First, happy New Year! Be sure your seat belt is securely fastened and your trays are in their upright and locked position. This could be a very rough landing. In response to today’s title about when tariffs are a good idea, for those who suffer from TL;DR, the answer is almost never. Let me explain. First, let us draw a distinction between what is sound economics and what is typical politics. Economic policy follows one principle - how do we expand the economic pie to make everybody potentially better off. If we include future generations in such policies, and there is absolutely no reason from an economic standpoint that we wouldn’t, we should further qualify the economic principle to ensure that we can sustainably expand the economy through good policy. Any policy has winners and losers - else it would be called a no-brainer rather than a policy. The key to sound economic policy is that the winners gain enough to potentially compensate the losers for any setback they may suffer from the policy. In economics we call this the Pareto Principle, after the 19th Century polymath Vilfredo Pareto who formulated the concept. Note that I used the term “potentially”. A policy is still good even if compensation is not made to losers in a policy change, so long as the gains are sufficient to complete the compensation if the population deems it necessary. Another way of stating this principle is that we should not pursue any policy unless its benefits exceed its costs, and we should scale the policy to ensure that the last bit of the policy just balances the last bit of its costs. This is the “marginal” principle in economics. If we properly quantify all the costs, including the costs to those harmed by a policy change or the cost on future generations, then we should seek economic policies for which the overall benefits most exceed the costs. This is where the principle of free trade comes in. The notion dates back to Adam Smith’s 1776 Wealth of Nations and beyond. If trade is voluntary, and if all the various benefits and costs are properly considered, nobody would trade if it were not in their interest. In other words, we all gain from trade, at the personal level when one decides the compensation from work is worth sacrificing our free time, when we agree that we benefit more from purchasing a product than its price, and, in the international sense, when we agree to buy a product from another country at the price offered us. There is no gun to our head in the purchase of an import. Free trade has nothing to do with liberty. Rather, it is the notion that an economy finds efficiency if I am left to decide what I value most, and you are free to decide what you can provide most profitably that interests me. It is all about efficiency rather than freedom, which is why perhaps free trade is misunderstood and why some would try to limit our choices to meet their political ends. For instance, we now see some countries accused of artificially selling their products at too low a price. Have you ever complained to a retail store manager that the sale price of a good is too low? Export subsidies are the same thing. If a company or a country wishes to increase their sales by decreasing their price, then that is a good thing, so long as all benefits and costs are considered. There are some instances when we may claim that is unfair. A company or country could try to expand their market share through predatory pricing - a temporary and seemingly irrational price decrease that is designed to force their competition out of the market. Such a policy may work with near monopolies, and is abhorred by economists, but can rarely if ever succeed internationally. Of course, the U.S. and other nations often subsidize various forms of production in ways that has the effect of reducing prices of our exports. A recent agriculture think tank report observed that US farmers on average receive about 36% of their income from the government. That is twice the average level of Organization for Economic Cooperation and Development (OECD) nations, and more than four times the rate of emerging and developing nations. Many nations subsidize their exports of agricultural products. It’s just that the US does it on the grandest scale. The policy is apparently not designed to ensure we have oats for our breakfast. It is a political decision argued to defend family farmers in rural areas where each political party panders for their vote. However, a big bulk of this vote-buying goes to corporate farms that can’t vote, so the policy is not only bad economics, but is also bad politics. The politicians have dug their hole on this one though. Any politician who would speak the truth to such subsidies would immediately be labeled as opposed to mom and apple pie. A subsidy can be used on a very short term basis to allow a new industry to gain a toehold in the market (Airbus in Europe, chipmaking in the US, ironically enough given that the US designed the first microprocessors). This is the so-called “infant industry” argument. A subsidy is not used for predatory reasons, but rather to increase competition in the long run by allowing new competitors to enter the market. This is the very opposite of predatory pricing designed to reduce competition. Such subsidies also often fall to political pandering. For instance, the US recently engaged in the king of all industry subsidies by providing demand-side incentives to purchase US-made electric vehicles. The subsidy was well-intentioned to solve a market failure. Investors have very short term horizons. If something like a new EV or a plant to build solar panels cannot produce quick results, the investment dollars flow elsewhere. EVs in particular are high risk because few manufacturers are innovative enough at a sufficiently low price point. A more effective subsidy would be designed to remove long term risk by investing directly in research and development that does not always result in a successful outcome rather than subsidizing purchases. Tesla was a huge beneficiary of such US subsidies. But, instead of building more and better cars here, they used the profits from the subsidies to build more cars elsewhere, in China, Germany, and even with plans for Mexico. Their decision to use the subsidies to expand rather than innovate means other companies, particularly from China, are now building the better and cheaper cars Tesla perennially promises but equally perennially fails to deliver. One might also subsidize in the longer run to ensure a steady stream of a critical resource which wars (with armies or trade) may threaten. Japan is land-locked and dependent on rice production so the nation ensures a sufficient supply of rice to guard against blockades that occurred, for example, in the Second World War. In any regard, such subsidies often provide what some would claim to be unfair advantages to certain companies or industries based on nationalistic politics. However, they still translate into lower prices, domestically and abroad. The other accusation often leveled from our own glass house is that countries manipulate their currency to make their products artificially cheap for foreigners. Such a policy is often leveled at China. When China’s economy was much smaller, it could have tried to manipulate its currency. For the last decade or so, though, that would be infeasible. The only way China could do so would be to skim a large share of its trade surplus and devote it to buying other currencies, particularly the American dollar. That is very costly and it removes the trade surplus from productive investment in their own country. It also basically subsidizes US consumption of their goods. If anything, such a policy is ill-advised for China and good for consumers. China knows that these trade surpluses could be better spent targeting strategic investments in their own economy to build better mousetraps. China’s central bank and government economists understand that. After all, many of their top scientists and social scientists were educated in the U.S. That is unnecessary now, given China’s massive investment in their education infrastructure. International currency expert Michael Klein, who also happened to have the office next to me when I was at Clark University, noted in a 2015 article that there could then be no claim that China was manipulating its currency. That is for small developing countries to mistakenly do, but China was already then too large to afford to manipulate their currency. If you look at today’s graph, China’s currency has only strengthened since then, even compared to the US dollar, which has soared compared to other currencies. If the observation that other currencies seem to consistently lose value against the dollar since 2015 is a measure of currency manipulation, then all countries apparently do that. Instead, it is a measure of a flocking of foreign capital to US investments, which strengthens the dollar and is a good thing. To claim otherwise is a false but politically expedient narrative. Currency manipulation is a politically popular ploy that then President Trump first used in 2017. If it was already invalid then, it is even more so now, but Trump cynically believes it gives him the rationale to impose severe sanctions on China in the form of import tariffs. Tariffs are a lazy way to be economically ineffective. They appear to cost a nation nothing but benefit domestic industries. But, while politicians love gimmicks, in economics there is no free lunch. If you follow the logic of tariff desirability to its natural conclusion, there would be no global trade, and EVERYBODY will suffer from an inability to trade voluntarily to further our individual interests. They are likened to subsidies of our domestic industries, but costlessly. The no free lunch conclusion is that the domestic cost is actually very high. Consumers immediately pay more for products only made abroad - think certain natural resources or products that are so inexpensive we don’t want to devote our skilled labor to make them domestically. Even domestic industries may suffer if some of their factors of production cross borders. A tariff on Canada will significantly push up the price of a US-made Ford that relies on Canadian content. This self-imposed shot-in-the-foot under the false premise of currency manipulation or lack of border security (1.5% of all illegal immigrant arrests occurred at the Canadian border) or drug-running (an even smaller 0.2% of all border fentanyl seizures were from Canada) creates an even worse result in that other nations naturally have to stand up for their domestic industries by imposing a similar tariff on U.S. imports. The only nations that win in this escalating tit-for-tat are those who build stronger relations with economic allies willing to forgo economic foolery. And, once that policy is pursued, greater economic, political, and defence integration will likely follow. American isolationism has little chance of success in the long run. Let us debunk one final claim about any perceived long run benefits from tariff imposition. The argument states that tariffs divert spending on goods from other countries to spending domestically on goods of higher prices. This inflation will discourage consumption and instead encourage investment, or so the flawed argument goes. This argument is false on many levels. First, anticipation of inflation actually increases spending because we believe our money will be worth less in the future. We are already seeing a wave of such inflation-anticipation spending. This leaves less money available for investment, not more. Besides, how are nationalistic voters going to feel about a policy designed to reduce consumption and increase inflation? Have fun selling that to the electorate. The second more fundamental flaw in President-elect Trump’s logic is that a wave of new manufacturing will occur domestically. We have already discussed in past blogs the microeconomic revelation that more expensive goods at Walmart will not result in a wave of US manufacturing of cheap plastic goods. But, even if one could make the case that such import substitution could occur, will there actually be the investment trade distortion proponents claim? If people actually consumed less and instead invested more, does that translate into more domestic jobs? No. When consumers invest, it is in the purchase of stock, not in building new factories. A financial bubble may form, but it is unlikely we’d see a significant increase in domestic jobs. Indeed, unless the tariff policy was also accompanied by a restriction on financial capital outflows, as some desperate nations have tried and failed, smart money will just go elsewhere less prone to the upheavals from costly trade wars. This leaves us with only one explanation. Tariffs are a convenient scapegoating tool for opportunistic politicians wishing to sow the seeds of nationalism at the expense of inflation and perhaps even domestic investment. They do not improve our global competitiveness and may actually worsen it. But, boy, they sure sound great on the campaign trail. It is always comforting for people in desperate circumstances to blame others for our own plight. It might be more productive, though, to sniff out why our economy is failing and fix problems with inadequate domestic investment or innovation, distorted domestic markets, or demand incentives rather than the more sorely-needed supply incentives. We’d be better served if, instead of pointing a finger at others, we point out ways to improve competitiveness ourselves rather than reduce competitiveness through tariffs. I know you all recall the vast arc of American history in which the nation believed in the American Exceptionalism notion that nothing can suppress American competitiveness. When was that replaced by the notion that the US can succeed only be suppressing others? Let's pull up our bootstraps rather than focussing our attention on tying down theirs. Has American Exceptionalism really be replaced by American Divisionism?

I was perusing the Federal Reserve Economic Database (FRED) earlier this week, as all good nerds do, and came across a troubling conclusion. We are witnessing the decline and fall of the middle class. At the same time, Natalie and I are tripping around India, a remarkable and the world’s most populous country, in which the abject poor live alongside some of the world’s wealthiest. India has the third most billionaires of any country, including Mukesh Abmani, one of the world’s ten wealthiest one hundred billionaires. At the same time, it struggles to create enough jobs to give its children an opportunity to succeed in life. The consumption-based economy that worked so well to vault post-WWII United States into the economic envy of the world was based on a simple Keynesian premise. If we can provide consumers with a sufficient income to purchase the products they produced, an economy can grow as the population and productivity grows. Even Henry Ford realized that paying a higher wage will allow his workers to buy his cars. This notion that a good share of our productivity was paid out in wages was the cornerstone that permitted the U.S. economy to consistently grow at a rate of 3-4% for decades. So, what happened? We live in economies that subscribe to an increasingly fictitious concept of a middle-class driven national economy. In fact, they are increasingly devoting more and more of our economic pie to the wealthiest. Meanwhile, consumption and growth are faltering. Let’s get back to FRED and Keynes. John Maynard Keynes integrated various economic ideas from the early twentieth century that harkened back to French physiocrats from the 18th century. Economies work best when income is constantly recycled - income is earned, and then spent to purchase products that generate additional income from those who produce them. This virtuous cycle makes the economy go round and is the basis for the consumer-driven economy. It requires the most sizable populations to have the means to spend. This was the notion of the middle class, a potent and large economic force that creates built-in demand for the products a nation could produce. This notion of a society in which the predominant class was middle income, perhaps constituting wage-earners from the 25th to the 75th percentiles of earnings, was the juggernaut of American economic success since the Eisenhower era with “a chicken in every pot and a car in every garage.” So, what happened to that American Dream of a predominant middle class? We don’t have to look too far back. The Reagan Revolution was based on the flawed premise that we could replace a consumer-based economy with an investor-based economy if only we let investors keep more of their income and wealth. The theory held that they would invest their newly-kept income in new enterprises. Instead, they merely pumped up financial bubbles even further, which gave the false impression of financial success with little additional production. Meanwhile the reduced taxes that permitted the wealthiest to keep their income accelerated our national deficits and debt. We have stuck with the unfortunate fiction ever since. Many, particularly the wealthy, believe that reduced taxation of million and billionaires would somehow translate into economic growth. Instead, our once strong 3-4% growth rate has halved to 1-2%, and the national debt has consistently grown. A quick appeal to FRED explains why. Today’s graph shows that, in 1979, a median wage earner, defined as the point in which half of our population earn less wages per year and half earn more, received wages of about $55,000 (in today’s dollars). Fifty years ago that income represented about 56% of our national productivity per person. By 2024, this median wage for one solidly in the middle class had risen ever-so-slightly, to $61,000. The average worker is simply not getting ahead much, even over almost half a century. The self-professed economic miracles of Reagan and Clinton have turned out to be a middle class mirage. That rising tide of upper income retained wealth has sunk the middle class American Dream. Meanwhile, our productive capacity zoomed ahead. The size of the American economy, on a per-person basis, has doubled from about $102 thousand per American worker to $219 thousand over the last half century. Wages are stagnant but growth churned upward. In other words, the American worker has been left behind. Where is all that additional production going if it is not to those who labor to produce our goods and services? Owners of the non-labor factors of production own the machines and resources, and those who own our companies have captured about half of the slice of the economic pie that belonged to workers. This matters from a Keynesian perspective because the wealthy are much fewer in number and consume much less as a consequence, in the aggregate. Their larger bite at the economic pie, at the expense of the masses, is slowing down the economy. A nation just can’t grow at the customary 3-4% if people aren’t around to buy its products, either domestically or internationally. I am witnessing in India a lot of poor people, almost unparalleled wealth,, and a realization that a nation that cannot create a productive middle class cannot develop much further. There is a lot of discussion on the development of a middle class in India, so at least they are going in the correct direction as they strive to become a top-three economy within this century. On the other hand, the U.S. is going in the opposite direction. Huge shares of wealth are moving from the vast middle class and into the hands of the relatively small handful who own non-labor resources. This is a recipe for long term economic decline. Elon Musk has been anointed to carve the U.S. economy into a shape that caters to what he believes ought to be the new American Dream. It is not one of an empowered middle class that shares in the growth of a nation’s wealth. While Musk is destined to attain a trillion dollars of wealth within a decade (and that was before his newfound ability to smooth the way), he does not buy 20 million more Teslas than the middle class worker earning one twenty-millionth of his wealth. The vast wealth transfer is reducing domestic demand. This is where good economic policy formulated for sustainable growth clashes with the capitalist system designed to concentrate wealth in the hands of those who own the scarcest resources. The problem with people is that we procreate. There is nothing scarce about the American worker and hence the middle class cannot command the clout of one who owns resources or patents. And, now with billionaires dictating the outcome of elections and the loyalties of those elected, it appears we are quickly veering away from the direction that most Americans have been led to believe is their destiny. I guess we will know more in another four years. It should be an interesting experiment as we round out a half century of Reaganomics, with its upward spiraling wealth and national debt, and downward spiraling American middle class.

(data from https://www.visualcapitalist.com/cp/ranked-dead-crypto-coins-by-year/, accessed Dec. 21, 2024) Every year Time Magazine names their person of the year. Some past recipients included Hitler (1938), Stalin (twice, in 1939 and 1942), Kruschev (1957), and the Ayatollah Khomeini (1979). I labelled them recipients rather than winners as the recognition is no prize. Time notes the distinction recognizes “a person, group, idea, or object that "for better or for worse ... has done the most to influence the events of the year". I can imagine there will be a number of challengers for the more dubious “for worse: distinction next year. To that list I will add Cryptocurrencies. Before we get into the weeds, let’s note that the 2024 U.S. presidential election was fought over and bought by cryptocurrency. I know - all the discussion about the election was about disaffected minorities and males, but let’s look at another demographic. We know that the election was won (or at least the successful presidential candidate secured 49.9% of the vote) by inducing twenty-something males to come to the polling stations and vote for Donald Trump en masse. One in seven young male voters shifted Republican. Their shift was even more profound in the three swing states that, combined, determined the election of Donald Trump by a little more than 200,000 votes. The Trump hold on young males shifted more than 2 million votes his way in an election he won by about 2.3 million in the popular vote. Combine young men with other crypto bros, and you see that a new pro-Trump coalition came in surprising numbers. About half of that same demographic of twenty-something males own and “invest” in cryptocurrencies. Young males are three times more likely to own crypto than young females. And many of them were motivated by a promise to grow their crypto investment if only they vote for the new darling of the sector, Donald Trump. Trump once had it right. He had said that bitcoin was a Ponzi scheme. There is no underlying value to the digital coin - no precious metal, no quarterly dividends, no products it manufactures or services it provides. Its value rises only because more people over time wish to buy bitcoin than sell it. In other words, only by constantly convincing more (young?) people to buy bitcoin will its value continue to rise. Trump once understood that, before his pollsters convinced him that it is far more profitable for him to reverse his position and tote the crypto party line. In the recent election, he pledged to order the federal government to buy about a million bitcoin over his upcoming term, at a cost of a hundred or hundreds of billions of taxpayer dollars. The resulting cash inflows to bitcoin will surely escalate its value and contribute incredible profits for the crypto industry and those enticed to vote for President Trump based on that promise. It will also be the first time that billons of taxpayer dollars have been invested in a Ponzi scheme. As with all Ponzi schemes, because they aren't selling anything of intrinsic value, bitcoin relies on the "greater fool" theory. So long as new fools continue to flow in to buy something that has value only on paper, the paper price will rise. I guess the U.S. taxpayer will be the greater fool for the next few years. Such an adoption of bitcoin as a reserve currency for the United States Treasury is very dangerous. Obviously, it is a highly volatile security that can gain or lose almost all its value at any time since there is nothing backing it but thin air. Recall the purpose of a reserve currency. It is a device to steady currency markets and stabilize the value of the U.S. dollar. How a highly volatile asset can help stabilize a currency is a mystery to me. This pledge is simple political pandering, but it was clever, devious, and perhaps even cynical on the part of the president. I also personally witnessed a profound shift in Democrat political policy in the summer and early fall of 2024. Representatives went from deep concerns about crypto to crypto zealots almost overnight once they saw the success the crypto campaign was having in attracting 20-something males who often don’t vote. But, by the time the Dems jumped on the crypto train, that train had left the station. This all did not happen by chance, though. It was a highly orchestrated strategy developed by the crypto industry itself. In fact, crypto emerged as the largest single benefactor to election year politics. Their associations “invested” hundreds of millions of dollars to be sure crypto candidates got elected. Combine their investments with those of Elon Musk, and we are talking billions of dollars to sway an election and, especially, get young males out to vote. Well, that’s the nature of politics. In a democracy people vote by their pocketbook, not the collective pocketbook of an economy. If we must now recognize that crypto is perhaps the most powerful single force with the wealth to purchase political power, what in their own words does the industry claim regarding their contributions to the economy? The crypto industry claims they contribute in the following ways: decentralized finance (DeFi), smart contracts, asset tokenization, financial innovation, increased transparency, and the possibility for broader participation in banking and investment markets. Let us discuss these in turn. The stated purpose of bitcoin and the cryptocurrency movement was defined by their times. Bitcoin inventor Satoshi Nakamoto was upset by the role central banks and banks-too-big-to-fail had in the 2008 Global Financial Meltdown and vowed to create a way to transact that defied central control. His (her) solution (because we don’t actually know who Satoshi was or is) was to design a digital token as an alternative to cash, and a digital wallet where we could keep our coins. Authorizing a transaction would then be equivalent to writing a check, albeit completely outside of the control of banks. This was decentralized in two ways. First, it defies central control because we are transacting with each other, not through our banks. Second, a computer program administered by dozens, then thousands, and now tens of millions of small computers worldwide would record all these transactions, adjust our balances, and check to be sure nobody or no machine is cheating. This is called the blockchain. At first, personal computers did the work of recording transactions. Bitcoin is now almost the only cryptocurrency processed using millions of machines, each looking over the other’s shoulder to deter cheating, in what the industry calls Proof-of-Work. Almost every other digital coin has adopted a far more efficient way to ensure accurate recording of transactions, called Proof-of-Stake (for the most part). However, this decentralization that really only describes bitcoin, not the other cryptocurrencies, is not what Satoshi intended. Nakamoto envisioned a handful of enthusiasts performing that function. Since the reward to run PCs and use electricity a decade and a half ago was small, the blockchain network was too. But, once the price of bitcoin started to rise with its popularity to fuel mostly illegal transactions then, so did the incentive to participate in the processing network. Since the reward structure was baked into the coin design, eventually this network generated fees to miners valued at millions of dollars every hour. These revenues to process transactions is what has created the huge profits crypto used to buy elections. Hence, the notion of a small and devoted community to help the unbanked participate as an alternative to the banking system instead grew into a financial and political behemoth with clout Satoshi could never have imagined, and would have found appalling, given his/her contempt for large self-serving financial institutions. Bitcoin is no longer decentralized, in the political sense. It is controlled by a very few very deep-pocketed individuals, called “whales” in the industry. The second crypto claim is that it can permit smart contracts, which are transactions that record more than just the money changing hands. Such a transaction might also indelibly record the terms of a car loan (monthly payments, interest rates, principal, maturity, etc.) or other more complicated transactions that would normally require reams of overly complicated legal documents to enshrine. While smart contracts are one of the promises of crypto, there are very few actual examples of such utility in reality. Instead, the vast majority of transactions are for illegal activity, evasion of international sanctions, ransom payments, money laundering, and speculation. Asset tokenization is merely a fancy way of saying commodification. It is complex to invest in commodities, but exchanges do this all the time - with fuel contracts, pork belly futures, exchange rate purchases, etc. Assets have been tokenized for centuries. There is nothing new or unique here, except that crypto can avoid all the regulations that typically protect consumers from commodity-peddling charlatans. Unfortunately, we can’t read our daily news feed without hearing of some recent scam relating to such crypto tokenization, including the Hawk Tuah woman of late who made hundreds of thousands of dollars by creating a new digital coin that almost immediately failed and took with it almost half a billion of other people’s cash. Indeed, the industry talks about such financial innovation as a good thing. The argument goes that, in the absence of crypto, the financial world would be less innovative. That is probably true. There is certainly a huge amount of resources, both human and electricity, devoted to the crypto industry. In fact, their electricity needs alone are enough to fuel some major nations like Sweden or Ireland. But, human and resource energy devoted to this new type of finance is not necessarily a measure of progress. It is creative destruction of traditional means of transacting, but what it creates in its wake is not productive, even if it is destructive. The industry also brags about its transparency. It believes that banks and other financial institutions are opaque in transactions that we must take as an act of faith. It is probably a bigger leap to trust that the latest crypto craze is legitimate, or that those who will transact with you, but only through a crypto currency are reputable. We need not look farther than the bankrupted crypto dealers and coins, and the trail of tearful transactors who have lost the economy billions of dollars to wonder if this unregulated sector lives up to its promises. Today’s graph shows the number of failed coins over the short period crypto has been around. Can you name even one example of any other form of currency that has failed as thousands of sham cryptocurrencies have disappeared in just a dozen years? Finally, the industry argues that it affords us the opportunity for participation in banking and investment markets. Certainly that was the promise - to bring banking to the unbanked. However, who would want to keep their cash in an asset whose value could drop 50% tomorrow. Yes, it might be great for financial risk takers, but the unbanked want to know they have money to pay the rent tomorrow. On the other hand, there are also a number of risks. These include reliance on cryptocurrencies run by fly-by-night crypto bros out to make a buck, an unregulated sector that affords none of the consumer protections we all expect, an inability to oversee the money supply to ensure monetary targets are met, and the waste of vast amounts of human and electrical energy just so we can replace our government-sponsored currencies. Yes, I understand why some wished in 2008 to break free of large financial institutions that had lost their faith and trust. But, to replace a government-backed currency with one that is so risky, so volatile, and so prone to scams, theft, and worse, all in the interest of financial anarchy, seems like a most dubious proposition. Alas, that proposition is now on the verge of becoming the official policy of the U.S. government. We live in truly scary times when elections can be bought and sold, and currencies debased, and we are all sold a bill of goods peddled by slick advertising and political campaigns. And they called it democracy. Let’s just see how well all this works out for the twenty-something males who are buying the latest and greatest version of snake oil, and who have taken us all for a crypto fueled joyride to boot. The celebrated economist and father of macroeconomics, John Maynard Keynes, once said, "I'll change my opinion when the facts change." Likewise, if there could ever be made a legitimate economic rather than political purpose for crypto such that the benefits to society outweigh the costs by a greater margin than its alternatives, I will be the first to step on the crypto bandwagon. I can't conceive of a circumstance in which the facts may swing sufficiently, but I will keep an open mind. But I won't hold my breath.

This has been a rocky decade for the U.S. Federal Reserve and for central banks worldwide. That should come as no surprise. COVID19, the biggest invasion in Europe since World War II, Israel at war in Gaza, the West Bank, Lebanon, and even Syria, Syria’s liberation from the grips of a cruel dictator, and of Iran and Russia, and civilians suffered even greater loss of life in Sudan. Rounding out the dirty dozen in terms of conflict include Mexico, Myanmar, Nigeria, Brazil, Columbia, Cameroon, and Pakistan. The world is suffering more this decade than any decade in my lifetime. Superpowers seem either incapable or unwilling to stem the bloodshed. Indeed, one nuclear power is the aggressor in one conflict and a coconspirator in others. But, putting rogue dictators and military incursions aside, presidents often do not have much to do with economic success. There is not much a president can do to significantly improve a stricken economy. If there was, they’d be doing that all the time to garner support. Nor can they make things much worse, unless they have the hubris to invoke terribly misguided economic policies. Fortunately, independent central banks have an even greater ability to steer an economy. The U.S. Federal Reserve will have one last opportunity to put their stamp on the Biden economy before he leaves office next month. I’d called earlier the almost unprecedentedly large drop in the Fed’s key interest rate a few months ago, followed by a smaller move in the same direction more recently. At that time, I felt the Fed would not be finished until after their December 18 meeting, with another quarter point drop then. I still believe so, but I agree that recent data means it is more of a 50/50 proposition. That’s not to say there are significant clouds on the economic horizon. In fact, by many measures, the economy has rarely been better. Unemployment is very low, but not pathologically so to put us at a risk of wage inflation or shortages. Interest rates are in comfortable historic ranges, even if they are significantly higher than the ridiculous rates maintained in the aftermath of the 2008 global financial meltdown. Heck, even gas is down to $2.75 per gallon with the 3% Sams Club discount. And, while today’s graph shows a slight uptick in inflation of late, it is still hovering around the Fed’s de facto 2% target. On the economic front, things could not get much better, even if wages will continue to lag prices indefinitely as wealth was transferred from buyers to sellers of products in the aftermath of COVID19. In fact, the economy is in such a good spot that some would argue there is no need to lower the Fed’s interest rate still further. An equally valid observation would be that the president presiding over such a strong economy would surely cruise to reelection. It just goes to show how conventional wisdom can be sorely mistaken. The Fed does not only develop policies to keep interest rates, wage growth, economic growth, and inflation within desired ranges. While the mean value of these measures is important, so to is their volatility. Any first year finance student will tell you markets are driven by both reward and risk. Now, more than perhaps any other time in recent memory, we are faced with the potential for self-induced economic risk. Market volatility is always an economic drag, even when that volatility is pushing key variables upward. Volatility, be it upside or downside risk, reduces market predictability and causes players to protect themselves rather than do what they do best. In other words, uncertainty is always a negative, from a planning perspective. Few would argue that President Biden had no faults. He was too fearful of action on some fronts and showed excessive hubris in other disastrous decisions. He promised to be a one-term president, but became so intoxicated by his own perceived brilliance that he could not imagine that one other of the nation’s 335 million people could do a better job than he could. His predecessor left him with the worst four year federal deficit of any presidency, of about $7.4 trillion, and added an almost identical amount over the Biden presidency, to leave us with a whopping $36 trillion of accumulated debt. Perhaps I should qualify that. The $107,000 owed by every man, woman, and child in this country won’t be much paid down by me and my generation. No, we will leave that for our children and grandchildren to rectify. Hopefully, the level of debt won’t continue to spiral upward and out of control over the next four years, but I am not the least bit confident it won’t. The reason is uncertainty. It appears the hallmark of the upcoming presidential term is to push people and markets back on their heels and use threats and the element of surprise to garner concessions. Maybe that is a common strategy in the ruthless world of commercial development contracting, for which society does not have a stake but to ensure disputes don't escalate into illegal behavior. Such civil disputes can perhaps suffer irrational behavior designed to secure bargaining position, which once in a while requires following through with irrational threats to ensure their credibility. But, we do have a collective stake when politicians of any stripe sow distrust and destroy alliances and cooperation nationally and globally level. The Fed must then do what it too often finds itself doing. When Congress is spending like drunken sailors, the Fed must try to slow the economy down. And when bungled fiscal policy induces recessions, the Fed must step in to try to spur economic activity. The global model of chaos, of political hubris, of divide-and-conquer, and of declared mandates to rewrite social and economic compacts but with only 49.9% of the American presidential vote, is precisely the political destabilization that our central banks worry most about. This to me is the biggest question the Fed will be asking itself when it begins meeting on the 17th and declares what it will do with the interest rate on the 18th. With the economy generally very healthy, with inflation in the correct range, albeit slightly higher than last time I reported it to you, with consumer confidence consistently improving since its low in 2020, but with greater uncertainty and the possibility of trade wars looming, the Fed has to maintain a very steady grip on the till of our economic ship. I believe that tips the balance toward one last drop in the Fed’s key interest rate, although I still see a good chance the “wait-and-see” attitude could prevail instead. It is not so much what we see them do on the 18th that is important. It is what discussions are happening behind the scenes and telegraphed between the lines of their statement that is most interesting. The problem is that, with the economy already performing very well and demonstrating amazing resilience, there is just not a lot of unanticipated growth that can occur. With little possibility of significant upside, any politically induced volatility can only affect us negatively. Negative news that impinges on the economy is precisely what scares the Fed most. I'll leave it to political scientists to judge the desirability of various political strategies, but my read of economic history tells me that political volatility bleeds into economic uncertainty and makes the Fed’s job exponentially more difficult. The Fed should be reading "If" by Rudyard Kipling: If you can keep your head when all about you Are losing theirs and blaming it on you, If you can trust yourself when all men doubt you, But make allowance for their doubting too; If you can wait and not be tired by waiting, Or being lied about, don’t deal in lies, Or being hated, don’t give way to hating, And yet don’t look too good, nor talk too wise: If you can dream—and not make dreams your master; If you can think—and not make thoughts your aim; If you can meet with Triumph and Disaster And treat those two impostors just the same; If you can bear to hear the truth you’ve spoken Twisted by knaves to make a trap for fools, Or watch the things you gave your life to, broken, And stoop and build ’em up with worn-out tools: If you can make one heap of all your winnings And risk it on one turn of pitch-and-toss, And lose, and start again at your beginnings And never breathe a word about your loss; If you can force your heart and nerve and sinew To serve your turn long after they are gone, And so hold on when there is nothing in you Except the Will which says to them: ‘Hold on!’ If you can talk with crowds and keep your virtue, Or walk with Kings—nor lose the common touch, If neither foes nor loving friends can hurt you, If all men count with you, but none too much; If you can fill the unforgiving minute With sixty seconds’ worth of distance run, Yours is the Earth and everything that’s in it, And—which is more—you’ll be a Man, my son! I've been critical of Chairman Powell when I believed he missed the cue to deal early enough with the COVID19-induced inflation a few years ago, but I always wish the Fed chair the best. It is a position that requires independence and it must fastidiously avoid attempts at political interference from those wishing to turn the economy into a political tool. It is essential we need adults in that room rather than political loyalists.

Regular readers know I applaud the entrepreneurial spirit, and have marveled what one man has done to advance technology. That enigma is Elon Musk. Let me dispense first with the obvious fly in that ointment. We should all know our limits. If one has command over machines, that genius does not necessarily translate into an all-knowing command of all else on the planet. It is a matter of specialization of labor. A focus on one arena of human activity only distracts from focus on another. Of course, when one has entrepreneurial genius that makes him the world’s richest person, it is compelling to throw one’s weight around. If a mere pauper cultivated influence as does Elon Musk, without the money to open the doors, we’d probably call that person a crazy fool. But, money, and a major social media platform, buys incredible influence, as we have seen. We know what Musk can do with rocketry and satellites and electric vehicles and robots and solar panels and tunnel diggers and brain implants and artificial intelligence and autonomous driving hardware and software. There are probably others he is working on, or was, before he was bit by the politics and influence bug. I don’t know what he can do as President-elect Trump’s new right hand man. I am confident, though, that it will garner him the almost universal respect as has his contributions to technology, but we shall see. Musk is in the better mousetrap business. The concept dates back to Charles Darwin’s Origin of Species and others. A genetic mutation that proves more adaptable to its environment can thrive and out-reproduce less adept genetic stock that eventually fades away in the survival of the fittest. Karl Marx referred to the tendency of capitalism to destroy the capacity of others. He viewed such a natural evolution of capitalism as violent and destructive. Then, in 1942, Joseph Schumpeter relabelled these forces as creative destruction. Better mousetraps replace inferior ones and frees up less efficient use of resources to find better applications. We embrace the automobile even though it makes the horse and buggy obsolete. Cable replaces rooftop television antennas, and cellphones have all but decimated the copper landline business. Now, Musk’s rockets have destroyed the rocketry fortunes of Airbus, Boeing, and other NASA contractors, while Teslas have displaced Toyotas in many markets. Musk’s new Starship vehicle is more successful than any government-funded rocket design in history, even when it fails. Musk has now launched half a dozen experimental attempts to send to space the largest rocket ever made, and bring it back to Earth for a soft landing. Let’s just focus for a moment on the launch and orbit part. Musk’s Starship is by far the largest rocket ever launched by anybody, ever. It is powered by 31 Raptor 3 rocket engines, the most advanced ever. The Raptor is a full-flow staged combustion engine that is one of the most efficient ever designed because of its ingenious design. Each of the 31 rocket engines on its booster produces about 620,000 pounds of thrust. Each has enough thrust to launch a fully loaded Boeing 747. In combination, the 31 booster engines can launch the booster and its second stage into orbit, fully loaded with fuel and a third of a million pounds, or about 220,000 pounds all the way to the Moon. The next iteration shall be able to deliver significantly more than that to orbit. The combined rocket stands at about 400 feet tall, taller and twice as powerful as the mighty Saturn V that took astronauts to the moon. It can launch not one but hundreds of satellites at a time. And it can do all this with a launch cost of $10 million to $100 million, less than 1% of the cost of any government-sponsored competitor. This rocket shall revolutionize the satellite industry, scientific launches, and space travel. Musk’s more conventional but equally revolutionary Falcon 9 launch vehicle, and other less spectacular efforts, have earned Musk’s companies about $20 billion of government fees-for-service to date, typically at far higher profit markups than its other launch sales. Yet, these subsidies pale in comparison to those earned by defense contractors who build rockets for NASA. Musk has now demonstrated that he can send this massive rocket to space, place its starship in low earth orbit, and start and stop some of the second stage’s six vacuum-optimized boosters. He is preparing to soon launch satellites. Already, this space program is a success by almost any measure. These experimental missions have another goal as well, though. SpaceX hoped to bring both the booster and the second stage back to Earth. It has already successfully retrieved the huge booster once by plucking the booster out of the air with giant chopsticks as it descended back to its original launch platform. At other times, the booster and the second stage returned to land softly, intact and vertical, on the ocean at predetermined spots. Since it has yet to simultaneously retrieve both a booster and its orbital second stage in chopsticks, and do so repeatedly and as regularly as it does with its smaller Falcon 9 spacecraft, the missions are not yet deemed fully successful. Let’s keep that in perspective, though. Musk’s failure is anyone else’s spectacular success. Nobody has commercialized the successful return to Earth of a booster, but Musk will do that about 150 times this year alone. Except for experimental space-planes such as the Space Shuttle that return to Earth as a plane, but without the significant and commercializable payload of a rocket, nobody has returned an orbital launch vehicle - ever. Musk will soon do that. I applaud Musk for doing incredible things others deem impossible, and with an efficiency a hundred times greater than any government contractor may promise. This drive to innovate has forever been the hallmark of the best examples of human technological creativity. I also agree with Musk’s frustration in dealing with agencies unable to keep up with his pace. Government should strive to be as innovative as the private sectors it regulates. However, Musk’s rhetoric seems to suggest regulators need to simply get out of his way. That is a gross miscalculation of the role of government. None of us would wish to live in a societal free-for-all, with people polluting, speeding, robbing, and running rampant beyond the protections of laws. Some argue that all we need is courts to arbitrate such disputes of what I wish to do that might cause harm to you. Courts are a terribly expensive and inefficient way to resolve disputes, and tend to afford far more justice to the wealthy than the poor, despite the claim that Mother Justice is blind to our social status. We all know that a lawless society would cater to those who can afford to buy the protections it wants, one way or another. Thus, we ask our government to maintain an ordered society and to protect against the excesses of capitalism which prefers to privatize gains but socialize losses and environmental damage. That requires regulations. Laws prevent me from speeding or you from acting with reckless disregard to others. These protections have to come as a package. We can’t endorse those regulations that favor us and disregard those that don’t. Your right to punch stops at the tip of my nose. I can’t help but imagine that zealous deregulation will be very selective to the preferences of those commissioned to do the deregulating. In that way, to ask the world’s richest person with the most gripes about how government constrains him from getting richer to regulate not in his interest but mine seems pretty far-fetched. Please, Elon, get back to what you do incredibly well. Your efforts have been failing since you decided to buy Twitter and use it to help get elected those who you believe will best augment your wealth. You can do far more good by doing what we know you can do well rather than proving you can do it all. Since his foray into politics, Musk’s car company has been floundering and a few companies from China are now outcompeting Tesla. Another China company is building a rival to Musk’s Starlink satellite internet system. His diggers don’t seem to be tunneling much and his solar company is cutting back dramatically. The robots he is making had to be operated by humans behind curtains in a recent deceptive public demonstration, and it appears other manufacturers now exceed Tesla’s self-driving capabilities. I don’t know what is happening with his Neuralink brain implant enterprise as they have backed off on their claims lately. But, space is still going strong. This may well be why Musk entered politics. He was frustrated with the slow regulatory process that oversees space launches. Never before had the Federal Aviation Administration needed to move so quickly. Before SpaceX, they just needed to move just a bit more quickly than the very slow and plodding pace of military industrial contractors who were paid based on cost-plus contracts with the government. Delays often made for higher costs and hence higher profits, so speed had never been the name of the game. But then came Musk and his technological impatience. Suddenly, regulators could not even nearly keep up, which frustrated the heck out of Musk. So, he did what anybody with more than a third of a trillion dollars would do. He bought the regulators - or at least created a strong and probably irresistible voice in how the government will run in the future, especially, surely, in ways that affect him. Within days of the election, Musk’s SpaceX company received the FAA approvals for which it had been waiting for years. Coincidence? I think not. If it is necessary to deregulate the economy at a pace an order of magnitude faster than any other deregulatory zealot in our history, and if it happens to be very profitable for the deregulator-in-chief, well it is what it is. That’s not to say that there aren’t inefficiencies in government. But, as compelling as creative destruction of government sounds, Musk cannot pull a better government mousetrap out of a hat. Government is a different enterprise than business. It is often about prevention rather than production. Musk can measure the drop in output when he fires a worker. But, how do we measure the increase in risk when we reduce the size of the FBI? We protect ourselves through detection and deterrence, with the results measured over years and decades. Getting rid of three quarters of all agencies, as Musk promises, may save some now, but it may cost us dearly in the long run. The goal of preventing pollution, protecting the weakest among us, educating our young, providing for senior citizens who have paid into a fund all their working lives, or protecting us all from the actions of a few cannot be performed by some magical substitute for government. We cannot so simply privatize much of the public sector. Imagine a privatized court system, privatized police, privatized regulators of pollution, and privatized overseers of Elon who work for him. We can make marginal improvements on government efficiency, but cannot save the sums Elon and Vivek suggest, and not in a way that preserves the protections upon which our elderly and our grandchildren depend. I personally see no compelling need to enrich Mr. Musk any further, especially since his innovations have failed to develop at their previous pace and other more innovative companies have overtaken him in some of his most public ventures such as Tesla. But, from a technological perspective, he deserves credit.

Our National Debt - Sunday, Dec. 1, 2024

For You I'll Make an Exception - Sunday, November 24, 2024

It's the Economy, Stupid - Sunday, November 17, 2024

This is a Great Election (for China) - Sunday, November 10, 2024