One of the many similarities between Jeremy Corbyn winning the Labour leadership election and the success of the socialist Bernie Sanders in the US Democratic primaries has been that they have taken most of the political and media world by complete surprise.
If you type “Corbyn Sanders compared” into Google, two of the first three links are to articles written last autumn saying that Sanders has an “infinitesimally small chance” of beating Hillary Clinton. Clinton is a formidable politician who is still expected to win, but I doubt even she would now describe her opponent’s chances as infinitesimal. Tony Blair, commenting on the pair’s rise, said in an interview this week: “I’m not sure I fully understand politics right now.”
But the success of Corbyn and Sanders should be no surprise. Indeed, the fact that so many in politics and the media were surprised tells us something important about that small world. To see why, we need to focus on the financial sectors of the UK, US and elsewhere.
The growth in the size and importance of the financial sectors in the industrialised countries over the past few decades is well known. In the UK and US it has had two major impacts on the economy. First, it spearheaded - particularly in the UK - a substantial rise in inequality at the top of the income distribution. Huge City and Wall Street salaries and bonuses are usually justified by the alleged talent of their recipients, but economists are still debating whether this rapid expansion in the financial sector has increased or decreased the overall welfare of those outside that sector. The problem is that a lot of this growth might have been what economists call rent-seeking.
Examples of rent-seeking that many may be familiar with are the charges financial firms make to manage any pension or financial wealth you may have. The claim of those running these managed funds is that they can pick the assets that will perform well. The evidence is that, on average, managers of these funds do little better than the market average, and so the fees you pay them are a waste of your money. You would be much better off buying a cheaper indexed or tracker fund, where your money is invested so as to track a relatively fixed group (such as the FTSE 100). This may be just one of many examples of rent-seeking, where the financial sector makes money at the expense of the rest of the economy.
The second consequence of the growth in the financial sector is that it created a global crisis. The sector pushed for less regulation, which helped allow a massive increase in risk-taking. As a result, a US housing sector collapse became a global financial crisis and the largest recession since the Second World War. Following this catastrophic event, you might have expected politicians to insist on some major reform of the financial sector, and banks in particular.
From an economist’s point of view, an obvious reform is to make banks like other companies, with a large equity buffer that can absorb shocks when things go wrong. Yet reform of this kind is just not on the table. As Ben Chu explained in his column last Thursday, actual reforms have been small, and even those are being compromised by politicians and regulators.
The reason for this lack of action is power and influence. In the US, the importance of financial sector campaign donations for members of Congress is well known, and in the UK those in the financial sector are major donors to the Conservative Party. It was this power and influence that led to the deregulation that allowed the global financial crisis, but nothing has been done to check it.
Yet there has been a major policy shift as a result of the global financial crisis and subsequent recession, and it is called austerity. The financial crash led to a recession which increased public deficits, as recessions do, but unlike normal recessions governments since 2010 have been cutting back on public spending.
In 2010 the European Central Bank refused to back countries such as Ireland or Spain. This led to a government debt-funding crisis in those countries: in Ireland partly because the government previously had to bail out its own banks. Those working for the financial sector told us that this debt-funding crisis was about to happen here, even though central banks outside the eurozone do back their governments. This fear created austerity, and it helped lead to a slow and partial recovery from the recession. For those (often called neoliberals) who believe that markets are best, regulations are bad and government just holds the private sector back, the global financial crisis should have been a severe setback. Instead it has led to some of the very policies they desire.
The establishment on the centre left often seems too timid or ignorant to talk about the power of the financial sector, and is therefore unwilling to challenge it. Many ordinary people who support the left in the UK and US do have some understanding of what has gone on. It should therefore not be surprising that they have moved away from established leaders towards those – like Corbyn and Sanders – who are willing to talk more openly about the power of the financial sector and inequality.
Why were politicians and the media so surprised by this success? I think it tells us how insular the Westminster and Washington bubbles really are. Political commentators talk to politicians who talk to political commentators. It tells us how embedded the influence of the City and Wall Street is. The media relies on economists from the financial sector, and so tends to see the economy from their perspective.
The blind spot is mostly to the left, because we have the Daily Mail and Fox News. As a result, it came as a complete surprise that a crisis caused by the financial sector that left that sector unscathed but instead led to a diminished role for the state, might make many people rather angry.
Simon Wren-Lewis is professor of economic policy at the Blavatnik School of Government, Oxford University