Do We Need a Social Welfare State?

One must evalulate all the trade-offs.

The following article in today’s NY Times asks the provocative question of whether we can afford a major shift to a social welfare state. One must also ask if the USA needs such a level of social welfare spending and what trade-offs it might impose. This is a question that must be answered through the democratic political process because the economic trade-offs are real.

See comments in RED.

Can America Afford to Become a Major Social Welfare State?

nytimes.com/2021/09/15/opinion/biden-spending-plan-welfare.html

By N. Gregory Mankiw

September 15, 2021

In the reconciliation package now being debated in Washington, President Biden and many congressional Democrats aim to expand the size and scope of government substantially. Americans should be wary of their plans — not only because of the sizable budgetary cost, but also because of the broader risks to economic prosperity.

The details of the ambitious $3.5 trillion social spending bill are still being discussed, so it is unclear what it will end up including. In many ways, it seems like a grab bag of initiatives assembled from the progressive wish list. And it may be bigger than it sounds: Reports suggest that some provisions will arbitrarily lapse before the end of the 10-year budget window to reduce the bill’s ostensible size, even though lawmakers hope to extend those policies at a later date.

People of all ages are in line to get something: government-funded pre-K for 3- and 4-year-olds, expanded child credits for families with children, two years of tuition-free community college, increased Pell grants for other college students, enhanced health insurance subsidies, paid family and medical leave, and expansions in Medicare for older Americans. A recent Times headline aptly described the plan’s coverage as “cradle to grave.”

If there is a common theme, it is that when you need a helping hand, the government will be there for you. It aims to assist people who are struggling in our rough-and-tumble market economy. On its face, that instinct doesn’t sound bad. Many Western European nations have more generous social safety nets than the United States. The Biden plan takes a big step in that direction.

Can the United States afford to embrace a larger welfare state? From a narrow budgetary standpoint, the answer is yes. But the policy also raises larger questions about American values and aspirations, and about what kind of nation we want to be.

The issue Prof. Mankiw addresses here is the question as to whether the costs of such programs yield the benefits desired. There is a lot of talk on the left that Modern Monetary Theory demonstrates that deficits don’t constrain government spending so that politicians should spend what’s needed to achieve whatever objective they choose. This is a bit of wishful fantasy. What matters economically and financially is whether such spending yields a greater return in terms of freedom and quality of life for society as a whole. If such spending merely increases the deficit but does not invest in the productivity of the economy, then it is a dead weight upon society. It’s not much different than one’s personal desire to choose between buying a new car or instead investing in education. One must compare how each choice will yield in terms of financial freedom and happiness over the longer term.

The Biden administration has promised to pay for the entire plan with higher taxes on corporations and the very wealthy. But there’s good reason to doubt that claim. Budget experts, such as Maya MacGuineas, president of the Committee for a Responsible Federal Budget, are skeptical that the government can raise enough tax revenue from the wealthy to finance Mr. Biden’s ambitious agenda.

The United States could do what Western Europe does — impose higher taxes on everyone. Most countries use a value-added tax, a form of a national sales tax, to raise a lot of revenue efficiently. If Americans really want larger government, we will have to pay for it, and a VAT could be the best way.

The costs of an expanded welfare state, however, extend beyond those reported in the budget. There are also broader economic effects.

Arthur Okun, the former economic adviser to President Lyndon Johnson, addressed this timeless issue in his 1975 book, “Equality and Efficiency: The Big Tradeoff.” According to Mr. Okun, policymakers want to maximize the economic pie while slicing it equally. But these goals often conflict. As policymakers attempt to rectify the market’s outcome by equalizing the slices, the pie tends to shrink.

Mr. Okun explains the trade-off with a metaphor: Providing a social safety net is like using a leaky bucket to redistribute water among people with different amounts. While bringing water to the thirstiest may be noble, it is also costly as some water is lost in transit. 

In the real world, this leakage occurs because higher taxes distort incentives and impede economic growth. And those taxes aren’t just the explicit ones that finance benefits such as public education or health care. They also include implicit taxes baked into the benefits themselves. If these benefits decline when your income rises, people are discouraged from working. This implicit tax distorts incentives just as explicit taxes do. That doesn’t mean there is no point in trying to help those in need, but it does require being mindful of the downsides of doing so.

Yes, we must reconcile the trade-off, but I would also characterize it as freedom and liberty to pursue one’s personal happiness versus the promise of individual economic security promised by the collective. The fulfillment of that promise is often costlier than anticipated and the benefits disappointing.

Which brings us back to Western Europe. Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom.

Economists disagree about why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott, a Nobel laureate, in 2003, is that Europeans work less than Americans because they face higher taxes to finance a more generous social safety net.

In other words, most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones. Americans should be careful to avoid that fate.

The point of course, is not that leisure time is undesirable but that people can choose how they invest their time and energy, rather than have state policy reward or penalize that choice arbitrarily. In a free and just society, this choice should be left to the individual. Liberty and security are not mutually exclusive goals.

Compassion is a virtue, but so is respect for those who are talented, hardworking and successful. Most Americans descended from immigrants, who left their homelands to find freedom and forge their own destinies. Because of this history, we are more individualistic than Europeans, and our policies rightly reflect that cultural difference.

That is not to say that the United States has already struck the right balance between compassion and prosperity. It is a continuing tragedy that children are more likely to live in poverty than the overall population. That’s why my favorite provision in the Biden plan is the expanded child credit, which would reduce childhood poverty. (I am also sympathetic to policies aimed at climate change, which is an entirely different problem. Sadly, the Biden plan misses the opportunity to embrace the best solution — a carbon tax.)

But the entire $3.5 trillion package is too big and too risky. The wiser course is to take more incremental steps rather than to try to remake the economy in one fell swoop.

Actually, I would suggest that the choice between liberty and security is a false one and the assumption that security can only be secured for the individual by the state to also be false. The leftist assumption is that the state has to intervene to redistribute wealth after the fact when instead we can design policies that empower citizens to join in the distribution of that wealth by participating in the risk-taking venture before the fact. Then the distribution of resources in society will mostly take care of itself. As it is now, and with this social welfare expansion, we prevent most individuals who need to participate from participating, forcing them to depend on the largesse of the state or the dictates of the market. This is hardly optimal in the search for liberty and justice. In light of my preference to preserve my liberty and take care of my own security, my answer to Prof. Mankiw’s question would be NO.

N. Gregory Mankiw is a professor of economics at Harvard. He was the chairman of the Council of Economic Advisers under President George W. Bush from 2003 to 2005.

Modern Monetary Fantasies 2

The Myth of Big Government Deficits – A TED Talk

This is quite the tale. I’m sure Ms. Kelton studied her economics but here with MMT she takes a few basic truths and spins an elaborate fantasy. Essentially her argument is that debt is no obstacle to economic policy and economic outcomes. You want a Ferrari? No problem, the Fed can write a check and it’s yours, no taxes, no worries. Advocates will hate this simplification but that’s essentially what Ms. Kelton is selling. (You can substitute free healthcare, free college, whatever you want, but I’d go with the Ferrari 365GT.)

MMT is utopian economics. Yes, in theory it can make sense, just don’t go too far down that rabbit hole. Govt debt is not like private debt because it never has to be paid back, only serviced and rolled over. So the debt in $ terms doesn’t matter, but the productivity of that debt matters a lot (the debt to GDP ratio is a good indicator – it looks worse every day).

She lauds the pandemic stimulus because that essentially was an MMT experiment. Look, no recession! But recessions are measured in monetary terms (not value), and if the Fed keeps pumping out money, voila! No recession. But value creation matters and in value terms, we are suffering an extreme recession and stagflation. How many small businesses have closed in the past 2 years? How much price inflation are we experiencing? 5-9%? Have you tried to buy a house lately? 20% price increases. Tried to get a plumber or electrician?

Yes, when the government spends $28 trillion, that money goes somewhere in the private sector. And yes, we’ve seen it skimmed off by the banking industry, the asset-rich who have merely leveraged 3% debt, and the securities markets that have bubbled up even as production has declined. This is what is driving inequality to new heights as the global elites suck up this cheap credit courtesy of the central banks. Check out the number of mega yachts plying the oceans.

Yes, we’ve seen the fantasy of MMT in action and that’s why we’re having a political revolution. Kelton and the handful of economists selling MMT are assuming a utopian political world where everybody always does the right thing. Ultimately, intellectual dishonesty like this is extremely damaging.

Read her book, there’s nothing there that will address these false assumptions. Credit and debt are tools that the market uses to restrain profligacy. Without those restraints, the party will eventually implode.

Afghanistan and the Politics of National Security

To Stop War, American Needs a Third Party

by Matt Taibbi, Substack

For the past few years I haven’t read much from Matt Taibbi to disagree with, as he has done a masterful job exposing the degeneracy of our political and cultural elites. I would agree here with the gist of his criticisms of bipartisan foreign policy and national security policy that has resulted in a long series of futile small war engagements.

However, I do fail to see the connection between war and political party systems he draws out in his title. Perhaps he is a bit unclear himself of the connection as he doesn’t really present the case as a solution, only that our two-party system is part of the problem. Basically he argues our two parties have failed and are corrupt (agreed), but then unconvincingly suggests maybe a third party is the solution. But I can’t find either internal logic or empirical history supporting the case for multiparty systems solving the national security dilemma, even while conceding Eisenhower’s warning concerning the Military Industrial Complex as a real danger. The solution to corrupt politics is to clean out the corruption through the voting process and, if necessary, through the checks of the judicial branch.

To review recent history, no multiparty democracy in the post-war world has satisfactorily solved the security dilemma without becoming dependent on the bipolar great power conflict between the USA and the former USSR. Even after the 1989 demise of the Soviet Bloc, the hegemonic dominance of US continued to provide a convenient security umbrella for European democracies, as well as many developing countries around the world. One must merely offer tacit submission to US global interests to have the US military do all the heavy lifting while the US taxpayer picks up the bill.

This convenient arrangement started to unravel as the global system became unipolar while the rest of the world began to catch up economically during Pax Americana. The cost of hegemony has continued to rise as the US$-centered global monetary system has undermined global trade flows and fundamental prices in asset markets. The liberalization of India and China has also contributed heavily to this transformation of global trade by shifting the global mix of capital and labor. What we have seen in the frequent mismanagement of global conflict by US hegemony has been, as Taibbi notes, an exercise in managing peace rather than decisively ending conflict. As Taibbi notes, one does not wage war for any other reason than to win by vanquishing one’s enemy. There is no polite, dignified way to do this and better not to start a war than to try to manage it over time.

Taibbi’s forlorn hope seems to be like that of Immanuel Kant, who believed democracies do not wage war against each other, so a world characterized by free democracies would ensure everlasting peace. History has proven otherwise as democracies are just less likely to initiate wars, but they are always drawn into them. We have not seen the End of History.

But this brings us to the suggested salve of multiparty systems, which are somewhat analogous to a multipolar international security system. Multipolar systems rely on configurations of alliances and these alliances must be trustworthy. Allies must be willing to commit to the alliance and absorb their share of the costs. This is a radically different dynamic than hegemony, where the big dog takes care of everything in return for obeisance. It is also radically different than bipolarity, which is what a two-party system is.

The USA is no longer the global hegemon because its leaders have not promoted the necessary commitments from the voting populace, and so the American public has moved away from supporting such a role. Remember, President George W. Bush maintained that we could fight the Afghan and Iraq wars without distracting ourselves from shopping at the mall. In other words, zero commitment from anyone, save those who volunteered to be on the front lines. This lack of commitment to assume the costs of global stability permeates US society today, from national politics to the financial sector to our cultural and educational institutions. It was reflected in President Trump’s desire to disengage from the Middle East. What should concern us, and Taibbi, is how global monetary hegemony of the US$ is destabilizing the global economic system, leading to more conflict at the periphery. US monetary policy, in coordination with the 4 other C5 central banks is creating massive inequalities between US$ holders and everyone else. The elite oligarchs of the world benefit from US$ portfolios, but their citizens do not and they will become increasingly restless and combative. There is no global policeman, so the world will become a more dangerous place in the absence of US hegemony.

A third-party in US politics can do nothing to reverse this trend toward irresponsible national policies in a multipolar world. And a multiparty electoral system is just as unstable as a multipolar global security system. It relies on fragile coalitions that give disproportionate power to minority parties that can tip the balance. On the other hand, a two-party system is quite effective in stabilizing a diverse, multi-ethnic, multi-racial pluralistic democratic society, albeit with certain trade-offs. Those trade-offs for stability include resistance to change and political sclerosis. But this is a crucial and deliberate element inherent to the overall design of our constitution to prevent passing populist fads from changing our form of self-government. I would be loathe to throw out national stability for the unwarranted hope of convergence on international comity. Instead, in a multiparty system we would expect the instability of comparable historical cases like post-war Italy, India, Indonesia or Brazil. A global superpower can hardly afford those kinds of risks.

I find Taibbi’s criticisms of our political leaders, our foreign policy bureaucracies, and our military-industrial complex to be on the mark. I sincerely doubt a third party solves any of these problems, but we will never find out because the logic of the two-party electoral system supersedes any argument against it for myriad reasons. Paramount is that national stability is a necessary precondition for good government, continuity, and preservation of the union. We’ve had dozens of third party movements in US history and the only ones that have been successful have been those rare moments when a new party replaces one of the two that has been rejected by the voters. The US electoral system favors reform from within the major parties by holding elected politicians to a higher standard and by removing them from office when necessary. The Republican party accomplished much of this house-cleaning in 2016, but the Democratic party is still conflicted over its future path.

It should be added that to reduce the risks of national politics we should devolve as much power away from the central government back to the states, counties, municipalities and individuals where it belongs. The central government was designed to coordinate democratic self-rule, not overrule.

But what we really need is a much broader understanding of our loss of political and financial integrity. What we need is another Greatest Generation on the horizon that recognizes good and evil and is willing to take a stand.

Bretton Woods – #2 of Series

Second of a Series of articles on the international monetary regime reprinted from the NY Sun.

Not sure I would agree with all of this. Net exports is different than manufacturing exports and manufacturing employment, especially in the global information economy. I believe the problem here is that the reserve currency allows the US central bank to issue too much US$ credit liabilities without paying the direct consequence. Our trading partners are not exactly happy about this either since they surrender control of their currencies to the dominance of the US Federal Reserve and US politics. I think we need to rein in political discretion over the value of money.

Time To Reverse the Curse Over the Dollar

nysun.com/national/beyond-bretton-woods-the-road-from-genoa/91606/

By JOHN MUELLER

Journalism thrives on simple narratives and round numbers. So I must note that what President Nixon ended 50 years ago was not the international gold standard, which persisted despite interruptions for more than two millennia to 1914, but its complicated parody: the gold-exchange standard, established 99, not 50, years ago by a 1922 agreement at Genoa.

Prime Minister David Lloyd George convened the Genoa Conference in an effort to restore the economies of Central and Eastern Europe, modify the schedule of German reparations owed to France, and begin the re-integration of Soviet Russia into the European economy. Lacking any American support, the conference was a failure on all those counts.

The gold-exchange standard, John Maynard Keynes’ idea, was Genoa’s one tangible result. Keynes had proposed in 1913 that the monetary system of British colonial India be adopted world-wide. The British pound would remain convertible into gold, but India’s and other countries’ domestic payments would be backed by ostensibly gold-convertible claims on London. Following Genoa, the pound could be exchanged for gold, and other national currencies could be exchanged for pounds.

But there was a complication: unlike most currencies, the Indian rupee actually was based on silver, not gold, and British officials, including Keynes, overvalued the silver rupee, hoping to reduce heavy demands for British gold. British monetary experts inserted this scheme (without the silver wrinkle) in the 1922 Genoa accord, incidentally forestalling impecunious Britain’s repayment of its World War I debts in gold.

While working 35 years ago for Congressman Jack Kemp, I first coined the term the “reserve currency curse.” I was tutored in the subject by Lewis E, Lehrman, who in turn was influenced by the French economist Jacques Rueff (1896-1978). Keynes had claimed that what matters is only the value, not kind, of monetary reserves. It was Rueff who countered in 1932 that foreign exchange is qualitatively different from an equal value of precious metal.

With the creation of, say, dollar reserves, purchasing power “has simply been duplicated, and thus the American market is in a position to buy in Europe, and in the United States, at the same time.” This credit duplication causes prices to rise faster in the reserve-currency country than its trading partners, precipitating the reserve-currency country’s deindustrialization. That fate soon befell Great Britain, then the United States after the dollar replaced the pound under the 1944 Bretton Woods agreement.

Other countries backing their currencies with dollar-denominated securities led to a dilemma for America. The United States is the only major country with negative net monetary reserves (foreign official assets minus liabilities). All others — even those whose currencies are used by foreign central banks — have positive net reserves (i.e., those countries’ foreign official assets exceed their foreign official liabilities).

There is a correlation of more than 90% between America’s net reserves and its manufacturing employment. American net reserves had been positive before but turned negative by 1960, and manufacturing jobs have since disappeared in direct proportion to the decline in our net reserves. Focusing on one bilateral trade balance or other — say, the US and China — is a mug’s game. What matters is the total balance, not bilateral subsets.

How could an American president reverse the reserve-currency curse? By making honesty the best policy: negotiating and starting repayment of all outstanding dollar reserves over several decades. Since international payments must be settled in real goods — not IOUs — the necessary production of American goods for export is the surest way to revive America’s manufacturing employment.

To increase our manufacturing jobs back to the peak of 17 million from today’s 12 million, it would be necessary to repay most outstanding official dollar reserves. If President Biden is as ineffectual as most of his recent predecessors in responding to the “reserve-currency curse,” he, too, will have to get used to the title “ex-President.”

________

Mr. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center in Washington DC and author of “Redeeming Economics.” Image: Conferees at the Genoa Conference, with Prime Minister Lloyd George of Britain front and center. Detail of a British Government photo, via Wikipedia Commons.

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. 

 

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.]

Bank Bailout 3.0

I’d have to agree with this. As we’ve said all along, saving the banking system was necessary, saving the bankers was not. Now we’re set up for the next bailout of the financial elite. What a great casino this is: heads they win, tails we lose.

The bank bailout of 2008 was unnecessary. Fed Chairman Ben Bernanke scared Congress into it

By Dean Baker

This week marked 10 years since the harrowing descent into the financial crisis — when the huge investment bank Lehman Bros. went into bankruptcy, with the country’s largest insurer, AIG, about to follow. No one was sure which financial institution might be next to fall.

 

The banking system started to freeze up. Banks typically extend short-term credit to one another for a few hundredths of a percentage point more than the cost of borrowing from the federal government. This gap exploded to 4 or 5 percentage points after Lehman collapsed. Federal Reserve Chair Ben Bernanke — along with Treasury Secretary Henry Paulson and Federal Reserve Bank of New York President Timothy Geithner — rushed to Congress to get $700 billion to bail out the banks. “If we don’t do this today we won’t have an economy on Monday,” is the line famously attributed to Bernanke.

The trio argued to lawmakers that without the bailout, the United States faced a catastrophic collapse of the financial system and a second Great Depression.

Neither part of that story was true.

Still, news reports on the crisis raised the prospect of empty ATMs and checks uncashed. There were stories in major media outlets about the bank runs of 1929.

No such scenario was in the cards in 2008.

Unlike 1929, we have the Federal Deposit Insurance Corporation. The FDIC was created precisely to prevent the sort of bank runs that were common during the Great Depression and earlier financial panics. The FDIC is very good at taking over a failed bank to ensure that checks are honored and ATMs keep working. In fact, the FDIC took over several major banks and many minor ones during the Great Recession. Business carried on as normal and most customers — unless they were following the news closely — remained unaware.

 

The prospect of Great Depression-style joblessness and bread lines was just a scare tactic used by Bernanke, Paulson and other proponents of the bailout.

Had bank collapses been more widespread, stretching the FDIC staff thin, it is certainly possible that there would be glitches. This could have led to some inability to access bank accounts immediately, but that inconvenience would most likely have lasted days, not weeks or months.

 

Following the collapse of Lehman Bros., however, the trio promoting the bank bailout pointed to a specific panic point: the commercial paper market. Commercial paper is short-term debt (30 to 90 days) that companies typically use to finance their operations. Without being able to borrow in this market even healthy companies not directly affected by the financial crisis such as Boeing or Verizon would have been unable to meet their payroll or pay their suppliers. That really would have been a disaster for the economy.

However, a $700-billion bank bailout wasn’t required to restore the commercial paper market. The country discovered this fact the weekend after Congress approved the bailout when the Fed announced a special lending facility to buy commercial paper ensuring the availability of credit for businesses.

 

bailout-cartoon-2

Without the bailout, yes, bank failures would have been more widespread and the initial downturn in 2008 and 2009 would have been worse. We were losing 700,000 jobs a month following the collapse of Lehman. Perhaps this would have been 800,000 or 900,000 a month. That is a very bad story, but still not the makings of an unavoidable depression with a decade of double-digit unemployment.

 

The Great Depression ended because of the massive government spending needed to fight World War II. But we don’t need a war to spend money. If the private sector is not creating enough demand for workers, the government can fill the gap by spending money on infrastructure, education, healthcare, childcare or many other needs.

There is no plausible story where a series of bank collapses in 2008-2009 would have prevented the federal government from spending the money needed to restore full employment. The prospect of Great Depression-style joblessness and bread lines was just a scare tactic used by Bernanke, Paulson and other proponents of the bailout to get the political support needed to save the Wall Street banks.

 

This kept the bloated financial structure that had developed over the last three decades in place. And it allowed the bankers who got rich off of the risky financial practices that led to the crisis to avoid the consequences of their actions.

 

While an orderly transition would have been best, if the market had been allowed to work its magic, we could have quickly eliminated bloat in the financial sector and sent the unscrupulous Wall Street banks into the dustbin of history. Instead, millions of Americans still suffered through the Great Recession, losing homes and jobs, and the big banks are bigger than ever. Saving the banks became the priority of the president and Congress. Saving people’s homes and jobs mattered much less or not at all.

 

Dean Baker is senior economist at the Center for Economic and Policy Research and the author of “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.”

bailout-toon2

Health Care Fantasies

A couple of articles today outlining how far apart from reality are the pro and con arguments for different possible reforms. This is going to matter at some point soon, if not now.

Socialized Medicine Has Won the Health Care Debate

The first article, by Sarah Jaffe published in The New Republic, suggests that “socialized” healthcare has won the policy debate. Citing opinion polls (for which all questions display a certain bias), the author claims that the American public favors government-run socialized medicine. (Here’s a good example of survey bias: “Do you favor free healthcare for all?” – How many No’s do you think that question elicits?)

Ms. Jaffe explains away Obamacare’s unpopularity with this, “What people don’t like are the inequities that still prevail in our health care system, not the fact that “government is too involved. …The law didn’t go too far for Americans to get behind. It didn’t go far enough. And while single-payer opponents continue to evoke rationed care, long lines and wait times, and other problems that supposedly plague England or Canada, the public seems well aware that the reality for many Americans is far worse.”

Really?

What’s more, what makes her think that government control removes inequalities rather than make them worse according to different selection criteria?

Finally, she proclaims, “This is now an American consensus. And if socialism is the medicine our system needs, the country is ready to embrace it—even by name.”

At no point does Ms. Jaffe discuss the associated costs, who is going to pay them, and what kind of trade-offs this will impose on citizens and taxpayers. This is an argument motivated by political ideology, not reality.

***

This brings us to the second article, by Sally Pipes in Investor’s Business Daily (this should give us a clue that Pipes actually plans to address money issues).

Sanders’ Single-Payer Fairy Tale

Ms. Pipes first gives us an indication of polling bias: “The idea is … enchanting ordinary Americans. Fifty-three percent support single payer, according to a June 2017 poll from the Kaiser Family Foundation. But this supposed support is a mirage. According to the same Kaiser poll, 62% would oppose single-payer if it gave the government too much power over health care. Sixty percent would reject it if it increased taxes.”

Sen. Sanders estimates that “Medicare for all” would cost an extra $14 trillion over 10 years, while the Urban Institute’s analysis of the plan puts the figure at $32 trillion. Our current annual health spending is $3.2 trillion, so Medicare at minimum would double that spending level, with no viable way to pay for it, with taxes or otherwise.

Medicare for the 65+ crowd is already a deficit buster, so the nation will not be affording such care for the entire population and promises to do so are a dangerous fantasy. We do know what will happen – the “free” care we expect will never be delivered and the politicians who sell such snake oil will be long gone.

The real problem with our health care debates is that they focus solely on distribution and not on the real problem, which is adequate supply. If no one is producing health care goods, what is there to distribute?

It’s the Fed, Stupid!

A Messaging Tip For The Donald: It’s The Fed, Stupid!

The Fed’s core policies of 2% inflation and 0% interest rates are kicking the economic stuffings out of Flyover AmericaThey are based on the specious academic theory that financial gambling fuels economic growth and that all economic classes prosper from inflation and march in lockstep together as prices and wages ascend on the Fed’s appointed path.

Read more

The New Old World Order

I cite this article because it is quite insightful of the failed political culture in the modern democratic West and particularly the failures of US party elites. It also exposes the larger historical forces at work that suggest the road forward may be rather rocky.

For me this 2016 moment resonates with historical analogies such as the Savonarolan episode in Renaissance Florence that I wrote about in The City of Man, the dissolution of the Weimar Republic in 1930s Germany, and the Iranian Fundamentalist Revolution in 1979. We haven’t reached those precipices yet, but all arrows point in that direction unless we come to grips with our current failures of both modern liberalism and neo-conservatism.

Donald Trump Does Have Ideas—and We’d Better Pay Attention to Them

The post-1989 world order is unraveling. Here are 6 ideas Trump has to replace it.

Politico, September 15, 2016

Ideas really don’t come along that often. Already in 1840, Alexis de Tocqueville observed that in America, “ideas are a sort of mental dust,” that float about us but seldom cohere or hold our attention. For ideas to take hold, they need to be comprehensive and organizing; they need to order people’s experience of themselves and of their world. In 20th-century America, there were only a few ideas: the Progressivism of Wilson; Roosevelt’s New Deal; the Containment Doctrine of Truman; Johnson’s War on Poverty; Reagan’s audacious claim that the Cold War could be won; and finally, the post-1989 order rooted in “globalization” and “identity politics,” which seems to be unraveling before our ey.es.

Yes, Donald Trump is implicated in that unraveling, cavalierly undermining decades worth of social and political certainties with his rapid-fire Twitter account and persona that only the borough of Queens can produce. But so is Bernie Sanders. And so is Brexit. And so are the growing rumblings in Europe, which are all the more dangerous because there is no exit strategy if the European Union proves unsustainable. It is not so much that there are no new ideas for us to consider in 2016; it is more that the old ones are being taken apart without a clear understanding of what comes next. 2016 is the year of mental dust, where notions that stand apart from the post-1989 order don’t fully cohere. The 2016 election will be the first—but not last—test of whether they can.
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If you listen closely to Trump, you’ll hear a direct repudiation of the system of globalization and identity politics that has defined the world order since the Cold War. There are, in fact, six specific ideas that he has either blurted out or thinly buried in his rhetoric: (1) borders matter; (2) immigration policy matters; (3) national interests, not so-called universal interests, matter; (4) entrepreneurship matters; (5) decentralization matters; (6) PC speech—without which identity politics is inconceivable—must be repudiated.

These six ideas together point to an end to the unstable experiment with supra- and sub-national sovereignty that many of our elites have guided us toward, siren-like, since 1989. That is what the Trump campaign, ghastly though it may at times be, leads us toward: A future where states matter. A future where people are citizens, working together toward (bourgeois) improvement of their lot. His ideas do not yet fully cohere. They are a bit too much like mental dust that has yet to come together. But they can come together. And Trump is the first American candidate to bring some coherence to them, however raucous his formulations have been.

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(Blog Note: It’s Not about Trump.)

Most of the commentary about Trump has treated him as if he is a one-off, as someone who has emerged because of the peculiar coincidence of his larger-than-life self-absorption and the advent of social media platforms that encourage it. When the world becomes a theater for soliloquy and self-aggrandizement, what else are we to expect?
But the Trump-as-one-off argument begins to fall apart when we think about what else happened in politics this year. First of all, Trump is not alone. If he alone had emerged—if there were no Bernie Sanders, no Brexit, no crisis in the EU—it would be justifiable to pay attention only to his peculiarities and to the oddities of the moment. But with these other uprisings occurring this year, it’s harder to dismiss Trump as a historical quirk.

Furthermore, if he had been just a one-off, surely the Republican Party would have been able to contain him, even co-opt him for its own purposes. After all, doesn’t the party decide? The Republican Party is not a one, however, it is a many. William F. Buckley Jr. and others invented the cultural conservatism portion of the party in the 1950s, with the turn to the traditionalism of Edmund Burke; the other big portion of the party adheres to the free-market conservatism of Friedrich Hayek. The third leg of the Republican Party stool, added during the Reagan years, includes evangelical Christians and Roman Catholics of the sort who were still unsure of the implications of Vatican II. To Burke and Hayek, then, add the names John Calvin and Aristotle/Thomas Aquinas. Anyone who really reads these figures knows that the tension between them is palpable. For a time, the three GOP factions were able to form an alliance against Communism abroad and against Progressivism at home. But after the Cold War ended, Communism withered and the culture wars were lost, there has been very little to keep the partnership together. And if it hadn’t been Trump, sooner or later someone else was going to come along and reveal the Republican Party’s inner fault lines. Trump alone might have been the catalyst, but the different factions of the GOP who quickly split over him were more than happy to oblige.

There is another reason why the Republican Party could not contain Trump, a perhaps deeper reason. Michael Oakeshott, an under-read political thinker in the mid-20th century, remarked in his exquisite essay, “Rationalism in Politics,” that one of the more pathological notions of our age is that political life can be understood in terms of “principles” that must be applied to circumstances. Politics-as-engineering, if you will. Republicans themselves succumbed to this notion, and members of the rank and file have noticed. Republicans stood for “the principles of the constitution,” for “the principles of the free market,” etc. The problem with standing for principles is that it allows you to remain unsullied by the political fray, to stand back and wait until yet another presidential election cycle when “our principles” can perhaps be applied. And if we lose, it’s OK, because we still have “our principles.” What Trump has been able to seize upon is growing dissatisfaction with this endless deferral, the sociological arrangement for which looks like comfortable Inside-the-Beltway Republicans defending “principles” and rank-and-file Republicans far from Washington-Babylon watching in horror and disgust.

Any number of commentators (and prominent Republican Party members) have said that Trump is an anti-ideas candidate. If we are serious about understanding our political moment, we have to be very clear about what this can mean. It can mean Trump’s administration will involve the-politics-of-will, so to speak; that the only thing that will matter in government will be what Trump demands. Or, it can mean that Trump is not a candidate who believes in “principles” at all. This is probably the more accurate usage. This doesn’t necessarily mean that he is unprincipled; it means rather that he doesn’t believe that yet another policy paper based on conservative “principles” is going to save either America or the Republican Party. In Democracy in America, Tocqueville was clear that the spirit of democracy is not made possible by great ideas (and certainly not by policy papers), but rather by practical, hands-on experience with self-governance. Ralph Waldo Emerson’s mystical musings in his essay, “Experience,” corroborate this. American democracy will not be rejuvenated by yet another policy paper from the Inside-the-Beltway gang. What I am not saying here is that Trump has the wisdom of an Oakeshott, a Tocqueville or an Emerson. What I am saying is that Trump is that quintessentially American figure, hated by intellectuals on both sides of the aisle and on the other side of the Atlantic, who doesn’t start with a “plan,” but rather gets himself in the thick of things and then moves outward to a workable idea—not a “principled” one—that can address the problem at hand, but which goes no further. That’s what American businessmen and women do. (And, if popular culture is a reliable guide to America, it is what Han Solo always does in Star Wars movies.) We would do well not to forget that the only school of philosophy developed in America has been Pragmatism. This second meaning of being an anti-ideas candidate is consonant with it.

If, as some have said, Trump’s only idea is, “I can solve it,” then we are in real trouble. The difficulty, of course, is that in this new, Trumpean moment when politics is unabashed rhetoric, it is very difficult to discern the direction a Trump administration will take us. Will he be the tyrant some fear, or the pragmatist that is needed?

It’s not unreasonable to think the latter. This is because, against the backdrop of post-1989 ideas, the Trump campaign does indeed have a nascent coherence. “Globalization” and “identity politics” are a remarkable configuration of ideas, which have sustained America, and much of the rest of the world, since 1989. With a historical eye—dating back to the formal acceptance of the state-system with the treaty of Westphalia in 1648—we see what is so remarkable about this configuration: It presumes that sovereignty rests not with the state, but with supra-national organizations—NAFTA, WTO, the U.N., the EU, the IMF, etc.—and with subnational sovereign sites that we name with the term “identity.” So inscribed in our post-1989 vernacular is the idea of “identity” that we can scarcely imagine ourselves without reference to our racial, gender, ethnic, national, religious and/or tribal “identity.” Once, we aspired to be citizens who abided by the rule of law prescribed within a territory; now we have sovereign “identities,” and wander aimlessly in a world without borders, with our gadgets in hand to distract us, and our polemics in mind to repudiate the disbelievers.

What, exactly, is the flaw with this remarkable post-1989 configuration of ideas? When you start thinking in terms of management by global elites at the trans-state level and homeless selves at the substate level that seek, but never really find, comfort in their “identities,” the consequences are significant: Slow growth rates (propped up by debt-financing) and isolated citizens who lose interest in building a world together. Then of course, there’s the rampant crony-capitalism that arises when, in the name of eliminating “global risk” and providing various forms of “security,” the collusion between ever-growing state bureaucracies and behemoth global corporations creates a permanent class of winners and losers. Hence, the huge disparities of wealth we see in the world today.

The post-1989 order of things fails to recognize that the state matters, and engaged citizens matter. The state is the largest possible unit of organization that allows for the political liberty and economic improvement of its citizens, in the long term. This arrangement entails competition, risk, success and failure. But it does lead to growth, citizen-involvement, and if not a full measure of happiness, then at least the satisfactions that competence and merit matter.

Trump, then, with his promise of a future in which the integrity of the state matters, and where citizens identify with the state because they have a stake in it rather than with identity-driven subgroups, proposes a satisfying alternative.

This is also why it would be a big mistake to underestimate Trump and the ideas he represents during this election. In the pages of the current issue of POLITICO Magazine, one author writes: “The Trump phenomenon is about cultural resentment, anger and most of all Trump. It’s primal-scream politics, a middle finger pointed at The Other, a nostalgia for a man-cave America where white dudes didn’t have to be so politically correct.”
I have no doubt that right now, somewhere in America (outside the Beltway), there are self-congratulatory men, probably white, huddled together in some smoky man-cave, with “Make America Great Again” placards on their John-Deere-tractor-mowed lawns.
But do not mistake the part for the whole. What is going on is that “globalization-and-identity-politics-speak” is being boldly challenged. Inside the Beltway, along the Atlantic and Pacific coasts, there is scarcely any evidence of this challenge. There are people in those places who will vote for Trump, but they dare not say it, for fear of ostracism. They think that identity politics has gone too far, or that if it hasn’t yet gone too far, there is no principled place where it must stop. They believe that the state can’t be our only large-scale political unit, but they see that on the post-1989 model, there will, finally, be no place for the state. Out beyond this hermetically sealed bicoastal consensus, there are Trump placards everywhere, not because citizens are racists or homophobes or some other vermin that needs to be eradicated, but because there is little evidence in their own lives that this vast post-1989 experiment with “globalization” and identity politics has done them much good.

The opposition to the post-1989 order is not just happening here in America; it is happening nearly everywhere. The Brexit vote stunned only those who believe in their bones that the very arc of history ends with “globalization” and identity politics.
The worry is that this powerful, growing disaffection with the status quo—both within Europe and elsewhere—will devolve into nefarious nationalism based on race, ethnicity or religion. To combat this, we are going to have to find constructive ways to build a new set of ideas around a very old set of ideas about sovereignty—namely, that the state and the citizens inside it matter. If we don’t find a way to base nationalism on a healthy understanding of what a liberal state is and what it does and expects from citizens to make it work well, dark nationalism, based on blood and religion, will prevail—again.
Nothing lasts forever. Is that not the mantra of the left? Why, then, would the ideas of globalization and identity politics not share the fate of all ideas that have their day then get tossed into the dust-bin of history?

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Of course, when new ideas take hold, old institutional arrangements face upheaval or implosion. There is no post-election scenario in which the Republican Party as we knew it prior to Trump remains intact. The Republicans who vote for Hillary Clinton will not be forgotten by those who think Trump is the one chance Republicans have to stop “globalization-and-identity-politics-speak” cold in its tracks. And neither will Inside-the-Beltway Republicans forget those in their party who are about to pull the lever for Trump. One can say that Trump has revealed what can be called The Aristotle Problem in the Republican Party. Almost every cultural conservative with whom I have spoken recently loves Aristotle and hates Trump. That is because on Aristotelian grounds, Trump lacks character, moderation, propriety and magnanimity. He is, as they put it, “unfit to serve.” The sublime paradox is that Republican heirs of Aristotle refuse to vote for Trump, but will vote for Clinton and her politically left-ish ideas that, while very much adopted to the American political landscape, trace their roots to Marx and to Nietzsche. Amazingly, cultural conservatives who have long blamed Marx and Nietzsche (and German philosophy as a whole) for the decay of the modern world would now rather not vote for an American who expressly opposes Marx and Nietzsche’s ideas! In the battle between Athens, Berlin and, well, the borough of Queens, they prefer Athens first, Berlin second and Queens not at all. The Aristotle Problem shows why these two groups—the #NeverTrumpers and the current Republicans who will vote for Trump—will never be reconciled.

There are, then, two developments we are likely to see going forward. First, cultural conservatives will seriously consider a political “Benedict Option,” dropping out of the Republican Party and forming a like-minded Book Group, unconcerned with winning elections and very concerned with maintaining their “principles.” Their fidelity is to Aristotle rather than to winning the battle for the political soul of America. The economic conservatives, meanwhile, will be urged to stay within the party—provided they focus on the problem of increasing the wealth of citizens within the state.

The other development, barely talked about, is very interesting and already underway, inside the Trump campaign. It involves the effort to convince Americans as a whole that they are not well-served by thinking of themselves as members of different “identity groups” who are owed a debt that—surprise!—Very White Progressives on the left will pay them if they loyally vote for the Democratic Party. The Maginot Line the Democratic Party has drawn purports to include on its side, African-Americans, Hispanics, gays, Muslims and women. (Thus, the lack of embarrassment, really, about the “basket of deplorables” reference to Trump supporters.) To its credit, the Democratic Party has made the convincing case, really since the Progressive Era in the early part of the 20th century, that the strong state is needed to rearrange the economy and society, so that citizens may have justice. Those who vote for the Democratic Party today are not just offered government program assistance, they are offered political protections and encouragements for social arrangements of one sort or another that might not otherwise emerge.

But where does this use of political power to rearrange the economy and society end? Continue using political power in the service of “identity politics” to reshape the economy and society and eventually both of them will become so enfeebled that they no longer work at all. The result will not be greater liberty for the oppressed, it will be the tyranny of the state over all. Trump does have sympathies for a strong state; but correctly or incorrectly, he has managed to convince his supporters that a more independent economy and society matters. In such an arrangement, citizens see their first support as the institutions of society (the family, religion, civic associations), their second support as a relatively free market, and their third support as the state, whose real job is to defend the country from foreign threats. Under these arrangements, citizens do not look upward to the state to confirm, fortify and support their “identities.” Rather, they look outward to their neighbor, who they must trust to build a world together. Only when the spell of identity politics is broken can this older, properly liberal, understanding take hold. That is why Trump is suggesting to these so-called identity groups that there is an alternative to the post-1989 worldview that Clinton and the Democratic Party are still pushing.

Now that Trump has disrupted the Republican Party beyond repair, the success of the future Republican Party will hang on whether Americans come to see themselves as American citizens before they see themselves as bearers of this or that “identity.” The Very White Progressives who run the Democratic Party have an abiding interest in the latter narrative, because holding on to support of entire identity groups helps them win elections. But I do not think it can be successful much longer, in part because it is predicated on the continual growth of government, which only the debt-financing can support. Our debt-financed binge is over, or it will be soon. The canary in the coal mine—now starting to sing—is the African-American community, which has, as a whole, been betrayed by a Democratic Party that promises through government largesse that its burden shall be eased. Over the past half-century nothing has been further from the truth, especially in high-density inner-city regions. While it receives little media attention, there are African-Americans who are dubious about the arrangement by which the Democratic Party expects them to abide. A simultaneously serious and humorous example of this is the long train of videos posted on YouTube by “Diamond and Silk.” To be sure, the current polls show that Trump has abysmal ratings among minorities. If he wins the election, he will have to succeed in convincing them that he offers an alternative to permanent government assistance and identity politics consciousness-raising that, in the end, does them little good; and that through the alternative he offers there is a hope of assimilation into the middle class. A tall order, to be sure.

These observations are not to be confused as a ringing endorsement for a Republican Party that does not yet exist, and perhaps never will exist. But they are warning, of sorts, about impending changes that cannot be laughed off. The Republicans have at least been given a gift, in the disruption caused by Trump. The old alliances within it were held together by a geopolitical fact-on-the-ground that no longer exists: the Cold War. Now long behind us, a new geopolitical moment, where states once again matter, demands new alliances and new ideas. With the defeat of Bernie Sanders in the primaries, Democrats have been denied their gift, and will lumber on, this 2016, with “globalization-and-identity-politics-speak,” hoping to defend the world order that is predicated on it. If Sanders had won, the Democrats would have put down their identity politics narrative and returned to claims about “class” and class consciousness; they would have put down the banner of Nietzsche and taken up the banner of Marx, again. And that would have been interesting! Alas, here we are, with, on the one hand, tired old post-1989 ideas in the Democratic Party searching for one more chance to prove that they remain vibrant and adequate to the problems at hand; and on the other, seemingly strange, ideas that swirl around us like mental dust waiting to coalesce.