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Peter Atwater: What the Pundits Got Wrong About the Forces Disrupting Political Order

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The root cause of recent shifts in domestic politics is chronic underconfidence.

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Jerry Seib is struggling.  Like so many political pundits, the Washington Bureau Chief for the Wall Street Journal is having a hard time getting to the root cause to what is afoot in American politics today.

After considering all of the evidence in front of him, Mr. Seib concludes in a piece published yesterday (subscription required): "Here's a unifying theory.  The world is being shaken by three big movements: globalization, alienation, and populism.  Each of them is a force that disrupts the established order."

While I have an enormous amount of respect for Mr. Seib and agree with him that there are big movements in all three of the areas he identified (in fact, I have been writing about them all for several years; see: The Escalating War on TransnationalismIn Our Zero Sum Economy, Are You Winning or Losing?; Interest in Income Inequality: US Case StudyThe Great Underconfidence-Driven Backlash), they are not the unifying theory for what is taking place in American politics today.  Chronic underconfidence among rank-and-file voters is.

Our level of confidence determines our preferences, decisions, and actions.  What we believe to be logical is driven by our level of confidence.  It is why, for example, retail investors routinely buy stocks when prices are high and sell when prices are low.  Their level of confidence -- high and low -- impacts what they believe to be logical, even if it couldn't be worse for them financially.

Looking at America today, Mr. Seib concludes, "It isn't logical -- but logic isn't the order of the day in the political world."  From a socionomic/confidence-driven decision-making perspective, in fact, it is all very logical.

When our confidence falls, our cognitive abilities are impaired, and as a result, our brains involuntarily seek to simplify the world around us.  Based on my research, we routinely accomplish this by narrowing what I refer to as our "Horizon Preference" -- how broadly we stretch ourselves in terms of time, physical and ethnic expansion, and our social relationships.  When our confidence is high, our Horizon Preference seems unlimited.  We explore.  We are inclusive and generous (politically, socially, and financially). The future and the unknown world around us are seen as opportunities. I've come to think of our high confidence world as "us, everywhere, forever" -- a multidimensional environment of endless possibilities where what is good today will only be better tomorrow.

When our confidence falls, however, our Horizon Preference shrinks. "Me, here, now" thinking takes hold as short-term rather than long-term time preferences dominate our decisions; and self-interest and close (physical and ethnic) proximity drive our choices.

In his column this morning in the Wall Street Journal, Mr. Seib identifies three specific ways falling confidence has materially changed our preferences -- globalization, alienation, and populism.

Here's how each ties to weak confidence.

Whereas during the 1990s globalization was viewed as unlimited opportunity for American businesses (and a source of ever cheaper consumer products), today we see it as threatening.  Consider, for example, what just took place with General Electric (NYSE:GE) and the government of France with Alstom.  Weak French confidence there changed policymakers' view of the transaction. Rather than helping the nation, GE's acquisition was seen as a threat. 

Since 2000 there has been a long line of these occurrences.  Here in the US, for example, you saw weak confidence scuttle the sale of Unocal in March 2005 to the Chinese National Offshore Oil Corporation (CNOOC).  A year later, similar "national security concerns" derailed the sale of the port management businesses in six major US seaports to a company based in the United Arab Emirates (UAE).

As Mr. Seib points out, today there is "an attraction to isolationism and protectionism."  Due to weakening American confidence, we no longer see globalism as good.  We see it as overly complex and threatening.  It runs counter to the "me, here, now" preferences of today.

The same is true for other "establishment" public and private organizations too.  Our feelings of "too big to fail" directed toward the world's largest financial institutions reflect weak confidence.  So, too, do Main Street's feelings of alienation toward Washington.  Washington, like Wall Street, is not seen as "me", and today "I" matters most.  To be fair, Washington and Wall Street are hardly alone as targets of America's rising anti-establishment sentiment.  I see the same feelings being expressed toward higher education today.

The third pillar of Mr. Seib's view, populism, also ties closely to falling confidence.  As Mr. Seib writes, there is a feeling "that the interests of the establishment are aligned against the common person."  As "me, here, now" preferences take hold, that is how we see the world.  When we feel increasing uncertainty, there is a natural desire, as Mr. Seib says, to "shake up the political and economic system to do something about it."

Earlier this spring, I wrote about the clear correlation between our perceptions of income inequality and falling confidence for the World Policy Institute. 

I wrote, "Beginning in late summer 2011, US economic confidence fell sharply and the Occupy Wall Street movement first emerged. These events brought a resurgence of public interest in income inequality throughout the fall period. Americans' political focus changed due to this decline in confidence."  We are seeing the same thing today.

Even more, from my perspective I am afraid that economists have labeled Americans' feelings far too narrowly.  Main Street doesn't perceive just income inequality, but influence inequality too.  There is an enormous gap in confidence between the haves and have-nots today, and that is driving social actions.

House Majority Leader Eric Cantor didn't see this until it was clearly too late. On May 23, I offered the following thoughts in the aftermath of the major midterm primaries:

The greatest risk America's two major political parties now face is that they breathe a big sigh of relief and set their political machines and fundraising plans on a moderate 2016 battle headlining Bush and Clinton.  Rather than anticipating a sharp turn down in mood, they will simply resurrect their 1988, 1992, 1996, 2000, and 2004 battle plans which focus entirely on the very modest light that exists between the centrist left and centrist right.

What neither party seems to appreciate this week is that they are now equally vulnerable to polarized, extremist grassroots efforts should social mood fall sharply.  If Washington is today focused on income inequality, what they should be really worrying about is influence inequality.  After this week a very small group of the political elite will set the course for 2016 while a vast number of voters on Main Street will feel completely unheard. 

The potential for a populist backlash on the both the right and the left today is enormous, and it will come alive if mood falls.

For both parties the 2014 midterm elections represent a pyrrhic victory.  We'll see how long it takes for that to become clear.

Then, not two weeks later following Mr. Cantor's defeat, I wrote the following:

This week, we have the answer:  Just 18 days. House Majority Leader Eric Cantor lost out to a candidate so unknown that even the Tea Party didn't back Mr. Brat. 

Deteriorating social mood has taken its first major toll, shaking the Republican establishment to its core.  While they are wise to be concerned, the implications to Mr. Cantor's defeat extend well into the left side of the aisle as well.

Of the many explanations of Mr. Cantor's loss, this one from Trip Gabriel of the New York Times stands out to me:
 
"Here in the place that Representative Eric Cantor calls home, few voters seemed to recognize him as one of their own. Despite Mr. Cantor's rise to be the second-most powerful member of his party in the House and, for a time, a leader of its angry right flank, Republicans here seemed in agreement with Mr. Cantor's challenger, who toppled him from power by tarring him as insufficiently conservative on issues including immigration, the federal budget and crony capitalism.
 
"But more than any specific issue, voter after voter in a district that reaches from farmland in Northern Virginia to the prosperous suburbs around Richmond had a more fundamental complaint: At a time of deep cynicism about government, they described Mr. Cantor as a man who had succumbed to Washington and forgotten where he came from.
 
"At a time when voters say they crave authenticity, they did not believe he displayed it."

When confidence is low it is all about being local and authentic.  People laugh, but it is why the microbrewery movement has been so significant to me.  Our food choices reflect our level of confidence far faster than many of our other behaviors. Craft beer has been a leading indicator of what was to come.

To voters outside of Richmond this week, Mr. Cantor had become Anheuser-Busch InBev (NYSE:BUD) when they wanted Dogfish Head Brewery. He became "they," which in times like this is anyone who is not "me."

If mood continues to fall as this week's market peak strongly suggests is now likely, Mr. Cantor will simply be the first among many Washington political mega-titans to now be ousted. By 2016, people will look back on the supposed certainty of a Hillary shoe-in victory and laugh.  Jeb Bush won't be on the Republican ticket, if there even is a Republican ticket at that point. Low mood will redefine grassroots American politics.

Mr. Seib is right to identify globalization, alienation and populism as concerns. In all three areas I see an acceleration of weak confidence-driven behaviors, despite continuing rising markets.

Still, if policymakers and economists are going to have a positive impact on America today, they, like Mr. Seib, need to stop claiming effects as the root causes of America's current malaise.

Our problem is chronic underconfidence. (See my TEDx talk on the topic, here.) Until we do something about that, I am afraid that what Mr. Seib identifies as the causes of our current uncertain political environment will only get worse.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
 
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
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