Monday Links

Thoughts on Trump's proposed Treasury Secretary, the Fed's framework review, why banks fail, John Rawls, and socially acceptable religious bigotry

1.      Scott Bessent Sees a Coming ‘Global Economic Reordering.’ He Wants to Be Part of It, Wall Street Journal, November 25, 2024

There’s a lot to like about President-elect Trump’s nominee for Secretary of the Treasury Scott Bessent. Although Bessent proposed the idea of a “shadow Fed chair” that I dismissed during the campaign, he is also something of an economic historian and is less bombastic and less obviously unable to admit the limits of human understanding. Here he contrasts sharply with, for example, the First Buddy Elon Musk, who never met an opinion in his own head that he regarded with skepticism. Perhaps it is for that reason that Musk was opposed to the appointment?

Bessent will need his wits as he, according to the article linked, seeks to “enact[] tariffs and cut[] spending” while also “maintaining the status of the dollar as the world’s reserve currency.” The problem is that these goals are at cross purposes. My colleague Kent Smetters estimates the Trump tax cuts as imposing an additional $4 trillion of weight on the public debt; across-the-board tariffs are likely to impose even more inflationary pressures. And dollar dominance, a complex phenomenon to be sure, relies in large part on the dollar’s ability to retain its value while servicing a thriving economy. If the Fed is a price taker when it comes to interest rates, and not a price setter, then monetary policy really is in an important sense in the hands of Scott Bessent. The status of the dollar unquestionably is within his purview.

Here economic history will be a useful if imperfect guide for the Secretary-designate, depending on how it is approached. My hope is that Bessent is the kind of student of history that recognizes the sheer power of contingency and incomplete information. Too many policy types, including in the academy, plunder lessons from history for tendentious purposes. Regardless, and although I expect I will oppose many of the controversial decisions he makes, I’ll be rooting for him.

2.      Why do banks fail? Bank runs versus solvency, by Sergio Correia, Stephen Luck, and Emil Verner, Federal Reserve Bank of New York, November 25, 2024

It doesn’t happen often that I read an academic paper that changes the way I think about core problems in the most important literature in which I am engaged. The paper Failing Banks by the authors cited above is one of them, perhaps one of the most important papers on banking, banking theory, and banking history in a decade.

Most of the policy response to the Global Financial Crisis focused on the problem of illiquid banks that suddenly and inexplicably found themselves on the south side of some bad trades that caught everyone by surprise. When the financial system seizes up in this way, the parade of responses—fiscal response, emergency central banking response, political response, bailouts, boondoggles, public marches in the street to the tune of the Tea Party or Occupy Wall Street—follows, none good, all in a world of lesser evils.

But these policy responses especially are necessary, the argument goes, because there’s no good way to predict these kinds of crises and no good use in moralizing bank failure. We saw similar arguments in 2023 when people like me thought that bailouts of wealthy uninsured depositors were a profound policy failure (rather than the existence of uninsured depositors; some people favor guaranteeing all bank deposits, full stop).

Correia, Luck, and Verner tackle this head on with 160 years of data. It’s an astonishingly good paper. It makes me question everything we are doing in bank policy.  I’ll say more in future posts.

3.      Fed announces policy framework review, plans for May 15-16 conference, Reuters, November 22, 2024

It’s time for the quadrennial policy review of the Federal Reserve’s entire intellectual and ideological approach to monetary policy. The last one, conducted during the pandemic, yielded the Flexible Average Inflation Targeting policy, the framework that some blamed as the reason the Fed was caught flat-footed on the inflation of 2022-23. I am less convinced that the 2020 approach was so categorically flawed. The idea of catch-up monetary policy is clearly correct. The mythic “lags” of economic policy are so baked into the policy equation that central bankers who jerk the chain of the economy in the face of every price movement will do substantially more harm than good.

That said, policy changes have a momentum all their own. I can see why the Fed is likely to adjust its course and have a smaller window for focusing on averages here. I’m more interested in the idea that the Fed is listening to inputs from diverse actors here. Among the biggest problems at the Federal Reserve is groupthink, that so many of its policymakers come from the same narrow confines of policymaking. I hope that the Fed considers a truly wide-open conversation on what should change and how.

4.      The Democrats Are in Trouble. This Man Can Save Them. Daniel Chandler, New York Times, November 24, 2024

A couple of readers sent this piece to me. I haven’t read a lot of the postmortems coming off the Democrats’ historic loss, but I’ve read enough to say this take on Rawls as the solution to every problem surely ranks among the worst. No, Rawls and Rawlsian theory cannot save the Democrats from the coalitional realignment that they are losing. No knock against Rawls, of course: reading A Theory of Justice in college blew my mind and put me on the path of taking political theory very seriously, even though I abandoned thoughts quickly enough about actually becoming a political theorist.

The basic problem is that the most enduring idea of Rawlsian Justice, the difference principle, already fairly characterizes much of the Democratic approach to government and governance in the post-Obama period. The difference principle holds that “social and economic inequalities are to be arranged so that they are to the greatest benefit of the least advantaged.” A fascinating thought experiment made more interesting because it is to take place behind a “veil of ignorance,” Rawls’s attempt to render inert the inevitable identitarian and factional impulses that so completely dominate democratic governance.

The problem with Rawlsian thought experiments is that they are so far from lived experience that they are mostly, in my view, useless. The “least advantaged” members of society are not so designated by DNA or Social Security Number—that is, they are not so designated as individuals. They are advantaged or disadvantaged by group. And defining the groups subject to advantage or disadvantage and rewarding those regarded as disadvantaged through policy intervention is precisely the zeitgeist of Trump-Biden era of Democratic Party politics. Love it or hate it or disregard it entirely, but in most important ways the ethos of politics is already Rawlsian. Hard to see how more of the same approach leads to anything other than more of the same results.

5.      The problem with ‘Heretic,’ Hugh Grant’s new horror movie about Latter-day Saint missionaries, Tad Walch, Deseret News, October 31, 2024.

This review of the new Hugh Grant psychological thriller that makes use of Latter-day Saint missionaries’ perceived innocence raises important questions by a believer about our cultural status in 2020s America. A reader of the blog sent me a question in response to my Q&A request with something similar: why are Mormons among the groups that society finds easiest to portray in these ways? From Big Love to The Book of Mormon (the musical) to so much more, Latter-day Saints have essentially no cultural cachet that allows us to protest and ask for a bit of space away from such mockery. I regard The Book of Mormon musical to be an especially painful form of socially-acceptable bigotry.

This point that we lack cultural cachet is not mine; McKay Coppins, a trenchant observer of Mormonism in politics made it first a few years ago. It resonates, though, with my own experiences, especially in the academy. I have encountered so much casual bigotry against Mormons in my ten years as a professor, including often when people did not know I was a Latter-day Saint (I did not attend BYU and am not from Utah and so it is easy for me to “pass”.)

What to do? I hosted a dinner recently for Wharton’s MBA Latter-day Saint Student Association and this general question came up.

My advice: remember that when you meet a Latter-day Saint—or any member of any affiliational group—you have learned almost nothing about them. You do not know their views on God or man; you do not know where they are from or what roads they have walked; you do not know their politics or socioeconomics. We can observe central tendencies when we study groups and group dynamics, but the assumption that any individual member of that group reflects those tendencies is a version of the “ecological fallacy.” When we commit it, we run the risk of committing bigotry—socially acceptable or otherwise—or simply statistical idiocy.

Because I want to be neither a bigot nor an idiot, I try as best I can not to assume much about others based on a single identitarian marker.  I do not think I can say the same about the Latter-day Saint-themed concoctions coming out of Hollywood, etc.