The disintegration of legitimacy in western democracies

Today’s daily post is going to be more of a theme post, largely because the news flow warrants it. I have at least three articles in mind, which were published over the last 24 hours that touch on the theme of a building illegitimacy in western democracies. So what I want to do here is throw them together into a more cohesive all-encompassing overview.

There are three separate themes from the posts:

• First is the idea that a minority of the populace or an elite is controlling the political agenda. And they are doing so to the detriment of everyone else, making their governance seem illegitimate to wide swathes of the population.
• Second is the concept that parties have lost their way and no longer represent their base of supporters. Instead, they are loyal to special interests or ideologies like globalization that work at the expense of their base of support.
• Third is the view that government is unaccountable to the electorate. By using bogus accounting gimmicks that even the largest firms in the private sector could never get away with, government is able to hide risks that will negatively impact its citizens for years to come.

The overarching theme here then is that the legitimacy of western democracies is disintegrating. I don’t have a fixed view on what happens as a result of this decline in legitimacy. I just want to present the ideas for discussion because they are current and seem pervasive.

Elite rule in Europe

Let’s start in Europe, with my own ideas about where the lack of legitimacy is coming.

Before the Fall of the Iron Curtain, the EU’s eastern expansion, and before the euro, western Europe’s national governments and the EU itself enjoyed great legitimacy. Though Britain has always been wary of the EU, it was seen as an integral part of the alliance against Soviet communism and an enabling force for democracy, particularly in the newly democratic Greece, Spain and Portugal.

But the collapse of the Soviet Union sapped the EU of much of its strength. First, the end of Soviet totalitarianism gave the EU less meaning as a bulwark against a competing ideology. Second, the rapid integration of the former east Bloc radically altered the power structure and cohesion within the EU. And third, the advent of the euro brought the EU to bear as a malevolent force onto much of the EU’s citizenry.

What was a glorified trade bloc created to maintain a peaceful and prosperous Europe became a bureaucracy, seemingly hellbent on creating a United States of Europe, and, thus, dominating legitimate elected national governments. And the European Sovereign Debt Crisis brought all of the illegitimate lack of democracy in Europe into the headlines in a way that I believed bolstered the case for Brexit in the minds of citizens of Europe’s most sceptical member state.

Europe has become a fractious region, ruled by an unelected elite, which overrode the wishes of democratically elected national governments. And the debacle now taking place in Italy also makes clear that the introduction of the euro has been instrumental in making this happen, because only with the euro does Brussels have the leverage it needs to force governments to its will.

Britain, which ironically has had the best deal in the EU, would certainly have had a much more severe economic crisis had it followed the wishes of former Prime Minister Tony Blair and given up its currency, the pound sterling. And so despite being saved from the fate of Spain or Ireland by having retained monetary sovereignty, the British are still aghast at the power plays from Brussels, and are now retreating from the EU altogether.

The refrain heard throughout Europe: the unelected elite of Brussels are dominating ordinary European citizens, forcing their governments to do things their citizens don’t want them to do.

In the next recession, Italy is going to run aground, despite having been an exemplar of fiscal rectitude for the past 20 years. That’s going to cause a huge crisis and economic depression. And it’s going to throw millions out of work. How legitimate is government going to seem then?

Minority Rule

Across the pond, something equally noxious in terms of illegitimacy, but of a different  tenor, is taking place. Let me outsource this to Ezra Klein at Vox, who has just written up his take on how to frame the problem. He calls it “The rigging of American politics“, likely as an ironic ode to current US President Donald Trump, who, based on the story Klein tells, occupies the White House, precisely because of this ‘rigging’.

Brett Kavanaugh was nominated to the Supreme Court by an unpopular president who won 3 million fewer votes than the runner-up. He was confirmed by a Senate majority that represents a minority of the country. He was confirmed despite most Americans telling pollster after pollster they did not want him seated on the Supreme Court.

Nothing about Kavanaugh’s ascension breaks the rules of American government. Donald Trump is the duly elected president of the United States. Republicans hold a majority in the US Senate. Elected officials bear no responsibility to follow public opinion. Yet the left sees Kavanaugh’s confirmation as illegitimate, and they’re turning their ire on the composition of the US Senate and their focus to the possibilities for future court-packing and judicial impeachment.

American politics is edging into an era of crisis. A constitutional system built to calm the tensions of America’s founding era is distorting the political competition between parties, making the country both less democratic and less Democratic.

Since 2000, fully 40 percent of presidential elections have been won by the loser of the popular vote. Republicans control the US Senate despite winning fewer votes than Democrats, and it’s understood that House Democrats need to beat Republicans by as much as 7 or 8 points in the popular vote to hold a majority in the chamber. Next year, it’s possible that Republicans will control the presidency and both chambers of Congress despite having received fewer votes for the White House in 2016 and for the House and Senate in 2018.

Kavanaugh now serves on a Supreme Court where four of the nine justices were nominated by a president who lost the popular vote in his initial run for office, and where the 5-4 conservative majority owes its existence to Senate Majority Leader Mitch McConnell’s extraordinary decision to deny Merrick Garland a hearing. This Court will rule on the constitutionality of gerrymandering, voter ID laws, union dues, campaign finance, Obamacare, and more; that is to say, they will rule on cases that will shape who holds, and who can effectively wield, political power in the future.

“The party that is trying to keep minority rule is also going to be the party that has less interest in true democratic representation,” says Lilliana Mason, a political scientist at the University of Maryland. “You have to break some rules of democracy in order to keep minority rule.”

I think Klein’s premise makes sense and I urge you to read his whole piece. What he is saying, in essence, is that a disproportionately Southern and midwestern, white, male dominated Republican party no longer represents the majority of Americans. Yet, because of the way the United States was organized as a republic over 240 years ago, the Republicans can dominate national politics in the US. And its values are far enough out of line with the majority that time and again, we see the US government promote policies that are not in line with what the public at large wants. This is true whether you talk about gun control, abortion or any of the wedge issues that have dominated the Trump Administration’s early days. We effectively have minority rule in the United States.

“At some point, people will get so angry that they will either talk about secession or start engaging in more direct measures, whether it takes the form of rioting or violence,” says Sanford Levinson, a constitutional law professor at the University of Texas Law School.

Political systems depend on all sides believing in the legitimacy of outcomes. In America, that legitimacy is in danger. And it’s only going to get worse.

“In countries where we see a lot of minority rule, it comes with a lot of violence,” says Mason.

But, of course, stacking the court, adding new states or impeaching sitting Supreme Court justices isn’t going to increase the legitimacy of government. It will decrease it.

Parties that don’t represent their members

You’ve heard me talk about this a lot about the implosion of the old-line middle-of-the-road parties in Europe. I wrote about this most recently on Monday regarding the election in Bavaria in Germany.

The problem is especially acute for the center-left. And the Financial Times has done a write-up on the failure of the SPD in Germany that I think is very good.

Germany is the birthplace of social democracy, and the political battlefield where it achieved some of its greatest victories. Generations of activists and leaders across Europe have looked to the SPD and its historic leaders for inspiration. Its blend of socialist idealism and reformist pragmatism has changed the face of Germany.

The party fought for universal suffrage and workers’ rights, defied Nazism and communism, expanded the welfare state and played a pivotal role in easing east-west tensions during the cold war.

Last year’s defeat came as a shock because of the magnitude of the drop in votes, but it was the continuation of a decades-long erosion of support. With one exception, the party has lost votes at every general election going back 20 years. Since 1998, it has shed half its electorate, and there is no sign the decline has stopped. Some recent polls show the party now being eclipsed not just by Angela Merkel’s Christian Democrats but also by the Greens and the far-right Alternative for Germany.

On Sunday, the party suffered another humiliating defeat in a regional election in Bavaria, where it slumped to just 9.7 per cent of the vote. All of this raises a profound question: can Europe’s oldest social democratic party survive? The answer has implications that resonate far beyond Berlin.

Over the past decade, SPD leaders have watched the agonising collapse of sister parties in countries such as France, Greece and the Netherlands, where once-mighty socialist and social democrat parties have slipped into political oblivion. Their demise reflects dramatic shifts in society, most notably the fraying of a working-class electorate that once formed the backbone of their support.

Many of the party’s core voters have seen their lives turned upside down by sweeping economic and social change, from globalisation and automation to mass migration…

Over the past decade, the SPD has shared responsibility for deeply unpopular decisions – on austerity measures and refugee policy, for example – without being able to stamp its own authority on government. The cross-party alliances have blurred the party’s political identity, and convinced many voters that the SPD is no longer a genuine alternative to Germany’s conservative bloc.

Basically, by modernizing and ceding ground to wage competition from technological change, globalization, and EU enlargement, Gerhard Schröder sold the working class out when he was elected Chancellor. And ever since his sellout, the party has declined in favour with the electorate.

And now the SPD is in a third grand coalition with the center-right CDU and CSU governments. Can they reasonably defend the working class’s interests? How legitimate do they look now?

Illegitimate financial standards

This last point is near and dear to my heart as someone who is a finance geek. It comes from Matthew Klein at Barron’s. But before I tee Matt up, I wanted to ask you this: did you know that most governments don’t use anything close to generally accepted accounting principles to keep their books and report their accounts? They use an almost fraudulent accounting that masks the true costs and benefits of their decisions. Let me let Matt tell the story.

Rather than use accrual accounting and double-entry bookkeeping, most governments focus on cash deficits and gross debt. One consequence is that many governments borrow extensively “off balance sheet.” The most common hidden obligation is the employee pension: promises of future income in exchange for labor provided today. According to the IMF, pensions alone are worth more than the face value of government bonds in Finland, Korea, Norway, Portugal, and the United Kingdom.

Even though those promises are economically equivalent to debt, they are not counted as debt in standard government accounts, if they are counted at all. Unscrupulous politicians can exploit the opaque accounting to hide the cost of their policies. Promising public servants more money when they retire is easier than raising taxes or cutting spending today.

…the typical U.S. public pension plan estimates its liabilities using a discount rate of 7.4%, compared with a 30-year Treasury yield that has spent most of the past decade at 3% to 4%. According to Stanford University economist Joshua Rauh, using the correct discount rate raises the U.S.’s public employee pension obligations by about 50%.

Liabilities are only one side of the balance sheet. Governments also have assets including sovereign-wealth funds, state-owned enterprises, infrastructure, land, and office space. For the most part, these assets are not properly counted, if they are counted at all.

In the U.S., for example, most public assets are valued at historical cost no matter how long ago they were acquired, supposedly because it is too difficult to do anything more sophisticated.

You’ve heard me talk about the Great American Pension Crisis coming in the next recession? This is exactly why.

And what’s going to happen is that local and state governments are going to have to admit they cooked the books for years. And they’ve finally run out of money. Either Uncle Sam will socialize the losses in some fashion – maybe the Fed will buy municipal bonds – or these states and municipalities will be forced to renege on their pension, healthcare and life insurance promises.

How legitimate will government look then?

My view

We definitely have a crisis on our hands. And I am not talking about an economic or financial crisis here because we are still very much in an economic upturn. Instead I am talking about the disintegration of legitimacy in western democracies.

How do we rediscover the good old days? I wish I had the answer.

Donald Trump’s version, Make America Great Again, has basically accelerated inequality in the US and hollowed out the civil service capable of maintaining a functioning government. That’s the message of Michael Lewis’s new book, The Fifth Risk.

Giuseppe Conte’s coalition government between the Five Star Movement and the League is about to run into an EU and sovereign debt market buzzsaw. Yields are already above 3.4% and will rise to strangle the Italian economy if the government doesn’t come to heel. So that’s not going to work either.

Then you’ve got the presumed saviour of Europe, Emmanuel Macron. He wants to go the way of Schröder and force deregulated markets onto the French. But his popularity is in freefall. Only 29% of the electorate are satisfied with the job he’s doing. That’s definitely not going to work.

Frankly, I feel like the answer is the one I don’t want to see, a major 1930s-style depression. That’s what Ray Dalio is suggesting awaits us.

Maybe you have the answer. I’d love to hear your view.