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Thursday, July 7, 2016

A unified theory of Brexit and Trump

by John MacBeath Watkins

One of the puzzles of this election year is why long-standing elements of the Republican platform aren't resonating this year.

Republicans have long advocated small government and free markets, including free markets in foreign trade. But Donald Trump won the most delegates in the primaries by advocating higher tariffs and promising not to cut Social Security.

The theory has been that both tariffs and the social safety net are government interfering in the marketplace. But there is now a clear division between the Republican donor class, which believes this, and the white blue-collar base that wants government to protect them from  both foreigners and foreign competition.

For decades, the donor class of rich Republicans have dictated the economic agenda of the party while working-class whites have provided the votes, based on promises that the economic program would benefit everyone and the exploitation of culture war issues such as "the war on Christmas," gays, and abortion, and guns.

They've also exploited racial resentment. The Southern strategy Nixon used grew out of the Republican right's rejection of the Civil Rights Act of 1964, and the party at this point has managed to purge itself of the sort of moderate Republicans who voted for that law.

But the basic economics were always against that strategy. Even prior to World War I, the nations most open to foreign trade have had the largest governments.

Kevin O'Rourke, in a July 1 post on The Irish Economy blog, explained how this works:

The main point of my 1999 book with Jeff Williamson was that globalisation produces both winners and losers, and that this can lead to an anti-globalisation backlash. We argued this based on late 19th century evidence, but opinion poll evidence (citations here) suggested that something similar was at work in the late 20th century as well, a hunch confirmed in the early 21st century by the 2005 and 2008 French and Irish referenda. 
What was missing from all this was an analysis of what, if anything, governments can do about this. Which is where Dani Rodrik’s finding that more open states had bigger governments in the late 20th century comes in. Dani’s interpretation is that markets expose workers to risk, and that government expenditure of various sorts can help protect them from those risks. In a series of articles, and an important book, Michael Huberman showed that this correlation between states and markets was present before 1914 as well: countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness.

In short, liberal trade policy requires liberal government policy. One reason Donald Trump became the voice of the white working class was that he was more explicit in exploiting racial resentment, of course, but another reason was that he did not buy into the Republican orthodoxy regarding free trade and small government. He doesn't really favor either.

Those who favored both free trade and small government tended to be those rich enough to insulate themselves against the risks free trade exposes the economy to. That's the donor class which has always set the economic agenda for the party.

In Britain, whatever the polls might say, the areas that voted most in favor of leaving the European Union have been those most impacted by competition from competition with Chinese manufacturing. From The Monkey Cage blog at the Washington Post:

Regardless of what voters or pundits might be saying, we find that Leave votes were systematically higher in regions more affected by the surge in Chinese imports over the last three decades. And we find no evidence that the presence or influx of immigrants correlates with a region’s support for Brexit.
So, the solution to problems caused by competition with China is to distance Britain from Europe, where a lot of its exports go. It doesn't make sense on an economic level, but it motivates voters on an emotional level.

And in America, workers who feel economically insecure because of economic globalization often support Donald Trump, who as Forbes magazine notes, outsources items produced for the Trump brand.

We are reaching for the wrong solutions because we are misunderstanding the problem. The problem is that if we are to have free trade, we need to provide a reliable safety net for workers, and if we're going to cut the safety net, we need to reduce the risk to workers by having less free trade.

This is a much bigger problem for Republicans than for Democrats. Most of the supporters for the Trans Pacific Partnership trade agreement are Republicans, not Democrats, and Democrats generally consider it a no-brainer that workers need a good safety net.

Now, it might seem odd for the party that most supports the safety net to be the one that also is less enthusiastic about free trade. After all, they support what is needed to have free trade without excessive backlash. But both things are part of the Democratic Party's history of supporting working families.

And Trump is just another stage in the long history of Republican's using cultural and racial issues to get working class whites to vote against their economic interest. For all his bluster, the economic plan he has presented is just designed to make the rich richer.