Kevin Villani

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

by

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

by

(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

by

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.

Draining the Swamp: Progressive Politics – the Road to Crony Capitalist Perdition

by

From A Libertarian Republic to Majoritarian-Totalitarian Democracy: a Summary

The 2016 American Presidential Election

Trust in government fell by almost 80% from the end of the Eisenhower Administration to the end of the Obama Administration. Then Americans endured one of the most divisive and longest two year election campaigns leading up to the 2016 election. Former Democrat turned Republican Donald Trump defeated a field of 17 traditional center-right Republicans to run against traditionally centerleft Democratic candidate Hillary Clinton who turned left to defeat her socialist competitor Bernie Sanders in the primary. Sanders correctly argued that the U.S. political system is rigged more than he knew at the time but responded by promising his generally young supporters socialism without totalitarianism. The public has endured another two years of divisiveness as the losing party tries to undermine and some would impeach the winner.

Republican nominee and arguably crony capitalist businessman Donald Trump, the son of a crony capitalist housing developer, ran on the paradoxical promise to “drain the swamp.” The faux democratic election of crony capitalist supremo Vladimir Putin in 2011 drew the public reprobation of then U.S. Secretary of State Hillary Clinton, the subsequent Democratic Party nominee. Putin responded with a campaign of not so fake news not to elect Trump they had the same polls as everybody else but to expose Clinton as a crony capitalist who also engaged in election-rigging. He hit pay dirt. The faux Russian collusion scandal has since been used to undermine the legitimacy of the Trump Administration.

On the issue of trade there was no difference between the three main candidates all opposed the new TTP trade agreement. The U.S. trade deficit has been about $500 billion a year during this century, consumption financed mostly with additional debt. Candidate Clinton, who supported China’s entry into the WTO during the Clinton Administration agreed she would if elected renegotiate NAFTA, the trade bill passed at her husband’s initiative. On the related issue of immigration, candidate Clinton voted for the bipartisan Secure Fence Act of 2006, as did then Senators Obama and Schumer.

The Obama Administration had doubled the federal debt outstanding to over $20 trillion – and the unfunded liability is approximately ten times that. President Obama’s Chairman of the Joint Chiefs of Staff publically warned as early as 2010 that the debt was a threat to national security. Candidate Clinton promised she wouldn’t add a penny to the national debt, but her platform had an imbedded $10 trillion increase, less than Sanders to be sure. Candidate Trump promised to eliminate the debt in eight years by increasing economic growth. Clinton’s was a political lie, Trump’s an outlandish campaign promise since going unfulfilled: his appropriations bill contained a $200 billion increase in spending, a Democratic victory for domestic spending in return for Republican defense spending.

Candidate Trump ran against the “deep state” wars and military interventions that candidate Clinton had voted for. But as President, Trump embraced it with overwhelming Democratic support to punish Russia.

Progressivism’s Administrative State

The Democrats’ agenda has arguably fared much better under Trump than Republicans did under Obama. Given these similarities in proposed and actual policies, the subsequent animosity might appear puzzling. But the biggest difference among the candidates relates to the relative roles of the public and private sectors. The U.S. is now governed by an unaccountable patria administrative state: judicial and legislative subsumed in the executive branch and sometimes independent even of that judge, jury and executioner. The new religion is “science” requiring a faux consensus and leadership by the “experts” as proposed by John Kenneth Galbraith in the New Industrial State (1967) over a half century ago.

Washington, D.C. is a place where self interested deals are made in hotel lobbies and K street offices, but the entire federal bureaucracy sits on a former swamp. Most federal politicians are political swamp people having worked their way up in local and state politics by making political deals for budget and/or tax subsidies and/or regulatory discretion – legal extortion. Candidate Clinton is a self described progressive and candidate Sanders a socialist, the former supports state control of business, the later favors more direct state ownership.

The Berlin Wall fell in 1989, followed by the Soviet Union two years later. In 1995 U.S. President Bill Clinton declared “The era of big government is over.” Britain’s Prime Minister Tony Blair, publishing in a Fabian pamphlet in 1998 argued: “Liberals (classical, i.e., American conservatives) asserted the primacy of individual liberty in the market economy; social democrats promoted social justice with the state as its main agent. There is no necessary conflict between the two, accepting as we now do that state power is one means to achieve our goals, but not the only one and emphatically not an end in itself.” But “the values which have guided progressive politics for more than a century – democracy, liberty, justice, mutual obligation and internationalism” have lead in practice to “state control, high taxation and producer interests (crony capitalism).” By the end of the century a few years after Blair spoke, the market had reached The Commanding Heights of the economy. But a decade later the Obama Administration had put the state back on top, seeking to control not just health care but finance and energy.

Progressivism like fascism and communism started with the best of intentions, in opposition to crony capitalism. Social welfare programs were implemented to spread the wealth and provide a safety net, but during the progressive Obama Administration economic growth per capita stagnated. Candidate Trump believed that rolling back the administrative state regulations and the tax on savings and investment as suggested by Blair would restore real private economic growth, the key to managing the public deficit. His Democratic opponents both favored a vast expansion of the administrative state and increases in the tax on capital.

Progressive Internationalism and the New World Order

Progressives supported freer trade even if not reciprocal in the post WW II era because America could still enjoy a balance of trade surplus that could be used to fund investments abroad and a “new world order” of American dominance in a bi-polar world with the Soviet Union and its satellites. The European Union evolved as a mechanism to end European – especially German “nationalism” in favor of this plan. Two events undercut this agenda of international control through capital flows: the 1960s wars on poverty and Vietnam turned American surpluses into deficits, and the common European currency created a German economic hegemony over Europe. The U.S. today is to China what Greece, Italy, Spain, Portugal and Ireland are to Germany, and that’s not a compliment. Both China and Germany – whose exports equal China’s with only 6% of the population – are mercantilist countries pursuing low wages and consumption domestically so that future generations can live off the debt that finances their over-consuming customers.

Germany understands perhaps better than any country the problem of using foreign debt to finance current consumption as it did to feed a starving population during the interwar years. The excessive debt undermined the fledgling Weimar Republic, giving rise to Hitler. Trumps trade policy appears incoherent, as is much of the criticism. Progressives still argue for globalism and internationalism while conservatives and libertarians are hung up on Ricardian theory of comparative advantage in international trade and the accounting identity of the trade and capital balance.

The problem isn’t global trade per se, but progressive policies that repress national saving and domestic labor and capital productivity while growing the administrative state. National boundaries still matter. In the EU the single currency zone has destabilized previously relatively stable prosperous countries, threatening political and economic collapse. The relationship between the U.S. and China reflects a similar dynamic: the willingness to accept American debt has kept the dollar from falling and trade adjusting. China holds over trillion dollars of debt backed by taxpayers, and was the biggest foreign funder of Fannie Mae and Freddie Mac during the sub-prime lending bubble. Progressives argued that we would grow out of this debt, but simultaneously and inconsistently deny that the failure to grow during the Obama Administration reflected economic repression but “secular stagnation” that capitalist innovation has run its course. If so, we are doomed when countries attempt to collect.

Thus far the main part of the Trump agenda, the tax reform and regulatory roll back – against universal Democratic opposition and condemnation – appears to be working. Economic growth per capita has picked up, unemployment is the lowest since the turn of the century, and business investment net of depreciation is rising from historic lows. But it is way too early to declare success. China entered the WTO without meeting the minimum requirements for intellectual property protection or reciprocity, a Clinton Administration oversight. Fixing the former should be uncontroversial. Reciprocity insures that the most competitive – not the most subsidized win. Subsidies may benefit American consumers temporarily, but the dislocations are costly and overconsumption dangerous, the debt leading to contemporary “gunboat diplomacy” to settle debts. A reciprocal tariff is a consumption tax, not irrational to consider under those circumstances.

Progressive efforts to Impeach President Trump: the Totalitarian Administrative State Strikes Back

Yet since the election, some progressive Democrats have been pushing for impeachment on grounds of Russian collusion and obstruction of justice, although no evidence has yet been produced of that after two years of investigation.

One thoughtful progressive commentator dismisses these grounds, arguing that the real grounds for impeachment are the “threats Trumpism poses to democracy and rule of law.” If true, those would indeed be grounds for impeachment but he doesn’t define Trumpism or provide evidence. The many articles in the progressive media can be summarized thus: Trump is tweeting against the administrative state agents that are out to get him.

Libertarians and Republican conservatives have argued that progressives have been undermining liberty and the rule of law for over a century to create the administrative state, obfuscating their agenda by manipulating words to mean the opposite of their historical meaning. Trump’s Court appointments are intended to reverse that trend. Statism is usually associated with one-party faux democracy to prevent state power from turning against the entrenched interests with a change of government. Trump ran against the progressive new world order, arguing to “put America first.” The Democrats didn’t think Trump had any chance to win. This seems the more compelling reason for their impeachment efforts. The anti-Trump organized hysteria bears a marked resemblance to the largely Soros funded Republican and Democratic efforts to ignite the democratic color revolutions in the former Soviet states described by F.William Engdahl in Full Spectrum Dominance: Totalitarian Democracy in the New World Order (2009).

This isn’t about Trump tweets. It’s a battle for the commanding heights.

Read more

Have American Workers Been Chronically Exploited?

by

For centuries leading up to the Bicentennial in 1976 the American Dream of perpetually rising living standards has been paid for with wages that rose faster than prices. During the post WW II era worker productivity – as measured by output per hour – has continued to rise at a constant rate. Wages rose in lockstep with increasing productivity until the mid 1970s, but have since stagnated, rising only 15% as much (11% as compared to 75%) through 2016, as reported by the think tank EPI. The view from the left is that the wealthy owners and managers of capital have expropriated 85% of the fruits of labor, implicitly reflecting the decline of unionization of the private labor force from about one in three workers in the 1950s to one in twenty today. Their policy proposals reflect this perception of exploitation.

Politicians promote “Social Justice” through protection and redistribution
Even Karl Marx never expected capitalists to be this successful at exploiting workers, exceeding even that of 19th century robber barons and pre-Civil War southern plantation owners who at least provided their slaves basic sustenance. Politicians have responded with labor protections and income subsidies.

For example, the Obama Administration strongly supported (and was generously supported by) public sector unions. It also supported the expansion of private sector unionization through such policies as card check and Davis Bacon “prevailing,” i.e., union, wages for construction. It also supported “living wage” laws and raised the federal minimum wage, with states following and in some cases leading. In addition, restrictive state certification rules have increased five-fold since the 1950s.

Politicians also responded by supporting a rising standard of living with welfare state income redistribution policies. Obama-Care made health insurance universal and the percentage of the population receiving food stamps rose by 32%. In addition, those receiving disability payments rose about 50% during the last decade, despite the decline in risky manufacturing jobs.

These labor and subsidy policies all have roots in the response to the Depression of 1929/30, before it became “Great.” FDR – following Hoover – supported private – but strongly opposed public – sector unionization and a high wage policy, successfully keeping wages 40% above their market clearing rate according to a 2009 article. Social Security was introduced by FDR’s Labor Department and food stamps by his Agriculture Department (food perishables were purchased by the government to keep farm prices inflated and taken off the market, then distributed to the poor to save storage costs).

Read more