Is it just me or does it seem like our politics are becoming increasingly polarized? The rise of the Tea Party, the Alt-Right, Donald Trump, Antifa, Bernie Sanders and the Social Democrats are all extremist responses to what seems like a world that has left many people behind. There are several reasons for this and I believe it will only get worse.
This is the most important chart in all of economics and politics:
Any layperson can understand this chart and so some version of this chart has been distributed broadly ever since the financial crisis when we watched bailouts for the wealthy as the poor and middle class were given little. It’s an extremely powerful visual and it’s not getting better any time soon.
What’s happening in the US economy is very simple. There is a high level of inequality.
As corporate profits boom and the rich get richer the median household feels left behind. The left says we need more government to fix this issue (by redistributing from the rich to the poor). And the right says we need less government to fix this issue (by letting the wealth trickle down as government gets out of the way). We don’t really know for certain if either side is right. After all, the last time inequality was this high it took a depression and a world war to cause it to come down.
Now, the issue is more complex than that. My view is that this whole view is confused to some degree. First, we have no quantifiable metric by which we can measure our living standards. I’ve argued in the past that American living standards are higher than ever. This appears to me to be an undeniable fact. We are better off despite stagnant median wages. Second, the average person doesn’t measure their personal well-being by having to spend less on necessities. They measure their well-being mainly by how much money they earn and retain. And by this metric alone they see an economy that isn’t working for the average person.
The whole situation is negatively reinforcing because of our inherently short political cycles. Inequality is an enormous macro trend that plays out over decades. No politician will fix this problem inside of one or two terms. So you have a problem that requires a long-term solution and fixers that operate over short time horizons. Add in the 24/7 news cycle and our own inherent short-termism and you have a recipe for political extremism where a long-term macro problem fails to get fixed and so we are constantly bouncing from one fixer to the next all the while fixing nothing.
It’s disconcerting to say the least. I don’t see how this can rectify itself without some sort of massive paradigm shifting change in our society or economy. After all, we just experienced a huge boom in government spending and debt under President Obama and inequality got worse! The same exact thing appears to be happening under President Trump. I am an optimist by nature, but the increasing extremism in the political arena has me feeling extremely skeptical of my own optimism.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.