The Fate of the West: The Battle to Save the World’s Most Successful Political Idea

by Bill Emmott

His essential point was that while it is not easy to get people and firms to band together as an interest group, the incentive to do so is nevertheless much stronger than the incentive to fight against that interest.

As an economist, Olson’s chief interest lay in the economic consequences of interest groups. In his 1982 book he argues that those consequences can be grave, producing rigidities and misallocations of resources that sap the economic dynamism of a country.

Similarly, the retreat of governments around the world from state ownership in the 1980s and 1990s had the benefit of not just introducing more competition and greater efficiency but also reducing the number of opportunities for interest groups to coerce governments.

In his final book, Olson also observed that no country in the post-war world that had satisfied two simple conditions had failed to prosper. The first was the existence of secure and well-defined individual rights. This is the rule of law, and equality of rights within it, made universal throughout a society. The second condition “is simply the absence of predation of any kind”. By predation he meant the arbitrary threats to persons and property that arise from war or authoritarian, confiscatory governments, but also the lobbying and subversion of legislation by interest groups of all kinds that leave individual rights intact in theory but in practice prey upon those rights through legal and democratic means.

The Occupy movement had correctly identified the fact that the single biggest source of inequality of voice and treatment, of distortions of public policy, in both the United States and western Europe, has been the rising power of the financial industry and of those who lead it.

Rather than broad attacks simply on “capitalism”, which are rather like attacking “life”, those aims ought better to have been the cutting down to size of the financial sector and the removal of the exorbitant privileges that have enabled banks to make profits at the expense of the rest of society and that, after the crisis, seemed to grant impunity to senior bankers.

But it’s possible to say all of that, and also recognise that not all financial innovation is valuable, not all trading plays a useful role, and that a bigger financial system is not necessarily a better one. And, indeed, there are good reasons for believing that the financial industry, more than any other sector of the economy, has an ability to generate unnecessary demand for its own services – that more trading and more financial innovation can under some circumstances create harmful volatility against which customers have to hedge, creating more demand for trading liquidity and innovative products; that parts of the financial services industry have a unique ability to attract to themselves unnecessarily high returns and create instability which harms the rest of society.

Most important, what that calamity demonstrated was the true basis of the sector’s success: it was taking bigger and bigger risks, confecting financial products of greater and greater complexity (the profit margins of which may well be related to the difficulty for customers in understanding them), while being supported by a massive public safety net – in effect, a subsidy – consisting of official deposit insurance and the sure knowledge that the bigger that financial institutions became, the more that governments would consider them “too big to fail” and step in to rescue them if they ran into trouble. And that is exactly what they did, on both sides of the Atlantic.

Most notorious, in the US at least, was the successful lobbying in 1998 by Wall Street of the treasury secretary, Robert Rubin, and his deputy, Larry Summers, to block regulation of the trading of complex derivatives products which had been proposed by the then head of the Commodity Futures Trading Commission, Brooksley Born.

than those recommended by Anat Admati of Stanford University and Martin Hellwig of the Max Planck Institute in the most respected analysis of the crash so far published, The Bankers’ New Clothes.

Dud subprime mortgages in the United States started the trouble, but the reason it became so catastrophically large was the loss of confidence between those many layers of counterparties.

One of the most devastating delusions during the decade that led up to the 2008 collapse was the notion that a process called securitisation was spreading risk around, putting it where it could most efficiently and safely be held, making the global financial system less risky than in the past. Securitisation is the process by which packages of loans – most notoriously subprime mortgage loans to poor people in the US, but also many others – are assembled by financial firms, often sliced up into their component parts, and sold on as so-called “derivative securities” (that is, paper that was derived from an original debt) in more and more complex forms, supposedly so as to make the slices of rights thereby concocted more appropriate for particular species of buyer.

The consequences were twofold. Many buyers had little understanding of the real nature of what they were buying, just that its apparent yield was higher than the dull alternatives on offer in what was a disinflationary, low interest rate environment. And many banks decided, fatefully, that rather than passing on all these derivatives to others – a business model that was known as “originate and distribute” – it would be more profitable to hold onto large bundles of derivatives themselves, placing them out of regulators’ sight in special off-balance-sheet entities. By thes...

That means large parts of the core of the international banking map remain, essentially, uncharted territory. These data gaps are even more acute when moving beyond the banking system. Large parts of the non-bank sector remain in the shadows from a data perspective.

So whatever the rules governing banks’ capital, the leverage they are allowed to deploy, or anything else, the fact remains that those whose job it is to supervise the banks basically have no real idea of what is going on and nor do other financial institutions that are lending to them.

Shadow banking lives on, and the shadows are as dark as ever. One reason why this has happened is that finance is global, which means that to change disclosure requirements in any meaningful way requires a wide international agreement, since otherwi...

The US and European economies, like Japan’s before them, still carry the wounds and scars of their immense crash, but what they now need is not emergency blood transfusions but deeper fitness regimes. Curbing the financial sector, as Martin Wolf, chief economics commentator of the Financial Times has written,7 ought to be a vital part of that new fitness regime, rather like cutting out an injuriously fatty part of your diet to avoid the recurrence of cardiac arrest.

in a 2012 study they showed that beyond a certain point (one that advanced economies passed long ago) a larger financial sector harms both productivity growth and overall economic growth.

The US is not the West. But the West would be severely diminished, even finished, without the US. If it were to abandon central tenets of Westernness and its alliances with other Western countries, even if just for a few years, the barbarians who are at the West’s gates would applaud and conclude that the modern equivalent of the Roman Empire was about to collapse. The ideas advocated by Donald Trump represent the beginning of exactly that sort of abandonment.

What is at issue, however, is how reliable the US will in future be as an ally to the many countries tied in with it in military, security and economic pacts, and what effect any change in that reliability could have on countries’ relationships with other great powers, notably China and Russia but also Iran, India, Brazil and so on. In play, also, is the status and strength of international law and of the multilateral institutions that try to shape and enforce it.

The effect is stagnant incomes and dying communities. The cause lies in policy blunders and in the unfair, manipulated, overly rigid decision-making that stands behind them. We have seen how entrenched inequality of income and wealth is creating a new aristocracy that is distorting the political system and subverting equality of rights. We have seen how Wall Street has captured the regulatory system and not just made individuals rich but preserved the right to take huge risks while landing the costs of those risks on the public purse. We have seen how technology giants such as Google have been able to see off antitrust investigations and preserve their dominant positions.

External threats are easy to spot. Internal ones are more hidden, more insidious.

the US is not quite as we think it is: bit by bit, it has become less open, less competitive, less free and notably less equal in terms of rights and opportunities than it is generally assumed to be.

This is all very encouraging for the country’s future prospects. But such shock at the new can distract from the bigger picture, which is a less positive one. Despite all that innovation, the intensity of competition in the US has actually been decreasing in recent years. The country has been becoming less dynamic, not more. Many industries have become dominated by larger and larger firms, thanks to mergers and takeovers, which are able to obstruct newcomers and extract high profits.

Hamel and Zanini argue that the ratio of managers and administrators to all employees could be halved from 1:4.7 to 1:10. That would, they reckon, free up 12.5 million people to do more creative and productive work. Adding to that direct gain the indirect savings that could come from eliminating a lot of wasteful internal compliance activities, the authors arrive at the deliberately provocative estimate that excess bureaucracy costs US companies $3 trillion a year, which is equal to 17% of annual GDP.

The important point such analysis reveals is that although scale and concentration in industries increases profitability by allowing companies to raise prices, the associated increase in the bureaucratic complexity of giant corporations brings huge inefficiencies of its own, an unproductive burden that is being made possible and encouraged by the excessive profits being earned because of market domination.

Like it or not, the labour market in the US looks as open as a cattle market. Except that it isn’t. One way in which it isn’t is that an increasing number of jobs now require applicants to hold a special “occupational licence” for that particular profession, generally provided and regulated by the states. According to a report released by the White House in 2015, nearly 30% of the US workforce now needs a licence from state, local or federal governments.2 Measuring just state-licensed jobs, the report says that the proportion has increased fivefold since the 1950s and has been rising in every decade in that time.

As Italy shows, however, licences, often guarded jealously by medieval-style professional guilds, can easily become privileges, barriers to competition and innovation that raise costs unnecessarily and make it harder for people to find and get the jobs that they aspire to.

But one of the drawbacks, arising from the decentralisation of government to state level in the US, is that licensing requirements differ hugely between states. So people able to qualify easily in one state for a profession can be excluded in the state next door, hampering the mobility of labour for which the country was once renowned.

In half the 50 states applicants for jobs can be denied an occupational licence if they have a criminal conviction of any kind, regardless of the offence’s relevance to the particular licence or how long ago it occurred.

The rate of incarceration in the US is one of the highest in the world – with 5% of world population, the country is home to 25% of the world’s prison population. This rate of incarceration raises its own issues, but for our purpose the chief importance of this large pool of convicted criminals is the part they play in one of the most puzzling phenomena in American life: the number of people, chiefly men, who have disappeared from the workforce. That is Eberstadt’s main concern too.

Why are so many men not even bothering to look for jobs in a country that is not exactly famous for the generosity of its welfare benefits? Eberstadt’s answer comes in two parts: first, the barriers to employment for felons leave many of this big pool of often young men as outcasts; second, government disability and means-tested benefit programmes are bigger and more useful to recipients than you would think, once you account for all the different schemes that are available.

Welfare reforms during the 1990s under the Clinton administration took millions of people off welfare schemes, which are typically run and financed by states, but provided states and, most particularly, lawyers, with an incentive to get people qualified instead for disability benefits, which once acquired can be more or less permanent and are financed by the federal government instead of the states.

If, however, low demand for unskilled workers were to be the heart of the problem, raising the wage rates that such workers are legally required to be paid would be likely to reduce such demand, not increase it.

Any explanation for the decline in participation needs also to take account of the illegal economy, especially that involving the production and trade of narcotic drugs. Such an illegal, drugs-based economy exists in European countries and Canada too, but the most extreme case of it is found in the United States, since that is also the largest market for illegal drugs.

The US’s long-running “war on drugs” has created a vicious cycle, in combination with restrictions in the labour market. Young men deal in drugs, are caught, convicted and incarcerated, and then when they are released they often return to the same trade for lack of other options.

Fighting the war on drugs through military assaults on the supply of drugs in Central and South America, and, especially in the case of crystal meth, a large drug enforcement operation inside the US itself, has been costly and ineffective. The legalisation of trade in narcotic drugs, which would open up the chance both to regulate supply and to try to moderate demand through taxation and education, makes more and more sense.

Like prohibition of alcohol in 1920–33, the war on drugs has increased crime and gun violence, enriched criminal groups big and small, spread corruption at all levels, and yet has failed to deter people of all social classes from using drugs.

This is, moreover, just what those who complain of the damaging impact of globalisation on manufacturing jobs in rustbelt cities have long been calling for: direct assistance to enable people to adjust to change.

Dealing with the missing male workers may not be rocket science, but it is political science – which in a democracy can prove harder.

The same applies to the other scleroses listed, of declining competition and increasing business bureaucracy. Stronger antitrust enforcement is the main necessary cure:

Any political system that presents a choice for the presidency between the dynastic and highly distrusted Hillary Clinton and the bombastic serial liar Donald Trump is not one that can be described as in good health.

“A democracy cannot function effectively when its constituent members believe laws are being bought and sold”.

the worst aspects of democracy: short-sightedness and selfishness.

In these respects, joking or otherwise, the state had become an extreme case of the democratic habits of self-entrapment that have featured in this book: short-term thinking, money politics, capture by interest groups, bust public finances, an inability to invest in long-term purposes such as education and infrastructure.

The 2016 election cycle surely demonstrated that there is now a big natural constituency in the US for measures that moderate inequality, that reduce the damage the financial sector can do, that seek ways to get the hidden millions of non-working men into work, and that get the visible millions of disgruntled lowly paid men and women into higher-paid work.

The slow response of producers whenever demand rose had made the UK more prone to inflation during the 1970s than Germany or France.

A notable example of one of those clusters is in Manchester, and it is based on science rather than the arts or software. In 2010 a team of scientists at Manchester University won the Nobel prize in physics for their discovery of graphene, a substance derived from carbon and popularly known as the new wonder material, as it is the strongest and thinnest material ever known. This achievement has led to the creation at Manchester University of the National Graphene Institute. The discovery, moreover, was a typical story of the modern, open, post-Thatcher UK: it was made by a team led by two immigrant scientists originally from Russia, Andre Geim and Konstantin Novoselov, one of whom had come to the UK via a university in the Netherlands.

In the end, though, polling analysis showed that the factor shared by the widest number of voters was a desire to put limits on immigration, and one unarguable fact was that under the EU’s treaties it is not possible for a member to impose limits on the freedom of movement to their country of other EU citizens.

To be born in many places in Britain is to suffer an irreversible lifelong defeat – a truncation of opportunity, of education, of access to power, of life expectancy … the vista instead is a landscape where there is often work … but it’s unsatisfying, insecure and low paid. This new work doesn’t do what the old work did: it doesn’t offer a sense of identity or community or self-worth … What, over the last few decades, has been the political “offer” to these people? In truth, nothing much.