"You People Seem to Think We Have to Start With Reality" - Living in a World Where Everything is Made Up

“You people seem to think that we have to start with reality. But we’re an empire now, and when we act, we create our own reality. And while you’re studying that reality – judiciously, as you will – we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors … and you, all of you, will be left to just study what we do.”
Karl Rove quoted by Ron Suskind in “Faith, Certainty, and the Presidency of George W. Bush, October 17, 2004.

Once upon a time, you were raised in some small place, told how the world was, and everywhere you looked you saw evidence of what you were told, all confirmation that the world was just one way.

Then everyone's world grew larger, we were exposed to other peoples and places, they invented travel, fiction, philosophies, and then science fiction, and then moving pictures and now everyone is exposed to a huge variety in lifestyles and ideas and values and can hardly escape the realization that everything is made up. We're all acutely aware at any given moment that things are one way now but they could be different. Likely will be different.

This could excite you, exhaust you, confuse you, make you open up or hunker down.

There are two choices once people get this insight.

1. Just make up and declare anything you want because, you know, everything is made up. Say that when people are offended by you, that's on them. Throw a piece of sheet metal into the air and call it an airplane. Just lie to people even when you know they know you're lying. Live by your own rules and change those depending on your mood.

Or,

2. Feel sobered by this insight that everything really is "just made up" and that making up the wrong things can leave a trail of dead bodies, broken hearts, bankruptcies, chlamydia and cynical, angry youths in your wake. Take at least as much care in "just making things up" as an architect and general contractor would in "just making up a house" that someone they loved was to live in for decades.

Freedom is a beautiful thing until it suggests freedom from consequences or conscience.

Debt Created the United States of America: Hamilton, The Constitution, National Debt and the World's Greatest Economy

Debt created the United States of America.

It was very expensive to go to war against the greatest empire in the world and newly independent colonialists ended the war with about $80 million of debt, representing roughly 40% of the $200 million total GDP at that time.

It was not just the magnitude of this debt. Before the constitution was created and approved, there wasn’t a national government. There were thirteen states but they were not united. The army was going to force congress to pay soldiers back wages after the war and this was the closest our nation has ever come to a coup. (Washington was able to head off this mutiny simply because he was, well, Washington.) In 1783, interest payments on bonds had been suspended and there was no good way to make interest payments. Again, states were real but – at this point – the federal government was fiction that still needed a constitution to become real. Fictional entities generally don’t pay their bills. The first treaty after independence was between Connecticut and Massachusetts settling a border dispute, as if they were France and Italy.

The historian James Beard made a very persuasive argument that the constitution that created the United States of America was driven by bond holders who wanted a national government that could honor its debt. Debt they held.

Collecting revenue and paying the national debt was one of the acts that made the Constitution real, that created the United States.

Hamilton was keen to honor the face value of all this debt. During the Revolution, various Americans bought bonds to help to finance the war. Some surely did it in the hopes of gain. Some did it as a show of support for this aspiring government. By the time the founding fathers were establishing this new democracy, though, most of the debt had been devalued to about 10 to 20% of its face value. Nobody really expected that it would be paid back fully.

Hamilton, though, thought that by honoring the debt he could do a variety of things – chief among them creating a financial system to encourage investing and early manufacturing and he saw the credibility of this new government as key to its credit and financial system. He pushed for valuing the debt at face value, bringing the value of existing bonds from 10 to 20% of their face value to 100%. He saw how debt could literally become a foundation for a modern economy.

Who voted for the new constitution that would create a federal government? And national taxation that would allow this new country to pay back its debt? Bond holders. Only 42% of the Senators who did not hold bonds voted to approve this new constitution. By contrast, 80% of the Senators who held bonds voted for the constitution, voted to create these United States. This vote – that literally established the United States – was biased by those who had the most to gain financially from creating a United States. Because a key part of this new constitution was the ability to tax and spend at a national level. This increased the value of bonds, making them worth 5 to 10X as much as they had been.

During the war, it was states that incurred the debt. The United States did not exist. One of the chief reasons for creating a new nation rather than simply leaving the states independent of one another was to consolidate the debt that states could not repay.

The Senators who helped to create Hamilton’s financial system that was embedded in the constitution made a great deal of money voting for it. But so did the country, creating a financial system that is now the most influential in the world.

Hamilton saw debt as a foundation for a great financial system, borrowing from the British model. In this he was very much aligned with George Washington. The Bank of England had been founded in 1694 and was to become the model for most central banks, a catalyst for the industrial revolution. Curiously, George Washington remained a stockholder in the Bank of England throughout the American War of Independence. Unsurprisingly, Washington approved the first Bank of the United States.

In Hamilton’s mind, taxes, debt, banking and industry were all of a piece. Taxation could finance interest payments on the debt. The debt could be used to create bank stock, something against which banks could issue banknotes and those banknotes could be used to finance industrial stocks, creating a manufacturing economy. Hamilton was one of the few founding fathers who really understood banking and finance, how debt itself could be a valuable asset.

Hamilton’s vision was merited. The US has never defaulted on its debt - has always honored the full face value of its bonds - and is the largest, most dynamic economy in the world and in history. (Russia, by contrast, has always defaulted before any 30-year bond has been paid back and even today about 20% of its population has no indoor plumbing.) And while Hamilton died before he could see it, the US did surpass the UK as the greatest industrial power in the world. And except for one year in its long history, the US government has always held debt since. And continued to prosper.

The United States since its founding has held debt. Honored that debt. And prospered. Just like it was designed to do from the moment our founding fathers first created and approved the constitution that first created this nation.

How Did the Party of Lincoln Degenerate Into the Party of Trump?

How did the party of Lincoln degenerate into the party of Trump? Trump who was born rich and presided over years of peace and prosperity punctuated by a dozen angry tweets every day. The man who claimed to be the most persecuted politician in our nation’s history. Lincoln who was born poor and was engaged in civil war for the entirety of his presidency but left us with some of the most inspiring and hopeful words of any president. Who became the first president to be assassinated. The stark contrast between them and the parties they led may point to a coalition of groups alienated by the transformative policies of three of America’s most influential presidents.

Thomas Jefferson was probably a deist and was (quietly) dismissive of Christianity. Jefferson’s University of Virginia was the first university in the West that was not initially founded as a school of divinity. He was in France as the American ambassador while the constitution was being written and approved. Coming in late to the debate, he argued that the constitution needed a Bill of Rights. The first of these ten amendments, inspired by a similar provision penned by Jefferson himself for Virginia's constitution, ensured the separation of church and state. “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” Fast forward to the era of Reagan, and we find a stark contrast. Reagan appealed to religious conservatives by pushing for an amendment endorsing prayer in public schools, thus inserting religion into public education, a domain which Jefferson fought to keep distinct.

Abraham Lincoln was an advocate for a new kind of industrial economy. Despite his lack of formal education, Lincoln’s fascination with the potential of machinery to revolutionize the economy led him to promote industrialization. But he didn’t see investments and their returns as something to be limited to private citizens and corporations. Lincoln championed the importance of government investment in both capital and education, leading to the establishment of the transcontinental railroad and Land-Grant colleges. The transcontinental railroad he authorized was completed in 1869 and it created a national economy that stretched from coast to coast. Before 1870, the American economy grew about 0.45 percent a year. After 1870, it began to grow about 2.1 percent a year – a stunning difference. (How stunning? At 0.45%, GDP takes about 160 years to double. At 2.1%, it takes only 34 years to double.)

To finance these initiatives, Lincoln instituted the IRS to administer the country’s first tax on income. The narrative of government investing in its citizens through taxation - particularly of those with higher incomes - has faced opposition in the last generation of Republicans, who have promised to reduce government spending and investment on initiatives aimed at poverty alleviation, public schools, and infrastructure. And modern Republicans continue to enact cuts to the IRS that make it more difficult to accomplish the goal of tax collection that Lincoln first defined.

No president experimented more boldly with initiatives to create jobs and to enhance the value of labor than FDR. He gave labor unions more power. He invested huge sums in R&D and education. He made workers more secure with unemployment insurance and social security. He strengthened capital markets but not at the expense of workers. In the few decades after FDR’s presidency, the new policies he’d instituted fed economic growth even more dramatic than the incredible growth that followed Lincoln’s presidency. LBJ took these policies even further, working to give equal opportunity to women, minorities and immigrants whose inclusion made America’s workforce a leader in diversity, productivity, and innovation.

Eisenhower, the first Republican president after FDR, largely continued with FDR’s policies. He wrote “Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. … Their number is negligible and they are stupid.”

Since Nixon, though, the Republican Party increasingly aligns itself against the socioeconomic reforms introduced by Franklin D. Roosevelt.

The policies of Jefferson, Lincoln, and FDR each led to an era of unprecedented economic growth, each time creating a level of prosperity unseen before in human history. Yet, the pushback against their policies has not disappeared. The religious conservatives, who were skeptical of Jefferson's clear separation of church and state, have found a home in today's Republican Party. The fiscal conservatives, resistant to Lincoln's vision of the government as a significant investor in public projects, are – weirdly – now a prominent and vocal part of the GOP. Social conservatives, disgruntled by the increasingly multicultural fabric of a society and economy dependent on not just men but women, minorities, and immigrants, were drawn to Trump's unapologetic rhetoric.

So, how did the party of Lincoln - arguably the most progressive political force of its time - transform into the party of Trump? It seems to come from a coalition of those resentful of Jefferson's secularism, Lincoln's faith in public investment, and FDR's commitment to empowering labor. These three presidents led us away from a past that many conservatives now idealize. The GOP that first emerged as a party able to create a new, prosperous future has become a coalition of those yearning for a return to a perceived golden past, wishing to unravel the legacy of America’s three most influential presidents.

6 Presidencies, 4 Economic Measures - Data on Inflation, Per Capita GDP Growth, Job Creation and Change in Annual Deficit

 Some of you like data that helps to inform your worldview. This post is for you. Here is data comparing the economy during six presidencies by four measures: inflation, per capita GDP growth, jobs created, and change in annual deficit.

How Kevin McCarthy's District and its Economy Might Explain Why He So Casually Threatens to Blowup Capital Markets

House Speaker Kevin McCarthy is toying with the possibility of blowing up the global financial system by refusing to raise the debt limit. It's a terrorist act that threatens to eradicate tens of trillions of dollars in assets in an instant.

McCarthy is a Californian but he's from an inland district more likely to employ farm workers than programmers. I think this may be part of why he feels like a functioning capital market is less important than, say, other California House representatives from places like Silicon Valley or any districts where they support rational thought.

The biggest employers in McCarthy's district (outside of the hospitals) are farms and oil companies. These are industries that rely on land - natural resources like oil, water, and sun - more than knowledge workers and generally trying to resist innovation. The value of an oil company could rapidly be halved with a breakthrough in new technology like fusion or solar energy. It is certainly possible that McCarthy sees financial markets as engines for disruption, financing the very technologies and industries that could obsolete jobs in his district. Why worry too much about the capital markets that seemingly worry so little about the industries that your district is home to?

The biggest employers in Silicon Valley are information companies like Apple, Meta (Facebook), Intel, Alphabet (Google), Cisco, and Adobe. These companies are heavily reliant on well educated knowledge workers from all around the world, people intent on developing new products. The value of one of these information companies could rapidly be doubled with a breakthrough in new technology. People and their representatives here rightfully see the plot to blow up financial markets that funnel money into a constant stream of startups and inventions as a threat to their economy.

McCarthy's casual disregard for international capital markets is a weird reminder that as capital markets have become more disruptive, the Republican Party has morphed from its pro-capitalists origins. Loudly anti-communist and now anti-capitalist as well, the Republican Party has become a refuge for anarchists who protest stifling regulation from government and the disruptive progress of capitalism alike, seemingly longing for an imagined past of in which capital markets created stable jobs and governments didn't funnel any tax money into unworthy people or programs.

For those of you from outside our great state of California, here are some comparisons from Kevin McCarthy's district and the 3 districts that comprise most of Silicon Valley. The districts most appalled at McCarthy's tactics have double the portion of college educated, about 3.5X as many households making more than $200k, and more than 3X as many foreign-born residents. Oh, and a voter in Silicon Valley is 2.5X as likely to vote for a Democrat rather than a Republican who might think it sport to eradicate trillions in global assets as a tactic to force cuts in funding for food stamps.