Stephen King: Why a victorious Bush beat the misery index

Modern-day economics revolves increasingly around global and regional trends, not trends in individual countries

The US presidential election results last week got me wondering. Is political economy a useful discipline anymore? I ask this because politics and economics no longer seem to gel in the way they once did. In the 1970s and 1980s, political economy really did seem to matter. The so-called misery index - the sum of the US inflation and unemployment rates - seemed to be an accurate predictor of election results. If the misery index began to rise, there was a good chance that the president and party in power would be voted out of office. The electorate seemed to believe that there was a genuine economic alternative that was at least worth a try. Whether or not the alternative worked, of course, was an entirely different matter.

The US presidential election results last week got me wondering. Is political economy a useful discipline anymore? I ask this because politics and economics no longer seem to gel in the way they once did. In the 1970s and 1980s, political economy really did seem to matter. The so-called misery index - the sum of the US inflation and unemployment rates - seemed to be an accurate predictor of election results. If the misery index began to rise, there was a good chance that the president and party in power would be voted out of office. The electorate seemed to believe that there was a genuine economic alternative that was at least worth a try. Whether or not the alternative worked, of course, was an entirely different matter.

Today, the misery index looks increasingly less relevant. It's risen over the last four years yet George W Bush, unlike his father, has slipped back into power. One reason is that inflation is no longer a problem and, as a result, the misery index is generally a lot lower than it used to be, so people can worry about other issues. There is a broad consensus that low inflation is good. There's an acceptance that there's no exploitable trade-off between unemployment and inflation. And the inflation process has been de-politicised through the growing independence of central banks. Put simply, politicians don't talk much about inflation any more because no one expects it to come back in any significant way.

Another reason is the decline of nation states as economic powers. Even if politicians claim that a choice is on offer, most people are unlikely to believe them. Modern-day economics revolves increasingly around global and regional trends, not trends in individual countries.

Globalisation is a fact of life, whether it reflects market developments or co-operative political ventures. On the market side, the unhindered flow of capital around the world implies that jobs are lost and won not so much through the interests of domestic political groups but, rather, through the invisible hand of the international price mechanism. Some US and European politicians might bemoan the outsourcing of jobs to other parts of the world but the process appears to be increasingly inevitable. It's important to recognise that the human drivers of this process - shareholders - are, these days, a fairly broad church. They might include cigar-chomping plutocrats but they also include the likes of you and me, particularly when we're increasingly worried about our retirement incomes and are wondering who is going to support us in our old age.

We haven't yet reached the apotheosis of this process. In the late 19th Century, it wasn't just capital that moved around. Labour also shifted: people voted with their feet. This process has only just started: some countries aren't keen on losing their workers, and others are not keen on accepting immigrants. Nevertheless, the flow of capital - and the more modest flow of labour - is reducing the power of politicians to dictate their nation's destiny (something that the late President Mitterrand discovered to his cost on coming to power in the early 1980s).

On the co-operative side, the most obvious examples are the free trade areas, notably NAFTA and the European Union. Of course, the European Union is, in reality, more than just a free-trade area, something too often ignored or conveniently forgotten in the UK. The Union is also a slowly evolving political entity, designed in one sense to "internalise" labour and capital flows, thereby allowing politicians once again to grasp the reins of power.

A third reason for the apparent demise of political economy is the collapse of communism. The most competitive market through much of the 20th Century was the market for ideas, a market that dominated political economy. In economic terms, communism and capitalism offered alternative visions of the allocation of resources: one based on central planning, the other based on the market. Of course, communism was, for the most part, not the result of democratic choice. Nevertheless, it had a profound effect on the choices made within liberal democracies. Communism may have been an extreme version of state intervention but the size of the state waxed and waned depending on the degree to which any elected government leaned to the right or to the left (how else would the welfare state have arisen?). Communism's demise and the emerging capitalist consensus have seemingly brought this debate to an end.

Yet it would be premature to announce the demise of political economy. It may be that individuals increasingly feel distanced from economic choice and, instead, vote on "moral" grounds, if the snap reactions to the US presidential election are to be believed. This does not mean, however, that political economy is dead. Rather, the debate has moved on.

Let me suggest four areas where political economy is still alive and kicking.

First, disenfranchised voters have the opportunity to express their views in other ways. At one extreme, they can become shareholders, influencing the choices that companies make around the world. At the other extreme, they can join anti-globalisation movements that, ironically, have become a force only as a result of the globalisation that they fight against (internet technologies both support globalisation and, at the same time, make it easier for anti-globalisation groups to form).

Second, the migration of capital associated with outsourcing has the potential to become a real economic issue. Today, the free market may appear to reign supreme. Tomorrow, that may no longer be the case. The rich nations may see China and India today as investment opportunities but when, tomorrow, an emerging middle class in those countries begins to demand its fair share of global resources, it is not difficult to imagine a world that descends into protectionist chaos. If you don't think so, take a quick look at the agricultural policies of the US and the European Union today, policies that deliberately discriminate against poorer producers elsewhere in the world.

Third, although the euro's arrival has removed currency uncertainty within much of Europe, other countries still have the capacity to play games with their currencies, leading to significant redistributions of growth - and, hence, income - around the world. America's current account deficit has got bigger and bigger over the years, turning the US into a huge debtor nation. An easy way for the US to deal with its debts is to devalue its currency. Having borrowed from the rest of the world in dollars, the losers from any dollar decline will, for the most part, be foreign creditors rather than the domestic US debtors. Global income and wealth redistribution is, therefore, still very much a live issue, not just between rich and poor but also between rich and rich.

Fourth, ageing populations in some parts of the world combined with emerging middle classes in other parts suggests a battle for resources. It's all very well European savers, for example, believing that they can live off their investments in other parts of the world where labour is cheap, but other countries may eventually change their attitudes about foreign investment on their soil. The sanctity or otherwise of property rights is, therefore, likely to become a very big issue in the years ahead.

Political economy is most definitely not dead. The issues, though, are not best expressed through the standard democratic process. Instead, a lot depends on how countries choose to relate to one another. We live in an increasingly multilateral world. I suspect, though, that the ebb and flow of politics - and, hence, of political economy - will increasingly focus on the competing claims of multilateralism versus unilateralism.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com