Elections In India, UK, France Show Bankrupt Nature Of Leftist Economics

Several major countries — India, the UK and France — have had elections to their central governments this year. The US will also have its elections later this year. Is there a common theme (a shift to the left or right in terms of economic ideologies?) running through these elections around the world? 

Before understanding the mood of the electorate around the world, it is worthwhile to understand the economic ideological spectrum. This is necessary as we tend to use the words “left-leaning” and “far-right political movement” without understanding the significance of these terms.

For example, the ruling party in India, the Bharatiya Janata Party (BJP), is supposed to represent the far-right ideology, but for all practical purposes, its economic ideology is “left of centre”. 

The Range Of Economic Ideologies

Plotted above is the entire range of economic ideologies ranging from nearly 100 per cent government control in economic activity under the “Far Left” (or what is more commonly known as “Marxism/Communism”) to nearly 0 per cent under the “Far Right” (or referred to as “Capitalism/Laissez Faire Economics/Austrian School of Economics”) economic system.

A country or a society is defined by what it does and not what is claimed by the political parties that control the country.

For example, China does not have a communist economic system despite the political structures that govern the country. On the other hand, the US is not a capitalistic society either, despite widespread references to the same in the media. 

A brief introduction to each of the four mutually exclusive ideologies is given below:

1. Marxists/Communists: The state or the government owns, controls, and directs the means of production. There is no private property and there is extensive control of economic activity by the government. A good example of this economic system would be the former Soviet Union. 

2. Keynesian Economics: Formulated by John Maynard Keynes and popularised by Paul Samuelson, this system advocates extensive government management of the economy through monetary and fiscal policy. The factors of production are privately owned though. This is the predominant mainstream macroeconomic thinking today and we would be hard-pressed to find a government that does not use the Keynesian playbook extensively these days.

3. Monetarist/The Chicago School: Formulated by Milton Friedman, the monetarist favoured a rule-based growth in money supply, i.e. proportional to the real GDP growth. In most other aspects, the monetarists were very close to the Austrian School of Economics in advocating a very limited role for the government in economic activity. 

4. Capitalism/Laissez Faire Economics/Austrian School of Economics: Formulated by a few economists emanating from Austria, this system advocated for a limited government (limited to the police/army and the justice system) and sound money. It particularly emphasised the need for a Gold Standard and as former US Fed Chairman Alan Greenspan (at a time when he was a disciple of Ayn Rand; much earlier to his tenure at the US Federal Reserve) wrote, “The gold standard and economic freedom” are inseparable.        

We have summarised the four schools of thought in a few lines. This is only for the readers to understand under what system a government is operating.

It must be easy to see that China today is a more capitalist system than what the US today is. It must indeed be ironic that a supposedly communist country is spearheading the global movement toward a gold standard through the BRICS (Brazil, Russia, India, China, and South Africa) currency. 

Of course, the US owes its rise to economic prominence to following the tenets of capitalism till the emergence of the US Federal Reserve in 1913, when it moved away from the classical gold standard that it had adopted till that time.

For readers who consider the US of today to be a capitalistic system, consider the size of the budget deficits it has run for the last few decades.

The essence of a capitalist system (ie, limited government and sound money) has long been absent in the US Economy as I explain in my book (RIP USD: 1971-202X …and the Way Forward).

It is this movement away from the last vestiges of the gold standard in 1971 that has resulted in the US government being on the verge of a technical bankruptcy today. 

Most governments, egged on by the self-serving bureaucrats, have adopted the Keynesian playbook as an economic system, and the abyss the world is staring at is an outcome of this “we-are-all-dead-in-the-long-run” approach. 

The differences in economic ideologies between the main political parties in most countries are very marginal. For example, in the US, if one studies the expansion of deficits and debt under Republican and Democratic governments, there is very little difference.

One can make a similar argument in the case of India as well between the two main political streams that have governed for the last 30-plus years. In economic policy aspects, as defined in terms of the four broad ideologies, there is almost no difference whatsoever. 

Whatever differences are perceived by their supporters/opponents, it is within a very narrow band of this left-of-centre Keynesian ideology. This narrow band has constantly been shifting to the left over the decades with bigger deficits, greater socialism, and more freebies.

The race for the last few decades has been to determine who can be perceived as more “caring”, ie, Left-leaning. Neither the media nor the bureaucrats seem to understand that these deficits ultimately destroy the currency which affects the poor and the middle-class who are supposed to be the very beneficiaries of these schemes. 

With that background, we can now look at the election results in different countries. The Keynesian playbook is in the final stages of bursting and what we are observing is a combination of high price inflation plus recession-like conditions (a technical impossibility under the Keynes school of thought) in most economies. These are the outcomes of a bipartisan policy of decades of deficit spending by governments. 

Even in the countries that are supposedly doing well, e.g.India, the official price inflation grossly understates the real inflation experienced by consumers. The unemployment problem is also severely understated with even students from the best educational Institutions in the country (ie, Indian Institute of Technology and Indian Institute of Management) struggling to find attractive job prospects. 

The election results are therefore an outcome, as James Carville summarised, “It’s the economy, Stupid”.

Understanding The Election Results

The average voter doesn’t understand the above-mentioned technical differences or even the basic fact that the Keynesian playbook eventually leads to the destruction of the currency.

They can, however, feel the pain of high inflation and economic stagnation experienced daily. The vote they are casting is against the incumbent even if the alternative could be worse. As is indeed the case with India and the UK.

INDIA

Although the incumbent Prime Minister came back to power, it was not with an overwhelming majority as was the case in his previous tenure. The opposition led by Rahul Gandhi promised policies that would make the situation substantially worse as compared to what Narendra Modi has done during his tenure.

That said, it was not a vote in favour of Gandhi’s policies — he could well have promised the exact opposite, ie, a limited government that would have reduced inflation and obtained a similar vote share. 

The next five years under Modi promise to be more of the same as we have witnessed in the last 10 years — bigger governments, greater socialism leading to burgeoning deficits, and even higher price inflation as well as unemployment. With little change in the team that is deciding the economic policy, we should not expect a substantive change in the direction as well. 

What India needs is for both the ruling dispensation as well as the opposition to evolve a narrative in favour of smaller governments and lower inflation, ie, a shift to the economic right from their current stance.

In the next elections, I suspect the opposition will win either way as the Indian economy will be in a much worse condition five years down the line.

But the proposed solutions have to address the root cause of big government for a semblance of economic stability to return. I hope it does not degenerate into a competitive political race to reach the bottom for the Indian rupee. 

UK

The Conservatives suffered their worst defeat primarily on account of economic stagnation. What the Labour Party promises to do, however, will only make the situation substantially worse — but the voters do not understand that today. 

While in the case of India, there is no existing credible alternative proposition, the UK fortunately has one. The Reform Party led by Nigel Farage has been talking about this (ie, limited government and sound money) for more than a decade now and it's time for the Conservatives to embrace this ideology.

This was indeed supposed to be the original Conservative platform till the compulsions of democratic politics pushed the Conservatives deep into the Keynesian framework. 

What the Labour Party will do over the next few years will unquestionably worsen the UK’s economic woes. It does indeed provide the opportunity for the Conservatives to do some soul-searching and return to its economic roots. 

FRANCE

The ruling Centrist party finishes third with the voters choosing both the supposed right wing and the left wing in the first round of voting. That this result changed in the second round due to political realignments does not change the underlying reality ahead.

The results indicate that voters are dissatisfied with the current dispensation but have little idea of what the correct solution should be.

Though the supposed far right under Marine Le Pen has gained some ground, their economic ideology isn’t very different, the rhetoric during political campaigns notwithstanding. 

US

While it appears certain that Donald Trump will win the elections, it is possibly the worst possible outcome for the US. Not that the Democrats are better.

The Trump 2.0 deficits, despite whatever he claims today in favour of smaller government, will possibly lead to the destruction of the US dollar as I have outlined in my book.

What Trump in the US will do and Rishi Sunak in the UK has done is give the Conservative ideology a very bad name. They have indeed been poor ambassadors for an otherwise acceptable ideology. 

Despite Joe Biden’s claims of low price inflation and low unemployment, alternate statistics point to quite the opposite. Price inflation numbers calculated by Shadow Government Statistics indicate that the reported price inflation numbers are understated by a whopping 8 per cent.

Similarly, the current unemployment rate is even worse than what prevailed during the 1970s — the US government has changed the definition of what constitutes unemployment (the current “U6” unemployed category used to be the “U3” rate of the 1970s) to report a lower number. 

The ideal outcome for the US would be for the Democrats to get one more term and with the economy deteriorating significantly, and the Republicans could favour somebody who genuinely represents the far right ideology — Dr Rand Paul or Thomas Massie, to make the required decisive shift towards limited government and sound money. 

The Lessons

In most countries, the incumbents have been defeated decisively and I think a similar story would repeat in four or five years’ time when we have a repeat of these elections.

The narrative that is required to turn around these economies from the twin problems of high price inflation and high unemployment is completely missing today. One can only hope that a shift to the economic right happens with all political parties.  

But there is indeed a ray of hope in a sea of gloom. It comes from a very unlikely place — Argentina — a country that has experienced more than 10 currency crises in the last 50 years.

Javier Milei, an economics professor who genuinely represents the “Far Right” movement of limited government and sound money, was sworn in as President in December 2023.

He has introduced sweeping reforms and Argentina, which had witnessed 50 per cent compounded annual price inflation in the preceding five years has now stabilised. 

Milei has even announced that he will not increase the supply of pesos.

The World Bank and the International Monetary Fund (IMF) have officially advocated annual deficits to the tune of 3 per cent of GDP to keep the countries indebted and this move by Milei exposes the fallacy of running annual deficits.

Much to the chagrin of these financial institutions, Argentina's economy has been turning around despite their forecasts of doom at these radical policies. 

All the countries need to make a decisive and radical shift similar to what Argentina has done. This advice is most definitely not going to be forthcoming from the IMF or World Bank and it’s time for the countries to understand the basics of economics. What Milei is doing, despite its unconventional nature, is exactly the path the US founding fathers laid down as well. 

We are indeed at the crossroads of the global economy. The path we have been on for the last few decades would certainly lead to an inflationary depression in the years ahead. The solutions are also very clear. It's high-time political parties and citizens embraced them.