The Wall Street Journal Follows Shulmaven on Socializing the Economy

 Today's Wall Street Journal brought with it an important article by economics columnist Greg Ip entitled "U.S. Marches Towards State Capitalism...." (See: https://www.wsj.com/economy/the-u-s-marches-toward-state-capitalism-with-american-characteristics-f75cafa8?mod=hp_lead_pos5 , paywall) In the article Ip outlines how the U.S. is moving towards state capitalism with Trump's demands for a share of NVIDIA's chip exports to China, the golden share in the U.S. Steel takeover and Biden's industrial policy. In my words, socialism with American characteristics. 

Aside from the over-night news about chip exports, Shulmaven made the same case on July 27th where we added tariffs and Biden's DEI policies. ( https://shulmaven.blogspot.com/2025/07/on-road-to-serfdom.html )Whether we call it state capitalism, socialism or fascism, the result is the same. We are entering a world of state controlled economic activity which in the words of Hayek will put us on "the road to serfdom."

Will AI be a winner Take All Market?

 Much has be written about the explosive growth in capital spending on AI by Google, Meta, Microsoft, and Amazon. (See: https://www.wsj.com/economy/the-ai-booms-hidden-risk-to-the-economy-731b00d6?mod=author_content_page_1_pos_1 , paywall) Those four companies are on tap to spend about $360 billion this year on building out data centers and related investments. Given the high prices of their stocks, market participants are assuming that AI investment will have a huge payoff in the future and are willing to overlook short term declines in free cash flow.

My sense is that investors are underappreciating three risks. The first is that the return on tangible capital will likely be lower than the hitherto high returns on intangible capital earned by the four companies. Second, the bidding war for talent where $100 million payouts have taken place will squeeze margins. Third, and perhaps most important, is that AI will not, at least initially, be a winner take all market. It is likely that AI will be nowhere near as profitable as winner take all Microsoft's operating systems, Google's search, and Meta's social media. 

Why? At the present time there are six highly capitalized entrants in the AI market and many smaller ventures competing for market share. The six are ChatGPT, Gemini, Anthropic, Perplexity, Meta AI, and Grok. Although ChatGPT has the current lead, this is a highly fluid market environment with deep pockets competing for market share. Thus, my guess is that investors will soon be disappointed with the returns coming from AI. The likely beneficiaries of this competition will be consumers and the highly talented employees.

The Guns of August*

One hundred and eleven years ago the guns of August opened fire signaling the start of World War I. Although far from being deadly, the July employment report reeked carnage on the stock market with the S&P 500 declining by 1.6% on Friday while the bond market sustained a massive rally with the 2-year note yields declining by 27 basis points and 10-year yields declining by 14 basis points. The markets are clearly sniffing out a recession.

 

Nonfarm payrolls increased by a meagre 73,000 jobs, but what really spooked the markets was a gigantic downward revision of 258,000 jobs for May and June. Further, all of the gain can be accounted for by healthcare and social services, hardly growth drivers. The three-month average for employment gains of 35,000 jobs is indicative of a stalled labor market. The far more volatile household survey was much worse with the average monthly decline from May to July of 287,000 jobs. My guess is that the administration’s immigration raids are now taking their toll on the job market. The labor market is experiencing simultaneous demand and supply shocks.

 

In March I called for the recession of 2025 to begin in the second quarter. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html ) That obviously didn’t pan out, but with real final domestic demand growing at only 1.2% in the second quarter and the job market stalling out, it was pretty close to a recession.

 

The day before the employment data came out, President Trump announced a panoply of tariffs on a host of countries that have failed to make a deal with him. Those tariffs and the earlier ones announced for the E.U. and Japan means that the U.S average tariff rate is now about 19%, eight times above where we started the year. Simply put, Trump called the market’s bluff on the TACO trade an eventuality we noted in June. (See: https://shulmaven.blogspot.com/2025/06/stocks-too-complacent-about-taco-trade.html )

 

As a result, with Trump’s tariffs now baked into the cake and with a stalled job market, the U.S. economy is on course for stagflation. The tariffs will keep inflation as measured by the core price indices above 3% and that will put the Fed between a rock and a hard place, especially because the unemployment rate will remain well contained, at least for now.

 

Adding insult to injury President Trump fired BLS Commissioner Erika McEntarfer because he didn’t like the revisions to the employment data. His big, beautiful economy is not as beautiful as he thought. This banana republic move will lower the market’s confidence in future data coming out for the government’s data mills, not a good thing.

 

Lastly, I have been skeptical of the stock market’s big rally off the April lows. (See: https://shulmaven.blogspot.com/2025/06/my-ucla-anderson-forecast-presentation.html ) My sense is that this skepticism will soon be justified.

*- With apologies to Barbara Tuchman

My Review of George Selgin's "False Dawn: The New Deal and the Promise of Recovery, 1933-1947"

The Recovery that Failed

Libertarian economist George Selgin has written an intriguing history of the New Deal and role Keynesian thought played in it. The book is largely a critique of Eric Rauchway’s “The Moneymakers.” (See:   https://shulmaven.blogspot.com/2015/12/my-amazon-review-of-eric-rauchways.html ) In the main I agree with Selgin. Simply put, many policies attributed to Roosevelt weren’t really his and by and large Roosevelt was wary of deficits as a macroeconomic policy tool. In Selgin’s framework the New Deal consisted of three R’s: recovery, relief, and reform. Selgin focuses on the recovery aspects and notes that Roosevelt’s deficits came from funding relief.

To begin with the ideas behind the Emergency Banking Act of 1933 which closed and then reopened the banks came from Hoover’s treasury department, namely Secretary Ogden Reed and Under-Secretary Arthur Ballentine. Further Roosevelt opposed the deposit insurance provisions of the Glass-Steagall Act because of the moral hazards associated with it. That issue would come to the fore in the 1980’s. A criticism of Selgin is that he does not give credit for how successful deposit insurance was during the 1937-38 downturn. The bank runs of the early depression were over.

 

As to deficit financing, the biggest deficit took place in 1936 when the World War I veterans’ bonus was paid out. Roosevelt opposed it and his veto was over-ridden. The payout provided a short-term boost to the economy and played a significant role in his re-election. However, in 1937 the lack of such stimulus played a role in that year’s downturn.

 

In the Spring of 1938 Roosevelt and his advisors finally took Keynes’ advice and embarked on the first true Keynesian stimulus of his administration. However, in the light of the World War II spending that was to come, it was far too little.

 

Selgin credits the massive gold inflows of the 1930’s for the modest recovery that took place. The gold came from Stalin’s stepping up gold production in the Soviet Union and European flight capital fearing Hitler. It was the gold inflow that enabled the Fed to embark on a policy of monetary easing, a policy that was halted in late 1936 as the treasury sterilized the gold inflows out of fear of inflation.

Roosevelt did take the U.S. off the gold standard in 1933 and raised the price of gold, a stratagem that Keynes advised. To Keynes it would be path to monetary ease. However, according to Selgin the increase in price of gold came from the ideas of George Warren who thought that a rise in the price of gold would automatically increase commodity prices. It did not.

 

Along the way Selgin notes how Roosevelt’s reforms stalled the economy, and the anti-business nature of his policies greatly weakened private investment. That would not turn until World War II ended and the feared depression did not take hold. Selgin observed a rise in business optimism in the aftermath of the war; however, this sentiment was not reflected in stock prices, as Wall Street experienced a three-year bear market from 1946 to 1949.  Stock market investors at the time were clearly worried. As a result, it would have helped to have some discussion of stock prices during his 1933-1947 history.

 

 

 

On the Road to Serfdom*

 Although few people realize it, the Trump/Biden years will be remembered when the United States took a giant step on the road to serfdom by socializing the economy. The Republicans of yore held up the virtues of the free market; under Trump that is no longer the case. For generations the Democrats have never been comfortable with the workings of the market, but they conceded its ability to generate wealth and to create a mass prosperity. However, today there are growing voices in the Democratic Party to socialize much of the economy.

Under Biden the country embarked on an industrial policy whose goals were to penalize the production of fossil fuels and subsidize clean energy (solar and wind), subsidize computer chip making, and further increase the government's involvement in healthcare, just to name a few. Biden also left the initial Trump tariffs in place. You can't look to the Democrats to support free trade. Further, Biden attempted to micromanage the economy by putting DEI into every nook and cranny of employment law.

Compared to Trump's second term, Biden's industrial policies were chump change. Trump is in the process of jacking up tariffs from 3% to close to 20%, extorted $550 billion from Japan to fund a sovereign wealth fund, made an investment in rare earth producer MP Materials (See: https://shulmaven.blogspot.com/2025/07/the-pentagon-makes-play-for-rare-earths.html), and with a "golden share" gave the president control of U.S. Steel. To me the sovereign wealth fund brings up memories of the corrupt Reconstruction Finance Corporation of 1932-1953, a path to corruption if there ever was one. Although American universities are need of significant reform, Trump's attempt to micromanage them goes far beyond what is necessary.

My sense is that under Trump we are on the road to something that will look a lot like Mussolini fascism where the private sector carries out the will of the state. For those comfortable with Trump, I would warn them what goes around comes around. When the Democrats return to power the economy could soon be turned into a 21st century version of British Labor Party socialism of the late 1940's with the added kicker of having DEI on steroids. Either way, it is not a pretty picture. 

*-With apologies to Friedrich von Hayek

My Review of Josh Dawsey's, Tyler Pager's. and Isaac Arnsdorf's "2024: How Trump......."

Slow Motion Train Wreck

Washington journalists Josh Dawsey, Tyler Pager, and Isaac Arnsdorf have written a personality-driven account of the 2024 presidential election. Starting in 2022 they take us behind the scenes of the Trump, Biden, and later Harris campaigns for the presidency. There is an inevitability to it all, but after all the book is an after the fact accounting of the election.

What the book lacks is a review of the structural backdrop to the election. There should have been tables of polling data on the relative popularity of the candidates along with the electorate’s view on whether the country was on the “right track” or the “wrong track.”

Much of the ground here was discussed in “Original Sin,” but that book ended with Biden dropping out of the race. (See: https://shulmaven.blogspot.com/2025/06/my-review-of-jake-tappers-and-alex.html) Both books are consistent in the view that Hunter Biden’s legal problems weighed greatly on Biden. The authors are sympathetic to Harris, but they do note her many unforced errors, specifically her failure to fully rebut her 2020 positions on hot button social issues, her failure to separate herself from Biden and picking the lackluster Tim Walz as her VP selection.

 

I learned much about the Trump campaign and how Suzie Wiles brought a modicum of discipline. She was instrumental in neutering Ron DeSantis, her former boss and the real rival to Trump. I also didn’t realize how important Steve Witkoff and Laura Loomer were to Trump. Witkoff was his consistent consigliere and is now a special ambassador to the Russia/Ukraine and the middle east. Loomer, despite being somewhat of an unguided missile, rallied support for Trump before and during the campaign.

 

The book also reinforced my view of Ron Klain, Biden’s chief of staff and campaign honcho. Klain instinct was always to seek support on the Left. This was true post-debate and well before, when he was in charge of policy. In my opinion it is was his predilections that kept Biden tacking Left while in office which, in my view, doomed his presidency.

 

This authors give us a real fly on the wall perspective to both campaigns, but I said at the outset, a full review of the structural parameters of the race would have been helpful.

My Review of Tom Arnold-Forster's "Walter Lippmann: An Intellectual Biography"

 The Evolution of Walter Lippmann from Socialist to Conservative-Liberal

 

I previously reviewed Craufurd Goodwin’s book on Walter Lippman as an economist. (See: https://shulmaven.blogspot.com/2014/11/my-amazon-review-of-craufurd-goodwins.html ) Here we have Tom Arnold-Forster’s work as a complete intellectual biography of Lippmann’s thought. Lippmann, born in 1889 from a wealthy Jewish family, would over the next seven decades would become one of America’s great pundits. He would ignore his Jewish heritage throughout his life.

 

Lippmann advised presidents, worked on Wilson’s 14 Points, was present at the Versailles Conference and with his 1922 “Public Opinion” became a leading political scientist. To Lippmann social psychology was the driving force behind the formation of public opinion.

 

After graduating from Harvard Lippmann hung out in the socialist milieu of the Greenwich Village and the New Republic crowd of the 1910’s. He became good buddies with the soon to be communist, John Reed. However, he never lived there and retreated to his upper-eastside family home.

 

From his perch as a syndicated columnist, first with the New York World and then with the Herald Tribune, through his "Today and Tomorrow" column he became widely known and very influential. He fully supported the urban liberalism of Al Smith. He was extraordinarily prescient in 1931 about the enormity of the crisis caused by the Great Depression and again in 1938 he fully understood Hitler’s motives to conquer Europe.

 

However, once the immediate emergency of the depression was over, Lippmann moved to the Right. So much so that a group of European conservative economists, including Hayek, sponsored a 1938 colloquium in his honor. Simply put Lippmann’s opposition to state planning put him in good stead with that group and it was there he coined the term “neo-liberal.”

 

He went all out to support the U.S. military build-up from 1939-41 and after the war he became an advocate of military-Keynesianism. Early on he understood the danger coming from the Soviet Union and he popularized the term, “Cold War.” His Eurocentricity made him a critic of the Vietnam war.

 

Lippmann was a great believer in the role of newspapers in forming public opinion. Afterall, he wrote “Public Opinion” just prior to the advent of radio. I wonder what he would think now of the collapse of newspapers and panoply of information sources that the public now has available?

 

My concern about the book is that Arnold-Forster largely presents criticisms of Lippmann from the Left about his economics and his belief in a strong America. Criticism from the Right comes very late in the book and is minimal. My guess is that the author unfortunately sides with the Left.