The Anti-Establishment Cycle

One common theme between the surprising successes of both Donald Trump and Bernie Sanders in this political campaign is an anti-establishment, anti-Washington sentiment. Far from being a new idea, it seems that we see a similar anti-establishment rise every few elections. While there are likely multiple causes of anti-establishment sentiment, I have one theory for why it never seems to go away, even when the old politicians are all thrown out and replaced with fresh new faces.

Let me explain this with an example: the plan to build a wall along the Mexican border. This has a been a key plank of Trump's campaign; however, it is certainly not an idea that he invented. The US government started building a security fence along the southern border during George W. Bush's presidency and continued it under Barrack Obama, yet this continues to be a key political issue in the current campaign because many voters perceive illegal immigration to still be a problem (whether they are correct about that is another matter).

From the voter's perspective, George W. Bush promised to stop illegal immigration and didn't deliver. The Republican's in control of Congress during Obama's presidency promised the same and also didn't deliver. What can explain this? The most obvious explanation is that these politicians aren't up to the job or, even worse, they don't actually want to solve the problem. Perhaps they are being paid off by special interests that want illegal immigration to continue!

In the case of the wall, none of these explanations is a good fit. As John Oliver explained, the real problems are that (1) building a wall turns out to be a lot harder than anyone thought and (2) the wall doesn't actually fix most of the problem. (Most illegal immigrants enter the country legally and then over-stay their visa.)

Let me abstract from this example to a more general description of what I think happens in many cases. First, the voters have a problem they want solved. Politicians come along to say that the problem has an easy answer but opponent's don't want to solve the problem because they're corrupt (or under the thumb of special interests), so the voters should give them power instead. Once elected, the politicians discover that the problem is a lot harder than they thought, but they don't want to admit that (because it would show their ineptitude), so they continue to blame their opponents. After a while, voters reach for the simplest explanation: these politicians must be corrupt too. So they throw them out and elect new politicians with a new easy answer.

In our example, the problem is illegal immigration and the easy answer is building a security fence. That didn't solve illegal immigration, so voters start to suspect that Republican's in Congress are incompetent or worse. Trump comes along with a new easy answer (replace the fence with a huge wall!) and explains that those who say it won't work actually want illegal immigration to continue.

Here's another example: on the Democratic side, Bernie Sanders says he can solve "too big too fail" by breaking up the big banks (the easy answer). The only reason that others won't implement his easy answer is that they're corrupt: they're being paid off by the big banks. In reality, the problem is far more complicated than this. For example, one of the reasons that we have a few big banks is that banks are so highly regulated. (Read the annual reports of M&T Bank to see how a smaller regional bank copes with regulations like Annunzio-Wylie, Sarbanes-Oxley, Dodd Frank, etc. and why it is more expensive for them than the larger banks.) More regulation of the banks is likely to make the big banks even bigger.

These are far from the only examples.

Why won't politicians raise the minimum wage in order to help poorer workers? It must be because they don't care about them. Again, the issue turns out to be more complicated. Until the last two decades, pretty much all economists believed that raising the minimum wage would help some workers but hurt others by taking their jobs away. Some more recent studies (e.g., Card and Krueger) found that this didn't happen in examples that they looked at, but they instead found businesses paid the higher wage by increasing prices. And since businesses that pay the minimum wage more often have poorer customers, you have the same problem of helping some poorer people and hurting others. (In this case, I have to say that I think there is an easy answer: the government should just give poor people money. However, the point remains about the minimum wage as the easy answer.)

Why won't politicians raise taxes to pay for more services? It must be because rich people are paying them off. In this case, the problem is that the revenue maximizing tax rate is typically much less than 100%. There have been some empirical studies on this (none of them great), but they suggest that the maximizing rate is around where tax rates are now. And in fact, despite having had a highest tax rate as high as 90% at some points in recent history, tax receipts as a percentage of GDP have only been higher than they are now at two points in history (2000 and 1945).

Why won't politicians cut taxes? It must be because they hate rich people. Nearly all of the Republican candidates in this campaign want to drop tax rates to around 20% and they claim that this will actually increase tax revenue either by increasing growth or because the current rates are above the revenue maximizing rate. As I noted above, the second claim is very likely false. As for the former, it too rests on shaky ground.

I could go on. Indeed, I actually think that the vast majority of all political problems are much more complicated than politicians want to admit. At the end of the day, "it's complicated" doesn't win many votes. Voters would rather believe that there are easy solutions,whose implementation is only being prevented by corruption. But when those easy solutions don't pan out, we can expect them to reach the only reasonable conclusion, that corruption has spread, and start the next wave of anti-establishment sentiment.

The One Claim From Which Trump Cannot Back Away

To say that this year's race for the Republican presidential nomination has been strange is of course an enormous understatement. The presumptive nominee, Donald Trump, as others have noted, does not even hold conservative views on most of the issues that Republican's have typically cared about. On those issues which Trump cares about, he holds views well outside of the norm, endorsing war crimes, religious persecution, mass deportations, and torture.

As a political moderate, I certainly do not agree with any of those positions (indeed, I find them morally repugnant). However, the purpose of this post is not to criticize any of the listed views of Donald Trump. Instead, I want to discuss one of Trump's outlandish positions that is unlike the others.

What distinguishes the position I have in mind is that it is one from which Trump cannot ever back away effectively. That matters because mainstream conservatives appear to believe that Trump will soon moderate his stances on these issues in order to make himself more electable to moderates (like myself). Whether he will do so remains to be seen, but the Republican establishment appears hopeful that Trump will repudiate his endorsements of those positions that are well outside the norms of American political beliefs, including all of those listed above (war crimes, religious persecution, torture, etc.).

What distinguishes the position I have in mind is that it is not one where Trump can undo the damage simply by backing away. For issues like war crimes or torture, if Trump changes position, becomes president, and never carries out his earlier proposals, you can argue that no real harm was done. No crimes were committed. No one was tortured. While his statements were disturbing, the damage pales in comparison to that of actually carrying out these ideas. So if he were to back away and never follow through, one could argue that there was little harm done.

For one of his proposals, however, I will argue that the damage is already done merely by it's suggestion. That proposal is the idea of defaulting on the US debt.

Before I begin in earnest, let me note that Trump was careful to avoid the word "default". That word has a negative connotations. Instead, he suggested that we "re-negotiate" our debt. However, the latter is something that occurs in default, so he is simply skipping mention of the step that sounds bad, despite the fact that it occurs before the part he did mention.

At present, US debt has the highest possible credit rating. It is referred to as "risk-free" because, while not literally risk free, it is believed to have less risk than any other financial asset. One key reason for that belief is that US government, regardless of which party is in control, has continued to publicly state that it would not, under any circumstances, default on that debt. It is generally believed that, in the worst case, rather than default, the US would increase taxes on its citizens in order to make good on the payments it has promised to debt holders.

The benefit of the belief that US debt is "risk-free" is that there is a large market for that debt. A great many individuals, corporations, and governments want to purchase our debt because they wish to avoid risk. As a result, the US is able to issue debt (i.e., sell bonds) at very low prices, meaning that the interest payments for the US are smaller than those of countries whose debt is seen as riskier.

The effects of low interest rates are probably familiar to anyone who owns a home (or who finances the purchase of a car): the lower the interest rate, the lower the monthly payment. Hence, the US has lower monthly payments per dollar of debt than most other countries in the world, which means we get to keep more of our money to spend on services for US citizens.

The key part of this for our discussion is that the interest rate on US debt is driven by perceived risk. The US pays a low rate because investors believe that debt is risk-free. If they start to worry that there is risk of default (even a little), then rates start to increase.

That may not sound so bad, but worries about default often become a self-fulfilling prophecy. When fewer investors want to buy, interest rates go up, which means the US has to pay more, which increases the risk of default.

Cosmo: ... Everything in this world, including money, operates not on reality... 

Bishop: but on the perception of reality.

Cosmo: Posit: people think a bank might be financially shaky.

Bishop: Consequence: people start to withdraw their money.

Cosmo: Result: pretty soon it is financially shaky.

-- Sneakers (1992) 

If you want a real world example of this, see the crisis of confidence in Greek debt that led to its default in 2012.

While Trump may furiously back-pedal on his suggestion of defaulting on US debt, as Cosmo noted in Sneakers, financial markets operate not on reality but on the perception of reality. If worldwide investors believe that there is even a small increase in real risk of default due to Trump becoming president, then interest rates will start to rise if he is elected. (Indeed, even Trump's nomination may cause an increase in perceived risk of default.)

That perception has real world consequences. In the short run, our debt will be harder to pay off, which means there will be less money remaining for services benefiting US citizens. In the long run, the risk of actual default will undoubtedly increase as well.

As hard as Trump may try to disavow this proposal, his one-time suggestion of default is a permanent stain on his candidacy that I do not believe can ever be fully erased.