Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon. I live in National Landing Va 22202

Covid-19: What should Uncle Sam do?

On February 29 the first person in the United States died from Covid-19, the disease caused by SARS-CoV-2, the so-called novel coronavirus first observed in Wuhan, China.  On March 12, three more people succumbed from this disease bringing the total to 41. Ten days later on March 22, 117 died bringing the total to 419 as the exponential growth of Covid-19 deaths continues. Globally 15,420 had died by midday March 23 and deaths are rising fast.

How and where will this end?  Shutting the economy down and keeping everyone isolated in place until the virus “dies” for lack of new victims would ultimately kill everyone from starvation (if not boredom).  This pandemic will only end (stabilize with the status of the flu, which currently kills about 34,000 per year in the U.S.) when an effective vaccine is developed and administered to almost everyone. This will take one year to eighteen months if it is discovered today, and that is if we are lucky that the safety and effectiveness trials go according to plan. Without a vaccine, the pandemic will “end” when most of us have acquired immunity to it as a result of having and surviving (as almost everyone will) covid-19 –acquiring so called herd immunity.  This assumes that having and surviving the disease will immunize us. This is generally the case with viruses but has not yet been established for SARS-CoV-2.

Our hospitals and medical services could not handle the patient load if every one contracted this disease over too short a period, so it is important to slow down the pace of infection–so called flattening the curve (which could spike quickly as you see from the opening paragraph). The ideal strategy is to allow the infection of those with low risk of serious illness or death to speed up herd immunity with minimum demand on our limited health facilities, while protecting and treating the most vulnerable. The young and healthy are least vulnerable and the old and health-impaired are the most vulnerable.  We should reopen schools and restaurants after Easter and gradually restart our cultural entertainment lives adhering to higher standards of hygiene and public interaction. This would be ideal both with regard to speeding up herd immunity and with regard to minimizing that damage to the economy.

What should government do?

I am from the government and I am here to help (it is risky to attempt humor in these times, but what the hell). “Treasury Secretary Steven Mnuchin warned GOP senators that the unemployment rate could spike to nearly 20 percent if they fail to act dramatically…. The United States is expected to lose 4.6 million travel-related jobs this year as the coronavirus outbreak levies an $809 billion blow to the economy, according to a projection released yesterday by the U.S. Travel Association…. Research from Imperial College London, endorsed by the U.K. government, suggests that 2.2 million would die in the United States and 510,000 would die in Britain if nothing is done by governments and individuals to stop the pandemic.” “six-chilling-estimates-underscore-danger-of-coronavirus-to-public-health-and-the-economy”

“Infectious disease experts do not yet know exactly how contagious or deadly the novel coronavirus is. But compared to SARS and MERS, SARS-CoV-2 [as the novel coronavirus is now labeled] has spread strikingly fast: While the MERS outbreak took about two and a half years to infect 1,000 people, and SARS took roughly four months, the novel coronavirus reached that figure in just 48 days.”  “Mapping the Novel Coronavirus Outbreak”

The U.S. does not have the medical equipment or hospital beds that will be needed for those anticipated to need ICU facilities.  And as poorly equipped medical staff fall ill from their exposure to the Coronavirus, we will run out of enough doctors and nurses to care for them forcing us to default to the unpleasant realities of medical triage where doctors begin to assess and choose those that have a higher probability of survival and to leave the weakest to fend for themselves. This has already started in Italy.

So, what should the government do? Its response might be considered under three categories:  a) Stop or slow the spread of covid-19; b) Help state and local health service providers care for those needing it; and c) minimize the damage to the economy (i.e. to those whose income is affected by the disease or the measures taken to slow the spread of the disease).

As with all good policies, as the government determines its immediate approaches to the crisis, it should keep one eye on the longer run implications of the policies adopted. It should balance the most effective immediate actions with the minimization of what economists call moral hazard in the future.  The simplest and best-known example of moral hazard results from the now hopefully banished practice of governments bailing out banks when they fail as a way of protecting depositors. This one way bet for the banks–they profit when they win their bets and the government bails them out when they lose them–encouraged banks to take on excessive risks. In the U.S. we have replace bank bail outs with deposit insurance and efficient bank resolution (bankruptcy) procedures. “Key Issues in Failed Bank Resolution”

If economists do nothing else, we pay very close attention to incentives, particularly those created by government rules and regulations (including taxes and subsidies).  Government financial assistance must also be carefully designed to be temporary, recognizing the danger that expansions of government into the economy in emergencies have the bad habit of becoming permanent.

From these general considerations our response should be guided by these principles: Measures should be effective with the least cost. They should be narrowly targeted. They should be temporary. The cost of financial assistance should be shared by all involved–no bailouts.

Flatten the curve 

The government’s first priorities must be to slow the spread of covid-19 while supporting the medical needs of those contracting it.  Limiting the number of infected will limit the resulting deaths (guesstimated to be around 1% of those infected by this virus). Slowing the rate at which people are infected–flattening the curve–will reduce the peak demand for hospital beds and related services until a vaccine is found (once one or several candidates are discovered today, it will take 12 to 18 months of tests to establish its safety and effectiveness and manufacture enough to start administering it).

Despite clear warnings that the novel coronavirus posed serious threats to the U.S. for which we were not prepared, President Trump failed to act until very recently, calling the scare a Democratic plot as recently as February 28. “Trump-says-the-coronavirus-is-the-democrats-new-hoax”  “U.S. intelligence agencies were issuing ominous, classified warnings in January and February about the global danger posed by the coronavirus while President Trump and lawmakers played down the threat and failed to take action that might have slowed the spread of the pathogen, according to U.S. officials familiar with spy agency reporting.” “US-intelligence-reports-from-january-and-february-warned-about-a-likely-pandemic”

Countries that acted quickly to identify and isolate those infected by the virus have generally succeeding in slowing its spread without shutting their economies down.  South Korea, Singapore, and Taiwan have tested widely and quarantined those testing positive, many of whom were asymptomatic. Their economies have not been shut down. Restaurants and bars remain open as do schools in Singapore and Taiwan.  New cases in S Korea have fallen to very low levels two weeks ago and active cases have been declining since March 11 as more people recover than acquire the disease. On March 22 only two people died from the disease.  Cases and deaths have remained low in Japan, Singapore and Taiwan. The following describes the lesson’s from Singapore’s success: plan ahead, respond quickly, test a lot, quarantine the sick, communicate honestly with the public, live normally:  “Why-Singapore’s-coronavirus-response-worked–and-what-we-can-all-learn”

As a result of the U.S. failing to act earlier, the potential for this approach has been reduced in the U.S.  Nonetheless, the government should urgently remove its barriers to testing, increase the supply of tests, and pay most of the cost of testing. In order to discourage frivolous testing those being tested should pay a small amount of the cost (e.g. ten dollars per test).  Even today (March 21) very few Americans are tested despite frantic catch up efforts by the U.S. government.  “A-government-monopoly-led-to-botched-covid-19-test-kits-but-private-labs-are-now-saving-the-day” Positive test results (“cases”) in the U.S. are rising rapidly (983 new cases on March 16 jumped to 9,339 on March 22, for a total of 33,546). However, as so little testing has been possible, there is no way we can know whether this dramatic increase reflects increases in infection or only the increase in the identification of existing infections. “Peggy Noonan gets tested–finally”

As a result, the government has urged people to stay home, and most entertainment centers (theaters, cinemas, restaurants, gyms, and bars) have closed, and a few state governors are mandating it.  Many international flights have been cancelled.  Aside from grocery stores and pharmacies, most shops and malls have closed. A controversy is raging over whether closing schools does more harm than good. Among the arguments against it is that because serious illness and death among the young is rare but they can spread the disease (to their families at home and others), attempting to block their infection interferes with herd immunization (protection from infection as the result of a large proportion of the population becoming immune as the result of recovery from infection).

The economic impact of those drastic measures will be explored below, but the government must now urgently prepare for the surge of covid-19 patients promising to overwhelm our brave medical health care workers, medical supplies and hospital beds even with these draconian measures. Priorities must be given to properly equipping medical service providers and training their replacements as they fall ill. Hospital beds and respirators and other equipment needed for the more seriously ill must be urgently produced, in part by turning out and away, less seriously ill patients and those with non-emergency, elective treatments. We can delay the investigation into why these steps where not taken two months ago when the need was identified.

Care for the sick

The government should support the market’s natural incentives to develop better treatments and ultimately a vaccine (i.e. profit). This raises challenging policy issues. Protecting the patent rights of firms developing treatments protects the profit incentive for them to do so. However, the sharing of research findings, thus threatening such patents, can greatly accelerate the discovery of helpful medicines or procedures. Hopefully rights can be established and protected that both encourage drug development and cooperative information sharing.

The failure of the U.S. government to provide for or allow significant testing for covid-19 is a scandal. The government should get out of the way. “Coronavirus-and-big-government” Its claim last week and the week before that testing was opening up is sadly not true.  By March 19th the U.S. with a population of 327 million had only tested 103,945 people (0.03%).  S. Korea with a population of 51.5 mil. had tested 316,664 by March 20th (0.6%) and Germany with a population of 82.9 mil. had tested 167,000 by March 15th (0.2%)  “Covid-19-why-arent-we-prepared”

President Trump’s trade war has damaged world’s ability to fight covid-19 in general but more specifically his tariffs on medical supplies are contributing to their shortage in the U.S.  “The US-China trade war has forced US buyers to reduce purchases of medical supplies from China and seek alternative sources. US imports of Chinese medical products covered by the Trump administration’s 25 percent tariffs dropped by 16 percent in 2019 compared with two years earlier.”  “Tariffs-disrupted-medical-supplies-critical-us-coronavirus-fight”

Save the economy

Having missed the opportunity to flatten the curve via testing and targeted quarantines, the U.S. has taken much more drastic steps to restrict public interactions, shutting down the entertainment, educational, and transportation sectors of the economy. These should result in temporary interruptions of the supply of these services that will bounce back when the restrictions are lifted. Some output will be lost forever (lost classroom time, and restaurant meals) but others can be recouped or at least restored to original levels (rates). Clothing and other retail items not purchased during the shut down can be purchased later.

What the economy will look like afterward (hopefully only a few months) will depend on several factors. The first is the extent to which our public behavior is altered permanently. Home movies might permanently replace some part of our usual attendance to the cinema. Teleconferencing might permanently reduce meeting travel or accelerate the existing trend in that direction, etc.

The policies being debated in congress at this moment for protecting individuals and firms from the financial cost of the temporary shutdown can profoundly affect the future composition and condition of the economy. Every big firm out there is working on how they can tap some of the taxpayer’s money that government will be giving out. Those pushing government interventions into new areas on a permanent basis will exploit the occasion to slip in their favorite policies. Unfortunately, once the government moves into an area– it rarely withdraws. Almost 19 years later, the horrible Patriot Act, adopted when a scared public was willing to trade off liberty for security, is still largely with us.

Our public interest would be served by incentives that lead those who might be sick with covid-19 to stay home rather than risk infecting others, and by policies that enable viable firms that lost customers and individuals who stayed home to bridge their financial gap until returning to normal. Affected firms and individuals will continue to have expenses (food, rent, mortgages, etc.) but no incomes. They should be provided with the funds to meet these expenses in order to return to life/work when the lights go back on. The sharing of the cost of those funds must be considered politically fair and must incentivize the desired behavior. Everyone must have some skin in the game (a share of the cost). Adopting measure that fill those criteria will not be easy.

The government (taxpayers) should cover much of the cost of the covid-19 related medical services and hospital costs, including very widespread testing. Medical service providers should be tested daily (e.g., several doctors have died from covid-19 in Italy). Anyone staying at home and testing positive should receive sick leave paid for by the government.

Assistance to companies and the self-employed should be as targeted as possible on those forced to reduce or stop operations as a result of covid-19. Where possible, assistance should take the form of loans to companies that continue to pay wages to their employees even if not working. Restrictions should be placed on how such loans are used (no stock buy backs, or salary increases during the life of the loans). Bank and lending regulators should allow and in fact encourage temporary loan forbearance by the lenders on temporary arrears from otherwise viable firms. “Bailout-stimulus-rescue-check” One small businessman convincingly argued that wage subsidies that keep working on the payroll are better than generous unemployment insurance, which makes it easier for firms to lay off their workers. “Dear-congress-i’m-a-small-business-owner-heres-what-my-business-needs-to-survive”

What about the big companies, such as Boeing, the airlines, the Hotel Chains, and Cruise ship operators? Yes, they should be included in the loan forbearance and incentive loan programs, but they should receive no special consideration beyond that. If government (partially) guaranteed loans through banks to pay wages and other fixed expenses for a few months are not enough to finance a firm’s expenses without income for a few months it is probably not viable in the long run anyway and should be resolved through bankruptcy as were GM and Chrysler in earlier financial crises. This would wipe out the stakes of owners while preserving the ability of the firm to return to profitable operation with new owners. “Bailing-out-well-if-bail-out-we-must”

Monetary policy

The American economy (and elsewhere) is suffering in the first instance a supply shock (sick people unable to work and produce). This fall in income from supply disruptions also reduces demand. Cutting the Fed’s already low interest rate target to almost zero is a mistake. No one will undertake new or expanded investments because of it, and its impact on reducing the return on pensions and other savings will, if anything, reduce spending. The last decade of very low interest rate policy targets has already contributed to excessive corporate debt and inflated stock prices (recently deflated back to normal).

Injecting liquidity via new lending facilities and international swap lines, as the Fed is now undertaking, is the correct response. If lenders allow their borrowers to delay repayments for a few months, they need to replace that missing income somehow (rather than calling in nonperforming loans and bankrupting the borrower). The Federal reserve should substitute for that income by lending to banks freely against the good collateral of government debt or government guaranteed debt.

“The vital need of everyone in the economy, from the corner drugstore to the local transit authority to the mightiest multinational, is liquidity: credit to meet payroll and other key obligations so as to remain solvent until the end of what we all must hope is a finite crisis.”  “Here’s-an-economic-aid-plan-better-than-mitch-McConnell’s”

Macroeconomic policy

As noted above, the government’s help should be narrowly targeted to the direct victims of covid-19.  A general fiscal or monetary stimulus is not needed or desirable.  Nonetheless, it will add to the federal debt that is already bloated by years of annual deficits at the peak of a business cycle when a surprise is customary and appropriate.

“The United States is not confronted with a financial crisis and a follow-on crisis of demand, as in 2008 or 1929. Rather, previously robust consumption and production are being deliberately halted to save lives. Thus, traditional tools of monetary and fiscal stimulus, such as zero interest rates and direct cash aid to households, are unlikely to prove decisive. You can’t shop, or invest in new construction, while on lockdown.”  “Here’s-an-economic-aid-plan-better-than-mitch-McConnell’s”

This is a dangerous period both for our personal health and for the health of the economy. Affected firms should be helped in order for them to continue paying their employees and to remain solvent until they can return to production. But the United States has failed to prepare properly and is handling the fight against covid-19 poorly. We need to reopen our schools and restaurants and return to normal at a reasonable pace while allowing herd immunity to develop at a faster pace while supporting the most rapid development of a vaccine possible. Don’t fight this wildfire with our eyes shut while enhancing the dangers of future fires from ill-advised measures undertaken in this emergency environment.

Stay strong everyone. We will all get through this.

Social Distancing

Research lead by Neil Ferguson and his colleagues at Imperial College London suggests that a staggering 2.2 million would die in the United States and 510,000 in Britain if nothing is done by governments and individuals to stop the pandemic (no social distancing or hand washing, etc.).  Imperial College London study  The U.S. was late and bumbling in addressing the Novel Coronavirus coming from China in December. The Food and Drug Administration (FDA) refused to authorize the use of tests approved by the EU and the test developed by Centers for Disease Control and Prevention (CDC) was flawed and had to be withdrawn. The United States remains embarrassing and dangerously behind other countries in testing and other preparations for dealing with the disease.  “Coronavirus-testing-delays-caused-red-tape-bureaucracy-scorn-private-companies”

Unable now to contain the virus in a targeted way, the U.S. has largely shut down its schools, theaters, restaurants and other places of public gatherings as well as flights from abroad. The Ferguson “report concludes that the British government might be able to keep the number of dead below 20,000 by enforcing social distancing for the entire population, isolating all cases, demanding quarantines of entire households where anyone is sick and closing all schools and universities — for 12 to 18 months, until a vaccine is available”. A comparable figure for the U.S. implies a reduction in the death rate to 86,000.

For perspective, traffic accidents in the U.S. in 2017 killed 40,100.  More than forty-seven thousand committed suicide that year and 55,672 died from influenza and pneumonia. When compared with ordinary flu, covid-19 spreads more rapidly and is ten times as deadly, but we still do not know very much else about its properties.  But, we can expect a relatively large number of deaths from this new virus no matter what we do.  But doing nothing will increase deaths considerably.

What steps should the U.S. take?  We don’t ban cars because people die in them. We choose to take calculated risks if they are not “excessive”.  https://wcoats.blog/2016/12/27/our-risks-from-terrorists/

The extreme measures being taken in the U.S. proceeded without serious estimates of the economic costs to the economy and the spill over health risks of children kept home with vulnerable grandparents, etc.  “The CDC guidelines advised that short- and medium-term school closures do not affect the spread of the virus and that evidence from other countries shows places that closed schools, such as Hong Kong, ‘have not had more success in reducing spread than those that did not,’ such as Singapore.  But this guidance was not released until Friday [March 13], after the cascade of school closings had begun.”  “States-are-rushing-to-close-schools-but-what-does-the-science-on-closures-say”

Our extreme reaction will generate huge costs that cannot be fully known reverberating for years to come. We can be pretty certain that there will be unintended, undesirable consequences quite beyond the disruption of our pleasurable, cultural activities (bankruptcies of otherwise viable firms and the resulting loss of jobs, etc.). The government (congress and the administration working together for a change) is attempting to anticipate and ameliorate as many of those consequences as possible. One example of the search for cost effective balance of cost and mitigation involves the stopping of flights from Europe.  The cost of monitoring arriving airline passengers before boarding abroad is very likely cheaper than the economic disruption and damage of forbidding foreign visitors at all.  Following Trump’s announcement of the travel ban (once his team sorted out and clarified what he was actually imposing) the American Civil Liberties Union announced, “These measures are extraordinary incursions on liberty and fly in the face of considerable evidence that travel bans and quarantines can do more harm than good.”

Unlike the U.S., Britain has not closed its schools and restaurants. But as I am writing this, the UK just announced that its schools will close Friday March 20.  The Patriot Act passed quickly after the 9/11 terrorist attacks in the U.S. on September 11, 2001 (for those of you too young to remember) reminds us how quickly and easily we surrender our revered liberties when we are scared.  Almost 19 years after 9/11 we still have the dangerously intrusive provisions of the Patriot Act.  Once freedoms are surrendered and the government steps in it seems to be hard to regain them.  The extreme measures being taken in the U.S. and elsewhere to slow the spread of covid-19 provide us with the latest example.

On March 16, Deborah Birx, White House coronavirus response coordinator, reported that models based on data available so far indicated that the biggest reduction in deaths came from “social distancing, small groups, not going in public in large groups. But the most important thing was if one person in the household became infected, the whole household self-quarantined for 14 days. Because that stops 100 percent of the transmission outside of the household,”

The biggest bang for the buck comes from individuals protecting themselves by social distancing, hand washing, and normal (and perhaps enhanced) care to avoid the sick and avoid exposing others when we are sick as we generally do now. Clear public health guidance from the government could go (would have gone) a long way to encourage the enhancement of such diligence.  The Kennedy Center for the Performing Arts never closed down during the flu season.

Covid-19 calls for vigorous government action, even now when it is too late to stop it any time soon. We will need extra hospital beds, medicine, respirators, protective gear, replacements for infected health workers, vaccine research, development, manufacture and administration and more.  Soon we will require replacements for the many brave health care workers such as nurses and doctors as they also become infected with the virus. But as with all decisions, private and public, a careful assessment of costs and benefits of different courses of action will produce the best result.  Knowledgeable public information to guide the natural protective self-interests of each of us and our usual concern and respect for the well-being of our families, friends and neighbors can carry us a long way toward minimizing the further spread of this disease at minimal cost to lives and property.

P.S.  In my previous blog of March 15 (Covid-19, why aren’t we prepared) I reported Beth Cameron’s claim that the National Security Council Directorate for Global Health Security and Biodefense was disbanded in May 2018.  Ms. Cameron was its director at the time.  Yesterday Tim Morrison, director of the successor unit for a year in 2018-19, “No-white-house-didn’t-dissolve-its-pandemic-response-office”, explained that its staff and function were merged with two other units performing overlapping functions in order to improve efficiency without a loss of its capacity “to do everything possible within the vast powers and resources of the U.S. government to prepare for the next disease outbreak and prevent it from becoming an epidemic or pandemic.”  I apologize for misrepresenting what happened and expect Mr. Morrison to apologize for the disastrous failure of his unit to fulfill its mandate.

Covid-19, Why Aren’t We Prepared?

Following the Ebola epidemic of 2014 President Obama established the National Security Council Directorate for Global Health Security and Biodefense “to do everything possible within the vast powers and resources of the U.S. government to prepare for the next disease outbreak and prevent it from becoming an epidemic or pandemic.” “NSC-pandemic-office-trump-closed”.  This unit was “disbanded under a reorganization by national security adviser John Bolton” in May 2018.

America’s disorganized and late starting response to the spread of Covid-19 in our country can be attributed in part to this act. What was obviously a mistake with the benefit of hindsight, however, was a more difficult judgement at the time. Two classes of judgements were involved: a) what organizational structure would service the country’s interests best (for Bolton, everything always seemed focused on the preparation for war), and b) how many and what resources should be devoted to events that might never occur?

The government’s role in disaster management is spread between a number of agencies, from FEMA (Federal Emergency Management Agency), the Department of Homeland Security, the Department of Health and Human Services (HHS), Food and Drug Administration (FDA), and the Center for Disease Control and Prevention (CDC), to state and local health services, fire departments etc. I have no idea if each potential disaster is managed by the most appropriate agency but coordination between them is often very important. That requires designated leadership.

Assigning resources to prepare for dealing with possible future epidemics means not assigning them to something also of value. What are the tradeoffs? We keep emergency reserves of many things: oil, medicine, face masks, excess capacity at hospitals, etc. What is the right amount? We keep a large military in case of war that we hope will never occur (unfortunately we have very foolishly used them unnecessarily too often and in too many places). What is the right size of the military given that every additional soldier is one fewer of whatever else she might have done?  Keeping a military reserve that can be called up in the case of war is one of the approaches we have taken in dealing with this question.

It is hard to impossible to know for sure the best answer.  Devoting resources to being prepared for an event that never occurs might seem (increasingly) wasteful. But so might an insurance policy for something we hope never happens, and we are generally wise to have it. Not taking the time and resources to be prepared can be extremely costly if the disaster occurs.  Large banks are now required to test the resilience of their balance sheets against financial shocks of one sort or another (stress tests) and to prepare living wills for how they would be liquidated if they became insolvent. These are costly exercises but well worth the cost if it helps avoid bank failures and/or makes the orderly liquidation of an insolvent large bank feasible, thus making market discipline of excessive bank risk taking credible. https://wcoats.blog/2012/06/29/spains-financial-crisis-first-principles/

There are rumors that the HHS blocked the use of foreign tests for the Coronavirus to preserve business for American pharmaceutical companies and that President Trump exempted the UK and Ireland from his initial European travel ban because he owns golf courses in Scotland and Ireland may or may not be true. https://wcoats.blog/?s=crony+capitalism.  Fortunately, we still have a free press, which is likely to get to the bottom of that.

Where the stakes are high, we should pay the cost of reasonable preparations for disasters of one sort or another. The lives of tens of thousands of citizens are at stake. Getting the balance right, as in so many other areas of governance is not easy. But the United States today is neither well organized nor properly prepared to mitigate the damage of the epidemic now about to sweep over us.  We will pay a much larger cost for this than we should have.

However, it is not only the country’s lack of preparedness that is a major problem in this national crisis. The President himself appears unprepared to handle facts or rely on his medical experts and convey confidence to the public by making accurate statements about what is being done and what the public should expect. His recent oval office statements about an all-encompassing Europe travel ban including the banning of cargo coming from Europe and the availability of free tests and treatments was basically wrong. Each claim had to be corrected and re-explained in an already confusing and panic-induced environment. The White House has not presented a clear, coherent plan for containing the damage of covid-19 that the Trump’s own administration understands or is behind.  Along with starting late to address the challenge, the Trump administration has been and remains incoherently organized to move forward from here. Stay tuned for the next tweet.

Protecting yourself from Coronavirus

How can you best protect yourself from coronavirus? Unfortunately, the “government” is providing inconsistent and sometimes misleading advice, as are airlines and other businesses that want to keep you coming.  Disinfecting surfaces and extra cleaning of airplanes and other public transports may not be helpful and can communicate a false sense of safety. You would be safer to sit on an uncleaned toilet and then wash your hands, than to clean the toilet seat yourself with some disinfectant.

Two key facts are critical to understanding the transmission of viruses, such as Coronavirus. The first is that not all disinfectants are created equal.  Most are effective in killing bacteria but not viruses.  By and large only products with bleach (Clorox or sodium hypochlorite) will destroy viruses, but they can potentially also destroy the surfaces they are applied to, including your skin and thus it is not desirable to use them routinely. The second fact is that the coronavirus does not enter your body through your skin. It enters through your eyes, nose or mouth (or an open sore). This is why you should avoid touching your face.  Your best protection is to keep the virus off your hands, and then keep your hands off your face. The best way to keep the virus off your hands is to be more careful where you put them and to wash them with ordinary hand soap whenever you think your hands might have contacted the virus.

Wash your hands:  “If we sanitize, it will be fine.” No it won’t. Saying so can give a false sense of safety. Products to disinfect your hands without rinsing might kill bacteria but they will only rearrange viruses on your hands. Even ordinary soap will not “kill” viruses, but it is great at removing them from your skin so they can be rinsed away. Wash for 30 seconds (humming the “happy birthday to you” song twice) and rinse well. The following article provides an excellent and detailed discussion of the power of soap: “Deadly-viruses-are-no-match-for-plain-old-soap-heres-the-science-behind-it”

Don’t touch your face:  The most reliable measure of protection from acquiring covid-19 is to avoid touching your eyes, mouth or the inside of your nose. These are the access points for viruses into your body. This is easier said than done. See Ito’s suggestions below.

If you are young, don’t worry and have fun. That’s what the young do anyway. If you are my age, keep a distance from others and try not to touch anything (especially someone else’s hands). Stay home more. It will also allow time to develop better treatment protocols, increase isolation ward capacity, and a vaccine (which, however, will take another year or more to test for safety and effectiveness).

In the following, Dr. Victorino (Ito) Briones, MD, Ph.D., provides the most relevant tips on how to prevent getting infected with the Coronavirus

  1. The most significant source of infection will be your hands.

We always use our hands in order to go about our daily routine. We touch the doorknob to open the door, hold the grocery handle from a cart or a basket, shake hands, etc. Do not be afraid to get the virus on your hands. Our skin is one of the best defense barriers from this virus. It will not infect you even if you have touched an object or another person’s hand that has the coronavirus. The way the virus can get into your body is by entering through your mucous membranes, which in this case includes your eyes and your mouth as well as the inside of your nose.

Suggestions:

  • Do not touch your face. Again, don’t worry that you might have the virus in your hands. But don’t transfer the virus from your hands to your face where it can enter and infect you through your eyes, mouth and nose.
  • Wash your hands with soap and water. Do this most especially before eating.

NOTES: Most often public toilets will have a liquid soap dispenser. Be mindful that the top of the bottle may be contaminated with the virus by the previous person who used it. Be careful when you use bar soaps as the virus may survive in the soap bar as well. Also be mindful that the faucet knob or handle may be contaminated with the virus so do not close the faucet with the hand you just washed.

The CDC suggests about 30 seconds of washing. I personally like to wash once with soap first, then rinse and then wash again a second time. Please understand that soap and water do not kill the virus. Washing simply removes the virus from your hands.

  • Wrap a masking tape around the tips of both your forefingers.

It is extremely difficult to consciously prevent ourselves from touching our face.    Research says that we touch our face about 20 times an hour and we may not be aware we’re doing it. Wrap a masking tape (blue or orange) around the tips of your forefingers. The hope is that the masking tape at the tip of the forefinger will remind you not to scratch our face with your hands. Also, the sensation of the tape on the face should immediately tell you to stop.

  • What about Masks?

Masks are most helpful to those who already have cough and colds symptoms and this prevents them from spreading the virus in the air. Wearing masks, however, can be helpful in reminding you not to touch your face especially your mouth. But personally, I don’t find it essential.

  • Hand sanitizers?

A friend showed me a hand sanitizer he was using and the label said “antibacterial”. Antibacterial sanitizers do not kill viruses. Bacteria and viruses are very different organisms. CDC recommendations here: https://www.cdc.gov/handwashing/show-me-the-science-hand-sanitizer.html

Personally, I don’t like to recommend hand sanitizers because it may give the person a false belief that his hands are virus free. My recommendation is to think that your hands are always contaminated with the virus.

  • How to scratch your face/eyes?

It may be time to carry a pack of tissues with you. If you feel the urge to scratch your eyes, use a clean tissue from the pack. Make sure that your fingers don’t touch your eyes or face. Then discard the tissue into a trash can after using. Do not re-use the tissue. Be mindful that if your hand is contaminated, then the tissue is also now contaminated with the virus.

    2.  It might be time to change some personal habits.

  • No more shaking hands and embracing when greeting other people. At this time, people already understand and, I think, appreciate that this form of greeting is no longer appropriate.
  • Perhaps start the standard of using virtual fist bumps or elbow bumps to acknowledge personal greetings.

In general, always consider the possibility that everything you touch is potentially contaminated with the virus. But also understand that the virus cannot enter your body through the skin on your hand.  So don’t be afraid to go about your daily lives. However, be always mindful that the virus can enter your body through your face. Your hands are the most probable source of infection.

 

Coronavirus and You

If you are infected by the coronavirus, i.e. if you contract covid-19, what is the probability of your dying from it?  What is the death rate of this particular virus?  On Tuesday March 3 the World Health Organization (WHO) stated that the global fatality rate was 3.4 percent. The figure changes daily, but if we take this to be a correct measure (it isn’t as I explain below), your own probability of dying from the disease will be higher than that if you are older and/or suffer from other health immune compromising conditions and lower if you are young and healthy, etc.  Oh to be young and healthy again.

Yesterday, Friday March 6, the WHO reported 3,400 deaths worldwide and 100,000 confirmed cases worldwide. This is the basis of the 3.4% death rate. 3,400/100,000=0.034=3.4%. The true figure is probably lower, but it could also be higher. The numerator of this fraction–deaths–should be pretty certain. However, mistakes can be made in stating the cause of death.  A covid-19 death could be missed and attributed to something else.

The biggest probable source of error is with the denominator: the number of cases. There is a high likelihood that many who have contracted the disease have not yet and may never be diagnosed to have it.  It is likely that these missed cases are milder than those that are identified and thus have lower death rates. The U.S. has been particularly slow in testing for the coronavirus. The number of test kits needed to perform such tests are still very limited in the U.S.  As of yesterday (Friday March 6), the U.S. had only tested 1,890 people of which about 10% were positive. By comparison South Korea has been testing about 10,000 people per day for weeks. To the extent that the actual number infected with the virus is larger, and probably much larger, than those identified, the denominator will be larger and the death rate lower.  By comparison in the 2017-18 flu season in the U.S. 45,000,000 had the flu and 61,000 died.

But that is not the end of the challenges to an accurate figure for the death rate. The 17 deaths so far in the U.S. may, and probably does undercount the number who will die from those currently infected. If some of those already infected will subsequently die, the true death rate will be higher. The true figure will only be known sometime after the event. The following article provides a very good discussion of this issue. https://www.washingtonpost.com/health/coronavirus-mortality-rate/2020/03/06/b0c4cdfc-5efc-11ea-b014-4fafa866bb81_story.html

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Dr. Briones adds the following description of a more scientific approach to estimating the death rate.

There is the “TRUE” death rate and there is the “EXPECTED” death rate. The True death rate answers the question of how many people died from a particular disease event. The expected death rate represents the more computable number when people ask for the probability of dying from coronavirus infection.

TRUE death rates can only be computed after the “event” has finished and all people involved have been counted including those that survived the event and those that died from the event. For example, a pile up car accident involving, say 100 people, with 20 deaths would have a TRUE death rate of 20%. The TRUE death rate in this situation can be calculated accurately because the event has finished and is no longer evolving. No more people will be involved in this particular situation in the future.

In the present coronavirus epidemic, the TRUE death rate CANNOT be computed because the infection and disease continue to evolve and increase. It remains impossible to determine how many people actually have been infected with the Coronavirus as compared to those who have been tested and found to be positive for the virus. Also, most importantly, the TRUE death rate cannot be established because all those that have been tested positive have not finished the disease process. The TRUE death rate requires knowing the number of people that recovered/survived after coronavirus infection as opposed to those that died from the infection. Since the present situation of the Coronavirus epidemic continues to spread and infect more people, the result cannot be computed. This may be possible after the Coronavirus epidemic has been contained and new infections have been significantly minimized.

The better computation to answer the question of probable mortality rate from Coronavirus infection would be the EXPECTED death rate. In this computation, a randomly selected group of individuals from the pool of people who have tested positive from the Coronavirus are followed to the end of the disease process. (This approach assumes that this group is representative of the whole population infected by the Coronavirus.) So far, people infected with coronavirus either recover after two weeks or so or they die from the disease due to respiratory distress.

For example, 100 people are randomly selected from those positive for the Coronavirus. After a month or so, these 100 people would either have recovered or died from the infection. If 2 people died from this selected group, then the expected or probable death rate would be 2%. One important key point in this experiment is to follow the disease process to its conclusion of either recovery or death.

To increase the “Power” of the result of this experiment, researchers can further increase the randomly selected population from 100 to 1000 or even 100,000. But it is important that those selected to be part of the final computation (number of deaths divided by the total population) should have finished the disease process.

To increase the accuracy and power of the EXPECTED/PROBABLE death rate is to further categorize the selection by age group. For example: 20 to 40 years of age versus 50 to 70 years. Another refinement of the group selected can address older people with underlying conditions selected for the study. Further refinements of this population group can be made in order to accurately answer the question of: What is my (male vs. female, young versus old, no underlying disease versus one with underlying disease, etc) probability of dying from Coronavirus infection.

With already over 100,000 Coronavirus infections around the world, these numbers and computations can be done on a retrospective analysis of the various population groups.

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WC: The above approach should produce a more accurate estimate of the death rate if the death rate of those testing positive is representative of the death rate of those not tested.  It is reasonable to assume that those who were not tested but had the infection and where thus not part of the population from which the test sample was drawn, had a milder reaction to the infection and thus probably a lower death rate (possibly even zero).  Thus the “expected” death rate computed in the way explained by Ito above would be a maximum expected rate and the actual rate is likely to be lower.

Socialism as seen by Millennials

“Seventy percent of millennials in a new poll say that they are somewhat or extremely likely to vote for a socialist candidate.” “70-percent-of-millennials-say-theyd-vote-for-a-socialist”  That, and the current lead of Bernie Sanders, a self-proclaimed Socialist, for the Presidential nomination of the Democratic Party, means that those of us who believe that capitalism is the foundation of our freedom and prosperity have a job to do to convince millennials that they are wrong about Socialism.  If Sanders wins the Democratic Party’s nomination, which I doubt, his long history of support for Soviet communism will be marched out by the Republicans. “Bernie Sanders support of communism is a moral failing”  As recently as a few days ago, Sanders was praising Fidel Castro. “Bernie-sanders-didnt-mention-the-dark-side-of-education-in-castros-cuba”  Sanders is not even a registered Democrat. But my concern is that so many millennials (born between 1981 and 1996) and Gen Z’s (born between 1995 and 2015) are attracted to Socialism. We need to convince them that it will not deliver the better society that they think it will.

We need to start with the recognition that these new generations, like all of their predecessors, want to do the “right thing.” “The-search-of-purpose”  They are searching for how best to address the deficiencies of life in America today. While dire poverty has been reduced from over 90% to less than 10% by capitalism, there is still that 10%.  Adult literacy has been at 99% for a few decades but the quality of public school education has been declining.  Only half of elementary school students in California are proficient in English (i.e., performed at grade level). “California-school-test-scores-2019”  And so on. The question is how to address these problems? What should we do to further improve our lives economically and culturally? Should we increase the role of government in directing resources and making our decisions or reduce it or adjust it? Do we need more Socialism or more Capitalism?

In 1919 the “Old Bolsheviks,” Nikolai Bukharin and Evgeny Preobrazhensky, wrote in the widely read The ABC of Communism, that the communist society is “an organized society,” based on a detailed, precisely calculated plan, which includes the “assignment” of labor to the various branches of production.  As for distribution, according to these eminent Bolshevik economists, all products will be delivered to communal warehouses, and the members of society will draw them out in accordance with their self-defined needs.  I urge my young friends to read the fuller account in Ralph Raico’s  “Marxist-dreams-and-soviet-realities”

The theoretical and historical/empirical cases against Socialism are overwhelming, at least to those of us who lived through the cold war and the decline and fall of the Soviet Union in the early 1990’s and the Israeli kibbutzim more gradually in the 1960s through 1980s.  Cuba, North Korea and Venezuela provide contemporary examples.  Sanders and many millennials reject these examples (sort of) as reflecting the bad luck of state capture by bad guys (I am not aware of any bad girl examples). But the centralization of the power to direct businesses and people that is the essence of Socialism, is a natural and powerful magnet for bad guys.  No socialist regime has escaped the opportunities and temptations to favor its friends and relatives with government contracts or protections from the horrors of competition. “Crony capitalism”  Venezuela is a particularly shocking example of the rapid deterioration of one of South America’s wealthiest countries.

Sanders often points to the Scandinavian countries as examples of the softer democratic Socialism he now says he has in mind.  But he is fifty years out of date. The experiment with “democratic socialism” by, for example, Sweden in the 1960s and 70s was a failure and abandoned in recent decades. “Bernie Sanders’s Scandinavian fantasy”

Socialism has failed historically because it lacks incentives (financial rewards) for hard work and the development of better mouse traps, provides incentives for corruption, and is really hard to “get right.”  National Socialism (Nazism) and other versions of socialism involved top down control over many aspects of society.  But the central allocation of resources and decisions about what we may and may not do–central planning–suffers from serious informational challenges even when made by smart and totally honest people. Friedrich Hayek had much to say about the importance of prices in a market economy for providing critical, decentralized information on people’s preferences and thus on the optimal allocation of resources. “The Road to Serfdom”

But we are not likely win over the younger generations to capitalism just on the bases that it has given us standards of material well-being and individual freedom unimaginable several hundred years ago.  We also need, I think, to defend its moral superiority while offering promising remedies to its remaining deficiencies.

The morality of capitalism rests, in my view, in its capacity to give us, and to protect, our ownership of the fruits of our own labor. This means also the freedom to decide how to live.  It is a system in which we bear the primary responsibility for our own decisions and actions and their consequences.  It is a system that flourishes in a culture of trust and mutual caring and thus encourages such values. It is a system that rewards and thus encourages virtuous behavior. The top down, central planning, central control of socialism tends to have the opposite effect.  A common saying in the Soviet Union (USSR), while it still existed, was that “They pretend to pay us, and we pretend to work.”

America was unique in its time (exceptional) in establishing a constitution and government in which the people gave up limited authority to their government to protect their property and liberty, rather than, as with the Magna Carta, the sovereign giving up some of its authority to the people.  See American Exceptionalism.  In the personal freedom this provided and the accompanying responsibilities it imposed, Americans flourished in every sense of the word more than most. Those who fall behind or floundered were not ignored.  It was a country of free and virtuous people and as Thomas Jefferson said at the end of his presidency in 1809: “the sole depository of the sacred fire of freedom and self-government.”[1]  Seymour Martin Lipset in the middle of the 1990s used the concept of this exceptionalism to explain “why the United States is the only industrialized country which does not have a significant socialist movement or Labor party.…”  I would hate to see that change.

Countries differ in the balance of personal freedom and security (safety net, police, army) they seek. But in the most successful ones the provision by the government of security is limited and well targeted to minimize its infringements on personal freedom.  Here are my earlier thoughts on improving the government’s role in and contribution to an orderly free market, capitalist system: “My-political-platform-for-the-nation-2017”

Let me end with a quote from Winston Churchill to drive my point home: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”  Indeed, Capitalism has its flaws, but Socialism has no success stories that we should strive to emulate. The way to move forward is to repair the flaws in a Capitalistic free market society.

[1] Quoted in Tucker and Hendrickson, Empire of Liberty p 7; see John P. Foley, ed. The Jeffersonian cyclopedia (1900).

Is Huawei a Security Risk?

This question is quite beyond my technical competence to answer.  Even the experts disagree amongst themselves.  President Trump thinks it is too risky to use Huawei equipment and insists that Britain and our other allies not use Huawei equipment for building out their 5G telephone infrastructures. British Prime Minister Boris Johnson thinks its OK (plus it is available and cheaper than its potential future competitors) for many but not all uses.  President Trump, who likes to think he is protecting American jobs even though our economy is fully employed, was so angry at Johnson’s unwillingness to bow to his demands that he hung up on Johnson in their most recent phone conversation.  Johnson promptly cancelled his planned trip to the White House. Ukraine President, Volodymyr Zelensky, must be shaking his head in disbelief.

Trump has reason to be suspicious of foreign produced equipment following the recent disclosure that a CIA owned Swiss company, Crypto AG, sold encryption devises to 120 countries that enabled the U.S. and Germany to “easily break the codes that countries used to send encrypted messages.”  This went on for over 40 years allowing us to spy on our friends and foes alike. “National-security/cia-crypto-encryption-machines-espionage”

But these days security is much more sophisticated and wouldn’t allow such hardware to slip through undetected. On the other hand, the spying technology is more sophisticated too. Britain and other European countries are avoiding Huawei equipment for sensitive applications and using it for the rest. My point is not to join the debate over whether and where to use Huawei equipment but rather to argue that the more promising approach to convincing our friends of potential dangers (the more Adult approach, if I may) is to present our evidence and endeavor to convince them of our views. Trump’s approach, as in so many other areas, is to threaten and bully. “The-basis-of-American-world-leadership”

It is not easy to determine when trade restrictions reflect genuine security concerns and when they are just another manifestation of Trump’s protectionist, central planning direction of our resources.  He has imposed and threatened to impose tariffs with abandon, inflicting harm on our own economy as well as the tariffs’ targets. “Trumps-recent-trade-moves-show-adversarial-approach-has-only-just-begun”  “The United States has also threatened duties of up to 100% on French goods, from champagne to handbags, because of a digital services tax that Washington says harms U.S. tech companies.”  “Trump-threatens-big-tariffs-on-car-imports-from-EU”  This use of tariffs has nothing to do with trade and violates WTO rules, which Trump seems to pay little attention to in any event.

While this type of bully approach might work sometimes, it is unsustainable in the long run.  Needless to say, world confidence in the U.S. to do the right thing has plummeted. While for now other countries bow to and follow orders from the U.S., not out of respect but out of fear of retaliation, they follow a strategic waiting game. They know that Trump will not always be in power. And after he is gone, the U.S. will no longer have allies but adversaries ready to bare their claws for revenge.  https://www”9-charts-on-how-the-world-sees-Trump”

 

 

 

The search for purpose: Nature and Nurture – Genes and culture

Every healthy boy and girl searches for the meaning and purpose of their lives. We ask why we are here and what we should do with our lives.  Where do we want to go and be in the future? How do we think we can best get there?  What should we strive for or should we strive at all?  The search for meaning can be agonizing but it is part of human nature to ask, “Who am I?”.

But we do not search in a vacuum.  That we search at all can be attributed to our genetic inheritance. Over the millennia our ancestors who pondered this question and chose and worked toward goals of mutual help and cooperation, prospered and multiplied relative to those who didn’t.  While personal and family survival and wellbeing come first, working together with others enhanced the wellbeing of both. In a fascinating presentation at the Cato Institution, Nicholas Christakis, Sterling Professor of Social and Natural Science, Yale University, discussed his new book “Blueprint: evolutionary origins of a good society”  He argued that the evolutionary survival of the fittest also favored (selected) those disposed to love, friendship, cooperation, and teaching. Homo sapiens with those qualities formed more successful and durable groups.

This happy genetic predisposition, however, was just the start, the foundation from which the search for the meaning of our lives was launched. The rest of the answer is the product of the values taught to us by, or absorbed from, our parents, family, and community and its religious and other institutions, and filtered by our reason, which is another capacity favored by evolution. The cultural values from which we learn what our peers value and respect in us can contribute to successful and prosperous societies (and their economies) or not. Children growing up in poor neighborhoods dominated by gangs are more likely to see success in terms of the demands of their gang. The esteem of their gang peers will be earned by very different behavior than in neighborhoods in which honesty and respect for the law are valued.  Gang culture does not contribute to safer, more prosperous neighborhoods or societies.

Cultures that reward cooperation, honesty, and trust enjoy more successful economies as well. Financial wealth is only one source of esteem, however, and after being well feed and well clothed, the respect of our communities probably tops the list of aspirations for our lives. The cultural values in which we map out our goals profoundly influence the choices we make.  Adam Smith’s “invisible hand” guiding our actions for our self-enrichment serves us individually and the society we live in best when functioning in a culture of mutual respect, honesty, and cooperation.  In free market, capitalist economies, individual workers and entrepreneurs profit by satisfying the wants of others. Thus, competitive capitalism encourages a culture of serving others and such a culture encourages successful economies.  These are win – win societies.

“The overwhelming weight of evidence supports the conviction that when human beings, created in the image of God as free, rational, social, and moral animals, are allowed to creatively serve each other’s needs and responsibly plan their own lives, they flourish. And when a nation’s citizens flourish, the nation as a whole flourishes as well.”  “Dylan Pahman: Why-economic-nationalism-fails-conservatism”

So where should today’s Generation Z and Millennials look to find meaning and purpose for their lives? Most of us want to “do good” for our community, country and the world as well as for ourselves and our families. Will today’s youth see this marriage of public and personal good in the world of personal freedom and responsibility described by Adam Smith, or in the world of greater central government assistance (control) advocated by Bernie Sanders?

Sanders says he is a socialist, but I doubt that he means government ownership and direction of the means of production, which is the traditional meaning of socialism.  Rather he seems to mean government provision of important goods in our lives (heath care, education, jobs, etc.)  But the provider also determines what and how to provide.  Are the key decisions in our lives to be made by each of us within the legal and cooperative framework of norms and support provided by our culture and government of limited scope, or to be determined centrally for our benefit by a larger more dominant government and its employees? Government employees no doubt feel good when they help others, but capitalism provides a financial reward for doing so as well. Human greed is more likely to be tempered by the requirements of success in free markets than in government bureaucracies.

Though the average family, and especially the poor, have never before had such wealth broadly defined, today’s world suffers many shortcomings. The social safety net of a properly limited government is not always effective or well designed.  Each person in our newest generation in seeking the esteem of its family and community will ask how best to fix these shortcomings and to address and reduce the barriers to their’s and their neighbor’s fulfillment of their potential for a rich and fulfilling life. Will they turn to the “socialism” of Bernie Sanders or the individual/family-based free market model of Adam Smith?

So called “socialism” is enjoying a resurgence of popularity among American youth today. Even before Trump’s election a majority of 18-29 year old’s viewed socialism favorably. “Why-so-many-millennials-are-socialists”  Why is this, given the strong theoretical and empirical case against it?  For one they were not alive to see its greatest failures (though we now have Venezuela and North Korea).  They seem to think of countries like Sweden as socialist. While the free market capitalist country of Sweden has a larger government than the U.S., it ranks only a bit below the U.S. on the Frasier Institute Index of Economic Freedom (8.07 versus 7.83 in 2015).  For example, Sweden adopted a nationwide universal voucher program (school choice) in 1992, well ahead of the U.S.  https://www.fraserinstitute.org/studies/economic-freedom

Like every generation before it, today’s youth wants to “do good.” They want to contribute to making the world better than it already is. Those of us who highly value our personal freedom as the basis of how we live and who have studied the weaknesses of government provided and guided economic resources [e.g., https://wcoats.blog/2020/01/25/crony-capitalism/] must take up the challenge of explaining the superiority of a family based social structure and honest, law abiding, mutual respecting, cooperative culture. While free market capitalism has produced incredible riches for almost everyone, its primary virtue, and potential appeal to Generation Z, is its promotion of caring for and serving our fellow man.

Crony Capitalism

The standard of living of the median income family in the United States has risen to heights that could not have been imagined just a hundred years ago ($73,891 in 2017). All other industrial countries have had similar experiences.  “As measured in 2011 U.S. dollars, the global income per person per day in the first year of the Common Era stood at $2. That’s also where it stood when William the Conqueror set sail in 1066 to claim the crown of England…. In 1800, the average income was $2.80. In the 18 centuries that separated the emperorship of Caesar Augustus and the presidency of Thomas Jefferson, per capita income rose by less than 40 percent….

“Then industrialization changed everything. Between 1800 and 1900, GDP per person per day doubled. In other words, income grew over twice as much in one century as it had over the preceding 18 combined. By 2016, the number…in the United States… stood at $145…. In other words, global and American standards of living rose twelve-fold and 24-fold respectively over the course of the last two centuries….  These and other fascinating data are presented by Marian Tupy in: https://humanprogress.org/article.php?p=1906

How was this miracle possible? It resulted from each worker on average becoming dramatically more productive and being able to trade his or her products for the other goods and services he or she wanted. But what was the source of such an amazing increase in productivity?  Workers developed and or were provided with tools and equipment (capital) that made it possible.  These machines, cooperative production structures and worker skills (so called “human capital”) were developed because “capitalists” creating and investing in them had protected property rights in them and shared in the profits from their use. In short, it was because people had an incentive to invent and learn that was lacking in feudal or earlier social structures.  Bill Gates, for example, became a billionaire from selling us the computer products and services that Microsoft invented and produced. We happily paid Microsoft these billions for its tools that greatly enhanced our own productivity in both production, household management, and play. In the win-win world of private property and trade, we gained from Microsoft as much or more than Bill Gates did.

Interestingly, there is more to this story. As industrialization took hold, and the incomes of the lower and middle classes rose, income inequality declined. The monopolies of feudal Lords were eroded.  More recently “global inequality is declining as developing countries catch up with the developed world. Between 1990 and 2017, argues Branko Milanovic from City University of New York, the global Gini coefficient, which measures income inequality among all of the world’s inhabitants, decreased from 0.7 to 0.63” i.e., became more equal (zero equals perfect equality). [Tupy]

In the U.S. after years of gradual decline, the Gini coefficient rose from 0.35 in 1979 to 0.49 in 2018, slightly less than China’s (0.47). What is going on? Though still more equal than the world on average, why is income distribution widening modestly over the last forty years in the U.S.?

A widely held explanation is that industries have become more concentrated and have exploited their quasi monopolistic market power to extract noncompetitive, i.e. monopoly, rents. Two hundred forty-four years ago, Adam Smith wrote that, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” [Wealth of Nations Book I, Chapter X.] What prevents such conspiracies from succeeding is the competition from other firms seeking to exploit these attractive prices. When faced with competition, a person or firm can only profit by satisfying customers better than the competition.

But why have American firms, and those of many other industrial countries, become more concentrated and protected from competition?  Largely via state capture. As he reluctantly increased U.S. military spending as the “Cold War” heated up, President Dwight D. Eisenhower worried that it would be hard to avoid a mutually self-serving relationship between the government paying the bills and the defense industry supplying the goods. In his famous Farewell Address on January 16, 1961, Eisenhower warned that: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes.”

When government becomes involved or increases its involvement with private firms, the door (and the revolving door) is opened for firms to exploit the relationship to their advantage. It is not just the military-industrial complex (or the military-industrial-congressional complex as Eisenhower stated it in the first draft of his Farewell Address) that enjoys government favor and protection. President Trump’s tariffs on imported steel and aluminum are not for the benefit of American’s generally but are protectionist favors to America’s uncompetitive steel and aluminum firms. Protectionism is just another word for corruption.

Some products and industries need to be regulated to protect consumers and insure honesty and transparency. But larger firms increasingly accept, if not welcome, overly burdensome regulations because they are better able to devote resources to complying with them and thus absorbing their cost than are smaller firms. Such regulations protect them from competition from new, smaller firms. Professional licensing has increasingly been used to protect professionals from hairdressers to real estate agents to lawyers from competitors thus enjoying higher fees than would result in a more competitive market for their services.

The quasi monopoly rents firms are able to extract as the result of government protection against competition grow with the size of government involvement with the economy. The increase in income inequality (a reflection of shrinking competition) of recent decades (the increase in America’s Gini coefficient) have followed the large increases in the size of government, whether measured by expenditures, employment, or regulations.  https://wcoats.blog/2008/09/06/how-to-measure-the-size-of-government/

“• In 1900 the federal government consumed less than 5 percent of total output.

  • In 1950 the federal government consumed roughly 15 percent of total output.
  • In 1992 the federal government consumed almost 25 percent of total output.”

https://fee.org/articles/the-growth-of-government-in-america/

Bernie Sanders, a self-proclaimed Socialist, and Elizabeth Warren, a self-proclaimed defender of capitalism (I am not joking), argue that to fix industrial concentration, to prevent or unwind monopolies, the government needs to be bigger and more active in the economy. This is backward in terms of logic and experience. I don’t question that overwhelmingly most public servants work for the government out of the desire to serve the public. However, the interface between government and the private sector creates opportunities and incentives (resisted by most I am sure) for corruption. By corruption I mean the exploitation of government regulations and contracts to reduce market competition for (i.e. to protect) established firms.

Political lobbying by firms and trade organizations can provide useful industry input to congressional legislation or executive rule making but it is generally the prospective of established firms rather than of potential competitors or the general public. “Since the 1970s, there has been explosive growth in the lobbying industry, particularly in Washington DC.  By 2011, one estimate of overall lobbying spending nationally was $30+ billion dollars. An estimate of lobbying expenses in the federal arena was $3.5 billion in 2010, while it had been only $1.4 billion in 1998.” “Lobbying_in_the_United_States – A_growing_billion_dollar_business”

In 2010 the Supreme Court ruled in a 5-4 decision in Citizens United v. Federal Election Commission, “that the free speech clause of the First Amendment prohibits the government from restricting independent expenditures for political communications by corporations, including nonprofit corporations, unions and other associations.” “Citizens_United_v._FEC – Super_PACs”  This opened the door to direct corporate and union “donations” to political candidates and parties, providing a powerful tool in achieving government cooperation with what these groups consider their special interest.

The competitiveness, and whatever the lack of it contributes to income inequality, of American businesses will not be served by expanding the government’s role in the economy, quite the opposite. Competition is rarely stifled by natural market phenomena. Rather it is much more often blocked or restrained by government regulations that favor the established, dominant firms, who are able to gain the government’s favor. The political forces of expanding government regulation and interference in the economy promote every increasing state capture by dominant firms.  Crony capitalism will be the death of the real thing if it is not continuously resisted. As we should all well know, the price of liberty is eternal vigilance.

The Basis of American World Leadership

Since the end of World War II, the United States has played a disproportionately large role in guiding world affairs. It has unquestionably been the most powerful nation on earth. Its dominance reflects a number of factors including economic and military strength. But in addition to these, most countries have been happy, or at least willing, to accept American leadership because it was largely seen as guided by broad principles of fair play and the rule of law.  American leadership was the least of evils. The United States has benefited a great deal from this good will.

But as the old saying goes: power tends to corrupt, etc.  Being able often to bend other countries to our will (as long as others still saw us as driven by widely shared principles of fair play), the U.S. increasingly exploited this influence to encompass policies or actions others were not so happy to comply with.  To take a fairly recent example, the wisdom of President Trump’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA or the Iran Deal) to stop Iran’s development of its nuclear capabilities for at least ten years was not shared by the other parties to the agreement (the P5+1–the permanent members of the UN Security Council: the United States, the United Kingdom, Russia, France, and China, plus Germany–and the European Union).  All signers of the agreement except the United States continued to abide by it. But the U.S. dollar is the primary currency used for international payments and the U.S. threatened to punish (cut off from the use of the dollar and trade with the U.S.) any country that did not observe its unilateral trade sanctions on Iran. The non-U.S. signers attempted to set up alternative ways for paying for trade with Iran that did not use the dollar but found the reach of American threats hard to avoid. On January 5, 2020 Iran announced that it would stop complying with the agreement and resume its nuclear development program. It is not clear why Trump considers this better for American security than the (at least) ten-year suspension in the Iran Deal he tore up.  See: Economic-Sanction

President Trump has also used up a lot of “good will capital” with his Trade wars. He began by withdrawing the U.S. from the 12-member Trans-Pacific Partnership or TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States). The TPP further reduced tariff and non-tariff restrictions on trade, while expanding and modernizing coverage for the digital world. As, or perhaps more, importantly, the TPP provided a model and positive encouragement to China to adopt Western trading rules as a condition of joining the TPP in the future.  The remaining signatories went forward with a Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which went into effect a year ago with the U.S.

But Trump’s counterproductive trade strategies didn’t stop there by a long shot. In addition to economically harmful tariff protection of inefficient American industries (e.g. steel, washing machines, etc.), Trump has angered many of our friends in Europe, Japan and elsewhere by threatening tariffs in situations that do not seem to be justified by the World Trade Organization’s rules. In the process he is ignoring and weakening the WTO, which has played such an important role in the gradual trade liberalization that has dramatically lifted living standards around the world following WWII. He even tore up the North American Free Trade Agreement (NAFTA) and replaced with a new agreement that is not unambiguously better.  See: The-shriveling-of-US-influence

But once bullies taste their power, their appetites tend to grow. While elected with promises to end our forever wars and reduce our military commitments around the world, Trump has done neither.  This is not the occasion for exploring why (I don’t doubt Trump’s sincere desire to achieve both of those goals, but his ignorance of history seems to have made him vulnerable to flipflopping in the face of pressure from the neocons, such as Secretary of State Pompeo, he has surrounded himself with). Rather it is to review his rapid descent into a major bully, to the detriment of American influence and security.

On January 3, President Trump ordered the assassination of Maj. Gen. Qassem Soleimani, the leader of Iran’s paramilitary Quds Force in retaliation for an attack a week earlier on an Iraqi air base in Kirkuk that killed a U.S. civilian contractor and injured four U.S. soldiers and two Iraqis.

The drone that launched two missiles that killed Gen. Soleimani at the Baghdad International Airport also killed the Iraqi leader of the PMU, Abu Mahdi al-Muhandis, a close Soleimani associate, and eight other Iraqis.  According to the Pentagon, “General Soleimani was actively developing plans to attack American diplomats and service members in Iraq and throughout the region,”  According to Adil Abdul-Mahdi, Prime Minister of Iraq, Soleimani was on his way to see the PM in order to discuss moves being made to ease the confrontation between Shia Iran and Sunni Saudi Arabia.

The White House stressed that Soleimani’s planned attack was “imminent” thus justifying it without having to first inform Congress. Bruce Ackerman argues that Trump’s failure to obtain Congressional authorization for the attack justifies a third article of impeachment.  See: Trump-war-against-Iran-impeachable-offense  Iraqi PM Mahdi claimed that the attack on Iraqi soil was a violation of Iraqi sovereignty and a violation of the agreement between the U.S. and Iraq for stationing American forces in Iraq. Though Congress was not informed in advance, the Israeli government was told of the planned attack, according to some reports. In these circumstances, it is very difficult to know which reports are authentic and which are deliberate (or sometimes inadvertent) fake news.

In order to assess the likely impact of all this on our standing and support in the rest of the world, I like to evaluate American actions from how they might seem standing in someone else’s shoes. How would Americans react, for example, if our government had invited, say, French troops for training in the U.S., and the French Army blew up a Russian general on his way to meetings at the UN (or reverse the roles between the French and the Russians) without our permission?

But this note is not about whether this assassination was legal or good policy. For that see the following article from The Economist: Was-Americas-assassination-of-Qassem-Suleimani-justified?  It’s about the rise of American bullying in the world and its impact on our standing and ability to influence friends and enemies in ways that serve our national interest. What followed in the days after Soleimani’s assassination is mind boggling.

Keep in mind that following America’s invasion of Iraq that started on March 20, 2003, the U.S. and its coalition partners returned sovereignty to the Iraqi government at the end of June 2004. I was there as part of the Coalition Provisional Authority (I was the Senior Monetary Policy Advisor to the Central Bank of Iraq reporting to the U.S. Treasury). As we boarded helicopters to waiting planes at the Baghdad International Airport (of recent fame) many of us recalled images of the last American helicopter lifting off the roof of the American Embassy in Saigon when the U.S. ended its participation in the Vietnam War. Over the next seven years American and coalition troops remained in Iraq under terms agreed to in a Status of Forces agreement with the Iraqi government.  Following the ups and downs of troop surges and draw downs American forces were kicked out after Blackwater security contractors killed 17 Iraqis in Nisour Square in 2010.

With the rise of the Islamic State (ISIS) American troops were invited back under new, less formal terms. “Instead, the current military presence is based on an arrangement dating from 2014 that’s less formal and ultimately based on the consent of the Iraqi government, which asked the parliament on Sunday to pass urgent measures to usher out foreign troops…. ‘If the prime minister rescinds the invitation, the U.S. military must leave, unless it wants to maintain what would be an illegal occupation in a hostile environment,’” said Ramzy Mardini, an Iraq scholar at the U.S. Institute of Peace.  Getting-us-troops-out-of-iraq-might-not-be-that-hard-say-experts

And how did POTUS, the great negotiator, respond to the Iraqi Parliament’s vote: “President Donald Trump threatened to impose deep sanctions on Iraq if it moves to expel U.S. troops…. ‘We’ve spent a lot of money in Iraq,’ Trump told reporters aboard Air Force One as he returned to Washington after spending the holidays at his Florida resort, Mar-a-Lago. ‘We have a very extraordinarily expensive air base that’s there. It cost billions of dollars to build. … We’re not leaving unless they pay us back for it.’” Trump-threatens-iraq-sanctions-expel-us-troops

However, the Pentagon promptly announced that it was repositioning its troops in preparation for withdrawing them. Reuters released a copy of a letter on US Department of Defense letterhead addressed to the Iraqi Defense Ministry by US Marine Corps Brigadier General William H. Seely III, the commanding general of Task Force Iraq, which read in relevant part: “In deference to the sovereignty of the Republic of Iraq, and as requested by the Iraqi Parliament and the Prime Minister, CITF-OIR will be repositioning forces over the course of the coming days and weeks to prepare for onward movement…. We respect your sovereign decision to order our departure.”  reuters.com/article/

Within hours, the Pentagon stated that no decisions had been taken and that the letter had been sent by mistake. “U.S. Army General Mark Milley, chairman of the Joint Chiefs of Staff, said on Monday that a leaked letter from the U.S. military to Iraq that created impressions of an imminent U.S. withdrawal was a poorly worded draft document meant only to underscore an increased movement of forces.”  Iraq-security-pm  Or maybe they forgot to consult POTUS or maybe he changed his mind.  Are you confused yet? See: Amid-confusion-and-contradictions-Trump-white-house-stumbles-in-initial-public-response-to-Soleimanis-killing

In response to Iran’s threat to retaliate for killing General Soleimani “Trump tweeted on Saturday that the United States has targeted 52 sites for possible retaliation, including “some at a very high level & important to Iran & the Iranian culture.” The outcry over this clear war crime was immediate. “Secretary of Defense Mark Esper… put himself at odds with President Trump on Monday night by definitively telling reporters that the U.S. military will not target cultural sites inside Iran on his watch, even if hostilities continue to escalate in the wake of the U.S. drone strike that killed Maj. Gen. Qasem Soleimani at the Baghdad airport last week. ‘We will follow the laws of armed conflict….’” See: Esper’s-split-with-trump-over-targeting-iranian-cultural-sites-is-a-nod-to-the-laws-of-armed-conflict  Trump quickly backed down. Perhaps discussing these decisions with his staff before twitting them would be a good idea.

These are but a few examples of a bully on the loose. “Foreign Minister Mohammed Javad Zarif told NPR that he was scheduled to deliver an address when the U.N. Security Council meets Thursday [Jan 9] but that he was told the State Department had informed the U.N. that there was not enough time to process his request for a visa, which he said he first submitted 25 days ago.” Iran-foreign-minster-javad-zarif-denied-visa   Under the 1947 U.N. headquarters agreement, “the United States is generally required to allow access to the United Nations for foreign diplomats.”  Once again, we are violating our commitments. Iran is demanding that all future meetings of international bodies be held outside the US.  The IMF and World Bank are also headquartered in the U.S.

The American and coalition partners now in Iraq are there to support its fight against ISIS. This benefits us, our partners, and Iraq. The traditional tools of diplomacy (persuasion), rather than the threats of a bully, would ultimately be more effective.  The respectful consideration traditionally given to the views and positions of the United States in international bodies –such as global satellite spectrum allocation–global warming agreements–security agreements–or any other multilateral agreement in which we have an interest, is rapidly vanishing.  Assuming that the Trump administration can de-escalate the current tensions with Iran, something quite possible with sufficient diplomatic skill–see: The-soleimani-killing-could-draw-the-us-deeper-into-the-mideast-but-it-doesnt-have-to–our general loss of good will is the real cost of excessive bullying and it will hurt us considerably.