Do We Need a Social Welfare State?

One must evalulate all the trade-offs.

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

See comments in RED.

Can America Afford to Become a Major Social Welfare State?

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

By N. Gregory Mankiw

September 15, 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Certain Uncertainty

Uncertainty is the nature of the universe. Get used to it.

Change is the only constant.

Those are far more profound statements than they appear to most people. Once we introduce time into the three-dimensional realm of space and matter, change is inevitable and with change we get the unpredictable nature of the future. Mankind is merely a bystander in this universe of uncertain change and it’s really the puzzle that has confounded the most brilliant minds in history: from Ptolemy to Copernicus to Einstein to Hawking.

The puzzle becomes more salient when we realize how uncertainty has shaped natural biology with biodiversity, adaptation, and the survival instincts that help species perpetuate in an uncertain environment of constant change. Humans are different only in that we are cognitively aware of the uncertainty. Together with our naturally endowed survival instincts, this awareness helps determine our behavioral adaptations. It applies to individual behavior and aggregate social behavior.

The social sciences, especially economics and finance, have now started to focus on this uncertain nature of the universe and how it determines how we cohere and interact in social communities characterized by economic exchange and social and political organization.

We can perhaps appreciate the extent that uncertainty infuses our lives by noting its influence on shaping our cultures and institutions. Religion, for example, is a faith-based belief system that not only shapes social behavior through doctrine, but also offers succor through prayer for the fears that uncertainty provokes. Modern democratic government has been called upon to manage the societal and economic risks of uncertainty through social insurance programs for retirement and healthcare, welfare, income maintenance, environmental risk and national defense.

A few authors have explicated a world characterized by uncertainty, most notably Nassim Nicholas Taleb with his compendium of books, including The Black Swan and Antifragile, as well as John Kay and Mervyn King with their collaboration, Radical Uncertainty.

I highly recommend these books, along with Peter Bernstein’s classic, Against the Gods. These frameworks for analysis help us understand the nature of uncertainty, risk and reward, and the imperatives of risk and loss aversion. Then we can decide how best to manage its inevitable effect on our lives.

Link to an excellent podcast of a symposium at the London School of Economics with the two authors of Radical Uncertainty:

https://www.lse.ac.uk/lse-player?id=4867

Risk-Free? No Such Thing.

‘There is no such thing as a risk-free world’

Excellent interview. Some excerpts:

There are sections of the public health and scientific community that have become infected with the general level of fear and anxiety in the population. You see that very clearly in the recent open letter signed by teaching unions and various behavioral scientists – more or less a coalition of the anxious – demanding that face masks be mandatory in schools until at least 21 June. These people are looking for a risk-free world. Anybody who understands the nature of risk knows that there is no such thing. The eradication of risk comes at unacceptable social and economic costs wherever you try to do it.

The propagation of fear is visible not just in advertising but also in the constant reiteration of certain symbols. You will find public health specialists say that they know masks don’t achieve very much, but they do remind people that there’s a pandemic going on. They address the question of how to keep people in a constant state of fear. 

Democracy is messy, it’s uncontrolled, it can be disruptive. But all of those things are actually really important for a good society. It’s out of the messiness that creativity and change and innovation come. We are erring too far towards elitist control, which is what edges us closer to the Chinese model of the party and the party scientists decreeing what a good life for citizens is and devising systems and structures to enforce it. That should concern us.

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. 

 

Healthcare Mythologies

First, I will disclose I am no expert on the health care industry, but I am somewhat of an expert on finance theory applied to risk management and insurance pooling. The political healthcare debate is so disconcerting that it’s impossible to sit by and watch without trying to inject some reason. Sorry.

We need health care reform, we’ve needed it for about 20 years now, but it matters what kind of reform we get. Here are two excerpts from recent articles written by Stephen Moore of the Heritage Foundation and Holman Jenkins Jr. of the WSJ that illustrate some of the uncomfortable truths.

First, we need to deal with some reality concerning the Affordable Care Act, aka ObamaCare:

Almost every promise made eight years ago about ObamaCare turned out to be a falsehood. You couldn’t keep your insurance plan, doctor or provider in many cases. It didn’t save $2,500 per family (more like $2,500 more). It didn’t lead to expanded patient choice. And the tax increases badly hurt the economy and jobs market, and the insurance markets really have entered a death spiral that if left unfixed will blow-up the entire insurance market.

The fundamental lie of ObamaCare is revealed in the law’s very title: The Affordable Care Act. Democrats and Barack Obama can sing the praises of this law until the cows come home, but no one with a straight face can say that it has made healthcare more “affordable” — except the millions whom we gave coverage to for free.

So, unless one believes in the “economics of free,” we’ve got a problem here and it’s written into the faulty logic of the plan.

Second, the way out of this quagmire is not going to be led by Bernie Sanders doubling and quadrupling down on “free.” Mr. Jenkins speaks an inconvenient truth:

Down this road [of reform] lies hope that Americans will stop channeling extravagant gobs of their income to the medical-industrial complex. Down this road Medicare could be rethought, perhaps with rational Democrats lending a hand. We know these things will have to happen anyway. Otherwise the country is bankrupt.

P.S. Don’t kid yourself that Democrats have a plan other than blindly defending more and more subsidies for more and more health-care consumers. Single-payer is not a plan. It’s an invitation for the health-care industry—doctors, hospitals, the research establishment—simply to turn their full attention to serving the self-paying rich.

So, as far as I can see, the AHCA is not perfect, but it is a step in the right direction. Do I believe this because I’m partisan? No. A healthcare market can only function to deliver a high-quality, affordable product if there is an abundant supply to meet the desired need/demand. Only a functioning consumer-product market can provide that supply at an efficient price. Yes, we need a safety net for pre-existing conditions and we need to save more for future medical needs. We’ll only be able to do that if we give up the fantasy that health care is a right to be provided “free” from the government.

Lastly, in economics we learn that everything in life is a trade-off. We need to figure out what kinds of trade-offs we want to make, individually and as a society.

It’s the Fed, Stupid!

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

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

Read more

Book Review: Makers and Takers

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

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

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

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

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

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

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

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

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

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

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

Why I Will Vote Neither…Nor…

Halfway through the presidential primary season I decided I would not and could not conscientiously vote for either Donald Trump or Hillary Clinton in the 2016 election. As a political scientist, this was not an uninformed decision. I have been observing, and studying, the degeneration of American party politics for the past two decades and nothing has reversed this trend.

Today, faced with the reality that these are the two major party nominees, I have carefully reconsidered my position but have come to the same conclusion. I do not believe Trump has the temperament, nor do I feel Clinton has the integrity, while neither display the requisite political skills to lead this nation.

So what is one to do? Flip a coin and hold one’s nose? However, as I will argue here, there is a meaningful alternative.

My decision to vote neither-nor is based on several assumptions which all voters may not share. First, I equally disapprove of both presidential candidates offered up by the Democrat and Republican parties. You may not share that sentiment and thus should vote your conscience. (BTW, if you are truly enamored of the status-quo, perhaps you should cast a write-in vote for Ben Bernanke. Our current economic fate has little to do with Obama, Clinton, or the Congress. In geopolitics it seems we’ve just blindly bumbled along.)

Second, I live in a state where the Electoral College votes are not really in contention. More simply, I live in CA. Thus whether I vote for Trump or Clinton will have no impact on the outcome and thus can be considered a wasted vote. Unless you live in a closely contested swing state, such as FL, PA, or OH, your vote for either candidate is also a meaningless vote.

But do neither-nor voters really have a meaningless say in this election? Only if you hold your nose and vote for one of the above. If you are dissatisfied with the choices presented, this may be the first time in our lifetimes that an alternative vote has meaning – and it matters not which alternative you prefer. An abstention, or a vote for Gary Johnson, or Jill Stein, or a write-in for Mickey Mouse or Bernie Sanders is a protest vote – a vote that neither major party can count on and must respond to as the tally grows. What is the signal sent if Clinton and Trump both get 30% of the vote and 40% is captured by a neither-nor protest? How will either President-elect govern with such a dearth of public support? It’s political suicide to ignore upwards of 70% of the country.

This strategy is a slightly different argument than support for a 3rd party. A 3rd party can’t win unless it displaces one of the two major parties. Thus it’s success depends on the failure of one of those parties. However, a protest vote is different in that left and right anti-establishment groups coalesce on their dissatisfaction with the status quo. In other words, Sanders and Tea Party voters can combine as a force to influence the two major parties.

Others may apply a different logic. Some will claim a protest vote is an irresponsible waste of a vote, but I consider voting against one’s conscience while knowing better is the true irresponsible action. (A more erudite exposition of my sentiments was written by Jonah Goldberg at National Review, but his is an internecine conflict on the right. One wonders what the leftist Bernie Sanders voters are thinking at this point.)

Our society’s future is more important than an emotional partisan showdown. Things won’t change unless we change from the ground up. With enough protest votes, perhaps the Washington establishment will finally have to respond to a majority of Americans voicing dissatisfaction with the political status-quo.

The Guardian view on central bankers: growing power and limited success

I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment.

– John Maynard Keynes

This editorial by The Guardian points out the futilities of current central banking policy around the world. Unfortunately, they only get it half right: the prescience of Keynes’s first sentence is only matched by the absurdity of his second sentence. Calculate the marginal efficiency of capital? Directing investment? Solyndra anyone? The captured State is the primary problem of politicized credit…

Reprinted from The Guardian, Thursday 25 August 2016

To find the true centre of power in today’s politics, ignore the sweaty press releases from select committees, look past the upcoming party conferences – and, for all our sakes, pay no mind to the seat allocations on the 11am Virgin train to Newcastle. Look instead to the mountains of Wyoming, and the fly-fishers’ paradise of Jackson Hole.

Over the next couple of days, the people who set interest rates for the world’s major economies will meet here to discuss the global outlook – but it’s no mere talking shop. What’s said here matters: when the head of the US Federal Reserve, Janet Yellen, speaks on Friday, the folk who manage our pension funds will take a break from the beach reads to check their smartphones for instant takes.

This year the scrutiny will be more widespread and particularly intense. Since the 2008 crash, what central bankers say and do has moved from the City pages to the front page. That is logical, given that the Bank of England created £375bn of new money through quantitative easing in the four years after 2009 and has just begun buying £70bn of IOUs from the government and big business. But the power and prominence of central banks today is also deeply worrying. For one, their multibillion-pound interventions have had only limited success – and it is doubtful that throwing more billions around will work much better. For another, politicians are compelling them to play a central role in our politics, even though they are far less accountable to voters. This is politics in the garb of technocracy.

Next month is the eighth anniversary of the collapse of Lehman Brothers. Since then the US central bank has bought $3.7tn (£2.8tn) of bonds. [Note: We’re going on $4 trillion of free money pumped into the financial sector, folks] All the major central banks have cut rates; according to the Bank of England’s chief economist, Andy Haldane, global interest rates are at their lowest in 5,000 years. Despite this, the world economy is, in his description, “stuck”. This government boasts of the UK’s recovery, but workers have seen a 10% drop in real wages since the end of 2007 – matched among developed economies only by Greece. Fuelling the popularity of Donald Trump and Bernie Sanders is the fact that the US is suffering one of the slowest and weakest recoveries in recent history. In April, the IMF described the state of the global economy as “Too Slow for Too Long”.

Having thrown everything they had at the world economy, all central bankers have to show is the most mediocre of score sheets. When it comes to monetary policy, the old cliche almost fits: you can lead a horse to water, but you cannot make it avail itself of super-low interest rates to kickstart a sustainable recovery. Two forces appear to be at work. First, monetary policy has been used by politicians as a replacement for fiscal policy on spending and taxes, when it should really be complementary. Second, major economies – such as Britain after Thatcher’s revolution – have become so unequal and lopsided that vast wealth is concentrated in the hands of a few who use it for speculation rather than productive investment. QE has pushed up the price of Mayfair flats and art by Damien Hirst. It has done next to nothing for graphene in Manchester. [Does it take a rocket scientist to figure this out?]

All this was foreseen by Keynes in his General Theory: “I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment.”

Eighty years on, it is time those words were heeded by policymakers. In Britain, that means using state-owned banks such as RBS and Lloyds to direct loans to those industries and parts of the country that elected and accountable politicians see as being in need. Couple that with a tax system that rewards companies on how much value they add to the British economy, and the UK might finally be back in business.

The State, run by the political class and their technocrats? Yikes!!! Will we ever learn?

Helicopter Money

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

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

Aug 5, 2016 5:41 AM EDT

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

What is Helicopter Money? 

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

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

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

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

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

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

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

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

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

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

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

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

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