In the decades that I have been listening to politicians clumsily trying to explain the economy there has never been a period, with the possible exception of the early Reagan years, in which major party leaders were able to present a solid grasp of economic principles. But I have never seen a time in which the levels of ignorance coming from those in leadership positions is so extreme.
The state of affairs can be illustrated by two interviews last week by Donald Trump and Alexandria Ocasio-Cortez for the Democrats, the two undisputed leaders of our major political parties. Both put forth visions this week that are illogical, incoherent, and that completely ignore both data and experience. But these leaders are putting out beacons under which the vast majority of Americans are congregating. It's worse than the blind leading the blind, and it bodes very poorly for our ability to deal with the next economic crisis, which I believe is certainly slouching towards Washington, waiting to be born.
Before I get into particulars, let's dispense with the notion that AOC does not speak for the Democrats. She is the leader of the progressives, and the progressives are in control. The recent dust up between Elizabeth Warren and Bernie Sanders shows how far the moderate wing of the Party has fallen.
While it may be true that Warren is just as far left as Sanders, the Democrat establishment is more comfortable with her, as they know she would be willing to fake moderation and to "tack" toward the center if she wins the nomination. On the other hand, Sanders has been an unrepentant communist his entire life and is unlikely to alter that message one iota if he faces Trump in the Fall. (In a 1981 Today Show interview, Sanders stated clearly that he does not support the "capitalist idea of competition" and that people work better under a cooperative system. In other words, he believes in the absurd Marxist proposition that people are just as likely to work for the benefit of strangers than they would for themselves.) Establishment Democrats fear that Trump will win that contest going away, so they are in full panic. Last week they took the gloves off.
It began with Warren's calculated allegations that Sanders, in a private conversation between the two, had claimed that a woman could not be elected president. The allegation was pressed by establishment allies at CNN through supportive commentaries and stilted questioning at the CNN-sponsored debate. Leading pundits fell in line behind Warren with an awkward twist on the "believe all women" mantra of the me-too movement. They painted Sanders as out of touch at best, and sexist at worst.
The next anti-Bernie attack came a few days later when Hillary Clinton let loose, calling him unlikable and ineffective. She even failed to commit to endorsing him if he were to win the nomination.(J.Easley & A. Parnes, The Hill, 1/22/20) This simply made Hillary look like a more corrupt and opportunistic figure than many democratic activists previously thought.
But these attacks failed spectacularly and simply deepened mistrust about the Clinton wing of the Party and reaffirmed Warren's reputation as an opportunist. Despite the full court press, the Warren campaign is now in free fall and the Sanders campaign is surging.
The establishment is left hoping that doddery Joe Biden can somehow revivify over the next 10 months, and escape any contamination from the Ukraine affair. But no one who is not receiving a paycheck from the DNC really believes this. It's no accident that a major poll this week showed Biden trailing Sanders for the first time nationally.
And while Bernie has now emerged as the soul of Democrats, everyone knows that he is not the Party's future. That honor is increasingly falling on his young and telegenic protégé from the Bronx, who would be running for president right now if she had enough candles on her cake to constitutionally qualify (she will be eligible in 2024).
For all his leftist authenticity, Sanders is also an old white man, a trio of sins that modern woke progressives have a hard time forgiving. On the other hand, Alexandria Ocasio-Cortez is the fulfillment of their wish list: she's ethnic, young, female, and sees the United States as a notably racist, sexist, and tyrannical country that continues to be a slave state for its own citizens and an oppressor to the rest of the world. And despite the fact that her resume is thin enough to be written on half a napkin, she is bold enough to challenge the most senior members of her own party (without paying the slightest price politically). Those in the establishment dare not cross her and her statements, no matter how absurd; they are treated as wisdom from the burning bush. In that sense, she looms over the Democrats much the way that Trump looms over the GOP.
As absurd as it may sound, there are remarkable similarities between the appeal of Trump and AOC. Both are political outsiders who use social media fueled demagoguery to appeal directly to the people, and are largely contemptuous of party establishments. Both shoot from the hip and spin stories that are completely unrelated to history or economic reality. So, with that preamble, let's see what these two economic luminaries are now saying.
On January 22, in a sit down at the World Economic Forum in Davos, with CNBC's reliably pro-Trump anchor Joe Kernan, the President delivered a self-congratulatory turn that was brazen by even Trump's legendary standards. With a series of wildly inaccurate statements (and I'm not just talking about his idea that Thomas Edison invented the wheel), Trump claimed that the U.S. economy is now experiencing "unprecedented economic growth that the world has never seen before." This statement is absurd on its face.
In his first three years in office, the U.S. economy has expanded at about 2.6% annually, based on GDP statistics from FRB St. Louis. While this is just slightly higher than the growth seen in Obama's second term (which President Trump described in his inaugural address as "American carnage"), it is strikingly lower than the average growth rate we have had over the last 90 years, based on GDP data from the U.S. Bureau of Economic Analysis (BEA). There are also many three or four year periods in our history in which GDP growth was multiples higher than the current growth rate. And that doesn't even address the growth rates that have been seen in recent history in Asian countries. For much of the past 20 years, Chinese growth has been north of 8% annually? Does he not know that?
Trump claimed that during his term in office, the net worth of the bottom half of wage earners has increased by 47%. I don't know where he got this statistic. I have looked, but I can't find it. But it does not pass the smell test. Median wage in the U.S. is about $63,000 (U.S. Census Bureau, 2018). The bottom half of earners must earn less than that by definition. People making that kind of money often have little to no assets or savings. What savings they may have are usually more than compensated by household debt. What factors would have resulted in a near 50% expansion of their net worth? Trump simply may be assuming that the 50% growth in the stock market since his election has created similar growth patterns in the broader economy. But that is not the case at all.
As proof of economic success, Trump noted that for the first time there are more women in the workforce than men, according to data from the U.S. Labor Department. But what does that prove? Perhaps it points to the contraction of those sectors that have typically employed more men, such as manufacturing and construction, while the service sector jobs in education and health care, which typically employ more women, have been expanding. This reality is in stark contrast to Trump's typical boast that his policies have led to a boom in domestic manufacturing. Manufacturing jobs have declined consistently during his presidency.
Trump also spent a lot of time with Kernan talking about his opposition to interest rate increases or attempts to shrink the Fed's balance sheet, and his desire for negative interest rates. Showing no understanding of why debt is a drag on growth or why high rates would be good for the economy, Trump believes that negative rates would boost the stock market further and help the country pay off the debt. In reality, negative rates would only make it easier for the government to borrow more. He then repeated the rhetorical question he asked at the signing ceremony for the Phase 1 China deal, regarding just who is dumb enough to buy negative yielding bonds. The obvious answer, that somehow eludes the President, is central banks. So Trump wants the Fed to be dumb so that he can look smart and keep pretending the economy is booming.
This then led to a discussion about Trump's plan to tackle the growing deficits, which in the first three years of his presidency are significantly higher than in Obama's second term. Kernan asked if Trump would favor relying more on tax increases or spending cuts to achieve that objective. Trump replied that he would do neither, and that additional tax cuts in his second term would solve the problem. It mattered little to Trump that the tax cuts in his first term led to much larger deficits.
Trump then went on to claim that he favors a strong dollar, but immediately followed up on how great it would be for the economy if the dollar gets weaker instead. Ironically, I think Trump's wish will be granted. But I suspect a weaker dollar will not deliver the benefits Trump is hoping for. It will push up interest rates and consumer prices, and prick the bubble that Trump so proudly claims constitutes the greatest economic boom in history.
For her part, Alexandria Ocasio-Cortez sat down in NYC for a Martin Luther King Day event with an equally sympathetic questioner, Ta-Nehisi Coates, the black author and activist. In their extraordinary exchange, AOC gave her clearest view to date of her absolute opposition to capitalism, business ownership, and economic freedom, and her clear support for state seizure of wealth and the control of the means of production. In other words, she went full-throated Bolshevik.
The sad part is that unlike her mentor Benie Sanders, AOC probably never studied anything about the Russian revolution and its subsequent evils and failures. While it's true that she only lived for 11 years in the 20th Century, I would have hoped that it would have come up once or twice in her history or economics classes at Boston University. But she behaves as if she is completely unaware of anything that happened before the 2016 election.
In her interview with Coates, AOC offered further development of the controversial "you didn't build that" claim made by Barack Obama in which the former President claimed that American business only succeed because of investments the government makes in education and infrastructure. And while that statement is widely off the mark, it's nothing compared to AOC's comment that in America "No one ever makes a billion dollars. You take a billion dollars." Her theory is rooted in Marxist theories of labor, which assumes that workers produce all the value of a company's products and services, while owners simply 'sit on the couch' and count the profits. She sees profits coming solely from worker exploitation, and that private ownership of capital is a modern version of slavery. When asked how a billionaire entrepreneur like Jeff Bezos could regain his status as a "moral" person, AOC says that the answer is simple "turn your company into a worker cooperative."
Of course, AOC never delineated a threshold by which an owner of a company becomes an evil bloodsucker. We know that she would apply that label to a billionaire with 1,000 employees. But how about a less successful entrepreneur with only 100 employees and $10m net worth? How about a store owner with 10 employees and $1m in the bank? Is it only the scale that makes the billionaire immoral? Who decides when that line is crossed? Clearly, AOC's experience taking classes at Boston University and mixing drinks in New York provide her with that expertise.
AOC claims that she wants to democratically transform the U.S. economy so that we finally give power to the people. But what she really wants to do is to take the power the people already have and give it to the government instead. AOC does not realize that capitalism empowers workers to decide where they want to work, where they want to live, and how they spend their money. The entire system is based on the process of getting consumers more of what they want for less money. Jeff Bezos became a billionaire because he made shopping easier for hundreds of millions of people. Collectively, the world has benefitted more than Bezos from his innovations. AOC wants to replace the free market with a command economy, where decisions are made by coercion rather than choice.
She further described capitalism as a fleeting and outmoded economic model. She argues that a "worker collective" in which the workers themselves own the companies they work for is a better model. She does not seem to realize that such structures are perfectly legal in the U.S. and that business partnerships happen all the time. However, she does not grasp how those structures become unworkable at large scale as executive authority is critical to making the decisions that keep a company alive.
She also does not understand that the vast majority of workers do not want to be business owners. That requires sacrifices and risks that they are unwilling to assume. Business owners don't just lie back on a couch as she imagines. They often put in far more hours than their paid employees. Workers want the security of a steady paycheck, something business owners forego. They also don't want to risk their savings on a business venture that may fail. Workers at any business are free to quit and join together to form their own cooperatives. But few are willing to take the chance. AOC's solution is to let someone else take the chance, make the sacrifices, and do all the work, and then if they succeed, employees can use their votes and the power of the state to steal the business. Apart from the immorality of legalized theft, history shows that once confiscated, successful businesses are quickly run into the ground.
If AOC knew anything about history, she would be familiar with the mass experiments in socialization that have come to ruin and misery in the recent past. She is similarly blind to the enormous strides in living standards that the developing world has made in recent years by embracing capitalism and rejecting socialism. And, of course, she fails to understand the history of her own country, which owes its prosperity to the system she despises.
So, that's what this has come to, Clash of the Titans. Two people, whose collective ignorance of economics is staggering to behold, vie for the soul of the country. Lord help us.
Unfortunately, I think a worst-case scenario may be the most likely one. And it goes something like this: Disarray in the Democrat Party allows for the nomination of Bernie Sanders, who loses to Trump in the general election. But then the danger arises. Trump and the Republicans could not have taken credit more forcefully for the current economy. When the current bubble pops during Trump's second term, there will be no way for them to avoid the blame. The more we cling to the ridiculous idea that the current economy is booming because of Trump, the more we create the conditions for Bernie Sanders and AOC to make us the next Venezuela.
Unfortunately, I think a worst-case scenario may be the most likely one. And it goes something like this: Disarray in the Democrat Party allows for the nomination of Bernie Sanders, who loses to Trump in the general election. But then the danger arises. Trump and the Republicans could not have taken credit more forcefully for the current economy. When the current bubble pops during Trump's second term, there will be no way for them to avoid the blame. The more we cling to the ridiculous idea that the current economy is booming because of Trump, the more we create the conditions for Bernie Sanders and AOC to make us the next Venezuela.
© Euro Pacific Capital
© Euro Pacific Capital
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