How my analytical approach is different Part III

Application to the transition after the Trump administration

Democrats are likely to win the election in 2028
Assuming America remains a democratic republic, Democrats are likely to regain control of the House in 2026, so the Speaker of the House will be a Democrat. Donald Trump will not be running in 2028. He says he will, but he will be 82 and even his base is going to want him to name a younger successor, particularly with a Democrat third in line for the presidency. In any case, Trump has rarely enjoyed an approval rate of 50% or higher, which implies a Rule 1 election in 2028, suggesting that Democrats will return to the White House in 2029.

The significance of our times; the secular cycle crisis.
According to Jack Goldstone and Peter Turchin’s SDT theory, the cause of secular cycle crises like now is too many elites desiring a piece of the pie. Here the pie is influence over political-economic culture and state policy. Crisis resolution involves reduction of elite numbers relative to the pie. This can be achieved by reduction in elite number, increase in the size of the pie, or both. Typically, elites are organized into two factions, there is some form of conflict between the two and the winning faction uses the power they gain from victory to reduce the elite/pie ratio, typically at the expense of the losing faction. Table 1 summarizes how this was done for the previous six Anglo-American secular cycles.

Table 1. Outcomes from past Anglo-American secular cycle crises
(links to reference 1 in table Mandarin and to reference 2 Red)

For the present cycle, only the Republican or “Red” elite faction has given any thought to how this crisis could be resolved. President Trump has begun his second term ruling by presidential order and has talked about serving a third term. So far neither of the technically co-equal branches of government have countermanded any of these orders. If this continues, the president will become the equivalent to a ruling monarch. If Trump can further arrange things so that presidential elections are always won by Republicans, he will have achieved a successful resolution of the crisis by stripping Democratic elites of their political power, as happened to the Democratic Southern elites after the Civil War (see Table 1). How this would happen or even whether something like this can happen without a civil war is unclear to me. Not only that, but I am unsure whether Trump is serious about a third term or only has been trolling us with his talk about it. Nevertheless, the end of democracy must be considered as a possible resolution.

Assuming Republicans do not transform the American government into a dictatorship, there is still a route for them to become the dominant political party for a generation by establishing a new dispensation as Reagan did. Models for this would be the McKinley and Franklin Roosevelt dispensations. McKinley and his successor Theodore Roosevelt modified the aging Lincoln dispensation. They retained adherence to the gold standard and support for tariffs, but replaced John Q. Adams’ call to go “not abroad, in search of monsters to destroy” with a muscular foreign policy. Roosevelt rekindled a long dormant Republican progressivism with his Square Deal program that involved government intervention in economic matters, rejecting their previous hands-off attitude towards business.

As I noted in Part I, a major issue in the 1896 critical election that preceded the new dispensation was the decades-long deflation following the Civil War that produced hardship for farmers. This problem was solved by the Alaskan gold rush shortly after 1896 and ceased to be an issue. It wasn’t solved by the Republican administration, but they got the credit for solving the big problem of the era, which established their dispensation (a similar thing happened after 1980). The (largely immigrant) working class was also experiencing hardship in 1896 but their problems had no political traction at this time. Roosevelt’s Square Deal addressed problems identified by middle-class Progressives, who also sought material improvements for immigrant working class people in an effort to uplift them. As I noted in Part I, their efforts had little impact on the working class GDPpc-adjusted wage trend, while Franklin Roosevelt’s New Deal did. Thus, McKinley-Roosevelt achieved their new dispensation through an external event which solved the pressing problem of their day for them, while Franklin Roosevelt achieved his new dispensation through implementation of policy that addressed the core problem of the (now mostly citizen) working class (and major source of votes).

History suggests Republicans have two routes to establish a dispensation. They can cross their fingers and hope the problems of the day are solved by external forces as was the case for McKinley-Roosevelt and Reagan. Both times the problem (deflation, inflation) was caused by Republican policy (gold standard, deficit spending) which was not changed. Both times the problem went away independently of anything they did. It is hard to see how the problems of the working class as proxied by the GDPpc-adjusted wage trend will simply disappear on their own. This leaves enacting policy that reverses the declining trend in working-class status as FDR did. But the Trump administration is not going to do this; they are continuing the Reagan dispensation program of tax cuts and deficit spending that caused the declining trend in the first place. In place of such a program, the Trump administration offers high tariffs that (they claim) will magically bring back good manufacturing jobs to renew the American working class. It won’t of course and I suspect this is just another con. In any case, I cannot see how the Trump administration could establish a new dispensation. Failing dictatorship, Democrats should get another bite at the apple in 2029.

Peter Turchin, writing from a straightforward cliodynamic perspective, sees the Trump administration as a revolution. My view is more detailed in that I use the political cycles literature (Key’s critical elections and Skowronek’s political time model) to develop the idea that a “political revolution” can serve the same role as violent revolution. Of course, the more standard revolution, civil war, or coup options remain possibilities. Hence my take is in line with that of Turchin.

How an opportunity for positive resolution by Democrats could arise
As an American living here, I strongly prefer policy leading to a mild outcome like the Industrial Cycle resolution in which there is no civil war, elites from both sides continued to hold important positions in government, while the crisis drivers are reduced to a safe level. The most straightforward way this could happen would be for Donald Trump to join Herbert Hoover in the Pantheon of Presidential Heroes by crashing the economy, setting the stage for a possible peaceful resolution of our present crisis and providing for a good ending for most Americans. Right now, the prospects for an economic crash seem promising.

Deflationary crisis
A positive resolution can most readily be achieved through a deflationary crash because that is how it happened in the last secular cycle crisis, which provides a model to emulate. Such a crash would be the result of a financial crisis that brought down the financial system. The Reagan dispensation transformed economic culture from labor-friendly stakeholder capitalism (SC) to capital-friendly shareholder primacy (SP) by cutting tax rates and legalizing stock buybacks. I have argued that under SP culture, financial crisis is more likely. If this is true, then the 2008 crisis was not a fluke but a feature of the Reagan dispensation, in which case it will happen again. Before the New Deal, when financial crises were a fact of life, they were semi-periodic, with a spacing of 14-22 years (average 18). It has been 17 years since the last one, and if the timing is the same as before, there is about a two-thirds probability that a deflationary financial crisis will happen during the current administration.

Inflationary crisis
An inflationary crisis may also serve, but it is less straightforward. It could arise as product of high tariffs and income tax cuts, both of which are being vigorously pursued. The US trade deficit means America exports dollars which are then used to buy US assets, chiefly government debt. Tax cuts translate to bigger fiscal deficits and increased borrowing. Cutting the trade deficit while increasing the fiscal deficit decreases the supply of finance while increasing the demand for it, which will lead to a higher price for finance (interest rates) unless the Fed provides the additional finance needed, which would probably lead to inflation. Higher rates raise the probability of recession and financial crisis. Some in the administration probably think that tax cuts without deficits can be achieved by cutting spending. Such a plan would likely lead to serious recession with possible financial crisis. If financial crisis does not happen, the expected outcome of an inflationary crisis would be 1970’s-type stagflation.

The Trump administration may find themselves in an economic straitjacket from which there is no escape without abandoning the tax cut ideology of the Reagan dispensation, which they cannot do. This is an example of the operational problems that normally arise as a dispensation ages. Perceptions of presidential greatness generally decline as the dispensation ages and becomes decreasingly relevant to the problems of the day. A similar thing happened with the Roosevelt dispensation in the seventies.

The role Democrats play is crucial
Assuming the theories I have used to provide a framework for my thinking about the present crisis are valid, there is a decent probability that an economic crisis will arise during the present administration that will provide an opportunity for Democrats to establish a dispensation.

In the case where the crisis is a financial panic like 2008, Democrats have an opportunity to act even before the election. Democrats had a previous opportunity to establish a dispensation in 2008 but chose not to. Following the Lehman Brothers collapse the Bush administration proposed the TARP which called for buying distressed private assets with public monies to prevent collapse of the financial system. Congressional Republicans voted against this Republican bill¹ because they did not wish to be seen as bailing out Wall Street. Democrats would have been well within their rights to insist that Republicans provide the bulk of the support for this likely to be unpopular measure. But they did not, rather they did the responsible thing and rescued the financial system, preventing a second Great Depression.

It is understandable why they did this, it was good economic policy, but it was bad politics. Economics plays second fiddle to politics. We have seen how political dispensations create economic environments selecting for SC or SP economic cultures under which the economy performs very differently. Table 1 shows how brutal secular cycle crisis resolutions can be in our own history. Hence it is incumbent on the Democrats, as the last “normal” political party, to get the politics right this time.

Strategy for deflationary crisis
Therefore, should a financial crisis materialize, Democrats and progressive activists must form common cause with rightwing fiscal conservatives to strenuously oppose investor bailouts, particularly QE operations by the Fed. A stock market decline to 1000-1800, on the S&P 500 would be necessary to generate the necessary panic to convince Republicans and neoliberal Democrats of the need for strong medicine that includes large tax increases on the rich and investors. Republicans will float their own economic rescue plan involving massive stimulus with lots of handouts to favored businesses, all financed with debt and no tax increases. Democrats must counter with their own proposal, direct payments to households and small businesses as was done during the pandemic with a range of tax and policy changes intended to minimize the additional debt incurred and prevent a recurrence. These policy changes would create an environment that evolves business culture away from shareholder primacy and towards stakeholder capitalism.

The fear raised by massive stock market and crypto price declines combined with the fear of inflation rekindled by the recent bout of inflation (which many believe played a significant role in Trump’s victory) could recreate the political conditions of 1932, when Hoover reversed the Republican program of tax cuts to enact massive tax increases to deal with record peacetime deficits. Tax increases then were not as forbidden to Republicans, as they are now, but that doesn’t mean Republicans liked higher taxes. Thus, it is imperative that the recession and bear market be allowed to play out until a Democratic administration who is psychologically capable of raising taxes comes to power. This is riskless for Democrats, the incumbent Republicans will not suddenly become popular in the midst of economic catastrophe and so they will face a Rule 1 election in 2028 and lose.

Republicans will propose massive rescue plans like what they did for the pandemic which will lead to inflation after the economy recovers. Democrats must counter with stimulus balanced by the massive tax increases linked to above. If Democrats take the Republican offering of unfunded stimulus to rescue the economy, they will still win the 2028 election only to get stuck with the post-crisis inflation, which will guarantee Republicans return to power in 2032. Democrats need to understand they will inherit this mess and would be best served by inheriting a place better prepared for them, as FDR did.

Strategy for inflationary crisis
In the case of an inflationary crisis, the stock and crypto markets will not have fallen near enough to panic elites, making bold action impossible. One possible version of such a crisis would be a sharp drop in the value of the dollar, which would lead to higher interest rates and even greater deficit spending due to higher interest rate payments. Foreign investors could stop buying US debt which, according to Paul Krugman, would result in a housing crash and recession. The only way out of this mess is anti-inflationary policies, which will either be monetary (higher interest rates) or fiscal (tax increases).

While Republicans are in power. Democrats would need to hold strong that the only remedy to our problems is tax increases and refuse to back any Republican initiative that attempts to address the economic problems without deficit-reducing tax increases. Republicans, facing steadily rising interest rates driving the economy deeper into recession, could opt for the platinum coin option, in which the government returns to the traditional means of government deficit finance: direct creation of money. Doing this will make the link between deficit spending and inflation much more direct. Attempting to do this without raising taxes, will threaten hyperinflation. Comparisons to Weimar Germany and Latin America will fill the political discourse, strengthening the political support for the necessary tax increases. Whether or not the Trump administration opts for the coin, the result of an inflationary crisis would be defeat in 2028, same as the financial crisis route. The difference is the inflationary crisis is messier and having no previous American example we do not have a roadmap on how to navigate this.

Tax increases are the magic sauce for a Democratic renewal
Once Democrats are in power, they need to enact the full range of tax increases, In the financial crisis case, the platinum coin option can be implemented right away. Its inflationary effects will be offset by the deflationary effects of financial crisis. In the inflationary crisis case, the coin will have to be deployed after recovery is well underway and revenue is strongly rising.

If all this is managed properly, the economic situation could be improved sufficiently so that the Democratic president would get reelected as Obama was in 2012. Two terms is not enough time for the policy changes made to address the crisis to evolve a new business culture, however. Hence, when Republicans return to power in 2037 according to Rule 3, everything Democrats tried to achieve will be undone—unless Democrats have established a new dispensation allowing them to win Rule 3 elections. If Democrats fail, the secular cycle crisis will deepen as an even more extreme Republicans return to power. This time I cannot see American democracy surviving.

A final note
The arguments made above assume that a financial crisis happens. There is a significant probability that there is no financial crisis this time. First of all, I estimate a 67% probability of financial crisis during the current term, assuming my analysis is valid. But there is also the possibility that my analysis is wrong, in which case the “base probability” for a panic of 14%² would apply. Thus, the actual probability of a crisis is 0.67x + 0.14(1-x), where x is the probability that my analysis is right. Assuming that my framework has 50-50 chance of being right or wrong, and given that my previous framework was not valid this gives an estimate of 25% probability (average of 50% and 0%) that the analysis is right, from which I obtain an 81% probability that there will be no financial crisis during this term. To check on this, I plugged these values (67% chance of panic if model is right, and 19% chance of panic) into the Bayes equation to get a 3.5-fold increase in my confidence that framework is valid if the predicted economic crisis happens. That is, if a crisis happens during this term, (as the framework forecasts) this will bump confidence that the model is right 3.5-fold, to 88%, given my initial guess at validity of 25%. On the other hand, if crisis does not happen, which seems likely (estimated probability of 81%) In this case, the probability that the framework is valid will fall to 10%. In that case one should not do what the framework says to do. This is why I do not consider what Democrats should do in this situation as it implies that the framework I am using is once again invalid and no insight about what Democrats should do can be drawn from it.

On the other hand. if an economic crisis does happen, which is not unlikely if the framework is valid, the arguments I develop here he may a worthy thing for Democrats to use to build a new dispensation and a better future for most Americans.

I will discuss the prospects for dispensation creation in Part IV.

1. Democrats voted 172 to 63 in favor of the legislation, while Republicans voted 108 to 91 against it.

2. Eight panics (1819, 1837, 1857, 1873, 1893, 1907, 1929, 2008) over 1800-2025 yields a probability of 8/225 per year, which over 4 years would be 4 x 8/225 or 14%.