Power & Market

The Republicans for National Renewal (RNR) held a promotional event in Phoenix, Arizona for the holiday season last year after an extensive lineup was sponsored on social media. At the time, they had little to no bragging rights as they fought an uphill battle against election integrity.

During the late hours of night in August 2022, it was clear that two themes were stated with confidence: Conservatives were out, and populists were in. The election results proved that the political landscape has been malleable, however there had been a lack of momentum from conservatives.

Like Murray Rothbard, others were estimating what the future ideological divide could be. Sam Francis was infamous for naming names, yet his most academic profile was the philosophical foundation that aligned with Rothbard. He asked:

“Should we be Lockians, Hobbesians, or Burkeans: natural rightsers, or traditionalists, or utilitarians? On political frameworks, should we be monarchists, check-and-balance federalists, or radical decentralists? Hamiltonians or Jeffersonians?”

These were the questions rarely asked outside of Mises conferences, but one man has been making them relevant again. Peter Thiel provides a backstory that only Rothbard seemed interested in years prior. When public gatherings like RNR were organized, a refreshing dialogue had a visible impact on the audience and sounded similar to Francis’s pitch. He said:

The strategy of the Right should be to enhance the polarization of Middle Americans from the incumbent regime, not to build coalitions with the regime's defenders and beneficiaries" (p. 230).

This was the place where the August election started its trajectory. It may have looked like a smaller competitor to the concurring Turning Point USA conference just down the street. In terms of finances, this would certainly be accurate. Another notable presence were the youth groups disaffected by the Republican organizations. Years ago, there were a handful of college opportunities that provided proper networking opportunities. Today, the groups are more distinct beyond the vague patriotism heard in conservative media. If donors like Thiel remain regulars in this populist faction, the financial gap may not be an obstacle moving forward.

As the title suggests, the event was a referendum on the GOP’s direction and not a carbon copy of the party platform. Many of the speakers consisted of Republicans, although not in the conventional sense. Blake Masters, backed by Thiel, delivered a speech on his prominent one income policy reverting to a human centered economy. Two more Arizona regulars, Kari Lake, and Wendy Rodgers shared dissident views on branching away from the party in favor of the Trumpian model over its neoconservative counterpart.

All the Rothbardian staples were present. They argued that the renewal within the GOP started with Pat Buchanan’s presidential campaign in 1992 and succeeded with Donald Trump. A list of the greatest hits were shared from the declining standard of living to unapologetic nationalism. According to Newsweek, this was part of a broader trend among Generation Z seeing where the wind is blowing and seizing the opportunity.

The culture wars were waging once more at the forefront of the event. Economic concerns, championed by the conservative establishment, took a back seat as social topics surfaced above everything else. The usual suspects were under the gun including Big Tech, unregulated capitalism, and feckless Republicans. The alliance binding all these Trumpian senators and influencers contributed to the “working-class realignment.” Based on the guest list, a coalition of grassroots conservatives were underway and anticipating the midterms with revitalized enthusiasm.

It was also a safe haven for the often-neglected paleo libertarians of the Mises Institute. Books from Hans-Hermann Hoppe and others were scattered throughout the greeting tables. Tho Bishop appeared as the main representative, opening one of the first serious speeches of the night. The tone resembles what Murray Rothbard referred to as “Right Wing Populism” and claimed to be the only strategic way to win elections in the long run. After a lengthy celebration in August, many have speculated that this trend isn’t exclusive to the state of Arizona.

For all their flaws, Generation Z is reaching an impasse, and many are hedging their bets on college organizations as the way forward for the GOP. But, if they’re wrong, Rothbard’s prominent words may be palatable among the new generation of populists.

It’s closer to 2023, yet, we’re constantly reminded how the Fed has learned from the Volcker era, therefore knows how to steer the economy in the right direction. Nothing could be further from the truth.

On Tuesday St. Louis Fed President James Bullard told CNBC that the economy can still avoid a recession and that rates will likely “have to go to 3.75% - 4% by the end of 2022,” in order to fight (price) inflation. He continued by drawing comparisons to over 40 years ago, as reported:

Bullard compared the Fed’s current situation to the problems central banks faced in the 1970s and early ’80s. Inflation is now running at the highest points since 1981.

In the time-honored tradition of throwing one’s predecessors under the bus, claiming this time will be different, Bullard said:

Modern central banks have more credibility than their counterparts in the 1970s.

According to him, it’s this credibility that the Fed and European Central Bank:

…may be able to disinflate in an orderly manner and achieve a relatively soft landing.

He bases his confidence on the Fed’s “credibility,” as if this determines what causes recessions or cures periods of high inflation. The article tries to explain his theory:

But Bullard argued that the ability for the Fed to steer the economy toward a soft landing rests largely on its credibility, specifically whether the financial markets and the public believe the Fed has the will to stop inflation. He differentiated that from the 1970s era when the Fed enacted rate hikes when faced with inflation but quickly backed off.

It's quite the explanation! However, it offers little confidence that anyone at the Fed knows what they’re doing, appealing to the passage of time and hope for a better future, more than anything.

Bullard makes a final plea to this fabled credibility as the difference maker:

That credibility didn’t exist in the earlier era… We have a lot more credibility than we used to have.

Unfortunately, it will take a lot more than credibility to get the economy out of its current (or upcoming) recession and bust cycle. Displaying little knowledge of the Austrian Business Cycle and how changes to the money supply alter the structure of production causing the boom/bust, it will be difficult for the Fed to “do the right thing,” which would simply be leaving the economy alone.

The on-going comparisons between now versus several decades ago is worrisome. Considering the national debt in 1981 was still under $1 trillion, but now is over $30 trillion, it’s disingenuous to say 2022 is the same as 1981. Still, one might argue that it’s all relative, and GDP has grown since then.

Despite the problems with GDP, looking at the debt to GDP ratio shows something troubling, making the comparison between now and then even more difficult to support:

debt_to_gdp_ratio.png

Between 1970 to 1980, the debt to GDP ratio hovered around 35%. By comparison, today’s ratio is at 123%! Very roughly, if the national debt were closer to 7 to 9 trillion dollars, we could say it has grown consistently with GDP. But we cannot say that. Either the national debt has drastically exploded, GDP has inexplicably shrunk, or a combination of the two.

Beyond that, it's exceedingly difficult to believe that any central banker or government official learned anything from 40 to 50 years ago, since they’ve done nothing except take on more debt and increase the money supply every year in as much time; if they really learned, then inflation would never have gotten this high to begin with. Technology is different. The Geo-Political landscape is also different. The accumulation of all debts, past inflations, price valuations, and malinvestments over time are now all combining to increase the severity of the next bust.

Other than “high inflation” now and “high inflation” then, and the hope to lower the rate of price increases, it’s best to believe that the Fed steers this ship without a rudder. Since little comparison can be made to now versus half a century ago, it makes little sense to cite this period pretending like our new central planners are more advanced, learned, or better than their predecessors.

I got a D the first time I took economics in college. I was right out of high school and directionless. I was content living at home, working at a video store (remember those?), golfing and partying. 

Plus, I was obsessed with my instructor’s uneven sideburns and the girls in class. Not the model student.

Obviously, this changed, but it came to mind recently when reading Joseph C. Sternberg’s review of former Federal Reserve Chairman Ben Bernanke’s new book, “21^st Century Monetary Policy” in the Wall Street Journal.

Certainly there are longer economics books than this one, which checks in at 480 pages. And I’m sure more reviewers will pick it apart. I myself however, will not be one of them. It would go against one of the basic tenets I teach my students, one that hopefully helps them avoid that same D: keep it simple.

Economics is not that complicated. The world has been worse off since we’ve portrayed the “dismal science” to be so. Tax policy was my first lesson, and the vehicle was former President George W. Bush’s $1.5 trillion dollar tax-cut proposal.

There was Senate minority leader Tom Daschle standing in front of a Lexus saying rich people would be able to buy another one with their “windfall.” At the same time, Republicans were saying it would create jobs. 

I felt like someone was being disingenuous, if not outright lying to me. Though my curiosity pushed me into grad school, I didn’t need it to arrive at a couple of initial, basic conclusions.

So what if rich people bought another luxury car? It was their money anyway. And it would after all, help keep a car salesman employed. In that regard, Republicans were correct. 

I learned later that they were onto something when stating that the rich would be as likely to invest their recaptured resources. That would in turn create steady, durable employment.

Now, in the realm of monetary issues, we have Nobel Laureate Paul Krugman admitting he was wrong about his inflation prophecies. 

It’s true presidents play more of a role in the value of the currency than many realize. However, simple math tells us that when the number of dollar bills in society artificially blasts through the roof, the ones in our pockets subsequently decline in value. Therefore, it takes more of them to buy things.

To add insult to injury, Mr. Krugman’s ilk has been suggesting for years that inflation was too low. They promoted policies they thought would push it higher, we get it, and now they’re saying “sorry”? 

Moreover, he barely mentions the real cause of soaring prices: the response of the Federal Reserve System to the offensive lockdowns forced upon us by state and local governments. 

This is where bureaucrats and many academics lose me; their attempts to predict policy outcomes. 

The predictions of impacts from regulations and ordinances. The predictions of revenue fluctuations resulting from changes in income and property tax rates. The predictions of shifts in poverty from adjusting the minimum wage. The predictions of job flows as a result of trade protectionist measures.

The list goes on and on. The forecasts are often wrong, and always a waste of time and taxpayer money. 

When I tell my students to keep it simple, “because real life will muck things up soon enough,” this is a big chunk of the muck I have in mind. 

It doesn’t take a brain surgeon to figure out that forcing employers to pay more for labor will cause them to buy less of it. It’s not rocket science to understand that giving people unearned money will make them less likely to look for work.

You don’t need to be a nuclear physicist to know that bossing productive citizens around and taking their earnings will put a dent in prosperity. 

Instead, these “dismal scientists” insist that “if we pass legislation A, with complementary component B, C will result and all will be well.” Somewhere along the way they lost their grounding in the real world, and the rest of us pay the price. 

Many in my classes are just a few years older than my daughters, half of whom will be high school graduates by this time next year. Their mother and I have always laid out a few basic ground rules: take care of business in school, have one extracurricular activity, and be respectful of others.

After that, they’re generally free to do whatever they want. Hopefully their generations will appreciate that as the simplest, most efficient and effective approach not only for life in general, but public policy as well.

For reasons familiar to any economist, American politics is a permanent duopoly in which neither party can gain a sustainable long-term advantage over the other, but that does not suggest or imply that neither party can collapse; it only implies that any collapsing party will soon be replaced. As we know, American parties come and go – not often, but not never either. The Federalists gave us several presidents, but they vanished; the Whigs the same; are the Democrats next?

Let’s begin by dismissing the most obvious objection: The Democratic Party is too old to disappear. If I told you that my one-hundred-year-old grandma hadn’t died in a century, and, therefore, she won’t die this year, would you believe me or marvel at my stupidity? Let’s face it: the death of the Democratic Party is overdue, so its age, if anything, works against it.

Now, let’s talk about the warning signs. If you were dying, would your base be shrinking geographically or growing? Well, do the Democrats rule – to the extent they rule – by relying on a handful of cities or are they geographically diversified? Is that trend accelerating or slowing down? Is their strength amongst Latinos growing or shrinking? How about Asians? How about African-Americans? Trying to find a group – any group – in which the Democrats are growing is pretty difficult; they win – to the extent they win – by squeezing more and more out of their diminishing base. It’s not like they’re doing better amongst African-American voters; instead, they’ve got to turn out more African-Americans to offset their declining margins, and that’s not a sustainable strategy over the long-term. To put it another way, 2020 was likely the best their current coalition could ever manage, and they scarcely won – the decline and rot hidden by a moment of victory, but unmistakable nonetheless.

Of course, polls and outcomes vary all the time; consequently, such evidence can’t prove anything one way or another, so why do I think this time is different? 

Think about what the Federalists were designed to do: they were designed to share power between New England and Virginia at a time that elections were not open to all white male voters; once elections were open to all male voters, Federalists couldn’t hope to win. Sure, they managed one last hurrah, with John Quincy Adams, but they were doomed by a larger change that shattered their coalition and eliminated their potential for victory.

Or think about what the Whigs were designed to do: they were intended to unite anti-Jacksonian voters in the North, many of whom despised slavery, with anti-Jacksonian voters in the South, who wanted to protect slavery. Once Polk’s annexation of Mexico’s territories put slavery expansion on the national agenda, there was no way for the Whigs to hold their coalition together.

Let’s turn, then, to the Democrats. They are designed to unite voters who want to spend government’s largesse on themselves and their pet causes to voters who want to profit from the government largesse via the implied put-on financial assets that the Fed is able to offer via its enormous balance sheet. The problem is that policy of unlimited federal spending coupled to unlimited federal debts is no longer tenable. One can debate how it will end or precisely when it will end, but everyone agrees it’s over. The only question now is how to reverse and decrease government spending, which means some members of the Democratic coalition will be pushed out.

You can raise taxes on the rich, chasing rich people out as they no longer benefit from the Fed’s support of financial assets. Or you can cut spending, chasing those beneficiaries out of the party, but there’s no way to put the coalition back together. For every Democrat who loved Build Back Better, there’s some Democrat somewhere who hated it, which is why Democrats like Manchin and Sinema ultimately defeated it. There’s literally no potential coalition that could elect the Democrats; from now on, it’s just about how many they’ll former Democrats they’ll lose because they used to be able to run against Trump on the promise of unlimited spending, but now they can’t promise unlimited spending, and they simply don’t have the margin to surrender.

Like the Federalists and the Whigs before them, they no longer have any reason to exist. Occasionally, a business finds new life after its reason to exist ceases, but, mostly, they just disappear in the process economists call “creative destruction.” I suspect that’s what we’re seeing now – the creative destruction of the Republican Party’s opposition.

In short, I struggle to believe that the Democrats can find a new reason to exist after spending decades running on how to spend the limitless sums of government money that they believed they could spend. Are they going to abandon Social Security? Medicare? Obamacare? If they don’t cut, they’ll lose their sacred cows and, thus, their voters; if they do, they’ll lose their voters. If they raise taxes, they’ll lose their donors (and voters). There are no good options; their current business model simply doesn’t work.

But the most damning proof of their impending demise is their own conduct: do you think they elected Biden because they wanted to hamstring themselves? Maybe you think their focus on pronouns and other divisive social issues is a sign of strength? They’re trying to squeeze the last vote out of their declining base precisely because they know there’s no way to grow their base; their current strategies are simply the best of their bad options. Like any declining business, they’re doubling down, rather than pivoting, because that’s what people typically do when their businesses are dying. In theory, word processing manufacturers like Wang can start making computers, but they don’t; instead, they tend to “improve” their product even as its market is vanishing. How many typewriting or word processing manufacturers made the leap to computers? That’s how many politicians will survive – the real winners will join whatever comes next first; they won’t try to save this version of the Democrats.

One suspects that the coming disaster of 2024 will be the moment the Democratic Party’s death becomes apparent, but I think we’re already hearing the proverbial aria that signals the end. It’s simple economics: a party built to spend America’s unlimited wealth cannot survive the end of that delusion.