Friday, April 22, 2016

The Presidential Nomination Process (which isn't "rigged"),The Divides in the Republic, and Old American Political Wings Grappling for Power

This post will be about the current state of the political system and the various wings of American politics. This post is partly a response to a different post on a different blog, which I don't do often, but will also go further into the divisions in the Republic as demonstrated the Presidential race. This post will go through the prevalent political wings, the divides in the Republic, the Presidential nomination process, and through some American history as well.

One of my favorite blogs to frequent is a blog called China's Financial Markets written by the brilliant author Professor Michael Pettis. This post will be a response to his most recent post, where he discussed what he calls the Re-emergence of the Jacksonians. Professor Pettis, whose posts are generally error-free, makes quite a few errors in his most recent post. He says that Trump represents the Jacksonian wing of American politics, which is incorrect. He also made the claim that Trump would only last a few weeks and extended that a few weeks further given the attacks in Brussels which was after the writing of his post was finished. Prof. Pettis also makes the claim that Trump has convinced his supporters that he's one of them when he does no such thing. Trump has been very explicit in speaking about his privileges and the unfairness of them. Pettis also claims Trump is feeding off populist sentiment from who hate big-city bankers, but this is just flat out not true. Trump has done rather well in urban centers, including in New York. Trump has even praised banks in general, but has said that they need to be held accountable. Prof. Pettis is also mistaken when he says the original Tea Partiers or the Sons of Liberty were Jacksonians. They were not Jacksonians. They weren't saying no taxes or arguing for laissez-faire or anything of the kind. They were okay with taxation given that they had representation. There was no real anti-city sentiment with the Tea Partiers, especially considering many of them resided in large cities. Prof. Pettis is mistaken because it's Ted Cruz that represents the Jacksonian wing and not Donald Trump. Why do I say this? I say this because of the coalitions both candidates are utilizing and the support structure/organization of both candidates. I'll also go a bit deeper into the major candidates of both parties.

In both parties, you've got two major candidates fighting for the nomination of each party (John Kasich isn't a serious candidate who can win). The Democratic Party has Bernie Sanders vs Hillary Clinton and the GOP has Ted Cruz and Donald Trump. Each candidate represents a certain 'wing' of American politics that has risen and fallen throughout American history. The following candidates correspond to the following wings:
--Ted Cruz: Jacksonian Wing (or the 'Jacksonian Democrats' (ironically, they're now in the GOP)
--Donald Trump: Roosevelt Republican Wing (or the 'Old Yankee Republicans')
--Bernie Sanders: Jeffersonian Wing (or the 'Jeffersonian Democrats')
--Hillary Clinton:Wall Street Wing (or 'The Wall Street Coalition')

In order to demonstrate and prove my thesis, I first need to define what each "wing" of American politics is. From here, I must show how each person represents the wing they do. To show how each candidate is representative of each wing, we need to know the coalition that's backing them and the issues pertinent to those coalitions. To know the coalitions backing the candidates, we will first need to have a solid understanding of operational aspects of the political system in order to display how each wing is represented. Then, we need to understand how the operational aspects of the political system determine the winners. Then, we must understand how the way the winners arise determines the way in which the coalitions form.

Hence, this post will be separated into six sections:
1. Definitions/Descriptions of the Coalitions/Wings
2. How the Nomination Process Works in the Democratic Party and the GOP
3. The Current State of Affairs in the Democratic Party: The Wall Street Coalition or Jeffersonian Democrats
4. The Current State of Affairs in the Republican Party: Cruz Control or the Trump Card
5. The Issues of the Candidates and Divides in the Republic
6. The Wings Fighting for Power

1. Definitions/Descriptions of the Coalitions/Wings:
Before I get into the definitions/descriptions, let's keep in mind that these wings each has a long American history that goes back at least 100 years (usually longer). In reality, the Roosevelt Republicans could even be considered as the old

Jacksonian Wing--The Jacksonians are a group in American politics that've historically been located in the South and the Western parts, but it's important to note the Western parts were generally in the Mountain West although the Jacksonians do well in specific parts of the Industrial Midwest. They generally tend to be strong in the countrysides, amongst the industrial towns, and smaller cities.
Roosevelt Republicans--The 'Roosevelt Republicans' are "moderate" Republicans generally located in "Old Union Turf". They tend to be especially strong in the Mid-Atlantic and Industrial Midwest. They have strong support in both urban areas and in various small towns, albeit to a lesser degree as the Jacksonians in regions like the Industrial Midwest. I'd like to note that this wing goes back as far as a critical component of the old Whigs.
Wall Street Wing--This group is the wing in American politics that's generally strong during periods of high immigration, financial innovation, and financial liberalization. They tend to consist heavily of wealthy elites, especially related to the financial sector and banking in particular, while building strong ties with many minorities or immigrants. This coalition tends to be particularly strong in regions with high minority populations and is especially strong in large urban centers or cities. This wing has its roots in Alexander Hamilton and the old Federalists.
Jeffersonian Wing--The Jeffersonian Democrats generally tend to be heavily white or native. They usually consist of large amounts of agrarian populists along with those that become burdened by large amounts of inequality. Generally speaking, they usually represent those who are struggling to maintain their class level or status from society. In regions with lots of minorities, the Jeffersonian Wing consists almost entirely of whites and tend to be very anti-finance. This wing has its roots in the old Democratic-Republicans that go back to Jefferson.

Now that I've defined and described the various wings, we will now go through the rest.

2. How the Nomination Process Works in the Democratic Party and the GOP:
For those who don't know how the nomination process works, it's pretty simple: it's all about who breaks the threshold for delegates at the party conventions. The delegate threshold for the nomination is 50% of the total delegates plus one more. Each state has a certain amount of delegates. The rules are slightly different for the Democratic Party and the Republican Party.

On the Democratic side, all of the popular delegates are distributed proportionally according to the portion of votes received by each candidate. These delegates become "pledged" to a candidate and are called pledged delegates. In addition to the popular delegates, you have super delegates that're basically party elites (like Senators, party bosses, etc.) who can support any candidate and switch their mind at any time before the convention. There's a total of 4,765 delegates in the Democratic side with 712 of those delegates being super delegates. The delegates that aren't super delegates are called "pledged delegates". The winner must get to a total of 2,383 delegates. The majority threshold in the pledged delegate count is 2,026 delegates.

On the GOP side, you have each state deciding how to apportion its delegates with some states having winner-take-all rules, others having winner-take-most (these are usually winner-take-all by district with each district having 1-3 delegates by state), others directly electing their delegates, and others having proportional representation of the vote. In the GOP case, once the voting is finished, the delegates in each state are "bound" do a candidate on the first ballot. If a candidate ever gets to 50%+1 of the total delegates, they get the nomination. If no one gets there on the first ballot, the convention is called a contested convention wherein more and more delegates slowly get "released" as the 2nd, 3rd, etc ballots take place. To win the Republican Party nomination without a contested convention requires the front-runner to have 1,237 delegates out of a total of 2473 delegates.

In both sides of the nomination process, 60-70% of the process is over. You have roughly 60 states+territories that vote with 15 left on the GOP side and 19 left on the Democratic side. After April that number will drop to 10  and 14 on the GOP and Democratic side, respectively.

3. The Current State of Affairs in the Democratic Party: The Wall Street Coalition or the Jeffersonian Democrats:
On the Democratic side, Clinton has ~1450 pledged delegates while Sanders has ~1200. She also currently leads Bernie by 2.5 million votes and ~225-275 pledge delegates. She's also consistently up in Maryland, Delaware, Connecticut, Rhode Island, and Pennsylvania (the next states to vote) by a polling average of ~10-15%. For Bernie to lead in pledged delegates at the end of the race, he'd need to win the remaining pledged delegates by a margin of ~19+%, which roughly translates into winning the remaining popular vote by ~20% from here on out.

Now keep in mind that each state can have either a primary or a caucus. In a primary, voters show up at the ballot box, put their vote, and then leave. In a caucus, you have a bunch of people in a room for hours involving yelling, screaming, and a certain procedure to determine who goes what way. In other words, caucuses actually disenfranchise voters. With that being said, the states that hold caucuses are: Washington state, Kansas, Utah, Idaho, Alaska, Hawaii, Colorado, Maine, Nebraska, Minnesota, Nevada, Iowa, Wyoming, and North Dakota. All of those states have voted except for North Dakota with Bernie Sanders winning all of the caucus states except Iowa and Nevada. Not only did Bernie win those states, but he won most of those states by huge margins including up to 30-40% (including Alaska, Maine, Washington state, Hawaii, and Utah). In caucuses, Bernie has upped Clinton by ~150 delegates. In primary states, Clinton has beaten Bernie by ~400 delegates, and Hillary's up on Bernie by 2.7 million votes. What does this mean? It means that Bernie isn't even very competitive.
Note #1: Keep in mind that for the past month or so, Bernie has been burning through lots of cash while the Clinton campaign is basically spending no money right now. They think they've locked up the nomination, they're up ~10-15% in the polls in the Mid-Atlantic states and in California that have ~900 pledged delegates and 1000 total delegates up for grabs. Even if they break even or lose by 5%, Clinton will only need ~100 delegates in the remaining states to lead in pledged delegates and will have secured the advantage in super delegates to put this thing away. In other words, Bernie's chances are slim.

In the event of a close election where Bernie somehow miraculously ends up with a lead in pledged delegates, he'll still likely be down in votes. It's also important to note that out of the 712 super delegates, ~500 have declared their support for Hillary Clinton while Bernie has amassed ~40 super delegates thus far. So if the primary results end up with the unlikely result of Bernie having a lead of <150 pledged delegates, Clinton will still get the nomination. Keep in mind that Bernie hasn't even been in the Democratic Party for a few years. If I'm correct, this may be the first time Bernie Sanders is actually running as a Democrat. So the party elite will show little loyalty to him (since he hasn't been loyal to the Democratic Party either) and if it's close, they'll give the nomination to Hillary Clinton although the super delegates can change their mind in the run-up to the Democratic convention.

Now that I've described the direction of the Democratic race up until this point, we should look at the coalitions each candidate has relied upon to get to their current position. Hillary Clinton has won: Nevada, South Carolina, Alabama, Arkansas, Georgia, Massachusetts, Tennessee, Texas, Virginia, Louisiana, Mississippi, Florida, Illinois, Missouri, North Carolina, Ohio, Arizona, and New York.
Bernie Sanders, on the other hand, has won: New Hampshire, Colorado, Minnesota, Oklahoma, Vermont, Kansas, Nebraska, Maine, Michigan, Idaho, Utah, Alaska, Hawaii, Washington state, Wisconsin, and Wyoming.

If we look at the demographic split for each candidate, we'll see that Bernie has been defeating Hillary Clinton among whites, among males, and among the young. In fact, the entire Democratic nomination process has been remarkably predictable based on demographics. Bernie has won states with heavily white populations and he's crushed Clinton in heavily rural regions. Bernie's coalition consists of sections of the Midwest, the Mountain West, and the West Coast and relies heavily on white voters, males, and young voters located in heavily rural areas. Bernie's coalition is an age-old aspect of American history that's generally called the Jeffersonian Democrats or the old Agrarian Populists. Now, they're parading a new banner by the name of Democratic Socialism. Of course, the platform and policies are largely the same.

Clinton, on the other hand, has consistently won minorities (especially blacks and Latinos, but others as well) by ~30-40% varying upon the state. So we can clearly see how this election process has played out here. Thus far, Hillary Clinton's campaign has consisted of the South, parts of the Midwest, and the Southwest that's relied heavily on upper-middle class/wealthy whites combined with minority populations in states with large urban centers. Hillary Clinton's coalition is the same as the Obama coalition that was derived off Clinton's move to the right to win the 1992 election. Obama constructed a coalition of large money, primarily financial/Wall Street elites, that shares little difference with the old 'Gilded Age' coalition involving wealthy elites, upper-middle class/wealthy whites, and minorities that existed in the Republican Party roughly 120-150 years ago.
Note #2: The only state Sanders has beaten Clinton among minorities was Hawaii where he won by 40% with <14,000 votes. To put that in perspective, Clinton won Detroit by roughly three times the margin that Sanders won Hawaii even though she lost Michigan by ~2%. So until Sanders consistently shows the ability to win minority populations, I don't think he really has a chance to beat Clinton.

4. The Current State of Affairs in the Republican Party: Cruz Control or the Trump Card
Trump came out with a huge initial lead in delegates early on as the anti-Trump vote was split among many candidates. Now, it's basically Ted Cruz vs Donald Trump. Currently, Trump has ~845 delegates and Cruz has ~559 delegates with Marco Rubio having 171 delegates and John Kasich having ~150 delegates. It's also important to note that Marco Rubio has suspended his campaign, but Kasich's campaign is still operating.

It's funny because most pundits were saying that Cruz's strength would be among evangelicals, but it's Trump that has actually won evangelicals. Cruz has gotten a lot of support from local unions, a lot of old Reagan Democrats, working-class people, old conservatives, and pro-gun guys although he's lost evangelicals and old union supporters. That seems way more of a Jacksonian coalition than Trump's supporters in old union territory, "moderate" Republicans, Yankee Republicans, and support from old industry.  Cruz's coalition is scantly differentiable from Andrew Jackson's old coalition. In my estimation, the only reason that Cruz is less likely to win the general election is because now we have the West Coast in the Union.

Note that when most of the South voted, Marco Rubio was in still in the race. The exit polls also show that Rubio's supporters would've backed Ted Cruz over Donald Trump by what's roughly a 3:1 or 4:1 margin. In other words, the only reason Trump won most Southern states was because there were many people splitting the vote amongst the rest of the Republican Party. Even with those facts, Cruz lost Missouri, Arkansas, North Carolina, Louisiana, and Kentucky by margins of ~.2%, ~2.3%, ~3.4%, ~3.6%, and 4.3% with Rubio still in the race. Had Rubio suspended his campaign a few weeks earlier than he did, Cruz would've won all of those states and some by significant margins. In a head-to-head contest (or a contest where you just didn't have Rubio), Cruz's coalition would heavily consist of critical states in the South that wouldn't have gone to Trump. To put frankly: Cruz would've locked up the GOP nomination by now had Marco Rubio dropped out a few weeks earlier.
Note #3: Cruz also lost South Carolina, Tennessee, and Georgia by ~10%, ~14% and ~15% as Cruz and Rubio effectively split 45%, 46%, and 48% of the total vote in both states respectively. The vote went 32.5%/22.5%/22.3%, 38.4%/24.7%/21.2%. and 38.8%/24.4%/23.6% for Trump/Rubio/Cruz in South Carolina, Tennessee, and Georgia (respectively). If Rubio wasn't a candidate during South Carolina or Tennessee or Georgia, Cruz would likely have taken South Carolina. There's a good chance he even takes Tennessee or Georgia although they would be less likely to be taken by Cruz than South Carolina.

Anyways, if we exclude the fact that a stupid decision made by a former Presidential candidate to stay in the race potentially sabotaged the candidate who's really organized by the grassroots, we'll see Cruz's actual coalition. Cruz has won the states of Iowa, Alaska, Oklahoma, Texas, Kansas, Maine, Idaho, Utah, and Wisconsin. If we add in the states Cruz would have won had Rubio not been a complete moron, we'd have added--at the very least--Missouri, Arkansas, North Carolina, Louisiana, and Kentucky. Therefore, we see that Cruz's strength lies in the Mountain West, in Texas, and along many states in the South although Cruz didn't technically win those states due to unfortunate circumstances.
Note #4: Notice that there were other candidates in the race who took away Cruz's support early including people like Ben Carson. Although Carson endorsed Trump, most of his supporters probably went to support Cruz once his campaign was suspended in much the same way Rubio's supporters did.

Hence, we can definitively say that the Cruz coalition is built heavily on the Mountain West alongside states like Oklahoma and Texas. We can also definitively say that Cruz relies heavily on states with high rural populations or old industrial towns for his support, especially in sparsely populated states. Thus, Cruz's coalition and the strength of his campaign involves the old coalition of Andrew Jackson and the entire wing of the American system that's centered around the Mountain West, rural regions in the Midwest, and many of the Southern states. 
Note #5: Although Trump technically won most of the Southern states, I'll give Cruz the edge in many of those states simply because the dynamics of the voting process at that time was tilted against Cruz.

We can also definitively say that Trump's wing relies on a completely different set of states involving a coalition of the Mid-Atlantic, New England, the Midwest and specific parts of the South. Trump relies on many states that have large urban population centers and probably relies on large urban populations among his voters. The rise of Trump isn't related to the rise of the Jacksonians, but instead it's related to the return of the Yankee/Midwestern Republicans including the likes of Rudy Guliani and Chris Christie who've both endorsed Trump.
Note #6: Notice that Trump is up big in the polls in the Mid-Atlantic which has yet to vote. Considering that there's no way Cruz or Kasich could even dream of catching up in the Mid-Atlantic, I'll give Trump every single one of the Mid-Atlantic states in a landslide.

5. The Issues of the Candidates and Divides in the Republic:
As we can see, there's clear divides inside each party and there's serious divides in the critical issues that're being addressed by each campaign. On the Democratic side, Bernie Sanders has made an entire campaign about "inequality"--by which he advocates equality of outcome, not equality of opportunity--and a populist appeal against the big city interests, high finance, and Wall Street. He's also pushing for strong centralized social supports like "tuition-free college", single-payer health care, high taxation, and high levels of redistribution while largely being against gun control (most of the anti-gun rhetoric from Bernie is nonsense as his record will tell you the truth). Bernie Sanders is also crying out against military spending.

In the case of Hillary Clinton, she's running an entire campaign to build off what Obama has done. She's arguing for some more social supports, but she's clearly drawn the line by saying that college shouldn't be tuition-free, she's arguing against single-payer, she's not advocating a large increase in taxation, and she's using Wall Street/high finance to support her campaign and hold her coalition together.

On the GOP side, you've got Trump that's campaigning on issues like universal health insurance, infrastructure spending, holding a line against illegal immigration, and cracking down on foreign freeloaders. You've also got Cruz--and while his campaign is mostly filled with blatant lies--his supporters know his record on government spending/expansion, religious liberty, and preventing immigration reform regarding illegal immigrants.

So as we can see, there's clear differences within each party on how critical issues should be resolved. However, it's also important to note that much of what Trump is advocating for are ideas that're considered "liberal" or closer to the "left-wing" of American politics while combined with anti-illegal immigrant and anti-foreign government sentiment. Cruz, on the other hand, lies as much as necessary to get power so that he can basically prevent government spending or reform across a broad range of issues. Cruz is also a vehement defender of state's rights while Trump fundamentally wants to expand federal power.

From this, we can conclude that the divides in the Republic are largely regional. In the Democratic Party, there's a demographic split by race, by gender, and by age. In the GOP, the divides are entirely regional. Both Cruz and Trump have won various combinations of old industrial areas that has resulted in Trump beating Cruz in some while Cruz gets the better of Trump in others. However, Trump has done better in regions close to the Mexican border and in cities. Cruz has also done better with women, but that's about as far as the demographic divides go, except maybe for income but the income based demographics aren't entirely consistent across states.

So we can conclude that there's crucial divides in both the Democratic Party and the GOP that're regional, but the divides in the Democratic Party go beyond regional divides and goes out into racial, gender, and age-based divides although those divides seem to be largely regional as well. In the Republican Party, the regional divides only apply to gender because Cruz has won Republican and conservative women.

6. The Wings Fighting for Power:
As I've described, we've seen huge divides not just across party lines but within the parties as well. In the Democratic Party, there are two key factions fighting for power. The first faction is what I've called The Wall Street Coalition; it's also known as the Obama Coalition. It's very similar to the Republican Party that used a combination of wealthy, big-city elites (particularly financial elites) to unite upper-middle class/wealthy whites with minorities and immigrants. This faction is represented by Hillary Clinton. It was also created by Barack Obama and has its roots in Bill Clinton moving the Democratic Party to the right in the 90's. The 'Wall Street Coalition' generally tends to be concerned with issues regarding minority rights, they tend to be pro-immigration, they tend to favor liberal finance or financial innovation, and are heavily concerned with issues regarding economic development via market-based institutions. This is basically Hillary Clinton's platform

The other faction in the Democratic Party is the old Jeffersonian Democrats. It's effectively a combination of agrarian populists that're largely white combined with younger voters who tend to be students that are ideological and naive. The policies, the platform, and the viewpoints of this wing that's represented by Bernie Sanders has its roots in Thomas Jefferson. These "democratic socialists" are nothing more than a rebranded version of the old Jeffersonian Democrats. The Jeffersonian Democrats have always primarily been concerned with issues regarding inequality, banking/finance, excess political power in the hands of elites, and the centralization of the government purely in the hands of the financial system alongside other capitalist elites. They also rail against large military spending, are almost always in favor of sharply reducing military spending, and tend towards pacifism. I just described the policy platform of Bernie Sanders.
Note #7: Most people think that Thomas Jefferson was against a strong central government, but this is not true. Jefferson felt that the central government should operate in an actually democratic way regarding the "will of the people" and in accordance to their desires. Jefferson was against the strong centralized government pushed by Alexander Hamilton via control of the financial system.

In the Republican Party, you've got Trump that's heavily reliant on a coalition of New England and the Mid-Atlantic alongside pieces of both the Midwest and the South. This wing is what I like to call the Yankee Republicans of the 20th century, but the history of this faction predates the 20th century. Prof. Pettis calls this wing the Jacksonians, but they're not like Andrew Jackson or the wing that Andrew Jackson drew his support from at all. No one can claim to be a Jacksonian when you crush your opponent in New York while getting annihilated in Texas. The Roosevelt Republicans tend to be rather moderate on almost all issues. They favor government involvement in health insurance or in other specific regions while being against "free trade". They favor moderate social supports combined with strong international intervention for the US atop the "World Order". They tend to be okay with some levels of redistribution. This is basically the entire point of Donald Trump's campaign.

With regards to Ted Cruz, his coalition is heavily reliant on the Mountain West, parts of the South or Midwest, and will probably include many parts of the West Coast. In other words, the coalition backing Ted Cruz are the actual Jacksonians. The Jacksonian heavily Southern or Western (like Jackson himself), but struggle to gain support in Yankee territory. They tend to be led by the kinds of people who're intelligent while coming off off as idiots to much of their opposition, they understand politics, they lie through their teeth while being relentlessly in service to those who elected them, and they're staunchly anti-corruption. The Jacksonians tend to favor laissez-faire economics with grassroots democracy and "sound money". They fight against what they perceive to be the institutionalization of power which means favoring things like term limits. They also tend to vehemently be in favor of states rights along with the rights of their local communities, which is why they're staunchly pro-gun, as opposed to the big cities. They also tend to be more imperial while generally leaning to isolationism, are staunchly anti-internationalist, and are ruthless in securing what they perceive to be American interests at almost any cost. This is a lot like Ted Cruz.
Note #8: In his post, Prof. Pettis said that the Jacksonians used to favor a stronger Presidency back in the time of Jackson, which is correct. However, they also favored states rights' on most occasions which is one of the arguments Jackson used to destroy the Bank of the United States. I'd argue that they favored a stronger executive in order to effectively protect what they felt to be an encroachment of the rights of their states/localities by established elites from DC. Sure enough, this is Ted Cruz's rhetoric if you pay close attention to it.

Note #9: The Jacksonians are very good at political mobilization at the grassroots level, which is really Ted Cruz's only path to the Republican nomination considering that he won't be able to get enough delegates to catch Trump, but while noting that most of the delegates at the convention will be Cruz guys that were promoted through the grassroots in the GOP. Any time you've got a person who was actively engaged in bringing the party leadership down from the inside that's forced the entire party leadership to throw their support to the guy that tried to unseat them: the grassroots movement that allows for such political maneuvering are the Jacksonians.

Extra Bonus: Nomination Process is not Rigged
Now that I've described the nomination process, let me attack this idea that the nomination process is "rigged". Outside of the stupid claims of voter suppression as being anti-Bernie by Bernie Sanders supporters (when all of the evidence shows that all of the voter disenfranchisement/suppression issues occurred in regions with such a history and that such disenfranchisement/suppression also occurred in particular regions that favored Hillary Clinton both demographically and in the polls while all of the "evidence" used by Bernie supporters for such a bias is largely anecdotal), both Bernie and Trump have been saying the system is "rigged".

The system is not rigged in any way. The rules have been known and unchanged for basically a year--much longer in some cases. The Democratic contest doesn't mean the elites select the candidate, but that they have a say in splitting the vote if it's close. The contest also rewards party loyalty, which makes sense. On the Republican side, everything is done by states where all states have a highly democratic process. If we look at Trump's claim that the process is rigged against him, we'd actually see that such claims are simply not true.

From a pure results-based standpoint, it's not like Bernie Sanders has been competitive enough for the entire thing to matter anyways. Even if Bernie somehow pulls off the unlikely win in pledged delegates, he'd still be losing in votes and winning due to his performance in caucuses which'd tell us that he's actually winning because of rules that disenfranchise many voters.

Sunday, April 17, 2016

On Faulty Leftist Attacks of Neoliberalism (featuring Latin America), The Neoliberal Track Record, and Why I Am Not a Neoliberal

During the period of time ranging from ~1980-2008, we were in a period of expanding liquidity and globalization (as I've spoken about previously). During this period, there was a rise of a system for political economy called neoliberalism. Neoliberalism is a framework for political economy that promotes ideas like economic and financial liberalization combined with free capital movements, generally unrestricted trade, and reductions in the size of the state in directing both the financial system and the economy.

Now that we're in the world of contracting liquidity where the world is entering a period of "deglobalization", we're seeing a rise or a return of ideologies that're anti-globalization. Of course, this includes many leftist ideologies and leftist attacks on the most recent world order. Many of these attacks are on "neoliberalism" are faulty, including the attacks from the left using Latin America as an example. Therefore, it makes sense to split up this post into four different parts:
1. On Faulty Leftist Attacks on Neoliberalism

2. Neoliberal Reforms, the Washington Consensus, and Williamson's Ten Points
3. The Neoliberal Track Record
4. Why I Am Not a Neoliberal

1. On Faulty Leftist Attacks on Neoliberalism:
The arguments against "neoliberalism" are really bullshit. For example, these are arguments pushed by those on the left-wing of the political spectrum who always talk about the "horrible impacts" neoliberalism had on Latin America, but if you've actually read the history you'd realize that everything they say is bullshit. For example, if we take Milton Friedman as a classic example of neoliberalism (I actually don't like Milton Friedman) and then go through at the countries that he or the "neoliberals" or the "Chicago Boys" supposedly "endorsed", you quickly realize that these Latin American countries did the exact opposite of what the "Chicago Boys" or the "neoliberals" suggested. For example, Friedman strongly pushed flexible exchange rates for all Latin American countries as a way to prevent the overvaluation of the rate of exchange. He also said that this would eventually force these countries into a balance of payments crisis that would form into a financial crisis that'd turn into a banking crisis which'd turn into a political and social crisis. Well, these countries didn't listen and guess what happened? What happened was exactly what Friedman, the "neoliberals", and the "Chicago Boys" warned.

The leftists also make the argument against what happened in Chile where you had the "neoliberals" supposedly prop up a dictator (Pinochet) who'd do exactly what the these "neoliberals" would tell him through American capitalist imperialism, but that's mostly a lie with a bit of truth. First off, Pinochet never really did take up the reforms as asked by the "neoliberals" and, in most cases, did the exact opposite of what they told him (at least initially). He didn't even listen to their advice on having a flexible exchange rate that Friedman and the Chicago Boys were so insistent on. They said it'd lead to financial, banking, social, and political crisis by distorting the balance of payments until you were forced to devalue as your banking system collapsed. So what happened? Well, the neoliberals were right and Chile had a major crisis like all of the other Latin American countries. After those crises, Pinochet came back to the drawing board with the "neoliberals" and the "Chicago Boys". This time, he decided to take their advice and ACTUALLY TAKE UP LIBERALIZING REFORMS! Eventually, he went through with the market-based reforms, then stepped down from power, and now Chile is only one of two countries in Latin America with stable political institutions. The other country was also forced to take up liberalizing reforms from American "neoliberals" purely because of its close proximity with the United States after it had a financial crisis in much the same way. So any way you wanna cut the cake, the neoliberals were almost entirely correct and any sensible (by sensible, I mean not hyper-sentimental) reading of the history will lead you to that conclusion.

2. Neoliberal Reforms, the Washington Consensus, and Williamson's Ten Points:
If you actually read through the reforms the "neoliberals" were suggesting, you'd come to the realization that almost all of Latin America has never ever made an attempt to even go through half of those reforms. The only countries that have gone through the reforms actually suggested by the "neoliberals" and the "Chicago Boys" are Mexico and Chile--both of whom did so after not taking up the "neoliberal doctrine" after which they ended up in crisis.

If you don't believe me, just look at the actual reforms that the supposed "neoliberals" were asking for. This is called the Washington Consensus. The specific neoliberal reforms that were pushed by the "Chicago Boys" and Milton Friedman were almost entirely the same as Williamson's Ten Points. These were the Ten Points Williamson recommended:
1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates
6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
10. Legal security for property rights.

In Latin America, most countries have never actually had legal security for property rights (only Mexico and Chile). Most countries in Latin America who blamed the "neoliberals", the "Chicago Boys", or other similar groups for their financial crises ended up in their financial crises because they had fixed exchange rates and refused to adopt flexible exchange rates. Most countries in Latin America still rely on public subsidies and are drastically underinvested in primary education, primary healthcare, and lack good infrastructure (the primary exceptions here are Mexico and Chile, again). The tax system in most of Latin America is so messed up that there's no real incentive to take risks or fail, especially when you add in the lack of a rule of law and legal protection for property rights. They never actually liberalized trade in any way and most of these countries still haven't liberalized either trade or capital flows (only Chile and Mexico have done these things). Most countries in Latin America have ZERO discipline when it comes to fiscal policy, which is why they usually resorted to fixed exchange rates to quell inflation since a flexible exchange rate would create a balance of payments problems since these countries have little institutional credibility which would force up inflation. Only two countries in Latin America have actually taken up policies of deregulation (Mexico and Chile). Most countries in Latin America still have massive amounts of state-owned enterprises (again, Mexico and Chile have relatively less). Also note that countries like Cuba or Venezuela or Bolivia or Colombia or Brazil that're in real dire straights right now with collapsing currencies, rampant corruption, and civil/political unrest ALL have financial and economic systems with state-owned enterprises and high business regulations preventing competition for those state-owned firms.

3. The Neoliberal Track Record:
So now that we've discussed the basics of the faulty leftist attacks on neoliberalism and the neoliberal suggestions for reform, let's look at the actual track record of neoliberalism. As we've demonstrated above, the track record of "neoliberal reforms" is nowhere near as bad as the leftist creed would make you believe. With that being said, let's actually see what success stories are hidden by leftists. So let's see where neoliberal reforms actually worked.

The classic example of neoliberal reforms working properly is in a country like India. From 1947-1990, the entire Indian government was controlled by the Indian National Congress which was a party with leftist leanings that took up a policy of combining British-style parliamentary democracy with Soviet-style central planning. What were the results? From 1947-1990, India's economic growth was ~1% per capita. During this period, India's population increased from ~300 million to >1 billion as India barely developed. In 1990-91, India's leftist economic policies were failing so badly that the government was forced to choose between a financial crisis that'd lead to political/social chaos or financial liberalization. The Congress politician had no choice but to choose the latter because it was simply much less costly.
Note: When you have ~1% GDP growth/capita for ~50 years while your population more than triples, that's quite sad. Now, 1% GDP growth/capita can actually lead to great increases in the standard of living while making real changes in development, but remember that there's also from a tripling of population in ~50 years that places costs on a society not seen in GDP calculations like environmental degradation or the required use of fossil fuels like coal to maintain energy or the costs of additional infrastructure and the costs of the provision of basic social services for the populace that're usually paid in the future.

Since the beginning of liberalization reforms, the Indian economy has grown at >5% per capita while almost all Indian states have fertility rates below the United States as most of the population growth is concentrated in a few specific states or districts. In other words, the "neoliberal" reforms that were taken up in 1990-91 were absolutely critical for India. Trade was liberalized so the large, protected Indian firms that were inefficient faced serious competition while barriers of entry were dropped. The financial system was liberalized to provide/distribute credit and capital more broadly at a cheaper cost. India's liberalization of capital flows allowed for foreign investment in Indian firms and provided India access to foreign technology, foreign capital, foreign organizational structure, and foreign institutions that carried significant credibility with them. Subsidies for state "regulated" firms were wound down, reduced, and even eliminated. Barriers to entry into the market place were also significantly brought down. The exchange rate was allowed to float freely (the fixed exchange rate was largely responsible for the crisis). Many SOEs were eventually privatized or at least partially privatized.

All of these shifts created an incredible shift in India's political, economic, financial, and social systems. These reforms unleashed ingenuity and the kinds of entrepreneurial spirit India had access to. The innovating ability and potential of India has shown its power, but the problem is that the costs from the rise in population based on the leftist model that India had been on for ~50 years placed entrenched bureaucracies that made it impossible for the country to function while the centrally planned industrialization allowed the agrarian society that still had massive fertility rates to sustain those fertility rates by forced interventions of the central government into the villages and countrysides of India all at once. Had the interventions been slower and more drawn out (as the British suggested, ironically enough), there'd be much less suffering in India today.

There were regulations that were suddenly placed on how businesses could hire and forced them to require government permission before hiring or firing workers. The financial system was nationalized as a way to protect government cronies and support patronage networks for the leadership to maintain power. In the end, the results were pathetic while the costs were all born by its future population. Of course, this reversed in 1990 although most of the damage had been done by then.

Other neoliberal successes involve countries like South Korea. In the 50's, China was actually wealthier than South Korea. South Korea was incredibly poor in the 50's, but then took up policies that resembled the "neoliberal" reforms as time went on. The "neoliberal" reforms in the 90's that Korea and other Asian countries took up were extremely successful. In many parts of Southeast Asia, there's many different countries that've done well via the "neoliberal" approach including Indonesia and Malaysia that've actually seen successful development.

As we've shown, the neoliberal reforms and neoliberal view worked quite well in a world that operated under a certain given set of circumstances. As usual, this is contrary to the leftist arguments about neoliberalism that're constantly thrown around. To put simply, the track record of neoliberal generally contains much more good than bad.

Note: Even when we look at the supposed "neoliberal failures", to which Latin America or Eastern Europe is used as an example, we quickly begin to realize that most of Latin America never actually took up those reforms. For the countries in Latin America that did take up those reforms, they're the only functioning countries in the region right now (Chile and Mexico). In most of the other countries in Latin America, they're ruled by strongmen who're generally leftist or fascist and view neoliberalism as a shill for "American imperialism". Even in the cases where neoliberal reforms took place after a violent overthrow of government from an imperial power, we begin to see that these reforms worked while those countries on the other side are still stuck in the doldrums.

4. Why I Am Not a Neoliberal:
So if I'm saying why neoliberalism has such a good track record, why do I not call myself a neoliberal? Well, the answers are rather simple. Neoliberalism has worked quite well across most of the globe for the past 35-40 years and anyone who says otherwise clearly hasn't looked at the history. If it worked for India, Southeast Asia, and parts of East Asia while it was only really tried in Latin American, South Asia, Southeast Asia, and a few other remote locations in Asia; neoliberalism must've worked across a high majority of the places it was tried.

So where are my disagreements with neoliberalism. My disagreements with neoliberalism lie in its assumptions. Neoliberalism works great when you have a geopolitical financial system run by one country in such a manner where all the countries operate by a set of given rules or dictates, where no one tries to screw up the positive-sum game by turning it into a zero-sum game with some neo-mercantilist policies, or where the countries that use neo-mercantilism are so small relative to the size of the total pie that their economic distortions are basically not felt anywhere.

In other words, my qualms with neoliberalism lie in the troubles created primarily by countries like China, Japan, and Germany in the 15 years that has destabilized the global geopolitical financial system. I've discussed the mechanics of the destabilization of these countries and their impacts in other posts which means I won't get into the details on this post. However, we'll notice that these countries are taking up policies to force the US to absorb their trade volatility because the world's reserve currency status forces us to have an uncontrolled capital account.

In other words, the neoliberal doctrine tells us nothing about how we should behave or what we should do when there's other countries taking up explicit policies to undermine the liberalized nature of the system as a tool for the ruling elites in these countries to extract rents from international trade/capital flows. In order to deal with this problem, we need a new way of thinking about things. To put simply: I am not a neoliberal because I do not find the framework suitable to challenging the needs and concerns of today's geopolitical financial system due to the inability of the country operating the system to retaliate against such countries exploiting the system to collect rents.

Other fundamental disagreements I've got with the neoliberal doctrine is in regards to poorer countries with internal development needs and protection. Many economists will cite Ricardo's comparative advantage to say that free trade leads to "more efficient" outcomes, but it's also important to note that Ricardo's theory abstracts away from time and that capital development is a dynamic process that takes time. In other words, maximizing economic efficiency in the short term can cause an overspecialization of a developing economy into its comparative advantage which is generally commodity exports, natural resources, or other extractive industries. Of course, those industries not only do nothing for the development of real capital, but may actually destroy capital by the impacts of shifts in incentive structures or via environmental degradation.

So in order for capital-poor countries to build a capital base, it may be (conditionally) necessary or beneficial to place restrictions on international trade in order to prevent the overspecialization of a developing economy that discourages the development of capital. The neoliberals don't acknowledge this scenario, but it's a fundamental disagreement that I've got with the neoliberal view. With that being said, my suggestion of capital-poor countries possibly finding it beneficial to place restrictions on international trade is a highly conditional suggestion that doesn't hold all the time. Historically, breaking down barriers to trade has had as much a positive impact as placing them. However, note that my suggestion in this regard is heavily conditional.

Tuesday, April 5, 2016

American Financing of Business and Why the Bank of England is Obviously Wrong

In a few exchanges on Twitter with various people (including economists who claim to understand money and banking like Steve Keen), I was pointed to claims that these people made which were largely wrong including the idea that most "money" that's created today occurs by commercial banks issuing loans. These people then referred to this Bank of England paper that describes a process (it's obviously wrong and I'll go into why). Of course, these are statements that cannot be accurate because when you start looking at the balance sheets of the banking system and private sector, their claims are in direct contradiction with the facts. To put simply, the numbers simply do not add up in a manner wherein their conclusions have any sort of validity or make any kind of sense.

The Bank of England (BoE) paper starts off by saying that these three points:
-"This article explains how the majority of money in the modern economy is created by commercial banks making loans."
-"Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits."
-" The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’"

While there is a little truth to the final two claims, the first claim and parts of the other two claims are blatantly wrong.

First Claim:
Most money in our economy IS NOT "created by commercial banks making loans". In fact, if we look at the total assets of the American banking system according to the Federal Reserve (as of March 23, 2016), we'll see that it amounts to $15.72 trillion. Out of those total assets of the American banking system, the assets we can clearly see that CANNOT BE loans by commercial banks are:
1. $2.5 trillion are in cash assets (most of this is reserve balances held at the Fed)
2. $2.25 trillion are in Treasury debt or agency debt (largely MBS)
3. $403 billion are in Fed Funds and reverse repos with both banks and nonbanks
4. $200 billion are in trading assets
5. $62 billion are in interbank loans

If we add all of those numbers up, we end up getting the total assets held by American banks that isn't commercial bank loans at ~$5.41 trillion. So the total remaining assets of American banks comes out to ~$10.31 trillion. Also from data kept by the Federal Reserve, we know that American national income (as approximated by GDP; annualized) was $18.13 trillion as of Q4 2015--keep in mind that GDP has gone up since 2015 and into 2016, but we're not accounting for that so our numbers are quite conservative estimates. So what this means is that the total commercial bank loans/GDP is AT MOST 57% of GDP. If we remove loans to non-depository financial institutions (this was at $398 billion) from that total, we get assets of $9.92 trillion that comes out to ~54.6% of GDP.

However, Fed data also tells us that total household debt/GDP is at ~80% and this doesn't even include non-financial business borrowing which runs at ~70% of GDP. If most money was created by "commercial banks making loans", then there's no way household debt must be <45% of GDP (loans for commercial real estate amounted to $1.82 trillion so the rest of the assets of American banks come out to <8.1 trillion or <45% of GDP).

Now if we look at the actual capital structure of American finance, we'll see that the total market capitalization of listed domestic companies was $26.33 TRILLION in 2014--according to the World Bank (I cannot find the 2015 and 2016 data)--but this amounted to 152% of GDP in 2014. Now this number has probably gone higher since 2014 and if we use the 2014 data combined with the 2016 GDP numbers, we'll see that the total size of American listed equity comes out to >145% of GDP.

If most money is created in the form of commercial banks issuing loans, then how is the amount total non-financial loans held by commercial banks LESS THAN 40% of the TOTAL LISTED EQUITY? Clearly, the BoE description of the financial system is simply not in conjunction with the facts. Hence, the first claim of the BoE is just straight up wrong.

Second Claim:
Now, if we look at the second claim of the BoE, what we realize is that it's not correct either. Banks often simply do act as intermediaries in our financial system because our financial system relies on shadow finance. As I've described in other posts, shadow finance can be thought of as capital market lending using money market funding where you have funds that hold asset backed securities (ABSs) and use these ABSs to acquire financing in via the repo (repurchase agreement) market.

With these ABS, there is certainly some financial institution (essentially a bank) acting as an intermediary. These ABSs are a liability of some financial institution that holds smaller assets which "back" a certain ABS. So in other words, we certainly have banks (a financial intermediary is usually a bank) that hold certain assets and securitize them into some kind of a security.

Third Claim:
In the third claim by the BoE, the central bank in today's financial system doesn't ultimately control the money supply or the amount of credit supplied by the financial system, except in a very limited way. It can force the financial system to contract sharply and has some ability to force it to expand, but it cannot force the financial system into expanding or contracting the money supply as I've discussed in a previously.

The money supply today can't really be put into a cohesive amount because different groups of the population view different financial instruments as money for different purposes. So the ultimate control of the money supply doesn't lie in the central bank, but instead lies wholly on the financial system. All the Federal Reserve can do is to increase/decrease the money market rate of interest or increase/decrease its holdings of longer-term securities (which do influence one another, but aren't entirely dependent). So in other words, the amount of money supply in the US doesn't depend on the central bank. The central bank can play a role, but so can the international policy of foreign governments, the domestic policy of Congress, and shifts in the policies of other federal agencies.

To put simply, there's a little truth to the last point in the BoE paper, but it's mostly false and based on a fundamental financial misunderstanding of how today's world actually operates.

In other words, all three claims made by the BoE in their paper are not only minor mistakes, but fundamental errors based on a massive conceptual misunderstanding of how financial markets and capital markets work today.

The financial system that we have today is far more complex and multi-dimensional than anything the BoE could imagine. They clearly have little grasp of it and seem to be living a world that may have existed 60-70 years ago, but certainly doesn't exist today. The entire paper they've laid out on monetary policy is nothing more than garbage.

If the British financial and policy-making elite are thinking about finance in these terms, then all it tells us is that the United Kingdom has fell far behind. This kind of financial thinking is primitive, wrong, and will really make sure the economic system lags behind. Quite frankly, it's the result of a backward view and a country that's now in decline.