The anti-establishment movement: explanation and remedy

The Iowa Caucus results confirm what the polls have indicated for months: the mood of the public is strongly anti-establishment. Republican talk radio would have us believe that the rejection of the establishment candidates is correlated with the anger directed toward those candidates that have willingly compromised with President Barack Obama on issues like healthcare, budgets, and immigration.

On the Democratic side, a self-proclaimed socialist performed exceptionally well against the Clinton political machine.

The political process is moving to South Carolina and before we cast our primary ballots we should seek a better understanding of the logic supporting the rejection of the establishment.

This opinion borrows from two models of political behavior. The first model has been around for a long time and comes from Harvard professor Arthur Schlesinger in 1959. In his book “Cycles in American History,” Schlesinger argues that the genius of American society is its focus on both the free market and social democracy. He argues that it is the balance between these two concepts that defines the political cycle.

The mood of the public oscillates between the private interest (reinforcing the free market) and the public interest (reinforcing social democracy). Politics is cyclical because our society is fundamentally a free market economy but we periodically reassess to address those elements in society that have been left behind in the prior cyclical wave. Thus, some measure of equality and individual social mobility is preserved.

If we are to apply Schlesinger’s model then we need to do nothing more than correctly assess our position in the cycle. Has the free market left too many citizens behind and is it time to reassess or has seven years of President Obama satiated the public’s social democracy craving and it is fatigued by public interest.

Thirty-seven percent of the voting population calls itself politically independent: either devoid of ideology or willing to suppress their own ideological preferences in order to correct the political cycle. Are the concentration of wealth statistics and the 35-year negative trend in real wages sufficient indicators of free market failure and the need for greater emphasis on social democracy? If so, should Republican primary voters support more moderate candidates in an effort to provide a palatable option for independent swing voters?

Or should they support Donald Trump because the foregoing statistical measures are due not to free market failure but instead are due to the establishment’s failure to stop illegal immigration and its willingness to represent corporate interest in flawed trade deals over the interest of working Americans? Can Trump tweak the free market component enough to correct the inequities without government involvement - without more social democracy?

The second model of political behavior comes from professors Daren Acemoglu (MIT) and James Robinson (Harvard). In their book, “Why Nations Fail,” the authors seek to explain global poverty and to do so through more secular rather than cyclical arguments. They argue that the prosperous nations of today had political and economic institutions in place at the time of the onset of the industrial revolution that were inclusive rather than extractive.

Those nations mired in poverty were subject to elitist political control and these elites created economic institutions to benefit themselves and extract wealth from the remainder of the population. To have adopted the technologies of the industrial revolution would have required the acceptance of creative destruction - destruction that would eliminate these extractive economic institutions - and as such the elites chose not to adopt these technologies.

Can we use the Acemoglu and Robinson framework of inclusive and extractive political and economic institutions to explain the anti-establishment movement? I believe we can.

The election of Ronald Reagan brought with it the beginning of a new cycle of reliance on the free market and the mood shifted toward private interest. Yet the free market underwent radical change beginning in the early 1980s. During the sixties and the seventies, the debate in corporate finance surrounded the “optimal capital structure” and the corporation was thought to balance the interest of shareholders, employees, management, and the communities in which they operated.

Beginning in the 1980s, it became accepted finance that the only constituencies that a corporation need consider in its activities were its shareholders. Moreover, private equity and financially engineered partnerships were the new wave in corporate finance. In order to participate in these partnerships, an investor was required to sign documents claiming a net worth of $1 million. These partnerships lead the way in corporate restructurings as they shed middle class jobs. These partnerships were and remain today, extractive economic institutions.

In the last 35 years we have witnessed a merger and acquisition wave of immense proportion. The Justice Department under Presidents Bush(s) and Clinton justified the mergers on the basis that the markets were global and domestic market share was irrelevant. Oligopoly is an extractive economic institution.

In the Acemoglu and Robinson model, those who benefit from extractive economic institutions will seek political influence through extractive political institutions. There should be little doubt that superpacs are extractive political institutions and campaign finance reform is required to restore inclusiveness.

Over the last 35 years, the establishment has weakened the nation. Our political and economic institutions have slid backward from the inclusive institutions that have made our nation strong and we have opted for more extractive institutions. The Bush and Clinton monarchies presided over this slippage; Republicans have impugned a penalty for the candidacy of Jeb while Democrats give a free pass to Hillary. This free pass is unwarranted. Hillary Clinton is an establishment candidate. The Empress hath no skirt.

This story was originally published February 8, 2016 at 7:42 AM with the headline "The anti-establishment movement: explanation and remedy."