My Political Beliefs
I thought it might be a good idea to lay out some of my political beliefs so readers will have some idea of my biases and can take them into account. Like many other belief systems, mine starts with a conception of human nature. I am not religious or spiritual and so do not believe in souls, spirits or other supernatural phenomena; I’m a materialist.
What is human nature and how does this differentiate us from the animals?
I believe humans are the only animals capable of acquiring cumulative culture. Though many animals can learn things and so have culture, they are not able to build on the learnings of those who came before to accumulation knowhow far beyond what could be acquired by trial-and-error learning over a single lifetime. Over time an inventory of cultural information accumulates that is transmitted by one generation to the next, with each contributing the knowledge they created to the growing sum. Humans use this information to aid in their survival, allowing them to colonize new habitats while remaining the same species. Other animals evolve their genes to colonize new places, and in doing so, become new species. By using cultural evolution, Homo sapiens has colonized the globe while remaining a single species. In my opinion, it is this ability that is the fundament of human nature, not intelligence or consciousness, which some other animals have.
What are my moral values?
I was raised Roman Catholic, and this has shaped my world view. As a nonspiritual materialist, the religious aspects of Catholicism didn’t take. I see religion and morality as social technologies that were almost certainly adaptive since they’ve been around a long time. Hence, just because I don’t believe in God does not mean I can blindly throw all the Catholic morality I grew up with out the window. There are probably some gems in there. So, at a time when many of my peers chose to live with their fiancée before marriage, I did not do so. I had grown up with the idea that this was wrong, and I could see possible reasons for it in such adages as “why buy the cow if you can get the milk for free”. Since then, after seeing many others live together before marriage and then go on to have a successful marriage, I stopped thinking co-habitation was unwise.
On the other hand, I rejected the pro-life position because I knew why abortion was wrong according to Catholic doctrine: the fetus received a soul at the point of conception, making it a person and abortion the murder of a person. This is how I saw it as a Catholic boy in Junior High in 1973. But souls are part of the supernatural, which I do not accept, so I have been pro-choice since my college days. I later learned that my approach was exposited by G.K. Chesterton. I find it reassuring that people smarter than I had thought the same way.
My economic views
I went to Catholic grade and high school and the social teaching acquired there played a role in my view that people had some responsibility for others in the community, particularly those less fortunate. I started my career at the Upjohn company in Kalamazoo MI (now Pfizer) where I met my wife. She was a foster parent to a couple of teenage girls, which I found appealing. Around this time, I became a Big Brother mentor to a 12-year-old boy, which she found appealing. We started dating and I saw a lot of the teens as well as her daughter. We became foster parents after we married, adopted one of our former foster kids, and remained in contact with most of our former foster children. Some of them had children who grew up seeing us as grandparents. I also continued by role as mentor to my Little after he turned 18 and the program ended. We see each other when possible (my wife and I just visited him and his family in Oregon last month).
My dad kindled my interest in social sciences when I was in third grade by suggesting I read this history series. This interest and the experiences described above generated warm feelings towards what one might call old-school, welfare liberalism. Even in my youth, when I would invent imaginary lands, what is today called world building, I invented worlds that worked well for most people, but were also realistic. I would read stories about much grimmer worlds but did not want to live in one, even as an elite. For example, I found the book Ready Player One unsettling when others might not see it that way.
Though I see capitalism as superior to socialism or communism, I have a very strong preference for stakeholder capitalism (SC) rather than shareholder primacy (SP) culture because of my bias in favor of the commonweal. This preference defines my political identity as a “New Dealer,” for it was they who created the original SC culture. New Dealer today means one who wants to replace SP with SC as the culture under which American capitalism operates.
Figure 1. Schematic of economy under SC culture compared to SP.
Figure 1 illustrates the difference between an economy operated under SC culture and one operated under SP culture. The figure shows flows of money (represented by arrows) into different parts of the economy (the boxes). The size of the boxes and thickness of the arrows is indicative of relative size. Under SP culture there are net flows of money into the economy due to money creation by both bank loans and government deficits. These are countered by large flows of money out of the economy in the form of trade deficits, dividend payments and stock buybacks. The net result is a real economy that is resistant to inflation because money creation by bank lending and deficit spending is rapidly removed from the economy by these outward flows. The result is the amount of money “chasing” goods and services in the real economy does not grow.
This effect is represented by Balance in my inflation model. Balance, in turn, affects NAIRU, the level of unemployment below which inflation rises. Efficient removal of money added by deficit spending, for example, keeps Balance and NAIRU low, allowing for low inflation, low interest rates, and low unemployment (what is called a Goldilocks economy) to exist at the same time as large fiscal deficits. By running very large fiscal deficits, it is possible to add so much money to the system that it overwhelms the outflows. This recently happened during the pandemic, The result was a temporary surge in inflation.
Much of the money efficiently removed from the economy flows into the stock market, where it does cause inflation, resulting in growth in the size of the stock market relative to the real economy. The ratio of the two is called the Buffet ratio, which has roughly doubled under SP culture compared to what it was under SC. This is indicated by the relative size of the boxes in Figure 2.
One might expect a Goldilocks economy to feature strong economic growth and wage growth, but actual growth is rather tepid, and wages do not rise. This is because earnings used for stock buybacks and larger dividends are not re-invested into the economy, resulting in reduced economic growth, or what I call the Capitalist Crisis. This result is in accordance with the objective of SP culture, which prioritizes growing the size of the stock market above all else. Where ancient Egyptian Civilization created monumental masonry architecture, American Civilization under SP culture creates “ziggurats of finance.” The result of this is rising inequality, elite proliferation and the political instability that brings. Peter Turchin’s new book End Times describes this process, providing many historical examples.
Under SC culture, there is only one outward flow of money from the real economy, dividends. Trade balance tends to be near zero, and can actually be in surplus, in which case there is a net flow of money into the economy. Because of this is it imperative that the growth in government debt relative to GDP not rise over a complete business cycle. This is represented by the gray double pointed arrow in the figure, indicating deficit in recession and balanced budgets or surpluses during expansions for an overall zero or negative net flow of money into the economy over a business cycle. In the SC economy, retained earnings (those not used for dividends) are invested into the economy, not used for stock buybacks. Here the biggest box is the real economy, because economic activity is about all participants (stakeholders) in the economy, not just investors, and so the objective is to grow the real economy. Investors do well because they are an important stakeholder, but they are not the only one.
Because of my experience as a foster parent and Big Brother, Catholic upbringing, and my dispositional conservatism I think the sort of economy I grew up in is better. I think young people should have a choice of paths, college and non-college, that can lead to a fulfilling life and things would be better for most young people if this were still the case. I think the choice to give up SC culture (and it was a choice) and go to SP culture was immoral. That is why I am a New Dealer.
My social views and political allegiance
I’m a Democrat. The reason is simple, Republicans like tax cuts and want to keep top income tax rates low, and capital gains and corporate tax rates low as well. Tax cuts in the latter two encourage large financial flows, supporting SP culture and so are immoral. Low top income taxes are one of the key environmental parameters that select for SP culture and so are immoral in my book. Not only that, but Republicans are the worst sort of hypocrites on fiscal deficits, which was once an important issue for me. They complain about Democratic spending, shut down the government, threaten to default on the debt, and then spend the same as the Democrats when in power. During my lifetime so far (1959-2022), Republican deficits have averaged 3.1% of GDP during the 34 years they were in power, while those of the Democrats have averaged 2.9% during the 30 years they have been in power. Since tax rates and deficits are central to my moral worldview, I see Republicans as immoral.
As should now be clear, my political allegiance is all about economics. But I find my social views to be reasonably consonant with mainstream Democratic views (at least those of Democrats my age). Some of this is simply because I haven’t really thought them through some of the new ones and just go along with my party—so I may change my mind after thinking about it. But some I have thought about and have come to a considered viewpoint. I am pro-choice and can defend this position logically. I am opposed to the nontraditional gun culture that has spung up over the last four decades and can justify my opposition. I became pro-gay marriage in 1994 and can also defend this position. I am also feminist and strongly believe there has been and still remains discrimination against women. I have yet to develop a fully fleshed out position on some of the newer stuff like trans issues or critical race theory, partly because I think most of these are ephemera arising from the current creedal passion period.
I do not believe that the present Democratic party can bring about SC culture even if they were to achieve a dispensation (political order) in their favor. A Democratic dispensation could bring universal health care and other things I support, but probably not the sort of top tax rates and balanced federal budgets that are necessary for an SC economy. Inequality and political instability would remain high, leading to an uncertain future. On the other hand, the new-style of Republican seem disposed to Putin-style authoritarianism, which has even less appeal to me that what we have now.
[KTA] Thanks for this detailed discussion of your worldview and the basis for it and how it has booked over time.It is helpful in reading your posts. However, with all due respect some of your resting does appear somewhat circular and at times seems be aimed at justifying what I might choose to label your preconceived inclinations.
[MA] You’re welcome. My “resting” comes from observations of anomalous stock market behaviors.
https://mikealexander.substack.com/p/how-anomalies-drove-my-social-science
[KTA] One example is that while I understand your descriptions of two systems which you label SC and SP , I believe that the descriptions are in fact if one system - free market capitalism- which experiences different types of distortion both temporally ( over time, not temporarily) and societally in its practical application.
[AM] Yeah, it’s all free market capitalism operating under an evolving business culture characterized as a mix of two business culture archetypes.
https://mikealexander.substack.com/p/how-economic-culture-evolves
[KTA] One concrete illustration is the mistaken view of how managements allocate capital to reinvestment in their business vs. returning it to investors.
[MA] I don’t talk about how this is done. I talk about the decisions made affect external observables like stock market levels.
[KTA] Once the investments are decided upon which are necessary to sustain and grow the business and provide the required ROIC ( return on invested capital) and Xcode the WACC ( weighted average capital cost, then a decision has to made as to the appropriate leverage and how much equity should be utilized to support those investments. If there are excess earning ( or more accurately cash flow) , then that amount is available to return to shareholders either in the form of dividends ( regular or special) or share buybacks.
[MA] Dividends are a return to shareowners. Stock buybacks are paid to former shareowners. They provide no direct benefit to existing shareowners. But they do provide a benefit to existing shareowners, which was one of the causes of the anomalous behavior of the stock market.
https://mikealexander.substack.com/p/looking-at-the-stock-market-in-terms
[KTA]..it is either a total misunderstanding of the capital allocation prices and/ or outright demagoguery by liberal politicians to argue that if stock buybacks were curtailed that he money would be reinvested in the business.
[MA] If buybacks were curtailed the money used would probably go to dividends. In the 19th century, the large majority of earnings were returned to investors (though not all of them like today). And by this I do not mean in individual companies, obvious companies with scads of cash will invest that rather than borrow it, but on an economy-wide basis it is happening and debt levels are rising. It appears debt is today being used for investments that were financed with profits in the past.
[KTA] If additional investments were available that appeared to provide the requisite rate of return. , they would be made by a profit maximin management. And if hey did not profit the requisite rate of return they would destroy economic value and make us all marginally poorer on average. Lastly , the money returned to shareholders either directly through dividends or indirectly through stock buybacks does not disappear down a black hole. It is recycled by its recipients, often more efficiently than corporate management can do.
[MA] This is an example of what I mean by culture. You speak of requisite rate of return, and economic value being destroyed if this is not achieved. Rate of return is a financial metric, not an economic one. That the two are not separated in your mind is a manifestation of SP culture.
About 15 years ago GaveKal wrote a little book in which they talked about their platform company model. This was a company that outsources all the low-value, capital intensive activities keeping the high-value activities in-house, and by doing so generating most of the profits here. It’s a no-brainer from a financial point of view. And if one sees economics in terms of generating sales and profits and investments to produce more sales and profits, as you seem to, such an economist would see the same thing,
But economics is not just about sales, profits and investments. It is ultimately about goods and services, which are real things that are only *measured* in financial terms. It *matters* if critical stuff is being made in China if China invades Taiwan. An example I gave in my review of GaveKal’s book was of a consumer product company selling their branded merchandize entirely produced by foreign companies who take only a small share of the profit. What is there to stop them from cutting off shipments of your product to you and selling it themselves at a lower price to capture more of the profit for themselves?
Thanks for this detailed discussion of your worldview and the basis for it and how it has booked over time.It is helpful in reading your posts. However, with all due respect some of your resting does appear somewhat circular and at times seems be aimed at justifying what I might choose to label your preconceived inclinations. Particularly in the sphere of economics and the stock market, both of which are areas I have a fair amount of knowledge and experience. I will leave it to others to determine whether or not I qualify as an expert.
One example is that while I understand your descriptions of two systems which you label SC and SP , I believe that the descriptions are in fact if one system - free market capitalism- which experiences different types of distortion both temporally ( over time, not temporarily) and societally in its practical application. IMHO- your distinction is arbitrary and it is a continuum with the underlying basic structure the same and the disparate causality which you attribute to these systems is also arbitrary rather than fact based experimentally justified. One concrete illustration is the mistaken view of how managements allocate capital to reinvestment in their business vs. retuning it to investors. This is based by a framework developed and guidelines decided upon by a board of directors in consultation with management subject to any legal constraints, indeed the priorities are obviously different for every company, particularly those in industries with widely divergent capital needs. Once the investments are decided upon which are necessary to sustain and grow the business and provide the required ROIC ( return on invested capital) and Xcode the WACC ( weighted average capital cost, then a decision has to made made as to the appropriate leverage and how much equity should be utilized to support those investments. If there are excess earning ( or more accurately cash flow) , then that amount is available to return to shareholders either in the for. Of dividends ( regular or special) or share buybacks. In reality, how much is returned to shareholders in the form of dividends vs. buybacks is a function of many factors, including the efficiency of the tax treatment of whatever methodology is decided upon. But it is either a total misunderstanding of the capital allocation prices and/ or outright demagoguery by liberal politicians ( think Pocohantas🙂, I mean Elizabeth Warren) to argue that if stock buybacks were curtailed that he money would be reinvested in the business. If additional investments were available that appeared to provide the requisite rate of return. , they would be made by a profit maximin management. And if hey did not profit the requisite rate of return they would destroy economic value and make us all marginally poorer on average. Lastly , the money returned to shareholders either directly through dividends or indirectly through stock buybacks does not disappear down a black hole. It is recycled by its recipients, often more efficiently than corporate management can do. The claim stock buybacks are a precision of SC is a bogeyman that only the misinformed attempt to justify
BTW - I do not disagree that there are real perversions of stakeholder capitalism which have been harmful both to our economy and individual investors. The two I would single our are first- the asymmetric nature of the benefits of stick options for management rather than stockholders - . It is “ a heads I win, tails you lose” situation. Second is the growth of the professional managerial clad as corporate size and complexity has increased and as institutional ownership has replaced direct individual ownership as Berle and Means presciently identified 91 years ago. The aforementioned trends have in effect departed the power of the property holders ( share owners) from the power to influence the management of the corporation. In effect now professional corporate managers in effect collude with investment managers to disenfranchise share holders and transfer wealth from the owners of the business to management, often egregiously compare to the results of their management. Correcting that abuse would be a much more productive use of the politicians and crusading populists than decrying stock buybacks. Crony capitalism is the real perversion, not your SP.