Democracy and Capitalism – are they compatible?

Although there have been arguments that democracy and capitalism are incompatible no advanced capitalist democracy has been relegated out of high-income countries or reverted into a totalitarian state. It seems that in advanced economies democracy and capitalism seem to promote each other. However the next few years will test this theory as inequality starts to threatens the foundations of democracy.

Economist have given their views as to why capitalist democracies might fail. The oldest worry is that the masses will vote to take possession of the wealthy and without secure property rights there can be no capitalism. Here are the thoughts of some economists:

However what explains why democracy and capitalism have co-existed for so long? Iversen and Soskice in their book “Democracy and Prosperity’ see capitalism and democracy as potentially mutually supporting, with three stabilising pillars.

1. Strong government – constraining the power of large firms and labour unions, and ensures competitive markets. Weaker countries find it harder to resist the short-term expediency of securing power by protecting monopolies.
   a sizeable middle class, forming a political bloc that shares in the prosperity created by a capitalist economy.
2. large firms that are not mobile – they cannot break their connections with local skilled networks where business plans and frontier technologies require the know-how developed and dispersed.
3. Immobile companies give governments a degree of sovereignty which they use to boost the middle class. The middle classes dictate to feeling confident about the economy but a sharp slowdown in growth in real median incomes, could strengthen the appeal of movements that threaten to disturb the status quo. Governments, too, are becoming less responsive to middle-class priorities. America’s is too dysfunctional, and Britain’s too distracted by Brexit, to focus on improving education, infrastructure and the competitiveness of markets.

Conclusion

Demographic change might also take a toll: older and whiter generations may not much care whether a would-be middle class that does not look like them has opportunities to advance or not. Then, too, the authors may have underestimated the corrosive effect of inequality. Threatening to leave is not the only way the rich can wield power. They control mass media, fund think-tanks and spend on or become political candidates. Proud democracies may well survive this period of turmoil. But it would be a mistake to assume survival is foreordained.

Source: The Economist – Economic stress and demographic change are weakening a symbiotic relationship. Jun 13th 2019

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Options for taking on Trump – the Japanese Model.

A colleague alerted me to a Terrie Lloyd a New Zealand businessman in Japan who writes a weekly newsletter. With the election of Donald Trump his recent writing looked at bullies and ways in which you deal with them. Shinzo Abe, the Japanese prime minister, has been proactive in getting to know Trump and his team and how the two countries can work together.

Research on bullies

Lloyd suggests that there are generally three ways to deal with a bully.

Run – UK seem to be taking this option
Fight – Chinese will do this
Suffer and appease – Japan, having a bullying culture already, will go for appeasement

Abe will be meeting with Trump on 10th February for a second time in as many months and will want to convince him that Japan is one of the good guys and if he has to pick on someone in the area he should pick on China. For this to work Abe also needs to feed Trump’s ego publicly

Lloyd looks at the work of Dacher Keltner who has written about appeasement and related
human emotion and social practice. He looks at two general classes of appeasement.

1) reactive – the person provides appropriate responses after incidents and these responses are usually public displays of embarrassment and shame.
2) anticipatory appeasement where a person is proactive and engages in certain strategies to avoid conflict. Polite modesty and shyness are also considered anticipatory appeasement.

Japanese Model for dealing with bullies

With Japan taking the latter option, Keltner is suggesting that Abe must appease Trump with gifts of value and that they are seen publicly to assist Trumps power and reputation. Last month the Japanese gave access to US car manufacturers but will that be enough to keep Trump happy? At the meeting on 10th February Abe will propose a package that could generate 700,000 U.S. jobs and help create a $450-billion market. It includes the building of infrastructure projects such as high-speed trains in the northeastern United States, and the states of Texas and California, and renovating subway and train cars. It also includes cooperation in global infrastructure investment, joint development of robots and artificial intelligence, and cooperation in cybersecurity and space exploration, among others.

Toyota the car manufacturer has also been taking the appeasement option after the Trump administration criticised their building of a second car assembly plant in Mexico and also threatened to impose a 20% tariff on Japanese automobile and auto parts makers with plants in Mexico. Toyota quickly announced it would invest $10 billion in its U.S. operations over the next five years.

Abe has definitely been massaging the ego of Trump not only being the first international leader to visit Washington after his election but also telling Trump that he “hopes the United States will become a greater country through (your) leadership,” adding Japan wants to “fulfill our role as your ally.” It will be interesting to see what happens after their meeting on Friday 10th February.

Sources: Terrie Lloyd,  The Japan Times

Winning votes by manipulating the economy. Does it work?

Recent research has looked at the ‘political business cycle’ (PBC) – which refers to the government of the day manipulating economic policy to boost their re-election chances. Examples have been as follows:

• increasing unemployment benefits
• reducing taxes
• increase in child benefits
• promising greater spending in certain sectors

PBC as you would expect is prevalent when elections are closely fought and is more pronounced in developing economies. However in election year spending rarely stimulates economic growth and firms tends to put investment on hold – 4.8% reduction than in non-election years. This suggests that there is a reverse political business cycle. It is only when the election is a foregone conclusion that investment remains constant.

Source: The Economist