Are Professional Economists Idiots?

That’s the view of Nassim Nicholas Taleb, Wharton MBA, mathematical finance PhD and author of Skin in the Game and The Black Swan.

Taleb, a libertarian, aims his critique of intellectuals yet idiots (IYI) broadly but particularly at the contemporary economics profession. His targets are those described by the Mises Institute:

“The professional economist is the specialist who is instrumental in designing various measures of government interference with business.”

The economics profession in the U.S. today is mostly involved in research and education that broadly investigates “market failures” or is directly engaged in public action – regulation, tax, expenditure and off budget guarantees – to manage industries and the macro-economy purportedly in the public interest. This is the opposite of laissez faire economics, political advice to a 17th century French minister to “let it be” later developed into an economic theory by the 18th century philosopher Adam Smith and popularized by 20TH century economist Milton Friedman, a libertarian and cofounder of FFE (and my advisor, twice removed). How and to what end did the economics profession evolve from a philosophy of leaving economic decisions to individuals in the marketplace with few exceptions to public economic management of the United States and global economy?

From Individual to Collective Economic Decision-making

Benjamin Franklin, considered the leading intellectual and inventor of the 18th century whose inventions are still in use today, admitted to Harvard at age 12, but instead indentured to his brother’s tannery, advised

“Tell me and I forget, teach me and I may remember, involve me and I learn”

That’s his rendering of a Confucian saying dating back thousands of years. Taleb, a Wall Street trader prior to his writing and academic career, echoes Franklin’s emphasis on direct experience, arguing that capitalism isn’t an ideology or system but a set of mutually agreeable arrangements worked out over the centuries through trial and error by market participants who bear the full consequences of their decisions.

Exiting the Constitutional Convention, Franklin, a great political theorist, when asked whether the Constitution had created a monarchy or republic replied

“a republic, if you can keep it.”

Taleb argues that if given the choice Franklin would have more accurately described the Constitution as a federation with powers over economic activity limited to promoting free trade among states. But these limits were lost more than a century later when progressive President Woodrow Wilson first created the Federal Reserve System then used entry into the war to “make the world safe for democracy” as the means to create the “modern state” managed on scientific economic principles. A half century later, focusing on the “principal –agent” problem of the modern corporation run by managers who had no “skin in the game” John Kenneth Galbraith in The New Industrial State (1967) argued for public management by an intellectual elite, replacing business experience with academic success.

From Competitive to Crony Market Capitalism and Rent-Seeking

Franklin had warned the Convention delegates that

“We must all hang together or most assuredly we will all hang separately.”

The libertarian U.S. Constitution never mentioned democracy, and principal-agent conflicts are orders of magnitude worse in the public sector. As public choice theorists have since noted, we neither hang deep state managers nor otherwise hold them accountable. Democracy may depend on the deep state as political theorist Francis Fukuyama argued in a recent Wall Street Journal article (12/20/2019), but it can’t hold it accountable, as Michael Lind argued in a subsequent Journal article. Accountability erodes with each additional layer of government as decisions are elevated from “at risk” individuals in the marketplace to private, local, state, and federal governing bodies and is virtually eliminated at international entities (e.g., the IMF and World Bank). In no case is democracy a substitute for markets because the most intolerant minority with the most to gain or lose inevitably dominates.

Market capitalism is the source of all human economic progress. Is there a sufficiently good reason for collective economic management? Adam Smith never argued in his Theory of Moral Sentiments (1759) that the invisible hand was perfect: the actual full quote favored nationalism over globalism. In The Wealth of Nations (1776) he did say:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”

same paragraph
but in the same paragraph admonished government from any attempt to do anything about it. Britain had long been what we now call a crony capitalist economy that heavily favored the political elite, which in Smith’s view further government intervention would only exacerbate.

Taleb’s “idiots” are Galbraith’s inexperienced intellectual elite economic managers and advisors who have no skin in the game. Professional economists are generally smart, rational (many ideologically dedicated ”virtue merchants”) exploiting a one sided trade, in economic jargon crony “rent seekers” – redistributing income (rents) from the generally lower income non-politically connected. (I would argue there is a minority in resistance, primarily in business schools and conservative think tanks.) It’s their statistical analysis and reasoning to justify rent seeking opportunities he often finds idiotic, faux science or scientism.

Public intervention to mitigate downside risk (as do e.g., public pension and retirement systems, housing, school and other entitlements, loan and deposit guarantees and other forms of insurance (e.g., flood) that can supposedly be financed without pain by taxing the idle rich or unlimited debt financed by money printing (Modern Monetary Theory) is a religion promising heaven without the threat of hell. Come Judgment Day when the system fails systemically, well insulated politicians and bureaucrats will subsequently label it “an extremely rare and random “Black Swan” event that nobody could have seen coming” and professional economists will join the chorus. The general public gets fleeced and market capitalism gets blamed.

Name any of sixty economic issues and presidential candidate Elizabeth Warren has a plan. The lyrics to the Beatles swan song album of a half century ago concludes “whisper words of wisdom, let it be.

Kevin Villani

—-

Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on how politicians and bureaucrats with no skin in the game caused the sub-prime lending bubble and systemic financial system failure.

Will America Vote to Drink the Kool Aid, Committing Mass Suicide?

Presidential candidates are talking about every issue except the one that matters most for America’s future: “American Exceptionalism.”

President Obama, a former professor of constitutional law, rejected the notion of American exceptionalism. Conservative writer Jonah Goldberg in Suicide of the West (2018) argues that the political abandonment of American Exceptionalism is eroding liberty, society and prosperity. Parenthetically, Taleb, Skin in the Game (2018) concludes (pg. 86) ”the west is currently in the process of committing suicide” by tolerating the intolerant. The “mass suicide” metaphor became a reality when religious cult leader Jim Jones told his followers in 1975  “I love socialism, and I’m willing to die to bring it about, but if I did, I’d take a thousand with me” which he did in Jamestown, Guyana three years later. “He wanted the world to think this was some uniform decision, that they willingly killed themselves for socialism to protest the inhumanity of capitalism” but armed guards made sure the reluctant chose the Kool Aid and exited the Johnstown dystopia for the promised socialist utopia in the next life.

Suicide of the West

Goldberg’s history of politics and human nature begins with humans first walking upright, concluding in 2017 with U.S. domestic political choices. Ideas promoted by John Locke and bequeathed by the British that the state is the servant of the people, are the core of American exceptionalism as opposed to the opposite ideas of the Frenchman Rousseau that individuals are the servant of the state, the governing principle of authoritarian socialist economies and in practice social democracies as well. What’s exceptional in the U.S. political system bequeathed by the Founders are the strict limits on federal powers in the two written documents, the Declaration of Independence and the U.S. Constitution. This is the cornerstone that allowed the many secular and religious institutions of civil society to deepen as a pre-requisite for and complement to entrepreneurial market capitalism, the source of virtually all human economic progress.

In the American version the state guarantees “life, liberty and the pursuit of happiness,” whereas the French national motto “liberty, equality, and fraternity” is an oxymoron. Individual liberty erodes at each stage as decisions are elevated from the marketplace to private, local, state, federal and ultimately international governing bodies. Competitive market capitalism’s “creative destruction” and entrepreneurial innovation produces relative winners but benefits all, whereas political favoritism comes at the expense of the typically poorer less politically favored.

The Deep State is Sovereign in a Democracy

In a recent Wall Street Journal article, political theorist Francis Fukuyama argues that “American Democracy Depends on the ‘Deep State’” run by professionals protected from politicians. Progressive President Wilson used entry into the war as the means to create the “modern” sovereign state” to which Fukuyama refers under the motto to “make the world safe for democracy,” never mentioned in the Founding documents. What took a Revolution to produce was protected only by the willingness to adhere to paper documents that Wilson basically ignored.

Individual dependence on the modern pater welfare state corrodes the institutions of civil society and inevitably leads to identity politics, tribalism and cronyism. With the state the master, many democracies evolve into one party rule, e.g., the communist “peoples’ democracy” of China, North Korea, East Germany or in capitalist countries the PRI in Mexico (in spite of a Constitution modeled after that in the U.S.) and Peronism in Argentina where the party is the master of the state. The rightist regime in Chile brought in the Chicago Boys to help implement free market reforms that produced a growth miracle, but that proved difficult to sustain as subsequent socialist governments burst that bubble.

The 2016 Presidential Election

In 2016 candidate Trump promised to drain the swamp and “end America’s endless wars” – both direct attacks on the deep state, particularly the military-industrial-congressional complex (Eisenhower’s original censored version) that manages the economy as well as foreign policy and military adventure. Reagan promised to roll back the deep state but failed. Clinton declared “the era of big government is over” but it barely paused. The Tea Party, composed of older more conservative voters tired of Republican false promises of limited government, launched a grass roots political campaign to limit government, which also failed. Once the state (or the Party of the state) is sovereign, the process has proven irreversible through political means.

That leaves the Supreme Court. Candidate Trump committed to nominating conservative Supreme Court Justices who would stay within the original intent of constitutional limits, the primary issue cited by his supporters. The abortion issue is a ruse, a litmus test for progressive precedents to trump constitutional intent.

The U.S. deep state is immune to accountability. A recent docudrama The Report tells the story of CIA torture after 911. The Agency lied to two Presidents, lied and stonewalled Congress over 8 years, violated the separation of powers and squashed the biggest seven thousand page Congressional oversight investigation in history. Only the stature of Senators Feinstein and McCain eventually got the Report released, but no one was held accountable, sending a clear signal that the deep state was immune. When President Trump alleged (later proven by the Mueller and Inspector General Reports – in spite of deep state resistance) that the intelligence community was involved in election rigging in 2016 and a subsequent coup attempt to remove him from office when that failed, Senator Schumer warned him: “Let me tell you, you take on the intelligence community, they have six ways from Sunday at getting back at you.” Impeachment is (only) one way.

The 2020 Presidential Election

On domestic policy, progressives arguably fared better under the Trump Administration than they would have from any of the other Republican candidate (e.g., victories on the budget and trade protectionism) and better than conservatives during the Obama Administration. Many conservatives (including Goldberg) join progressives in abhorring Trump’s personality and attacking his character (questionable, as is that of his political antagonists, e.g., Congressman Schiff). His lies and exaggerations may stretch the limits of political discourse, but the main stream media has regressed to Infamous Scribblers. The biggest cause of Trump derangement syndrome – and his source of political support – is likely his politically incorrect speech.

But Supreme Court appointments remain the existential issue for progressives and conservatives alike (as the Kavanaugh Hearings demonstrated), although limiting the power of federal government leaves progressives with free reign at the state and local level where they have had substantial success. Even “popular democracy” in big states like California is rigged by the state, forcing the oppressed to ‘vote with their feet’ leaving progressive states like California and New York with deficits, which then seek federal bailouts.

The electorate is divided along generational lines, with democrats appealing to younger liberal voters and republicans to older conservative voters. Lowering the voting age to 18 dramatically increased this demographic (why Democratic Speaker of the House Nancy Pelosi proposed lowering it to 16). Yet current Democratic candidates are divided among the ”electable”“moderate” 78 year old (by inauguration) Joe Biden campaigning as the former VP of a decidedly immoderate administration, authoritarian Michael Bloomberg who is almost a year older that Biden, socialist Bernie Sanders who is more than a year older than Biden, and Progressive Elizabeth Warren who would be 70 by inauguration. The young intolerant radical anti-capitalist progressives/socialists will undoubtedly be in control should victory be achieved by any of these elders following Taleb’s thesis (pg 69) that in a democracy the intolerant dominate.

What explains the strong Democratic appeal of 18-29 year old voters? Goldberg (pg. 340) quotes theologian Eugene Peterson: “humans try to find transcendence-apart from God – through the ecstasy of alcohol and drugs, recreational sex, or … crowds (i.e., mobs or cults).” Millenials are less religious than older voters and sex has declined relative to past generations. Non-college graduates have turned to drugs – 70,000 deaths annually.

Promises of debt forgiveness and free stuff by Socialist Sanders – and Warren – obviously appeal to the typically deeply indebted college educated. But so does their attack on business. Once taboo, socialism is now chic on college campuses as anti-business progressive ideas pervade college professorial ranks, particularly among historians and economists. This goes back to the early days of progressivism as socialist/communist historical myth makers accused business leaders of being “Robber Barons,” vastly over-stating the extent of American cronyism. Economists have generally under-appreciate the fragility and benefits of capitalism focusing instead on “market failures” real or imagined requiring government intervention, to be expected by a profession started by a German educated progressive to train Americans in the visible hand (fist) of state economic management

So millenials may be lured to join the cult and drink the Kool Aid: as an aging baby boomer, I’ll cling to religion and, Inshallah, sex and alcohol (bourbon, of course).

Kevin Villani

—-

Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

Re-Privatizing Fannie and Freddie: It’s Déjà Vu All Over Again

Privatization reform of Fannie Mae and Freddie Mac, a hot topic on and off since their founding eight and five decades ago respectively, is heating up once again after more than a decade of temporary conservatorship. All past reform efforts have failed. What should we have learned?

  • Private markets operate on one set of incentives and accountability, government on an entirely different set. Each has its problems and imperfect solutions.
  • Private markets may inappropriately discriminate against qualified borrowers, for example, whereas public programs may fail to adequately discriminate.
  • Public enterprises created to jump-start or complement private markets often miss the mark, with unintended consequences.
  • Politicians much prefer to deliver subsidies through taxes (in this case tax exempt debt substituting for taxable equity) rather than expenditures – especially since the Budget Control Act of 1974 – and implicit off-budget credit guarantees that delay the reckoning.
  • In spite of good intentions and design to get the best of both, privatized hybrid public-private systems inevitably embody the worst: public risk for private profit. Lacking both market and public discipline, they cause systemic failure that “nobody could have seen coming.”
  • Political reform reflexively blames private market failure, doubling down on unaccountable and ineffective bureaucratic methods while providing opaque bailouts through greater tax and credit subsidies.
  • Political reform starts with what is, not what should be, repeating the cycle.

U.S. secondary markets evolved entirely in response to anachronistic political forces. FHA was created in 1936 to stimulate new construction jobs subsequent to a huge housing construction boom. Fannie Mae was created two years later to prop up flagging demand for FHA mortgages. Ginnie Mae was created in 1968 to liquidate Fannie Mae after prior privatization attempts failed to reduce official government debt, but the residual $1 billion secondary market facility with minimal shares outstanding as a result of a mandatory user purchase program was instead privatized. When that entity turned down tax exempt pass-through securitization to circumvent the myriad laws and regulations preventing the development of a national securities market, Ginnie Mae stepped in. Rather than liquidate, the privatized Fannie turned to funding conventional mortgages for their mortgage banker clients. To protect their turf, portfolio lending savings and loans then demanded their own secondary market facility, Freddie Mac. It later privatized mainly to provide management incentives comparable to Fannie, particularly stock options.

They then morphed into massive public directed credit institutions, with profits from government subsidies privatized but otherwise lacking the benefits of market efficiency and discipline. About half of F&F subsidies were captured by shareholders, managers and politicians (my estimates), an invitation to affordable housing proponents to share in this booty. Several 2018 Democratic presidential candidates have proposed upping these goals.

U.S. mortgage markets were characterized by cut-throat competition decades before the advent of government sponsored enterprises (GSEs): the indiscriminant lending and private market securitization during the sub-prime lending bubble of 2004 to 2007 suggests that is still the case.

What the private market can’t deliver are the tax and credit subsidies – worth tens of billions annually – that result from federal backing to support fixed rate mortgage interest rate and affordable housing credit risks. Any re-privatized hybrid system that promises to mimic the market, e.g., by requiring that it actuarially price a government credit guarantee as the market oriented Milken Institute and others recommend and to impose market capital requirements and risk regulations directly conflicts with these goals and is doomed to failure. Regulatory restrictions will remain malleable because politics has and will continue to trump bureaucracy. Nor will the market discipline this regulated too-big-to-fail public mission duopoly, having correctly inferred an implicit guarantee in the past for the GSEs, disclosures, regulations and legislation notwithstanding.

There is a better “public/private” policy option to deliver these subsidies. Long term fixed rate FHA insured mortgage loans have since 1970 been funded almost exclusively with Ginnie Mae securities. Investors take the interest rate risk, HUD takes the credit risks and all ancillary functions are delegated to a competitive private marketplace. FHA, a government sponsored mutual insurance fund with de facto public backing since incorporated into and regulated by HUD insures each mortgage. The un-capitalized Ginnie Mae de jure security guarantee covers only timeliness of FHA payments, but de facto acts as a guarantor of FHA mortgage securities.

While FHA has failed actuarially – in part due to overly ambitious political goals and its focus on borrowers who may not have qualified for a conventional loan – bailouts have been opaque with minimal or no budget transfers, investor losses or market disruption. It survived the sub-prime lending debacle relatively unscathed. This system hasn’t failed systemically because it separates the private and public functions into different entities, minimizing public risk for private profit incentive conflicts.

A federal guarantor for conventional mortgage securities modeled after Ginnie Mae (something Ginnie Mae proposed in the late 1970s but I opposed on grounds that it would displace the private savings and loan system of the time) should replace F&F, with the existing infrastructure auctioned to the highest bidder .

Properly designed, a federal guarantor wouldn’t experience any loss except in catastrophic circumstances. The original Fannie Mae and particularly Freddie Mac secondary market system that left credit risk primarily with multiple state regulated private mortgage insurer’s (pmi’s), experienced negligible credit losses until the market collapse of 2008, after which F&F credit losses of about $300 billion were ten times total pmi industry losses, due to loss severity far exceeding insurance limits. A federal guarantor should be limited to pools of fixed rate mortgages with deeper pmi coverage to reduce exposure, and ideally partially re-insured with private mortgage pool insurers to further capitalize and diversify risk.

The tax and credit subsidies all go to uniformly lower rates. Deeper affordability subsidies in pursuit of federal home ownership affordability goals were previously provided by HUD’s Section 235 homeowner program targeted to individual FHA mortgage borrower needs, the right approach for achieving this goal. But after years of default losses, Congress shut it down in 1989 rather than increase the budget to reflect the true cost. Following the law of unintended consequences, the affordable housing goals were then dramatically expanded in the Federal Housing Enterprises Regulatory Reform Act of 1992, a precursor to their subsequent failure.

The debate over the desirability and magnitude of homeownership subsidies remains unresolved. This proposal shifts it to the political arena.

Kevin Villani

—-

Kevin Villani, chief economist of HUD during the Carter and Reagan Administrations and Freddie Mac from 1982 to 1985, is the author of Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

Bernie Sanders Won the Debate

(WSJ: Bernie Sanders Won the Debate)
 
—-

The 20 candidates in the Democratic debates on June 26 & 27 accepted Sanders’s fundamental vision of Democratic Socialism.

Bernie Sanders’s June 12 speech at George Washington University proposing “a 21st Century Economic Bill of Rights (EBR)” to “a decent job that pays a living wage; quality health care; complete (higher) education; affordable housing; a clean environment; and a secure retirement” all “regardless of his or her income” started a competition among the current democratic candidates for the 2020 Democratic nomination with promises of free stuff. This new Democratic socialism makes two promises:

“It is free to the masses.”

“If you like your democratic system of government, you can keep it.”

This isn’t new and isn’t true.

The ideological Cold War between the socialist totalitarian countries and the capitalist social democracies ended with the economic and political bankruptcy of virtually all of the former. The latter expanded their welfare states by taxing the economic fruits of capitalism, contracting when going too far, with symptoms including declining investment and innovation and rising public deficits and debt burdens. The proposed EBR to expand the welfare state to socialist extremes while maintaining democracy will erode both living standards and liberty.

The Unintended Consequences of the Economic Bill of Rights

The market system is based upon individuals responding to incentives, mostly embodied in market prices. Contemporary economists have done Nobel-worthy research demonstrating that individuals don’t always respond rationally. But the EBR promising free or cheap stuff well below cost with wages and income determined well above productivity is incompatible with a market economy and individual liberty. It would severely distort work and consumption incentives: already declining labor force participation would collapse and productivity stagnation would worsen. Costs of health care, education and housing would rise. The Green New Deal environmental proposal would cost up to $100 trillion while providing negligible environmental benefit. Private household saving would shrink further with the right to a secure retirement.

States that raise income taxes on high net worth businesses and/or firms face an exodus of both. Individuals and firms similarly shift their tax residence outside the U.S. reducing U.S. domestic innovation. Trade deficits widen. The cost of the EBR exceeds the revenue from these types of taxes by orders of magnitude. The progressive states are already voting themselves into bankruptcy, anticipating a federal bailout.

Modern Monetary Theory: Old Fashioned Money Printing

To avoid the political consequences of massive middle class taxation, the Modern Monetary Theory (MMT) promoted by a Sanders campaign economic advisor proposes debt financing. Wall Street prognosticators forecast the end of the debt supercycle in 2011 and the collapse of the international monetary system in 2014, going code red. But the debt supercycle has continued, so proponents of the MMT assume that interest rates will remain low indefinitely so the cost can be financed with no long term consequence, whether bought by domestic or foreign creditors or the Federal Reserve.

They may be right about America’s creditors continuing to accept debt in the near term, but excessive debt always ends, suddenly and badly: the longer it goes on the bigger the bust. As the world’s reserve currency the debt can’t simply be inflated away. The consequences of a U.S. international default, no matter how delivered, would be catastrophic.

Democratic Socialism and Individual Freedom

The socialist EBR is the responsibility of the administrative state, which requires totalitarian political power to deliver. What, then, do democratic socialists mean by “democracy”?

The ancient Greek city-states began experimenting with democracy (literally, “people power” in Greek) about 2500 years ago, limited to males selected on merit. After about a century of experimentation, Greek philosophers concluded that democracy was a form of mob tyranny that undermined individual freedom and the rule of law. United States exceptionalism is rooted in the U.S. Constitution, an experiment in a representative federal republic held in check by a limited list of enumerated powers to protect individual freedoms and prevent mob rule.

The extension of voting rights to former slaves – and over a half century later to women– was overdue. The 14th Amendment was necessary to restrict the ability of Southern states from inhibiting their voting rights but has since been interpreted to give the federal government virtual total supremacy. The direct election of Senators in the 17th Amendment of 1912 further expanded populist democracy.

Marx promised democracy and universal suffrage. Trotsky promised a peoples democracy, as did Mao. The current progressive platform on voting rights; opposing voter registration, supporting immigration of dependents with voting rights rather than working rights, eliminating the Electoral College, reducing the voting age to 16 years old, registering prisoners, and drive-by voter registration would complete the transition from a representative republic to a peoples democracy.

Kevin Villani

—-

Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

America, the Land of the Free Lunch and the Home of the Brave Easily Traumatized

As a Boston area baby boomer, I belted out the National Anthem in my youth with conviction at sporting events. Massachusetts educators emphasized its role as the birthplace of the American Revolution from distant unaccountable politicians (leaving out the crucial role of fake news written and published by the infamous brewer’s son Sam Adams) and the motivating principles, summed up by Virginian Patrick Henry’s immortal phrase: “give me liberty or give me death.”

In the 1970s Boston’s U.S. Congressman Speaker of the House Tip O’Neill quipped “all politics is local.” Now the progressive daily prayer on Twitter begins “Our father, who art in Washington D.C. give us money – a guaranteed minimum income, reparations, welfare, entitlements, etc. and other free stuff – food, housing, medical care, a college education.”

Bostonian President Kennedy’s appeal to voters’ patriotism in the 1960’s to “Ask not what your country can do for you. Ask what you can do for your country” is reversed today. Patriotism is as out of favor with many millenials (who proudly display their participatory soccer trophies) as are the Boston (now New England) Patriots for hogging the Super Bowl Trophy this century, stigmatizing other teams as “losers.”

Competing Foreign Ideologies

Traumatized by competing ideas, many millenials would trade U.S. competitive capitalism and individual freedom for a free lunch. “History doesn’t repeat itself but it rhymes” according to Mark Twain. The core contemporary national political issue is whether America’s popular progressive ”social democracy” ideology rhymes with its founding principles and historical values or foreign ideologies that threaten the body politic?

The Communism Threat

The Bolshevik Revolution ended an anachronistic Imperial dynasty in a country with no prior democratic traditions. Communist intellectual Leon Trotsky promised a utopian Marxist socialism, international brotherhood and the end of nation-state competition for resources as the state would wither away. Communist atrocities under Stalin, murders and deaths measured in the tens and hundreds of millions, predated the WW II Western Alliance in a desperate attempt to industrialize a backward agrarian society.

Stalin promoted opaque Russian Imperialism under the banner of brotherhood. Soviet skullduggery in post War elections in Europe and around the globe – and CIA involvement to counter it (or visa-versa) – was widespread. The post WW I & II “Red Scare” of communist infiltration of state institutions in the U.S. was somewhat over-blown, but the belief that communists could be elected in a democracy based on false promises then turn dictatorial and refuse to relinquish power as has occurred most recently in Venezuela, was well founded. Fearing such a cancer on the body politic, the Communist Control Act of 1954 outlawing the Communist Party in the United States suppressing free speech passed with the full support of progressive Democrats who wanted to distance themselves from ”Uncle Joe” Stalin (and later, many others, including Mao).

Fascism, Communism’s Cousin and Bitter Political Rival

Hitler came to power in democratic Germany promising economic prosperity, understandably as wartime consumer deprivation far exceeded that of France and Britain (where communist sympathies were widespread), and post war reparations inhibited a consumer recovery. Although Mussolini, the founder of European fascism, once headed the Communist Party in Italy, and Hitler founded the National Socialist Party, neither implemented socialism domestically. By national, they meant a return to Germany’s pre-War greatness: consumers initially benefitted from a massive boom in defense spending before once again suffering wartime deprivations.

The nationalist agenda was less imperial than traditional. European history since 1453 is largely related to border wars as Germany is caught in the middle between the British and French empires to the west and Russian empire to the east: only the scale of Nazi eastward border expansion represented a radical departure. In Hitler’s view this rhymed with American westward expansion and genocide of the indigenous populations. He persecuted the Jews, even ethnic Germans, based on Nazi perception of Jewish financing of German enemies on the WW I battlefield and in the labor movement fomenting unrest on the home front and their perceived outsized influence in the Bolshevik communist movement (Trotsky was Jewish).

Hitler inherited a failing German economy. He was aware that the economic potential of the western capitalist powers were orders of magnitude greater and growing faster, causing him to knowingly take enormous risks to address what he believed was an existential threat. Even as he acquired new territories he was playing catch up. Unlike Stalin, he was not driven by an anti-capitalist economic ideology, but intervention in the German economy increased as the Wehrmacht consumed an ever increasing share of GDP – over half at the peak – relying on private enterprise and the profit and price mechanism to the extent feasible (and arguably more than FDR) relative to the size of the war effort. Dictatorial power and crony capitalist corruption – favoritism of the political elite – was an inevitable result of a rising government share of the economy.

Racist ideology contributed to his miscalculation of the military industrial ability of the Soviet Union, where his early luck inevitably ran out, after which a war of attrition would exploit Germany’s relative economic weakness. Economic desperation determined the magnitude of Nazi atrocities, less in scope and subsequent to those of the communists in the Soviet Union, but driven by racism.

In 1977 the U.S. Supreme Court extended freedom of speech protection to the National Socialist Party of America, a racist fringe rather than socialist party.

European Social Democracy

In the wake of WW II deprivation and devastation in Europe, “social democracy” – a greater role of the state in providing household necessities – was viewed as a more benign alternative to communism. Britain, particularly Scotland, experimented primarily with socialized housing and medical care until the late 1970s when, as British Prime Minister Margret Thatcher put it, they were running out of “other peoples’ money.”It was also tried in the small relatively homogeneous Nordic countries, running out of money in Sweden in the 1990s and Finland more recently. These experiments were not democratic socialism or the fascist prone democratic capitalism, as all were financed by taxing capitalist-created income and resulted in retrenchment rather than socio-political collapse when they went to far.

American Progressivism Rhymes with Fascism and Communism, not European Social Democracy

But for democrat skullduggery, Socialist Bernie Sanders might well have been the 2016 Democratic candidate and also won the election. Most of his younger Democrat competitors for 2020 support the Green New Deal, the latest utopian vision. Their success hinges on rhyming this vision with small-state European social democracy, but the American progressive movement has always focused on the entire nation. When a failed ideology is adopted by a large too-big-to-fail nation-state like Germany or the Soviet Union in the past or the U.S. at present, unaccountable politicians cover-up and double down on failure until it is systemic and seismic like the 2008 financial crisis.

Progressivism’s historical nationalism and racism and current methods of intervention in a capitalist market economy rhyme with fascism: its premise that economic progress is attributable to politics and its utopian goal of social justice without regard to national borders both rhyme with communism: the inherent dictatorial lack of political or fiscal accountability rhymes with both.

American Nationalism

Federal power ballooned during the wars of progressive presidents TR, Wilson, FDR and LBJ. That American patriotism is excessively nationalistic has been an issue since the Monroe Doctrine and subsequent Manifest Destiny. America’s support of free trade post WW II supported by American hegemony over trade routes worked well, as it did under British hegemony leading up to WW I. But the post WW II order is once again breaking down as a consequence of increasing nation-state rivalry over resources and trade routes. President Trump’s “Make America Great Again” is daily attacked not as patriotism but Nazi racist nationalism. The future of American Hegemony should be the central issue in the next presidential election.

Racism and Sexism

In a competitive free market economy those who would inappropriately discriminate by race or sex always lose out, always: racism requires political protection from competition. Socialism is inherently discriminatory; the state determines who gets what and who pays. The Democratic Party was the party of slavery, Jim Crow and voter discrimination; it remains the party of restrictive working laws and regulations (with a “disparate impact” on black youth employment) e.g., with well above market “living” minimum wages, credentialing and anti-immigrant worker prohibitions, and admission quotas. Winners beget losers: progressives once again discriminate against Asians.

The progressive party founded the eugenics movement targeted to limit the black population from which Hitler borrowed ideology. Roe versus Wade represents a eugenic success story, as abortion for the white population at the time required no more than a bus ticket to the next state. Now about half of black pregnancies are terminated.

The Road to Serfdom

The promise of “free stuff” to those mostly not yet paying taxes and of cancelling their debt likely explains college students’ preference for socialism over capitalism, and the myth of socialist environmentalism the Green New Deal environmental goals.

Income inequality and Social Justice in a Democracy

America’s social welfare system while not as generous as the Nordic countries generally provides a standard of living sufficient by international comparison and luxurious compared to the deprivations suffered when fascism and communism incubated. Competitive market capitalism produces unequal incomes, the source of its ability to raise the living standards of all through increased productivity. Progressive policies that cross the constitutional threshold of equality of opportunity to demand equality of economic outcomes by broadening the base of the politically favored are a subset of crony capitalism that favors the political elite at the expense of society generally, a failed ideology. Socialism fails every time because incentives matter.

The Green New Deal: a Fentanyl induced Utopian High

Concern for the environment and the human impact on it is warranted, but what to do about it is a difficult question primarily for foreign diplomats. The Green New Deal adopted by only the U.S. would provide negligible environmental benefit. But as virtually all past environmental initiatives, it would be a bonanza for the crony capitalists and their political patrons. Whether or not the Green New Deal cost $100 trillion or only $10 trillion, it is a road to serfdom for millenials, with no exit provided by the archaic modern monetary theory.

Democrats Cross the Rubicon

“The founders of the Roman Republic, like the American founding fathers, placed checks and balances on the power of their leaders. The Romans, however, came up with a way to sidestep these checks and balances when strong leadership was needed, such as a time of crisis.” 

Communism, fascism, the New Deal and social democracy were all implemented in response to an existential crisis. It is no accident that progressives exploited the “environmental crisis” to push their social justice agenda: these faux crises don’t justify national socialism, an existential threat to the body politic.

The majority of American voters – positively correlated to age – still properly associate socialism with the totalitarian communist and Nazi regimes rather than European democratic socialism as socialist Sanders’ argues, undercut by his Moscow honeymoon. The two big progressive myths are that European social democracies never run out of money and that “other peoples’ money” i.e., the other party’s voters, will somehow finance the socialist agenda. Green New Deal proponents refused to vote for it to avoid voter accountability for the costs. National socialism and the virtual one party rule necessary to achieve it provides the best explanation for the rest of the 2020 “democratic” agenda.

Progressive Social Democracy isn’t Nordic

The population of California is four times that of the largest Nordic country Sweden. It, like all the progressive states is over taxed and over indebted. Obamacare impregnated promiscuous states with these twin fiscal burdens with a whispered promise of a subsequent opaque federal bailout when they matured, making states subservient to D.C. like Soviet Oblasts to Moscow.

Suppression of Free Speech

The free speech amendment is listed first as the foremost safeguard against infringement of individual freedom and equality under the law. The Communist Party remains illegal in U.S. due to its meretricious promises, now virtually indistinguishable from those of progressives. Conservative speech to expose the fallacies of progressive ideology and the threat to the Republic is suppressed by the democratic state apparatus. Free speech invites propaganda, including Russian translations, think tank and academic “research” but should be protected, even for communists and neo-Nazis.

From Republicanism to Democratic Totalitarianism and One Party Rule

The American experiment with a limited government republic has been undergoing constant change since the “peoples” candidate Andrew Jackson, founder of the Democratic Party and seventh President, while winning the popular vote in the post-universal male suffrage election of 1824 lost in the Electoral College, which he then proposed to abolish. Subsequent progressive constitutional amendments extended voting rights to former slaves and their decedents (15th), women (19th) and the direct election of Senators (17th).

Even with control of the House, Senate and Presidency, this wasn’t enough to pass Obamacare, arguably the stealth stepping stone to single payer Medicare for all. Unprecedented political maneuvering and prosecutorial and administrative abuse by then FBI Director Robert Mueller was employed. Then a lone opinion of Chief Justice Roberts relied on another progressive amendment, the 16th enabling unlimited power to tax, to save it.

Socialism in a large diverse nation like the U.S. requires permanent dictatorial powers of enforcement, as highlighted by the requirements of Obamacare and the controversy over the individual mandate. This explains the progressive platform on: voting rights; opposing voter registration, supporting immigration of dependents with voting rights rather than working rights, eliminating the Electoral College, reducing the voting age to 16 years old, registering prisoners, and drive-by voter registration: the Supreme Court; nominating liberal (i.e., anti-Constitutional) Supreme Court Justices, packing the Supreme Court (again), and: the apparent attempt by the Obama Administration to implement PRI style hereditary presidential selection. This rhymes with Mao’s “people’s democratic dictatorship” not the individual liberty of the American Lion.

To quote America’s greatest economist Milton Friedman:  “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

Kevin Villani

 
 
—-

Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.