Posted by on October 19, 2015

I have not finished watching the Democratic debate but I saw enough to prompt a little metaphorical and literal regurgitation.[1]

Martin O’Malley

Let’s warm up with Martin O’Malley.

It is pretty clear from the debate that O’Malley thinks that he has Hillary Clinton’s goat with his stand on re-instating Glass-Steagall, the provisions of the US Banking Act of 1933 which separated commercial from investment banking activities.  The provisions were repealed in 1999 with the enthusiastic endorsement of President Bill Clinton.  So, O’Malley thinks that this is a great wedge issue, particularly because of her Wall Street financial backing.

Unfortunately, O’Malley has to re-write the history of the recent financial crisis to make his point.  Although this will probably be obvious to any follower of this blog, someone forgot to tell O’Malley that the financial crisis had almost nothing to do with the repeal of Glass-Steagall.

Think of the names and events that comprise the financial crisis: Lehman Brothers.  AIG.  Bear Stearns.  Washington Mutual (WaMu).  “Breaking the buck” with Reserve Primary Fund.  Merrill Lynch.  Sub-prime loans.  Countrywide Financial.  CDOs, CDOs “squared” and credit default swaps.  Fannie Mae and Freddie Mac.  And the perpetual outlier, Citibank.

With the exception of Citibank, all of these names were firmly on one side or the other of the division between investment banking (Lehman, Bear and Merrill) and commercial banking (WaMu).   Or they simply had nothing to do with this distinction (AIG, Reserve Primary, Countrywide, Fannie and Freddie).  And the major cause of the financial crisis was the formerly prosaic commercial banking practise of granting residential mortgages.  Although this practise was “turbo charged” with some Wall Street financial engineering and a huge amount of encouragement from Freddie, Fannie and the Fed, there was nothing in the chain of sub-prime mortgage loan origination, selling, packaging, “squaring,” and derivation that would have been forbidden had Glass-Steagall been in place.  And WaMu is the proof that lenders could have gotten into even more trouble if they had just done the traditional thing of keeping the loans on their books.

In fact, the strongest link that can be drawn between the financial crisis and Glass-Steagall is that the crisis probably would have been worse if Glass-Steagall had still been around.  With Glass-Steagall, it would have been impossible to “save” Bear Stearns and Merrill Lynch by selling them to JP Morgan and Bank of America, respectively.  It also would have been impossible to “save” Goldman Sachs and Morgan Stanley by allowing them to convert to Bank Holding Companies, thereby gaining access to emergency funding from the Federal Reserve.  Regardless of what you think about these salvations, and I certainly do not think that they were unalloyed good things in the long term, there is no doubt that they helped quell the crisis.  And all of them would have been impossible if Glass-Steagall had still been around.

So, Martin, please stop barking up this particular tree.   There is a huge amount wrong with financial regulation and there are certainly very strong arguments for eliminating, or at least greatly reducing, the ability of financiers to play “heads I win, tails you lose” with government-backed funding.  I have made many of these arguments myself (such as here, here, and here).  But there are many ways for commercial bankers to play this game that have absolutely nothing to do with investment banking.  And in this era of “too big to fail” investment banks and other systematically important financial institutions, there are plenty of ways for non-banks to play the game too.  A focus on Glass-Steagall would simply distract us from the real changes that are needed.

Bernie Sanders

Having never seen Bernie in action before, I have to admit I understand a lot of the appeal.  He does the Old Testament prophet, thundering against the iniquities of the age, very well.  He even looks the part.

Of course, his entire act would have been much more effective if it hadn’t followed seven years of a Democratic administration that has apparently done nothing to right these wrongs.  But the Democrats can simply dip into the New Testament for the ready-made answer to this criticism, with Obama playing the role of John the Baptist:

“I baptize you with water for repentance, but he who is coming after me is mightier than I, whose sandals I am not worthy to carry. He will baptize you with the Holy Spirit and fire.”

Like with all their failed policies, the Democrats will simply say that Obama just didn’t use enough HS and fire.

I had to laugh, though, when early in the debate Bernie invoked Sweden, Norway and Denmark as blueprints for his democratic-socialist vision of America.  (He could have stayed closer to home and invoked his native Vermont, which is more or less the same thing.)  I mean, it is obvious that these benchmarks are much more relevant for America than other democratic-socialist experiments, such as England (before Thatcher) or Canada (during the Trudeau era or in modern day Quebec).  Or that shining beacon of economic performance, stability and opportunity called “the rest of Europe.”

He might have also noticed that even Sweden, Norway and Denmark are marching in the opposite direction from his intended course, rolling back many of the socialist policies that he so admires.  These policies in Norway gave rise to a new verb: “to nave,” or to live off the social welfare agency, NAV.  The Finance Minister of Norway recently estimated that 600,000 Norwegians are out of the labor force due to the generosity of welfare and pensions.  Since there are only 5.1 million Norwegians, and an even smaller working population, some might consider this material.  With the fall in the price of oil, the “blue-eyed Arabs” can no longer afford this largesse and Bernie will be saddened to learn that much of this is going the way of the dodo.  Sweden and Denmark, not blessed with black gold, have already had to make adjustments.

But most importantly, it is utter nonsense to extrapolate from these three tiny and highly cohesive countries to America.  Or, for that matter, from small-town and rural Vermont to the rest of the country.  This is what I have said about this subject before in my discussion of “Work versus Welfare”:

“…this talent for gaming the system doesn’t always manifest itself. Internalized (“pride” and “guilt”) and externalized (“shame”) factors sometimes override it. For example, the famously generous welfare states of Scandinavia have survived, I am convinced, because these small and highly cohesive societies produce cultural factors that have largely offset the economic motivations provided by their systems. It should come as a surprise to no one, however, that as cultural cohesiveness has broken down under the impact of immigration and greater mobility, these countries are increasingly questioning the sustainability of their models.

Unfortunately, the anonymity and mobility of American society means that we can count very little on these cultural inhibitors. In addition, it is clear that in all societies, inhibition falls in an atmosphere of generalized cheating: eventually, even the virtuous start to question why they are the only ones playing the game straight. In fact, societies probably reach a “tipping point” where gaming is so prevalent that people start to feel that they have to cheat just to even the odds. Although I can’t prove it, I get a distinct feeling that America has recently reached this tipping point…”

And here is Christian Bjørnskov of Aarhus University in Denmark, one of the leading “trust” researchers, as recently quoted in The Wall Street Journal:

“We’ve always had a great trust in other people in Scandinavia, and this trust is the cornerstone of our welfare state.   The welfare state would collapse in a country like Greece, where distrust and corruption are widespread.  It’s a very human reaction to take as much as you can if you feel that others are doing the same.”

I will leave it to the reader to judge whether America is closer to Scandinavia or Greece in this aspect of culture.  I would just point out that, if I argued that the experience of Switzerland proved that it was okay for every military-aged male in America to keep an automatic weapon in his bedroom closet, Bernie would rightfully jump on me with both feet.  Because culture matters a great deal.  Bernie would doubtlessly agree with this statement when it comes to weapons, but he conveniently forgets the lesson when it comes to socialism.

Hillary Clinton

I obviously could have spent this entire post discussing the big, bad ideas of Hillary Clinton, but I would just like to focus on one: raising the minimum wage.

An enormous amount of ink has been spilled on this subject.  I have no intention of going through the statistics from all the conflicting studies, or dragging my innocent readers through them.  The Economist magazine, in recent opinion pieces entitled “A reckless wager – A global movement to much higher minimum wages is dangerous” and “Destination unknown – Large increases in the minimum wage could have severe long-term effects,” does a passably balanced and complete job of summarizing these results.  So, let’s stick to these.[2]

Here are the main points from the Economist:

  • Small increases in the minimum wage appear to have had a negligible negative impact on employment, at least in the short term.  However, the increases that are being mooted by the Democratic candidates, such as the increase to $15 per hour proposed by Sanders and O’Malley or even Clinton’s $12 per hour, are well beyond the level that would qualify as “small.”  An increase to $15 per hour, for example, would affect two-fifths of the workers in America.
  • Not surprisingly, the long term negative impact is much more dramatic.  Perhaps as much as 100 times greater, as one study found.  Over time, companies respond to higher minimum wages by substituting machinery for workers.  This should not come as a surprise to anyone who has seen a video of an Amazon automated warehouse or is watching the race between Uber, Google and Apple to produce cars that will not need drivers.  (Or, for that matter, anyone who has used a self-checkout line at a grocery store or paid for gasoline with a credit card at the pump.  But like driving herself, these are probably things Hilary Clinton hasn’t done for years.)  The Economist points out that, when there are already many concerns about machinery replacing humans, this is not the ideal time to be raising the cost of the two-legged competitors.
  • The studies show that the negative employment impact of the minimum wage clusters in the young and those without advanced education.  In other words, exactly the part of society that the minimum wage is supposed to help.  This result justifies the longstanding characterization of the minimum wage by economist Milton Friedman as a form of discrimination against the young and the unskilled.
  • Raising the minimum wage may cause and allow businesses to raise prices.  If true, then the minimum wage is a subsidy paid for through a hidden sales tax.  Sales taxes are notoriously regressive, which means that the minimum wage once again harms precisely the segment of the population it is intended to help.
  • The minimum wage is intended to lift people out of poverty.  For this goal, it is a blunt and often misguided instrument.  A study by the Congressional Budge Office found that only one-fifth of the estimated net gain in earnings would go to households below the poverty line.  This is largely because many of the people who would benefit are second earners in a household that is already doing pretty well.
  • Finally, most economist agree that the government has far more effective tools for helping the working poor, including the Earned Income Tax Credit (“EITC”), which tops up earnings without destroying jobs.  Although not perfect, the EITC can be easily improved, as has been proposed, for example, by Republican candidate Marco Rubio.

This is what the statistical analysis shows.  But we all know the old saying about lies, damned lies and statistics.  Common sense, however, is no more supportive of the case for raising the minimum wage.  How probable is it that a material increase in the cost of labor has a negligible impact on the amount demanded?  Why should this be the only good in society that displays this characteristic?[3]  Where is the money going to come from to pay the additional wages, particularly when the industries which are most affected by the minimum wage are also some of the ones with the thinnest margins (such as retailers, restaurants, warehouses, etc)?  And if the increases are self-funded through higher productivity and employee loyalty, as proponents sometimes claim, then how is it that employers haven’t figured this out for themselves, particularly when the first ones to do so can benefit not only from higher productivity but also from the better quality staff that paying higher wages would allow them to attract?

The argument that minimum wages have a negligible impact on employment is simply untenable, particularly in the longer term.  Another response, however, is that these are bad jobs – “McJobs,” as they are often derided – and we should be happy to see them go.  This is also nonsense.  Is it really better for the unskilled, and the young, to be at home catching up on day-time television than to be working in any job?   A McJob at least gets someone into the discipline, pride and socialization of working.  It gets them onto the first rung of the employment ladder.  Clinton, and the others like her, want to saw the first rung off and then sit around wondering why all the short people are unemployed.

There is another corrosive aspect to this policy.  Politicians in general, but the Democrats in particular, love rewarding their constituencies with invisible money.  Do our people want free contraceptives?  Let’s give them a “contraceptive mandate.”  Do our people want free child care?  Let’s require paid parental leave.  Do the working poor, at least the ones who retain their jobs, want higher incomes?  Let’s give them a higher minimum wage.  Let’s do all of these things because none of them hit the budget and therefore we can still claim to be fiscally prudent.  Best of all, when these added burdens contribute to flat-lining wage growth [4], we can then point to this as another reason for further government intervention.  From the standpoint of our parasitical governing class, this constitutes a “virtuous circle.”

Politicians of all stripes should not be allowed this cowardice.  They should be forced to recognize and defend the explicit costs of their policies, and not to hide them in regulatory burdens imposed directly on employers and other parts of the private sector.  If they want to increase the compensation of the working poor, then let them propose and defend increases in, for example, the EITC.  But of course they don’t want to do this.  They prefer to keep the constituency bribery below the table.

For those who saw the debate, you might remember the way that this topic was introduced by Clinton.  She was asked a question about inequality, to which she responded, offhandedly, “of course, increase the minimum wage” before she went on to list a number of other equally misguided policies.  Like only a particularly dim-witted child could fail to appreciate the obvious intelligence and benevolence of the proposal.  Well, actually Hillary, this is one child who remains unconvinced.  I doubt that I am alone.


I will probably have further comments after watching the last 60 minutes of the debate.  But one more early observation: I saw very little daylight between the economic positions of the candidates.  All railed against the growing inequality.  All attributed this to an economic system that was biased in favour of the rich, including with a tax system that failed to soak them sufficiently.  All were in favor of new government programs (such as parental leave) and the extension of existing programs (such as Obamacare, the minimum wage, indiscriminate financial support for college education and Dodd-Frank).  All were against the Trans Pacific Partnership and freer trade in general.  Yet, for all this similarity, only one candidate dared to call it “socialism.”  This branding supposedly makes Bernie Sanders unelectable.  Hopefully voters will realize that, underneath the packaging, they could have all said “Je suis Bernie.”

Roger Barris, Weybridge

[1] I won’t comment in this blog about Jim Webb and Lincoln Chaffee, except to say: Please pull out before the next debates and spare us any more of your cringeworthy performances.

[2] Truth be told, I think that these Economist articles are overly kind to these policies.  A strong case can be made that even their lukewarm endorsement of small increases overstates the case.  For a much more negative view, readers can refer to an article entitled “How to Destroy 6.6 Million Jobs And Get Only 6.7% Of The Benefit To Workers In Poverty – Raise The Minimum Wage to $15).  This article, prepared by the former Director of the Congressional Budget Office, isn’t lukewarm.  It is scalding.

[3] Yes, yes, yes.  I know that people sometimes buy more Hermes bags the higher the price.  But employers are a lot smarter than the Kim Kardashians of the world.  Or they are out of business.

[4] One of the arguments for increasing the minimum wage is the allegation that productivity improvements are no longer being passed on to workers, as economic theory would predict.  There is an interesting BloombergView article (entitled “American Capitalism Isn’t Broken After All“) that addresses this issue.  The article describes a study done by Harvard’s Robert Lawrence that shows that, if you adjust properly for such things as benefits and other employer burdens, the correct population of workers, inflation and depreciation, then in fact the gap between wage and productivity growth since the 1970s almost disappears.  The article also makes the point that growing inequality is small beans, in terms of living standards, compared to lagging productivity growth.  As usual, the politicians are focussed on the wrong problem.

Read Offline:
Posted in: Economics, Finance, Politics

Leave a Reply

3 Comments on "Big Ideas From the Democratic Debate…NOT!"

newest oldest most voted
Notify of

Culture does matter. Cohesion mitigates. I just returned from a trip to Rome. Despite the pickpockets, I never felt unsafe as I would in more fragmented cities, such as Chicago. Sanders does seem to fail to understand that.


[…] have commented before about Bernie Sanders’ affection for Denmark (see Bernie Sanders here).   I was reminded of this when listening to a recent debate between editors from Reason and […]