The Capital Letter

The Capital Letter: Week of July 27

A trader wears a mask on the floor of the New York Stock Exchange, March 20, 2020. (Lucas Jackson/Reuters)

Welcome to the inaugural Capital Letter. At National Review Capital Matters we publish a daily Capital Note between Monday and Thursday. On Friday, we will review some of what we have published during the week in The Capital Letter, which will soon be available in newsletter form. You can sign up for it on the Capital Matters home page.

National Review and National Review Institute marked Tuesday’s launch of Capital Matters with a webinar, which you can see here, and which featured a discussion between Rich Lowry, Kevin Hassett, Kevin Williamson, Ramesh Ponnuru, and me on the topic of what Capital Matters is trying to achieve.

In short, we are living in a time when free markets are under attack not only from the left, but also from some segments of the right, as well, somewhat more subtly, by a corporate America that is embracing “stakeholder capitalism” or, to put it more bluntly, yet another variant of corporatism. Capital Matters will be a platform for those who wish to make the case for free markets and, indeed, for those who want simply to explain how free markets work, and what they can achieve. We also recognize that there is room for disagreement among those who support free markets over the right policies to pursue. National Review has a long tradition of publishing different viewpoints from those who, in broader terms, are on the same side.  That tradition will be fully respected at Capital Matters.

As weeks go, this was not the best. Beyond the terrible human cost inflicted by COVID-19, the economic data continue to be appalling as the country works its way, not always as intelligently as it might, through the current crisis. And, oh yes, there is an election in November.

In many respects, these are the worst of times, but their nature makes it, we believe, all the more necessary to establish a platform specifically dedicated to explaining and defending the free markets that are the foundation of both our prosperity and our liberty.

Our Week
This week we looked, of course, at the current crisis. In Making Up Is Not So Hard to Do, David Beckworth argued for a shift in the Fed’s policy framework following a recession:

[T]he Fed’s current monetary-policy framework is defined by a firm commitment to low inflation. Like a speed limit that keeps traffic from traveling too fast, this commitment keeps the economy from growing too rapidly, which is normally a good thing. But after a recession, it can stifle a recovery. Just as vehicles need to temporarily go faster than the speed limit to make up for lost time after a traffic jam, so an economy needs to temporarily grow faster than normal to get back to its pre-crisis trajectory after a recession.

Doing so, however, requires temporarily running the economy hot, which may cause inflation to briefly surge above the Fed’s 2 percent speed limit. The current Fed framework strictly enforces this speed limit and therefore does not allow for such catch-up growth in the dollar size of the economy. This means that even if there is still a big hole in the economy, and dollar incomes are still below pre-crisis trend values, the Fed will begin tightening monetary policy if inflation starts rising and approaches 2 percent.

This, argued David, needs to change.

In From PPP to MAFA, Glenn Hubbard reminded us that the best paycheck-protection plan is growth, and set out an agenda for achieving just that:

[A growth agenda] starts with and must be judged against a “first principle” of mass flourishing. Second, it will require investments of public funds — it is not and cannot be simply about small-government laissez-faire. Third, it needs articulation and careful implementation.

In What Will the Next COVID-Relief Bill Look Like? Robert Verbruggen came up with some ideas, while noting cheerfully that:

[W]e’re in for another one of those confusing bursts of last-minute legislative chaos, in which major provisions change constantly as the House, the Senate, and the White House try to whip up something they can all agree on. More than likely, we’ll find out too late about a bunch of drafting errors and unintended loopholes, but that’s Washington for you.

In The Mythical Aggregate Demand Effect of Redistribution, Casey Mulligan took aim at a key assumption underpinning what might or might not be included in the next round of stimulus.

In Bringing the ‘Stimulus’ Back to Stimulus, David Bahnsen set out his ideas for what any stimulus package should contain, but also included a reminder that basic economic principles should not be thrown out of the window “before we give another $2 trillion to $3 trillion of future generations’ money away.”

While on the subject of principles, Brian Riedl asked Who Will Fund $24 Trillion in New Government Debt?

Good question:

Over the past 20 years, the national debt gradually rose by $14 trillion (from 32 percent to 79 percent of the economy) without major economic consequences. But the U.S. is now embarking on a debt binge the likes of which it hasn’t risked since the height of World War II. If foreign borrowing remains relatively flat, there may be intense pressure for the Federal Reserve to essentially monetize more of the debt in order to keep rates from rising and protect business investment. America’s borrowing capacity is large, but we may discover that it is not unlimited.

Indeed, we may.

On a cheerier note, Joseph Sullivan, our chart guy, looked at GDP growth between 2016-9. His conclusion? American Economic Growth: First in Its Class.

And in Dollar Weakness Is a Policy Success, Daniel Tenreiro saw strength, paradoxically, in the dollar’s current weakness:

[D]on’t misinterpret the dollar’s recent slide as an indictment of the U.S. economy as a whole. In stabilizing the global financial system, the Fed no doubt strengthened the case for continued use of the dollar as a global reserve currency. As always, accommodative monetary policy carries a risk of excessive inflation, but in an environment of secular low inflation rates, that risk remains remote. Low Treasury yields and stronger global growth prospects may lead to dollar depreciation, but it is depreciation by design.

Looking bleakly at Washington, which is probably the only approach to take to that city, Jessica Melugin reported that House Antitrust Hearing Discusses Everything but Antitrust Law:

In Wednesday’s antitrust hearing with the CEOs of Amazon, Apple, Facebook, and Google, questions from liberal members of Congress laid the groundwork for expanding the scope of U.S. antitrust law. Questions from the conservative members highlighted concerns about political bias in content moderation. Notably lacking from the political theater was the current U.S. standard for antitrust: consumer harm.

“Socially Responsible” investing, to use that self-regarding term, will be something that we will be watching very carefully at Capital Matters.  In ESG Investing and the Use of ‘Risk’, Charles and Jerry Bowyer examined how the concept of ‘risk’ is being distorted in the interests of an ideological agenda, while I took a look at the advance of ESG — and some of its contradictions — in ESG on a Tear, But No Boohoo (Maybe).

Capital Matters won’t confine itself to the U.S. alone. In The Habsburg Moment, Kevin Williamson warned:

If the European Union is having a Hamilton moment, the United States should take care that it is not having a Habsburg moment. When Philip the Pious was installed on the Spanish throne in 1598, he believed that he had inherited an empire in its prime. In reality, he and his successors would learn that the conditions for decay in their kingdom had set in well and deeply at least a generation before, and Spain would spend most of the coming century in a state of decadence and decline. By the time Alexander Hamilton worked out his famous financial compromise, Spain was just starting to figure out how far it had fallen, and Napoleon already was waiting in the wings.

As Charles Krauthammer famously put it, decline is a choice. But it is sometimes a choice that you do not realize that you have made until after the fact.

Steve Hanke, meanwhile, made the case for dollarization abroad in Mothball Central Banks and Dollarize:

Emerging-market countries should follow Panama’s lead and “dollarize.” Most central banks in emerging countries produce junk currencies, banking crises, instability, and economic misery. These central banks should have been mothballed and put in museums long ago.

Steve’s point is not hurt by the fact that Che Guevara was once in charge of Cuba’s central bank, one of the topics covered in our Capital Notes this week. Others included the gold price (and, not unrelatedly, a Roman coin that held its value for centuries), how Sweden’s companies are managing without a lockdown (not at all badly, awkwardly), the euro zone’s woes, a narrowly averted meltdown in the Treasury market, and the Robinhood renaissance.

Next week? Who knows? We are meant to be running a piece on the kidnapping of Adam Smith, but its author is currently in Portland…

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