The Capital Letter

The Capital Letter: Week of August 3

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The week was marked by the absence (seemingly, anyway) of progress on a stimulus package, but ended, at least, on a relatively (I would stress that qualification) upbeat note with the publication of better-than-expected job numbers. Nonfarm payrolls increased by nearly 1.8 million in July and the unemployment rate fell to 10.2 percent. This compares with Wall Street forecasts of some 1.5 million and 10.6 percent, respectively. Progress, but there is still a very long way ago. As Steve Rick, chief economist at CUNA Mutual Group, told Fox Business, “Re-openings have been rolling backwards, weekly jobless claims are continuing to pile up and we’re still operating from a huge deficit compared to the beginning of the year.”

Over at Capital Matters it was a busy week.

Kevin Williamson noted how efforts to protect companies from abusive coronavirus litigation had run into the ground:

The coronavirus liability shield authored by Senators Mitch McConnell (R., Ky.) and John Cornyn (R., Texas) would redirect lawsuits accusing businesses of exposing employees or customers to the coronavirus, diverting them into the federal system. It would limit the cases to those in which the businesses could be demonstrated to have shown “gross negligence” and would exempt from liability those businesses that can prove they made “reasonable efforts” to comply with government guidelines.

Senator McConnell has held fast to the liability shield, and President Donald Trump did his standard thing of standing tall right up until the moment Nancy Pelosi bullies him into rolling over, which he did on Thursday, offering to support a deal without the liability provision that was, until five minutes ago, the top legislative priority. Instead of having to fight Pelosi, McConnell and Senate Republicans now have to in effect fight the speaker of the House and the president together. As usual, Mr. Art of the Deal cannot figure out how to make a deal with his own team.

But surely, pointed out Kevin, something could be done at state level.  While there has been some progress here and there, it has only been “halting and partial,” and much more needs to be done:

The coronavirus epidemic has revived interest in tort reform, not just among big national firms whose deep pockets are lawsuit bait but also among small and independent businesses whose owners have suddenly been made acutely aware of the depth and immediacy of certain liability risks. Republicans looking for something to offer other than tax cuts — or even dreaming of finding a way back into competitiveness in California or New York — have a rare opportunity here that combines good politics with good policy.

Meanwhile, Patrick Mulholland reviewed Susan Berfield’s new book on the prolonged tussle between J.P. Morgan and Teddy Roosevelt:

[W]hile Morgan had “an aristocrat’s disdain for public sentiment,” Roosevelt reveled in it. On occasion, he would gossip with journalists during his afternoon shave, dictating statements on policy even as his face was lathered in shaving cream. Morgan, by contrast, dealt in private. He preferred to gather disputing parties around a table — usually his table aboard his yacht, the Corsair — and “fix it up.” The banker saw Washington as a second-rate power to the world of high finance. As a matter of fact, he had singlehandedly ended the Panic of 1893 by bailing out the United States Treasury. Morgan convinced President Grover Cleveland not to sell government bonds on the public market and risk a run on gold and instead to sell $65 million in securities to him and his syndicate of buyers, stabilizing the economy as it teetered on the brink of financial collapse. Roosevelt took a different view. To his mind, Manhattan was a “troublesome insular possession” that exercised an outsized influence over the country at the expense of the government. And that had to change.

“I am afraid of Mr. Roosevelt because I don’t know what he’ll do,” said Morgan, according to one apocryphal account. Roosevelt’s reply: “He’s afraid of me because he does know what I’ll do.”

Comparisons are obviously drawn between the concentration of corporate power in the Gilded Age and what we are seeing now. One difference, I suspect, is the current emergence of “stakeholder capitalism,” the latest iteration of corporatism, where government, large corporations, and various interest groups collaborate on setting an agenda for the nation, and the individual counts for nothing.

Representative Kevin Brady weighed in on the debate over the next stimulus package. In addition to direct financial assistance, Brady argued that:

Congress needs to include two more key elements to restore a strong, post-COVID economy that expands paychecks and increases the number of U.S. jobs: First, we must make America medically independent from China. Second, we must use pro-growth policies that will foster real prosperity beyond just getting through the next few months.

During this crisis, we have learned about America’s vulnerability to China when it comes to crucial medicines, medical supplies, ingredients, and technology. Yet Congress, despite spending trillions to deal with the fallout from that vulnerability, has not acted on this cruel COVID lesson.

Edward P. Lazear punctured some myths surrounding growing wage inequality (something that is, as he reminded readers, by no means confined to the U.S.). In essence, he sees this as a problem of growing skills inequality:

If not capitalism per se, what is the explanation for growing wage inequality? The answer is increasing dispersion in labor-market productivity. In labor markets where firms must compete with one another to hire and retain workers, wages tend to reflect a worker’s productivity. The evidence supporting this linkage is strong. If wages at the bottom are not growing as rapidly as wages at the top, perhaps productivity among the least skilled workers is not growing as rapidly as productivity among the most skilled workers. In fact, that is exactly what appears to be happening…

What can be done about [the productivity gap]? To eliminate the growing gap in wages, it is necessary to eliminate the growing gap in productivity. The only solution is to increase both the amount and quality of education obtained by those falling behind. Elsewhere, I have argued that a move in the direction of the vocational-schooling model would be beneficial to both productivity and wages. In Germany, which is known to have highly developed and effective vocational training, workers with vocational apprenticeships earn about 92 percent of the average domestic wage, whereas American high-school grads earn only 70 percent of the average American wage. Data show that over the past 15 years Germans with vocational apprenticeships have been considerably better off than their American counterparts. Americans who finish only high school or, worse, drop out before completion, do not have the skills necessary to make them productive in a modern economy. Providing the option of skills-based training to our high-school and community-college students could better equip them to earn higher wages.

Much vocational training is in service industries, not manufacturing or construction, so the vocational model need not force young people into blue-collar occupations, although it should be noted that many blue-collar occupations pay more than jobs requiring higher levels of education.

And the clock is ticking.

As technology speeds up and artificial intelligence becomes more prevalent, exacerbating the problem of skill inequality, low-wage workers will fall even further behind. Rather than condemning capitalism, claiming monopolistic exploitation of the poor, or blaming increasing greed, we should focus on providing the skills necessary to make all workers productive and high-earning members of the modern economy.

As a pessimist about what the current automation wave is going to mean for the job market and, by extension, social stability, I believe the race to upgrade skills is critical and, I suspect, a constant struggle to keep up.

Mathis Bitton called for action against China’s ever-expanding economic influence:

So far, the U.S. and its allies have not been able to respond to [Chinese] economic pressures with corresponding force. And this impotence should not surprise us. During the Cold War, America built a phenomenal array of institutions to combat the military threat posed by the Soviet Union. From NATO and intelligence partnerships to the CIA and the Air Force, America ensured that every threat would be met with a proportional — if not superior — response. This infrastructure is still in place today. After decades of rising defense spending, the U.S. is in a good position to respond to Chinese military threats with tact. However, when it comes to economic defense infrastructure, America has not yet formed appropriate coalitions to take collective action when the CCP uses economic power as an instrument of political coercion. When Australia legitimately demands an investigation into the origins of COVID-19, it should not face Beijing’s threats alone. Nor should Sweden when its government dares to give a literary award to Gui Minhai, a dissident Chinese publisher. Nor should Britain when Boris Johnson offers refugee status to Hong Kong protesters. Nor should any liberal democracy standing up for liberal democratic principles in an increasingly illiberal world.

Gone is the assumption that free trade and unchaperoned markets will somehow bring about the rise of freedom in every corner of the earth. Entering now is a new kind of realpolitik in which those who cherish the Westphalia order have to coalesce and respond to every economic threat with the appropriate amount of force — and caution.

On a cheerier note, I reported on Michael Dell’s upbeat comments about America in a New York Times interview:

The first eight years, we grew compounded 80 percent per year. The six years after that we grew about 60 percent per year. Any number you start with, if you put that into your calculator, you get like tens of billions of dollars. That’s what happened. America, what a country.

At the same time, I noted how Mr. Dell was too diplomatic to engage with his interviewer on the damage that higher taxes could do to the American model. This though will not be a debate where anyone will have the luxury of remaining neutral.

We ran an extract (“Socialism and the Corporation: A Love-Hate Relationship”) from Iain Murray’s new book, The Socialist Temptation (of which this is an extract of an extract):

Not only are corporations accused of greed, they are alleged to be destroying the planet. New-style businesses such as Uber are accused of not just exploiting workers but outright cheating them. Yet increasingly socialists, realizing the political impossibility of getting rid of the corporations, are turning to co-opting them instead.

Corporatism, again.

Returning to the grim topic of the pandemic, I examined how Sweden’s relatively (that word again) resilient economic performance might offer some lessons for New York City and elsewhere. One thing worth stressing in the debate surrounding the Swedish approach (which, incidentally, as in many other places, was deeply flawed when it came to care homes) is that we will not be able to measure its overall effectiveness until this pandemic has passed. Much will rest on whether Sweden manages to avoid or minimize a second wave, and, of course, on how other countries fare if or when the coronavirus returns in full force.

Sami Karam discussed what’s been happening to the price of gold (spoiler: quite a lot):

An often-heard criticism from the school of discounted-cash-flow valuation is that gold “has no intrinsic value” because it has no cash flows, meaning that you cannot derive an income from it. But you could say the same about a pile of dollars put away in a mattress. These stored dollars have no cash flows, but they could appreciate (or depreciate) in value for someone whose primary currency is, for example, euros or yens. This is not a productive way to make money, but that is not the point. Yes, an investment in gold is pathetically unproductive, and yes, it can generate a gain anyway.

David Bahnsen highlighted a possible new approach from the Fed and Douglas Carr warned of the dangers of America (to quote the song that some of us are old enough to remember) “turning Japanese”:

CBO data highlight how close the U.S. is to a Japanese-style death spiral. In March of this year, CBO projected a long-term rise in government spending to 35.3 percent of GDP in 2021-30, to 37.9 percent for the next decade, and to 41.5 percent for 2040-50. The above chart indicates that growth rates associated with these spending levels are 1.7-2.2 percent from 2021-30, 0.7-1.5 percent from 2030-39, and -0.1-0.7 percent for 2040-50. Of course, CBO’s recent forecast was prepared before the coronavirus shock and does not incorporate spending by a new Democratic government, so this dismal outlook is likely to worsen.

And Kevin Hassett had some questions for Peter Navarro, on trade, on China, and on hydroxychloroquine.

Finally, Daniel Tenreiro and I produced the Capital Note (our ‘daily’, well Monday-Thursday anyway). Topics covered included SPACs, office space (no longer a comedy, alas), Argentinian debt, problems in the pensions sector, the (superior) stock market returns of companies that are active on Twitter, longer-term unemployment problems, and troubles at CalPERS.

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