The Financial Education of the Eurozone

Christopher Smart
. Penone sculpture at ECB

LONDON – In 2017, Europe’s leaders will confront an array of severe tests, including tumultuous elections featuring populist insurgencies, complex negotiations over Britain’s departure from the European Union, and a new American president who thinks that the transatlantic alliance is “obsolete.”
But, despite these challenges, EU leaders will also have an opportunity to strengthen their battered union and reinforce its institutions. In particular, they should focus on restoring the banking sector’s credibility, by providing it with more capital and better oversight. Even if they make progress on nothing else, achieving this goal could turn 2017 into a very good year after all.
Europe’s banks have long been central to the continent’s economy. In France and Germany, bank assets amount to 350-400% of GDP, whereas in the United States, they are equal to just over 100% of GDP. After the 2008 financial crisis, the eurozone’s weakest banks quickly buckled under the weight of their bad loans, and then threatened to drag their respective governments down with them. With many countries’ creditworthiness in doubt, even strong banks were caught in a “doom loop,” as they suffered losses from the collapsing sovereign debt on their books.
Ironically, eurozone banks’ interdependence is what eventually saved the day. Because Irish, Portuguese, and Greek banks owed money largely to German, French, and Dutch banks, the external shocks to the weakest banks and economies were immediately shared with the strongest. This forced all stakeholders to cooperate on a joint response, despite the political costs. Had all European banks and economies not been imperiled, it is hard to imagine that European leaders ever would have agreed to a $1 trillion backstop for financial markets.
Meanwhile, the European Central Bank’s integrated payment system enabled regular transfers to continue between peripheral and core banks, which sustained commercial activity and financing through the worst parts of the crisis. The ECB also maintained its liquidity support – if not always generously and reliably – and ultimately committed to intervening to resolve threatened institutions, thus alleviating market turmoil. While political leaders were caviling over the legality of interstate loans, European institutions were softening the blow from a global shock.
Economists tend to agree that an “optimum currency union” requires such features as high labor mobility, shared fiscal oversight, and synchronized business cycles – none of which the eurozone has. But as the financial crisis revealed, integrated banks and financial markets can also be an essential source of resilience.
Contrary to many predictions, the eurozone did not inevitably collapse; rather, it was undeniably bolstered by a response that improved oversight, strengthened institutions, and pooled resources. It is particularly remarkable that eurozone regulators can now oversee and, if necessary, intervene on behalf of the monetary union’s largest banks.
Of course, the crisis, together with European institutions’ perceived clumsiness, has also provoked a significant backlash among voters, some of whom doubt that the common currency can deliver prosperity. Indeed, just because the euro survived the last crisis does not mean that it will survive the next one.
And yet, even in today’s fraught political climate, European leaders can make progress if they set aside grand, unrealistic proposals for a European finance minister or more intrusive inquiries into countries’ economic policies. Instead, they must concentrate on reinforcing the common currency’s inherent strengths, not least by formulating a credible plan to clean up the bad loans on Italian and Portuguese banks’ balance sheets. Ideally, such a plan would include European resources as well as local reforms, and it would address insolvency-regime inefficiencies, so that banks are not burdened with non-performing loans while they wait for a court’s approval to convert collateral.
To improve confidence in the overall system, policymakers also need to set limits on banks’ sovereign-debt exposure, which will end the doom loop and allow for more contributions to flow into the EU’s Single Resolution Fund. And, for good measure, the ECB should consider intervening to restructure a couple of medium-size banks, just to show that it can.
Finally, policymakers should encourage further capital-market integration, which would reinforce the euro, improve cross-border risk taking, diversify funding sources, and expand access to finance. This will become all the more important after the United Kingdom has left the single market.
Today’s political climate limits the possibilities for structural reforms, fiscal pooling, and improved labor mobility. But if European leaders can strengthen the banking union, there is still hope for the eurozone’s future.
The eurozone has gone through a period of financial education. Political leaders were forced by global markets to take unpalatable steps to reinforce the monetary union, only to realize that one feature of the problem – bank and market interdependence – also pointed to a solution, and will likely drive more reforms.
Taking steps to integrate the banking union and European capital markets further may not be sufficient to ensure the euro’s long-term survival; but doing so is necessary. And in these politically tumultuous times, it is the only realistic option.
This commentary is based on a study of the European crisis, “The Financial Education of the Eurozone,” published this month as a Mossavar-Rahmani Center Associate Working Paper.

If This Trend Continues, a Full-Fledged Credit Crisis Is Inevitable

Justin Spittler

On the surface, the U.S. economy looks like it’s doing fine.

The unemployment rate is at an all-time low. Inflation—a popular measure of economic growth—is picking up. Consumer confidence is at the highest mark since 2004.

But these “mainstream” indicators aren't telling the whole story…

You see, at the Dispatch, we look beyond the headlines to understand how the economy’s really doing. And we recently found something disturbing in our research.

Almost no one is talking about this. But that could soon change…

• Americans are filing bankruptcy at the fastest rate in years…

Last month, 55,421 U.S. consumers filed bankruptcy. That’s 5.4% more than in January 2016.

It was the second month in a row that consumer bankruptcies rose, too. In December, we had 4.5% more consumer bankruptcies than in December 2015.

This marks the first time in seven years that consumer bankruptcies have risen back-to-back monthly.

But that’s not all.

• A growing number of U.S. businesses are going bust…

Last year, 37,823 U.S. companies went bankrupt. That’s 26% more than in all of 2015.

According to Business Insider, consumer and business bankruptcies are now rising together for the first time in seven years. You can see this alarming trend in the chart below.

• This is clearly a bad sign for the economy…

But we can’t say we’re surprised.

After all, the Federal Reserve has been flooding the economy with cheap money for nearly a decade.

It did so by holding its key interest rate near zero since 2008.

This was supposed to stimulate the economy. But all it did was encourage a lot of reckless borrowing.

U.S. corporations have borrowed more than $9.5 trillion in the bond market since 2009. That’s 61% more than they borrowed in the eight years leading up to the 2008–2009 financial crisis.

Everyday Americans have racked up huge debts, too.

Last year, the value of U.S. auto loans topped $1 trillion for the first time ever. Outstanding credit card debt has also surged to record highs. The value of student loans has doubled since 2009.

• This wouldn’t be such a big problem if the economy were doing well…

But it’s not.

The U.S. economy has grown just 2% per year since 2009. That makes the current recovery the weakest on record.

More importantly, the economy hasn’t grown nearly as fast as consumer and business debt.

After almost a decade of reckless borrowing, people are finally paying the price.

They’re falling behind on their debt. They’re ending up in bankruptcy court.

And what we’ve seen so far is probably just the tip of the iceberg.

• Corporate America is drowning in debt…

Just look at the chart below.

It shows the cash-to-debt ratio for nearly 2,000 major U.S. companies. This key ratio has been falling since 2010.

Corporate balance sheets are now in far worse shape than they were before the last financial crisis.

The situation isn’t much better for everyday Americans, either.

U.S. households are more than $12.3 trillion in debt. Nearly half of all Americans are living paycheck to paycheck. Nearly 60% of Americans don’t set aside enough money to cover a $500 emergency.

What’s more, our economy’s precarious situation could soon be put to the test.

• Interest rates are rising for the first time in years…

You probably heard that the Fed raised its key interest rate in December. It was only its second rate hike since 2006.

The Fed also said it plans to raise rates three more times in 2017.

This is a huge deal.

You see, the Fed’s key rate sets the tone for rates across the economy. When it rises, mortgages and credit card rates rise, too.

And that’s exactly what’s happened.

The U.S. 30-year fixed mortgage rate has already jumped from 3.4% last July to 4.2% today.

Rates on corporate debt, student loans, and credit cards have also spiked over the last few months.

• The higher rates climb, the harder it will be for people to pay off their debts…

Unless rates change course, we could see many more bankruptcies in the coming months.

In other words, we could be on the edge of a full-fledged credit crisis.

Obviously, the Fed would do everything in its power to stop this. Maybe it will only raise its key rate once this year…or not at all.

This might buy the economy time…but it wouldn’t prevent the coming crisis.

You see, the Fed can influence things like mortgage and credit card rates. But it doesn’t set them.

Lenders do.

Pretend you're in their shoes. What would you do if bankruptcies were on the rise?

You would probably issue fewer loans. On the loans you did make, you would also probably charge higher rates. This would compensate you for the extra risk you’d be taking on.

• Now, imagine this happening on a grand scale…

Credit would dry up in a hurry. Our debt-addicted economy could start to unravel.

That’s where we find ourselves today.

Of course, we have no way of knowing if this is really the beginning of a giant bankruptcy wave. Only hindsight will tell.

But it’s something you should prepare for either way.

• To get started, take a good look at your portfolio…

Look "under the hoods" of the stocks you own.

Make sure these companies don’t need cheap credit to pay the bills. If they do, get rid of them.

One way to get a sense of a company’s financial health is to look at its interest coverage ratio.

This metric tells you how easily a company can finance its debt. The higher the ratio, the better.

Generally speaking, avoid any company with a ratio below 1.5. These companies are already struggling to pay their lenders. If borrowing costs keep rising, they could default on their debt or even go bankrupt.

Chart of the Day: Debt Won't Fix Your Problems

Today’s chart tells a story. It explains why everyday Americans are borrowing more money than they can afford.

The green line shows how fast the typical American household income has grown since 2003.

The blue line measures how fast the cost of living has climbed over the same period.

You can see that living costs are rising faster than incomes. Because of this, many Americans have borrowed money just to make ends meet.

Now, borrowing to pay bills might work for a while. But this “solution” turns into a big problem over time.

We’re seeing this right now. This is why everyday people are going bankrupt at the fastest pace in nearly a decade.

One China, Two Koreas

The issues dividing the U.S. and China go beyond the "one China" policy.

By Jacob L. Shapiro

U.S. President Donald Trump told Chinese President Xi Jinping that he accepts the “one China” policy during a phone call on Feb 10. It is ironic that in the age of social media, the United States has entered a period of telephone diplomacy. Every word the U.S. president says over the phone seems to generate headlines. The headlines over Trump’s embrace of “one China” have been histrionic: Trump has given China “the upper hand,” Trump is nothing but a “paper tiger,” Trump has lost credibility in Beijing. Just two months ago, everyone was focused on the congratulatory phone call Taiwan’s president made to the then president-elect. The headlines at the time were equally melodramatic.

They portrayed Trump as either a bumbling novice who clearly didn’t know what he was doing or a brilliant tactician setting China back on its heels.

“One China” is a pleasant fiction. It is a vestigial diplomatic arrangement whereby China gets official recognition from most of the world and the U.S. recognizes Taiwan as an unofficial ally. In December, Trump indicated that the U.S. was not locked into an inevitable acceptance of the “one China.” This was a tactical move that had a specific purpose: to put China on notice that the U.S.’ previous policy was not sacred by dint of being the way things were done before. The real news isn’t that the U.S. has capitulated and accepted “one China.” It is that the U.S. does not view “one China” as a foregone conclusion and has reserved the right to take it off the table if the situation dictates.

Chinese President Xi Jinping looks on during a meeting at the United Nations European headquarters in Geneva, on Jan. 18, 2017. DENIS BALIBOUSE/AFP/Getty Images

With this diplomatic foreplay concluded, the U.S. and China can now get down to addressing the issues currently dividing the two countries. These issues can be divided roughly into three main areas.

The first is U.S. disapproval of Chinese military activity in the South and East China seas. The second is the U.S. desire to change some of the parameters of the U.S.-China trade relationship. The third is what to do about North Korea, which carried out its first missile test since Trump took office the day after the phone call with Xi.

With regards to the first issue, the U.S. is unhappy with the current level of Chinese assertiveness in the South and East China seas. China is building up military installations on various shoals and islands that are also claimed by other countries in the region. China likes to send its ships to controversial places, such as the waters around the Senkaku Islands in the East China Sea. These ships rarely take offensive action and usually withdraw. The result is an expression of diplomatic outrage from whichever country believes its claims or waters have been violated. In recent months, China also has taken to sending its overhyped and newly operational aircraft carrier into politically controversial areas, such as the Taiwan Strait.

The problem for the U.S. in dealing with this issue is that China’s moves are more publicity stunts than challenges to the balance of power in the region. The various islands China is building on are small enough that strategically significant supplies of weapons or ammunition can’t be stationed there. The U.S. and other countries find it annoying when China sails ships into contested waters, even sometimes into the sovereign waters of another country. However, China does not use these ships to obstruct global shipping lanes or attack U.S. naval assets. The worst that happens is minor scuffles over fishing rights. The point is that while the U.S. does not like these moves, the political and military costs of stopping them are too high.

The second issue is the U.S.-China trade relationship, which is as complex as it is large. It is well established that China needs access to the U.S. market for its exports. It is also well established that U.S. consumers depend on access to cheap imports from China. What the U.S. objects to is China’s currency manipulation and reduction of its export prices to such an extent that American producers cannot compete. Trump made this a key plank in his campaign, but it is not a new issue. Under former President Barack Obama, the U.S. raised tariffs on some Chinese goods, applied anti-dumping duties on others and brought many cases to the World Trade Organization over Chinese non-compliance with trading rules.

There is a great deal of concern that a trade war is brewing between China and the U.S. That is hot air, and the air is only going to get hotter. Trump promised his base that he would be tough on China.

He told these constituents they would reap the economic benefits of this toughness in the form of new jobs. That is going to be an impossible pledge for Trump to uphold. Even if it were as simple as finding the right economic levers to stop U.S. jobs from moving to China, the jobs that have already left would not simply return to the United States. This means Trump will be under significant pressure to demonstrate that he is extracting economic concessions from China. Ultimately, the economic relationship between the U.S. and China is too important for either side to turn its back on. There will be friction, accusations and recriminations, but trade will go on.

The last issue is North Korea. On the campaign trail, Trump accused China of not doing enough to combat the North Korean threat. For China, North Korea is a valuable tool for managing its relationship with the U.S. The more the U.S. must rely on China to manage North Korea, the more leverage China has over the United States. That said, the main goal for Washington and Beijing relating to North Korea is not in dispute. The U.S. does not want North Korea to have nuclear weapons. Neither does China. The disagreement comes in how to achieve that goal.

The Obama administration made a point of highlighting North Korea as the top national security threat the U.S. would face in the coming years. This is an exaggeration. North Korea does not have a device capable of reaching the United States. If it develops one, North Korea won’t fire it at the U.S. Mutually assured destruction loses nothing in its translation to Korean. North Korea’s key goal is regime survival. Its nuclear program is about ensuring that survival. The irony of nuclear weapons is that they only ensure survival by not being used.

Besides this, the U.S. lacks the ability to do destroy North Korea’s nuclear weapons program. A military intervention would have to be a surgical strike against North Korea’s nuclear infrastructure and current weapons stockpiles. The strike itself is theoretically possible. The problem is the incredibly precise intelligence needed to turn theory into practice. Furthermore, such a strike would have significant fallout. At best, its ramifications would be limited to reinvigorating the current regime’s legitimacy. At worst, North Korea might retaliate with attacks against South Korea and Japan that would kill many people. Sanctions are another approach pushed by the U.S. Sanctions, however, have had a limited effect on North Korea’s leadership as well as on other regimes. Iran, for example, agreed to a deal on its nuclear program because the rise of the Islamic State changed the strategic situation for both Washington and Tehran. Sanctions hurt the Iranian economy but new shared interests are what brought both sides to the negotiating table. Sanctions on Russia have not resulted (and won’t result) in an end to the Ukrainian conflict either.

China does not need to be told North Korea is an issue. China does not have the luxury of the entire Pacific Ocean separating it from what happens north of the Yalu River. China does not want North Korea to have nuclear weapons. More than that, China wants a certain degree of, if not political stability, than at least predictability in North Korea. If the North Korean regime collapses, the effects will spill over into China, and the prospect of unification on the Korean Peninsula will present a serious long-term challenge to Chinese interests. For all these reasons, China argues against antagonizing the regime in Pyongyang. Such moves from China’s perspective only cause North Korea to double down on its current approach and further destabilize the situation. China prefers a long, patient approach that maximizes regime stability and Chinese influence.

These three issues will define the relationship between the U.S. and China during Trump’s presidency. Whether it is appropriate to refer to Taiwan as the “Republic of China” will be determined by the geopolitics of the U.S.-China relationship, not vice versa. China has carefully crafted an image of being both incredibly sensitive when it comes to diplomatic protocol and deeply skilled in the art of negotiation. What can be said at least is that China is exceptionally good at crafting that image.

Retail Zombies Haunt Industry

The lengthy list of retailers teetering on the edge of bankruptcy but not being allowed to die is holding the rest of the industry back

By Miriam Gottfried

Investors are normally a ruthless bunch but some are keeping alive a range of battered retailers, which is making things worse for the already struggling industry.

More retailers are teetering on the edge of bankruptcy than at any point since the recession.

Moody’s rates the debt of 19 retailers, or 13.5% of the retailers it covers, as “speculative, of poor standing and subject to very high credit risk” or worse. That is up from only 5.6% of the ratings agency’s retail portfolio at the end of 2011 and compares with 16% in 2009 in the middle of the financial crisis.

As dismal as things are among stores fighting e-commerce competition and endless price pressure, not that many have gone bankrupt. American Apparel, Limited Stores, Wet Seal and Sports Authority so far have been more the exception rather than the rule.

The roster of the living dead is mostly made up of household names, including publicly held companies Sears Holdings, Fairway Group Holdings and Bon-Ton Stores and private-equity-owned David’s Bridal, TOMS Shoes, True Religion Apparel, Nine West Holdings, Payless ShoeSource, Gymboree, Claire’s Stores and J. Crew parent Chinos Intermediate Holdings.

The future doesn’t look any brighter. A Republican proposal to tax imports by making them nondeductible expenses and exempt exports could further burden these companies.

To buy themselves time, some of the companies have done distressed-debt exchanges, in which bondholders agree to take a haircut, and other more creative arrangements. In September, Claire’s said it swapped $574 million of debt for new term loans that mature in 2021. And in December, J. Crew moved $250 million worth of intellectual property to a Cayman Islands subsidiary with the aim of borrowing against the assets and using the proceeds to buy back some of its debt. Gymboree, which has a $769 million secured term loan due February 2018, could end up looking for a similar out.

But investors may just be prolonging the inevitable. “What is the end game?” asks Moody’s retail analyst Charles O’Shea.

The problem is investors don’t want to believe the end is near. Instead bondholders are clinging to the idea that at least part of the dire situation is a temporary—the result of bad weather, a dip in tourism or fluctuations in oil and gas prices—as opposed to a secular decline. By allowing the most troubled retailers to live on, investors are contributing to the glut of bricks-and-mortar stores that has been weighing on retail margins, leading to store closures even at healthier retailers such as Macy’s.

A rise in bankruptcies wouldn’t be painless for the survivors. There would be inventory liquidations and even more vacancies at malls. Still, stronger retailers’ best hope for survival may be putting the zombie retailers to rest.

Technocracy, Liberal Democracy and the Division of Our Time

The idea that expertise ought to guide our political life is at odds with the principle of national self-determination.

I spend last week in the United Arab Emirates at a conference on the future of governance. While there, I was struck by the two principles that underlay this conference and its ilk. The participants’ core belief was that human government can be improved, and the means for improving it is social engineering. If we all turn our minds to governance, we can find solutions to the problems. The idea that human government is a permanent thing that reached its perfection in Athens and Jerusalem was not part of the participants’ ideology. What was most striking is that sitting within sight of the Gulf – Arab or Persian depending on the viewpoint – in a place of ancient civilizations, the theme was how to engineer the political future. 

Less alien, but not less striking, is the manner in which this concept has taken hold in Euro-American civilization. That civilization grew out of the Enlightenment, and its political foundation was the idea of republicanism, an idea that rests on the right of national self-determination. The idea that the nation is the foundation of a moral political life was self-evident to the American and French revolutions and their heirs. The individual and his nation were intimately bound. And the right of a nation’s people to govern themselves was central to the nation.

There was, of course, another part of the Enlightenment, the idea that reason ought to be used to improve all things, including government, and the idea that those who had mastered the subject at hand were to be respected and listened to. So an aeronautical engineer (always on my mind when I am at 36,000 feet) should design planes. Experts in governance should design governments.
Supreme Court Rules On Government's Brexit Appeal
A man carries a European Union flag outside the Supreme Court in Parliament Square, on Jan. 24, 2017 in London, England. Leon Neal/Getty Images
The idea that expertise ought to guide our political life is at odds with the principle of national self-determination. Expertise means experts, and experts are defined as knowing more than the rest of us. If government ought to rest on expertise, then experts should govern. If government should rest on the consent of the governed, then the premise is that all of us, by virtue of being citizens of a nation, are qualified to determine how the nation ought to be governed.

There is a blended version of this. The people should govern by selecting representatives, then those representatives ought to select experts to work on the details. It seems to me that this is one of those solutions that appears readily soluble but isn’t. In selecting a president or prime minister, the people are both imbuing him with power and holding him accountable. The idea of expertise is that governance is so complicated it requires experts to manage it. Very quickly the ability of the elected representative to determine the direction of the nation, or of the possibility of national self-determination, dissolves.

This is not the result of a conspiracy of the experts. The people’s expectation of what the state can do for them has surged, and with it the complexity of the process. Citizens cannot manage the complexity, and elected officials cannot oversee the complexity. By default, the republican system has moved from a relationship between the people and their representatives to one between the people, their representatives and the managers.

This process has been underway for a long time, since European states created a permanent civil service to do the bidding of their political masters. And since that time, the civil servants have increasingly managed the system – and managed their political masters.

Over time, the technocrats, who are the experts, developed ambitions and ideology. The ambition was to be free of the meddling hand of politicians and the ignorant whims of the people, and to be free, in the words of the United States Constitution, to build “a more perfect union” without being constrained by the inexpert help of the citizens or government. There was political ambition in this of course, but there was also logic. If history is the unfolding of reason, then those most trained in the application of reason must be allowed to rule. But the truth also was that the creation of a defense plan or a health care system requires expertise that citizens and representatives lack.

At the same time, there was an ideology at work as well, and it was most visible in the European Union. If the goal is to constantly improve governance, then a broader vision than the nation-state is needed. The problems that have to be solved can’t be solved within the narrow confines of a single nation-state. The nation stands in the way of improvement. Just as the people are incapable of understanding the technical complexity of the matter at hand, national boundaries are unable to contain the solution.

In going to meetings – and these happen continually and globally – attendees are experts in all areas. They genuinely know many vital things. But in thinking of global problems, they tend to think of national boundaries as impediments to solutions and national self-determination as being of value, as long as nations understand that there is a problem, that they are unlikely to solve it or even understand it, and they are prepared to cede authority to the experts, the technocrats.

In Europe, which was the laboratory for this, there was an attempt to solve the problem. National self-determination was guaranteed, but a complex political process with uncertain authority and little deference to the people governed. Behind it a relatively small but powerful group of technocrats designed and redesigned the details of European life.

It was a reasonable arrangement as long as it worked. The problem with technocracy is that its claim to authority is expertise, and the proof of expertise is success. If the technocracy is seen as a failure, then the technocrats’ right to manage the systems is destroyed. But the problem then is that given the complexity of what has been created, even a failed technocracy can argue that it may not have done well, but it can understand the failure better than anyone else. And more likely, the claim will be made that it did not fail, but the remnants of nations, governments and uneducated people selecting these governments caused it to fail.

There are two questions facing us. First, does the nation still constitute the framework of human life, and is representative democracy competent in managing the state? Second, is the theory of social and political expertise a myth? Are the technocrats competent to manage the complexity that the state has become?

This has become the fundamental issue of our time. From the technocrats’ point of view, the idea that the nation should be the primary interest of the state is anachronistic and dangerous. Nationalist movements threaten the ability of experts to govern. From the standpoint of increasing numbers of voters, technocracy usurps the power vested in the people without being able to manage the system successfully.

This has also created a social divide. The Euro-American educational system is constructed on the idea that management is at the center of success. The management of a government, a business, a hospital or a charity depends on expertise. For their social position, members of the managerial class of Euro-American society depend on the idea that they are indispensable to society. They have an obligation to manage well, and they have a right to rewards for good management. As such, this class manages everything from hedge funds to schools and shares in common this sense of social obligation and rights.

That class excluded from the managerial class is increasingly unprepared to concede that the technocrats of the managerial class have earned their benefits. 2008 was important for many reasons, but chief among them, it raised the question of whether the claims of expertise and beneficial social consequences was simply a cover for avarice. Indeed, the argument against technocrats everywhere is that they lack the expertise they claim to have, and their real end is to skew wealth in their favor.

This argument goes along with the argument that the technocrats, rather than increasing their modesty, are increasing their claim to authority and working to eliminate the right to national self-determination. That right derives from the moral equality of all people, and claims that the right to control government derives from a citizen’s human rights and interests. It does not rest on an expertise that technocracy claims but doesn’t clearly have or use for the common good.

One class is appalled by the rise of nationalism. The other is terrified that in stripping away the nation-state, they will be left helpless. This is not a frivolous argument. It rests directly at the heart of the Enlightenment and of the Euro-American search for representative democracy and expertise. On one side, the complexity of governance is beyond all our ability to grasp. It must have technocrats. On the other, that complexity may be a threat to liberal democracy as first conceived.

This question is at the heart of many of our divisions, and is being discussed daily even when people don’t realize they are discussing it. Technocrats are struggling with how to perfect the world. Citizens are struggling with how not to lose control over their lives. It is not just that they live different lives. It is that they live in different moral universes.