The Conservatives need to embrace the Centre Right

 

Chris talks about the death of the centre right, but I would argue the centre right in the UK and US died a long time ago, with the advent of neoliberalism. The centre right that I can still dimly remember in the UK was a Conservative party that accepted the need for a sizable state, strong trade unions, the nationalisation of essential utilities and high rates of taxation on top incomes. These were the governments of MacMillan and the the views of the Tory ‘Wets’ that were horrified by the unemployment Thatcher’s monetarism created.

Now you could argue that since those days what is thought of as the centre has shifted, so what is centre right now is different from what was centre right in the 1960s, 70s and early 80s. That is true to some extent. But I think the real misconception comes because what many currently mean by centre right is much better described as the socially liberal right. Things are much clearer if we think in two dimensions, separating (as far as possible) the economic and social.

Have a look at the new Prosper group within the Conservative party. Under ‘what we believe’ we have “free markets give consumers choice and foster innovation”, “businesses create that growth, not government” and “too much regulation stifles growth”. So where does this group believe in things that might upset Kemi Badenoch? It is with things like “we should allow people with the skills our economy needs to come here” and “we should reduce barriers to trade, especially with our closest neighbours”. It is socially conservative populism, introduced into the Conservative party by Johnson and Farage, that Prosper along with one nation conservatives want to stand apart from.

It also seems clear from Badenoch that she doesn’t want a broad church Conservative Party that includes people that might be part of the Prosper group. On social issues like immigration she is in a race with Reform to see who can promise to deport the most. She wants to take the UK out of the ECHR, and she wants to repeal the Climate Change Act. In terms of policy it is getting very difficult to tell Reform and the Conservative party apart.

To many this seems crazy. Why abandon the centre ground if you want to win elections? But under one particular view of where voters currently are this positioning makes some sense. Suppose we believe that the electorate is increasingly split into two blocs, left liberal and the socially conservative right, and that nearly all the changes in party popularity come from movements within rather than between those blocs. There is a lot of evidence to support that idea. If this was absolutely true, with no voters crossing the divide between the two blocs, then Badenoch’s strategy makes some sense.

The reason why is nicely laid out in a recent post by Peter Kellner, where he reminds us of how two ice cream vans might position themselves on a long beach front. While it would be best for those on the beach if these two vans positioned themselves well apart from each other, competition will put them side by side in the middle of the beach. If one van takes pity on those at the their end of the beach and moves closer to them, they will lose some customers in the middle of the beach who are now closer to the other van, even if the other van doesn’t move. But the other van will move, to be right next to the van that first moved, capturing even more of the beach market. Using economics jargon, both vans next to each other in the middle of the beach is an equilibrium.

So if voters in the socially conservative bloc only ever vote for one of the two socially conservative parties, then it makes sense for Badenoch to put her party as close as she can to Reform. Like the two ice cream vans, they will be next to each other in policy terms. In particular because Reform is pretty socially conservative, so will the Conservative party. Any social liberals in the party should either keep quiet or leave.

Note, however, that exactly the same reasoning applies to those in the socially liberal left bloc. If we ignore the Liberal Democrats for just a moment, then Labour should be adopting policies very close to the ideas promoted by the Green’s Zack Polanski. Which they clearly are not doing.

The reason why Badenoch’s strategy is wrong is that not all electoral movements take place within both blocs. Most might have done in recent years, but even then not all. It used to be the case that we had two dominant parties, and elections were one or lost by voters moving between these two parties. Part of the reason for that is that many voters position themselves close to the centre in both economic and social terms, and these voters will switch between the socially conservative right wing bloc and the socially liberal left wing bloc at each election. [2]

Which is where we do need to talk about the Liberal Democrat party. Most of their seats, including those won at the last election, are where the Conservatives are their main challengers. The majority are in what used to be the Conservative’s southern heartlands. As a result, in economic policy terms the Liberal Democrats are much more right wing than the preferences of their membership. But in social policy terms they are liberal. They are filling the gap left by the Conservative party’s march towards social conservatism, just as the Green’s growing popularity is a result of Labour’s attempt to sound more like Reform than the socially liberal party most of its voters want it to be.

What about the argument that the Conservatives have lost far more votes to Reform than the Liberal Democrats or Labour, so their focus should be on Reform. While this is undoubtedly true, the analysis above was about policy positions. There is a big difference between ‘focusing on Reform voters' and copying their policies. Neither Labour or the Conservatives have learnt that the more they talk about socially conservative issues like immigration and asylum in a way that seems very similar to the way Reform talks about these issues, the more they boost Reform’s support rather than their own. Farage owns these issues, because the Conservatives are tainted by the ‘Boris wave’ of post-Covid immigration and because the boats will keep coming under Labour.

In contrast, as Owen Winter outlines here, the Conservatives are ideally placed to take Reform voters who are on the economic centre or right, as well as centre or right wing voters on economic issues who are in the centre on social issues, because of rising concerns over higher taxes. On economic issues they have (surprisingly given their period in government) a relatively positive image among voters. (Liberal Democrats policy positions outside elections are less well known.) So Badenoch should be embracing the Prosper group, not giving them a cold shoulder. They could even paint recent defections in a positive light. [1]

You can make the same point by looking at attitudes to Trump. Badenoch has largely followed Reform in supporting Trump, and Trump-like policies like deportation. Yet Trump is disliked by Conservative voters even more than Labour voters dislike Trump. Many Reform voters have a negative attitude towards Trump. (Even among Conservative party members, more dislike than like Trump.) Badenoch could gain votes by using Trump and Farage’s attachment to him to attack Reform, but she doesn’t.

The same point can be made another way. As I have noted before, the main political parties in the UK are neatly lining up with the four segments of economic and social policy space. The Greens are socially liberal and left wing, the LibDems are socially liberal and (mildly) right wing, Labour are socially conservative and (mildly) left wing. The anomaly is that we have two major political parties in the socially conservative, right wing space. Both want to eliminate the other. Farage’s comparative advantage is on socially conservative issues, and Conservatives are stronger on economic issues. The Conservatives should play to their strengths, not their weaknesses, and set policy on social issues with one eye to voters in the centre.

For these reasons, Badenoch should be embracing politicians like those in the Prosper Group, not giving them a cold shoulder. If she continues to pursue her current course the more socially liberal but economically right wing Conservative voters the politicians of Prosper represent will not disappear, but instead they will move in even greater numbers to the Liberal Democrats. [3]

Does any of this matter to voters in the other bloc: left wing socially liberal voters? A more broad church Conservative party will be a tougher opposition to both the Liberal Democrats and Labour, and will therefore mean a government from the left liberal bloc is less likely to be elected. For that reason Labour and the LibDems will be happy with Badenoch's cold shoulder for Prosper. But there is a counter argument.  As I have said many times, the biggest threat the UK faces is a socially conservative populist government in Trump’s image. That will happen if Reform wins, or if the Conservatives win at the cost of turning themselves into a socially conservative populist party in Trump’s image. One danger is that a Conservative leadership that does their best to ostracise more socially liberal Conservatives will mean one of these two outcomes will occur. 

[1] Many many years ago when I was working in H.M.Treasury I left my CV in a photocopier. Luckily a friend found it. On these grounds I might feel some sympathy for someone whose mislaid documents were used against him, but I cannot feel any sympathy for someone like Robert Jenrick.

[2] Labour and the Conservatives are making the opposite mistake right now, although it means they end up going in the same direction. Labour are too preoccupied with voters switching blocs (Labour to Reform or the Tories), which means they are haemorrhaging votes to the Greens and LibDems. In contrast the Conservatives are trying to match policies with those in the same bloc, and therefore are losing votes in the centre (and particularly in key seats to the LibDems).

[3] Why is Badenoch making this mistake? I think part of the answer is Brexit. Brexit was a policy largely supported by social conservatives and opposed by social liberals. As long as the Conservatives continue to support Brexit despite all the evidence that it was a disaster, and oppose Labour’s attempts to soften its negative impact on UK prosperity and international influence, then they tie themselves to Reform and against the liberal right of Prosper. Given what Johnson did when he took over the Conservative party, it will probably require more than one election defeat to change the Conservative party’s position on Brexit. Another reason is the defection of Conservative MPs and former MPs to Reform. When your constant worry as leader is yet another Tory defection to Reform, it is very difficult not to think that any attempt to distance your party’s policies from Reform’s will only encourage further defections. But of course yet another reason may simply be that Badenoch, knowingly or not, is putting her own policy preferences ahead of party popularity.

How Liberal Democratic Countries will cooperate without the US

 

I sometimes get things right and sometimes wrong, but I cannot remember one of my posts being proved right within two days of publication. Europe stood up to Trump’s bullying over Greenland, and Trump backed down for all the reasons I gave in last week’s post. It was a big failure for Trump, and a big victory for European politicians including Starmer, although media coverage did its best to hide the fact. [1] The past week may well be seen in retrospect as a turning point, and that turning point was marked by a speech as well as Trump’s humiliation.

As speeches go, Mark Carney’s to Davos was very well written. It was also I think the first time a Western leader outside the US has publicly stated so clearly that the old world order has gone. The idea that a US based world order has come to an end is hardly new (even I argued as much a year ago), but for it to be stated so directly is striking. That this should come from Carney in part reflects that US threats to Canada helped get him elected, but more importantly as Adam Tooze notes, Carney had been thinking about the role of US hegemony for some time.

What is implicit in the speech is that the rupture, not transition (to use his words), in the old world order is a result of a change in the stance of the United States. It is no longer the leader and protector of the old order, but is instead acting in its leaders own personal interests which includes confrontation with and even invasion of European countries, and a total disregard of existing rules and institutions.

One of the unusual features of the speech is that it was honest about its subject matter. To quote:

“We knew the story of the international rules-based order was partially false. That the strongest would exempt themselves when convenient. That trade rules were enforced asymmetrically. And that international law applied with varying rigour depending on the identity of the accused or the victim. This fiction was useful, and American hegemony, in particular, helped provide public goods: open sea lanes, a stable financial system, collective security, and support for frameworks for resolving disputes.”

In contradiction, it could be argued that the change is just Trump treating Europe and Canada in the way the US often treated South America. But this would be a mistake because the nature of US meddling in other countries has changed. Whereas during the Cold War in particular the focus was on ‘discouraging’ left wing governments and backing US business interests, the aim of the current US regime is to promote governments in its own image: populist, anti-democratic, authoritarian.

A question that the speech does not address is whether this rupture is permanent. I suspect many Labour politicians in the UK hope that it isn’t, and that when Trump goes something like the old order can be rescued. I addressed that in my post a year ago. First, there is a strong chance that Trump will defy the US Constitution and stay as effective President for more than his second four year term. Second, while the Republican party is now almost completely under the thumb of Trump, the MAGA movement that now dominates that party will outlast him. The structural factors that allowed a majority of voters to make a known fascist the President have not gone away, and instead have intensified as right wing oligopolists have taken over much of the means by which most US citizens get information.

Carney’s speech is a plea for ‘middle powers’ like Canada that retain liberal democratic governments not to retreat into national sovereignty but also to cooperate with each other. When middle powers “negotiate bilaterally with a hegemon, we negotiate from weakness. We accept what is offered. We compete with each other to be the most accommodating.” On this he is absolutely right. The decision by the UK to leave the EU to gain additional national sovereignty can now be seen clearly as the colossal error many of us knew it always was. To quote Chris Grey:

“The Brexiter insistence that the EU was irrelevant to UK security, which they claimed was entirely catered for by a US-led NATO, which was always ill-informed, is now exposed as the greatest strategic miscalculation in modern British history.”

What kind of coalition building are we talking about? Carney and Canada are “pursuing variable geometry— different coalitions for different issues, based on values and interests. On Ukraine, we are a core member of the Coalition of the Willing and one of the largest per-capita contributors to its defence and security. On Arctic sovereignty, we stand firmly with Greenland and Denmark and fully support their unique right to determine Greenland’s future. Our commitment to Article 5 is unwavering….. On plurilateral trade, we are championing efforts to build a bridge between the Trans-Pacific Partnership and the European Union, creating a new trading block of 1.5 billion people.”

He describes this approach as

“principled and pragmatic. Principled in our commitment to fundamental values: sovereignty and territorial integrity, the prohibition of the use of force except when consistent with the UN Charter, respect for human rights. Pragmatic in recognising that progress is often incremental, that interests diverge, that not every partner shares our values. We are engaging broadly, strategically, with open eyes. We actively take on the world as it is, not wait for a world we wish to be.”

Of course principles may not be applied consistently. Canada still provides arms and support for a right populist wing populist government in Israel that has, according to most experts, been committing genocide in Gaza.

For a middle sized power like Canada this “variable geometry” could be described in another way: seek alliances where you can to replace a historic dependence on the US. On the assumption that rejoining the EU is unlikely to happen anytime soon, the UK in this respect is a middle sized power in a very similar position to Canada. Yet Starmer’s initial response to Trump’s Greenland threats was very different in tone, stressing the importance of the US to the UK’s security in particular. It was more a ‘colleagues will differ’ talk rather than Carney’s ‘the world has changed’ speech. Whether this represents a lack of honesty facilitated by not wanting to provoke the beast, or a hope that the old order can be restored once Trump is gone, is not totally clear.

If it was the former, subsequent events showed the nature of the problem that the UK and all the remaining liberal democracies around the world face with the Trump/Vance/Miller regime. Starmer was ‘rewarded’ for his praise of the US/UK alliance with an attack from Trump over the Chagos islands deal. Trump did this not because the US opposes the deal, but simply because it helped the UK's right wing populist parties. I suspect Carney is right in understanding that when your very existence provokes the Trump regime, worrying about how what you say will be received by Trump may matter less than being honest with your own voters.

Starmer’s response to Trump’s Chagos attack was much better, where he was direct about what Trump was trying to do. Then last Friday he directly attacked Trump’s remarks about British soldiers in Afghanistan, and said Trump should apologise. Once again we may be seeing the consequences of Trump overplaying his hand, turning Starmer within just a week from an appeaser into someone not afraid to use attacks on Trump for electoral advantage. [2] I fear it is more likely that after this week Starmer will revert to his original stance.

The EU is in a rather different position to Canada or the UK. It could potentially become a global power to match the US, China and Russia. Indeed, it is possible to imagine that the old world order survives, simply refashioned with the EU replacing the US as the dominant power. There are two obvious problems with this. The first is that the EU is a group of member states rather than a single country. The second is right wing populism is already dominant in a few EU countries, and as a result one of these at least, Hungary, appears closer to Russia and the US than the EU. This particular problem may go away in April, where Orbán’s Fidesz party may well be defeated, but a more serious challenge comes in 2027 with the French Presidential elections, where the right wing populist candidate has according to current polls a good chance of winning.

Until then, at least, the EU will continue to limit its dependence on the US as far as it can. The ‘variable geometry’ that Carney talked about will mean that trade with the US will continue, despite tariffs, but those European companies and some US exporters wanting stable and secure markets or supply chains will over time try to avoid the disruption of unpredictable tariffs by avoiding the US. [3] Through the Digital Euro the EU will try to reduce its dependence on a dollar payments system. The dollar’s share of global foreign currency reserves is falling rapidly. Needless to say, none of these are quick processes. 

On security Europe and Canada will endeavour to keep NATO ties because that hinders potential US aggression towards Europe, as the Greenland resolution showed. Like NATO, other institutions of the old order, like the IMF and the World Bank, will continue as a means of trying to anchor the US as far as possible to normality. It is unlikely that we will see new institutions emerge involving the middle powers that remain liberal democracies. Instead we are likely to see more ad hoc groupings of nations aimed at tackling specific issues, such as Greenland, or the ‘Coalition of the Willing’ helping Ukraine fight Russian aggression and already replacing the assistance that the US used to provide. In the longer term major European countries, especially the UK, will have to divorce themselves from the US inspired ‘war on terror’ whose disastrous consequences include, at least in part, Western complicity in the genocide in Gaza.

[1] True, I didn’t prophesy the market reaction to both Trump’s tariff threats and the EU’s robust reaction, but the point of the post was that he resorted to the weak threat of tariffs precisely because his political ground was much more fragile than Europe’s.

[2] The best thing Trump could do for Starmer right now is threaten some part of UK territory, as elections in Canada and now Denmark show,

[3] It is tempting to believe that the US administration's obsession with tariffs will not outlive Trump, and that even with Trump negative market reaction may limit their use in the future. However populists governments do seem to often put impediments in the way of trade in goods. As a result trade between liberal democracies may be less hazardous than trade with right wing populist governments.

Greenland

 

There is no doubt that Trump wants to be able to say that he and the United States ‘owns’ Greenland. This has nothing to do with US strategic interests or US security. The 1951 Greenland Defense Agreement, which was renewed in 2004, allows the United States to build bases there, station troops, and more. For Trump, owning Greenland is purely personal. As he told the New York Times on 7 January he wants to own Greenland because “that’s what I feel is psychologically needed for success”.

The fact that US foreign policy could be dictated by the President’s psychological need, a need that if translated into action would destroy NATO as currently constituted and start a war with at least one long standing ally of the US, just reflects how much the United States has become a fascist state. When I wrote this post almost a year ago I argued that Trump’s administration could reasonably be called fascist in part because of its use of violence. Back then the main example was Trump’s attempt to overthrow the 2020 election, and his pardon for all those convicted in that attempt. Now we can see how he has created his own police force with the clear intention of terrorising that part of the population that didn’t vote for him, and his administration’s attempts to justify the killing of innocent civilians by that force (and using law enforcement agencies to prosecute victims and political opponents). 

Given this, Europe is absolutely right to take Trump’s threats against Greenland extremely seriously. Various European countries sending troops to Greenland is, I think, the correct response. Of course Europe does not have the military capability to actually fight the US if it actually came to a conflict. That is not why Europe has sent troops. Instead Europe is increasing the cost to Trump of any invasion. These troops are not meant to fight, but to deter.

The key thing to recognise, and what is missing from much UK analysis, is how fragile the Trump regime is on this issue. A majority of US citizens do not want to be part of a fascist state, even though a very substantial minority act as if they do. The Republican party has lost all the elections held since Trump took power, and in many cases lost big. In addition Trump craves popularity, and his popularity ratings remain pretty poor.

In one recent poll, 86 percent were against the U.S. using military force to acquire Greenland, with just 9 percent in favor of such a move. Would those numbers shift after a US military operation and ‘success’? I doubt that. It would become clear that through this invasion Trump had effectively withdrawn the United States from NATO. Pictures of US troops taking troops from Europe prisoner would not play nearly as well as them taking an unpopular dictator from Venezuela.

Perhaps more important is the reaction of the US military and Congress. Unsurprisingly, US generals are far from happy about the prospect of attacking a NATO ally, particularly if the order to do so did not have Congressional backing. This is why members of Congress have declared any order to invade Greenland would be illegal. As NATO has been such an important part of the US military for so long, of course such a blatant way of ending that alliance would cause deep unease, and perhaps lead to several resignations. Of course those within the Trump administration who actively want the US out of NATO may be pushing a Greenland invasion for precisely that reason.

Even more important would be Congress. The Republicans have a wafer thin majority in the House of Representatives, and an invasion of the territory of a NATO ally would almost certainly mean that majority would no longer exist. So far Congress has essentially allowed Trump to do whatever he likes, even when he steps on the legal ground that Congress formally controls, but taking the US out of NATO would be a step too far for some Republican politicians.

There is also a cost to the MAGA fanatics who are pushing Emperor Trump to realise his imperial ambitions. A US takeover in Greenland and the withdrawal/expulsion of the US from NATO would be a big blow to the populist right in many European countries. It would become much easier for mainstream politicians to paint the populist right as the enemy within, supporting Trump either directly or indirectly by promoting the policies that Trump supports.

So the military reaction of Denmark and other European countries to Trump's threats over Greenland make sense as a form of deterrent, trying to increase the political costs to him of his ambitions by as much as they can. There is at least a short term asymmetry that benefits the European side. Any conflict will hit the popularity of Trump and the Republican party before crucial midterm elections this year, but a conflict is likely to enhance the popularity of most European governments, particularly against populist oppositions that have links to the US right. It could also benefit European governments in diluting any non-populist opposition, much as Trump’s attacks on Canadian sovereignty helped Mark Carney in last year’s Canadian elections.

It is for this reason that Trump is now trying to use tariffs in an effort to force European governments to back down. But, at least in the short term, the asymmetry in the reaction of public opinion noted above is also likely to apply with tariffs. Higher tariffs are not popular in the US because they tend to push up the prices US consumers face. They are costly for European companies and economies as well, of course, but again it is clear to voters who started this fight. While economics might suggest that the best response of Europe to higher tariffs is to do nothing, economic retaliation in some form may well play better politically.

It is also important to note that a habitual liar like Trump does have an exit path that allows him to save face. Trump could back down on the idea of owning Greenland, but pretend he has achieved a victory through some manufactured ‘new agreement’ to increase the number of US bases in Greenland or something similar. To his MAGA base and a by now largely captured US media, it wouldn’t matter too much that such an agreement gave the US rights it already has. In contrast European governments will only suffer if they give in to Trump’s demands.

In the past I have written that right wing populist’s worst enemy is often their tendency to overreach and overplay their hand. The more they depend on the mind of a single individual surrounded by yes men or fanatics the more this is likely to happen. I suspect Trump and Greenland will turn out to be an example of this, although the costs of populist failure on this particular issue may be felt more by populists outside the US than by Trump himself.

A Post Neoliberal Consensus

 

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Dani Rodrik recently wrote an article entitled “The Post-Neoliberal Consensus is here”. He argues that it comprises three elements:

1. the concentration of economic power has become excessive

2. restoring dignity to people and regions that neoliberalism left behind, which in particular involves providing good jobs

3. The government has an active role to play in intervening in the market economy

Such a ‘consensus’ is clearly not neoliberal. While some forms of neoliberal theory do worry about excessive market power, neoliberalism in practice does not. Equally neoliberalism celebrates rather than worries about the growing wealth at the very top. While neoliberalism may require a strong state, it is to protect an ‘unshackled’ and deregulated market economy, rather than directly intervene in that economy. Of course Trump’s MAGA economy, if it has any coherent logic at all, is also not neoliberal, because there the state does intervene in the market economy (tariffs, immigration controls, and even in some cases state holdings in major companies in return for favours).

In October last year the LSE published a book (see above) edited by Tim Besley & Andrés Velasco (B&V) that attempts to define this new economic consensus. In their introduction these authors outlined five core principles.

1. The idea that the market does production and the government does any required redistribution, while still often useful, no longer works as a core principle.

2. The need for an active innovation policy, both to increase growth overall but also to make sure it is evenly spread geographically.

3. Government is the insurer of last resort. This includes “There is strong justification for an activist fiscal policy that goes far beyond the Keynesian role.”

4. Economics cannot be separated from politics.

5. States need to be capable.

It is easy to relate these to Rodrik’s three points. Are both just a reiteration of well known social democratic ideas? In some sense clearly yes, but this is different from the social democracy typically practiced in the UK in the 1960s or 70s, for example. In particular, trade unions do not play a major role, and there is no suggestion that state intervention should involve trying to shift the Phillips curve. Nor is nationalisation seen as desirable for its own sake.

Rodrik’s (1) can be seen as a specific example of B&V’s (4), but I like the emphasis that Rodrik gives on this point. For example A&V, like many economists, tend to discuss wealth taxes in terms of revenue raised (uncertain because of international mobility etc) rather than both fairness and, in particular, political power. The US is the clearest example of the dangers that excessive wealth can bring to politics, as the work of Martin Gilens (Affluence andInfluence: Economic Inequality and Political Power in America) and others make clear. It is impossible to ignore this when you live under a plutocratic dictatorship, but the UK is not immune to exactly the same fate, and it would be foolish to think it is. [1]

This raises another question, which is whether discussions of a new economic consensus is relevant at a time when liberal democracy is fighting an existential battle with right wing populism at best, and resurgent fascism at worst. Surely the best way of fighting this battle is through economics that is popular, and whether it works well has to be a secondary consideration.

The obvious response to this is that for liberal democratic governments in power what works matters, because in part they will be judged on how far what they have improved the welfare of the electorate. Trying to assess what works matters. To put this point most bluntly, in many ways pursuing a neoliberal conception of what economic policy should be has got us into the position where the threat from right wing populism is so grave, so it would be foolhardy indeed to carry on pursuing policies based on that old consensus.

This new consensus is very relevant to the current UK government, for example. I suspect it would sign up to points (2) and (3) on Rodrik’s list, but in my view their implementation on both fronts has been tentative in the extreme. Rodrick’s (1) is also the area where I am most pessimistic, both in the UK and elsewhere. In the UK the power of the populist press has gone unchallenged, as has GB news, as has the BBC preferring to both sides events where the evidence is clear. The government continues to use X rather than BlueSky, and appears to have conceded that social media should be a propaganda weapon for the populist right in the same way they have conceded it for the press. Little has been done to curb the influence of money on politics, even though this money (often from the US) clearly encourages and favours the populist right, often in its most extreme form.

Can you reasonably argue that, in the battle to defeat right wing populism, it is better to keep potentially sympathetic elements of the wealthy elite onside by not pursuing Rodrik’s point (1)? Elements within Labour in the UK and the Democrats in the US often act as if they believe there is a strong argument along these lines, but I would like to see it clearly spelt out. The counterargument is very strong. As long as concentrations of extreme wealth exist, and its influence on politics is unchecked, then the battle between liberal democracy and right wing populism is in danger of being never ending.

While it is important to lay out what the successor to neoliberalism within liberal democracies should look like, there remains a tension between these ideals of best practice and the battle between liberal democracy and right wing populism, particularly when right wing populism is in power. Whether all the the proposals put forward by Zohran Mamdani in his victory in the New York City mayoral election, or the platform of any other social liberal successfully fighting right wing populists for that matter, would find favour with the London Consensus may seem beside the point as long as they win.

As Martin Sandbu notes, the London Consensus is more of a handbook than a left wing version of the Washington Consensus, and it would take many more blog posts to cover its contents. That is something I hope to do in future posts. But I think it and Rodrik’s article are correct in identifying two ways in which neoliberalism is no longer the intellectual force it once was. The first is a recognition that, on political grounds alone, it is no longer politically feasible to ignore issues of distribution on a regional or personal level in the pursuit of aggregate growth or prosperity. The second is that markets fail in many ways, and a capable state is vital in managing markets when this happens. This was something most economists always knew, of course, and it is also something that economists know rather a lot about.

[1] Like the US, the populist right in the UK has a core base that brings it close to a majority. A mistake that is consistently made is to equate the populist base in the UK with the Reform vote, but the Conservative party under its current and likely future leader are much the same. It was Boris Johnson who greatly increased the influence of private wealth on government decisions.

What kind of crisis would a bursting AI bubble become?

 

In this post I’m not going to speculate about whether the current boom in AI infrastructure (mainly data centres, mainly in the US) is a bubble or not, but rather ask what would happen if it was and, as bubbles do, it burst. [1] What kind of impact might this have on the world economy? There are three main elements that might be involved in any bubble bursting: a stock market collapse, a collapse in real investment, and financial sector problems.

A stock market collapse is perhaps the least interesting, and least worrying. The current boom in the US stock market is very much led by a small number of tech companies. Now my Google AI overview says that a “stock market collapse centered on the artificial intelligence (AI) sector would likely be highly deflationary, primarily by triggering a sharp recession.” It’s possible, of course, but the key point is that the transmission mechanism between a stock market collapse and a recession is a fall in aggregate demand, and specifically a fall in consumer confidence. One thing we know for sure is that policy can influence aggregate demand. [2]

The most immediate impact of a stock market collapse would be a fall in short term interest rates, as the central bank attempts to avoid a recession. A decline in interest rates will not reverse the fall in the stock market, but it may well offset the impact of the stock market decline on consumption and therefore aggregate demand. Indeed that is exactly what the central bank will try and do.

It is possible, of course, that central banks, and particularly the US Fed, will run out of ammunition because interest rates hit their lower bound, just as they did after the Global Financial Crisis. But then a fiscal stimulus can take its place, and at least in the US my guess would be that Trump will not hesitate to pull that lever for purely short term political reasons. That in turn will make US fiscal sustainability even worse, but I doubt whether that will lead to fiscal stimulus having a insignificant or contractionary effect.

A second element of a bursting bubble might be a sudden slowdown in the amount of investment in new data centres. Less new buildings will be built, and less chips to put in them will be bought. That will have a direct negative impact on aggregate demand, mainly in the US. My own guess would be that we are unlikely to see a sudden stop in such investment, for two reasons. First, AI will still be used and will need testing and developing, and the chips required to do that don’t last very long, so will need replacing. A more likely outcome is that investment falls back as some of the companies bow out of the AI race.

Once again, this is a hit to aggregate demand in the short run, so everything noted above about a stock market collapse also applies. Short term interest rates will fall to at least offset the impact on employment of the investment decline, although perhaps not to offset the impact on GDP.

Both scenarios indicate a key point that is often neglected when talking about the consequences of a bursting bubble. If the bubble bursting hits aggregate demand, then policymakers can replace that demand using monetary and fiscal policy. As long as policymakers are prepared to use these instruments, the impact of shocks that just reduce aggregate demand is not nearly as significant as is often portrayed. Keynes taught us that we could stop demand driven recessions, and he was right.

The wildcard in all this is the financial sector. For some companies the initial expansion in AI investment was financed out of these companies’ huge cash reserves, and it is only more recently that investment has been funded by borrowing. Once the investment is financed by borrowing, the possibility that companies may not be able to pay back (or service) that borrowing arises. If default happens, then the financial sector is hit.

The Global Financial Crisis (GFC) involved three elements, all of which were necessary to produce it. The first, and perhaps the least important, was the collapse of the US sub-prime mortgage market. Why do I say least important? Because shocks to the financial sector are bound to occur from time to time. The financial sector should be robust to such shocks. The second element was how interconnected Western banks had become, so problems in a US market hit banks not just in the US, but also the UK and Europe. (Those that forecast a crisis because the UK private sector was borrowing too much were not spot on: the big UK banks got into difficulty because of the exposure to US defaults.) That was why a US centred crisis became global. The third, and the key, problem before the GFC, was that the banking sector in most Western countries had made itself extremely fragile to such shocks.

The crucial concept here is leverage: the ratio of loans to the capital a financial company has. Here is this data for US banks (source).

G-SIBs are ‘global systemically important banks’. You can see how, before the GFC, banks reduced the amount of capital they had relative to loans, which meant that they became much more vulnerable to shocks. That has been more than reversed since the crisis (largely because of tougher rules imposed by governments), so banks at least should be more resilient to a financial shock such as defaults on loans for AI investments.

It would be nice to conclude that the financial system should now be able to weather an AI shock, but that would be a dangerous assumption for two reasons. First, while banks are more resilient now than they were in 2007, they still will be vulnerable if the shock to hit them is very large. As I argued in various posts, capital requirements for banks should be much higher than they currently are, because there is little justification for the state to implicitly provide an insurance policy to banks against very large financial shocks. Second, the financial system remains both extremely complex and interconnected, so it is possible that some non-bank institutions might fail as a result of a sufficiently big AI shock, and that will intensify any impact on banks. As Paul Kedrosky outlines here, there are elements of the GFC collapse that are being repeated with the AI boom. See also this.

Note also that instances of default and financial concern need not be caused by a complete collapse of the AI bubble. Perhaps more likely is that some firms succeed in generating revenues to pay back loans (through AI or their existing activities) while others do not. What we just do not know for certain is whether this more limited AI financial shock can be absorbed by the financial sector as a whole, or not,

Here I want to make a more general point about financial crises and macroeconomic forecasts. It is extremely unlikely that macroeconomic forecasts will ever anticipate a financial crisis, because to anticipate a financial crisis involves deep knowledge of a very opaque and rapidly changing financial system that very few people have. Before the GFC, some well known economists did know about the increase in bank leverage and did try and justify it with invalid arguments, and at least one other economist publicly disagreed. As I argue here, to suggest that economics as a whole is somehow discredited as a result of the GFC is nonsense. Equally it is foolish to believe that macroeconomists like myself can tell you whether bursting of the AI bubble will precipitate a similar crisis.

What is well known and is a legitimate issue of concern is that policymakers, at least in the US and UK, are currently focused on reducing rather than increasing banking sector capital requirements. The reasons why the current administration in the US wants to do this are obvious and not worth discussing. Rather more surprising, as David Aikman - the new NIESR director - notes in a recent blog, is that the Bank of England's Fiscal Policy Committee also thinks the appropriate capital requirement for UK banks has fallen. Aikman starts his blog with "Did they get the sign wrong?" Readers can judge themselves by reading the latest FPC report, about whether it squares its opening statement "Risks to financial stability have increased during 2025" with this recommendation at the end, and whether pressure from the Chancellor that the report discusses in between is material or not.

None of this suggests that we should be sanguine about the consequence of an AI bubble bursting. But nor is it the case that we should be fatalistic about the consequences of such an event. Policy can do a great deal to moderate the impact of a burst AI bubble. While fiscal policy failed to take such action in a consistent way after the GFC, it did react in a much more appropriate manner during the pandemic, and in the UK at least may have provided too much fiscal support. The biggest risk, but also perhaps the least likely, is that a bursting bubble creates insolvencies in parts of the financial system.

[1] For those that just want to find out more about what AI is and the nature of the boom, I would recommend this discussion between Paul Krugman and Paul Kedrosky. 

[2] There would be a risk if a stock market bust hurt institutional investors. However, as Adam Tooze notes here: "the current bubble is a self-feeding surge in confidence, amplified by endogenous credit creation with retail investors and the media to the fore. The risks to the financial system are somewhat moderated by the fact that institutional investors are taking more cautious positions. If there is a bust, this is good news, at least so long as retail investors are not as heavily leveraged as professional hedge funds might be."

Understanding the rise of the populist far right

 

This is a follow-up to last week’s post. Occasionally I receive comments on social media that point me to academic analysis that I wasn’t aware of, particularly on an issue that is not macroeconomics. Last week was one of these occasions (thanks to @yusufimaadkhan.com), and it allows me to expand on what I wrote to give it wider scope.

As a brief reminder, I argued last week that support for far right populist parties depended to a significant extent on the attitudes of political elites, and in particular leaders of mainstream parties. If these elites ostracise far right or racist views, then this discourages voters from voting for far right parties. A clear example of that in the UK was Prime Minister Edward Heath sacking Enoch Powell after his ‘rivers of blood’ speech. In contrast, if mainstream political leaders attempt to attract potential far right voters by adopting far right rhetoric on issues that concern those voters (immigration, asylum, human rights), this not only destroys any social taboos on voting for far right parties but actively encourages such votes. An example of this would be the recent behaviour of first the Conservative party and more recently the Labour party in the UK.

This idea has strong similarities to the thesis set out in a book published in 2024 by Vicente Valentim, who is Assistant Professor at IE University in Spain, called “The Normalization of the Radical Right: A Norms Theory of Political Supply and Demand” and published by Oxford University Press.

The book proposes a theory based on social norms, where growing radical-right behavior is driven by individuals who already held radical-right views, but who previously did not act on them because they thought that they were socially unacceptable.

A key implication of this theory and my previous post was that the rise of right wing populism should not be seen as a surprise, but instead represents a return to a more natural state of affairs where a significant section of the population holds pretty socially conservative (including xenophobic or racist) views and votes accordingly. The unusual period is not today but the fifty odd years after WWII, where this vote was suppressed or diverted because of strong social norms against anything that appeared to be racist behaviour. Let me quote from an interview Valentim recently gave:

“the argument in the book is that many voters already hold radical-right views before radical-right parties and politicians first become successful. However, they typically hide them to avoid social repercussions.”

An obvious reason why this strong social norm existed after WWII was that the war had been fought and won against right wing populist (in particular fascist) regimes, and the horrors that these regimes can create became well known. I have suggested that part of the reason that right wing populist parties have become more socially acceptable for some is simply the distance in time between WWII and today.

Valentim's main account of the rise in radical right parties is based on political entrepreneurs.

“The fact that [voters] do not show these views lead politicians to underestimate the electoral viability of running for politics on a radical-right platform. This leaves radical-right parties with less skilled leaders who are unable to mobilize even voters with privately held radical-right preferences to go out and vote for them.”

He calls this the ‘latency’ phase. It is followed by an ‘activation’ phase, when far right leaders do manage to mobilise far right votes, and a ‘surfacing’ phase where because

“radical-right parties and politicians become successful and enter political institutions [this] makes individuals perceive that their positions are more socially acceptable than anticipated. This has two implications. First, at the demand-side level, it means that voters, who already held radical-right views but did not show them in public, become more comfortable expressing these radical-right views. … Second, at the supply-side level, politicians learn that one can be electorally successful while espousing radical-right views.”

Valentim identifies triggers that can begin the activation stage. In Germany, for example, he points to the 2015 refugee crisis, although in my view German unification must also be important. In the interview Valentim points to Obama’s presidency as a trigger for the US, but my own view is that in both the US and UK the growing unpopularity of neoliberalism played an important supply side role in motivating right wing politicians to move to social rather than economic issues. I’m also not sure that the ‘latency’ phase can be put down to the ignorance of political entrepreneurs. To go back to the Heath/Powell moment in the UK, it was quite clear that Powell had plenty of popular support. Rather it was the social values held by mainstream political leaders and many in the media that kept Powell’s views outside the Overton window of acceptable public discourse.

While our views on what sustains social norms against very socially conservative views and what leads to their breakdown may differ, we agree on how the behaviour of mainstream politicians can magnify that breakdown. To quote from the interview again:

“mainstream actors have a crucial role to play in processes of normalization. After radical-right politicians become successful, other politicians often move closer to their position (what is often called accommodation). This move can have important consequences in further normalizing radical-right views, because it makes those views seem even more widely accepted.”

Can social norms against racist or xenophobic views, or more generally against the demonisation of minorities, be replaced once lost? Valentim thinks not, although he does point to the role of education in changing people’s views. I share this pessimism, in part because of the role that very wealthy individuals inside and outside the media are playing in supporting the far right. After all, the social norm against these views has not normally broken down because the majority of voters don’t approve of that norm, but because political elites have allowed that social norm to be broken.

While it is depressing to acknowledge the idea that it is normal for far right populist parties to have large vote shares once social norms against very socially conservative views have broken down, it does suggest that trying to find demand side explanations for the growing popularity of right wing populism may be pointless. For example, while it may be very desirable to reduce regional and other divergences in economic prosperity, and this will help stop right wing populists winning elections, doing so is unlikely to return us to a world where the populist far right is an insignificant political force. More generally, it may be pointless to look for economic or cultural demand-side factors that largely explain the growing appeal of right wing populism.