The Potemkin Village Economics of Late Liberalism

Macroeconomist Philip Pilkington examines the similarities between the economics of Brezhnev’s late-soviet economy and Biden’s version of the same downward spiral.

Most of the people who grew up during the Cold War still have a sense that the Soviet Union during the 1970s was a nightmarish totalitarian system. There is no doubt that there was little liberty in the Soviet Union in this period. Freedom of speech was non-existent, the media people consumed was almost completely controlled, and the secret police kept their eye on anyone who expressed ‘deviant’ thoughts. But despite this, the Soviet Union of the 1970s was not the totalitarian nightmare state that it was under Joseph Stalin in the 1930sand 1940s. For one did not have the same chaotic, unpredictable, and murderous character. Nor did it have the same unity of purpose and overarching vision.

In the late-1950s, under Nikita Khruschev, the Soviet Union attempted reform. Not the sorts of reforms that would later be associated with Mikhail Gorbachev, which would attempt to genuinely liberalise the Soviet Union, but an attempt to pursue a sort of humane communism. Khruschev wanted to get rid of the overt terror associated with the Stalinist era, and while the Soviet people still had a limited amount of freedom after the Khruschev reforms they no longer lived in fear. By the time Leonid Brezhnev took over in 1964 it was gradually becoming clear that the reforms had not worked and there were fundamental, structural problems with the Soviet system. Brezhnev’s period of rule started with a bang, but by the time he was leaving office a deep cynicism had set in about the Soviet system.

Living under the late-Soviet model was not typically experienced as nightmarish or even scary, but rather as silly and fake. It was a sort of “clown world”, to quote a well-known contemporary trope, where nothing worked, and leaders were not taken seriously. This is captured in a popular Soviet joke of the time. It runs like this: Stalin, Khruschev, and Brezhnev are on a train going to the Russian countryside but suddenly it stops. As the engineer and the driver attempt to work out the problem Stalin gets angry and starts to shout: “I will solve this. Send the driver to the gulag for being an ideological deviationist and shoot the engineer for being a capitalist saboteur!” The trio wait for the train to shunt into action, but it does not move. Khruschev strokes his chin and then pipes up: “This is not right, let’s release the driver from the gulag.” But without an engineer, the train still fails to move. At that moment, Brezhnev takes a large shot of vodka, smiles, and says: “Comrades! No need to worry! Pull down the window shades and let’s start rocking the train from side to side!”

The transition from the focused but terrifying Stalin-era to the train-rocking antics of the Brezhnev-era is clearly captured in the Soviet growth statistics, revised in 1987 by the Russian economist and historian Grigorii Khanin. In the 1960s, the Soviet economy was growing at an annual rate of about 4.3%. This was a reasonable rate, though not a particularly impressive one given that the Soviet Union was effectively a developing economy. In the early 1970s, this dropped to around 3.2% annual growth. But by the late-1970s and early-1980s, the nadir of the clownish Brezhnev era, growth had fallen to 0.8%. In this period, also known as the ‘Era of Stagnation’, people shirked work and drank a lot. They made jokes about authority figures and faced the world with a resigned cynicism.

If all of this sounds remarkably familiar, it should. It sounds increasingly like our contemporary experience of late liberalism. Although the popularity of alcohol seems to have given way to the widespread use of marijuana and psychedelics – not to mention the horrifying proliferation of opiates, a nihilistic death-plague the likes of which even the Soviet Union never experienced. The profusion of ‘memes’ in our era bears a striking resemblance to the ‘samizdat’ – or unofficial, self-published cultural production – that spread in the late Soviet Union. The election of eccentric political leaders like Donald Trump or Javier Milei, who reflect the prevailing cultural cynicism of their supporters, seems exactly like what would have happened were the Soviet Union an electoral democracy in the late-1970s.

But the shrinking pool of late liberalism’s ideological defenders will no doubt say that those of us who suspect there may be parallels are looking for patterns that are not there. We are lying on our backs and seeing what we think are grim faces in the clouds – but these faces are simply projections of our own dyspeptic mood, a mood soured by our contemptuous and wrong-headed rejection of the tenets of liberalism. Yet the emerging economic reality of late liberalism is becoming harder and harder to ignore. One of the benefits of liberalism, we are often told, is that it produces economic growth – it “makes the GDP line go up”, as the meme merchants say. But does it? As we move from 2023 into 2024, it is becoming increasingly unclear if liberalism can produce the goods – and by ‘goods’ we mean actual goods, actual economic output.

The canary in the coalmine here is Europe. Europe’s economic problems have been evident for some time. According to the IMF, between 1992 and 2007 the European economy grew by an average of around 2.1% per year. But since 2008 it has only grown at an annual rate of around 0.8% per year – the same number as the Soviet Union experienced in the late Brezhnev era. The IMF projects an average annual growth rate of 1.4% between 2023 and 2028. In truth, especially with the high energy prices driven by the mysterious exploding (passive voice) of the Nordstreampipeline, these projections look overly optimistic. But even then, they are still very low.

In the shorter term, the European economy is deteriorating at a rapid clip. The manufacturing sector has been in decline for months. Purchasing manager indices show that it has been contracting since early-2022. With recent readings as low as 43, the sector is contracting at a rate that is typically associated with a recession. Yet the European economy continues to stumble forward, like a zombie. This is unlikely to last the next 12-18 months, however, as the services sector is now starting to decline too. Until now, services were propping up the European economy but since August 2023 it too has started to contract. Meanwhile, the housing market looks like it is collapsing too, with prices starting to fall in August 2022. Falling house prices, driven by rising interest rates and a consequent decline in new mortgages, are driving down the construction sector with them. The European construction sector has been contracting since early-2022.

If we crossed the Atlantic and took a brief look at the statistics, we would conclude that a veritable economic boom is taking place. Recent data shows that in the third quarter of 2023, the economy grew at a rate of 5.2% a year. To give some context to that remarkable growth number, last time we have seen growth that high without an immediately preceding recession, was in the second quarter of 2000 – 23 years ago. Yet many other indicators seem to indicate a sick economy. The manufacturing sector has been in decline since at least mid-2022. During this period retail sales have been weak too. And consumer confidence recently touched levels below what we saw at the bottom of the 2008-09 Great Recession. Public opinion seems to agree with the alternative statistics rather than the GDP boom, with 67% of people polled by Gallup saying that they disapproved of the way that President Biden had handled the economy.

But why the discrepancy between the official numbers and the unofficial numbers? Are we so deep into late liberal decline that the authorities are simply making the numbers up? There has been an unusual amount of data revisions these past two years, but it seems unlikely that these explain the booming GDP growth numbers. Rather the GDP numbers seem to be explained by the fact that the Biden Administration is running enormous government fiscal deficits. Recent estimates put the fiscal deficit at 8.6% of GDP in 2023. Outside of the unprecedented response to the COVID-19 pandemic, these sorts of budget deficits are associated with deep recession of the sort we saw in 2008-09. But GDP numbers are telling us something deeply counterintuitive, namely that the economy is not in deep recession aren’t wrong, but is booming. What is going on? Simply put, the government deficit is propping up the economy like a puppeteer holding up a marionette.

How does the illusion work? GDP is calculated by adding private investment, private consumption, net exports, and government spending. If the government increases government spending, GDP will go up – even if the rest of the economy is in absolute shambles. This appears to be what is happening in the American economy in 2023. Without the Biden Treasury juicing the economy, the whole thing would collapse – as if the puppeteer had let go of the marionette’s strings. The American economy has become a sort of Potemkin Village, propped up for DC insiders to gawk at the artificially inflated GDP numbers while everyone else sits and stews in the ever-spreading cynicism of late liberalism.

The picture gets even worse and even more late Soviet-like when we consider what the money is being spent on. Here we must turn to the Biden Administration’s biggest legislative achievement on fiscal policy: the Inflation Reduction Act (IRA). The act has nothing to do with inflation, much less its reduction. It is a giveaway to the increasingly bloated green energy sector that has taken over Washington DC. The Biden Administration pitched the IRA as an industrial policy aimed at revivifying the American manufacturing sector, but the reality is that for every $1 that goes to actual manufacturing companies $6 goes to the big green energy blob – a sector staffed mainly with Democrat Party loyalists.

This explains why the polls and the consumer confidence surveys disagree with the GDP numbers. Just as the GDP numbers are inflated by massive government spending for DC insiders to gawk at, the spending itself is flowing into a parallel economy populated by these same DC insiders. Subsidies and tax credits are passed out to those loyal to the liberal regime who get access to them by either founding or joining a company that advertises its ‘green’ credentials. The green credentials themselves are much like holding a Communist Party membership in the late Soviet Union. During the Brezhnev era, there may have been toilet paper shortages for the average person, but Communist Party members still had access to most consumer goods that they needed. And while the American economy today is much richer than the Soviet economy under Brezhnev, the same phenomena of a different economy operating for insiders than for outsiders is crystal clear.

But pumping money in to grow the big green blob cannot last forever. In fact, it cannot even last for much longer. Congress is now controlled by the Republicans, and there is no way they will feed the blob another penny. And so, the spending will soon run out. The juicing effect that the fiscal stimulus is providing the economy will soon fade – although the debt accumulated will remain. At that point, the underlying rot in the economy will be exposed and it will collapse into a recession. This recession will take place against the backdrop of an extremely weak and exposed financial system, which has already experienced bank runs and bankruptcies when merely faced with higher interest rates, as we saw with Silicon Valley Bank and Signature Bank. There are also well-known problems in the so-called shadow banking system, with private equity highly leveraged and deeply involved in the real estate sector – a sector already melting down due to the exodus from the increasingly crime-ridden cities which in turn is driving down the value of commercial real estate.

Late liberalism is in its Brezhnev years. It has been since the financial crisis of 2008-09, from which it has never truly recovered. But since the outbreak of COVID-19 it has become increasingly fake. Any sense amongst policymakers that they should remain prudent in their use of the government purse, or in how much they should stuff the pockets of political allies, has fallen by the wayside. A veritable orgy of fiscal experimentation has given rise to the zombie economy that exists today. As in the popular 1980s movie “Weekend at Bernie’s” the liberal elite manipulate the limbs of the corpse in a desperate attempt to convince horrified onlookers that the victim is alive. But the act cannot continue forever. And if there is one iron law in politics and economics it is that what cannot go on forever, will not go on forever.