The Economist and “Wokeness”

The September 4^th issue of The Economist has an editorial (“leader”) and article on “the threat from the illiberal left” in the United States. These articles are particularly irritating because they exaggerate the influence of the far left in the U.S., buy into the right’s hysteria about wokeness, and minimizes by implication the real threat to liberal democracy from the far right, both in the U.S. and in Europe.

The editorial, while putting forth high-minded ideals of “classical liberals” (with which I agree), is amazingly fact free in making its case for its subtitle – “ Don’t underestimate the danger of left-leaning identity politics.” The article in the “Briefing: the illiberal left” – “Out of the Academy: How did a loose set of radical idea leap from campus to American life? – is a mishmash of ideas and facts. It is difficult to discern a coherent argument.

The article appears to be mainly a complaint about an emphasis, misguided in its estimation, on diversity in academic faculties and the media and implies that systemic racism is not the problem that some think it is. It also posits that “special favors” for the systemically disadvantaged is not good policy, but it assumes that is obvious rather than making an argument for this point of view. It also does not seem happy with efforts of corporations to deal with racism and gender discrimination, without ever quite saying why this is wrong.   

The article begins and ends with the San Francisco School Board, which is an easy target. The Board’s effort to rename schools were widely derided, and no less a liberal than Laurence Tribe joined a legal effort to stop the Board. It so happens that Mr. Tribe, a retired Harvard Law School professor, attended Lincoln High School in San Francisco and objected to it being renamed. The mayor of San Francisco, an African-American woman by the name of London Breed, also criticized the School Board for focusing on renaming schools which were empty due to the pandemic rather than figuring out how to get the schools reopened. At one point the City and County of San Francisco was threatening to sue the school board because of its slowness in reopening the schools.

While San Francisco is hardly the obvious pick for demonstrating a political trend in the U.S., the example does not work. The article admits that at the end, when it notes: “There are some signs of a backlash. Three members of San Francisco’s board of education, including its president, are under threat of a recall election.” Then the article concludes: “however, the underlying engine—the questionable ideas of some academics, and the generational change they are rendering—is not shutting off. America has not yet reached peak woke.”

The article does not make a case that the ideas of the academics are dangerous or even describe in any detail what they are. It also does not make the case that left-wing academics are having an increased role in making public policy. Why the writer or writers think that the U.S. “has not yet reached peak woke,” whatever that is, remains, as math textbooks annoyingly often say, an exercise left to the reader.

While the author(s) of this article seem unhappy at what they perceive to be a left-wing turn in public discourse, they might usefully look at the New York Times nonfiction bestseller list, on which right-wing books are well represented. They might also consider the popularity of Fox News and its current brightest star, Tucker Carlson.

Yes, the American left sometimes has crazy ideas and demonstrates political stupidity. That does not mean that it poses any real danger to liberal democracy at the current juncture, though, it admittedly may make certain people in certain milieus uncomfortable. One suspects that is the case with those responsible for this article. The real danger to liberal democracy in the U.S., as it has been in the past (remember the Palmer Raids or the McCarthy era?), is from the right not the left, as anyone who has been paying attention should know, though I continue to be optimistic that the current influence of the right will fade in time.

The problem for The Economist in publishing silly articles such as these is that it hurts its credibility. The U.S. is its biggest market; its American circulation is larger than that of the U.K. While many subscribers probably may be more interested in its foreign coverage, which is not easily found elsewhere, simplistic, biased, and poorly argued articles about the U.S. may create some skepticism about the fairness of articles about less familiar parts of the world.

Book Review: “The Dreamt Land: Chasing Water and Dust Across California” by Mark Arax

 Mark Arax in his book, The Dreamt Land, forcefully makes the point that there have been  massive engineering projects moving water from some parts of the state to others. While Los Angeles and San Francisco benefit from this (the movie Chinatown is based on this and San Francisco benefits from Hetch Hetchy), most of the water goes to and the focus of this book is on the agricultural regions of the Central Valley (between the Coast Range and the Sierra Nevada mountains).

The book contains stories about the struggle for water among regions and among wealthy land owners for water, with some of the actions of questionable legality. The use of pumps to access underground aquifers, especially during periods when water has been scarce, has caused environmental damage with the ground noticeably sinking. The author points out that average rain and snowfall are meaningless; California has veered from too little water to too much.

Reading this book forces one to consider the fragility of the water system that California agriculture is based in the light of climate change. If there is less water flowing in the rivers and the canals and the California aqueduct because of a smaller snowpack in the Sierras, then this will force changes in California agriculture, which, because of its size, will affect where food comes from in the U.S. and much of the world. 

The book, though, leaves this as something to consider, not a sustained argument that it is making. The problem with the book is that its organizational plan is difficult to discern and it does not make a sustained argument. It is, in fact, a set of stories, mostly set in the Central Valley, from the past and present. Sometimes the author veers from the subject of water to other issues which the author cares about, such as undocumented farmworkers. The book seems to be based on all the author’s notes compiled over the years. It could have done with some ruthless editing.

The book has a map, but it could have done with more and better maps so that those readers not deeply knowledgeable of the geography of the Central Valley could more easily follow the narrative, such as it is.

Nevertheless, to those interested in the massive water projects in California and those interested in agriculture, this long book is worth reading. A reader will also learn a considerable amount of California’s history.

The author, who grew up in the Central Valley and became a reporter, has a deep knowledge of the area and he writes very well, in fact much better than most journalists who go on to write books. One wishes, though, that publishing houses would do more editing of the books they publish. 

Book Review: “Season of the Witch: Enchantment, Terror, and Deliverance in the City of Love” by David Talbot

San Francisco is a much more complicated city than its reputation among those who have never lived there as a lefty, libertine, and dirty place. Yes, in national elections, the city will reliably vote for Democrats, though local elections are nonpartisan. And yes, there is a big homeless problem and a big gap between the incomes of the homeless and new arrivals who can afford the high cost of San Francisco housing. To read some press accounts, the city would appear to be in an absolute mess and unliveable. Of course, that does not explain the expensive real estate. The city has incredible beauty, mostly due to its location and by some of its man-made creations, such as the Golden Gate Bridge.

One corrective to the stereotypes of San Francisco is the 2012 book, Season of the Witch, by David Talbot.  It is a fascinating book, a real page-turner about some disturbing city history, but a flawed book with respect to its central premise. 

The book focuses on the late 1960s to the early 1980s, with brief excursions back to the 1930s and forward to the 2000s. Each chapter is deeply researched, and Talbot was able to interview many key figures for the story he tells, including Dianne Feinstein, Willie Brown, and Armistead Maupin, and relatives of key figures who have died. 

While all the chapters are interesting, the most fascinating concern Jim Jones, the preacher whose ministry ended in tragedy in Guyana, where he led members of his church to their death by having them “drink the Kool-Aid” after the killing of visiting U.S. Congressman Leo Ryan by church members. I did not know until reading this book the extent Jim Jones had insinuated himself into the city’s government or the influence he had. For example, Talbot claims that in the 1975 race for mayor, George Moscone benefitted from voter fraud engineered by Jones in what was a very close election, though Talbot does not claim that Moscone knew about the fraud. Talbot further details Jones’ influence with other major politicians, including Harvey Milk and Willie Brown. Also, Talbot reports that a member of Jones’ Peoples Temple was able to obtain a senior job in the District Attorney’s office and thwart investigations of Jones’s church.

This is all interesting, as are other chapters such as the one on the Zebra killings, the kidnaping of Patty Hearst, the murders of Mayor George Moscone and Supervisor Harvey Milk, among others. Talbot even manages to make his account of a 1982 football game between the San Francisco 49ers and the Dallas Cowboys engaging to this reader, who is not a football fan. 

The football episode, though, highlights what is wrong with this book. Each chapter would make an excellent magazine article, but the structure of the book – enchantment, followed by terror and then deliverance – is unconvincing. For example, in the deliverance phase, Talbot wants to make a football game the catalyst for a renaissance of San Francisco after the terrible 1970s. This is a stretch. He then goes on to make the AIDS epidemic, which hit San Francisco hard, as part of the deliverance because people worked hard for the people who fell to the disease. This doesn’t work. One could easily make AIDS, which spread among the gay community at an alarming rate, part of the terror.

Also, in his recounting of terrible days in San Francisco, Talbot seems fixated on Irish and Italian Catholics. In his telling, the former dominated the police force and the latter were heavily represented among politicians. Neither group comes out well in the book. The Irish and Italian Catholic communities are mostly referenced by Catholic key actors in the history the book recounts who knew each other and attended the same Caholic schools, but this will leave some readers with an unfair impression of the general Catholic community. 

Moreover, the fixation on Catholics glides over the reality that San Francisco is not just composed of Catholics. The large Chinese community is given a mention, but no real analysis. For example, there is no discussion of the school busing controversy of the 1970s in San Francisco, where it was the Chinese community, not the white population, which was the most fervently opposed to busing. Also, the Jewish community is largely absent. While Harvey Milk and Dianne Feinstein are Jewish, there is no mention of the prominent role Jews have played in San Francisco, for example in the establishment of businesses and, especially, in philanthropy which has benefitted the city. Other groups, such as the Russians in the Richmond district are not mentioned at all nor is the large Hispanic community much discussed. The African-American community, which probably represented about ten percent of the population during the period covered by the book, is discussed, but mostly in terms of their participation in some of the terrible events recounted. There is no discussion about what life was like in areas such as Hunters Point. 

In other words, this is a selective history with no real effort made to link the undeniably terrible events and practices of prominent people to the lives of most city residents. Then, near the end of the book, Talbot turns to the general population and implies that they are mostly rabid football fans whose lives were transformed when the 49ers vastly improved their game.

This may seem unfair criticism, since the author has not written a sociological study of San Francisco. But then his theme does not work. To what extent did the city suffer in the 1970s because of the events he recounts and did it really rebound from that in the 80s? The 1970s of course were not a pleasant time; the economy’s stagflation, the Vietnam war, Watergate, and other developments made sure of that, but this is not just a San Francisco story. 

At the end of the book, Talbot says that San Francisco ended up a more enlightened city. He implies that San Francisco was an intolerant place before, but that is not really true. Sure, the police may have behaved badly, and one can point to their hostile attitude and actions as the gay community expanded and became much more visible. I would argue, though, that the influx of gays to San Francisco was not just because of the attraction of a beautiful city but due to a reputation the city had for tolerance. Of course, there were people made queasy by the changes along Castro Street; indeed, I knew people who expressed their discomfort to me with what was happening. But the relative tolerance of the city was well-known. People now are less queasy about gays, but that is something that has occurred in general in most of the United States at a surprisingly rapid rate, which likely has something to do with different generational attitudes.

San Francisco is still complicated. While the portrait of the city as a leftist haven was always exaggerated and ignored some of the conservatism prevalent among business interests and some of the population, nimbyism, which is conservative in nature, is currently common in San Francisco. For example, at the corner of Haight and Stanyan across from the eastern end of Golden Gate Park, there used to be a troubled McDonald’s in which reportedly drug dealing and perhaps other crimes were occurring. The McDonald’s has closed, and the city acquired the building, which has now been torn down, along with its large parking lot. About a year ago, the city decided that it would operate a tent city for the homeless on this lot. There was a furious reaction from some of the people and businesses in the area, though it was not universal. The city went ahead, and it has worked. The tents are off the sidewalks, and the people down on their luck in the tent city, which is shielded from the street, have access to food, toilets and washing facilities. The Whole Foods across the street continues to do a good business. Obviously, this is not a permanent solution, but it was good use of a vacant lot until something better can be figured out.

In line with the stereotypes of San Francisco, the school board has recently spent a great deal of effort to rename schools which had names that they did not like, including Lincoln and Feinstein. The board’s historical research was superficial and no professional historians were consulted. This all made the city look ridiculous. But contrary to the impression given by a reading of non-local news outlet accounts and commentary on this issue, many in San Francisco do not support the school board. It finally had to back down in this endeavor because of the criticism and political pressure, including from Mayor London Breed, who is African-American, and a prominent alumnus of Lincoln High School, liberal lawyer  Laurence Tribe. There was even the threat of litigation and there is currently an effort to recall some of the school board members. The board may revisit the subject at a later date after life in the public schools, which had been closed during this controversy, returns to something approximating normal, but the indication is that possible future consideration will involve historians. The board will likely tread more carefully in what it has discovered is treacherous terrain.

San Francisco does not match its stereotypes nor the framework Talbot has tried to impose on some of its history. Nevertheless, the book is fascinating and well-worth reading for the history it does recount. It is well-written and pleasurable to read. Even most San Franciscans will learn something from it, but readers should ignore the arc of the book and concentrate on the episodes.

Amy Coney Barrett, the ACA, Abortion, and the Future of the Supreme Court

Two big issues that the opposition to Amy Coney Barrett's confirmation as an Associate Justice of the U.S. Supreme Court have focused on are abortion and the Affordable Care Act. With respect to the ACA, Barrett seems open to a severability argument. As I understand it (I have not researched this in depth), in the current case before the Supreme Court, those, including the Trump Administration, who want the Supreme Court to decide that the ACA is unconstitutional are arguing that the mandate to have health insurance is no longer a tax since Congress lowered the penalty to zero and hence is unconstitutional. This, they argue, means that the ACA in its entirety is unconstitutional. The doctrine of severability implies that the Court could decide that the mandate is unconstitutional but not strike down the rest of the ACA. (The Congress next year could change the law so that there is a penalty, perhaps small, which would seem to moot the case.) In the future, others could bring different cases to attack the ACA, and it is possible with Barrett on the Court that it could reverse its recent precedent on this. Of course, while I think this is not that likely, it is also possible that Barrett and four other Justices decide for some reason that severability does not apply in the current case before the Court.

Abortion has been a hot-button issue for a long time. As way of background, before Roe v. Wade, there was the 1965 case, Griswold v. Connecticut. Contraception was illegal in Connecticut, and in this case, the Supreme Court decided that married couples had a right of privacy under the Constitution and could, therefore, not be denied the use of contraceptives. (A 1972 case, Eisenstadt v. Baird, extended the right to use contraception to unmarried couples. This struck down a Massachusetts law based on the Equal Protection Clause of the 14th Amendment.) The Roe v. Wade opinion used the right of privacy argument stemming from the Griswold case to hold that laws prohibiting abortion were unconstitutional.

It is, therefore, instructive that, when asked at her confirmation hearing whether she agrees with the Court's Griswold opinion, Barrett refused to answer. She did say that it was unlikely that Griswold would be struck down, since, for that to happen, a state would have to enact a law prohibiting contraception and the challenge to that law would go to the Supreme Court. She viewed this as unlikely. (While it is unlikely that a state legislature would pass a law prohibiting all contraception, it is possible that a state could enact a law prohibiting certain types of contraception, especially those viewed by some as “abortifacients.” That would likely reach the Supreme Court.)

In contrast to Barrett, when John Roberts was asked about the Griswold case at his confirmation hearing to be Chief Justice, he answered that “there is a right to privacy protected as part of the liberty guarantee in the Due Process Clause.” He further said: "I agree with the Griswold Court’s conclusion that marital privacy extends to contraception and the availability of that."

Clarence Thomas at his confirmation hearing to be an Associate Justice also said he agreed with the Griswold decision, saying “my bottom line was that I felt that there was a right to privacy in the Constitution, and that the marital right to privacy, of course, is at the core of that.”

Samuel Alito at his confirmation hearing also affirmed that there was a right of privacy under the Constitution. He was a bit more ambiguous about Griswold: “I agree that Griswold is now, I think, understood by the Supreme Court as based on the liberty clauses of the due process clause of the Fifth Amendment and the 14th Amendment.” 

The two newest Justices would not say whether they agreed with Griswold. When asked at his confirmation hearing about Griswold, all Justice Neil Gorsuch would say is that it was long-established precedent. He would not answer whether he agreed with the decision.  Justice Brett Kavanaugh also refused to say whether he agreed with the reasoning of the Griswold decision in his confirmation hearing.

Given that Roe v. Wade relies on Griswold and that there seems to be some Justices who do not believe that the Constitution grants a right of privacy, it is not that hard to see it being reversed at some point in the future.

However, sometimes lost in the discussion of Roe v. Wade is a discussion of the Planned Parenthood v. Casey decision (1992), which modified Roe v. Wade by applying on state restrictions on abortion "an undue burden" test. In subsequent decisions, the Supreme Court has found that many state laws applicable to abortion clinics do not pose an "undue burden" on women who want to have an abortion. As a result, many women of limited means find it nearly impossible to obtain an abortion in some states. (Other states, such as Virginia, have relaxed in recent years the laws applicable to abortion.) In other words, while the Court has claimed that the central holding of Roe v. Wade has been affirmed, how much access there is to abortion as a practical matter remains to a great degree up to state governments.

As a self-defined “originalist,” Barrett most likely disagrees with the right of privacy justification in Griswold for striking down the contraception law in Connecticut. Moreover, one can say with a great deal of certainty that she believes that Roe v. Wade was wrongly decided. The real question is what she thinks of the Casey decision, which relies heavily on the doctrine of stare decisis to uphold a woman’s right to terminate a pregnancy prior to the point of viability. Casey, though, does jettison the trimester approach in Roe and explicitly allows for state rules governing abortion unless they impose an “undue burden” on a woman’s right to obtain an abortion.

The authors of the governing decision in Casey – Justices Sandra Day O’Connor, Anthony Kennedy, and David Souter  – spend quite a few words worrying about the Court’s perceived legitimacy if it did not adhere to stare decisis with respect to Roe. They do say that there are times when a decision is so egregious that it must be overturned. They mention specifically Lochner v. New York and Plessy v. Ferguson. Lochner struck down a New York State law limiting bakers to work at most 60 hours a week and Plessy v. Ferguson decided that racial segregation laws were constitutional for facilities that were “separate but equal.” With respect to Roe, the Justices writing the controlling opinion in Casey wrote: “In contrast, because neither the factual underpinnings of Roe’s central holding nor this Court’s understanding of it has changed (and because no other indication of weakened precedent has been shown), the Court could not pretend to be reexamining Roe with any justification beyond a present doctrinal disposition to come out differently from the Roe Court. That is an inadequate basis for overruling a prior case.”

It is not clear what Barrett thinks of this argument, and, if she disagrees, how far she is willing to go in limiting the legal right of women to terminate pregnancies. It is also not clear how far four other Justices are willing to go, now that the “conservatives” (assuming Barrett is confirmed) will have a clear majority and their decisions will have real-word effects. At a minimum, it is likely that Roe will continue to be whittled down by burdens that the Court decides are not “undue.” Whether they go further than that is uncertain. They know that public sentiment is not on their side.

Making abortion illegal would not eliminate it. There will always be women who will seek abortions, no matter how easily available various types of contraception are. If it is illegal, there will be illegal and, in many cases, unsafe abortions. That is not an optimum policy result.

While the most likely result is a patchwork of different laws among the states concerning abortion, according to Laurence Tribe, Congress could make it illegal everywhere if Roe were overturned. I doubt that would happen, given public opinion on the subject, but it is worth keeping in mind. Also, Tribe points out in a 2018 tweet, that Roe “is a 2-sided coin. It protects a woman’s liberty to choose *whether or not* to bear a child. Relegating that choice to the state isn’t a PRO-LIFE move but an ANTI-LIBERTY move. If a state can say ‘stay pregnant!’ it can also say ‘abort!’” Again, that is unlikely but possible.

The concentration on the ACA and abortion partially eclipses other matters that come before the Court. With Barrett on the Court, one can easily see the dismantling of many regulations that business interests view as "undue burdens," such as those protecting the environment and worker safety. Also, there could well be decisions allowing more voter suppression than is currently the case.

Barrett argues that the originalist approach to the Constitution is one of judicial modesty. She says that the elected branches should make policy, not unelected Justices. However, if the Supreme Court interprets the Constitution as limiting severely what legislation is permissible, the Court will be in the policymaking business, as it was when it was striking down New Deal legislation, leading President Franklin Roosevelt to propose a complicated court-packing scheme. While that proposal was and is viewed by most unfavorably, there is an argument that it worked, since two Justices subsequently started voting with the liberals then on the Court. “A switch in time saved nine.”

Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

Modern monetary theory (MMT) is controversial. It upsets deficit hawks because it claims that the limits on running a budget deficit for a government that is a “currency issuer” (unlike state governments or members of the Eurozone) are the productive capacity of the economy and inflation. A currency issuer can always make good on debt that is denominated and paid in its own currency. Also, it upsets most mainstream economists with its argument that fiscal policy, rather than monetary policy, should be the main instrument that should be used by governments that are currency issuers to steer the economy to full employment and low inflation.

Stephanie Kelton’s new book, The Deficit Myth, aims to convince interested persons in the correctness of these ideas. It can be easily read by non-economists, but the simplification of the argument does not help it to be persuasive.  

The book is at its best when discussing the budget deficit of a currency issuer government. She argues persuasively that analogies to corporations or household budgets are not appropriate.1 Many economists would agree with this, though most would be concerned about the budget deficit when the economy is doing well. Kelton would respond to that criticism by pointing out that the government should not run budget deficits when inflation starts appearing. In the current circumstances, most economists would agree that the large budget deficits of the federal government are necessary.

However, the book is a disappointment. With regard to budget deficits, Kelton does not acknowledge that at some point there could be a lack of confidence in a particular currency, justified or not, which could affect the foreign exchange market and force the government to change its policies.

The most grievous flaw in the book is the brushing aside of institutional detail. The author asserts that the government just issues newly created money to pay its bills and then replaces some of that money with government securities. In the U.S. that is not quite how it works under the current institutional arrangements. The Treasury maintains in effect a checking account at the Federal Reserve. Treasury staff make projections for the months ahead of the amounts of cash that will come into that account and will go out of that account on a daily basis. Then Treasury decides the timing and quantity of its security issuance so that its balance does not go negative. Treasury is prohibited from borrowing directly from the Fed, but an inadvertent one-day overdraft is permitted. 

Also, Kelton seems to argue that the government is the sole source of money creation. However, the Federal Reserve controls the monetary base, but it is the banking system that creates money by taking in deposits and lending it out. The ratio of the supply of money (M1 or M2) and the bank reserves that the Fed creates is not constant.2

Another monetary issue that Kelton ignores is the velocity of money, which is the ratio of the GDP to the money supply. That is also not constant.3 

MMT proponents do not provide a convincing explanation of the combination of inflation and a bad economy in the 1970s (“stagflation”). They are not alone in not explaining convincingly why this happened, but, since their core argument is that deficit spending is only limited by the productive capacity of the economy and inflation, they need to address it.

Finally, with regard to fiscal and monetary policy, Kelton ignores that the Fed can act very quickly, but Congress cannot. And even when Congress passes appropriation legislation that the President signs, it takes some time for the spending to take place. 

The argument that the central bank should be made a bit player and all the action should be concentrated in fiscal policy is not convincing. Kelton surely knows of the issues I have mentioned here, but to simplify her argument she ignores them. If she writes another book, she should address these types of issues and be more explicit about what she is advocating and why she thinks it is practical and feasible, both technically and politically.

The book also addresses Social Security, and I mostly agree with her discussion of this. From an economic perspective, it does not really matter whether benefits are paid from the general fund or the Social Security trust fund, though it matters politically. In this regard, the argument is made by conservatives and others that we should not let the trust funds run down enough that money from the general fund is necessary to make sure that benefits are not cut. This, they say, would make the program subject to politics. This is ridiculous on its face, since Social Security benefits are already subject to politics, as they amply demonstrate by making the argument that future benefits should be cut. They argue that we need to cut future Social Security benefits now in order “to protect” Social Security. From what?  Politics?   

In another chapter, Kelton argues that the federal government should act as an employer of last resort when the economy is doing badly. The attractiveness of this idea is clear, and to an extent during the Depression, entities such as the Civilian Conservation Corps were set up to provide employment when there were no private sector jobs to be had. However, Kelton underestimates the enormous practical challenges of setting up and administering an agency or agencies that would employ people when the unemployment rate was high. For the idea to be taken seriously, more thought needs to be given about how this would work and what type of jobs would be offered. For example, let’s say that the demand for aerospace engineers collapsed. What would the government employ them to do?

Currently, the U.S. government is conducting a giant economic experiment. It has been spending without regard to the budget deficit, at least until recently when Congress is having difficulty passing legislation to spend more money to help the economy. The Fed has essentially monetized the deficit. While Treasury cannot borrow directly from the Fed, the Fed has been buying up Treasury securities in large amounts in the market, thus replacing Treasury securities with bank reserves. The adherents to MMT and most economists think this is necessary in the situation we find ourselves in. In fact, the well-respected journalist, Sebastian Mallaby, who generally holds more traditional economic views than that of MMT, calls this “the age of magic money.”

In a way then, MMT is being tested, but there may be a return to more traditional ways of thinking once the current crisis is over. MMT cannot be as easily dismissed as Larry Summers tried to do in a March 2019 article for the Washington Post (“The left’s embrace of modern monetary theory is a recipe for disaster”). But it needs more work, and they will have to get into the details of how the monetary system works and how they would reform it in order not to be dismissed as a fringe group, in the manner Art Laffer’s version of supply-side economics is viewed.

Endnotes:

1. In this regard, President Obama was wrong when he said that the government needed to tighten its belt just as families were doing. Precisely the opposite is necessary when the economy is doing poorly.

2. This incidentally is a problem with the monetarism associated with Milton Friedman, which often implicitly assumed that it is constant. 

3. Again, the monetarists usually assumed that velocity was relatively constant and that the central bank only had to worry about the amount of reserves it created. Friedman, only half-jokingly, said that we did not need an open market committee at the Fed, a computer could be programed to do this.

Comments on 2020 Presidential Politics

Because the Iowa caucuses and the New Hampshire primaries are the first contests for the Democratic and Republican parties’ nomination process, they receive outsized attention by the candidates and the news media. In fact, few delegates are at stake, but they provide a test of the candidates’ retail politics abilities and do not provide insurmountable financial barriers that the larger states often present. Despite the cold weather, reporters seem to enjoy covering these events, and defend them for the seriousness that the voters of these states consider their choices. As has been pointed out, though, the demographics of both states do not reflect the country at large, and the population of both states is largely white. Many question the role that these two states play in choosing the next President of the United States.

With no real contest taking place among the Republicans this year, the focus has been on the Democrats. Before the New Hampshire primary, four significant Democratic contenders,  Beto O'Rourke,  Kamala Harris, Cory Booker, and Julián Castro dropped out of the race. All four were attractive candidates and three are non-white. However, their polling numbers, financial difficulties, and, in the case of Kamala Harris, campaign management problems caused their departures, not the first two electoral contests. After New Hampshire, Andrew Yang dropped out.

More significant this year was the next primary, South Carolina. Arguably, the makeup of the Democratic Party in that state is also not representative of all Democrats. Approximately 60 percent of the Democratic electorate in that state is African-American. The South Carolina primary served to resurrect the candidacy of Joe Biden, whom many had written off, and propelled him to victory in many states on Super Tuesday.

This is a strange way to choose the Democratic nominee. Unless some development totally collapses Trump’s candidacy, he will almost certainly win South Carolina’s electoral votes in November. The Democrats in that state though appear to have had the largest voice in picking the Democratic nominee. It is still possible for Bernie Sanders to win the nomination, especially after his performance in California, but as of now, the odds favor Biden. The reason that they do is the results of the South Carolina primary.

As far as the general election goes, Trump will have the support of an enthusiastic base, but he needs more than that to win. If Sanders were to win the Democratic nomination, he would have an enthusiastic base, but many in the center would not vote for him. They also might not vote for Trump in large numbers. If Biden were to win, he would not have an enthusiastic base supporting him, but he would have the votes of all who dislike Trump, which is sizeable. The betting of the Democratic establishment and primary voters is that Biden has the best chance to beat Trump.

Trump would probably prefer to run against Sanders, whom the Republicans would portray as a dangerous socialist and point to communist regimes as illustrating the danger. This would be unfair to his positions and what he could conceivably get enacted by Congress, but it could work. With Biden, the Republicans are going to point to his gaffes and hint that age has taken a sufficient toll on Biden that he should not be President. It is not clear that strategy will work.

Democrats need to more forcefully discuss Trump’s unsavory business history than did Hillary Clinton’s overly confident campaign. They also need to criticize his record as President, including the inhumane treatment of people trying to enter the country, tax policies slanted to the rich, attempts to repeal the ACA, a muddled foreign policy, disastrous environmental policies, and arguably illegal uses of his office to further his political and financial interests.

It will be a dirty and hard-fought campaign.

Book Review: The Fed and Lehman Brothers by Laurence M. Ball

Laurence M. Ball is the Chair of the Economics Department at Johns Hopkins University. He has been researching and writing papers about the events that led to Lehman Brothers’ filing for bankruptcy on September 15, 2008. This research has led to him writing an important book aimed at an audience beyond financial economists and other financial industry professionals, The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster. The thesis of the book is quite simple: the real reason that the Federal Reserve did not extend loans secured by Lehman collateral in order to stave off bankruptcy and give the firm a chance to survive, as it did with other firms before and after Lehman’s bankruptcy, was due to political considerations. He bluntly states that the argument that Ben Bernanke, Timothy Geithner, and Hank Paulson, who, during the 2008 financial crisis were respectively the Chairman of the Federal Reserve Board, the President of the Federal Reserve Bank of New York, and the Secretary of the Treasury, make that the Fed lacked the legal authority to extend a loan to Lehman Brothers due to its insolvency and lacking sufficiently good collateral is flatly wrong.

The first part of the book is important but a bit of a slog to get through. Ball examines in detail Lehman’s balance sheet, the law with respect to Fed loans to non-members of the Federal Reserve System, Lehman’s assets available as collateral for a loan, and the reasons for its liquidity problems. After reading Ball’s analysis of these matters, it is hard to see what convincing rebuttal Bernanke, Geithner, or Paulson could offer. The last part of the book is somewhat easier to read as it analyzes what various officials said to the committees of Congress and to the Financial Crisis Inquiry Commission. The author conclusively demonstrates that the decision not to extend a loan to Lehman to buy time so that Barclays could go through the procedures UK regulators were insisting to purchase Lehman or for some other arrangement, including in the worst case an orderly liquidation, could be made. The person most responsible for this political decision, Ball argues, is the one who had no legal authority in this matter, Secretary Paulson, who from all reports can come on forcefully, making other fearful to oppose him. One does not become the head of Goldman Sachs, his previous job, with a self-effacing or modest manner, as Bernanke, who is obviously a brilliant economist, often does. Geithner, whom I know, is no shrinking violet and can be charming or, if he believes the situation demands it, will display a calculated show of anger, apparently felt it judicious in the fast-moving crisis to defer to Paulson. It is not clear whether Bernanke or Geithner totally agreed with Paulson. They may have, or they may have harbored doubts.

Paulson seems to have come to his decision for two related reasons. The first is that he believed that bailing out Lehman would increase moral hazard. That is jargon for saying that, if firms know that they are going to be bailed out if they get into trouble, they are more likely to take more risks than they otherwise would. The other reason is that Paulson did not want to be known as “Mr. Bailout.” That, one notes, means that even though he lacked the legal authority to decide on Federal Reserve policy in this matter, he was cognizant that public perception, as well as the underlying reality, was that he was the official effectively making the decisions.

After the failure of Lehman, the Federal Reserve and subsequently the Treasury with the creation of the Troubled Asset Relief Program fund bailed out various financial institutions. In particular, Ball points to the bailout of AIG. Ball, though, could have pointed out that there was an enormous exposure of various firms to a unit of AIG, because many of them had entered into credit default swaps with AIG in seeking to reduce their exposure to possible defaults on home mortgages. It is likely that a failure of AIG would have been even more calamitous for the financial system and the economy than Lehman’s was. In this connection, it is worth mentioning, though Ball does not because his focus is on Lehman, that it was a failure of the various financial regulators to notice the risk that firms subject to regulation and oversight were collectively off-loading to AIG. The Office of Thrift Supervision (OTS) was theoretically responsible for overseeing AIG, because its ownership of a savings and loan made it a thrift holding company, but OTS did not have the resources to do this. The other financial regulators had access to the information about the transactions their charges were doing with AIG and could have inquired. They all seem to have missed this and did nothing.

Also, while Ball clearly believes that the failure to stave off Lehman’s bankruptcy was a mistake, he could have addressed a contrary argument made by then New York Times financial columnist Joe Nocera in September 2009 in an article headlined “Lehman Had to Die So Global Finance Could Live.” Nocera argues that, even if Lehman had been bailed out, the financial crisis would have proceeded, and the next financial institution to be on the brink of failure would have been a larger, more significant institution (for example, AIG). The failure of Lehman, unfair as it was, turned out to be necessary because its aftermath demonstrated the need to bailout other institutions. Nocera writes: “John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, ‘If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.’ I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.” Of course, no one knows what would have happened if Lehman had been bailed out. Would the government have bailed out each institution as it came to the brink of failure and avoided the financial calamity that took place?

 I would be a bit more forgiving than Ball of the decision Paulson and others made about Lehman. They were under a great deal of pressure and thought that the market would not react too badly to a Lehman failure. What is more difficult to understand is why the three principals and others have stuck to a story about a lack of legal authority to have done something different. They have not made a convincing argument that this was true, and Ball has demolished this story convincingly. It would have been, and still would be, better to admit that this was not the real reason, or, in the alternative that their understanding of Lehman’s financial situation and the applicable law was imperfect. They could also argue that pursuing another course would also have been disastrous.