Iran’s Theocracy: An Uneasy Fusion of Religion and Political Economy

As mass protests erupted in Iran during the second week of January, 2026, Iran’s theocracy was on edge. That the protests stemmed from the dire economic conditions facing the people amid staggering inflation, including on basic food staples, rather than from foreign affairs, raises the question of whether religious clergy, including the “supreme leader,” Ayatollah Ali Khamenei, are competent in making economic policy. Without the ongoing political pressure that can come from constituents in a representative democracy, or republic, it is no surprise that the protests in Iran quickly became mass riots. In other words, bad economic policy by religious clerics in power in an autocracy can easily result in popular protests abruptly erupting into rioting. The overreaching of functionaries based in the domain of religion into politics (including economic policy), such that the distinctiveness of the two domains is ignored or obfuscated, can be distinguished from the problems that go with autocracy.

On January 9, 2026, the theocracy signaled that the rioting would be dealt with severely. Iran’s judiciary chief, Gholamhossein Mohseni-Ejei, in assuming a non-judicial political role, “vowed that punishment for protesters ‘will be decisive, maximum and without any legal leniency.”[1] Separation of powers obviously did not exist in the Islamic regime. That both the internet and international calls were being blocked by the government signals that the protests could realistically result in the fall of the Islamic revolution in Iran. In other words, the severity of the government’s measures in shutting down communication can be read as indicative of a government whose days are numbered. In an interview, U.S. President Trump said that Iran’s dictator was already “looking to go someplace” because the situation on the streets was “getting very bad.”[2]

Demonstrating that expertise in theology does not extend to politics (as well as economics), Khamenei accused the rioters of “ruining their own streets . . . in order to please the president of the United States.”[3] Nothing was said about the hyperinflation that was putting even basic foodstuffs out of reach for an increasing number of people as the reason for the protests. Nothing was said about Crown Prince Reza Pahavi having called for the protests on January 8, 2025, and that the protests “included cries in support of the shah,” which can be distinguished from chants in favor of President Trump, which did not occur.[4] Pahavi was not calling for the United States to invade Iran. Ayatollah Ali Khamenei’s rhetoric was therefore very poor from a political standpoint (i.e., his statement was incorrect), and he did not address the reeling economy in any constructive way in terms of advocating economic reform that actually had a chance of working. Knowledge in theology does not carry over onto the domains of politics and economics, so the overreach is problematic.

This critique can be distinguished from one premised on the American separation of “church and state,” which actually could use some work in American jurisprudence because “In God We Trust” is printed on the currency. To be against a government establishing a religion (e.g., proclaiming a religion to be the official religion) is different than being against a religion superimposing its distinctive criteria onto a civic government because an over-reaching of the political domain into the religious domain is distinct from the religious domain overreaching into the political realm, even though both instantiate the conflation of two distinct domains of human experience. Ayatollah Ali Khamenei should have stuck to theology as a cleric rather than try to run a government, and his response to the economic protests—even that such protests morphed so quickly into riots—demonstrates the intractably problematic nature of overreaching from one domain onto another, qualitatively different, one as if the criteria and credentials of the former could and should supplant those of the latter in the latter.

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1. Jon Gambrell, “Iran Supreme Leader Signals Upcoming Crackdown on Protesters ‘Ruining Their Own Streets’ for Trump,” APnews.com, January 9, 2026.
2. Ibid.
3. Ibid.
4. Ibid.

Negotiating from Weakness: The Plight of the European Union

To go to much effort to construct an economy on the scale of an empire only to refer instead to the economies within such a union, whether the E.U. or U.S. is to pay excessive homage to an ideology that can be termed Euroskeptic and anti-federalist, respectively. To refer to economies in one union and the economy in the other is just one means by which an ideology can distort a person’s reasoning and perception without the person being conscious of the underlying logical inconsistency. Such an inconsistency is incurred not only in “having it both ways” in the E.U. being a common market even as the states are referred to as economies even though many share a currency and thus a central bank, but also in referring to the federal system as if it were a mere “bloc,” or “network.”  In all of these cases of ideological word-games, the E.U. itself is minimized and thus implicitly marginalized from within. With Russia invading Ukraine and Israel eviscerating the Muslim residents of Gaza, self-marginalization for ideological purposes is indeed costly. Even referring to the federal official who is in charge of foreign policy as a “high representative” is implicitly denigrating and thus counter-productive to the E.U. being able to stand up to Putin and even Netanyahu in 2025.

The full essay is at "Negotiating from Weakness."

Poverty Impeding Development

In the 1980s, the advent of some newly-industrializing countries (NICs) in east Asia, such as Taiwan and South Korea, was generating excitement around the world that the gap between the least developed countries (LDCs) and the developed countries (DCs) then had a viable bridge through foreign direct-investment; that is, what had been a dichotomy was becoming a spectrum. The hope that globally-circulating capital might raise even the LDCs out of poverty. Of course, there was scarce any thought that the combined pollution of an economically developing world would raise global air and sea temperatures above 1.5C. Human beings are too near-sighted for that, and, of course, there is the allure of profits and higher salaries and wages. Also, the sheer inexorability, or stubborn persistence, of poverty in scaring off rather than being lifted up from foreign-direct investment may have been minimized by the hope. Roughly forty years later, Oriana Bandiera of the London School of Economics spoke on the theory that economic opportunities are impacted by how much wealth a person has at the outset—the alternative theory being that the opportunities are just as good for the poor as for the rich because differences are due to exogenous (i.e., outside) factors. The micro-level condition of a country’s poor impacts the attractiveness of a country to foreign direct-investment.

Poor people are more likely to be doing casual, self-employed work than running a small business or raising livestock, according to Bandiera. Wage-labor tends not to go to the poor. Sustenance-level casual work, which is not as regular as wage-labor, is typically not enough to accumulate savings, which could be spent on training or education, or to buy livestock or equipment to increase production of crafts such that economies of scale might be realized. A bimodal structure thus emerges with equilibria being at subsistence level and middle-class, but not in between them. In terms of public policy, craft-oriented small-business loans can perhaps increase the number of poor people who can enter the interim space between the two equilibria. Only governments would be willing to take the risk, and should be willing to make sure that the loans are not spent on consumption, for pressing consumption needs are part of the reason why the poor do not save money on an ongoing basis.

Similarly on the macro level, the Asian NICs were distinguished from the LDCs in Latin America in the 1980s because only the former group had governments strong enough to withstand the political pressure from the people for increased government spending for consumption. Strong states, even if they are authoritarian rather than democratic, can resist popular pressure to exhaust government coffers by expanding entitlement programs. That by 2025 several E.U. states had deficits and debts greater than the limits prescribed by the Stability and Growth Pact and those governments faced no real accountability from the E.U.’s federal government adds support to the argument that democracy may be at odds with sustained and balanced fiscal policy unless, as the U.S.’s Thomas Jefferson and John Adams agreed, the citizenry who vote (i.e., the electorate) are educated and virtuous.  

In terms of business, enterprises in LDC’s tend to be smaller than those in developed countries (and NICs). Smaller organizations are less competitive in trade because they cannot realize the benefits of economies of scale. Such organizations also have less job-specialization and job variety. Bandiera even referred to the labor of such companies as a “disassociated group of self-employed.” Additionally, the CEOs of those enterprises tend to be managers more so than leaders, meaning that those CEOs spend more of their time oriented to functions inside the organizations and less time oriented to external stakeholders and even society as a whole. Visionary leadership is something that the head of a small business in a developing country cannot afford.

Even in business schools in developed countries, the business field of business environment has a place similar to that of Pluto in the solar system. Situating the field of business ethics within business environment is logically and conceptually dubious—but not to worry; few “scholars” of business ethics have actually studied philosophy, of which ethics is a subfield. One business ethics “scholar” at MIT told me in 2024 that ethics is actually situated in sociology rather than philosophy. Being in the humanities, I only smiled and wished her well. Rather than copy the business systems of developed countries, perhaps LDCs should grow their own varieties. The question is perhaps whether the governments should first not only invest in infrastructure, but also underwrite small-business loans to a sufficient portion of poor households before enticing foreign direct-investment. After all, forests develop in stages.

On the Role of Agribusiness in Global Warming

Agriculture is a major source of carbon and methane emissions, which in turn are responsible for the general trend of the warming of the planet’s atmosphere and oceans. In fact, agriculture emits more than all of the cars on the roads. 10 percent of the emissions carbon dioxide and methane in the U.S. come from the agricultural sector. Livestock is the biggest source of methane. Cows, for example, emit methane. Methane from a number or sources, including the thawing permafrost, accounted for 30 percent of global warming in 2023. As global population has grown exponentially since the early 1900s, herds of livestock at farms have expanded, at least in the U.S., due to the increasing demand.[1] We are biological animals, and we too must eat. More people means that more food is needed, and the agricultural lobby in the U.S. is not about to let the governments require every resident to become a vegetarian. Indeed, the economic and political power of the large agribusinesses in the U.S. have effectively staved off federal and state regulations regarding emissions. It comes down to population, capitalism, and plutocracy warping democracy.

The full essay is at "On the Role of Agribusiness in Global Warming."

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1. Georgina Gustin, “Climate Change and Agriculture,” Yale University, February 22, 2024.

Monetary and Fiscal Policy and Structural Reform: Each Had a Role to Play after the Financial Crisis

With fiscal policy hamstrung by public debt in both the E.U. and U.S., monetary policy was a major beneficiary of the financial crisis of 2008 and the ensuing state-debt crisis that stammered on at least until 2013 in Europe. Lest it be concluded that central bank policy had reached an unassailable peak of salvation, the expanded role actually made its limitations transparent, at least in financial circles.
Speaking to Charlie Rose on March 11, 2013, Jeremy Grantham of a Wall Street firm argued that the U.S. Federal Reserve Bank's extremely low interest-rate policy would be unlikely to spark an increase in employment even in the severe recession following the financial crisis. In fact, a low interest rate is a transfer of wealth from the poor to the rich. Fiscal policy, such as the Conservation Civilians Corps of U.S. President Franklin Roosevelt's New Deal in the 1930s, is a much better tool to achieve full employment. Yet even the New Deal did not have enough fire-power to bring the U.S. economy out of the Great Depression; it took the breaking out of a second world war to get America's military-industrial complex to create enough jobs. One implication is that a competitive market alone is not sufficient to reach full employment. Even though such a market can sport great efficiency if kept competitive by the enforcement of anti-trust law, natural consumption levels have been unable to spark enough jobs for full employment to be achieved. Not even low interest rates can do that, as per the decade of the 2010's. We ought to accept that a lot of fiscal stimulus is needed to achieve full employment, even if it is not optimally efficient. 
Meanwhile, Jens Weidmann, the president of the Bundesbank, argued that monetary policy in the E.U. “can only buy time at best..” He went on to say he was “a bit concerned about some of the expectations around the power and potential of monetary policy.”[1] In other words, the ECB should have gotten back to monetary policy in a stricter sense, rather than trying to spark economic growth and employment through low interest rates and buying state-government bonds.
Behind the view of interest-rate, or monetary, policy as being capable of giving us economic salvation was the paralysis of fiscal policy determination in both federal unions.  Divided government at the federal level stymied fiscal policy in the U.S. after President Obama’s insufficient “stimulus” package in 2010. In the E.U., the vetoes retained by the fiscally- and debt-conservative state governments such as Germany at the federal level through the European Council put pressure on state governments strapped fiscally to take on even more debt even just to avoid defaulting on existing debt, not to mention keeping their fiscal policy-levels sufficient that their residents would not be imperiled. Increasing debt-loads for fiscal reasons did not serve states like Greece and Spain well. Fiscal redistribution at the federal level is one of the benefits of federalism, and yet the E.U. was stymied because each state government had too much power at the federal level (quite unlike the states in the U.S. at its federal level). 
In short, much of the allure of monetary policy actually came from fiscal frustration at the federal levels of both unions. Alternatively, both fiscal and monetary policy could have been used, and pointed in the same direction: toward full employment. Using low interest rates and the issuance of debt, respectively, to pull up an economy out of severe recession and even as political coverage (in the U.S.) or leverage (in the E.U.) for needed structural reforms of a financial system and indebted states, respectively, may not have been sufficient or even smart. Taking on a corruption-induced financial system in the U.S. required a lot of political guts, which not even the Obama administration had, for the Dodd-Frank Act of 2010 did not go far enough in deconstructing the conflicts of interest in the system. Also, feeding Wall Street with infusions of government money appropriated by Congress and much more created by the Federal Reserve Bank, with no strings attached, did not make the bankers at the big banks any more willing to accept structural reforms even though they would have protected the banks by fixing the system. Not even fiscal stimulus plus low interest rates could keep the U.S. out of a severe recession, though arguably the U.S. could have entered a severe depression otherwise. Both fiscal and monetary policy and going politically after dysfunctional systems, whether that of Wall Street or those of heavily-indebted E.U. states, all must be used so none of the tools is over-relied upon and thus overused.  

See Institutional Conflicts of Interest, Essays on the Financial Crisis, and Essays on the E.U. Political Economy. All are available at Amazon.

1. Katy Barnato, “Central Banks Alone Can’t Fix Europe: Weidmann,” CNBC, March 12, 2013.  

An Empire's Economic Scale Demands a Market System: The Case of China

A trend of increased-scale economies can be observed through history as city-states have given way to the increased military power of centralized Medieval kingdoms. Many of those expanded into Early Modern kingdoms as advances in military technology make it possible for kings to extend the territory under their control. Even empires have gotten bigger. Modern-day Germany was once considered an empire, as were Switzerland and the Netherlands. Today these polities are states in a modern form of empire, the EU. Similarly, the emergent United Colonies of America was considered to be an empire within the British Empire, with the individual colonies being viewed on both sides of the Atlantic as Early Modern kingdom-level polities on par with the states of the E.U. in the twentieth century. Similarly in China, as kingdoms were added, an old form of empire took shape. Because these enlargements came about gradually over centuries, it has been difficult for the human mind to recalibrate how the modern large empire-scale economies should be designed to take into effect the distinct challenges of the scale. We can see such an adjustment in the case of China as economic centralization came to be replaced by regulated markets, albeit with a sizeable involvement still of the government in the economy. 
Communism, for lack of a better word, has somehow morphed into Capitalism in China, as if a genetic mutation had taken hold through mitosis. This reflects an important trend that can be traced back to Deng Xiaoping (1904-1997), who “abandoned many orthodox communist doctrines and attempted to incorporate elements of the free-enterprise system into the Chinese economy” beginning in the late 1970's, according to the Encyclopedia Britannica. Decades later, upon becoming prime minister, Li Keqiang announced in 2013 that the central government would reduce the state’s role in the economy. The Chinese government issued a set of policy proposals to reduce “government intervention in the marketplace” and give “competition among private businesses a bigger role in investment decisions and setting prices.”[1] According to the proposals, a tax on natural resources would be expanded, market forces would play a larger role in determining bank interest rates, and, according to the government, policies would be enacted to “promote the effective entry of private capital into finance, energy, railways, telecommunications and other spheres.”[2] Foreign investors would be given more opportunities to invest in finance, including banking, logistics and healthcare. Foreign exchange controls would also be loosened further.
The proposals were enough for Stephen Green, an economist with Standard Chartered, to remark, “This is radical stuff, really.”[3] Huang Yiping, chief economist at Barclays, pointed to lower growth projections and massive amounts of debt as giving the Chinese government a rather practical motive in continuing the trend of refurbishing communism. Many experts doubted, however, whether the Communist Party would “abandon the state capitalist model, break up huge, state-run oligopolies or privatize major sectors of the economy that the party considers strategic, like banking, energy and telecommunications.”[4] Additionally, corrupt government officials would doubtlessly resist losing what the New York Times called their “secret stakes in companies,” not to mention all the bribes.[5]
Even so, it is astounding that the prime minister, a communist, would say: “If we place excessive reliance on government steering and policy leverage to stimulate growth, that will be difficult to sustain and could even produce new problems and risks. The market is the creator of social wealth and the wellspring of self-sustaining economic development.”[6] Marx and Lenin would hardly recognize the Chinese Communist Party. Because China has over a billion people, the old “command-and-control” economic model based on centralized directives on production quotas and prices had become increasingly difficult to coordinate. Bottlenecks in supply causing shortages on the shelves could eventually occur, with political instability increasingly likely.  The sheer scale of China, an empire of former kingdoms, has rendered centralized control highly inefficient.

The Emperor Kangxi of the Qing Dynasty. He ruled for 60 years, greatly expanding the size of the empire.      Source: Chinahighlights.com

Interestingly, even as Emperor Kangxi (1654-1722), the second emperor of the Qing Dynasty (1644-1911), expanded the empire by taking over central Asian Muslim kingdoms, he resisted the preceding Ming Dynasty’s laissez-faire policy on internal trade and industry by turning some crucial industries into monopolies. Interestingly, John D. Rockefeller would probably have concurred, based on his own theory that the coordination in a monopoly in a vital industry such as oil could put an end to destructive competition. In any case, Kangxi apparently saw no contradiction between expanding the empire and centralizing some important sectors of the economy. Similarly, Mao saw no internal tension in collectivized consolidation on a large scale. As tempting centralization has been for Chinese dictators seeking increased control and thus power, government regulation of competitive markets is eminently better in empire-scale economies, not only of China, but the E.U., U.S., and Russia as well. 

1. David Barboza, “China Plans to Reduce the State’s Role in the Economy,” The New York Times, May 24, 2013.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.

Secession E.U.-Style: Beyond the Economic Implications

Financial markets place bets on political outcomes, such as how or even whether the E.U. state of Britain would secede from the Union. Leading up to the March, 29, 2019 secession date, the shifting odds moved stock, bond and foreign exchange markets, especially given the instability in the state government in general and more particularly on reaching a deal with the federal government in Brussels on just how the state would secede. Of course, the political magnitude of a state seceding from a Union such as the E.U. or U.S. is not captured by how markets anticipate the risks. To reduce secession to the end of a trade treaty does the secession and the Union itself a grave injustice. More generally, political changes do not reduce to their economic anticipations or effects. Nor is it wise to assess the political viability of future political events by the economic assessments in financial markets.

On January 16, 2019, for example, Capital Economics, a research group in London, placed a 70% probability that Britain would find a way to “fudge and delay” its secession past the deadline, as per the E.U., Article 50, of March 29, 2019.[1] To investors, the implications that the British pound would probably rise and the stocks would likely surge are of value. This does not capture, however, the political downside of a government dealing with such an important matter by “fudge and delay.” In other words, what such a way of handling something as important as seceding from a union in which the states are semi-sovereign means in terms of governance is not captured by the 70% projected likelihood.

March 29, 2019 remained “a meaningful deadline” even as British “lawmakers were unable to agree on a course of action.”[2] This reflects terribly not just on that government, but democracy itself. The establishment of an ordered means by which a state could secede from the E.U. represents a significant advance over the U.S., which has left states with one option—secession by force. Yet the British government mishandled the matter of seceding from the E.U. after the state invoked the secession process at the federal level. This undermined the E.U.’s prudent advance over the U.S. in introducing a flexible constitutional (or "basic law") way for states to secede without the need to resort to force.

The probability of somewhere below 20% but above zero that the secession would occur without any negotiated agreement represents a more dire economic prospect. In November, 2018, the Bank of England projected “a major shock that could subtract more than 10 percent from Britain’s gross domestic product” from this low-probability outcome.[3] Yet even such a remarkable economic effect on the state would not capture the severity of the political failure. Secession from a union is not just ending a trade treaty; much more than the economic aspect is involved. At the very least, the failure of the negotiations between the state and federal government would point to a major weakness in the E.U.’s Article 50, and thus to a political need to alter it. In short, secession should not depend on the vagaries of negotiation. After all, it had broken down between U.S. President Lincoln and the state of South Carolina in 1861. 
Another possible scenario facing Britain before the March deadline was that the state would not secede after all. "Goldman placed a 40 percent probability on the chance that Britain, in the end, would not leave the European Union at all, which would be accomplished through another referendum repudiating the original vote."[4] Because the original referendum had been billed as the decision point on the question, to go back on that decision just because it was difficult for the British government to implement betrays democracy itself, for the people had spoken with the understanding that it would be final. To say, "Oh, actually it wasn't" would be bad form. That the people had spoken, each side playing by the same rule (i.e., the question would be settled by that referendum), is something that government officials and legislators should--from a democratic standpoint--have fully respected from the day of the referendum. That the losing side on the question would set up another referendum would undermine democracy because even those decisions billed as determinative could not be taken as such. Goldman's 40% probability can thus be read as saying something about democracy in Britain and democracy itself, and we can't get this merely from the way the announcement of the 40% probability affected financial markets and individual investors. 

See Essays on the E.U. Political Economy and Two Federal Empires, both available at Amazon.

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1. Jeff Sommer, “Governments Malfunction and the Markets Place Their Bets,” The New York Times, January 25, 2019.

2. Ibid.

3. Ibid.
4. Ibid.

Affluence and Democracy in China: A Complicated Relationship

The Financial Times reported in 2013 that there was “no great clamour in China for western democracy.”[1] The assumption in the West that prosperity in China will someday inevitably usher in democracy may unduly privilege Western political values in an exogenous context. The newspaper suggested that prosperity can be the source of rising pressure for political change rather than an antidote to it. In other words, the power shift between the state and individual that is unleashed by rising incomes does not necessary privilege the individual. Time and again, China’s leaders have refused to shift power to the individual at the expense of the state; social harmony, and power, are just too important. To be sure, cronyism and corruption, while endemic in China, are not esteemed cultural values, and the rising middle-class may demand that the state clamp down on the unfairness of government officials “wetting their beaks.” This would be particularly problematic if the growing upper-middle-class demand more transparency in government and more rule-of-law to instill fairness over the personal aggrandizement of government officials. However, President Xi, at least publically, would hardly object, as he set out to come down hard on corruption even in the state. At the very least, the matter of increasing wealth and democracy in China can only be complex, yet we can come to some conclusions based on Chinese history and the Chinese view of democracy being Western.

The relationship between economic development and political democracy in China is more complex than is typically presumed in the West. Put another way, the rest of the world is not made in the West’s image. That the newly affluent in China (except for in Hong Kong) would not necessarily demand democracy would strike most Westerners as bizarre. Why would not enhanced choice given the greater buying-power translate into choice in politics too? It is very possible that the Chinese newly rich would want a breed of change in government that does not reflect Western democracy. Certainly the extant ruling elite would favor such a force over one that is pro-democracy.Rather than a change of system, rising incomes may fuel a power struggle between different power-centers—one being the old and the other(s) being the new. This sort of thing happened in the Salem witch trials in seventeenth-century New England. Newly-propertied women were literally burned-to-death by city officials who favored the established landed gentry. The religious subterfuge belied the more earthly battle between old and new centers of power based at least in part on economic change.
Similarly, contending centers of power held within the Communist Party widen to include the rich and professional classes (i.e., upper and upper-middle). With the exception of the two short-lived republics attempted at the end of the Qing dynasty in the early twentieth century, China has no history of democracy, so it would not be likely that the ruling party expands to include a democratic faction.

Because the two brief republics occurred just after the Qing dynasty fell, and, moreover, because the history of China contains cycle after cycle of dynasties rising and falling, real change that includes a democratic system would most likely be possible only after the fall of the Communist Party dynasty. Considering that the Qing dynasty went from 1644 to 1910, I wouldn't look for this kind of change any time soon. Yet within the current dynasty, more pockets of limited democracy, perhaps similar to Hong Kong's, may be established, or, more to the point, allowed by the power in the status quo.

1. Philip Stephens, “Political Cracks Imperil China’s Power,” The Financial Times, January 24, 2013.

“Fiscal Cliff” in U.S.: Real or Hyped?

As the U.S. economy slogged through a recession following the credit crisis in 2008 and the E.U. was weighed down by the ballast of austerity in the most indebted states, developing economies, including those of China and India, kept the world economy afloat. As a group, those economies grew 7.4% in 2010, 6.2% in 2011, and 5.5% in 2012. In keeping with this trend, the Global Economic Outlook of the Conference Board predicted 4.7% for 2013. Fortunately, the Board also predicted a pick-up in consumer demand in the U.S. to pick up the slack. “The only really short-term positive impact that we can have is that we can see a faster return of demand, particularly in the U.S.,” the Board’s chief economist said. As of 2012, such a return was not necessarily “in the cards.” The pessimism can be seen in the projected world economic growth of 3 percent, which is lower than the 3.2% expected in 2012 and the 3.8% achieved in 2011. That the projected growth rate of only 1.8% for the U.S. in 2013 is less than the projected 2.1% for 2012 indicates that increased demand in the U.S. was not expected to fully pick up the slack for the slowing-down of the developing economies. Here I want to point to a major factor in the U.S.: the possibly impending “fiscal cliff” of cuts in the federal budget and the end of the Bush tax breaks  that were scheduled to begin on January 1, 2013 unless Congress and the White House could come to a legislative agreement beforehand on an alternative way of holding down the deficits. Presumably that way would have a less recessionary effect.

In doing political risk analysis, one might be tempted to weigh in on predictions of a grand deal. I submit that predicting whether one comes together, as well as its differential economic impact would be, is not merely difficult, but also nearly impossible—unless one has “inside information” from the key players in Washington. Political risk analysis is not a sort of crystal-ball operation. Predicting the future is notoriously difficult for us mere mortals. However, we can assess how the prospect of a possible event, such as the “fiscal cliff,” is being played out in real-time. In other words, it is possible to determine whether the “fear-mongers” are exaggerating the probably economic impact (and why!). Assessing the severity of the worst-case scenario can thus be recalibrated, with implications for strategic planning.

Should the automatic cuts in the U.S. federal budget and end of the Bush tax cuts begin on January 1, 2013—a combined hit of over $500 million in that year alone—a “recessionary toll” was generally held to be the result. That is to say, the domestic demand made possible by increasing discretionary spending would be reduced as government spending decreases and federal income taxes increase. The Global Economic Outlook pointed to the prospect of Congressional and White House negotiations potentially obviating the sequestration as bearing on the global economic growth. Even though Congressional leaders could be counted on to rise to the occasion in delivering on sufficient dramatics at the last minute, the general public could not be sure that the denouement would involve a quick swerve away from “fiscal cliff” as though in some 1940s film noir.

Just by the numbers—around $500 million in 2013—the Conference Board may have been overstating the recessionary impact of the sequestration in an economy whose GDP was over $16 trillion. For one thing, the momentum in 2012 was in the direction of increasing demand. Also, corporate planning may have already “hedged their bets” so “going over the cliff” would not actually involve much change, at least initially, on their part.

I must add here the caveat that I not an economist. Hence, I do not have the quantitative expertise necessary to "run the numbers" on how much GNP would decline from the sequestration. However, I have run economic regressions, so I have some sense that the actual variables in a political economy are not as formulaic as those in a regression equation. The inherrent uncertainty in the political dimension in particular renders suspect the “empirical social science” approach of modern economics as determinative in political economy. Put another way, the political-risk-analysis dimension of an economic growth projection introduces considerable uncertainty in an otherwise quantitative economic numbers game, which might itself be overly deterministic or "exact." Even if we could untangle the myriad political factors going into political negotiations beforehand, we would still have to accept the uncertainty that is inherent in predicting the future, especially where human decisions are in the mix. That is to say, the future cannot be known for certain, given the respective natures of time and human beings.

I suspect the differential economic impact between a possible deal and sequestration was being exaggerated, particularly by the media but also by officials in government and CEOs—all of whom had subterranean reasons for doing so.  The media’s “fiscal cliff” label alone illustrates the proclivity to exaggerate. It is not as though a deal would have absolutely no drag on the economy, even if significantly less than that of sequestration. However, in distinguishing between “some” and “more” in terms of a drag on consumer demand in the U.S., the impact on the overall global economic output may be less than the “fiscal cliff” rhetoric implies because the world is much more than the American union. In other words, if the “differential” in terms of economic impact between a deal to cut the deficit and sequestration turns out to be less than portrayed in 2012, the resulting impact on the larger global economy would also be less.

In terms of a prognosis for 2013 from the vantage-point of late 2012, my best guess was that it would be largely similar to 2012 globally—the U.S. and E.U. continuing to climb out of deep recessions while struggling to inflict austerity on themselves for their own good, and the developing economies continuing to cooling their heels from growth rates that were probably unsustainable anyway. In terms of international business prospects, “continued languid” rather than “fiscal cliff” would be my headline. 

Source:

Matthew Walter, “U.S. Seen Propelling Growth of Global Economy in 2013,” The Wall Street Journal, November 13, 2012.

Questioning Universal Basic Income

The gist of basic income is that a government “distributes cash universally. As the logic runs, if everyone gets money—rich and poor, the employed and the jobless—it removes the stigma of traditional welfare schemes while ensuring sustenance for all.”[1] The “logic,” I submit, is flawed even if the basic idea is solid.

The notion of a basic income sprung from the desire to “reimagine capitalism to more justly distribute its gains.”[2] Justice here translates into the ideological belief that sustenance itself is a basic human right, and thus should be guaranteed to everyone. The obligation of government follows from this right. Interestingly, the laissez-faire economist, Milton Friedman, “embraced the idea of negative income taxes that put cash in the hands of the poorest people.”[3] But as the poorest may not fill out tax returns, cash payments by governments may more fully realize the objective of a basic income-floor (i.e., no one gets less than the floor-amount).

I submit that just as making sure that every adult has the basic, or floor, income, the notion of such a floor does not justify a government giving cash to everyone—rich or poor, employed or jobless. Adults whose income already exceeds the income-floor do not need additional income to get up to the floor, for such people are already above it. As for the stigma of welfare, which is very real in states like Arizona, the notion of a basic income can appeal to people whose income is above the floor, for they would be free of the anxiety of possibly falling through the cracks of a checkered social net should even a high income end amid continued high expenses. In the wake of the financial crisis of 2008, for instance, many people whose income exceeded a basic floor oriented to sustenance lost their homes when they went under water as real estate markets collapsed—especially in Florida and California.

Orienting the give-out of cash only to adults whose existing income is zero or otherwise below an established floor (i.e., a floor sufficient that sustenance can be achieved) would render such a program more fiscally stable. Whereas Stockton, California, began a test program in 2018 whereby 100 families would get only $500 a month—an amount clearly below sustenance—the requirement of a full-fledged program wherein only adults below the floor would get cash could more easily afford to set a floor that truly allows for substance.  Then nobody, rich or poor, would have to fear not being able to survive.

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1. Peter S. Goodman, “Inequality? California City Is First in U.S. to Try,” The New York Times, May 30, 2018.

2. Ibid.

3. Ibid.

Social Harmony and Toxic Chemicals in China

According to the New York Times in 2012, the Chinese had become increasingly willing “to take to the streets despite the perils of openly challenging the country’s authoritarian government.” Even more surprising, government officials had actually acquiesced in some notable cases. Given the raw nature of power, particularly under authoritarian auspices, revolution rather than gradual reform may still be the most likely means by which democracy can bloom under the golden, albeit hazy, sun.
In October 2012, local officials in the coastal city of Ningbo promised “to halt the expansion of a petrochemical plant after thousands of demonstrators [had] clashed with the police during three days of protests that spotlighted the public’s mounting discontent with industrial pollution. . . . The project, an $8.8 billion expansion of a refinery owned by the state-run behemoth Sinopec, was eagerly backed by the local government, which [had] been promoting a vast industrial zone outside Ningbo, a city of 3.4 million people in Zhejiang Province. Residents were particularly unnerved by one major component of the project: the production of paraxylene, a toxic petrochemical known as PX that is a crucial ingredient in the manufacture of polyester, paints and plastic bottles. Many residents [contended] that the concentration of polluting factories in the Ningbo Chemical Industrial Zone [had] led to a surge in cancer and other illnesses.” Lest it be assumed the officials had suddenly “got religion” as far as democracy is concerned, the New York Times provides a more realistic explanation:

“Although local officials were undoubtedly alarmed by the size and ferocity of the protests, their decision to bend so quickly was also probably influenced by the coming series of meetings that will determine China’s next generation of leaders. The ruling Communist Party, always eager to keep a lid on public discontent, is especially nervous about any disruptions that might mar the 18th Party Congress.”

Culturally, the Chinese officials—like the Chinese people generally—undoubtedly felt the need to protect or restore social harmony. At close range, loud protests ring out like a frontal assault on such harmony. The protests began “when farmers blocked a road near the refinery, grew over the weekend as thousands of students and middle-class residents converged on a downtown square carrying handmade banners and wearing surgical masks painted with skull and bones. . . . (T)he demonstrations turned violent when riot police fired tear gas and began to beat and drag away protesters. At one point, according to people who were there, marchers tossed bricks and bottles at the police. At least 100 people were detained, according to some estimates, although most were later released.” Accordingly, the immediate instinct of the officials would have been to do whatever would be most likely to stop the disruption as soon as possible.
In the long term, however, social harmony requires some degree of fit between public policy and popular sentiment. While not necessarily the will of the people, the intensity of political protests can provide some indication of the extent of a breach or gap. Whether by deflating or squashing, short-circuiting a protest at its outset in a dire attempt to restore the appearance of social harmony can mean that public officials lose touch with the popular mood and thus “fly blind.” The result could be a revolution in ten or twenty years, the ferocity of which could come as a complete surprise to the party officials.
Put another way, the apparent success of protests could belie the more subterranean possibility that public officials were still impervious to public demands. “In 2007, protesters in the coastal city of Xiamen, in Fujian Province, successfully forced the relocation of a PX plant that had been planned just 10 miles from downtown. In August 2012, officials in Dalian, in northeast China, announced that they would shut down a PX plant there after thousands of residents angrily confronted the riot police.” However, as of the fourth quarter of 2012, that factory was still operating. “We’ve seen the same pattern over and over again,” said Ma Jun, the director of the Institute of Public and Environmental Affairs. “Ignoring public concerns leads to confrontation. We can’t resolve all our environmental issues through street action. The cost is just too high.” That is to say, protests do not guarantee that government officials will heed popular sentiment, and the result of continued protests could be violent.
Seeming to acquiesce could simply be a strategy by which to assuage the public. “The announcement is just a way to ease tensions,” said Yu Xiaoming, a critic of the plant who took part in negotiations with the authorities on Sunday. Even if paraxylene is not produced in Ningbo, the chemical could be quietly made elsewhere. A pattern of such apparent placating, moreover, could give everyone the false impression of social and political cohesion between the Chinese people and the government. Minimizing broader knowledge that the protests had taken place only contributes to the misleading picture of social harmony instead of strife. Although Ningbo residents “held aloft smartphones and computer tablets and flooded microblog sites with images and vivid descriptions of the running battles with the police,” for example, the “Chinese news media carried no reports of the protests.”
In spite of the appearance being constructed by the apparent “listening” by government officials and the government-media censorship, pressure could nonetheless build and possibly erupt in contagious strife spiraling uncontrollably into full-blown revolution. That it would seem to come out of nowhere would only heighten the fear on both sides, and thus the sense of a lack of control and related violence. Any apparent gradual “opening up” toward democracy, as in permitting the residents of Hong Kong to vote for some offices, would be only on the surface, and even misleading.
One might imagine a flight-control tower with radar screens overstating the distance between planes in the air. Flight-control might dismiss the concerns of the pilots and even permit more planes into the area. A mid-air collision would come as a complete surprise to everyone, even though such an outcome would be more likely due to the perceptual misalignment. In terms of China, a full-blown revolution could be extremely disruptive not only within China, but also for the world given China’s sheer size and economic role in the global economy. Gradual reform in China is in everyone’s interest—even those officials interested in maintaining social harmony. 

Source:

Andrew Jacobs, “Protests Over Chemical Plant Force Chinese Officials to Back Down,” The New York Times, October 29, 2012.

Essays on the Financial Crisis

The financial crisis that peaked in the United States during the fall of 2008 is an excellent case study of what can go wrong with leadership and corporate governance in business, financial ethics, government regulation directed both to the firm level and that of the financial system itself, and legal accountability for the culprits. The collection of essays begins with a series of essays on Lehman Brothers, with particular attention on its last CEO, Richard Fuld. Given the fraud surrounding subprime-mortgage bonds at numerous banks, the second part of the book looks at why legal accountability was so elusive in the United States. Weaknesses in the financial regulation, with particular attention to whether agencies had been captured by their respective regulated firms, comprises the third part. The fourth part examines the culpability of the Federal Reserve Bank, which had perhaps been too close to its regulated banks to anticipate the crisis. The book concludes with essays on why business ethics had been so very weak. The careful reader will take from the book a sense that the financial system remained vulnerable even after government attempts to reduce the systemic risks of a big bank going under. 

The book: Essays on the Financial Crisis

Is Undoing Financial Reform In Line With Free-Market Ideology?

Legislating on the basis of an aversion to government intervention in financial markets can paradoxically result in more massive intervention. The latter can come to pass even amid an anti-interventionist ideology on account of the emergency conditions that call for the extraordinary incursion of government into a market. Undoing the Orderly Liquidation Authority of the Dodd-Frank Act in the U.S. is a case in point.

The full essay is at "Financial Deregulation."

Wallonia Threatens to Veto the E.U.-Canada Trade Treaty: Complicating State Sovereignty in the E.U.

"The European Union and Canada signed a far-reaching trade agreement on [October 30, 2016] that commits them to opening their markets to greater competition, after overcoming a last-minute political obstacle that reflected the growing skepticism toward globalization in much of the developed world."[1] The obstacle may indeed have reflected increasing resistance at the time to globalization, but this veil can be pulled back to reveal the underlying political obstacle--that of states' rights in the E.U., taken to a crippling extreme.

The complete essay is at Essays on Two Federal Empires.

1. James Kanter, "Canada and E.U. Sign Trade Deal, Bucking Resistance to Globalization," The New York Times, October 30, 2016.

Going to the Extreme for Economic Growth: Low Interest-Rates as Unfair and Unwise

Is moderate monetary policy better than going to the extremes? The same can be asked of fiscal policy. Moreover, is a hypertrophic urge to prompt economic growth as if it were an end in itself better than seeking an economic equilibrium? Generally speaking, systems in equilibrium are more stable than those that include a schizogenic, or limitlessly maximizing, variable. An example of the latter is the population growth of our species relative to the equilibria otherwise established by the ecosystems in which we live. A desire for economic growth is a maximizing variable in a political economy. So too is the related practice of taking monetary (and fiscal) policy to an extreme. If the desire is great enough and the related policies extreme enough, the equilibrium of a political economy can be punctured with systemic risk increasing as does the instability of the system. I contend, therefore, that moderate government and central bank policies are preferable to going to the extremes. Here, I address monetary policy.

As Raghuram Rajan stepped down on September 4, 2016 as India’s central banker, he warned the world—and especially the U.S. and E.U.— against keeping interest rates low as a way to encourage growth. He claimed that low interest rates globally could distort markets and are difficult to raise. Central bankers setting interest rates low to stimulate economic growth can become “trapped” out of fear that raising the rates would slow economic growth.[1] This is ultimately a defect of democracy itself—the inflicting of necessary “pain” on the electorate being very difficult politically. Hence, for example, the U.S. Federal Reserve Bank at the time was caught in its “long-running dilemma about whether the labor market [could] easily withstand another interest-rate increase” even though many policy makers believed that the economy was nearing full employment.[2] That the market nonetheless expected that the Fed would “push off a rate increase until December” demonstrates just how politically difficult raising rates can be even when they are extremely low and the economy is near full-employment.

Given such political sensitivity, Rajan urged central bankers and government officials not to use low interest rates as a substitute for “other instruments of policy” and ‘various kinds of reforms” that are needed to encourage growth; it is simply too difficult politically to increase such “good” rates.[3] Relying too much on one policy lever, moreover, is not wise because doing so could introduce a maximizing variable that could compromise the equilibrium of a political economy.

As one example of why going to extremes on monetary policy is not a good idea, Japan was issuing negative interest-rate bonds at the time, which some investors were actually buying. Such bonds do not pay interest, and the principal returned is less than that which the investor paid for the bond. Willing investors were betting that their purchases would stimulate other investors to buy, so the price of the bonds would go up (the original investors would then sell for a profit).

Yet another instance concerns companies in the E.U. that were issuing bonds with negative interest-rates. Investors were “paying for the privilege of lending their money to companies.”[4] This is clearly dysfunctional from a financial standpoint. Edward Farley, head of European corporate bonds at PGIM Fixed Income, said, “It seems pretty bizarre to ask a corporate to look after your money and give you back less in two or three years’ time.”[5] To be sure, the E.U.’s central bank had expanded its bond-buying to corporate debt over the previous summer, hence “creating more demand for bonds and pushing down their yields.”[6] This does not explain the investors’ bizarre behavior in buying bonds with negative interest-rates. Something else was behind the oddity; something was wrong, financially speaking. The Wall Street Journal makes the source of the problem explicit, noting at the time that the negative interest-rates were a “sign of how aggressive central-bank policy is upending conventional patterns in finance.”[7] We can substitute “extreme” for aggressive, and we have an explicit link between upending conventional behavior in finance and a central bank going to extreme measures.

Another example of a warping of finance concerns savings accounts. When the price of money reaches an extreme low, people have less incentive to put money into a savings account. Consumption is artificially stimulated while saving is discouraged. This imbalance can through off the equilibrium of a stable economy. Furthermore, it is not fair to penalize one sector of a financial system (i.e., savers) while making it easier for another sector (mortgage holders). Put another way, the efforts to stimulate economic growth should not be borne on one group in the economy while another group benefits.

In general, going to an extreme in monetary policy, such as when a government relies exclusively on low interest rates to spur economic growth, is not wise because setting a variable in the economy at an extreme can cause the economy to become distorted. This in turn can rip a tear in the economy’s equilibrium. The solution is not just to balance the use of monetary and fiscal policy; resisting the temptation to go to extremes in demanding economic growth may also be needed.

At that more fundamental level, achieving and sustaining an equilibrium at the macro level (i.e., the economy or political economy) should be valued more when monetary or fiscal policy is being pushed to extremes. At that level, societal values, rather than merely political platforms and central-bank policies, must be changed; otherwise, electorates will continue to pressure politicians and central bankers to do what they have to in order to get more economic growth. To be sure, voters want more jobs, and thus a growing economy, so the societal values that support the demand beyond that which is in keeping with maintaining equilibrium are not easily changed. I submit that the existing societal values in advanced economies lapse in failing to recognize that equilibrium is elastic within limits. So to a certain extent growth vs. equilibrium, or increase vs. balance is a false dichotomy.

To be sure, the economic growth that is in keeping with growing the existing equilibrium rather than piercing through it is not necessarily enough for full employment to be achieved. As per the U.S. Full Employment Act of 1946, governments may need to step in to fill the gap such that everyone who wants a job can have one, even if the government is the employer. Franklin Roosevelt understood this in the Great Depression of the 1930’s, so he instituted the CCC and other programs in his New Deal. With governments stepping up to the plate, voters might not insist that their elected representatives and their appointees in turn set monetary or fiscal policy to an extreme level in order to pump up an economy beyond an undistorted equilibrium. Like someone who tries too hard, pushing monetary or fiscal policy to an extreme may ultimately be worse economically than had the devices been used moderately.

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[1] Geeta Anand, “A Departing Central Banker’s Warning,” The New York Times, September 5, 2016.

[2] Eric Morath, “Jobs Data Cool Odds on Rate Rise,” The Wall Street Journal, September 3-4, 2016.

[3] Anand, “A Departing Central Banker’s Warning.”

[4] Christopher Whittall, “European Firms Borrow at Subzero Rates,” The Wall Street Journal, September 7, 2016.

[5] Ibid.

[6] Ibid.

[7] Ibid.

Brazil’s Rousseff Impeached and Removed from Office: A Case of Partisan Politics?

Dilma Rousseff was impeached and removed from office at the end of August, 2016. The state’s senate voted 61-20 to convict her on charges that she used illegal bookkeeping maneuvers to hid a growing budget deficit.[1] Her defense that she did not enrich herself through public office—that she did not steal public money for her own account—can be regarded as an attempt to deflect the legislators from the existing charges.[2] Only 56 legislators were necessary for a two-thirds majority. Given the problems of hyperinflation and fiscal mismanagement, including a growing public debt, her offenses were “deemed an impeachable crime.”[3] Although Brazil was hardly the only country where the chief executive has sought under political pressure to make a budget deficit look smaller than it actually was, enforcing deterring consequences even just in this case is laudable—while other, partisan motives, detracted from the vote’s legitimacy.

In a representative democracy, the popular sovereign—the People—have a right and interest in getting accurate deficit figures from their government. Put another way, accounting gimmicks have no place in a republic. Rousseff’s impeachment and removal from office would be inappropriate, however, to the extent that the legislators were motivated by partisanship or even displeasure as to the government’s economic performance. The point of having terms of office is to insulate office holders so they can enact painful measures that are nonetheless needed, such as efforts to reduce the debt. Not even something less than success with deficits warrants removal of office, for elections serve that purpose without compromising the institution of a term of office.

In Brazil, Rousseff’s administration “had come under pressure over a brutal recession.”[4] According to the Wall Street Journal, many people believed that “Rousseff’s fall had less to do with the official charges than her mishandling of South America’s largest economy, which moved from 7.6% GDO growth in 2010, when she was first elected, to the worst downturn since the Great Depression in her second term.”[5]  The economy contracted by 3.8% in 2015 and was expected to shrink another 3.2% in 2016.[6] Pressure to remove her out of attribution of the economic decline to her policies should not have been a factor in the impeachment vote because bad policies, or even becoming unpopular, is not criminal in nature. Sen. Cristovam Buarque of the Popular Socialist Party was wrong, therefore, when he declared, “Impeachment isn’t only about a crime. There is also a government without support in [the legislature] and without a path for the economy.”[7] At the very least, his vote to impeach the president was misguided and thus stained.

Being implicated in the “massive corruption scandal at the state oil company,” however, could justify impeachment.[8] Rousseff was indeed damaged by the scandal, as she had headed Petrobra’s board of directors when much of the illegal activity occurred. Petrobras wrote off nearly $30 billion in 2014 and 2015—much of it due to bribes and inflated contracts.[9] Yet did she know of these at the time? A subsequent investigation found no evidence that she personally benefitted from the big-rigging and bribery scandal in which politicians and contractors colluded to loot billions from the giant oil company.[10] Of course, this does not mean that she did not go along with the schemes. Given the magnitude of money involved, it is hard to believe that the chair of the board would be oblivious and thus guilt-free.

Regardless of the question of her tacit approval of the corruption, that the scandal “splintered her political base and devastated her popular support” should not have fed into the vote against her.[11] That such a political loss during a term of office would make it easier for legislators to vote against her is something they should resist, for otherwise the vote becomes merely a partisan opportunity to change the parties in power.

Her removal did indeed end 13 years in which her Workers’ Party was in power. Such a political feat as removing such a longstanding party means a partisan motive could indeed have contributed to the 61-20 result. Before the vote, her “political enemies hailed her looming removal “as a rebuke to the leftist tide that swept across many South American countries in the early 2000s.”[12] The use of an impeachment vote to make such a rebuke is not appropriate because the impeachment device is supposed to deal with criminal activity such as deliberately misstating budget-deficit numbers. That Sen. Ronaldo Caiado of the Democrats Party said the “ouster was a repudiation [of] the Workers’ Party” suggests that the impeachment mechanism was used inappropriately. In short, Caiado was confusing an election with an impeachment.

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[1] Paulo Trevisani and Reed Johnson, “Brazilian President Rousseff Ousted,” The Wall Street Journal, September 1, 2016.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.