Dream States: Why No Resolution To Current Political Conflicts Is Possible

Analysts and commentators continue to demonstrate a penchant for trying to couch the various conflicts that have arisen from the semi-global populist upsurge in terms that implicitly assume the antagonists (the populists) have a set of goals in mind or are otherwise aiming to secure some kind of concessions, even if they’re not entirely sure what those concessions are.

I continue to think this is a mistake. If we learned anything from the Brexit experience, it’s that the populist backlash in all its various manifestations rests on nebulous concepts, not concrete policy goals.

The Brexit negotiations have been nothing short of a nightmare for any number of reasons, not the least of which is that nobody knows exactly what “Brexit” means.

It’s not even clear what part of speech “Brexit” is. Is it a noun? If so, is it a proper noun, or is it just capitalized by default because the first two letters denote the name of a country? Or maybe it’s a verb. If that’s the case, how does one “Brexit”?

Whatever the case, it’s an amorphous concept that had symbolic meaning to the extent it conveyed something about public sentiment, but had little to no practical applications at the time of the referendum. Effectively, Britain voted to do something and then left it to policymakers to figure out what it was they had voted to do.

The Guardian’s Martin Kettle wrote about this last month:

It is not possible to understand Brexit without understanding that Brexit is, as [Boris] Johnson called it, a dream. Many different dreams, in fact. For some it has been a dream of sovereignty, for others a dream of freedom, or of restored greatness and much else. There is nothing necessarily wrong or ignoble with dreams, or even some of those particular dreams. But in the end dreams exist in the imagination, not reality. They don’t put food on the table. They don’t balance the accounts. Dreams are never enough. That has been this government’s achilles heel.

The fundamental practical difficulty that all Brexiteers have faced since June 2016 is that dreams of this kind oversimplify a world full of complexity. Brexit was offered as a single liberating proposition, when in fact it involved multi-layered consequences and implications that require negotiation with others.

In my opinion, “Brexit”, “MAGA” and similarly vague mantras are conceptually distinct from something like, say, the Catalan independence push. I’m no scholar of Spanish politics and there’s certainly no shortage of commentators who would suggest that an independent Catalonia most assuredly falls into the category of a “dream that oversimplifies a world full of complexity”, but at least there’s an readily identifiable aim there.

That, as opposed to “MAGA”, which is just a meaningless slogan. And this is where the real irony comes in.

Donald Trump’s apologists spend a lot of time on television suggesting that the problem with Democrats is that they (Democrats) do not run on policies but rather on a platform that is essentially centered around criticizing the President. There are multiple levels of built-in absurdity there, two of which are i) the fact that the same commentators who say Democrats have no real policy proposals invariably go on to criticize Democrats’ policies in the very next breath (you know, the policies that didn’t exist five seconds previous), and ii) it makes sense to run on an anti-this-president platform when this president has been implicated in a criminal conspiracy in open court by his former personal attorney.

But aside from that, the fundamental absurdity in populist apologists accusing Democrats and establishment Republicans of having no policies is that there is no more amorphous a policy platform than “MAGA”.

“MAGA” as a political movement is just as silly as a lawn business whose slogan is “make yards great again!” Sure, everybody wants a “great yard”, but when you step back and think about that, every lawn business is by definition competing on that same slogan precisely because no one would ever argue the opposite. Who wants a “not-great” yard? That’s why lawn businesses generally try to provide a bit more in the way of specificity, like say “affordable lawn care!” or, “voted best landscaping business for upscale communities five years running!” or, “fast and courteous!”, etc. etc.

Of course it’s not that simple and if you want a more in-depth exposition of MAGA and how it fits into the history of populism, see “The nostalgia of greatness and the deconstruction of a déjà vu“.

But the ambiguity inherent in “MAGA” and “Brexit” and various other manifestations of modern populism in part explains why the political opportunists behind the slogans are forced to lean on anger, fear, and generalized disaffection in the electorate. People like Trump have no legitimate policy ideas and the “solutions” they offer when it comes to allaying the fear and anger they depend on for support collide with reality at every turn. Here are some examples:

• “Let’s restrict immigration in order to cut down on crime!” That might play well among uneducated voters, but the statistics overwhelmingly show that immigrants commit fewer crimes than the native born population.
• “Let’s cut the trade deficit with China because trade deficits mean we’re losing on trade!” That might play well with people who don’t know anything about economics, but simply put, that’s not what trade deficits mean.
• “Let’s bring back coal, because our coal workers have been left behind!” That might play well in coal country, but the inescapable reality is that coal is dirty, is (still) relatively dangerous to procure and is an environment hazard.
• “Let’s slap tariffs on everyone so we can reinvigorate American manufacturing and make farmers prosperous again!” Globalized supply chains and the necessity of retaining access to foreign markets for crops produced domestically means that rallying cry is not just fundamentally misguided, but is in fact doomed to produce exactly the opposite of what’s being promised.
• “The economic recovery from the crisis is weak by historical standards, so let’s plunge the nation further into debt in order to introduce fiscal stimulus late in the cycle!” That might work for a quarter or two or three, but’s it’s not sustainable and it puts the country on a dangerous fiscal path.

In short, the anger, fear and disaffection is real, but instead of addressing the problems and trying to come up with solutions that take into account the complex reality that produced them, Trump and his counterparts in Europe offer quick “fixes” with potentially disastrous long-term consequences.

Given all of the above, I don’t think it’s safe to assume that Trump or the Brexiteers or Italy’s populists can be characterized as any semblance of rational, or at least not when it comes to negotiating (to the extent they understand how to play on voter gullibility, they’re highly rational).

They’re opportunists whose political survival depends on keeping the dream they initially sold to voters alive. But reality is everywhere and always trying to reassert itself. And not because reality is “conspiring” against the populists. Reality cannot “conspire”; it is not a thing with a sense of purpose. Rather, reality just is, which means it will perpetually challenge anyone trying to subvert it. This is why Trump and Salvini (to name two) are constantly on social media pushing the dream. It’s a 24-7 maintenance job to keep supporters from coming around to what’s actually going on. Consider, for instance, what Trump told veterans at an event in Kansas City last month:

 

See what I mean? And while reality will always win over the long haul, Trump, Salvini, and “hard” Brexit advocates will continue to fight in the near-term, which entails doing and saying anything to avoid conceding the battle.

This is where the problem comes in when it comes to gaming out scenarios around something like, for instance, the trade dispute between Washington and Beijing. Trump isn’t engaged in a trade war with China. Rather, the trade war with China is just one manifestation of Trump’s increasingly bitter dispute with reality. So his “strategy” when it comes to China isn’t really aimed at resolving the trade dispute; it’s aimed at perpetuating the dream he’s selling to voters. The dynamic is conceptually similar for Italy’s various disputes with Brussels (e.g., the budget battle and the immigration debate) and for the U.K.’s Brexit boondoggle.

Consider that and then read the following from a BofAML note out Friday:

The “game of chicken” and the “prisoner’s dilemma” are two popular game-theoretic frameworks that are often used to describe real-world situations. They are similar in many ways. Using terminology from our previous work, in both settings, two countries (or any two sides in a conflict) must choose whether to escalate or de-escalate a potential conflict. Mutual de-escalation preserves the status quo but mutual escalation results in a “lose-lose” scenario that leaves both sides worse off than they were under the status quo. And in both settings, a country “wins” when it escalates the conflict but the other country de-escalates.

There is only one real difference between a game of chicken and a prisoner’s dilemma, but it has important consequences. The framework represented in Chart 1 becomes a game of chicken when the unknown variable c, which is the cost of capitulation (losing when the other side wins), is not very large (c<10). In this case, if one country is certain to escalate the conflict, the other prefers to de-escalate. That is, countries would rather “hand the other side a win” than pay the price of mutual escalation. As a result the game of chicken typically has a relatively benign outcome or “Nash equilibrium.” One country wins and the other loses, but barring some miscalculation, the mutually-painful scenario is avoided.

By contrast, Chart 1 represents a prisoner’s dilemma if the cost of “letting” the other side win is so high (c>10) that both sides prefer the lose-lose outcome instead. Since they both have incentive to escalate the conflict regardless of whether the other side escalates or de-escalates, the only possible result is mutual escalation.

No one wants to be chicken. We think this simple framework provides broad lessons for many of the political risks facing the global economy. The first is about rhetoric. In a game of chicken, strong rhetoric is helpful in signaling commitment to a confrontational stance. Examples include:

• The Trump administration’s threat to put tariffs on another $200bn in imports from China and raise the tariff rate to 25% (from 10%), even though the prices of consumer goods such as electronics will likely increase.
• China’s unwillingness to compromise thus far, even though economic activity appears to have slowed slightly because of the trade war, and the Shanghai Composite Index is down almost 20% year-to-date. China has responded to the latest US threats by promising to retaliate with tariffs on $60bn of US goods.
• The strong statements that have been made in the US-Iran conflict. For example, President Rouhani recently said that “war with Iran is the mother of all wars,” even though military conflict is not a realistic possibility.
• The UK government’s claims soon after the Brexit vote that it had a strong negotiating hand. More recently, Brexiters’ insistence on a clean break from the EU, even though a ‘hard’ Brexit would be economically very damaging for the UK.
• The euroskeptic Italian government’s proposals for aggressive fiscal expansion, even though it would run counter to EU rules, which call for a reduction in the structural deficit. Chiara Angeloni and Gilles Moec expect the 2019 Italian budget to target a deficit of less than 2% of GDP. This would be modest relative to campaign promises but would still be about double the previous government’s 2019 target.

In each case we think the goal is to make the other side blink in the face of aggression. However, the risk is that these conflicts will morph into prisoner’s dilemmas.

BofAML goes on to posit that escalations in rhetoric from the Trump administration on trade (they specifically cite Larry Kudlow’s comments documented extensively here) and Rouhani’s “mother of all wars” comment make it impossible for China and the U.S. to back down on trade and sanctions, respectively. Relatedly, the bank argues that Brexiteers may have backed themselves into a corner with their aggressive rhetoric.

In other words, employing shrill rhetoric can result in a scenario where a participant in the political conflict game backs both the other side into a corner and backs themselves into a corner.

But here’s the thing. This is, to my mind, a fruitless analytical exercise. There are no concessions that China can make that will restore American manufacturing “greatness” or that will result in a trade agreement that Trump would deem unequivocally “fair”. Similarly, there is no scenario in which Brussels could concede something on budget rules and/or immigration that will lead to an outcome that’s sufficient to pacify Salvini (and make no mistake, he’s the problem there – not Di Maio and not Giuseppe Conte). In the same vein, there is no Brexit deal that would somehow lead to an outcome that Brexiteers would be willing to accept as a “win”.

The reason that’s the case is that these populist agendas aren’t based on actual goals. They’re based almost entirely on the continual suspension of disbelief among large swaths of the electorate. Those voters’ willingness to persist in a dream state hinges entirely on these conflicts never being resolved, because once they’re resolved, reality will again come calling.

For instance, on May 19, Steve Mnuchin struck a deal with Chinese Vice Premier Liu He that would have entailed China “significantly increasing” their purchases of U.S. goods in order to bring down the trade deficit. There was an actual press release that accompanied that deal.

Just days later, the protectionist contingent came out to try and undermine it. Steve Bannon, for example, told Bloomberg the following about the Treasury Secretary’s attempts to make nice with Beijing:

They’re in a trade war with us and it hasn’t stopped. Mnuchin has completely misread the geopolitical, military, and historical precedence and what President Trump had done was finally put the Chinese on their back heels.

After Trump scrapped Mnuchin’s deal on the way to refusing to extend waivers on metals tariffs to U.S. allies and setting a date for the imposition of the first round of 301-related tariffs on China, Peter Navarro went on CNBC and called the President a “courageous visionary” for moving ahead with the tariffs despite Mnuchin’s deal and despite Europe’s desperate calls for reconciliation.

The administration claimed the Mnuchin deal didn’t go far enough in cutting the trade deficit, but the real reason it was scrapped was down to the fact that if Trump ever claims to have secured a final “deal” on trade or immigration or [fill in the blank], voters are going to expect that to be accompanied by the promised restoration of “greatness”.

Of course that won’t pan out, at which point Trump would have to either concede that his plan was flawed or else find another scapegoat and conjure more windmills at which to tilt.

The bottom line here is that for these populist movements to remain viable, supporters have to remain trapped in the dream they were sold. Paradoxically, the daily battle between, for instance, Trump and reality, is part and parcel of keeping that dream alive. While he’s undoubtedly frustrated by the burden of having to fight it all day, everyday, it’s critical to political preservation.

In the end, there are no concessions that anyone can make to Trump or to the Brexiteers or to Italy’s populists that will result in deescalation of political conflict. Without that conflict, reality will reassert itself and the dream will die.

For now, the U.S., the U.K. and Italy are dream states – figuratively and literally.

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