Commentary

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Interest Rates, Faith, and Democracy

What a pickle!

The Federal Reserve Board’s meetings have become a media event. The last few days – weeks if you want to be more inclusive – have been awash with media chatter and analysis about the probability that the Fed will, at last, raise interest rates. As a public service here are the pros and cons as seen through the eyes of the Economist:

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And here, in its entirety is a letter to the editor of the Financial Times just yesterday from someone called Thaddeus Walkowicz, who lives in East Hampton, New York:

Fed’s focus on creating jobs comes at huge cost to the rest of US society

“Sir, Although is universally described as the “smartest man in the room”, Lawrence Summers’ article on “neutral interest rates” (Central bankers do not have as many options as they think”, Dec 7) is simply a part of the nest chapter of trying to perpetuate failed Keynesian perspectives and a desperate attempt to institutionalize acceptance of “observations” that masquerade as policy-justifying “research”.

As developing countries grab a greater share of world gross domestic product through the provision of cheap labor, governments and central bankers of the industrialized west have resorted to “serial stimulus” to try to achieve historical levels of growth, almost as if their countries were entitled to the levels of growth. The accompanying monetary stimulus has driven down real interest rates, and these rates are now included as data points with the perverse circular narrative that the lower levels represent some form of appropriate “real rate equilibrium”. (This is indeed true if generational theft is an integral part of policy.)

Ignoring the theft of senior’s savings imparted by negative real interest rates, completely missing from Professor Summers’ article is any discussion about the effects Generation X’s and Millennials’ savings required for retirement, with the negative real rates and lower risk premiums on all asset classes, and more importantly what this means for current and future spending/growth.

It’s time to face the music: the simple reality, as harsh as it may be for those without marketable skills or even PhDs and for central bankers protecting an “intellectual” legacy, is that an overextended focus on job creation is not worth the long-term cost to the rest of society in terms of the continued upheaval of a free-market economy, one characterized by a fair, market-driven balance between lenders and borrowers.”

Wow.

Interest rates, faith, and democracy all bound up in one big spewing forth of anti-economics venom.

Tell us what you think Thaddeus.

It’s hard to know how to respond, but I want to pick out a few points.

First, Thaddeus clearly has a deep disregard for economics. In this I must admit he is not alone. Just yesterday Lars Syll referred to a book by Dani Rodrik and explained that Rodrik’s comments were more about economists than the substance of their work. Here’s what Syll said:

“There’s much in the book I like and appreciate, but there is also a very disturbing apologetic tendency to blame all of the shortcomings on the economists and depicting economics itself as a problem-free smorgasbord collection of models.”

This is what Thaddeus is saying too. Only with less precision. If we view economics as an array of models to be taken out and deployed whenever we wish, then we rapidly approach the “observations” that masquerade as policy-justifying “research” that Thaddeus dismisses rather contemptuously. After all such an array does start to look an awful lot like a whimsical toy-box full of goodies that an economist can take out and play with arbitrarily. What, a quizzical onlooker might well ask, determines which model we deploy? An examination of the facts? if so, which facts? What triggers are we responding to? What is our desired goal? The sad matter is that economics has many models for most occasions and the choice can, indeed, appear arbitrary.

Worse, it can appear faith-based or ideologically driven.

Back to Thaddeus’ letter: I like the way he dismisses Keynes as being a “perspective”, or, rather, a “failed perspective”. He doesn’t even dignify Keynes as having produced a theory or the kind of model Rodrik talks about. That’s pretty low. But it fits neatly with a right of center narrative that markets are natural phenomena that we meddle with at our peril. Poor old Keynes might have thought he was saving capitalism from itself, but he doesn’t get many thanks from our capitalist class.

Just for the record: markets are social constructions that occasionally display “law-like” behavior, but they are profoundly human and thus exhibit all our human frailties.

I also like the”theft”  concept that Thaddeus tosses about. It’s clear that in his eyes low interest rates are a form of theft. With the aggrieved party being, presumably, anyone who is saving or has saved for retirement. That’s my best spin. I suspect though that underneath the surface Thaddeus is really making a statement on behalf of rentiers everywhere: how’s a good rentier to make a buck in this low rate environment?

Thaddeus also seems to have bought into secular stagnation. He doesn’t mention it explicitly, but the idea lurks behind his suspicion that central bankers are trying to pump up growth because it’s “almost as if their countries were entitled to the levels of growth”. Naughty industrial countries! Such entitlement. Only rentiers are allowed to have real entitlements.

Speaking of which: Thaddeus clearly holds every day workers in even more contempt than he does economists. His apparent reference to the days of growth being gone and to the speciousness of attempts to create jobs speaks volumes for his empathy for his fellow citizens.

The sad part Thaddeus is not alone. His lack of empathy is matched and often outdone by economists who have fallen foul of the “laws” of economics. If you believe – have faith in – in the natural nature of the economy and ignore its human origins, if, in other words, you tend to refer to people as “agents” or “units” or any other elision of their human reality, it is quite possible to look upon job creation as a false activity. What you are likely to be more focused on is the urgency of avoiding debasement of the currency and the preservation, at all costs, of faith in the value of the dollar. In other words the Fed needs to fight inflation, and not to worry about jobs. Especially for those “without marketable skills”,  as Thaddeus so amiably puts it.

When I read letters like this I wonder how it was that mainstream economics became so resolutely anti-democratic. Perhaps that’s too harsh. Perhaps it is just that the “natural laws” that drive the economy are so anti-democratic, and economists are simply swept along by their observation. In this narrative economists are only the bearers of bad news, constantly telling us that our lives are subject to the great machinery of supply and demand and not at all to human intentions and/or interventions.

I suppose that all this is simply my way of saying that when I approach that smorgasbord of models I look first for those that preserve democracy and tend to shun those that undermine it.

Which brings me all the way back to interest rates: yes, I think the Fed will raise them. No, I don’t agree – there’s too much downside risk. Yes, the Fed ought to focus on job creation – its the democratic thing to do! And, by the way, looking back into history we find that the so-called “normal” and thus higher rate levels rentiers are pining for are the exception not the rule. Low rates are here to stay.

Well that’s what some of the models say. As for the other models …

You see what I’m saying?

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Numbers Matter: Guns and Terrorism

Numbers matter. Take these for instance:

In the last decade about 40 Americans have died as a result of terrorism

During that same period about 280,000 Americans have died as a result of gun violence.

Absurd.

The debates, to the extent that it can be called that, about both terrorism and guns is radically out of proportion  to the facts.

This is really absurd, but that’s how exceptional America has become.

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The Anti-Gates

Bob Gates has made quite a name for himself by being ‘that sensible guy’ —  the one who cuts through the rhetoric and tells it the way it is. In this vein he fits alongside other ‘serious people’ such as the infamous Simpson and Bowles who, as you might recall, made a great name for themselves back in the days when the world was ending because of our Federal debt problems.

And just like Simpson and Bowles, Gates is simply defending the status quo. Or, rather, trying to re-assert the dominance of the older status quo he is fearful we are losing.

In his latest attempt to burnish his serious reputation he lectures us on the kind of president we ought to elect.

Clearly he doesn’t think much of either Donald Trump or Bernie Sanders because both are clumped together repeatedly as representative of who we ought to avoid.

Gates is wrong on many counts. Let me enumerate them:

First: let’s all stop this nonsense about equating Trump with Sanders. This equation is a tell-tale sign of faux centrism. It has become an obsession of ‘serious’ people who want to appear sensibly grounded in facts and not wild eyed ideas. Trump is an inexperienced demagogue. Sanders is a battle hardened politician from the left. Trump has no core ideas he simply rattles the cage and stirs up the passions on popular hopes and fears. Sanders offers a long and well thought out response to issues that may be neither popular nor new — but he has thought about them for a long time. Trump is a bombastic bully who appeals to emotion. Sanders is a skilled debater who appeals to reason. I could go on, but the point remains the same: Trump and Sanders are not equivalent. That they sit on opposite sides of the political spectrum does not make them equivalent.

Second: Gates gives us the standard centrist debating points about the American political system. It is designed he reminds us to do nothing. Well he doesn’t say it quite like that, but the implication is clear. The American political system is designed to enforce compromise and thus preserve the status quo Gates prizes so highly. It does not permit heavily partisan movement because of the division called the separation of the powers. This separation is a deep flaw: it prevents the emotions of the electorate being expressed and thus vented before they build into toxic anger. Ironically it is the existence of this toxic anger that Gates seems most to fear.

Perpetual compromise is precisely what has sent America down the path to economic inequality and social divide. Had, at any point, the partisan views of either side been fully expressed in actual policy the nation could have responded with rebuttal or affirmation at the next election. Instead neither side of the divide has ever properly felt it has ‘won’ and neither side can say its ideas have been fully tested or that they have succeeded or failed. Hence the anger within the electorate. No one is satisfied. And the problems persist.

Third: this latter point is vital. Under normal circumstances where crises are few and people generally feel both secure and prosperous, the system of compromise is adequate: it prevents anyone rocking the boat and thus threatening that secure prosperity. But when society is manifestly stressed either by external threats of internal failures, persistent compromise simply serves to act against the installation of a solution. Conversely, it can allow the emergence of false solutions in circumstances where the ‘centrists’ or ‘serious people’ see problems or threats to their  preferred status quo.

It is this latter problem that dogs us so vitally today.

Our so-called centrists are heavily vested in the policies that have produced the lack of secure prosperity that the majority of people are now bridling against. They represent the neoliberal view of the past forty years and are steeped in the foreign policies of post-Soviet American world domination. Their lens is sullied by this narrow perspective.

The Bowles-Simpson solution to the debt ‘crisis’ is a good example. It was a highly biased set of proposals that placed the burden for crisis resolution firmly on the shoulders of those who had least responsibility for the problem in the first place. It took for granted constraints on spending and taxation that were political choices and not ‘facts’. It thus expressed a preferred and privileged point of view and not the kind of objectivity or ‘centrism’ its supporters pretended it had.

Gates falls into this category of faux sensibility when he argues that the next president needs to talk to the people truthfully. By this I take it he means that the ‘truth’ is a set of values or ideas that Gates agrees with. Sanders invective about inequality would probably not be seen, in this light, as truthful – perhaps the world is too complex simply to load neoliberalism with the blame. Or Trump’s attacks on immigrants are not, presumably, tapping into nativist fears that whilst noxious, are also real.

Lastly: Gates for all his self-regarding seriousness is hapless in his naivety. His opinion is actually a cry for help. The world of the last sixteen years – he casts the blame of being too ideological equally onto the last two presidents – is, in his eyes, proof that we need to revert to management by consensus and to avoid the foolishness that ideologies of either side might be a better guide to policy. In other words the blame for the so-called gridlock is not the antiquated system Gates so reveres, but the attempt to search for partisan solutions. He wants us to drain ourselves of ideas and to settle back into a world of sensible management by people like himself who are bureaucratically capable, well-informed (by which he means having similar ideas to his own), and firmly attached to the status quo.

What he totally misses is the tumult of the past few decades and the rapid change being thrust upon the masses. Whether that change is the deterioration in the prosperity, the rapid change in social norms that threaten their traditional values, or the perception of potential external existential calamity, they all have a common thread: they demand a response from outside the comfort of the neoliberal status quo gates sits in the center of.

The people are angry, not so much about the gridlock, but more about the total disregard of their interests by erstwhile centrist policy makers like Gates. It is this lack of response that irks, not the gridlock that is often blamed for this lack of response.

Gates is oblivious to this difference. He is oblivious to the central fact of our times: the political system has been co-opted and is being run to the advantage of a few. The vast majority are correct in believing that their views are not taken into account. The co-option means that the process of compromise is simply a method for enforcing this advantage enjoyed by a few.

Another great irony of Gates opinion is that he lauds both FDR and Reagan as being pragmatic yet strong leaders. Does he not realize that they both ushered in political epochs of radically different natures and they upended the status quo they found? That is not compromise. It is radical response to circumstances. And it works within the American system only under duress and when leadership can undermine the defenses of the centrists who are dug in defending the past.

The success of both FDR and Reagan is that they redefined the center. Radically so. One shifted it leftwards. The other back rightwards.

So, to respond to the accumulated angst being expressed as anger by voters, our next president needs to redefine the center and not simply acquiesce to the old center. And that requires ideas. It requires us to have clear choice. Do we go further right? Do we go back more to the left?

Gates refuses to give us that choice. Which is why his advice is so wrong.

But on one point I agree.

Trump is not a valid representation of the choice to shift further right. He is, as I said above, simply a demagogue and bully. Ted Cruz is the better representative of the far right’s desire we move more rightwards. Cruz is the analogue to Sanders. All the rest are simply moe of the same.

And it is more of the same that is making voters so angry.

 

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Tower of Babel

I have quoted Gombrowicz before, allow me to repeat myself – or, rather him, – once more. Only this time at more length:

“I stopped by the cafe where a group of young poets, Concreto-Invencion (or maybe it was the group Madi), gather every week. There were always ten poets yelling at each other in a passionate exchange at one of the tables. Yet this cafe has terrible acoustics and at this hour is full of people. You can’t hear a thing. So I said: wouldn’t it be appropriate to move to another cafe? … but these words drowned in the general racket. So I shouted them again, once, twice, and I kept on shouting into the ear of my neighbor until I realized that they were probably all shouting the same thing – but they could not hear each other. Strange people these poets. To gather together every week in one place in order not to be able to make themselves understood in the matter of moving to another cafe …”

I have the same reaction.

Non-mainstream economists seem to gather together for the sole reason of exchanging the same opinion all the time. That opinion bounces back and forth symbolically. It becomes a totem of allegiance. It is invariant. Indeed it is the one thing we can rely upon: mainstream economics – whatever that truly is – sucks. It is absurd. Silly. Unrealistic. It does grave injustice to the world as we know it. Yet it endures.

Its endurance is abetted, of course, by its critics who take little responsibility for discussing something else. Like their own ideas. Or those of others who might have useful input into a new economics, but who aren’t economists. Like historians, for instance.

Now, I realize I am doing great disservice to those who have dedicated their lives to living on the fringes of what passes for economics. For this I apologize. But we must progress. Plurality is perilously close to babel too. We must be careful that we do not choose plurality for fear of making a choice. There are wrongheaded heterodox ideas too. They must be weeded out. Or ignored.

For this latter ability – ignorance – we can lean heavily on the lessons learned by the mainstream economists: they have developed a supreme capacity to ignore anything they find inconvenient. They simply sweep it aside contemptuously as having no great import. They then march onwards secure that their ignorance provides them with sufficient cover against the charge of disregarding an issue. Such issues, they argue on these occasions, were examined and cast aside as unimportant.

High amongst the pantheon of those given the task of this incorporating ignorance into the mainstream was Milton Friedman. Indeed there are moments when I see Friedman as leading the charge towards ignorance.

Why am I thinking all this?

Because I have just read the review of “Saving Capitalism: For the Many, Not the Few” by Robert Reich, in the Holiday issue of the New York Review of Books written by Paul Krugman. Deep inside this review Krugman suddenly springs open a door onto the ignorance of which I speak when he says this:

“Economists struggling to make sense of economic polarization are, increasingly, talking not about technology but about power”

As if any discussion of the economy could possibly ignore power. Krugman goes on to to argue that power, in its suitably cleansed personas and technically neutered guises of monopoly, monopsony, or oligopoly have always been part of the mainstream’s analytical arsenal. Then he says:

“But what does this matter? Milton Friedman, in a deeply influential 1953 essay, argued that monopoly mattered only to the extent that actual market behavior differed from the predictions of simple supply-and-demand – and that in fact there was little evidence that monopoly had important effects.”

Friedman had a habit of writing ‘deeply influential’ essays that exonerated economics from taking reality too seriously. After all his preferred system of thought operated far more smoothly if we all simply assumed it as being right all along, and that any glitches could be ‘safely ignored’ as irrelevant. Such ignorance, as they say, is bliss. Especially if it expedites the incorporation of all that fancy mathematics we want to display in order to demonstrate the rigor of our work.

What is particularly sublime in Friedman’s intent is to ignore as much as he could about the actual workings of the origins of supply. Economists generally fall into this trap so perhaps I ought not blame Friedman too much. Supply in maintream economics is generally distorted and simplified out of recognition until it pops up as a function and not an activity or process subject to the whims of power.

This contrivance – a deliberate veil of ignorance over ugly reality – is necessary in order to facilitate the smooth workings of models that subjugate all else to the magic of markets. For, if we want to believe that outcomes in our economy are all the result of ‘forces’ that are both inexorable and objective, and are thus unarguably and unassailably ‘fair’ or ‘efficient’, we must first of all prevent the taint of power intruding into their formation.

And monopoly is not just a taint, it is a great big blot.

So we treat it as an exception set aside for those who are curious to go study at their leisure. Meanwhile we assure the less curious that the market – which without the taint of power is now portrayed as a warm bath of impersonal objective interaction – cannot be improved upon. It just cannot.

Unless we are at business school where we teach that the market exists to be manipulated in whatever way we like in order to extract every last drop of ‘profit’. It is not that warm bath but is a vortex of dastardly competition, corporate intrigue, and manipulation. In other words it is a veritable clearing house for power relations.

And since the real world of supply is more affected by those who are trained to distort markets than by those who are trained to adore markets, guess which education reflects the real world?

All economics, every last part of it, ought to begin with power relations as a central aspect of explanation. Power is not an exception. It is the rule.

But now I sound like one of those poets in Gombrowicz’ favorite cafe: shouting myself hoarse with exactly the same message that my fellow poets are also shouting.

And what’s the point of that?

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Paris and Refugees

One more quick word:

How wrong is it to reduce or stop entirely our willingness to accommodate refugees fleeing from the middle east? The knee jerk reaction on the right has been to call for a total halt to that willingness. What a horrible and un-American reaction.

Since 9/11 America has steadily exhibited a cowardice and retreat from its values that defies its swagger on the international stage. It’s reaction to being attacked was to turn world bully and to corrupt those values by diluting the freedom of its own citizens and by engaging in arbitrary violence around the world.

Now this defeatist petulance has been given new life by the Paris attacks. We are being urged, once more, to close the borders. This time even to those who deserve and need out help.

Why?

Fear. We cower in fear. We shake with national cowardice.

Instead of standing up and proclaiming the worth of our values, and instead of defying terror with our relentless attachment to freedom, we surrender it quickly and hide behind the false wall of security. While I understand the need to be alert and to protect ourselves – obviously – this ought be balanced with a pride in what we are supposed to stand for.

And what is this?

Our belief in modernity which brings with it a bundle of values not found in the homelands of the terrorists. Tolerance. Openness. Freedom. Equality of citizenship. And all the other attributes that add to to what we call democracy.

This is crucial.

You will notice we are not defending or standing up for our economic system. We are standing up for something far more important: democracy.

But we aren’t are we? We are quivering behind the chair or in the basement. We are stocking up with guns so we can shoot at ghosts. We are afraid instead of defiant. We are supine instead of erect. We are terrorized instead of strong.

And this defeatism is reflected in the Republican calls to close the borders. This is in stark contrast the usual braggadocio and bombast we get from the right who are usually so trigger happy and willing to bomb our ‘enemies’ that they scarcely ever stop to think about the unintended consequences.

Like encouraging terrorists.

 

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