Tag Archives: economy

Is it 2008 again, or not?

Runs on two banks raise questions about the stability of the whole system.

If you had money in Silicon Valley or Signature Banks — both of which have gone under since Friday — you still have it, even if your account was larger than $250,000 and technically shouldn’t be insured by the FDIC. On the other hand, if you owned stock in either bank, your money is gone. If you were a senior manager at either bank, you have lost your job. If the banks’ remaining assets won’t cover the above-$250K accounts, the extra money will come from a special assessment on surviving banks, not from the taxpayers.

That’s the upshot of a joint statement released yesterday evening by the Federal Reserve, the Department of the Treasury, and the FDIC. It’s a very different resolution than the 2008-2009 banking crisis, when failing banks were bailed out in their entirety, with management still in place.

What remains to be seen is whether yesterday’s government intervention ended the crisis. Bankruptcies have a way of cascading like dominoes; if I can’t pay you, maybe you can’t pay your creditors either, even though your business looked sound yesterday. And if I have to close my doors and lay off my workers, the businesses that count on my workers to be their customers could also be in trouble. That’s how depressions start.

Idiosyncratic or systemic? Sometimes a big financial failure is an isolated incident. This bank or that brokerage house might go under due to fraud or a few idiosyncratic bad decisions that say nothing about the larger economy. But sometimes it’s a signal that a systemic problem is worse than anybody thought. When Lehman Brothers collapsed in 2008, it demonstrated that the subprime lending problem was not limited to a few foolish lenders, and before long all financial institutions were in trouble.

So the big question that faces the markets and the government this week is: Which kind of failure is this? There are indications in both directions.

For each of the failed banks, you can tell a story that makes their problems unique: Silicon Valley’s customers were largely start-up companies that had future prospects but no current earnings. Such companies saw a big influx of investor cash when interest rates were near zero. But as rates rose, market sentiment shifted towards safer investments, so start-ups began to burn through their cash rather than raise more of it. So Silicon Valley’s deposits began to shrink rather than grow. Signature had lent to companies associated with crypto-assets. So the recent slide in the market value of cryptocurrencies hurt them.

But both banks, once they started to run into problems, had an issue that they share with just about all other banks: Their “safe” money, the money they were counting on to be there if they needed it, was invested in long-term government bonds. Those bonds are indeed safe, in the sense that the government is good for the money when the bonds come due (assuming House Republicans don’t create a debt-ceiling crisis later this year). But if you can’t wait until the bond comes due to get your money, you have to sell the bond on the open market — and that has been a problem lately. As interest rates go up, the market value of such bonds goes down. (It’s common sense: Why should I buy your bond yielding 1% when new bonds are coming out yielding more than 4%? Of course you’re going to have to take less than face value for your bond.)

So at each bank, the need to raise cash forced them to sell bonds at a loss, which ate into their capital. When word gets out that capital is low, big depositors — the ones with way more than the $250,000 FDIC insurance limit — start to worry. Then the bank becomes vulnerable to a run, when all the depositors want their money at the same time. That’s what happened to Silicon Valley late last week: It faced withdrawals of $42 billion on Thursday alone. On Friday, it closed its doors.

Once a run starts at one bank, depositors at other banks start to worry whether their money is safe. So Signature, facing its own capital problem, saw a run begin on Friday and threaten to become overwhelming by today. That’s why the government shut it down. We’ll see today and tomorrow whether runs start at other banks, or whether the announced government intervention has plugged the hole in the dam.

Both banks were unusually vulnerable to a run: At both banks, a large percentage of deposits were in large, uninsured accounts where depositors would be unusually skittish. At Silicon Valley, a large number of them knew each other: Many of the start-up companies had connections with the same venture capitalists. So once it became known that a few key depositors were pulling their money out, the race was on.

At the same time, both banks share problems with the rest of the banking system. Rising interest rates have hit the whole economy, so just about all banks are looking at large unrealized losses in their bond portfolios. And the run on Silicon Valley demonstrated just how quickly a bank run can happen in this new era of electronic banking.

Our classic image of a bank run comes from the Depression: Long lines of depositors trying to get into a bank to withdraw their money. During the bank run in It’s a Wonderful Life, George Bailey gets to remonstrate with the customers one by one: Faith in his S&L means having faith in each other and in the community. A bank run could take all day or even several days. In the meantime, maybe a banker could sell some assets or get a loan from some other bank.

But a 21st-century bank run can happen without any personal contact at all, and it can bleed a bank dry in minutes.

Liquidity or solvency? In the Wonderful Life bank run, George’s savings and loan has a liquidity crisis, not a solvency crisis. That’s what he’s trying to explain to the panicking depositors: Your money isn’t in the vault, but it’s invested in your neighbor’s house. If you trust your neighbors to pay their bills, you can trust the S&L. So if everybody is patient, nobody has to lose money.

But a solvency crisis is different: The bank owes its depositors more than its assets are worth, so somebody is going to lose money. The question is who, and that will be determined by how fast everybody can act. If you’re the first in line to close your account, you’ll be fine, but if you snooze, you lose.

A bank run can turn a liquidity crisis into a solvency crisis, by making banks sell assets quickly at bad prices. (As an analogy, imagine that you had to pay off your mortgage by the end of the day. Probably you’d end up selling your house for less than it’s worth, just to get cash.) So there’s a vicious cycle: Worries about a solvency crisis can lead to a bank run that creates a solvency crisis.

The 20th-century bank reforms were aimed at stopping bank runs and solving liquidity problems. The Federal Reserve was created to be a lender-of-last-resort, so that a bank facing a liquidity crisis could get a loan to keep it afloat long enough to realize the value of its assets. Government inspection of bank balance sheets was supposed to spot problem banks early, and to give the public confidence in the solidity of banks that stayed open. FDIC insurance guaranteed middle-class depositors that their money would not vanish.

At its root, though, 2008 was a solvency crisis. Banks had loaned money to people who were never going to be able to pay it back, based on collateral that was overvalued precisely because banks had loaned money to bid the prices up. From there, complex financial derivatives magnified the problem; essentially people were placing bets on the value of valueless assets, creating more valueless assets. So a lot of the “assets” on bank balance sheets weren’t real. That’s what made the problem so difficult to solve: Floating some loans would just delay the day of judgment. New money had to come from somewhere, so it came from the government.

Right now, the role of the non-performing subprime loans is being played by low-interest-rate government bonds whose market value has fallen below their face value. That lost value is not as crazy and negligent as 2008’s subprime mortgages (or the derivatives based on them), but nonetheless the value has been lost. The question is what this does to bank balance sheets: If losses are within the margins of error, banks are still solvent.

Moral hazard. The worst mistake the government made during the 2008 crisis was to bail out the banks more-or-less without consequences. Most of the executives kept their jobs and the shareholders were not wiped out. Some bank stocks have never regained their 2006 highs, but others are more valuable than ever. (As you can see in the chart below, Citigroup stock never recovered, but JP Morgan Chase has done well.) Many banks that were too-big-to-fail then are even bigger now.

Anger over that outcome was a big piece of the populist wave that has been roiling our politics ever since. If you lost your home or your job, but your bank got bailed out, you’re not going to forget that. Worse, many bankers who “earned” big bonuses by booking phony profits got to keep that money after the “assets” they built turned out to be worthless. The idea that cheaters profit while the government protects them from consequences is corrosive. It eats away at public trust and makes it harder for government to deal with non-financial problems like climate change or the Covid pandemic.

At the same time, though, banking really is a unique industry that should get special consideration, because bank failures can have repercussions that travel well beyond the banks.

That’s what’s behind the remaining anti-populist element of Sunday’s intervention: Depositors with accounts larger than $250K were never insured by the FDIC, but their money is being guaranteed anyway. This is just as much of a bailout as, say, canceling student loans, and the beneficiaries are much richer. But it’s happening just like that, without any public debate.

The argument for covering those large deposits revolves around stopping two kinds of contagions:

  • Not covering them might make large depositors at other banks nervous, and start bank runs elsewhere.
  • The depositors themselves are businesses that might go under if they lose their money. They, in turn, might start a wave of cascading bankruptcies.

For liberals the poster children of depositors are the solar-power start-ups, many of which are Silicon Bank customers. If you want to save them, you’ll have to save a lot of rich people as well.

* Disclosure: Slightly less than 1% of my retirement portfolio is invested in bank stocks: JP Morgan Chase and Citicorp.

About Those Gas Prices

As someone born into the era of big tail fins and bumpers with breasts, it’s not news to me that we Americans get irrational about our cars.

So of course we also obsess about gas prices. If the rent or the cable bill goes up, we’ll grumble and pay it. If the price of beef skyrockets, we’ll eat more chicken. When there was no toilet paper on the shelves, the most common response was frantic desperation, not anger. But high gas prices bring out the pitchforks and torches: This has to be somebody’s fault, and we’re going to make them pay.

So maybe it’s Biden’s fault or Putin’s or Exxon’s or environmentalists’. Let’s see if we can sort this out, starting from the beginning.

How bad is it? Various commenters had already been talking about “record gas prices” for several weeks, but prices didn’t actually start breaking records until March 7. Even then records were not being broken by much, and only if you didn’t adjust for inflation. In July of 2008, national average gas prices hit $4.11. Cumulative inflation in the last 14 years has been 32%, so gas prices won’t equal 2008 prices in inflation-adjusted dollars unless they hit $5.42. AAA’s current national average price is $4.25.

The price a year ago, when Covid was keeping most people close to home, was an unusually low $2.89. So there’s been a steep increase since then, but not to off-the-charts levels.

Rockets and feathers. The apparent reason for the increase was that the price of oil went up. But oil prices crashed back down this week, and gas prices are still high. (Though they are trending somewhat downward. AAA reports a drop from $4.33 in the last week.) This is the main reason people give when they blame the oil companies for price gouging.

The following chart was on the Trending Economics web site Saturday morning.

So a year ago, the world price of oil was about $60 a barrel. It started creeping upward as economies recovered from the Covid emergency, reaching $90 by late February, when the Ukraine crisis began to get serious. Post-invasion and post-sanctions, it jumped up to $123 on March 8. Then it fell back below $100, and ended last week at $104.70.

The complaint is that gas prices go up immediately when the price of oil rises, but they don’t fall immediately when it drops. This is not your imagination.

The trend is called “rocketing and feathering,” according to oil industry analysts. Gas prices rocket up and then they come down slowly like a feather in the wind.

Think about how this works: Suppose you run oil tankers back and forth between, say, Nigeria and the United States. A trip takes weeks, maybe a month, depending on conditions. So the oil you loaded in Lagos was worth about $90 a barrel, but by the time you get to America, the price has risen to $120. So what do you sell for?

The way a lot of people’s economic intuition works, you ought to sell for $90 plus a reasonable profit on your expenses; say, $93 or $95. (Those numbers are based on several minutes worth of googling, so don’t use them for anything other than illustration.) This way of thinking is called “just price economics“, and it was popular in the Middle Ages.

But the world doesn’t really work that way. Of course you sell for $120, making a $30-a-barrel windfall profit. On other trips you might have windfall losses, so you’d better take the money now.

That’s how rocketing works, all the way up and down the path from oil well to gas pump: Increases get incorporated into the price immediately. Imagine you own a local gas station. Your last delivery arrived when you were selling gas for $3.50 a gallon, so in theory you could still sell for $3.50 and make a profit. But your next delivery is going to cost $4 a gallon. So why would you sell something for $3.50 when it’s going to cost you $4 to replace it?

But now picture what happens when prices fall: You paid $4 a gallon for the gas in your tanks now, so you’re going to be reluctant to sell it for less than that, even if you can replace it for $3.50. You’ll lower your price when you have to, i.e., when the gas station across the street lowers its price.

How fast prices fall depends on how much competition there is. If there are bottlenecks in the market — say, a small number of refineries producing gas for a large region — the businesses that control that bottleneck are in a position to insist on getting at least a just price. And they will. You would too.

The conclusion I draw from all this is that no one in the rocketing-and-feathering scenario is particularly villainous. Price drops would happen faster if markets were more competitive, as in the classic Adam Smith model. But this situation is very different from monopoly pricing, where sellers are only restrained by consumers’ inability or unwillingness to keep paying. (True monopolists don’t need an excuse to raise prices or to keep them high.) Supply-and-demand is working, albeit with a little sluggishness.

A long-term partial solution — nothing would solve it completely — would be more rigorous antitrust enforcement. Short-term, a direct government payment financed by a windfall profits tax would deal with the painful symptoms.

Why is oil so high? Oil is an unusual commodity, because in the short term, neither supply nor demand have much elasticity. An oil field isn’t like a car factory that can run longer shifts, pay overtime, and deliver more cars to the dealers in a matter of days. In the medium term, an oil company can drill more wells, and reopen wells that weren’t economical to run at lower prices. Longer term, it can explore for new oil fields. But none of that increases supply immediately.

Similarly, when the price goes up by 10-20%, you still have to get to work, and you’re probably not going to cancel your vacation plans. Airlines aren’t going to cancel flights. It takes time to arrange a carpool, replace your gas-guzzler with an electric, or move closer to your job.

The result of that lack of elasticity is that oil prices swing more wildly than most commodities. It goes way up and way down because that’s what it takes to change people’s behavior. (Remember what a market price is: The price at which buyers want the exact quantity that sellers are offering. So price moves that don’t cause people to enter or leave the market aren’t big enough.) So when demand crashed at the beginning of the Covid lockdowns, the price on the most volatile oil markets briefly went negative. (Imagine the grocery paying you to take away their excess milk.) Here’s the 25-year version of the graph above.

Not a lot of other prices relevant to your life went up 7 times between 2002 and 2008, only to crash all the way back by 2020.

I learn a few things from this graph.

  • If you just look at the 2020-2022 part, the price is skyrocketing. But if you take a longer view, you see a lot of zigging and zagging within a wide range. It’s a mistake to imagine that the Covid-lockdown price of $20 was “normal”.
  • I’m not surprised that oil production doesn’t instantly ramp up in response to a high price. If I’m deciding whether to drill a well that I expect to be productive over 5-10 years, how can I be sure the price won’t be much lower for most of that time?
  • The price increase didn’t start with the Ukraine War. Oil prices went up because the world economy was recovering (and speculators anticipated further recovery). The effect of war and sanctions sits on top of that rise.

Is Biden to blame? Mostly no, but there are hooks you can hang that argument on if you really want to.

First, there’s inflation in general. Like many other governments, the US policy response to the Covid lockdowns focused on avoiding a depression, which was a real possibility. So the Federal Reserve pumped a lot of money into the economy, and the government distributed money directly to individuals and businesses. Both policies started under Trump, but Biden continued and even increased the depression-avoiding spending with his American Rescue Plan.

Two consequences come out of that: the intended one of keeping the economy afloat, and the unintended (but somewhat expected) one of inflation. So unemployment is now at 3.8%, down from 6% a year ago and 15% two years ago. It’s close to the pre-Covid 3.5% that Trump claimed as evidence of “the greatest economy ever”.

The price of those jobs is inflation, which was up to 7.9% before the Ukraine invasion and the sanctions against Russia. Personally, I think that’s a price worth paying. But other people may disagree, and many more will argue in bad faith, criticizing Biden for the inflation without crediting him for the jobs.

Second, we come to the sanctions, which again are a trade-off. Getting Russian oil off the market leaves a production gap, which raises prices. I don’t have a good explanation for why oil has almost returned to its pre-invasion level, but I wouldn’t count on it to stay there.

It’s possible that a President Trump might have been able to call his good buddy MBS and get the Saudis to produce more to make up the gap. (Of course he won’t do that now, because a larger oil supply would just benefit America, and not Trump personally.) Other possible sources of increased oil production would be the other sanctioned countries: Iran and Venezuela. (Iranian oil might not be sanctioned at all if Trump hadn’t scrapped the Iranian nuclear deal.) But none of that has worked out either.

Finally, there’s the question of American production. And here is where the case against Biden is flimsiest. The accusation is that American oil production would be much higher if Biden weren’t so hostile to the oil industry. If he had only kept building the Keystone XL pipeline, or opened more federal land to drilling, or not rejoined the Paris Climate Accord, or maybe had just smiled more at oil executives — then we’d have so much production the world wouldn’t need Russia.

This is nonsense, and I can’t explain it any better than Jen Psaki did.

  • Keystone XL wouldn’t be operating yet anyway. It wasn’t scheduled to open until 2023.
  • Pipelines don’t produce oil, they just move it. The Canadian oil Keystone XL would move is getting to market by other means.
  • Psaki claimed (and I have no way of checking) that the oil companies have 9,000 unused drilling permits. It’s not that they have nowhere to drill.
  • US production went down when the price of oil went down, but it is ramping back up. Next year the US should produce more oil than ever before.

Some of the points here are related to the next blame-object, environmentalists.

Are environmentalists to blame? As Fox News reporter Peter Doocy put it (in a question to Psaki): “How high would [gas prices] have to get before President Biden would say ‘I’m going to set aside my ambitious climate goals and just increase domestic oil production, get the producers to drill more here, and we can address the fossil fuel future later’?”

The unstated assumption behind that question is that climate change isn’t really that big a deal. Global warming is the liberal version of made-up conservative issues like critical race theory and cancel culture. So in the face of a real threat like Russia, and a real consequence like $4 gas, why can’t liberals just get off it?

But the vast consensus of scientists who study this issue is that climate change is a big deal, and will have catastrophic consequences (some of which are already apparent) if humanity continues to burn fossil fuels at an ever-increasing rate. There will always be competing problems that present more obvious short-term dangers. If we let those problems delay action on climate issues, we will never take action, with dire results.

Breathing is more of a short-term necessity than eating, but if we are to survive, we must envision a future where we can do both. In the same way, we have to find a path into the future where we deal with both aggressive autocrats and climate change.

Right now, Germany’s decision to close its nuclear plants makes it more dependent on Russian natural gas. (The proper role of nuclear power in limiting carbon emissions is a debatable issue that I haven’t studied.) That choice has certainly made the current situation more difficult.

But in a longer view, the faster we get to a sustainable-energy future, the less dependent we will be on fossil-fuel exporting countries, many of whose governments are repugnant. The price of wind energy has not increased at all in the last few months, and Vladimir Putin cannot affect it.


In conclusion, higher gas prices have two main causes: The general inflation that comes from choosing to stimulate job creation as we come out of the Covid economic downturn, and the reduced supply of oil as Russian oil is pushed off the market. Those are both policy decisions that were made for good reasons.

Other Biden decisions, like canceling the Keystone XL pipeline, have had little to no effect. Anything the US government could do now to stimulate oil production wouldn’t produce results for many months or even years. Meanwhile, market forces are raising US oil production without any new government encouragement.

Oil companies are gaining windfall profits as the price of oil rises, but I don’t see anything sinister going on there. They could altruistically decide to charge less, but none of the rest of us do that. If those profits are a problem, they could be taxed.

And in the long run, the pain caused by the current high gas prices is one more reminder that we need to become less dependent on fossil fuels. Trying to get out of the present crisis by finding more oil somewhere is just trading one problem for another.

Those Executive Orders

Like everything Trump does, they don’t match what he’s says he’s doing.

Remember the government shutdown that lasted from December 22, 2018 to January 25, 2019? Congress was refusing to fund Trump’s border wall, so he pulled out of a previously settled deal to fund the government. When public opinion didn’t rally behind his position, he relented on funding the government, but declared a state of emergency and used it to seize money Congress had appropriated for other purposes and redirect it to his wall. The Supreme Court has not yet ruled on the legality of this move, which seems to usurp Congress’ constitutional power of the purse, but it has allowed construction to continue so long that the case may become moot because the money is already spent.

Cases like these are never one-offs. Having gotten away with something once, Trump is bound to try it again.

So here we are: The CARES Act was passed in March as an emergency appropriation intended to see the country through the economic impact of the Covid-19 epidemic. At the time, no one imagined that the US would botch its response to the epidemic so badly that a thousand people a day would still be dying in August, so most of the CARES provisions ran out on July 31, including a moratorium on evictions and the $600-per-week enhanced unemployment payments.

Nancy Pelosi’s House had the foresight to pass a follow-up, the HEROES Act in May. But Mitch McConnell refused to bring it to the floor of the Senate, and did not start negotiating any CARES extensions at all until late July. With much of the Republican Senate caucus already plotting their resistance to the Biden administration, McConnell doesn’t have the votes to pass any CARES-extension bill without Democratic buy-in. So he left the negotiations to the White House team of Steve Mnuchin and Mark Meadows.

The White House refused to budge from its plan, which is about 1/3 the size of the HEROES plan, and contains no money to fill the budget gaps of state and local governments. Politically, Trump looks like the one with the most to lose if nothing gets done and the economy crashes, so Pelosi is not inclined to cave in to his demands without getting some concessions in return. So no deal has gotten done. (Has anybody noticed that our Art-of-the-Deal President never seems to get to Yes on a deal?)

So we’re back to the emergency-executive-powers trick. Or something. Maybe.

Saturday Trump signed three memos and an executive order which, in typical Trumpian fashion, don’t actually do what he claims. Here’s what is kinda/sorta in them.

  • A $400 unemployment enhancement to replace the CARES $600 replacement. Except that $100 has to come from the states, which may not have any money to cover it. The $300 federal contribution comes from a $44 billion pot of money that FEMA has, and of course won’t need during this record-threatening hurricane season. (This is literally an idea out of House of Cards, which FEMA officials rejected as unrealistic at the time.) Since we’re talking about 30 million unemployed people, the money will run out in about five weeks, assuming that they actually receive it and that it’s legal for Trump to spend it this way at all.
  • Eviction protection. Except, not really. The executive order asks relevant government officers to “consider” doing something to stop evictions, and to “identify” existing federal appropriations that might help stressed renters and homeowners, assuming that there are any such appropriations. If your landlord has a court date for your eviction, nothing in this order interferes with that proceeding.
  • Cuts in payroll tax deductions. The order doesn’t actually cut what you or your employer owe in Social Security and Medicare taxes. It just stops collecting those taxes for a while. So temporarily you might see more money in your paycheck, assuming you’re still getting one from somewhere, but your arrears will be building up, and will come due after the election. If he’s re-elected, Trump wants to cancel that debt too, but that just raises a new question: How do Social Security and Medicare get funded?

So basically what we have is flim-flam put together with a constitutionally questionable claim on FEMA money. In the context of the border-wall emergency, Trump is pushing us closer and closer to a model where the President can take any money Congress appropriates and spend it however he wants. It should go without saying that this is very, very far from the process the Founders thought they were establishing.

James Fallows raises the question we should all be asking:

I am not aware of any of the “strict constructionists” who blasted Obama for executive-order overreach, who have weighed in about Trump’s l’etat-c’est-moi wave of appropriation-by-exec-order. Are there any?

To be fair, a handful of Republican lawmakers have said something that expressed concern of some sort. But most of the hand-wringing was of the “Now look what the Democrats made him do” variety. If you’re looking for a flat-out “This is unconstitutional”, you won’t find it. Apparently respect for the Constitution is like fiscal responsibility or free trade or freedom or any of the other high-minded principles Republicans have put forward over the years. All such principled expressions are made in bad faith, and go out the window as soon as they become inconvenient.

What’s Up With the Stock Market?

Unemployment has hit levels not seen since the Great Depression. More than 10,000 Americans are dying every week with no end in sight. And the Dow is up 33% since March 23.

Friday morning, the April jobs report came out, and it was horrific: The economy lost 20.5 million jobs in April, and the unemployment rate soared to 14.5% — territory not seen since the Great Depression. And there’s no reason to think it won’t go higher. (If you can’t read the graph below, click on it to go to the CNN article where I found it.)

So naturally, the Dow Jones average proceeded to go up 455 points. That jump was weirdly typical of how the market has been behaving lately. In March, when the economy was being shut down, the Dow plunged in a way that seemed appropriate to the unfolding disaster: from its all-time high of 29,568 on February 12 down to 18,213 on March 23. But since then the market has had a nice rally, making up more than half its losses and getting back to 24,331.

Another way to look at it is in time rather than dollars: Friday the Dow closed 1,000 points higher than it was at the start of 2019. Can you remember back 16 months or so? Unemployment was 3.7% then, not 14.5%. Did that strike you as a less promising time than right now? Did you have more confidence in the economy? Less uncertainty and fear?

Among people who don’t study investing, facts like these are usually taken as signs of collective insanity, or maybe evidence of a vast market-manipulating conspiracy of the super-wealthy. And while collective insanity has been known to strike the market from time to time, and I’ve never regarded the super-wealthy as entirely trustworthy, there are some reasons why the market is where it is. Several recent articles (Emily Stewart’s in Vox is my current favorite) review those reasons, which I will try to summarize in my own way.

Forward-looking? I need to start by debunking a bad explanation. One old saw you will hear repeated at moments like this is: “The market is forward-looking.” In other words, things may look bad right now, but the market is looking ahead to conditions six months or a year down the road, when the situation will be much better.

Really? If that’s what investors are thinking as they bid prices up to this level, then I’m thrust back into the collective-insanity explanation. It’s definitely possible that some of our current uncertainty will resolve in a positive way over the coming months: Maybe phase-two vaccine trials will look promising. Maybe remdesivir or some other anti-viral drug will turn out to be an effective treatment, or just limit the lethality of the disease. Maybe curve-flattening will keep working even as we start to open more businesses, so that we hit some sweet spot of a better economy without a worse public-health situation.

None of that is unreasonable to hope for. But it’s also not assured. So far, the death numbers have stayed stubbornly high, and a lot of states’ opening-up plans have lacked the care and thoughtfulness many of us expected. (The Trump administration decided not to publish the CDC’s guidelines for opening various kinds of businesses safely. My guess is that Trump’s people thought they would be too discouraging. If that’s what it takes to open safely, lots of businesses might just stay closed. Much better, the Trumpists think, just to go ahead and encourage them to open unsafely.) The virus appears to be making the transition from urban areas to rural areas. If there is a weather effect, and infection numbers go down in the summer, they might snap back in the fall. There’s still no good plan for re-opening the schools, and how are you going to get parents back to work until their kids have somewhere to go?

In short, pessimism has its case too. And in addition to the epidemiological pessimism, you might also have economic pessimism: There could be a vaccine tomorrow, and the economy still might not recover right away. As we saw in years after the 2008 collapse, economies are like that. If something causes a depression, the depression doesn’t automatically go away once the cause is removed.

So no, the market is not predicting that something wonderful will happen between now and the fall or winter. Maybe it will, but maybe it won’t.

So what are the real reasons the market is so high?

Publicly traded businesses are not typical of the economy. It’s not hard to think of publicly traded companies that are doing badly right now. The big retailers are almost all close to bankruptcy. The real-estate trusts that own the malls are in bad shape. So are the cruise lines, and the hotel chains, and the movie theaters. Even as its new streaming-subscription service is booming, Disney suffers under the twin blows of closed parks and movies it can’t release. And whenever other businesses do badly, banks suffer, because a lot of loans may never be repaid.

But it’s an ill wind that blows no one to good. Lots of businesses are doing OK during the plague, maybe better than ever. Zoom is benefiting from the boom in online meetings. Gilead could have a blockbuster drug in remdesivir. Quest and LabCorp have developed home Covid-19 tests. What’s bad for the gyms is great for Peloton, which pulls isolated stationary-bike riders together into classes or even communities. The money people aren’t spending on restaurants is going to grocery chains like Kroger. What’s killing Macy’s is boosting Amazon. The business models of Google and Facebook are unaffected by the virus. Netflix is well positioned. Stocks like that are up for good reasons.

More ominously, in the long run the big chains stand to benefit if their smaller competitors get wiped out. The family that runs your local diner might go bankrupt, but Denny’s will probably survive. Your barber might lose his shop, but Supercuts will make it. Who knows what will happen to your friendly neighborhood coffee shop, but Starbucks isn’t going anywhere.

The local coffee shop is not on the New York Stock Exchange, but Starbucks is. A lot of the economic pain in the country is happening outside the view of the NYSE. And the demise of businesses off the stock exchange is raising the prospects of the businesses on it.

The Fed Put. For several years, the United States’ single biggest exporter has been Boeing. The aircraft manufacturer employs 161,000 people. The company was already under stress before the pandemic, due to the safety problems of its 737 MAX airliners, which have been grounded for more than a year. And now its main customers, the airlines, can’t fill the planes they have. The maps below — again, click to find a more legible version — show the decline in air traffic between March and April.

But there’s more to that story: “We’re not letting Boeing go out of business,” Trump told Fox News on March 24. The CARES Act included $17 billion that could have been loaned to Boeing.  As it turned out, the company didn’t take the money, choosing instead to float a $25 billion bond issue. But that also might turn out to be government money in a more roundabout way. The bond market is so cooperative because the Federal Reserve, fearing a liquidity crunch, has announced its intention to buy huge quantities of corporate bonds.

And even if Boeing’s money doesn’t come directly from the Fed, wouldn’t you feel more confident owning its bonds, now that you know Trump won’t let the business fail?

I pick out Boeing just for clarity, but it illustrates a wider phenomenon. The Fed has been creating money at a fierce rate, both to cover the federal budget deficit and to prevent a credit crunch or a collapse in demand. Inevitably, some large chunk of that money eventually flows into the investment markets, driving up prices, or at least keeping them from collapsing. Among traders, this is known as “the Fed put” — the belief that the downside risk in the stock market is limited because the Federal Reserve will intervene if things start to collapse.

Interest rates and stock prices (1). But the biggest reason stock prices are as high as they are is interest rates, which are historically low right now. (Again, due to the intervention of the Fed.) It’s practically axiomatic that low interest rates lead to high stock prices.

There are two ways to see that. The first is just simple comparison shopping. Imagine that you’re a big investor. Say you manage the investments of a big pension fund. The model under which your pot of money funds the pensions it’s supposed to cover says that you have to make a certain average return year after year. Let’s make up a number and say it’s 4%. If you average 4% over the next 20 years, the teachers (or whoever) get their pensions and everybody’s happy.

Now imagine interest rates are such that you can buy well-rated 20-year bonds that pay 6%. You’re done. Just buy them and you’ll exceed your goal.

But if you’re in an environment like we see today, a 20-year bond won’t pay much over 1% unless it’s pretty risky. So if you’re going to make your goal, you’re probably going to have to invest in stocks and hope for growth.

When a lot of investors come to that conclusion at the same time, they bid up the price of stocks.

Interest rates and stock prices (2). The second way to see how interest rates affect stocks is more theoretical. In theory, what a stock is worth is the present value of the sum total of all the future earnings per share. The “present value” of $1 of earnings in 2050 — what somebody should be willing to pay today to get $1 in 2050 — is usually quite a bit less than $1. But how much less is determined by the long-term interest rate. What an interest rate is, in essence, is a measure of how the value of money changes through time.  If the long-term interest rate were 0%, that would mean that $1 in 2050 is worth $1 today. At higher rates, that future dollar might only be worth fifty cents today or twenty-five cents or ten cents.

So when interest rates go down, the fundamental value of a stock goes up — even if the economic prospects of the company have not improved.

What investors are thinking. It sometimes comes up on this blog that I buy and sell stocks. I’m far from a tycoon, but my wife and I do have a retirement nest egg that needs to be invested somewhere. So while I don’t operate on the scale of someone who manages a big pension fund or hedge fund, I do go through some of the same thought processes.

And yes, that thinking has to start with the recognition that the economy is historically terrible right now. People disagree about what kind of recovery we can expect over the next year or two, but I expect it to be slow. If the states roll back their lockdown restrictions in a sensible way, we should eventually get to an economy that is just very, very bad rather than apocalyptic. (I think it was Matt Yglesias who imagined a recovery where 80% of the population does 80% of what they used to do. That would still constitute a huge drop in GDP.) If they do it badly (and I think some are), the virus could spike again and start a new lockdown.

At the same time, there will be winners in that world, and we’re all competing to figure out who they will be. For example, I’m betting that most people will continue to pay their phone bills, and that many of them will want to up their data plans. So I own stock in Verizon.

Assuming that you’ve picked a company that will weather the storm, you then have to decide what you think their stock is worth. Is the current price a bargain? Or is it so overvalued that you should sell the stock you own?

And that’s where the question of competing investments comes in. If I sell, what do I do with the money I get? If I leave it in a money market account, it will earn near zero interest. Lots of stocks pay dividends that don’t sound like much by our previous standards, but that look pretty good compared to zero. (Apple currently pays about 1%. Coca-Cola pays 3.5%.) Maybe I wouldn’t buy them if I could get 4% from a CD at my credit union. But I can’t.

On the other hand, maybe the economy’s prospects are even worse than my fellow investors think. (There’s a good chance of that. Investors tend to be professional-class folks or higher up the pyramid. They’re likely to know a lot of people who can work from home and think of the lockdown as an inconvenience. They likely don’t know many people who can’t work and are defaulting on their rent or mortgage. They probably underestimate how many such people there are.) Maybe as we get into summer, the real state of things will filter into the statistics they pay attention to, and we’ll see another crash. In that scenario, I would be happy that I had kept money sitting in a fund paying .01%. Then I could swoop in and buy Apple and Coke at much lower prices (and higher dividend rates).

But back on the first hand, the Fed has created a lot of money, and so have the central banks in other countries. Wherever that money starts out — like the federal government borrowing a bunch of it to send people those $1,200 payments — eventually it’s going to pool up somewhere. And whoever owns that pool is going to want to invest it somewhere. Wouldn’t it make sense to be in the market now, before all that extra money arrives and bids prices up higher?

It’s a conundrum. But on the whole, the lack of competing investments and the fear of missing out pushes me into the market, the same way it pushes a lot of other people. I hold back a little, and I try to be careful about what I buy, but I’m not sitting out.

And that’s why the market is so high.

Economies Aren’t Built to Stop and Restart

As of this morning, Republicans and Democrats in Congress still hadn’t agreed on a stimulus/bailout package for the economy. (Global markets are once again plunging this morning.) The parties agree on the need for extra government money, and even seem to agree on the size ($1.8 trillion). The remaining issues are who gets the money and what kinds of strings should be attached to it.

It’s far too easy to jump straight into the partisan back-and-forth of the issue — and we’ll get to that — but first I’d like to review why government intervention is needed in the first place.

It starts with a simple truth: Modern capitalist economies are supposed to be perpetual-motion machines. They’re never supposed to stop, and so there is no obvious way to restart them.

Right now, though, we’re in a situation where much of the US (and global) economy needs to stop. To prevent (or perhaps just slow) the spread of the COVID-19 virus, people need to stay home and stay away from all but a handful of other people. So industries that depend on gathering people together (sports, bars and restaurants, live entertainment, conventions, schools, retail malls) need to come to a halt. Industries that depend on travel (airlines, hotels, tourism) need to stop as well. If a factory employs a large number of people at the same location and and has them touch a lot of the same objects, it has to stop. Services in which practitioners touch their clients (barber shops, beauty salons, massage therapists) or enter people’s homes (cleaners, dog-walkers) or invite people to enter their homes (music teachers) have to stop.

How long? We’re not sure. Probably until summer. Maybe longer.

Then what?

There are basically two problems, or rather one problem relating to two kinds of entities: people and businesses. How do they survive until things start up again?

Our models for thinking about economic dislocations like this are natural disasters like hurricanes, floods, or earthquakes. But none of those models quite fit, because the economic infrastructure hasn’t been damaged. There are still plenty of places to live in America and plenty of foods to eat. The fields, mines and factories are still there. Nothing needs rebuilding, we just need to survive until the virus is gone and then restart. But how?

People. Long before COVID-19 got started, studies had revealed that about half of American households live paycheck-to-paycheck. Around 40% would have had trouble coming up with $400 to cover some surprise expense. Now that the economy is pulling back to just food and healthcare, large numbers of those people will be without paychecks until summer (or maybe fall).

They don’t make it without some kind of help. Some of them could rely on family or friends, but many couldn’t. And what if those families and friends are financially stressed at the same time? After all, American society is economically stratified: Rich people tend to know rich people, and people on the edge tend to know people on the edge.

The problem, as I said above, isn’t a shortage of stuff. It’s that people can’t earn money to pay for the stuff they need. Somebody needs to collect or create enough money to get them through and figure out a way to distribute it. The federal government is really the only institution set up to do that.

Businesses. If you’re a minimum-wage worker, the business that employs you — whether it’s a corner restaurant or a giant manufacturer like Boeing — seems incredibly rich. And it probably is, as long as the perpetual-motion machine of the economy keeps running. But American business, large and small, runs on debt. Debt requires interest, but in normal times a successful business generates plenty of revenue to cover that interest.

Very few businesses, though, are set up to survive without revenue for even a fairly short amount of time. Nobody has a plan for that, because it wasn’t supposed to happen. Economies don’t just stop.

But now large chunks of the economy are stopping. The problem shows up first in businesses that have a lot of debt and are supposed to generate a lot of revenue. Airlines, for example, borrow to buy their planes. (And banks or bond investors are happy to lend them the money, because an airliner is good collateral — as long as airlines go bankrupt one at a time and aren’t all looking to sell off their planes simultaneously.) On a smaller scale, restaurants rent their space, and may rent their fixtures as well.

Both Delta and Joe’s Diner have employees — pilots and cooks, respectively — they really can’t afford to lose. Restarting will be tricky if they have to go out and find new ones quickly. So even if you don’t have anything for them to do in the meantime, you really want to maintain their employment somehow.

Add all that up — rent, interest, and some kind of salary to essential employees — and a business runs out of capital in a hurry. I’ve seen an estimate that the airlines will all be bankrupt by May, and Boeing is likely to go down with them. That’s likely just the beginning. The auto companies can’t operate their factories. And if enough large and small businesses can’t repay their loans, banks will go under. We saw in 2008 how far the ripples of a banking collapse can spread.

So this crisis may have started as a health crisis, but it quickly turns into a financial crisis. And we know from 2008 how hard those are to solve.

Preserving business preserves inequality. Imagine that we get to October and COVID-19 is gone — there’s a treatment of some sort, or maybe the infection has just run its course. The government has pumped out enough money to keep everybody eating and living somewhere, so the 99% of the population that survives is ready to go back to work.

But where do they go? A few companies — Amazon, maybe, and possibly the big grocery chains and internet providers — have actually prospered. Others (Apple, for example) had big cash hoards that kept them going. But the majority of business have gone belly-up. Eventually, the market would probably sort that out. New businesses would arise to fill the demand for air travel or hotel rooms or meals out or whatever. But it could be a long painful process.

The alternative is that the government could keep businesses going the same way that it kept people going. It could float big low-interest loans or buy stock or just write checks. So all the businesses survive, and are ready to rehire people at the same time that people are ready to go back to work.

There are two problems with that scenario. First, it’s an awesome amount of money, and (since we don’t know when the pandemic ends) nobody has a good estimate how much we’re talking about. And second, the government would not just be preserving the workplaces of workers, it might also be preserving the fortunes of rich people. There’s good reason to want the economy to be in a position to restart, but why does it have to restart in the same place?

That was what was so unpopular about the bailouts of 2008-2009. Government money didn’t just save the financial system, it saved the banks and the bankers who arguably had crashed everything to begin with.

This time around, you can already see the problem with the first bailout candidates: the airlines and Boeing. The airlines go into the crisis short of cash because they spent it all on stock buybacks. Robert Reich isn’t having it:

The biggest U.S. airlines spent 96% of free cash flow over the last decade to buy back shares of their own stock in order to boost executive bonuses and please wealthy investors. Now, they expect taxpayers to bail them out to the tune of $50 billion. It’s the same old story.

Boeing entered the crisis in a weakened state because of safety problems with the 737 Max. The company cut corners and airplanes crashed. If they’d won that gamble, the profits would have stayed with the company and its shareholders. But they lost it, and now they need to be bailed out with public money.

And those are just the companies that need help right away. Once we establish the pattern of bailing out big companies hurt by the virus, how do we say no to the companies that run out of money in June or August? How much will that take?

There’s also a too-big-to-fail problem again. The main proposal for helping small business is via government loans. The proprietor of a dog-walking service in Philadelphia doesn’t see the sense of that:

We have no idea what sort of landscape we will return to when this is all over. Will we come back to 90% of our previous business if this ends in two months? If this goes on for four months, will 50% of our clients be laid off themselves and unable to rehire us? If this goes for a year, will we have any clients or employees left? Will we have to start from scratch with nothing but our reputation?

Two weeks ago, a bank would not underwrite a loan without a clear business plan. Right now, none of us can do any sort of business forecasting for what our revenue is going to look after this Covid-19 pandemic recedes, but we’re being told to take out loans. That is not sound business advice. It’s the government passing the buck to the very job creators that employ millions of Americans.

But a major employer like Boeing will probably get free money, not just a loan.

The corruption problem. The most efficient way to distribute whatever cash the government sets aside for bailouts is to have a simple process overseen by a single person. In the current proposal, that person would be Treasury Secretary Steve Mnuchin.

The problem, though, is that a streamlined process is open to corruption. Maybe WalMart gets bailout money because its owners support conservative causes, and Amazon doesn’t because Jeff Bezos owns the Washington Post. Or maybe Amazon does get money, but not until after the Post starts covering the Trump more favorably. (That’s a bad example, because neither WalMart nor Amazon is likely to need bailing out, but you see the point.)

That would be a disturbing possibility in the best of times, but it’s particularly troublesome with the current administration and its history of self-dealing. The gist of the Ukraine scandal was that Trump is willing to use the powers of his office to gain unfair political advantages. How can he (or a Treasury Secretary who has shown no ability to say no to him) be trusted to dole out large sums of money?

And while we’re at it: If the hotel industry ultimately gets a bailout, won’t a chunk of that money go straight to the Trump Organization? How can we trust the Trump administration to judge fairly the amount of public subsidy the President’s business needs?

The Warren principles. That’s why Senator Warren has put forward eight principles that would control bailouts:

  • Companies must maintain payrolls and use federal funds to keep people working.
  • Businesses must provide $15 an hour minimum wage quickly but no later than a year from the end
  • Companies would be permanently banned from engaging in stock buybacks.
  • Companies would be barred from paying out dividends or executive bonuses while they receive federal funds and the ban would be in place for three years.
  • Businesses would have to provide at least one seat to workers on their board of directors, though it could be more depending on size of the rescue package.
  • Collective bargaining agreements must remain in place.
  • Corporate boards must get shareholder approval for all political spending.
  • CEOs must certify their companies are complying with the rules and face criminal penalties for violating them.

The legislation Majority Leader McConnell is trying to push through the Senate doesn’t fulfill those conditions. In particular, it includes $500 billion for Secretary Mnuchin to distribute with very few strings attached. Paul Krugman had already criticized such a proposal in advance:

as Congress allocates money to reduce the economic pain from Covid-19, it shouldn’t give Trump any discretion over how the money is spent. For example, while it may be necessary to provide funds for some business bailouts, Congress must specify the rules for who gets those funds and under what conditions. Otherwise you know what will happen: Trump will abuse any discretion to reward his friends and punish his enemies. That’s just who he is.

According to Politico:

the language drafted by Senate Republicans also allows Mnuchin to withhold the names of the companies that receive federal money and how much they get for up to six months if he so decides.

So if he were to simply hand a few billion to the Trump Organization in mid-May, no one need hear about it until after the election.

The Balloon Pops on Trump’s Economic Promises

The data that came in this week wasn’t terrible, but it was far from Trump’s campaign rhetoric.

It’s hard to know how to respond when Trump sets up a stupid benchmark and then fails to meet it. On the one hand, the failure points out that his policies haven’t done what he expected them to do, because the world doesn’t work the way he thinks it does. But on the other hand, I don’t want to validate the benchmark, because then I’ll start feeling obligated to judge future presidents by it.

Case in point: the mercantile trade deficit, which set an $891 billion record in 2018, despite Trump’s promise to shrink it.

Trump takes a pre-Adam-Smith mercantilist view of trade; if a country sells us more stuff than we sell to them, then they’re “beating” us and we need to do something to stop “losing” to them. The economic reality is a lot more complicated. (The libertarian Cato Institute explained this back in 1998, when a trade deficit of $250 billion seemed scandalous.) True, they might be selling us more because they make better products more efficiently. But it also might be because the strength of the dollar makes our exports look artificially expensive. And the dollar might be strong because people around the world want dollars; they view it as a more secure store of value than their home currency; or they want to invest their savings in the US because the American system has more respect for the rule of law; or for some other reason. Maybe what we’re trading for those refrigerators and TVs is paper, like shares in start-up corporations that pop up in the US because our economy does a better job nurturing such things. And so on.

Also, focusing on the deficit in goods ignores services. So if some country makes our bicycles while we handle their banking and insurance, the mercantile trade deficit may say that we’re “losing”, when in reality we might be trading bad jobs for good jobs.

So anyway, Trump has identified the mercantile trade deficit as a major problem, which it isn’t. When he was campaigning in 2016, he said:

Today, our manufacturing trade deficit with the world is nearly $800 billion. And going up, going up fast. Unless I become president. You will see a drop like you’ve never seen before.

In July, Trump falsely told a crowd:

Thanks to our powerful trade policies, the trade deficit is falling and falling and falling.

The point of all his tariffs and trade wars has been to bring the mercantile trade deficit down, so that we stop “losing” to other countries. But it’s not working, as any economist could have told him ahead of time. In 2018, we also ran a somewhat smaller surplus in services, so the overall trade deficit was $621 billion, the highest since 2008.

That graph should tell you something about our mercantile trade deficit: It went way down in 2009. (It also wasn’t “going up fast” in 2016. That was a lie.) What was happening in 2009? A lot of stuff we wouldn’t want to repeat, like massive unemployment that caused people to stop buying stuff. Also, the price of oil crashed in the Great Recession, so that our energy imports cost less. A lower mercantile trade deficit is not always a good thing.

GDP presents another how-to-cover-this quandary: What should I say when the administration makes ridiculously optimistic predictions, and then the results that come in are just OK?

So, after some delay due to the government shutdown, the 2018 GDP stats are in: The economy grew 2.9%. That’s not bad, and even kind of good when looked at realistically. It’s at the upper range of recent annual growth results. GDP grew 2.9% in 2015, but that was the top mark for the Obama administration. 2016 came in at 1.6%. Under Trump GDP has grown 2.2% and 2.9%.

That would be great if 2.2% and 2.9% were the beginning of an up-trend, but it doesn’t look that way. The CBO predicts 2.7% and 1.9% for the next two years. That’s not what Trump promised.

Throughout the 2016 campaign and since, the president and his party have vowed to kick-start tepid Obama-era economic growth. Specifically, they insisted tax cuts and deregulation would return growth to its post-World War II average of 3 percent — a level, candidate Trump said derisively, that President Barack Obama became “the first president in modern history” never to reach in a single year.

So the Trump numbers are not at all terrible; in fact, they’re about what you’d expect from another two years of Obama, particularly if Congress would have let Obama run the kind of deficits Trump is running.

Jobs. The reason growth projections for the next two years are not as high is that the tax cut isn’t having the kind of structural effect on the economy that its backers claimed. Instead, it has stimulated the economy the same way any deficit-increasing measure does.

February job numbers were outright lousy, but it’s a mistake to make too much of that yet. The economy added 20,000 jobs in February, which is pretty sickly: It has been averaging 100K-300K new jobs per month since the end of the recession.

So if 20,000 is where job-creation is going to be now, or worse, if it’s the start of a down-trend, then that would be worrisome. But as you can see in the graph, the monthly data is noisy. Random fluctuation is more likely than the beginning of a new trend.

But take a closer look at that graph without paying attention to the years on the lower axis: Can you tell where the Obama economy ends and the Trump economy starts? I can’t.

That’s how just about all the economic graphs look. After all the sturm-und-drang we’ve had about tax cuts and tariffs and trade deals, and all the hype about how great the Trump economy has been, the Trump economy mostly looks like two more years of the Obama economy.

10 Years After: The Post-Recovery Economy

The recovery from the Great Recession didn’t bring back some previous state of prosperity and resume growth from there. It created a new economy that, in some ways, may never again be what it was.

In addition to 9-11, which was a Tuesday this year, this week included one other important anniversary: Saturday marked ten years since the collapse of the Lehman Brothers investment bank, the spark that ignited the financial crisis that started the Great Recession.

Like most major world events, the Great Recession didn’t begin in an instant and didn’t have a single cause. Just as Europe had started sliding towards World War I long before Archduke Ferdinand’s assassination, the world financial system had been showing signs of strain long before Lehman declared bankruptcy. But Lehman had been one of the biggest players in the international financial markets, so its insolvency was a huge shock: If their debts weren’t good, whose were? Who knew what other financial institutions were insolvent, now that Lehman wouldn’t be repaying its loans? Suddenly, banks were afraid to loan money even to other banks, and the dominoes began to fall.

The worst financial panics are marked by cascading waves of bankruptcies. Alice can’t pay Bob, and Bob had been counting on Alice’s money to pay Charlie and Darlene, who now won’t be able to meet their payrolls. Charlie and Darlene’s employees, in turn, won’t be able to pay their rent, and so their landlords won’t be able to make their mortgage payments to the bank, which may also become insolvent. Where does it stop?

Wikipedia sums up the effects:

While the recession technically lasted from December 2007-June 2009 (the nominal GDP trough), many important economic variables did not regain pre-recession (November or Q4 2007) levels until 2011-2016. For example, real GDP fell $650 billion (4.3%) and did not recover its $15 trillion pre-recession level until Q3 2011. Household net worth, which reflects the value of both stock markets and housing prices, fell $11.5 trillion (17.3%) and did not regain its pre-recession level of $66.4 trillion until Q3 2012. The number of persons with jobs (total non-farm payrolls) fell 8.6 million (6.2%) and did not regain the pre-recession level of 138.3 million until May 2014. The unemployment rate peaked at 10.0% in October 2009 and did not return to its pre-recession level of 4.7% until May 2016.

This week, the New York Times ran a series of articles pointing out all the ways in which the economy has still not recovered. Or, putting it another way, how the economy has changed. We haven’t simply returned to some previous state of prosperity and continued growing from there. We have entered a new economy, parts of which may never return to previous levels of prosperity.

The most significant change is an increase in inequality. The lower your pre-Lehman income and net worth, the longer it has taken the recovery to reach you. People at the top of the economy are far better off than they have ever been. But people at the bottom are still waiting to get back to where they were, and some never will. In fact, if you take the top 10% of earners out of your statistics, the 90% who are left are only just now getting back to their 2006 incomes, and that’s only because of tax cuts and government programs like unemployment insurance, Food Stamps, and ObamaCare. If you just look at pre-tax income, it’s still underwater.

Wikipedia noted that household net worth was back to its pre-Lehman levels by 2012. But that number has been pulled up by the huge gains of the richest households. Median household net worth, the net worth of the households in the middle of the economy, has still not recovered. In fact, it is still below its level at the beginning of the previous recession, the one that started when the dot-com bubble burst in 2000 and 2001.

GDP recovered by 2011, but Wednesday the Census Bureau announced that median household income had only just recovered by 2017.

[T]he details of the report raised questions about whether middle-class households — which have experienced an economic “lost decade” — are now likely to see actual income gains or if they will simply tread water. One reason for concern is that income growth slowed in 2017, to 1.8 percent. Median income had grown more rapidly in previous years, by 5.2 percent in 2015 and 3.2 percent in 2016.

Another NYT article (by Nelson Schwartz) digs a little deeper:

Data from the Federal Reserve show that over the last decade and a half, the proportion of family income from wages has dropped from nearly 70 percent to just under 61 percent. It’s an extraordinary shift, driven largely by the investment profits of the very wealthy. In short, the people who possess tradable assets, especially stocks, have enjoyed a recovery that Americans dependent on savings or income from their weekly paycheck have yet to see. Ten years after the financial crisis, getting ahead by going to work every day seems quaint, akin to using the phone book to find a number or renting a video at Blockbuster.

Basically, there are two dividing lines: About a fifth the households in America either own nothing to speak of, or have debts that are greater than their assets. They live paycheck-to-paycheck, and miss out entirely on that 39% of national household income that now comes from something other than wages.

A large chunk of households in the middle of the economy have a positive net worth, but that wealth is almost entirely in the form of home equity. (Their IRAs or 401(k)s may own a few shares of stock, but those shares are not a significant percentage of their assets.) After paying the mortgage, they also live paycheck-to-paycheck. In most of the country, house prices collapsed in the Great Recession, and (except in a few hot markets) they haven’t grown much (if at all) in the last ten years, so these families’ net worth has remained relatively stagnant.

But at the top of the economy, people own stocks. They get dividends and capital gains that are taxed at a lower rate. And the government’s economic-recovery policies worked much better for them than for homeowners.

Like the bankers, shareholders and investors were also bailed out. By cutting interest rates to near zero and pumping trillions — yes, you read that right — into the economy, the Federal Reserve essentially put a trampoline under the stock market. The subsequent bounce produced a windfall, but only for a limited group of beneficiaries. Only about half of American households have any exposure to the stock market, including 401(k)’s and retirement plans, and ownership of the shares of individual companies is clustered among upper-income families.

For homeowners, there wasn’t much of a rescue package from Washington, and eight million succumbed to foreclosure. Sometimes, eviction came in the form of marshals with court orders; in other cases, families quietly handed over the keys to the bank and just walked away. Although home prices in hot markets have fully recovered, many homeowners are still underwater in the worst-hit states like Florida, Arizona and Nevada. Meanwhile, more Americans are renting and have little prospect of ever owning a home.

The housing crash hit middle-class black and Hispanic families harder than middle-class white families, worsening the racial wealth gap.

[F]amilies in the latter two groups were more dependent on housing as their principal form of investment. Not only were both minority groups harder hit by foreclosures, but Hispanics were also twice as likely as other Americans to be living in Sun Belt states where the housing crash was most severe.

In 2016, net worth among white middle-income families was 19 percent below 2007 levels, adjusted for inflation. But among blacks, it was down 40 percent, and Hispanics saw a drop of 46 percent.

Young people have also been set back. With their parents’ home equity all but gone, they face a choice between entering the economy without marketable skills and borrowing heavily to go to college or get other training. Student debt, says the NYT, “is now the second-largest category of consumer debt outstanding, after mortgages.”

A personal view comes from NYT editor M. H. Miller, who tells of his parents attending his 2009 graduation while facing foreclosure. At an age when previous generations of Americans were taking on mortgages and building for the future, Miller still owes $100K of student debt. “The financial crisis remains the defining trauma of my generation,” he says.

Finally, we come to what has happened at the bottom levels of the job market, covered by Matthew Desmond. He follows Vanessa Solivan, a home health aide raising three children in Trenton, New Jersey.

In May, Vanessa finally secured a spot in public housing. But for almost three years, she had belonged to the “working homeless,” a now-necessary phrase in today’s low-wage/high-rent society. … After juggling the kids and managing her diabetes, Vanessa is able to work 20 to 30 hours a week, which earns her around $1,200 a month. And that’s when things go well.

These days, we’re told that the American economy is strong. Unemployment is down, the Dow Jones industrial average is north of 25,000 and millions of jobs are going unfilled. But for people like Vanessa, the question is not, Can I land a job? (The answer is almost certainly, Yes, you can.) Instead the question is, What kinds of jobs are available to people without much education? By and large, the answer is: jobs that do not pay enough to live on.

It’s not that safety-net programs don’t help; on the contrary, they lift millions of families above the poverty line each year. But one of the most effective antipoverty solutions is a decent-paying job, and those have become scarce for people like Vanessa. Today, 41.7 million laborers — nearly a third of the American work force — earn less than $12 an hour, and almost none of their employers offer health insurance.

Desmond did well to focus on Vanessa. I suspect that the majority of NYT readers (whom I picture as better off than most Americans) have little contact with low-wage workers. Janitors, dishwashers, and busboys are almost invisible. Farm workers are out there in the country somewhere doing God-knows-what. You can imagine that waitresses make a lot in tips, and a few of them actually do. When your personal experiences don’t connect you to people, it’s easy to accept stereotyped accounts of their lives and problems: It’s their own fault. They just need to work harder and stay off drugs. If they learned to practice middle-class virtues, they’d be middle class themselves soon enough.

But lots and lots of professional-class folks have had needed home health aides at one time or another, either while recovering from something themselves or when they were trying to keep aging parents out of a nursing home. I dealt with several in my parents’ final years, and I know the agency didn’t charge us enough to pay them very well. The aides are not nurses, but they do hard, necessary work. The ones I met did it cheerfully, without complaining. None of the negative stereotypes of low-wage workers — that they’re lazy, stupid, resentful, unreliable, irresponsible, and have to be watched every minute — applied to the aides who took care of Mom and Dad.

In short, when I picture a home health aide, I picture someone who deserves to have a decent life. (Whether anyone deserves not to have a decent life is another question. But surely home health aides shouldn’t fall into that abyss.) The thought of Vanessa doing all the work she can get and still living in her car — that’s jarring to me in a way that stories of other low-wage workers might not be. I can’t easily make up some excuse to explain it, or make it seem just. I suspect that a lot of NYT readers had a similar reaction.

Similarly, many professional-class people recall the low-paying jobs they held as teen-agers, or during the summers of their college years, and may regard the experience as a harmless hazing that welcomes young people into the workforce. But Vanessa is 33, and is not on the road to some future prosperity. This is her life, and it’s the life of a lot of adult Americans.

The Bureau of Labor Statistics defines a “working poor” person as someone below the poverty line who spent at least half the year either working or looking for employment. In 2016, there were roughly 7.6 million Americans who fell into this category. Most working poor people are over 35, while fewer than five in 100 are between the ages of 16 and 19. In other words, the working poor are not primarily teenagers bagging groceries or scooping ice cream in paper hats. They are adults — and often parents — wiping down hotel showers and toilets, taking food orders and bussing tables, eviscerating chickens at meat-processing plants, minding children at 24-hour day care centers, picking berries, emptying trash cans, stacking grocery shelves at midnight, driving taxis and Ubers, answering customer-service hotlines, smoothing hot asphalt on freeways, teaching community-college students as adjunct professors and, yes, bagging groceries and scooping ice cream in paper hats.

There was never a golden age when the American Dream (whatever it may have been in that era) was available to all on equal terms. Inequality has always been with us, and has been increasing since the late 1970s. It is not some new development of the last ten years, but class lines have increasingly hardened since the Great Recession.

If you are a child of wealth, your path to success is comparatively smooth: As a child, you will get whatever help you need to maximize your talents and your attractiveness to elite colleges. With appropriate effort on your part, you will graduate not just with a punched ticket to the professional class, but without debt. If at some point your further development requires either more training or the capital to start a business, that won’t be a problem. Quite likely, you will reach 40 in good shape, ready to give your own children similar advantages, but with no awareness of ever having taken a “handout”. You got the grades, you did the work, you started the business — by what right can these socialists tax “your” money away and spend it on the people who lost the games you won?

But if your parents are not rich, you face difficult hurdles and choices. Depending on where you live, public schools may or may not give you the grounding you need to move on and get an advanced education. If that path is available to you, will it be worth all the money you will have to borrow? Or should you take your chances in the unskilled workforce, knowing that jobs and wages can evaporate in an instant, and that the best you can hope for is to scrape by from one week to the next?

That is our “recovered” economy. It’s “booming”, we are told. And for many people, it is. But not for everybody.

Elizabeth Warren stakes out her message

Two of Warren’s recent proposals could shift the public debate in a positive direction — but only if she’s willing to push them with a presidential campaign.

I have been one of the people predicting that Elizabeth Warren wouldn’t run for president in 2020, or ever. It seemed to me that the door was wide open for her to challenge Hillary from the left in 2016, and that Bernie Sanders only entered the race after realizing that she wouldn’t. Since then, I have believed her claims that she’s happy being a senator and isn’t interested in seeking a promotion.

I’m going to stop doing that.

In the last two weeks she has put forward two major pieces of legislation that won’t go anywhere in Mitch McConnell’s Senate, but which lay out clear themes for a national run. You don’t have to be a presidential candidate to take a big-picture view and lay out your best visions for the country, and actually I wish more senators would. But these two proposals really look to me like a foundation on which to build a presidential platform, so I’m going to stop denying that Warren is interested in the White House.

The proposals are the Accountable Capitalism Act and the Anti-Corruption and Public Integrity Act. Together, they point to a different strategy for reaching those voters who feel that economic growth has passed them by.

The Great Divergence. The reasons Americans might feel discouraged about economic growth are well known, and I’ve covered them in this blog many times. Between the end of World War II and the mid-1970s, wages and productivity increased together; as technology and capital formation led to more efficient ways of producing goods and services, the workers who produced those goods and services benefited. “A rising tide lifts all boats,” the adage went.

But since then, wages and productivity have diverged. Productivity kept increasing while wages stayed flat. The economy kept growing, but the people who made stuff didn’t wind up with more. Instead, just about all the new wealth accumulated at the very top. It went to the people who own companies rather than the people who work at them.

The difference that trend makes from one year to the next doesn’t amount to much compared to the fluctuations of the business cycle; whether or not you can find a job counts for much more than whether or not wages in general are increasing. But over the course of a generation it makes a huge difference. My parents’ generation (born in the 1920s) lived like kings compared to their parents. What had been luxuries when they were young — cars, houses with more rooms than people, meals at restaurants — became commonplace in middle age.

For my generation (born in the 1950s) it’s been more hit-and-miss. If you moved up the educational ladder and got into a more lucrative profession than your parents, you did better than they had. But if you stayed on the same level — say if you tried to follow your Dad into the factories or mines — you did much worse.

The generation born in the 1990s may eventually come out well, but right now things look hard: Unless they were born into at least the upper middle class, a college degree leaves them deep in debt, while not getting a degree leaves them with many fewer options than I would have had. Either way, they enter adulthood with more headaches than my generation had.

Political responses. The Republican message ignores the Great Divergence, and claims that more GDP growth will solve everybody’s problems, as if the rising tide still lifted all boats. But it doesn’t any more. More economic growth might just mean that Jeff Bezos is worth $200 billion instead of $100 billion. In the expanding part of the business cycle (like now) ordinary people may find it easier to get jobs. But they still may not find it easier to get jobs that pay more than their parents made at the same age. A full generation’s worth of growth in the national economy may not have touched them at all.

The Democratic message has mostly been that people need help from government. Depending on where you are on the economic scale, you may need help paying for food and housing, or for health care, or for education. And so there are proposals like Medicare for All, free college, or even a basic income.

But redistributive proposals — taxing the rich and spending the money on everybody else — just mitigate the effects of stagnant wages. They make it easier to live in an economy that channels all of its productivity increases to the rich, but they don’t fundamentally change that economy.

Redistribution of power. Something the Trump campaign understood and took advantage of in 2016 was that Americans are frustrated by something deeper than just the fact that they aren’t winning the game financially. They’re angry about playing a game that they feel is rigged against them. “Make America Great Again” did have all sorts of racist, sexist, homophobic, and xenophobic (in a single word, deplorable) implications, but it also evoked a well-deserved nostalgia for that pre-Divergence world, when the game felt winnable (at least for straight white men).

Just redistributing money doesn’t fix that. If you run a race with weights around your ankles, and somebody who doesn’t carry those weights gets a big head start, giving everybody a participation trophy at the end won’t make you feel much better about losing. No, to really fix the problem we need to redistribute power.

Promoting unions would help some, for reasons Trae Crowder explains in this video.

In this country, you’re not paid for the skills you have. If that were true the Kardashians wouldn’t have a fleet of Maseratis. No, in America you’re paid based on what you can bargain for.

Those factory-and-mining jobs that Trump keeps claiming (mostly falsely) that he’s bringing back — it’s not that they’re inherently good jobs. (In the 19th century they were terrible jobs. They paid starvation wages and you stood a good chance of getting killed.) It’s that unionized miners and factory workers had the power to force the owners to give them a fair share of the industry’s profits.

Warren’s insight is that we don’t just need to give workers better tools to channel power. We also need to weaken the corporations and wealthy individuals that they bargain against.

The corporate/government power loop. In this era of corporate personhood, we take for granted that corporations are immortal sociopaths. As I noted in 2010:

Diagnostic criteria for sociopathy include symptoms like: persistent lying or stealing, apparent lack of remorse or empathy, cruelty to animals, recurring difficulties with the law, disregard for right and wrong, tendency to violate the boundaries and rights of others, irresponsible work behavior, and disregard for safety. [1]

Any of that sound familiar?

We take for granted that (within the law and occasionally outside of it) corporations will do whatever they can to increase their profits. We fault a poor person for taking advantage of a loophole in the Food Stamp program, and Trump rails against desperate immigrants who take advantage of our asylum laws. But if a corporation takes a subsidy or tax cut that was supposed to encourage it to create jobs, and then it destroys jobs instead … well, that’s just how they are; it was our own fault for not negotiating a tighter agreement. If a corporation moves its headquarters to the Cayman Islands to escape taxes, what did you expect? Corporations aren’t patriotic. If a health insurance company finds a loophole that lets it kick sick people to the curb, it’s just doing a good job for its stockholders.

We forget that corporations were not always this way. In the era of the Founders, corporations were rare and were chartered for specific purposes like building a canal or running a college. The Founders themselves recalled the British East India Company as a bad example they didn’t want to recreate.

Corporations are not a natural species that we have discovered and integrated into our society. They are created by law, and they should be what we need them to be. Maybe it doesn’t serve our purposes to give enormous economic and political power to immortal sociopaths. [2]

The obvious answer is to regulate them tightly. President Grover Cleveland — how often does his name come up? — said in his 1888 State of the Union that corporations “should be the carefully restrained creatures of the law and the servants of the people” but that they “are fast becoming the people’s masters.”

Already in Cleveland’s day, the problem was that corporations corrupt the regulating process. Not only do they have the time and money to find the weak points in whatever system we construct, but they also influence how those systems are set up in the first place. Often the laws regulating corporations are written by corporate lobbyists, and then applied by bureaucrats who hope to make a lot of money as corporate lobbyists in the future. And now that the Supreme Court has given the go-ahead to unlimited corporate political spending, a lot of politicians are either afraid to oppose them or unable to beat them.

So there’s a power loop: corporations control the government that is supposed to protect us from corporations. It’s no wonder ordinary people can’t win.

Vox looks back at the seminal Milton Friedman article “The Social Responsibility of Business is to Increase Its Profits” from 1970.

Friedman allows that executives are obligated to follow the law — an important caveat — establishing a conceptual framework in which policy goals should be pursued by the government, while businesses pursue the prime business directive of profitability.

One important real-world complication that Friedman’s article largely neglects is that business lobbying does a great deal to determine what the laws are. It’s all well and good, in other words, to say that businesses should follow the rules and leave worrying about environmental externalities up to the regulators. But in reality, polluting companies invest heavily in making sure that regulators underregulate — and it seems to follow from the doctrine of shareholder supremacy that if lobbying to create bad laws is profitable for shareholders, corporate executives are required to do it.

Warren’s proposals. Taken together, Warren’s two proposals are aimed at attacking that corporate/government power loop from both sides. The Accountable Capitalism Act focuses on the corporate side. Vox explains:

Warren wants to create an Office of United States Corporations inside the Department of Commerce and require any corporation with revenue over $1 billion — only a few thousand companies, but a large share of overall employment and economic activity — to obtain a federal charter of corporate citizenship.

The charter tells company directors to consider the interests of all relevant stakeholders — shareholders, but also customers, employees, and the communities in which the company operates — when making decisions. That could concretely shift the outcome of some shareholder lawsuits but is aimed more broadly at shifting American business culture out of its current shareholders-first framework and back toward something more like the broad ethic of social responsibility that took hold during WWII and continued for several decades.

That sounds kind of idealistic, but there are some very practical enforcement mechanisms: Workers would elect 40% of the corporate board of directors: not enough to give the workers control, but more than enough to settle any internal disputes among the stockholders. And then, the bill would “require corporate political activity to be authorized specifically by both 75 percent of shareholders and 75 percent of board members”.

Think about what that means: The board members elected by the workers could veto any corporate political contributions or lobbying efforts. So if corporate management wants something out of the government that benefits the whole company, it could still fund that. But if it wants government help breaking its union or killing government healthcare programs or generally tilting the economy in a pro-business direction, that’s probably not going to go through.

This is a way to limit corporate political spending that gets around John Roberts’ corporations-have-free-speech notions. They still have free speech, but the process by which they decide what to say has been fuzzed up a little.

The Anti-Corruption and Public Integrity Act hits the government side of the power loop. A different Vox article:

The bill would institute a lifetime ban on the president, vice president, Cabinet members, and congressional lawmakers becoming lobbyists after they leave office. It would give other federal workers restrictions — albeit less severe — on entering lobbying firms. The act would also bar federal judges from owning individual stocks or accepting gifts or payments that could potentially influence the outcome of their rulings.

Warren’s bill would also mandate presidential and vice presidential candidates to, by law, disclose eight years’ worth of tax returns and place any assets that could present a conflict of interest into a blind trust to be sold off (neither of which President Donald Trump has done). Members of Congress would have to do the same with two years of tax returns.

Critics say this law would make it hard to recruit people into government jobs, but it looks to me like it would just weed out people who want government jobs for the wrong reasons. If you want to work for the FDA because you care about public health, you’ll still want to work for the FDA. But if you want to work for the FDA because you hope for a big payday from the drug industry after you leave government, you won’t.

Where this goes. Immediately, it goes nowhere. Mitch McConnell controls what bills come up for a vote, and the GOP has the votes to kill anything its corporate masters don’t like. I don’t even know how many Democratic senators would line up behind this.

What Warren has done, though, is drive a stake into the ground, and say “We need to build something here.” I haven’t read either bill in its entirety, and I suspect there will be considerable room for debate about the details. She may not have them right.

But she has the big picture right. We do need to regulate corporate activity more tightly, especially in the ways that it incestuously influences its own regulation. We need to restrain the power of corporate money in our elections. We need to make it less tempting for politicians and bureaucrats to sell out the public interest.

In the near term, the significance of these proposals is that they can shift a stagnant public debate. The right forum for that debate to get started, though, is the 2020 presidential campaign. Unless some major presidential candidate picks these ideas up and carries them into the televised debates, they’ll fade into the background.

So what do you think, Senator Warren? Will some major candidate pick these ideas up?

[1] Several of those links had rotted in the last 8 years, so I updated them.

[2] I often wonder if all the vampires who show up in our novels, TV shows, and movies are some kind of collective unconscious response to the immortal sociopaths we have to deal with every day. Don’t you ever feel like your cable or credit-card company would like to suck your blood?

“America First!” means China wins

China either is already the world’s largest economy or soon will be. In order to compete for world leadership in the coming decades, the US will need to represent a community of like-minded nations, not go it alone.

America First. The foreign policy Donald Trump ran on came down to two words: “America First!”

He never spelled out exactly what policy agenda that slogan entailed — Trump 2016 was never the kind of campaign that constructed 12-point plans or posted white papers on its web site — but the attitude it expressed was clear: Both economically and militarily, the United States is the world’s 800-pound gorilla, and we need to start acting like it.

According to Trump’s populist critique, past administrations of both parties worried too much about principles like free trade and human rights, and invested too much of their hopes in multinational organizations like the UN, the WTO, and NATO. The Bushes and Clintons and Obama — and basically every president since Truman — tried to create a world of rules and mutual commitments, and failed to recognize something Trump finds obvious: Rules protect the weak. A world without rules is governed by the Law of the Jungle, and under that law the 800-pound gorilla always wins. That’s why he felt confident promising us “so much winning“.

To Trump and his followers, it makes no sense that the US has been trying to lead the world by setting a good example, rather than dominate it by telling other countries how things are going to work. It’s been crazy to keep our markets open when other countries close theirs, respect their intellectual property when they don’t respect ours, or extend our military shield over allies who don’t invest in their own armed forces the way we do. Our strength ought to get us a better deal, but it doesn’t because we keep volunteering to take a worse one.

So if it meant anything, “America First!” meant that it was high time we stopped volunteering to take the short end of the stick. Stop trying to create a world of rules that apply equally to everyone and stop averting our eyes when other countries cut corners. Instead, deal with every country one-on-one, a situation where our superior power will let us tell them what’s what. And what we will tell them is: “You need us more than we need you. So we win, you lose.”

During the campaign, examples of how Trump pictured this working would occasionally pop out: If we were going to liberate the Iraqi people from Saddam Hussein’s tyranny, we should have taken their oil to make it worth our while. If our military is going to keep defending Europe, they should pay us. Shortly after taking office he told the CIA the principle we ought to live by: “To the victor belong the spoils.

Short-term and long-term. A year and a half into the Trump administration, we’re still waiting for those white papers and 12-point plans. (An anonymous staffer recently summed up the Trump Doctrine by expanding “America First!” from a two-word to a three-word slogan: “We’re America, bitch!“) But the outlines of a Trump foreign policy are starting to become clear: no TPP; no Paris Climate Accord; no Iran denuclearization deal; no UN Human Rights Council. We move our embassy to Jerusalem because we’ve taken Israel’s side, and aren’t trying to broker peace any more. We don’t accept other countries’ refugees. We insult our allies and leave them in the dark about our intentions. We can act like that because we’re America, bitch.

Once the Trump administration gets outside the restrictions of multinational agreements and into bilateral negotiations, it makes big demands and waits for other nations to back down, threatening terrible consequences if they don’t. Strangely, these tactics have yet to work anywhere. Mexico still isn’t paying for the wall and just elected a government more resistant to American pressure than ever. No one — not China, not Canada, not the EU — is knuckling under to our trade demands. North Korea gave us some pretty words, but doesn’t seem inclined to abandon its nukes.

Those problems, the administration assures us, are just short-term. As soon as other countries understand that we’re serious, they’ll realize who has the upper hand. Thursday night, Trump told a rally in Montana: “We’re going to win [the trade war with China] because we have all the cards.”

So far, that hasn’t been true: We hit them, they hit back — as if we were equals or something. But who knows? Maybe in the medium term Trump’s strategy works out. Maybe over the next year or so Canada and Mexico will decide that they do need to renegotiate NAFTA so that it tilts more in our favor. Maybe China and the EU will drop their reprisal tariffs and be content to let us buy less from them. Maybe we’ll get a new Iran deal that restricts their nuclear program for longer than Obama’s deal did, or adds provisions about ballistic missiles or exporting terrorism. Maybe the North Korea denuclearization agreement will turn into more than a handshake and a photo op.

I’d be surprised, but what do I know? Stranger things have happened.

But now let’s expand our time horizon and recognize one obvious fact: In the long run, it’s China who will be the world’s 800-pound gorilla. If the world is running according to the Law of the Jungle in 2030 or 2050, they win, not us.

How the US and China stack up. At the moment, China has around 1.4 billion people, about 1/6th of the world’s population and four times America’s. Per capita, it’s still a much poorer country than we are, but the national totals are starting to even out.

Depending on how you measure, China either has already overtaken us as the world’s largest economy or soon will. [1] It’s more-or-less inevitable: As Japan and South Korea and Singapore have shown, it’s much easier to bring your people up to a standard that some other nation has already achieved than to create an entirely new standard of wealth. So China’s GDP grows over 6% in a bad year, while ours grows 3% in a good year. [2]Over time that adds up. If China ever manages to achieve a per capita income that is just half of ours, its total economy will be twice as large. That will give it a leading role on the world stage.

Already China is flexing its muscles in terms of soft power. Its Belt and Road Initiative is a multi-trillion-dollar plan to rebuild Eurasia’s infrastructure around China-centered trade routes and financial institutions.

Think about what this means diplomatically. China can approach Pakistan with its plan for a Pakistan-China Economic Corridor. What’s our vision for Pakistan? China foresees a high-speed-rail network that connects Shanghai to Singapore and Bangkok. What do we foresee?

It may not happen right away, but over time you have to expect China to exert the kind of world influence that comes with being the world’s largest economy. They will have the tax base to outstrip us in military spending eventually, if they choose to. Someday Shanghai or Hong Kong might replace New York as the world financial capital. Already, China can challenge us as a regional military power in Asia. Eventually it will have the resources, if it wants, to challenge us around world — at least if we are foolish enough to take them on by ourselves.

We need allies. We need institutions. In short, this is a uniquely bad time for the US to set up the world to be dominated by an 800-pound gorilla. Because before much longer, that gorilla won’t be us.

For the United States to continue to be the world’s most influential nation, we’re going to have to rely on two factors that Trump wants to turn his back on.

  • We represent values that the world admires, not just our own money and power.
  • We lead a community of nations who share those values.

If those two things are true, then America is the leading member of a coalition China won’t be able to bully for a very long time, or maybe ever: ourselves, the EU, Japan, the English-speaking parts of the British Commonwealth, South Korea, Taiwan, and maybe a few other countries. As India, Brazil, and other nations achieve relative economic equality with the countries in that coalition, there’s reason to hope that they will find it a club worth joining.

Whatever you may think of how the Trans-Pacific Partnership turned out in its final form, this was the geo-political vision that got it started: We would not negotiate trade with China by ourselves, but would get together with a large number of like-minded nations to write rules of the road. Long-term, we hoped that China might someday accept our rules in order to get the benefits of belonging to our club. There are many reasonable arguments against the TPP as it eventually was negotiated, but to scrap it and replace it with nothing will eventually prove to be a huge missed opportunity. (Pulling out of the WTO, which Trump is reported to be considering, would be even worse.)

Going forward, we want to live in a world of multinational institutions, because in a world of bilateral agreements, more and more it will be China who tells other nations how things are going to be.

The benefits of being a benign superpower. Since the end of World War II, the United States has been the chief promoter and protector of the international financial system. Trump and his followers see only the costs of this role and ignore all the ways that it has enhanced American power.

In the world today, the dollar is the international currency. National banks of almost all countries hold large reserves of dollars, and international trade is denominated in dollars. Just about any international transfer of money at some point passes through the US banking system.

What this means is that the market for dollars goes well beyond the needs of the US economy. The Federal Reserve creates dollars at zero cost, by entering numbers into its database. Many of those dollars go overseas eventually, and we get real goods in return: cars, iPhones, oil, steel, and Ivanka Trump’s fashion line. This is the seldom-discussed flip side of our trade deficit: We get away with running that deficit — consuming more than we produce — because the international economy needs a currency, and the dollar plays that role. The dollar is our chief export.

Similarly, US Treasury bills are the world’s default investment. This has allowed us to finance our budget deficit year after year, without suffering any of the ill effects that budget hawks are constantly predicting: Our national debt hasn’t caused inflation. The dollar’s value hasn’t collapsed. We don’t have to offer higher and higher interest rates to get investors to loan us money.

Short of military attack, the most potent weapon we can aim at an adversary is to cut them off from the US banking system. When fully enforced, that sanction can reduce another nation’s international trade to barter, and induce it to invent elaborate and expensive money-laundering schemes. The sanction that hurts Putin’s oligarchs most is the Magnitsky Act, which prevents sanctioned individuals from using the US banking system. The Atlantic explains:

What made Russian officialdom so mad about the Magnitsky Act is that it was the first time that there was some kind of roadblock to getting stolen money to safety. In Russia, after all, officers and bureaucrats could steal it again, the same way they had stolen it in the first place: a raid, an extortion racket, a crooked court case with forged documents—the possibilities are endless. Protecting the money meant getting it out of Russia. But what happens if you get it out of Russia and it’s frozen by Western authorities? What’s the point of stealing all that money if you can’t enjoy the Miami condo it bought you? What’s the point if you can’t use it to travel to the Côte d’Azur in luxury?

Once your wealth is expressed in dollars and recognized by the US banking system, you can take it anywhere and do anything you want with it. But otherwise, it’s barely money at all.

In a lot of ways, our banking power is better than military power. Unlike tanks or even nuclear missiles, our enemies have no answer for it. What are they going to threaten in return — to cut us off from the Russian or North Korean or Iranian banking system? Why would we care?

You might ask: How did we get power like this? Why do other nations let us keep it?

And the answer is that we have been entrusted with this kind of power because (for the most part) we have used it benignly. In theory, the other nations of the world could cut us out of the picture by deciding to use the yen or the Euro instead, or by getting together and creating a truly international currency and a truly international banking system to go with it. But the new currency would be like the Euro on a larger scale: negotiating and managing that new monetary system would be a huge headache, and who knows what holes and glitches it might develop? It’s just much more convenient for everybody to stick with the dollar and the US banking system, because our occasional abuses of that power have stayed within reasonable bounds.

In short, we have been fairly faithful stewards of other nations’ trust.

Or, translating the same idea into Trump-speak: We’ve been suckers. We haven’t put America first. We haven’t used every tool at our disposal to drive other nations to the wall and make them do what we want.

But that’s why other nations trusted us in the first place. And over time, we have benefited a great deal from that trust.

Bad timing. During this era, when we can see China gaining on us in the race for power (and in some areas already beginning to pass us), it’s tempting to try to squeeze all the juice we can out of our superpower status before we lose it. It’s also the worst strategic decision we could possibly make. At best, such a policy might produce a brief flare of American brilliance before our power winks out completely.

Now more than ever, the United States needs an international system based on principles and enforced by international institutions supported by multilateral agreements that all parties can live with and see benefit from. We need a system that isolates rogue nations and draws them into the rules-based community. We need to stand for universally attractive ideals like democracy, human rights, and opportunity for all. If China wants to compete with us for leadership, let it compete to lead the ideals-based coalition we have assembled. Let it compete to be a more admirable nation or a better steward of the world’s trust.

On the other hand, over the next five or ten years there might be some gains to cash in by becoming a rogue nation ourselves, flouting the principles we previously tried to establish, undercutting international cooperation on issues like global warming, and imposing win/lose agreements on weaker countries. The international institutions we helped design would likely wither, and to the extent they survived they would become alliances against our abuses of power. As we turned inward, other nations would as well, and the world as a whole would become a less prosperous place.

None of this would thwart China’s rise. And as the American Era ended, our legacy would not be an international system of mutually beneficial principles, rules, and institutions, but a Law-of-the-Jungle world, where the 800-pound gorilla always wins.

Unfortunately, that 800-pound gorilla would be China. China would owe us a great debt of gratitude for establishing a world system that allowed it to throw its weight around, dominating smaller nations (including us). However, I suspect China would never feel obligated to offer us anything to settle that debt. After all, gratitude is for suckers.

[1] If you google “countries ranked by GDP“, you’ll see lists from various international organizations that make it look like we still have a wide lead. For example: $19.4 trillion to $12.2 trillion in the World Bank list for 2017.

However lists like that are suspect for the following reason: They usually start by estimating a country’s annual GDP in the local currency, and then convert that estimate to dollars using the current exchange rates. But it’s widely suspected that China’s currency is undervalued; that’s what gives it such a big advantage in trade. Once you adjust for that undervaluation, you get very different numbers.

Economists argue about how to make that adjustment. One complex tool called “purchasing power index” says that the Chinese GDP really represents $21.4 trillion of purchasing power.

That’s calculation is hard for a non-economist to follow, but one quick-and-dirty (not to mention amusing) method for comparing the value of products across currencies is to use the Big Mac Index: Express all prices in units of locally produced Big Macs, which are assumed to be more-or-less identical around the world. (Example: If an iPhone 8 costs about $700 and a Big Mac sells for $3.50, an iPhone 8 costs 200 Big Macs.) At current exchange rates, you can buy 1.8 Chinese Big Macs for the price of 1 US Big Mac. So (adjusting everything by a factor of 1.8) annual Chinese GDP represents a number of Big Macs that would sell for around $22 trillion in the United States.

[2] In his 2012 campaign, Mitt Romney made the wildly optimistic prediction that his economic policies would lead to 4% growth. If Chinese growth got down to 4%, it would be a national emergency.

The Brazen Cynicism of the Tax-Reform Vote

Without even the appearance of doing something good for the country, the Senate plunged ahead.

I admit it: Senate Republicans surprised me this week.

I know, it shouldn’t be shocking that Republicans would give a big windfall to corporations and the very rich. It’s what they do. Just last summer, they came within one vote of taking healthcare away from 20-some million Americans so that the wealthy could pay less tax.

Usually, though, they do a better job of giving themselves cover. The fringe of the party includes people like Susan Collins and John McCain, who try to retain at least the appearance of a conscience. It also includes clever apologists, whose arguments often obscure what’s really going on and make it possible to claim some noble purpose.

But by early Saturday morning, when the Senate passed its tax reform proposal on a nearly party-line vote, those justifications were all gone. This bill was about paying off the big donors and enriching the Trump family, and everybody knew it. Some senators continued mouthing words like growth and middle-class families, but they weren’t arguing any more, they were just lying. They weren’t fooling anybody, and they didn’t seem to care.

In the end, 51 Republicans voted for the bill, with only Bob Corker opposed. All 48 Democrats voted against it. (Remember that, the next time someone claims there’s no difference between the parties.) One by one, the last holdouts had tossed away their fig leaves and jumped into the mire.

  • John McCain, who gave such a moving speech about returning to regular order before he cast the deciding vote against ObamaCare repeal in July, was unperturbed by a very similar process this time, in which the 479-page bill was not available for inspection until a few hours before the vote.
  • Susan Collins, who in the summer seemed to worry deeply about people losing their health insurance, stopped worrying and accepted the Senate leadership’s promises about future legislation that I will be very surprised to see pass the House (unless it’s paired with a whole bunch of really bad things).
  • Jeff Flake, who (like just about all Republicans) seemed to believe during the Obama years that the deficit was a looming catastrophe, and who supposedly had achieved his independence by choosing not to run for re-election, decided that an extra trillion or two of debt really wasn’t worth getting excited about.

So this is where we are: A similar-but-not-identical bill passed the House in mid-November, so a conference committee will have to work out a compromise bill that both houses can pass. In other words, there is still room for something to go wrong, but some bill of this form is increasingly likely to become law by the end of the year.

The numbers. All along, independent analyses from the Tax Policy Center, the Penn-Wharton Budget Model, and even Congress’ own CBO had been telling a very consistent story: The bill would lead to major increases in the deficit with little-to-no long-term benefits for anybody but the wealthy.

This conclusion was supported by anecdotal evidence. The centerpiece of the bill — lowering the corporate tax rate from 35% to 20% — was supposed to generate massive new investments in production, creating so many jobs that workers would have bargaining power again, raising wages for everybody. But whenever actual corporate CEOs were consulted, they said they would pass the money on to shareholders through dividends or stock buy-backs rather than build new factories or pay workers more. Bloomberg reported:

That money is also unlikely to spur hiring because companies are already well-capitalized and can bring on as many employees as they need, said John Shin, a foreign-exchange strategist at Bank of America Merrill Lynch.

“Companies are sitting on large amounts of cash. They’re not really financially constrained,” Shin, who conducted a survey of more than 300 companies asking their plans for a tax overhaul, said in an interview. “They’re still working for their shareholders, primarily.”

Right up until Thursday, though, Republicans were hoping more favorable numbers would appear. Congress’ Joint Committee on Taxation hadn’t weighed in yet, and they were known to use the dynamic-scoring model conservatives favor, the one that figures in the effects of tax-cut-induced growth. The Treasury Department supposedly had over 100 people churning out analyses; presumably Secretary Mnuchin had seen their preliminary results when he claimed that the proposal wouldn’t just be deficit neutral, it would “pay down debt” by generating more new revenue than the tax cuts gave up.

The JCT analysis came out Thursday, just hours before the Senate was scheduled to vote. Its most favorable dynamic scoring said that increased economic growth would restore about 1/3 of the revenue lost, so that the deficit would only increase by $1 trillion rather than the nominal $1.5 trillion. A third is better than nothing, but even if you allowed for growth, the deficit was going up.

Would this guy lie to you?

But what about Mnuchin and the Treasury? It turned out that they had no analysis, or at least none they were willing to make public.

Those inside Treasury’s Office of Tax Policy, which Mr. Mnuchin has credited with running the models, say they have been largely shut out of the process and are not working on the type of detailed analysis that he has mentioned. An economist at the Office of Tax Analysis, who spoke on the condition of anonymity so as not to jeopardize his job, said Treasury had not released a “dynamic” analysis showing that the tax plan would be paid for with economic growth because one did not exist.

So Mnuchin’s many public statements about tax reform had been airy nonsense, grounded in nothing. Meanwhile, here’s what the JCT projected for American families:

(Here’s the same information as a series of charts.) In other words: More than 1/3 of U.S. households will never get anything out of this bill, not even in the first few years. That situation gets progressively worse until nearly all the individual cuts expire in 2027, at which point about 1 in 4 are paying higher taxes, while only 16% still see a tax cut of more than $100.

Senate Republican Whip John Cornyn dealt with this convergence of expert analysis by saying, “I think it’s pretty clear they’re wrong.” Just because.

Full speed ahead. The original plan had been for the Senate to vote on Thursday. But the surprising (to some) revelation that the JCT analysis agreed in principle with all the other analyses, that nothing to the contrary would being coming out of the Treasury, and so the claims they were making had literally no basis — it threw a wrench into the process.

Many options were possible at that point. The bill could have gone back to committee to be scaled down into a defensible form. Maybe 20% was a bridge too far, and corporations would have to be satisfied with a 25% tax rate. That would create some room to fulfill the original stated purpose of the bill: cutting middle-class taxes for real this time.

Maybe the deficit didn’t have to go up, either. Back in 2012, President Obama had proposed a 28% rate that he claimed would produce more revenue than the 35% rate, without any analytic sleight-of-hand. Both parties have acknowledged for years that our high-rates-with-many-loopholes corporate tax system is inefficient. With a little genuine give-and-take, leaders on both sides might assemble a bipartisan coalition of  60 votes or more, avoiding the reconciliation process entirely.

Or, Mitch McConnell could scrawl a few last-minute changes in the margins to assuage the doubts the last few Republican hold-outs, and the Senate could shamelessly go forward with a bill to borrow an extra trillion dollars or more so that the GOP could give a big Christmas present to the very rich. But if they were going to do it, they’d better do it fast, before the public was able to organize against this already very unpopular bill.

By now, you know which choice they made.

The people they betrayed. One way the Senate got its bill to fit onto the procrustean bed of the $1.5 trillion-over-ten-years price tag authorized by the FY2018 budget resolution was to make of a now-you-see-it, now-you-don’t gimmick Paul Krugman refers to as Schroedinger’s tax hike. The budget numbers work because only the corporate tax cuts are permanent; the individual cuts mostly phase out, resulting in this graph from the JCT.

(These numbers refer to an earlier version of the bill, but I believe a similar graph could be drawn for the current version.)

Republicans are arguing that those tax breaks [for individuals] won’t actually be temporary, that future Congresses will extend them. But they also need to assume that those tax breaks really will expire in order to meet their budget numbers. So the temporary tax breaks need, for political purposes, to be both alive and dead.

So either individual taxes will turn sharply upwards in 2025, or the tax-reform bill costs a whole lot more than $1.5 trillion. It’s one or the other. Ezra Klein points out the “pure fraud” in the deficit arguments Republicans have been making for years.

The GOP spent the Obama years in a frenzy over debt and deficits. Now they are passing a tax bill that will add trillions to the national debt, complete with budget gimmicks that, if they play out the way Republicans are publicly hoping they will play out, will lead to an even higher price tag.

When a Democrat is in the White House, the national debt is an existential crisis that threatens to bring down the Republic. But that threat magically vanishes when a Republican takes office.

So if you believed what Republicans told you about the deficit then, they’ve betrayed you now. But they’ve also betrayed you if you believed the populist side of Trump’s 2016 message. Because here’s where we are, prior to this bill becoming law: The national debt is around $20 trillion, and is already projected to increase to $30 trillion over the next ten years. Rather than do anything about that, Congress is in the act of tossing another trillion or two on top it. (BTW: In the speech where he announced his candidacy, Trump said: “$24 trillion— we’re very close— that’s the point of no return. $24 trillion. We will be there soon. That’s when we become Greece. That’s when we become a country that’s unsalvageable. And we’re gonna be there very soon.”)

So what about that big infrastructure project Trump talked about? (“So we have to rebuild our infrastructure, our bridges, our roadways, our airports. You come into La Guardia Airport, it’s like we’re in a third world country.”) Where’s the money for that going to come from? How’s he going to keep his promise not to cut Medicare, Medicaid, and Social Security, once the trillion-a-year deficits start happening? (“Save Medicare, Medicaid and Social Security without cuts. Have to do it.”)

He won’t keep that promise. He’s already breaking it.

If this passes, there will be no money left for populism, and no money left to save the programs the middle class depends on. They’ll have given it all to the rich.

They’re doing it as you read this, and they’re being totally brazen about it.