The Deconstruction of the West

What concerns me most from the following article is the misguided notion that pan-nationalism and global citizenship has displaced the sovereign nation-state international system. The sovereign nation-state is all we have to manage global affairs in a representative democratic, people-centered global society. Without it we are all vulnerable to constellations of power among political elites and authoritarians of all stripes.

Reprinted from The American Interest:

The Deconstruction of the West

ANDREW A. MICHTA

April 12, 2017

The greatest threat to the liberal international order comes not from Russia, China, or jihadist terror but from the self-induced deconstruction of Western culture.

To say that the world has been getting progressively less stable and more dangerous is to state the obvious. But amidst the volumes written on the causes of this ongoing systemic change, one key driver barely gets mentioned: the fracturing of the collective West. And yet the unraveling of the idea of the West has degraded our ability to respond with a clear strategy to protect our regional and global interests. It has weakened the NATO alliance and changed not just the global security calculus but now also the power equilibrium in Europe. If anyone doubts the scope and severity of the problem, he or she should ask why it has been so difficult of late to develop a consensus between the United States and Europe on such key issues as defense, trade, migration, and how to deal with Russia, China, and Islamic jihadists.

The problem confronting the West today stems not from a shortage of power, but rather from the inability to build consensus on the shared goals and interests in whose name that power ought to be applied. The growing instability in the international system is not, as some argue, due to the rise of China as an aspiring global power, the resurgence of Russia as a systemic spoiler, the aspirations of Iran for regional hegemony, or the rogue despotism of a nuclear-armed North Korea; the rise and relative decline of states is nothing new, and it doesn’t necessarily entail instability. The West’s problem today is also not mainly the result of the economic decline of the United States or the European Union, for while both have had to deal with serious economic issues since the 2008 meltdown, they remain the two largest economies in the world, whose combined wealth and technological prowess are unmatched. Nor is the increasing global instability due to a surge in Islamic jihadism across the globe, for despite the horrors the jihadists have wrought upon the peoples of the Middle East and North Africa, and the attendant anxiety now pervading Europe and America, they have nowhere near the capabilities needed to confront great powers.

The problem, rather, is the West’s growing inability to agree on how it should be defined as a civilization. At the core of the deepening dysfunction in the West is the self-induced deconstruction of Western culture and, with it, the glue that for two centuries kept Europe and the United States at the center of the international system. The nation-state has been arguably the most enduring and successful idea that Western culture has produced. It offers a recipe to achieve security, economic growth, and individual freedom at levels unmatched in human history. This concept of a historically anchored and territorially defined national homeland, having absorbed the principles of liberal democracy, the right to private property and liberty bound by the rule of law, has been the core building block of the West’s global success and of whatever “order” has ever existed in the so-called international order. Since 1945 it has been the most successful Western “export” across the globe, with the surge of decolonization driven by the quintessentially American precept of the right to self-determination of peoples, a testimony to its enduring appeal. Though challenged by fascism, Nazism, and communism, the West emerged victorious, for when confronted with existential danger, it defaulted to shared, deeply held values and the fervent belief that what its culture and heritage represented were worth fighting, and if necessary even dying, to preserve. The West prevailed then because it was confident that on balance it offered the best set of ideas, values, and principles for others to emulate.

Today, in the wake of decades of group identity politics and the attendant deconstruction of our heritage through academia, the media, and popular culture, this conviction in the uniqueness of the West is only a pale shadow of what it was a mere half century ago. It has been replaced by elite narratives substituting shame for pride and indifference to one’s own heritage for patriotism. After decades of Gramsci’s proverbial “long march” through the educational and cultural institutions, Western societies have been changed in ways that make social mobilization around the shared idea of a nation increasingly problematic. This ideological hollowing out of the West has been accompanied by a surge in confident and revanchist nationalisms in other parts of the world, as well as religiously inspired totalitarianism.

National communities cannot be built around the idea of collective shame over their past, and yet this is what is increasingly displacing a once confident (perhaps overconfident, at times) Western civilization. The increasing political uncertainty in Europe has been triggered less by the phenomenon of migration than it has by the inability of European governments to set baselines of what they will and will not accept. Over the past two decades Western elites have advocated (or conceded) a so-called “multicultural policy,” whereby immigrants would no longer be asked to become citizens in the true sense of the Western liberal tradition. People who do not speak the national language, do not know the nation’s history, and do not identify with its culture and traditions cannot help but remain visitors. The failure to acculturate immigrants into the liberal Western democracies is arguably at the core of the growing balkanization, and attendant instability, of Western nation-states, in Europe as well as in the United States.

Whether one gives the deconstruction of the Western nation-state the name of postmodernism or globalism, the ideological assault on this very foundation of the Western-led international system has been unrelenting. It is no surprise that a poorly resourced radical Islamic insurgency has been able to make such vast inroads against the West, in the process remaking our societies and redefining our way of life. It is also not surprising that a weak and corrupt Russia has been able to shake the international order by simply applying limited conventional military power. Or that a growing China casts an ever-longer shadow over the West. The greatest threat to the security and survival of the democratic West as the leader and the norm-setter of the international system comes not from the outside but from within. And with each passing year, the deconstruction of Western culture, and with it the nation-state, breeds more internal chaos and makes our international bonds across the West ever more tenuous.

Andrew A. Michta is the dean of the College of International and Security Studies at the George C. Marshall European Center for Security Studies. Views expressed here are his own.

It’s the Fed, Stupid!

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

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

Read more

The New Old World Order

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

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

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

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

Politico, September 15, 2016

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

Yes, Donald Trump is implicated in that unraveling, cavalierly undermining decades worth of social and political certainties with his rapid-fire Twitter account and persona that only the borough of Queens can produce. But so is Bernie Sanders. And so is Brexit. And so are the growing rumblings in Europe, which are all the more dangerous because there is no exit strategy if the European Union proves unsustainable. It is not so much that there are no new ideas for us to consider in 2016; it is more that the old ones are being taken apart without a clear understanding of what comes next. 2016 is the year of mental dust, where notions that stand apart from the post-1989 order don’t fully cohere. The 2016 election will be the first—but not last—test of whether they can.
Story Continued Below

If you listen closely to Trump, you’ll hear a direct repudiation of the system of globalization and identity politics that has defined the world order since the Cold War. There are, in fact, six specific ideas that he has either blurted out or thinly buried in his rhetoric: (1) borders matter; (2) immigration policy matters; (3) national interests, not so-called universal interests, matter; (4) entrepreneurship matters; (5) decentralization matters; (6) PC speech—without which identity politics is inconceivable—must be repudiated.

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

***

(Blog Note: It’s Not about Trump.)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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.

Politics, Economics, and the State of Our World

QE paradox

This is an interesting graphic that not only illustrates the futility of current monetary stimulus (the QE-ZIRP Paradox), but also the larger contradiction we’ve created in the relationship between politics and economics. I’ll explicate how this contradiction also explains Europe’s predicament with Greece and the other periphery countries in Eurozone, and also applies to emerging countries, especially China.

We can envision economics as a boundary of constraints or possibilities on the choices we can make in life. We might call these budgetary constraints, but it also pertains to constraints on growth and expansion. Relate this to personal finance:  economics constrains the choices we have on what kind of house we buy or rent, what cars we drive, what vacations we can take, what schools we attend, etc., etc. Within those constraints we often have many choices and possibilities for trade-offs. We can decide to buy a small house to afford a big car, or a tuition-free school in favor of more exotic vacations. We make these decisions everyday throughout our lifetimes.

The personal choices we make within the constraints of economics are analogous to the social choices we make through democratic politics. So, economics is like the box within which politics can allocate resources by democratic consensus. We can decide on more social welfare, or more national defense, or more leisure time. The irrationality is believing that we can somehow make choices that lie far outside the constraints of economics. Fantasies like we can all fly to the moon, all have a heart transplant, or perhaps live high on the hog without working to produce the necessary prosperity.

Economic constraints and political choices interact, an important dynamic since both are malleable over time. We can make choices that expand the constraints of economics, which would mean an expansion of possibilities through growth. Or we can make choices that shrink the boundaries of the economically possible, reducing our choices in the future. The interesting point to make at this stage of our exposition is that, like the boundaries we set for our children, economic constraints are a disciplinary factor that helps to keep our political choices honest.  In other words, economics disciplines our political choices by penalizing bad choices and rewarding good choices.

This has profound implications for how society works.

One can imagine that one of the major economic constraints on our personal set of choices is the amount of money we have. In other words, the fungible value of our assets and savings. Rich people have fewer economic constraints than poor people. But this supply of money is not fixed and can be augmented by borrowing through the issuance of credit and assumption of debt obligations. So, one can buy a more expensive house by borrowing the necessary funds from a mortgage lender and then paying it back over time. We soon figured out that when the supply of money is too strict, economic constraints are unnecessarily tight, so money supply should adapt to the needs of the political economy.

Thus, we can expand the economic constraints facing society by expanding the supply of money through credit. One might think, “Wow, that was easy. Now we have lots more choices!” And the next thought should be, “Well, what’s the limit on how much money we can create?”

First, we should remember that money is not wealth, it merely represents wealth. When money was backed by gold reserves, the supply of gold limited the amount of money in the system. If  Country A adopted bad policies relative to its trading partner Country B, gold reserves would flow out, threatening the underlying value of Country A’s currency. This would force Country A to correct its policies or risk impoverishment. The exchange rates between currency A and B did not reflect these changes because both were fixed to gold; but the underlying values had obviously changed demanding a revaluation of both currencies relative to gold. While workable, this was a herky-jerky way of adapting to changing economic conditions and resulted in many financial,  economic, and political crises along the way. It took WWI and WWII to finally break away from a gold standard as an economic constraint.

In 1948, the western powers that had been victorious in WWII established an international currency regime (called Bretton Woods) backed by the US$ fixed to gold and a host of institutions to help manage international relations, such as the IMF, the World Bank and the United Nations. Unfortunately, this regime depended on US policy to defend the monetary regime, even when it contradicted US domestic economic interests. With Vietnam war spending and Great Society social spending (guns and butter), too many dollars were created, causing a run on US gold redemptions by countries like France. In 1971, the Bretton Woods system finally broke down as Nixon closed the gold window to redemptions and all currencies began to float in value relative to other currencies. There was now no fixed relationship of the currency to anything of tangible value – its value was established by government fiat. The initial effect was a stagnating economy plus inflation, a decade-long slog in the 1970s that gave birth to the term stagflation.

At the time, it was thought that exchange rate movements would signal necessary policy changes to keep each countries’ political priorities aligned with economic constraints. It turns out this assumption did not hold up to political realities because volatile exchange rates do not necessarily affect domestic economic interests to the point where politicians feel the need to respond. How many of us know or care how the US$ is performing relative to the other currencies of the world? The result was that politically favorable (more for everybody!), but economically detrimental, policies could be pursued, while exchange rate volatility could be largely ignored. Thus, the economic discipline to guide political choices was lost, permitting bad policies to persist. We have seen this in the explosion of credit and debt around the world and the volatility in exchange rates and asset markets.

Now we can see the problem illustrated in the graphic above. Instead of forcing necessary fiscal reform, we end up throwing more monetary stimulus at the problem. The results have been rising inequality, asset booms and busts, and massive resource misallocations that will cost society economically for a long time. On the global stage, China is the poster child of excess. It will all end when we finally hit the wall and throwing more money at the problem no longer works.

Europe, the EU, and Greece.

We can consider another case in Europe where volatile exchange rates after 1971 inhibited trade with unnecessary currency risks and conversion costs. The idea was that a currency union under the euro would greatly expand intra-European trade by eliminating these costs. But a currency union requires consistent monetary and fiscal policy and a re-balancing mechanism. In the US this is achieved through a Federal government that taxes and redistributes resources. In the European view, economic discipline would by imposed by a set of consistent policy rules established under the European Union and Parliament. Once, again, the result was that individual country governments found ways to skirt the rules or outright deceive the EU on its government budgets. Sometimes this was necessary given the varying needs of uneven development among countries. We see the result in Greece, when it was soon discovered that Greece had borrowed and spent public funds far in excess of the 3% boundary established by the EU.

So, a currency union also has failed to discipline politics, and the result has been a catastrophe for the Greek people and a severe blow to the concept and credibility of the European Union and the euro.

————

The bottom line is that democratic politics needs a firm disciplinary constraint, or else a financially manipulated economy will give society just enough rope to hang itself with. Unfortunately, this has happened quite frequently in history.

Gerrymandering Our Demise

The_Gerry-Mander_Edit

The graphic above is an historically famous newspaper illustration of the first application of redistricting based upon choosing voters likely to vote for one party over the other, thereby assuring the election of a favored candidate. The map is of Massachusetts’ counties in 1812 and how they were cobbled together by redistricting to elect congressional candidates favored by Governor Elbridge Gerry. Newspaper wags thought the result looked like a salamander and dubbed the creature a “gerrymander.”

A recent exchange I had with a Political Science colleague over some electoral studies we’ve conducted separately illuminated for me how redistricting, or gerrymandering, is contributing greatly to our national political polarization and governing dysfunction.

After the presidential elections of 2000 and 2004 I became quite curious about the red state-blue state narrative promoted by the media to explain the election results. The narrative keyed on subcultural stereotypes across America that served to define political preferences. Most of us are familiar with such stereotypes (guns and religion vs. Priuses and lattes), but it struck me then that the differences had to be  more correlated with geography than cultural identity. After all, red-blue was a geographic pattern, so it had to incorporate a geographic explanation. I conducted an empirical study of those elections that compared county voting with county census demographics. The results revealed that the most significant factors determining party preferences were population density and household formation. Other census characteristics–such as race, gender, age, income–added no explanatory power. (In 2005, I published an op-ed explanation here.)

To bring us up to date, I read another study last week (titled, The 2014 House Elections: Political Analysis and The Enduring Importance of Demographics) that analyzed the 2008, -10, -12, -14 elections in the same manner, comparing census demographic data with congressional district results. The author found that the two most important factors were population density and race/ethnicity of minority vs. white voters. At first I wondered why our results differed, as I suspected nothing much had changed in the electorate beyond a presidential candidate who was the first African American in US history. After some discussions I realized the differences between counties and Congressional districts (CDs) is because county lines, like state lines, are not redrawn to influence electoral outcomes while CDs are deliberately redrawn to favor those outcomes.

Below are some examples of tortuously drawn CDs that are intended to bind racial and ethnic communities together to elect racial and ethnic representatives in a white majority nation.

Worst GerryMandered districts

It didn’t take long to figure out that the difference between the results of the two studies can be traced to the unit of analysis: counties vs. congressional districts. Counties reflect a cross-section of lifestyle preferences based upon geography and demographics versus congressional districts that are carved out to achieve a desired electoral outcome based solely on race or ethnicity.

Underlying this policy objective is the assumption that only a racial or ethnic minority candidate can adequately represent a racial or ethnic community. We can debate whether this assumption holds true or not, but the unfortunate result is that gerrymandering reinforces the bias. In other words, if we’re looking for racial bias and then organize our electoral system to reinforce racial and ethnic divisions, is it any wonder that we then find a correlation between race and political outcomes?

There are other pernicious effects of redistricting along racial and ethnic demographics. First, it reduces electoral competition, and this works equally well for both parties. As non-whites get carved out of white districts, the remaining districts are more purely white. In effect, we are sectioning our electorate into white and non-white political entities. This goes against our long-running public battle to integrate communities, but reducing electoral competition also means parties and candidates can become less responsive to voters’ demands and not suffer for it. This translates into democratic governance that is anything but “of the people, by the people, and for the people.”

Second, democracy is founded on the process of compromise, but how does a political group defined by biological identity compromise? It becomes impossible to compromise one’s racial, ethnic or sexual identity, so we get much less compromise on issues that go beyond biology. This inability to compromise has greatly hampered our democratic governance. We have basically yielded our politics to a class of elites who are highly motivated to secure and wield power and wealth in their favor: the 99% governed by the 1%.

Taken in total, regardless of the political benefits, what gerrymandering and redistricting has done is weaken our commitment to one of the founding tenets of the American experiment, expressed in the Latin words, e pluribus unum: Out of One, Many.

Instead we’ve allowed ourselves to  become too easily divided and conquered.

 

 

The Bubble Economy Redux

cartoon-bubble-v31

Good article. A little sunshine goes a long way. The reason QE hasn’t caused inflation is because of massive disinflationary forces around the world unleashed by excessive credit and debt creation. People won’t borrow at low interest rates if they already have too much debt, they merely refinance. Banks also do not want to lend in an uncertain monetary environment with distorted prices of collateral, so they leave their excess reserves idle or buy Treasury bonds and earn the difference.

But QE HAS generated much asset price inflation in real and financial assets, hence the booms in select housing, land, art, and financial markets. The Fed thus has caused relative price distortion that is greatly impeding long-term risk-taking, production, and job creation. Is this a secret? I think not. Time for a reckoning of monetary and fiscal policy.

From the National Review Online:

The Other Bubble

Some highly placed people don’t want a serious discussion of quantitative easing.

By Amity Shlaes

Back in the late 1990s and right up to 2007, journalists occasionally wondered about two big enterprises called Fannie Mae and Freddie Mac. Fannie had come out of an obscure period of American history, the New Deal. Freddie had been created more recently, but no one could explain quite how. The official job of the pair was to provide liquidity in the housing sector in various ways, including creating a secondary market in securities backed by mortgage loans. Whatever Fan and Fred did, their form seemed a contradictory hybrid: On the one hand they were “private.” On the other hand their bonds sold at a premium over other bonds, suggesting that the Treasury or the Fed would always bail them out. These “government-sponsored enterprises,” as they were known, were both growing. Logic suggested that the more they grew, the more bailing them out would rattle markets.

Yet if a reporter took a stab at explaining these mystery entities in a story, or even merely spotlighted them, that reporter paid for it. Fannie and Freddie’s big executives, credentialed power brokers from both parties, hopped on the Shuttle and came to New York to bully the newspaper into shutting up. The executives suggested the journalists weren’t bright enough to appreciate the financial mechanics of Fannie or Freddie. This brazen effort at intimidation was unusual. Even senior editors could recall nothing like it — unless they were old enough to have met with a Teamster.

Those writers who experienced this finger-wagging and strong-arming in the conference room will never forget the queasy feeling they engendered. Fannie and Freddie’s lobbyists did not succeed in muzzling big news. From time to time, even after such a visit, editors ordered up and reporters wrote articles probing the GSEs. But when it came to big, sustained investigations, most newspapers turned to easier topics. When, much later, Fannie and Freddie proved to have been ticking time bombs and set off the financial crisis, the reporters told themselves that the very blatancy of the effort to intimidate should have tipped them off. They vowed to respond differently should that queasy feeling ever return.

Well, queasy is back. And this time, the strong arm belongs not to the boss of the company, Janet Yellen of the Fed, but to a media supporter, Paul Krugman of the New York Times. Unlike the old Fan and Fred execs, Krugman isn’t administering his punishment in the privacy of a conference room but rather in his columns and blogs. Example: This week, the professor’s target was actually another man qualified to be a professor, Cliff Asness, a University of Chicago Ph.D. who does his own academic work. Asness also runs tens of billions at a hedge fund, a fact that suggests he has thought about interest rates and the Fed quite a bit. To Asness Krugman wrote: “But if you’re one of those people who don’t have time to understand the monetary debate, I have a simple piece of advice: Don’t lecture the chairman of the Fed on monetary policy.”

What triggered Krugman’s pulling some kind of imagined rank on Asness was that Asness, along with me and others, signed a letter a few years ago suggesting that Fed policy might be off, and that inflation might result. Well, inflation hasn’t come on a big scale, apparently. Or not yet. Still, a lot of us remain comfortable with that letter, since we figure someone in the world ought always to warn about the possibility of inflation. Even if what the Fed is doing is not inflationary, the arbitrary fashion in which our central bank responds to markets betrays a lack of concern about inflation. And that behavior by monetary authorities is enough to make markets expect inflation in future.

Besides, the Fed cannot keep interest rates this low forever. As former Fed governor Larry Lindsey notes, the cycle of quantitative easing has become predictable: “QE1 ends. Stock market sells off. QE2 begins. Then, QE2 ends. Stock market sells off. Operation Twist starts to be soon followed by a full-blown start of QE3. Now here we are in October and QE3 is finally winding down. This time it was ‘tapered’ rather than abruptly ended. Still, stock market sells off.” Concludes Lindsey: “Whenever the Fed withdraws a stimulus it is going to be painful. Whenever officials flinch and ease because of the pain it just becomes harder next time.”

Given all the confusion, it would surely be useful have a vigorous debate on the Federal Reserve law and Fed policy — one that includes all kinds of arguments, and in which nobody calls anybody a “wing nut.” One that asks whether stock prices or, for that matter, housing prices may reflect inflation or deflation, or whether the dollar will always behave the way it does now. The authorities’ response — “We’re smart, so be quiet” — suggests that the greatest bubble of all bubbles may be the bubble of credibility of central bankers. Whenever that one pops, the whole world will feel queasy.

Housing Casino Bosses

HeliBenWhat we have here is a clear case of market manipulation and price distortion with arbitrary effects across the economy. Specifically, “when the central bank buys private assets, it can tilt the playing field toward some borrowers at the expense of others, affecting the allocation of credit.” The result is neither fair, nor is it economically efficient. “It is as if the Fed has provided off-budget funding for home-mortgage borrowers, financed by selling U.S. Treasury debt to the public.” If you bought or lent against an overpriced asset, send a thank you note to the Fed. If you’re hoping to buy one of those overpriced assets and looking for a lender, you know who Scrooge is. From the WSJ:

The Fed’s Mortgage Favoritism

When the central bank buys private assets, it distorts markets and undermines its claim to independence.

By Jeffrey M. Lacker And John A. Weinberg

Oct. 7, 2014 6:42 p.m. ET

Modern central banks enjoy extraordinary independence, typically operating free from political interference. That has proved critical for price stability in recent decades, but it puts central banks in a perpetually precarious position. Central-bank legitimacy will wane without boundaries on tools used for credit-market intervention.

Since 2009 the Fed has acquired $1.7 trillion in mortgage-backed securities underwritten by Fannie Mae and Freddie Mac , the mortgage companies now under government conservatorship. Housing finance was at the heart of the financial crisis, and these purchases began in early 2009 out of concern for the stability of the housing-finance system. Mortgage markets have since stabilized, but the purchases have resumed, with more than $800 billion accumulated since September 2012.

We were skeptical of the need for the purchase of mortgage assets, even in 2009, believing that the Fed could achieve its goals through the purchase of Treasury securities alone. Now, as the Fed looks to raise the federal-funds rate and other short-term interest rates to more normal levels, that normalization should include a plan to sell these assets at a predictable pace, so that we can minimize our distortion of credit markets. The Federal Open Market Committee’s recent statement of normalization principles did not include such a plan. For this reason, the first author, an FOMC participant, was unwilling to support the principles.

The Fed’s MBS holdings go well beyond what is required to conduct monetary policy, even with interest rates near zero. The Federal Reserve has two main policy mandates: price stability and maximum employment. In the past, the pursuit of higher employment has sometimes led the Fed (and other central banks) to sacrifice monetary stability for the short-term employment gains that easier policy can provide. This sacrifice can bring unfortunate consequences such as the double-digit inflation seen in the 1960s and 1970s.

But during the Great Moderation—the period of relatively favorable economic conditions in the 1980s and 1990s—a consensus emerged that, over time, the central bank’s effect on employment and other real economic variables is limited. Instead, the central bank’s unique capability is to anchor the longer-term behavior of the price level. Governments came to see that entrusting monetary policy to an institution with substantial day-to-day independence could help overcome the inflationary bias that short-term electoral pressures can impart.

The independence of the central bank cannot be boundless, however. In a democracy, the central bank must be accountable for performance against its legislated macroeconomic goals. What is essential for operational independence is the central bank’s ability to manage the quantity of money it supplies—that is, the monetary liabilities on its balance sheet—because this is how modern central banks influence short-term interest rates.

A balance sheet has two sides, though, and it is the asset side that can be problematic. When the Fed buys Treasury securities, any interest-rate effects will flow evenly to all private borrowers, since all credit markets are ultimately linked to the risk-free yields on Treasurys. But when the central bank buys private assets, it can tilt the playing field toward some borrowers at the expense of others, affecting the allocation of credit.

If the Fed’s MBS holdings are of any direct consequence, they favor home-mortgage borrowers by putting downward pressure on mortgage rates. This increases the interest rates faced by other borrowers, compared with holding an equivalent amount of Treasurys. It is as if the Fed has provided off-budget funding for home-mortgage borrowers, financed by selling U.S. Treasury debt to the public.

Such interference in the allocation of credit is an inappropriate use of the central bank’s asset portfolio. It is not necessary for conducting monetary policy, and it involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not at the discretion of an independent central bank.

Some will say that central bank credit-market interventions reflect an age-old role as “lender of last resort.” But this expression historically referred to policies aimed at increasing the supply of paper notes when the demand for notes surged during episodes of financial turmoil. Today, fluctuations in the demand for central bank money can easily be accommodated through open-market purchases of Treasury securities. Expansive lending powers raise credit-allocation concerns similar to those raised by the purchase of private assets.

Moreover, Federal Reserve actions in the recent crisis bore little resemblance to the historical concept of a lender of last resort. While these actions were intended to preserve the stability of the financial system, they may have actually promoted greater fragility. Ambiguous boundaries around Fed credit-market intervention create expectations of intervention in future crises, dampening incentives for the private sector to monitor risk-taking and seek out stable funding arrangements.

Central bank operational independence is a unique institutional privilege. While such independence is vitally important to preserving monetary stability, it is likely to prove unstable—both politically and economically—without clear boundaries. Central bank actions that alter the allocation of credit blur those boundaries and endanger the stability the Fed was designed to ensure.

The Politics and Policies of Inequality

American-Roulette I won’t blame this on the man or the office, but definitely on the policies pursued. Yes, from the WSJ:

The President of Inequality

Policies promoting equality over growth have damaged both.

Oct. 2, 2014 7:26 p.m. ET
In the latest grim tiding of the public mood, merely 42% think the American dream that “if you work hard, you’ll get ahead” remains true, down from 53% in 2012 and 50% in 2010. According to the Public Religion Research Institute poll last week, the steepest declines in belief in the last two years were among people under age 30 (down 16 percentage points), women (14 points) and Democrats (17).In other words, the most disillusioned belong to the coalition that elected President Obama. But before giving up on upward mobility, they ought to blame the policies he has enacted. Mr. Obama has been the best President for slow growth and inequality in modern history, as new economic surveys show.

***

Start with the Census Bureau’s annual poverty and income survey, which came out this month. Real U.S. median household income—or the wages earned in the middle of the wage distribution—was $51,939, a 0.3% increase over 2012. But the 2013 figure is still 3.9% lower than the median income when the recession ended in 2009, and 7.9% lower than the median in 2007.

One trick some liberals use to obscure the uniquely bad performance of the Obama years is to go back to the height of the dot-com bubble in 1999 when real income peaked at $56,895 and compare it to 2013. But this conveniently ignores that real median household income rebounded smartly in the middle of the last decade. That rebound occurred after the Bush tax cuts on capital income and marginal income-tax rates became law in 2003.

As the nearby chart shows, incomes fell after 1999 through 2004 but then rose again for three straight years and nearly reached the 1999 level in 2007 at $56,436. The bottom fell out with the 2008 financial panic and recession, as you would expect. But the amazing fact of the Obama years is that incomes did not rebound with the recovery as they have in every other expansion. Only in 2013 did incomes begin to pick up modestly, five long years into recovery.

Even then real median income did not increase in 2013 in 36 states. Instead, the gains were concentrated in metro areas like Washington-Arlington-Alexandria (median: $90,149), San Francisco-Oakland-Hayward ($79,624) and Boston-Cambridge-Newton ($72,907). Wyoming amid the fracking revolution was another standout, with the median rising 5.7%.

This slow, uneven growth has also led to an increase in inequality by the measures the President’s favorite economists like to cite. The Census reports that the U.S. Gini Coefficient, which measures income inequality, “was significantly higher” in 2013, rising to 0.481 from 0.476. About 45.3 million people or 14.5% of the population live below the official poverty line, down from 15% in 2012 but statistically the same number of people. Poverty over the prior four years rose to the highest levels since the mid-1960s. The poverty rate was 14.3% in 2009 and 12.5% in 2007.

This month the Federal Reserve also published its triennial Survey of Consumer Finances examining the 2010-2013 period. Overall average real family income rose 4%, but median income fell 5%, “consistent with increasing income concentration.” There were essentially no changes for people between the 40th and 90th income percentiles after steep losses from 2007-2010, while median income rose 2% among the top 10% and fell 5.5% among the bottom 40%.

All of this is especially notable because it follows the most sustained policy focus on reducing inequality in decades. President Obama’s stimulus spending in 2009-2010 was devoted mainly to transfer payments like Medicaid and jobless benefits. Expanding the number of Americans on food stamps and disability payments have been explicit policy goals. ObamaCare is designed to provide “free” health care to millions of Americans by taxing the wealthy and those who already have insurance.

Mr. Obama has also focused on income redistribution to punish the affluent while financing income transfers. So he cornered Republicans in the 2013 fiscal cliff and succeeded in raising the top income tax rate as well as levies on capital gains, dividends and small-business income.

On CBS ‘s “60 Minutes” on Sunday Mr. Obama answered a question about economic anxiety by offering another increase in the minimum wage. But the Nancy Pelosi Democrats raised the minimum wage in three stages to $7.25 an hour in 2009 from $5.15 in 2007. If mandated wages are so beneficial to the American worker, where is the evidence?

The Census data show that every income group that was supposed to benefit from the higher wages is worse off than before the minimum wage was increased. This is because the benefits of mandated wage increases for some workers are dwarfed by the overall negative economic trends of slower growth and reduced opportunity.

Another culprit [the main culprit, I would say] in this skewed economic recovery has been monetary policy. The Fed’s QE exertions have been explicitly targeted at raising asset prices, such as stocks and real estate, that are disproportionately held by the affluent. Meantime, Americans without such assets have received a pittance on their savings. The White House has been a stalwart supporter of these Fed policies.

***

Census data like this used to get banner headlines, but these days they barely get media notice. Perhaps it is too embarrassing to point out that the policies flaunted to reduce inequality have presided over so much more of it. Instead, liberals use the fact of flat or falling incomes to call for more of the same policies that have resulted in flat or falling incomes. By making equality a higher priority than economic growth, Mr. Obama has reduced growth and increased inequality.

What’s needed now is a return to policies that put growth as the country’s highest economic priority. The wealthy may get richer as a result, but so will the middle class and poor who haven’t benefited from Mr. Obama’s focus on inequality.

The good news is that the public may be ahead of the politicians in seeking this change, and it is certainly ahead of the media. A survey this year by the Global Strategy Group found that by 59% to 37% Americans prefer a political candidate who focuses on economic growth to one who focuses on fairness. Thus is Mr. Obama creating, albeit unintentionally, a new opening for the politics of growth.

In Search of the Elusive Unicorn

unicorn

Economist Michael Munger writing in the Freeman, Aug. 11:

When I am discussing the state with my colleagues at Duke, it’s not long before I realize that, for them, almost without exception, the State is a unicorn. I come from the Public Choice tradition, which tends to emphasize consequentialist arguments more than natural rights, and so the distinction is particularly important for me. My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA.

But their solution is, without exception, to expand the power of “the State.” That seems literally insane to me—a non sequitur of such monstrous proportions that I had trouble taking it seriously.

Then I realized that they want a kind of unicorn, a State that has the properties, motivations, knowledge, and abilities that they can imagine for it. When I finally realized that we were talking past each other, I felt kind of dumb. Because essentially this very realization—that people who favor expansion of government imagine a State different from the one possible in the physical world—has been a core part of the argument made by classical liberals for at least three hundred years.