In a recent feature in The New York Times Book Review entitled “The Story Behind This Week’s Best Sellers,” Gregory Cowles notes that the word “macroeconomics” doesn’t turn up much on the best-seller lists. No surprise, he says, given that “the field isn’t exactly sexy.” But an exception to the rule emerged with the recent publication of David M. Smick’s The Great Equalizer: How Main Street Capitalism Can Create an Economy for Everyone, which entered the hardcover nonfiction list at No. 8. Smick, who calls himself a “global macroeconomic strategist,” eschews artful prose in the book as he delivers a practical discussion of economic policy seasoned with healthy doses of supply-side gospel, quotes from hundreds of clients and acquaintances, and no small amount of populist sympathy. The book seems to have arrived at a propitious time.
To understand why, we might go back to February 2016, when Lawrence Summers published in Foreign Affairs an article entitled, “The Age of Secular Stagnation: What It Is and What to Do About It.” The article explored how expansionary fiscal policy by the U.S. government can help overcome secular stagnation and get “growth,” as defined by the neoliberal elite, back on track. Aside from being a replay of some tired arguments about the efficacy of economic stimulus, the Summers case for fiscal spending was essentially a reprise of Francis Fukuyama’s “End of History” thesis promulgated in his famous 1989 essay in The National Interest.
In suggesting that the fascist and communist challenges to liberalism were dead, Fukuyama asked whether democratic capitalism, as practiced in the West, faced any possible ideological competitors. “Or put another way,” he wrote, “are there contradictions in liberal society beyond that of class that are not resolvable?” He saw two possibilities: “those of religion and nationalism.”
Now comes nationalism. The British vote for Brexit last summer and Donald Trump’s subsequent election to the American presidency suggest that Fukuyama’s focus on nationalism as a challenge to the liberal order was prescient, though he perhaps slighted economic factors as the driver. It is no small irony that Trump was carried into office on a platform of protectionist trade policy, fiscal stimulus in the form of spending on infrastructure, and supply-side tax cuts to stimulate investment. At the risk of contradiction, one could describe the kaleidoscopic political economy envisioned in Trumpism as the latest evolution of neoliberalism, a modified form of classical-liberal governance tending to favor the kind of capitalism that is much beloved by Latin dictators and Asian strongmen.
Summers’s analysis basically suggests that a surfeit of savings has somehow stifled investment and innovation, as illustrated by the torpid performance of productivity growth. “The key to understanding this situation lies in the concept of secular stagnation, first put forward by the economist Alvin Hansen in the 1930s,” Summers argues. “The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates.”
While most economists and members of the public accept such views, there are dissenters. “The fall in global nominal GDP growth—by more than one-third—from the pre-crisis period to the post-crisis period is alarming,” notes Kevin Warsh, a former governor of the Federal Reserve Board and now a visiting fellow at Stanford University. “We’ve seen a further weakening of global economic growth since the summer of 2015. I suspect some members of our guild will be calling this ‘the newer normal’ … as we persist in defining deviancy down. And we are told by the preachers of secular stagnation that our fates are sealed. This dangerous defeatism by some of the leading lights of our guild is owed more to rationalization than reflection.”
Summers of course reflects the standard Keynesian worldview that has governed American economic thinking for most of the last century, a perspective of fantasy not really connected to the natural world. To use Keynes’s own words, as amplified by Henry Hazlitt, this view “does not happen to be those of the society in which we actually live.” Summers and a number of liberal economists blame the slow rate of consumption and job growth on fiscal austerity measures in the European Union, U.S., and China. But the slowdown in demand for both consumer goods and major industrial commodities such as oil, copper, and iron ore reflects a more complex structural change in the global economy, financial flows, and the availability of credit.
In the years since the Great Recession, policymakers have relied on aggressive monetary policy, and trade and fiscal deficits run primarily by the U.S., to drive global growth, but now the international economy is entering a new phase of lower growth based on the fundamental economic activity in each nation. The policy of using ever-cheaper credit to pull tomorrow’s demand into the present day seemingly no longer has any juice. With most nation-states already burdened by debt and thus unwilling or unable to use fiscal expansion to stoke short-term demand, global central banks have been asked to somehow, acting alone, address the burdens of overcapacity, excessive debt, rising unemployment, and slack consumer demand. It can’t be done.
Perhaps we ought to be grateful that officials at the Fed and other central banks are trying to address these chronic structural problems, but it seems clear that new thinking is needed in both monetary and fiscal policy. A large portion of the industrial world struggles today under the weight of negative interest rates, which in essence constitute a harsh confiscation of private savings effected by central bankers that are clearly antithetical to any sort of true economic expansion and certainly not consistent with any form of classical liberalism. Termed “financial repression,” negative interest rates are not stimulus but rather a slow form of theft from all types of savers perpetrated by heavily indebted states.
The economic cost of such policies is high. Even relatively low levels of inflation targeted as part of low or negative interest-rate policies, over a period of years, have a corrosive effect on real incomes and consumer purchasing power. More, as was seen in the 2001–2005 period, prolonged periods of low interest rates can create the circumstances for new financial crises. Yet the economists who head the Bank of Japan and European Central Bank persist in following these policies, actions that can only lead to new financial crises and even slower growth.
Likewise the effectiveness of the type of fiscal spending advocated by Summers and even President Trump is greatly in doubt, partly because the spending must be funded with more debt. Smick quotes Summers in this regard: “It is difficult if not impossible to remain the world’s greatest power while also the world’s greatest borrower.” Yet he and the other advocates of fiscal stimulus cannot rely wholly or even partly on tax increases in an economy that is only growing at less than 2 percent annually. And even more debt-financed spending may actually hurt growth.
Lacy Hunt, chief economist at Hoisington Investment Management, told a 2016 conference sponsored by Grant’s Interest Rate Observer that in the 1960s a $1 increase in deficit spending produced a $5 boost in GDP. Today, Hunt warns, a $1 deficit increase actually reduces GDP by a like amount, suggesting that the magic multiplier so beloved by the Keynesian crowd now is actually negative. This, says Hunt, is due to the fact that the growing debt of the U.S. supports consumption rather than investment in anything that’s actually productive.
So if neither low interest rates nor fiscal spending is a realistic alternative to the global economic malaise, has the end of economic history truly arrived? Into this ideological fray steps Smick with his new book. “How does the world of angry supporters of Donald Trump or Bernie Sanders relate to the world of Mark Zuckerberg and Elon Musk and their acolytes?” he asks. The answer is that they don’t and won’t, but that does not prevent the former staffer to Congressman Jack Kemp from offering some Main Street prescriptions for generating economic prosperity. The Great Equalizer’s status as a Times best-seller says a good bit about Smick’s skill as a writer, although he has made his living as one of the more savvy observers of the peculiar ecosystem known as Washington.
Like Smick’s earlier work, The World is Curved: Hidden Dangers to the Global Economy, which essentially predicted the Great Recession, this latest effort combines astute political timing with the author’s considerable knowledge of the world of economics and its inhabitants. For decades Smick has operated a private salon and publishing operation in Washington built around his vanity title, The International Economy magazine.
He has consulted for hedge funds, corporations, and foreign governments, skillfully focusing on global economic policy, and has managed to establish a relationship with most of the key decision-makers of his era. His latest book seeks to change the narrative of economic thinking from a dismal acceptance of low-growth mediocrity viewed from a top-down perspective to an economic renaissance built upon “a bottom-up narrative that not only seeks the best of the world’s future entrepreneurial breakthroughs but also seeks to transform all elements of existing society.”
The Great Equalizer, far from being lyrical, reads mostly like a primer for an incoming president and perhaps that was the intention. The book touches most of the pressing issues that have dominated the American conversation over the past year or more, such as the monopoly power of big banks and companies and the need to focus renewed attention on creating new, smaller enterprises on Main Street. At the end, the book presents a 14 Point Plan for Main Street Capitalism—proposals that are neither conservative nor particularly focused on helping Main Street. Cutting grand bargains with Congress, repatriation of the offshore earnings of multinational companies, and a global conference on debt reduction for bloated governments all sound impressive, but they also reflect the sophisticated perspective of the author, one of Washington’s most successful consultants, not the youthful vision of the David Smick who grew up in a working-class neighborhood in Baltimore.
For example, the federal government could help Main Street considerably by using the power of antitrust laws to break up the largest banks. For years, the Federal Reserve has countenanced mergers of large troubled banks with healthy institutions, creating even larger zombies that stifle competition in banking, monopolize the capital markets, and certainly do not support the credit needs of small Main Street businesses of the type championed by Smick. While the author excoriates the zombie leviathans, he doesn’t address how a president can restore competition to the credit markets so long as these zombie banks dominate the financial world.
Likewise, Smick proposes a tax holiday whereby multinational corporations would be allowed to repatriate offshore income so long as these funds were invested in infrastructure bonds “paying one percent.” It needs to be said that corporate America has squirrelled away tens of trillions of dollars offshore via various fraudulent schemes that mischaracterize financial transactions as sales when they are in fact secured borrowings. The bankruptcy litigation of Overseas Shipholding Group Inc. is instructive here. Again, to Smick’s desire to help Main Street, there is no discussion of breaking up the large corporate monopolies that dominate the international economy.
Another one of the 14 Points is a call to avert a debt crisis by holding a global conclave among nations to consider debt reduction and engage in “contingency planning.” This is obviously an extremely timely subject given that America’s federal deficits are set to explode over the next two decades regardless of whether or not President Trump increases spending or cuts taxes. But the sad reality is that the debt burdens already shouldered by most industrial nations imply national insolvency; it is only a question of how much longer they can borrow the interest on debt that can never be repaid.
In a November 2008 interview with this writer, William Janeway, the former vice chairman of the private investment firm Warburg Pincus, offered a fascinating description of the phases of finance. The first phase, a healthy phase, is fully secured lending. One provides a loan and gets repaid. The second phase involves loans where only interest expense is covered, echoing the marketing pitch of the infamous Jay Cooke in the years following the American Civil War. This second phase relies on refinancing to repay principal. The third phase—where even the interest on existing debt is not “earned” in any economic sense and has to be borrowed to keep the enterprise afloat—has arrived for most industrial nations, including the United States. Only the fact of the dollar’s franchise as the global means of exchange separates the credit standing of the U.S. from other nations in this regard.
Perhaps the most interesting parts of The Great Equalizer are those portions that deal with the global political economy, Smick’s strongest suit as both writer and strategic analyst. In the latter part of the book, he recounts a 2014 luncheon exchange with China’s ambassador to the United States, Cui Tiankai, where he suggested that China’s increasingly aggressive behavior in Asia was meant to divert attention from the impending collapse of China’s troubled economy.
“Has China, Mr. Ambassador, become aggressive with its neighbors as a diversion to stoke up nationalistic sentiments back home?” asked Smick, no doubt while he wore that broad smile that is his signature, even when he is being particularly provocative. “Is your financial system in trouble? With slower domestic growth, perhaps slower than your official statistics suggest, your debt is expanding rapidly.” The Chinese ambassador did not answer directly, but his non-answer, along with the intensity of his gaze, spoke volumes.
Smick relates that as he left that Washington luncheon with the Chinese ambassador, “I was struck by how little Washington policy makers think about financial risk.” Of course, in the post-World War II era, both America and communist China have assumed that financial stability is a natural function of any nation-state’s military power. Smick notes that both the Chinese and the Russians have, from time to time, posited the idea of an alternative to the dollar as the global currency, a theme regularly examined by author James Rickards in his books about currency wars. But the fascinating end point of Smick’s book suggests a different scenario, with the United States decoupling from the global economy and refocusing its energy inward on a bottom-up revolution. This is a strategy formulation that doubtless will resonate with President Trump and his key adviser, Steve Bannon.
Writes Smick: “America’s task is now clear: to produce the kind of economic and psychological transformation that will achieve average annual growth rates of 3 percent or more. That’s the difference between America thriving despite its debt and collapsing under the weight of its debt. … The notion that decline is inevitable is a myth. Americans are fighters. They are also dreamers and discoverers. But the window for the new president to act is open only briefly.”
In fact, 3 percent annual GDP growth is probably not sufficient for America to grow its way out of the staggering debt that burdens the federal government, both directly and indirectly. The Great Equalizer offers some encouragement, but it is mostly a feel-good tome written by a consummate Washington insider for Washington insiders to keep the fiscal demons at bay for a few more years. While Smick does rightly warn that the condition of China’s economy is cause for concern in Washington, and also is extremely stern in his warning of the U.S. debt crisis, in his next book he might ponder the similarities between Washington and Beijing. Both for President Trump and for Communist Party General Secretary Xi JinPing, controlling the political narrative is far more important than implementing policies that actually impact the economic reality.
Christopher Whalen, investment banker and author, is senior managing director and head of research at Kroll Bond Rating Agency, where he is responsible for credit ratings for financial institutions. His latest book is Ford Men: From Inspiration to Enterprise.