Why the US establishment works better than most people think

Viewed from the outside the American legal and political system has not done too badly, from an economic perspective

Donald Trump speaks at a caucus night rally in Des Moines, Iowa (Reuters)

The American establishment just about held it together in Iowa, but the antipathy towards mainstream political ideas was as evident as ever. Donald Trump was beaten by what would 18 months ago have seemed an extreme candidate and Hillary Clinton basically drew with Bernie Sanders. Both races remain wide open. US voters are angry and unpredictable.

Yet this is the country which has achieved the best recovery since the recession of any of the large economies. It is creating jobs: unemployment is down to 5 per cent, close to the bottom levels prior to the crisis. Core inflation, which excludes the impact of cheap energy, is 2.1 per cent, fine by international standards. The fiscal deficit is running at 2.6 per cent of GDP, again pretty good by international standards. House prices have recovered, and though in many areas they remain below their 2007 peak, this is a positive, too: young Americans do not face the difficulties of buying their first home that young Brits do. As for the future, the US Federal Reserve is confident enough to have started to push interest rates up.

Insofar as the political mood is determined by economic factors you would expect voters to be reasonably content. Maybe they should not be positively grateful for what the present politicians have achieved, for it has been a difficult several years there, as it has here. But from this side of the Atlantic at least, they seem unduly cranky. Why?

Well, economics aren’t everything, and there are other reasons why they are upset. Fairly or unfairly the leadership of both main parties is seen as weak. The administration’s foreign policy is seen as ineffective. And there is this general, hard-to-pin-down mood that America’s best days are behind it. But I think economics do have a lot to do with it, for you don’t have to be there very long to notice a disenchantment with a system that seems to favour Wall Street over Main Street, and the few over the many. All mainstream politicians are seen as representing the few, notwithstanding Hillary Clinton’s attacks on Wall Street. And bizarrely Donald Trump, one of the great beneficiaries of rising wealth inequality, is seen as representing the many.

There are several aspects of the American economy that I think explain the disenchantment, and they all have to do with the huge structural changes that are taking place in the way people earn their living. Those changes are evident in other economies, including our own, but they are happening more rapidly in the US.

The first is the change in the nature of work. It is not just that all jobs have become less secure, though of course they have. It is that many middle-skill, white collar jobs are disappearing. What happened in manufacturing a quarter century ago is now starting to happen in services. There are new jobs being created but they are not only less secure; they also require new skills that established workers don’t have. Further, most of the new jobs are self-employed. The number of employees in the US is the same, give or take a few percentage points, as it was in 2000. The number of self-employed (so-called proprietors) is up by more than 50 per cent. For some people this is a blessing, for they have freedoms they did not have a generation ago. But for them, the benefits are the result of their own hard work. For people who find it harder to cope, it can be very tough. Put crudely, the winners thank themselves, while the losers blame the establishment.

Associated with insecurity is inequality. This is such a huge subject it is hard to break it down into bite-sized chunks, but there are a couple of aspects that are particularly damaging to mainstream politicians. One is that measures taken to rescue the economy from the last recession involved support for big business and big finance: bailing out the automobile companies and the banks. These have been central to the recovery, but they have reinforced the feeling that politicians are on the side of the big battalions, not the people who elect them.

The other is the way monetary policy has created an asset price boom. Share prices have come off a bit, but at the peak last year they were nearly double the level they were four years earlier. The more people had, the richer they have become. I suspect, though it is hard to pin it down, that the rise in wealth inequality is even more corrosive to “American values” – the sense that everyone has the opportunity to become rich – than income inequality.

There is a further twist. It is that university education has become a huge burden on the middle class. You need a college education to maintain your position in the middle class, but the class of students who graduated last year will pay back an average of $35,000 in debt. That figure is not so much bigger than the UK number of £20,500, but the pressure to pay back is greater.

Underlying everything is the fact that median US real incomes have not yet got back to their pre-crash peak. That is common throughout the developed world, and though the detail depends a bit on how you do the sums, the US in general is no worse than other countries and better than most. But this period of flat or falling real incomes follows a 20-year period of a stagnant standard of living for middle earners, whereas we had rising real incomes until 2007.

Finally, the benefits that Americans have got to their standard of living have come from technology – iPhones, apps and so on – rather than from politicians. The economic heroes and heroines are the people who create this stuff, not the people who macro-manage the economy, who are perceived not to have managed things very well.

For those of us who visit the US frequently but don’t actually live there, the hostility towards the established politicians often seems a bit unfair. Viewed from outside the American legal and political system has not done too badly, not just at an economic level but at a societal level, too. The US sometimes succeeds where the UK and Europe fail. It took the US to start sorting out corruption at Fifa. But unfair or not, disenchantment with the establishment is real and troubling, and like the presidential race, it ain’t over till it’s over.