Everything is Broken

A couple of excellent articles that give the long-tailed, big picture of how the global economy has gotten itself between a rock and a hard place. Mostly due to political and financial mismanagement. The consequences were not inevitable, but Mauldin explains how we’re beyond the point of no return.

We have arrived. Any choice the government and central banks of the US and the rest of the world make will ultimately lead to a crisis. Just as the choices that Greenspan and Bernanke made about monetary policy created the Great Recession, Yellen and Powell’s choices will eventually lead us to the next crisis and ultimately to what I call The Great Reset.

I believe we have passed the point of no return. Changing policy now would create a recession as big as Paul Volcker’s in the early ‘80s. There is simply no appetite for that. Further, the national debt and continued yearly deficits force monetary policy to stay accommodative.

John Mauldin, Inflation is Broken.

Everything is Broken.

Inflation is Broken.

Broken Credit
Broken Retirement
Broken Stocks
Broken Data
Broken Unemployment System
Puerto Rico, Vaccines, and Some Good News

Broken lines, broken strings,
Broken threads, broken springs,
Broken idols, broken heads,
People sleeping in broken beds

—Bob Dylan, “Everything is Broken” from the album Oh Mercy, 1989

Electoral College Misinformation

Joe Biden, under the guidance of the Democratic Party, won the battle of the swing states, most likely due to ballot harvesting in urban districts in the states of PA, WI, MI, GA, AZ and NV.  This strategy was legitimized by the electoral boards of these states and enabled by relaxed mail-in ballot rules blamed on a pandemic. Thus, it was a legal, if cynical, electoral strategy. We should expect no less from our political parties.

But now there is a concerted effort to solidify urban liberal gains under Biden by changing the electoral system and also the operation of the Senate. Here we will discuss the selective misinformation propagating across the urban media concerning the Electoral College system.

Specific counter-arguments in red.

Why Getting the Most Votes Matters

(Actually, it doesn’t matter as much as this author thinks.)

December 13, 2020

As the 538 members of the Electoral College gather on Monday to carry out their constitutional duty and officially elect Joe Biden as the nation’s 46th president and Kamala Harris as his vice president, we are confronted again with the jarring reminder that it could easily have gone the other way. We came within a hairbreadth of re-electing a man who finished more than seven million votes behind his opponent — and we nearly repeated the shock of 2016, when Donald Trump took office after coming in a distant second in the balloting. (Sorry, it was not a distant second, nor was it even second. See voting data analysis here.)

No other election in the country is run like this. But why not? (Because it is a national election across a large diverse population spread over a large land mass consisting of a compact of semi-sovereign states. At local and state levels we can and do use simple majority voting.) That question has been nagging at me for the past few years, particularly in the weeks since Election Day, as I’ve watched with morbid fascination the ludicrous effort by Mr. Trump and his allies to use the Electoral College to subvert the will of the majority of American voters and overturn an election that he lost. (A POTUS election is won or lost in the Electoral College and the popular vote does NOT confirm the common will of the people by definition.) 

The obvious answer is that, for the most part, we abide by the principle of majority rule. From the time we are old enough to count, we are taught that the bigger number beats the smaller number. It is the essence of fairness. (If this were true we would not need a Bill of Rights amended to our Constitution.) It dictates outcomes in all areas of life, from politics to sports to cattle auctions. It’s decisive even in institutions whose purpose is to serve as a buffer against the majority. (And that would include the Electoral College and the Senate.)

“Take the Supreme Court,” said Akhil Amar, a constitutional scholar at Yale Law School. “No one thinks that when it’s 5 to 4, the four win and the five lose. Everyone understands that five beats four. It goes without saying.” (Absurd reductionist argument – the SCOTUS process involves 9 votes, not 150+ million.)

But the principle is especially important in elections. Why? Boil it down to three pillars of democratic self-governance: equality, legitimacy and accountability. We ignore them at our peril. And yet they are being ignored right now by millions of Americans, not to mention hundreds of high-ranking elected officials of one of our two major political parties. (Another false assumption. A voting system is merely an imperfect inference of the common will. All voting systems are biased, so the electoral rules try to minimize these bias errors.)

It occurred to me that in this moment, a defense of the concept of majority rule can no longer go without saying. (If it was an honest defense.)

First, and most fundamental: Majority rule is the only rule that treats all people as political equals. (False. Majority rule merely allows the majority to dominate the minority. Whether that is acceptable or not depends on other factors.) “That’s actually enormously important,” said Richard Primus, a professor at the University of Michigan law school. Any other rule inevitably treats certain votes as worth more than others. Sometimes that’s what we want, as when we require criminal juries to be unanimous in voting to convict. In that case, “there is one error that we prefer to the other error,” Mr. Primus said. “We want to make false convictions very difficult, much more rare than false acquittals.” (But this idea that all votes are not equal is specious. One cannot apply a national population weighting to the EC and then claim it is unequal. All votes for POTUS have equal weight within the states they are cast. That is how our Republic works because we are not “one nation” like France, we are a union of 50 semi-sovereign states and the national governing system is designed to balance large populous states with small less populous states. That’s why we have a bicameral national legislature and rejected simple majority voting for our national leader. Also, in reality, due to winner-take-all rules a minority of voters in large states like CA, NY and TX wield a disproportionate influence over the national outcome. That should be corrected by considering proportional representation of state electors. In other words, only 60% of CA, TX and NY EC votes should be cast for the winner of those states. Let’s see how the parties like that.) 

But in an election for the president, he said, there is no “morally relevant criterion” for departing from majority rule. Voters in one part of the country are no wiser or more worthy than voters in another. And yet the votes of those in certain states always matter more. “What could possibly justify that?” Mr. Primus asked. (Again, the geographic distribution of voting preferences is highly relevant to the process. If one takes a look at this distribution across the history of our national elections, the differences are obvious and significant for national politics. We ignore this to our great misunderstanding of our politics today. We are a sea of red dotted with islands of blue. We cannot let one or the other dominate by design.)

This is not just an abstract numerical concern. When people’s votes are treated as unequal, it’s a short jump to treating people as unequal. Put another way, it’s not enough to say that we’re all equal before the law; we also must be able to have an equal say in the choice of the representatives who make and enforce the laws. (False assumptions lead to false conclusions.)

There is a second reason majority rule is critical: It bestows legitimacy on the system. A representative government only works when its citizens see the electoral process as fair. When that legitimacy is absent, when people perceive — often accurately — that their vote doesn’t matter, they will eventually reject the system. (There’s nothing legitimate about it. Legitimacy is conferred by a social compact and social contract as stipulated in our national Constitution. It is not conferred by what the majority think they want.)

“If we’re going to rule ourselves, we’re going to be ruled by majorities,” said Astra Taylor, an author and democracy activist. “There’s a stability in that idea. There’s a sense of the people deciding for themselves and buying in. That stability is incredibly valuable. The alternative is one in which we’re being ruled by something which is outside of us, whether a dictator or a technocracy or an algorithm.” (No. We decide according to a national compromise. Simple majority violates that national compromise to favor one particular constituency.)

Finally, majority rule ensures electoral accountability. As the economist Amartya Sen put it, democracies don’t have famines. A government that doesn’t have to earn the support of a majority of its citizens, or at least a plurality, is not truly accountable to them, and has no incentive to represent their interests or provide for their needs. This opens the door to neglect, corruption and abuse of power. (Talk to the millions of Californians ignored by President Trump during wildfire season.) “If someone has to run for re-election, they have to put attention into running things well,” Mr. Amar said. “If they don’t, they will lose elections.” (Simple majority rule would mean that the government is only accountable to that majority and no one else. The Bill of Rights be damned?)

The benefits of majority rule aren’t just a preoccupation for liberals like me, still stewing over the elections of 2000 and 2016. On election night 2012, when it appeared briefly that Mitt Romney might win the national popular vote but not the Electoral College, Donald Trump tweeted, “The electoral college is a disaster for a democracy.” A little while later, he tweeted, “More votes equals a loss … revolution!”

He deleted that second one, but he needn’t have. He was only expressing a gut feeling everyone can recognize: The person who gets the most votes should win. If you doubt that, consider that the essence of the case Mr. Trump and his backers are making in every state where they are challenging the result is that the president won more votes than Mr. Biden.

Mr. Trump made the same argument in 2016, when he lost the popular vote by nearly three million, yet insisted that he had actually won it “if you deduct the millions of people who voted illegally.”

That both claims are laughably false is beside the point. Mr. Trump knows that in a democracy, real legitimacy comes from winning more votes than the other guy (or woman).

(What President Trump thinks is irrelevant. He is a politician and all politicians favor what serves their political ambitions.)

Of course, everyone is a fan of majority rule until they realize they can win without it. (Which is exactly why we need a more defensible principled position on social choice, not one that favors one group/party over another.) In the last 20 years, Republicans have been gifted the White House while losing the popular vote twice, and it came distressingly close to happening for a third time this year. So it’s no surprise that in that period, the commitment of Republicans to majority rule, along with other democratic norms, has plummeted. A report by an international team of political scientists found a steep drop in Republican support for things like free and fair elections, and the respectful treatment of political opponents. The party’s rhetoric “is closer to authoritarian parties” in Eastern Europe, the report found. (Here, again, Mr. Wegman tries to make this a partisan issue. In 1960 Republicans opposed the EC, since 2000, Democrats have opposed it. Both are speaking to their electoral interests, not principle.)

For modern Republicans, democracy has become a foreign language. “We’re not a democracy,” Senator Mike Lee of Utah tweeted in October, in what has become a disturbingly common refrain among conservatives. “Democracy isn’t the objective; liberty, peace, and prosperity are. We want the human condition to flourish. Rank democracy can thwart that.” (In spite of his word choice, Rep. Lee is correct. Simple majority democracy is the proper term.)

Notice how, in Mr. Lee’s telling, “democracy” morphs into “rank democracy.” What does he mean by “rank democracy”? Presumably, what James Madison referred to as direct or “pure” democracy, the form of self-rule in which people vote directly on the laws that govern them. But there is no such thing as “rank democracy” when it comes to elections. The term is nothing more than a modern Republican euphemism for majority rule. (More partisan bias.)

Speaking of the founders, Republicans love to invoke them in support of their stiff-arming of democracy. Perhaps they forgot what those founders actually said.

“The fundamental maxim of republican government,” Alexander Hamilton wrote in the Federalist No. 22, “requires that the sense of the majority should prevail.”

(The Founders were not fools. Mr. Wegman tries to interpret their meaning to serve his own. Hamilton’s “sense of the majority” refers to the need for a national mandate to lead the nation – not a voting rule. Madison refers specifically to “republican government,” which is exactly what the EC serves.)

James Madison, who is often cited for his warnings about the threats of popular majorities, changed his tune after spending several decades watching the American system of government he designed play out in practice. “No government of human device and human administration can be perfect,” Madison wrote in 1834. But republican government is “the best of all governments, because the least imperfect,” and “the vital principle of republican government is … the will of the majority.”

Thomas Jefferson, in his first Inaugural Address, said the “sacred principle” is that “the will of the majority is in all cases to prevail.” In the same breath he emphasized that political minorities also have rights that require protection. Those protections exist in the design of our government and in the guarantees of the Constitution, as applied by the courts. The point is that minorities can be protected at the same time that majorities elect leaders to represent us in the first place.

(Again, Jefferson refers to the “will of the majority” but the popular vote does not necessarily indicate that ‘will’ as it applies across the national compact of states. The common will is inferred by the voting system, not defined by it. In our system we balance the depth of support (concentrated in population centers) with the breadth of that support across 50 states (the EC tally).)

Joe Biden will be the next president because he won the Electoral College. But he should really have the job because he won the most votes.

On the larger scales of history and justice, I find the arguments presented here rather odd. The settlement and development of the vast plains of the midwest are what made the USA the most powerful and richest national experiment in history. Compare this to the experience of Argentina. The USA and Argentina were similarly blessed with geography and natural resources, settled by Europeans, and were quite similar in endowments. Yet Argentinian policies did not open up the land to the larger population through homesteading and transportation networks, so the wealth became concentrated among a few privileged large landowners. No vibrant middle class was created. In contrast, the policies pursued by our national development created a middle class and an interdependent market economy that has become the envy of the world. China today is deliberately trying to engineer the same. Yet, our urban sophisticates want to discount the political preferences of “flyover country” and denigrate those preferences as the ignorance of the “deplorables.” I can imagine nothing so dangerous to our national unity.

I also find it bizarre that urban political advocates extoll the protection of minority rights, but then disregard such when addressing the national electoral system. Imagine, if you can, that the entire majority white population lived in the urban metro areas of the country while the non-white population was scattered across the rest of the country’s land mass. Would urban liberals be content to allow the urban white majority to dominate national democratic politics merely because they outnumbered the others? Would this be a blatant case of “white privilege”? Yet, when we simply classify people as urban vs. non-urban–which happens to correlate highly with how they vote, whether black, white, male or female–suddenly the tyranny of an urban majority is perfectly acceptable? That rationalization directly violates our understanding of liberty and justice.

No, the National Popular Vote does not define a free and just democracy.

A more circumspect analysis of our national politics would reveal that our current dysfunction is not the fault of the electoral system, but caused by our partisan polarization by geography and population density. This is a battle between urban blues and non-urban reds that cannot be won by either side without threatening the unity of the whole. We should sober up and keep that in mind. Our national media does us no service by distorting this fact.

Why We Can’t Handle Pandemics

We find ourselves approaching Month Nine of a world-wide pandemic shutdown with only a few isolated exceptions across countries. There seems to be no end in sight. This should suggest that the particular nature of a virus pathogen defies a rational, measured social response, especially for a free democratic society.

This nature is defined by an unmeasurable risk shrouded in a fog of uncertainty that is reflected in the emotional fear incited by the coronavirus. That fear is amplified by several scientific realities: there is yet no sure treatment cure, there is yet no effective, preventive vaccine, and there is yet little verified knowledge about how the virus behaves and what effects it may have on long-term human health. These truths create the impenetrable fog of uncertainty that incites our fears.

On a societal level, fear is manifested in a loss of trust among fellow citizens who harbor different tolerances for risk and uncertainty, which leads them to question whether others share the same risk profiles and associated safety protocols and what those protocols should be.

All these factors taken together present a formidable challenge to those charged with messaging and managing an effective policy response, from politicians and agency bureaucrats to scientists and medical practitioners.

We’ve seen historic cases of how this plays out. There was the Black Death, smallpox, and frequent outbreaks of the plague during the Middle Ages. We have the Spanish flu and the polio epidemic a century ago and, in more recent times, the Avian and Swine flus, AIDS, SARS and Ebola. We have discovered, despite our interventions, that most of these pandemics run their course before dying out. The coronavirus that afflicts us today appears to have certain unique characteristics that distinguish it from other, more familiar virus pathogens. One is that it seems to spread easily and effectively, despite strict hygienic practices. Second, the health and fatality risks seem to skew more seriously against the old and the infirm.

But what is far more salient to our fates with this virus are not the epidemiological factors, but the psychological effects on society at large. The costs of these effects are largely ignored because they are based on unknown probabilities. What we need to know is what is going on inside the human brain that influences mass social behavior, with its potential for hysteria.

Over the past fifty years we’ve accumulated a wealth of psychological research that addresses behavior under extreme uncertainty. The foundational research was produced by the collaboration of two Israeli psychologists, Amos Tversky and Daniel Kahneman. Much of their work helped shape our understanding of behavior and decision-making under uncertainty and led to a Novel Prize in economics for Prof. Kahneman in 2002.

What is interesting is that some of the experimental study scenarios they developed closely approximate what we are experiencing today in real time and help to illuminate why we mismanage such uncertainty. In particular, there was an experiment then became widely known as the Asian Disease Problem. 

This experiment asked subjects to imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed, assuming that the exact scientific estimate of the consequence of the programs is as follows:

If Program A is adopted, 200 people will be saved.

If Program B is adopted, there is a 1/3 probability that 600 people will be saved, and a 2/3 probability that no people will be saved. Which of the two programs would you favor?

An overwhelming majority chose Program A, and saved 200 lives with certainty rather than take a gamble where 600 might die. They chose the certainty over the risk of trying to save all.

A second group of subjects got the same setup but with a choice between two other programs:

If Program C is adopted, 400 people will die.

If Program D is adopted, there is a 1/3 probability that nobody will die and a 2/3 probability that 600 people will die.

When the choice was framed this way, an overwhelmingly majority chose Program D.

One can see that the expected outcomes here are identical: 200 people are saved for sure, while 400 people die for sure vs. 1/3 probability of saving all and a 2/3 probability of losing all.

The authors explain this flip as “framing” the issue either as a sure win or loss. When you frame the sure thing as a loss, people choose the gamble. But when you frame it as a gain, people pick the sure thing. The choice is determined by how the problem is framed. Furthermore, what led subjects to distinguish between a gain and a loss was a psychological state, which differs from individual to individual. We’ll explore how this may apply to the coronavirus pandemic, but first we must examine another key finding of Kahneman and Tversky’s research.

In another series of studies, they found that subjects were confused by remote probabilities. They feared a one-in-a-billion chance of loss more than they should and attached more hope to a one-in-a-billion chance of gain than they should. They treat all remote probabilities as if they are possibilities. People’s emotional response to extremely long odds leads them to reverse their usual taste for risk, and to become risk-seeking when pursuing a long-shot gain and risk-averse when faced with the extremely remote possibility of loss.

In gambles that offer a certain outcome, people willingly pay a premium beyond the expected outcome for that certainty. To predict how people actually choose when faced with radical uncertainty, one had to “weight” the probabilities with emotion. Then one can explain why people overpay when they buy insurance or lottery tickets. We reconcile this behavior as loss aversion to distinguish it from pure risk aversion.

The desire for certainty can extract a high price, but the problem we all face in life is that the only certainty is uncertainty. So, people unknowingly pay a high price for themere illusion of certainty.

I hope we are beginning to see how these human instinctual behaviors will play out when faced with a radically uncertain virus pandemic. So far, we have two premises supported by empirical studies:

  1. People react differently to risk depending on how the narrative of uncertainty is framed;
  2. People overestimate remote probabilities and react emotionally to loss aversion.

In the context of a real virus pandemic we have several more confounding factors. First, unlike the Asian Disease experiment, we have no idea of the probabilities of imagined scenarios, so we are heavily influenced by psychological factors. Second is the effect of the media and the bias of its messaging. It is common knowledge in the news industry that emotional sensationalism sells the product far better than sterile information: “If it bleeds, it leads.”  We see this in the emphasis of news reporting on daily death counts and unconfirmed fatality, hospitalization, and infection rates. Then these frequency counts and rates of change are projected in a straight line or even exponential function to invoke wild predictions of an apocalyptic future.

The effect on mass psychology, especially with the prevalence of unfiltered social media, transmutes rational prudence and caution into unrestrained fear and panic. This is very bad science, but profitable, if not good, journalism.

Finally, we must turn to the challenges facing public leaders in managing an uncontrollable pandemic crisis. What do they do? To fathom that we need to examine the incentives that these public officials themselves face, given that they’re subject to the same psychological effects as everyone else.

Public officials mostly face downside risk: they get blamed for obvious failure, yet the upside consists mostly of avoiding that blame. If they project 500,000 people might die if nothing is done, but then only 200,000 die, they can claim success. But if they claim only 150,000 may die and 200,000 actually die, then they are blamed for losing 50,000 lives. We saw these incentives in play early in the pandemic with wild predictions of 65% infection rates combined with 2% mortality rates, implying that millions if not tens of millions of people would die unless drastic measures were taken.

State and local officials could also avoid taking responsibility for the costs of these measures under the guise of Federal revenue sharing and disaster relief. In other words, they can pass the buck. The result of this risk-reward incentive structure means these public officials and politicians, with few notable exceptions, are inclined to be extremely risk and loss averse, no matter what the cost. This means rational economic trade-offs are ignored in favor of extreme measures pursuing the delusion of zero-risk tolerance.

Medical experts, trained under the Hippocratic Oath to do no harm, face these same incentives, no matter how competent they are. They are trained to heal and avoid deciding life-and-death trade-offs of a deadly pandemic.

We can summarize how this story inevitably plays out and if that helps us understand how the pandemic mismanagement has unfolded in reality. When the threat was a distant one in a distant land, almost all politicians understandably underplayed the threat. The outbreaks in Italy then set off the media messaging, hyping the fear of coronavirus infection and death from Covid-19. The fact that the crisis could be politicized in an election year added fuel to the fire.

Let us recall “Flatten the curve” back in March, 2020, when exponential functions of death counts were all the rage. At this time certain governors promoted incomprehensible exponential predictions of mortality rates amid demands for complete shutdowns of society. All of this unfolded in a deep shroud of uncertainty with media accounts of catastrophes in China, Italy, and Spain.

So, the risk was framed as the ultimate loss of life with probabilities that had little basis in empirical data and were presented as likely possibilities rather than truly remote probabilities. With public criticism and accountability falling on political leaders, “flatten the curve” suddenly was transformed into perpetual lockdowns with moving goal posts.

The uncertainty surrounding the virus pathology led medical experts to issue contradictory and inconsistent directives and advice. First masks were unnecessary, then they became mandatory. A distance of six feet was determined as the range of infectious spread, but then sitting on a beach in solitude was deemed unacceptable.

Soon the data began to reveal the narrowness of the at-risk population based on age and co-morbidities, but the media focus targeted singular anomalies associated with anecdotal cases, heightening fears that Covid-19 is a deadly threat to all. The demands for zero-risk tolerance grew among those more loss averse and less affected by economic lockdowns. Life could not return to normal until a vaccine was developed, ignoring the fact that no virus vaccines are near 100% effective.

Rational health practices to bolster immune systems and protect at-risk population cohorts have been forced into one-size-fits-all safety protocols. At the same time, the deadly health effects of an endless quarantine are being ignored for this overreaction to remote possibilities. More data has started to make this clear, yet we seem rooted in the emotion-driven mistakes of the status-quo.  

The risks of Covid-19 vary widely across the population based on personal characteristics, mostly age and immune health, so a general risk factor cannot be established, except that it is extremely small compared to most other health risks. For example, I am a 66-year-old, Caucasian male in good health with no immune issues. I plugged my data into two online calculators of my risk for contracting the virus and my contingent risk of dying from Covid-19. My risk of contracting the virus and getting sick is 2.2% or 2 in 100. Assuming that I actually do test positive and get ill, my chance of dying in considered high at 1.08% or 1 in 100. But multiplying these two risks (I can’t die of Covid-19 if I don’t contract the virus) gives me a risk factor of dying from Covid-19 of 0.024%. That’s not 2 of 100 or even 2 out of 1000, but 2 out of 10,000. 

The question, of course, is how much am I really willing to pay to avoid a risk of 2 out of 10,000? And I am in a high-risk age category. Selling Covid-19 life insurance has got to be one of the most lucrative business ideas imaginable.

Given the behaviors driven by human instinct and emotion and the incentive structures of free democratic societies, we should concede the inevitability that such crises will be mismanaged with public policy. (Authoritarian regimes, on the other hand, don’t face the same hurdles.)

This coronavirus pandemic is a global tragedy, one that is still ongoing. Unfortunately, the crisis gets magnified by our human failings. Probably the best free democracies can do is to take simple, not drastic, precautions and wait for the virus to resolve itself. We must live with that uncertainty.

Chalk it up to a costly and painful learning experience.

The Single Turning Point That Explains Our World Today.

As the story goes…

On the afternoon of Friday, August 13, 1971, Federal Reserve banking officials along with twelve other high-ranking White House and Treasury advisors met secretly with President Richard Nixon at Camp David. There was great debate about what Nixon should do, but ultimately Nixon, relying heavily on the advice of the self-confident Connally, decided to break up Bretton Woods by announcing the following on August 15:

Nixon directed Treasury Secretary Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the gold window to be closed such that foreign governments could no longer exchange their dollars for gold.

The significance of this policy action would slowly be felt over the next 50 years and puts us where we are today. The end of the US$ peg put the global monetary system on a floating exchange rate basis and currency trading exploded. However, in the 1970s and mid- 80s the US monetary authorities and markets were still operating under the previous regime where government borrowing and spending was restrained by gold redemptions, even though the redemptions had been closed. In 1981-82, Fed chairman Volcker contracted credit with sharply higher interest rates, plunging the US into a steep recession but wringing CPI inflation out of the system.

Credit became quite cheap, fueling a rapid technology-driven expansion in the mid-1980s that strengthened the US$. Then Volcker was replaced by Greenspan and soon after Black Monday hit the global markets that had been flying high on cheap credit. It was then that the Fed realized it had an open checkbook to throw at the markets and prevent them from crashing. This has been the policy ever since because the only consequence of excessive credit has been financial asset bubbles, primarily securities markets and real estate.

But fomenting asset bubbles has created severe disparities between those who own assets and those who don’t. During this period, the economic liberalization of the two most populous societies on the planet – China and India – has driven the world price of labor down across the board, depreciating the value of that labor, constraining cost-push inflation of consumer prices.

These three trends – cheap credit, technology, and globalization – have promoted casino capitalism encompassing asset speculation and the massive substitution of cheap capital for more expensive labor, reducing labor participation rates across developed countries, and greatly aggravating wealth and income inequality.

This puts us where we are today and unfortunately the cheap credit and technology trends are accelerating. Most people today think Donald Trump has something to do with our plight, but that’s absurd on the face of it. This has been a 50-year trend in policy choices by a slowly degenerating political class under the Federal Reserve in coordination with other developed countries’ central banks. It’s all great fun until the bubble bursts.

So, how much is your house worth? Don’t kid yourself. At some point, all asset prices will reflect real value or phony currency value. There will be a massive battle between those who possess the assets and those who hold the debts used to buy them.

As propounded by Herbert Stein’s Law, “If something cannot go on forever, it will stop.”

How I will Vote This Time. And Why.

Back in September, 2016, I wrote an essay posted here explaining why I would not be voting for either Hillary Clinton or Donald Trump for POTUS. At the time I stated that “I do not believe Trump has the temperament, nor do I feel Clinton has the integrity, while neither display the requisite political skills to lead this nation.” At the time I argued for a protest vote and explained why, but nobody really needed to listen.

One could probably argue that I was only half right, because Trump did win the election and we’re still here. Political competence is probably in the eye of the beholder.

So, four years later we’re back with a similar choice between Trump for re-election or former VP Joe Biden to succeed him and I am again faced with the same quandary. You’re probably thinking, who cares? But I will state here in writing my decision for several reasons, in brief so as to not needlessly bore you if you’re still reading.

First, I’m a political scientist and policy analyst, so I’m not uninformed when it comes to American politics as I have been observing, studying, and analyzing our party politics for the better part of four decades. Second, due to my professional interests I find myself frequently in these contentious debates over partisan and ideological politics where the accusations and projections fly, the result being that I find myself constantly having to restate my initial positions, which are now published here forever on the Internet. With this record, I can merely refer my discussant to review what I wrote, rather than waste time restating it and not being believed.

This has been useful because for the past four years I have tried to explain to Trump-haters (and they really do hate him) that Trump is not the cause, but the symptom of our political dysfunction. Now, if you’re a Trump-hater, and I’m not, you’ll have none of it and so I have often been accused of being a Trump supporter, and I’m not. I just want to live in a rational world and there’s nothing rational about our current politics.

Let me give a quick overview of the situation as I see it. I don’t see a knight in shining armor here, either in the person of the President or his challenger. On one side I see a bull in a china shop, being deliberately poked and breaking things as his ego, self-aggrandizement, and political survival require. I do believe his one desire, for better or worse, is to be judged by history as a successful president. I imagine every president’s ultimate aspiration is to be judged in the same company as Washington, Jefferson, and Lincoln.

On the other side, I see a historically weak candidate with 47 unremarkable years in Washington politics, paired with an ambitious dark horse running mate that failed miserably among her own voters; both being propped up by a shadow party eager to return to power. Given Biden’s obvious cognitive decline and the excessive demands of the presidency, I really have no idea who would be commanding a Biden administration or what agenda they would put forth once they no longer have an opposition to demonize. The candidate seems unable to articulate this.

Not a great choice, but this is where we are.

For me this election is not just about judging personalities and character, both of which I find wanting (the first debate confirmed this). What I see beyond the media-driven smoke and mirrors is a deep power struggle between two contending visions of American society and between two elite political camps who both want to secure that power. But these visions seem to be a means to an end rather than the defense of constitutional first principles. It also appears that either side will do anything, say anything, in order to prevail in the coming election, even fanning the flames of social conflict.

I don’t see American politics as a battle between Athens and Sparta, or Rome and Carthage, where the loser will be erased from history. Rather I see a pendulum swing that has always marked our national politics. In my own experience I have seen Nixon as a reaction to Johnson, Carter as a reaction to Nixon, Reagan as a reaction to Carter, Clinton as a reaction to Reagan/Bush, Bush as a reaction to Clinton, Obama as a reaction to Bush, and finally Trump as a reaction to Obama. Will Biden be a reaction to Trump, or will we need to wait for 2024?

At the same time, I have lived through a cultural evolution that has seen the decline of national identity that has diminished our sense of shared community. As a matter of fact, supported by data, this is most defined by a rural – suburban – urban divide, which has been blurred by our obsessions with multiculturalism and identity politics. We are also divided by class, with growing inequality between the asset-rich and asset-poor. These changes have accelerated with technology and globalization. The resulting tension is over the pace of change, between gradual managed traditionalism vs. proactive progressivism. This is a significant point, because opposing positions on the pace of change can be reconciled.

Unfortunately, I see us turning national politics into the ultimate prize conferring power over the present and future, and now even the past. I think this is largely a political conceit. The pendulum still swings, but in the short-term power means wealth and control and that seems to be what motivates our politics today, from the top down. Prudently managing change and stable continuity seems to have gotten lost in the shuffle.

If you love or hate Trump, nothing I write here is going to change your mind – that’s pretty much a given. But consider the endless parade of scandals for and against the Trump administration and how that reflects on our democratic governance. Look at the failures of the media – both for and against Trump – to inform us objectively. Look at the attacks on our institutions – again from both sides. Look at the decline in trust across our society. One can merely reference a long laundry list of inter-party sabotage: from Russian collusion investigations and counter-investigations; to impeachment proceedings that were cynically pursued even though everyone knew it was a purely partisan gambit; to the politicization of a global virus pandemic; to racial unrest that has degenerated into violence and disorder; to a democratic national election that establishment elites threaten to dismiss as illegitimate. As I write this, we can now expect to enjoin another fierce battle that further politicizes our Supreme Court and judiciary. And I thought justice was supposed to be blind.

Trump is not “doing” this to us, and I’ve already used his name too many times in this essay considering he’s merely a symptom. My evaluation of his presidency is mixed, but one would think it to be an unmitigated disaster according to much of the news media. I can understand the dismay because the current administration has largely reversed the direction of the previous administration across most of the policy landscape. But that’s free democracy, which, despite protests to the contrary, we have not abandoned as we contest competing visions through the electoral process. But obsessing over the person of the presidency is driving us to the brink of insanity. Thank goodness for the Federal Reserve and Treasury, which keeps pumping money into our pockets (please note the sarcasm).

These last four years of political clashes underline the deeper societal dysfunction that has plagued us for almost two generations through divisive identity politics and a multiculturalism that deemphasizes our shared national culture. This is what I find far more disturbing than an elected official I didn’t vote for. What happened to winning elections through persuasion and common interests?

So, in brief, in November I will be casting a vote for the re-election of Donald Trump for three main reasons:

  1. A Russian collusion/impeachment effort that has consumed 4 years of national governance for naught, promoted by a disingenuous political opposition and a complacent or duplicitous Fourth Estate;
  2. A pandemic policy that has ignored rational risk trade-offs in a further attempt to politicize a health crisis that affects us all, especially those who can’t vote;
  3. The promotion of racial animus and division through identity politics and public shaming in order to advance narrow political ambitions.

To be sure, racial minorities do have legitimate and pressing grievances. But these societal failures are not being addressed by cancel culture and the Black Lives Matter movement. Minorities, especially urban minorities, have been victims of poor housing policy, failures of public education that impede life opportunities, welfare policies that weaken family structures, failed drug and criminal justice policies, and class-based tax and financial policies that disfavor the asset-poor, driving inequality. I don’t see so-called woke activists addressing any of these challenges, but rather scapegoating the police who have been tasked to manage these aforementioned failures. With the exception of financial policy, these are primarily municipal and state failures and the only national demand on the POTUS will be to restore law and order.

In my reading of American politics, all the misguided efforts have been primarily driven by the singular desire to destroy a presidency by extraordinary, undemocratic means. And yes, he punches back with little concern for decorum. But this has only served to delegitimize and damage our trust in American democratic politics and institutions. In historical context this is truly a self-inflicted tragedy and one that our foreign adversaries certainly appreciate.

Perhaps the cultural rot goes much deeper and for that we have only ourselves to blame. Several recent books have traced this decline from the mid-60s to the present. Today one observes a certain psychological hysteria consuming much of the population over politics. Just yesterday I read another typical quote in the media on the upcoming SCOTUS nomination: “The Republican Party is preparing…to send the U.S. spiraling into an abyss of illegitimacy.” Really? This has been going on for four years and we wonder why so many voters have tuned out. In reality, I suspect some of these alarmists are staring into the abyss of political irrelevance.

I cannot see where this election takes us but I can’t condone political sabotage, no matter who’s holding office. And I’m not interested in childishness claims of, “He started it!” Four years ago, I registered a protest vote, but events have degenerated to the point I will cast my lot. What I seek above all in American democracy is the support and defense of liberty and justice for all, in the historical tradition of classical liberalism and a free society. A further descent into chaos and anarchy certainly doesn’t promote that objective. As I have tried to explain: Trump did not convince me to vote for him, the Democratic Party did.

I imagine many who read this will vehemently disagree with my interpretations and conclusion, claiming Trump is the threat to democracy. I’m unconvinced. Trump is a one-man force of nature opposed by the entire Washington establishment and mainstream press. He’s not an ideologue and can hardly lead an authoritarian coup – he has no army of Brownshirts and the other two branches of government have not collapsed. We can survive one man for four more years, but the collapse of democratic government will be far more costly. Trump’s election was a warning shot across the bow of both parties, so I would prefer to see the political establishments and media promote successful governance rather than trying to tear down a sitting POTUS. Trump’s instincts have been good, though he tests the waters with tweets meant to provoke. That’s his strategy to read public support.

Dissent is to be expected and tolerated in the messy process of democracy. However, there is a growing tendency to dismiss those who disagree with us as not acting in good faith. I find that tendency to run counter to the ideals of a free society. I would merely encourage each and every single voter to examine their own conscience, vote, and then accept the results with sober resolve.

Then we can get back to more important task of living in peace.

Risk in a Free Society

Risk in life cannot be eliminated, but it can be managed. This is the nature of a dynamic universe undergoing constant unpredictable change. This article from City Journal explains well the role risk and uncertainty plays in our lives. [Comments in red italics.]

Propeller of Growth

Technology and globalization are changing the nature of work and commerce, displacing workers, and altering the way of life for many people. In response to this uncertain economic environment, policymakers from both parties have become preoccupied with reducing risk. But many of their risk-management proposals go too far, address the wrong sources of risk, and would undermine America’s economic leadership.

The general conception of risk management is that it serves to eliminate bad outcomes. On the plus side, risk propels economies and motivates entrepreneurs to innovate. Risk, for better and worse, is at the heart of economic growth, and successfully apportioning it—not avoiding it—is the key to prosperity. The purpose of markets is not only to match buyers and sellers and establish prices but also to allocate risk. In a functioning market, people who take the most risk can reap the biggest reward. Those who wish to avoid risk can reduce it by hedging or diversifying or by paying someone, in the form of insurance, to take on the downside risk for them.

Sometimes reducing risk is impossible because a market has distortions or is incomplete, leaving participants bearing more risk than they would like. For example, a worker may want to reduce the risk of losing his job by saving money or by pooling his risk with other workers. These options are difficult, though: he may not have enough money to save, and a market for private wage insurance doesn’t exist because it’s not profitable for insurance companies.

Government can fill this void, providing some protection, so that bad luck doesn’t leave people destitute. Unemployment insurance, for instance, pools risk for workers, a certain percentage of whom are out of work at any given time, while Social Security diversifies risk across generations. The government can foster functioning financial markets, enforce property rights, and maintain rule of law to create an environment where taking risks is rewarded. But too much intervention distorts choice by encouraging people to take the wrong risks or by eliminating risk-taking altogether.

Progressives, calling for greater government intervention, often cite the work of Yale political scientist Jacob Hacker, who argues that income has become unstable and retirement riskier. [Note: Hacker’s research is illuminating, but the reasons he cites for increased risk burdens are more related to financial policy that has increased the volatility in asset markets while increasing inequality between the asset-rich and asset-poor.] But economists, using Social Security earning records, found that income volatility (as represented by year-to-year income shocks) has actually decreased since the late 1970s, and that job stability has increased since the 1980s, with average job tenure longer now than it was then. [Note: And neither of these measures is measuring the inequality of asset markets.] It’s true that breadwinning has gotten riskier, especially for low-income workers, who face longer spells of unemployment during recessions and higher vulnerability to being replaced by technology. But progressive policymakers are addressing the wrong problems, focusing on solutions better suited to dealing with year-to-year wage volatility than with systemic risks associated with long-term economic change.

California recently enacted AB5, a law regulating freelance “gig work,” the growing popularity of which is often regarded as a signal of the American worker’s tenuous economic situation. But contrary to popular perception, gig work is usually supplementing traditional work, not replacing it. The number of workers who claim contract work as their primary job has fallen; what has gone up is the number of Americans who do gig work to smooth out income drops or periods of unemployment. The flexibility of freelance labor is what makes gig work a valuable risk-reduction strategy—it needn’t interfere with a primary job, job training, or a job search. California’s effort to standardize gig work, with regular hours and benefits, is thus counterproductive, and will result in fewer options for workers. [Yes.]

Counterproductive, too, are bigger policies targeted to the middle- and upper middle-income brackets. Both Bernie Sanders and Elizabeth Warren would like to eliminate risks associated with middle-class wealth by making college free, cancelling student debt, and expanding Social Security. But college-educated workers, even indebted ones, have lower rates of unemployment and experience joblessness for shorter periods. They are also better equipped to acquire new job skills years after they finish college. Given limited government resources, ameliorating risk for the college-educated should be a lower priority than helping less-educated workers in rural areas, who face higher risks of economic hardship.

Expanding Social Security doesn’t reduce the biggest risk in retirement, either. Americans have more income in retirement than ever before. Defined-contribution retirement plans like 401(k)s shift risk onto individuals, but they also cover many more people than defined-benefit pension plans ever did. The major risk that Americans face is the prospect of high long-term-care costs not covered by Medicare. Affordable long-term-care insurance is practically nonexistent because it’s unprofitable for insurance companies to provide. This creates a potentially huge financial and time burden for many families—one much worthier of government resources than expanding Social Security benefits. [The solutions to long-term care are health savings accounts promoting a higher level of national savings for end-of-life costs. Certainties in life must be paid for through savings, not insurance. Our entitlement programs discourage that saving.]

American health care is expensive and uncertain and suffers from coverage gaps. But nationalization of the multitrillion-dollar health-care industry will stifle innovation, as will Warren’s plans to pay for expanded health care, Social Security, and education programs by limiting returns on investment. She plans to increase capital gains and corporate taxes, set a 14.8 percent tax on income exceeding $250,000 (including investment income), and impose a constitutionally dubious wealth tax on fortunes greater than $50 million. The rewards from risk-taking are what motivate entrepreneurs to innovate despite high odds of failure. Punitive taxation on income and capital gains is a means of managing risk by capping the reward of taking it in the first place. But a growth-oriented economy demands that all participants in a risk-taking venture be rewarded, including investors and early hires. [Note: Most definitely. Assuming and managing risk-taking is the key to successful participation in a capitalist society. This is also the solution to the inequality problem over time.]

Some Republicans are also responding to the new economy by embracing more government intervention to reduce risk. President Donald Trump makes no secret of his desire for the Fed to lower interest rates in order to boost the stock market. But the Fed’s efforts to minimize risk by keeping rates artificially low in a growing economy create distortions and bubbles by making loans artificially cheap and encouraging leverage. This strategy may reduce short-term asset volatility but at the cost of more severe systemic risk.

Senator Marco Rubio, a former and perhaps future presidential contender, hopes to reduce the risk of American failure in global markets by advocating industrial policy that subsidizes particular industries. This puts the government in the role of picking winners—something it has shown little faculty for doing—and distorts risk-taking. As economic historian Joel Mokyr has argued, innovation is never predictable, especially in a transitioning economy. New technology often creates a market that no one could have predicted. Subsidizing pet industries slows and distorts the discovery process, funneling capital to the wrong places and putting entrepreneurs who want to take a chance at a fledging, not yet favored, industry at a disadvantage when it comes to raising capital. It’s true that industrial policies worked in some Asian economies, but these policies made use of already market-proven technology. Industrial policy is less effective for economies that hope to maintain a leadership role.

The U.S. economy gained supremacy by trusting markets to allocate risk, by letting people fail, and by rewarding those who thrived. Government has a role to play in reducing risk, but to do its job well it needs to be clear about what the most pressing risks are and how best to address them—while still rewarding risk-taking. 

 

A Fundamentalist Revival?

This is a fine essay by David French, noting the ideological rather than just the religious underpinnings of fundamentalist social movements.

In the US, the Left has embarked on a secular fundamentalist movement that is now reaching a fever pitch. It is a bit ironic that its proponents have strongly condemned conservative religious fundamentalism along the way while adopting the same social behavioral tactics. Fascism was/is a form of fundamentalism too, as well as communism and environmentalism. So is the more virulent form of right-wing Trumpism.

Fundamentalism comes with the territory when we all are expected to march in lockstep toward some abstract common good. Coercion is its necessary tool. But freedom and civic responsibility have always accomplished this task far better.

America Is in the Grips of a Fundamentalist Revival

But it’s not Christian.

 

“…yes, secular religion is breaking out across the land. That’s old news. Here’s what’s new—it’s growing so very dark. We don’t need to repeat all the recent excesses of cancel culture to know that many anti-racist progressives are in the midst of a hunt for ideological heretics, and even the oldest sins can’t be forgiven. Consider that on Friday a Boeing executive resigned after an employee complained about an article he wrote 33 years ago opposing women in combat.”

 

Cancel

Another interesting passage that ties belief systems to the uncertainty that is the nature of the universe:

To understand the distinction between fundamentalism and, say, evangelicalism or other forms of devotion, I want to go back to Ecclesiastes 3:11 and quote the entire verse: “He has made everything appropriate in its time. He has also put eternity in their hearts, but no one can discover the work God has done from beginning to end.”

Let me quote another verse, this one from the New Testament: “For now we see in a mirror dimly, but then face to face. Now I know in part; then I shall know fully, even as I have been fully known.”

Both of these passages speak to the existence of an immovable, irreducible amount of uncertainty in this world, including mysteries about God Himself.

Recall the end of the book of Job, when the righteous, suffering man demands an explanation for his plight from the God of the universe, and the God of the universe responds with an extended soliloquy that essentially declares, “I’m God, and you’re not.” And what is Job’s response? “Behold, I am of small account; what shall I answer you? I lay my hand on my mouth.”

As a consequence, while there are many, many things we can know about God—and many things we can learn—we must approach our faith and our world with a sense of existential humility.

Managing the uncertainties of our existence brings us back to social science, economics and the art of politics. It’s a deep well.

What’s Really Going On?

Reading the news each morning one might conclude that a significant part of our society has gone pretty much off the rails. A few recent article links are enough to make the point:

The Orwellian Nightmare

The Thought Police Are Coming

American Version of the French Revolution?

These trends are antithetical to a free society, so what is going on? It would be easy to point to one factor, like the police, as the cause of this meltdown but social science and history are usually a lot more complex than that. In fact, one might rightly suspect most of what we see on the television, read in the news or on social media is one major distraction from the true challenges we face. And one does not need to dismiss any contributing factors like the virus pandemic, the shutdowns, or racist conflict to make the case.

There is racism in this country – it exists, it’s real. But there is racism to different degrees in every society – the fear and persecution of the “other” is one of the stains on the human soul, one of our original sins. The question is how determinant race discrimination is in any particular society in determining the outcomes and fates of those so discriminated against. Posing that question demands an empirical analysis – it cannot rely solely on anecdotal, lived experiences. In other words, if I have suffered a racist action, that alone does not prove the entire society is racist, only that one case of racism has occurred. A pattern of anecdotal cases is also not enough, we must do an analysis with a much larger data sample. So, “systemic” racism must be addressed with scientific data analysis, not lived experience and media narratives. That work has been done elsewhere and is not the focus of this essay.

Instead, we will zoom out from the chaos to gain a more measured perspective. Police violence is the tip of the spear propelled by a complex web of social and political policy failures. I cite a few recent articles (and one video) that make the larger points surrounding our current social crisis:

The True Plight of Black Americans

[The] Depth of Black Americans’ Economic Struggle

America’s New Nihilism

The first article is written by Walter Williams, one of the most prominent scholars on the economic plight of blacks in America. He, along with Thomas Sowell, has examined the causes and effects of racism and their research, along with that of some sociologists, point to the more significant causes of urban poverty: the breakdown of the family due to welfare dependency, failures of public education, corrupt machine politics, drug culture, lack of economic opportunity, among others. These urban cities have been dominated by the post-60s liberal ideology of the Democratic Party. But we disassemble and allow these failed policies to continue, then expect the police to step in to control the chaos.

A simple graph of the plight of blacks in Minneapolis reinforces the case:

This is less a failure of black Americans to grasp the American Dream than it is of failed social, tax, and financial policy by the Federal and state governments under both party leaderships. The volcano we see erupting today has been boiling below the surface for the last 50 years. The biggest factor is financial policy, because, with the right financial policies, we can usually afford a lot of social policy failure.

The decoupling of monetary policy from the discipline of Bretton Woods pegged-dollar policy means the supply of money and credit is no longer constrained beyond the discretion of the monetary and political authorities. This happened in 1971 but it took a decade into the mid-80s before policymakers realized that they were no longer constrained by price inflation as well because of the explosion of global labor supply. The economic liberalization due to the failures of state planning in the USSR, China, India, Africa, and South America, opened up their labor forces to international trade and production. This kept wage push inflation off the table and allowed the Federal Reserve to pursue its massive credit creation and financial repression. The result has been a combination of cheap credit and low wages, leading to the massive leverage of existing productive assets.

That has driven wealth and income inequality that has impoverished those who do not own these appreciating assets. So, jobs have been created because they’re cheap in many respects, but everything one needs to buy – such as housing, education, medical care – has sky-rocketed in relative price. Most urban residents left behind on this train have dim prospects for wage incomes, decent educational opportunities, homeownership, or accessible healthcare. This is what has thrust the spear of police violence against the urban poor into the spotlight.

So one can understand how the Tea Party and Occupy Wall Street came to this. The solutions are obvious, we just choose to ignore them because of our treasured political ideologies and partisanship identity politics. Urban minorities must turn the tide against corrupt urban machine politics. Zooming in again, here is an article showing how one city reformed urban policing:

Camden, NJ, did police reform right

The key cited here, which many on the Left will find disconcerting, is to reform public-sector union contracts to break up the cozy relationship between city councils and those who fund their campaigns: public-sector unions. This applies to teachers’ unions, police unions, firefighter unions, and municipal employees’ unions. At the same time, we need more transparency concerning the relationships of politicians with the private sector, including real estate developers and the Bar Association.

Zooming back out. These urban political reforms can only succeed if we get our financial house in order. Free-wheeling monetary policy – like the one that quadrupled the price of a house in the past 20 years – must be reined in to support fundamental value creation. In other words, our economy must produce and distribute wealth according to real value creation that improves our quality of life, not through speculating on asset appreciation. When the hedge fund industry and lives of the financial elites are no longer in the headlines, we’ll know we’re on the right path. Unfortunately, with our descent into the distractions of anarchy and chaos over identity, I don’t have hopes of this happening any time soon.

 

 

Global Depression or Persistent Stagflation?

Dr. Doom and Gloom lays out the downside global economic scenario. Worth reading and factoring into our economic posturing…[Comments bracketed in red].

Published in NY Magazine

Why Our Economy May Be Headed for a Decade of Depression

Eric Levitz May 22, 2020

The worst is yet to come?

In September 2006, Nouriel Roubini told the International Monetary Fund what it didn’t want to hear. Standing before an audience of economists at the organization’s headquarters, the New York University professor warned that the U.S. housing market would soon collapse — and, quite possibly, bring the global financial system down with it. Real-estate values had been propped up by unsustainably shady lending practices, Roubini explained. Once those prices came back to earth, millions of underwater homeowners would default on their mortgages, trillions of dollars worth of mortgage-backed securities would unravel, and hedge funds, investment banks, and lenders like Fannie Mae and Freddie Mac could sink into insolvency.

At the time, the global economy had just recorded its fastest half-decade of growth in 30 years. And Nouriel Roubini was just some obscure academic. Thus, in the IMF’s cozy confines, his remarks roused less alarm over America’s housing bubble than concern for the professor’s psychological well-being.

Of course, the ensuing two years turned Roubini’s prophecy into history, and the little-known scholar of emerging markets into a Wall Street celebrity.

A decade later, “Dr. Doom” is a bear once again. While many investors bet on a “V-shaped recovery,” Roubini is staking his reputation on an L-shaped depression. The economist (and host of a biweekly economic news broadcastdoes expect things to get better before they get worse: He foresees a slow, lackluster (i.e., “U-shaped”) economic rebound in the pandemic’s immediate aftermath. But he insists that this recovery will quickly collapse beneath the weight of the global economy’s accumulated debts. Specifically, Roubini argues that the massive private debts accrued during both the 2008 crash and COVID-19 crisis will durably depress consumption and weaken the short-lived recovery. Meanwhile, the aging of populations across the West will further undermine growth while increasing the fiscal burdens of states already saddled with hazardous debt loads. Although deficit spending is necessary in the present crisis, and will appear benign at the onset of recovery, it is laying the kindling for an inflationary conflagration by mid-decade. As the deepening geopolitical rift between the United States and China triggers a wave of deglobalization, negative supply shocks akin those of the 1970s are going to raise the cost of real resources, even as hyperexploited workers suffer perpetual wage and benefit declines. Prices will rise, but growth will peter out, since ordinary people will be forced to pare back their consumption more and more. Stagflation will beget depression. And through it all, humanity will be beset by unnatural disasters, from extreme weather events wrought by man-made climate change to pandemics induced by our disruption of natural ecosystems.

Roubini allows that, after a decade of misery, we may get around to developing a “more inclusive, cooperative, and stable international order.” But, he hastens to add, “any happy ending assumes that we find a way to survive” the hard times to come.

Intelligencer recently spoke with Roubini about our impending doom.

You predict that the coronavirus recession will be followed by a lackluster recovery and global depression. The financial markets ostensibly see a much brighter future. What are they missing and why?

Well, first of all, my prediction is not for 2020. It’s a prediction that these ten major forces will, by the middle of the coming decade, lead us into a “Greater Depression.” Markets, of course, have a shorter horizon. In the short run, I expect a U-shaped recovery while the markets seem to be pricing in a V-shape recovery.

Of course the markets are going higher because there’s a massive monetary stimulus, there’s a massive fiscal stimulus. People expect that the news about the contagion will improve, and that there’s going to be a vaccine at some point down the line. And there is an element “FOMO” [fear of missing out]; there are millions of new online accounts — unemployed people sitting at home doing day-trading — and they’re essentially playing the market based on pure sentiment. My view is that there’s going to be a meaningful correction once people realize this is going to be a U-shaped recovery. If you listen carefully to what Fed officials are saying — or even what JPMorgan and Goldman Sachs are saying — initially they were all in the V camp, but now they’re all saying, well, maybe it’s going to be more of a U. The consensus is moving in a different direction.

Your prediction of a weak recovery seems predicated on there being a persistent shortfall in consumer demand due to income lost during the pandemic. A bullish investor might counter that the Cares Act has left the bulk of laid-off workers with as much — if not more — income than they had been earning at their former jobs. Meanwhile, white-collar workers who’ve remained employed are typically earning as much as they used to, but spending far less. Together, this might augur a surge in post-pandemic spending that powers a V-shaped recovery. What does the bullish story get wrong?

Yes, there are unemployment benefits. And some unemployed people may be making more money than when they were working. But those unemployment benefits are going to run out in July. The consensus says the unemployment rate is headed to 25 percent. Maybe we get lucky. Maybe there’s an early recovery, and it only goes to 16 percent. Either way, tons of people are going to lose unemployment benefits in July. And if they’re rehired, it’s not going to be like before — formal employment, full benefits. You want to come back to work at my restaurant? Tough luck. I can hire you only on an hourly basis with no benefits and a low wage. That’s what every business is going to be offering. Meanwhile, many, many people are going to be without jobs of any kind. It took us ten years — between 2009 and 2019 — to create 22 million jobs. And we’ve lost 30 million jobs in two months. [This begins to show why employment is the wrong focus for the Information Age.]

So when unemployment benefits expire, lots of people aren’t going to have any income. Those who do get jobs are going to work under more miserable conditions than before. And people, even middle-income people, given the shock that has just occurred — which could happen again in the summer, could happen again in the winter — you are going to want more precautionary savings. You are going to cut back on discretionary spending. Your credit score is going to be worse. Are you going to go buy a home? Are you gonna buy a car? Are you going to dine out? In Germany and China, they already reopened all the stores a month ago. You look at any survey, the restaurants are totally empty. Almost nobody’s buying anything. Everybody’s worried and cautious. And this is in Germany, where unemployment is up by only one percent. Forty percent of Americans have less than $400 in liquid cash saved for an emergency. [This is a major policy failure that citizens of other countries do not share. Our tax policies have discouraged savings but encouraged borrowing.] You think they are going to spend?

Graphic: Financial Times
Graphic: Financial Times

You’re going to start having food riots soon enough. [I don’t see that happening, at least not in the US. People on state welfare support are going to need more of it and the welfare roles will rise.] Look at the luxury stores in New York. They’ve either boarded them up or emptied their shelves,  because they’re worried people are going to steal the Chanel bags. [Yes, because luxury goods are a form of currency. Luxury stores are also a focus of resentment.] The few stores that are open, like my Whole Foods, have security guards both inside and outside. We are one step away from food riots. There are lines three miles long at food banks. [This not a riot, it’s an overload on govt provided welfare.] That’s what’s happening in America. You’re telling me everything’s going to become normal in three months? That’s lunacy.

Your projection of a “Greater Depression” is premised on deglobalization sparking negative supply shocks. And that prediction of deglobalization is itself rooted in the notion that the U.S. and China are locked in a so-called Thucydides trap, in which the geopolitical tensions between a dominant and rising power will overwhelm mutual financial self-interest. But given the deep interconnections between the American and Chinese economies — and warm relations between much of the U.S. and Chinese financial elite — isn’t it possible that class solidarity will take precedence over Great Power rivalry? In other words, don’t the most powerful people in both countries understand they have a lot to lose financially and economically from decoupling? And if so, why shouldn’t we see the uptick in jingoistic rhetoric on both sides as mere posturing for a domestic audience?

First of all, my argument for why inflation will eventually come back is not just based on U.S.-China relations. I actually have 14 separate arguments for why this will happen. That said, everybody agrees that there is the beginning of a Cold War between the U.S. and China. I was in Beijing in November of 2015, with a delegation that met with Xi Jinping in the Great Hall of the People. And he spent the first 15 minutes of his remarks speaking, unprompted, about why the U.S. and China will not get caught in a Thucydides trap, and why there will actually be a peaceful rise of China.

Since then, Trump got elected. Now, we have a full-scale trade war, technology war, financial war, monetary war, technology, information, data, investment, pretty much anything across the board. Look at tech — there is complete decoupling. They just decided Huawei isn’t going to have any access to U.S. semiconductors and technology. We’re imposing total restrictions on the transfer of technology from the U.S. to China and China to the U.S. And if the United States argues that 5G or Huawei is a backdoor to the Chinese government, the tech war will become a trade war. Because tomorrow, every piece of consumer electronics, even your lowly coffee machine or microwave or toaster, is going to have a 5G chip. That’s what the internet of things is about. If the Chinese can listen to you through your smartphone, they can listen to you through your toaster. Once we declare that 5G is going to allow China to listen to our communication, we will also have to ban all household electronics made in China. So, the decoupling is happening. We’re going to have a “splinternet.” It’s only a matter of how much and how fast.

And there is going to be a cold war between the U.S. and China. Even the foreign policy Establishment — Democrats and Republicans — that had been in favor of better relations with China has become skeptical in the last few years. They say, “You know, we thought that China was going to become more open if we let them into the WTO. We thought they’d become less authoritarian.” Instead, under Xi Jinping, China has become more state capitalist, more authoritarian, and instead of biding its time and hiding its strength, like Deng Xiaoping wanted it to do, it’s flexing its geopolitical muscle. And the U.S., rightly or wrongly, feels threatened. I’m not making a normative statement. I’m just saying, as a matter of fact, we are in a Thucydides trap. The only debate is about whether there will be a cold war or a hot one. Historically, these things have led to a hot war in 12 out of 16 episodes in 2,000 years of history. So we’ll be lucky if we just get a cold war.

Some Trumpian nationalists and labor-aligned progressives might see an upside in your prediction that America is going to bring manufacturing back “onshore.” But you insist that ordinary Americans will suffer from the downsides of reshoring (higher consumer prices) without enjoying the ostensible benefits (more job opportunities and higher wages). In your telling, onshoring won’t actually bring back jobs, only accelerate automation. And then, again with automation, you insist that Americans will suffer from the downside (unemployment, lower wages from competition with robots) but enjoy none of the upside from the productivity gains that robotization will ostensibly produce. So, what do you say to someone who looks at your forecast and decides that you are indeed “Dr. Doom” — not a realist, as you claim to be, but a pessimist, who ignores the bright side of every subject?

When you reshore, you are moving production from regions of the world like China, and other parts of Asia, that have low labor costs, to parts of the world like the U.S. and Europe that have higher labor costs. That is a fact. How is the corporate sector going respond to that? It’s going to respond by replacing labor with robots, automation, and AI.

I was recently in South Korea. I met the head of Hyundai, the third-largest automaker in the world. He told me that tomorrow, they could convert their factories to run with all robots and no workers. Why don’t they do it? Because they have unions that are powerful. In Korea, you cannot fire these workers, they have lifetime employment. [There is a serious cost to raising labor rates in a world with price competition. Raising input costs means pricing power rules and most producers lack that pricing power. If Hyundai cars become more expensive, then Hyundai loses sales and Hyundai requires state subsidies paid for by Korean taxpayers. If Hyundai reduces costs, Hyundai workers face dimmer income prospects and more state welfare. The only way out of this conundrum is to share the economic costs across all stakeholders. That’s best done through equity rights than through state directives. This is especially true in the US under the corporate legal structure.]

But suppose you take production from a labor-intensive factory in China — in any industry — and move it into a brand-new factory in the United States. You don’t have any legacy workers, any entrenched union. You are going to design that factory to use as few workers as you can. Any new factory in the U.S. is going to be capital-intensive and labor-saving. It’s been happening for the last ten years and it’s going to happen more when we reshore. So reshoring means increasing production in the United States but not increasing employment. Yes, there will be productivity increases. And the profits of those firms that relocate production may be slightly higher than they were in China (though that isn’t certain since automation requires a lot of expensive capital investment).

But you’re not going to get many jobs. The factory of the future is going to be one person manning 1,000 robots and a second person cleaning the floor. And eventually the guy cleaning the floor is going to be replaced by a Roomba because a Roomba doesn’t ask for benefits or bathroom breaks or get sick and can work 24-7. [I’ve written many times in the past, what matters is who owns and controls the robots.]

The fundamental problem today is that people think there is a correlation between what’s good for Wall Street and what’s good for Main Street. [Yes, but conceptually we can close this conflict of interest by turning more of Main St. into entrepreneurial risk takers through the sharing of diversified equity risks.] That wasn’t even true during the global financial crisis when we were saying, “We’ve got to bail out Wall Street because if we don’t, Main Street is going to collapse.” How did Wall Street react to the crisis? They fired workers. And when they rehired them, they were all gig workers, contractors, freelancers, and so on. That’s what happened last time. This time is going to be more of the same. Thirty-five to 40 million people have already been fired. When they start slowly rehiring some of them (not all of them), those workers are going to get part-time jobs, without benefits, without high wages. That’s the only way for the corporates to survive. Because they’re so highly leveraged today, they’re going to need to cut costs, and the first cost you cut is labor. But of course, your labor cost is my consumption. So in an equilibrium where everyone’s slashing labor costs, households are going to have less income. [Again, this is why using wage labor as the dominant distributional mechanism for the success of capitalism is no longer viable. It only was during the industrial age.] And they’re going to save more to protect themselves from another coronavirus crisis. And so consumption is going to be weak. That’s why you get the U-shaped recovery.

There’s a conflict between workers and capital. [Only in the short-run.] For a decade, workers have been screwed. Now, they’re going to be screwed more. There’s a conflict between small business and large business.

Millions of these small businesses are going to go bankrupt. Half of the restaurants in New York are never going to reopen. How can they survive? They have such tiny margins. Who’s going to survive? The big chains. Retailers. Fast food. The small businesses are going to disappear in the post-coronavirus economy. So there is a fundamental conflict between Wall Street (big banks and big firms) and Main Street (workers and small businesses). And Wall Street is going to win. [We all win by participating in the financing and risk sharing of capitalism. We all need to be invested in Wall St., and finance – both ownership and control – must be transparent. Someday we will have blockchain smart contracts distribute corporate profits to shareholders in a transparent manner under the shareholders’ control, reducing the agency costs and conflicts of interest.]

Clearly, you’re bearish on the potential of existing governments intervening in that conflict on Main Street’s behalf. But if we made you dictator of the United States tomorrow, what policies would you enact to strengthen labor, and avert (or at least mitigate) the Greater Depression? 

The market, as currently ordered, is going to make capital stronger and labor weaker. So, to change this, you need to invest in your workers. [Yes, but that does not mean wage or labor supply controls – intervention on the cost side of production will only backfire.] Give them education, a social safety net — so if they lose their jobs to an economic or technological shock, they get job training, unemployment benefits, social welfare, health care for free. [These policies all lead to productive investment in human capital, but it is not enough. Workers need financial capital that generates diversified streams of income.]  Otherwise, the trends of the market are going to imply more income and wealth inequality. [The Fed has been no help here.] There’s a lot we can do to rebalance it. But I don’t think it’s going to happen anytime soon. If Bernie Sanders had become president, maybe we could’ve had policies of that sort. [No, Bernie is completely focused on intervening into labor markets. Workers look like they’re gaining in the short-run and lose big time in the long-run.] Of course, Bernie Sanders is to the right of the CDU party in Germany. I mean, Angela Merkel is to the left of Bernie Sanders. Boris Johnson is to the left of Bernie Sanders, in terms of social democratic politics. Only by U.S. standards does Bernie Sanders look like a Bolshevik.

In Germany, the unemployment rate has gone up by one percent. In the U.S., the unemployment rate has gone from 4 percent to 20 percent (correctly measured) in two months. We lost 30 million jobs. Germany lost 200,000. Why is that the case? You have different economic institutions. Workers sit on the boards of German companies. So you share the costs of the shock between the workers, the firms, and the government. [Yes, this is how it should be, but in US society and business, equity is the cleanest way to achieve this representation. Stakeholders should have board representation through their equity ownership claims.]

In 2009, you argued that if deficit spending to combat high unemployment continued indefinitely, “it will fuel persistent, large budget deficits and lead to inflation.” You were right on the first count obviously. And yet, a decade of fiscal expansion not only failed to produce high inflation, but was insufficient to reach the Fed’s 2 percent inflation goal. Is it fair to say that you underestimated America’s fiscal capacity back then? And if you overestimated the harms of America’s large public debts in the past, what makes you confident you aren’t doing so in the present?

First of all, in 2009, I was in favor of a bigger stimulus than the one that we got. I was not in favor of fiscal consolidation. There’s a huge difference between the global financial crisis and the coronavirus crisis because the former was a crisis of aggregate demand, given the housing bust. And so monetary policy alone was insufficient and you needed fiscal stimulus. And the fiscal stimulus that Obama passed was smaller than justified. So stimulus was the right response, at least for a while. And then you do consolidation.

What I have argued this time around is that in the short run, this is both a supply shock and a demand shock. And, of course, in the short run, if you want to avoid a depression, you need to do monetary and fiscal stimulus. What I’m saying is that once you run a budget deficit of not 3, not 5, not 8, but 15 or 20 percent of GDP — and you’re going to fully monetize it (because that’s what the Fed has been doing) — you still won’t have inflation in the short run, not this year or next year, because you have slack in goods markets, slack in labor markets, slack in commodities markets, etc. But there will be inflation in the post-coronavirus world. [We will have asset price inflation in the immediate and longer-term – this greatly aggravates inequality.] This is because we’re going to see two big negative supply shocks. For the last decade, prices have been constrained by two positive supply shocks — globalization and technology. Well, globalization is going to become deglobalization thanks to decoupling, protectionism, fragmentation, and so on. So that’s going to be a negative supply shock. And technology is not going to be the same as before. The 5G of Erickson and Nokia costs 30 percent more than the one of Huawei, and is 20 percent less productive. So to install non-Chinese 5G networks, we’re going to pay 50 percent more. So technology is going to gradually become a negative supply shock. So you have two major forces that had been exerting downward pressure on prices moving in the opposite direction, and you have a massive monetization of fiscal deficits. Remember the 1970s? You had two negative supply shocks — ’73 and ’79, the Yom Kippur War and the Iranian Revolution. What did you get? Stagflation.

Now, I’m not talking about hyperinflation — not Zimbabwe or Argentina. I’m not even talking about 10 percent inflation. It’s enough for inflation to go from one to 4 percent. Then, ten-year Treasury bonds — which today have interest rates close to zero percent — will need to have an inflation premium. So, think about a ten-year Treasury, five years from now, going from one percent to 5 percent, while inflation goes from near zero to 4 percent. And ask yourself, what’s going to happen to the real economy? Well, in the fourth quarter of 2018, when the Federal Reserve tried to raise rates above 2 percent, the market couldn’t take it. So we don’t need hyperinflation to have a disaster. [So we seesaw between heeling one way or the other –  inflationary or deflationary pressures with volatile financial policy. Sounds like a great policy scenario.]

In other words, you’re saying that because of structural weaknesses in the economy, even modest inflation would be crisis-inducing because key economic actors are dependent on near-zero interest rates?

For the last decade, debt-to-GDP ratios in the U.S. and globally have been rising. And debts were rising for corporations and households as well. But we survived this, because, while debt ratios were high, debt-servicing ratios were low, since we had zero percent policy rates and long rates close to zero — or, in Europe and Japan, negative. But the second the Fed started to hike rates, there was panic.

In December 2018, Jay Powell said, “You know what. I’m at 2.5 percent. I’m going to go to 3.25. And I’m going to continue running down my balance sheet.” And the market totally crashed. And then, literally on January 2, 2019, Powell comes back and says, “Sorry, I was kidding. I’m not going to do quantitative tightening. I’m not going to raise rates.” So the economy couldn’t take a Fed funds rate of 2.5 percent. In the strongest economy in the world. There is so much debt, if long-term rates go from zero to 3 percent, the economy is going to crash.

You’ve written a lot about negative supply shocks from deglobalization. Another potential source of such shocks is climate change. Many scientists believe that rising temperatures threaten the supply of our most precious commodities — food and water. How does climate figure into your analysis?

I am not an expert on global climate change. But one of the ten forces that I believe will bring a Greater Depression is man-made disasters. And global climate change, which is producing more extreme weather phenomena — on one side, hurricanes, typhoons, and floods; on the other side, fires, desertification, and agricultural collapse — is not a natural disaster. The science says these extreme events are becoming more frequent, are coming farther inland, and are doing more damage. And they are doing this now, not 30 years from now. 

So there is climate change. And its economic costs are becoming quite extreme. In Indonesia, they’ve decided to move the capital out of Jakarta to somewhere inland because they know that their capital is going to be fully flooded. In New York, there are plans to build a wall all around Manhattan at the cost of $120 billion. And then they said, “Oh no, that wall is going to be so ugly, it’s going to feel like we’re in a prison.” So they want to do something near the Verrazzano Bridge that’s going to cost another $120 billion. And it’s not even going to work.

The Paris Accord said 1.5 degrees. Then they say two. Now, every scientist says, “Look, this is a voluntary agreement, we’ll be lucky if we get three — and more likely, it will be four — degree Celsius increases by the end of the century.” How are we going to live in a world where temperatures are four degrees higher? And we’re not doing anything about it. The Paris Accord is just a joke. And it’s not just the U.S. and Trump. China’s not doing anything. The Europeans aren’t doing anything. It’s only talk.

And then there’s the pandemics. These are also man-made disasters. You’re destroying the ecosystems of animals. You are putting them into cages — the bats and pangolins and all the other wildlife — and they interact and create viruses and then spread to humans. First, we had HIV. Then we had SARS. Then MERS, then swine flu, then Zika, then Ebola, now this one. And there’s a connection between global climate change and pandemics. Suppose the permafrost in Siberia melts. There are probably viruses that have been in there since the Stone Age. We don’t know what kind of nasty stuff is going to get out. We don’t even know what’s coming. [Climate change and environmental degradation need to be managed, probably in a decentralized manner using market signals to change behavior. But a society needs resilience, slack, and insurance to manage the vagaries and risks of uncertain change. We’ve reduced our ability to adapt through misguided policies for about 50 years now, greatly increasing systemic risk. That’s what man-made disasters are made of.]