Paul Krugman’s newest work a piece simply entitled: “Keynes Was Right.” I want to focus on only one thing Krugman says in the article, since taking apart his defense of the Stimulus as not being significant or big enough has been thoroughly debunked elsewhere. Krugman opens up his piece with this paragraph:

“’The boom, not the slump, is the right time for austerity at the Treasury.’ So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.”

For an economist that is essentially a politician at this point (or maybe a community organizer), Krugman’s choice of a quote is notable for its naïveté and it shows just how disconnected someone can be who studies and bases his argument only on theories of politics and not on practices in politics. I would liken Krugman to a theoretical physicist who, when confronted by contradictory results from experimental physicists argues the reality must be wrong because the theory is right. In this case, the assumption which bears no relation to reality is that governments (at least in Western societies today) are rational (and Keynesian) economic actors who implement austerity during boom times.

In Washington and elsewhere, the logic by those in power (presidents, congress, members of parliament, prime ministers) inevitably goes something like this when the world is moving along: “Times are good. We are collecting a lot of tax revenue. Let’s spend that money and make wonderful improvements (in infrastructure, public works, etc.) with all this “excess” money. There will be roads for Bob, a new airport for Jim, guaranteed free access to healthcare for Sue, more teachers per pupil for Cathy and a high speed train for Tim. We can afford all of this now and in the future we may not be able to, so spend while we have the money. And, if we don’t have all of the money, we’ll borrow what we need based on these great projections of continuing prosperity that makes credit cheap. Besides, we will all get reelected by grateful constituencies that get their priorities funded.”

When the world is suffering, the logic goes like this: “Times are bad. We have very little money but we have made promises to Jim, Sue, Cathy and Tim. Some of those promises are even guaranteed by law. The ones that aren’t we dare not keep for fear of angering the constituencies. What do we do? We borrow lots of money. We burnt through our cash in good times, but we can always promise to pay in the future, when we are sure times will be good again and we will have so much productivity that it will be easy to pay down our debt. Also, Keynes said we should increase government spending in a recession. We don’t think his advice during the good years is particularly relevant – he was writing in a much different time – but his advice on spending during recessions is every bit as poignant now as it was the day he put pen to paper. Besides, we will all get thrown out by angry constituencies that don’t get the money we promised them.”

In short, it is very simple. Politicians make decisions for many different reasons and, usually, for their own political interests. Even if we assume Keynesian theory is right, politicians do not study Keynes – they only borrow those principles that conform to the choices they are already going to make and use the theory as a fig leaf. You cannot make a serious argument as an observer of the political process that assumes, as Krugman does, that economic theory will win over political reality. When empirical data contradicts theoretical formulas, you need to rethink your formulas.

The ACLU has filed a lawsuit against the state of Wisconsin, which is attempting to put into place voter ID laws similar to those that have been proposed and/or adopted in many other states.  The ACLU is alleging that the voter ID laws disenfranchise voters, particularly minorities and the poor.  Meanwhile, Eric Holder is alleging that the purpose of the voter ID laws is to intentionally suppressed minority voters, presumably because they tend to vote Democrat, and is reported to be considering his own lawsuit.  In general, the political left has been opposed to voter ID laws, and have rung the racism bell to try and guilt their way to victory.  Said Holder at a speech in Texas:

“It is time to ask: What kind of nation and what kind of people do we want to be? Are we willing to allow this era — our era — to be remembered as the age when our nation’s proud tradition of expanding the franchise ended?”

Apparently for Holder and the ACLU, verifying that a voter is actually who he says he is is simply too much to deal with.  The fact that people may be disenfranchised because of fraud and improper voting seems to be of little concern to them.  It should be.  Extra votes and fraudulent votes introduce into the system a level of corruption that we should not tolerate.  Voting ranks among the most important rights that a citizen has, and it is just as important that legitimate votes not be tainted by mendaciousness as it is that legitimate votes not be denied for frivolous or malicious reasons.

The history of the Jim Crow South and denial of voting rights through overt acts of intimidation and legislation by private citizens and the government has colored our modern discourse on the verification issue.  Opponents of IDs often allege racist motives by proponents and argue that minorities will be unfairly burdened by basic ID requirements.  When direct appeals to racism fail, they claim that disenfranchisement occurs because there is a class of citizens that is too poor or burdened to get ID.  Both arguments are pathetic.

If racism and outright voter suppression is a real issue, then let us use of the criminal justice system.  Certainly our current attorney general will not have a problem pursuing allegations of voter intimidation (well, except if it is implemented by the Black Panthers in Philadelphia) or suppression using all of the resources at his disposal.  And, should there be actual cases, he will be wholly justified in prosecuting the offenders.  There is no excuse for intentionally denying citizens their legitimate right to vote.

Similarly, if there are instances where there are citizens who find themselves without ID due to financial or other burdens, the solution is to create a system where we get them IDs, gratis.  Most people in this country have IDs because they are needed for most of the basic aspects of modern life.  Think about what a person needs ID for in this country today.  Among many, many other things, you need an ID to:

1. Buy alcohol
2. Board a plane
3. Buy an Amtrak ticket
4. Purchase spray paint
5. Go to the movies
6. Open a bank account
7. Enter some federal buildings
8. Drive
9. Rent a car
10. Get a mortgage

Are any of these things more important or fundamental to a democracy than voting?  Do any of these items merit more stringent protections than voting?  It is inconceivable that the solution to the problem that there is some small fraction of people in the U.S. with issues getting proper ID is to decide that verification isn’t important at all, and that we should err on the side of, in effect, taking a person’s word that he is who he says he is.  Those who oppose identification and verification of voters at the polls are just as guilty of disenfranchising citizens as those that would actively prevent legitimate voters from exercising their franchise.  For elections to be legitimate, the must both include all those who have a right to vote and exclude those that don’t.  Allowing people to vote who have no right hurts us all and undermines our rights as citizens.  In the twenty first century, we possess the money (which is a relatively small amount), technology and systems we need to accurately identify voters.  Opponents of ID laws should be working with states to improve our processes, not trying to destroy them.

Today, David Blood and Al Gore have an op-ed in the Wall Street Journal, in which they didn’t just offer an embarrassed excuse for interjecting politics into businesses, but a full-on paean to its desirability.  They euphemistically describe this goal as “sustainable capitalism,” by which they appear to mean capitalism that is managed by politicians and is subject to their whims in much the same manner as Russia “manages” its democracy.

The authors commence their argument with the familiar trope that it’s a brave new world out there and new controls are needed to rectify a host of problems.  Of course, the threats that the authors identify as being of serious concern are, with the exception of global warming, merely many of the same issues of the 70s, 60s, 1890s and 1880s recycled.  To quote:

 The disruptive threats now facing the planet are extraordinary: climate change, water scarcity, poverty, disease, growing income inequality, urbanization, massive economic volatility and more.

If you go back to the writings of Paul Ehrlich and the Population Bomb you can find all of these dangers spelled out in great deal.  You can also read about how the world, as we know it, should have ended about ten to twenty years ago from massive famine, disease, etc.  Go back to the 1890s and you can find writers talking about the issues of poverty, poor environment and income inequality in Britain and elsewhere.  In short, the “rare turning point in history when dangerous challenges and limitless opportunities cry out for clear, long-term thinking” is nothing of the sort.  It is not different this time and the issues the authors identify, while real, have been with us since the industrial age began.

So, now that Bood & Gore have set up their argument with an appeal to urgency, what exactly is it they want?

 Before the crisis and since, we and others have called for a more responsible form of capitalism, what we call sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.

The authors then go on to posit that, rather than asking why “sustainability” adds value, people should ask “Why does an absence of sustainability not damage companies, investors and society at large?”  Blood and Gore proffer a series of conjectures about why ESG metrics matter, all stemming from their belief that profitability is enhanced by paying attention to ESG:

1. Developing sustainable products and services can increase a company’s profits, enhance its brand, and improve its competitive positioning, as the market increasingly rewards this behavior.
2. Sustainable capitalism can also help companies save money by reducing waste and increasing energy efficiency in the supply chain, and by improving human-capital practices so that retention rates rise and the costs of training new employees decline.
3. Third, focusing on ESG metrics allows companies to achieve higher compliance standards and better manage risk since they have a more holistic understanding of the material issues affecting their business.
4. Researchers (including Rob Bauer and Daniel Hann of Maastricht University, and Beiting Cheng, Ioannis Ioannou and George Serafeim of Harvard) have found that sustainable businesses realize financial benefits such as lower cost of debt and lower capital constraints.
5. Sustainable capitalism is also important for investors. Mr. Serafeim and his colleague Robert G. Eccles have shown that sustainable companies outperform their unsustainable peers in the long term. Therefore, investors who identify companies that embed sustainability into their strategies can earn substantial returns, while experiencing low volatility.

Having diagnosed the advantages of ESG (which may or may not be true) the authors run into logical problems when they come to their prescriptive analysis (or, rather, there would be logical problems if their real objective was to create a more efficient system, which it most emphatically is not).

If Blood & Gore are right, and all of the points above are true, then we have a very easy problem to deal with.  Companies like to make more money, not less.  They prefer to spend less than more.  They prefer a lower cost of capital to a higher cost.  They would rather outperform their peers than underperform.  If the advantages that the authors claim are really there, then all they need to do is produce the hard evidence that presumably underlies their argument and companies and investors will take ESG metrics into account.  They’d be fools not to and, even if some are foolish, the companies and investors that do incorporate ESG into their decision making will, over time, beat the ones that do not, thereby  leaving everyone left standing at the end of the day using ESG metrics.

Of course, the hard data isn’t really there, which is why the authors want to have the government require ESG reporting.  ESG is really about pressuring companies to follow green programs, politically correct policies and whatever flavor of the month the left is supporting.  ESG reporting requirements are meant to allow politicians to bang companies that fail to show the appropriate level of deference to the environmental, social and governance (read union) goals of left-wing politicians and labor leaders.  Positioning the adoption of ESG metrics as a pro-investment, pro-competition move is an insidious attempt to obfuscate Blood & Gore’s true objective, which is to create a political weapon that can be used to pressure companies to take all sorts of investor-unfriendly, unprofitable actions that are politically profitable and/or desirable by a select liberal constituency.

There is an overarching problem that pervades the discussion of the Euro whenever I hear finance people and economists talk about it – logic.  Almost invariably, discussions of the Euro by financial people revolve around logical and rational arguments that focus on the currency’s strengths and weaknesses, the fiscal position of the Eurozone countries, etc.  They talk about the Euro as if it is the same as the dollar, pound or yen.  The problem is that it is not.

The dollar, pound and yen are strictly currencies – placeholders for value.  The Euro, however, is two things – a currency and an idea, and this makes it doomed to fail.  The Euro was pushed forward, not only to simplify trade and increase economic capabilities, but also to attempt to unite a divided continent and entwine its nations together so tightly that the problems of history wars, disunity, etc. would be shunted aside.  The Euro was a building block on the path to a greater United States of Europe, whereby sovereignty would be extinguished (or at least marginalized) to the point where there would be not only fiscal union, but political union as well.

The problem with this is that it is a fantasy.  The peoples of Europe have long histories as disparate groups.  Germans and Spaniards have very different views of the world, as do French and Greeks.  The only way that a United States of Europe becomes a reality is for organic, slow change to occur over many years to the point where the peoples of Europe feel that they are close enough together to actually form a political union.  Of course, this slow process is (and was) of no interest to the elite bureaucrats in Europe, who barely believe in democracy (they just like its veneer) and seem to prefer a technocracy of unelected officials who will (of course) run things as they should be run.  The ultimate evidence of this was the European constitution, where when the people did not deliver the result the bureaucrats want, they deemed the electorate to be fools and sent it right back.

Now, back to the Euro and its discussion in financial circles, the finance types who discuss the Euro tend to completely ignore the idea side of its raison d’etre.  That also means that they usually fail to discuss, or give enough wait to, the issue of sovereignty.  They talk about Euros as if the economic formulas and analysis that apply to currencies without the mandate to help unify a continent can be used.  They can’t.  The individual states of Europe are, for the time being, still sovereign and, unlike California, can always resort to abrogating their obligations.  This is important because decisions about whether to stay in the Euro or leave it are driven just as much, if not more so, by political considerations, domestic needs and politicians’ desires to stay in power as they are by fiscal sense.  Decisions that are seemingly stupid and would be considered incoherent were they to be taken by U.S. or Japanese policy makers make perfect sense in the context of a conclave of divided, sovereign states that each have different priorities.

In the end, the sovereignty distinction is everything.  The Euro will fail, whether today or tomorrow, because it is an attempt to create political unity through a top-down system, rather than an outcome of political unity that started from the bottom up.

Andy Stern, former head of the SEIU, had a remarkable piece in yesterday’s Wall Street Journal – remarkable for its naiveté, obtuseness and sheer gullability.  It was one of the worst things I have ever read in a serious newspaper.  The piece, entitled “China’s Superior Economic Model” is a paean to the Chinese state and its political leadership.  With its creation, Stern joins the list of left-leaning pundits (think Friedman) who see authoritarianism and central planning as a panacea for a messy world.  The errors are many and the truths are few, so where to begin?

How about with the fact that if China there are no free employee public unions, and Andy Stern’s very reason for existence wouldn’t be tolerated?  In Wisconsin, Scott Walker and the Republicans, through legal means, changed the law to prevent collective bargaining of public sector unions.  Andy Stern vehemently opposed Walker’s actions, as was his right.  Yet, here we find him supporting a regime that tolerates no dissent and no political organizations that do not toe the party line or are not controlled by the Communist party.  If Stern had tried to form the SEIU or a similar organization in China, he would have been thrown in jail and, perhaps, tortured or executed.

Stern proceeds in his piece to comment:

 “[f]or me, the tension resulting from the chorus of American criticism paled in significance compared to reading the emerging outline of China’s 12th five-year plan. The aims: a 7% annual economic growth rate; a $640 billion investment in renewable energy; construction of six million homes; and expanding next-generation IT, clean-energy vehicles, biotechnology, high-end manufacturing and environmental protection—all while promoting social equity and rural development.”

Road maps are great – they lay out exactly how one should proceed and show where one should end up.  Paul Ryan has a road map, but I doubt Andy Stern likes it.  Of course the road map looks good – it is a one-sided unverifiable analysis of what China would like to do.  Have you ever seen a plan that said “we are going to contract our economy by 3%, increase unemployment, install old technology and produce pollution?”  The problem here is that the road map which Stern likes is an illusion.  China cannot guarantee a 7% economic growth rate for five years, though it can try.  It may be able to build 6 million homes, but the question is does that make sense?  Why should China build the homes and where should they be put?  In a free market, individuals decide that question, in China, it is by government fiat.  That is what has led to an entire ghost city in China – lots of homes but nobody wants to live there.  Ditto for all the rest of it.  Everything sounds good, but then you realize China is building high-speed rail that costs billions and doesn’t work because it comes from a centrally planned vision.  Finally, there is that last gem “promoting social equity and rural development.”  If there is one thing that doesn’t exist in communist states, it is “social equity.”  There is clearly a dominant political class in China which controls everything, tells people how to live and demands obedience.  The idea that they care about equity is laughable, just look at what they do to people who speak up about poor conditions and bad government.

A little bit further down the page:

 “The current debates about China’s currency, the trade imbalance, our debt and China’s excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping’s government-led, growth-oriented reforms—has created the planet’s second-largest economy. It’s on a clear trajectory to knock America off its perch by 2025.”

The jury’s definitely still out on this point.  Remember when Japan was going to take over the world?  Predicting fifteen years into the future is very difficult and with China’s hyper-economy it is possible the whole system could crash and burn.  This is a country experiencing massive upheaval on numerous fronts.  It is also a country of corruption and lawlessness with little to no respect for intellectual property or rule of law.  It is true, many have flocked to China with investments because it is a hot area, but who knows what will happen?  Russia and Venezuela looked like good places to invest, until the governments started confiscating assets.

There is much more to comment on regarding Stern’s piece, but the bottom line is that it is full of assumptions that are less than sound, admiration for a dictatorial regime with an atrocious regard with respect to human rights and rule of law and arguments for the centralization of power in the hands of a select few.  I assume Stern likes the China model because he believes the centralized control of the economy is an evolutionary step over free market capitalism (points made in his article).  He must then also assume that, like in the U.S., public labor unions can capture the centralized decision makers through political contributions and alliances that will thereby enable unions to extract more money and more benefits for their members.  All of this rests on the assumption that unions will be welcomed and embraced by the central authorities.  The irony, of course, is that in communist China, there is no place for public unions because there is no need of their money – when you are a corrupt central government you don’t have any political competition which means you don’t need those resources.  Of course, Stern isn’t concerned about the Chinese workforce.  What he really wants is to take what he sees as the “best” of the Chinese system (central control by politicians and bureaucrats) and marry it to the current U.S. system to wind up with centralized powers beholden to public employee unions that, as a result, give those unions wages and benefits in excess of what they would otherwise have.  It makes complete sense from Stern’s point of view, but it is an albatross for everyone else.