By James Kwak

I’ve been asked if you can sign up for email notifications when I write stories on Medium. Apparently you can, but the option is a bit buried. (One of the nice things about Medium is the clean interface. One downside of that clean interface is that sometimes you have to go looking for things.)

If you’re on my main page (jamesykwak.medium.com), you have to click on About at the top.

Then you get to this page, and at the bottom there’s a link to an email subscription form.

I hope that helps.

By James Kwak

I’ve decided not to post on The Baseline Scenario anymore. I’ve thought about this on and off during the several years that the site has been mostly dormant, but I never pulled the trigger, mainly because this blog still has thousands of email subscribers and an unknown number of followers on Facebook. But I obviously haven’t been into blogging for a long time now, and it feels weird to continue using a platform whose peak was in 2010 and 2011 (when we were regularly listed, with reason, as one of the most important finance and economics blogs on the Internet). As you’ve probably noticed, Facebook, Twitter, and the consolidation of media platforms (the Times, the Atlantic, Slate, Vox, etc.) has killed off most independent blogging. In addition, while Simon and I rarely disagree on anything, we tend to care and write about different things, as evidenced by our latest books—his on investing in science and technology to create better jobs, mine on partisan politics and expanding the welfare state. Both of us also write about issues that have strayed far from the original focus that drew in our core readers—primarily, the financial crisis and financial regulation. For example, the book I’m working on now is about injustice in the criminal legal system.

I owe this blog a lot. Without the blog, there would have been no “Quiet Coup” and hence no 13 Bankers, which got me fifteen minutes of fame, an academic job, and a new career that has lasted a decade so far. There would not have been the day that Larry Summers sent an email to the National Economic Council staff saying that The Baseline Scenario was required reading. I would not have met some good friends, some of whom have gone on to be far more influential than I ever was.

The blog itself will stay up indefinitely, taking up space on the Internet. Simon may choose to post here in the future, so don’t cancel your email subscription if you have one.

I will continue to write, occasionally at least. The primary place I will post things is Medium; you can find me at https://jamesykwak.medium.com/. For a while I’ve been posting articles in both locations, there and here. I just posted an article about this year’s presidential election that you can read on Medium. I’d be flattered if you decided to follow me there. I also have a Twitter account, of course; I spend little time on Twitter (because it’s awful), but links to things that I write get posted there. I have no plans to use Facebook (because it’s also awful).

Good bye, and thank you for reading.

By James Kwak

One of Congress’s top priorities this week and next is to pass some kind of funding bill that will keep the federal government operating past December 11. There are basically two ways this could happen. Option A is that Congress could pass a continuing resolution that maintains funding at current levels until, say, the end of January—that is, when we’ll have a new Congress and a new administration. Option B is to pass an omnibus fiscal year 2021 spending bill that determines discretionary spending levels through September of next year when the federal government’s fiscal year ends.

The Democratic leadership apparently is pushing for Option B because—well, probably because they think it’s the responsible thing to do and will make them look good with that tiny but all-important segment of voters who know the difference between a continuing resolution and a proper appropriations bill. But, in doing so, they could be throwing away one of the few levers that Democrats will have to actually accomplish anything during the next congressional term.

The point is that government funding measures are must-pass bills. No one likes a government shutdown, and historically Democrats have been able to pin most of the blame for them on Republicans, dating back to 1995, when Bill Clinton successfully portrayed Newt Gingrich as a zealot who was out to slash Medicare (which he was). If Jon Ossoff and Raphael Warnock come through in Georgia on January 5, Democrats will have majorities in both houses of Congress for the first time since 2010—but such razor-thin minorities that Joe Manchin is already rubbing his hands with glee at the prospect of becoming the most important person on Capitol Hill.

In this context, an omnibus budget reconciliation bill could represent one of the Biden administration’s few real chances to pass anything through Congress. Bills passed through reconciliation are not subject to the Senate filibuster (which isn’t going away, regardless of what you think about it), which means they only need a bare majority. The need to avert a government shutdown creates the pressure to bring people (the so-called moderates) to the table to come to a deal. Now, Joe Manchin isn’t suddenly going to become a sponsor of the Green New Deal because the Democrats have a majority in the Senate—he’s going to extract everything he can in exchange for his vote. But there is still a lot that Democrats could accomplish in an omnibus spending bill: money for the DOJ Civil Rights Division, money for the EPA, money for election protection, money for low-income housing, and so on. This is an opportunity to dictate discretionary spending priorities a full eight months earlier than we would otherwise be able to do. And would you rather negotiate with Manchin or with Mitch McConnell?

And yet the Democratic leadership in Congress seems inclined to give up the potential chance to write their own appropriations bill in January in exchange for a bill that they have to negotiate with McConnell and . . . Donald J. Trump. (The vague new COVID-19 stimulus bill that people are talking about is currently being positioned as a separate piece of legislation—which makes sense because it’s toxic to most Republicans.) It’s almost as if they don’t want the opportunity to govern. Sure, Ossoff and Warnock could lose in January, but we would still be in a stronger position than we are now, with Biden in the White House.

During the next two years, we are going to have precious few chances to pass any kind of meaningful legislation. Why are we throwing one of them away?

By James Kwak

Today, the Washington Post’s Outlook section published my article on the future of the American economy in the wake of the pandemic. They invited me to write it because of my earlier blog post on “Winners and Losers.” (Hey, despite all appearances, maybe blogs are still worth writing.)

The article is pretty gloomy. The short summary is that the COVID-19 pandemic will accelerate and reinforce the two primary economic trends of our time: consolidation and inequality. At this moment, I believe that more strongly than when I originally drafted the article two months ago. It seems to me that, as a society, we are caught between two unacceptable outcomes: either we reopen elementary schools (at least) so that parents can go to work, adding fuel to the epidemiological fire that is already burning throughout much of the country; or we keep schools closed and millions of predominantly low-income workers lose their jobs because they have to take care of their children. Choosing between your job and your children is not something that should happen in a supposedly rich society, yet there we are.

A few friends have asked me what I think the solution is. Here are the last three paragraphs of my first draft, which ended up on the cutting room floor:

“Things don’t have to turn out this way. Perhaps the experience of this pandemic—a disjointed health care system, poor people forced by poverty to fight on the front lines of a war, an unemployment rate that could reach 25 percent—could inspire a new New Deal, or a rethinking of the kind of society we want to live in.

“The prospects for a resurgence of social solidarity seem dim, however. Remember, the political legacy of the financial crisis—an example of the dangers of greed and deregulation if there ever was one—was the Tea Party and, arguably, President Donald Trump. It is more likely that the deficits that the federal government has incurred to mitigate the economic damage so far will be used to justify austerity in the not-too-distant future. Robert Rubin—President Clinton’s treasury secretary, and to all appearances still the holder of a veto over Democratic economic policy—already could not resist using pandemic spending to call for action to reduce the national debt in the long term. Republicans will be far less nuanced. Deficits will be the trump card played—by moderate Democrats if necessary—to block universal pre-K, free college, expanded Social Security benefits, or Medicare for All.

“This is the future we are headed for. But there are no immutable laws of economics. We could choose to break up large companies, enable workers to unionize, mandate paid sick leave, and tax rich people to provide capital to young entrepreneurs. If we fail to make a choice, however, COVID-19 will cast a long shadow over our economic future.”

(You see, even when proposing solutions, I can still be gloomy.)

I think the policy solutions are obvious. We need to commit to an all-out-effort to contain the coronavirus—which can be done, as most developed countries, as well as New England, have proven. In the meantime, we have to provide unlimited emergency support, in the form of cash and health care, to people who cannot work, as well as bonuses to the essential workers who keep the rest of us alive. We pay for it by issuing bonds at negative real interest rates—10-year Treasuries are yielding 0.65%, which is about half the market-implied inflation rate—and we pay back those bonds later by raising taxes on rich people and corporations. We need stronger antitrust policies to break up large corporations. We need capital grants—paid for by inheritance taxes—such as those proposed by Thomas Piketty in his new book, to enable people to start small businesses to replace the ones that will be wiped out this year.

That is not a complete solution to all the problems we faced on January 1, 2020. But it will help hold the line against the changes being wrought by a virus.

The problem, of course, is the politics—not just President Trump and the Republicans, but a Democratic Party controlled by its conservative wing, defined primarily by its insistence on fiscal responsibility, and terrified of doing anything that anyone might call socialist. Perhaps this crisis will push Joe Biden to embrace the progressive agenda of Bernie Sanders and Elizabeth Warren. Perhaps not. That, of course, is the subject of another book.

By James Kwak

I think it’s highly likely that the dust will clear eventually and that our economy will come back to life at some point in the next two or three years. I know there are certain disaster scenarios that can’t be ruled out, but I think they are unlikely. I’m not going to guess when things will return to a semblance of normal. Really, no one knows.

The question for now is: what will that economy look like?

A few things, I think, are clear. The economy will not grow back up to its trend line prior to the pandemic. This, for example, from the Center on Budget and Policy Priorities, is what happened after the financial crisis and Great Recession:

Not only did actual GDP fall, but the trend line of potential GDP fell as well, costing the economy trillions of dollars of output. Behind that loss of potential GDP is an enormous human cost. Recessions cause permanent damage to people who lose their jobs and to recent graduates who can’t find jobs.

There will also be a certain amount of psychological scarring that will affect the economy for at least a generation. People buying safety stocks of dried beans and toilet paper may give the consumer goods sector a one-time boost. But those with enough income will save more, depressing demand, and people will also be much more reluctant to start small businesses.

Amazon will be a big winner, of course. A large proportion of the population, particularly among the affluent, already reflexively shopped for everything at Amazon. (I used to, but now I try to find things elsewhere first, basically for political reasons.) The pandemic is pushing more people to try to fulfill all of their consumer needs online, and they aren’t going to stop when the coast clears.

More generally, big chains will expand their domination over the economy. Tens of thousands of small businesses will vanish, never to return, wiped out by weeks or months of zero revenues. Large corporations will have the capital to swoop in and steal their customer base. Family-owned restaurants will be replaced by national chains. Sporting goods stores will be replaced by Dicks. Electronics shops, if there are any left, will be replaced by Best Buy. Bookstores … well, there aren’t many of those left, anyway.

The other winners will be private equity funds with the nerve to buy assets on the cheap. After the financial crisis, investment funds bought up single-family homes in foreclosure, becoming some of the nation’s largest landlords. This time, the bargains will be found in small businesses desperate for capital and commercial real estate hammered by defaulting tenants.

The business sector will become more concentrated. Inequality will increase. The fundamental trends that have reshaped the American economy over my lifetime will accelerate. The survival of capitalism depends on a large enough proportion of the population having a stake in its survival. For how much longer?

By James Kwak

By some measures, in the short term, COVID-19 will surely reduce inequality of wealth, and probably inequality of income as well. As a purely mechanical matter, the rich have a lot more money to lose when the stock market crashes and most sectors of the economy grind to a halt.

At the same time, however, this pandemic is throwing into stark relief how unequal the lives of Americans are today. Most of the upper-middle class and rich seem to fall into one of two categories. Those without children in the house trade suggestions on how to fill their time: virtual happy hours, virtual yoga, free streaming opera, binge TV-watching, etc. Those with children in the house trade suggestions on how to keep said children occupied so that we can get anything done or have any time to ourselves: educational apps and websites, home science experiments, live streaming from zoos and aquariums, etc.

There are exceptions, of course. Doctors generally make comfortable livings, and many of them are currently facing difficult working conditions and high risk of infection to save as many lives as possible. But the most difficult thing many rich people have to endure is figuring out how to get a Peapod or Instacart delivery slot, or finding a good recipe for canned tuna.

On the other side of the great income divide, things are very different. Tens of millions of people suddenly lost their jobs and barely have enough cash to buy groceries, let alone stock up on gourmet canned tuna. Remember, 17 percent of adults already couldn’t pay at least one of their bills even before COVID-19 hit. Economic insecurity is so widespread that a large portion of the population is just one shock away from being unable to make ends meet. Well, that shock just hit.

Then there are the people who still have jobs, whom all of us are relying on: people who work in warehouses, distribution centers, delivery services, grocery stores, pharmacies, and hospitals. Many of them go to work, keep our society functioning, and face an elevated risk of infection because they can’t afford to lose their jobs. Amazon warehouses, of course, are so efficient that there isn’t time to wash your hands. And Amazon workers don’t get paid sick leave—unless they test positive for COVID-19 (then they get two weeks), which is virtually impossible given the lack of testing in this country. But Jeff Bezos doesn’t even need to call out the National Guard to force his employees to go to work. As one warehouse employee said, “A lot of people are going to be there for longer. People will take as much OT as they can get, because we’re all poor.”

The vague parallels between COVID-19 and September 11 have been drawn a million times already. Then the heroes were first responders who risked their lives to save people. They were also underpaid, but at least many of them knowingly took jobs that involved risk. The people on the front lines today are doctors and nurses, of course, but also millions of low-wage workers (including many in hospitals) who have been drafted into this war and are kept there by poverty and economic insecurity.

Is this the society we want?

By James Kwak

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

—Adam Smith, The Wealth of Nations

This is the most famous line from the most famous justification of market capitalism. Smith’s point is that it is individual self-interest that drives the economy. In the next paragraph, he goes on to describe how gains from trade explain the division of labor in a modern economy:

“The certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.”

As I’ve said before, “whenever the butcher, the brewer, the baker, or the invisible hand is invoked, the reader should hear alarm bells going off.” The COVID-19 pandemic provides a particularly stark demonstration of the problems with Smith’s comforting fable and how it is used in contemporary politics.

Market capitalism depends on the happy assumption that everyone has some marketable skills: something that person can do that can be exchanged for money, with which she can then exchange for everything else that she needs to survive. If you believe that premise, then you can criticize poor or unemployed people as lazy good-for-nothings and destroy the social safety net with a clean conscience. This was the philosophical justification behind welfare reform, for example, which placed created work requirements for and imposed lifetime benefit caps on recipients, assuming that all they needed was sufficient incentive to find a job and get to work. Indeed, it is the philosophical justification behind the modern conservative economic platform.

But think about what is happening right now. At this moment, to a reasonable approximation, the only people with any marketable skills are those in health care, manufacturing of drugs and medical supplies, and food production and distribution, and certain critical infrastructure functions (electricity, gasoline, communications, etc.). That’s why tens of millions of people could suddenly be out of work, through no fault of their own.

So what do we do? We help those people. The Federal Housing Finance Agency suspends foreclosures and evictions for homeowners with federally-backed mortgages. States expand and accelerate unemployment benefits. Even the Trump administration proposes sending cash to every person in the country to help them pay the bills. (They also want to create a giant slush fund to help business owners, which I don’t agree with, but that’s not the point here.) We do what we can to make sure that people can stay in their homes, get enough food, and take care of their families.

At any moment in the past decade, there were millions of Americans who couldn’t find work, or couldn’t get enough hours to make ends meet—through no fault of their own. They came from broken households, or poor neighborhoods without good schools, or countries torn apart by war. Or they were disabled fighting in Iraq or Afghanistan, or they suffer chronic medical conditions that limit their ability to work. Or they held full-time jobs that suddenly vanished one day because people in other countries could do those jobs more cheaply. The prevailing attitude to these people—at least judging by the economic policies put in place by the politicians who were popularly elected—was: screw them.

But what happened to them is no different from what happened to most of us in the past week. The only real difference, as far as I can see, is that they were a small enough minority that most people could pretend they didn’t exist, or that their problems were their own fault. Now there are so many of us in the same bucket that we can’t—or don’t want to—say the same thing about ourselves. Sure, I could have become a doctor, which would give me a marketable skill right now, but I don’t think it’s a moral failing that I didn’t.

So the lesson I think we should all take away from this crisis is this: If someone cannot provide for herself and her family in a market capitalist economy, that is not a moral failing on her part. There are always people who struggle to get by, through no fault of their own. Indeed, I strongly suspect that there will be more and more of them in the future, as robots and artificial intelligence get better and better at doing things that were once the sole province of humans. As a society, our duty is to care for the welfare of all of our members—and, yes, that requires action by the government, just as tens of millions of people will soon be relying on government checks.

The problems of market capitalism are always there to see, though many people choose not to look. Perhaps this crisis will open our eyes.

By James Kwak

It seems that social distancing is the primary strategy for slowing the propagation rate of COVID-19. That and widespread testing are the key tools for containing an outbreak, for reasons discussed repeatedly in the media.

But does it work? Or, more to the point, how well do different degrees of social distancing work? How strict does it need to be, and how tightly does it need to be enforced? It seems to me that this is an important and at least theoretically answerable question.

Thanks to ubiquitous commercial and government surveillance, there are staggeringly comprehensive databases of exactly where people are at all times. Google has one, for example. Picture for yourself an enormous aerial picture of some metropolitan area with a dot for every person’s location; then picture those dots moving around as time passes. That’s more or less what is available. (Some people are blocking their location data, and some people don’t have personal surveillance devices smart phones. But there are certainly enough people transmitting their location to do the analysis discussed below.)

Assume for a moment a can opener that we have a good measure of the number of cases of COVID-19 in any geographic area at any time. (We don’t have to know every case; it would be enough if we were testing a random sample of people every day.) Then the analysis is conceptually simple. We need some measure of social distance. Ideally we’d want to count the number of people that each person comes within one meter of for each day, then average that number across the entire population. GPS is only (theoretically) accurate down to about 5 meters, but it can give us a rough idea of how many people could be close to each other at once.  That’s the social distance variable, which we can measure each day. Then we basically need to regress the percentage daily change in the number of COVID-19 cases against the social distance variable, with some sort of lag to account for the fact that cases don’t appear for several days. Given the number of places where there have been outbreaks, we should be able to get some idea of how low the social distance variable has to be in order to flatten out the rate of new infections.

OK, that’s the easy part. Now back to that can opener. The problem is that official case counts depend on three major factors: (a) the underlying rate of infection in the population (what we care about); (b) the number of tests being done; and (c) the selection criteria for those tests. You get very different results if you only test sick people in the hospital as opposed to testing a random sample, even if you do the same number of tests. So the harder question is figuring out how the official case count relates to the underlying rate of infection.

Still, though, this is conceptually just a multivariate regression. On the right (independent variable) side, in addition to the social distance variable, you need a variable for the number of tests, and you need a set of dummy variables for the various testing strategies that different places have employed (i.e., one for the American test-only-the-sick-and-the-rich-and-famous strategy, one for the Korean test-everyone-within-range-of-the-outbreak strategy, and so on). You can probably think of other things you should control for, like the weather (readily available). Again, given the number of outbreaks that have occurred all over the world, there is a decent chance that there is enough variation to actually get results.

There are a couple of problems that the statistically-minded among you have already noticed. One is that once people are trying to implement social distancing, not only will they avoid proximity with other people (which is visible by GPS), but they will also behave differently when they are in proximity with others (not visible by GPS). There are also differences in cultural behavior—handshakes vs. la bise vs. a small bow—that affect propagation. You may be able to overcome that using variation within a single culture (e.g., the United States, where there is plenty of variation in how people in different parts of the country are behaving).

I haven’t the statistical or data management skills to do this myself. And maybe even if it’s done right the margins of error are too big to be useful. But if no one is doing it already, it seems worth trying.

By James Kwak

The airline industry is trying to hold up the federal government for $29 billion in grants and another $29 billion in loans. They threaten that if they don’t get the grants they will lay off employees, and that if they don’t get the loans they will use their remaining cash on dividends and stock buybacks.

First of all, the second threat is staggering in its audacity. At current course and speed, the airlines will go bankrupt. When you are in financial distress, the last thing you should do is take your scarce cash and hand it to your shareholders. That meets at least the spirit, and perhaps the letter, of a fraudulent conveyance in bankruptcy law. But it represents the pinnacle of the idea of shareholder capitalism: screw the workers, screw the creditors, just take the money and run.

More importantly: the federal government should not give the airline industry a single penny either in grant aid or in sweetheart loans. I understand the economic challenges here. Thousands of workers are at risk of losing their jobs and not being to pay for food or rent in the midst of the greatest crisis of our lifetimes. To the extent we want to help them, the top priority is to give money directly to them.

It is true that there is some value in preserving the airlines as viable entities rather than letting them go bankrupt. If there were other companies able to take over their assets and workforces and put them to productive use, then by all means they could just fail, but that is probably not the case right now.

If the government does choose to rescue the airlines themselves—and not just their workers—it should do so by buying equity in the companies, at prices that don’t already reflect the possibility of a bailout. (Most of the value that airline stocks have today is probably based on expectations that they can get a good deal out of the crony-capitalist Trump administration.) That way, when the economy someday recovers and people start flying again, the U.S. government—and hence its taxpayers—will benefit, not the people who currently happen to own stock in airlines. And the government should not dilute its ownership by finding creative ways to funnel cash to the industry on favorable terms, as it did with the megabanks in the financial crisis (most notably the third Citigroup bailout). Airline executives and their shareholders have no viable alternative; without a government bailout, their most likely future is bankruptcy and being bought by some private equity firm for a fraction of the face value of their debt (paid to creditors, not shareholders).

Either way, the principle is the same: not one penny of free money.

By James Kwak

Our business and household sectors are losing lots of money every day, and will continue to lose money for the foreseeable future. People no longer spend money at restaurants. Restaurant owners can no longer pay the rent or pay back their business loans. Restaurants fire their workers, who lose their paychecks and can no longer pay their rent, or their credit card bills, or their student debt. In an economic crisis like this, the overriding question is: who ultimately bears the losses?

Photo by skeeze from Pixabay

We’ve been through this before. In the 2008 financial crisis, we applied the usual rules of capitalism—unless you were a large bank. Businesses failed and their owners (including shareholders, for corporations) were wiped out. Renters were evicted. Homeowners lost their houses. Investment funds that had bought mortgage-backed securities and collateralized debt obligations lost their money. Workers lost their pensions. Small banks were shut down by the FDIC. Big banks, however, got unlimited cheap credit from the Federal Reserve to stay afloat, thanks the the people we all know.

Will things be different this time? Perhaps. The Trump administration seems more willing than the Obama administration to relax the rules of capitalism—which should not be too surprising with a president who flaunts any and all rules, is more than happy to dole out goodies to his friends, and is unable to add numbers together. I think the megabanks can rest assured that they are still too big to fail and can count on unlimited support from their friends at the Federal Reserve and Treasury—Title II of the Dodd-Frank Act notwithstanding.

The surprise so far as been the decision to suspend foreclosures and evictions of anyone with a federally-backed mortgage for at least sixty days. Fannie and Freddie also are suspending mortgage payments for up to a year. This, as far as I can recall, is more than the Obama administration ever did for ordinary people hit by the collapse of the housing bubble in 2008 and 2009. Again, it shouldn’t be that surprising that Donald Trump is willing to take losses onto the federal balance sheet—it’s not his money, after all. This time, though, it happens to be the right thing to do.

These rules, of course, don’t apply to the private sector. If you are a small business owner who owes rent to your landlord or interest to your bank, there’s no reason to think you’re going to be let off the hook. The same goes for tenants with private landlords. Which raises the question: When the economy is hit by what is essentially an “act of God,” why is it that the owners of capital are kept whole, and the renters of capital have to bear all the losses? It’s not efficient—the economy would be a whole lot better off if people didn’t have to leave their homes and businesses didn’t have to close—and it certainly isn’t fair. Yet that’s the way our capitalist system works.

There is only one entity in the country—and perhaps the world—that can absorb the losses being generated by this crisis: the federal government, with its unmatched ability to borrow money. This time around, the top priority of the government should be direct assistance to the people who need it most—both workers and business owners who need cash to buy food, stay in their homes, and take care of their families. It should finance that assistance by borrowing money—at record-low interest rates—and by taxing the rich people who can most afford to absorb losses. Landlords and lenders will be made whole because of the money their borrowers are getting from the government, but they or their shareholders, to the extent they are rich, will lose money in the form of taxes.

It’s not that complicated. But I doubt our society and political system are equipped to solve this problem.

This post was largely inspired by a friend who I think prefers to remain anonymous.

By James Kwak

PPE, as we now know, stands for Personal Protective Equipment, like face masks and gloves. Right now there isn’t enough of it, and that’s one of the constraints on being able to test people, which is one of the biggest problems we face.

Photo by ehpien (CC BY-NC-ND 2.0)

The only point I want me make here is this: This is how capitalism is supposed to work. If you’re a for-profit healthcare provider—or any kind of provider that is trying to provide the most value, however defined, with limited resources— you are not going to stock up on enough PPE to handle every possible scenario you might face. This is what management consultants and business school professors have been saying for decades. PPE, like inventory, is a form of working capital. If you can reduce the amount of working capital you need, you can translate that dollar-for-dollar into cash for your shareholders—or, if you’re a non-profit, into clinics for poor people, salaries for your executives, or that next gorgeous building you’re going to put up. Excess working capital is pure inefficiency.

Sure, there’s the risk that you might run out in an emergency. But capitalism works on expectations: If there’s a 1% chance of a $10 million loss, you’re willing to spend $100,000 to prevent it. If there’s a 0.001% chance (according to your latest models) of a $1 billion loss, you’re only willing to spend $10,000 to prevent it. COVID-19 was basically off the probability charts, at least as far as operational preparedness was concerned. This is exactly parallel to the factors that created the financial crisis. VAR models only attempted to estimate the potential risk in scenarios that were, say, 1% likely, and they were excessively optimistic because they were based on historical data from the Great Moderation. Hospital preparedness similarly was based on historical data with no pandemic.

In capitalism, you know you can only prepare for 99% of the scenarios. It’s just not value maximizing to worry about the others. If those others occur, you go bankrupt, dust yourself off, and start again.

But that’s why capitalism is a lousy way to run a healthcare sector.

What should we instead? Well, probably the federal government should have a big stockpile of medical equipment to be used in an emergency. You know, big government.

Brief note from the author: I haven’t written anything about COVID-19 because I have no particular expertise in medicine or public health. But there are some aspects of the crisis that are amenable to economic, statistical, or simply logical analysis. This blog, as a few people may remember, was born during the financial crisis as an attempt to help make sense of what was going on. (Hence the subtitle at the top of the page: “What happened to the global economy and what we can do about it.”) To the extent I think I have anything to say that I think might be useful, I’ll put it up here.

Be safe.

By James Kwak

Today is the day of the New Hampshire primary, and, perhaps more importantly, lots of people in California are getting their ballots around now. Before you cast your vote in the Democratic presidential primary, I wish you would read Take Back Our Party, either online (for free) or in print. But I know most of you won’t, so this is what I want to say.

As a preamble, if you are a moderate Democrat—if you think welfare reform and financial deregulation were good ideas; if you think, along with Barack Obama, that more oil production is a good thing; if you think that America’s health care problems can be solved by private health insurance companies—what I am going to say is not for you. Go ahead and vote for Joe Biden, or Pete Buttigieg, or Amy Klobuchar.

The key message of Take Back Our Party is that the national Democratic Party of the past thirty years has been a failure, both as policy and as politics. What victories there were happened despite the party establishment (gay marriage, for example) or were actually moderate Republican policies (Obamacare). Both Presidents Clinton and Obama turned their backs on redistribution and social solidarity, preferring the soaring rhetoric of growth and opportunity: maximizing overall economic growth while giving everyone the “opportunity” to participate in prosperity. But what we got was modest growth whose benefits were monopolized by the 1%, soaring inequality, and widespread economic insecurity. (For the numbers, see Chapter 2 of Take Back Our Party.) As a society, we have to recognize that growth is not the answer. What we should care about is the actual welfare of ordinary families: whether they can afford health care, whether they can afford a place to live, whether they can go to college, whether they can retire, and so on. Those are the things our economic platform should focus on—not the myth that a rising tide lifts all boats.

Now, the issue on everyone’s minds is electability. Sure, we may want Medicare for All—but what most people want more than anything else is to defeat President Trump. And many people think that the most electable candidate is the most right-wing candidate. This is based on the theory of the median voter. The idea is that you can line up all voters on an ideological spectrum, and they will vote for the candidate who is closest to them—which means that we want to nominate someone in the middle (or, more accurately, someone just to the left of Trump).

The median voter theory is nonsense. If it were true, Donald Trump would not be president today. Nor would the Republicans have a majority of the Senate, and a majority of governorships, and a majority of state legislatures. They have achieved this electoral success despite running far to the right of where most Americans stand on just about every issue—immigration, abortion, gay rights, taxes, you name it.

We have to give people a reason to vote for us. The problem is, for decades, Democrats have not given people a reason to vote for them. Once upon a time, we were the party of the people—of workers, the New Deal, and the social safety net. Then (for reasons discussed in Chapter 1) we became the party of finance, technology, innovation, and economic growth—the party of the 1%, claiming that we were also the party of the 99%. Our talking points became economic growth, fiscal responsibility, and technocratic expertise—things that the Republicans claimed, too. And eventually, people forgot why they should vote for us.

The central problem of our time is inequality. The central political problem is that too many people feel left behind by our economic and political system. Those are the conditions that lead people to vote for a charlatan like Donald Trump. We are not going to win them back by saying that we will return to the “good old days” of the Obama administration, or that we are going to bring America together, or that we have impeccable educational and professional credentials, or that we are not as ridiculous as Trump. We tried that in 2016, and we lost.

I think it was one of Bill Clinton’s advisors who said that every election is ultimately about change versus more of the same. Right now, many people are hurting—because of stagnant wages, falling life expectancy, increasing out-of-pocket health care costs, the opioid epidemic, student debt, rising rents, insufficient retirement savings, and so on. And yet the Democratic establishment continues promising more of the same: incrementalism wrapped in phony post-partisan rhetoric, along with a healthy dose of “Isn’t Trump stupid?” That’s why we do well with well-educated professionals living in thriving urban centers—with people who are already doing pretty well. But this is not a recipe for victory.

Donald Trump offers change—xenophobia, white supremacism, and misogyny—even if many of his actual policies are standard conservative fare. We need to offer change as well: universal health care, free college, and Social Security. Our vision is more compelling than his. But we have to have the courage to offer that vision to the American people. Otherwise we will remain, as we were in 2016, the party of an increasingly bankrupt status quo.

That is all.

By James Kwak

I’ve never wanted to write a book as much as I wanted to write Take Back Our Party. And I’ve never wanted people to read one of my books as much as this one—in particular, before the 2020 Democratic primary season ends. For that reason, I bypassed the usual publication route. (As my editor at Pantheon liked to say, the period for turning a manuscript into a book is, for unknown reasons, the same as the gestation period of a human. In his defense, he did get both 13 Bankers and White House Burning out in around 5–6 months.)

Instead, David Dayen, executive editor of The American Prospect, agreed to publish the book online, and it went live here in December. In addition, I wanted there to be a print edition for people (like me) who, well, prefer reading things on paper—and for mailing to people who should read it. Ryan Grim at Strong Arm Press gamely agreed to publish it, knowing that it was already available on the Internet. Jordan Jones did the interior design and Soohee Cho did the cover. The print edition has a small number of corrections, it has real footnotes with accurate page citations (something you can’t do with Internet-style hyperlinking), and it has a descriptive index so you can look up your favorite neoliberal from the past three decades.

You can order a print or ebook copy via the Strong Arm website (or, of course, from your least-favorite monopolist). They should start shipping on Tuesday, and I believe the ebook is available right now. The online version at the Prospect will still be available for the foreseeable future.

I’m pretty sure I’m going to lose money on this, taking the book design costs into account, but that was never the point. The point was for people to read it. So do that now.

By James Kwak

David Brancaccio of Marketplace has started a new radio project called Econ Extra Credit: reading a first-year economics textbook, one chapter per week, along with his listeners. Luckily, he chose one of the textbooks produced by the CORE project, a group of economists who set out to rewrite the economics curriculum in the wake of the financial crisis and Great Recession.

David invited me to talk with him about “Economics 101” and the one-sided impression of the world that people often take away from the class—especially those for whom it is their only economics class. This, of course, was the subject of my 2017 book Economism: Bad Economics and the Rise of Inequality.

You can hear the whole interview here. Enjoy!

By James Kwak

The scene: Two well-dressed, fully employed people sitting at a table in the chic café at their workplace.

Martha: Do you like your health plan?

George: I love it.

Martha: How much do you pay for your plan?

George: About $550 per month.*

Martha: Do you have a deductible?

George: I have a $1,000 deductible for my whole family.

Martha: What about co-payments?

George: I have to pay 20% of the cost for hospital stays and outpatient surgery.

Martha: What if you just want to see the doctor?

George: I pay $25 to see my primary care physician, and $40 to see a specialist.

Martha: Can you see anyone you want?

George: I pay more if I see people out of network, but the insurer still pays something.

Martha: I’m thinking about switching to the new plan they’re offering. Have you heard about it?

George: No. What is it?

Martha: Well, it covers everything, including vision and dental. And you can see anyone you want.

George: How much does it cost?

Martha: Nothing. There are no premiums and no deductibles or co-payments. Well, you may have co-payments for prescription drugs, but there’s an annual maximum of $200.

George thinks.

George: I think I’ll keep my health plan. I just like it.

End scene.

All those people saying that that Medicare for All will take away people’s health insurance against their will? And that some people would rather be able to keep their current plans, so we should instead just have a public option? They are George.

Health insurance is an intermediate financial product. It’s a contract you buy that pays you money in certain states of the world. It’s not something that people want in and of itself. They don’t want choice in insurance plans for the sake of having choice. They want health care, and someone else to pay for it.

That’s Medicare for All, at least in the Bernie Sanders bill (also endorsed by Elizabeth Warren, although they differ in the political tactics of how to pass it). It gives you all health care that is “medically necessary or appropriate for the maintenance of health or for the diagnosis, treatment, or rehabilitation of a health condition”—for free.

You can argue that this will be expensive—although Warren has produced a detailed plan for how to pay for it. You can argue that Warren’s financing scheme will be bad for the economy—although it’s hard to ignore the fact that the transfer of wealth from the very rich to everyone else would be an enormous economic stimulus.

But you can’t in good faith argue that Medicare for All is bad because it forces people to give up their existing health insurance. Because at that point you are arguing that people are like George: Given the ability to see any provider for free, they would choose to continue paying thousands of dollars in premiums and cost sharing to get access to a limited network of doctors and hospitals. And even given the low opinion that much of the political class has of ordinary voters, that’s a bit much.

* All figures for George’s current plan are from the Kaiser Family Foundation’s 2019 Employer Health Benefits Survey, and are based on the average costs for a PPO plan (the most common type of plan at the large employers whose employees are most likely to be satisfied with their health insurance). Employee contribution: p. 100. Deductible: p. 112. Co-insurance for hospitals and surgery: p. 128. Co-payments for doctors: p. 131. George is also indirectly paying the employer contribution (more than $14,000 per year) in the form of lower wages, but I assume that, under either Sanders or Warren, employers would end up paying a similar amount, at least in aggregate.

By James Kwak

Ever since I finished Economism (and the 2016 elections, which happened about the same time), there has only been one thing I have wanted to write. I tried in “The Importance of Fairness: A New Economic Vision for the Democratic Party,” and in “A New Economic Vision, in 27 Words,” and again in “Hey Democrats, the Problem Isn’t Jobs and Growth.”

I wanted to write this thing because it has become clear to me not only that our economic world is screwed up in all sorts of obvious ways, but also that the only viable path to fixing it runs through the Democratic Party. The Republican Party is what it is; even if it weren’t currently in the grip of a madman, it would at best be the party of Mitt Romney, Paul Ryan, Lindsay Graham, Marco Rubio, Ted Cruz, … you get the point. The 1% will always have their party. The problem is that the 99% don’t have theirs. The result has been the rightward drift of our entire political system, in which Republicans use their turns in power to advance their extremist agenda, and we Democrats use our at-bats to hold the line and nominate reasonable people to the Supreme Court.

So the important question is how the Democratic Party can be rallied behind a new economic vision that can both stem the rising tide of inequality and wrest control of the political landscape back from the conservatives. And that, of course, means we have to replace the economic vision of Clinton, Obama, Clinton, and most of the primary candidates today: the fantasy that private sector growth, aided by clever government nudges to make markets work better, can solve all problems for all people.

The working title of Take Back Our Party—the one I carried around in my head but was too embarrassed to tell people—was Manifesto of Our Democratic Party. (David Dayen eventually agreed with me that it was too presumptuous.) But they idea was very simple: They—the party establishment—have their Democratic Party; but we have a vision of a different Democratic Party. And ours is better. Hence the titles of Chapters 1 and 4.

Their party has failed, both as policy (25 years of rising inequality) and as politics (see the enormous shift in control of state governments over the past decade and the election of Donald Trump). If you’re reading this, you probably agree with me. (If you don’t, read Chapters 2 and 3.) But the question is what to replace them with.

In my 27-word economic vision from back in 2017, this is what I said:

All people need a few basic things:

• An education
• A job
• A place to live
• Health care
• A decent retirement

Let’s make sure everyone has these things.

That’s basically what Chapter 4 says, in many more words, except that I dropped jobs from the list (for reasons explained in depth there).

The epigraph of that chapter was originally another Don Draper gem: “If you don’t like what is being said, change the conversation.” For too long, the Democratic economic message has been that we like markets and business just as much as the Republicans, only we are better at managing markets and helping businesses grow. And throughout that time, this may have been true, but ordinary people know they are getting left further and further behind as the rich jet off into another dimension of wealth and success. Another clever infrastructure investment plan or a new tax credit for apprenticeships, supposed to generate jobs and growth, is not going to change the way people see the world.

We need to change the conversation. We need a new message. We can’t just say we feel people’s pain and ask them to trust us to increase economic growth. Our message should be that a good society takes care of all its members; that that means making sure everyone has the basic necessities of life, including health care, education, housing, and retirement income; and that government is the way a society fulfills these obligations to its members. This is the message that Franklin Roosevelt proclaimed in 1944.

I can’t promise you that this is the right platform to lead us to victory. But I can promise you that the one we have now isn’t working. It isn’t slowing the rise of inequality, and it isn’t giving voters a reason to choose us. It’s time for a change.

Here’s the final chapter of Take Back Our Party. Thanks for reading.

By James Kwak

Chapter 2 of Take Back Our Party made the case that the market-centric policies of the Democratic establishment have failed to do anything about—and in many cases have exacerbated—the rise of inequality. Chapter 3 continues the indictment, arguing that the “growth and opportunity” doctrine of Clinton and Obama has also failed as politics.

The New Democrats chose to identify themselves as the party of jobs and growth because they did not want to be seen as the party of redistribution and welfare. But in copying the Republican message of market-driven growth, they also lost the ability to differentiate themselves from those same Republicans. While conservatives promised that slashing regulations and cutting taxes would unleash the ingenuity of the private sector, the Democratic message was roundabout and equivocal: yes, markets are the source of prosperity, but sometimes they suffer from market failures, so cleverly designed government policies are required to make them work properly, etc. We may be right about the economics, but as politics it fails to establish a compelling choice.

But the bigger problem is that by not doing anything about inequality for so many years, the Democratic leadership frittered away the brand equity that the party had built up since the days of Franklin Roosevelt and the New Deal. Once upon a time, lower-income voters assumed that, at least on economic issues, the Democratic Party stood for them. As Bill Clinton and then Barack Obama did little that was recognizably, specifically for workers, they stopped believing that the party cared about them. Which brought us to 2016, when Donald Trump vastly outperformed Mitt Romney among low-income voters.

For more, the entire chapter is up at The American Prospect, as usual.

By James Kwak

The Democratic Party is at a crossroads. On a host of issues, it is clear what we stand for and how we differ from the Republicans: minority rights, abortion, immigration, gun control, climate change, the importance of facts, and, of course, whether or not the president is above the law. On economic issues, however, the picture is not so clear. Elizabeth Warren’s speech at St. Anselm’s College on Thursday is an attempt to fix that problem—and also a shot across the bow of the Democratic elite. 

With each passing year, the widening gulf between the very rich and everyone else becomes more and more apparent. Even after ten years of economic expansion and with unemployment at historic lows, working-age adults in the bottom half of the income distribution make less than they did a full two generations ago, while the very rich now count their wealth with twelve digits instead of eleven. Yet the Democratic establishment insists that we must stay the course, and shared prosperity will be just around the corner. 

Elizabeth Warren campaigning for the Democratic establishment back in 2016 when everyone got along. Photo: Tim Pierce (CC BY-SA 4.0)

Ever since the rise of the New Democrats in the 1980s and the election of Bill Clinton in 1992, the party’s power brokers have preached the gospel of “growth and opportunity.” (This is the story I tell in the first chapter of my new book, Take Back Our Party, available for free at The American Prospect.)  All good things come from the private sector; government’s role is to help markets function efficiently, create the conditions for private sector growth, and help people participate in those markets. Hence welfare reform, financial deregulation, and Obamacare, among other things. Hence also the intense, coordinated assaults on Bernie Sanders in 2016 and both Sanders and Warren today.

Senator Warren’s speech today exposed the failings of the Democratic economic platform of the past thirty years. Yes, markets produce growth. But she highlighted the question that the Clinton-Obama policy elite never wanted to answer: Who benefits? For the establishment, even to pose the question is to commit the mortal sin of “class warfare.” They take as axiomatic—an iron law of economics—that a rising tide lifts all boats, that growth is the best way to help the 99% as well as the 1%. 

But the unwelcome fact is that, in recent decades, increases in productivity and output have primarily enriched corporate executives, fund managers, and the wealthy people who own most of the assets in our economy. Literally none of that growth is trickling down to half of our population. (See Chapter 2 of Take Back Our Party.) That’s why Warren proposes to change the way markets distribute wealth in the first place—by strengthening the bargaining position of workers and attacking economic concentration.

Senator Warren also shines the spotlight on the failings of our economy. Despite ten years of growth and low unemployment, families from the poor through the middle class struggle with constant economic insecurity—with record levels of student debt, rising urban rents, insufficient retirement savings, and the increasing cost of simply using a health insurance plan. 

The signature policies of the Clinton and Obama administrations were sorely ineffective in the face of rising inequality: Welfare reform contributed to a tripling of the number of people living in extreme poverty; financial deregulation eventually cost nine million families lost their homes; cheaper student loans created a generation buried in debt; and Obamacare’s inability to control costs led to a rapid increase in deductibles and co-payments.

That’s why, instead of the empty promise of “growth and opportunity,” Warren wants to give people the things they actually need: child care, free college, expanded Social Security benefits, and Medicare for All. Yes, market capitalism makes it possible for many people to find satisfying jobs producing valuable goods and services. But if you can’t, for whatever reason (poverty, bad education, disability, racial discrimination, etc.), that doesn’t mean you don’t exist.  

And this is what frightens the Democratic elite most. It’s not that they really think that Warren’s policies will be bad for the economy. Her plans in aggregate represent the largest ever transfer of wealth from the very rich, who tend to save or “consume” paintings that were painted centuries ago, to the poor and the middle class, who tend to buy things they have to. And taking the problem of health care away from businesses will eliminate the single biggest burden weighing on long-term profits.

The problem is that she is threatening their self-identity by hearkening back to the historical legacy that they rejected thirty years ago. The Democratic Party was once the party of the New Deal and the War on Poverty, of unions, the social safety net, and a government that tried to help people. But in 1980 and again in 1984, Ronald Reagan successfully branded the Democrats as tax-and-spend liberals, in the pocket of union bosses who raised taxes on workers to funnel benefits to mythical “welfare queens”—a framing that simultaneously appealed to an entire bundle of common prejudices. 

Instead of defending government and social solidarity, the New Democrats adopted the same attack lines and the same economic vision. To return to power, they argued, the party had to discard the now-tarnished legacy of the New Deal and create a new identity: finance, not manufacturing; business, not government; balanced budgets, not domestic spending programs; and growth, not redistribution. 

Warren’s speech points out the obvious: that the Democratic establishment has failed to do anything about (or actively enabled) today’s unfair economy, in which a small handful of highly skilled, well connected, or simply rich people appropriate the spoils; and that, in taking the money of the billionaire class and catering to their policy preferences, they have become unable to do anything about this rigged system and the inequality that it produces. And the billionaires themselves, from Bill Gates to Michael Bloomberg, are terrified because Warren refuses to court them, signaling an end to decades of business as usual. 

The real problem with her vision, for the party’s current bosses, is that it represents a complete repudiation of their precious image of themselves and their place in history. She promises worker power instead of corporate profits, domestic spending programs instead of cleverly designed markets, redistribution instead of the glib proverb of the rising tide, and a government that actually helps people instead of one that oversees the economy from on high and lets the chips fall where they may. What we are seeing is the existential crisis of the Democratic establishment. And it isn’t pretty.

By James Kwak

Today’s installment of my new book, Take Back Our Party, evaluates the quarter-century reign of the Clinton-Obama axis over Democratic economic policy. (Chapter 1, if you missed it, is a historical account of the rise of the New Democrats and what they did once in power.)

The picture is not a pretty one, no matter how you look at it. This chart, for example, shows the distribution of economic growth across different groups in the income distribution:

(Data are from Piketty, Saez, and Zucman, of course.) There it looks like the bottom 50%—that’s half of the people in our country—have more or less broken even. But the true story is even worse:

Among people in the bottom 50%, all of the income growth has gone to the elderly in the form of rising Social Security and pension payouts. Working-age people are doing worse than in 1980, and those below the age of 45 are doing much worse.

And this is not just the result of globalization and technology. Major Democratic policy choices including welfare reform, financial deregulation, and the abandonment of homeowners after the financial crisis all had the net effect of increasing inequality. The Affordable Care Act did some good in the short term—primarily by expanding Medicaid eligibility in most states—but has been powerless against the underlying problem of rising health care costs, which have resulted in higher deductibles and co-payments. That’s why even many families with health insurance cannot afford to get the health care they need.

Perhaps more important, the doctrine of “growth and opportunity”—the idea that government should focus on making the pie larger, and helping people gain access to the markets that would provide everything they need—continues to rationalize the Democratic Party’s failure to do anything about inequality itself:

“In the end, a Democratic Party traumatized by the Reagan Revolution and defined by its aversion to the words ‘socialist’ and even ‘liberal’ has proven powerless against the economic and political forces that have created this Second Gilded Age of monumental inequality. Flattered by its growing proximity with the economic elite and unwilling to do anything that might smack of class warfare, the party that was supposed to stand up for the working class instead took the side of markets and the overall economy, protesting that this was, in fact, the smarter, more sophisticated way to help all Americans. It wasn’t.”

They had their turn. They failed. It’s time for something new.

You can read the whole chapter here.

By James Kwak

Chapter 1 of new book is now available at The American Prospect. (If you missed the introduction, you can find all the chapters here as they are released).

This chapter, “Their Democratic Party,” is a brief history of the takeover of the party by the New Democrats in the 1980s and 1990s. It describes how, in the aftermath of the crushing electoral defeats of 1980 and 1984, a new generation of party leaders—including Bruce Babbitt, Chuck Robb, Lloyd Bentsen, and of course Bill Clinton and Al Gore—chose to run away from the historical Democratic legacy as the party of workers and the poor. Instead, they trailed in the rightward footsteps of the Republicans, associating the party with business, the private sector, finance, and economic growth.

Their economic platform was that markets are the sole source of prosperity and that government should limit itself to nurturing the private sector and ensuring that all people can participate in the benefits of growth. That’s why the principal Democratic domestic policy achievements of the past three decades have been welfare reform, financial deregulation, and a health care reform plan based on private competition and initially conceived by the Heritage Foundation.

This is still the dominant ideology of the Democratic establishment:

“Leaving aside the recent progressive insurrection … it is a party devoid of any compelling idea of how to address the fundamental economic challenges our country faces today: wage stagnation, the rising cost of health care and urban housing, the precariousness of most jobs, and extreme inequality. After defining themselves in opposition to old-fashioned government spending programs that smacked suspiciously of redistribution, after embracing the doctrine of market-based solutions, and after insisting for decades that economic growth would solve all problems, establishment Democrats today have nothing left to offer.”

Enjoy!