Ardent US capitalists should embrace ‘socialism’

They can contain anger at the market system by making pragmatic concessions to it

Janan Ganesh

Senator Elizabeth Warren, who is running for president, is unpopular on Wall Street because of her taste for wealth taxes © Bloomberg

In a country where “liberalism” means big government and “neoconservatism” implies utopian derring-do, the mangling of another abstract noun was probably due. What US politics has done to “socialism” over recent months is no less regrettable for that.

Whether in the mouths of Democrats, who are warming to the word, or of Republicans, who still spit it out, it has come to mean something more familiar to a European as social (or Christian) democracy. Fiscal transfers, universal healthcare, powerful trade unions: not only do these things not add up to socialism — Denmark is no command economy — a true stickler for that creed would actively oppose them as efforts to buy off the revolution. They are not designed to replace the market so much as to stop the masses turning against it.

All of which provokes a counter-intuitive thought. Hardened capitalists should vote for a Democratic president in 2020 — even a fairly leftwing one — rather than a Republican. The market system is under greater popular stress, after all, than at any time since the 1930s. One answer to the resentment is to give no quarter at all. A wiser one is to contain the anger by making pragmatic concessions to it.

Donald Trump won the presidency by taking the second approach but has governed, mystifyingly, with the first. Having begun his White House campaign with a pledge to save not just Medicare (which serves the old) but Medicaid (which serves the poor), he has cut taxes and is now seeking welfare efficiencies to make up the budgetary shortfall. After all his vaunted “disruption” of GOP orthodoxy, he seems set to run on a platform of colour-by-numbers Republicanism, at least in domestic affairs.

If this is the right’s plan to save the free-market system, then capitalists should take their chances with the left. There is a plausible future in which a more generous welfare state, funded by taxes on those who have been enriched by a decade’s asset inflation, drains some of the anti-capitalist pus from the body politic. There is no plausible future in which another round of unreconstructed supply-side economics does the same.

One more presidential term of this stuff would be a tactical gain for free-marketeers, true, but what of the strategic risk? For the short-term pleasure of lower marginal tax rates and thinned-out regulations, they risk the further disillusionment of an electorate that already worries about the fairness of the system. Millennial attitudes to capitalism should keep them up at night. The transient nuisance of a “progressive” administration should not. The priority of capitalists is not the election of Republicans. It is the maintenance of public support for capitalism. If this is best achieved through some redistribution and regulation, it would not be the first time.

As ever in politics, the trick is to distinguish between lesser and greater evils. Not everyone can. Consider the sulphurous unpopularity on Wall Street of Elizabeth Warren. Even potential Democratic donors wonder what they will do if the Massachusetts senator becomes the party’s candidate in 2020. Her crime? A taste for wealth taxes and financial regulation. It is natural for bankers to worry about these policies. But they should also worry about the anger that will be stored up if somevariation of her reform does not happen.

Ms Warren is “a capitalist to my bones”. She wants more, not less competition in the economy. If capitalists think that four or eight years of her leftish technocracy is the worst that can happen, they are not using their imaginations. Better her than a more severe reckoning with public opinion down the line. Better a controlled explosion than a random, all-engulfing one. Right now, the political debate concerns the excesses of capitalism. In no time at all, it will move on to the fundaments of the system itself.

The preservation of capitalism through its moderation: there is no paradox here. Dwight Eisenhower understood it as basic statecraft, as did Richard Nixon and other Republicans who reconciled themselves to big government. Mr Trump reached a similar intuition in 2016. At least as far back as John Maynard Keynes, the truest friends of capitalism have understood that it cannot command an electoral majority in its purest form. Franklin Roosevelt turned out to be a better custodian of the system than those who cried philosophical betrayal at first whiff of the New Deal.

He knew that an idea can die of purity. Too few now do. There is more to the defence of free markets than the resistance of all reform as a red menace. If Republicans have become dangerous to the cause, it is because they believe in it too much.

ETF investor inflows tumble 28% in first quarter

Lyxor and State Street Global Advisors among worst performers so far in 2019

Chris Flood

Société Générale declined to say how many jobs it would cut at poorly performing Lyxor (Charles Platiau/Reuters)

This year’s battle between providers of exchange traded funds to drum up new business has made an anaemic start with worldwide investor inflows down more than a quarter in the first three months.

The weaker growth from almost all ETF managers comes in spite of a 13 per cent first-quarter rally for the S&P 500, the US equity benchmark, and strong gains across other equity markets globally.

Investors ploughed $99.1bn into ETFs (funds and products) in the first three months, down 28 per cent on the $136.8bn registered in last year’s first quarter, according to preliminary data from ETFGI, the London consultancy.

Lyxor, the Paris-based asset manager, reported the weakest quarterly performance with outflows of $3.1bn. It followed a disappointing 2018 performance for Lyxor’s ETF business when it gathered just $2.7bn over the whole of last year.

Arnaud Llinas, head of Lyxor’s ETF business, said there were “significant outflows” from EuroStoxx 50 ETFs as well as individual country funds tracking stock markets in France, Italy and Spain.

Jobs will be cut this year at Lyxor after its parent Société Générale said it would reduce staff numbers by 1,600 as part of a plan to cut costs by €500m. Société Générale declined to disclose how many jobs would be cut at Lyxor.

State Street, the third-largest ETF provider globally, also made a weak start with net outflows of $1.8bn while China Asset Management registered $1.9bn in ETF withdrawals.

New business for BlackRock’s iShares division, the world’s largest ETF manager, dropped 13 per cent to $29.3bn.

Pennsylvania-based Vanguard, the nearest rival to BlackRock, attracted ETF inflows of $19.2bn, a decline of 19.2 per cent.

The unexpected shift in monetary policy by the US Federal Reserve, which signalled last month that it would refrain from raising interest rates for the rest of the year, stimulated inflows into ETFs linked to fixed-income markets. Bond ETFs gathered record inflows of $56.4bn in the first quarter, more than double the same period last year and taking assets in fixed-income ETFs closer to the $1tn milestone.

Matthew Bartolini, head of Americas research at State Street Global Advisors, said the interest rate shift by the Fed and other central banks should further support risk assets such as equities and high-yield bonds.

“Just don’t expect the pace of gains [seen in the first quarter] to continue this late into the cycle,” he said.

Bank of America Merrill Lynch said investor optimism appeared to be improving with clients rotating out of single stocks into ETFs for a fourth consecutive week ending April 1.

The consensus forecast among Wall Street analysts is for earnings growth for the S&P 500 to slow to 3.5 per cent in 2019 from about 21 per cent last year due to weaker US growth and trade tension between Washington and Beijing.

Savita Subramanian, head of US equity and quantitative strategy at BofA, said the outcome of the trade negotiations with China was “the key factor” for US earnings in 2019.

She said that a “real trade deal” could boost S&P 500 earnings by about 1 percentage point in 2019. A full-blown trade war involving higher tariffs on $200bn of US exports to China would reduce S&P 500 earnings by a similar amount in 2019.

Don't Ignore The Warning Signs: A Market Meltdown Might Be Approaching

by: Victor Dergunov


- The S&P 500, and stocks in general, are at a crucial inflection point.

- The S&P 500 needs to break out above the 2,800 soon, or momentum could dissipate, and stocks would be in serious danger of entering a bear market.

- Moreover, warning signs are abundant, suggesting the illusive economic recession is now clearly on the horizon.

- Don't ignore the danger signs.

- Reduce risk exposure, rotate, increase yield, and hedge to stay in the game and decrease downside risk to your portfolio.

Why A Market Meltdown May Be Approaching
The S&P 500 is at a crucial inflection point. Stocks could either rebound from their recent slump, or this selloff could intensify, equities could enter a bear market, and stocks could potentially go much lower.
I have been short-term bullish since the stock market bottomed in late December, and I've written several articles why stocks are likely to continue their move higher, citing the 2,800 level as the most crucial resistance point likely to stand in the way of new all-time highs.
SPX 1-Year
So, here we are, the S&P 500 rallied by 20% from the bottom and is now struggling to break above 2,800. I am not implying that it's time ring the alarm bell, but market participants should be getting more cautious here, especially longer-term.
There are a growing number of warning signs that suggest the economy is weakening, and could continue to deteriorate further. Warning signs are abundant, and they should not be ignored. Moreover, the Fed's influence to prop up stock prices may be more limited than many market participants perceive.

Therefore, a recession is likely approaching, and if the S&P 500 cannot breakout above 2,800 soon, momentum is likely to dissipate, and stocks could potentially enter a bear market that could take equities much lower.
Do Not Ignore the Warning Signs
Jobs: The Big Picture
The recent nonfarm payrolls report of 20k was very disappointing. However, since the prior month's report was a big beat, this 20k number may be attributed to a hangover effect, and one month does not necessarily constitute a trend. However, future months could tell a story of a worsening labor market if numbers continue to disappoint.
Also, if we look at the current unemployment rate, we see that it has gotten down to an extraordinarily low level, and it is likely going through a bottoming process right now. If we look at a short-term chart, we see that the unemployment rate has been stuck in a range between 3.7% and 4% for a year now.
U.S. Unemployment Rate
If we look at a long-term chart, we see that such periods of unemployment rate bottoming have preceded recessions and major stock market declines.
Unemployment Rate Long-Term
The unemployment rate has not been this low since about the late 60s, right before a major recession hit. Further, we can see ultra-low and/or bottoming unemployment periods coinciding with recessions in the early 90s, early 2000s, and 2008.
Inflation Dropping Sharply
Another troubling factor is the sharp drop in inflation. Just look at the CPI rate, which has been cut in half from nearly 3% to just 1.6% in the last 7 months. Inflation faltering sharply such as this is not good for the economy, as it signifies a deceleration in growth, and could potentially lead to stagnant growth or deflation, which is the archenemy of higher asset prices.
The image is even worse if we look at the PPI, as producer prices have fallen off a cliff since last October. Final demand goods inflation has tanked from over 4% in the summer of last year to just under 1% last reading. Falling prices may be beneficial to some facets of the economy, but in general, it is a clear warning sign that growth is decelerating, and could continue to drop going forward.
PPI Inflation
Why GDP Growth Could Falter
The economy just went through its best expansion year since the recovery began in 2009, 3.1% for full year 2018. Now, some of the growth materialized due to tax and fiscal stimuli provided by the Trump administration's initiatives undertaken in recent years. Also, the consumer was still extremely strong in 2018, and corporations had record profits.
U.S. GDP Growth
Will 2019 top 2018 even though corporate earnings may have peaked, tailwinds from government stimuli are fizzling out, inflation is falling, and the consumer seems to be slowing down? I am not so sure. Thus, GDP could stagnate, or decline this year, therefore, putting the U.S. in a recession later this year, or in 2020.
Consumer Confidence Declining
There is no denying it, consumer spending has been on a tear in recent years. 2018 was by far the record year, but could spending be reaching a top? After all, with record amounts of debt all around us, it certainly seems possible.
Let's look at two key components, consumer confidence and retail sales. Retail sales declined by 1.2% last month, the worst MoM decline since the times of the great recession. Is this just a one month fluke? Maybe, but it could be a warning signal instead.
U.S. Retail Sales
Perhaps more importantly, consumer confidence appears to have topped and appears to be turning now. We also see that consumer confidence typically tops right before a recession hits.
We can see tops in consumer confidence coinciding with recessions in the mid 70s, late 80s, 2000, and 2007. We also see that consumer confidence typically tops out around 101, and 101 was reached in early 2018, and now appears to be trending lower.
U.S. Consumer Confidence
With retail sales slowing, and consumer confidence declining, consumer spending growth is likely to slow, may stagnate, and could even decline going forward, which will reflect negatively on GDP as about 70% of U.S. GDP is generated through U.S. consumer spending. 
Corporate Earnings Recession is Coming
Corporate earnings have surged over the past 10 years, and with the "Trump Tax Cuts", coupled with other government stimuli, have essentially gone parabolic in recent quarters. There is bound to be a hangover effect, and a corporate recession seems very plausible this year.
U.S. Corporate Profits
In fact, some analysts are predicting just that, Morgan Stanley's chief equity analyst Mike Wilson says that earnings expectations are likely to come down further, and hopes for an earnings reacceleration in the second half of 2019 is misplaced.
Overall, the chief equity strategist expects earnings growth could fall by as much as 3.5% this year, which should put additional pressure on GDP as well as equity prices in general.
Bond Inversion Continues
The 2-year and the 3-month are now providing higher yield than the 5-year. Moreover, the spread between the 5-year and the 10-year is fewer than 20 basis points now. The bond market is telling us that longer-term rates are gaining demand as bond investors want to lock in the rate they can now, before longer-term rates go lower in the future.
Chart  Data by YCharts

Why would longer-term rates go lower? Most likely because the Fed will need to bring long-term rates down as another economic downturn or a recession approaches. This way, the bond market is essentially telling us that a significant market downturn may materialize relatively son.
Defensive Sector Rotation Continues
Sector rotation continues to be of a very defensive nature. If we look at all the 11 major sectors, the only two making new all-time highs are utilities and real estate, the two most defensive sectors. Other sectors, especially the more economically sensitive ones like energy, technology, and others appear to be struggling with major resistance levels.
High Valuations in Stocks
The bottom line is that there is a lot going on beneath the market's surface. There are a lot of red flags, and there are many concerns, but valuations are far from cheap. Despite a recent blip lower, S&P 500 companies, on average are trading at 2.07 times sales, close to a record high.
This suggests that in general, stock prices have expanded to a record level relative to underlying company revenues.
SPX Price to Sales Ratio
Moreover, the S&P 500 P/E ratio is at 21.04, which is about 43% above its historical median average of 14.74. A case could be made for higher valuations when there is plenty of growth runway left in the economy, but at a time such as this, it hardly seems appropriate to pay such premiums for equities.
Perhaps most notably, the Shiller PE is at around 30 right now, one of its highest gauges in history, even well above the valuations we saw in the 2007 market top. In fact, the Schiller P/E is about 91% above its historic median of 15.7.
SPX Shiller P/E Ratio
This implies that the S&P 500 would need to correct by as much as 48% from current levels just to get back down in line with the median norm. A 48% decline would bring the SPX all the way down to the 1,426 level, quite the steep decline from current levels.
Again, a case for much higher than historic valuations could be made in certain market conditions.
However, this does not appear like an appropriate time, as the U.S. is likely towards the latter part of an economic cycle, and a rescission appears to be materializing on the horizon.
The Fed Cannot Fix Everything
The Fed has provided an incredible amount of monetary stimulus over the last decade to prop up and propel stock prices. In fact, the Fed essentially quintupled the monetary base in the 5 years following the financial crisis. However, the Fed cannot continue to blow this monetary bubble forever, as the Fed's balance sheet is already extremely bloated, and rates can only go so low. Furthermore, exacerbation of the Fed's monetary policy can lead to unintended consequences like much higher than intended inflation, which can turn into a systemic risk for the U.S. economy.
Ultimately, the Fed is not almighty, and while the organization has done an excellent job at propping up asset prices and extending the current economic expansion, it won't be able to keep the pending recession at bay forever.
Do Not Ignore Political Risks
The market has been largely decoupled from political events for a long time, however, all this may change soon. First, market participants should not ignore the possibility of a possible impeachment of the current sitting President. The Democrats now control the house, and many, or perhaps collectively even, are intent in bringing about the downfall of Donald Trump.
Source: Time Magazine
The Mueller probe is producing pleas, convictions, former trump allies are flipping, some are giving damaging testimony to Congress, and so on. The stage may be getting set for when President Trump is officially implicated in illegal activities, which could serve as a basis for an official impeachment process.
This would likely be damaging for the stock market, however, what would be even more damaging, is if a Democratic President got elected in 2020. The Democratic party has become radicalized in many respects. Many democrats are screaming out for higher taxes, stricter regulation, redistribution of wealth, and essentially socialism.

Does any of this sound bullish for stocks? No, it is not. In fact, much of what the Democratic party is proposing are antigrowth policies that are likely to expend government, hurt business, blowout the government debt, and tilt the economy closer to a recession.
What to Watch for Technically
Right now, technicals are extremely important to the market. The market is at a crucial inflection point, and if momentum let's up now, prices could drop a lot lower. The most optimal scenario would be for the S&P 500 to rebounded around the 2,725-2,700 level. This would suggest that the market could potential break above the 2,800, in which case momentum and sentiment would likely drive the S&P 500 back up to prior highs, and then to new all-time highs.
SPX 5-Year
On the flip side, if 2,800 fails, and the S&P 500 is not able to hold the crucial 2,625 support level, stocks are likely to at least retest the prior lows of 2,350. A failure in upside momentum at this point would also greatly increase the chances of the current rout being the early stages of a prolonged bear market, that could potentially take the SPX down to the 1,400 - 1,500, or possibly lower even if stocks overshoot to the downside in a panic like scenario. 
Bottom Line: Investors Should be Cautious Right Now
While I am still short-term bullish on stocks, I remain longer-term bearish on equities as I strongly believe a recession coupled with a violent bear market is imminently approaching. If the S&P 500 can manage to break above the 2,800 level it is likely to retest prior highs, and could potentially go on to make marginal higher all-time highs.
Nevertheless, the downturn will materialize regardless, and based on the overwhelming amount of economic evidence a recession is possible, likely even, this year or the next. Therefore, regardless where the next top is 2,800, 3,000, or 3,200, a significant market decline seems overwhelmingly likely relatively son.

The Case for a Bold Economics

Although economists are well positioned to imagine new institutional arrangements, their habit of thinking at the margin and sticking close to the evidence at hand encourages an aversion to radical change. But, when presented with new challenges, economists must envision new solutions – as a new group is determined to do.

Dani Rodrik  

CAMBRIDGE – At the end of 1933, John Maynard Keynes sent a remarkable public letter to US President Franklin Delano Roosevelt. FDR had taken office earlier that year, in the midst of an economic slump that had pushed a quarter of the labor force into unemployment. He had launched his ambitious New Deal policies, including public works programs, farm subsidies, financial regulation, and labor reforms. He had also taken the US off the gold standard to give domestic monetary policy freer rein.

Keynes approved of the general direction of these policies, but also had some sharp criticism. He worried that FDR complicated the economic recovery effort by broadening his policy agenda unnecessarily. FDR was doing too little to increase aggregate demand and too much to change the rules of the economy. Keynes took particular aim at the National Industrial Recovery Act, which, among other things, greatly expanded labor rights and fostered independent unions. He fretted that the NIRA would sap business confidence and weigh on the federal bureaucracy, without making a direct contribution to recovery. He wondered whether some of the advice FDR was getting “is not crack-brained and queer.”

Keynes did not think much of FDR’s economics, but at least he was a sympathetic critic. Because much of the New Deal ran against the prevailing economic orthodoxy, FDR’s policies had little support from leading economists of the day. For example, as Sebastián Edwards explains in his fascinating recent book American Default, the predominant view among economists was that breaking the dollar’s link with gold would create havoc and uncertainty. The only bona fide economist in FDR’s “brain trust” was Rexford Tugwell, a little-known 41-year old Columbia professor who did not even teach graduate students.

Will economists prove more helpful today, at a time when the challenges we face are nearly as pressing as those during the Great Depression? Unemployment may not be a severe problem in most advanced countries currently, but large segments of the labor force seem cut off from economic progress. Record levels of inequality and poor earnings prospects for younger, less educated workers are eroding the foundations of liberal democracies. The rules that underpin globalization are badly in need of reform. And climate change continues to pose an existential threat.

These problems demand bold responses. Yet, for the most part, mainstream economists seem preoccupied with marginal fixes – a tax-code tweak here, a carbon tax there, perhaps a sprinkling of wage subsidies – that leave untouched the structures of power underwriting the rules of the economic game.

Economists can rise to the challenge by adopting a broader vision. Last month, I joined a group of prominent economists to launch an initiative that we have called “Economics for Inclusive Prosperity” (EfIP). From labor markets and finance to innovation policies and electoral rules, the goal is to advance ambitious policy ideas that pay much closer attention to inequality and exclusion – and to the power imbalances that produce them.

As Suresh Naidu, Gabriel Zucman, and I explain in our “manifesto,” neither sound economics nor convincing evidence support many of the dominant policy ideas of the last few decades. What has come to be called “neoliberalism” is in many ways a derogation of mainstream economics. And contemporary economic research, appropriately deployed, is in fact fully conducive to new ideas for creating a fairer society. Economics can be an ally of inclusive prosperity. But it is up to us economists to convince our audience of the merits of these claims.

Our network is made up of academic economists who believe new ideas can be developed without abandoning scientific rigor. The catchphrase of our day is “evidence-based policy.” Accordingly, our policy briefs are based on empirical analysis, using tools of mainstream economics. But, for us, an “evidence-based” approach is not one that reinforces a conservative bias in favor of policies at the margins of existing institutional arrangements; it is one that encourages experimentation. After all, how can we develop new evidence without trying something new?

Markets rely on a wide range of institutions to create, regulate, and stabilize them. These institutions do not come with predetermined forms. Property and contracts – the most elementary institutions required to make markets work – are legal constructs that can be designed in any number of ways. As we grapple with new realities created by technological innovation and climate change, questions about the allocation of property rights among different claimants become crucial. Economics does not provide definite answers here, but it supplies the tools needed to identify the relevant tradeoffs.

A common theme running through our initial set of policy proposals is the power asymmetries that shape the functioning of the contemporary global economy. Many economists dismiss the role of such asymmetries because there is little scope for power under conditions of perfect competition and perfect information. But in the real world that we examine, power asymmetries abound.

Who has the upper hand in bargaining for wages and employment benefits? Who dominates markets and who must submit to market forces? Who can move across borders and who is stuck at home? Who can evade taxation and who cannot? Who gets to set the agenda of trade negotiations and who is excluded? Who can vote and who is effectively disenfranchised? We argue that addressing such asymmetries makes sense not only from a distributional standpoint, but also for improving overall economic performance. Economists have a powerful theoretical apparatus that allows them to think about such matters.

Although economists are well positioned to develop institutional arrangements that go beyond what already exists, their habit of thinking at the margin and sticking close to the evidence at hand encourages an aversion to radical change. But, when presented with new challenges, economists must envision new solutions. Imagination is crucial. Not everything we try will succeed; but if we do not rediscover the value of FDR’s credo – “bold, persistent experimentation” – we will certainly fail.

Dani Rodrik is Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy, Economics Rules: The Rights and Wrongs of the Dismal Science, and, most recently, Straight Talk on Trade: Ideas for a Sane World Economy.

At Trump’s Pentagon, Empty Offices Are the New Normal

The problem has worsened since James Mattis left the U.S. Defense Department.

By Lara Seligman, Robbie Gramer

Then-U.S. Secretary of Defense James Mattis and Vice President Mike Pence listen while President Donald Trump speaks to the press before a meeting in the Pentagon in Washington on Jan. 18, 2018. (Brendan Smialowski/AFP/Getty Images)
Then-U.S. Secretary of Defense James Mattis and Vice President Mike Pence listen while President Donald Trump speaks to the press before a meeting in the Pentagon in Washington on Jan. 18, 2018. (Brendan Smialowski/AFP/Getty Images)

The resignation of two senior Pentagon officials last week brings the number of vacancies and posts filled on a temporary basis at the U.S. Department of Defense to a new high, a troubling state of affairs that some blame on the uncertainties surrounding former Secretary of Defense James Mattis’s departure.

Air Force Secretary Heather Wilson announced her intent to step down on Friday, bringing to a close months of speculation over whether she would be nominated as President Donald Trump’s permanent secretary of defense or fired over what was seen as a campaign to slow roll the establishment of a separate Space Force.

Little noticed was the resignation the same day of another top female Pentagon official, Phyllis Bayer, the Navy civilian in charge of energy, environment, and installations—basing and housing.

The high number of empty posts at the Pentagon dates back to the beginning of President Donald Trump’s administration, when the White House struggled to find and recruit candidates for top jobs across U.S. agencies. However, Mattis’ departure and questions about Acting Secretary of Defense Patrick Shanahan’s management style, along with the administration’s delay in nominating a permanent secretary, has exacerbated the problem, experts say.

The number of empty posts is alarming veteran defense officials, who fear too many vacancies are grinding down the Pentagon’s effectiveness.

“The acting people, the most they can do is tread water,” said Jim Townsend, a former career Pentagon official. “When you’ve got problems to deal with initiatives you need to take, acting officials don’t do that. … It’s the full appointees who jump in and exercise leadership.”

In addition to the top two jobs at the Pentagon, two out of seven undersecretaries of defense and nearly half the assistant secretaries of defense—including the top civilian for international security affairs—are either acting or temporarily performing the job. Many deputy assistant secretary of defense slots also remain unfilled, as well as various other senior positions throughout the department. Townsend, now at the Center for a New American Security, said the number of empty posts appears to be “unprecedented.”

A certain amount of turnover is to be expected with a change in leadership, said Pentagon spokesperson Eric Pahon, stressing that the transition is not impacting normal operations.

“With any change in senior leadership, you would normally expect a large change in supporting personnel,” Pahon said. “It’s been a very short time since Mattis unexpectedly stepped down, but there has been no interruption in Pentagon operations under the acting secretary’s leadership.”

Still, the vacancies at the Defense Department highlight a broader concern about how many posts sit empty in the Trump administration, over two years after the president first entered the White House. Only 429 of 712 key senior posts in the U.S. government that require presidential nomination and Senate confirmation are filled to date, according to the Washington Post and the Partnership for Public Service, a nonprofit group that analyzes governance issues.

Some observers tie the high number of vacancies, especially in the Office of the Secretary of Defense, to Mattis’s resignation in December following Trump’s decision—which he has since partially reversed—to withdraw U.S. forces from Syria. Days later, his assistant secretary of defense for public affairs, Dana White, one of few people of color in the ranks of the Pentagon, also stepped down.

Mattis’s departure left the top two jobs in the Pentagon filled in a temporary capacity after Patrick Shanahan was elevated from deputy secretary of defense to acting secretary of defense. Pentagon Comptroller David Norquist is filling the No. 2 job in addition to performing his permanent duties.

The White House appeared to hint this week that Shanahan may soon be tapped for the permanent job, but cautioned a final decision has not been made.

The absence of Mattis’s leadership also likely contributed to the recent exodus, said one former U.S. official. “At the DoD, most people joined to support the President and work for Mattis. No one came to work for Pat Shanahan,” the former official said, predicting that, “If he’s nominated and confirmed, you will likely see more departures.”

The former official added that Shanahan’s indecisive management style, lack of experience in Washington, and failure to understand the role of Congress may drive some Pentagon officials out the door. Shanahan worked at Boeing for more than 30 years before taking the deputy secretary of defense job in 2017.

“Secretary Mattis was the smartest man in any room, but he sought dissenting opinions and listened more than he talked. By contrast, Shanahan believes he’s an expert on everything and routinely dismisses divergent or contrary views,” said the former official.

Shanahan’s disagreements with Wilson, for example, contributed to her decision to step down, said one source with knowledge of the discussions around her departure.

“She has no desire to work for the current acting [secretary of defense],” the source said.

Diversity is also suffering at the Pentagon with the recent departures. Before they announced their resignations, Wilson and Bayer were two of just six Senate-confirmed women serving in top Pentagon positions, according to Loren DeJonge Schulman, a former Pentagon official who researches national security and defense reform at the Center for a New American Security.

With their departure, this number will dip by one-third. In addition, just one of six undersecretaries of defense is female.

“We are at a bad spot in terms of women’s representation in national security and at DoD in particular, but it is really unfortunately nothing new for this administration,” said DeJonge Schulman. “They have had a terrible record of appointing women overall.”

Still, overall, about two-thirds of Senate-confirmed DoD positions are filled right now, which is “actually not that bad,” said DeJonge Schulman, noting that officials tend to cycle out at the two-year mark. But the number of empty slots at the Office of the Secretary of Defense “is troubling” if not surprising at this point in an administration that had difficulty hiring people to begin with.

This reality puts the officials acting in a temporary capacity at a disadvantage in internal administration discussions, as well as sensitive negotiations with foreign leaders, DeJonge Schulman said.

“These people tend to be the workhorses of the political appointees,” she said. “This is where the rubber meets the road.”

In addition, having a high number of civilian positions unfilled or filled temporarily also shifts the balance of power to the military, she said, noting that uniformed members of the Joint Chiefs of Staff and the U.S. armed services may step in to fill any gaps.

Lara Seligman is a staff writer at Foreign Policy
Robbie Gramer is a diplomacy and national security reporter at Foreign Policy.