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


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.

On Thomas Sowell

This is a nice review of a biography of one of the pre-eminent economic intellectuals of our time, Thomas Sowell.

The triumph of Thomas Sowell

Features June 2021

Thomas Sowell. Photo: Free to Choose Network.

by John Steele Gordon

On Maverick: A Biography of Thomas Sowell, by Jason L. Riley.

Thomas Sowell is one of the towering American intellectuals of our time. An economist trained at the University of Chicago and a social theorist of the first rank, he has been a senior fellow at the Hoover Institution at Stanford University since 1980.

He has written an astonishing fifty books (if you count revised and expanded editions), numerous essays, and a long-running, twice-a-week newspaper column. Extraordinarily wide ranging, he has covered everything from the rudiments of economics to race relations, the housing crisis of 2008 to late-talking children.

His best known book, Basic Economics (2000), a best-selling, chart-, graph-, and jargon-free introduction to the subject, is now in its fifth edition and has been translated into seven languages.

No less an authority than Milton Friedman, who taught Sowell at the University of Chicago, has said that “The word ‘genius’ is thrown around so much that it’s becoming meaningless, but nevertheless I think Tom Sowell is close to being one.”

So it’s about time for there to be a biography of this remarkable man, although it should be noted that Maverick is far more an intellectual biography than a personal one.1 And we should be grateful to Jason L. Riley for writing a very good one. Riley is the author of Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed (Encounter). He is also a senior fellow at the Manhattan Institute and a columnist at TheWall Street Journal.

Sowell’s life did not get off to an easy start, to put it mildly. In 1930, the year he was born into a black family in Gastonia, North Carolina, the Great Depression was gathering strength. And Jim Crow was in full force, so he seldom encountered white people in his early years. As Riley explains, “He’d been turned away from restaurants and housing because of his skin color. He’d felt the pain and humiliation of racism firsthand throughout his life. He needed no lectures from anyone on the evils of Jim Crow.”

His father had died a few months before his birth, and his mother, a housemaid, already had four children. So he was raised by a great-aunt.

The family moved to Harlem when he was nine, part of the great migration of black families from the South to the North in search of greater opportunity in those years. Forced to drop out of high school to get a job, he only went to college after a stint in the Marines during the Korean War.

He was the first member of his family to get beyond the seventh grade, and he was ignorant of even the basics of higher education. At first he thought that professors who were addressed as “doctor” were physicians as well as professors. “It came as a revelation to me that there was education beyond college,” he wrote, “and it was some time before I was clear whether an M.A. was beyond a Ph.D. or vice versa. Certainly I had no plans to get either.”

At first he attended night classes at the historically black Howard University. There, his professors noted his remarkable intellect and capacity for hard work and helped him transfer to Harvard the next year. He thrived there intellectually and graduated at the age of twenty-eight magna cum laude.

But he was less enamored of the social atmosphere in Cambridge. Sowell noted that he “resented attempts by some thoughtless Harvardians to assimilate me, based on the assumption that the supreme honor they could bestow was to allow me to become like them.”

Chicago was not an imitation of anything. It was wholly itself.

He got his master’s degree the next year at Columbia and intended to get his doctorate there as well, so he could study under George Stigler, who had written an essay on the early economist David Ricardo that Sowell had greatly admired. (It might be noted that the very first quotation in Sowell’s Basic Economics, written many years later, is from George Stigler.) But when Stigler (who won a Nobel Prize in 1982) moved to the University of Chicago, Sowell followed him there. He was very glad he did.

For while Sowell thought Columbia was a sort of a “watered-down” version of Harvard, Chicago was not an imitation of anything. It was wholly itself.

And the economics department was extraordinarily rigorous. Ross Emmett, an authority on the economics department at Chicago, told Riley that “During that period of time, Harvard took in twenty-five to twenty-seven students and graduated twenty-five of them, whereas Chicago took in seventy students and graduated twenty-five of them.” In the fifty-two years that Nobel Prizes in economics have been awarded, no fewer than thirteen have gone to scholars associated with the University of Chicago.

Although Chicago has long been the center of the study of free-market economics, Sowell was a Marxist in his twenties. He explained that, when working as a Western Union messenger after he left high school, he would sometimes ride the bus from the Wall Street area to his home in Harlem. The ride took him past the upscale department stores on Fifth Avenue, past Carnegie Hall, and through the affluent residential neighborhoods of Riverside Drive. “And then,” Sowell wrote, “somewhere around 120th Street, it would cross a viaduct and onto 135th Street, where you have the tenements. And that’s where I got off. The contrast between that and what I’d been seeing most of the trip really baffled me. And Marx seemed to explain it.”

But then he took a summer job at the U.S. Department of Labor in 1960, when he turned thirty. Even after a year at the University of Chicago, including a course under Milton Friedman, Sowell had “remained as much a Marxist as I had been before arriving.”

He spent the summer analyzing the sugar industry in Puerto Rico, where a minimum wage was set by the U.S. Government. It wasn’t long before he noticed that as the minimum wage had risen, the number of sugar workers fell. He had always supported minimum wages, assuming they helped the poor earn a decent living. But now he realized that minimum-wage laws cost jobs and were a net detriment to the poor.

“From there on,” Sowell wrote, “as I learned more and more from both experience and research, my adherence to the visions and doctrines of the left began to erode rapidly.”

Soon, Sowell was “rethinking the whole notion of government as a potentially benevolent force in the economy and society.” He also couldn’t help noticing that his fellow bureaucrats did not care if the minimum wage helped workers. Their job was to enforce the laws. It was not to see if the laws did any good.

“It forced me to realize, Sowell wrote, “that government agencies have their own self-interest to look after, regardless of those for whom a program has been set up.” Marxist theory ignores the powerful force of self-interest in the working of economies, and Sowell came to realize the centrality of self-interest to the human universe.

At Chicago, Sowell studied the history of ideas under the great Friedrich Hayek, but it was Hayek’s own ideas that had lasting consequences for him. Hayek’s essay “The Use of Knowledge in Society” dealt with how the information used to make economic decisions spreads through an economy. Its central insight is that knowledge is highly dispersed and no one person or group can possess all the knowledge needed to make good economic decisions. Therefore, he argued, the decision-making process should also be decentralized, the opposite of what Marx argued for.

Later, when Sowell was asked to teach a course on the Soviet economy, the significance of Hayek’s essay hit home:

I could see what the factors were that led the Soviets to do what they were doing, and why it wasn’t working. There was a knowledge problem that was inherent in that system. In a nutshell, those with the power didn’t have the knowledge, and those with the knowledge didn’t have the power.

Out of this came one of Sowell’s most important books, Knowledge and Decisions (1980), which extended Hayek’s work and, as Riley says, “would do so in ways that even Hayek had never contemplated.”

In hopes of reaching a wider audience than Hayek, who wrote in the technical language of economics, Sowell’s book, in “lieu of graphs and equations . . . offers rich metaphors and copious real-world examples that make the weightier concepts under discussion not merely digestible but tasty.” This appeal to a wider audience is no small part of the reason that Sowell has been so influential.

Another is that, while an economist by training, Sowell’s mastery of subjects is far wider. Gerald Early, of Washington University, noted that his expertise extends to sociology and history as well. “He had some kind of mastery of other fields to do the kind of comprehensive stuff he was doing. Whether you agree totally with his ideas or not, it was impressive what he was doing. Who knew an economist could write that stuff?”

Indeed, far too many economists can’t write, period. Sowell most certainly can. Early, who is black himself, noted that “I knew lots of black people who were not academics and who had heard about him and were reading his stuff because it was accessible.”

Another thing that distinguishes Sowell from all too many other economists is his insistence that theory be tested in the real world. Gunnar Myrdal, who won the Nobel Prize in economics in 1974, for instance, argued that third-world countries could not develop without extensive foreign aid and much central planning, despite the fact that post-war Japan, Taiwan, South Korea, and Singapore did exactly that in the late twentieth century.

“I got no sense,” Sowell wrote, “that Myrdal actually investigated these theories of his and compared them with anything that actually happened. I myself, of course, started out on the left and believed a lot of this stuff. The one thing that saved me was that I always thought facts mattered. And once you think that facts matter, then of course that’s a very different ball game.”

Myrdal and his type are essentially theoretical in their approach to economics. Sowell, like Stiller, Hayek, and Friedman, is empirical, demanding real-world proof, not just elegant ideas.

“The market can be ruthless in devaluing degrees that do not mean what they say.”

Sowell has always regarded himself as fortunate that his higher education came before the era of affirmative action, which he regards as an unmitigated disaster for blacks. In his memoir, My Grandfather’s Son (2007), the Supreme Court Justice Clarence Thomas recalled how shocked he had been when his law degree from Yale and his sterling grades failed to impress the white-shoe law firms where he applied for a job. “Now I knew what a law degree from Yale was worth when it bore the taint of racial preference,” he wrote.

But Sowell had predicted this in the very first days of affirmative action. “The double standard of grades and degrees is an open secret on many college campuses, and it is only a matter of time before it is an open secret among employers as well,” he predicted in 1970. “The market can be ruthless in devaluing degrees that do not mean what they say. It should be apparent to anyone not blinded by his own nobility that it also devalues the student in his own eyes.”

One of Sowell’s most important contributions has been to notice how wide the gap often is between ordinary black Americans and black intellectuals and civil rights leaders. In a pair of op-eds in The WashingtonPost in 1981, Sowell wrote that

Historically, the black elite has been preoccupied with symbolism rather than pragmatism. Like other human beings, they have been able to rationalize their special perspective and self-interest as a general good. Much of their demand for removing racial barriers was a demand that they be allowed to join the white elite and escape the black masses.

In other words, they have been all too anxious to do what Sowell had spurned doing many years before at Harvard.

In fact, Sowell doesn’t have much use for the pretensions of intellectuals of whatever color. Perhaps my favorite quote in Maverick is used by Riley to open his chapter on “Sowell’s Wisdom”: “Some of the biggest cases of mistaken identity are among intellectuals who have trouble remembering that they are not God.”

In this short, well-written book, Jason Riley leads the reader on an enlightening tour of the thought and experiences of one of the most luminous minds this country has produced.

It should cause many readers to explore the works of Thomas Sowell. They will be richly rewarded for doing so.

1Maverick: A Biography of Thomas Sowell, by Jason L. Riley; Basic Books, 304 pages, $30.

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.]

What’s Goin’ On…

This essay by Victor Davis Hanson is worth reprinting in full (with citation). Our current politics is so focused on the Trump phenomenon that people miss the fact that this all started long before Trump set his sights on the POTUS. Trump is a symptom, not a cause.

We may all have laudable goals for society, but it matters how we attain them.

Why Are the Western Middle Classes So Angry?

What is going on with the unending Brexit drama, the aftershocks of Donald Trump’s election and the “yellow vests” protests in France? What drives the growing estrangement of southern and eastern Europe from the European Union establishment? What fuels the anti-EU themes of recent European elections and the stunning recent Australian re-election of conservatives?

Put simply, the middle classes are revolting against Western managerial elites. The latter group includes professional politicians, entrenched bureaucrats, condescending academics, corporate phonies and propagandistic journalists.

What are the popular gripes against them?

One, illegal immigration and open borders have led to chaos. Lax immigration policies have taxed social services and fueled multicultural identity politics, often to the benefit of boutique leftist political agendas.

Two, globalization enriched the cosmopolitan elites who found worldwide markets for their various services. New global markets and commerce meant Western nations outsourced, offshored and ignored their own industries and manufacturing (or anything dependent on muscular labor that could be replaced by cheaper workers abroad).

Three, unelected bureaucrats multiplied and vastly increased their power over private citizens. The targeted middle classes lacked the resources to fight back against the royal armies of tenured regulators, planners, auditors, inspectors and adjustors who could not be fired and were never accountable.

Four, the new global media reached billions and indoctrinated rather than reported.

Five, academia became politicized as a shrill agent of cultural transformation rather than focusing on education — while charging more for less learning.

Six, utopian social planning increased housing, energy and transportation costs.

One common gripe framed all these diverse issues: The wealthy had the means and influence not to be bothered by higher taxes and fees or to avoid them altogether. Not so much the middle classes, who lacked the clout of the virtue-signaling rich and the romance of the distant poor.

In other words, elites never suffered the firsthand consequences of their own ideological fiats.

Green policies were aimed at raising fees on, and restricting the use of, carbon-based fuels. But proposed green belt-tightening among hoi polloi was not matched by a cutback in second and third homes, overseas vacations, luxury cars, private jets and high-tech appurtenances.

In education, government directives and academic hectoring about admissions quotas and ideological indoctrination likewise targeted the middle classes but not the elite. The micromanagers of Western public schools and universities often preferred private academies and rigorous traditional training for own children. Elites relied on old-boy networks to get their own kids into colleges. Diversity administrators multiplied at universities while indebted students borrowed more money to pay for them.

In matters of immigration, the story was much the same. Western elites encouraged the migration of indigent, unskilled and often poorly educated foreign nationals who would ensure that government social programs — and the power of the elites themselves — grew. The champions of open borders made sure that such influxes did not materially affect their own neighborhoods, schools and privileged way of life.

Elites masked their hypocrisy by virtue-signaling their disdain for the supposedly xenophobic, racist or nativist middle classes. Yet the non-elite have experienced firsthand the impact on social programs, schools and safety from sudden, massive and often illegal immigration from Latin America, the Middle East, Africa and Asia into their communities.

As for trade, few still believe in “free” trade when it remains so unfair. Why didn’t elites extend to China their same tough-love lectures about global warming, or about breaking the rules of trade, copyrights and patents?

The middle classes became nauseated by the constant elite trashing of their culture, history and traditions, including the tearing down of statues, the Trotskyizing of past heroes, the renaming of public buildings and streets, and, for some, the tired and empty whining about “white privilege.”

If Western nations were really so bad, and so flawed at their founding, why were millions of non-Westerners risking their lives to reach Western soil?

How was it that elites themselves had made so much money, had gained so much influence, and had enjoyed such material bounty and leisure from such a supposedly toxic system — benefits that they were unwilling to give up despite their tired moralizing about selfishness and privilege?

In the next few years, expect more grassroots demands for the restoration of the value of citizenship. There will be fewer middle-class apologies for patriotism and nationalism. The non-elite will become angrier about illegal immigration, demanding a return to the idea of measured, meritocratic, diverse and legal immigration.

Because elites have no answers to popular furor, the anger directed at them will only increase until they give up — or finally succeed in their grand agenda of a non-democratic, all-powerful Orwellian state.


Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University. His latest book is The Savior Generals from BloomsburyBooks. You can reach him by e-mailing

Generalists vs. Specialists

Specialization has led to great economic gains over the course of civilization. But specialization as such is an economic imperative, not a humanistic or evolutionary one. Evolution, as this article argues, may strongly favor the generalist capabilities of a species. And it rewards individuals with its humanistic benefits, if not in material gains.

As an unrepentant generalist across many disciplines, I especially appreciate the intangible benefits and payoffs (if not the monetary tradeoffs!).

I’m reminded of the academic distinction: a generalist is somebody who knows nothing about everything, while a specialist is one who knows everything about nothing.

The Generalist Specialist: Why Homo Sapiens Succeeded

By Gemma Tarlach | July 30, 2018 10:00 am



Being a generalist specialist, a unique niche, is the hallmark of our species, say researchers — and the reason Homo sapiens (left) are still around but other hominins, including Neanderthals (right), are not. (Credit: Wikimedia Commons)

Some animals are jacks of all trades, some masters of one. Homo sapiens, argues a provocative new commentary, are an evolutionary success story because our ancestors pulled off a unique feat: being masterly jacks of all trades. But is this ecological niche, the generalist specialist, the real reason our species is the last hominin standing?

When paleoanthropologists and archaeologists define what makes our species unique, they usually focus on our use of symbolism and language, as well as our skills in social networking (long before Facebook) and technological innovation. Those arguments for human exceptionalism have been challenged in recent years, however, as researchers have uncovered evidence that other members of the genus Homo, notably Neanderthals, were capable of similar cognitive processes, from artistic expression to producing fire at will.

But maybe, say two researchers, we got it wrong. What defines our species, and has allowed H. sapiens to survive and even thrive after all other hominins went extinct, is not about making better stone projectiles, or networking, or sprucing up the cave walls with a little ochre artwork. We’re the last hominins on Earth because we’re really good at adapting to a huge range of environments, including the extreme.

Over The River And Through The Woods (And The Tundra, And The Desert…)

To make their case, researchers mapped out the likely ranges of archaic members of the genus Homo according to current fossil, paleoenviromental and archaeological evidence. Being a fan of the scientific method, I think it’s worth noting here that this map almost certainly will change as new finds turn up. But for now, working with the best body of evidence we’ve got, it’s clear that early H. sapiens, once they left Africa, seemed to explode across the Old World, moving into territory previously occupied by one or at most two other hominin species.

A map of the estimated ranges of archaic members of the genus Homo, spanning the period H. sapiens emerged in Africa and dispersed across the rest of the Old World, roughly 60,000-300,000 years ago. (Credit: Roberts and Stewart, 2018. Defining the ‘generalist specialist’ niche for Pleistocene Homo sapiens. Nature Human Behaviour. 10.1038/s41562-018-0394-4)

To be clear, there is good evidence that other hominins called extreme environments home. Denisovans appear to have adapted to high-altitude life in Central Asia, for example, while diminutive H. floresiensis was at home in equatorial island rainforests. It’s been argued, heatedly (no pun intended), that Neanderthals were high-latitude specialists. But only H. sapiens turn up in all of those environments. What might not be immediately evident from the map is that early H. sapiens dispersal wasn’t just about setting foot on a new continent; it was also about moving into new and often extremely challenging environments, from deserts to arctic climes, from treeless, high-altitude plateaus to dense tropical rainforests.

Nevertheless We Persisted

It’s the “unique ecological plasticity” of our species that’s our defining trait, argue the researchers, and it’s what gave us a leg up on surviving, whether moving into new territories or adapting to changing climate conditions. While this conclusion may seem obvious to us now, it’s only been possible to reach it thanks to the flood of new evidence that’s revised the timeline of human evolution and dispersal.

The new research has shown our species evolved earlier than once thought (our start date is now at least 300,000 years ago) and spread beyond Africa sooner than expected: Consider, for example, the first H. sapiens fossil found in the Arabian Peninsula — once thought inhospitable to early humans — and described earlier this year, or a H. sapiens partial jaw from Israel that’s 177,000-194,000 years old.

The key to proving their hypothesis is correct — and to understanding how this ecological plasticity arose in our species — will be acquiring not just more evidence of a H. sapiens presence at different sites, but also strong paleo-enviromental data, particularly in Africa where the earliest H. sapiens lived.

In the meantime, the researchers have coined a novel niche for the intrepid early H. sapiens: the generalist specialist. The team looked at the ecological niche profiles of specialists, such as pandas, and generalists, like the trash panda (aka the raccoon). They concluded that H. sapiens’ unique generalist specialist niche allowed early members of our species to adapt to, and specialize in, living in wildly different environments.


Pandas are considered specialists because all individuals utilize a single food web. Raccoons, on the other hand (paw?), are generalists adept at exploiting whatever food web they can find, as anyone who has left an unsecured trash can out at night probably knows. Our species has often been considered a generalist, but the authors of today’s commentary propose a new ecological niche for us: the generalist specialist, with different populations capable of adapting to and specializing in a wide range of environments and resources. (Credit: Roberts and Stewart, 2018)

While occupying the unique niche of generalist specialist will no doubt appeal to fans of H. sapiens exceptionalism, it’s unclear that it provides what the researchers describe as a “framework for discussing…how our species became the last surviving hominin on the planet.” Specialists tend to face extinction, for example, only if their specialized ecological niche is wiped out — or they are out-competed by an invasive species. Ahem.

Networks and Hierarchies

This is a review of British historian Niall Ferguson’s new book titled The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power. It’s interesting to take the long arc of history into account in this day and age of global communication networks, which might seem to herald the permanent dominance of networks over hierarchies. That history cautions us otherwise.

Ferguson notes two predominant ages of networks: the advent of the printing press in 1452 that led to an explosion of networks across the world until around 1800. This was the Enlightenment period that helped transform economics, politics, and social relations.

Today, the second age of networks consumes us, starting at about 1970 with microchip technology and continuing forward to the present. It is the age of telecommunications, digital technology, and global networks. Ours is an age where it seems “everything is connected.”

Ferguson notes that, beginning with the invention of written language,  all that has happened is that new technologies have facilitated our innate, ancient urge to network – in other words, to connect. This seems to affirm Aristotle’s observation that “man is a social animal,” as well as a large library of psychological behavioral studies over the past century. He also notes that most networks may reflect a power law distribution and be scale-free. In other words, large networks grow larger and become more valuable as they do so. This means the rich get richer and most social networks are profoundly inegalitarian. This implies that the GoogleAmazonFacebookApple (GAFA) oligarchy may be taking over the world, leaving the rest of us as powerless as feudal serfs.

But there is a fatal weakness inherent to this futuristic scenario, in that complex networks create interdependent relationships that can lead to catastrophic cascades, such as the global financial crisis of 2008. Or an explosion of “fake news” and misinformation spewed out by global gossip networks.

We are also seeing a gradual deconstruction of networks that compete with the power of nation-state sovereignty. This is reflected in the rise of nationalistic politics in democracies and authoritarian monopoly control over information in autocracies.

However, from the angle of hierarchical control, Ferguson notes that failures of democratic governance through the administrative state “represents the last iteration of political hierarchy: a system that spews out rules, generates complexity, and undermines both prosperity and stability.”

These historical paths imply that the conflict between distributed networks and concentrated hierarchies is likely a natural tension in search of an uneasy equilibrium.

Ferguson notes “if Facebook initially satisfied the human need to gossip, it was Twitter – founded in March 2006 – that satisfied the more specific need to exchange news, often (though not always) political.” But when I read Twitter feeds I’m thinking Twitter may be more of a tool for disruption rather than constructive dialogue. In other words, we can use these networking technologies to tear things down, but not so much to build them back up again.

As a Twitter co-founder confesses:

‘I thought once everybody could speak freely and exchange information and ideas, the world is automatically going to be a better place,’ said Evan Williams, one of the co-founders of Twitter in May 2017. ‘I was wrong about that.’

Rather, as Ferguson asserts, “The lesson of history is that trusting in networks to run the world is a recipe for anarchy: at best, power ends up in the hands of the Illuminati, but more likely it ends up in the hands of the Jacobins.”

Ferguson is quite pessimistic about today’s dominance of networks, with one slim ray of hope. As he writes,

“…how can an urbanized, technologically advanced society avoid disaster when its social consequences are profoundly inegalitarian?

“To put the question more simply: can a networked world have order? As we have seen, some say that it can. In the light of historical experience, I very much doubt it.”

That slim ray of hope? Blockchain technology!

A thought-provoking book.













How the Enlightenment Ends

A Financial Crisis Is Coming?

A provocative article in USNWR. We’ve been warning about unsustainable asset prices built on unsustainable debt leverage for the past 8 years (which only means we were waaaaay too early, but not necessarily wrong!) For all this time we’ve been focused on growing total debt to GDP ratios, which means we’re not getting much bang for all that cheap credit, trying to borrow and spend our way to prosperity.

The PE ratios of equities and housing reflect a disconnect with fundamental values based on decades of market data. For example, one cannot really pay 8-10x income on residential housing for long, or pay near to 50% of income on rents, as many are doing in our most pricey cities.

Nose-bleed asset prices on everything from yachts to vacation homes to art and collectibles to technology stocks and cryptocurrencies are indicative of excessive global liquidity. Soaking up that liquidity to return to long-term trend lines will be a long, jarring process. Nobody really knows whence comes the reckoning since we have perfected a particularly successful strategy of kicking the can down the road.

A Crisis Is Coming

All the ingredients are in place for a catastrophic economic and financial market crisis.

By Desmond Lachman Opinion Contributor USNWR, Feb. 14, 2018, at 7:00 a.m.

MY LONG CAREER AS A macro-economist both at the IMF and on Wall Street has taught me that it is very well to make bold macroeconomic calls as long as you do not specify a time period within which those calls will occur. However, there are occasions, such as today, when the overwhelming evidence suggests that a major economic event will occur within a relatively short time period. On those occasions, it is very difficult to resist making a time-sensitive bold economic call.


So here goes. By this time next year, we will have had another 2008-2009 style global economic and financial market crisis. And we will do so despite Janet Yellen’s recent reassurances that we would not have another such crisis within her lifetime.


There are two basic reasons to fear another full-blown global economic crisis soon: The first is that we have in place all the ingredients for such a crisis. The second is that due to major economic policy mistakes by both the Federal Reserve and the U.S. administration, the U.S. economy is in danger of soon overheating, which will bring inflation in its wake. That in turn is all too likely to lead to rising interest rates, which could very well be the trigger that bursts the all too many asset price bubbles around the world.

A key ingredient for a global economic crisis is asset price bubbles and credit risk mispricing. On that score, today’s financial market situation would appear to be very much more concerning than that on the eve of the September 2008 Lehman-bankruptcy. Whereas then, asset price bubbles were largely confined to the U.S. housing and credit markets, today, asset price bubbles are more pervasive being all too much in evidence around the globe.


It is not simply that global equity valuations today are at lofty levels experienced only three times in the last one hundred years. It is also that we have a global government bond market bubble, the serious mispricing of credit risk in the world’s high yield and emerging market corporate-bond markets and troublesome housing bubbles in major economies like Canada, China, and the United Kingdom.


Another key ingredient for a global economic crisis is a very high debt level. Here too today’s situation has to be very concerning. According to IMF estimates, today the global debt-to-GDP level is significantly higher than it was in 2008. Particularly concerning has to be the fact that far from declining, over the past few years Italy’s public debt has risen now to 135 percent of GDP. That has to raise the real risk that we could have yet another round of the Eurozone debt crisis in the event that we were to have another global economic recession.


Today’s asset price bubbles have been created by many years of unusually easy global monetary policy. The persistence of those bubbles can only be rationalized on the assumption that interest rates will remain indefinitely at their currently very low levels. Sadly, there is every reason to believe that at least in the United States, the period of low interest rates is about to end abruptly due to an overheated economy.

The reason for fearing that the U.S. economy will soon overheat is not simply that it is currently at or very close to full employment and growing at a healthy clip. It is rather that it is also now getting an extraordinary degree of monetary and fiscal policy stimulus at this very late stage of the cycle.

Today, U.S. financial conditions are at their most expansionary levels in the past 40 years due to the combination of very low interest rates, inflated equity prices and a weak dollar. Compounding matters is the fact that the U.S. economy is now receiving a significant pro-cyclical boost from the unfunded Trump tax cut and from last week’s two-year congressional spending pact aimed at boosting military and disaster-relief spending.


Today, in the face of an overheated U.S. economy, the Federal Reserve has an unenviable choice. It can either raise its interest rate and risk bursting the global asset price bubble, or it can delay its interests rate decision and risk incurring the wrath of the bond vigilantes who might sense that the Federal Reserve is not serious about inflation risk. In that event, interest rates are apt to rise in a disorderly fashion, which could lead to the more abrupt deflating of the global asset bubble.


This time next year, it could very well turn out that today’s asset price bubbles will not have burst and we will not have been thrown into another global economic recession. In which event, I will admit that I was wrong in having been too pessimistic about the global economic outlook. However, I will fall back on the defense that all of the clues were pointing in the opposite direction.

G–gle Culture



These excerpts are from a recent online interview by Stefan Molyneux of the fired Google employee James Damore explaining himself:

Generally, I just really like understanding things,” he said about his reasons for compiling his argument. “And recently, through interactions with people, I have noticed how different political ideologies divide us in many ways. I wanted to understand what was behind all that.”

“I read a lot into Jonathan Haidt’s work, a lot about what exactly is the philosophy behind all of these things. And that led me to the beginning of the document,” he explained. 

He described his crystallizing moment as: “I could see that all of us are really blind to the other side, so in these environments where everyone is in these echo chambers just talking to themselves, they are totally blind to so many things.We really need both sides to be talk to each other about these things and trying to understand each other.” 

He critiques both the left and right for not working together: “The easiest way of understanding the left is: It is very open, it is looking for changes. While the right is more closed, and wants more stability. There are definitely advantages to both of those. Sometimes there are things that need to change, but you actually need a vision for what you want. There is value in tradition, but not all traditions should be how they are.”

“We create biases for ourselves. This is particularly interesting, when we talk about how it relates to reality,” he said.

“Both sides are biased in a way, they have motivated reasoning to see what they want out of a lot of things,” he continued. 

This happens a lot in social science, where it is 95% leaning to the left. And so they only study what they want, and they only see the types of things that they want, and they really aren’t as critical of their own research as much as they should. The popular conception is that the right doesn’t understand science at all, that the right is anti-science. It is true that they often deny evolution and climate science, climate change, but the left also has its own things that it denies. Biological differences between people — in this case, sex differences,” he explained. 

He described the experience of diversity training at Google, which inspired him to write: “I heard things I definitely disagreed with in some of the programs. I had some discussions with people there, but there was a lot of just shaming. ‘No you can’t say that, that’s sexist, you can’t do this.’ There is so much hypocrisy in a lot things they are saying. I decided to just create the document just to clarify my thoughts.

I have often recommended Jon Haidt’s research presented in his book, The Righteous Mind. It’s worth a read because much of what is happening in social and political discourse these days reflects a psychological pathology that should be completely unnecessary. But getting out of our own way in politics is a difficult challenge.

I find nothing particularly mendacious about Mr. Damore’s document or his intentions to clarify what is basically an empirical puzzle concerning gender differences. Of course, this was all blown way out of proportion because it challenges some unscientific political agenda.

As a scientist, I assume that all empirical phenomena should be open to skepticism and challenges. I’m not sure how we progress intellectually any other way. The attack on Mr. Damore is an attack on science and for me can only reveal an indefensible political agenda. This is sad, if not dangerous, to say the least.

My own approach in this blog has been to suggest analytical frameworks to help understand how human behavior aggregates up into social behavior that defines our civilization; past, present and future (see Common Cent$). The universe is constantly changing, and survival depends on successful adaptation. Unsuccessful adaptation leads to extinction. Thus, the problem for all species is how to successfully adapt.

It seems to me our knowledge-base in the biological and social sciences, and in the arts and humanities can help us humans out here and I can’t understand why anyone who wants to survive would ignore or discount anything we can learn from that wealth of knowledge. Yet, some would choose to ignore anything that might challenge their world-view, even when they know it is false. G–gle seems to have succumbed to that pressure. That’s a shame, but not a path any of us have to accept.

What’s G–gle’s motto again?





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