At YaleGlobal Online foreign correspondent Mike Chinoy analyzes the situation in Hong Kong:

In any case, the long-term prognosis for Hong Kong appears bleak. Indeed, diplomatic sources report that a deeper rethink is underway within the Chinese Communist Party about how to handle the territory. According to one analyst, a number of Chinese think tanks have begun to explore the concept of a “second handover,” acknowledging that, from Beijing’s perspective, the first two decades of post-colonial rule have been a failure. China could seek a new formulation under which Hong Kong would be thoroughly absorbed into the mainland, suggests one well-informed Western observer, “although precisely what Hong Kong will look like afterwards remains to be worked out.”

In the meantime, the question from China’s the 1989 democracy movement remains: How much longer will China’s communist rulers let this continue?

or, said another way, the Chinese leadership realizes that they don’t need Hong Kong any more and that the risks of a semi-autonomous Hong Kong far exceed the rewards. Or, said yet another way, international agreements with the Chinese authorities are worthless.

One thing I didn’t touch on in my posts about risk yesterday was that public pension funds have been taking bigger risks with the funds entrusted to them. At City Journal Steven Malanga explains:

Since 2001, the study found, most government pension funds have boosted their share of investments in riskier financial vehicles, from volatile stocks to real estate. During this period, pension funds achieved median annualized returns of just 6.4 percent, well below the goal of 7.5 percent to 8 percent returns. Only one pension system has met its investing goals since 2001. No wonder, then, that the indebtedness of state systems increased from $33 billion to a staggering $1.5 trillion.

The problem stems from politicians squandering the strong investment returns of the 1990s. Rather than banking pension systems’ rising surpluses in those flush years, elected leaders in California, Illinois, New Jersey, South Carolina, and elsewhere expanded worker benefits—promising that financial markets could underwrite the new costs. But economic downturns inevitably ensued, with market crashes in 2001 and 2008. The declines drained the systems of valuable assets, and when the Federal Reserve lowered interest rates, returns languished in safer investments, such as government bonds. The so-called risk-free rate of return—that is, the return that an investor earns from putting money into such instruments—fell from 5 percent in 2001 to just 2 percent today.

Forced to seek bigger gains elsewhere, pension funds have gambled more. Since 2001, the portion of state pension-fund portfolios invested in stocks and alternate financial vehicles rose by 10 points, to 77 percent. Portfolio managers chased these investments even as the pension systems matured, with a growing percentage of members nearing retirement. This approach departed from that of just about every other type of pension fund. As a 2014 study by the Society of Actuaries noted, “Public sector plans in the U.S. are unique in that they have taken additional risk as the plans have become more mature, compared to private sector plans in the U.S. and private and public sector plans in Canada, UK and the Netherlands, which have taken less risk as plans have matured.”

The stock market isn’t like an annuity. The history of equities tells us that returns come in fits and starts. There can be many years of few if any returns followed by a few spikes of great returns. But that’s not what the assumptions of public pension funds need to meet their goals. They must realize 7.5% – 8% returns every year. All but a very few public pension funds have come anywhere near that so, consequently, they’re chasing greater returns by taking more serious risks.

That’s what will inevitably happen when assumptions are unrealistic and neither those putting the pension plans into effect, the beneficiaries of the pensions, or the managers of the pensions assume any risk. Worst comes to worst they can always fall back on the taxpayer.

Or can they? Illinois’s population is declining in absolute terms and on average those leaving have higher incomes and wealth than those remaining.

What I think should happen is that the pay and pensions of legislators should be contingent on the assumptions they’ve built into the plans they’re created being met. They are, after all, the people who are able to change those assumptions and plans. They need more skin in the game. Maybe even clawbacks. Maybe even clawbacks that exceed the state pay they’ve received—many derive much more income from peddling their contacts and influence than they do at their jobs as state legislators, cf. House Speaker Mike Madigan.

But all of that is a pipedream.

I found the opening sentence of this editorial in the Washington Examiner thought-provoking:

The life cycle of labor unions is predictable, the late economist Sylvester Petro once wrote. Because they are born not out of mutual exchange, but out of state-backed coercion, American unions inevitably face eventual demise triggered by their own corruption.

from which point the editors proceed by chronicling the enormous amount of corruption infecting the United Auto Workers union. The editors may or may not be correct in their attribution of the source of the problem but the corruption is obvious.

But why stop there? So many of our institutions are hopelessly corrupt. Our government at all levels. Both political parties. Unions. Organized religion. Universities. Corporations. Not-for-profits. Newspapers. Hospitals and the practice of medicine. It might actually be easier to list the institutions that are free of corruption (“abuse of entrusted power for private gain”) that to try to catalog the corrupt ones. If I could think of any.

I think that all human institutions are prone to corruption and that the larger, more pervasive, more entrencyed, and more powerful they become the more inevitable and pervasive the rot. There is no remedy. It is an inherent condition. There isn’t even a mitigation other than constant vigilance and a willingness to prune back the dead and putrid sections to allow healthy new growth. That takes so much work and care it is no wonder it is done so rarely. Especially since the dead and putrid sections fight back with all of their not inconsiderable power.

It genuinely distresses me that so many journalists and pundits can’t find it in themselves to admit that maintaining a low profile is the best policy for the United States with respect to Hong Kong. Don’t give the Chinese authorities any excuses for cracking down on the protesters.

I didn’t know whether to laugh or to cry in reaction to the slug at James Holmes’s post at The National Interest:

Bottom line, there’s a whiff of the 1930s in the air in East Asia today.

Of course there is. What you smell is fascism and it’s made a tremendous recovery.

Let me start by defining my terms. “Fascism” is tricky to define. People are inevitably moved to define it so as to exculpate themselves. If there is such a thing as generic fascism, I would say that it has the following characteristics:

• Although generally characterized as “authoritarian”, I would say it is not merely authoritarian but totalitarian, ultimately seeking state control over every aspect of life—politics, the economy, religion, you name it.
• Underscore: state control
• State socialism and state capitalism
• It tends to oppose both liberal democracy and conservatism.
• It is frequently accompanied by strong nationalism, even ultranationalism.
• It is also frequently accompanied by an appeal to modernism, science, etc.
• It is also frequently millennialist or apocalyptic.
• There is also frequently an emphasis on a charismatic leader.

I would also say that the expression of fascism varied from country to country, i.e. German fascism was not identical to Italian, Russian, American, or Japanese.

When I look at the 1930s what I see is that the dominant political thrust was fascistic, not just in Germany and Italy but in the Soviet Union and here in the United States as well. Naziism was the expression of fascism in Germany, Stalinism in the Soviet Union, but the New Deal was the expression of fascism in the United States.

I recognize that many if not most Americans would bitterly reject that characterization but I think they’re making distinctions without differences and looking at it backwards. That the expression of fascism in the United States would be the New Deal is not a condemnation of the U. S. or Roosevelt. It shows how much more benign our institutions are than Germany’s or Russia’s.

Now fast forward to the 21st century. It is patently obvious that what has materialized in China is fascism with Chinese characteristics: it is totalitarian, fosters both state socialism and state capitalism, opposes liberal democracy and conservatism, is nationalistic, and is increasingly focused on the person of its leader, President Xi.

That leads, naturally enough, to an examination of whether Trump is a fascist and whether Trumpism is fascism? The factors that say “yes” are the cult of personality surrounding him and nationalism. Maybe I’m seeing things through rose-colored glasses but I don’t think those are enough for fascism.

However, the likelihood of increasing fascism in East Asia is concerning and not limited to Xi and Kim. There’s also Duterte in the Philippines, Prayut Chan-o-cha in Thailand, even Modi in India.

There is a passage in Joel Kotkin’s post at newgeography that caught my attention:

But even if the Democrats go off into a Marxist fantasyland, Trump could still lose a large portion of working class voters, notably women turned off by his boorish behavior. Latinos, heavily represented in blue collar professions, notably in the service fields, construction, logistics and manufacturing, have done better under President Trump but his nativist tendencies — however exaggerated by a hostile media — may prevent him from harvesting these gains. Latino voters may be most hurt by progressive policies that inflate the cost of housing and energy, but may have a hard time supporting someone who seems to consider their entire community a burden to the nation.

That’s a good, succinct description of the choices we seem to have. Decades of terrible decisions have left us in the situation that we may not be able to bear the level of risk we see before us. There are no really good alternatives left.

Before we take a look at Robert Samuelson’s latest Washington Post column, musing over the loss of dynamism in the U. S. economy and how that can possibly have happened, let’s take a look at the chart above. The chart, graciously provided in an excellent post at Evonomics, illustrates mergers and acquisitions as a percentage of fixed asset investment and the 100 biggest companies as a percentage of the “corporate universe”. As you can see, right now big companies have a larger footprint in the economy that at any time previously in the post-war period other than, possibly, in the run-up to the financial crisis of 2008 which should tell you something.

Now back to Mr. Samuelson. He considers a recent study:

Consider a new study by economist Joel A. Elvery of the Federal Reserve Bank of Cleveland, who examined how workers’ occupations had altered from 1860 to 2015.

He placed all workers in one of 23 large occupational groupings (examples: farmers, laborers, engineers and managers) and then monitored what happened to the various groupings over time. The sharp decline of some occupational groups and the rise of others gauged the magnitude of economic disruption.

Some changes, though familiar, were stunning. Farming (including fishing and forestry) dropped from 43 percent of employment in 1860 to 1 percent in 2015. In an interview, Elvery credited mechanization (tractors and the like), better seeds, more fertilizers and more irrigation for the shift. Over the same period, the number of non-farm laborers fell from about 10 percent of employment to about 4 percent. The bulldozer was a crucial cause, Elvery noted. “One bulldozer could do the work of 50 people,” he said. The impact was enormous.

The study’s overall conclusion, however, was surprising and counterintuitive. Americans have been conditioned to think that present economic disruptions are at, or near, historical highs. Markets are cruel, hardhearted and volatile; job insecurity is on the rise. But that’s not what the study found. Instead, it concluded: “After 100 years of dramatic change, the mix of occupations has been more stable since 1970.” Occupational disruption is about half the level of the peak decades, the 1900s and the 1940s.

In theory, the stability of the occupational structure can be reconciled with rising economic insecurity. As Elvery pointed out, people can lose their jobs without switching occupations. For example: Unemployed journalists can — perhaps — find other journalism jobs, as opposed to becoming rocket scientists. But, again, this does not seem to be what’s happening.

A more likely possibility is that, in many different ways, the U.S. economy is becoming less dynamic. The most significant evidence of this is “The Rise and Fall of American Growth,” by economist Robert J. Gordon of Northwestern University, an encyclopedic overview of technological change since the Civil War. Greatly simplified, Gordon’s thesis is that the innovations up to 1970 (cars, airplanes, telephones, indoor plumbing, television, air conditioning, modern pharmaceuticals and more) dwarf the Internet as a source of rising living standards.

Other indicators point in the same direction. The business start-up rate has declined. Workers are moving less frequently to find new jobs. Productivity growth (a.k.a. overall efficiency) has lagged. Large firms are returning sizable amounts of cash to their shareholders, arguably because they can’t find attractive investment opportunities or, possibly, because they have become more risk-averse.

To me this is obviously true. Back to the graph at the top of the page. Big companies are more dominant than ever before. Big companies don’t take risks. They mitigate them. They are able to manipulate the forces in the society, whether financial, legal, or regulatory to their advantage and the return on investment of doing that is orders of magnitude better than doing it the old-fashioned way—by earning it. They acquire companies that have already taken the risks and subsume them into smothering, risk-averse corporate cultures. I cannot tell you how many business plans I have seen that amount to “do something that will get my company acquired by Microsoft, Google, or Facebook”.

How does this relate to my “theme of the day”? Increasing the barriers to entry into a sector of the economy or jobs, imposes risks on the company or individual. A perfect example of that is requiring a college degree for jobs that don’t pragmatically require one. That imposes thousands or even hundreds of thousands of dollars of cost and months or years of elapsed time on individuals seeking to enter the field. Those are risks and the effect is to transfer risks from companies to workers.

There is also a risk to the entire society. An economy is like an ecosystem. Dynamism and variety are a form of hedging your bets. When you’re afraid to let a big company collapse because of the run-on effects on the economy, which is exactly what happened in 2008-2009, there has been too much consolidation. That company should never have been allowed to exist in the first place.

The theme that I see that joins the news stories of the day is risk. What are the risks? Who bears them?

One of the many ways in which George W. Bush made me uncomfortable was that his views of risk were completely foreign to me. Any risks he had taken in his entire life were risks he had sought on his own. He lived a live highly insulated from external risks. I see that in the Kennedys, too. They were insulated from risk but, perhaps because they were so cosseted, thirsted for it.

That, too, is one of the reasons I’m uncomfortable with Donald Trump and even with Democratic presidential front-runners. They have practically no experience outside of government or with government handmaiden industries. Naturally, they look for government-based solutions. The reality for most people is that they bear a lot more risk in their lives than that.

One of the ways of telling the story of the U. S. economy over the last 50 years is that risks have been shifted from employers to employees. That’s true except in the government sector in which neither politicians nor government employees bear risks. All of the risk is borne by the taxpayers.

Every part of the United States has its own risks. In St. Louis, where I grew up, there were risks from tornados, thunderstorms, hurricanes, drought, earthquakes, flood, and even the occasional blizzard. Living in Southern California carries substantial risks from earthquakes, fires, drought, and mudslides. There’s either too much rain or not enough. Living anywhere along the coast carries risks of sea and storm. In the North there are nor’easters; in the South hurricanes.

Who should bear the risks? I think that people who make the choices should also bear the risk. I shouldn’t be asked to indemnify Californians against the risks of earthquakes; Californians shouldn’t indemnify Chicagoans against snowstorms. In the case of emergency we should offer assistance but such assistance should always be limited in scope and duration.

When the well-to-do move to the coast, they assume not only their own risks but also those of the less-than-well-to-do who serve them. That’s a practical necessity. If they don’t like it, they shouldn’t move to the coast. It’s a lesson that anyone who grows up in sight of the Mississippi understands: don’t build in the flood plain and for goodness sake don’t encourage people to build in the flood plain.

What about other countries? Again, in the case of emergency we should offer assistance. It’s the right thing to do but that assistance should be limited in scope and duration. There’s a simple reason for that. Permanent assumption of risks conveys ownership including ownership of future risks.

At Bloomberg Justin Fox argues that most people are better off in Canada than they are in the U. S.:

Defenders of the U.S. approach can point, though, to the fact that per-capita gross domestic product has remained higher in the U.S. than in all but a few small nations with unique characteristics (Qatar, Luxembourg, Singapore, Switzerland, Norway, etc.) — so much higher that even with the less-equal income distribution here, most Americans continue to have higher incomes than their peers in other large, affluent countries.

Times may be changing, though, and international income comparisons are definitely getting more precise. Five years ago, David Leonhardt and Kevin Quealy of the New York Times showed using numbers from the Luxembourg Income Study Database that the median income in Canada had caught up with that of the U.S. as of 2010, and speculated that Canada had probably passed the U.S. since. (The median is the income of a person in the middle of the income distribution, with as many people earning more as earning less.)

Now there’s more evidence. A report released this summer by the Centre for the Study of Living Standards, an Ottawa nonprofit, contends that as of 2016 Canada had in fact pulled ahead of the U.S. in median household income, with a $59,438 to $58,849 advantage in U.S. dollars if (and this is a reasonably big if) you use the Canadian government statistical agency’s formula for converting Canadian dollars into U.S. ones. The study also compares incomes in every percentile of the income distribution, and finds that up through the 56th percentile Canadians are better off than their U.S. counterparts.

I wouldn’t be surprised if that were correct. Canada has one tremendous advantage over the United States: it has the U. S. to act as backstop and buffer. Our high defense spending means that Canada’s may be less than it would otherwise be. Canadians who are dissatisfied with what their domestic health care system provides for them can always come here. The reverse is not true. If Americans started seeking treatment in Canada in numbers, they would quickly overwhelm the Canadian system. The Canadians have convince me of that. Just look into their arguments against allowing Americans to purchase their pharmaceuticals in Canada.

Maybe we should emulate Mexico and, rather than blocking migrants across our southern border, facilitate the movement of those migrants into Canada. Look how much better off they could be!