Makers and Takers – Rana Foroohar

Ms Foroohar is a Time economic columnist and CNN global economic analyst who has written one of the most scathingscreen-shot-2016-10-31-at-15-14-50 books about the American finance industry I have read. It addresses the process of financialisation, a process as ugly as its name. In essence it is about the transformation of the banking sector from something that sustained Main Street businesses in a solid, if slightly boring way, to something which now dominates and, more importantly, sucks the lifeblood from the very businesses it previously supported.

One point which is worth stressing from the outset, Ms Foroohar is not anti-capitalist. She is one of a growing number of people who are supporters of free market capitalism but who are very concerned with the way it is evolving. As she states at the outset, Ms Foroohar is “…not in favour of a planned economy or a move away from a market system. I simply don’t think that the system we now have is a properly functioning market system.”

She begins by considering the way finance has expanded dramatically over the past 40 years and particularly how it has shaken off the shackles of post 1929 depression. One example is emblematic of the way banking has moved away from a highly regulated sector is a piece of legislation called Regulation Q. This prohibited banks from paying interest on current accounts and controlled the level of interest that could be paid on other accounts. Its purpose was to “prevent banks from competing too vigorously with one another … which might in turn push them into the sort of risky investments that had precipitated Black Tuesday in 1929.” The aim of this and other regulations like Glass Steagall was to ensure banking remained a “safe boring utility”.

This regulatory framework remained robust and effective throughout the 30’s, 40’s and 50’s. In the 1960’s however things began to change. Ms Foroohar illustrates the shift of the sector through the history of National City Bank which ultimately became CitiCorp, the classic too big to fail bank. Specifically she charts the career of Walter Writson the Chief Executive of Citibank/Citicorp from 1967 to 1984, one of the most influential commercial bankers of his time. In essence he wanted to move banking out from being a low risk, low profit, highly regulated sector to something much more glamorous.

Writson’s actions, in terms of challenging regulation, dreaming up increasingly complex products to get around the rules, increasing the leverage of the bank and changing the compensation structure were things that would be repeated across the sector undermining the commitment to regulation so that bit by bit it was repealed with Jimmy Carter deregulating interest rates (Regulation Q) in 1980 and then critically Bill Clinton repealing Glass-Steagall in 1999.

The result was an explosion in banks turnover and the development of increasingly sophisticated financial products and derivatives. This led to increasing  profit levels which in turn drove a series of behaviours to protect and develop those profits which were more or, increasingly, less legal. Even the activities which were perfectly legal changed the risk profile of banking and its relationship with the businesses it was supposed to be encouraging and generated enormous systemic risk which exploded in 2007/08.

Whilst the inherent risks of fractional reserves and complex debt instruments like Collateralised Debt Obligations, made famous by the credit crunch, are important, the less legal side of the industry should not be overlooked. It is a staggering fact the  industry paid £139bn in fines between 2012 and 2014 for: rigging Libor, insider trading and a great deal more (and of course this is just banks within the USA in a 3 year period!). In the massively profitable finance industry however the view seems to be that fines are simply another cost of business.

Over the period that the finance “takers” were in the ascendancy at the same time the business “makers” were under attack. The growing importance of finance was leading to the development of what some have called “quarterly capitalism”. This meant that stock price was everything and it had to move upwards every quarter. The heroes of shareholder value, like Jack Welch of General Electric (Manager of the Century according to Fortune magazine), came to be seen as the models for business leadership. These were people whose interest in engineering was more financial than mechanical. Ruthless cost cutting, getting rid of jobs and reducing investment in R&D to feed the ever demanding stock market.

Those businesses which did not employ the right staff to do this internally were targeted by what used to be called corporate raiders but are now more politely called “shareholder activists”. These individuals, like Carl Icahn, buy sufficient shares in companies to replace existing management with more aggressive mangers who will take the “hard decisions”, cut cost and increase shareholder returns. They may also sell off valuable assets or break up the company to extract value.

This might be seen as the kind of process that Schumpeter described as “creative destruction”, getting rid of the dead wood. However, a growing body of evidence suggests that the stripping out of value is actually undermining the economy not making it more efficient. Evidence is emerging that private companies, i.e. those that have not gone to the market and become public have better track records of investment in R&D, staff and capital and more critically long term profitability.

Public corporations are bizarrely now borrowing to fund shareholder dividends and share buy backs thus artificially pushing up the value of the remaining shares. Why borrow to do that? Like Apple, to avoid having to bring the massive pile of cash from profit you have made abroad back to the States where you would have to pay tax on it.  According to Foroohar corporations have invested around 10% of every dollar they borrow into their company and 90% into shareholder payouts. This means the role of stock markets has reversed. Instead of wealthy individuals investing in new productive capital, rather, companies have been making payouts to the wealthy individuals. This might be morally objectionable but more importantly it does not provide for sustainable capitalism. This is cannibalistic capitalism, its eating itself.

Over the years another phenomenon has emerged consistent with the old adage, if you can’t beat them join them. GE probably the most significant engineering company in the world, decided the finance department should become a profit centre. It created GE Capital which was to all intents and purposes a bank but not registered as one. Not just any bank, in 2013 the Financial Stability Oversight Council declared GE Capital to be a systemically important financial Institution and thus subject to Federal Reserve oversight. What could have made them come to this snap decision? Because in the 2007/8 crash it was bailed out by the American taxpayer to the tune of $139bn.

Ms Foroohar’s book explores the way “financial speculation is playing a greater and greater role in fueling volatility in commodities…”.  Since 2000 there has been a fiftyfold increase in dollars invested in commodity linked index funds. Several things are pointed to as having pushed this: Goldman Sachs creation of a commodity index fund; deregulation of commodity markets; the credit crunch that scared people out of stocks; and the $4.5bn QE exercise. This financialisation means that businesses now have to compete with their banks for commodities. If this sounds weird it’s because it is and one example makes the point.

Goldman Sachs bought up thousands of tons of aluminium which it then controlled the supply of. By doing this of course they were able to control the price and thus increase the value of their investment and any commodity trades that they had done in relation to aluminium. Whilst this was an issue for Coke Cola, in that it put up the price of their cans, the wider speculation in commodities had much more significant effects.

In 2003  big investors were putting $13bn into commodity index trading, by 2008 it had risen to $260bn. Over the same period the price of 25 commodities including cattle and heating oil increased by 183%. When asked whether institutional investors were contributing to food and energy price inflation the unequivocal answer given by Michael Masters, a hedge fund manager was “Yes”. This means speculators were gambling with products that meant people ate or starved, and many starved.

Ms Foroohar addresses the fact that many of the people and institutions that have been involved in this process of financialisation have benefited spectacularly with astronomical reward packages and profit levels. She goes on to review how they spend hundreds of thousands of dollars to avoid paying tax on their enormous earnings. She also looks at the phenomenon of the “revolving door”. This is the process whereby elected officials and appointed civil servants, charged with regulating the financial sector, move into their posts from the very sector they are regulating and move back into the sector when they retire from public life. She suggests the opportunity to sit on the Board of a large financial institution may colour the view of regulators whilst they are doing their job in the public sector. Whether this is true or not is increasingly beyond the point. Many Americans think it is true and that is what matters.

Financialisation is  one, if not the, most significant trends that has occurred over the past 30-40 years. Ms Foroohar’s claim is that it has sucked the lifeblood out of Main Street America, undermined investment in innovation and productivity and thus the future of the nation. Putting finance back in its place will not be easy. It means empowering the makers which would involve a genuine and major shift of power. Ms Foroohar sets out a sensible programme of reform. My concern is that people rarely give power back it is usually taken from them and the result of that is not always sensible. Lets hope this time it will be different.


Takers and Makers: The Rise of Finance and the Fall of American Business: R Foroohar. Crown Business 2016


Hillbilly Elergy

This is a timely look at the viability of the American Dream. It is an autobiographical account of one hillbilly’s transition from a “broken home” childhood in a lower-working-class family, into a graduate of Yale Law School. I place “broken family” in inverted coma’s because the book challenges the glib labels that are placed on people and experiences. If this book does one thing it takes you into the complexity and contradictions of life amongst the poor white communities of the United States.

img_1542This is an insiders’ take on what it is like to live in a family where fierce loyalty and random neglect coexist. Where love and hate are two sides of an indivisible coin. Where parental violence is commonplace and serial relationships are the norm. Where a mother will demand a urine sample of her young son in order that she can pass a random drug test at work.

The author paints a picture which captures the ambiguity of the strengths of hillbilly life with its strong commitment to family and national loyalty. It describes how these strengths carried to extreme convert family loyalty into blood feuds and patriotism into a deep distrust of outsiders. Whilst the book is very much focused on the detail of the lives of individuals it is set against the economic backdrop of the migration of hillbillies from the poorer regions of Appalachia to places like Ohio, Indiana and Michigan.  The context is one where poor white Americans leave areas of decline to escape poverty and look for a new life in the industrial heartland of America being built just after the last war. This economically driven dislocation had its costs and casualties although the question is raised to what extent these were caused by the dislocation or were inherent in the codes of honour and double think of some existing aspects hillbilly life in the Appalachians.

Despite the fact his mother had a succession of partners and an addiction to prescription drugs, and despite the fact that she would occasionally threaten serious violence to her son and daughter, the author recognises that he was lucky in having a maternal grandmother and grandfather (Mamaw and Papaw) and a sister that provided points of stability, a permanent refuge and unconditional love.

Reading the book you feel the author would certainly have struggled had it not been for the unsentimental but solid support of his grandparents. He recalls how Pawpaw would spend hours helping him with his maths and taught him that, “…lack of knowledge and lack of intelligence were not the same. The former could be remedied with a little patience and a lot of hard work. And the latter? Well I guess you’re up shit creek without a paddle”. His Mamaw would always open her home and heart to him when he needed respite from his mother, even when she was in her seventies.

This is the same Pawpaw who had spent a large part of his early married life drinking and fighting with his wife Mamaw who herself was reputed to have killed a man. These are rough diamonds, at times, very rough. There is no sentimentality in this book, but there is an underlying theme of redemption. No one is all evil. People do good things even if most of their life they do the wrong thing. And most of the time when they do the wrong thing it is without either malice or forethought, and mostly to their own detriment. But to understand all is not to excuse all. Whilst the author records  Pawpaw recognises the extent to which he as failed his daughter in the past and is therefore in some sense responsible for her shortcomings as a mother this does not absolve her of all responsibility.

The ambiguity of reality is everywhere in this book. His mother, who he had, at best, a tempestuous relationship with, reinforced within him the view that education was important, taking him to the library and getting him a library card. She may not have nurtured it and created the best environment for it to flourish but she inculcated the benefits of learning into what was clearly a receptive mind.

A real strength of the book is the balanced and clear focus on the stresses and strains of life in poor families. Families where aspiration is a job not a career, where education is girlie, where arguments replace discussion and where fights replace arguments. Where the most innocuous of slights can become the subject of blood feud and where contradictory beliefs can be held, and fought for, without apparent hypocrisy.

The book has been picked up in the US by many on the right who claim it shows that individuals need to accept responsibility for their own failings.  The author may well be a patriot, he may well vote republican, he may still cling to the American Dream, but he has a clear view that the Dream is something that is getting harder and harder and that for folks from his background tantamount to impossible. Whilst he does argue strongly for personal responsibility, he also recognises the social, economic and psychological forces that weigh down upon and shape peoples actions. He does not offer easy solutions. He raises difficult questions and does so with an empathy and personal understanding for those that face the dilemmas of poverty.

His focus is on the cultural and personal issues, which undermine the Dream. This might be seen as a rerun of the “culture of poverty” thesis, which focuses responsibility for poverty on the communities that are poor. They are trapped in a culture of their own making which keeps them in poverty. I think his view is more subtle than this. I think he sees the interplay between the loss of employment in the rust belt and the decline into drugs and alcohol abuse and all that goes with that.

What he does do is wrestle with where one draws the line on personal responsibility. Whilst he recognises that not everyone has a Mamaw or a Pawpaw in their life he does not accept the view that people are simply the product of their environment and cannot be held to account personally for their decisions.

There is a touch of the Ayn Rand rugged individualism about his position. At one point he talks about the fact that his Mamaw could not leave bicycles locked up out on the porch for fear they would be stolen, or that someone had to sell his mothers house because he could not rely on his neighbours not to wreck it,  or that his Mamaw was afraid to answer the door to a neighbour who pestered her for money for drugs. He goes on to say, “These problems were not created by governments or corporations or anyone else. We created them and only we can fix them.”

Whilst some of us think there are things which governments and corporations do which directly contribute to these problems, it is a mechanical mind that thinks this is not tempered and mediated through real individuals making real choices which carry moral responsibility. Clearly, there are massive differences in the life chances of individuals and the author speaks very eloquently about the different environment, nay world, that “the rich” inhabit, a world full of social capital, and an understanding how to use it. But he also never loses sight of individual choice.

What is indisputable is that the author provides an intimate and clear-sighted view of what it is like to grow up in a family which has little money and a lot of uncertainty in the richest country in the world. He also describes the intimate stresses and strains of moving from a lower working class background to a solid middle class future. The constant fear of being “found out”, of discovering at university that a mistake had been made and your entry grades confused with someone else’s. If you have any experience of that transition the authenticity of the book will shine through.

Early in the book he says he recognises that he is a “hill person”. He goes on to say “So is much of America’s white working class. And we hill people aren’t doing very well.” This is certainly true and I suspect is part of the explanation for the popularity of Trump. I recommend this as an interesting and timely take on the life experience of poor white Americans.

JD Vance. Hillbilly Elegy: A memoir of a Family and Culture in Crisis. William Collins 2016

“Martial Aid”

Given the nature of their engagement in “diplomacy by other means” it is perhaps not surprising that the most sensible comments on what ought to be the direction of foreign policy in the Middle East has come from a retired United States General. John R Allen was President Obama’s Special Envoy to the Global Coalition to Counter ISIS. Before that he commended NATO and US forces in Afghanistan from 2011 to 2013.

His analysis of the current situation in Syria, and the wider Middle East, sees victory over ISIS as a necessary response to an immediate threat. However, he believes military success on the battlefield will yield no lasting peace. Battlefield war will simply evolve into terrorism, or “war carried on by other means”. Worse, for those in the West, is that this might mean more atrocities on the streets of London, Paris and New York.

At the moment the major part of the conflict is elsewhere and the vast bulk of the resources of ISIS and their backers is devoted to a military campaign for territory. If that territorial battle is decisively lost will the leaders and ideologues of militant Islam give up? Will they recognise defeat and accept the status quo ante?

General Allen’s view is this is highly unlikely. Much more likely is a terrorist diaspora. Battalions of soldiers will go home or to some other part of the world and become dispersed cells of terrorists along the Al-Qaeda model. What is happening in Syria at the moment is a battle, which ISIS may well be losing. If they do lose the battle however, we should not think we have won the war. The problem will not go away it will simply relocate. This might be in the west or it may be elsewhere in the region causing another round of death, destruction and dislocation. The result of this will be even more people fleeing the region creating greater tensions in Europe as they attempt to find a safe haven.

The citizens of Europe and the United States are fed up with the endless turmoil in the Middle East. More they do not want to expend blood and treasure trying to solve what looks like an insoluble problem when they are being told they must accept another half decade of austerity. This general opposition is reinforced by a wholly reasonable belief that when it comes to wars in the region our political leadership are incompetent or duplicitous, or both.

It is clear that the Bush/Blair invasion of Iraq had no thought to what needed to happen beyond a successful campaign on the battlefield. Similar criticisms were levelled at Mr Cameron’s unclear war aims when he proposed the intervention in Syria in 2013.

The reality the region remains one, which has strategic importance for the west and will continue to do so for years to come. Clearly the supply of oil is a major consideration with more than 25% of the world’s annual oil production coming out of the area. Significant disruption of this would have an impact on the global economy and the living standards of millions of people.

The populations of the region are unlikely to stop in their struggle for political freedoms and, perhaps more importantly, economic progress. This will result in more conflicts, population disruption and emigration to regions perceived as safer and offering more opportunity.

The option of ignoring the problem, therefore, is not a practical one. However, continuous forays into the region to shore up one regime or change another is not a viable long-term strategy either. General Allen made the point on the Today Programme on 22 October 2016 that what is needed is a radical, long-term plan of engagement with the region. He recognised the challenge of securing this. He felt however that until we “embrace the enormity of the newness of thinking” required we shall be condemned to “interminable conflict” in the region which we can neither ignore nor avoid being dragged into.

What new thinking was he proposing? In essence something like the Marshall Plan. This was the provision by the United States of something in excess of $12bn (circa $120bn in today’s money) to help rebuild Western European economies after the Second World War. The ambition of this is not lost on General Allen. However, you can see that without something along these lines, which helps establish a dynamic economy in the region benefiting the vast bulk of the population peace is likely to be a pipe dream.

Clearly progress needs to continue to be made on the military and diplomatic fronts however a prerequisite of effective democracy is social cohesion and that is only possible when people have a stake and a future in the society they live in. This can only happen if there is a functioning economy which provides gainful employment to the majority of the people.

Recent years have seen massive destruction of cities across the Middle East. They need to be rebuilt. As Lord Stern makes clear in his recent book “Why are we Waiting” the next twenty years of infrastructure development are going to be absolutely crucial to determining whether the world meets its targets of constraining global warming to less than 1.5 degrees C.

It would make sense for the West to work together to help fund the reconstruction of those cities and to treat it as a demonstration of what can be achieved in terms of low-carbon development, management and maintenance of urban centres.

All this may sound hopelessly idealistic but we should keep in mind that between 2003 and 2009 the Iraq war cost the UK alone £8.4bn. Whatever happens we and the rest of the West are going to be spending large amounts of money trying to stabilise recurrent conflicts in the region. Eventually we will either reconcile ourselves to perpetual war and the insecurity this generates or face the need to try a radically different approach. There is no doubt this would require political leadership in the West of the highest order and to be fair that doesn’t look likely to arise any time soon.
General Allen has pointed a way forward. He recognises this is a generational strategy not a tactical deployment between elections. Investing in this would support building the economies of the region, create employment and save millions of lives from the blight of war. It might also contribute to saving the planet. It must be worth a go.

Why is Trump so popular?

Ok maybe his star is waning. Maybe he has crossed one norm that alienates him from the majority in the United States, commitment to the democratic process. However it cannot be denied that, for a bombastic, demagogue who has cornered the market on phobes, (Zeno, Homo, Islama etc.) and has all the charm of a lounge iguana, Trump has tapped into a genuine and substantial vein of discontent.

The 2016 election may well come to be seen as a portent of things to come. Two years ago the idea that an avowed socialist would give Mrs Clinton such a run for her money in the Democratic primaries would have been laughed at. Similarly, who thought Donald Trump could become the Republican nominee, and what is more, run Mrs Clinton a tight race despite a whole number of increasingly outrageous comments.

I suspect after the race if Trump loses there will be analysis to demonstrate that he was never going to win given the basic demographics of the States. Even if this is true there is no denying his popularity amongst a large swath of the American public. More, his radical agenda might have got even more traction, including amongst traditional Democratic supporters, if he were not such a bafoon.

Mrs Clinton made the mistake of consigning half Trumps supporters to the “basket of deplorables”. This was not just a tactical, PR mistake it was a theoretical error. Whilst I have every confidence some of his followers are thoroughly objectionable people, his popularity goes well beyond that small substratum of society. There is genuine depth to his support, a depth which has been generated by tectonic shifts in America’s political economy that have been happening over decades, perhaps half a century. Each year, a small, almost imperceptible, but definitely detrimental, change in the position of the American Middle Class, and specifically, blue-collar workers.

It is a process which Ryan Avent claims began sometime in the 1970’s and is not about the periodic cycle of economic boom and bust. It is a secular decline in the relative position of labour in the distribution of income and wealth. The post war era was a boom time for the vast bulk of the American population. Between 1947 and 1972 real wages in the US rose by between 2.5% and 3% per annum.

From the 1970’s however, the rate of increase of real pay declined to an average of less than 1%. Up to the 1970’s workers pay rose broadly in line with the increase in productivity. From the 1970’s onwards however productivity growth slowed. Pay however, faired even less well, between 2005 and 2014 productivity increased by about 1.4% per annum, about twice the rate of real pay increases.

Avent goes onto make the point that even the poor performance of mean average real wages does not capture the reality for many Americans. “Median wage growth, or growth in wages for the American in the middle of the distribution, did far worse. Indeed, since 2000 the real wage for the typical American has not risen at all. Looking further back does not much improve the picture either; since 1980 the median real wage is up by only about 4%. Not per year, but over the whole period. And if you then focus in just on the real wage of the median male worker, the duration of the stagnation extends back into the 1960’s”. (1)

The picture painted by Avent of stagnating incomes for the majority of the population has been well documented in a range of book over the past few years. Robert Stiglitz(2) , Hacker and Pierson(3) and, of course, Thomas Picketty(4) have screen-shot-2016-10-23-at-14-58-44all pointed to this phenomenon and its role in increasing the levels of inequality in America. Typical is the “U” shaped graph showing Income inequality in the United States 1910 – 2010 in Thomas Picketty’s book Capital in the 21st Century. This charts the high levels of inequality in the first 40 years of the 20th Century followed by the dramatic reduction in inequality from the period after the second world war, then an accelerating growth in inequality since the 1970’s to levels not seen since the late 1920’s.

Given this gradual but enormous change in the position of middle class America it should be no surprise that people are frustrated and angry. The frustration arises out of the narrative that says this process is an inevitable result of progress. Opposing it is a luddite response to the course of history and in due course a whole load of new jobs will come along to take up the slack. The problem is the new jobs that have come so far are low skilled, low paid and very precarious.

At the same time people can see corporate and financial leaders taking enormous salaries, many multiples those of their predecessors at a time when GDP growth is lower than it used to be. Worse the people that take these enormous salaries seem to be able to secure them through location rather than performance. Whatever the results of the company the salaries of those in the C suite go up.

Worse yet when exceptionally highly paid people in the finance industry bring the economy to its knees, costing thousands of jobs and homes they are bailed out by the very people whose lives have been devastated, the tax payers. The people who arrange these bailouts as public officials later move on to work in the very institutions that have been saved. In these circumstances you can understand why the ordinary American is highly cynical about the ability of the existing political system to bring about change in their favour. This is why Mrs Clinton is struggling. She is perceived as too close to the traditional political machine and worse, Wall Street.

America may have averted a tragedy if they avoid the election of Donald Trump but they should not think they have avoided a crisis. It is not going to be politics as usual even if Mrs Clinton secures the White House. Radical change is needed in the States. There are a number of systemic problems that need to be addressed which would involve a real shift in the distribution of power. If Mrs Clinton can achieve this she will go down as one of the great US Presidents. If she cannot, and I am not optimistic, America, and therefore the rest of the world, are in for a very challenging time.





(1) Ryan Avent The Wealth of Humans: Work and its absence in the Twenty First Century. Penguin Random House 2016

(2) Joseph P Stiglitz The Price on Inequality Allen Lane 2012

(3) JacobS Hacker & Paul Pierson Winner Take All Politics Simon and Schuster Paperbacks 2011

(4) Thomas Piketty Capital in the 21st Century Harvard University Press 2014

Why Trump must stay in the race.

At first sight the suggestion it is important Donald Trump stay in the campaign to become the next President of the United States might seem crazy. Why might one want a bigoted, misogynistic, demagogue to remain a contender to become the most powerful person in the world. The first, and in truth the most important, reason is the fact that it looks now as if hscreen-shot-2016-10-15-at-12-54-25e will lose. The FT US Election 2016 graph of the latest polls shows Mrs Clinton with a 5% lead and describes support draining away from Trump as the revelations about his views on women continue to emerge. So it looks like a Clinton victory is becoming more and more likely which ought to be good news. However, I fear there is no good outcome for this election

It is clear that for many Mrs Clinton is just the  least worst candidate. Pew Research in the States  shows that for each candidate a third of those intending to vote for them are doing so  simply to stop the other candidate getting elected. If Mrs Clinton wins it is going to be difficult to claim a ringing endorsement when the main reason 32% of her supporters give for voting for her is because she is not Donald Trump. This cannot be a good outcome for a process to identify the most powerful person in the world.

What has also become clear through the course of the campaign is the widening gulf between the supporters of the two main parties. Supporters for the two candidates not only disagree over screen-shot-2016-10-15-at-13-28-25policies, they cannot agree on basic facts. They appear to inhabit different worlds with little in common but everything contested. What is more, everything contested in  a very aggressive, not to say vicious, way. Compromise is not possible nor even thinkable. It is this which creates stalemate in the American system.

Worst of all is the fact that for a majority their overwhelming attitude to the whole Election is one of frustration or disgust. This is worrying in the extreme.screen-shot-2016-10-15-at-13-28-42 It is possible that people are going to start agreeing with the first part of Winston Churchill’s famous dictum on democracy being the worst form of government. Democracy can be remarkably robust when it rests upon  a foundation of internal social cohesion. Then the electoral process is a pragmatic way of conferring legitimate authority for a period of time. Take away the foundation of social cohesion and democracy becomes an arid arithmetic formula for arriving at a decision about who gains the levers of state power. To be a successful democratic nation its citizens need to have a common understanding of some foundational issues and a high degree of tolerance. At the moment tolerance is in short supply in  the States and the glue of the American dream seems to be dissolving.

All this brings me back to the issue of why I think Donald Trump needs to remain in the campaign. I fear that if he were to drop out then two things would happen. First, the die hard Trump supporters would develop a  rhetoric of the stolen election blaming the liberal media for giving credence to false accusations, there is evidence of this already and worse it is emanating from Trump himself. Second, those now saying they will vote for Mrs Clinton in order to prevent Trump getting elected might simply walk away. This may result in a President being elected on an historically low popular turnout. In circumstances like this the real loser will be democracy as some will believe their man has been swindled and others will have but tepid support for the victorious candidate.

Let me be clear I think that Hilary Clinton is by far the preferable candidate and she is focused on the kind of liberal issues which need to be addressed in the States.  However there are some more fundamental issues about growing inequality and the dominance of Wall Street over Main Street which are the issues which are exciting the citizens of the United States, her own supporters as much as those of Donald Trump. If these are not addressed it may be the US simply becomes ungovernable.

The grandees of the GOP seem to have calculated Trump is a lost cause and will lose the election they are therefore turning their attention to the race for the Senate, where 34 seats are up for grabs, aiming to increase their current majority. All this means 2017 may well be another year of paralysis on Capitol Hill further undermining support for the political system and by association democracy. Inequality will increase, the living standards of the majority will continue to stagnate and the grounds will be laid for a far more radical solution to be proposed by a demagogue with more traction. More Marine Le Penn than Nigel Farage. The fact that someone as obviously phoney and inappropriate as Donald Trump could get so far in the process is a clear sign that something fundamental is broken at the heart of American democracy. Radical change is needed which will mean a real shift in power. Those that have it are not likely to support this. They need to be careful however as the alternative may end up being worse, even for them.

We can only hope that some in the States remember the second part of Churchill’s dictum that democracy is the worst form of government… apart from all the others.


Trump lashes out at establishment over groping claims

Donald Trump painted himself as the victim of an establishment conspiracy as he rejected fresh allegations that he had made unwelcome sexual advances towards women, slamming the media for producing them in cahoots with Hillary Clinton.In a fiery campaign speech filled with sweeping indictments of his perceived enemies, Mr Trump sought to use the furore over his alleged conduct to make the case to supporters that he was being mistreated by the elite just as they had been.

Source: Trump lashes out at establishment over groping claims


Brass neck he lacks not! However, incredible though it is Mr Trump’s candidacy does have one area  of credibility. It speaks to the level of alienation from their political system of large numbers of Americans. It is a supreme irony that a billionaire has articulated the intuition of many citizens that America has the best democracy money can buy – and it has been bought from under them.

Whilst the election of Trump would have been a global disaster, the result of this election can only be, at best, least worst. Whilst the growing evidence of his lack of personal integrity may be pushing some supporters away it is only going to reinforce their frustration with a political system that does not seem capable of responding to their needs. The space remains for a more credible demagogue with all the risks that that entails. It is probably the case that western democracy is more at risk than it has been since before the second world war. These are frightening times.

Cathy O’Neil on Weapons of Math Destruction | EconTalk | Library of Economics and Liberty

Algorithms are increasingly used to shape a whole range of social policy issues in the States. This podcast looks at some of the risks attached to their use. Much has been made of their application to stock market and derivatives trading notably in Michael Lewis’s book “Flash Boys”. Cathy O’Neil does talk about that but also looks at how algorithms have been constructed to predict recidivism rates as an aid to sentencing and as ways of assessing teacher competence to manage performance and ultimately to dismiss those that the algorithms show are failing.

What Cathy does, is show how the structure of these algorithms relies on assumptions which replicate racist practice in relation to sentencing and provide virtually useless information about the performance of teachers. It addresses the distinction between prediction and causation which in the age of big data is in danger of being lost, at some cost.

If you have never heard a Econ Talk podcast I recommend them generally. The host, Russ Roberts is unfailingly courteous to his guests but takes a very orthodox liberal view of economics and the wonder of markets. For example he thinks that the state has played a bad role in relation to education in the United States and it would be better provided by the private sector. You might occasionally get irritated but it is good to try to avoid confirmation bias and he does get some fascinating speakers on issues economic. Having said that it is a wide definition of economics that is adopted.

Source: Cathy O’Neil on Weapons of Math Destruction | EconTalk | Library of Economics and Liberty