Wednesday, November 30, 2016

Carrier Capitalism

According to very reliable press reports United Technologies, the parent corporation of Carrier, has promised the incoming Trump Administration to remain in Indiana instead of moving its heating equipment parts facility to Mexico. From a political standpoint this represents a "YUGE" victory for Donald Trump. Simply put, he promised to save the approximately 1000 jobs and he delivered.

In exchange for staying United Technologies relied on the promise of fundamental tax reform being offered by President-elect Trump and a modest amount of tax incentives offered up by Indiana Governor and Vice-President-elect Mike Pence. This act will certainly put Congress under the gun to act on his proposal. What is left unsaid is the fact that United Technologies does about $6 billion worth of business with the Department of Defense. It certainly wasn't worth it for them to get off on the wrong foot with the new administration.

What is troubling about the whole transaction is the direct involvement of the incoming administration to get involved in what is essentially a private decision. Is this a one-off event or will we see a line-up of corporations announcing moves to Mexico in order to extract concessions? What we have here is the President-elect acting as a governor. Governor's do this all of the time for the benefit of the corporate sector at the expense of the taxpayer. "Crony capitalism" if you will.

My guess is that it won't be the first time and we will see President-elect Trump with his gazillionaire cabinet acting as a Jacksonian tribune of the people. But make no mistake, politically it was brilliant. 

Tuesday, November 22, 2016

The Coming Political Realignment

You have got to give Donald Trump credit. He destroyed the two reigning dynasties in American politics; the Bushes and the Clintons. He is now in the process of destroying the hollowed out shells of the Democratic and Republican parties. By the end of his term there could very well be two Democratic parties. A social democratic one headed by Bernie Sanders and Elizabeth Warren based on hostility to capitalism, an expanded welfare state and identity politics. The last of which can be viewed as fundamentally anti-American in the sense that it rejects our national motto, “E Pluribus Unum,” which means “out of many one”.  This faction is open to unskilled immigration, anti-trade and isolationist with respect to foreign policy.

I would characterize establishment wing of the Democratic Party, formerly headed by the Clintons as Left Hamiltonians. The favor big government but are friendly to finance, Hollywood and Silicon Valley. They favor open trade, an internationalist foreign policy, high skilled immigration, the regulatory state and thoroughly believe in the educational meritocracy that by and large runs the country. To them Trump is the ultimate outsider. My question is will they remain in what will be a very left wing Democratic Party with its hostility to the elites that they are?

On the Republican side we now have a very populist Jacksonian party that is hostile to nontraditional lifestyle choices, trade, immigration and foreign entanglements. It supports the existing entitlement programs and is voice of dispossessed white people who now believe that they are a minority group and are voting as such. They too are hostile to E Pluribus Unum. It was these voters that elected Donald Trump. To be sure there racism is present, but the grievances are real as they are looked down upon by the elites of both parties. On economic issues they are closer to the social democratic wing of the Democratic Party than the establishment Republicans, a fact highlighted by Donald Trump during the campaign.

I would characterize the establishment wing of the Republican Party, now a shell of its former self, as Right Hamiltonians as typified by House Speaker Paul Ryan. They favor big government where it can help big business, low taxes, open trade, high skilled immigration, and an internationalist foreign policy. They have more in common with the Left Hamiltonians in the Democratic Party than they do with the Jacksonians that are now running their party. The basis of a new party can be formed here similar to the way the Northern Whigs and the anti-slavery Democrats merged to form the Republican Party in 1854.

There is also a Jeffersonian wing in the Republican Party. They are called libertarians who favor a small government, an isolationist foreign policy and are wide open to the life style choices people make. It isn’t clear they have a home in the newly constituted Jacksonian Republican Party.

So fasten your seat belts, we are in for a wild ride over the next four years!

Friday, November 11, 2016

My Letter to The Wall Street Journal on Monopsony Labor Markets, Nov 11

Jason Furman and Alan Krueger ought to look in the mirror. The Affordable Care Act, which both authors supported, triggered a host of hospital mergers, thereby creating monopsony power in many local health-care markets.

The link is here:

Wednesday, November 9, 2016

After Action Report on the 2016 Election

WOW! Confounding all of the pollsters and the experts Donald Trump has become the President Elect. He relied on the voters willingness to "stick it to the man" (the global elite), the emergence of a bloc of white voters who acted as an "oppressed" minority, and he did much better than expected with suburban and Hispanic voters. Simply put nationalism is back. For whatever reason the Trump campaign sensed an opportunity in the upper Midwest and pounced. If anything this election represented a big loss for high-priced political consultants.

Shulmaven's forecast was pretty close we had Clinton winning on the electoral college by 288-250. We had Michigan going for Trump, but Florida going for Clinton. That was are big mistake because with Florida Trump in our model would have ended up with 279 electoral votes. It now looks like he will get around 300. We had Clinton winning the popular vote by 3 points; she will end up winning it by 1 point.

We were very close to the mark with the House and Senate races. We had the Republicans ending up with 51 seats; it now looks like they will have 52 or 53 seats. In the House we had the Republicans losing 12 seats which is about double the 6 or 7 seats they will end up losing. Not bad.

Where we are most surprised we thought there would be a major stock market sell-off. We got that overnight, but as of 11AM Eastern Time, stocks are off modestly with the bond substitutes, hospitals and auto parts suppliers bearing the brunt of the selling while defense, infrastructure and pharmaceutical stocks are soaring. I guess the market believes that Trump's reckless fiscal policy will be pro-growth and his barks on trade and immigration are just that with no follow through.

We will have more comments later in the week.

Sunday, November 6, 2016

Election Forecast: Clinton Wins, Republicans Hold Senate and House

It is going to be a long night. My best guess is that Clinton will beat Trump in the popular vote by 3 points, 48.5 - 45.5 with Johnson and Stein getting 4% and 2%, respectively. The electoral college could very well end up being a squeaker with Clinton beating Trump 288-250. Why so close? If I am right about Clinton's 3 point margin, which is somewhat above the polling averages, then California will account for the entire margin of victory. Using simple math with Clinton carrying California by 20 points and California accounting for about 15% of the popular vote; then by simple multiplication you get 3 points. That means the rest of the country will be tied.

How I get to 288 for Clinton is that I give her Nevada and Florida, but I give Trump Ohio, North Carolina and in two upsets I give him New Hampshire and Michigan. Question: why are Obama, Hillary and Bill visiting Michigan tomorrow? Trust me, it is not for the mid-Fall weather.

As far as the Senate goes, with Trump not collapsing the GOP has a real chance to hold on. There are going to be more than a half dozen very tight races so the margin for error is large. My central tendency is for the Republicans to hold the Senate by a razor thin 51-49 majority. The only sure loser the Republicans have is Mark Kirk in Illinois. Now if Clinton wins by 5 points, the Democrats will take the Senate by something like 52-48. 

As far as the House goes it now looks like my fears of a few weeks ago that the Democrats would take the House were unwarranted. Again assuming a 3 point victory for Clinton, the Republicans figure to lose about a dozen seats ending up with a 234-201 majority. And because the Republicans are the "stupid" party they will immediately squander their victory by having a leadership fight. A fitting coda for the ongoing collapse of a party that had victory on a plate and it nominated the only candidate that could lose to Clinton.

Correction and Addendum

California accounts for 10% of the vote not 15% as stated above. Thus with Clinton carry California by 20 points her margin of victory in the rest of the country would be 1 point. Not zero, but very close. In 2012 President Obama beat Romney by 5 points with 2 of those points coming from California. Thus if his margin of victory was only by three points with California being roughly unchained, we might now be witnessing Mitt Romney's reelection campaign.  

Monday, October 24, 2016

My Amazon Review of Sebastian Mallaby's "The Man who Knew: The Life and Times of Alan Greenspan"

From Sideman to Conductor of the Global Economic Orchestra

Sebastian Mallaby has written a magnificent well-written book about Alan Greenspan and the times that shaped him. (Full Disclosure: I am mentioned in the book.) It is a story about a musically talented Jewish kid from Washington Heights who became a sideman playing the saxophone in a 1940s jazz band and who by the dint of his intelligence rises to become chairman of the Federal Reserve Board. We follow Greenspan through his undergraduate days at NYU where is math geekiness shines through to his stint in an economics graduate program at Columbia. There he meets future Fed Chairman Arthur Burns and learns the importance of knowing every number in the economic data set. By doing this he sees the economy from the ground up rather from the top down approaches of grand theory. His knowledge of the data will become most useful as his career progresses.

After a brief interlude he forms the economic consultancy of Townsend-Greenspan and garners a host of industrial and Wall Street accounts. He becomes the man who knew. About the same time he falls into the ultra-libertarian cult of Ayn Rand. Somehow he managed to keep the practicalities of his work separate from the extremes of the cult. In 1959 he authors a paper describing how share prices influence corporate capital expenditures. It is a precursor to Tobin’s Q for which James Tobin wins the Nobel Prize in economics. Simply put when share prices exceed replacement cost there is an incentive to expand and vice versa. Forty years later Larry Summers jokes that Tobin owes Greenspan a share of Nobel cash.

By the late 1960s Greenspan catches the political bug and works as an insider on Nixon’s presidential campaign. It is from that beginning he has an involvement in every Republican administration that came later. He learns how to wield power and bests Henry Kissinger in a bureaucratic fight over an Iran oil deal that never came to pass. By 1980 he was one of the key negotiators in the aborted attempt to have Jerry Ford become Reagan’s 1980 running mate. Far from being a sideman he was inside in the thick of it.

In 1987 Reagan appoints him to chair the Federal Reserve and of a sudden the stock market crashes. He with others work to prevent a repetition of 1929 and he comes out of it with an enhanced reputation. He has an icy relationship with the Bush Administration but gets along famously with the Clintons. It is then when the late 1990s economy takes off that he becomes the conductor of the global economic orchestra and is practically deified for a sustained period of high growth, low unemployment and low inflation. He rightly diagnoses well ahead of the data that productivity was surging. That was brilliant, but all those factors lead to “irrational exuberance” in the stock market.

But herein lies the problem that would haunt his reputation 10 years later. By targeting inflation and employment he necessarily ignored the asset markets and their potential to trigger instability. He ignored the warning of Hyman Minsky who noted that “stability leads to instability” as investors anticipate that the good times will last forever. When they don’t the financial system is undermined and with that the safety and soundness of the banking system.

Greenspan’s critics argue that he should have stopped the housing bubble of the mid-2000s through increased regulation. Mallaby rightly argues that getting the regulations right is a difficult task and in the midst of a bubble it is hard to do politically. Greenspan was unwilling to spend his political capital on this.  Where Greenspan failed was that he believed that bankers in their own self-interest would prevent risk from getting out of control. They didn’t. I made a similar mistake in thinking that the Wall Street investment banks would not end up eating their own cooking by keeping so much bad paper on their balance sheet. They did. On the other hand Mallaby supports the critics in thinking that Greenspan should have been more aggressive in raising rates in 2004-06. To be sure bubbles are hard to detect and there was belief that the authorities could clean up a mess after the fact, but as it turned out the cleanup costs in 2008-2010 and still ongoing were enormous.

Mallaby also discusses Greenspan’s private life. After a failed marriage in the 1950s Greenspan becomes a serial monogamist dating staff members at Townsend-Greenspan, a speech writer in the Ford Administration, television personality Barbara Walters, and a host of others until he marries NBC newswoman Andrea Mitchell.

My few quibbles with the book is that in Mallaby’s discussion of the economic history he leaves out the importance of the Garn-St.Germain Depository Institutions Act of 1982 which enabled savings and loan associations to diversify their asset portfolios. That in combination with the new Reagan depreciation schedules created a marriage made in hell between the S&L’s and the tax syndicators that helped overbuild America in the 1980s. He doesn’t discuss the 1985 Plaza Accord whose effect was to flood the global economy with money setting up the 1987 crash and the final surge of the commercial real estate boom. He also fails to note that the Fed missed the rolling recession in commercial real estate that began in Texas, went to Phoenix and finally the Fed woke up when it reached New England. But New England was a weigh station on the road to Southern California and the New York City metropolitan area. Leaving these points aside I would highly recommend this book for readers interested in the life of a very interesting man and how economic policy is really made.

Thursday, October 13, 2016

My Amazon Review of David Reid's "The Brazen Age: New York City and the American Empire: Politics, Art and Bohemia"

Art and Politics in Late 1940s Greenwich Village

David Reid over-promises with his title. To be sure it is about the arts community in Greenwich Village and the left leaning politics associated with it. However it is not about New York City and what he calls the American Empire of the late 1940s. He rightfully opens his book with FDR’s open car tour in the rain for three million New Yorkers in the late days of his 1944 reelection campaign. After all as Michael Barone wrote so eloquently that New York City was the city that was winning the war. Unfortunately that is the last we see of the average New  Yorker. He also doesn’t flush out the role of New York’s foreign policy elite in shaping Truman Administration policy.

Reid’s book would have been far better if he placed the political left and the arts community in the context of the hopes and aspirations of eight million New Yorkers who suffered through the privations 15 years of depression and war. What they wanted was to move to the suburbs or the new apartment blocks rising in Queens, buy cars and above all else they wanted to have babies. These wants were hardly a priority for the villagers he discusses. Also nowhere is there a discussion of the important role played by baseball in the lives of the average New Yorker. There were far more discussions about the 1947 pennant races than the potential for a Henry Wallace campaign in 1948. Further in 1947 Jackie Robinson broke the color line in baseball which had far reaching political consequences.

What Reid does discuss is the minutia of Greenwich Village going way back to the 1800s and the denizens who lived there. He brings to life the beginnings of abstract expressionism, the rise of Norman Mailer as a great novelist and the differences between “The Partisan Review” and “Commentary”. Then of a sudden he goes into a discussion of the Truman Administration and its growing Cold War posture. To me Truman is a hero, not so to Reid.

As a result I was disappointed. Those interested in in the narrow comings and goings of the Greenwich Village of the late 1940s would have a more positive review of the book than me.