Coronavirus vs. Debt Economy

Modern America is by far the wealthiest nation on Earth. We can afford to shut down the economy for a few months and keep meeting our physical needs. But we can’t keep paying our debts, and in our system, the average person is required to be deeply in debt.

Yesterday, 601 Italians died of the Coronavirus. The day before, the death toll was 651, and the day before that, it was 793. It appears that Italy has pulled off what China did a month earlier, and reversed the growth of the virus by means of a very strict shutdown, with all shops closed except for grocery stores and pharmacies.

Right now, the United States is in a similar situation to Italy. Our death rate hasn’t peaked yet, but if we keep doing what Italy’s doing, we can expect the same overall result.

But now, Donald Trump is talking about how he wants the shutdown to end after 15 days. Trump can’t end it himself – at least not nationwide, because the “shutdown” is really a patchwork of emergency measures imposed by states, cities, and counties – but if enough people followed his lead and lifted said measures, we could expect the virus to start spreading again just as if a red traffic light had changed back to green.

Everyone knows we can’t keep the shutdown going forever, but when it was first imposed, the idea was to slow down the virus until somebody developed a vaccine or cure, or until it evolved into a less deadly form, or at least until America’s hospitals had the resources to properly treat millions of cases so that the fatality rate would only be one percent instead or two or three percent. A 15-day shutdown, followed by business as usual, is actually pretty useless.

And yet with the need for a $6 trillion (!) bailout looming on the horizon, letting the virus have free reign is looking more and more appealing to the President and his advisers. The alternative – having to come up with a way to recover from the loss of a third of our annual GDP – is something that politicians in both parties would much rather not do.

And yet, it shouldn’t really be a problem if our economic output in 2020 turns out to be only two-thirds of what it was last year. After all, the per-capita GDPs of both Britain and France are a little less than two-thirds of ours, and those nations aren’t living in poverty.

But the problem isn’t that we can’t shut down the economy for a few months and still meet our needs. It’s that we can't shut it down and still pay our debts.

Most Americans are living on the edge of insolvency. They have little savings and lots of debt. If their paychecks don’t come in each fortnight, they will soon have no food and no place to live.

Businesses are the same way. The reason that the government can’t respond to the rent crunch in the obvious way – by suspending the obligation to pay rent until the crisis is past – is that landlords usually have to pay the mortgage every month. Other kinds of businesses also have obligations that aren’t going away.

The easy thing to do, when looking at a situation like this, is to blame ordinary Americans. “If they weren’t so lazy and irresponsible,” you could say, “they wouldn’t be in so much debt.”

But that isn’t really accurate. Americans in the 1950s and 1960s were much thriftier than they are today, but most were still in debt. In fact, since 1933, our country’s monetary system has been set up to make it impossible for the average person to not be in debt.

This is a fact which even many critics of the present regime fail to grasp. It is common, in libertarian circles, to hear that the economy is in trouble because our money is made of paper and backed by nothing. But that isn’t quite true. The economy is in trouble because our money is backed by debt.

To get a grasp of the concept of the debt economy, consider the following scenario:

Suppose that one hundred people are living at peace in a simple, agrarian village. Some of them are farmers, some are shepherds, some grow grapes and olives, some make and mend clothing, and so forth. One day, a one-hundred-and-first man arrives in the village, and introduces the other villagers to the concept of money. They all decide that they like the idea, and would be happy to give up bartering and instead have a single resource that can be traded for anything else. Thus, they agree to make this man their banker, with sole authority to issue money in their village.

The newest villager fashions a wood-block press, brews a pot of ink, skins some sheep to make parchment, and prints 10,000 paper marks. But he doesn’t just give them away; instead, like any good banker, he lends them out on credit. Each villager borrows 100 marks at ten percent interest. They begin using them in commerce with one another, and everyone is pleased with the new invention.

Most of the villagers feel like it would be a good idea to get out of debt. Some, by a combination of hard work, skilful trading, and luck, finish the year with more than 110 marks to their name, and pay off both the principal and the interest. Most don’t, and they only pay the 10 marks of accrued interest.

Now, there is a problem in the village: the amount of money that the villagers owe to the banker is greater than the amount that exists. The whole village can never pay its way out of debt. Some individuals may win back their freedom, but only by selling their goods and services to others who remain indebted. If the majority of the people are lazy, then an individual can get out of debt by working hard. But if the majority works hard, then hard work alone won’t be enough; one will also need superior talent or luck. Most people will never escape.

From time to time, the banker lends more money to the struggling villagers. This allows them to get by without the economy grinding to a halt, but it doesn’t bring them any closer to freedom.

Is the money that these villagers use worthless, because it is made of paper? Not at all. In fact, the villagers always want more money than they have, and many of them, who were once scrupulously honest, have found that they are now willing to lie and steal in order to get the stuff. After all, even the villagers who don’t care about living luxuriously still need increasingly large sums of money just to service their debt.

In the real world, simple, agrarian societies don’t do this kind of thing. They use commodity money: gold, silver, wampum, cocoa beans, or some other physical good that doesn’t have to be borrowed into existence.

That doesn’t mean that some people won’t choose to borrow money anyway. Indeed, many societies with commodity money, such as the United States prior to 1933, have had banks and even central banking. But the ultimate creators of money were gold and silver miners, not banks, and banks had to pay interest on their specie reserves as well as collecting interest on their loans. Participation in the debt economy was optional.

Then, in 1933, the New Deal government made Federal Reserve notes the only kind of money that common citizens could legally own, and participation in the debt economy became mandatory.

In modern America, the Federal Reserve fills the role of the banker in my story. It doesn’t lend to you and me directly (two percent interest rates, after all, are not for the Plebs) but it lends to other banks, and those banks lend to you and me. There is always more debt in the economy than there is money, and most people, just like most businesses, will never pay off their debts.

We Americans don’t really need to consume nearly as many resources as we are used to consuming. Temporary losing the ability to produce most goods and services won’t hurt us. But our economy isn’t based on goods and services, it’s based on debt, and losing the ability to pay our debts is quite a different matter.

 

Forgetting Hard Times

Some countries in the world today have experienced major disasters within living memory. Others haven’t. And the nations that have gone the longest since their last disturbance are usually the ones that will handle the next one the most ineptly.

I first mentioned the Wuhan Coronavirus on this blog on the last day of January. After a brief overview of the fatality statistics, I concluded that even in a worst-case scenario where most people in the world get infected, the virus would kill fewer people, in every age-group, than die in a normal year from heart disease, cancer, and all the usual causes of death.

If, on the other hand, the virus did what most new viruses do, and evolved milder symptoms so as to spread more easily, then the epidemic might drop out of the news just like the Swine Flu did. Therefore, I said, there was no chance of a serious disruption to the functioning of our global civilization.

As it turns out, the virus didn’t become less deadly, and the case fatality rate is still around two percent. Nevertheless, I think my original claim still holds: it won’t be the end of civilization as we know it, nor will 2020 mark some major turning point in the books of future historians.

But I have a confession to make. At the time I wrote that post, I hadn’t thought at all about the economic effects of the coronavirus – or, more precisely, the economic effects of the measures to contain the coronavirus. The upshot is that all this social distancing and isolation is going to leave us with a brutal recession, probably on level with what happened in 2008.

Will that crash the global economy? No – after all, people managed to pick themselves up and keep going after 2008. But it’s going to be a rough year or two, especially for the United States.

Why is America so likely to handle this worse than most countries do? Ask an American liberal, and you’ll likely hear that it’s because Donald Trump is such an egotistical ass. But that’s nowhere near the full story. While Trump’s handling of the crisis has been far from ideal, I’m not convinced that Obama or Bush Jr. would have done any better.

The real answer is, I think, more mundane, but also more revealing. America is handling this badly because we’ve had such a long run of peace and prosperity compared to the rest of the world. Basically, we’ve forgotten how to deal with hard times.

This ‘time since hardship’ variable has been at play in American life long before we heard anything at all about the scary new virus that had suddenly appeared in bat-eating Wuhan.

For instance, just ask yourself why America consumes so much more petroleum, per capita, than nearly any other country. To compare: China consumes 3.5 barrels per person per year, Russia 8, Britain and France 9 each, and Germany and Japan 11. For the United States, that number is 22.

Because oil isn’t a renewable resource – and because America’s days of being able to consume a quarter of the world’s oil are numbered – this isn’t going to end well for us. So why do we keep doing it? Since I’m not going to hop on the liberal bandwagon and say that America was founded on oppression and has a unique moral rottenness about it, I have to find an explanation somewhere else.

My explanation is that Americans are behaving the way they are for the simple reason that we have no living memory of hard times. We’re wasteful because peace and prosperity have made us wasteful.

In the first decade or so after the world was remade in 1945, the United States sat squarely on top of it. We had the best farmland, the biggest oil reserves, and the only industrial plant that hadn’t been bombed out during the war. This wealth let us build the interstate, cruise from coast to coast in our gas-guzzling automobiles, build really big houses, and eat lots of meat.

Meanwhile the Europeans and Japanese, having just lived through a decade of scarcity and having experienced war up-close, were much more frugal. Not everybody could afford a car, so they got around by rail, bus, and bicycle. They lived in smaller houses and ate more plants. When energy prices shot up in the 1970s, they responded by building nuclear reactors and bullet trains.

America’s energy policy, on the other hand, consists mainly of coups and invasions in petroleum-rich nations and massive trade deficits to fund the importation of oil, while at home the rail system is in total disrepair, and we live in cities built with the assumption that everybody will have a car. Sooner or later, this policy is going to blow up in our face. But most Americans don’t think about that, because it isn’t in the nature of someone who has only ever known prosperity to think about how fragile that prosperity really is.

Now consider how various countries handled the Wuhan Coronavirus. China, where it all started, is used to hardship. Many people still vividly remember the famines under Mao. The Chinese have little expectation of personal freedom. They’re used to being told when it’s time to give up their rights for the common good.

On the whole, China’s system of government is not worthy of imitation. But it was able to stop the Coronavirus. After the initial policy of coverup was abandoned and the people at the top started taking the crisis seriously, China sprang into high gear. Much of the nation is in lockdown, and huge numbers of people are being quarantined. The result is that the daily death rate declined from its peak of 150 in mid-February to 11 yesterday.

Now compare that to Italy. Italy experienced war and famine in the 1940s, which made the people cautious and frugal, for a while. But the memory of those events has grown dim.

As an example of this, in 2010, Italy’s state-owned television network fired an old chef for talking about his experience cooking and eating cats in his childhood during the war. A country doesn’t treat its elders this way unless the bulk of its people have lost touch with reality – namely, the reality that there are times when you have to choose between living differently than you normally do, or not staying alive at all.

Which is how Italy has managed to take China’s place and become the new center of the pandemic, with 345 deaths just yesterday. Last week, Italy finally woke up to the severity of what was going on, and ordered an end to all public meetings, and the closure of all schools and all shops except for grocery stores and pharmacies. Will these measures be as successful as China’s? Right now, nobody knows.

Then we get to the United States, a country which hasn’t dealt with war or famine on its own soil since 1865.

Even though he had plenty of advance warning about the Coronavirus, President Trump spent most of February talking about how the situation was totally under control and bragging about the stock market. “Because of all we’ve done,” he said less than three weeks ago, “the risk to the American people remains very low… you have 15 people, and the 15 within a couple of days is going to be down to close to zero. That’s a pretty good job we’ve done.”

By now there are over 6,000 known cases and 108 American deaths. The real case count is probably much higher than 6,000 simply because America, in its state of unpreparedness, has tested so few people. It wasn’t until the pandemic was declared on 11 March that Americans started acting like this was serious. I won’t bother listing the resulting cancelations and closures, because they’re already all over the news.

People in Washington are trying to figure out what to do about the economy. (People in Washington are often trying to figure out what to do about the economy – it seldom ends well). President Trump wants to cut the payroll tax, a measure which would be completely useless for the people who need relief most – namely, those who are out of work entirely.

Meanwhile, Mitt Romney is saying that the government should give every American $1,000 immediately. Such a hand-out shouldn’t be necessary – in the old days, people had their families and their churches to help them through times like this, and in any case, if Romney’s plan did go through, most of the people who got the thousand dollars would squander it. But these days, the typical American no longer has the same kind of support structure that he or she used to have.

The plain fact is that we’re about to see a lot of people who work at restaurants, bars, gyms, schools, or similar places, and aren’t high enough on the ladder to get paid leave, who have no way to keep up on rent.

Whether or not the Romney plan ever goes through, the government will still be handing out a lot of free money. That’s what happens when the Federal Reserve cuts interest rates to zero. But can you or I go to the bank and get a zero-interest loan so that we don’t have to worry about paying the bills for the next few months? No, only wealthy corporations get to do that.

America’s exceptionally long run of peace and prosperity has made us inept at handling serious crises. We’ve forgotten how to live in hard times, but as history has shown again and again, hard times do not stay forgotten forever.

 

Some Thoughts on Super Tuesday

Joe Biden won big this week, and he will probably go on to be the Democratic nominee. So I put together a brief commentary on why this is happening, and what it means for the big picture.

Well, he did it. It looks like Joe Biden is on track to be the Democratic nominee. This is a comeback worth remembering. A week ago, there were seven or eight candidates in the running and Biden was near the bottom of the heap; now, it’s a two-man race between Biden and Sanders, with nearly everyone else having dropped out and endorsed Biden. We can speculate about what kind of arm-twisting was required to get such a fractious field to fall in line so quickly, but the upshot is that the Democrats have all but settled on their nominee.

Mike Bloomberg’s quick exit surprised me. Remember, this is a man who just spent half a billion dollars chasing his mad dream that Democrats would turn out in force to vote for a former Republican who insisted that his money made him the only man who could take on President Trump. I thought that someone who believed such a thing would surely hang on until the bitter end. I was wrong; Bloomberg dropped out and endorsed Biden within a few hours of being trounced on Super Tuesday.

That leaves the prediction I made three weeks ago – that Biden had no way to the nomination that didn’t go through a brokered convention – looking rather silly. It will now join my insistence, last October, that Boris Johnson would fail to get Brexit passed in whatever place failed internet predictions go these days.

For what it’s worth, my New Years prediction had Joe Biden winning the primaries. And New Years predictions count for double – or at least, I hope they do.

For pragmatic reasons, I’m happy to see Biden back in the lead. He’s well past his intellectual prime, has a history of plagiarism and graft, and even in his own party very few people are excited to vote for him. If he gets the nomination, it will almost certainly mean four more years of Trump, because the sacred cow of the moderate wings of both parties – the idea that the way to win over swing voters is to pick a boring enough candidate – is total nonsense.

Nevertheless, if I had to choose the next President from among the two remaining Democrat, I would go with Bernie Sanders. Think about it this way: Sanders is dovish on foreign policy, he always has been, and he’s a staunch ideologue whose positions are hard to sway. Thus, he is unlikely to get the United States into any new conflicts. Joe Biden lacks ideological commitments to much of anything, he's no longer mentally present all the time, and if he wins the White House, he’ll spend four years surrounded by advisers hankering for the next war. Do you see what could go wrong here?

And yet a lot of conservative pundits are celebrating the fact that so many Democrats, by voting against Sanders, are rejecting “Socialism.” I have explained before why I think this is a meaningless label.

Nevertheless, there is a certain worldview, prevalent among American conservatives, that flattens the great conflicts of the world into a binary struggle between Capitalism and Socialism and then naively accepts the claims of people like Joe Biden and Elizabeth Warren when they say they’re opposed to the latter.

I recall just yesterday hearing Ben Shapiro wax hysterical about how deluded all those young Democrats must be to support a socialist, and how the country he knows and loves is on the verge of being gone within a year should Sanders become president.

This is the same Ben Shapiro, mind you, who deplores nearly every expansion of federal power over the last century, talks at length about how America’s moral foundations have rotted out, and shares the standard conservative view that abortion is a horrific injustice and that the 62-million body count since legalization ought not to be ignored. Surely he knows that both Biden and Sanders are in favor of expansive federal powers and government-funded-abortion.

And yet the thing we need to worry the most about – the thing that would signify that the country that we've cherished since 1776 is really, truly lost – is if we elect a President who doesn’t pay lip service to the free market.

Give me a break. The struggle between capitalism and socialism is the wrong lens through which to view the events of our time. “Socialism” is just a word that Bernie Sanders picked up to get the mob excited about faster-than-usual change. And if “capitalism” is what you call the status quo in this country, then I would never in a thousand years identify myself as a capitalist.

I think that this whole fixation on the socialist/capitalist divide is a manifestation of a habit of lazy thought that prevails among today’s intelligentsia, in which the thinker mentally sorts everything and puts it into either the good bin or the bad bin, and then says good things about the stuff in the good bin, and bad things about the stuff in the bad bin, and doesn’t worry himself about whether what he is saying makes sense.

One example of this is when conservatives claim that Sanders’ impending defeat in the primaries is a victory for the cause of liberty, because capitalism is good and socialism is bad.

Another example occurred a few days ago when The Federalist ran an article entitled “Yes, A Border Wall Will Help Contain The Coronavirus.”

When that article was published, there were 122 cases of the Coronavirus in the United States, and five in Mexico. The journalist who wrote that article isn’t saying what he said because it has any connection with reality. He’s saying it because, about four years ago, the conservative movement decided that the wall is a good thing, and now it’s his job to say good things about the wall.

 The fact that people are trying to stuff the Coronavirus into so many dumb political molds is another good sign of just how far gone America’s intellectual tradition is these days. About a century ago, the Spanish Flu, which was much worse than the Coronavirus, killed well over a million Americans, most of them young and healthy. But people back then had the decency to not drag Woodrow Wilson through the mud over something that was quite a ways out of the President’s control.

Now, Democrats are champing at the bit for opportunities to blame the Trump Administration every time things take a turn for the worse. Meanwhile the right is choc full of people who insist that the virus started out as a bioweapon (in reality, it probably started out with somebody eating a bat) or that it only spread out from that Wuhan varmint market because China, being a communist country, doesn’t care about its citizens’ health (in reality, China is doing a much better job of containing the virus than either Europe or the United States).

You can expect the media to tell us to panic when a half-dozen or so members of Congress die of the Coronavirus, and expect us to overlook the fact that they’ll have only died of it because they’re so old, and Senators and Representatives die of old age all the time without throwing the government into chaos.

Meanwhile, since all the men still vying for the Presidency – Trump, Biden, and Sanders – are in their 70s, and they spend enough time in crowds that they’re bound to get the virus sooner or later, there’s about a 22 percent chance that at least one of them will die of it this summer. (The case fatality rate for that age group is 8 percent.)

That means we might be looking at a President Pence running for re-election in November, or the Democratic superdelegates scrambling for a nominee at the last moment when they realize the one they’ve got is no longer breathing. But we probably won’t.

And that’s the way that predicting the future works. The most mundane outcome – the one that doesn’t upset any trends – is the one that’s most likely to happen, but it isn’t the only one that could happen. So if Joe Biden maintains his lead long enough to win the nomination, nobody will ever again say that you have to come in first or second in New Hampshire in order to win. And if, heaven forbid, he defeats Trump in November, then he’ll break the record for America’s oldest president on the very day he takes the oath of office.

 

The Electability Trap

A large portion of the American punditry still insists, in the teeth of the evidence, that a party that chooses a boring enough candidate in the primaries will be at an advantage in November. There's only one problem: candidates who run on the argument that they’re electable have a history of losing elections.

At the moment I am writing this, it’s morning on Super Tuesday. Pete Buttigieg and Amy Klobuchar just dropped out of the race, leaving Joe Biden, who just won big in South Carolina, solidly in command of the establishment side of the field. (Unless you count Michael Bloomberg as establishment, which most people don’t).

Now, it’s a race between Sanders and Biden, who are both polling well over the 15 percent threshold and will win delegates in every state tonight, and Warren and Bloomberg, who probably won’t.

Outside of the delusional dreams of Michael Bloomberg, or the 10 to 15% chance that either Sanders or Biden dies of the Coronavirus (they are both septuagenarians, after all) the possibility of a brokered convention is dead in the water.

A lot of Democratic pundits, meanwhile, are celebrating Buttigieg and Klobuchar’s decision to scram and make way for Biden. Just look at some of their tweets:

Laura Rosenberger: Wow – Democrats actually learned the lesson from Republicans in 2016.

The Washington Post: Moderate Democrats are doing what Republicans refused to do in 2016 – getting out of the way.

Brad Bauman: Presidential candidates dropping out over the past few days shows that Democrats fully understand the mistakes Republicans made in 2016, and we truly are the party of adults.

And it goes on and on.

What those pundits never seem to get around to explaining is why it’s so crucial for Democrats to avoid making the ‘mistakes’ the Republicans made in 2016. It’s as if these people had followed news coverage of the last election right up until the night of 7 Nov, hearing nearly every media outlet in the country talk about how the Republican Party had committed suicide by nominating Donald Trump, and then never bothered to watch the next day’s news and find out who actually won.

Instead, they are acting as if the 2016 election never happened, and insisting that it’s still a good idea to choose a nominee on the basis of electability.

Electability, to put it bluntly, is the quality that a politician claims to have when he lacks charisma, ideological purity, meaningful policy proposals, a unique vision for the country’s future, or any other asset that might win over voters.

The crassest example of the appeal to electability is the campaign of Michael Bloomberg. Bloomberg’s thesis is that his history of corruption, flip-flopping, enacting policies that most Democrats consider racist, and actually being a Republican at the beginning of his mayorship doesn’t really matter, because Donald Trump is really awful,  so beating Trump is the one thing that does matter.

And why is Bloomberg in the best position to beat Trump? Because of his money. He can buy a lot of ads. Bloomberg isn’t at all popular with the Democratic base, but that doesn’t matter to him, because he expects them to once again swallow the tired old nonsense that to win over swing voters, you have pick somebody that your own side finds dull and uninspiring.

Except that this isn’t how it works in real life. Back in 2016, the Republicans picked a man who rallied the base and got his followers more excited to vote for him than they had been to vote for anyone else in their lives. Then, after winning the primary, he kept right on rallying his base until he won with a record turnout in November, having also persuaded millions of people who had never voted before that this time, they had a reason to make their voice heard.

Turnout is a big deal in elections. Just think about it: since the modern primary system was set up in the 1970s, there have been four years – 1988, 2000, 2008, and 2016 – in which neither party had an incumbent in the running. All four times, the party that turned out the most voters in the New Hampshire primary went on to win the White House in November.

You do not turn out huge numbers of voters by running a candidate who is corrupt, uninspiring, or lacking in meaningful policy proposals.

When I defined electability a few paragraphs earlier, I said it’s what candidates claim to have when nothing else about them appeals to the voters. I didn’t use the dictionary definition of the word – ‘able to be elected’ – because, when the chips are down, candidates who ran on electability generally don’t do that.

Almost nobody in the mainstream press thought that Donald Trump was electable. He got elected anyway. In 2008 and 2012, when the Republicans had to choose between a variety of ideologically interesting candidates and an uninspiring flip-flopper who was widely considered the most electable, they went with the electable moderate – McCain and Romney – and lost both times.

Yet, whenever Republicans seem to be on the verge of choosing someone too conservative for the media’s tastes, the pundits trot out the example of 1964 and insist that, if we don’t listen to them and prioritize electability over ideology, we’ll get another Barry Goldwater. Why do they expect us to overlook our recent experiences with McCain and Romney and instead only think about an election that took place more than half a century ago, and in which Lyndon Johnson had it clinched anyway with the huge sympathy vote from the assassination the previous year? They do that because if we looked at literally any other election between then and now, we would have to throw the media’s thesis out the window.

Right now, the Democrats have a choice to make. They can learn the lessons of 2016 and go with the candidate whom voters like. Or they can go with the candidate that voters don’t like, but whom the elites say is electable.

As I’ve explained before, the odds are against them either way. But if the Democrats pick Bernie Sanders, they will have a small but real chance of winning this thing. If they choose the electable Joe Biden – or the richer, flip-floppier, and even more electable Michael Bloomberg – then they are doomed to lose the election.