The challenges for our next great leaders

Is great leadership nature or nurture and what's the new arms race? It's time to take The Sniff Test.

What makes a great leader?

The question is triggered by a stream of surveys to our house asking whether Sunak or Starmer makes for a better Prime Minister. Sunak projects competence and avoids oozing wealth, while Starmer offers compassion as he holds back the urges of his party. Neither will be great, because neither will tackle the challenges of our time.

George Friedman, whose work I have highlighted, argues that leaders react to circumstances rather than creating them. Great change is possible only at particular times, which candidates don’t control. Obama was elected on hope for change, but the world needed stability after the Great Financial Crisis.

This was provided by nationalising private debts. We became reliant on the narrative that governments don’t go bust and, encouraged by that, governments spend more. The financial world works on the premise that central banks in the West, and government in China, will bail out markets whenever problems get too big. We assume the two will cooperate.

The next great leaders will deal with the consequences of this. In doing so, they will address the no-go areas of today’s politics, such as education and healthcare, and infrastructure and housing. They may also need to remedy an unholy mess in our pensions.

What might trigger such radical change and where are the signs it is starting?

Identity Politics and Civil War

Barbara Walter is an expert in civil wars who sat on the CIA taskforce identifying countries at risk. As the CIA operates abroad, the US was off-limits, which prompted Walter’s TED talk that was promoted this week. Its provocative title is “Is the US headed towards another civil war?”.

Walter highlights two common themes behind every civil war. The first is partial democracy and the second identity politics instead of ideological. She notes that wars are caused by the groups who are losing their grip on power and whose identity is under attack.

Hungary is an example of a country with partial democracy, which is a constant thorn in the EU’s side. Elections are held regularly and participation is enthusiastic, but governments operate unchecked. Karl Popper’s definition of democracy is a system where you can throw the rotten apples out.

Walter argues that the dangerous identity in the US is white males. The US will be the first Anglo-American nation to become majority non-white and act as a guide to what happens elsewhere. The dominant role of white males in US society is under threat and the Capital Hill riots are wheeled out as evidence of the risks.

The share of the white population in the US (source: US Census Bureau)

Walter notes that countries do avoid civil wars by managing the decline of the former dominant group. The logical conclusion is pro white male politics, or more broadly pro worker and pro family politics. That really would be a change in the political winds, although it is what is happening in the private sector with substantial wage increases that are grabbing headlines.

White male is a catch-all for working people and nuclear families. Not every white woman is a struggling single mother facing down the patriarchy. 42% of women voted for Trump in 2020, which was a percent more than in 2016 and six percent higher than voted for the Republican candidate defeated by Obama four years earlier.

The political divide in America is more geographic than gender. While only 28% of Californian females voted Trump, three-quarters did in Virginia. What could go wrong in a country divided on geographic lines?

The irrelevance and importance of transgender sport

The hallmark of polarising politics is campaigning against rather than for something, but with the same intention of rousing supporters. Transgender sport is fertile ground, because while men may pour scorn, it is a genuine threat to identity for many women.

Fewer than 1% of professional athletes are transgender, although their concentration in individual sports may give them outsized recognition. But it is at the grassroots level of high school sport where the campaigning focuses.

If you’ve never lived in America it is hard to understand the importance of school sport, both high school and college. Weekends centre on it and new business contact begins with the question of where you went to school, quickly followed by recall of the nickname of the college’s top sports team. Go Wildcats. Bruce Springsteen immortalised this in Glory Days.

19 states have outlawed transgender athletes at high school level. All 19 voted Trump in 2020. California is the only state to legislate in favour of transgender participation, but six solidly blue states allow it through the rules of their high school sports associations. Here’s a map of the high school transgender sports issue courtesy of Roger Pielke, with bans in place in states coloured red.

Source: The Honest Broker by Roger Pielke

You might argue that this issue simply magnifies an existing divide. That’s what polarisation is and it works by an appeal to community and values. You are no longer of the left or the right, but us and them. Environmental politics works this way too, as you are either part of the solution or you are the problem.

The sacred cows of the social sector

The revolutionary’s curse is the need to be elected. This painfully honest description of grass roots politics by

Michael Taylor

shows how hard it is to unseat incumbents. The first challenge for would-be great leaders is to get elected.

This is particularly the case in the UK and US, where liberal democracies have survived great turmoil through temporary suspension of liberal values. The largest European nations all operate in systems devised post the last great crisis of the second world war and approach the next one untested. Europe will forever be an issue for the UK given its proximity and Brexit was never going to change that, but politically it provides no role models that have stood the test of time.

Once elected, great leaders will slaughter the sacred cows of the old regime. Education and healthcare loom largest as huge productivity sinks whose prices rise faster than wages and as result, pile up debts at local and national level. Reform is as inevitable as it is unimaginable, although not yet and don’t expect Rishi or Sir Keir to do anything but show support for our hard-working nurses and teachers.

Infrastructure and housing are also crying out for change. The Blair government that swept to power in the late nineties was desperate to shake off the tag of economic incompetency worn by Labour and introduced rigorous cost-benefit analysis into every public spending decision.

This is a technique beloved by consultants because it promises change yet reinforces the status quo. Innovation does not result from an analysis of winners and losers, because its tears up the rules of the game as its first premise. You don’t innovate by committee.

It is almost impossible to justify spending on infrastructure that is not in London or one of the existing conurbations. This is where people live and therefore where the most benefit will be felt. You have to think three or four steps ahead to envisage the gains from opening up new areas to development. Bureaucrats do not think this way.

These changes will only be possible once we have addressed the mountain of public debt and its consequences. Signs of stress will be felt first in financial markets and it is here that we should look for clues. The ramifications for your pension are significant.

The fraying narratives of economy and politics

Financial markets operate on a series of narratives that are similar in nature to the sacred cows of politics. These are rules of thumb that everyone knows to be temporary but treats as permanent. There’s no money in betting against consensus in mainstream finance and regulation ensures that this is not possible for most money managers. George Soros didn’t break the Bank of England with people’s pension funds.

The first-among-equals narrative of finance is central bank competency. Look how they saved us in 2009 and 2012 in Europe, dragging behind as ever. Regard how quickly they responded to Covid and see now how they are breaking the back of inflation.

But they’re not and worker unrest is rife. The UPS example is only the most egregious and Starmer will not be able to play whack-a-mole fast enough to keep his unions in place once elected. This is how it should be. Better wages were at the heart of votes for Brexit and Trump and are the only way to keep up with the costs of education, health, housing, communications and energy until those markets are reformed. Wages are the salve for white male identity politics.

Central bank competence and controlled inflation must mean lower interest rates. This means bond prices go up. This is good news because UK pension fund rules mean you own huge quantities of bonds, because you’re the patsy at the poker table who thinks the game’s played fairly.

Allocations in UK Pension Funds (source: New Financial)

If inflation does not come down, then neither will interest rates and bond prices will collapse. Arguably the UK is better placed here because general incompetence means markets are less trusting of its ability to control, but nowhere will be safe if interest rates unexpectedly rise. Your pension fund will explode, as it did when Liz Truss arrived and was why she hastily departed.

Nationalising private debt in 2009 had two consequences. It greatly increased the burden on taxpayers of higher interest rates and allowed the private sector to borrow back up to the gills. Interest rates can’t go up because we cannot afford it and that’s exactly why they will.

Soros may be semi-retired but his heir apparents are more prevalent than ever. The more debt there is, the more money and the more financial our world. In this world, the banker and money manager rule supreme and wealth inequality rises. This is another challenge for our as-yet unidentified great leaders of the 2030s.

How to Read the Runes

What are the signs to look out for that any of what I have said is even vaguely likely? Don’t expect the news to be full of this until after its happened and you’ll need to be vigilant.

One sign is continued strikes and demands for wage increases. We’re addressing forty years of stagnant real wages in a much shorter timeframe and that will cause things to break. Reshoring of manufacturing and growing tension with China are the reversals of globalisation that deliver higher wages to domestic workers.

The prevalence of identity in politics is another sign. This means demands for more rights for women and minorities and the pushback against this, with the resulting calls for curtailing free speech in social media. This is the conflict between liberalism and democracy and our choice between the European insistence on rights over votes, or the Anglo-American willingness to go the other way.

Finally, it’s still the economy stupid, as Clinton strategist James Carville quipped. Inflation and rising interest rates, however much markets are betting the other way, cause downturns. As with bankruptcy, this happens slowly at first and then all of a sudden.

The Latter Day Arms Race

If money and debt, two sides of the same coin, are the issue and unfettered spending the evidence, then the escalating costs of the green evolution will be front and centre. China has a huge head start in renewable energy and the US response is creating panic in Europe. This includes the UK, where to date we cannot even massively subsidise a new battery facility.

This week the debate over the exact costs of the Biden administration’s support for new technologies reared its head. The reality is no one knows, by design, but it’s going to be trillions not billions. The law allows for tax breaks without limits provided you invest in approved areas.

This is the latter day arms race. The Soviet Union collapsed because the costs of the cold war proved prohibitive. Reagan, the last great leader according to Friedman, simply outspent them. Green spending in the US falls under the hilariously named Inflation Reduction Act and may be the first strike in the new cold war with China. Economic power still lies in America and with the mighty dollar.