Tishrei Wrap

And the post-holiday crash

Solomon Hart, The Feast of the Rejoicing of the Law at the Synagogue in Leghorn, Italy


Tishrei, the Jewish month of holidays, is finally over, and they ended on a wonderful note, with a Simchat Torah service that I was able to really let go in for the first time in years. I don’t know if it’s just gratitude that we’re back in person or if there are deeper factors in play, but I do hope I can hold on to the feeling.

However, after the holidays I basically crashed, so this has been a relatively light week, making for a relatively light wrap.

It’s the Virus Stupid

Despite the crash, I had two columns at The Week—because I wrote the first one last week. That one was about why Biden’s approval ratings have sunk, and what he can do about it. I don’t think the primary reason for the decline was the problems associated with the pullout from Afghanistan, and I think the infighting over the infrastructure and reconciliation bills are more a consequence than a cause (and while passing nothing will likely lead to further decline, likely so will passing something unpopular).

So how did they get to this impasse? And what should the Democrats do to get out of it? The usual political advice given when an issue is bad for you is to change the subject to one that matters more and where you have a natural advantage. Fortunately, such an issue exists. Unfortunately, it's precisely the issue that the Democrats were hoping to claim an early victory on and then pivot triumphantly away from.

That problem is COVID.

In the latest polling from Gallup from the end of August, fully 26 percent of Americans cited the pandemic as the most important issue facing the country. That's more than three times the number who cited the economy in general as the top issue, and nearly 50 percent more than cited any economic issue, like unemployment or inflation. It's also more than twice the number that cited immigration. Indeed, it's more than the number who cited racism, the environment, crime, poverty, homelessness, family values, electoral integrity, health care, education and guns put together. And the second-place choice for biggest problem — poor leadership — is inevitably bound up with frustration at the government's failures, at all levels, in this most crucial fight.

That 26 percent number is also more than double the percentage that cited the pandemic as the top problem only a month before — and tracking that change helps clarify how the Democrats got themselves into their current bind in the first place. The spring tranche of COVID relief passed relatively easily despite its high price tag because it fit with their original strategy: tide everyone over until the pandemic is defeated, watch the economy come roaring back in the summer, and then ride a tide of popularity and flush wallets to make progress on climate change and the caring economy. In a nutshell, the plan was: Defeat COVID first, then build back better.

That's not what happened. Instead of the economy, it's the virus that came roaring back, leaving us in what feels like an extended twilight of anxiety and agitation. Now the Democrats find themselves trying to change the subject to other longstanding priorities, while the issue that likely got them elected in the first place remains both unresolved and front and center in voters' minds.

I don’t know that this leaves the Democrats with that many good options, unfortunately. There are a handful of things that the Biden administration could do to publicly pivot to Covid, that would be popular and would demonstrate seriousness. But they aren’t likely to affect the short-term course of the virus itself in a profound way. Based on the seasonal patterns observed in 2020, it’s likely that we’ll see a rise in cases across the Midwest as the weather cools, and possibly even in the Northeast despite the high regional vaccination rate. Even if hospitalizations and deaths don’t rise in tandem, the rise in cases will lead to new restrictions and behavior changes. That’s going to be a drag on the administration’s popularity, and that in turn is going to make it harder to hold the caucus together.

It’s the Chinese Housing Bubble

The other column is about the Evergrande crisis, and the housing bubble that underlies it.

Beijing's development model plows Chinese citizens' extremely high rate of national savings into physical capital: power plants, roads, railways, and especially housing, to facilitate China's transformation from a mostly-rural to an overwhelmingly urban society. When those projects no longer had a clear case for being economically viable, though, China continued to build. In consequence, they overbuilt so much that people began to speak of "ghost cities," entire municipalities without inhabitants. While some of these have started to attract residents and businesses, the overhang is still enormous. But despite government efforts to encourage renting, real estate has remained a preferred investment for Chinese families, in part because they have few other options: Bank deposits have very low yields, the stock market is viewed as corrupt, and capital controls prevent investing outside of China.

That describes a classic housing bubble, and Evergrande is centrally exposed to it. China may want to punish Evergrande to warn other firms to improve their financial management, but if the bubble starts to pop, then even if contagion is prevented those other firms won't have a ready means of exit. And individual homeowners, of course, will have the least recourse of all.

Ultimately, the risk is to the Chinese political and economic model itself. A decade ago, the Chinese Communist Party could say that, whatever its other failures or oppressive features, it was delivering a dramatically increased standard of living, as well as certain freedoms. The scope of those freedoms has narrowed steadily in the Xi years, and economic growth has slowed as well. Beyond the short-term risk of unrest from angry bondholders, if the main mechanism for wealth-building — the value of housing — goes into reverse, what will the regime be able to point to for legitimacy? And what will happen to its economic model if ordinary people wonder why they are working so hard and saving so much? Beijing may make a showy example of a few real estate moguls and corporate executives to demonstrate that they are on the people's side, but you can't eat schadenfreude.

Since writing the piece, the most interesting article I’ve read about the housing situation in China is this one at The Economist, about the central role of land sales in financing local government. If that process goes into reverse, China could see its hinterland hollow out, something Americans are sadly all too familiar with.

There were multiple layers to the crash of the American housing bubble: there was the immediate effect on the balance sheets of American banks and insurers, which triggered a financial crisis; there was the steep recession that the crisis engendered; and there was the grinding effect of waves of foreclosures. But the popping of the bubble also revealed how much of the middling prosperity of the Bush years was illusory, and how disconnected the upper echelons of the American economy was from the lives of ordinary people. Those revelations were what powered the political fallout from the crisis.

That’s what China has to worry about as well. I think they’re in a good position to prevent contagion. If they want to punish the heads of companies they deem to have behaved imprudently, they can do that. But I don’t think that will protect them if their economic model no longer works. America’s failure to hold anyone accountable for the financial crisis added insult to injury, but the injury was always the most important thing. And it will be the most important thing in China, too.

It’s the Last Vote That Matters Most

My only post on here this week was about the German elections. I think we’re headed for a traffic light—and I think that means the FDP has the most leverage to shape the terms of the coalition.

To be specific, if Linke had done better then the Greens and the SPD would be incentivized to quickly come to an agreement and then present the FDP with an ultimatum: make reasonable demands to join the coalition or we can turn to Linke instead. Preventing an outright left-wing government might have been enough to bring the FDP to come into the fold, but if it wasn’t they would have other options. All of which would mean that the Greens would have been in the position to demand the most to form that core coalition. The SPD would provide the chancellor, but the Greens might have had vast influence over the new government.

But as things stand, the party with the most leverage is the FDP. They would prefer a coalition with the CDU/CSU, but that coalition isn’t close to having enough seats to govern; they’d need to bring in either the Greens or (much less likely) the SPD. So they would be well-advised to talk both to the Greens and the SPD first—and the SPD has powerful incentives to come to some kind of agreement with the FDP because having done that, bringing in the Greens would be relatively easy.

I am not particularly expert in German politics, so take my opinions with a big grain of salt. I note that the Greens and the FDP are already meeting to work out their own differences (which are substantial) so that they can drive the best bargain with either the SDP or the CDU/CSU. That’s sensible of them—but there too I think the FDP have the strongest hand, because the Greens need a common front more than they do. I’m very interested to see what lines in the sand the Greens are truly willing to draw, and where they will draw them.

It’s Baumol’s Cost Disease

The most interesting thing I read this week was this report from the Niskanen Center on Baumol’s Cost Disease and its implications for socializing more of the “caring economy.” This is something I brood about a lot and have written about before. I don’t fully agree with the claim in the report that the real roots of Baumol’s Cost Disease in America are regulatory in nature; the report does a bit of handwaving to suggest that big efficiencies in education, healthcare, etc. are possible but unrealized because of rent-seeking, and I’m just not sure that’s true. On the contrary, I think the tendency with deregulation in these areas is to push costs back onto individuals and pretend those are efficiencies. There clearly are efficiency gains to be had in some industries from regulatory relief and cutting out rent-seeking, but the big ones I’m aware of are in construction.

Nonetheless, the folks at Niskanen are highlighting a phenomenon that poses real challenges for socializing more costs in this area. Advocates of building back better should read their report with attention and care.