- The New Rules with Alan Pentz
- Posts
- Was That A Realignment?
Welcome back to The New Rules
A quick message before we jump in:
If you’re reading this online, subscribe HERE and join over 8,000 people who want to understand the world better by receiving these emails every week.
And don’t forget about The New Rules podcast where I go deeper on my posts or bring in a guest whose ideas I find intriguing.
Let’s dive in…
Was last Tuesday a political realignment? By realignment, I mean the crafting of a new durable majority coalition that can last for decades. FDR did this in the 1930s and Reagan did it to a lesser extent in 1980.
Realignments don’t happen often so we should be cautious about declaring one. For example, 2008 was supposed to be one but wasn’t. However, with a full Republican sweep of the House, Senate, and Presidency, the potential for a new and durable majority coalition is there for the Republicans, if they want to take it. As Rudy Teixeira put it in his substack, The Liberal Patriot, the Democratic coalition was shattered in this election.
Trump’s win was decisive. He shifted middle and working class voters into his coalition including large percentages of minorities. If he can build on that coalition, he could be like Reagan and remake the party. On the face of it, it looks like a realignment but there’s a voice in the back of my head disagreeing.
Why It Might Not Be A Realignment
It took a couple of days for me but by the end of last week, I started to doubt the realignment narrative. Some commentators began to note that every incumbent party in a democracy that faced voters in 2024 lost or had their margins greatly reduced.
That happened in the UK where the Tories lost to Labor, in India where Modi held on but with a greatly reduced margin, in Japan where the LDP lost its majority, Macron lost his majority in the French Parliament, and Germany looks set to turn out its government when elections are held next year.
When you see a wave that strong in one direction, you have to start doubting how much the details of the US election mattered. Of course, a worldwide trend could lead to a realignment but in this case I don’t think so.
It seems like the inflation that followed the pandemic might be the real culprit. As Matt Klein who writes The Overshoot showed, inflation wasn’t just a US phenomenon. It happened everywhere and all at once. Contrary to narratives about profligate spending causing inflation in the US, we were about average when you look across the developed world.
Of course other countries spent money too but not at the pace that the US did. Most of that inflation was caused by supply chain disruption rather than government fiscal policy. Of course, I think it’s fair to say that politicians leaned into fiscal policy much more during the pandemic than they did in Great Financial Crisis so they share some portion of the blame but I don’t think not spending was right decision either.
As this chart from EPB Research shows, the fiscal austerity adopted in the wake of the Great Financial Crisis failed to get growth back on trend. That resulted in Obama’s mid term losses in 2010 and most likely led to Trump’s first election.
Austerity wasn’t any more popular than inflation. What’s a politician to do? I don’t really know. Get lucky is the only advice I have because it seems like you just have to play the cards you are dealt and you can only change things around the edges.
In the end, it seems like any Democrat was bound to lose.
The second reason I don’t think this was a realignment is that Harris was an historically bad candidate. Would the result have been as sweeping with a Josh Shapiro or Gretchen Whitmer at the top of the ticket? I doubt it. Early analysis shows that Democratic turnout was down suggesting a lack of enthusiasm for the candidate.
Additionally, the Dems had a high number of Senate seats up versus the Republicans so a Senate flip was close to inevitable. I’d attribute 90% of the loss to inflation, 5% to Harris, and 5% to the disproportionate amount of Senate seats Democrats had to defend.
The All Important Middle Class
What will determine who wins future elections is who wins the working and middle classes. Trump shifted those voters to him in 2024 but many of these voters went with Obama and then Trump (some stopped along the way by Bernie) and then Biden and then back to Trump. They are driven by a wider sense that the economy isn’t working for them. While real wages are up, the cost of many of the key elements of middle class life have grown much faster than inflation and wages.
As this chart shows: the cost of medical care, housing, education, etc. have grown much faster than inflation. True those increases are offset by cheap TVs but another TV isn’t going to get your kid through college. Inflation in 2021-2023 made this worse but these key services have been outpacing wage growth for a decade or two.
I think there’s a group of voters in the middle who keep shifting back and forth trying to find a candidate that will do something about the inequality that makes the rise in the cost of these services affordable for the affluent but increasingly out of reach for the middle. The leader that solves this problem will remake the party system and create a durable majority coalition.
Is that going to be Trump?
The Unstable Coalition
It seems to me that there is an inherent instability to Trump’s coalition that will be exposed as it takes power. How can you square the circle between what Wall Street and big business want and what Joe Sixpack wants on Main Street?
Trump is promising corporate tax cuts, tariffs, and middle class wage increases. All of this is inflationary which we know is unpopular. He also has Elon threatening $2 trillion in spending cuts and they are talking about a repeal of Obamacare. These policies could offset that inflationary impact but the middle class will rise up if services are cut and a recession will follow any real amount of fiscal austerity. We know that austerity is also unpopular.
My guess is the Dems will have a perfect opening to take back large portions of the middle class in 2-4 years with a message blaming the Republicans for some combination of continuing inflation, causing a recession, cutting services for the middle class, or giving tax breaks to corporations.
The policies needed for a durable coalition would focus on shoring up middle class jobs while also fully funding services for the elderly and that same middle class. That means raising tariffs (or using capital controls) to favor domestic manufacturing. It would also mean expanding industrial policies to fend off Chinese competition in areas like robotics, AI, and semiconductors.
To avoid an inflation blow out those policies would need to be offset by tax increases on corporations and higher paid workers. That burden would have to fall on large multinationals hardest who have used international tax games to avoid taxes. We’d also need to increase taxes for those making $100-400k. Democrats have set $400k as the upper limit of what they consider middle class and therefore exempt from tax hikes. This is far too high. We need to expand the tax base if we are going to get close to paying for the government.
I could see someone like JD Vance supporting those policies but Trump is looking to multiple Wall Street titans to staff the Treasury and his other finance related positions. He also likes to pal around with S&P 500 CEOs and looks at the stock market as an indicator of his success. That makes me question how working class Trump’s policies will be.
What Will Trump Do?
I tend to agree with the analyst, Marko Papic, about what Trump will do. On trade and China, he sees Trump using the threat of increased tariffs to cut a deal with Xi to bring more Chinese manufacturing to the US. This is essentially what Japan and Germany did in moving auto plants to the Southeast. That will certainly boost jobs in a few states but won’t change the fundamental problem.
China wants to dominate key technology areas and in particular advanced manufacturing. It is not going to invest in extensive physical plant in the US, give up core technology, or give up the badly needed jobs in China. They aren’t as dumb as we were. It’s not that China won’t cut a deal, it’s just that they won’t make good on it.
Best case scenario is that China builds a few electric vehicle factories and Trump gets to cut a few ribbons. But most of the promises will never be fulfilled. This is exactly what happened in Trump’s first trade deal with China.
Papic also speculates that Trump will be forced to dial back his fiscal commitments as treasury yields rise in response. Treasury yields tend to increase with the expectation of increasing federal deficits. If yields increase too much, it could cause the stock market to plummet and that might bring on a recession. To avoid this, Trump will either need to abandon many of his tax cuts or cut back on federal spending.
I tend to think he will defend his tax cuts as they were the signature achievement of his first term. Unfortunately, because tax rates are already low, an extension won’t add much to growth, but cutting federal spending would most likely result in recession as well and a reduction in services for the middle class.
In the end, I don’t think Trump will get his realignment. He won’t do the hard work of raising taxes on corporations or fundamentally reshaping our trade policy. Most likely he’ll cut a few deals that don’t amount to much and leave the Republicans Party scrambling in 2026 and almost certainly in 2028 in the wake of a recession or an inflationary spike.
What the Dems Need to Change
In my view, the Democrats will be in fine shape to contest future elections as is. Most of the next two elections will be determined by the contradictions of Trump’s coalition. All the Dems need to do it stay out of the way and run the better candidates who will emerge from competitive primaries. That’s unfortunate as I think a more prolonged time in the wilderness might cure the party of its excesses.
As I made clear above, the working and middle classes will be the battleground going forward. The Progressive agenda the Biden Administration implemented post 2020 was not popular. Rather than focus on economic inequality, the Progressive agenda focused on a narrative rooted in oppressor versus oppressed groups. Economically it sought to remake the working class as a unionized cohort of green economy workers.
Both of these policies failed. The oppressor versus oppressed lens distracted Dems from focusing on growing economic inequality. Instead they seemed focused on narrow set aside programs to throw some goodies to those deemed oppressed. It also led to a series of soft on crime policies that turned into a disaster and unlimited illegal migration.
The Green New Deal policies have had some successes in driving employment but because the Democrats haven’t dealt comprehensively with global trade imbalances and China, it hasn’t delivered the promised manufacturing renaissance. Additionally while green energy is an important component of future growth, it’s clear that cheap energy from all sources is the real goal. Trying to blunt the US’s advantages in natural gas and oil production is another stone cold loser policy.
In order to realign the electorate, Democrats need to learn from Trump and do the things his coalition can’t. They should focus on a comprehensive reformulation of the global trading system through a combination of tariffs, industrial policy, and currency controls. That will bring real and durable jobs back along with securing America’s future. Second, they should become the party of tax increases for corporations and the wealthy to pay for services for the middle class.
This requires a focus on the average person (White, Black, Hispanic, or Asian); not further subdividing people into increasingly obscure interest groups. This was essentially Bernie Sander’s 2016 economic pitch. Add in a more patriotic attitude and a tough on crime approach and you win.
It doesn’t mean abandoning issues like immigration. Remember that immigration was actually popular midway through Trump’s first term. You just can’t run on unfettered illegal immigration. That’s another losing policy but I’d wager increasing legal immigration will be popular again if Trump tacts too far right on the issue.
These are the openings Trump’s coalition will create. Will the Dems walk through them?
I’m not going to hold my breath. The Democratic Party is firmly controlled by coastal elites who have spent the days since the election cursing the very voters they need to attract. Blaming voters for being dumb, misogynistic, and racist isn’t going to realign the electorate.
The Democrats will be very competitive in future elections. However, it will probably require another Bernie Sanders like revolution to overturn the party establishment and capture a durable majority. Trump created this possibility for Republicans but I think he’ll squander it.
For now, my prediction is we continue to see seesaw elections.
Keep learning,
Alan
P.S.
Reply