In the aftermath of the 2008 financial crisis, the term “Black Swan” was popularized by Nassim Nicholas Taleb to describe the occurrence and influence of highly improbable events. A Black Swan is not only unpredictable but also carries enormous impact; the invention of the atomic bomb, the attacks of 9/11, and the assassination of JFK are all Black Swans.
By most measures, a victory by Donald Trump on Election Day looks unlikely. The Real Clear Politics polling average shows him trailing Hillary Clinton by more than 5 percentage points nationally and forecasts show him losing key electoral states. But Black Swans happen in politics — witness Brexit. As Trump himself points out, polls immediately before the British vote showed “leave” the EU down 52%-48%, and on the day of the election the British bookmaker Ladbrokes predicted only a 19% chance of a British departure. Today, Ladbrokes gives Trump a 36% chance of winning.
The path to a Trump Black Swan lies in the current paradoxes of the U.S. economy and resulting voter frustration: Stagnant income for the average worker despite strong productivity increases; lower new-job creation than in past recoveries, with new jobs concentrated in lower-wage and shorter-term positions; and an acceleration of wealth in the top percentiles leading to higher income inequality than we have seen in a century. What if these were all signs of a fundamental change in the economy sparking a political realignment?
As some economists are starting to observe, notably Peter Temin, former head of MIT’s economics department, the U.S. economy may no longer be operating as a single unified structure but, instead, as a “dual economy” — two separate and distinct economic sectors within one country living side by side.
The dual-economy framework was first proposed in the last century to explain the characteristics of a developing nation, where a small and modern commercial sector used technology and capital to create exports and wealth by manufacturing products or extracting natural resources, while the rest of the country remained at a subsistence level struggling to get by.
Think of India under the British Raj, or Indonesia and the Dutch East India Company. The cleavage is not only economic but social and political, with little mobility between sectors, sense of community or shared priorities.
In the 21st century dual economy the split is between a dynamic, high-opportunity sector (HOS) where globalization and automation provide enormous benefits, coexisting with a low-opportunity sector (LOS) where those same factors increase competition, depress wages and eliminate jobs.
The HOS comprises highly educated and skilled workers, what author and former Labor Secretary Robert Reich calls “symbolic analysts” — engineers, attorneys, scientists, senior executives and consultants, concentrated in the global industries of technology, biotech, finance, pharmaceuticals, media and telecommunications. At the apex of this group are those who own or have access to large pools of capital — bankers, hedge fund managers, venture capitalists, private equity investors and senior corporate executives — who can take advantage of integrated global capital and labor markets to earn high returns.
The LOS contains the rest of the population in three broad groups: non-college educated workers who face fewer and fewer employment options; employees across all industries who are in job categories at high risk of automation, including many entry- and midlevel white collar jobs; and in-person service providers such as home health-care professionals, security guards, and restaurant and hotel staff.
A Trump Black Swan depends on a realignment of the traditional political map along the fault lines of the dual economy. The numbers are there, but it is a narrow path.
Voters without a college education make up 70% percent of the electorate, but in the 2012 election only 55% of the group’s voting-age population participated, compared to a rate of 77% for college-educated voters. If Trump’s economic message brought voters without a college education to the polls, Trump could win. Specifically, non-college-educated men have been hardest hit in the transition to a dual economy. They already form the core of Trump supporters and would need to turn out in record numbers to give him a shot in the battleground states.
It is a highly unlikely outcome that would shock the political world for years to come. In other words, it would be a Black Swan.
- Socas is general partner of Updata Partners, an investment firm based in Washington, D.C.
View more information: https://www.investors.com/politics/commentary/a-trump-win-the-black-swan-of-2016/