The edge of democracy

Over the weekend, I watched the new Netflix documentary “The Edge of Democracy”. In it, filmmaker Petra Costa follows the main actors in Brazil’s political elite from the indictments against former Presidents Lula da Silva and Dilma Rousseff to the election of current President Jair Bolsonaro.

What is striking about the movie is not so much the portrayal of the basket case that is Brazilian politics, but the many parallels to the current state of the political debate in the US. While the roles between left and right are largely reversed between Brazil and the US, several important developments stand out. These developments paint a frightening picture of the current state of US democracy and the direction it might be headed should things go wrong.

First, the movie documents how political cooperation across parties increasingly broke down over time. The challenge posed to a conservative elite by the democratically elected President Lula of the socialist Workers Party creates a strong backlash by the opposition that eventually leads to the impeachment of Dilma Rousseff, Lula’s successor, and her removal from office. A striking parallel to the current US political situation is – and I wasn’t aware of that until I saw the movie – that the impeachment trial was fought on shaky legal grounds. I always thought that the impeachment came based on accusations of corruption from what is commonly known as “Operation Car Wash”, the largest and most comprehensive investigation of corrupt practices in Brazil. As it turned out, the investigators thought that Lula, Rousseff and other prominent politicians were taking bribes but could not prove anything. Thus, the impeachment against Rousseff was grounded on a claim that she committed accounting fraud and paid money belonging to the national bank too late rather than charges of corruption. Similarly, Lula was indicted based on charges that he was the beneficial owner of an apartment in Sao Paolo given to him by a prominent construction company, though no direct evidence exists of this. When lawmakers are finally interviewed why they think Dilma Rousseff should be impeached they cite all kinds of reasons ranging from the current economic downturn in Brazil’s economy to political ineptitude.

It is striking to see how the US President, who was democratically elected was the subject of an FBI investigation that did not provide any clear evidence of obstruction of justice or collusion with a foreign adversary. But despite this lack of hard evidence, the calls for impeachment don’t stop. I am not a fan of Donald Trump and think he is one of the worst Presidents the US has ever had, but using impeachment proceedings to overturn a democratic process is an extraordinary step and should only be taken if strong proof exists of his wrongdoing. Impeaching Richard Nixon was justified given the weight of the evidence against him. Impeaching Bill Clinton was not and it undermined the democracy in the US. Impeaching Donald Trump is likely to follow in the footsteps of the Clinton impeachment insofar as it would generally be seen by the public as an effort by the opposition to undermine the President – something that is likely to backfire politically.

Second, it is intriguing to see how the breakdown of consensus politics leads to a swing to the extremes of the political spectrum on both sides of the aisle. Lula da Silva was a socialist President with outright socialist policies that hurt the economy in the long run. Now, he has been replaced by a President who is equally far to the right end of the political spectrum. He is in the process of hurting the Brazilian economy not with socialist policies but with free market policies that are in the process of depleting the country from its natural resources to the benefit of a corrupt economic elite and foreign investors. Both Presidents follow unsustainable policies that make the country poorer in the long run. The difference is that Bolsonaro is popular in the West because the spoils of his policies show up in the profits of Western companies.

Politicians in the US have set course on the same trajectory as Brazil. The current free market policies have increased inequality in the country and the backlash is creating a large group of opposition politicians that advocate for the most left-wing economic policies since the New Deal. As I have argued in the past in my discussions on Modern Monetary Theory here, here and here, the risk is that these policies, if enacted, will only continue the relative economic decline of the US compared to China and other countries.

Third, the documentary movie shows that no matter the outcome on the political front, one group of society will always be the winner: the economic elite. In a revealing shot, Kraus shows the two plaques installed outside the Presidential palace in Brasilia. On one side a plaque installed by a previous conservative government that commemorates the companies that helped build the palace and supported the government. On the opposite side a plaque installed by Lula da Silva commemorating the companies that helped him implement his policies. Many of the companies are the same on both plaques because Brazil, effectively, is not a democracy, but a plutocracy where the economic elites bribe politicians to ensure their own prosperity. And the big Brazilian companies care little who they have to bribe as long as the politicians do their bidding for them. 

Studies of the US political system already show that the political decisions are predominantly driven by the interest of the economic elites. A 2014 study by Martin Gilens and Benjamin Page concluded that “When the preferences of economic elites and the stands of organized interest groups are controlled for, the preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy”. When large parts of the population feel disenfranchised from the political process, they tend to vote for more aggressive, populist candidates that promise to overthrow the system. As Timothy Snyder has shown in his book “On Tyranny” this is probably the most common way for democracies to die, not through a coup or a revolution but through a slow and steady erosion of norms and disenfranchisement of larger and larger parts of society.

What does all of this have to do with investments, you ask? Well, financial markets tend to like politicians like Bolsonaro or Trump who openly support business interests and their policies typically lead to a stock market boom. But after a while, the fireworks of their pro-business policies stop and markets are left with a massive hangover – especially when the pro-business politicians are replaced by extreme anti-business politicians. Some wise man (or women) once said: “You have to give people a little bit of socialism in order to prevent them from asking for a lot”. I think that this is all too often forgotten in today’s free market ideology. The result is that the current boom in markets may have sowed the seeds for its own destruction.

Correlation between the interests of affluent people and political outcomes in the US

Source: Gilens and Page (2014).

Note: The black line (left hand scale) represents the likelihood of adoption of a policy that is in line with the interests of the economic elite in the US (horizontal axis), while the grey bars (right hand scale) show the share of political decisions in each category.