Time to Do the Hard Thing

By John Mauldin

Source: Fox Business

How to reform today’s rigged capitalism

We must address weakened competition, feeble productivity growth, high inequality and degraded democracy

Martin Wolf


© Efi Chalikopoulou


“It is clear then that . . . those states in which the middle element is large, and stronger if possible than the other two [wealthy and poor] together, or at any rate stronger than either of them alone, have every chance of having a well-run constitution.”

Thus did Aristotle summarise his analysis of the Greek city states. The stability of what we would now call “constitutional democracy” depended on the size of its middle class. It is no accident that the US and UK, long-stable democracies today succumbing to demagogy, are the most unequal of the western high-income countries. Aristotle, we are learning, was right. (See charts.)

My September analysis of “rigged capitalism” concluded that “we need a dynamic capitalist economy that gives everybody a justified belief that they can share in the benefits.

What we increasingly seem to have instead is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.”

So what is to be done?




The answer is not to overthrow the market economy, undo globalisation or halt technological change. It is to do what has been done many times in the past: reform capitalism. That is the argument I made in a recent debate with former Greek finance minister Yanis Varoufakis on whether liberal capitalism should be saved.

I argued, in effect, that “if we want everything to stay the same, everything must change”, as the Italian author Giuseppe Tomasi di Lampedusa wrote. If we want to preserve our freedom and democracy we need to embrace change.

Here are five policy areas that need to be addressed.




First, competition. Thomas Philippon’s wonderful book, The Great Reversal, demonstrates how far competition has weakened in the US. This is not the result of inevitable forces, but of policy choices, especially abandonment of an active competition policy. US markets have become less competitive: concentration is high, leaders are entrenched and profit rates are excessive.

Moreover, this lack of competition has hurt US consumers and workers: it has led to higher prices, lower investment and lower productivity growth. In a paper on reducing inequalities, in an invaluable collection on “Beyond Brexit: A Programme for UK Economic Reform”, Russell Jones and John Llewellyn argue that concentration and mark-ups have also risen in the UK.




In the past decade, Amazon, Apple, Facebook, Google, and Microsoft combined have made over 400 acquisitions globally. Dominant companies should not be given a free hand to buy potential rivals. Such market and political power is unacceptable. A refurbishment of competition policy should start from the assumption that mergers and acquisitions need to be properly justified.

Second, finance. One of Prof Philippon’s most striking conclusions is that the unit cost of financial intermediation has not fallen in the US over 140 years, despite technological advances.

This stagnation in costs has, alas, not meant financial stability. There is also evidence that there is now simply too much credit and debt.

Radical solutions exist here, too: raise the capital requirements of banking intermediaries substantially, while reducing prescriptive interventions; and, crucially, eliminate the tax-deductibility of interest, so putting debt finance on a par with equity.




Third, the corporation. The limited liability joint stock corporation was a great invention, but it is also a highly privileged entity. The narrow focus on maximising shareholder value has exacerbated the bad side-effects.

As the British Academy’s “Principles for Purposeful Business” report argues, “the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems”.

That is self-evident. It is also hopeless to rely on regulation alone to save us from the consequences of myopic business behaviour, particularly when business uses its vast resources to lobby on the other side.

The US Business Roundtable has recognised this. We need new laws, to effect required changes.





Fourth, inequality. As Aristotle warned, beyond a certain point, in­equality is corrosive. It makes politics far more fractious, undermines social mobility; weakens aggregate demand and slows economic growth.

Heather Boushey’s Unbound spells all this out in convincing detail. To tackle it will require a combination of policies: proactive competition policy; attacks on tax avoidance and evasion; a fairer sharing of the tax burden than in many democracies today; more spending on education, especially for the very young; and active labour market policies, combined with decent minimum wages and tax credits.

The US has poor labour force participation of prime-aged adults, despite unregulated labour markets and a minimal welfare state. It is possible to have far better outcomes.




Finally, our democracies need refurbishing. Probably, the most important concerns are over the role of money in politics and the way the media works. Money buys politicians.

This is plutocracy, not democracy. The malign impact of fake news (which is the opposite of what the US president means by the term) is also clear. We need public funding of parties, complete transparency of private funding and also far greater use of consultative forums.

Without political reform, little of what we need elsewhere will happen. If things then stay as they are, economic and political performance is likely to get worse, until our system of democratic capitalism collapses, in whole or in part. The cause then is great. So is the urgency.

We must not accept the status quo. It does not work and has to change.

A Holiday Haircut for Chinese Dollar Debt

By Nathaniel Taplin

Restoring Central Banks’ Credibility

The old central-bank playbook of slashing interest rates to spur consumption, investment, and employment has become less effective since the 2008 financial crisis. Yet without effective tools and the public's confidence, central banks will be unable to rise to the occasion when the next recession arrives.

Larry Hatheway



ZURICH – Recent jumps in equity prices and bond yields suggest that recession fears are receding. But the global economic expansion cannot last forever, and when the next recession comes, central banks may not be adequately prepared to respond. Enhancing central-bank credibility to bolster the effectiveness of monetary policy is thus an urgent priority.

Before the 2008 financial crisis, central bankers could rely on slashing interest rates to spur consumption, investment, and employment. But that playbook no longer works as well as it once did. One reason is elevated uncertainty, owing to globalization, societal aging, changing consumer preferences, growing income and wealth inequality, rising health-care costs, rapid technological change, and other factors. Even in the absence of recession, for many households and businesses, the future seems daunting and unpredictable.

This uncertainty will exacerbate the downturn when it comes. When uncertainty spikes, low or even negative real (inflation-adjusted) interest rates may not induce higher spending. Rather, savings may rise and investment may falter even as interest rates plunge. If governments are unwilling or unable to boost demand with fiscal policy, the result will be a prolonged and deep economic slump.

Few would doubt that monetary policy should be eased in such circumstances. In theory, central banks have extraordinary means to respond, through negative interest rates, asset purchases, “forward guidance,” and the like. Yet, in practice, central banks face tight constraints, which means that their response to the next recession may prove insufficient.

Broadly, these constraints fall into two categories: laws or established policies that define what monetary policy can do; and political and institutional limits that hem in central banks’ decision-making. The legal limitations vary according to the political and institutional environment and history of a central bank’s jurisdiction.

In conducting open market operations, for example, the US Federal Reserve may purchase only debt securities issued or guaranteed by the US federal government. In contrast, the Bank of Japan may purchase private-sector securities such as equities or corporate bonds, giving it potentially greater latitude to expand its balance sheet and stimulate corporate finance.

Such differences could matter in the event of a severe slump that requires extraordinary measures. To take an extreme example, the Fed cannot unilaterally create “helicopter money” – a metaphor invoked by Milton Friedman to describe how a central bank might distribute cash directly to individuals in order to stimulate consumption.

To create cash (a central-bank liability), the Fed must purchase an asset. Yet because private-sector IOUs are not eligible assets, the Fed cannot distribute cash directly to the bank accounts of ordinary Americans (nor could it drop $20 bills from the sky, even if it had the helicopters).

So, in the US case, helicopter money would actually have to be a fiscal transfer from the federal government to its citizens, underwritten by Fed purchases of Treasury securities. As such, it is a policy that only Congress and the president can enact. The problem is that legislating such measures would take considerable time, whereas the next economic or financial crisis will probably require swift and decisive action.

To be sure, helicopter money is typically viewed as a last resort. But even less heterodox policies may be hamstrung by policy norms. For example, the Fed has been reluctant to endorse the option of breaching the “zero lower bound” (ZLB) and introducing negative policy rates. Yet if the equilibrium real interest rate falls below zero, as seems likely in the next recession, that self-imposed ZLB limitation could pose problems.

In fact, the Fed’s own staff has estimated that the ZLB floor could prevent it from delivering an appropriately low real interest rate as often as 40% of the time, given plausible estimates of the neutral real policy rate and the odds of below-trend growth. Such failures could threaten the next recovery, and even the Fed’s independence.

Central bankers also face political and institutional constraints. In Europe, financial institutions (particularly the Bundesbank), pensioners, and savers dislike negative interest rates. Whether these constituencies’ opposition to monetary-policy easing has prevented the European Central Bank from acting as forcefully as it might otherwise have done is an open question. But, clearly, an air of timidity has damaged the ECB’s credibility.

The ECB staunchly opposes high inflation, but has been tolerant of below-target inflation. In 2012, then-ECB President Mario Draghi famously committed to do “whatever it takes” to save the euro. Yet he never mustered the same resolve to ensure that inflation would reach the bank’s mandated target.

Economists agree that credibility reinforces monetary-policy effectiveness. If consumers, workers, and businesses don’t believe that a central bank is committed to achieving its mandate, they will adjust their behavior accordingly. Low inflation expectations will lead to low inflation outcomes.

Those outcomes are not costless. When inflation is too low, it is harder to push down real interest rates, particularly if citizens oppose negative nominal rates. In such circumstances, a central bank that is unwilling to commit to its inflation target partly surrenders its most important policy tool: the ability to cut real interest rates in the event of a downturn.

Forfeiting policy tools is especially problematic now that the traditional transmission channels for monetary policy are proving less effective. Easing policy is less likely to depreciate the currency and boost net exports if other central banks are doing the same. And while loose monetary policies may boost asset prices, consumption won’t increase much if the benefits are accruing only to the wealthy.

Whenever the next downturn comes, it will be too late to remedy central banks’ shortcomings.

But by making changes before they are necessary, central banks can restore their credibility.

For example, the ECB could immediately announce a “whatever it takes” commitment to a symmetric inflation target, and then back it up with a round of easing. Doing this when confidence in growth is returning would send a powerful signal that the policy change is structural and not just another belated cyclical Band-Aid.

Central bankers should also revisit legal and self-imposed policy constraints, with an eye toward amending or removing those that could hinder policy flexibility in “tail risk” scenarios.

Demonstrating a willingness to act before the crisis arrives is a costless way for central banks to safeguard their most important asset: the belief that they know what they’re doing.


Larry Hatheway is Group Head of Investment Solutions and Group Chief Economist at GAM.

Is it better to impeach and lose or never to impeach at all?

Lessons from Watergate for Donald Trump and the Democratic Party




After a couple of false alarms, Donald Trump’s “Watergate” moment has arrived. On December 4th the House Judiciary Committee will begin a process of deliberation that will probably lead to it drafting articles of impeachment against the president by the end of the year. Whether a hot-button charge of bribery—the most specific ground for presidential dismissal described in the constitution—will make the list is unclear: Democratic leaders say it might. Yet the case against Mr Trump, that he sought to shake down a foreign leader for political favours using military aid and other state resources as leverage, is essentially already proven.

The White House record of Mr Trump’s “Do us a favour” call to President Volodymyr Zelensky was the smoking gun. The public hearings House Democrats conducted in November mostly underlined that. They also revealed how many of those around Mr Trump—including Mike Pence, Mick Mulvaney and Mike Pompeo—knew of or facilitated his scheme. Having conceded their original defence (that there was no shakedown), Mr Trump and his supporters have therefore fallen back on a line that takes less account of the Ukrainian matter in hand: the president is the victim of a vast left-wing conspiracy. This is nothing less, writes a columnist in American Greatness, a pro-Trump publication, than a “de facto, three-year-long singular effort to delegitimise and ultimately remove Trump from office before the 2020 election.” Mr Trump calls the congressional probe into his behaviour a “coup”.

Although the liberal backlash against Mr Trump has been overboard and self-defeating at times (starting with the handful of Democrats who talked about impeaching him from the very beginning), this is not a credible defence. It is plainly designed to distract from and minimise the specific charges the president faces, which he and his advisers are at the same time striving to discredit. (Mr Pompeo’s statement this week that he had a “duty” to investigate the president’s damaging and untrue claim that Ukraine, not Russia, was behind the 2016 election hack was especially dismal.)

Tellingly, their partisan attack-line was also used by Richard Nixon and his supporters as the evidence against him mounted. “Watergate was a coup d’état that…destroyed a president who had humiliated the liberal establishment,” fumed “Pitchfork Pat” Buchanan, a Nixon aide and sometime Republican presidential candidate, fully 40 years later. Though Watergate is known for the bipartisan moment when Republican support crumbled before the proof of Nixon’s crookedness, the grievance his investigation and removal stirred on the right lasted long after that moment passed.

Mr Trump’s accusers can take three, somewhat contradictory, lessons from this historical echo. First, tough political outcomes always look easier in retrospect than they did at the time. Partisanship, an older blight than many recall, has made most things worth fighting for highly uncertain at times. If the impeachment experts that the Judiciary Committee will convene at its first hearing make a strong case that Mr Trump warrants the ultimate constitutional check, history might therefore seem to recommend it.

Yet the Watergate comparison also shows how much harder dislodging Mr Trump would be than removing Nixon was. He is far more popular with Republicans. Having governed as a centrist, Nixon endeared himself to conservatives only when his progressive accusers started to seem more threatening than his support for civil rights and detente with China had. And today’s Republicans are more ideologically aligned, and thus tribal, than they were then. That is largely a product of the grievance-powered conservative media bubble, currently thrumming with anti-Ukraine and anti-left conspiracy theories—which is in turn partly a response to Nixon’s removal. The genius behind Fox News, Roger Ailes, was a former Nixon aide driven by a determination to create a counterweight to the liberal establishment that did him in.

Fox and its peers were designed, in other words, to go to war for a conservative champion at such a time as this. And in Mr Trump they have a champion to die for. This is his biggest advantage in an impeachment knife-fight. Where fulminating against the libs was something Nixon mostly did alone with his Scotch bottle, until it became his last-ditch defence, it is Mr Trump’s main method. In his policies and rhetoric he governs like a wartime president, as the Atlantic’s Ron Brownstein puts it—forever rallying his supporters against the enemy that is the other half of America. Whether an impeachment trial could actually strengthen him, as he claims, is hard to predict. A small majority already wants to see the back of him. But Mr Trump is uniquely well prepared to survive it.

That might argue for abandoning the effort, whatever the experts advise. Some nervous Democrats want this. Yet the comparison with Watergate also points to the rising possible cost of such a retreat. Although Nixon and then Bill Clinton considered their accusers malevolent and tried to block them, illegally at times, neither disputed that a president can be subject to investigation. Mr Trump, who has ordered his administration not to comply with the congressional probe and says the constitution lets him do “whatever I want as president”, disputes this every day.

The right of kings

A growing number of conservatives agree with him. Indeed Mr Trump’s argument is a logical extension of the post-Watergate view on the right that checks on the presidency are illegitimate when wielded by the other side. That was the essence of Mr Buchanan’s rhetoric and also of a recent speech by William Barr, the attorney-general, in which he asserted that the president’s accusers were subverting the constitution and undermining the rule of law. Mr Barr is known for taking an expansive view of executive power—but only, it seems, when a Republican is in charge.

If Democrats want to leave him the field they know what to do. They have only to refrain from impeaching Mr Trump, not because it would be unwarranted, but because it would be too hard.