The Greatest Political Instability in a Century

The GOP Presidential ticket is being led by a man with no political experience whatsoever, and prominent members of his own party are finding it difficult to support him. In the UK, the EU referendum is tearing the country in half. Radical parties are making inroads at every level of government around the continent of Europe. Does it just feel like there is more political instability or is this really what’s happening?

Goldman Sachs interviewed David Brady, the Bowen H. and Janice Arthur McCoy Professor of Political Science at the Stanford Graduate School of Business and the Davies Family Senior Fellow at the Hoover Institution. Brady believes instability is more than a feeling. He points to globalization and technological change as the factors driving the biggest upheaval for traditional political parties since the late 1800’s… (emphasis mine):

The only comparable period of political instability resulted from the first great transformation and globalization of the world economy between 1850 and 1900. In 1870, the two largest occupations around the world were farm workers and servants. But technological advances that dramatically increased agricultural productivity and a sharp drop in transportation costs that allowed a rise in global trade had begun to substantially change the nature of work, creating a new working class: blue-collar industrial workers, who by the early twentieth century comprised about half of the work force.

This transformation generally increased wealth and standards of living, but it also devastated many agricultural areas and forced painful dislocations in labor markets, which were exacerbated by the Great Depression of 1873-1896. The result was substantial political discontent around the turn of the century that focused on income inequality, the loss of low-skilled jobs, fear of mass immigration, and the culpability of bankers—eerily similar to the sources of political dissatisfaction.

The key difference is that the current, second great wave of globalization is more powerful because it includes economies like China and India. Three quarters of the world is now involved in the global capital-based economy. Technological change is also much faster. And whereas agrarian jobs were largely replaced with industrial jobs during the last transformation, many jobs lost today are disappearing altogether, which has impinged on people’s sense of identity.

For all of these reasons, political uncertainty is greater today.

The prognosis, according to Brady, is more of the same going forward.

The last bout of this sort of electoral volatility came to an end as industrial workers eventually unionized and by the middle of the twentieth century, were able to attain middle class living standards and become a powerful political constituency. With this coming apart, it’s hard to envision what will materialize in its stead. In the meantime, turnover and upheaval in voting blocs may become the norm.

the most direct economic consequence of political instability is policy uncertainty, which amounts to a major impediment to investment. Beyond that, one can envision a self-reinforcing cycle in which political instability reduces the likelihood of a coherent economic policy agenda, which in turn perpetuates the low growth and income equality that fuel political instability in the first place. Our research has shown that countries with below-average economic performance have experienced the most electoral volatility, which is not surprising.


Top of Mind
Goldman Sachs – June 23rd 2016


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