(What’s Left of) Our Economy: Is the Fed Taking Us to Economics Infinity – & Beyond?

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big govenment, CCP Virus, coronavirus, COVID 19, credit, economics, Fed, Federal Reserve, finance, fiscal conservatism, Franklin D. Roosevelt, Great Depression, Great Recession, Jerome Powell, moral hazard, New Deal, stimulus package, Wuhan virus, {What's Left of) Our Economy

Since I’ve never liked recycling my own material, I’ve rarely written here on specific arguments I make on Twitter. (And I make a lot of them!) But since these times are so exceptional, and have just generated such an exceptional response from the Federal Reserve, an exception here seems more than justified. So here are three longer-than-a-tweet expressions of concern about the broadest impacts of the massive support for the everyday economy (as opposed to the financial system) just announced by the central bank in response to the CCP Virus.

The first has to do with the perils of super-easy money. Fed Chair Jerome Powell has just again made clear in remarks this morning that there’s “no limit” to the amount of credit the central bank can pump into the economy to create a “bridge” over which imperiled businesses large and small, and now state and local governments, can cross in order to return intact to “the other side” of the pandemic.

Yes there are conditions – mainly, the borrowers need to be creditworthy (though the definition of “creditworthy” has been expanded). So at least in principle, previous individual or business “bad behavior” won’t be rewarded and thereby enabled going forward – a practice economists call incurring “moral hazard.” That’s (again, in principle) different from the previous financial crisis-related bailouts, when lots of bad or incompetent behavior, especially by Wall Street and the automobile industry, was generously rewarded.

(More encouragingly, other, impressive conditions have been placed on beneficiaries of previously announced fiscal economic aid – the type provided with taxpayer money by the Executive Branch and Congress – including temporary bans on stock buybacks.)

But moral hazard doesn’t necessarily result from the behavior of apples that are already bad. The concept is so powerful (and has long been so convincing) in part because it holds that showering borrowers with easy (and now free money) tends to turn good apples bad. That’s because a credit glut greatly reduces the penalties created for poor decisions by the normal relative scarcity of capital and the price (interest rates) that lenders normally demand in order to impose some degree of discipline.

The lack of adequate discipline on borrowers is surely one big reason why the post-financial crisis economic recovery had been so historically sluggish: Capital wasn’t being used very efficiently, and therefore wasn’t creating as much output and employment as usual. Maybe, therefore, all these new stimulus programs, whether desperately needed now or not, are also setting the stage for a dreary repeat performance?

Which brings up the second issue raised by the latest Fed and other federal rescue operations: Their sheer scale, and the Powell’s “no limits” declaration strongly undercuts the most basic assumption behind the very discipline of economics: that resources will be relatively scarce. That is, there will never be enough wealth in particular to satisfy everyone’s needs, much less wants.

Think about it. If all the wealth needed or wanted could somehow be automatically summoned into existence, why would anyone have to think seriously about economic subjects at all? What would be the point of trying to figure out how to use resources most productively, or even how to distribute them most equitably?

I remain deeply skeptical about the idea that money literally “grows on trees” (as most of our ancestors would have put it). But Powell’s statement sure seems to lend it credence. Moreover, I’m among the many who have been astonished that the United States hasn’t so far had to pay the proverbial piper for all the debt that’s been created especially since financial crisis hit. So it’s entirely possible that I – and others who have fretted about the spending and lending spree the economy had already been on before the pandemic struck – have had it completely wrong.

It would still, however, seem important for economists and national leaders to make this point at least more explicitly going forward. For if it’s true, why even lend out money? Why have banks and financial markets themselves? Why shouldn’t the government just print money and distribute it – including to government agencies? Why for that matter tax anyone, rich or poor?

Just as important, if “on trees” thinking remains wrong – and possibly dangerous – folks who know what they’re talking about had better make the possible costs clear, too. Because if enough Americans become persuaded that there is indeed this kind of massive free lunch, what would stop them from demanding it? Why wouldn’t it be crazy not to? And how could elected leaders resist?

In fact, I’m also concerned about the emergence of a shorter term, more humdrum version of this situation. (This is my third worry for today.) Specifically, Powell clearly views the new Fed programs as emergency measures, which will be dialed back once the emergency is over. Similarly, at least some of the nation’s supposed fiscal conservatives are claiming that they’ve supported the sweeping anti-CCP Virus because it amounts “restitution” for all those individuals and businesses whose “property and economic rights” have been taken from them by the government decision to shut down the economy.

Nonetheless, let’s keep in mind that as former President Franklin D. Roosevelt was rolling out his New Deal programs to fight the Great Depression of the 1930s, he continually justified them as emergency measures. The President himself tried returning to his previous backing for budget balancing once some signs of recovery appeared.

His optimism, as it turned out, was premature, and helped bring on a second slump. Nonetheless, even had this about-face not failed, is it remotely likely that many other New Deal programs, ranging from Social Security to the Tennessee Valley Authority to the Federal Deposit Insurance Corporation to federal mortgage support agencies wouldn’t be alive and kicking, to put it mildly. Obviously that’s because however much most Americans may talk a small government game, they understandably like big government when it delivers tangible benefits.

As a result, when Powell, and others, promise that “When the economy is well on its way back to recovery…we will put these emergency tools away,” you’re free to smirk. The first clause in this sentence alone is grounds for caution, stating that the aid won’t be withdrawn once the worst is over, or when a rebound starts, but when normality is a certainty. If the national experience following the last financial crisis is any guide, when the Fed, for example, even pre-CCP Virus kept interest rates super low for many years after some growth had returned, “the other side” is going to be a place whose location will keep receding for the foreseeable future.

So the specter of the economy remaining hooked on massive government stimulus both for economic and these political reasons could be another reason for bearishness about a robust near-term rebound. (And no, I’m not trying to give out any investment advice here.)  

I’m not necessarily being critical here of the stimulus packages. Just trying to spotlight the safest bets to make, and the need to examine the future with eyes wide open. Is there any viable alternative?

Im-Politic: The Meaning of Trump-ism

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2016 election, Andrew Jackson, Barry Goldwater, big government, Donald Trump, establishment, Franklin Roosevelt, free trade, Hillary Clinton, Im-Politic, Immigration, internationalism, Jacksonian Democracy, Mainstream Media, middle class, New Deal, Open Borders, Populism, presidential debate, protectionism, Ronald Reagan, Sun Belt, working class

On the eve of what could be an historically transformational debate for American politics, I’m still struck by (a) how mysterious to the nation’s chattering classes Donald Trump’s appeal to so many Main Street Americans remains; and (b) how vividly the elites’ befuddlement at – and clear disdain for – the maverick Republican presidential nominee keeps signalling their (witting or unwitting) cluelessness about life outside their increasingly chichi urban bubbles.

First, though, I’m serious about the importance of tonight’s debate between Trump and his Democratic counterpart, Hillary Clinton. His insurgency against an entire, bipartisan national political power structure may be no more sweeping than Ross Perot’s in 1992. But having captured one of the two major parties, he faces none of the so-far insuperable institutional obstacles encountered by third party candidates in presidential politics. As a result, Trump’s odds of victory in November seem solid, and it’s at least arguable that this event would produce the greatest shock to America’s political culture since the Jacksonian revolution of the 1820s.

Of course, American political history has been dotted with other strong candidates for the mantle of revolution (at least by the nation’s admittedly moderate standards). Ronald Reagan originally came from Hollywood, and promised to kill off the post-New Deal model of mixed capitalism that even a critical mass of Republicans had embraced since the Eisenhower era. But Reagan was strongly backed not only by big segments of middle- and working-class Americans who felt neglected, and on the tax front, even exploited, by Big Government politicians. He would never had made the White House had he not also championed a counter-business establishment that had risen outside the Northeast, and especially in a Sun Belt region that styled itself as the embodiment of traditional American rugged individualism.

Moreover, although Reagan also promised a much harder line in foreign policy, in crucial respects his worldview and proposals still fell within the bounds of the strategic ideology that had prevailed in America since Pearl Harbor – which has been dubbed internationalism. Though much more confrontational than his immediate predecessors, Reagan still bought the notion that America’s vital interests still spanned the globe, and the related assumption that active U.S. engagement of some form in even the remotest countries and regions was essential.

Barry Goldwater had run on a similar insurgent platform in 1964, but lost in a landslide – though his nomination victory over that Republican establishment of that era clearly paved the way for Reagan’s far more complete and lasting triumph.

Policy-wise, a strong case can be made that Franklin Roosevelt’s New Deal was more of a break with the past than practically anything Trump has proposed. Nor was New Deal innovation restricted to the domestic economy, as its pursuit of trade liberalization reversed a protectionist approach that had reigned in America for most of its history since the founding. In political, social, and cultural terms, Roosevelt’s triumph in 1932 revealed that eastern ethnic cities and their worldviews had supplanted those of small midwestern towns and rural communities. In many cases, moreover, the New Dealers themselves were something fundamentally new – especially the academics. But in an ironically Reaganesque way, they were less outsiders than representatives of an emerging counter-establishment.

As personally flamboyant as he was, Theodore Roosevelt was an establishmentarian at heart as well. In fact, one of his most important – and underappreciated – contributions to American politics was encouraging his upper class patrician peers to stop looking down their noses at public life, take an active role in politics, and make sure that noblesse oblige steered the nation’s course as opposed to the petty concerns of Democratic machine politicians and the ferocious greed of the nouveaux riches Captains of Industry.

So I really do think that you need to go back to Old Hickory to find an American politician who explicitly stood for the rabble and actually won the White House. Will Trump actually follow through with a populist agenda ? I know how many skeptics continue insisting that Trump’s only interest is further lining his own pockets and those of the Wall Street-ers he’s chosen as economic advisers. Since I’m not clairvoyant, I don’t feel confident in voicing an opinion either way. But interestingly, much of the rest of Wall Street doesn’t seem to agree. Nor does Big Business. Further, would Trump excite such vehement opposition from the nation’s offshoring- and Open Borders-happy Mainstream Media and bipartisan policy establishments if he was simply a crook? Their reactions to Trump’s views on national security don’t seem exactly blasé, either.

Which brings us to the combination of bafflement and outrage voiced ceaselessly by these elites regarding Trump’s appeal – which has brought him to within striking distance of the White House. I don’t claim to have all the answers on this score, but here’s one consideration that establishment Never-Trump-ers not only haven’t thought of but seem incapable of appreciating: Their charges of Trump bullying and even Trump business scamming are failing and even backfiring for the same reason that their charges of Trump’s working the system as relentlessly as any other special interest have met the same fate.

Simply put, when many of his supporters hear these indictments, they’re not thinking about whatever rudeness or prejudice or even indecency the relevant remarks allegedly reveal. Just as Trump’s lobbying apparently has prompted hopes that, “Finally! Someone’s going to work the system for me!” the moral turpitude charges suggest “Finally! Someone’s going to be my bully! Someone’s going to be a con man on my behalf!”

And though these aspirations sound odious themselves, it’s revealing – and in my view encouraging – that the two likeliest issue candidates for this Trump approach seem to be trade and immigration. After all, they concern international relations, where for all the talk issuing from the establishment about the importance of and need for norms and rules, power and skill in its use is the paramount currency, and will remain so for the foreseeable future.

Nonetheless, as has been true throughout his campaign, this source of Trump strength has been a persistent Trump weakness – or perhaps more accurately, a foregone opportunity. For as I have long maintained, with just a little more precision, these points could be made every bit as powerfully without slurs directed at largely blameless parties (e.g., illegal immigrants, moderate Muslims), or understandably perceived in this way, and without vulgar sexism (against, e.g., his Republican primary rival Carly Fiorina, or Fox News anchor Megyn Kelly, or even Clinton for taking a lavatory break). Hard-core Trump-ers would have been just as enthusiastic, and many fewer independents turned off.

All the same, since Trump has essentially pulled even in the race, since not trivial amounts of voters remained undecided, and since big turnout questions dog Clinton in particular, his foregone opportunity has not been completely lost. Will he begin seizing it starting tonight?