Donald Trump ran up budget deficits in his first three years to levels seen in our history only during major wars and financial crises — thanks to tax cuts, military spending and little fiscal discipline. And he did so prepandemic, when the economy was already expanding and unemployment was low. But now that Joe Biden wants to spend more on pandemic relief and prevent the economy from tanking further, many Republicans — on cue — are rediscovering their deficit hawk wings.
We need to do whatever it takes to help the most vulnerable Americans who have lost jobs, homes or businesses to Covid-19 — and to buttress cities overwhelmed by the virus. So, put me down for a double dose of generosity.
But, but, but … when this virus clears, we ALL need to have a talk.
There has been so much focus in recent years on the downsides of rapid globalization and “neoliberal free-market groupthink” — influencing both Democrats and Republicans — that we’ve ignored another, more powerful consensus that has taken hold on both parties: That we are in a new era of permanently low interest rates, so deficits don’t matter as long as you can service them, and so the role of government in developed countries can keep expanding — which it has with steadily larger bailouts, persistent deficit spending, mounting government debts and increasingly easy money out of Central Banks to finance it all.
This new consensus has a name: “Socialism for the rich and capitalism for the rest,” argues Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, author of “The Ten Rules of Successful Nations” and one of my favorite contrarian economic thinkers.
“Socialism for the rich and capitalism for the rest” — a variation on a theme popularized in the 1960s — happens, Sharma explained in a phone interview, when government intervention does more to stimulate the financial markets than the real economy. So, America’s richest 10 percent, who own more than 80 percent of U.S. stocks, have seen their wealth more than triple in 30 years, while the bottom 50 percent, relying on their day jobs in real markets to survive, had zero gains. Meanwhile, mediocre productivity in the real economy has limited opportunity, choice and income gains for the poor and middle class alike.
The best evidence is the last year: We’re in the middle of a pandemic that has crushed jobs and small businesses — but the stock market is soaring. That’s not right. That’s elephants flying. I always get worried watching elephants fly. It usually doesn’t end well.
And even if we raise taxes on the rich and direct more relief to the poor, which I favor, when you keep relying on this much stimulus, argues Sharma, you’re going to get lots of unintended consequences. And we are.
For instance, Sharma wrote in July in a Wall Street Journal essay titled “The Rescues Ruining Capitalism,” that easy money and increasingly generous bailouts fuel the rise of monopolies and keep “alive heavily indebted ‘zombie’ firms, at the expense of start-ups, which drive innovation.” And all of that is contributing to lower productivity, which means slower economic growth and “a shrinking of the pie for everyone.”
As such, no one should be surprised “that millennials and Gen Z are growing disillusioned with this distorted form of capitalism and say that they prefer socialism.”
In the 1980s, “only 2 percent of publicly traded companies in the U.S. were considered ‘zombies,’ a term used by the Bank for International Settlements (BIS) for companies that, over the previous three years, had not earned enough profit to make even the interest payments on their debt,” Sharma wrote. “The zombie minority started to grow rapidly in the early 2000s, and by the eve of the pandemic, accounted for 19 percent of U.S.-listed companies.” It’s happening in Europe, China and Japan, too.
And it’s all logical. Prolonged and increasingly generous bailouts, where governments are willing to buy even corporate junk bonds to prevent foreclosures, added Sharma, “distort the efficient allocation of capital needed to raise productivity.”
The past few years should have been an era of huge creative destruction. With so many new cheap digital tools of innovation, so much access to cheap high-powered computing and so much easy money, start-ups should have been exploding. They were not.
“Before the pandemic, the U.S. was generating start-ups — and shutting down established companies — at the slowest rates since at least the 1970s,” wrote Sharma. “The number of publicly traded U.S. companies had fallen by nearly half, to around 4,400, since the peak in 1996.” (The number of start-ups has increased in the pandemic, but that may be because so many businesses closed.)
Alas, though, big companies are becoming huge and more monopolistic in this easy money, low interest rate era. It is not only because the internet created global winner-take-all markets, which have enabled companies like Amazon, Google, Facebook and Apple to amass cash piles bigger than the reserves of many nation-states. It’s also because they can so easily use their inflated stock prices or cash hoards to buy up budding competitors and suck up all the talent and resources “crowding out the little guys,” Sharma said.
Meanwhile, he added, as governments keep stepping in to eliminate recessions, downturns no longer play their role of purging the economy of inefficient companies, and recoveries have grown weaker and weaker, with lower productivity growth. So it takes more and more stimulus each time to prop up growth.
This is all actually making our system more fragile.
Now that so many countries, led by the U.S., have massively increased their debt loads, if we got even a small burst of inflation that drove interest on the 10-year Treasury to 3 percent from 1 percent, the amount of money the U.S. would have to devote to debt servicing would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.
Sure, we could then just print even more money, but that could threaten the status of the dollar as the world’s reserve currency and raise our borrowing costs even more.
So, yes, yes, yes — we must, right now, help our fellow citizens, who are hurting, through this pandemic. But instead of more cash handouts, maybe we should do it the way the Koreans, Taiwanese, Singaporeans, Chinese and other East Asians have been doing it — cash assistance to only the most vulnerable and more investments in infrastructure that improve productivity and create good jobs. The East Asians also focus on making their governments smarter, particularly around delivering things like health care, rather than bigger — one reason they have gotten through this pandemic with less pain.
Biden plans a big infrastructure package soon. He totally gets it. I just hope that Congress, and the markets, don’t have debt fatigue by the time we get to the most productive medicine: infrastructure.
Going forward, how about more inclusive capitalism for everyone and less knee-jerk socialism for rich people. Economies grow from more people inventing and starting stuff. “Without entrepreneurial risk and creative destruction, capitalism doesn’t work,” wrote Sharma. “Disruption and regeneration, the heart of the system, grind to a halt. The deadwood never falls from the tree. The green shoots are nipped in the bud.”