How Have Free Markets Gone Wrong?

           Keith's article entitled "Lost Jobs, Stagnant Wages" raises a critical issue on which rational political debate has given way to a dysfunctional mix of stale ideas and demagoguery. And if Keith is right that the Republicans have emphasized jobs and compensation issue more than the Democrats, it's only in the sense they have demagogued it more aggressively, not that they've focused on it constructively as problem-solvers. Ritualistic China-bashing is not economic policy formulation. 
          
           Free-trade theory is simply liberal market theory, in the traditional sense, extrapolated internationally. And it is axiomatic that markets and trade, both domestic and international,  represent the source of all economic wealth and provide the foundation for everybody's livelihood. "Trickle Down" is a dismissive and dangerously misleading characterization of what is in fact a powerful democratizing force. The economic gain, or "profit", that results from rational trade provides both the incentive for hiring workers and the financial raw material for capital re-investment. It thus constitutes the driving force for economic growth, innovation, and job creation. Furthermore, by increasing the abundance and diversity of available goods and services, and by driving down their prices, trade increases everybody's standard of living, even when nominal wages appear "stagnant". The aggregate mass of employee compensation, plus the money applied to necessary re-investment, greatly exceeds the money allowed to "trickle up" towards the self-indulgence of capitalists.  Thus the bête noire of traditional leftist outrage remains a bit of a red herring, as it always has been.
           
           That being said, however, something has indeed gone wrong with free trade, and wrong with capitalism itself. The "populists" of both parties, currently hammering away at many of the same nails, are reflecting too much common experience to be lightly dismissed. Keith summarizes the issue as stagnant wages and lost jobs, capturing its essence well enough I suppose, even though there are more dimensions to it, and he ticks off several cogent ideas for addressing it. However, like most of us with our debating hats on, he is approaching the problem from the perspective of the macro-economist, who believes the right mix of macro policy tweaks can always be found to fix any problem. Even when economic logic is sound, macro-tinkering generally fails because of unintended consequences and bad timing. It's my judgment that the economic dysfunction we're experiencing currently has deeper roots anyway, and cannot be addressed so simply.
          
           The fundamental problem, in my view, lies with money itself, and the manner  in which the world's central banks, who create it, are using it to control financial markets. Led by the American Fed, central banks, no longer bound by a gold standard or any other basis for the money they create, have learned reflexively to pour liquidity onto every crisis and to use perpetually accommodative monetary policy to sustain financial asset values that are already too high and supposed to go on rising steadily. This chronically sloppy policy is characterized by zero or near-zero short-term interest rates, and it's one of the few policy options that tends anymore to enjoy universal support across our warring political factions. Maybe that in itself should be viewed as a red flag. It's its impact, however, while largely hidden,  is devastating because it:

• Makes capital cheap relative to labor, causing unemployment and downward pressure on wages
• Leads to over-leveraging in the economy, since debt is cheap
• Incentivizes managers to favor stock buy-backs and uneconomic mergers over productive capital investment
• Leads to financial instability as markets cut loose from their moorings in the real economy
• Devalues hard work and entrepreneurship relative to the easy-money pursuits of financial engineering
• Aggravates wealth disparities in society as easy wealth compounds easily
• Increases political pressure for bigger and more intrusive government as the deus-ex-machina necessary to fix all of the above, exposing us all to a horrible Catch-22 dynamic.

I myself have no practical solutions to offer for the above. The ideas Keith has put forward are not necessarily bad ideas, but like most macro-policy prescriptions are probably as likely to do harm as good. If central bank policy is indeed the root of much of what's wrong, I have no ideas about how to reform it.  It's above my pay grade at this stage of life. A return to some form gold standard is tempting, but it seems utterly impractical and any crude attempt to impose one at this point would trigger a devastating depression, along with all the chaotic consequences implied. Other than that, I can't imagine what should be done.

          I guess we'll just have to wait and see what happens.

Lost Jobs, Stagnant Wages: a Solution

Are Today's Democrats The Party Of Moderation In America?

          My blog partner recently published an article on these pages entitled: "Tribalism: opportunity and challenge". He makes some interesting observations in this commentary, and even a few with which I would agree. However,  in what comes across as almost a throw-away assumption at the beginning, he states that our modern-day Democrats have become somehow "more moderate" in recent years, in contrast to the supposedly "radical" Republicans. Reflecting as it does a distortive meme that Democratic strategists are seeking to plant in the public imagination in the midst of the current presidential campaign, the notion needs to be addressed.

          Let me start first with supposed radicalization of the Republican party. The problem with the Republicans currently is not that they are becoming more radical, but that they are in a state of ideological disarray. There is no "mainstream" remaining  capable of being identified accurately as conservative, moderate or anything else.

         Any political party, and particularly one functioning in a two-party system like ours, represents a coalition of interest groups that, beneath the surface, often are simply allied with one another rather that sharing much in the way of real common ground. It's the job of party politicians  in such a system to establish a rhetorical line that satisfies enough of the factions to bring them together in some semblance of unity. For the Republicans, Ronald Reagan forged such a consensus in the 1980's. More recently, Bill Clinton and Barak Obama have done it for the Democrats. The problem for the Republicans is that they currently have no effective leader and no unifying ideological agenda. Their candidates hearken back to decades-old Reaganism at every opportunity, but this is sounding increasingly antiquated and out-of touch. As a result, the party's factions are becoming naked as factions for all to see.

          The media, of course, loves this state of affairs and will tend to boost the faction offering the most sensational coverage opportunities. Currently, the "nativist" faction, which has always been a subdued element in the Republican base, fits this bill for them. It's serendipity for the media that someone like Donald Trump, more of a showboat than a serious politician, has come along to take up the nativist standard, even though in my judgment he doesn't personally believe in their ideology any more than he believes in  anything else outside of his own playpen. The hapless Republican party, lacking a rudder, is floating along in his wake and has become defenseless against disparaging caricatures.

          As for the Democrats, my friend Keith must be living in a time warp to
claim they've become more moderate. The party had its own period of debilitating disarray during the 1960's and 70's, when its feckless foreign policy and dangerously inflationary domestic policies almost brought the country to its knees, paving the way for Ronald  Reagan's election in 1980. Paradoxically, this period also facilitated the rise of Bill Clinton, who helped steer the Democrats  away from the leftish rhetoric and policies that by the 1970's had tagged them as the party of disorder, stagflation, rationing,  and retreat. Without ever abandoning the Democrats' traditional base, Clinton urged and later adopted policies that his left-wing enemies at the time derided as Republican-lite. He thereby rescued the party and did in fact make it more moderate.

          But that was a long time ago, and whatever Bill might be saying nowadays, his party of that bygone era is not the party of Barak Obama today. We only have to go back to 2008 to understand what our modern-day Democrats  are really about. That the financial crisis struck in what happened to be an election year gifted the Democrats with landslide sweep that included the White House and both houses of Congress. Giddy with success, they pulled out all the stops to ram through as much leftish legislation as they could while the stars were still aligned in their favor, driving government spending, budget deficits and debt, as a percent of GDP, to the highest levels seen since WWII. All this was done, of course, in the name of stimulating an imperiled economy, but in what was in fact a Trojan Horse strategy, Obama and his cohorts were enacting as much government expansion as they could get away with in the time available to them. And to hear the party strategists tell their own story at the time, they were really just getting started. They were obsessed with the heroic romance FDR's "first 100 days" and determined finally to grasp hold of what the great man had initiated and carry it to a new level.

          Unfortunately for them they overplayed their hand, and did so in full view of the voting public. The Affordable Care Act, the most visible portion of their legislative program,  was implemented with an incompetence born of indecent haste and signaled to the public that something rotten was afoot. The Dodd-Frank Act, which was supposed to reform the broken financial system, did succeed in greatly expanding the scope of federal regulatory agencies, but without giving much reason to believe the banks would become safer as a result. The grab-bag of stimulus programs passed soon began looking like little more than the usual assortment of pork-barrel projects and giveaways to pet constituencies. All of this left a bad aroma in the nostrils of the voting public, and the Democrats soon saw part of their prize taken away from them as they lost control first of the House of Representatives, then the Senate. Since then, the budget deficit and national debt problems have receded somewhat. However, this does not reflect any new "moderation" on the part of our Democrats, only the fact that they no longer possess untrammeled power to follow their native instincts.

           Which brings me to the current election campaign. Due to the supine state  of the Republican party at the present time, it seems virtually certain that, barring a crash of the heavens, Hillary Clinton will be our next President. She has the luxury of calmly taking the political lay of the land right now and considering her options for the kind of administration she will lead.

          In this regard, Bernie Sanders is playing a highly useful role for her. He, first of all, is providing at least the illusion of competition in the race,  which will allow her to enter office with the air of some competitive momentum behind her. The American people like that sort of thing. More importantly, however, he is acting as a stalking horse for leftwing policies in this country. By opening calling himself a Socialist, Sanders is trying to de-stigmatize the term and hopefully the kind of policies it represents. This is not simply a harmless "nod to youthful radicalism" as Keith has characterized it. We should not patronize Mr. Sanders, and we should definitely take him at his word. He is essentially doubling and tripling down on everything Obama tried to start, offering Medicare for all, free college education for all, and no doubt before long free anything else that might appear to have political resonance, all of it financed, of course, by taxes on the "very rich". It's as though Hugo Chavez has been reincarnated here to operate right in the belly of the beast.

          Hillary obviously likes Bernie and is watching him closely. We have to remember that her husband's successful tilt to the right always reflected political opportunism more than conviction. Similarly opportunistic, Hillary herself is fully capable of taking a hard turn to the left if she judges it politically expedient. If she determines that Americans perhaps are still balking at hard socialism, she can back gingerly away from it. If, on the other hand,  it starts looking like people maybe are finally ready to abandon their old-fashioned hang-ups and embrace the idea of free stuff for everybody, she could go that way too.

          If you admire the kinds of policies our modern-day Democrats seem to be gravitating towards, you can bath them in whatever laudatory light you choose. Just don't call them the party of moderation.

Tribalism: opportunity and challenge

It seems to be generally agreed that public affairs go better when the two national political parties each contain a mixture of views, so that Congresses and Presidents can find common ground. At present, however, the parties are highly polarized and unable to agree on many important matters, sometimes including even the value of the non-military aspects of government.

Pundits usually attribute polarization to both the Republican and the Democratic parties, as though each has moved toward its most extreme positions.[1] Actually, however, the Democrats have gotten more moderate. Those leaders now called radical, like Elizabeth Warren and Bernie Sanders, remain clear supporters of free enterprise. They aim to civilize it, not replace it. Even Sanders’ self-proclaimed “socialism” seems more nostalgic nod to youthful radicalism than identification with socialist political philosophy.

The Republican Party, on the other hand, has greatly changed. Although it still advocates business’s interests, a Party descended from Abraham Lincoln has discarded that legacy and in recent decades has advocated few rights apart from that to bear arms. It now bases its popular appeal on what I would call tribalism.

Tribalism is a political stance based on dividing people into “us” and “them” tribes (white/black, native/alien, believers/secularists, pro/con guns, Christian/Moslem, etc.), and giving political priority to opposing “them.” Periodically this tribalism emerges in American politics, and in recent years a rising tide of fear and anger has galvanized tribalists into fervent and far-reaching political action, largely within the Republican Party. They now outstrip even business interests in selecting Republican candidates. Their candidates almost uniformly profess the uncompromising ideological views that this tribalist “base” demands.

Two relatively recent developments largely explain tribalism’s current power within the Party.

The first is Richard Nixon’s famous “southern strategy” that capitalized on southern white hostility to President Johnson’s civil rights measures. By supporting sympathetic political candidates, the Republican Party attracted many former southern Democrats, turned the former Confederate states Republican, and allowed traditional southern tribalism to shape the Party’s ideology and programs.

In recent decades, a second and more currently powerful development has been the stagnation of employment compensation. Although liberals have noted this stagnation, the inequality that preoccupies recent liberal thought misdirects Democrats’ attention: it is not the income gap between employees and the wealthy that causes growing fear, anger, and disappointment, but rather the economic misery and hopelessness that stagnation has brought to millions of families.

In reality, the stagnation of employee compensation is not solely a US phenomenon. Rather, the stagnation rests largely on two global developments that both Republicans and Democrats have welcomed: free trade and high tech.

In classical economic theory, free trade stimulates sales and reduces costs, increasing prosperity. During the post-war period that ran into the 1970’s, increasing prosperity was widely shared, raising real wages. Free traders assumed “trickle down” would continue.

But rarely have the benefits of recent free trade advances like NAFTA and market-opening agreements with China and other countries “trickled down.” Rather, with new technologies like computers, speedy and extensive communications, and automation these trade agreements have instead exposed US employees to the international labor market. Consequently, some employees have lost jobs to automation and offshoring; many have seen their compensation plateau or decline due to competition with international wage rates; and most live in fear of job loss or wage reduction.

Absent appropriate solutions from Democrats haring after inequality, Republican candidates who specialize in scapegoating and simplistic, mean-spirited solutions gain traction with those who regard their family incomes as the most serious problem they face. Hence global trends toward free trade and high technology have reinforced the deliberate recourse to tribalism that Nixon’s southern strategy took.

What does the Republican Party’s turn toward tribalism mean for the future and for the Democrats?

Republicans: Both the business and the tribalist wings present some legitimate grievances. Many who support Republican candidates because of employment and compensation problems want the current stagnation reversed. And the business wing wants regulations simplified or eliminated, presenting example after example of ridiculous, unjust, incompetent, or counterproductive ones. But the widespread Republican distrust of government hampers them from offering workable solutions. Instead, both wings offer ideology: Tribalists would attack disfavored minorities, enact theological precepts, and disregard conflicting Constitutional rights. The business wing pledges fealty to long discredited laissez-faire and economic concepts while disregarding corporate malfeasance. And both want tax cuts regardless of consequences, while demanding foreign policies based on the early and frequent use of vastly expensive military force.

Democrats: The flawed concepts underlying national Republican policies mean that the Republican appeal to many of its voters is rather shallow. If the Democrats shelve their current preoccupation with inequality and focus on policies that would, without significantly harming prosperity, allow employees to share in it, while offering business a serious commitment to regulatory simplification, they may well attract independents and parts of the current Republican constituency. But if they fail to do these things, Republican demagoguery could prevail. And given the concepts they espouse, this would be a catastrophe for the nation and the world.

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[1] This attribution applies, not to all who identify with the parties, most of whom probably do so more from tradition than considered conviction, but to those who shape the parties’ ideologies and policy positions.