Doubling Down On Losing Bets

In explaining away the failing monetary policy of America's central bank since 2008, my blog partner Keith has trotted out what has by now become the standard Krugmanite rationalization: The problem lies not with our intrepid central bankers - who of course can only be expected to do so much -  but rather once again with those REPUBLICANS in Congress, who refuse to complement the bankers' efforts by doubling down on failed fiscal policy as well.  One can almost hear the frustrated sighs of the wise Dr. Krugman as he ponders the puzzle he could solve so easily if only they would give him untrammeled  power and move the fools aside.

What Dr. Krugman, and apparently my friend Keith, conveniently overlook is that for two years following the 2008 elections,  like-minded policymakers in fact HAD what, in a democratic society, is about as close as one ever gets to untrammeled power. They controlled both the executive and the legislative branches of our government with significant majorities and what appeared to be a glowing popular mandate. And what did they do with this power? They initiated a feeding frenzy of aimless spending and other legislation that accomplished little but soon drove the federal budget deficit to the highest level, as a percent of GDP, we have seen since World War II,  a time of real national emergency. Our central bank, always happy to accommodate nowadays, did their supportive bit by hammering short-term interest rates down to zero and keeping them there.  Hence the confluence of fiscal and monetary policies infused the American economy with enough government stimulation that the sainted John Maynard Keynes should have been smiling down with fatherly pride.

Unfortunately, it didn't work and has provided us with little more than a limp recovery that is about to give way again, if for no other reason than it is already long-in-the-tooth by historical standards. While increased tax revenues have allowed  us to chip away at the budget deficit, it's still high after several years of economic recovery and poised to skyrocket again whenever the next recession indeed hits, or even without a recession given our demographics and the Ponzi-like logic of our entitlement programs. The debt burden that increasingly hobbles our economy has done nothing but grow, since chronic deficits can ipso facto have no other effect over time. If the burden grows heavier as the economy grows weaker, we would be approaching an economic black hole. And there are not enough billionaires or Wall Street tycoons out there for even outright confiscation of their wealth to make a meaningful dent in the problem.
Dr. Krugman has been chugging away like an uphill steam engine in his labor to defend the Keynesian legacy.  There is something constitutionally dogmatic about economists of all ideological stripes, not just Dr. K., although he's among the worst.  I believe it's because they spend most of their time working with abstract economic  models which,  when cleverly manipulated, have a rewarding way of always behaving in line with prediction. When confronting the real world, however, economists become grumpy (notice how Dr. K. is always frowning) because their models in the end can't account for unintended consequences and for the chaotic behavior of live human beings and complex institutions.

The problem with dogmatists is that they are, pretty much by definition, unable to accept the possibility of anything being amiss with their theories. They instinctively look for scapegoats to blame for failure, or any reasons other than cracks in their own ideas. Keith himself inadvertently demonstrates what I mean here with his list of places and times where Keynesianism has come up short, of course though no flaw in the theory: (1)  Roosevelt in the 1930's failed because he didn't keep the faith and stopped "prematurely" (even though he had a largely captive Congress behind him and was in power for an ungodly long time); (2) The Europeans have failed because of those "parochial" Germans (who not coincidently enjoy the closest thing to sustainable system in Europe today);  (3) the Japanese have failed because they have a third-world economy (thank you, Keith - this is the first time I've heard that one). And I think we might as well add China to the list too, since in their devotion to state-centered crony-capitalism, fueled by oceans of fiat money, they are not so different from us today as we generally like to believe. And currently, they seem to be hitting up against the same economic stone wall.
The time has clearly arrived that we need to accept what in my judgment is the obvious conclusion that the dominant economic ideology governing the capitalist democracies since WWII has reached the limits of its utility. And if I wanted to put a optimistic spin on all this, I might try to attribute the budding political instability threatening much of the world right now to a collective awareness of this impending breakdown and of the need for fresh thinking to confront it. However, fresh thinking can take many turns, and not all of them lead to happy places. Based on the evidence before me, I'm not feeling optimistic.

Leaving the rest of the world aside for the moment, let's just consider the United States.  We enjoy the largest economy in the world, control what is still the world's primary reserve currency, and have a military force that much of the world, happily or not,  still looks to for security.  Yet our political system is giving every sign of an impending implosion. We have a two-party democracy in which one of those parties - the Republicans - appears to be self-destructing as we speak, having winnowed their presidential field down to the narcissistic and buffoonish Donald Trump and a handful of limp-wrists lacking in both charisma and ideas. The once-silly notion of Trump actually getting their nomination is no longer as farfetched as it seemed.
On the other side, the Democrats are self-destructing too, although along a different track. Hillary Clinton, their leading candidate, is widely viewed as unlikable and untrustworthy, even by many of her supporters, and there remains a chance she could be indicted for her negligent handling of classified materials during her stint as Secretary of State. And her only opponent within the Party is a proud Socialist whose scatter-brained economic program makes him sound like Hugo Chavez.   In fact, towards the end of last year the Clinton campaign attacked Sanders with precisely this comparison, pointing out his apparent affinity with the cheeky Venezuelan tough guy. Sanders responded with such a bitter denial that one had to believe the attack poked sharply into a nerve.

And while it's too  bad for the Venezuelans, it's actually useful right now to have a contemporary example of what happens when ambitious politicians promise free stuff to everybody while over-taxing, over-regulating, and marginalizing the very people expected to produce the stuff. Burgeoning demand meets shrinking supply, and the system falls apart. Truth-tellers are branded saboteurs and are sent to jail.
Hillary's nomination still appears to be the most likely scenario for the Democrats,  but the party will become so beholden to the Bernienistas in their midst that Hillary's economic program is likely to drift far enough to the left to be largely indistinguishable from what Bernie himself would have tried to impose. This will mean more than just doubling down on bad economics, but tripling and quadrupling down, hamstringing the economy with new taxes and debt while multiplying the obligations this same weakened economy is expected to meet. This indeed suggests the formation of an economic black hole in which no amount of political, intellectual or spiritual strength will be able to resist the entropy.


On US v Apple iPhone

I start with two questions, finish with another:

1. Suppose the US government forces Apple to "fix" the terrorist iPhone so its agents can look inside. Is there not unbreakable encryption software available to block government access—perhaps not in this one case if they didn’t use it, but in the future for other terrorists?

2. Suppose the US government cannot prevail. How could Apple (or any other smartphone manufacturer) resist similar demands from China, the EU, Indonesia, Brazil, or others less concerned with legal niceties without ceding those markets to more pliant competitors? 

If there is secure software encryption, the government's demand won't get it very far even if it does win this one case.
Unless all other countries respect Apple's claim to keep the iPhone encrypted, Apple must either yield or lose important markets to more pliant competitors.

In short, if the government prevails, it may not gain very much. If Apple prevails, it may not gain very much. 

I assume the very smart attorneys on both sides understand this. So what’s really going on?