it’s useful to understand how the systemworks and the key turning point is avery remarkable period it’s WilliamJennings Bryan William Jennings Bryan in1896 was a fairly young 36 year oldNebraskan who got up in the middle ofthat particular I guess you could sayAssociation of then the Democratic Partyand it was the one of thoseextraordinary events which turnspolitics around the Democratic Party wasa highly conservative party prior tothem and essentially it’s characterizedby presidents who thought that the leastgovernment the best it was essentiallylazy fair he got up Bryan got up andmade this extraordinary speech which isnow historical and then cross of goldspeech about the American worker and theAmerican farmer of being crucified on across of gold called being the goldstandard and that propelled himstrangely enough into the head of theparty he got nominated he never becamepresident because he kept losingyou think he went three times and failedeach time but left a very majorindelible stamp which led to WoodrowWilson and all the way through toFranklin Roosevelt and I you know Ilooked at Bryan as the root of FranklinRoosevelt’s New Dealthat’s fascinating cause I think mostpeople that part of it’s often beingobscured in history it’s again one ofthe reasons why this book is sointeresting is it throws up thesecreating the existing tax pattern [M]yview is that that’s the right thing todo provided you funded the result ofthat is a bit of variance is going to bea very large federal budget deficit andfederal budget deficits invariably downthe road out qualification in genderinflation at the moment we have thetightest labor market I have ever seenthat is the number of job openings issignificantly greater than the number ofpeople looking for work and that mustinevitably begin to push on wages italways has and always will but it’salways delayedand my told you that is something hasgot to give and that’s I don’t knowwhere it all comes out well your blyatcomes out with inflation well theproblem basically is if we do nothingwe’re going to end up with probablystagflation which is an inflation rate Ishould say it’s partly stagnation whichas mentioned was very significantlyslowed output per our output per hournow which used to be 3/4 percent peryearback in the early post-world war iiperiod it’s now well under 1% whichbrings me very nicely on to the nextquestion from the audience which issomeone has asked for you to share yourthoughts about president Trump’s recentcriticism of Jay Powell and the Fed Ilike him to answer that with all theanswers I think it’s very short-sightedthe issue of the Federal Reserve isrequired by the Congress to maintain astable currency which means no inflationno deflation and the policy they’reembarked upon at the moment seems verysense it will be caused as I mentionedbefore the wage rates are beginning toshow signs of moving and you cannot havereal wages rising without it ultimatelythink if they continue on the road wouldthat we willgoing Pretlow I should say that thepresident wants to go we’re gonna end upwith a very significant budget deficitand very significant inflationultimately not not in the short termthat it takes a whilepolitical system doesn’t care aboutdeficits what they do care about isinflation when the inflation rate was 4%in the 1970sPresident Nixon imposed wage and pricecontrols were nowhere near there yet butit’s wrong our wayif we are though heading towards apotential rise in inflation rise in debtat a time of growing populism do youthink there’s a chance that the FederalReserve will lose independence I’mtrying to follow you which I mean wellcheating is a chance at Congress or thepresident will try to control theFederal Reserve or take away some of itsindependence I really don’t know one ofthose forecasting aspects which isdifficult another question from theaudience as the Federal Reserve’s reachgrows do you think that leged ofoversight will become necessary againthat’s above my pay gradeor do you think that Congress shouldexert more control or oversight of theFed I think the Federal Reserve is bystatuteremember the Federal Reserve Act of 1913which essentially did something veryunusual we had a long period wediscussed this in the book in whichfinancial crises kept surging up andthen collapsing which is a typical cyclewithwhich went on to a decade upon decadeand the populism that evolved as aconsequence of this looked atever-increasing lead to find a way tosolve the problem of why the crisesoccur and the general solution was ifthe economy is accelerating and it’srunning out of gold species and you’regoing to get into a situation in whichthey are always going to be crises sowhat the Federal Reserve Act actuallydid was very very interesting itsubstituted the sovereign credit of theUnited States for gold and then if no westayed on the gold standard technicallythat was a major change in Americanfinancial history and debate the basicconsequence of that is that FederalReserve determines what in effect is asensible level of money supply expansionand one of the reasons the FederalReserve Act was actually passed was toprevent the political system whenbecoming so very dominant in determiningmonetary policy which is exactly whatyou don’t want to happen and I mean Iwas you know eighteen and a half yearsas you mentioned getting letters fromeverybody who won very littlecongressmen or otherwise who wants it’sa the issue of and don’t worry about theissue of inflationand nobody was well when I would begetting people who say we want lowerinterest rates I got tons of that mail Inever got a single letter saying pleaseraise them and it tells you that thereare some views which go against realityand reality always wins but if you lookat that the history of populism some ofthe worst populism you got was in the1970s some of the work that the angerthat was generated by inflation in thenineteen seventies were roiled right theway through the political systemeventually leads to the rise of ofRonald Reagan because and who comes inand then you know crushes crushesinflation so inflation is is not asolution to populism it drivers it makespeople very angry do you think thecurrent populism is going to get worsechairman Greenspan well let’s rememberwhere populism comes from it’s I don’tknow whether this is a generalproposition but I find it’s difficult toget around the answer that when theinflation rate or that must theinflation ratings as much as the levelsof income slow down when you getproductivity for example which is thatthe major determinant of income and youget productivity slowing down you get amuch lower increase in JD GDP and grossdomestic income and wages and salariesalike and there’s a great deal of uneasein the population which is saying thingsare not good somebody come help us andsomebody necessarily on the white horsebecause comes up and says I’ve got a wayto handle this and if you look at LatinAmerica the history ofgoodly part of Latin America is aremarkable amount of people like Peroncoming in and all the subsequent postWorld War two governments in LatinAmerica and it’s really quiteunfortunate and surprising it’s not thatthey try it and it fails which it doesalways it always fails but it doesn’teliminate the desire to do it in otherwords of Peru Brazil and like they’veall undergone very significant periodsof huge inflation and collapsing andnobody wears a lessonyeah well we’re almost out of time butthere’s one other question from theaudience which I think cuts to the heartof a lot of what we’re talking aboutright now which is this does the successof capitalism come at the cost ofenormous wealth disparity is it possibleto have this vision of creativedestruction of capitalism of dynamismwithout having massive income inequalityI doubt it and I doubt it for the reasonI said earlier namely that we’ve got theproblem that human beings don’t changebut technology as it advances and it’sembodied in the growth of an economy isalways growing and when you havesomething that’s growing and the otherthing that’s flat you get obviouslyinequality and the politicalconsequences of that can I qualify thatjust a little bit I mean there – thereare different sorts of inequalitythere’s a there’s the inequality thatyou get from suddenly like Bill Gates orSteve Jobs producing a fantastic newinnovation and idea which means thatthey reap a lot of rewardfor that but which means that society asa whole gets richer and better off andthere’s the inequality that comes fromcrony capitalism from people usingpolitical influence blocking innovationand and sucking out and do rewards forthemselves so I think we need to beabsolutely very very sensitive to thewrong source of inequality whilecelebrating the right sort of inequalityand also had that Joseph Schumpeter thatgreat man once said that the the natureof capitalist progress doesn’t consistof Queens having a million or twomillion pairs of silk stockings itconsists of what used to be theprerogative of a queen being spreadthroughout the whole of society silkstockings you know that become somethingthat go from being very rare and onlyworn by Queens to being worn by allsorts of people all over the place soit’s the nature of capitalism is tocreate new innovations which are atfirst rare but spread throughout thewhole of society and everybody uses soif you think think of the the iPhone orsomething like that some that wassomething that was incredibly rare and afew people had those sort ofcommunications vais now everybodycarries them around all the time and thegreat capitalists the Bill Gates theSteve Jobs don’t get rich by selling onereally really good iPhone to one purposeand they get into selling their productsto all sorts of people so there’s asense in which there is no realtrade-off between very rich peoplegetting very rich and the rest ofsociety getting getting better off youknow they only get rich because theycreate things which everybody mostpeople want to have and buy you knowit’s it’s it’s it’s the Silk Stockingquestion really I you know I accept thatqualifications let me just say one thingyou going back to his mentioning hereWalter Isaacson’s book on innovation hewrote that book and I remember readingit and my final conclusion was and Iasked him why is it that most innovationis in the United Statesit’s American and he said you know I’venever thought of that I don’t think hewas aware of the fact that he here andall these innovationto developers and they all turned out tobe American which leads me to concludethat there’s something fundamental inthe psyche of American history in theAmerican public which creates it it’snot an accident which is why I won in itwho too often so which is what you ofcourse you sought to explain the book soif you had a chance to take this bookinto the Oval Office today or into theTreasury and give it to the Presidentand say this is a history of Americahere are the key lessons what is a topbit of advice that you would give to theadministration today to keep capitalismgrowing in America well you know we dohave we haven’t mentioned that there’san underlying financial problem which wehaven’t addressed in the best way todiscuss it as when I first became awareof itI would haven’t been looking at data andaccidentally created a chart whichshowed the relationship betweenentitlements spending which is socialbenefits in the rest of the world andgross domestic savings and I’m from 1965to the current period the ratio ofentitlements to the sum of those two isflat as a percent of gross domesticproduct which means or at least impliesthat one is crowding out the other andwhen you look at the individuals theyare actually looking different andenable one goes up the other goes downand so forth and I think that’ssuggestively the fact that there issomething in the sense of when we saythat entitlements by which a rising andthe baby boom generation is essentiallycrowding out gross domestic savingswhich in turn coupled withthe borrowing from abroad is how wefinance our gross domestic investmentwhich is the key factor in productivityright so entitlement reform well I lookforward to a tweet about entitlementreform I look forward to this veryimportant book being part of thediscussion about how to keep AmericaAmerica’s economy great and growing butin the meantime thank you both very muchindeed for sharing your thoughts it isindeed a fascinating book and quite anachievement and best of luck in gettingthis very important message out so thankyou both very much indeed[Applause]
Modern Monetary Inevitabilities
ALEXANDRIA, VIRGINIA – In a recent Project Syndicate commentary, James K. Galbraith of the University of Texas at Austin defendsModern Monetary Theory and corrects some misunderstandings about the relationships among MMT, federal deficits, and central-bank independence. But Galbraith does not explore what is perhaps the most important issue of all: the political conditions needed to implement MMT effectively.
MMT owes its newfound relevance to the fact that deflation, rather than inflation, is becoming central banks’ main concern. For a high-debt, high-deficit economy like the United States, deflation is an especially serious threat, because it delays consumption and increases debtor anxiety. Consumers forego major purchases on the assumption that future prices will be lower. Homeowners with mortgages cut back their spending when they see home prices falling and the equity in their homes declining. These cutbacks worry the Federal Reserve, because they add to deflationary pressures and could trigger deeper spending cuts, stock-market declines, and widespread deleveraging.
The Fed’s inability so far to reach its 2% target for annual inflation suggests that it lacks the means to overcome persistent disinflationary forces in the economy. These forces include increased US market concentration, which diminishes aggregate demand by weakening employee bargaining power and increasing income inequality; population aging; inadequate investment in infrastructure and climate-change abatement; and technology-driven labor displacement. Making matters worse, US political gridlock assures continued commitment to economically exhausted strategies such as tax cuts for the rich, at the expense of investment in education and other sources of long-term growth. These conditions cry out for significant changes in US government spending and tax policies.
MMT is seen as a way to accomplish the needed changes. It holds that a government can spend as much as it wants if it borrows in its own currency and its central bank can buy as much of the government’s debt as necessary – as long as doing so doesn’t generate unacceptably high inflation. Both tax-cut advocates and supporters of public investment find little not to like.
MMT has been roundly criticized by economists across the political spectrum, from Kenneth Rogoff and Lawrence H. Summers of Harvard University to Paul Krugman of the City University of New York. All contend that it is a political argument masquerading as economic theory. But Galbraith and Ray Dalio of Bridgewater Associates see MMT differently. Dalio argues that MMT is real and, more to the point, it is an inevitable policy step in historically recurring debt-cycle downturns.
In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is
- to cut overnight official rates to stimulate credit and investment expansion. The second (MP2)
- is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and
- proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.
Achieving political agreement on what to finance and how is essential for implementing MP3 effectively. In a financial meltdown or other national emergency, political unity and prompt action are essential. Unity requires a strong consensus on what should be financed. Speed requires the existence of a trusted institution to direct the spending.
In the early 1940s, when the US entered World War II and winning the war became the government’s top priority, the Fed entered full MP3 mode. It not only set short- and long-term rates for Treasury bonds, but also bought as much government debt as necessary to finance the war effort. MP3 was possible because the war united the country politically and gave the Roosevelt administration near-authoritarian rule over the economy.
The core weakness of MP3/MMT advocacy is the absence of an explanation of how to achieve political unity on what to finance and how. This absence is inexcusable. Total US debt (as a share of GDP) is approaching levels associated with past financial meltdowns, and that doesn’t even account for the hidden debts associated with infrastructure maintenance, rising sea levels, and unfunded pensions. For the reasons Dalio lays out, a US debt crisis requiring some form of MP3 is all but inevitable.
The crucial question that any effort to achieve political unity must answer is what constitutes justifiable spending. Alexander Hamilton, America’s first Secretary of the Treasury, offered an answer in 1781: “A national debt,” he wrote, “if it is not excessive will be to us a national blessing.” A government’s debt is “excessive” if it cannot be repaid because its proceeds were spent in ways that did not increase national wealth enough to do so. Debt resulting from tax cuts that are spent on mega-yachts would almost certainly be excessive; debt incurred to improve educational outcomes, maintain essential infrastructure, or address climate change would probably not be. Accordingly, it will be easier to achieve political unity if MP3 proceeds are spent on priorities such as education, infrastructure, or climate.
The political test for justifying MP3-financed government spending, is clear: Will future generations judge that the borrowing was not “excessive”? Most Americans born well after WWII would say that the debt incurred to win that war was justified, as was the debt that financed the construction of the Interstate Highway System, which literally paved the way for stronger growth.
As the 1930s and 1940s show, MP3 is a natural component of government responses to major debt downturns and the political crises they trigger. We know much more about what contributes to economic growth and sustainability than we did in the first half of the twentieth century. To speed recovery from the next downturn, we need to identify now the types of spending that will contribute most to sustainable recovery and that in hindsight will be viewed as most justified by future Americans. We need also to design the institutions that will direct the spending. These are the keys to building the political unity that MMT requires. To know what to finance and how, future Americans can show us the way; we need only put ourselves in their shoes.
Russia and Cuba Could End the Venezuelan Catastrophe. Seriously.
In Castrospeak, when something is said not to happen, it likely will. The island produces very little and has little money to spend on imports. As of last week, eggs, chicken and pork are being rationed, as the country struggles to cope with shortages of staple foods. If the situation persists, the regime may face real protest for the first time since the Soviet Union collapsed in 1991. Russia might prefer to concentrate its efforts on saving Cuba, rather than focusing on it and Venezuela simultaneously.
.. Three reasons are generally cited to explain Russia’s growing involvement in Venezuela.
- First, to protect and perhaps one day recover the more than 60 billion dollars different Venezuelan entities owe various Russian banks and companies. A post-Maduro government may not recognize these debts, many of which were not approved by Venezuela’s National Assembly.
- Second, Mr. Putin is picking his nose at the United States by being a nuisance in its backyard, in a tit-for-tat response to what Moscow considers NATO’s interference in Eastern European affairs.
Lastly, and perhaps crucially, Russia hopes to project power in a region the American government considers its sphere of influence. Russia has maintained close ties with Havana for 60 years, dating back to when Nikita Khrushchev was leader of the Soviet Union. By extending loans to Argentina, Bolivia and Ecuador, Mr. Putin is trying to expand Russia’s influence in the region.
Washington has a strong hand to play, but it must do so wisely. If in fact Mr. Trump wants to do away with both governments in Cuba and Venezuela, or if he is really after regime change only in Cuba, this will lead to failure and invariably anger the country’s democratic partners in Latin America and Europe. With the exceptions of Nicaragua, Bolivia, Uruguay and Mexico, the region wants Mr. Maduro out. But it will not support Mr. Trump in any effort to dislodge the Cuban dictatorship.
Instead, Mr. Trump should continue to press Cuba to join its efforts to remove Mr. Maduro. The country can play a crucial role by affording him a safe haven and by participating in the transitional arrangements that would ensure a democratic transition: freeing all political prisoners and allowing all opposition leaders to run for office in free, fair and internationally supervised elections, re-establishing freedom of the press and association, gradually and peacefully reducing its footprint in Venezuela. Mr. Trump should engage Russia to persuade the Cubans to do so. And he should remember that after all, there is no carrot and stick approach without a carrot.
Two Capitalists Worry About Capitalism’s Future
James Dimon and Ray Dalio are among the most successful capitalists in the U.S. today. So when they worry aloud about the future of capitalism, it’s worth listening.
“I believe that all good things taken to an extreme become self-destructive and that everything must evolve or die. This is now true for capitalism,” Mr. Dalio, founder of hedge-fund manager Bridgewater Associates, writes on LinkedIn.
Mr. Dimon, chief executive of JPMorgan Chase & Co., writes in his annual letter to shareholders: “In many ways and without ill intent, many companies were able to avoid—almost literally drive by—many of society’s problems.”
Captains of industry have always opined on the issues of the day. Still, these latest missives are noteworthy for three reasons.
- First, the authors: Mr. Dalio anticipated the financial crisis; his systematic management and investment style has made Bridgewater the world’s largest hedge-fund manager. Mr. Dimon is arguably the country’s most successful banker, having steered J.P. Morgan clear of the subprime mortgage disaster to become the country’s most valuable financial institution.
- Second, the timing: They are speaking out at a time when the free-market capitalism that has served them so well is questioned by many Americans, including prominent Democrats.
- Third, the content. Mr. Dalio and Mr. Dimon love capitalism and aren’t apologizing for it. But they recognize the system isn’t working for everyone, and they have ideas for fixing it, some of which might require rich people like themselves to pay more tax. Yet they fear the federal government is hamstrung by intensifying partisanship. So they are putting their money and reputations where their mouths are by speaking out, backing local initiatives and hoping like-minded business leaders join them. In effect, they are breathing life into the shrinking nonpartisan center.
In an interview, Mr. Dalio says many business leaders “don’t want to get into the argument. I can understand that. I say to myself, Should I get in? I do think if everyone keeps quiet, we’re going to continue to behave as we’re behaving, and it’s going to tear us apart.”
Mr. Dalio’s essay was inspired by a longstanding interest in the parallels between the 1930s and the present:
- the growth of debt and
- the relative impotence of central banks, the
- widening of inequality and the
- rise of populism.
Capitalism, he says, is now in a “self-reinforcing feedback loop”:
- companies develop labor-saving technologies that enrich their owners while displacing workers.
- The haves spend more on child care and education, widening their lead over the have-nots,
- whose predicament is compounded by underperforming schools,
- the decline of two-parent families, and
- rising incarceration.
Mr. Dalio thinks inequality has fueled populism and ideological extremism, which he fears means capitalism will be either abandoned or left unreformed.
But, like Mr. Dalio, he worries partisanship has crippled the country’s ability to enact basic reforms that elevate economic growth and strengthen the safety net, such as
- improving high schools and community colleges’ provision of useful skills,
- more cost-effective health care,
- faster infrastructure approval,
- more skilled immigrants coupled with legalizing illegal immigrants, and
- requiring fewer licenses to start a small businesses.
“Can you imagine me saying, I can do a better job for the Chase customer if I don’t get involved in details, the products, the services, the prices, how we treat people, how call centers work?” Mr. Dimon asks in an interview. “Policy has too often become disconnected from the analytics; we got slogans instead. It’s driving people apart.”
There’s a chicken-and-egg problem with these well-intentioned calls for nonpartisan problem solving: It requires a level of nonpartisanship that doesn’t exist; otherwise the problems would, presumably, have been solved.
If business leaders can’t persuade with words, they may by example. Mr. Dalio and his wife, Barbara, have donated $100 million to the state of Connecticut, to be matched by the state and other philanthropists, to create a $300 million partnership devoted to reducing dropout rates and promoting entrepreneurship in underserved schools and communities.
For its part, J.P. Morgan has under Mr. Dimon combined commercial and philanthropic resources to finance affordable housing, small business and infrastructure and job training in Detroit, announced $600 million in workforce development grants since 2013, and boosted salaries for lower-end employees. Mr. Dimon, in his shareholder letter, called on fellow CEOs to “take positions on public policy that they think are good for the country.”
It doesn’t always work. The Business Roundtable, which Mr. Dimon chairs, successfully pressed Congress and President Trump for lower business taxes, but unsuccessfully for more infrastructure and legalizing illegal immigrants. Says Mr. Dimon: “We should give it the best shot we’ve got.”