Central Banks Are the Fall Guys

For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.

CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been  the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.

In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election. When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.

This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.

Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.

But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.

Second, since the crisis, central banks have repeatedly fallen short of their inflation targets. While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools. Any hint of further easing seems to encourage financial risk-taking more than real investment. Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.

Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark. That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they

  1. failed to prevent the financial crisis and paid no price; they are
  2. failing now to meet their mandate; and they
  3. seem to know no more than the rest of us about the economy.

It is no surprise that populist leaders would be among the most incensed at central banks. Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.

Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.

A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower. In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.

Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future. Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.

What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy. Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.

Ann Coulter: Trump will just have been a joke presidency who scammed the American people, amused the populists for a while

Trump will just have been a joke presidency who scammed the American people, amused the populists for a while, but he’ll have no legacy whatsoever” if yields on the issue, columnist Ann Coulter told the Daily Caller in a podcast.

 

.. David Bossie: Attacks on Trump ignore all the things he’s accomplished.

Marc Thiessen: Trump called Obama the ‘founder of ISIS,’ why would he make the same mistake?

 

 

The Weekly Standard is gone. But the future of conservatism is bright.

With the closing of the Weekly Standard, an influential publication that many considered a respectable, center-right, alternative to more pro-Trump outlets such as Breitbart and Fox News, and the continued ostracization of “Never-Trump conservatives” from the Republican Party, many wonder who, if anyone, will carry the torch of prudential conservatism while President Trump occupies the White House.

Just last week, a group of prominent intellectuals and political figures including Maryland Gov.

  • Larry Hogan,
  • Bill Kristol and
  • David Frum

gathered for a conference at Washington’s Niskanen Center titled “Starting Over: The Center-Right After Trump.” The underlying assumption of the conference: It’s time for moderate conservatives to regroup and reconsider their relationship to a Republican Party that has been overrun by populists, nationalists and demagogues.

As someone who runs an organization founded at the time of the Iraq War with the aim of changing the direction of American conservatism, I can sympathize with their efforts, but I fundamentally disagree on their diagnosis of the problem. In the long run, both the conservative movement and Republican Party will be better off for having had Donald Trump shatter the combination of neoconservatism and Reaganism that held the political right captive and blinded since the end of the Cold War. Ronald Reagan was the statesman that America needed for his time, but the clock had run out on many of his policy prescriptions and it took a “hurricane,” as the Niskanen Center conference described it, like Trump to wake up conservatism — and America.

.. I need not provide an exhaustive list, as Time magazine’s October cover story by Sam Tanenhaus, “How Trumpism Will Outlast Trump,” did a good job surveying the landscape that includes thinkers such as

  1. Julius Krein at American Affairs,
  2. Daniel McCarthy at Modern Age,
  3. Yuval Levin at National Affairs,
  4. Michael Anton at Hillsdale College and
  5. David Azerrad at the Heritage Foundation.

.. What does this new program for the right entail if not a return to the neoconservatism of the George W. Bush years? It’s time for Republicans to embrace a “Main Street” conservatism that prizes solidarity over individualism and culture over efficiency. America needs a foreign policy that serves our vital national interests by securing the safety and happiness of the American people. This means putting an end to the regime-change and nation-building experiments that have devastated Afghanistan, Iraq, Syria and Libya; ending U.S. support for the Saudis’ involvement in the Yemeni civil war; reclaiming our national sovereignty; and prioritizing diplomacy over intervention

..  On domestic issues, especially when our country is bitterly divided along partisan lines, we must decentralize both political and economic power to bring it closer to the people. This would allow local and state governments greater flexibility to address their unique problems, letting California be California and Texas be Texas.

.. Regarding the problem of economic concentration, conservatives should stand up to the crony capitalism that has protected big banks and defense contractors, and revisit antitrust enforcement to prevent corporate monopolies from stamping out competition and entrepreneurship. And finally, conservatives should adopt a cultural platform with a renewed focus on civic education; implementing economic and social policies that strengthen families, such as paid family leave and an increase in the child tax credit; promoting vocational training as a dignified alternative to traditional universities; and working toward an immigration policy that better balances economic and cultural concerns.

.. When searching for a prudential conservatism today, it’s best to ignore the advice of those who brought us the Iraq War, the hollowing out of our industrial base and our broken immigration system. The future belongs to conservatives who take Middle America seriously and actually care about the systemic problems that drove the Rust Belt into the arms of then-candidate Trump.

 

 

From Economic Crisis to World War III

The response to the 2008 economic crisis has relied far too much on monetary stimulus, in the form of quantitative easing and near-zero (or even negative) interest rates, and included far too little structural reform. This means that the next crisis could come soon – and pave the way for a large-scale military conflict.

BEIJING – The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.

The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.

But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.

Policymakers have utterly failed to pursue such reforms, despite promising to do so. Instead, they have remained preoccupied with politics. From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment.

The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated to its most efficient uses. Instead, it raised global asset prices to levels even higher than those prevailing before 2008.

In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. The price-to-earnings (CAPE) ratio, which measures whether stock-market prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929.

As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance to our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy.

If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war.

For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.

To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.

According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster.

This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including

  • technological disruption, a
  • record-breaking migration crisis,
  • anxiety over globalization,
  • political polarization, and
  • rising nationalism.

All are symptoms of failed policies that could turn out to be trigger points for a future crisis.

.. Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.

Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. By the logicof the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. The alternative may well be global conflagration.

This will never be normal

One of the current complaints of the Trump right concerns the treatment given to Alex Jones by Facebook, which has temporarily banned the Internet radio host for videos that violated “community standards.” According to Lou Dobbs of the Fox Business Network, “freedom of speech [is] under attack.” Fox News television personality Tucker Carlson has also come to Jones’s defense, saying sarcastically, “I know we’re supposed to think Alex Jones is way more radical than, like, Bill Maher.”

.. Well, yes, that is precisely what we should think. At various points, Jones has promoted the belief that

  • 9/11 was an “inside job,” that
  • Hillary Clinton was running a child sex ring out of a pizzeria, that
  • NASA had built a child slave colony on Mars in order to harvest blood and bone marrow, that
  • the Oklahoma City bombing,
  • the Boston Marathon bombing and the
  • Sandy Hook school shooting were government “false flag” operations, that
  • some shooting survivors were “crisis actors,” that
  • “globalists” are intent on committing genocide and that
  • Democrats are on the verge of launching a second civil war.

.. President Trump has made a great many unpleasant things unavoidable. He has appeared on Jones’s Infowars program and assured Jones that his “reputation is amazing.” The White House briefly gave Infowars a press credential. And Donald Trump Jr. has retweeted Infowars stories.

.. It represents not only a certain approach to political strategy but also a certain approach to morality, pressed to its logical extreme. Trump is not a dogmatist; he is an egotist. He judges others not by their convictions, or even by their hold on reality, but by their fidelity to his person. It is a form of identity politics in which all that counts is one man’s identity. So Sen. John McCain (R-Ariz.), being faithless to Trump, is an enemy. And the revealer of child slavery on Mars is a friend.

.. Remember when a white man in Boston, spouting Trump slogans, beat up a homeless man outside a subway station? Trump responded: “People who are following me are very passionate. They love this country and they want this country to be great again.”

.. Remember when a Trump supporter punched an African American man at a rally? Trump said that his follower “obviously loves his country.”

.. Remember when the alt-right provoked violence in Charlottesville? Trump pronounced some white nationalists to be “very fine people.”

.. The president has a nearly impossible time criticizing his fans, even when they are guilty of hate crimes and violence. In Trump’s own private creed, they are absolved of guilt by their loyalty to him.

.. This commitment

  • transforms their cruelty into the proof of passion; their
  • prejudice into an expression of patriotism; their
  • lawlessness into the embrace of his higher order. ‘

Just ask former Phoenix area

  • sheriff Joe Arpaio, pardoned after his abuse of Hispanic migrants. Or
  • Oregon cattle ranchers Dwight Hammond and his son Steven, pardoned after defying the federal government.

All were justified and sanctified by their devotion to Trump.

.. Any political movement is defined not just by what it aspires to, but also by whom it excludes. And the alt-right, the Alex Jones right, the white nationalist right know that they are fully included in Trump’s definition of his movement.

.. They know that their loyalty to him has been rewarded with a legitimacy they have craved for decades. And they are full, enthusiastic partners in the Trump project — to delegitimize any source of authority and information but his own.

  • .. Genuine populists are discredited by consorting with people who accuse elites of arming for mass murder.
  • The religious right is caught in bed with a diseased, seeping moral relativism. And
  • Fox anchors come to the defense of a man who verbally defiles the graves of murdered children.

 

Nationalism Will Go Bankrupt

the supposed rebellion of “common people” against elites has not been much in evidence. Billionaires have taken over US politics under President Donald Trump; unelected professors run the “populist” Italian government; and all over the world, taxes have been slashed on the ever-rising incomes of financiers, technologists, and corporate managers.

.. Meanwhile, ordinary workers have resigned themselves to the reality that high-quality housing, education, and even health care are hopelessly beyond their reach.

.. What, then, explains the sudden dominance of nationalism? There is not much positively patriotic about the new nationalism in Italy, Britain, or even the US. Instead, the upsurge of national feeling seems largely a xenophobic phenomenon, as famously defined by the Czech-American sociologist Karl Deutsch: “A nation is a group of people linked together by a common error about their ancestry and a common dislike of their neighbors.”

  • .. Hard times –
  • low wages,
  • inequality,
  • regional deprivation, and
  • post-crisis austerity

– provoke a hunt for scapegoats, and foreigners are always a tempting target.

.. There is nothing patriotic about Trump’s belligerence against Mexican immigrants and Canadian imports, or the nativist policies of the new Italian government, or Theresa May’s most famous statement after becoming UK Prime Minister: “If you believe you are a citizen of the world, you are a citizen of nowhere. You don’t understand what citizenship means.”

.. The xenophobic effort to blame economic hardship on foreigners is doomed to failure.

.. Consider the post-crisis effort to divert popular anger about the  onto “greedy bankers.” This ultimately failed, in part because bankers have huge resources to defend themselves, which foreigners generally do not.

.. banker-bashing failed to assuage public anger mainly because attacking finance did nothing to boost wages, diminish inequality, or reverse social neglect. The same will be true of the current attacks on foreign influence, whether through immigration or trade.

.. European issues have nothing to do with the genuine political grievances that motivated a large part of the “Leave” vote. Instead, the Brexit negotiations will now dominate and distract British politics for many years, or even decades. And Britain’s nationalist confrontation with the rest of Europe will offer politicians of all parties endless excuses for failing to improve everyday life.

..  scapegoating foreign influences, whether through trade or immigration, will do nothing to lift living standards or address the sources of political discontent.

.. Successive Italian governments since the financial crisis have gradually laid the foundations for pension, labor market, and banking reforms. These changes have created the conditions for economic recovery .. but they have been politically unpopular and are now being denounced as symbols of elitist foreign oppression.

.. If the new government abandons all three reform projects, Italians can also abandon hope of economic recovery, perhaps for another decade.

.. Trump thinks his measures against imports from China, Germany, and Canada will hurt these trading partners and create American jobs. This might have been true when the US economy was suffering weak growth and deflation. But in a world of strong demand and rising inflation, German and Chinese exporters will find new markets for their products, whereas US manufacturers will struggle to replace foreign suppliers.

.. tariffs will act as a tax on American consumers, through higher prices, and on American workers, businesses, and homeowners, through rising interest rates.

 

How to Steal the Populists’ Clothes

The continued electoral success of populists in Europe, Africa, Asia, Latin America, and in the United States shows that while their policy proposals may be fanciful, their mode of conducting politics is effective. To win at the ballot box, mainstream politicians should apply three lessons that populists have mastered.

.. Rather than complaining about populist successes, established political parties should take a page from the populist playbook. Three lessons, in particular, cry out for attention.

The first lesson is to connect to the people you wish to represent by learning about them and winning their trust.

.. The complacent assumption that people will always vote along party or class lines is obsolete.

.. After a decade of economic malaise, voters are skeptical of mainstream politicians who offer rote promises of growth and improved standards of living. In the eyes of disenchanted workers, those in power have simply been feathering their own nests. Even in many of the world’s strongest economies, workers are earning less in real terms than they did ten years ago.

.. the twin threats of automation and outsourcing have made employment more precarious, and sapped workers’ bargaining power.

.. Who is to blame for this state of affairs? Those who vote for populists clearly hold establishment politicians responsible

.. Contrary to popular belief, recent research finds that technology is not the primary driver of labor’s declining share of income. Rather, the worsening plight of workers is due to

  • lost bargaining power and union density,
  • welfare-state retrenchment,
  • offshoring, and the
  • growth of the financial sector as a share of the economy.

the effective tax rates “paid by the world’s 10 biggest public companies by market capitalization in each of nine sectors” have fallen by nearly one-third since 2000, from 34% to 24%.

since 2008, personal income-tax rates across all countries have increased by 6%, on average.

Against this backdrop, the emergence of populist parties and politicians should come as no surprise. When a majority of people becomes poorer, there will be stark consequences at the ballot box. And yet, in one country after another, the political establishment has been remarkably slow to recognize this.

.. Meanwhile, the populist presidential candidate, Jair Bolsonaro, proposes giving every Brazilian a gun so they can defend themselves. To the elites, this sounds (and is) preposterous. But for Brazilians who worry about their own safety, he is at least showing that he understands their top concern.

.. Before winning the French presidency and a parliamentary majority last year, Emmanuel Macron .. sent volunteers across the country to listen to voters’ concerns.

.. populists is to use simple, intuitive messaging to signal your goals. Yes, slogans like “I’ll protect your jobs” and “Make America great again” sound simplistic. But where are the sophisticated alternatives?

.. In the United Kingdom’s Brexit referendum, the Remain campaign, phlegmatically led by then-Prime Minister David Cameron’s government, argued that leaving the European Union would result in lower GDP, lost trade, and disruption to the financial sector.

.. Such arguments completely missed what concerned most voters. By contrast, the Brexiteers promised to “take back control” of the UK’s borders and claimed – falsely – that the National Health Service would enjoy a windfall of £350 million ($490 million) per week.

.. Academics, pundits, and political, business, and civil-society leaders have been far too slow to articulate new economic and social policies that have broad-based appeal.

.. it takes a commitment of time and energy to understand the plight of the electorate and to frame solutions in a clear, simple way.

.. The third lesson from the populist playbook is to be bold.

.. people are seeking a transformational vision of the future, not slight improvements. After 30 years of pragmatism and incremental change, it is time for a new tone.

.. Recall that in 1945, Winston Churchill, having delivered victory for Britain in World War II, lost the general election.

The winner, Clement Attlee, promised what was effectively a new social contract for war-weary Britons still living under rations. His government went on to provide free universal health care, unemployment insurance, pensions, decent housing, and secure jobs in nationalized industries. And all this was done with the national debt still at 250% of GDP.