Are We in a Recession or Should I Say a “Banana”?

What is a Recession?

In the 1970’s Alfred Khan, an economist who was responsible for fighting inflation during the Carter administration, used the word “banana” as a substitute for “recession” when speaking to the press. His reasoning was that it made people nervous when he used the word “recession.” Apparently, he later switched to “kumquat” when a banana company complained. He was a funny guy.

We seem to be at a similar moment in history. First, let’s get the definitional argument out of the way. The National Bureau of Economic Research (NBER) uses a variety of factors to say whether the economy is in recession. Two consecutive quarters of negative GDP growth are among those criteria, but there are others. But to be honest, lots of people use the two quarter decline in GDP as a marker for a recession and you wont find many historical periods which had two such quarters that are not now considered to have been in a recession.

So what is the big deal?

Folks who root for the Democratic Party are reluctant to have the word “recession” associated with the Biden administration. Folks who cheer for the Republican Party are eager to tar the Biden administration with the term. The argument is pointless. The fact is the economy is slowing down and two quarters of negative GDP growth are a good marker for that.

Is a slow down bad thing?

In my opinion, a slow down is actually exactly what we need. More than a decade of loose monetary policy accompanied by aggressive fiscal stimulus, supply chain problems, and war have created the worst inflation in 40 years. The Federal Reserve needs to bring that inflation under control quickly before inflationary expectations become ingrained. That means higher interest rates with reduced demand for housing, cars, and capital investment. All of those mean a much cooler labor market. In the context of accelerating inflation these are good and necessary things. Ideally the slow down will be mild and brief, but make no mistake it is necessary.

What Should We Call the Current Phase in the Economy?

If it makes you happy you can call it a recession. If you prefer you can call it a temporary slow down (crossing your fingers and hoping for the best). Or you can follow Alfred Kahn’s lead and call it a “banana” or a “kumquat.” Whatever you call it remember it is not, necessarily, a bad thing.

Opportunities to Move Politics Toward the Center.

Vote in the Primaries

Opportunities to Vote for the the Center and Against Extremists

There are a number of excellent opportunities to prune the political tree of extremists today, August 2, 2022.

On the Democratic Side

Representatives Cori Bush (D-Mo.) and Rashida Tlaib (D-Mich.), both members of the so-called Squad are being challenged by more centrist Democrats in their primaries today. Please vote for the centrists. Representative Andy Levin (D-Mich.), a member of the Congressional Progressive Caucus is being challenged by Representative Haley Stevens (D-Mich.), who belongs to the more centrist New Democrat Coalition in a new district created by redistricting. Please vote for the more centrist candidate, Haley Stevens.

On the Republican Side

Donald Trump has, helpfully, compiled a list of candidates to vote against. (A specific list of 25 candidates Trump endorses in today’s primaries is included in this link.) He calls it endorsements. Absent any other information simply voting against these candidates would help move American politics back to the center.

Please Vote

Please vote in the primaries. If we have no centrist candidates to vote for in the general election, we have only ourselves to blame.

Why is Russia Choking Off Gas Supplies and How Should the West Respond?

Why is Russia Chocking Off Natural Gas Supplies?

If an Embargo of Russian Gas is a Good Idea, Why is Russia Cutting Off Supplies?

In earlier posts I have pressed for an embargo on Russian natural gas exports. I still think this makes sense, but I can also see the wisdom of a buyers’ cartel that would cap the price that Europe would pay for Russian gas (also explained here). What gave me pause in these thoughts was Putin’s decision (and I am assuming it was his idea) to reduce Russian gas exports through the Nord Stream pipeline. Why would he voluntarily forego this revenue? Does he really think it hurts the West more than it hurts him? Does he just think that Western leaders, particularly German leaders, are so weak-willed that even a small amount of pain will cause them to collapse like a house of cards? Is he just acting like a spoiled child, threatening to hold his breath until his parents give in?

The Role of Contracts

One clue as to what is behind the choking off of gas supplies is the excuse offered: technical problems with the generators that push the gas through the pipeline. The company responsible for maintaining the compressors says that it is unaware of any problems. Why offer this excuse? Presumably the gas flowing through the Nord Stream pipeline is sold under a long-term contract with a fixed price (or some complicated formula that limits the extent of fluctuation in the price). What this means is that even though natural gas prices in Europe are exceptionally high, Russia is receiving a price for the gas that is substantially lower.

Isn’t Russia Contractually Obligated to Supply the Gas?

There is, probably, an out in the contract, for technical problems or “acts of god” that make it difficult to supply the gas. My guess is that Putin is using this ruse to limit Europe’s ability to stockpile gas for this coming winter.

What Should the West Do?

If there are contracts that govern the sale of gas through Nord Stream and other pipelines, the West ought to seize the opportunity created by Russia’s abrogation of its responsibilities under those contracts. The West should “renegotiate” the terms of purchase under those contracts at a lower fixed price determined by a Western buyers’ cartel. By the way, there is no reason why this arrangement should not survive the end of Russia’s war against Ukraine. It is important to remember that this is at least the second time that Russia has, probably, violated the terms of its contracts. The first was when they insisted on payment in rubles.

Would this Work?

I am assuming a lot of facts in this argument and would welcome others, who know the details of the Nord Stream agreement, to weigh in. However, if I am right, a buyers’ cartel for gas delivered by pipeline from Russia to Western Europe could accomplish two important objectives. One, it would deny Putin an important source of funds for carrying out his unprovoked war against Ukraine. Two, it would mitigate the harm to Western Europe from continuing to impose sanctions on Russia.

What Would Putin Do?

In response, Putin could do any of the following. First, he could realize that, in the long run, his situation is hopeless and withdraw his forces from all of Ukraine and cease all hostile acts against Ukraine. (I know this isn’t likely, but one can only hope that at some point Putin will come to his senses.) Or second, he could double down on the spoiled child model and refuse to sell gas at the cartel price, in which case we have a de facto embargo. Or third, he could accept that, once again, he has overplayed his hand and accept what he is offered for his gas.

Inflation: What Should the Fed Do and How Far Should It Go?

U.S. Federal Reserve Bank

Inflation is about Monetary Policy

Inflation appears to be at the top of everyone’s mind lately. That is understandable given that current inflation rates are at 40 year highs. It is likely to play a major role in determining the outcome of the 2022 mid-term elections, despite the fact that there is much bi-partisan blame to be parceled out for the current high rates of inflation. There are, also, a lot of silly proposals on the table for combating it, e.g. price controls and gas tax holidays. There are also some ideas that may be reasonable policy suggestions, in their own right, but have nothing to do with inflation, e.g. lowering tariffs, allowing Medicare to negotiate some drug prices, or facilitating more domestic energy production.

Milton Friedman, a Noble prize winning economist famous for his work on monetary theory and policy, said that “inflation is always and everywhere a monetary phenomenon.” Things like supply chain problems, higher oil and gas prices, Russia’s invasion of Ukraine, the rapid snap back from the Covid 19 induced recession, and aggressive fiscal policy did play a role. They helped to kick start the current inflation, but in the absence of accommodating monetary policy they would not have caused persistent inflation.

The Theory

In theory, all of the above would have resulted in some things becoming more expensive. Absent monetary accommodation, these price increases would have been accompanied by declining prices for other goods and services. If those price declines did not materialize, because of “sticky wages and prices” we would have seen a recession until the under-employment of labor and other resources forced a relative price adjustment.

Evidence Backing the Theory

Those who think this is just theory should take a look at the inflation rates in Switzerland. The inflation rate in Switzerland (3.4%) is about half that of the rest of Europe (8.6%), yet virtually all of the litany of other factors listed above were present for Switzerland. What is different? Switzerland does not use the Euro and Switzerland’s monetary policy is not controlled by the European Central Bank (the European version of the Fed). Also of note is Turkey, which runs its own, extremely loose, monetary policy and has an inflation rate of 78.6%.

The History: The Fed, The Energy Crisis, and Monetary Policy in the 1970’s

In the 1970’s the Federal Reserve Board attempted to avert a recession, in the aftermath of that decade’s oil price shocks, by expanding the money supply. The idea was to produce just enough inflation so that wages and prices for non-energy intensive goods could decline in real terms (but stay constant in nominal terms) while prices in energy intensive industries could increase in real and nominal terms. Done just right this results in mild inflation and no recession. Sadly, the strategy is nearly impossible to execute properly. The problem is that inflation, once started is devilishly difficult to stop. The result was the “stagflation” of the 1970’s, high inflation and low growth. It was not until Paul Volcker really put the screws to the system, in the early 1980’s, and drove interest rates over 20%, that inflation was finally crushed.

What Should the Fed Do Now?

The policy solution is straight forward, if somewhat distasteful. The Fed needs to reduce the rate of growth of the money supply and quickly raise real interest rates with all of the tools it has at its disposal.

Calculation of Real Interest Rates

Real interest rates are the difference between the nominal interest rate and the expected rate of inflation.

The 10 Year Real Interest Rate

In calculating real interest rates it is important to subtract an estimate of inflationary expectations rather than a historical inflation rate, like the CPI, from current interest rates. The problem with using calculated measures of inflation, like the Consumer Price Index (CPI), is that they are backward looking and the current interest rate is forward looking. If we use the current nominal yield on 10 year Treasuries of 2.9% and the Federal Reserve Bank of St. Louis’ estimate of average inflationary expectations over 10 years of 2.34%, the real 10 year interest rate is 0.56% (2.9 minus 2.34), or nearly zero.

The Short Term Real Interest Rate

If we use the New York Fed’s estimate of 12 month forward inflationary expectations of 6.8%, the real short-term (one year) interest rate is -3.8% based on the current nominal yield on Treasuries of about 3%.

However you look at it, real interest rates, despite recent Fed action, are still either extremely low or significantly negative.

What Should the Target Be?

How high should the Fed push real interest rates? Reasonable people can disagree about the target and the speed for getting there. My own preference would be to see real short-term (1 year) interest rates at about 1-2% and long term (10-30 year) real rates of 3-4%. Getting there will require nominal interest rates in the high single digits or possibly higher. I am not sure what the appropriate speed should be to reach this target but I am sure that it is faster than the Fed is currently moving.

Will this Mean a Recession?

Maybe, but the longer we wait before trying to bring inflation down, the deeper and longer lasting the recession will be. We have already waited too long.

Price Cap on Russian Oil and Gas Exports?

Oil Or Gas Transportation
Oil tanker on the high sea

There is a proposal, backed by the U.S., to cap the price of oil and gas purchased from Russia. Janet Yellen, the U.S. Treasury Secretary, is apparently attempting to find international support for this plan. I am skeptical that this proposal will work, but it is not impossible.

The first thing to remember is that even if it does work, the objective is to deny Russia some of the revenues from its energy exports. Even if it worked perfectly, it would not lower world oil and gas prices. Why? Because world oil and gas prices are determined by global supply and demand. Capping the price that Russia can receive for its exports will not affect either supply or demand, unless it causes Russia to export less.

That is not to say that a price cap is a bad idea. There are two ways in which it might work.

The first way recognizes that the West has a degree of market power over Russian exports that must arrive by pipeline. If there is no feasible way for Russia to redirect these exports to other markets, Western countries can exercise that power by collectively refusing to pay more than the cap. If Russia wants any revenue from these exports it must accept the price cap. The oil and gas purchased through this buyer’s cartel can then be resold at market prices. The best way of doing this is for the oil and gas to be auctioned off by the buyer’s cartel with the difference between the price cap and the market price being shared by the participants in the buyer’s cartel.

The second way that the price cap might work, that is often mentioned in the press, is for the West to use its control over finance, shipping and insurance markets to coerce Russia to sell its oil and gas exports at the price cap. The problem with this mechanism is that it would be difficult to prevent purchasers from separately compensating Russia for the sale. If China or India, for example, receive the discounted oil and gas they can have a side deal to pay Russia the difference between the price cap and the market price or some portion of it. It is not at all clear to me how we intend to prevent these side deals. It is also not clear to me why Russia would sell its exports to anyone unwilling to provide the side payment.

My feeling is that the first of these two plans is plausible and worth trying. The second proposal strikes me as very difficult to execute effectively. It would leak faster than a ruptured tanker.

Endorsement for June 7, California Primary for the U.S. Senate Seat.

Vote In the California Primary for U.S. Senate

The California primary for the U.S. Senate seat will be held June 7, 2022. It is an open primary with 20 candidates including Democrats, Republicans, Greens, Socialists, and independents. The top two vote getters, regardless of party, will go on to a general election. You would think that in a field that large the Centrist Independent Voter could find a truly attractive choice. Well, actually, it is not as easy as we had thought. Many of the candidates are running just to focus attention on a pet issue. While some of these issues are worthy, these candidates are not even trying to present themselves as viable general election candidates.

Gov. Gavin Newsom selected Alex Padilla (D) to replace Kamala Harris when she became Vice President. California law requires an election to fill the seat at the next available election cycle. There are, therefore, two U.S. Senate elections going on in California this week: one to finish out Harris’ Senate term and one to succeed her.

Padilla is heavily favored to win enough votes in the primary to put him into the general election for both terms.

Among the challengers there is one candidate who, in our mind, should also be there. That is Jon Elist. A Republican, he characterizes himself as a pragmatic conservative. There is a small amount of overlap between his positions on issues and those of the Centrist Independent Voter. On those issues he does address, he takes advantage of his newcomer status to remain vague on what he actually would support. I am sure that during the general election he will be forced to be more explicit about his policy preferences. Nevertheless, we find his attempt to seek the crossover vote rather than cater to the hard right as refreshing, and would like to see him on the ballot in the general election.

We, therefore, endorse Jon Elist in the June 7, 2022 California primary for the U.S. Senate.

Gun Control

Gun Control Legislation

The Centrist Independent Voter policy position on gun control supports the Heller decision by the Supreme Court. That decision made it clear that there is a constitutionally protected, individual, right to bear arms. It also clearly states, as President Biden noted last night, that that right is not unlimited.

Now that Congress is considering passing legislation to codify some of the limits on gun rights, I think that CIVPAC should take sides on what those limits should be. Here is my list:

1) Banning the sale of high powered, semi-automatic rifles (i.e. assault weapons), or at a minimum raising the age to purchase these guns to 21, with waiting periods for anyone else wishing to purchase an assault weapon;

2) Banning the sale of high capacity magazines and bump stocks;

3) Raising the age to purchase any gun to 21;

4) Universal background checks with no loopholes for gun shows or online sales;

5) Red Flag laws that can prevent those who are under court orders from getting guns;

6) Regulation of “ghost guns,” (unregulated firearms that anyone-including minors and prohibited purchasers-can buy and build without a background check);

7) Making those who, through negligence or intentionally, allow their firearms to be used by others, legally liable for crimes committed with those firearms. This would, also, apply to those who illegally sell firearms.

Why Not Remove Liability Protection for Gun Manufacturers?

Much of this list overlaps with President Biden’s proposals. One thing that is missing is removing liability protection for gun manufacturers, for the use of guns in the commission of crimes. I view that part of the Biden package as a reward to the plaintiffs’ bar. The plaintiffs’ bar is to the Democratic Party what the NRA is to the Republican Party.

The reason why the liability protection for gun manufacturers exists in the first place is because many believe, with some justification, that without it law suits would effectively make the sale of firearms prohibitively expensive. Many view removing this protection as a slow form of banning the purchase of guns altogether. We do not hold automobile manufacturers liable if one of their cars is used to rob a bank or kills someone in an accident caused by the driver. It is not necessary to provide this kind of protection for automobile manufacturers because no one believes a jury would hold automakers liable under these circumstances. The same cannot be said for juries trying to find someone to punish after a mass shooting in which the perpetrator is dead.

At the same time, it would not be unreasonable to hold manufacturers accountable if they intentionally marketed legal guns that could easily be converted into illegal guns, when there was a way of manufacturing the gun that could easily prevent this from happening. The key here is to find a good faith method of regulating the industry that is not a gift to the plaintiffs’ bar and provides clear guidelines to the industry about what is legal and what is not.

For a thoughtful history of the Second Amendment and battles over gun control, see Gunfight: The Battle Over the Right to Bear Arms in America, by Adam Winkler. Winkler is a professor at the UCLA School of Law and has been ranked as one of the twenty most cited legal scholars in judicial opinions, including landmark Supreme Court cases on the First and Second Amendments.

Legislative Resolution of the Debate on Abortion Rights

Legislative Solution to Abortion Rights

The Centrist Independent Voter policy position on abortion rights is that if Roe/Casey is overturned, we should attempt to re-establish those same rights legislatively. The position is also that we should not take that opportunity to either expand or contract those rights.

Susan Collins(R) and Lisa Murkowski (R) have jointly introduced legislation in the Senate to accomplish exactly this objective. This link also provides their defense of this legislation.

If the Democrats in the Senate were to embrace this proposal, they might well be able to muster the votes necessary to overcome the filibuster. In addition to Collins and Murkowski, Shelley Moore Capito (R) is pro-choice. I believe seven more Republicans can be found who would settle for this legislation rather than risk having the Senate rules changed to eliminate the filibuster and seeing the Democratic version of this legislation pass and seeing the Court packed with liberal justices.

Remember some conservatives objected to the Roe decision because it represented an overreach by an activist court rather than because of the content of the decision. Reversal of Roe combined with a legislative answer to the issue constitutes victory for these judicial conservatives.

Democrats who want to use this issue to end the filibuster and pack the Court should remember that they will not always be in control.

Democrats who turn down this compromise, because they hope to gain a political advantage in the mid-terms, should remember that their refusal to even consider the compromise will hurt them. They should also remember that while support for abortion rights similar to those laid out in the Collins/Murkowski legislation is widespread, support for unlimited abortion rights is far less popular.

A final reason for Democrats to embrace the Collins/Murkowski bill is that it would make a Supreme Court decision on the issue currently before the court moot. If the Collins/Murkowski bill became law, the Mississippi law before the Court would clearly be illegal. The Court does not issue decisions if the issue is moot. That would address the concern that the Alito draft decision, if adopted, would set a precedent that would undermine other court decisions such as contraception and same sex marriage rights. If the Democrats wait until the Supreme Court delivers their final decision they will have missed this opportunity.

2022 Utah Republican Primary for the U.S. Senate

2022 Utah Republican Primary for U.S. Senate

The Republican primary for the U.S. Senate seat is scheduled for June 28, 2022.

Mike Lee, the incumbent U.S. Senator from Utah, has gone from a Trump skeptic to a Trump enabler.

If the Utah Republican Party nominates Lee for the U.S. Senate race in 2022, it is likely that the Centrist Independent Voter will endorse his independent opponent, Evan McMullin, in the general election. The Utah Democratic party has chosen to forego nominating a candidate and has endorsed McMullin. McMullin is a center-right candidate and is attempting to forge an alliance of Democrats, independents, and disgruntled Republicans. If Lee wins in the primary this strategy might well succeed, as noted in this article in the Economist.

The other Republican candidates for this seat , according to Ballotpedia, are Becky Edwards and Ally Isom. Of these, Becky Edwards appears to have the stronger chance of defeating Lee based on polling data.

Edwards is reliably conservative and hardly a centrist, but she does not have Trump’s endorsement and has the best chance of defeating Lee. The Centrist Independent Voter, therefore, endorses Becky Edwards in the Republican primary for the U.S. Senate seat from Utah.

To see other Centrist Independent Voter endorsements in the primaries visit 2022 Primary Endorsements. To see Centrist Independent Voter endorsements for the general election visit 2022 General Election Endorsements.

2022 General Election Endorsement for Ohio Senate Race

2022 Ohio Senate Race

Centrist Independent Voter Endorsements for the 2022 General Election

Because of limited time and resources, we are focusing on a relatively small number of elections in 2022. If you have an election you would like us to take a position on, contact us through the feedback button on the side or bottom of this page or use the contact us page. We will be adding more general election endorsements as the primaries conclude.

Ohio General Election for the U.S. Senate Seat

The Republicans have nominated J.D. Vance for this seat. We endorsed Matt Dolan in the Republican primary. Dolan did better than expected, by not good enough to get the nomination. Vance has a number of strikes against him. First, he has Trump’s endorsement. If Vance wins, Trump will use that fact to strengthen his hold over the Republican Party. Second, Vance has come to embrace what some refer to as Conservative Nationalism. As best we can determine, this means conservative on social issues like abortion, protectionist on trade, anti-immigration and isolationist on international affairs. In a particularly egregious example of his isolationist views, he has made it clear that he is indifferent to Ukraine’s fate. Anyone who has examined the Centrist Independent Voter’s philosophy section or the public policy section would conclude that the Centrist Independent Voter could not endorse J.D. Vance.

The Democrats easily nominated Tim Ryan. The Centrist Independent Voter endorsed Ryan in the Ohio Democratic Primary. Ryan is a center-of-the-left politician. For our tastes he is far too pro-union, but Ohio is heavily unionized. For a review of his positions on other issues visit ontheissues.org. He is, also, a member of the Problem Solvers Caucus in the U.S. House of Representatives, which marks him as more centrist than many Democrats. He is certainly more centrist than his opponents in the Democratic primary.

There is no question that Ryan is something of a long shot. However, a win for Ryan would strongly buttress the case, to both parties, that extremism loses, moderation wins. Tim Ryan therefore gets our endorsement for the U.S. Senate seat from Ohio.