Economic Inequality??

One can easily misrepresent or exaggerate reality with a few select statistics and come to conveniently chosen conclusions. This doesn’t really help the conversation.

The distribution of wealth and income has become a social, economic, and political problem in recent decades. And not only in the US. But the question is why and what to do about it.

First, we should notice the timeframe of the comparison: 1980 vs. 2014. During these years there has been a massive credit bubble with low to zero interest rates and low inflation, especially over the past 16 years. This has disproportionately rewarded asset holders and debt-driven consumption and the income shares in industries associated with that, like FIRE.

The cheap credit has also led to massive investments in technology and biotech, where income levels have far exceeded those in other industries. This is not necessarily a bad thing, especially for aggregate growth, but it does have distributional consequences for wealth and income. Globalization, through outsourcing, trade and labor migration, has also served to keep labor costs low in developed nations.

So, what to make of this? I would have differences with the suggestions of the author as stated here:

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation. 

First, the problem with the tax code is that it creates barriers for asset accumulation for those without assets. In other words, it favors the haves over the wannabes, even if the wannabes are more deserving. So we need to reduce those barriers. Not by making it harder to get rich, but by making it harder to stay rich and idle sitting on assets that have ballooned in value through no effort on the owners of those assets. Thus, we should look more toward wealth taxes as opposed to income or capital taxes. We should also make capital taxes more progressive so that the have-nots are not doomed to remain so. Have you seen your interest on savings lately?

Second, a better functioning education system is always a deserved policy priority, but it won’t fix this income distribution problem. The cost of education is becoming prohibitive and elitism is turning top universities, where costs are in the stratosphere, into branding agents rather than educating institutions. In other words, the Ivy League degree is more valuable as a signalling device than anything a student may or may not have learned there. Thus we are biasing favoritism over meritocracy.

Third, the focus on wages and organized labor is completely misguided.  Most workers in growth industries in the 21st century eschew labor unions in favor of equity participation and risk-taking entrepreneurship. Does that mean manufacturing labor has no future? Not at all. But it should be bargaining for equity in addition to a base wage. Competing solely on wages means workers are competing with the global supply of labor, which is a losing proposition for developed countries’ workers.

The inability of policymakers to see clearly how the world has changed and how ownership and control structures must adapt to the information economy leads them towards the rabbit hole of universal basic incomes, which fundamentally is a universal welfare program to support consumption. One thing we’ve learned over the past 60 years is that nobody wants welfare, but many become addicted to it. It’s not a solution or even a short-term fix.

Refer to the NYT website link to view the graphs…

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable.

But it’s not.

 

A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.

 

The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.

 

This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here.

The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in percentage terms, than the pay of the rich.

 

The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2 percent a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)

 

In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else.

 

The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

 

It’s true that the country can’t magically return to the 1950s and 1960s (nor would we want to, all things considered). Economic growth was faster in those decades than we can reasonably expect today. Yet there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population.

 

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

 

Remarkably, President Trump and the Republican leaders in Congress are trying to go in the other direction. They spent months trying to take away health insurance from millions of middle-class and poor families. Their initial tax-reform planswould reduce taxes for the rich much more than for everyone else. And they want to cut spending on schools, even though education is the single best way to improve middle-class living standards over the long term.

 

Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough.

The Bubble Economy

This is where the easy credit goes. A slush fund for Wall St. and Silicon Valley…

Full article here.

Money, money, money: Silicon Valley speculation recalls dotcom mania

Venture capitalists and private equity investors keep the bubble going with their millions

by Rana Foroohar

Financial Times
July 17, 2017

…It’s a bubble that is different — but the same — as the last time. In 2000, start-ups like pets.com were able to go public and jack up share prices even as they were losing hundreds of millions of dollars. The digital ecosystem has since grown, changed and deepened. Today it is harder for companies to receive funding just by sticking “.com” behind their names.

But now, as then, you do not necessarily need profits or paying customers to draw investor interest but rather “users” in a hot market niche. Compelling narratives develop around these sectors (wearables, electric cars, the “sharing” economy). Companies send market signals about their own “value” with announcements that play off these narratives, for example, Uber’s $680m purchase of self-driving truck firm Otto).

Venture capitalists and private equity investors keep the bubble going by buying into it at higher and higher valuations. The smartest ones guarantee their own success by taking rich advisory fees along the way and exiting before disaster via the secondary market for private shares. And this is, as behavioural economist Peter Atwater recently pointed out to me, unusually liquid thanks in part to central bank-enabled easy money.

The virtual money, generated by valuations that are based as much on narrative as fact, is used to salaries: it can cost upward of $2m in cash and stock options to recruit a driverless-car engineer in the Valley. These then distort the price of property, services and labour. You’ll weep when you see the prices of depressing ranch-style homes off Highway 101, which runs through Silicon Valley. The whole cycle is straight-up “madness of crowds”, as described by Charles Mackay in 1841.

Leviathan State

From the point of view of political economy and policy, this is the best and most relevant essay I’ve read in awhile. The Administrative State (or Deep State), no matter how much good it does, is antithetical to individual liberty, justice, and, I would argue, long-term economic and political security and stability. Be careful what you wish for with free health care or an imperial POTUS!

Reprinted from the WSJ:

The Tyranny of the Administrative State

Government by unelected experts isn’t all that different from the ‘royal prerogative’ of 17th-century England, argues constitutional scholar Philip Hamburger.

New York

What’s the greatest threat to liberty in America? Liberals rail at Donald Trump’s executive orders on immigration and his hostility toward the press, while conservatives vow to reverse Barack Obama’s regulatory assault on religion, education and business. Philip Hamburger says both sides are thinking too small.

Like the blind men in the fable who try to describe an elephant by feeling different parts of its body, they’re not perceiving the whole problem: the enormous rogue beast known as the administrative state.

Sometimes called the regulatory state or the deep state, it is a government within the government, run by the president and the dozens of federal agencies that assume powers once claimed only by kings. In place of royal decrees, they issue rules and send out “guidance” letters like the one from an Education Department official in 2011 that stripped college students of due process when accused of sexual misconduct.

Unelected bureaucrats not only write their own laws, they also interpret these laws and enforce them in their own courts with their own judges. All this is in blatant violation of the Constitution, says Mr. Hamburger, 60, a constitutional scholar and winner of the Manhattan Institute’s Hayek Prize last year for his scholarly 2014 book, “Is Administrative Law Unlawful?” (Spoiler alert: Yes.)

“Essentially, much of the Bill of Rights has been gutted,” he says, sitting in his office at Columbia Law School. “The government can choose to proceed against you in a trial in court with constitutional processes, or it can use an administrative proceeding where you don’t have the right to be heard by a real judge or a jury and you don’t have the full due process of law. Our fundamental procedural freedoms, which once were guarantees, have become mere options.” ​

In volume and complexity, the edicts from federal agencies exceed the laws passed by Congress by orders of magnitude. “The administrative state has become the government’s predominant mode of contact with citizens,” Mr. Hamburger says. “Ultimately this is not about the politics of left or right. Unlawful government power should worry everybody.”

Defenders of agencies like the Securities and Exchange Commission or the Environmental Protection Agency often describe them as the only practical way to regulate today’s complex world. The Founding Fathers, they argue, could not have imagined the challenges that face a large and technologically advanced society, so Congress and the judiciary have wisely delegated their duties by giving new powers to experts in executive-branch agencies.

Mr. Hamburger doesn’t buy it. In his view, not only is such delegation unconstitutional, it’s nothing new. The founders, far from being naive about the need for expert guidance, limited executive powers precisely because of the abuses of 17th-century kings like James I.

James, who reigned in England from 1603 through 1625, claimed that divinely granted “absolute power” authorized him to suspend laws enacted by Parliament or dispense with them for any favored person. Mr. Hamburger likens this royal “dispensing” power to modern agency “waivers,” like the ones from the Obama administration exempting McDonald’s and other corporations from complying with provisions of the Affordable Care Act.

James also made his own laws, bypassing Parliament and the courts by issuing proclamations and using his “royal prerogative” to establish commissions and tribunals. He exploited the infamous Star Chamber, a court that got its name from the gilded stars on its ceiling.

“The Hollywood version of the Star Chamber is a torture chamber where the walls were speckled with blood,” Mr. Hamburger says. “But torture was a very minor part of its business. It was very bureaucratic. Like modern administrative agencies, it commissioned expert reports, issued decrees and enforced them. It had regulations controlling the press, and it issued rules for urban development, environmental matters and various industries.”

James’s claims were rebuffed by England’s chief justice, Edward Coke, who in 1610 declared that the king “by his proclamation cannot create any offense which was not an offense before.” The king eventually dismissed Coke, and expansive royal powers continued to be exercised by James and his successor, Charles I. The angry backlash ultimately prompted Parliament to abolish the Star Chamber and helped provoke a civil war that ended with the beheading of Charles in 1649.

A subsequent king, James II, took the throne in 1685 and tried to reassert the prerogative power. But he was dethroned in the Glorious Revolution in 1688, which was followed by Parliament’s adoption of a bill of rights limiting the monarch and reasserting the primacy of Parliament and the courts. That history inspired the American Constitution’s limits on the executive branch, which James Madison explained as a protection against “the danger to liberty from the overgrown and all-grasping prerogative of an hereditary magistrate.”

“The framers of the Constitution were very clear about this,” Mr. Hamburger says, rummaging in a drawer for a pocket edition. He opens to the first page, featuring the Preamble and Article 1, which begins: “All legislative Powers herein granted shall be vested in a Congress.”

“That first word is crucial,” he says. “The very first substantive word of the Constitution is ‘all.’ That makes it an exclusive vesting of the legislative powers in an elected legislature. Congress cannot delegate the legislative powers to an agency, just as judges cannot delegate their power to an agency.”

Those restrictions on executive power have been disappearing since the late 19th century, starting with the creation of the Interstate Commerce Commission in 1887. Centralized power appealed to big business—railroads found commissioners easier to manipulate than legislators—as well as to American intellectuals who’d studied public policy at German universities. Unlike Britain, Germany had rejected constitutional restraints in favor of a Prussian model that gave administrative agencies the prerogative powers of the king.

Mr. Hamburger believes it’s no coincidence that the growth of America’s administrative state coincided with the addition to the electorate of Catholic immigrants, blacks and other minorities. WASP progressives like Woodrow Wilson considered these groups an obstacle to reform.

“The bulk of mankind is rigidly unphilosophical, and nowadays the bulk of mankind votes,” Wilson complained, noting in particular the difficulty of winning over the minds “of Irishmen, of Germans, of Negroes.” His solution was to push his agenda using federal agencies staffed by experts of his own caste—what Mr. Hamburger calls the “knowledge class.” Wilson was the only president ever to hold a doctorate.

“There’s been something of a bait and switch,” Mr. Hamburger says. “We talk about the importance of expanding voting rights, but behind the scenes there’s been a transfer of power from voters to members of the knowledge class. A large part of the knowledge class, Republicans as well as Democrats, went out of their way to make the administrative state work.”

Mr. Hamburger was born into the knowledge class. He grew up in a book-filled house near New Haven, Conn. His father was a Yale law professor and his mother a researcher in economics and intellectual history. During his father’s sabbaticals in London, Philip acquired a passion for 17th-century English history and spent long hours studying manuscripts at the British Museum. That’s where he learned about the royal prerogative.

He went to Princeton and then Yale Law School, where he avoided courses on administrative law, which struck him as “tedious beyond belief.” He became slightly more interested during a stint as a corporate lawyer specializing in taxes—he could see the sweeping powers wielded by the Internal Revenue Service—but the topic didn’t engage him until midway through his academic career.

While at the University of Chicago, he heard of a colleague’s inability to publish a research paper because the study had not been approved ahead of time by a federally mandated institutional review board. That sounded like an unconstitutional suppression of free speech, and it reminded Mr. Hamburger of those manuscripts at the British Museum.

Why the return of the royal prerogative? “The answer rests ultimately on human nature,” Mr. Hamburger writes in “The Administrative Threat,” a new short book aimed at a general readership. “Ever tempted to exert more power with less effort, rulers are rarely content to govern merely through the law.”

Instead, presidents govern by interpreting statutes in ways lawmakers never imagined. Barack Obama openly boasted of his intention to bypass Congress: “I’ve got a pen and I’ve got a phone.” Unable to persuade a Congress controlled by his own party to regulate carbon dioxide, Mr. Obama did it himself in 2009 by having the EPA declare it a pollutant covered by a decades-old law. (In 2007 the Supreme Court had affirmed the EPA’s authority to do so.)

Similarly, the Title IX legislation passed in 1972 was intended mainly to protect women in higher education from employment discrimination. Under Mr. Obama, Education Department bureaucrats used it to issue orders about bathrooms for transgender students at public schools and to mandate campus tribunals to adjudicate sexual misconduct—including “verbal misconduct,” or speech—that are in many ways less fair to the accused than the Star Chamber.

At this point, the idea of restraining the executive branch may seem quixotic, but Mr. Hamburger says there are practical ways to do so. One would be to make government officials financially accountable for their excesses, as they were in the 18th and 19th centuries, when they could be sued individually for damages. Today they’re protected thanks to “qualified immunity,” a doctrine Mr. Hamburger thinks should be narrowed.

“One does have to worry about frivolous lawsuits against government officers who have to make quick decisions in the field, like police officers,” he says. “But someone sitting behind a desk at the EPA or the SEC has plenty of time to consult lawyers before acting. There’s no reason to give them qualified immunity. They’ll be more careful not to exceed their constitutional authority if they have to weigh the risk of losing their own money.”

Another way of restraining agencies—one President Trump could adopt on his own—would be to require them to submit new rules to Congress for approval instead of imposing them by fiat. The president could also order at least some agencies to resolve disputes in regular courts instead of using administrative judges, who are departmental employees. Meanwhile, Congress could reclaim its legislative power by going through regulations, agency by agency, and deciding which ones to enact into law.

Mr. Hamburger’s chief hope for reform lies in the courts, which in earlier eras rebuffed the executive branch’s power grabs. Those rulings so frustrated both Theodore Roosevelt and Franklin D. Roosevelt that they threatened retaliation—such as FDR’s plan to pack the Supreme Court by expanding its size. Eventually judges surrendered and validated sweeping executive powers. Mr. Hamburger calls it “one of the most shameful episodes in the history of the federal judiciary.”

The Supreme Court capitulated further in decisions like Chevron v. Natural Resources Defense Council (1984), which requires judges to defer to any “reasonable interpretation” of an ambiguous statute by a federal agency. “Chevron deference should be called Chevron bias,” Mr. Hamburger says. “It requires judges to abandon due process and independent judgment. The courts have corrupted their processes by saying that when the government is a party in case, they will be systematically biased—they will favor the more powerful party.”

Mr. Hamburger sees a good chance that the high court will limit and eventually abandon the Chevron doctrine, and he expects other litigation giving the judiciary a chance to reassert its powers and protect constitutional rights. “Slowly, step by step, we can persuade judges to recognize the risks of what they’ve done so far and to grapple with this very dangerous type of power,” he says. The judiciary, like academia, has many liberals who have been sympathetic to the growth of executive power, but their perspective may be changing.

“Administrative power is like off-road driving,” Mr. Hamburger continues. “It’s exhilarating to operate off-road when you’re in the driver’s seat, but it’s a little unnerving for everyone else.”

He says he observed this effect during a recent conversation with a prominent legal scholar. The colleague, a longtime defender of administrative law, was discussing the topic shortly after Mr. Trump’s inauguration.

The colleague told Mr. Hamburger: “I am beginning to see the merit of your ideas.”

Blogger’s Note: I’m a member of the knowledge class and trust me, nobody really knows anything!

Finite and Infinite Games: the Internet and Politics

About two decades ago James Carse, a religious scholar and historian, wrote a philosophical text titled Finite and Infinite Games. As he explained, there are two kinds of games. One could be called finite, the other infinite. A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play.

This simple distinction invites some profound thought. War is a finite game, as is the Superbowl. Peace is an infinite game, as is the game of love. Finite games end with a winner(s) and loser(s), while infinite games seek perpetual play. Politics is a finite game; democracy, liberty, and justice are infinite games.

Life itself, then, could be considered a finite or infinite game depending on which perspective one takes. If ‘he who dies with the most toys wins,’ one is living in a finite game that ends with death. If one chooses to create an entity that lives beyond the grave, a legacy that perpetuates through time, then one is playing an infinite game.

One can imagine that we often play a number of finite games within an infinite game. This supports the idea of waging war in order to attain peace (though I wouldn’t go so far as saying it validates destroying the village in order to save it). The taxonomy also relates to the time horizon of one’s perspective in engaging in the game. In other words, are we playing for the short term gain or the long term payoff?

I find Carse’s arguments compelling when I relate them to the new digital economy and how the digital world is transforming how we play certain games, especially those of social interaction and the monetization of value. That sounds a bit hard to follow, but what I’m referring to is the value of the information network (the Internet) as an infinite game.

I would value the internet according to its power to help people connect and share ideas. (I recently wrote a short book on this power called The Ultimate Killer App: The Power to Create and Connect.) The more an idea is shared, the more powerful and valuable it can be. In this sense, the internet is far more valuable than the sum of its various parts, and for it to end as the victim of a finite game would be a tragedy for all. So, I see playing on the information network as an infinite game.

The paradox is that most of the big players on the internet – the Googles, Facebooks, Amazons, etc – are playing finite games on and with the network. In fact, they are using the natural monopoly of network dynamics to win finite games for themselves, reaping enormous value in the process. But while they are winning, many others are losing. Yes, we do gain in certain ways, but the redistribution of information data power is leading to the redistribution of monetary gains and losses across the population of users. In many cases those gains and losses are redistributed quite arbitrarily.

For instance, let us take the disruption of the music industry, or the travel industry, or the publishing industry. One need not lament the fate of obsolete business models to recognize that for play to continue, players must have the possibility of adapting to change in order to keep the infinite game on course. Most musicians and authors believe their professions are DOA. What does that say for the future of culture?

Unfortunately, this disruption across the global economy wrought by digitization is being reflected in the chaotic politics of our times, mostly across previously stable developed democracies.

These economic and political developments don’t seem particularly farsighted and one can only speculate how the game plays out. But to relate it to current events, many of us are playing electoral politics in a finite game that has profound implications for the more important infinite game we should be playing.

 

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

Book Review: Makers and Takers

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Crown Business; 1st edition (May 17, 2016)

Ms. Foroohar does a fine job of journalistic reporting here. She identifies many of the failures of the current economic policy regime that has led to the dominance of the financial industry. She follows the logical progression of central bank credit policy to inflate the banking system, that in turn captures democratic politics and policymaking in a vicious cycle of anti-democratic cronyism.

However, her ability to follow the money and power is not matched by an ability to analyze the true cause and effect and thus misguides her proposed solutions. Typical of a journalistic narrative, she identifies certain “culprits” in this story: the bankers and policymakers who favor them. But the true cause of this failed paradigm of easy credit and debt is found in the central bank and monetary policy.

Since 1971 the Western democracies have operated under a global fiat currency regime, where the value of the currencies are based solely on the full faith and credit of the various governments. In the case of the US$, that represents the taxing power of our Federal government in D.C.

The unfortunate reality, based on polling the American people (and Europeans) on trust in government, is that trust in our governmental institutions has plunged from almost 80% in 1964 to less than 20% today. Our 2016 POTUS campaign reflects this deep mistrust in the status quo and the political direction of the country. For good reason. So, what is the value of a dollar if nobody trusts the government to defend it? How does one invest under that uncertainty? You don’t.

One would hope Ms. Foroohar would ask, how did we get here? The essential cause is cheap excess credit, as has been experienced in financial crises all through history. The collapse of Bretton Woods in 1971, when the US repudiated the dollar gold conversion, called the gold peg, has allowed central banks to fund excessive government spending on cheap credit – exploding our debt obligations to the tune of $19 trillion. There seems to be no end in sight as the Federal Reserve promises to write checks without end.

Why has this caused the complete financialization of the economy? Because real economic growth depends on technology and demographics and cannot keep up with 4-6% per year. So the excess credit goes into asset speculation, mostly currency, commodity, and securities trading. This explosion of trading has amped incentives to develop new financial technologies and instruments to trade. Thus, we have the explosion of derivatives trading, which essentially is trading on trading, ad infinitum. Thus, Wall Street finance has come to be dominated by trading and socialized risk-taking rather than investing and private risk management.

After 2001 the central bank decided housing as an asset class was ripe for a boom, and that’s what we got: a debt-fueled bubble that we’ve merely re-inflated since 2008. There is a fundamental value to a house, and in most regions we have far departed from it.

So much money floating through so few hands naturally ends up in the political arena to influence policy going forward. Thus, not only is democratic politics corrupted, but so are any legal regulatory restraints on banking and finance. The simplistic cure of “More regulation!” is belied by the ease with which the bureaucratic regulatory system is captured by powerful interests.

The true problem is the policy paradigm pushed by the consortium of central banks in Europe, Japan, China, and the US. (The Swiss have resisted, but not out of altruism for the poor savers of the world.) Until monetary/credit policy in the free world becomes tethered and disciplined by something more than the promises of politicians and central bankers, we will continue full-speed off the eventual cliff. But our financial masters see this eventuality as a great buying opportunity.

Helicopter Money

Central bank “Helicopter Money” is to the economy what helicopter parents are to their unfortunate children. This from Bloomberg View:

`Helicopter Money’ Is Coming to the U.S.

Aug 5, 2016 5:41 AM EDT

Several years of rock-bottom interest rates around the world haven’t been all bad. They’ve helped reduce government borrowing costs, for sure. Central banks also send back to their governments most of the interest received on assets purchased through quantitative-easing programs. Governments essentially are paying interest to themselves.

What is Helicopter Money? 

Since the beginning of their quantitative-easing activities, the Federal Reserve has returned $596 billion to the U.S. Treasury and the Bank of England has given back $47 billion. This cozy relationship between central banks and their governments resembles “helicopter money,” the unconventional form of stimulus that some central banks may be considering as a way to spur economic growth.

I’m looking for more such helicopter money — fiscal stimulus applied directly to the U.S. economy and financed by the Fed –no matter who wins the Presidential election in November.

It’s called helicopter money because of the illusion of dumping currency from the sky to people who will rapidly spend it, thereby creating demand, jobs and economic growth. Central banks can raise and lower interest rates and buy and sell securities, but that’s it. They can thereby make credit cheap and readily available, yet they can’t force banks to lend and consumers and businesses to borrow, spend and invest. That undermines the effectiveness of QE; as the proverb says, you can lead a horse to water, but you can’t make it drink.

Furthermore, developed-country central banks purchase government securities on open markets, not from governments directly. You might ask: “What’s the difference between the Treasury issuing debt in the market and the Fed buying it, versus the Fed buying securities directly from the Treasury?” The difference is that the open market determines the prices of Treasuries, not the government or the central bank. The market intervenes between the two, which keeps the government from shoving huge quantities of debt directly onto the central bank without a market-intervening test. This enforces central bank discipline and maintains credibility.

In contrast, direct sales to central banks have been the normal course of government finance in places like Zimbabwe and Argentina. It often leads to hyperinflation and financial disaster. (I keep a 100-trillion Zimbabwe dollar bank note, issued in 2008, which was worth only a few U.S. cents as inflation rates there accelerated to the hundreds-of-million-percent level. Now it sells for several U.S. dollars as a collector’s item, after the long-entrenched and corrupt Zimbabwean government switched to U.S. dollars and stopped issuing its own currency.)

Argentina was excluded from borrowing abroad after defaulting in 2001. Little domestic funding was available and the Argentine government was unwilling to reduce spending to cut the deficit. So it turned to the central bank, which printed 4 billion pesos in 2007 (then worth about $1.3 billion). That increased to 159 billion pesos in 2015, equal to 3 percent of gross domestic product. Not surprisingly, inflation skyrocketed to about 25 percent last year, up from 6 percent in 2009.

To be sure, the independence of most central banks from their governments is rarely clear cut. It’s become the norm in peacetime, but not during times of war, when government spending shoots up and the resulting debt requires considerable central-bank assistance. That was certainly true during World War II, when the U.S. money supply increased by 25 percent a year. The Federal Reserve was the handmaiden of the U.S. government in financing spending that far exceeded revenue.

Today, developed countries are engaged not in shooting wars but wars against chronically slow economic growth. So the belief in close coordination between governments and central banks in spurring economic activity is back in vogue — thus helicopter money.

All of the QE activity over the past several years by the Fed, the Bank of England, the European Central Bank, the Bank of Japan and others has failed to significantly revive economic growth. U.S. economic growth in this recovery has been the weakest of any post-war recovery. Growth in Japan has been minimal, and economies in the U.K. and the euro area remain under pressure.

The U.K.’s exit from the European Union may well lead to a recession in Britain and the EU as slow growth turns negative. A downturn could spread globally if financial disruptions are severe. This would no doubt ensure a drop in crude oil prices to the $10 to $20 a barrel level that I forecast in February 2015. This, too, would generate considerable financial distress, given the highly leveraged condition of the energy sector.

Both U.S. political parties seem to agree that funding for infrastructure projects is needed, given the poor state of American highways, ports, bridges and the like. And a boost in defense spending may also be in the works, especially if Republicans retain control of Congress and win the White House.

Given the “mad as hell” attitude of many voters in Europe and the U.S., on the left and the right, don’t be surprised to see a new round of fiscal stimulus financed by helicopter money, whether Donald Trump or Hillary Clinton is the next president.

Major central bank helicopter money is a fact of life in war time — and that includes the current global war on slower growth. Conventional monetary policy is impotent and voters in Europe and North America are screaming for government stimulus. I just hope it doesn’t set a precedent and continue after rapid growth resumes — otherwise, the fragile independence of major central banks could go the way of those in banana republics.

Brexit: Failure of the Central State

This is the best article I’ve seen on Brexit. Basically we’re witnessing the failure of statism, politically and economically…and a desperate reassertion of the principles of democracy, sovereignty and freedom.

Brexit: A Very British Revolution

The vote to leave the EU began as a cry for liberty and ended as a rebuke to the establishment

By FRASER NELSON
The Wall Street Journal, June 24, 2016 4:33 p.m. ET

The world is looking at Britain and asking: What on Earth just happened? Those who run Britain are asking the same question.

Never has there been a greater coalition of the establishment than that assembled by Prime Minister David Cameron for his referendum campaign to keep the U.K. in the European Union. There was almost every Westminster party leader, most of their troops and almost every trade union and employers’ federation. There were retired spy chiefs, historians, football clubs, national treasures like Stephen Hawking and divinities like Keira Knightley. And some global glamour too: President Barack Obama flew to London to do his bit, and Goldman Sachs opened its checkbook.

And none of it worked. The opinion polls barely moved over the course of the campaign, and 52% of Britons voted to leave the EU. That slender majority was probably the biggest slap in the face ever delivered to the British establishment in the history of universal suffrage.

Mr. Cameron announced that he would resign because he felt the country has taken a new direction—one that he disagrees with. If everyone else did the same, the House of Commons would be almost empty. Britain’s exit from the EU, or Brexit, was backed by barely a quarter of his government members and by not even a tenth of Labour politicians. It was a very British revolution.

Donald Trump’s arrival in Scotland on Friday to visit one of his golf courses was precisely the metaphor that the Brexiteers didn’t want. The presumptive Republican presidential nominee cheerily declared that the British had just “taken back their country” in the same way that he’s inviting Americans to do—underscoring one of the biggest misconceptions about the EU referendum campaign. Britain isn’t having a Trump moment, turning in on itself in a fit of protectionist and nativist pique. Rather, the vote for Brexit was about liberty and free trade—and about trying to manage globalization better than the EU has been doing from Brussels.

The Brexit campaign started as a cry for liberty, perhaps articulated most clearly by Michael Gove, the British justice secretary (and, on this issue, the most prominent dissenter in Mr. Cameron’s cabinet). Mr. Gove offered practical examples of the problems of EU membership. As a minister, he said, he deals constantly with edicts and regulations framed at the European level—rules that he doesn’t want and can’t change. These were rules that no one in Britain asked for, rules promulgated by officials whose names Brits don’t know, people whom they never elected and cannot remove from office. Yet they become the law of the land. Much of what we think of as British democracy, Mr. Gove argued, is now no such thing.

Instead of grumbling about the things we can’t change, Mr. Gove said, it was time to follow “the Americans who declared their independence and never looked back” and “become an exemplar of what an inclusive, open and innovative democracy can achieve.” Many of the Brexiteers think that Britain voted this week to follow a template set in 1776 on the other side of the Atlantic.

Mr. Gove was mocked for such analogies. Surely, some in the Remain camp argued, the people who were voting for Leave—the pensioners in the seaside towns, the plumbers and chip-shop owners—weren’t wondering how they could reboot the Anglo-Scottish Enlightenment for the 21st century. Perhaps not, but the sentiment holds: Liberty and democracy matter. As a recent editorial in Der Spiegel put it, Brits “have an inner independence that we Germans lack, in addition to myriad anti-authoritarian, defiant tendencies.”

Mr. Cameron has been trying to explain this to Angela Merkel for some time. He once regaled the German chancellor with a pre-dinner PowerPoint presentation to explain his whole referendum idea. Public support for keeping Britain within the EU was collapsing, he warned, but a renegotiation of its terms would save Britain’s membership. Ms. Merkel was never quite persuaded, and Mr. Cameron was sent away with a renegotiation barely worthy of the name. It was a fatal mistake—not nearly enough to help Mr. Cameron shift the terms of a debate he was already well on the way to losing.

The EU took a gamble: that the Brits were bluffing and would never vote to leave. A more generous deal—perhaps aimed at allowing the U.K. more control over immigration, the top public concern in Britain—would probably have (just) stopped Brexit. But the absence of a deal sent a clear and crushing message: The EU isn’t interested in reforming, so it is past time to stop pretending otherwise.

With no deal, all Mr. Cameron could do was warn about the risks of leaving the EU. If Brits try to escape, he said, they’d face the razor wire of a recession or the dogs of World War III. He rather overdid it. Instead of fear, he seemed to have stoked a mood of mass defiance.

Mr. Obama also overdid it when he notoriously told the British that, if they opted for Brexit, they would find themselves “in the back of the queue” for a trade deal with the U.S. That overlooked a basic point: The U.K. doesn’t currently have a trade deal with the U.S., despite being its largest foreign investor. Moreover, no deal seems forthcoming: The negotiations between the U.S. and the EU over the trans-Atlantic Trade and Investment Partnership are going slowly, and the Brits involved in the talks are in despair.

Deals negotiated through the EU always move at the pace dictated by the most reluctant country. Italy has threatened to derail a trade deal with Australia over a spat about exports of canned tomatoes; a trade deal with Canada was held up after a row about Romanian visas. Brexit wasn’t a call for a Little England. It was an attempt to escape from a Little Europe.

Many British voters felt a similar frustration on security issues, where the EU’s leaders have for decades now displayed a toxic combination of hunger for power and incompetence at wielding it. When war broke out in the former Yugoslavia in 1991, the then-chair of the European Community’s Council of Ministers declared that this was “the hour of Europe, not the hour of the Americans—if one problem can be solved by the Europeans, it is the Yugoslav problem.” It was not to be.

Nor did the EU acquit itself much better in more recent crises in Ukraine and Libya. Field Marshal Lord Charles Guthrie, a former chief of the British military, put it bluntly last week: “I feel more European than I do American, but it’s absolutely unrealistic to think we are all going to work together. When things get really serious, we need the Americans. That’s where the power is.” Brits feel comfortable with this; the French less so.

Throughout the campaign, the Brexit side was attacked for being inward-looking, nostalgic, dreaming of the days of empire or refusing to acknowledge that modern nations need to work with allies. But it was the Brexiteers who were doing the hardest thinking about this, worrying about the implications of a dysfunctional EU trying to undermine or supplant NATO, which remains the true guarantor of European security.

In the turbulent weeks and months ahead, we can expect a loud message from the Brexiteers in the British government: The question is not whether to work with Europe but how to work with Europe. Alliances work best when they are coalitions of the willing. The EU has become a coalition of the unwilling, the place where the finest multilateral ambitions go to die. Britain’s network of embassies will now go into overdrive, offering olive branches in capital after capital. Britain wants to deal, nation to nation, and is looking for partners.

Even the debate about immigration had an internationalist flavor to it. Any member of any EU state has had the right to live and work in Britain; any American, Indian or Australian needs to apply through a painstaking process. Mr. Cameron’s goal is to bring net immigration to below 100,000 a year (it was a little over three times that at last count). So the more who arrive from the EU, the more we need to crack down on those from outside the EU. The U.K. government now requires any non-European who wants to settle here to earn an annual salary of at least £35,000 (or about $52,000)—so we would deport, say, a young American flutist but couldn’t exclude a Bulgarian convict who could claim (under EU human-rights rules) that he has family ties in the U.K.

To most Brits, this makes no sense. In a television debate last week, Mr. Cameron was asked if there was “anything fair about an immigration system that prioritizes unskilled workers from within the EU over skilled workers who are coming from outside the EU?” He had no convincing answer.

The sense of a lack of control over immigration to Britain has been vividly reinforced by the scenes on the continent. In theory, the EU is supposed to protect its external borders by insisting that refugees claim asylum in the first country they enter. In practice, this agreement—the so-called Dublin Convention—was torn up by Ms. Merkel when she recklessly offered to settle any fleeing Syrians who managed to make it over the German border. The blame here lies not with the tens of thousands of desperate people who subsequently set out; the blame lies with an EU system that has proven itself hopelessly unequal to such a complex and intensifying challenge. The EU’s failure has been a boon for the people-trafficking industry, a global evil that has led to almost 3,000 deaths in the Mediterranean so far this year.

Britain has been shielded from the worst of this. Being an island helps, as does our rejection of the ill-advised Schengen border-free travel agreement that connects 26 European countries. But the scenes on the continent of thousands of young men on the march (one of which made it onto a particularly tasteless pro-Brexit poster unveiled by Nigel Farage, the leader of the anti-immigration UK Independence Party) give the sense of complete political dysfunction. To many voters in Britain, this referendum was about whether they want to be linked to such tragic incompetence.

The economists who warned about the perils of Brexit also assure voters that immigration is a net benefit, its advantages outweighing its losses. Perhaps so, but this overlooks the human factor. Who loses, and who gains? Immigration is great if you’re in the market for a nanny, a plumber or a table at a new restaurant. But to those competing with immigrants for jobs, houses or seats at schools, it looks rather different. And this, perhaps, explains the stark social divide exposed in the Brexit campaign.

Seldom has the United Kingdom looked less united: London and Scotland voted to stay in the EU, Wales and the English shires voted to get out. (Scottish First Minister Nicola Sturgeon has already called a fresh vote on secession “highly likely.”) Some 70% of university graduates were in favor of the EU; an equally disproportionate 68% of those who hadn’t finished high school were against it. Londoners and those under age 30 were strongly for Remain; the northern English and those over 60 were strongly for Leave. An astonishing 70% of the skilled working class supported Brexit.

Here, the Brexit battle lines ought to be familiar: They are similar to the socioeconomic battles being fought throughout so many Western democracies. It is the jet-set graduates versus the working class, the metropolitans versus the bumpkins—and, above all, the winners of globalization against its losers. Politicians, ever obsessed about the future, can tend to regard those left unprotected in our increasingly interconnected age as artifacts of the past. In fact, the losers of globalization are, by definition, as new as globalization itself.

To see such worries as resurgent nationalism is to oversimplify. The nation-state is a social construct: Done properly, it is the glue that binds society together. In Europe, the losers of globalization are seeking the protection of their nation-states, not a remote and unresponsive European superstate. They see the economy developing in ways that aren’t to their advantage and look to their governments to lend a helping hand—or at least attempt to control immigration. No EU country can honestly claim to control European immigration, and there is no prospect of this changing: These are the facts that led to Brexit.

The pound took a pounding on the currency markets Friday, but it wasn’t alone. The Swedish krona and the Polish zloty were down by about 5% against the dollar; the euro was down 3%. The markets are wondering who might be next. In April, the polling firm Ipsos MORI asked voters in nine EU countries if they would like a referendum on their countries’ memberships: 45% said yes, and 33% said they’d vote to get out. A Pew poll recently found that the Greeks and the French are the most hostile to the EU in the continent—and that the British were no more annoyed with the EU than the Swedes, the Dutch and the Germans.

The Brexit campaign was led by Europhiles. Boris Johnson, the former London mayor turned pro-Brexit firebrand who now seems likely to succeed Mr. Cameron, used to live in Brussels and can give interviews in French. Mr. Gove’s idea of perfect happiness is sitting on a wooden bench listening to Wagner in an airless concert hall in Bavaria. Both stressed that they love Europe but also love democracy—and want to keep the two compatible. The Brexit revolution is intended to make that point.

Mr. Gove has taken to borrowing the 18th-century politician William Pitt’s dictum about how England can “save herself by her exertions and Europe by her example.” After Mr. Cameron departs and new British leadership arrives, it will be keen to strike new alliances based on the principles of democracy, sovereignty and freedom. You never know: That might just catch on.

The Fed Is as Clueless as You Are

Some analysts noted that the Fed has lost credibility. But perhaps traders have just had too much faith in the omniscience of central bankers all along. They don’t have a crystal ball and are apparently as vulnerable as anyone else to misreading economic tea leaves. There is no corner on certainty in an uncertain world.

‘Nuff said.

http://www.bloomberg.com/gadfly/articles/2016-06-03/the-federal-reserve-is-as-clueless-as-everyone-else

In the last 30 years, the FED has been good at only one thing and that is creating bubbles. Greenspan started them, handed off to Bernanke who then handed off to Yellen. One double talking FED chair after another seeking to destroy the middle class under the guise of ‘this is good for you.’ Financial engineering is reaching epidemic proportions while destroying everything in its path.

It’s a Bird, It’s a Plane, It’s the Clueless FED

Yellin

Economic Policy Report Card: C-

Today’s headlines:

Still anemic: U.S. growth picks up to only 0.8%

U.S. economic growth between January and March was 0.8% compared to the same time frame a year ago. That’s better than the initial estimate of 0.5%, which came in April, but still pretty sluggish.

unemployment-grads-cartoon1

US created 38,000 jobs in May vs. 162,000 expected

Job creation tumbled in May, with the economy adding just 38,000 positions, casting doubt on hopes for a stronger economic recovery as well as a Fed rate hike this summer.

The Labor Department also reported Friday that the headline unemployment fell to 4.7 percent. That rate does not include those who did not actively look for employment during the month or the underemployed who were working part time for economic reasons. A more encompassing rate that includes those groups held steady at 9.7 percent.

The drop in the unemployment rate was primarily due to a decline in the labor force participation rate, which fell to a 2016 low of 62.6 percent, a level near a four-decade low. The number of Americans not in the labor force surged to a record 94.7 million, an increase of 664,000.

growth chart

We’ve been predicting such disappointing results of ineffectual monetary and fiscal policies since this blog began back in August of 2011. And providing corroborating evidence along the way. Yet our policy experts continue to double-down on failed policies.

The problem is that when a nation inflates asset bubbles like we did with commodities, houses, stocks, and bonds over the past 20 years, there is no silver-lining policy correction that does not involve some  economic pain for the body politic. We had that awakening in 2008, but since then we have merely jumped on the same train by pumping out cheap credit for 8+ years.

Perhaps a medical metaphor works here. When prescribing antibiotics to combat an infection one can use small doses to avoid side-effects or one large overkill dose to knock-out the offending bacteria. The first treatment is the conservative, prudent approach that seeks a gradual recovery. The second risks a sudden shock to the system that kills off the infection so the patient can begin healing.

In medicine we’ve discovered that the gradual treatment can enable the bacteria to evolve and resist the antibiotics, making them ineffectual. In a nutshell, this is what we have done with economic policy, especially monetary policy that has distorted interest rates for more than 15 years.

The conservative approach marked by bailouts and government bail-ins has kept the patient flat on his back for 8 years. The more disciplined approach would have shocked the economy severely but gotten the patient out of the recovery room much quicker. We’ve seen that with other countries, like Iceland, that were forced to swallow their medicine in one quick dose.

But, of course, that would have meant a lot of politicians would have lost their cozy jobs. That may happen anyway after the next election.