Our So-Called Foreign Policy: Globalists Keep Abusing the Lessons of History

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America First, globalism, John Maynard Keynes, Jonathan Kirshner, Our So-Called Foreign Policy, The New York Times, Trump, Versailles treaty, Wall Street, Woodrow Wilson, World War I

Although I’m a long ways past high school, I wouldn’t be at all surprised to learn that students are still being taught that the main lesson Americans should draw from their country’s foreign policy during the early decades of the twentieth century is that standing aloof from world affairs is a catastrophic mistake.

The most familiar feature of this claim holds that by preventing the United States from joining the League of Nations after World War I, America’s so-called isolationists guaranteed that no effective counter to fascist aggression could be mounted, and thereby guaranteed the outbreak of a far more destructive global conflict. But an economic indictment has been leveled against U.S. policy during those years as well.

As made clear between the lines of a December 7 New York Times op-ed piece, supporters of the foreign policy globalism opposed by President Trump and most of his backers have long ardently believed that international financial policies after the First World War also took a disastrous, “America First”-type turn. One big problem, though – history actually shows that the fundamental mistake Washington made was not too little international economic engagement after the war, but too much during it.

In the article – which usefully commemorates the hundredth anniversary of a seminal book by iconic twentieth century British economist John Maynard Keynes – Boston University political scientist Jonathan Kirshner rightly lauds Keynes’ eloquent case against the economic punishments levied against Germany by the 1919 Versailles peace treaty. He’s also right in criticizing the United States’ “stubborn” and “shortsighted” insistence that its allies fully repay the enormous war debts they’d racked up to America.

As Keynes himself insisted, those obligations were “a menace to financial stability everywhere,” imposing a “crushing burden,” that would be “a constant source of international friction.” An international financial order that was little more than a tangle of debts and reparations, he warned, could hardly “last a day.”

Kirshner, though, looks like he has a hidden – globalist – agenda. Echoing today’s criticisms of Mr. Trump’s trade and foreign policies (which, I need to note, have been far from models of consistent America First-ism), he condemned American leaders of the 1920s for ending a “brief flirtation” with internationalism (a pre-Trump term for globalism) under President Woodrow Wilson and returning to “nationalism and nativism.” “Domestic demands,” he continued, were placed above “global concerns.”

Even more pointedly, he repeated Keynes’ contention that it “will be a disaster for the world if America isolates herself.”

Nonetheless, you don’t need to buy into America First-ism or even simply criticize globalism to recognize that Kirshner (and Keynes himself, for that matter), have completely ignored the financial run-up to Versailles. During these years, private American banks lent massively to the belligerents before the U.S. entry into the war in April, 1917 (overwhelmingly to the allies, but including minor credits extended to Germany), and after America joined the conflict, Washington took over.  (Here’s a handy brief history.)

In other words, the eventually ruinous war debts amassed by the European victors were possible largely because Wall Street massively intervened in the conflict financially in its early years, and because the U.S. government continued underwriting the fighting in its latter stages.

Also – and comparably – crucial: Just as America’s very entry into the war both guaranteed its prolongation and ensured that its ending would become a exercise in self-righteous, destabilizing, and ultimately disastrous vengeance rather than the kind of cold-blooded but hard-headed diplomacy that had contained the damage from previous conflicts, its loans to the belligerents worsened the destructiveness of the fighting and the consequent challenges of reconstruction. Indeed, Wilson himself was worried that Wall Street’s largesse was helping the allies in particular to wage war far longer than they otherwise could have afforded, and helped ward off the sheer exhaustion that would force a negotiated peace.

Thus the real lesson of America’s early 20th century financial diplomacy isn’t that international engagement is always bad, or that international non-involvement is always good.  It isn’t even that the United States should never seek to have its cake and eat it, too – which was clearly the expectation of Wilson’s successors.  It’s that in this particular instance, America’s combination of actions backfired. 

And let’s not forget a broader lesson for students of foreign policy and its record that’s reinforced by Kirshner’s article:  Beware of scholars cherry-picking history.   

(What’s Left of) Our Economy: Trade War(s) Update

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Argentina, Bloomberg.com, Brazil, business investment, China, CNBC, consumption, currency manipulation, debt, Democrats, digital services tax, election 2020, EU, European Union, export controls, Financial Crisis, France, Huawei, internet, investors, manufacturing, production, steel, steel tariffs, tariffs, Trade, Trade Deficits, trade enforcement, trade war, Trump, Wall Street, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

The most important takeaway from this post about the current status of U.S. trade policy, especially toward China, is that it may have already been overtaken by events since I began putting these thoughts together yesterday.

What follows is a lightly edited version of talking points I put together for staffers at CNBC in preparation for their interview with me yesterday. I thought this exercise would be useful because these appearances are always so brief (even though this one, unusually, featured me solo), and because sometimes they take unexpected detours from the main subject. .

Before presenting them, however, let’s keep in mind this new Bloomberg piece, which came on the heels of remarks yesterday by President Trump signaling that a trade deal with China may need to await next year’s U.S. Presidential election, and plunged the world’s investors into deep gloom. This morning, however, the news agency reported that considerable progress has been made despite “harsh” rhetoric lately from both countries. It seems pretty thinly sourced to me, and the supposed course of the trade talks seems to change almost daily, but stock indices are up considerably all the same.

Moreover, even leaving that proviso aside, what I wrote to the CNBC folks yesterday seems likely to hold up pretty well. And here it is:

1. The President’s latest comments on the China trade deal – which he says might take till after the presidential election to complete – seriously undermines the claim that he considers a deal crucial to his reelection chances because it’s likely to appease Wall Street and thereby prop up the economy. Of course, given Mr. Trump’s mercurial nature, and negotiating style, this latest statement could also simply amount to him playing “bad cop” for the moment.

2. His relative pessimism about a quick “Phase One” deal also seems to reinforce a suggestion implicitly made yesterday by Commerce Secretary Wilbur Ross when he listed verification and enforcement concerns as among the obstacles to signing the so-called Phase One deal. I have always argued that such concerns are likely to prevent the conclusion of any kind of trade deal acceptable to US interests. That’s both because of China’s poor record of keeping its commitments, and because the Chinese government is too secretive and too big to monitor effectively even the most promising Chinese pledges to change policies on intellectual property theft, illegal subsidies, discriminatory government procurement, and other so-called structural issues.

3. Recent reports of the United States considering tightening (or expanding) restrictions on tech exports to Chinese entities like Huawei also support my longstanding point that the US and Chinese economies will continue to decouple whatever the fate of the current or other trade talks.

4. In my opinion, the President is absolutely right to play hard-to-get on China trade, because Chinese dictator Xi Jinping is under so much pressure due to his own weakening economy, and because of the still-explosive Hong Kong situation.

5. I’ll be especially interested to learn of the Democratic presidential candidates’ reactions to Mr. Trump’s latest China statement, as well as the announcement of the reimposed steel tariffs on Argentina and Brazil, and the threatened tariffs on French “digital services” [internet] taxes. With the exception of Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders, the candidates’ China policies seem to boil down to “Yes, we need to get tough with China, but tariffs are the worst possible response.” None of them has adequately described an alternative approach. The reactions of Democratic Congress leaders Nancy Pelosi in the House and Charles Schumer will be worth noting, too. The latter has been strongly supportive of the Trump approach in general.

6. The new steel tariffs, as widely noted, are especially interesting because they were justified for currency devaluation reasons, with no mention made of the alleged national security threats originally cited as the rationale. Nonetheless, I don’t believe that they represent a significant change in the Trump approach to metals trade, because the administration has always emphasized the need for the duties to be global in scope – to prevent China from transshipping its overcapacity to the US through third countries, and to prevent third countries to relieve the pressures felt by their steel sectors from Chinese product by ramping up their own exports to the US. Obviously, all else equal, countries with weakening currencies (for whatever reason) will realize big advantages in steel trade, as the prices of their output will fall way below those of competitors’ steel industries.

7. Regarding the tariffs threatened in retaliation for France’s digital services tax, they’re consistent with Trump’s longstanding contention that the US-European Union (EU) trade relationship has been lopsidedly in favor of the Europeans for too long, and that tariff pressure is needed to restore some sustainable balance. In this vein, I don’t take seriously the French claim that the tax isn’t targeting U.S. companies specifically. After all, those firms are the dominant players in the field. Second, senior EU officials have started talking openly about strengthening Europe’s “technological sovereignty” – making sure that the continent eliminates its dependence on non-European entities in the sector (including China’s as well as America’s). The digital tax would certainly further the aim of building up European champions – and if need be, at the expense of US-owned companies.

By the way, this position of mine in no way reflects a view that more taxation and more regulation of these companies isn’t warranted. But it’s my belief that these issues should be handled by the American political system.

Also of note: Trump’s suggestion this morning that the French tax isn’t a big deal, and that negotiations look like a promising way to resolve the disagreement.

Finally, here are two more points I wound up making. First, I expressed agreement that the President’s tariff-centric trade policies have created significant uncertainties in the economy’s trade-heavy manufacturing sector in particular – stalling some of the planned business investment that’s essential for healthy growth. But I also noted that much of this uncertainty surely stems from the on-again-off-again nature of the tariffs’ actual and threatened imposition.

As a result, I argued, uncertainty could be significantly reduced if Mr. Trump made much clearer that, whatever the trade talks’ fate, the days of Washington trying to maximize unfettered bilateral trade and investment are over, and a new era marked by much more caution and many more restrictions (including tighter export controls and investment restrictions, as well as tariffs), is at hand.

Second, at the very end, I contended that President Trump deserves great credit for focusing public attention on the country’s massive trade deficits in general. For notwithstanding the standard economists’ view that they don’t matter, reducing them is essential if Americans want their economy’s growth to become healthy, and more sustainable. For as the last financial crisis should have taught the nation, when consumption exceeds production by too great a margin, debts and consequent economic bubbles get inflated – and tend to burst disastrously.

Making News: Video of Presidential Campaign Economics Interview Now On-Line!

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Democrats, economy, election 2020, Elizabeth Warren, Liquid Lunch, Making News, NewsmaxTV.com, Wall Street

This past week has been so crazy news-wise that I’d completely forgotten to post a link to a video of an interview I did for NewsmaxTV.com two Fridays ago. The subject: some recent economy-related developments in the current and intensifying presidential campaign!

So click here for a great (and still timely!) discussion on the “Liquid Lunch” program focusing in particular on Massachusetts Senator Elizabeth Warren’s rise to just-about-front-runner status among the Democratic contenders – and on an apparently strong reaction from Wall Street.

And keep checking with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

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bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.

Im-Politic: Comey’s Real Motivation?

Tags

2016 election, Charles Krauthammer, classified material, Eric Holder, FBI, Financial Crisis, Hillary Clinton, Im-Politic, indictment, James Comey, prosecutors, rule of law, Wall Street

Possibly the only certainty surrounding the FBI’s decision not to indict Hillary Clinton for mishandling sensitive government documents is that we’ll be buried in analysis and commentary for the foreseeable future. That’s why it’s so remarkable that the most important point we’ll hear about the controversy may have already been made – by nationally syndicated conservative columnist Charles Krauthammer.

Addressing FBI Director James Comey’s unwillingness to recommend criminal charges against the presumptive Democratic presidential candidate, Krauthammer provided an explanation that’s far more convincing than the claims that Comey’s conclusion was legally justified (unless the “gross negligence” set as a bar for criminality is indeed substantially different than the “extreme carelessness” the FBI did find).

The Krauthammer take is also more convincing than the charges filling the air that the Republican Comey was responding to political pressure from a Democratic administration, or that he absolved Clinton in exchange for an implicit or explicit promise of an official job if she won the White House. Not that this kind of sleaze is unknown in American politics. But these accusations and insinuations apparently clash with everything said over the years by Democrats and Republicans, including hyper-partisans, about Comey’s integrity.

Krauthammer’s alternative hypothesis was more comforting – but only somewhat so. In his view, Comey wound up opposing criminal prosecution for fear of decisively influencing the presidential election – the nation’s most important political contest – with a legal decision. In Krauthammer’s words, Comey:

“knows if he had indicted her, that’s the end of her campaign. That will be the event of the 2016 campaign history. He will be the — it will be the decision that sways everything the most. I think he didn’t want to be that. And I think it’s because she is running. Not so much she is a Clinton, not so much because of her reputation and all that and her power, but I think Comey did not want to be the person that history remembers as changing the course of this presidential election.”

From a purely human and political standpoint, such reluctance to shape political outcomes through even entirely legitimate exercises of legal authority would be entirely understandable. In many ways, the nation still hasn’t recovered from the Supreme Court’s involvement in the 2000 presidential election’s Florida recount. Another legal decision that further poisons the atmosphere and further polarizes the electorate is the last thing America needs.

Nonetheless, if this was indeed Comey’s rationale, then he greatly overstepped his job description. However defensible this judgment on the merits, precisely because law enforcement and politics should be kept as separate as possible, Comey would have had no business deciding a criminal case based on his (or anyone’s) sense of how even the most important election would be affected. The scope for abuse is so vast that this simply can’t be the justice system’s call.

In fact, such reasoning would be disturbingly reminiscent of former Attorney General Eric Holder’s refusal to prosecute Wall Street kingpins for their role in fostering the financial crisis because he was

“concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”

Prosecutors are supposed to prosecute – nothing more, nothing less. If they don’t feel free to pursue lawbreakers with a “chips fall where they may” attitude, they inevitably undermine the foundational American belief that no person or institution is above the law. Comey may have had the best of intentions, but even if a sincere and reasonable belief that the public interest required legal restraint motivated him, he would stand guilty of betraying the public trust.

(What’s Left of) Our Economy: New Data Showing the Fed Really has Worsened Inequality

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asset prices, Bank of America, Ben Bernanke, bubbles, Federal Reserve, finance, housing, inequality, interest rates, Janet Yellen, QE, quantitative easing, recovery, stocks, Wall Street, zero interest rate policy, ZIRP, {What's Left of) Our Economy

Here’s a shock! A study claiming that the Federal Reserve’s historically unprecedented easy money policies have supercharged Wall Street (and the rich) and left Main Street (and the rest) in the dust! And it comes from Wall Street!

The debate over how the central bank’s zero interest rate policy (ZIRP) and quantitative easing bond-buying program (QE) has impacted inequality in America has been just as heated as the debate over how these decisions have impacted economic growth and the prospects for recreating real national prosperity.

The critics charge that easy money has greatly widened the rich-poor gap, largely by boosting incentives to buy and own stocks, and thereby fueling a long, powerful bull market that has overwhelmingly benefited the wealthy because they dominate stock ownership.

The mainstream Fed position was stated by Chair Janet Yellen at the September press conference following the decision to keep interest rates on hold:

“It is true that interest rates affect asset prices, but they have a complex effect through balance sheets, through liabilities and assets. To me, the main thing that an accommodative monetary policy does is put people back to work. And since income inequality is surely exacerbated by a high—having high unemployment and a weak job market that has the most profound negative effects on the most vulnerable individuals, to me, putting people back to work and seeing a strengthening of the labor market that has a disproportionately favorable effect on vulnerable portions of our population, that’s not something that increases income inequality.”

Her predecessor, Ben Bernanke, has made similar points, albeit with more reservations.

A new study from Bank of America, however, contains some data strongly indicating that the Fed’s critics deserve to win this clash hands down. For example, the B of A researchers examined the fate of various possible uses of $100 since the Fed began massively supporting the U.S. economy after the collapse of Lehman Brothers in the fall of 2008. The main findings? A $100 dollar investment in a standard stock and bond portfolio during this time would have more than doubled in value. But a $100 dollar wage would be worth only 14 percent more.

The same methodology also reveals that the financial system is channeling much more credit to the wealthy than to the rest. Thus for every $100 they raised at the start of 2010, venture capital and private equity funds are now raising $275. But for every $100 of mortgage credit extended in America since then, just $61 is being loaned and accepted today. And prime real estate in the nation has appreciated in value more than ten times as much as all U.S. residential real estate.

These results (and others in the study) hardly end the debate over the Fed and inequality. Bernanke and Yellen still make powerful “counterfactual”-based arguments – i.e., claiming that as bad as the situation is now, it would be even worse had the central bank not acted so decisively. And B of A’s possible motives need to be noted. Generally speaking, the financial sector has been campaigning strongly for a Fed rate hike because rock bottom interest rates have greatly reduced the profitability of lending.  (In that respect, this report may not be such a shock.)

But the B of A study should greatly increase the burden on the Fed to demonstrate that its monetary policies haven’t been little more than a boondoggle for the nation’s upper classes – not to mention a flop in and possibly an obstacle to restoring genuine economic health.

Im-Politic: Why CNBC’s Bias isn’t Simply Partisan

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bailouts, Ben Carson, Bernie Sanders, Black Lives Matter, boardroom liberalism, capitalism, Clinton Democrats, CNBC, crony capitalism, Democrats, Donald Trump, free markets, globalization, Im-Politic, Immigration, Larry Kudlow, media, media bias, Noam Scheiber, Obama, Occupy Wall Street, Tea Party, Trade, Wall Street

Many of those nice enough to comment on my post yesterday on CNBC’s awful presidential debate performance have attributed the often abusive questions posed by the moderators as evidence of liberal/Democratic media bias. And that’s what some of the Republican candidates charged as well. My response? I wish the fundamental problem was that obvious – and therefore that correctable, at least in theory.

Instead, what the network’s evident mindset represents is the much more insidious development of a national political class homogeneous enough to share fundamental values, assumptions, and positions (with all too superficial variations) and powerful enough to ignore and, when necessary, keep out of the governing system against-the-grain views.

Part of this analysis reflects my own experience as a frequent CNBC viewer – and not only as background noise during the workday. I think the network’s coverage of finance, business, and economic headline developments is acceptable, and it at least mentions major breaking news in other spheres. Yes, I could watch Bloomberg, or Fox Business. But as my father used to say, we’re all creatures of habit, and my sampling of the newer competition has not yet persuaded me to change the channel permanently. Nor have I yet found any other continuous sources of reasonably serious hard news.

And when I hear or see the letters, “CNBC,” my first reaction isn’t “Democrats.” Quite the opposite. Even with the blatantly partisan Larry Kudlow gone from daily programming, the network clearly is tailoring its material towards the investment community and the steadily shrinking pool of American retail investors – groups not known for progressive leanings. In fact, with the latter ever more skewed toward the upper income strata, it hasn’t been surprising to see CNBC broadcast more and more segments that openly celebrate the “lifestyles of the rich and famous.” That’s of course on top of the broader tendency of the business press to create and glorify the “Superstar CEO” – a practice that (amazingly? or not?) has survived the financial crisis and ensuing recession.

When it comes to policy – overwhelmingly economic policy, of course – CNBC is firmly in the free market camp. Minimal taxation and regulation are constantly touted, as are free trade agreements, un- or barely fettered immigration policies, and the supposedly iron, unchangeable, undeniable realities that make them necessities – the historically inevitable and beneficent globalization of business; the equally inexorable triumph of capitalism worldwide; and the resulting supreme imperative of participating in and growing foreign market opportunities. And when the focus is domestic, CNBC therefore places on a pedestal “business-friendly” states, which unlike their more neanderthal (usually Democratic governed) counterparts are supposedly wise enough to spare companies of nearly all the costs of public goods and services – and to discourage unions.

It’s true that much else that’s central to CNBC’s worldview isn’t very consistent with free markets. But institutions like activist central banking are accepted not so much as regulatory exceptions to a more liberal rule, but as fixtures without which the economic landscape would be unrecognizable, and therefore literally inconceivable. Similarly, although the bailouts of non-financial companies were positively scorned, the bailout of Wall Street was (a little sheepishly) accepted because, well, it beat global destruction.

These exceptions to free market norms have convinced many that CNBC is extolling not genuine market capitalism, but crony capitalism, in which the biggest, most politically connected businesses manipulate government to serve their own selfish purposes and especially to marginalize newer, less influential competitors or even prevent them from forming. I agree that the network isn’t inclined to assail this form of corruption. (Of course the pugnacious Rick Santelli is a prominent exception.) But another implicit assumption needs to be added here to flesh out the full CNBC worldview, and it concerns the ostensible virtues of what I’ve referred to as “boardroom liberalism.”

This is a school of thought identified by New York Times reporter Noam Scheiber, and he put it better than I ever could:

“It’s a worldview that’s steeped in social progressivism, in the values of tolerance and diversity. It takes as a given that government has a role to play in building infrastructure, regulating business, training workers, smoothing out the boom-bust cycles of the economy, providing for the poor and disadvantaged. But it is a view from on high—one that presumes a dominant role for large institutions like corporations and a wisdom on the part of elites. It believes that the world works best when these elites use their power magnanimously, not when they’re forced to share it. The picture of the boardroom liberal is a corporate CEO handing a refrigerator-sized check to the head of a charity at a celebrity golf tournament. All the better if they’re surrounded by minority children and struggling moms.”

Scheiber used the term to describe the outlook of President Obama, and obviously it holds for Clinton-style Democrats, too. Just as important, because the most powerful ideologies and worldviews can accommodate a fair amount of diversity, it’s easy to imagine a conservative version of “boardroom liberalism,” and in fact, between the two of them, they dominate the perspectives of the establishment politicians, senior bureaucrats, media figures, and so-called policy intellectuals that in turn dominate American politics and discussion thereof.

In my view, this is the perspective that reigns at CNBC, and throughout the establishment media. And although it’s surely closer to the Democratic Party mainstream than to the Republican rank and file, and reserves special contempt for the Tea Party faction (as well as religious conservatives), it doesn’t hold much affection for Bernie Sanders and the Occupy Wall Street crowd, either.  (History-induced guilt typically inspires more indulgence for Black Lives Matter.)

I’m sure it’s clear why an ideologically uniform press corps is as big a threat to a democracy worthy of the name as an ideologically uniform party system. But an even greater danger is posed when the same precepts unite those media and political worlds – along with their colleagues in think tank ranks and academia. Conventional wisdoms become completely ossified and the decision-making apparatus becomes almost impervious to fundamentally new ideas – even in times of crisis.

When powerful challengers from utterly alien universes do loom on the horizon (e.g., a Donald Trump or a Ben Carson, Tea Party-ers uninterested in politically convenient compromises), all the major occupational groups and ideological sects comprising this polyglot establishment rush to join forces against the invaders. And they employ all the (predominantly verbal) weapons they can muster, ranging from slanderous invective to loudly professed indifference to chortling condescension to outright ridicule. This counterattack, moreover, is conducted with unusual vehemence when the outsiders make perfectly clear that they have no use, much less respect, for the conventional wisdom-mongers.

On the one hand, it’s comforting that a lively alternative media-verse has emerged in recent years – precisely in response to the power, intolerance, and resulting arrogance of the establishment. On the other hand, the establishment still seems firmly ensconced – in journalism and in both parties. Since it’s still early in the 2016 presidential cycle, this year finally being different can hardly be ruled out. But as Yogi Berra once said, “It gets late early out here.”

(What’s Left of) Our Economy: Bernanke Flunks Crisis History 101

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Ben Bernanke, bubble decade, bubbles, Federal Reserve, finance, Financial Crisis, Great Recession, Lehman Brothers, monetary policy, recovery, regulation, Wall Street, zero interest rate policy, ZIRP, {What's Left of) Our Economy

Because America is unlikely to avoid a rerun of the last financial crisis and recession without recognizing why they broke out in the first place, it can’t be good news that former Fed Chair Ben Bernanke still apparently hasn’t learned the main lesson of this near-catastrophe (and its still punishing aftermath): The crisis was rooted ultimately not in failures of the American financial system, but in weaknesses in the real economy that remain largely neglected.

I say “apparently” because this judgment is based on interviews Bernanke has granted to tout his new memoir on the crisis, and I haven’t read the volume. But it must be significant that both Bernanke and the leading financial journalists who questioned him have concentrated exclusively on the role played by Wall Street’s behavior and structures on the one hand, and lax regulation on the other, in nearly destroying the global economy. No attention whatever has been paid to the deteriorating ability of the Main Street economy to generate adequate levels of real wealth and income; to decisions made going back to the early 2000s to mask these deficiencies with crackpot credit-creation practices; or to the reckless lending and investment patterns to which this artificial credit glut led.

Not that Bernanke is the last word in crisis-ology. Yes, he spearheaded Washington’s efforts to contain the meltdown and spark recovery. But since his tenure at the central bank began in 2002, just about when the bubbles began inflating, and his Chairmanship began in 2006, just before they started bursting, he clearly was as much part of the problem as he’s been part of what’s so far passed for a solution. So his memoir is obviously an opportunity for reputation-burnishing. But finance has so completely dominated America’s views of the crisis and its origins that Bernanke’s perspective can’t simply be dismissed as self-serving.

Here’s a typical Bernanke comment presenting his view that the crisis was rooted in a panic in the unregulated, uninsured non-bank portion of the financial system that had grown so large that it became capable of endangering an otherwise healthy non-financial economy:

“The previous six months [before Lehman Brothers failed], the economy had been growing, house prices had fallen moderately. After Lehman, the economy just went into a death spiral. The fourth quarter of 2008 and the first quarter of 2009 was among the sharpest declines in the economy in U.S. history. Once the crisis went into a new gear, house prices started falling more quickly, and that had a feedback mechanism. Absent the broad-based panic that froze credit markets, caused asset prices to drop sharply and punctured confidence, we wouldn’t have had nearly so bad a recession.”

Bernanke has even appeared to deny that the economy during the previous decade was bubble-ized by overly easy Fed monetary policy. Asked whether the central bank had kept interest rates too low for too long – in fact long after the shallow recession of 2001 had ended – Bernanke responded:

“The first part of a response is to ask whether monetary policy was, in fact, a major contributor to the housing bubble and all that happened. Serious studies that look at it don’t find that to be the case. People such as Bob Shiller [a Nobel laureate currently serving as a Sterling professor of economics at Yale University], who has a lot of credibility on this topic, says that: it wasn’t monetary policy at all; it came from a mania, a psychological phenomenon, that took off from the tech boom and moved into housing.”

Here’s the immensely big picture that Bernanke is missing. The 2001 to 2007 economy was indeed growing, but the growth was energetically propped up by artificial – and, as it turned out, completely unsustainable – government stimulus. In fact, as shown in this (admittedly complicated) chart I made up while that previous recovery was proceeding, the federal funds rate – the short-term rate directly controlled by the Fed – had been plunged to multi-decade lows during that period, whether in inflation-adjusted or current dollar terms. At the same time, within a few short years, George W. Bush’s administration and the Congresses it worked with drove the federal budget from its biggest surplus in decades as a share of the total economy into deep deficit.

But did this unprecedented peacetime stimulus result in unprecedented peacetime growth? As the chart shows, anything but. And the discrepancy between Washington’s herculean efforts and the the economy’s mediocre results could not have made clearer that the nation’s engines of real (not financial) wealth creation, and thus real prosperity, had broken down.

As I’ve written repeatedly, American leaders could have responded with programs to strengthen that real economy, and therefore the real spending power of American workers. Instead, they tried to create the illusion of prosperity by enabling consumer spending that was not remotely justified by consumer incomes.

Fast forward to 2015, and despite the literally trillions of dollars of stimulus poured into the economy by the Fed under Bernanke and his successor, Janet Yellen, U.S. incomes continue to lag and the current recovery has seen even weaker growth than that of the bubble decade. It’s true, as Bernanke and others have argued, that expansion today is being slowed by a significant reduction in federal deficits. But it’s even more important to recognize that the economy will never truly heal unless the private sector leads. And let’s not forget that, thanks to the zero interest rate policy put in effect by Bernanke’s Fed in December, 2008, credit in America has never been cheaper.

Bernanke by no means deserves all or even most of the blame for the nation’s recent economic malaise. The last time I checked, the president and Members of Congress have been cashing paychecks all this time as well. But since leaving the Fed last year, Bernanke has been outspoken enough to make clear his ambition to remain a major economic voice. Judging from his take on why the financial crisis broke out, however, he doesn’t have much of value to teach.

(What’s Left of) Our Economy: A Blame-the-Victim Theory of Trade Policy

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consumers, free trade, free trade agreements, lobbying, Mancur Olson, manufacturing, multinational corporations, productivity, retailers, Robert Samuelson, special interests, trade policy, Wall Street

Nationally syndicated economics columnist Robert Samuelson deserves a nice hand for identifying a possible cause for America’s pronounced productivity slowdown that’s been generally overlooked: the relentlessly growing power in national politics and policy of special interest groups. In a column earlier this week, he drew on the ground-breaking analysis of the late Mancur Olson to argue that the numerous successes achieved by smallish but narrowly focused and highly motivated lobbies in securing specialized favors for themselves from government have encouraged countless other interests to pursue the same strategies. The net effect is to diminish the total resources expended by the economy on production, and to increase the resources used for winning and keeping economically unproductive privileges.

I have several big problems with Samuelson’s discussion, though – and in fact with some of the leading examples used by Olson – and they all involve trade policy.

As Samuelson explains it, companies and workers pressing for protection from imports show exactly how the system now functions – and malfunctions. A winning campaign “saves jobs and raises prices and profits. But consumers — who pay the higher prices — don’t create a counter-lobby, because it’s too much trouble and the higher prices are diluted among many individual consumers. Gains are concentrated, losses dispersed.”

The problem is that, however compelling this sounds in theory, at least when it comes to trade policy, it produces a picture that is simply unrecognizable to anyone with any real familiarity with the subject. Perhaps the most important flaw is the implicit assumption that the freest possible trade always results in the best possible outcomes for the greatest number of Americans – and indeed for the economy as a whole – while calls for interfering with such trade flows always result from special interest pleading.

That’s a tough argument to make when you consider that the relentlessly rising trade deficits generated by the standard free trade approach have slowed the growth of this already sluggish recovery considerably. It’s even tough to make given that the income losses that can be blamed on this trade strategy – which were extremely broad-based – spurred Washington to fill the gap with easy money and the mammoth debt it brought, helping to trigger the financial crisis.

The big-small actor aspect of Olson’s theory doesn’t hold up, either in the trade policy sphere. For decades, the biggest winners by far in the nation’s leading trade policy fights have been big, offshoring-oriented multinational corporations and the often bigger Big Box retailers and Wall Street banks with which they’ve worked fist in glove. The ranks of smaller manufacturers were split, but those opposed to free trade agreements and related decisions were most often defeated. And the smaller companies that did indeed seek to throw sand in the fears of trade liberalization in fact were actually the ones trying to promote broader economic and national interests.

And the smaller retailers and other small service companies not directly affected by trade liberalization generally sided with the corporate giants – in order to win a few easy brownie and lobbying log-rolling points with them (as in “You scratch my back and I’ll scratch yours.”) So they were acting first and foremost on their own narrow interests as well.

As for consumers, who supposedly benefited from those lower prices, they have indeed been pretty disengaged from trade policy disputes. But their apathy powerfully enabled decisions that wound up backfiring on tens of millions of them disastrously, as the crisis increasingly cost them their jobs and their homes. So the Olson theory holds up in the sense that the gains from winning trade positions were highly concentrated – they overwhelmingly benefited the limited constituencies that worked so energetically and effectively to prevail. And the losses were indeed dispersed – among workers and especially among apathetic consumers. The results, however, so damaged the entire economy that its ability to recover fully remains in doubt.

There’s an especially crucial productivity angle that needs to be recognized as well: Surely one of the most effective ways to undermine an economy’s productivity growth is to send much of its most historically productive sector – manufacturing – overseas. So in that sense, the political and lobbying dynamics highlighted by Olson have backfired against the broad national interest as well.

In addition, these trends fed on themselves in a widely unrecognized way: The smaller domestic manufacturing’s physical footprint became, in terms of its share of the workforce and of economic activity, the fewer Americans directly experienced the damage caused by its shrinkage – and the clearer the path to victory for the offshoring/trade liberalization lobby. The latter also benefited from the increased concentration of manufacturing in smaller cities and towns and semi-rural areas. So factories and their workers literally became harder for the rest of the population literally to see and interact with.

Since I’m much less familiar with the lobbying and politics of numerous other economic issues, I don’t feel comfortable commenting on how well the Olson theory describes their workings. But if its tenets are as off-base in these areas as they are in trade policy, it’s easy to see how these ideas would be prized by business, political, and media elites with such a strong stake in blaming the victims for their own grievous policy blunders.

Making News: Podcast of New BBC Interview on China and Global Markets

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BBC, China, China stock markets, currency, currency wars, devaluation, emerging markets, export-led growth, Federal Reserve, finance, interest rates, investing, Making News, monetary policy, recovery, Trade, Wall Street, yuan, ZIRP

I’m pleased to announce that I was interviewed on the BBC this morning on China’s economic and financial turmoil, and how it’s been shaking the world’s economy and financial markets.  Click on this link for the podcast.  My segment is titled “Global Markets React to China’s ‘Black Friday'” and yours truly comes in at about the 7 minute-50-seconds mark.

Moreover, even as we speak, I’m working on a more detailed analysis that I hope to post shortly.  Stay tuned!