Kevin Villani

Charlottesville Revisited – The Next American Rebellion Won’t Be a Black Swan

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The 2020 Presidential election is being tee’d up to foment racial animosity between Biden’s Blacks and Trump’s Deplorables.

The2020 Democratic presidential candidate Joe Biden is far ahead of the incumbent Donald Trump in the polls, but two thirds of his supporters cite fear of Trump being re-elected, mostly due to perceptions of racism, rather than support for the candidate or his Party’s Platform. Biden’s core supporters are angry black protestors, Trump’s core are largely angry white “deplorables.”

The Charlottesville Premise

Bucolic Charlottesville is rich in political symbolism as home to the University of Virginia founded by Thomas Jefferson, author of the Declaration of Independence and founder of the Democratic Republican Party. Virginia was the Capital of the South during the great Civil War, Charlottesville the site of the statue of the Confederate military leader Robert E. Lee. In 2017 riots broke out there between black groups led largely by the Black Lives Matter (BLM) movement leading protests of this and other statues. After strongly condemning the historically racist groups that a Charlottesville resident had invited to oppose the destruction, President Trump said that there were “good people” on both sides of the monument issue, then insisted that the racial hatred must stop.

Some conservatives would go along with tearing down Confederate statues. But predictably, the Founding Fathers were targeted next. Statues of George Washington have already been destroyed and the Washington Monument is on the chopping block. In New York, where the current governor and Democratic presidential hopeful Andrew Cuomo renamed the Tappan zee Bridge after himself (technically, his father), political leaders have voted to remove Thomas Jefferson’s statue, the Jefferson Memorial sure to follow. Even Lincoln isn’t safe.

The Charlottesville premise is that America was born to slavery and American racist oppression never ended, causing the current income and wealth gap with whites, and that the statues are symbols of this inborn oppression, The Democratic Party Platform to be finalized in August promises to eliminate racial income and wealth differences by doubling down on traditional socialist redistribution. The young party leaders correctly argue that this will require “fundamental change,” a political Jacobin revolution converting America from a failed meritocratic Republic to a “peoples’ democracy.”

I’ve argued elsewhere that the economic and social costs of this agenda pose an existential threat to America. However unrealistic, “moral imperatives” trump constitutional, institutional and resource constraints. Nations don’t choose suicide, they just stumble into it one step at a time.

Governor Cuomo responded to Trump’s 2016 campaign theme to Make America Great Again (MAGA) that “America was never that great” based on its racial history. The liberal main stream media labeled Trump, the Republican Party and anyone who might disagree with their Charlottesville premise – hence their platform – as racist. When the Democrats decided to shift attention from their platform by choosing as an interim “centrist” leader the soon to be 78 year old Joe Biden, it wasn’t surprising that when announcing his candidacy he chose to make Trump’s racism his central campaign issue by replaying a truncated clip of Trump’s Charlottesville “good people” quote.

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From the Cosmos to Strings: Parallels of Economics to Physics

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The first macroeconomic model of the U.S. economy consisted of 20 boxes of punched cards at 2000 cards per box that I would wheel on a dolly stacked five feet high to the main frame computer center where it took about three days to get results back.

Mathematics is the language of physics. Graduating with a BS in mathematics in the 1960’s, I faced a choice between my two minors, physics or economics. Some famous physicists had already declared that the quest for a unified mathematical explanation of the cosmos and its smallest building blocks was at hand. In economics, the attempt to build a mathematical macro model of the U.S. economy and fully integrate it with the micro economic mathematical models of human behavior represented a new frontier. I chose economics.

In retrospect, physicists are still searching for a Grand Unified Theory (GUT) of the universe. In economics, mathematics and statistics have widened the disagreement about how the economy works and the proper role of government in economic management.

God and Physics: from Aristotle to Hawking

Aristotle (382-324 BC) described the cosmos of round bodies in motion circling around the earth. It took almost two millennia until the sun-centric Copernican model was popularized by Galileo, who was imprisoned by the Pope, the political enforcer of orthodoxy at the time, in 1633 for heresy, forcing him to recant. But only a half century later, Newton described the mechanics of the universe and sun-centric solar system in Principia Mathematica (1687), which remains the cornerstone of basic physics.

In Newtonian physics, motion and speed are calculated relative to what you are moving away from. Maxwell’s discovery in the mid-1800’s that the speed of light was “absolute” required an explanation that stumped many physicists until the young patent office clerk Albert Einstein, unaware of these efforts, provided the novel Special Theory of Relativity (1905) that if light speed was constant space and time must be relative.

His mathematical model proved over time to provide a more precise description of the movement of heavenly bodies, but the implication of his equations that the universe was expanding violated his belief in a master plan of a “creator,” so he inserted a mathematical cosmological constant (what economic model builders would subsequently call a “dummy variable”) to stagnate it. But other physicists confirmed his original model, which in reverse required a mathematical ”singularity” – a beginning of time with a “big bang” from an infinitely small spec. The Catholic Church approved this model in 1952 as consistent with its orthodox views of a creator.

In 1970 Stephen Hawking proved that the big bang theory was the only one consistent with the existing models of the universe, but he later challenged those models. First, the violent path of destruction and creation over billions of years subsequent to the big bang that ultimately produced the building blocks of life was a “million to one shot”- is ours just one of millions of universes? Second, macro models of the universe broke down at the mathematical singularity, which remains inconsistent with micro models of the very small – in my youth molecules then atoms made up of protons, neutrons and electrons, now subatomic “quarks” and more recently sub-quark vibrating strings.

The scientific method is a slog: to understand the universe, the models must not only be tested empirically but compared to all the potential alternative explanations. Pre-conceived orthodox ideology has at times set the investigation back centuries.

The Progressive Orthodoxy of Mathematical Models in Economics

Macro economics, the desire to understand and control the workings of the economy at large, developed in response to the Great Depression. The roots of the mathematical approach to economic management trace to the founding of the Econometrics Society in 1930. John Maynard Keynes published his General Theory of Employment, Interest and Money in 1935, the title invoking the universality and finality of Einstein’s General Theory of Relativity published two decades prior.

Paul Samuelson’s Foundations of Economic Analysis (1947) provided a mathematical model of micro economic consumer and business behavior. I was a regular reader of Samuelson’s Newsweek columns in high school and used his undergraduate economics text at UMass, where I worked on the first macro economic model of the U.S. economy developed at the University of Pennsylvania by Samuelson’s first PhD student Lawrence Klein.

As a student of former Federal Reserve Board economist Pat Hendershott, I worked on the first Flow of Funds model of the U.S. financial sector. The main frame computer at Purdue University would run the punch cards of a professor’s research overnight, a big improvement. Such macro economic models are “Keynesian” central government centric by design: fiscal and monetary policies are modeled to control the economy, mitigating recessions and unemployment.

But other models haven’t been ruled out. In The Forgotten Depression (2014) James Grant argues that the Depression of 1921 there was no official designating body at the time following the end of the Great War cured itself in 18 months due to official benign neglect. In Grant’s view (and many others, including economists living through it) what made the subsequent Depression “Great” was massive political intervention that prevented the required adjustments.

While the merits and long term effectiveness of “small scale” and “counter-cyclical” measures remain debatable, the merits of the socialist centrally planned economies are not: hundreds of millions died and the remainder suffered economic stagnation while the capitalist world prospered. Only self described democratic socialist Bernie Sanders openly touts the performance of the centrally planned economies, but there isn’t much difference in the government centric policy approach of progressive politicians.

This macro narrative is generally consistent with anti-capitalist progressive ideology of business, workers and consumers dating back to Marx that is accepted by the majority of more recent college graduates. Economic statistical research across a wide spectrum from discrimination and labor exploitation to income inequality and market failure is offered in support, albeit inconsistent with a competitive market system. The competitiveness of the U.S. economy implies that correlation is too often assumed to imply causation without rigorously considering alternative explanations.

Creative Destruction Produces Economic Expansion

Humans owe their very existence to the massive creative destruction of the Cosmos (whether or not by the grace of God) for we are all made from the dust of exploding stars. In the economic sphere, virtually all human economic progress is attributable to capitalist competition and creative destruction, favoring the adaptive over the sluggish. Mathematical models haven’t adequately described entrepreneurial innovation. Progressive intervention to mitigate downside risk of creative destruction, broadly or to specific political constituencies, is highly correlated with stagnation.

Historically, even natural disasters including pandemics such as the corona virus (I assume it was “natural”) have provided opportunities for creative destruction. Consider, for example, the requirement that university students study online during the pandemic. While traditional colleges aren’t yet offering rebates, we know from experience that without the room, board and administrative costs and with increased productivity of fewer professors, online degrees can be provided for as little as one tenth the cost of the traditional approach.

Progressive proposals for taxpayers to foot the entire bill for the high cost model may be called democratic socialism but are indistinguishable from democratic crony capitalism for the political elite.

Kevin Villani

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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.

Democratic Presidential Candidates Debate the Origins of the 2008 Financial Crisis and Systemic Failure

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Are greedy racist “Wall Street” bank lenders responsible, or progressive politicians?

The housing finance systems of some developed countries have failed, but only the U.S. federally dominated system failed systemically twice in two decades, the second time in 2008 with global repercussions. Then Republican Mayor of New York now 2020 Democratic presidential candidate Michael Bloomberg blamed politicians for pushing lenders to make loans to “poor people” in low income neighborhoods that they couldn’t afford. 2020 progressive Democratic presidential candidate Warren, apparently reflecting the views of the Party, responded to Bloomberg: “That crisis would not have been averted if the banks had been able to be bigger racists.”  

The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 creating Warren’s proposed Consumer Financial Protection Bureau and the Financial Stability Oversight Council (FSOC) to Monitor and Mitigate Systemic Risk made up of the various financial regulators reflects the Warren/Democratic narrative. This narrative is the foundation of not just housing and financial sector policy proposals, but the entire progressive agenda.

I’m from the federal government and I’m here to help you.

That’s the punch line to the joke about the three biggest lies Pres Martin used to tell about a half century ago as past Chairman of the Federal Home Loan Bank Board (FHLBB) (hence Freddie Mac’s first Chairman) and Vice Chairman of the Federal Reserve System.

The first wave of “help” came after the repeated waves of bank failures with the creation of the Federal Reserve System in 1913. The second wave came during the Great Depression with deposit insurance and associated regulation of the banking and savings and loan industries. This was followed by the creation of FHA mortgage insurance: to stimulate FHA demand, Fannie Mae was created make a market for which there were few buyers or sellers. By the late 60’s, rather than end a failed experiment Fannie Mae was “privatized” and the public monopoly was subsequently expanded to a tri-poly with the addition of Freddie Mac and Ginnie Mae, all funding fixed rate mortgages (FRMs) first introduced by FHA. As Milton Friedman famously said, “there is nothing so permanent as a temporary government program.”

It didn’t help potential borrowers much. The resulting federally dominated U.S. Housing Finance System had been touted as the best in the world, a model to emulate for developed, developing and transitioning economies alike during the three decades prior to the 2004-2007 sub-prime mortgage lending debacle and globally systemic financial crisis of 2008. But the benefits are hard to identify: the U.S. homeownership rate is about the same as in the mid 1960’s under the prior savings and loan system in spite of a 50% increase in female labor force participation, a historically low real interest rate and a dramatic shift from detached single family to condo apartments.

Civil rights legislation culminating in the Fair Housing Act of 1968 made racial discrimination in home sales a federal crime. The black homeownership rate which rose more than that for whites during the 2004-2007 sub-prime lending spree has returned to about where it was during the 1960’s.

Market Discipline versus Public Regulation

It didn’t help existing lenders much either. In the 1970’s federally sponsored agencies competed directly with federally chartered savings and loans whose investments were limited by regulators hamstrung by politicians to FRMs, forcing them to borrow short and lend long with callable insured deposits. Systemic failure was assured when interest rates rose as they did in the late 1970’s, with failures strung out over the 1980’s as regulators seized but often didn’t close zombie institutions, often run by academics.

Systemic risk, the simultaneous failure of many or all firms (and households) in an industry or across industries, primarily afflicts mixed progressive financial systems, i.e., those with privately owned but publicly regulated financial institutions. Firms in an un-or-less regulated market economy may be fragile but “Wall Street” traders mitigate systemic risk by betting against weak firms and industries, either forcing corrective action or failure hence the derogatory political reference to “speculators.” At the other extreme, state owned financial firms generally fail financially but face only a political bankruptcy constraint.

Two types of progressive policies created systemic risk. First those intended to mitigate the failure of individual firms with public insurance and prudential regulation, making failure less frequent but more systemic. Regulators prevent commercial bank failures purportedly to protect public confidence in the payments mechanism. Second are those policies intended to universally favor borrowers and/or creditors – like requiring mortgages to have a fixed rate – making systemic failure more likely and more costly.

Underwriting Mortgage Credit Risk: Discrimination and “Disparate Impact”

With the exception of the Great Depression and 2008 financial crisis, home mortgage credit losses had been “Gaussian (normally distributed),” that is, they followed a predictable pattern that allowed them to be insured according to the law of large numbers, for all practical purposes eliminating uncertainty, hence risk.

Loan data during the sub-prime lending debacle unambiguously supports Bloomberg as minority lending skyrocketed. Progressives imputed racist motives to excessive minority lending, arguing that “predatory” lenders “tricked” minorities into accepting loans they couldn’t afford so they could later foreclose. There is some truth to the first part, as banks solicited minority borrowers with loans they had to know were risky. But they had little incentive to foreclose, as that always resulted in a deep loss. What did motivate lenders?

Homeownership was no more affordable for black households during the 2004-2007 sub-prime lending bubble than it was in the 1960’s for a variety of reasons. But current Democratic presidential candidate Deval Patrick argued in 1994 as Deputy Attorney General of the Department of Justice that any final lending distribution that contained racial disparities—disparate impact—relative to population was a violation of federal law unless the lender could prove otherwise. Such “proof” of non-discrimination would be difficult to produce at best, since the disparity itself was considered proof of racial prejudice, and the cost of a legal defense is generally crippling. This was called “confiscation by consent decree” at the time and later “extortion by consent decree” for which Gaussian credit risk models didn’t apply.

Avoiding Black Swans

Former trader now internationally recognized risk expert – Nicholas Nassim Taleb describes in his 2007 book The Black Swan “how high impact but rare events dominate history, how we retrospectively give ourselves the illusion of understanding them thanks to narratives, how they are impossible to estimate scientifically, how this makes some areas but not others totally unpredictable and unforecastable, how confirmatory methods of knowledge don’t work, and how thanks to Black Swan-blind “faux experts” we are prone to building systems increasingly fragile to extreme events.”

Was the 2008 systemic failure an unpredictable Black Swan event? Politicians and their regulators who push the “Wall Street greed” narrative argued that nobody could have foreseen it, but Taleb exempts only economist Nouriel Roubini Crisis Economics (2010) from that delusion, who (pg. 16) concludes “it was probable. It was even predictable…” based on the failure of prudential regulation. But how did that fail? Systemic failure had long been predicted (by me and others, including the Federal Reserve) based on the progressive policies that attributed illegal racial discrimination motives to traditional income and appraisal underwriting.

No Skin in the Game

The sub-prime lending bubble of 1995 through 1998 financed with opaque securities issued by independent finance companies that following SEC rules reported phantom profits burst with no systemic consequences. By 2000 many of these former sub-prime lenders and securitization practices had migrated to the federally insured commercial banks in part to finance Community Reinvestment Act (CRA) lending commitments. These increased 500 fold after the deregulation of interstate Banking in 1994 when discretionary regulatory permission for M&A activity was held hostage to a favorable public CRA Report. Pushed by regulators and pulled by the big potential M&A payoff, borrower down payment requirements were virtually eliminated and bank “regulatory arbitrage” minimized capital requirements, virtually eliminating any Skin in the Game (Taleb, 2018). This asymmetric “trade” was irresistible.

The Perfect Storm

The Big Short by Michael Lewis presents the progressive narrative of “greedy” speculators who were shorting the housing market but doesn’t explain why they failed to prevent the bubble from inflating to systemic proportions by bankrupting lenders. The reason is that the cheap Federal Reserve credit continued to be channeled to the housing bubble by Fannie and Freddie. Historically conservative, they were now led by politically anointed CEO’s who, facing no bankruptcy constraint, willingly followed the path to perdition. This path was paved by HUD’s “Mission Regulator” who not only ratcheted up the lending goals well beyond prudent limits but in 2005 imposed a new goal that they maintain a 50% market share with these private lenders. Propped up by the federal government, all the big players were going for broke simultaneously.

This was guaranteed to fail. Financial institutions reported several trillion dollars (pgs. 157-158) of home mortgage credit losses after the bubble burst and 10 million homeowners lost their homes over the next six years in spite of massive government efforts to avoid or delay foreclosure. Like the lending bubble, the foreclosure bubble was much bigger for minorities. Yet The Financial Crisis Inquiry Commission Democrat Majority Report (2010) spun the narrative that the systemic “risk” was due mainly to traditional liquidity concerns.

I’m from the federal government and I’m here to blame you.

That’s no joke. During the Obama Administration Patrick, then Governor of Massachusetts led the multi-state suit against lenders alleging discrimination in foreclosures based on disparate impact. At the same time, current DNC Chairman Tom Perez was pursuing “disparate impact” cases against lenders under the Fair Housing Act as Attorney General Eric Holder’s Deputy.

In a 2009 Financial Times editorial Taleb proposed ten principles to avoid a repeat of 2008:

What is fragile should break early, while it’s still small.

No socialization of losses and privatization of gains.

People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

Don’t let somebody making an incentive bonus manage a nuclear plant or your financial risks.

Compensate complexity with simplicity.

Do not give children dynamite sticks, even if they come with a warning label.

Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence.”

Do not give an addict more drugs if he has withdrawal pains.

Citizens should not depend on financial assets as a repository of value, and should not rely on fallible “expert” advice for their retirement.

Make an omelet with the broken eggs.

All good advice, all ignored by politicians and regulators who created the Rube Goldberg dystopia they rail against.

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Kevin Villani

Kevin Villani was Chief Economist at Freddie Mac from 1982 to 1985 and HUD from 1979-1982. He 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.

Are Professional Economists Idiots?

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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

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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?

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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

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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.