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January 28, 2021

Flying Elephants Aren’t Pretty

Socialism for the rich increases inequality.

In a New York Times oped Thomas Friedman writes:

“…We’re in the middle of a pandemic that has crushed jobs and small businesses — but the stock market is soaring. That’s not right. That’s elephants flying. I always get worried watching elephants fly. It usually doesn’t end well.”

Friedman is complaining – correctly IMO – that much of what is sold as recession relief is actually socialism for the rich at the expense of everyone else and at great long-term danger to the economy.

The economic arguments in Friedman’s oped come from a Wall Street Journal essay titled The Rescues Ruining Capitalism by Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management and an iconoclast among bankers who are generally in favor of easy money and wealthfare. Sharma writes:

“Easy money and constant stimulus have undermined the basic dynamics of the free market. We’ve paid the price in low growth and productivity, falling entrepreneurship and rising inequality.

“…A growing body of research shows that constant government stimulus has been a major contributor to many of modern capitalism’s most glaring ills. Easy money fuels the rise of giant firms and, along with crisis bailouts, keeps alive heavily indebted “zombie” firms at the expense of startups, which typically drive innovation. All of this leads to low productivity—the prime contributor to the slowdown in economic growth and a shrinking of the pie for everyone.

“At the same time, easy money has juiced up the value of stocks, bonds and other financial assets, which benefits mainly the rich, inflaming social resentment over growing inequalities in income and wealth. It should not be surprising that millennials and Gen Z are growing disillusioned with this distorted form of capitalism and say that they prefer socialism. The irony is that the rising culture of government dependence is, in fact, a form of socialism—for the rich and powerful.”

Neither Friedman or Sharma is critical of the immediate relief delivered directly to workers in the great recession or now during the pandemic. Neither has sympathy for Republicans’ new-found fear of deficits now that Ds will get credit for the largesse. Their quarrel is with the bailout of banks and large corporations, the bailouts which continue even after the immediate crisis is over. The Fed kept interest rates artificially low all the way from 2008 (TARP) through the boom which preceded the pandemic. The credit subsidies kept zombie corporations – companies which don’t earn enough to pay their debts – alive with subsidized credit. The zombies absorbed resources which would have been available to dynamic startups if only the zombies had been allowed to fail.

As an aside which neither of them mentions, “free credit” from the Fed competes with capital which savers have accumulated. Those who’ve saved a nest egg have not been able to earn reasonable interest from it. Moreover, cheap money tips the scale against labor by making it much cheaper to buy a new machine than hire more workers.

Sharma writes:

“The idea of government as the balm for all crises is appealing in the short term, but it ignores the unintended consequences. Without entrepreneurial risk and creative destruction, capitalism doesn’t work. Disruption and regeneration, the heart of the system, grind to a halt. The deadwood never falls from the tree. The green shoots are nipped in the bud.”

Winter has a purpose in the woods. We don’t try to prop up all the limbs which snow and wind will bring down. If we did, we’d have increasingly unhealthy trees. We wouldn’t have the new growth we need for a resilient forest.  An economy needs recessions even though we want to protect people from the worst consequences.

Modern economic theory is that governments can print money without apparent economic consequences so why not keep doing it. The Fed says “Look, there’s no inflation. Maybe we need to print more money.” But there is inflation! The inflation is in the stock market. The inflation is in the price of mansions (although maybe not urban condos anymore). What the Fed is really saying is that we’ve found a way to let the prices of some assets go up without having any wage inflation. You peasants really ought to be happy that the rich can use their increasing wealth to buy more of your labor without the inconvenience of having to pay more for it.

Sharma concludes:

“When the pandemic passes, authorities need to shift out of rescue mode and start weaning capitalism off easy money and bailouts. They have to recognize how heavy government intervention is distorting the price signals that make free markets efficient in allocating capital. Otherwise, they will continue creating more zombies and monopolies, widening inequality, undermining productivity and slowing growth. For all their good intentions, they will continue to feed the dysfunction that is alienating younger generations and deforming capitalism.”

Otherwise beware of falling elephants.

For a dystopian view of how the printing money strategy can turn out, see Dystopia, The Novel.

See also:

Don’t Bail Out the Oil Industry (or the Banks)

We’ve Been T*RPed

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