Oct.31 — Nassim Nicholas Taleb, scientific advisor at Universa Investments, discusses the factors causing global fragility, hidden liabilities in global markets, and what he sees as safe trades in the current market. He speaks with Bloomberg’s Erik Schatzker on “Bloomberg Markets.”
Before going to the White House, Donald Trump demanded that the Fed raise interest rates despite high unemployment and low inflation. Now he’s demanding rate cuts, even though the unemployment rate is much lower and inflation at least a bit higher. To be fair, there is a real economic argument for rate cuts as insurance against a possible slowdown. But it’s clear that Trump’s motives are and always have been purely political: he wanted the Fed to hurt President Obama, and now he wants it to boost his own reelection chances.
It’s not surprising, then, that Trump is also trying to stuff the Federal Reserve Board with political allies. What may seem surprising is that many of his would-be appointees, like Stephen Moore and now Judy Shelton, have long records of supporting the gold standard or something like it. This should put them at odds with his efforts to politicize the Fed. After all, one of the supposed points of a gold standard is to remove any hint of politics from monetary policy. And with gold prices rising lately, gold standard advocates should be calling for the Fed to raise rates, not lower them.
But of course both Moore and Shelton have endorsed Trump’s demand for rate cuts. This creates a dual puzzle: Why does Trump want these people, and why are they so willing to cater to his wishes?
Well, I think there’s a simple answer to both sides of the puzzle, which involves the reason some economic commentators (not sure if they deserve to be called “economists”) become goldbugs in the first place. What I’d suggest is that it usually has less to do with conviction than with cynical careerism. And this in turn means that goldbugs are, in general, the kind of people who can be counted on to do Trump’s bidding, never mind what they may have said in the past.
Let me start with what might seem like a trivial question, but which is, I believe, crucial: What does it take to build a successful career as a mainstream economist?
The truth is that it’s not at all easy. Parroting orthodox views definitely won’t do it; you have to be technically proficient, and to have a really good career you must be seen as making important new contributions — innovative ways to think about economic issues and/or innovative ways to bring data to bear on those issues. And the truth is that not many people can pull this off: it requires a combination of deep knowledge of previous research and the ability to think differently. You have to both understand the box and be able to think outside it.
I don’t want to romanticize the mainstream economics profession, which suffers from multiple sins. Male economists like me are only beginning to comprehend the depths of the profession’s sexism. There’s far too much dominance by an old-boy network of economists with PhDs from a handful of elite institutions. (And yes, I’ve been a beneficiary of these sins.) Many good ideas have been effectively blocked by ideology — even now, for example, it’s hard to publish anything with a Keynesian flavor in top journals. And there’s still an overvaluation of mathematical razzle-dazzle relative to real insight.
But even for people who can check off all the right identity boxes, climbing the ladder of success in mainstream economics is tough. And here’s the thing: for those who can’t or won’t make that climb, there are other ladders. Heterodoxy can itself be a careerist move, as long as it’s an approved, orthodox sort of heterodoxy.
Everyone loves the idea of brave, independent thinkers whose brilliant insights are rejected by a hidebound establishment, only to be vindicated in the end. And such people do exist, in economics as in other fields. Someone like Hyman Minsky, with his theory of financial instability, was, in fact, ignored by almost everyone in the mainstream until the 2008 crisis sent everyone scurrying off to read his work.
But the sad truth is that the great majority of people who reject mainstream economics do so because they don’t understand it; and a fair number of these people don’t understand it because their salary depends on their not understanding it.
Which brings me to the gold standard.
There is overwhelming consensus among professional economists that a return to the gold standard would be a bad idea. That’s not supposition: Chicago’s Booth School, which surveys a broad bipartisan group of economists on various topics, found literally zero support for the gold standard.
The events of the past dozen years have only reinforced that consensus. After all, the price of gold soared from 2007 to 2011; if gold-standard ideology had any truth to it, that would have been a harbinger of runaway inflation, and the Fed should have been raising interest rates to keep the dollar’s gold value constant. In fact, inflation never materialized, and an interest rate hike in the face of surging unemployment would have been a disaster.
Thank God we weren’t on the gold standardCreditFederal Reserve of St. Louis
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Thank God we weren’t on the gold standardCreditFederal Reserve of St. Louis
So why did gold soar? The main answer seems to be plunging returns on other assets, especially bonds, which were the product of a depressed world economy. What this means is that in practice pegging the dollar to gold would mean systematically raising interest rates when the economy slumps. Not exactly a recipe for stability.
Why, then, does goldbuggery persist? Well, some billionaires — such as Robert Mercer, also a big Trump supporter — have a thing about gold. I’m not entirely sure why, although I suspect that it’s just a plutocratic version of the Fox News syndrome — the angry old white guy ranting about big-government types inflating away his hard-earned wealth to give it away to Those People. And these billionaires give a lot of money to libertarianish think tanks that peddle gold standard derp.
Now imagine yourself as a conservative who writes about economics, but who doesn’t have the technical proficiency and originality needed to get a good job in academia, an economic policy institution like the Fed, or a serious think tank. Well, becoming a vocal gold-standard advocate opens a whole different set of doors. You’ll have a much fancier and more lucrative career, get invited to a lot more stuff, than you would if you stayed with the professional consensus.
What I’m suggesting, in other words, is that gold-standard advocacy is a lot like climate change denial: There are big personal and financial rewards for an “expert” willing to say what a few billionaires want to hear, precisely because no serious expert agrees. In the climate arena, we know that essentially all climate deniers are on the fossil-fuel take. There may be some true believers in the monetary magic of gold, but it’s hard to tell; what we do know is that prominent goldbugs do very well relative to where their careers would be if they didn’t buy into this particular area of derp.
And that, in turn, brings us back to Trump.
Why would Trump expect goldbugs to abandon their principles and back his demands to fire up the printing presses? Why is he, in fact, apparently finding it easy to get goldbugs willing to turn their backs on everything they claimed to believe?
The answer, I’d submit, is that it was never about principles in the first place. Many, perhaps most prominent goldbugs advocate a gold standard not out of conviction but out of ambition; they sold their principles a long time ago. So selling those pretend principles yet again in order to get a nice Trump-sponsored job is no big deal.
The movement’s main founder, Robert A. Mundell, wrote prolifically on the subject avant la lettre in top economics journals in the 1960s and 1970s. Mundell’s protégé at the University of Chicago, Arthur B. Laffer, did the same, then branched out to a consulting business where he put out some 50 papers per year that dilated on supply-side economics.
Archives? The Hoover Institution in California has hundreds of boxes of papers of the first journalistic supply-siders, Wall Street Journal editor Robert L. Bartley and his assistant Jude Wanniski. As for supply-side economics’ Congressional lodestar, Jack Kemp, there are more boxes on end at the Library of Congress.
I looked and looked at all this stuff, and a definition emerged clear as the sky. This was that supply-side economics favored a particular way of solving the kind of recessions we have been prone to since the founding of the Federal Reserve and the income tax, both in the year 1913. This is to stabilize the dollar and cut taxes.
This definition—stabilize money and cut taxes—was repeated so often, so uniformly, and over so much time by the original supply-siders that it became possible to identify a canonical statement, the Ur-document, the quintessential rendering of the supply-siders as to their philosophy.
This is it, from a paper Mundell wrote in 1971: “The correct policy mix is based on fiscal ease to get more production out of the economy, in combination with monetary restraint….The increased momentum of the economy provided by…a tax cut will cause a sufficient demand for credit to permit real monetary expansion at higher interest rates.”
As for details, to a one the supply-siders favored tax cuts of the marginal and capital-gains variety, and monetary stability in the form of a gold-anchored dollar.
Readers of this column can be forgiven for asking if I haven’t been repeating myself. Haven’t I availed of the above Mundell quotation in recent columns, keen to point out that supply-side economics is a policy mix of two things, stable money and marginal tax cuts?
Indeed I am repeating myself—for an all too appropriate reason.
Last week, for the umpteenth time, a major, credentialed economist wrote an article, one read far and wide, contending that supply-side economics has to do exclusively with tax cuts. There is probably no bigger economics blogger than Mark Thoma, and marginal-tax-cuts-equal-supply-side-economics is what he made his supposition in “Why the GOP Won’t Admit Supply-Side Econ Has Failed.”
You can click on the link to see Thoma go about all this, but the essential thing is as follows. There is no credible historical evidence ever produced by a scholar that has served to delink monetary issues from the core doctrine of supply-side economics. In fact, all primary evidence ever produced as to the central claims of supply-side economics has confirmed that supply-siders insisted that monetary restraint and progress toward a gold standard is as crucial as any kind of tax policy. To say otherwise is to speak in the absence of evidence.
But in current circumstances, you see how it can be so…tempting…to say that supply-side economics was only ever a policy of tax cuts. This is because the George W. Bush tax cuts—those things on the chopping block in this fiscal cliff drama—supervised a mere boomlet in the mid-2000s, and then the Great Recession after 2008. If you trash W.’s policy by calling it supply-side, then by association you can discredit the Reagan success too. Conservative economic policy: a comprehensive failure in its decades-long response to Keynes!
Go back to the record ten years ago and see if the supply-siders were unconcerned about monetary issues, as the Bush-era Fed made money as loose as it was in the 1970s. See if Robert Mundell quit on the idea of a unitary dollar-euro exchange rate and an anchor akin to gold. See if the second generation of supply-siders, the next round of journalists and Congressmen (such as Kemp trainee Rep. Paul Ryan) didn’t call out the money-printing 2000s as making the W. tax cuts nothing but a “small, ambiguous reprise” of the great tradition, as I would put it in the book, Econoclasts, which came out in 2009.
But “everyone knows” that supply-side economics’ main, if not exclusive concern was with tax cuts, and that’s good enough for Mark Thoma. Cui bono from burying the true history of the objectives of supply-side economics? Fiscal-cliff corner-cutters and their enablers, but certainly not sincere political economists trying to master our recent history for the purpose of getting our once-great economy back in good repair.
In 1900, there were two great philosophers working side by side at Harvard, William James and Josiah Royce. James was from an eminent Boston family and had all the grace, brilliance and sophistication that his class aspired to. Royce, as the historian Allen Guelzo points out, was the first major American philosopher born west of the Mississippi. His parents were Forty-Niners who moved to California but failed to find gold. He grew up in squalor, was stocky, lonely and probably knew more about despair and the brooding shadows that can come in life.
James and Royce admired and learned from each other, but their philosophies were different, too. James was pragmatic and tough-minded, looking for empirical truth. Royce was more idealistic and tender-minded, more spiritual and abstract.
They differed on the individual’s role in society. As David Lamberth of Harvard notes, James’s emphasis was on tolerance. We live in a pluralistic society and we each know only a fragment of the truth. People should give one another enough social space so they can be themselves. For Royce the good life meant tightly binding yourself to others — giving yourself away with others for the sake of a noble cause. Tolerance is not enough.
James’s influence is now enormous — deservedly so. Royce is almost entirely forgotten. And yet I would say that Royce is the philosopher we need today. In an age of division, fragmentation and isolation, Royce is the philosopher we don’t know we have. He is the philosopher of binding and connection.
Royce argued that meaningful lives are marked, above all, by loyalty. Out on the frontier, he had seen the chaos and anarchy that ensues when it’s every man for himself, when society is just a bunch of individuals searching for gain. He concluded that people make themselves miserable when they pursue nothing more than their “fleeting, capricious and insatiable” desires.
So for him the good human life meant loyalty, “the willing and practical and thoroughgoing devotion of a person to a cause.”
A person doesn’t have to invent a cause, or find it deep within herself. You are born into a world of causes, which existed before you were born and will be there after you die. You just have to become gripped by one, to give yourself away to it realizing that the cause is more important than your individual pleasure or pain.
You’re never going to find a cause if you are working in a bland office; you have to go out to where the problems are. Loyalty is not just emotion. It is action.
“The loyal man serves. That is, he does not merely follow his own impulses. He looks to his cause for guidance. This cause tells him what to do,” Royce wrote in “The Philosophy of Loyalty.”
In such a community, people submit themselves to their institution, say to a university. They discover how good it is by serving it, and they allow themselves to be formed by it. According to Royce, communities find their voice when they own their own betrayals; evil exists so we can struggle to overcome it.
Royce took his philosophy one more crucial step: Though we have our different communities, underneath there is an absolute unity to life. He believed that all separate individuals and all separate loyalties are mere fragments of a spiritual unity — an Absolute Knower, a moral truth.
That sense of an ultimate unity at the end things, shines back on us, because it means all our diverse loyalties are actually parts of the same loyalty. We all, he wrote, “seek a city out of sight.” This sense of ultimate unity, of human brotherhood and sisterhood, is what is missing in a lot of the current pessimism and divisiveness.
Royce’s philosophy is helpful with the problem we have today. How does the individual fit into the community and how does each community fit into the whole? He offered a shift in perspective. When evaluating your life, don’t ask, “How happy am I?” Ask, “How loyal am I, and to what?”
