Limits to Overused Fiscal and Monetary Policy Can Result in Self-Induced Governmental Impotence

“The [U.S.] federal budget deficit is growing faster than expected as President Trump’s spending and tax cut policies force the United States to borrow increasing sums of money.”[1] This observation was made just after the Federal Reserve Bank relented under pressure from the White House to lower interest rates because bond investors had been investing with a possible future recession in mind. With the U.S. Government’s accumulated debt standing at $22.4 trillion and interest rates already low, the limits to both fiscal and monetary policy were apparent even if most Americans in the political and business elite were focused on avoiding a possible recession in 2020.

According to the Congressional Budget Office in August, 2019, the federal deficit for fiscal 2019 would reach $960 billion; the deficit for the next year would reach $1 trillion.[2] Back during the Reagan administration in the 1980’s, deficits were in the hundreds of billions and the debt was in the trillions. It would seem that the fiscal imbalance had gotten worse since then, in spite of the fact that recessionary periods were greatly outweighed by stretches of growth. In fact, the U.S. in 2019 was in its longest period of economic expansion. Yet the deficits and thus debt rose rather than dropped. President’s tax cuts in that period of expansion played a significant role. Tax revenues for 2018 and 2019 fell more than $430 billion short of what the Congressional Budget Office had predicted.[3] In August of 2019, the president made public his consideration of payroll tax cuts just to guard against a possible recession (especially if one should hit before the next election day).

Using recessionary fiscal tools during an economic expansion means the deficits in good times won’t counter those in bad times. The result in the case of the U.S. has been a steadily increasing accumulated debt, rather than a debt from bad times being paid off in good times. That’s the fiscal theory, but it ignores the insatiable desire for instant gratification in human nature that can easily find power in a representative democracy. Accordingly, the use of leverage, or debt, by a democratic government should be extremely limited; tax cuts during periods of expansion can be seen as a red flag that a government has already gone too far.

Fortunately, lower than expected interest rates even before the Fed’s announced rate cut in August, 2019, reduced the amount of money the U.S. Treasury had to pay to its borrowers. So the public as well as policy makers could conveniently overlook the fact that the projected deficit for fiscal year 2019 was 25% higher than the prior year’s deficit. One weakness of a democracy is that if things look ok on the surface, needed work on the fundamentals—the substratum—will likely be put off. It’s more understandable that the electorate would have this weakness—less so for the elected representatives who know or should know the fundamentals and look out for the fiscal balance of the government. Speaking of balance, it is interesting that the federal system too was so much out of balance with the federal level holding most of the governmental power even though the States technically still had residual sovereignty. In other words, the tremendous fiscal imbalance can be viewed as an indication or manifestation of a more fundamental imbalance in the U.S. system of governments. In contrast, the E.U. suffered from an imbalance in the other direction, as the state governments anxiously guarded most of their powers.

See: Skip Worden, Essays on Two Federal Empires. Available at Amazon.

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1. Jim Tankersley and Emily Cochrane, “Budget Deficit Is Set to Surge Past $1 Trillion,” The New York Times, August 22, 2019.

2. Ibid.

3. Ibid.

Anticipating a Recession: Economic and Political Indicators in the E.U.

Anticipation in August, 2019, at least among bond purchasers on Wall Street, of an impending recession in 2020 had at least in part to do with the E.U. In particular, a large state, Germany, had a disappointing second quarter in terms of contracting economic output, and the increasing prospect of Britain seceding from the Union was thought to result in the E.U. economy turning recessionary. I contend that both of these baleful indicators were over-emphasized. Additionally, adding the increasing political polarization in the E.U. as another contributor to an upcoming recession would be too much.

Germany’s economy contracted just 0.1% from the 0.4% growth rate of the first quarter.[1] Placing such emphasis on a change from 0.4 to 0.3 might strike some people as being petty. Yet Carsten Brzeski, chief economist in Germany of the Dutch bank ING said at the time, “Today’s GDP report definitely marks the end of a golden decade for the German economy.”[2] A 0.1% change ends a golden decade. How fragile golden decades must be!

To be sure, “industrial output for June dropped over 5% compared to the previous year. And the ZEW indicator of economic sentiment for August plunged sharply, hitting its lowest level since December 2011.”[3] Brzeski pointed to increased uncertainty from a large state seceding from the E.U. and the U.S.-China trade negotiations as the main culprit. Whereas the British economy would likely be negatively affected in the scenario of secession without coordination, the argument that the E.U. economy would contract as a result is more tenuous. Even if the British economy of a fully sovereign U.K. were to falter, the E.U. economy, being, like that of the U.S., made up of state economies, would hopefully be able to absorb interruptions in trade with Britain. Moreover, the empire-scale of the E.U. (and U.S.) is, as a cluster, much larger than the state-scale of political entities within the empire-scale union.[4]  Baleful economic predictions in 2019 for the E.U. post-secession may have been exaggerated in part due to conflating the two political scales. References to Britain’s “divorce” from the E.U. serve as perfect examples of the category-mistake. No, Virginia, the U.K. is not another E.U.; rather, pre-secession Britain was/is a political sub-unit in the E.U., whose laws and court (ECJ) trump(ed) British law and courts.

The pre-secession trend of business moving from the state of the U.K. to other states may suggest that the E.U. economy would actually benefit from a “no deal” secession. Furthermore, the E.U. trades with other countries, so disruption in trade with a former state could be viewed relatively and thus seen as less baleful for the Union than some economic forecasters were predicting in 2019.

More crucial to the E.U., and less to its economy, were “insurgent movements from the anticapitalist far-left to the nativist far-right,” which have “made inroads” amid “eroding public confidence in mainstream conservative and social-democratic parties that for decades” had dominated at the state level.[5] Although it is tempting to label all this as political instability, the political institutions have funneled even parties like the 5 Star party, which came out of anti-corruption protests, into the nitty-gritty of coalition talks.

Even the political tensions in 2018 between the state government of Italy and the federal E.U. level, which “upset investors in Italian bonds and banks, hurting the flow of credit,” and the collapse of the governing coalition in 2019, which drive some investors into bonds, were not economic crises for the E.U. economy as a whole. Politically, however, Matteo Salvini of the League Party in Italy, could already be viewed as potentially damaging the E.U. federal system. He “challenged” the E.U. law on fiscal discipline for state governments, accusing the states of Germany and France of hypocritically getting away with exceeding the limits on state debt and deficits while the E.U. imposed austerity on the Italian government. His complaint was valid enough. On August 20, 2019, he repeated he would defy federal authorities on the tax-increase (rather than a decrease!) part of the austerity fiscal-discipline federal mandate.

In the early 1830’s, U.S. President Andrew Jackson was forced to deal with South Carolina’s Nullification Acts, which stipulated that the state government could defy federal law regarding laws that the state deems are detrimental to South Carolina. Jackson was aware that a federal system in which governmental sovereignty is split, as in the U.S. and E.U., cannot long survive when even just one state government can decide to defy federal law. So the political uncertainty regarding the growing power of the political extremes in the E.U. has primarily political implications. To put the economics before the political in such a case represents yet another over-statement of the economic. Politics does not reduce to economics. Although the former can obviously affect the latter, one of the domains should not be put foremost in the domain of the other. My thinking on political uncertainty is that its economic effects tend to be overstated. Even in political terms, political institutions have shown a remarkable ability to funnel, or normalize, what was once raw political conflict.

Related: Skip Worden, Essays on the E.U. Political Economy: Federalism and the Debt Crisis. Available at Amazon.

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[1] Julia Horowitz, “German Economy Shrinks as ‘Golden Decade’ Comes to an End,” CNN.com, August 14, 2019.

[2] Ibid.

[3] Ibid.

[4] Skip Worden, British Colonies Forge an American Empire: A Basis for Trans-Atlantic Comparisons. Available at Amazon.

[5] Marcus Walker, “Italy’s Government Collapse Sets Up a Power Struggle,” The Wall Street Journal, August 21, 2019.

When Platitudes Undermine Real Change: US President Obama at the U.N.

U.S. President Obama’s 2010 speech at the UN’s annual opening lacked tangible proposals.  For example, he urged progress on the Middle East peace talks, but proffered no proposal.  He said Africa could be prosperous agriculturally, but gave no proposal for how.  He claimed that corruption in governments of developing countries is a problem, but offered no solution.  Pointing to corruption in general diffuses responsibility so talking about it does not shame anyone into making hard choices. Such platitudes belied the president's claim to being an advocate of real change. 
The substance of the platitudes rested on the then-current paradigm of international political economy rather than moved over onto an alternative. For example, he could have proposed a Middle East Federation or trading agreement. He could also have announced that the U.S. would no longer give any foreign aid to A.U. states that are riveted with corruption. He could have urged African leaders to cede more governmental sovereignty to the African Union, which in turn could have been given the power to act as a check on government corruption at the state level.
Additionally, Obama could have gone beyond citing his efforts to reduce the risk of nuclear proliferation to announce that the U.S. would join the ten countries that have created a movement with the goal of eliminating nuclear weapons completely. Meeting on the sidelines of the UN General Assembly in New York, the ten countries launched the new initiative to work towards a world without nuclear weapons. Foreign ministers, led by Japan and Australia, hoped to bring new life to efforts for nonproliferation and disarmament. Their mission statement said: “The only guarantee against the use and threat of nuclear weapons is their total elimination.”[1] This would indeed be real change.  In contrast, Obama said only that his goal was securing loose nuclear material around the world in four years. 

In short, real change goes beyond politics as usual and platitudes. It goes beyond incrementalism to proffer systemic change. Refusing to challenge the status quo intellectually or take on its power not only restricts a leader's ability to lead, but also eliminates real change as even an option. 

See: The Essence of Leadership: A Cross-Cultural Comparison, by Skip Worden, Ph.D. Available at Amazon.

1. Catherine Bolsover, “Germany Joins New International Initiative for Nuclear Disarmament,” Deutsche Welle, September 23, 2010.

On the Role of Partisan Political Ideology in the U.S. Supreme Court

Observing a pattern of sustained ideological proclivities in the decisions of justices of the U.S. Supreme Court, The New York Times editorialized in 2011 that the “court cannot maintain its legitimacy as guardian of the rule of law when justices behave like politicians.”[1] One could just as easily say behave like human beings, for juridical interpretation itself contains ample space for an interpreter’s ideology to have a role, especially given human nature that is apt to exploit such leeway. In other words, ideology may be part and parcel of the essential function of a constitutional court, given the nature of juridical interpretation. 
Rather than being a technical application sans discretion of a constitution to a matter of law, constitutional interpretation may be one of many ways of pushing for one’s view of the optimal government and society. Accordingly, the arrangement wherein a constitutional court is the final decider of the constitutionality of law, short of a constitutional amendment, may be criticized because it enables the ideologies of a few unelected jurispruds to rule, in effect, or have the last word.

The editorial in The New York Times displays a tendency to skirt the basis of the problem. For example, the editorial castigates justices who have attended political events in violation of the ethics code that applies to the rest of the federal judiciary. Such conduct compromises the appearance of being impartial and independent. This appearance in turn is based on the presupposition that the judiciary is not a political branch. Justice Ginsburg, for example, makes this assumption explicit in pointing to its tenuousness: “What I care most about I think most of my colleagues do, too, is that we want this institution to maintain the position that it has had in this system, where it is not considered a political branch of government.”[2] 

I contend that not considering the U.S. Supreme Court as involving political ideology is to ignore the space for ideology allowed in constitutional interpretation. No human being is impartial internally concerning matters of government and society. Beyond the reach of ethics codes, the space allowed by interpretation is naturally to be filled not only by “pure reason,” but also by ideology informed by one’s values and beliefs concerning the good society and ideal governance.

In the Court’s 2010-2011 term, for instance, ten of the sixteen 5-4 decisions were split along the familiar ideological grounds. The conservative majority showed “contempt for laws that provide some balance to the unlimited amounts of money flooding the political system,” “made it much harder for private lawsuits to succeed against mutual fund malefactors, even when they have admitted to lying and cheating,” made it more difficult for citizens to hold prosecutors accountable, and struck at consumer (ATT) and labor (Wal-Mart) rights.[3] The similarity between this judicial conservative majority and the political right makes these rulings particularly suspect. Were the Court’s “conservative” majority conservative in a distinctly judicial sense distinct from the planks of political conservatives, the role of the judicial ideology would not be as harmful or baleful to the republic. The fear, in other words, is that politically partisan agendas operate through judicial decisions of the Court via the discretion involved in judicial interpretation. Conservatives had a sense of this from the Warren Court just as liberals suspect the influence of politically conservative ideology in the Rehnquist and Roberts Courts. Neither conservatives nor liberals go far enough, however, in recognizing that constitutional interpretation itself allows for ideology.

The Times points to the superficial distinction that informs the design of the U.S. Supreme Court. “The framers of the Constitution envisioned law as having authority apart from politics. They gave justices life tenure so they would be free to upset the powerful and have no need to cultivate political support.”[4] However, the source of the political ideology is less due to political support and more a function of a justice’s own ideology. This is why an ethics code ought not be relied upon to eviscerate the interlarding of partisan politics in the Court. The justices are human, all too human, just like the rest of us. Perhaps we ought not assume otherwise.

The editorial touches on the inevitability of partisan ideology in the Court in the following passage: “Constitutional law is political because it results from choices rooted in fundamental social concepts like liberty and property. When the court deals with social policy decisions, the law it shapes is inescapably political — which is why decisions split along ideological lines are so easily dismissed as partisan.”[5] Being “dismissed” as partisan might be too loose; the decisions cannot but contain a partisan element, given human nature and the space in interpretation.

Rather than expecting the justices not to be human or assuming that an ethics code would do the trick, we could admit to the inevitability of political ideology in judicial interpretation. If the ideologies of five to nine citizens who serve on the U.S. Supreme Court ought not be definitive, judicial review ought not be the final decider short of constitutional amendment. A supermajority in the U.S. House and U.S. Senate, or a supermajority of the state legislatures, could be given the authority to overturn a decision of the U.S. Supreme Court. I would suggest that both Congress and the state governments could act thus to have the final say short of undergoing the constitutional amendment process. All branches of all governments in the United States are duty-bound, after all, to consider the constitutionality of their respective laws. Constitutional interpretation is an exercise not devoid of political ideology, as one’s values and beliefs cannot but come into play.

1. The New York Times, “Ethics, Politics and the Law,” Editorial, July 1, 2011, p. A22.

2. Joan Biskupic, “Justice Ginsburg Wields Greater Sway on High Court,” USA Today, July 1-4, 2011, p. A1.
3. The New York Times, “Ethics, Politics and the Law,”
4. Ibid.
5. Ibid.

Raising Retirement Ages in the E.U.: The Case of Spain

The New York Times reported in 2012, “Spain has a stubbornly high budget deficit, its banks require tens of billions of euros in rescue loans and the government may soon have little choice but to request bailout funds” from the E.U.’s “TARP” program. Nevertheless, the state government’s “budget would actually increase pension payouts 1 percent [in 2013]. The money includes not only pensions for former public employees, but also the social security payments that go to all retired [residents].”[1] Pension expenditures represented nearly 40 percent of the state's budget and 9 percent of the state’s economic output, so one would think that line-item would have been first up on the chopping block. To be sure, cutting sustenance programs such as pensions could actually exacerbate a government's debt because if a resulting decline in demand adds to unemployment. In this case, the politics in the state seems to have gone along with the economics. I submit that Spain could have gone further economically were it not for entitlement politics interlarding the retirement-age issue.
Delaying the increase in the retirement age in Spain from 65 to 67 until 2027 could be seen as a case of politics operating at the expense of what was most needed economically. Given the advances in modern medicine and the universal health-care systems in the E.U., even 67 have been too low and too late. 
Firstly, in the 2010's, the E.U. would struggle with immigration even as more workers were needed. The failure of politics in the state of Spain to jack up the retirement age significantly as early as 2013 may therefore have been a contributing factor in shortchanging the local residents from satisfying the state's need for labor. 

Do the state governments have too much power at the federal level? If so, are Greece and Spain paying the price of the self-interest of more dominant states?  

The E.U. state of Greece demonstrates that going just from 65 to 67 can indeed be accomplished legislatively in a year, even with political protests. “For Greece, the longtime generosity of its pension system — in which large numbers were previously allowed to retire at 50 and younger — came to define the bankrupt condition of the Greek state. In the years before the crisis hit, pension payments in Greece totaled as much as 14 percent” of the state’s economic output.[2] Spain too could have used the decrease in pension costs that a relatively quick raise to 67 would have engendered. Raising the age is distinct from cutting pension amounts, yet the austerity-bred entitlement politics may have spilled onto the age issue. 
Raising the retirement age can be distinguished from the cuts in monthly entitlement programs, such as in the lender-imposed austerity program in Greece. If heath-related exceptions can be made to a higher retirement age based on a generally longer human lifespan, then cutting entitlement programs more than raising the retirement age puts lives at risk. This difference may have been lost in the politics of raising the retirement age in Spain.

1. Landon Thomas, “Pension Dilemma in Europe’s Debt Crisis,” The New York Times, September 30, 2012.
2. Ibid.

Stock Market Efficiency: Regulating Speed Trades

A flurry of international activity aimed at putting limitations on computer-based speed-trading was striking during the Fall of 2012 in the U.S. because regulators had been slow to act. Typically, the NYSE has been viewed by the world as the Mecca of efficient investment markets. Paradoxically, however, efficiency may be improved by restricting—meaning regulating—the masses of computer-enabled quick trades that take advantage of momentary microscopic arbitrage opportunities that are too quick for the human hand. The American conventional wisdom seems to be that regulation and market-efficiency are inversely related, rather than complementary. This assumption might be overly simplistic, coming from an inherited ideology. Fortunately, the rest of the world has not been following the SEC.

 A trader on the floor of the NYSE.   Getty Images

The broadest and fastest changes to unfettered speed-trading as of September 2012 were in Canada, where regulators had began increasing the fees charged to firms that flood the market with orders back in the spring of that year. According to the research and trading firm ITG, the change made trading more rather than less efficient because the crush of data burdening the market’s computer systems was reduced. Too much information coming all at once can be distinguished from perfect information, and can even overwhelm a market’s very infrastructure, eviscerating any possible gain from the additional information. For computer science folks, all this can be pretty sexy language; for the rest of us, the mundane fact of the matter is that more information does not always make a market more efficient. Exploiting small increments of arbitrage at a high volume so as to make a quick fortune may not actually improve a stock market’s efficiency because the market itself might crash. Regardless, any increase in the micro efficiency of the stock prices may not be significant, which is perhaps why such volume must be thrown at the problem to make enough money at the macro level.

Nevertheless, the SEC was proposing nothing to hamper the unfettered wild-west of computer trading. Meanwhile, Canadian trading desks were preparing for rules coming into effect on October 15, 2012 that would curtail the growth of the sophisticated trading venues known as dark pools, which the U.S. Government had allowed them to proliferate in the United States. To be sure, the Canadian rules had been hotly debated, but many Canadian bankers and investors determined that they did not want to go any further down the road that has taken the United States from having one major exchange in 2002 to having 13 official exchanges and dozens of dark pools in 2012. In the interim, trading firms and investors on Wall Street were hardest hit by a series of market disruptions, including the flash crash of 2010 and the runaway trading in August 2012 by Knight Capital that cost it $440 million in just hours.

What is striking about Canada is not so much that it was not following the SEC; rather, even the rules going into effect in mid-October were seen by some banks there as insufficient. “We don’t want to look like the U.S., but we have to do it better than we are now,” said Greg Mills, the head of stock trading at Canada’s largest bank, Royal Bank of Canada.[1] Major market participants urging the state to better protect the viability of the market itself through more regulation is a case of statesmanship, or a sort of enlightened self-interest that fuels principled leadership over opportunism in the short-run. To be sure, legislators and regulators should not depend on such “industry self-regulation,” but it is quite beneficial as a supplement. That is to say, the cart should not lead the horse, but it is nice when the cart voluntarily lessens the load.

In the “theory of regulation” literature, market participants urging more regulation are typically presumed to be invoking the comparative advantage of regulation. A bank that would benefit over its rivals if computer-trades were not allowed in such time-volume as they were in the U.S. as of 2012 is typically assumed to be the only player willing to advocate for more government. Admittedly, the strategic use of regulation is not lost on businesses invested in the profit-motive. Nevertheless, this motivation does not exclude the possibility that market participants may urge more regulation out of a realization that if the market freezes up or collapses even for a time, every participant suffers financially.

Perhaps business practitioners in the U.S. are missing not only the forest for the trees, but also the trees for the branches, and the legislators and regulators are following in suit—in part due to the shared perspective (as it is so subtle being everywhere) and in part due to the corporate campaign contributions and intense lobbying. That is to say, the limiting nature of a perspective, unknown to the holders, is as it were a common denominator that tacitly supports a corrosive plutocratic (i.e., rule by wealth) symbiotic relationship between business and government that undermines the system itself. That there are other systems, such as Canada, that are founded on a different set of assumptions can mean that the basic form of the American perspective, which would otherwise be invisible or taken as a given, can be seen, or at least finally glimpsed. From this transparency, the assumptions taken for granted can be put as a problem to be solved. 

1. Nathaniel Popper, “Beyond Wall St., Curbs on High Speed Trades Proceed,” The New York Times, September 28, 2012.