The recent arrest in Canada, under a request from the US, of the CFO of Huawei, the leading Chinese telecom equipment manufacturer, doesn’t seem to be an accident. In the context of the growing commercial dispute between China and the US, it will undoubtedly inflame the Chinese. In our view, it is a catastrophic strategic error. Was it merely an agency of the US government acting without Presidential instruction? Was this bad political governance or just an errant bureaucratic mistake? Either way, the consequences seem horrendous. Continue reading
In a previous essay, we lamented that Mighty Casey had struck out. Maybe what is needed is not another Casey, but fixing Mudville. That means changing our expectations of good governance and then doing something about a reduced menu of expectations. There are many sources of our disaffection with government. Our political fragmentation, however, assures us that there is not a single silver bullet. As a country we have very different expectations concerning what our Government should provide for us.
From an historical perspective, what we wanted in 1776 and later in 1787 was that Government should insure our liberty and our freedom. Those were simpler times and the Founding Fathers prescribed a stronger national government that could marshal the resources to defend our nation and protect us from violent uprisings internally. The Philadelphia convention of 1787 was highly fearful of the outbreak of domestic uprising, coming as it did shortly after Shays Rebellion was put down only through a massive effort by the State of Massachusetts.
The Founders wanted an orderly state, hopefully not torn apart by faction. Federalist #10 (Madison) was devoted to just that issue: factionalism, and how the separate sovereignty of the 13 States coming together in a Union would provide a protection against factionalism. The Fathers were also strongly aware of the precarious nature of our finances. The Continental Congress had made long-term sufferers out of its own Army by its failure to raise sufficient resources to pay the Army and its officers. After the Constitution was written, Hamilton, as the first Treasury Secretary, federalized the separate States’ debt thereby creating a viable financial system that could support the new Government and its armed forces. Tax revenues then came largely from taxes on trade—tariffs! It would not be until the 20th century that the US turned to personal income taxation. In spite of the brilliance of our Founders, history must judge their failure to place term limits on the legislature as a strategic error.
Term limits were thoroughly discussed during the deliberations in Philadelphia and while some limits had been in effect under the Articles of Confederation, they disappeared completely in the final draft of the Constitution. Even from Madison’s voluminous notes, it is unclear how this omission was contrived. Government was smaller and stayed smaller, absent the Civil War, until the advent of the Great Depression. Perhaps the small size of the actual government and the limited scope of its interests at the Federal level dictated that outcome? We cannot be sure.
The size and extent of Government’s intervention into private endeavors is very much at the source of the observed cronyism and corruption that so disfigures our current governance. It might seem strange that government size would be a source of corruption, given that smaller states also suffer the malady. Consider, however, the nature of any Government effort, either through specific legislative enactment or through the rules of a government agency designated by that legislation.
The bureaucracy writes the rules and largely interprets them even though the formal legal structure comes from the Congress and is signed by the President. Each activity that is so described by the legislation both prohibits or directs that private actors, firms, households, individuals, associations, NGO’s —all domiciled in the private sector—are to undertake an activity or to forsake an activity under the sanction of a Government regulation.
Each such regulation sets up incentives to abide by the directives but the regulation also implicitly sets up a shadow price that measures the value of non-compliance to the regulation. Thus, regulations set up incentives for behavior of agents in the private sector and clearly these agents respond to these incentives. Then comes the investigation of such deviations and the enforcement by the specific government bureau or agency designated to compel private behavior. How do markets respond to these incentives?
Largely, in the US, it is first by lobbying efforts paid for by affected private agents. The lobbying can take place in the designated bureau and/or it can take place in front of particular legislators. Here a quid pro quo often occurs. Private agents want a “seat at the table,” and they are wiling to purchase the necessary admission tickets. They can contribute directly to a sympathetic legislator’s campaign to purchase that seat at the table.
The absence of term limits has created many permanent politicians, each of whom requires resources to maintain his elected status. Markets work—often all too effectively—and we then observe special interests buying tickets to the cronyism and corruption circus. The circus never pulls down its tent. It is a permanent fixture of expanding government interference in the affairs of the private sector.
Now Mudville complains that its true wishes are not heard, that no one in Washington really hears what they want. That’s tinder for a political candidate willing to state he hears the cries of the disaffected. Sound familiar? Clearly, no joy in Mudville. Instead, we have frustrated grievances by a great many angry voters. Can representative government survive this tumult? One has to wonder?
I loved this poem as a young boy thinking about baseball in a much simpler era. It was post WWII and there were no major television networks. You read about the Majors in the newspapers—the clubs were in the East and the Midwest. Migration was to be many years in the future. The war was over and the newspaper was one’s major source of information. The Cold War had begun, but we didn’t have the troubling doubts about Presidential and Congressional leadership that today race across our phones, tablets and other Internet connected devices.
We got through the harrowing experience of Korea and we began to notice that there were few “mighty “ anymore. Information flowed more readily across the television networks. Government provided information was more carefully parsed. Idols fell more frequently from exposed clay feet. Still, most of America believed what Government told us. Witness the support polls for the Viet Nam war that continued high well into the 1970’s despite the nightly baths of tragedy that streamed over national television. Then came Watergate, the resignation of a corrupted Vice President and finally the first resignation of a President.
Today, we have a surfeit of what passes for news, much of it highly infused with the political opinions of the networks, newscasters and the overabundant ‘talking heads.’ The Web is full of “bots” that convey “information” that incentivized sources wish to provide for what seems to be a still gullible public. And, above all, we have a troubled Presidency, attacked as illegitimate by one side of the aisle and supported on the other by a much-threatened, confused and silenced party.
The massive waves of dissent that redounds across America remind us of our earlier, troubled era of the Viet Nam war and our painful exit. Viet Nam taught us not to believe in what our Government told us, and our agony stretched past the fourteen years of our troop involvement. Revelations about the extent of lying during the war dragged on for at least a decade following our exit. There might have been little joy in Mudville as the war wound down and American forces were withdrawn but our malaise continued well through the 1970’s. The decade was troubled by incendiary politics, slowing growth and inflation and the post mortems of government mendacity during the war. Troubles were not confined to America. South East Asia exhibited horrifying murders and genocide in Laos and Cambodia; the Middle East exploded in another war and the decade’s end was underscored by the cancellation of our participation in the Moscow Olympics over the Soviet’s invasion of Afghanistan and our covert support of the Mujahedin against the Soviets.
There was a seeming respite in the 1980’s and the evident beginnings of a huge technological computer revolution that was gaining ground at every step. Plus, we had a very likeable President who seemed to ‘take it to the enemy,’ with his adamant refusal to kowtow to the Russians; his famous taunt to Gorbachev to tear down the Berlin Wall (which finally fell a year after his Presidency) and his constant stress on the American exception. His term ended with palpable celebrations despite the Iran Contra investigation and the evident cover-up that had cloaked its continuance. The residue of distrust of Government did not subside. It might have been tempered during the Reagan era, but it did not vanish.
Another recession and a shortened Presidency following Reagan ushered in the booming 1990’s, troubled once again by an impeachment proceeding (that failed) and a shocking defeat of Government sponsored health care. Markets boomed, however, and whatever distrust we as a people had developed was often subsumed by a huge stock market rally. It was to some a “unipolar” world with a collapsed former enemy seemingly weakened irretrievably by the fall of the Soviet Communist Party and the liberation of its East European satrapies. China was the new Casey at bat, with its rather unique Chinese Capitalism moving millions of impoverished families into the penumbra of growing wealth. They moved from agriculture to newly built factories. A growing class of wealthy Chinese began to tour the world, replacing the seemingly moribund Japanese of a decade earlier. It all seemed glorious and the US seemed to escape the Asian collapse of 1997 as we sped to the Dot Com world. Even the recession of 2001-2002 didn’t humble us, but 9-11 made us aware that new threats had emerged with asymmetric warfare now ascendant.
The debacles in Iraq affirmed our suspicions that much of the information that Government provided was either wrong or intentionally shaded. While Bush II served two terms, he was widely undermined by a media that seemed to thrive on his malapropisms. The contrast to a well spoken, Harvard educated, social activist infatuated the press, but the Obama era was a watershed for acrimony between the two major parties.
Obama succeeded in passing Medicare, but its terms were unacceptable to the losing party. Obama withdrew forces from both Afghanistan and Iraq only to see Iraq collapse and the rise of ISIS. The divisions in our body politic were widening. Then came the campaign of 2016 from which we have not recovered at all.
Some see Trump’s capture of the Republican nomination as a political fluke while others blame it on a vast conspiracy fomented by Russian computers! His election is incomprehensible to the party that won the popular vote but lost in the Electoral College. They see conspiracy everywhere and our practicing “payback,” at every turn.
Bipartisanship is non-existent even at the water’s edge, despite the long period of foreign policy cooperation that had stretched some 60-odd years through even the early 2000’s. Economic policy is a one party game and immigration policy changes are blocked at every turn. Unless the polls are wrong again as they were in 2016, it seems quite likely that come January 2019, we will have totally divided government and the increased likelihood of rule by executive order. We may see a rancorous attempt at Impeachment. The mists are too thick to see past 2019 into 2020’s Presidential contest, but the level of distrust and disenchantment with Government is surely rising.
Meanwhile, as Government becomes more a story of the regulation derby, it also must mean, “who you know” becomes far more important than “what you know.” Voter disenchantment can only rise. If Trump’s victory lay in his recruitment of those voters who felt increasingly disenfranchised and unheard at senior government levels, what is likely in 2020 and beyond? A split of legislative and executive power may produce a kind of quasi-stability, but it cannot produce joy in Mudville. There will be no “mighty Casey” in our future.
The lamentable state of democratic order in America is hardly confined to our shores. Some 25-odd countries, all of who possess some sort of democratic republic structure seem to be suffering as well from widespread voter disaffection. Prior to Trump’s election, troubles in Australia and Canada produced similar symptomology. Those elections went different “political directions,” (one right, one left) but that is a key to understanding the current dilemma in democratic republics. Next is the Brexit upset and then Greece! Then comes the wide disaffection within the EU, including perhaps the failure in Italy. The rise of right wing anti-immigration parties in Sweden, in Hungary, in Austria and even in France and Germany, play a recurring theme. Dis-affection with Government, mistrust of Government, political fragmentation and consequential rule by executive order are now widespread across the democratic universe.
When the “national interest” becomes fragmented, “special interests” invariably rule by default. In the absence of term limits on legislators, particularly in the US, staying in office become a perpetual money-raising game. Those who have access to money can buy media time and a vast proliferation of Internet ads. Media consultants may provide strategy and tactics to electoral candidates, but they drive an increasing wedge between the average voter and the elected. The voter begins to think he is a chump. How long before that distrust mushrooms into support of an extremist candidate?
Trump’s 2016 election strategy was derided by the “liberal media,” but despite its odious historical comparisons to Germany in the 1930’s, it provided a vehicle for disaffected voters. They crossed over, because he brought them a road to travel on. He emphasized how unlike them were his opposition. He was “fighting” the establishment (for himself, to be sure) but for “them!” He gave them a hope that they would be “heard,” and they repaid him by crossing over. He perpetuated an invalid economic narrative that they were the “victims” of globalization and too many immigrants sucking away their jobs and undermining their pay structures. It was wrong, but it was credible.
He is not the first politician in history to construct a faulty but believable narrative. His ostensible wealth and previous success did not transmit to the disaffected that he lived in a very different world than his would be voters! On the contrary, it spoke of his success in besting the powers that be in the liberal cities where he built his hotels and buildings. He knew the “game!” He didn’t deny playing that game. He trumpeted his success in winning those concessions. He was a Master of the Game, and in spite of their hugely different class backgrounds, his crossover voters ate up his rhetoric.
When Media America constantly questions how he regularly insults accepted liberal norms, they see their champion. That is his strength and in a hugely fragmented body politic. His “minority” politics thrives. The consummate testament to his strategy is that the Democratic Party is now fragmented between espousers of “socialism” (despite its continuous history of failure wherever it has been tried) and capitalist democrats who know how to win with the money provided from “special interests.”
It may be that the November elections will feature a Republican defeat in the House and possibly an overturn in the Senate, but that will mean a two year era of rule by executive decree and constant legal appeals to the Courts to overturn Trump inspired orders. This can only mean more fragmentation and a deeper division of the electorate.
It is hard to judge whether the current level of political invective and disharmony has historical precedent. Certainly the decade before the outbreak of the Civil War showed how extremism and the lack of bi-partisanship could rip apart a country. But, 1860 and 2020 are separated by more than time. News traveled slowly in 1860. “News,” or whatever passes for that much- trammeled noun, travels instantaneously today. Truth loses out continually to immediacy—as Trump has learned. The Washington Post may flash four or five “Pinocchio’s” each day, but working class voters in Ohio are likely to ignore that. Beside, the “press” is a kept lady in their view. It doesn’t belong to “their kind.” It really doesn’t matter, despite the constant rant of the critics, how much Trump lies or distorts the information. Germany’s history proved how a “big lie” can work, and sadly, it continues to be proven day in and day out here in America. It is alleged that Trump rises early to “tweet” America its new truths. That is not accidental. He sets the agenda, irrespective of the truth table that accompanies the tweet.
Will an impeachment stop this game? Highly unlikely, unless one believes that the Senate could convict? If the Mueller investigation finally comes up with compelling evidence of an actual conspiracy between the Russians and the Trump campaign, perhaps that could turn the tide. So far, despite the Cohen and Manafort agreements to “cooperate,” no one has seen any substantive evidence that will document such a conspiracy.
The foregoing points up how important the Regulatory State has become, ironically even more important under Trump than before. The growth of Government is the prime source of political corruption. The more we allow Government to enter our lives, the more political corruption will occur. All regulatory efforts create two incentives: one to prohibit and one to avoid the prohibition. In turn, this makes the money flow that influences the legislators and the regulators in a particular direction. Lobbying and campaign finance are not an accident. They are market’s reaction to impending or actual legislation or regulation. The Smithian dream of a huge market of small firms each competing in its own way falls victim to the nightmare of much, much larger firms with very large resources to not only “listen” for changes in Congress and the regulatory establishment, but to promote those changes that are instrumentally important to the particular firm. The banking industry is a perfect example. The cost of compliance rising rapidly since Dodd Frank drives small banks into the arms of larger banks, better able to defray the cost of compliance. It is no different in a host of other industries.
At the end of the day, Pogo (a comic strip character from my forgotten age) was right: “I have seen the enemy. It is us.” The great tragedy of American politics is that “redress of grievances” produces excesses of Government intervention and regulation. If something is wrong with your corporate or personal life, get a Congressman or Congresswoman to address your grievance. If you are poor, there are many NGO’s that will pick up your cry. If you are poor and a member of a racial minority that’s even better. If you are not employed in the manner you feel you ought to be employed, find a “loudspeaker” to vent your case. Are you potentially harassed by your employer, find a media stringer to write your story of abuse and a class action lawyer to take your case!
The growing abundance of “Government Remedies” breeds the cabal of corruption that we witness daily in our political governance. Is there a way to reduce corruption and cronyism? There is no silver bullet, but there are some things we could do if we understood the problem and were willing to unite to limit its incidence. That is the subject of another essay. This one, like today’s baseball games, is already too long.
Once one begins thinking about the recurrent failings of corporate governance, particularly of large public companies, it is hard to stop thinking about the many, repeated occurrences of corporate misgovernance, “disorganized crimes,” as we have so titled them.
The Wells Fargo charade is only the latest, but sadly, not the last one in this recurring story. Without the special knowledge that will inevitably be dredged up over many months by investigative reporters and public displays of Congressional mourning for account holder losses, we are forced to merely conjecture about how the Wells Fargo saga took place and to explain how long it lasted. Surely, some of the executive management team, and certainly some of its ‘distinguished’ Board of Directors were familiar with the many occurrences of pas corporate misgovernance, particularly since the Enron affair. “Learned nothing and forgot nothing, as Talleyrand once remarked about the Bourbons of the French revolution
Perhaps the Board was blinded by the apparent ease of Wells’ passage through the financial crisis of 2007/2008 or mesmerized by its former CEO’s railing against Wells Fargo’s forced acceptance of Government funding in 2008 Wells had an enviable post-crisis record of earnings growth and was the darling of investors such as Warren Buffett.
Undoubtedly, such an exalted status creates sizeable insulation from thoughtful probing by a Board. But, that is precisely the point. Shareholders who are lulled by apparent earnings prowess and “above suspicion” accolades are those most vulnerable to the shock of corporate misgovernance. So are Boards of such impeccably credentialed public corporations. Being lulled is not an excuse. Weakening earnings are not the usual antecedents of corporate shock. It is almost always just the reverse. A firm that “stands out’ among its peers should evoke some thoughtful examination. ‘How does my company do so well when its competitors struggle’
It is a rare Board that will question the sources of apparent and long-standing success, ignoring the proverbial wisdom of “pride goeth before a fall.” Sadly, that is when the common shareholders need their Boards to work especially hard in understanding the daily operations and risks taken by corporate management.
Cross selling was not the sin. The failing was using a highly publicized incentive program for employees to do the cross selling and such incentives were bound to push excessive and perhaps illegal behavior on the part of the ‘cross-sellers” without a very careful examination of the details of that cross selling program. When an employee is incentivized to induce customers to take on additional “features,” even when they have no interest in such opportunities, there is an implicit warning sign that should not be ignored by the Board. Incentives are powerful behavioral devices. Without constant supervision and a careful delineation of proper responsibility, it is simply obvious that some employees and some of their managers will overlook how the cross sale is achieved
Employees and managers are not angels. They are human and subject to greed and avarice. So are we all. Boards surely must know that from their own, individual experiences. Why believe otherwise that each employee and each manager, rewarded for increased cross selling, would not step over the line Apparently some managers knew where the line was and employees were indeed “fired,” for behaving irresponsibly and possibly illegally.
It is far more likely that excesses were known to top management and judging by previous cases of corporate misgovernance were at a loss as to how to put the genie back in the jug. I personally know of one case of an employee resigning because he felt that Wells was behaving improperly. Surely, there will be many others that will come forth to tell a story about how Wells managed to induce their employees to cross sell, rewarded their achievements and ignored internal protests that there was “fire in the hole.”
All of this brings to our attention once again what we should expect our Boards to do: look closely, ask hard questions and report fairly to the shareholders that seemingly wonderful earnings stories are founded on truly good corporate behavior. And, when there is smoke, look intensively for the fire and not be afraid to pull the alarm when the fire is detected.
The clawbacks of corporate rewards have begun. Shouldn’t the Wells Fargo Board be subject to the same mechanisms ‘No pain, no gain.” It is time to assess penalties on the watchdogs whose job it is to police issues of corporate governance. Quis custodiet ipsos custodies
 Former CEO and Chairman Kovacevich (allegedly raged against Henry Paulson, the US Secretary of the Treasury, forcing the 9 largest banks to take in multi-billion dollar infusions in 2008 under the Secretary’s threat that a bank’s refusal to accept such funds would trigger severe reactions by particular regulators. (See Andrew Ross Sorkin, Too Big To Fail, p.525. Sorkin quotes Kovacevich as follows. “”I’m not one of you New York guys with your fancy products. Why am I in this room, talking about bailing you”’ At which point Paulson replied, “Your regulator is sitting right there.” Later, “And you’re going to get a call tomorrow telling you you’re undercapitalized and that you won’t be able to raise money in the private markets.”
Kim Strassels op-ed (The U.S.Department of Clinton) WSJ 8/25/2016 put her writing finger on the real HRC issue: there was no line between her activities as the Secretary of State and as Secretary of the Clinton Foundation. The crossovers are too numerous to catalogue, but will motivate ambitious expose journalists who will mine this story for all that its worth. And, it could be worth a lot, particularly if HRC succeeds in wasting her opportunity to become the first woman President.
After the slow but steady drip of importunate details of her many crossovers between pubic and private service, it becomes even clearer what Big Government has done to an electorate badly in need of no conflict of interest public servants. Hard to find, Harder to elect.
For many years, the SEC and the FCC and NLRB—along with all the other alphabet of Washington regulators has been a revolving door between public service and private emolument. For those who wish to endow their human capital with a fat rolodex and many shoulder-rubs with the powers that be, a few years writing papers for the higher ups, commenting on policy proposals, doing the case work on a forthcoming prosecution, etc. is an apprenticeship with fine rewards at the end of ones stay within the Beltway. Not only do the public service neophytes learn whos who in the power ladder, but they also learn the techniques of rolling their log in the tree pond in exchange for favors done by counterparts and higher-ups. Is it any wonder that these loyal knights of the realm have trouble finding the clear line between public service and private reward After all, they do their government apprenticeship with the firm belief that it will come in handy in the private sector. And it surely does.
The HRC affair has exploded because of her candidacy. Expose passes for election policy statements these days. This will be one of the dirtiest campaigns on record, but it is a mere mirror of the filth of private ambition coupled with government power.
The Clinton Foundation should get a marketing reward and acase study of how it managed to gather so many supporters worldwide. The case will be taught for years in Marketing courses for MBAs. The Pay for Play scandals in New York State wereonly the tip of the iceberg in comparison to the major access stories now seeping out. Pay for Play, has long been a staple in winning Municipal Bond underwritings, or in insurance contracts, etc. What is the real lesson for voters and citizens to take in from the HRC/Clinton Foundation tight linkage
Very simply, this is what Big Government comes to mean in a world of Big Industries, Big Banks, Big Insurance, Big MediaIt is well understood that Bigness produces Big Compensation in the corporate world and being a Big Person, puts you in line for the rewards that Big Government can throw out. Cronyism is the market response to regulation—to insuring that any new regulation does as little damage to your Big Firms interests as possible, or even better yet, your Big Firm gets a carve out exemption!
What is the difference between cronyism and corruption: the explicitness of the payment for getting the deal done But that is a very thin, almost unobservable line. In the HRC/Clinton Foundation case, draped as it is with the robes of Charity, it was clear that to get access, donations were the ticket. Become a friend of the Foundation and you got access. The quality of the access and what was paid for it still has to be measured, but that will come. Some enterprising journalist looking to make her bones will be able to compute the regression equation.
Our major point is that the bigger the government, the more intrusive government becomes in everyday life, the bigger the rewards for individuals who can blunt the charge of government regulation. Big Government provides the incentives for cronyism. and for corruption as well.
The immigration Trigger
Observers of the current Presidential campaign who are familiar with American political history cannot ignore the striking parallels between this election and the electoral scene of America in the mid 1850s. In that pre-Civil War period, the Whigs and the Democrats were torn apart over the issue of slavery while the country was also deeply troubled by large flows of Catholic immigrants coming to the United States from Germany and Ireland. The decades prior to the Civil War also featured significant reductions in shipping and communication costs that stimulated large movements of foreign direct investment as well. It was a period similar to our recent era of globalization. Capital from Europe flowed into railroads, coal mining and many new factories accompanied by a plentiful supply of labor willing to work at what seemed to the existing work force to be low wages. While international trade and finance expanded, there was a rapid rise in discontent from both the labor and middle class over the new immigrants that in turn caused huge political upheavals.
Beginning in the 1840s, the anti-immigration wave coalesced in a number of political parties. By 1843, these nativist sympathies coalesced into the American Republican Party and spread into Pennsylvania under the name of The American Native Party, even sending a representative to Congress in 1844. Perhaps the best known was the No-Nothing party. Stimulated by anti-Catholicism and nativism, local and state elections were heavily impacted in the 1840s and 1850s. . The No-Nothings swept state elections in Massachusetts and were influential in a number of other states. Secret orders were started that reflected these prejudices and the feelings of disenfranchisement threatened by the flow of cheap labor.
The Anti Slavery Movement and the new Republican Party
The more vocal issue in the 1850s was of course slavery and the anti-slave movement weakened the Whig Party (the major alternative to the Democratic Party). By the 1850s the surge of immigration had quintupled the immigrant flow of a decade earlier. It wasnt outsourcing that aroused the political passions of the day. It was the in-sourcing of cheaper labor fleeing disturbed conditions in Europe while American industry expanded through foreign capital inflows and cheap European labor. Inflamed passions riled the traditionalAmerican political parties, leading to the view that the extant Party structure no longer reflected the needs ofAmerican voters. To respond to these passions effectively, however required political leadership.
The split in the Whig party over slavery irrupted in Ripon, Wisconsin in 1854 culminating in the formation of the Republican Party and the early emergence of Abraham Lincoln as a national politician. In 1856, the Republicans unsuccessfully ran a Presidential candidate, General John Fremont. The die was cast for the struggle over the Union. While Lincoln lost his seat in Congress, he became a growing force in the new Republican Party through speeches and press coverage. His famed debates with Senator Stephen Douglas in the Illinois senatorial contest of 1858 increased his national prominence.
In a democratic society, Politics often reflects the passion rather than the insight of voters. Consequently, the true leadership quality of a candidate is frequently obscured until after the votes are counted. It is a danger that the Founders recognized, but never were able to totally circumvent. Rational politics begins with a more careful assessment of both abilities and plans laid out by the candidates. The endgame is measured by electoral success.
The Republican Party was very clever. It needed mass and in order to gain sway over a larger portion of the voters, it allied itself with the Know-Nothings (in spite of their nativism) as well as other parties (e.g. the Free Soilers) that did not share many Republican views on other issues. With the breakdown of political amity in Washington, the election of 1860 was the quintessential fragmenting experience for America. Lincoln became President, but he but did not represent a majority of voters. He also didnot disavowed some of the more extreme nativist sentiments of the Know Nothings. He was a thoughtful politician who didnt want to make enemies. He won by focusing on what he stood for and ignored extremist views of his own allies. He won in the electoral college where it counted, letting ambiguity rule over extremist views of his allies. In 1861, his leadership gifts allowed him to take each of his principal rivals for the Presidency into his cabinet. He was a living realization of the old Mafia shibboleth about keeping ones friends close but ones enemies even closer.
Nativism and Immigration in the Current Campaign
This campaign illustrates what can happen to more traditional politics in a time of great economic dislocation. Trump expresses a kind of nave nativism in his tortured presentation of Muslims migrating into America masking the entrance of potential Jihadists. Even when called out for his nativism, he identifies Islam with terrorism, slipping away from a more careful and nuanced delineation that is needed between a religion and terrorism.
Great leadership could make that distinction, but itt appears Trump is not interested or not capable of drawing a fine line between the two. He appeals to more base sentiments. He relishes his nativism as if it really pointed to solutions for America as a whole. Similarly, he espouses a modern form of America First, jettisoning more than a century of American tradition to be a banner for liberty and the bearer of the torch of freedom internationally. He disdains European allies as weak and unable to carry out their mutual defense burdens with the United States. He even goes so far as to praise the leadership of Americas former Cold War enemy. His slogan make America great again, is devoid of any practical content. He waves the flag, but is unclear what his flag stands for. Careless phrases and potentially divisive sloganeering are his daily script. Who can sit under his flag today in America: the disgruntled; those who seem to have fared less well in our rapidly globalizing economy; those who feel theyhave been disadvantaged by Americas attempt to right its blighted racial history. Were he to be elected, it is unclear what his policies would embrace. His tax and spending plans are as mysterious as his unrevealed tax returns. He promises nothing to our modern-day Know Nothings.What about his opponent
Mrs. Clinton seems to have a program for every claimed ailment in America. She evidently believes that by changing the law or the administration of the law she has a fix for every minority. On the economics front, it is a return to Keynesian spending but ignores the fundamental forces that promote growth: incentives to invest in both physical and human capital. This may be a winning political strategy, but it is an economics strategy that can only lead to disaster. Without growth, even the current commitments of our Federal system cannot be supported.
Her most well known economist advocate, Larry Summers, has recently written about the necessity for the Democratic Party to pay attention to measures that will improve our growth rate. That said, one is not sure that anyone in the Democratic Party is listening or even recognizes the difference between Keynesian spending and curing the disincentives that militate against revived economic growth. Nine tenths of the iceberg is beneath the water. Without growth, even when you cant see how it is going to occur, the Titanic of Federal Expenditures will overwhelm us all in the next two decades. Democrats tend to think of Big Government as the equalizer for the disadvantaged, but fail to see the conflict with proper incentives for economic growth.
Big Government has neither achieved the sought for equality or the economic growth that are cardinal elements in an enlightened Democratic view of contemporary economic problems. Clinton bashes Wall Street, setting up the straw man that Wall Street banks are the enemy of the people while running away from the inferences that the Clinton foundation trades access for donations. A plan for all problems is not a plan. A plan means choosing between competing alternatives while paying attention to the national budget constraint. A program to fix everything provides a rhetorical excuse to fix nothing. The great irony of the 2016 campaign is that it has become a contest between knowing nothing and getting nothing important done.
The present contest fits a sad historical pattern of America in the middle years of the 19th century. We have seen it before. Our inability to reach a political settlement between North and South resulted in the worst casualties of any war in our history. It left a legacy of disenfranchisement and ultimately an attempt to make Government provide what economic progress had not.
What is the likely outcome of Nothing vs. Everything A failure to deal with the root causes of slowing economic growth and diminished opportunity. Blame replaces insight, but blame doesnt cure. It just provides a rhetorical excuse for empty-headed policy making. We have heard this music before. It is not the sound of a lively march into the future. It is a dirge that memorializes our failures. Every band and every parade needs a leader, not just followers. What the election of 2016 represents is a massive leadership deficit, a turn to the past and a very clouded future. A modern day Lincoln we do not have,
The disorganized crime of this election is the disorganized politics of its two candidates and its two disheveled Parties. Despite our need, another Lincoln is not waiting in the wings. Neither Nothing nor Everything will work. Its time for a new Ripon for the Republicans. Its time for the Democrats to stop Ripping Off the tax paying electorate by promising both bread and circuses to its sliced and diced voting minorities. Leadership is what we badly need and do not have.
The Upside of the Downside
The election is a bitter pill for Americans looking to end the dissonance and hoping for a government that does what it can and should while recognizing the limits that Big Government presents. If, as is likely, the Democrats not only win the White House but recapture the Senate, many things will change, not all of them beneficial to a resumption of growth or the defeat of excessive inequality. In fact, low growth really means even less equalitarian outcomes are on the horizon. Rapid growth is the best weapon against poverty.
The downside of a Republican defeat is the likely hood of larger tax burdens on the rich, on corporate profits, the collapse the Trans Pacific Trade Agreement and the strong likelihood of an activist Supreme Court that further unbalances our politics. But surely, after themassive defeat thatseems to be likely, there will be strong forces to re-make the Republican partyto end its flirtation with nativism—and to develop a comprehensive program of tax reform.
Above all else, defeated Republicans should look for a new Ripon based upon competitive and free markets, free trade, muscular internationalism and constitutional restraints on the actions of the Federal Reserve. The Republican Party has to open its doors to all races and religions by stressing its desire for equal access not equal outcomes. The incentive to improve is the sine qua non of rapideconomic growth. Republicans need to march away from their own cronyism and open the tent. They must not be afraid to deal with environmental or infrastructure problems. They need to reaffirm their faith and support of free, competitive markets here and within the economies of their trading powers. Above all, they need to constantly renew their focus on creating the right incentives for human capital and physical capital improvements. Their narrative must shift from the condemnation of certain minorities toa re-assertion that America welcomes those who can contribute to its citizens well being. Not every great idea or innovation is American, but an American economy free of the vast constraints now imposed and now projected can provide the bountiful harvest needed to satisfy our many residents. Its time to go back to work.
Ripon revisited cannot come any too soon. Maybe the new slogan should be A Positive Program for American Progress. A great deal can change from January 2017 toNovember 2020. Its time for vision and great leadership. If necessity is indeed the mother of invention, it is time to realize how necessary it is to create a new, progressive American conservatism open to all and focused on all. On to Ripon II.
Brexit and its unknown consequences first dragged down equity markets in an unexpected and largely unpredicted way. This happened because markets had not correctly forecast the Leave vote. But reason can dominate fear over time. Markets now seem to want to take back those losses. Indeed, the early polls gave the markets a misdirection feint, and now, when the situation seems less threatening, at least in the present, markets are trying to shine light through the fog. Still, Leave has won and Remain has lost. It is time to think through possible outcomes from this vote. To do this, however, it is worthwhile to understand the true interests of the principals, the EU and the UK. To put one in the right frame of mind, it pays to think through the following:
Why did the voters of the UK deem it preferable to leave rather than remain1
Why didnt the polls and the other prognosticators (including several quite knowledgeable British politicians) see the risks that Leave could pose 2
Is there a deeper meaning in the lack of a massively supportive Remain vote
In our view, many in the UK feel estranged both from their own leaders and from the Brussels Bureaucrats who make rules that have significant consequences for individuals in the UK without any direct accountability to British voters. When you think about the issue of remote decision-making and a lack of direct accountability, many citizens of the EU actually feel the same way. The EU administrators have chosen what is right for Europeans, but the voters in those countries are very distanced from these decisions. This is politics by imposition.
This is a problem for many countries within the EU. As decision- making has been elevated away from local communities, to countries and from countries to a supranational authority, remoteness and a lack of accountability trouble the average citizen all over the EU. It is no different in the US. Poor outcomes from Government sponsored efforts to change how people and firms behave, coupled to the pathetic performance of Government institutions to raise up the poor, creates broad based cynicism about what Government can really do. The enemy is not some stranger. It is us, in the words of Pogo, from many years ago.3
Governments have constricted the choice space of many firms, households and individuals through restrictions on their freedom of movement; their choices of profession or business activities; through regulations on what and how they may produce, and where production can take place. Indeed, even on the very process of production. We have restrictions on what clean water is to look like and taste like, but no follow-up on deviations from the production of clean water—until a disaster has occurred. Taking control of local decisions means the local decision makers essentially abstain from their control and audit functions.
Government bureaucrats all over the world have decided that the best is what they say is best. Legislators have been cajoled by pseudo science into passing legislation permitting and prohibiting all sorts of activities and then creating monstrous administrative bureaucracies to implement legislation that is often vague and self- contradictory. It is the distance from the rule-making body to the citizen and a citizens lack of review that clutters the free choice space.
Think of the old, but troubled area of zoning. It used to be a totally local affair. Today, it involves a massive regulatory establishment that places localities under constraints with regard to what is permitted even within local zones. Then, think about the huge cross border (national border) movement that disturbs the internal economic and political equilibrium in many countries. Brexit is the first revolt certainly not the last.
The individual has limits on the constraints on his behavior that he or she is willing endure for a broader social purpose. It was one thing to produce legislation. It is another to leave over the administration of that passed legislation to Administrators and Regulators who are typically far beyond the reach of the individual voter. Watching the regulatory upsurge is like watching a snake swallowing a pig.
I am very much a student of the man many call the greatest Liberal in history, Edmund Burke. Burke stood 30 years in Parliament fighting over zealous” reformers who didnt think carefully about the consequences of their “reforms”. He stood against the Crown and the vast majority in Parliament who were urging war rather than conciliation with the American Colonies. Today, we know the outcome was highly positive for America, but Americas growth was not to the benefit of England until well into the 19th century. It took the Souths defeat by the North to clear the air between the US and the UK and for each to enjoy fully expanded trade between their two nations.
Trumps campaign is a great danger to international equilibrium, both because of his unthoughtful proposals but also from the hysteria he seeks to create. Sanders was also a danger. The loquacious appeal that Sanders made to voters to revolt against Wall Street was both misleading and dangerous. A public platform for Socialist nonsense can do great damage, particularly when there is no one else on the platform to contradict infantile economics. Sanders is not just a fool. He is a dangerous fool. His proposals amount to a strong effort to subvert economic growth. Wall Street may well be a greedy environment. It is not a cause of slow growth.
Kill growth and you kill the very mechanism that has made capitalism the greatest anti-poverty weapon the world has ever known. Either Sanders doesn’t really know the true enemy (poverty) or he is just another in a long line of muckrakers whose muck is in their eyes. They are blinded by continual, invidious comparisons between successful and rich people and the poor people who are left out of the increasing bounty of a growing economy. The rants of such social critics make good press copy but increased obscurantism. The crowd is led away from common sense and toward a belief that further regulations will address their fundamental disenchantment with their status. Nothing could be further from the truth.
Regarding regulation, the EU went even further. It coupled the inabilities of nations to secure their borders with increased cross border terrorism. The unwanted terrorist properly documented is free to travel within the EU under the Schengen Agreement. What worked perhaps a decade ago before the Islamic Revolt is no longer acceptable security in many countries. One should be thoughtful about the similarity of complaints in the US and in Europe over immigration.
Throughout the entire history of mankind, people have chosen their friends and their neighbors. Tribalism must have served some function in the progress of human history. When they are now told they cannot object to a new neighbor, it seems as if they are being asked to accept what is strange or foreign to them. They are compelled to accept a new neighbor who may choose to work for less than they do in their own trade. They are thus threatened. Brexit should be seen for what it is. It is a revolt against distant authority over which the British voter had little recourse. The local village is striking back. How people voted on Brexit was graphically illustrated by the voting pattern across the wide geographic span of the UK.
How voters chose was partly a function of the age of the voter. Younger people, equipped with more human capital and less bogged down with the expenses of young families voted to Remain. Older and voters perhaps less endowed with human capital often said No.
In the context of rather unpredicted results in our Presidential primaries or even the quixotic voting indications in a country like Australia, the case can be made that there is growing concern in many essentially democratic countries that Government, is the problem as President Reagan once said. More severe critics simply argue, Government has failed.
The alleged failures include growing income inequality; the appearance that some voices count more than the voices of others; frustrations over immigration coupled to a perceived lack of upward mobility; fears that those who are working might not be able to continue in their good jobs, while those not working might not find suitable employment now or in the future.
One hears globalization on the lips of the forlorn as well as in the voices of leaders who wish to take the fight against globalization and greater economic and political integration into personal political capital. In short, globalization is now the new dirty word of national politics. Keep them out and make sure we get whats rightly ours!
This is not a new cry. We have had riots against machines and cheap imports before. We have heaped blame on newly arrived immigrants who were willing to do physical labor much more cheaply than the existing workforce. The rant against globalization has been around for a very long time. It doesnt mean migration is bad. It does mean that it can be disturbing, particularly to those with lower skills.
At each stage of the worlds integration of trade and finance, some rent holders are inevitably going to lose their presently secure positions while new beneficiaries arise to take advantage of that integration. One can think about the dominance of brand, when one or two brands squeeze out many suppliers in a particular market. Such a process creates many complaints of the losers even though consumers may experience more variety and lower prices. In the early days of Wal-Marts expansion around the country, there were countless complaints that local business could no longer compete. Smaller firms that had supplied similar but not identical services failed because consumers liked the scope of Wal-marts offerings and the prices at which they were available. There are the examples of wounded American steel producers who vigorously complain when imports of cheaper Chinese steel hit the American market. Lesson: both consumers and producers can be turned into dissatisfied voters because their traditional venues of production and distribution are disturbed. When the noise from both sides of the aisle rises loud enough and focuses on a single cause (even if incorrect), passions can be inflamed and voter upheaval is likely to result.
Furthermore, there is the so-called network effect, offered up by social media. Everyone is connected, so one mans beef, is anothers stimulus. Individuals find that their fears are not just their own. There are others out in the ether of the network that are also fearful. Their fears may be different, but that they are fearful is a common ground and provides comfort to separate discontents.
A final point about the inherent confusion of citizens in a rapidly integrating world is the essential unpredictability of their reactions. Look at the just concluded American Presidential primary campaigns. Who could have predicted that an independent socialist who caucuses with Democrats but is an independent, would do so well in the Democratic primaries, running on an ideology that has proven to be a distinct disaster in so many countries Yet Bernie Sanders drew in the young—in large numbers—and the discontented. He crossed older age-determined voting patterns. He drew large amounts of contributions based on small individual donations. That story is yet to be well understood. At the same time, a very rich and raucous political voice that treads daily on traditional political niceties won the popular vote on the Republican side. Trumps outcries were so offensive to some Republicans that they repudiated him and will not support his candidacy. Then there are the more obvious complaints from minority groups and women. Yet, in some polls, Trump is not running distinctly far behind Clinton. That ought to tell us that traditional political prediction models may be truly misleading going forward.
Finally, try a simple thought experiment. Look at a nominally successful growth story like China, albeit slowing as it is today, and ask, what would a massive, free political campaign show if the question were, whom do you want to run the Government of China: the Chinese Communist Party or a number of freely electable parties with divergent views of a proper democratic setting Not that there is going to be such an election in the future, but one might ask how would such a vote turn out Looking around the world, I think you get a clear answer. There would be supporters of both the CCP and supporters of every other party that put a candidate in the field. But it is not clear that a plurality would vote for the non-communist parties, even though we in the West would like to believe that a party that brooks no independent thought could never be a majority party!
Why wouldnt all people choose freedom over dictated choice Because with Freedom, comes uncertainty! Uncertainty is painful in markets. It is discomforting to many in the electorate. We cant be sure of the outcome. All we know is that in a democratic society, we are free to change our minds and change the political leaders who will govern policy. But elections and governance feature the same possibility: Uncertainty. The content of the policies we vote for may not be what we expected and there are always unintended consequences of policies that are chosen.
If you think of the Brexit vote, you get a clear insight into what representative government truly means. In the UK, the voters were offered a choice to move away from known uncertainties and known benefit structures. They cast their vote for unknown unknowns.4 What they will get may be far different from what they expected.
It is clear however that the vote sign signifies that there is a large measure of dissatisfaction in how life is experienced today in the UK as a member of the EU. The EU became a target for that dissatisfaction even though now there will be considerable uncertainty as to who wins and who loses. To get a good result, there has to be a willingness of the voting population to give up what they know and hope that what they dont know will be better.
One cannot imagine such a vote actually taking place in China now or for decades into the future. Freedom to choose means freedom to change and change is not costless. The cost is that one can never be sure if the political structure to which one is accustomed, could be radically changed tomorrow. Democratic States are loud and noisy and we should remember Brexit because these states are not always unchanging, rock solid masses of a single political opinion or insight. The thought experiment tells us a lot.
The Chinese get restricted choice but certainty of political outcome. If they are uncertain, it is over whether that outcome can ever be changed and it would seem that broadly speaking, they dont think that it can, otherwise the clamor for change would be far more widespread. Yet, there is evidence of the level and extent of their discontent. Look at the massive capital outflow that China has been facing recently. Chinese savers are voting with their feet, and the bureaucrats in Beijing are worried about that. Chinese are worried that the future in China could turn out to be far different than the recent present.
Interpreting Markets and the BREXIT vote. The Unknown Unknown suddenly popped up and dismantled our previously held certainties. Equity and bond markets first went into a tizzy. Despite their recovery, in recent days, markets are nowlikely to be quite volatile in the future as the geopolitical fog into which we have now plunged may not soon lift.
We have no particular insight as to how the Europeans (now badly kicked in the shins) will react to their rejection. One thought is they now have to contend with the possibility that other nations within the EU will also try to escape. There is talk of that in the Netherlands and Denmark and Italy. The French and the Germans wont want that to happen and may decide to punish the UK, but that is a strategy fraught with nastiness on both sides.
There is also a leadership crisis in the UK with dissenters (Remainers) in both the Conservative and Labor parties. Affection and disgust for the EU and all it stood for was not a partisan affair. There were Leavers and Remainers in both parties. The English political system now confronts a sitting Prime Minister who has notified the public of his intent to resign in three months. So not only is direction in question, but who the captain of the ship leaving the EU will be is open.
Speculation on what the EU will do is dominated by fears that other EU members wish to depart the present political and administrative vision that dominates the bureaucracy in Brussels. The French-German alliance that is the keystone of the EU will take considerable pressure to remain the foundations of the EU.
Each of these unknown unknowns, and unknown knowns create uncertainty. Economic growth is likely to be retarded as business investment slows. The Goldman Sachs forecast for the UK has reduced 2016 growth (reduced by 0.5% to 1.5%) and 2017 growth (from 1.8% to 0.2%), lowering GDP by 2% over the next two years. Goldman also expects the BOE to reduce their policy rate by the July MPC meeting. All in all, GS is predicting a technical recession in FH 2017. Corporate leaders dont yet know how to plan for this kind of an uncertain political and economic environment. Added to the uncertainty, is the US Presidential campaign is soon to get underway in full stride after the (foregone) conclusion of the two political conventions. Will US Trade policy be restructured since both presumptive candidates are calling for reworking the present TPP agreement Blaming the foreigner and foreign trade has become the currency of the realm in both the UK and in the US.
The forthcoming negotiations between the UK and the EU will be a highlight of the developing scenario, except of course at this point we dont know who will become Prime Minister when Cameron steps down. Nor do we really know what the key members (Germany and France) will do when the UK finally sits down to negotiate its exit.
As Henry Kissinger pointed out in a recent Wall Street Op Ed, the UK and Germany are quite important to each other with regard to trade and with regard to NATO foreign policy.5 There is both opportunity and potential pitfalls. Whether their respective leadership will focus on what is jointly important to each or whether the EU will turn to a punishment scenario depends critically on political leadership. Little will be gained from the punishment scenario, but there is considerable fear in the EU that a weak reprimand of the UKs exit may prompt other restive countries in the EU to seek their own exits. Never has political leadership been more important.
- The voting analysis is just beginning See http://www.theguardian.com/politics/ng-interactive/2016/jun/23/eu-referendum-live-results-and-analysis [↩]
- The NY Times reported that in fact 15 out of 35 surveys showed exit while the remaining 17 showed remain. Clearly, there was a large division of opinion that was shifting on a daily basis. Perhaps in light of the collapse in the price of equities, the question is why did markets fail to take into account the non-trivial possibility that Remain would fail Maybe this was a case of market player not being willing to face the uncertainty that an Exit vote would imply [↩]
- I have seen the enemy. It is us. [↩]
- Former Secretary of Defense, Rumsfeld, was quoted as saying, Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.
- Henry Kissinger, Out of the Brexit Turmoil: Opportunity, WSJ 6/28/2016 [↩]
It is amazing how often politicians misleadingly cite the Founding Fathers to advocate their own parochial positions. It is as if they have either not read or not understood the dilemma faced by the writers of our Constitution prior to and after its adoption. The Constitution is an inherently contradictory document. Perhaps, that is its most unusual virtue. Contradictory might strike some as an unfair characterization of a truly remarkable political achievement, but consider the problem: how can parochial and national interests be reconciled in a single national state
One can highlight the contradiction by reference to how the Founding Fathers answered the problem posed by Montesquieu with regard to governance in a democratic Republic. Montesquieu cited the dominating interest of the majority that could lord over the rights of the minorities as the primary defect of early Republics. His view, largely accepted by the Founding Fathers, posed an intellectual as well as a political challenge in arguing for passage of the Constitution.
Majoritarian dominance on domestic policy had often resulted in irreconcilable conflict that shattered the commonality of purpose of a democratic nation-state. The Federalists answered that critique by claiming that with 13 separate sovereign states, the likelihood of a dominating majority that could tyrannize over the minority views would be unlikely, because it would require the majority to prevail in a majority of the sovereign states. That might have been true if issues were strictly internal. It clearly is not the case when the dangers to a Republic emanate from abroad. It is also likely that the growth of the State, particularly in the 20th and 21st centuries, has created so many separate minority interests that a national election demands a slice and dice approach that negates articulating a well defined national Interest. The current campaign has highlighted the absence of an articulated overriding national interest, while each candidate slices and dices their parochial visions to create a majority win.
Historically, matters of national defense or foreign policy were clearly relegated not to the sovereign states but to the Presidency, subsequently ratified by a majority of national representatives. Most of the time that distinction allowed the US to achieve a seemingly definitive internal policy. A significant exception was the issue of slavery. The Founding Fathers chose to ignore slavery in the hopes that it would die a natural death over time. Unfortunately, their denial didnt work and slavery had to be killed on the battlefields of the Civil War. It had become an insuperable obstacle to the continuation of the Union.
Lincoln foresaw the problem in his losing 1858 campaign against Douglas. He went on to become the Republican nominee in 1860 and was elected because a strong minority, third party arose to divide the Electoral College, making Lincoln a minority President. Lincolns greatness as President emerged through his relentless drive to preserve the Union in spite of the secession of the slave states. His ability to focus on a strictly national issue enabled him to slowly overcome the various sectarian interests in the North. His term in office was never quiet. It was quite unruly as he coped with divisions even within his own cabinet as well as between the various abolitionist minorities within the Congress.1
Success in creating a true national interest that could override sectional or parochial interests often eluded later Presidents, the most evident of which was Wilsons notable failure after Versailles to include the United States in the League of Nations despite his own authorship. Subsequent national commitments, such as Viet Nam or Iraq have exposed that contradiction more than once. Defining a true national interest except during true national emergencies has been exceedingly difficult given our fractionated citizenry.
Perhaps the most significant override of sectional and parochial interests came in the four-term Presidency of FDR during the Great Depression. One might generalize this occurrence to suggest that only when the threat to the nation is sufficiently large can a truly national interest prevail over the suppurating sores of factional domestic interests.
This leads us to consider the implications of the current election and the presumptive nomination of two candidates who seem to evoke excessive dislike by the electorate. The Clinton-Trump election will be a raucous exhibit of our constitutional contradiction once again. Low growth, prospective budgetary crises in the future, and a continuing military campaign against Jihadi terrorism, notwithstanding, there are still insufficient threats to weld together a truly national interest policy agenda. That will create a policy-making dilemma of epic proportions. It may even create a breakdown of both major parties and the creation of a viable third party, as it did more than 162 years ago.2 The current election campaign seems excessively disjointed from the two major parties traditional platforms. The divisions are sufficiently serious as to give rise to a serious possibility of a third party once again.3
Historically, third parties have not prospered in America because they often are built around rather narrow ideological interests. Such parties are unable to play the dice and slice politics necessary for a majority electoral vote. This time, however, the presumptive nominee of the Republican Party is displaying a sharp break with traditional Republican views on the Budget, Welfare, Taxation, International Trade and Foreign Policy. Trumps success is seemingly built by his appeal to hysteria, fear among working class voters over jobs and an apparent willingness to disdain the support of women and minorities. It has led to a revolt among current Republican Party officials that is broad and likely to grow. If, in fact, the Republican Party loses both chambers and the Presidency, the party will either unify along more traditional lines or that the traditionalist faction will re-emerge as a new party that can appeal to conservative Democrats, Libertarians and (insulted) minorities. Perhaps that will constitute the healing of American politics that will allow our system to confront its current challenges
The gridlock that has emerged during the Obama administration is not exactly the failure, that political soothsayers have claimed. The failure of the Republican Party to disown and disable Obamacare, suggests that large sections of the voting public do indeed want some sort of national health care program. The difficulty is that wanting and paying are two, distinct issues. Similar considerations apply to reforming Social Security. Furthermore, paying for it, involves two rather distinct views of taxation and its consequences.
As the cost of these current programs accelerates, whoever succeeds in November will have to deal with an ensuing budget deficit likely to grow over time.4 Some economists do believe that the source of the low growth pattern of recent years is the excessive growth of the Regulatory State that inhibits small business and tends to cartelize various industries among big business that can cope with the cost of regulation. Whether the market will force an address to budget deficits early in a new Administration is not yet clear, given the desultory state of the world economy. However, one can certainly hypothesize a set of conditions that will force the budget issue into primacy. Rising wage costs, possible inflationary expectations and/or growth accelerating in the emerging markets and China could produce much higher long term interest rates and create a budgetary nightmare for the incoming Administration whatever its party colors.
The Federal Reserve has recently embarked upon considerations of the world economy as an excuse for keeping interest rates abnormally low. Low growth overseas has allowed the FOMC to vacillate, but domestic conditions could put the so-called Bond Vigilantes back on their horses. Rising long term interest rates will play havoc with the Federal budget, particularly if the US low growth performance persists. The Democratic Partys recurrent preoccupation with deflation could be rattled if actual inflation begins to emerge. Claims of deflation will then quickly turn to cries of stagflation that can create a division in the ranks of the Democratic Party.
The constitutional contradiction to which we have pointed in the actual practice of American politics could then be transformed into a national issue under appropriate conditions. Then, the pressure will grow to create a new party or radically transform the old parties. The American genius of responding to significant challenge may once again emerge, but it is unlikely to be a subtle or quiet transformation.
- Doris Kearns Goodwin documents those divisions in her Team of Rivals, as did Gore Vidals Lincoln. The conventional view is that Lincoln was the ablest” lawyer in a cabinet of lawyers. He managed to outlawyer them all! [↩]
- The modern Republican Party emerged in 1854, running its first candidate in 1856 (Fremont), who lost. Four years later, Lincoln won in a minority election with three separate national parties running candidates. [↩]
- See our post “Political Disaster as Opportunity [↩]
- Underlying these spending issues, as well as the apparently neglected equipment replacement and modernization costs ofour national defense, is the apparent low growth situation that pervades recent economic history. While one candidate for the Republican nomination put out a 4% growth program, the public didnt respond to it and Jeb Bush dropped out of the race [↩]
If you were hoping that Americas Leadership Deficit would end this November, you are going to be sadly disappointed. If the Republican debates didnt destroy your hopes for meaningful change, it is highly unlikely you will find your enthusiasm lifted by watching the Democratic debates.
Last night, I decided to tune turn off a reasonably competitive basketball game to glance at the latest Clinton-Sanders soap opera. I could stand only about 15 minutes. The debate was moderated by PBS anchors no doubt to emphasize that this year the US can (and likely will) elect its first female President. Will that remedy our leadership deficit la mme chose.
When I tuned in, the two candidates were resorting to their typical sophisms that characterize American political discourse. Theyshowed no specific remedies other than throwing more government resources at the problems, and advocating higher taxes on the “rich,” to pay for it. The rhetoric of treating American social failures was predictable. The solution set ofeachcandidate was truly null and void.
Sanders excoriated the truly lamentable statistics on the number of Americans now in prison—which he claimed without any substantiating evidence— now exceeds the totals imprisoned in China with a population five times greater. (Hard to know his source of information on the Chinese penal system). Forgetting the hyperbole, it is true that at the end of 2014, over 1.5 million people were held in American prisons. It is sad, never mind the Chinese comparison.
The candidates focused on the composition of the male prison population that includes some37% black males, 33% Hispanic males and 22% white males. No gender equality found here! Moreover, and this was the real point of the debate—drawing in minority voters—the most obvious remedy was overlooked, and their attention centered almost exclusively on cleaning up American police force methods and police profiling. They ignored the fact that more than 50% of those incarcerated got into prison via convictions for drug offenses. The obvious solution—repealing our current drug laws—was never mentioned. Instead, our criminal justice system was condemned for carrying out the laws that legislators such as these two have passed or allowed to remain on the books.
Neither candidate —at least during the few minutes I could stand to watch—took up George Shultzs recent Op Ed piece in the WSJ (“We reduced smoking, why not drug use” 2/9/2016) that focused on the abject failure of our War on Drugs. Doing that should have been obvious, but these two candidates werent really interested in effective solutions. They were interested in pandering tovoters. Since non-whites aresome 70% of the prison population, it was obvious that discrimination against non-white drug offenders was rampant. With low skills, poor education, deficient family structures, are we surprised that the lucrative earning power of dealing drugs by unemployed and unskilled males is compelling Neither candidate questioned whether the real problem in America was punishing people for their sumptuary preferences and the large economic rents these productsgenerate to those willing to risk catering to that demand. Instead, what was recommended was teaching policemen to be unprejudiced in their law enforcement efforts and making the racial composition of the police forces mirror the racial composition of the neighborhoods they policed.
We dont have to exonerate police who have frequently used racially focused tactics, including unofficial racial profiling, when they arrest suspects. Even with explicit withdrawal of racial profiling, policemen know the stats and their arrest behavior is understandable. The problem is not profiling: the problem is our drug laws are out of step with the population and our War on Drugs tends to arrest the foot soldiers of drug distribution. Regarding the nature of the social ills that our society suffers, tastes have changed. Marijuana is not viewed as a scourge. Many states allow its production and use and some its distribution, taxing the drug that they cannot control with police and prisons.
What cries out inany rational assessment of Americas drug demand is that we need to reduce the gains from dealing drugs. That means ending criminal prosecutions for these offenses and making our police instruments of civilian safety, not alocal drug gendarms. As for usage of harder drugs, Schultz cited the clear and well-documented drop in smoking that stemmed from well-documented research coupling smoking to serious diseases. What counts is to reduce the demand for dangerous substances, and not creating a black market in drugs that draws in the uneducated and low-skilled populations who distribute such products. Ironic and sad it is that two legislators, now Presidential seekers, dont focus on the obvious changes in our Federal criminal statutes that would reduce the scope of the problem. Neither do they put forward a solid program for instructing our people about the consequences of (hard) drug use. Americans growing use of drugs is not dealt with. Instead, Americas police, who try to enforce a much-outdated set of laws, are the whipping boys to advance these candidates electoral interests.
Perhaps the most cynical attack was from Sanders. He advocates more education in prison; re-training of prisoners; early release and continuing government transfer payments to low-income individuals. Any one who looks at the rather unfavorable statistics of retraining or improving education has got to feel that simply throwing more Federal money at the problems of low income, low skill people, is not going to be more effective than it has been to date. That is political escapism, at best, political pandering at worst. What it is not is real political leadership. That deficit is not going away soon!
In modern society, those that are poorly educated, poorly socialized and vastly unemployed gravitate unsurprisingly to benefitting fromthe rent streams that our faulty laws produce. What is needed is to reduce those rewards. That would berelatively easy, if not a sexy political pander job. Is that not obvious
Why dont the candidates deal directly with the problem and advocate realistic changes in our drug laws The answer is that would require real political leadership. The candidates, if they are expert in anything, are masters of pandering to the voters and offering more bread and circuses. Sadly, Americas leadership deficit is not about to end.
- I was pleasantly surprised by the positive reaction I received to my blog yesterday1. For those of you who wrote in, thank you. That said, I wanted to rewrite it, but didnt quite get to it. I would have changed the title to read Failed Leadership: organizing disorganized crimes.” Why As I have thought more about the woeful state of the world with its wide-spread absence of good leadership, it seemed to me that when important institutions and organizations suffer from a leadership deficit, what might have otherwise been disorganized crimes, are more likely to become organized criminal activity.
- At first blush, this might seem paradoxical, but common sense and thoughtful reflection provide good evidence for the proposition. A family that suffers from inadequate parenting creates risks for its children. The data on this are overwhelming, and most of us know this from our own life experiences. Mentoring a child is terribly important to the childs progress. Professor Gary Becker, who made his life work the study of Human Capital2in its various dimensions, gave us a model to understand this process. Parents invest in their children by educating them and leading them with good role models. In general, more investment in those children leads those children to higher levels of human capital, and as a consequence, the choices and opportunities open to children with higher human capital are better and last longer. They tend to finish high school with greater frequency. They go on to college in greater numbers. They get better jobs and their lifetime incomes are substantially higherthan those with significantly lesshuman capital. They live longer and as a group, they experience less crime and far fewer penal outcomes.
- You can reverse that causal sequence in a poorly parented family. An absent parent is not a leader. A single parent has greater leadership responsibilities and often, single parents cant carry the load of being both a breadwinner and the leader in the family at the same time. In a family with poor leadership, children are first disorganized and then they become self-organized by leadership outside the family. Some of those leaders outside the family provide unhealthy lessons for these children. Mentoring by outside “parents” can involve joining a street gang or becoming attracted to the drug trade. It often leads to poor schooling experience and an ultimate drop out. This is why the absence of leadership is critical. Deficient leadership can convert disorganized lives into organized crimes.
- The inference we draw from this sketch is that rules organize human activity and that social organization works best with good leadership. Whoever leads generally follows some schema of rules but not all rules are good rules. Bad rules are often based on an uninformed prejudice, not credible facts. Some prejudices become the fuel for outrageous displays of Xenophobia. Xenophobia lies at the root of the so-called Immigration Crisis. Is it a crisis, or is there substantial misperception, deliberate or otherwise
- No area of American (and European) life seems more fractious than the issue of immigration. Xenophobia also runs through European politics. Sadly, it is infecting the American Presidential campaign.3. In our view, the immigration crisis, is largely based on bad data or in the worst cases, no data at all supportive of such xenophobic contentions. In the era of Big Data, it is shocking to see those claiming to be leaders, basing their outrage and their solutions, on such an uninformed basis. It is particularly shameful for those who claim to be true conservatives or libertarians to fall prey to these claimed facts that are simply not true.
- Poor leaders thrive on phony data, on facts that are untrue, or on lies that are politically expedient and dangerous to the body politic. Have we learned nothing from the horrors of World War II as well as all the other ethnic cleansing stories in recent years from countries led by awful officials Repeated intensively, the big lie, becomes the factual basis of a terrifying cure. What is the Mexican problem, after all—a revival of the Jewish Question We should know better and we should demand that our potential leaders immediately stop pandering to big lies. It will take courage for these candidates to get their head wrapped around the real facts and our own American historybut isnt courage one of the vital qualities that we look for in our leaders To lead well, they must begin with the truth.
- As I have listened to these debates from alleged conservatives, I could not help but think, not only is the US suffering from a huge leadership deficit, but campaigns such as we now observe, extend and intensify that leadership deficit. Over the long run a leadership deficit will bring more trouble to this country than a fiscal deficit. We can cure the latter even in a modest amount of time. We reduce the size of government and much of the fiscal deficit will disappear as economic growth takes place. All of this is so well known by those who wish to know that it scarcely seems necessary to point it out. Yet, immigration, legal or illegal, has become the whipping boy of slow wage growth, increased crime and an expanding fiscal deficit. Resort to such factually empty explanations only underscores our growing leadership deficit. What about immigration, then Is it or is it not a serious problem
- This country was built on immigrants. Immigration, particularly the heavy immigration of the later half of the 19th and early 20th century was positive for growth, positive for the growth of real wages and positive for the existing residents and surely positive for the immigrants. Those were years of mighty economic expansion, but note, there was no welfare state. That is a big difference as compared to today. The economics of that period is well understood by economists. Yet, some economists think that our immigration problems today are different. They are and they arent. Lets carefully understand where differences between our 19th and early 20th century experience and our current circumstances in the 21st Century lie, particularly since the 2007-2008 economic crisis.
- The late Professor Milton Friedman made the issue of immigration totally clear years ago to Americans of every political stripe. As frequently happens, however, lesser men and women didnt understand or distorted what he said. Worse, they misquoted him and turned his powerful logic upside down. Heres the long and the short of it.4
- The existence of the Welfare State changes the game. A legal immigrant by definition lowers welfare of those already here! An illegal immigrant raises welfare! Thats a paradox that seems at first blush difficult to understand. Clearly the Presidential candidates dont understand it. But, it is actually quite simple as Professor Friedman explained. It all depends upon who gets the welfare!
- Suppose that all legal immigrants are entitled to the welfare benefits that existing citizens possess once they enter the U.S. And, for the simplest case, imagine that the sum total of all these welfare benefits amount to a trilliondollars (of course this is just a simple illustration). Further,imagine that there are no new immigrants in the first instance. Then, the per capita welfare benefit of a trillion dollars is divided over the existing population (excluding immigrants). Now suppose new immigrants (legal and illegal) appear and are entitled to the same benefits By definition, the rest of us suffer a diminution of welfare. Of course, our leaders can easilyincrease the welfare budget and laythe expenseon future generations. In either case, our welfare declines.
- Now suppose there isonly illegal immigration An illegal immigrant cant qualify for benefits (when the rules are enforced). Thus, if a million illegals enter, the work force expands, (more GDP) but no more is spent on welfare than before they came. Whoops! Welfare for the rest of us goes up, because output goes up with no extra Federal Expense! Wheres the rub Simple: if you dont have a welfare state, then immigration (of either kind) is beneficial because output rises. Professor Friedman concluded that as long as we have a welfare state (which we are not ready to truncate), legal immigration can reduce our welfare, but illegal immigration, where welfare benefits are strictly enforced and illegals dont qualify, is welfare increasing! Ok, Candidates! Wrap your heads around that one!
- The Candidates have it exactly wrong. They should all either agree to abolish the welfare state—in which case legal and illegal immigration benefit the rest of us—or they should permit only illegal immigration and enforce the law!
- There is a moral to this story. If we have a rule, we need to enforce it. If we have a welfare state that we are unwilling to give up, then enforcing rules is very important. Politicians who find ways to leave rules unenforced, walk our citizens into a trap. But that is what we observe from our politicians who have huge leadership deficits.
- At the end of the day, most of what comes out of the so-called immigration crisis, is gibberish in the best case, awful pandering or the Big Lie in the worst of cases. And, dont forget, at the base of this pile of dung, there are politicians who have failed at their most basic task: to be leaders. World history offers literally endless examples of States gone sour when their leaders failed to properly lead their citizens. Our founding fathers knew this, and they were deeply worried about how to prevent the future destruction of the Republic they had delivered to the world.
- They started from the Articles of Confederation that had produced a weak national government and left the citizens of the new Republic as potential victims of foreign powers who would meet a fractured and weakened country. They labored in Philadelphia to produce a founding document that would answer the observed defects of prior, failed Republics. Together with the first 10 Amendments (The Bill of Rights, demanded by the Anti-Federalists as remedies to absolute power by the State), they produced a remarkable document. The Constitution has flexed and swayed and adapted to the exigencies of a rapidly growing country, suffused with immigrants who were building the New World. Implicit in this construction, however, was the need for thoughtful, courageous and diligent leaders. We were very lucky to have survived the early years of the Republic.
- You know the rest of the story. Fourscore and seven years ago. To advance the cause of liberty and freedom, we found ourselves in a great Civil War that tested our principles and our leaders. Fortunately, when we needed them most, we did not have a leadership deficit and we entered the 20th century as a surging, growing, expanding, young nation ready to take on the world. We did it with masses of immigrants who arrived here looking for a better life than the one they had left. Those immigrants did very well, and so did the residents they joined. They were a powerful force for building America. We absorbed them, and they helped to transform America. Germans, Irish, East European Jews, Italians and a multitude of other nations and cultures. They took the jobs that those already here were not willing to take; they raised their children, they learned our language and our customs and they rose or fell strictly on their own efforts. There were no requirements for entry into the U.S. until we again got that immigration crisis mentality and started to restrict who could come here and under what conditions in the 1920’s. In the years after World War I, we had a series of business cycles that disrupted and changed America. Immigrants were blamed again. We began restricting entry.
- We are now living in difficult times when many more demands are placed on Government to help the disadvantaged, and create a security blanket for those already here. When the immigrants come today, they dont face thenarrower government of the 19th and early 20thcenturies. They see an expanded Welfare State and by neglecting the rules, we have gotten into the habit of passing out the benefits to newcomers as well asexisting residents. That makes some people mad, but their causal reasoning is terribly faulty. We dont seem to have leaders willing to tell them the truth. Instead, we have politicians who want to use the immigration crisis as a path to office and power.
- We have seen this movie before. Its time to shut it down. We have to stop confusing the so-called immigration crisiswith the problems that stem directly from the Welfare State we have created and the ‘leaders’ who run that state. Lets face it. We dont have an immigration crisis. We have a leadership crisis. Its time to put the leadership crisis to bed.
- DISORGANIZED AND ORGANIZED CRIMES: failed leadership and its consequences [↩]
- Gary Becker,Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, UChicago Press [↩]
- The Immigration Boogeyman: Separating Fact from Fiction, at wharton.upenn.edu, 9/30/2015 [↩]
- What Milton Friedman really said about immigration,Classically Liberal, May 8 2008 at freestudents.blogspot.com/2008/02/what-milton-friedman-really-said.html [↩]