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Donald Trump’s rise is the financial crisis of politics

Demonstrators hold up a piñata of Republican presidential candidate Donald Trump during a protest outside Trump Tower.
Demonstrators hold up a piñata of Republican presidential candidate Donald Trump during a protest outside Trump Tower.
Scott Olson/Getty Images

In 2008-'09, a major financial meltdown shook the economy and caused a significant recession. This crisis came as a surprise. No models predicted it. Initially, the only people who picked up on the warning signs were dismissed as crazy. But looking back, it should have been clear all along.

We now know that the system was shot through with perverse incentives that privileged short-term gains over long-term stability. Actors operated on faulty assumptions about how existing arrangements were infinitely sustainable (they weren't). Eventually it took a massive government intervention to bail out the banks and allow the "toxic assets" to recover.

Obviously, financial markets and political systems are not exactly the same, and there is a danger in stretching any analogy too far. But there are important similarities in that both are big, complex, interdependent systems that are never truly stable. Both systems get into trouble when they become overwhelmed with perverse incentives, and when actors assume they can maintain increasingly illogical arrangements and ignore warning signs.

One benefit of such a comparison is that thinking in this way allows us to see Trump's rise as the result of the incentives and structure of the existing political system, in the same way that we came to think about the financial crisis as the result of the incentives and structures of the financial system. This has consequences for the reform conversations that this crisis will hopefully bring about.

A second benefit of this comparison is that the analogy to toxic assets seems particularly useful. The anger turned violence that has emerged in the 2016 campaign is similar to the toxic assets that came out of the financial crisis. And to push the analogy further, those who think Trump can be simply marginalized by responsible Republican leaders are deluding themselves, somewhat like investors who argued that the collapse of Bear Stearns in May 2008 could be safely contained and we could then move back to endlessly increase housing prices.

While some might prefer to wish away the toxic elements of our politics that are emerging, this would be unwise. We need to find a way to rescue them.

A system full of perverse incentives

One reason the financial crisis was so bad was that the financial system was full of perverse incentives. For example, mortgage brokers and investment banks got rich by making and securitizing loans that should never have been made. But because they got rich doing so, they financed and securitized riskier and riskier loans, until the system was so flooded with junk that it of course collapsed.

In a similar way, it seems that Republicans received short-term electoral rewards for poisoning our political system with increasingly hateful and nihilistic rhetoric. As Vox's Ezra Klein wrote: "Republicans have worked for years to radicalize their base against Obama, to persuade them that something truly different and terrifying is going on, and in that project they have enjoyed a catastrophic success."

In 2009, Republicans faced a choice. They could have looked at the disastrous second term of George W. Bush's presidency as the logical end of the Reagan coalition and seen the Democrats' sweeping 2008 victory as heralding a new political order, and then worked constructively to pass a climate bill and a health care bill and end an era of increasingly bitter partisanship. Instead, Republicans decided that the problem was that they had not been conservative enough. Their congressional leaders opted for pure obstructionism. And their messaging rediscovered regions of negativity and hatred that had been ignored in America for decades.

The benefit was clear: As long as they directed fire at a common enemy, they could continue to maintain the fiction that their coalition was unified, papering over the growing contradictions and disappointments. Republicans could continue to placate their wealthy donors with fiscally conservative policies because they could misdirect blame onto Washington Democrats and their big-government agenda for any stagnating wages.

Sure, they were playing with fire. But like the investment bankers who kept shoveling toxic assets into the system even as the thin logic that had once rationalized them vanished, all the incentives pushed toward maintaining the existing fiction.

What investment banker would have benefited in 2007 from telling clients that all these securitized mortgages were really junk and it was time to stop investing in them? Everybody had an incentive to perpetuate the status quo just a little longer, deluding themselves that it could go on and on.

Similarly, what Republican politician would have turned his back on the fight, accepting minority status for the price of peace? All the incentives pushed to maintaining the existing fights. And especially when the Republican strategy worked in 2010, the rewards became clear.

The false assumption that the present trends will last forever

The 1999 book Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market is now a joke, a book published at the height of the tech stock bubble. (The Dow peaked at just below 12,000 in January 2000 and is now at about 17,000, 17 years later.) But this kind of thing always happens in financial bubbles: Investors look at the recent trends and make the common mistake of thinking that whatever has been happening recently will probably continue indefinitely into the future.

A year ago at this time, I was confidently predicting Jeb Bush would be the Republican Party nominee — because of course that was how things worked. He had the money and was poised to get the endorsements, and that was what had mattered for decades. Like most, I was convinced by the "party decides" thesis, because the recent data largely supported it. And so when Bush faltered, I followed the conventional wisdom that Rubio would take his place. Because of course.

Financial bubbles are pretty much impossible to time. We all know they happen, but no theory can perfectly predict them. Market highs are only clear from the hindsight purview of the trough.

In a similar way, all party coalitions in American politics are of limited duration.

We've arguably had six party systems in the United States. By "party system," I mean relatively stable coalitions that fight predictable ideological battles. But because losing parties are always looking to expand their coalitions by picking off groups from the winning party, and because issues shift and demographics change, no party coalition is ever permanently stable. Realignments always happen.

Here's a classic summation of this point by political scientists Edward G. Carmines and James A. Stimson:

Thus, by their very nature, all party alignments contain the seeds of their own destruction, the various groups that make up the party may be united on some issues, particularly on those that gave rise to the alignment in the first place. But lurking just below the surface a myriad of potential issues divides the party faithful and can lead to a dissolution of the existing equilibrium. In politics, as Riker notes, because of the inevitability of internal contradictions, disequilibrium may only be one issue away.

Arguably, the current party system emerged out of the period following the 1964 Civil Rights Act, when Lyndon Johnson allegedly acknowledged that the Democrats "have lost the South for a generation." For about four elections, the parties were thoroughly scrambled, producing a time of low polarization and high legislative productivity.

But by 1980, the Republicans solidified around the Reagan vision for the Republican Party — strong on defense, traditional values, and free market economics. Most significantly, this offered a new and permanent home for the conservative Southerners who were now at odds with the increasingly effete libertine Democratic Party.

And once this party system was in place, polarization took off.

But beneath this increasingly partisan voting was an electorate that was always much more ideologically diverse than the increasingly bipolar two-party system. And the more this underlying ideological diversity was hemmed in by party orthodoxy on both sides, the more adherents of unrepresented views felt disenfranchised and the more both parties had to turn up negative partisanship to keep their coalition together.

In retrospect, we can see the fissures in the Republican Party in the rise of the Tea Party and perhaps more clearly in the intraparty Republican fights over the House leadership in 2015. As with most financial crises, the first warning signs are often dismissed: It's just a slight deviation; things will return to normal.

We can also now see how the Republican coalition was prolonged beyond its shelf life. We can now see how Republican voters were becoming more secular, making the social conservative piece of the Reagan coalition less important. We can see how support for the strong-on-defense piece of the Reagan coalition fell apart after the failed Iraq War.

And, most significantly, we can now see how the tension between the fiscal conservatism of the increasingly powerful Republican donor class came into increasing tension with the growing numbers of working-class Republican voters suffering from increasing insecurity and inequality, and how the pro-immigration views of the donor class conflicted with the anxieties voters felt as the percentage of US residents born elsewhere reached levels not seen since the 1920s.

We can also now see that Europe has also been experiencing a rise of right-wing populism, suggesting that there is something in the changing dynamics of the global economy and culture that also made the existing political coalitions outdated.

Bubbles do happen, because all momentum in the system works to perpetuate them. But the more a bubble is allowed to persist beyond its logical limits, the worse the eventual fallout.

Now what?

Donald Trump represents the consequence of a political system in which the contradictions have been expanding for probably two decades now: a system in which economically struggling and less well-educated voters have been marginalized, in which both parties (but especially Republicans) have sided with their donor classes against their voters, and in which both parties (again, especially Republicans) have attempted to paper over their internal contradictions by spewing negative partisanship into the system. More than ever, voters support their party not because they like their party but because they absolutely hate the other party.

The political system that created this moment was also a system that centralized leadership in both parties in a way that minimized internal party diversity, fueling a reinforcing feedback loop of hyperpartisanship that left many voters unrepresented because they didn't fit into the narrow lines of partisan conflict.

Republicans distressed by the rise of Trump currently now seem split between denial, despair, and desperation. Some seem to think that Trump's rise is a temporary fever, one that will break after this election, and things will return to normal in 2018 or 2020. Others are ready to write the obituary for the GOP.  Still others seem inclined to take increasingly desperate and drastic measures to try to deny Trump the party's nomination.

None of these seem especially productive. At some point, Republicans in the #NeverTrump wing of the party are going to have to come to terms with the fact that a significant portion of self-identified Republicans support and believe in Donald Trump, and that their views and attitudes, long marginalized in the American political system, have now discovered a voice that is not going to fade away.

Because these views were marginalized for a long time, and because Republicans fostered anger to maintain their coalition's unity against the Democrats, the political system now faces a potentially toxic asset. Denying this reality and hoping it will go away is the equivalent of the Treasury deciding it wasn't going to backstop large financial institutions and just letting the chips fall where they may because, on principle, government shouldn't get involved.

Trump voters now have a leader who is comfortable inciting violence and who craves the spotlight in unhealthy ways. This is not good. And it will be even worse if Trump is denied the nomination.

The political system needs to find a responsible way to make these voters feel like they are being heard and represented, and we are going to need to do it soon. Honestly, I'm not sure how this happens absent Trump becoming the Republican nominee. But that has its own problems, which have to be carefully managed. Leaders in the media and the Democratic Party are going to need to treat this situation carefully.

Longer term, we need to identify some of the pathologies of the political order that led us to this point so we can do better going forward.

For one, we need to move to a campaign finance system that doesn't create strong incentives for party leaders to support policies that make their donors happy but piss off their voters and then use the money to channel their voters' anger at the other party. That's not sustainable. We also need to make sure we have a political system that fosters more internal diversity within the party, so large groups of voters don't feel that they are unrepresented for extended periods of time.

The American political system always works better when the parties are more internally diverse, because a second dimension of political conflict creates much more space for dealmaking. I've outlined these ideas (and others) for fixing our political system a New America policy paper, Political Dynamism.

This is a frightening moment in American politics. But the most dangerous thing to do in a potential crisis is just continue to do the same things that led to the current moment, thinking somehow you can just ride past it and everything will be back to normal next election. It won't.