Training Thinkers

Will Milberg discusses the unique history of The New School for Social Research, and why its traditions are particularly relevant today.

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The Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy

Setting the record straight and identifying less destructive pathways forward than round after round of interest rate increases.

Economic history is full of episodes in which inflation triggered both intense social conflicts and heated debates among economists and policymakers over its causes. The present worldwide upsurge in prices is no exception: from the moment governments and central banks first contemplated how to protect their citizens from COVID, inflation hawks and doves divided over whether the measures would touch off an inflationary price spiral.

The arguments intensified as government relief packages swelled and central banks not only supported those but embarked on gigantic programs of quantitative easing to buttress swooning financial markets. In the U.S., discord reached a fever pitch as the incoming Biden administration brought in what became its $1.9 trillion relief package in early 2021. Not only analysts allied with Republican administrations, but prominent Democratic economists predicted disaster, arguing that the Biden relief package, taken together with an earlier December 2020 relief package, was far too large for the likely demand shortfall that the administration intended to offset – and therefore would very likely generate a surge in U.S. inflation.

We underestimated the extent to which inflation would become a problem. So, we undertook a review to figure out why we missed the turn and get a sense of what policy should have been. As we scrutinized the data it quickly became plain that the conventional wisdom that roots the inflationary upsurge in the Biden stimulus is seriously deficient. What is now trumpeted as a triumph of insightful economic analysis is really something else. It looks more like the fabled case of the broken clock that eventually tells the correct time: That, in other words, after being so wrong in the financial crisis of 2008 and the ensuing Euro crisis, inflation hawks finally got lucky for reasons they have not correctly identified to this day.

Our new INET working paper thus undertakes a fresh analysis of the U.S. inflation experience since COVID in hopes of setting the record straight and identifying less destructive pathways forward than round after round of interest rate increases.

The discussion is organized as follows. The first section begins by retracing inflation’s time path in the United States. This lays out benchmarks and GDP data that sets the stage for our analysis in section 2 of whether the observed pattern of price rises is consistent with claims about the role of the Biden stimulus in generating excess demand. Scrutiny of inflation’s course also prepares the way for the discussion in later parts of our paper of how the twin crises of 2022 – the outbreak of war in Ukraine and the off-the-charts weather extremes that so much of the world experienced – have dramatically recast the problem of inflation going forward.

Section 2 presents our critical analysis of the claims about the Biden stimulus. Our demonstration of their spuriousness proceeds in three steps. First, we build on section 1’s discussion of inflation’s course to show how outlandish are notions that rounds of federal (and state-level) pandemic relief spending somehow fueled mighty bursts of consumer demand. The two key data series – stimulus spending and inflation – move dramatically out of phase. While the first ebbs quickly, the second only surges.

Other studies underscore our conclusion. For instance, according to the Brookings Institute Hutchins Center Fiscal Impact Measure, fiscal policy has been a drag on U.S. economic growth from the second quarter of 2021 onwards, driven by the waning effects of the pandemic relief spending, a rise in federal and state tax collections and declines in real federal, state and local purchases. It is obvious that the fiscal drag on U.S. economic growth coincides in time with rising PCE inflation, directly contradicting claims that the Biden stimulus was a major driver of accelerating inflation. Other sources show that American households spent only a small fraction of their 2020 and January 2021 Economic Impact Payments (EIPs) within a couple of months of arrival and did not raise spending at all following the third round of EIPs in March 2021. Taken together, these findings should put to bed claims that the surge in inflation has been caused by Biden’s pandemic relief spending.

We then look at alternative explanations for the price rises. We consider in turn four supply-side sources of inflation: imports, energy prices, rise in corporate profit margins, and COVID. We believe discussions of COVID’s impact have thus far only tangentially acknowledged its importance. In particular, the analysis of its impact on low-wage labor markets in the U.S. has missed important implications of COVID’s continuing importance for wage patterns. The pandemic continues to wreak havoc in labor markets in complex ways that analysts and governments have yet to grapple with, not just directly but now also in the form of long COVID and COVID-induced complications to other illnesses.

Our conclusion is that these commonly cited factors played critical roles in bringing on and sustaining inflation, but they cannot explain all of it. There really is an aggregate demand problem when supply is constrained. This is a point we acknowledge we missed earlier. But the source of this surprise surge in demand was not federal government spending. It came from a feature of this inflation that no one has thus far spotlighted: the unprecedented gains in household wealth, particularly for the richest 10% of households, which we show powered the recovery of aggregate US consumption expenditure, especially from July 2021.

Our estimates indicate an aggregate wealth impact on consumption of $1 trillion during 2020Q1-2022Q1. This implies that the wealth effect amounted to about half of the size of the $2.1 trillion Biden corona support measures. The wealth effect on consumption demand is not based on a broad-based stimulus, however, but rather on the skewed, highly concentrated, pandemic gains in personal wealth arising mostly from the Federal Reserve’s quantitative easing program. Almost three-quarters of the wealth effect on consumption is due to higher wealth for just the richest 10%—and the richest 1% alone account for more than 40% of the increase in consumption demand.

Analysts who have fastened on excess bank reserves generated by quantitative easing as the cause of this spending miss the key point: Reserves (and for that matter the money supply figured any number of ways) have long towered far over legal requirements. But with the waning of the vast Omicron wave of COVID, affluent Americans came out in force and started spending. They had not done this earlier, at virtually the same level of bank reserves.

Section 3 considers how the war in Ukraine and the climate shocks of the summer of 2022 have now added entirely new dimensions to the problem of inflation going forward. The outbreak of war in February had dramatic effects on prices for food, energy, and other important commodities, including fertilizers. More fundamentally, the western democratic countries’ sanctions on Russia, especially the restrictions on the use of the U.S. dollar, dramatically reshuffled existing military alliances and defense arrangements, not simply in NATO, but also in the Pacific. With friction increasing between the U.S. and China, the shifts in the military balance and alliances vastly accelerated evolving patterns in the global economy and the international relations system that until then were maturing at a glacial pace. This newly minted “New World Order” has profound implications for the reliability of global supply chains and patterns of demand, not least in energy. In our view, it implies a long period of intensified and irregularly variable pressures on supply chains that will keep interacting with COVID and climate extremes. Depending on how peripheral wars flare up and down, further changes in alliances and safe areas for commerce will disrupt trading patterns as parts of the world economy partially decouple from each other.

Our conclusion outlines how we believe policies for dealing with inflation have to change if the majority of the world’s population is not to be stressed to an inhuman degree. Our argument is basically that current inflation combines the worst of wartime price rises and the price cycles that wracked earlier agricultural societies. It responds only at an enormous cost to monetary policies because it arises mostly from supply-side difficulties.

Many of these pressures, unfortunately, will vary directly with the extent to which cooperation, rather than destructive competition prevails in the new, rapidly evolving system of international relations. Without serious efforts to restrain super-power interventions, arms spending, and resort to war, no inflation containment strategy is likely to work very well. If, somehow, the current drift toward a multipolar system with a bias toward intensifying conflict can be arrested, then inflation control will be much easier. But supply-side inflation can only be dealt with efficiently through initiatives that work on the supply issues, such as vigorous antitrust, tight limits on commodities markets, and other targeted (microeconomic) regulatory measures, together with major investments in public health and renewable energy.

Fiscal policy also has to adapt: to control supply shock inflation of the type the world is now fated to experience, existing explorations of ways to steady demand over the business cycle have to embrace much bolder macroeconomic measures to control over-spending when supply plummets or becomes more volatile. Some of these include measures in the spirit of (Keynes, 1940); another could be progressive consumption taxes.

What has to be avoided is precisely what is happening now, as central banks respond to the demands for protection from inflation by kicking interest rates up and up. That is a program that is guaranteed to undermine economic progress and, potentially, democracy itself. It makes about as much sense as raising rates in response to harvest failures in old-time agricultural economies.

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Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy

A critical reappraisal of the case in favor of monetary tightening pressed by inflation hawks is overdue.

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Meet the Grinch Stealing the Future of Gen Y And Z

Salaries in the U.S. aren’t keeping up with inflation, despite pandemic-related increases in some sectors. That’s a major threat to the future for all working Americans – especially the youngest.

Social Security is your future. And that future could come sooner than you think.

Conversations about the program often pit younger workers against retirees, but Social Security is really an intergenerational compact that boosts the well-being of Americans of all ages — that’s one of the reasons the program is so cherished.

One in five Americans receives a Social Security benefit today, and about one in three of these aren’t retired. Social Security protects young workers and their families if they become disabled, and it provides benefits to the survivors of deceased workers, including their kids. Studies show that a 20-year-old worker has a one in three chance of qualifying for disability benefits before reaching retirement age.

Today’s seniors rely on Social Security for most of their income – and younger generations without traditional pensions will need the program even more. The situation is dire: we already know that the total wealth of Millennials is lower than that of their parents and grandparents at the same age. Social Security protects the health and dignity of younger folks down the road – it’s the only guaranteed source of retirement income that isn’t subject to the vagaries of investment risk or financial market fluctuations.

Yet threats to the program are coming fast and furious, from calls to cut benefits by changing how cost-of-living adjustments are calculated to schemes to raise the retirement age (which already happened in 1983 under Reagan).

There’s one threat that gets far less attention, which has been impacting American workers since the 1970s: wages that just don’t keep up, despite increased productivity. Social Security was designed for wages that rise with inflation – but that’s not happening. In an interview with the Institute for New Economic Thinking, Eric Laursen, author of The People’s Pension: The Struggle to Defend Social Security Since Reagan, breaks down how the program works, why wage stagnation represents a mounting threat, and what can be done to strengthen and update the program for the 21^stcentury.

Lynn Parramore: Social Security has been America’s most successful retirement program for the last 87 years. Yet the public is constantly hearing that the program is going to “run out of money.” Is that actually true? Can Social Security actually go bankrupt?

Eric Laursen: No, and the word bankrupt is just about a complete misnomer when it comes to Social Security. The program is funded by contributions that participants and their employers make through their paychecks. It’s also backed by a Trust Fund which is accumulated over time.

That Trust Fund is dwindling now, and it’s expected to run out of money in the early 2030s. But Social Security can’t actually go bankrupt. If the situation arises where there is not enough money either in the Trust Fund or coming through from contributions to fund current benefits, then those benefits can’t be paid, perhaps as much as 25%. In that case, Congress would be faced with a choice to either cut benefits or increase contributions.

There’s a lot of pressure from people who want to cut Social Security to do it now rather than waiting for that point in the future, because at that point, Congress would be under a lot of pressure to make good on what people have been promised.

LP: About these predictions that the Trust Fund will run out of money -- does anybody really know what will be happening in 2030? Economists, after all, are actually very bad at making predictions (most didn’t see the 2007-8 crash coming, for example). We don’t actually know for certain there will be a shortfall, do we?

EL: That’s absolutely correct. Although you’d be surprised how much certainty economists assume when they make their predictions!

LP: Can you explain how the payroll tax works and how the amount of earnings that are subject to this tax makes a big difference in the whole equation? The press often doesn’t do a very good job of making it clear.

EL. Sure. The payroll tax is a 6.2 percent tax on employees and 6.2 percent for employers that is used to fund Social Security. The way the system works is a little bit convoluted, but essentially, that money goes to purchase Treasury bills, which go into the Trust Fund. Those Treasury bills are liquidated in order to pay benefits. The result is that Social Security is not like any other social benefit program in that it’s completely self-funded. It belongs to the people who put the money in. The Treasury can use the money it gets from those Treasury bills to do other things, but ultimately, those are obligations to the people who contribute to the program.

There are definitely alternatives to cutting Social Security if the Trust Fund runs out of money. For example, you could simply raise the payroll tax to some extent. This is used to scare people by critics of the system because people think “wait, raising taxes is always bad.” But the fact is that Social Security taxes have been raised repeatedly in the decades when the system was being expanded and improved in the ‘50s and ‘60s, for example, with no complaint about it. In fact, people polled consistently answer yes to the question, “Would you be willing to pay more in payroll taxes in order to keep your present Social Security level?”

It’s a myth that taxes are the third rail somehow. The importance of Social Security to people today is huge. It’s the one part of the old age benefit picture that has remained stable over the last 40 years. Employer-based pension systems have disintegrated and 401(k) plans have proved to be inadequate. People depend on Social Security more and more. Raising the payroll tax is a viable thing if it’s done in a gradual way.

LP: Isn’t that how the program was intended to work in the first place?

EL: Yes. The way the system works is that the contributions you make to Social Security only go up to a certain level of income. So if you’re making $147,000 a year—going up to $162,200 in 2023—up to that amount you pay payroll tax on your income. One of the reasons that the Trust Fund money is dwindling is that so much income of upper-income people is now above that amount. There’s a lot of income in this country that doesn’t get taxed for payroll. Some of the proposals we’ve seen from people on the Democratic side would address that.

The real reason for the shortfall doesn’t have to do with lower birth rates or life expectancies, which is what is usually discussed in the media and on the right as being the culprits. Those changes were actually pretty well understood and anticipated 40 years ago, which is the last time the program was updated in a major way. The real culprit is wage stagnation. Wages have not kept up at all with the pace they had prior to the early 1980s. This was not anticipated. The result is a system that is not bringing in money the way it formerly had.

LP: There are reports that President Biden is suggesting not only raising the cap but changing the measure of inflation to something called the CPI-E. Why is the program’s inflationary tether important and which measure do you think should be used?

EL: The CPI is what’s used to calculate increases in benefits every year. This past year we had a very big increase in benefits because the CPI jumped a lot. That was important to protect retirees from the impact of inflation.

The CPI-E is a measure developed back in the ‘80s, I believe, and it is geared particularly towards the basket of goods and services that the elderly – people over the age of 62 – use to a greater extent, like medical care and housing. The idea is to apply that to Social Security rather than the standard CPI.

On the right, there is another measure called the chained CPI, which they have been pushing. The chained CPI is designed to provide a more accurate read of inflation by more aggressively applying substitutions to the basket of goods and services. So if the price of beef is going up, the idea is that people will switch to eating chicken, so you factor that into the CPI. That slows the growth of the CPI, so it slows the growth of benefits in terms of how inflation is seen to impact elder benefits. There’s been a tug of war. The right wants chained CPI, which would slow the growth of Social Security benefits, while people on the progressive side want the CPI-E.

I’m in favor of the CPI-E. It’s a more accurate reflection of how inflation impacts the elderly. If we want to have a Social Security benefit that addresses their needs, that’s the most direct way to do it.

LP: I’m a Gen Xer born in 1970, which means that when Ronald Reagan was in office, two years of my Social Security benefits were taken away on the advice of the Greenspan Commission before I was old enough to vote. The age at which Social Security benefits could be collected was raised on people born after 1960 from 65 to 67. What’s your assessment of the economic and political aspects of that move? Was it necessary?

EL: I address this in my book, The People’s Pension. There’s a lot of murkiness surrounding it because not everyone’s motives were 100% clear when the Social Security amendments of 1983 were passed, which were proposed initially by the Greenspan Commission and then enacted by Congress.

The reality is that it was not necessary to institute this sort of phased raising of the retirement age at the time. It resulted in Social Security building up a larger Trust Fund, but it wasn’t the thing that saved the system back in 1983, a time when it really was in trouble. The truth is that as a result of the raising of the retirement age, the lifetime benefits which people will receive were eroded. Put simply, the change in the retirement age lowers the amount of money you’re going to get from Social Security after you retire. In the early ‘80s, Social Security, on average, replaced about 42% of the final salary or compensation for workers who were retiring. That’s down to about 32%.

LP: That’s a big difference.

EL: A very big difference. Social Security was never designed to be a total pension for everybody, although there’s a strong argument now for turning it into one. It was supposed to give you a critical mass so that you could supplement that with a private pension and private savings and come up with something comparable to what you were making before you retired. It doesn’t do that anymore, and the increase in the retirement age is one of the things that has created that situation, so it would be a very good thing if that could be reversed or simply held in place.

I understand your frustration, that this is not something you were able to weigh in on even though you were alive at the time. It also affects people who are retired now. It was done as a way to assuage major critics of the system of the time. It really isn’t something that had to be done.

LP: How worried should younger generations today be that something like this could happen again? What can they do to protect their futures?

EL: I have to come down on the side of saying they should be worried. The reason has nothing to do with the economics or fiscal viability of the system. It has to do with politics.

Social Security is in need of being improved and updated for the 21^st century. It has been 40 years since any significant improvements or tweaks were made to the program. But the fact that there has been this constant pressure from the right, from the Republican Party and some Democrats, to cut benefits and to “save the program” – which really means cutting it back to the point where it would not be very useful at all – has kept people who support the system in Washington on the defensive for a good 40 years now. So the whole political energy has been around trying to play defense against these efforts to cut it, rather than to try to improve it. That’s the real danger for people in their 20s and 30s.

The reality is that it’s the stagnation in wages that has been the real problem for the program.

We’re going through a period right now in which there is a tight labor market and wages have been going up in some sectors, but that’s very much tied to the pandemic and the economic repercussions from that, and it’s not going to last unless there are changes made to some of the conditions in which the labor market operates – there we’re talking about offshoring of industries, the conditions for labor organizing, and so on.

If you really wanted to save Social Security and make sure that it was around for you, the thing to do is not to worry about the structure of the program, but to push for an economy that provides good jobs, good pay, that increases over time. That’s what we really need. So this is not a problem that younger people should think of as something happening down the road. It’s closely tied to the problem they have right now – that this economy doesn’t produce well-paying jobs. That’s something that arguably was engineered back in the ‘70s and ‘80s, right around the time that Social Security started to be neglected. That’s the real threat to younger people.

The interesting thing about this is that when people on the right and the center-right of the Democratic Party try and sell Social Security “reform,” which generally means cutting it, one of the tricks they have is to say, well, of course, we’re not going to touch the benefits of current retirees – they’ll be protected. The problem is that current retirees still do fairly well under the program, despite the erosion in benefits. It’s younger people who are really going to depend on Social Security. They are the ones that need the program to be improved.

LP: Dare we use the word “expanded”?

EL: Exactly.

LP: Many people may assume that the threats to Social Security come from the right and the Republican Party. How do you assess Biden's history on this issue?

EL: You have to remember that Biden and most of the other leaders in Washington think like politicians. They’re concerned first and foremost to get themselves reelected and they’re very sensitive to how far they can push things. Biden, in the ‘80s and ‘90s, was a vociferous supporter of “reforming” Social Security – freezing entitlements, cutting back on benefits in order to “save the system.” Many people in the Democratic leadership at the time thought the same way. That was the popular thing. “Reforming” Social Security has always been a peculiarly Washington obsession. The trick has always been to come up with a critical mass of Republicans plus enough center-right Democrats to push it through.

These days it’s not as popular a thing. Mitch McConnell, for example, has so far ruled out doing anything to Social Security over the next couple of years because he knows it’s a political loser. It won’t fly right now. But it’s always there in the background. And I should point out that this last election was very revealing. It’s sometimes thought that the real Trump-y members of Congress and the Republicans from that side of the party are less enthusiastic about cutting Social Security – that they’re friendlier towards entitlements as long as they go to their kind of people. But in fact, some of the most radical proposals for Social Security in this past election came from some of the most far-right people in the party – the ones who are closest to Trump.

LP: The ones who claim to be populists.

EL: Exactly. You’ve got people like Senator Ron Johnson [R-WI] who is literally saying Social Security should not be self-financed anymore. He says it should be thrown into the pot along with every other federal expenditure and hashed out every single year. Now, you can’t run a retirement program that way because there’s no certainty. But that doesn’t seem to make any difference to him.

LP: So Sen. Ron Johnson wants to remove the very aspect of the program that makes it work so well – the part that guarantees people can depend on that check coming year after year.

EL: Yes. And that’s why the fact that it’s a self-financing program is so important. There is an element of mutual aid to Social Security that is in its DNA. It’s people of a wide range of generations supporting each other because they know that at a certain point they will be the recipient rather than the payer. Once you destroy that element of social solidarity, the program is just like any other welfare program. And of course, the history of those over the last 40 or 50 years in this country is that they get cut.

LP: How do you rate the Biden Administration on Social Security now?

EL: It’s fairly positive. This goes back to 2016 when the election was looming, and Bernie Sanders was pushing very, very hard, and a number of progressives in Congress were pushing very hard for a platform that would improve the program. Obama, in his last year as president, got behind them. Hillary Clinton got behind them. That was a big opportunity that was lost when Trump won the presidency because there would have been some momentum for that. That all died under Trump. This year there are proposals again in Congress to improve Social Security. It won’t be easy to do in the Congress that’s about to take its seat, but the Biden administration has been, at least in a general way, positive towards it. But we’re not going to see a lot of progress tomorrow.

LP: What would you do to make sure that Social Security is protected and remains strong? Does it need to be modernized in some ways to keep it effective?

EL: There are a number of things that can be done. One is to raise the cap. More of income beyond the $147,000 threshold needs to be taxed for payroll tax purposes. Another thing that can be done is passing the Social Security Expansion Act that Sanders, Elizabeth Warren, and others have backed. There is a special minimum benefit for Social Security recipients that’s aimed at keeping people who have really low incomes during their lifetimes above the poverty level, and that needs to be improved. That’s not asking a lot. It should be done.

You can also change the rules for wealthy people. One of the differences between now and 40 years ago is that people in the really high income brackets get much more of their income from investments, stock options, and other business holdings than they do from salaries and wages. We need to figure out a formula for applying the payroll tax to at least some of that investment income – like capital gains and so forth. Definitely, the CPI-E needs to be instituted. There should be an expansion of benefits across the board for Social Security benefits. We need the CPI-E at a base level that’s more reasonable. Another thing I think is important: one of the changes that happened in ’83 that was really bad was that Social Security survivor benefits were ended for children of deceased or disabled workers above the age of 18. It used to be that you could get those until 22 and they would help you to go to college. That was abolished. It would be a very good thing if that could be reinstated so that more people have some level of security to pursue higher education.

LP: If there’s one thing you could get the public to understand right now about Social Security, what would it be?

EL: I’ll make it two things. First, Social Security is not something you can consider in isolation. It gets back to what I said about how if you have good pay with steady increases, then you can have a healthy Social Security system in a fiscal sense. Without that, you can make all the cuts you want, you can tweak it any way you want to make benefits more moderate, and the system will still deteriorate. You must have a good economy, and that includes everything from encouraging the development of industries that generate those kinds of jobs. It means not making it harder for unions to organize so they can push for higher wages. Social Security is closely tied up in that aspect of the economy.

Second, keep in mind that Social Security belongs to you as a working person who is contributing to it. It doesn’t belong to the politicians, although they make decisions about it. It belongs to you and I think that there needs to be a sort of consciousness among people of this so that when they discuss it or make their views known to politicians, the politicians understand in Washington that this is something that is not theirs to play with.

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High-level Panel Discussion: Development Prospects in a Fractured World

As 2022 comes to a close, panelists discuss the immediate prospects for the global economy, the dangers of a lost decade for developing countries and what needs to be done to put the SDGs back on track.

Moderator: Richard Kozul-Wright, Director of the Globalization and Development Strategies Division

UNCTAD Panelists:

• Jeffrey D. Sachs, University Professor and Director of the Center for Sustainable Development at Columbia University
• Jose Antonio Ocampo, Minister of Finance and Public Credit, Republic of Colombia
• Jayati Ghosh, Professor of Economics, University of Massachusetts-Amherst https://unctad.org/meeting/high-level...

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Bankman-Fried, Political Money, and the Crash of FTX

How Showering Money on Both Parties Paralyzed Regulators

Late last week, Samuel Bankman-Fried, in the eyes of many our century’s answer to 18th-century fraudster John Law, Charles Ponzi, and the con artists who puffed tulips back in the Dutch Golden Age, allowed that he would be willing to testify before the House Committee on Financial Services. Curiously, for someone usually so eager to jump on stages where he could trumpet his determination to make the world a better place, Mr. Bankman-Fried was far more tentative about the possibility of appearing before the Senate Banking Committee.

That little factoid, reported with no real explanation in the media accounts we saw, suggested to us that a little basic research might be in order. Like everybody else, we were eyeing the astronomical totals of political contributions ascribed to Mr. Bankman-Fried (hereafter SBF), his colleagues, and FTX, the crypto-currency exchange that SBF ran before it filed for bankruptcy. But past experience with mass media and scholarly analyses of campaign finance suggested to us a deep dive into the data would still prove highly instructive.

And so it turns out. In the interests of basic fairness and because so much data from the 2022 election cycle is still being posted on the websites of the Federal Election Commission and the Internal Revenue Service (which reports so-called “527” contributions usually neglected by journalists and scholars), we need to wave a few cautionary yellow flags about what we found.

Note first of all that as yet Mr. Bankman-Fried and his coworkers have not been convicted of anything, though the swiftness with which he and some of his colleagues made themselves scarce within the territorial United States as FTX imploded was striking. Recent comments and Congressional testimony by John J. Ray, the executive who is now presiding over the bankrupt shell of FTX, are also not encouraging. Indeed, coming from someone who helped liquidate Enron and a long line of other financial duds, they are downright chilling: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

We also take to heart warnings from public figures who admit they spent a lot more political money than the press recognized. While his recent public utterances clearly often mix poetry and truth, some of SBF’s statements on this score are noteworthy: “I donated to both parties. I donated about the same amount to both parties this year.” He added that “that was not generally known, because, despite Citizens United [the famous court case widely, if mostly mistakenly, blamed for opening the floodgates to giant waves of money in politics] being literally the highest-profile Supreme Court case of the decade and the thing everyone talks about when they talk about campaign finance, for some reason, in practice, no one could possibly fathom the idea that someone in practice actually gave dark.”[1]

“Dark money,” of course refers to contributions that are laundered through gifts to qualifying charities that are not themselves required to report where the money came from, only whom it went to. Election money analysts, accordingly, can see the money gushing out, but not the invisible spring it really comes from. As we have documented from time to time, Mitch McConnell along with many other politicos, including nowadays many Democrats, are past masters of stuffing campaign piggybanks in this stealthy way.

A passage from one of the indictments of SBF just unsealed underscores the need for wariness and, we would add, far more disclosure:

In furtherance of the conspiracy and to effect the illegal objects thereof, the following overt act, among others, was committed in the Southern District of New York and elsewhere: in or about 2022, SAMUEL BANKMAN-FRIED a/k/a “SBF,” the defendant,and one or more other conspirators agreed to and did make corporate contributions to candidates and committees in the Southern District of New York that were reported in the name of another person.[2]

In other words, the government contends, SBF and colleagues used dummies, too.

Here we can deal only with the on-the-record money. Dark money by definition stays dark unless some Congressional committee demands disclosure of how many of its own members and their colleagues really supped at the trough or prosecutors find the records.

But in the case of SBF and his colleagues, the public totals are quite something, even by the standards of American political finance.

Money in politics today is a Category 5 hurricane. Just when you think you have finally absorbed the worst punch the storm has to offer, some other eddy comes blasting down. We have tried to pull together the many streams of political money from SBF, his senior associates, and all other employees of FTX, together with the executives of Alameda Research, the crypto hedge fund that SBF had co-founded and remained involved with. We include individual donations and PAC contributions, but also the often gigantic 527 transfers reported to the IRS. We counted his brother, but not his parents. We have not looked at law firms that represented SBF or the firms or other possible sources of more money. And we warn readers that the group donated lavishly to think tanks, including the Center for American Progress. It also nourished a stable of former regulators, especially from its preferred regulatory venue, the Commodity Futures Trading Commission, and – secretly – at least one media outlet.

Still, our total is substantially higher than most others reported: over $89 million dollars since 2019, with the bulk of it coming during the 2021-22 political cycle when the campaign to keep crypto clear of federal regulation swung into high gear.

Three graphs clarify some of the issues debated in public. Figure 1 displays the time path of all the contributions we identified; Figures 2 and 3 display total contributions to Republicans and Democrats respectively. Figures 2 and 3 do not quite sum to the totals in Figure 1, since some streams of money could not be clearly pigeonholed in partisan terms. These last mostly represented donations to popular fundraising vehicles within the crypto industry or broader sectors of business that dispense money to politicians of both parties.

Figure 1 - Total Contributions

Figure 2 - Total $ to Republicans

Figure 3 - Total to Democrats

A strong current of Twitter feeds and press clips on the far, far right suggest that FTX was deeply involved with US-Ukrainian relations. So far, very little has come to light about FTX’s foreign subsidiaries or international dealings, save that some investors in the Bahamas were allegedly afforded a special opportunity to withdraw funds after the firm stopped withdrawals by other customers. But details of the public donations and their timing offer virtually no support to suggestions that eastern Europe was much on the mind of SBF and his colleagues. Many 2022 cycle contributions predate the outbreak of the war, though obviously not all do. Nor, though readers will have to take our word for it at least for now, the rivers of political money were not heading toward key foreign policy players in Congress. The FTX group focused on financial regulation. These little piggies were going to market: they wanted to keep crypto lightly regulated while dramatically expanding their field of action.

The alleged progressive tilt of the group’s donations was a smokescreen, as SBF’s confession quoted earlier testifies. The trough was quite bipartisan, even if tilted toward Democrats. The public data show that many Republicans received large sums from the donor group. Election financing vehicles controlled by McConnell, McCarthy, and other Republicans received substantial amounts, as did some very prominent representatives noisily involved in the battle to regulate crypto, such as Representative Tom Emmer (R-MN), Ritchie Torres (D-NY), and Josh Gottheimer (D-NJ). Stories suggesting that the group tilted toward liberal Democrats are also nonsense. That is not true even for SBF alone; his own contributions to Republican groups were substantial, including over $105,000 to Alabama Conservative Fund, the Super PAC supporting the newly elected Katie Britt in June 2022. When he gave to Democrats, the money flowed almost entirely to corporate Democratic groups and centrist Democratic politicians, not AOC or Justice Democrats.

A look at the institutional context clarifies what was really at stake in all this hyperactivity. FTX’s real aim was to put across a drastic rewrite of longstanding regulations governing commodity clearing houses in favor of a new system that would allow it to “offer direct clearing access to margined futures contracts.” This was no detail; it implied a sweeping change in the “structure of the entire futures market” that would vastly increase “the participation of retail speculators in futures markets, which have historically been markets for physical producers and purchases to hedge price risk, almost always by institutional participants who have the financial resources and sophistication to protect themselves.”[3] Or in other words, invite a vast new herd of eager, but inexperienced lambs to run free in the heady world of leveraged derivatives using crypto, alongside very experienced and well-capitalized wolves.

What could possibly go wrong?

Other major exchanges opposed this but warned that if the Commodity Futures Trading Commission allowed FTX to do this they would follow suit. Regulatory legislation on the books gave significant roles to both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission. But the crypto industry constantly contested the authority of the SEC. It sought to shunt exclusive jurisdiction to the CFTC, which was more than happy to play along.[4] Thus the FTX group (along with many others in the industry) heavily supported representatives of both parties who favored locating regulation in the Commodity Future Trading Commission.

The Agricultural Committees in Congress principally oversee the CFTC, not the Banking committees. So the FTX groups donated heavily to members of those committees, including at least 19 members of the House Agriculture Committee. The ranking member of that committee, Glenn Thompson (R-PA), took in over $61,000 of direct contributions, for example. Other top recipients on the House Agriculture Committee included Josh Harder (D-CA), Salud Carbajal (D-CA), and Angie Craig (D-MN).

Senate Agriculture was a big winner: McConnell ($3,626,100 – you read that right); Democrat Debbie Stabenow, whose former aide chairs the CFTC ($38,200); John Boozman ($33,200), John Thune ($14,200), and Kirsten Gillibrand ($13,700). By comparison, only six members of the Senate Banking Committee received contributions. Jon Tester led the way with a paltry $8,300.[5]

The FTX group did direct some serious money to the House Financial Services Committee: Ann Wagner (R-MO) led the way with $50,000, but not far behind were some of the most vocal critics of the SEC: Ritchie Torres receiving nearly $30,000, Josh Gottheimer collected $16,600, with Tom Emmer garnering $11,600. An unsympathetic observer might thus conclude, in the spirit of the “revealed preference” theory common in modern economics, that that is the reason SBF preferred to talk to the House, but not Senate Banking Committee. In the House, his appearance would have been more like a Christmas visit from Santa.

If all this brings to mind the long, disgraceful battles over derivatives regulation in the nineteen nineties, it should. It is a near carbon copy of that earlier travesty, right down to the vast clamor from the media and think tanks that all but drowns out critics. The industry was on the verge of getting its way when the crypto dominoes started tumbling down, temporarily slowing its momentum.

But the crypto story, if not FTX’s, is really a zombie movie. Despite everything that’s happened, crypto forces in Congress are still pushing to change the rules on exchanges and to allow pension funds to invest in crypto. Borrowing another leaf from the nineties, they are striving to pin the blame on the disaster that’s occurred on the stronger regulator, the SEC, for not acting, even though they spent years trying to block it from doing so. It strikes us, accordingly, that the first item of business ought to be the demand for full disclosure of all political money SBF, his colleagues, and their firms contributed to everyone on the Congressional committees and in the rest of the political system, together with a full accounting of grants to think tanks and researchers. And the second should be drastic changes at the CFTC, which has once again failed to protect the public.

Notes

[1] Bankman-Fried advanced the claim in an interview with Tiffany Fong. The quotations are taken from CNBC. This article draws also from a complaint by the Citizens for Responsibility and Ethics in Washington.

Bankman-Fried went on to add that he concealed the donations “because reporters freak the f--- out if you donate to a Republican because they’re all super liberal. And I didn’t want to have that fight.” “So, I made all the Republican ones dark.” In fact, there was plenty of money to Republicans on the record from both the group as a whole and Bankman-Fried himself, as we show below. Some other comments he has made about his political giving being limited to primaries are equally discordant with the public record; we refrain from a longer discussion.

A few press accounts recognized the bipartisan nature of the campaign. See especially Politico and The American Prospect.

[2] The quotation comes from the indictment presented here. Several other sections deal with political money.

[3] Letter Dennis M. Kelleher, Stephen W. Hall, Jason Grimes, Scott Farnin of Better Markets, Inc. to The Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission, June 16, 2022.

[4] See, among many sources, the compelling summaries here and here.

[5] The totals here and below to individual representatives combine cash streaming into a variety of committees they drew on for resources, not simply their individual campaign committees.

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Why Economists Should Support Populist Antitrust Goals

Despite the accumulation of serious and unsolvable problems, the Consumer Welfare Standard survives and continues to be taught to students for reasons unrelated to theoretical consistency and empirical confirmation.

In the later New Deal, a policy consensus emerged that included strong regulation of finance, income equalization, support for unions, and strong antitrust enforcement. This set of policies is often referred to as the New Deal Consensus. During its period of dominance from the late 1930s to the late 1970s the American economy experienced its greatest period of economic growth and prosperity. During the crisis of the 1970s, neoliberalism rose to policy prominence. It expressed confidence that the unfettered actions of big business would result in positive economic outcomes for everyone. The Chicago School of antitrust was an integral part of the neoliberal revolution. It held that most traditional anticompetitive concerns were misplaced. At the heart of the Chicago School’s program for antitrust is the Consumer Welfare Standard which Chicago School advocates claimed to be the proper normative economic approach to determining antitrust goals. Its adoption was partly based on the argument that its tenets could find support in microeconomic theory.

The Chicago School’s neoliberal program for antitrust has resulted in a massive increase in market power in the U.S. economy and no evidence of any positive influence on macroeconomic performance. As a result, support for most of the remaining tenets of the Chicago School program for antitrust is in decline. But the Consumer Welfare Standard remains. In our paper, we show that the Consumer Welfare Standard is based on Alfred Marshall’s theory of consumer surplus, or more generally, the surplus approach to economic welfare. Neoclassical economists trained in industrial organization learn this approach and apply it in antitrust cases.

But welfare economists, the specialist subgroup of economists who study welfare economics, have abandoned the surplus approach. Our new INET Working Paper “Why Economists Should Support Populist Antitrust Goals,” shows that the consumer welfare standard is (1) too narrow, (2) biased toward big business and the rich, and (3) theoretically inconsistent, and therefore economists should abandon their support for this approach to antitrust policy. The consumer welfare standard is too narrow because it recognizes only antitrust goals that can be measured using the economic surplus concept. This means only policy that directly impacts demand or price is a proper goal. But this eliminates the progressive traditional antitrust goals that motivated the original passage of the Sherman Act and the Clayton Act: preservation of political democracy and protection of small business. It makes no sense to adopt a policy standard that a priori eliminates policy goals that both impact human welfare and can be influenced by competition policy solely because a particular economic theory can’t assess it.

The consumer welfare standard is also biased. In order to aggregate surplus across individuals the theory assumes that there is a constant and equal marginal utility of money or its ordinal equivalent. In other words, an additional dollar has the same value to both rich and poor. Even worse, the rich will always have a greater influence on surplus, so the theory is inherently biased.

Finally, we describe the inconsistencies that have caused the specialists in this area to abandon the surplus approach. As sometimes occurs in economics, despite the accumulation of serious and unsolvable problems, a theory survives and continues to be taught to students for reasons unrelated to theoretical consistency and empirical confirmation. This is what Paul Krugman calls “Zombie” economics (think the aggregate production function or that tax cuts create growth). The Consumer Welfare Standard stubbornly endures in antitrust policy circles even though on the merits it needs to be jettisoned once and for all.

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