Populists-nationalists: their inevitability and their usefulness

After I published this piece on America tearing itself apart in Medium.com this morning, a friend flagged this G-30 lecture by Raghuram Rajan last month.

I thought that the flow was somehow not there in the speech. I can understand that at one level. He is trying to understand the world. It is work in progress for him and for all of us. It is not a facile topic.

Issues he flags are very well documented, by now. For example, I had blogged extensively on the Chairman’s letter of M&T Bank. Not many could have explained the situation better.

On answers, Raghu is very thin. But, that is not his fault. Societies always figure out what not to do. But, what to do is the tricky question. That takes much longer to evolve and involves luck and extreme circumstances.

In a sense, that is what populists-nationalists offer: ‘Extreme Circumstances’. Yes, they would fail to solve the problem. One cannot redistribute without growing the pie.

Populists-nationalists will probably not grow the pie. Of course, it is a different matter that the globalists grew the pie but also grew debt much more than that. So, perhaps, one could argue that they have a worse record!

But, that said, I do agree that eventually populists-nationalists would fail. They would neither succeed in re-distributing nor in growing the pie for THREE reasons: One is what I said earlier. There are no easy answers. Second, they have to face the constant backlash from those who feel threatened and who are losing their privileges. Taking the country and the world back from them is not going to be easy at all. Status quo and incumbency have their advantages.

Third and perhaps most importantly, sometimes it is impossible to undo and ‘restore’. [Even Microsoft Windows 10 does not do that properly despite users having the theoretical option of doing so.] There is no second chance. Once something is lost, it stays lost.

However, they (populists-nationalists) do serve one useful purpose. They serve as a rallying cause. A lightning rod. Humans and nations always need the ‘other’ – an Opposition/opposing force – to survive and focus minds. The ‘others’ impart a sense of urgency to the problems that have festered for long and they help focus minds on the problem.

Once we know that their answers are not the right answers, the rest of us are compelled to come up with solutions that are better than what they offer. Of course, it would involve sacrifices – sacrifices of the privileges that elites have gotten accustomed to and grown to take for granted.  But, they will have come to the conclusion by then that they are better off making those sacrifices for the sake of preserving the chance to remain in the game and re-gaining those privileges again.

That is the very useful purpose that populists-nationalists serve.  That is why I had argued that populists-nationalists were not only inevitable but that they would well be necessary for the world to arrive at its answers, eventually. For now, we are a long way off from this seemingly happy ending.

On the deadly viruses of political correctness and victimhood in America – great weekend reads

(1) The Media Bubble is Real — And Worse Than You Think [Politico].

The only quibble I have with the article is that it concludes that journalists respond best when their vanity is punctured. But, far from trying to figure out why they were so vain as to miss what was happening to America, their vanity is making them tilt at the manifestation of their failure – Donald Trump. So, they are pitting their vanity against his and are directing their energies at getting him out. Russia is their trump card (pun intended). If they succeed in removing him, they think that they can exculpate themselves of the failure to anticipate his rise. Then, it would be difficult for the authors of this wonderful article to come up with another explanation as to how the media could do worse than they did in 2016.

(2) Professors moved Left in the 1990s. The rest of the country did not. Great read although it is from 2016.

While the data confirms that university and college faculty have long leaned left, a notable shift began in the middle of the 1990s as the Greatest Generation was leaving the stage and the last Baby Boomers were taking up teaching positions. Between 1995 and 2010, members of the academy went from leaning left to being almost entirely on the left. Moderates declined by nearly a quarter and conservatives decreased by nearly a third.

What is it about the boomers that they turned so irredeemably Left? Is it their success or is it guilt conscience that they achieved so much success at so high a cost to the world at large, to Planet Earth, etc.,?

(3) Heather Mac Donald’s experience at Claremont McKenna College in April 2017. It is positively scary and despairing. David Brooks is right to call it a tale of ‘chilling intolerance’.

(4) A great title: ‘Freedom from speech’ and a great line (George Will – Nov. 2015):

Campuses so saturated with progressivism that they celebrate diversity in everything but thought [Link]

(5) David Brooks is unfortunately likely to be proven right here:

These days, the whole idea of Western civilisation is assumed to be reactionary and oppressive. All I can say is, if you think that was reactionary and oppressive, wait until you get a load of the world that comes after it. [Link]

(6) On a hopeful note: this video has more than seven million views on YouTube

(Most of the links above were picked from the Twitter handle of Jonathan Haidt)

Anna and Annette on the Fed PUT

Anna Cieslak and Annette Vissing-Jorgensen had written another terrific paper – this time on the Fed PUT.

The highlights of the paper are as follows:

(1) Reaction of actual economic output (GDP growth) to excess stock market returns is small and is symmetric for stock market gains and losses.

(2) Reaction of unemployment to excess stock market returns is asymmetric. That is, unemployment rises more when stock market records losses than it falls when the stock market posts gains. But, the Federal Reserve expectations for unemployment change much more than actual unemployment changes themselves!

(3) Sensitivity of actual private consumption to negative stock market outcomes is small, especially in the 1994-2016 period. But, the focus of the Federal Reserve on the stock market is driven a lot by its concern over stock market declines on consumption.

(4) Before 1994, going back to September 1982, there is no significant relationship between the stock market and updates to Fed growth expectations.

(5) The Fed updates its macroeconomic expectations (about growth and unemployment)
in a way that is highly sensitive to stock market outcomes during the inter-meeting period. This relationship is pervasive starting from the mid-1990s, but is largely absent before that.

This paper and their earlier paper, ‘Stock returns over the FOMC cycle’ (with a third author) could very well be the harbingers of the long overdue reform of the monetary policy framework of the Federal Reserve or that of the reform of the Federal Reserve itself.

Like it or not, Trump Presidency is delivering on jobs!

Somewhat belatedly, I went through the U.S. non-farm payroll employment for April 2017.  It is simply amazing. Apart from the fact that it was a strong report in many dimensions, consider the following facts. Data comparison is between Dec. 2016 and April 2017 because that is how far back that the April 2017 Employment Situation Report goes.

  • The median duration of unemployment is down to 10.2 weeks
  • There is a remarkably sharp fall in the unemployment rates of those with High School Degrees and those who do not even have that. In contrast, those who have a Bachelor’s degree or some associate degree  below Bachelor’s, their unemployment rate has barely budged, since December 2016. Clearly, there is a correlation/association between the Trump Presidency and the falling unemployment rate for the constituencies that voted for him!
  • Between Dec.2016 and April 2017, White Labour Force is up by 300,000. Those not in the labour force has shrunk by nearly half a million.
  • White male unemployment rate is down big time from 4.1% in December to 3.4% April 2017. Black men unemployment rate has declined while that of women has ticked up by 0.1% from 6.8% to 6.9%
  • Asian unemployment rate has gone up from 2.6% in December to 3.2% in April 2017! Again, Trump Presidency is delivering jobs to those who voted for him!
  • Number of full-time employment has jumped 1.739 million from Dec. 2016 to April 2017
  • Number of part-time employed has declined from 27.9 million to 27.2 million
  • Number of multiple job holders has gone up from 7.554 million to 7.683 million but it has registered a big drop from March 2017 level of 7.96 million.

Overall, something for him to shout about even if causality is hard to establish. It may not be there. But, it is a safe bet that had the indicators deteriorated, it would have been pinned on him by our dear media colleagues on either side of the Atlantic.

Tett, Trump and Comey

A disappointing piece by Ms. Tett.  As Senator Susan Collins said – and she is no admirer of President Trump – to put it mildly – the FBI Chief deserved to go. Further, she noted that Trump was not shutting down FBI. There are enough dirt diggers on Trump. One may not like him; one may even detest him for his values, for his policies and for his personality but President Trump is not a fool to walk into a suicidal trap. He would have known that he is handing a big stick for his detractors to beat him with.

Remember, he outsmarted the chattering classes to become the President. They guessed wrong and now all of them are trying to prove themselves right, by finding a reason to get rid of him.  To do so, they are perhaps barking up the wrong tree. The hyperventilation over Russia is a case of self-perpetuating logic.

Whether or not there was collusion with Russia that helped him win the Presidency – a very remote possibility –  there are serious conflicts of interest that are arising with China.

Kushner has almost single-handedly derailed the Trump agenda over China. From the aborted attempt on the part of Anbang insurance to bail out his failed real estate deals, to his children singing Mandarin songs for the visiting Chinese President and his wife to his family members selling U.S. Permanent Residency for real estate transactions claiming proximity with the highest office of the land, etc., there is plenty to worry about there.

China – with its unstable economy and its empire building – is a bigger threat to the global order than Russia. China ought to be a bigger worry for those who worry about the stability of markets.

Is it a sign of foolishly misplaced priorities that there is hyperventilation about Russia while China gets away with far less scrutiny or is it something more sinister?

In 2001, on the request of the Head of Citigroup Investment Banking Head, Robert Rubin, former U.S. Treasury Secretary telephoned a Treasury undersecretary in the new Republican Administration to ensure that Enron Debt was not downgraded. Citi was having a big exposure to Enron.

He could do so because Bill Clinton had rescinded a rule that barred Cabinet members from interceding with the Department that they had worked for.

Luigi Zingales, Professor at the University of Chicago, had recalled the incident in his book, ‘A Capitalism for the people’. That is the kind of ‘bipartisanship’ that America had witnessed in the last two or three decades in sinking the pillars of probity in governance.

Good journalists must know the issues that they ought to focus on.

Lessons in economic ideology from office room allocation in U. Chicago

This is coming from Luigi Zingales who wanted to save capitalism from capitalists!

When I visited Stanford Business School many years ago , I was surprised to see that all of the offices in its new building were identical — a result that had cost money , thanks to the structure of the building . Why should socialism prevail with respect to offices ? I was told that the dean , who had to assign the offices , wanted to avoid the headache of having to decide who would get the best ones.

At the time , I thought these concerns were exaggerated , until Chicago Booth also constructed a new building for itself but decided to differentiate offices . To minimize lobbying , the dean announced that each faculty member would be randomly assigned a number within categories — presumably assistant , associate , full , and chair professor ( though this was not explicit ) , and would choose an office sequentially . But when the selection order was announced , the most famous faculty members were first , suggesting that the process had not in fact been random . The school erupted . Emotions took over . One faculty member shouted “ I hate you ! ” at another who had received a better office , ruining their relationship for quite some time .

We might underestimate the cost of all this commotion because it was not easily measurable . But if you do factor in the time wasted in office – allocation simulations , along with the cost of tense relationships for years to come , you see that Stanford’s choice was the more efficient one. This point has been recognized by a few economists.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 205). Basic Books. Kindle Edition.

I shared this with my friend Gulzar Natarajan. We then had a couple of back and forth on it. He was wondering whether Communism and Socialism were ostracized because they were also tainted by association with totalitarian repression that some of the Communist leaders practiced.

At the same time, he noted that capitalism had adapted by embracing certain aspects of socialism:

“adaptability of capitalism to emergent threats – the welfare state, regulatory institutions, social democracy itself.”

This is what I wrote in response:

Several valid questions and interesting speculations in your email. Who knows the answers? In all these matters, all of us are like the blind men guessing the elephant. We are also influenced by the context and the times in the weights we assign to competing arguments.

I have always believed that a competitive market economy is about as egalitarian as one can get, in terms of opportunities. That is about the best one can hope to achieve in a society. Equality of outcomes, of course, takes away the incentives.

The best a government should aim for is a combination of competitive market economy with social safety and affirmative actions in the early phase of lives for the population – for health and education. Easier said than done.

In the concluding chapters, in ‘Faultlines’, Raghuram Rajan spends some time on these questions. They were practical and useful.

As for the current state of the world, humans are doomed to go through the cycles – swings between extremes with very brief (if lucky) interludes of stable equilibriums. Those of us who are lucky to find ourselves born and grow into adulthood in such stable equilibrium periods think that this steady state of affairs prevails permanently. We fail to grasp and remember our history lessons well.

In fact, that is the other lesson from this office room allocation episode. No matter how much of economics or anthropology or sociology these Professors have learnt, they had to fight for their office rooms with bitter name calling! We have too many flaws to create/achieve anything positive and stable on an enduring basis.

That enduring feature of humanity is what brings out and accentuates the drawbacks in these systems – capitalism or socialism or market economy.

We are capable of bringing out the worst in ourselves and in all things that we touch!

I am re-reading Yuval Harari’s Homo Sapiens. I read it too quickly the first time around. Sapiens are deadly!

Only one firm matters

An extraordinary proportion of people with training and experience in finance have worked at the highest levels of every recent presidential administration. Four of the last six secretaries of the Treasury fit this description. In fact , all four were directly or indirectly connected to one firm: Goldman Sachs. This is hardly the historical norm : of the previous six Treasury secretaries, only one had a finance background .

In 2001, following revelations of accounting irregularities, Enron verged on collapse, which meant that Citigroup, a major lender, would lose a significant amount of money. Fulfilling a request made by Michael Carpenter, head of Citigroup’s investment banking unit, Rubin called Peter R . Fisher, then undersecretary of the Treasury and asked him to consider advising the bond – rating agencies against an immediate downgrade of Enron’s debt. In other words , Rubin (a Democrat ) lobbied Fisher (a Republican ) to help bail out Enron. ( So much for Washington’s ideological divide.)

What Rubin did was technically legal, as The Economist explained, only because Bill Clinton , in his last days as president , had canceled an executive order that barred top officials from lobbying their old departments for five years after leaving office.

Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 68). Basic Books. Kindle Edition.

Today, of course, there is far more money riding on the models than in the 1980s – and when it comes to positive feedback, size matters. Indeed, another example of positive feedback is the relationship between the financial sector and regulators. As the sector increases in size, it gains more influence over the government; this allows it to change regulations in its favor, which allows it to grow even larger, and so on, until it becomes Goldman Sachs.

  • Sometimes called Government Sachs, because of the remarkable ability of its alumni to go straight into senior levels of government, perhaps related to the fact that the firm is a leading corporate donor to political campaigns (Baram, 2009). It is even better represented at central banks. Four of the Federal Reserve’s 12 regional banks  are currently headed by former Goldman Sachs executives. Only five banks have voting power, in a rotating fashion, and in 2017 ex-Goldmanites will hold four of these votes. Together with Mark Carney at the Bank of England and Mario Draghi at the European Central Bank, this means that interest rate decisions for much of the world’s economy are made by people who came from a single firm. Nothing to see here, move along.

Source: Wilmott, Paul; Orrell, David. The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets (Kindle Locations 4524-4527). Wiley. Kindle Edition.