In his conceit, the president likes to think that both an accelerating economy and the soar-away stock market are the result of his own genius
Politics and economics tend to be regarded as inextricably linked, such that we even have a term for the way the one orders the other – the “political economy”. Sometimes, however, we assume that government is far more influential when it comes to the macro economy than it really is. One of the most striking features of economic conditions today is that they seem almost entirely unaffected by the hopelessness of our politics.
Globally, the economy has returned to a period of relative health, with all three major economic regions – America, Europe and Asia – in synchronised growth, the first time this has happened since the financial crisis nearly ten years ago.
Yet politically, the situation looks dire. Among the G7 group of major advanced economies, only Canada and Japan have remotely stable or effective government. In America, we have a petulant and dysfunctional presidency whose daily outbursts and absurdities are a source of almost universal international derision, and more worryingly, continues to pose a serious threat to the global trading system.
In France, a self-styled Napoleon rules at the Élysée, yet his reform agenda is already effectively dead in the water. Lest it be forgotten amid all the guff about how Macron has turned the tide against populism, nearly half of French voters opted for eurosceptic alternatives in the last election. France’s newly acquired reputation for responsible, centrist government is a mirage that disguises still deep seated political discontents.
In Italy, the anti-establishment Five Star Movement has emerged as the country’s most popular party; opinion polls ahead of March’s general election point to the formation of a government with strongly eurosceptic views. Any such coalition would in practice be most unlikely to pull Italy out of the euro, despite the threats. Even so, the election threatens a previously untested degree of political turmoil.
As for Germany, there is no government at all, with Angela Merkel still struggling to cement a workable coalition after an election that gave the far-Right a significant presence in the Bundestag. Britain is meanwhile mired in the constraints of minority government and the obsessions of Brexit, paralysing virtually all other gainful activity. Labour sits there in the wings, threatening the imposition of the most hard-Left, populist government in decades.
Political crisis is for the European Union as a whole a more or less permanent state of affairs, but with British withdrawal, things could get much worse, punching a big hole in the bloc’s budget. In the scale of things, the sums involved are trivial. They none the less have the potential to create major problems. Only reluctantly will other big net contributors cough up more. The conditionality attached to these payments will drive a further wedge between the EU and its Visegrád members, several of which are already in open rebellion against the EU’s obligations and requirements.
"If anyone can claim the credit, it is the central bankers, who have kept their foot flat down on the monetary accelerator ever since the financial crisis"
Turning now to the economy, it is as if none of this is of any consequence. It was said that both Brexit and the election of Donald Trump would plunge the world economy into chaos; so far, they have not. The American recovery has strengthened further since Trump’s victory, Europe has turned the corner, and beyond the impact on real wages of a devalued pound, even the UK economy seems to have been largely unaffected by the vote for Brexit.
None of this is any thanks to the politicians. If anyone can claim the credit, it is the central bankers, who, riding above the political circus, have kept their foot flat down on the monetary accelerator ever since the financial crisis, and even now, with the economy in many respects back to normal, continue to provide it with extreme levels of support.
The truth is that when it comes to the economy, even the president of the United States will much of the time have only marginal influence. Far more important are the natural ups and downs of the business cycle and the actions of the Federal Reserve.
Most economists think the Trump tax cuts will have some positive impact, all other things being equal, but few believe it will be huge. If on the other hand they generate a boom, then the Fed will act to dampen it down. In his conceit, the president likes to think that both an accelerating economy and the soar-away stock market are the result of his own genius; possibly at the margin, his various business friendly initiatives have indeed helped unleash pent up animal spirits. At root, however, continued economic expansion is merely cyclical. Trump is neither positive nor negative.
Much the same is true of Europe. The rebound has nothing to do with the structural reforms forced through at great political and social cost during the eurozone debt crisis, and virtually everything to do with Mario Draghi’s ultra-accommodative money printing.
None of this is to argue that the politics are irrelevant. In the long run, and sometimes even in the short run if policy is reckless enough, bad government will destroy an economy just as effectively as irresponsible bankers. American hegemony also vests the US presidency with the power to invoke geo-political crisis, the economic consequences of which can be devastating.
Even so, we shouldn’t be so surprised that the world economy is motoring again, despite the failings of our political leaders and systems. If demand is growing, supply will respond regardless.
What we also know is that at some stage the cycle will turn. The present US expansion is already only months away from being the second longest in US history. What is more, it is sustained only by the persistence of ultra-low interest rates, which have in turn crimped productivity growth and supported a debt fuelled bubble in asset prices. There is a sense in which the true adjustment to the financial crisis has yet to happen.
Dysfunctional government may not matter very much when the economy is growing, but it will matter a lot come the next big shock. It is hard to believe, for instance, that today’s ragbag of cowed, inward-looking political leaders would be capable of the co-ordinated and relatively effective international response that was mounted to the financial crisis. The complexities of today’s world frequently require a multilateral response; yet we seem fast to be retreating into the pinched, national solutions of the past.