Hmmm? What a curious situation. September should be interesting.
The system is such that it was to be expected that the most liberal bill would come out of the House. Founding fathers designed it that way. Most populist views, left or right, come from the House, "The People's Chamber." The Senate, on the other hand, was to represent the status quo...the establishment. Basically, the Senate represents the sovereignty of the States; the House, the sovereignty of the People.
That coupled to gerrymandering House districts to ensure "safe seats" and the seniority system, almost assures that the more radical base of each party controls their party's leadership in the House.
Nevertheless...President Obama's handling of the situation was less than "excellent." "Excellent?"...Downgrade that to "less than good." If he cannot get a health care reform bill through, I would expect heads to roll in the White House...perhaps starting with his Chief of Staff.
And, two trillion off on the deficit projection? More heads...perhaps his chief of the Domestic Economic Council.
Granted, he has one of the most difficult tasks in recent memory...but running afoul of politics doesn't help. They missed the Town Hallers and Democratic Blue Dogs and were over focused on the Clinton single payer "left" in the House leadership positions.
If you look at each piece of the Obama platform separately,you miss the message. Each is a tactical piece of an overall strategy...namely the rebuilding of the American Economy to restore a strong and prosperous middle class, that saves and pays taxes, rather than spends and acquires debt. That goal, puts him squarely against most of the status quo who have profited off an over-emphasis on the global economy over a generation.
Investors do not invest to create American jobs. They invest for a return on the investment - i.e. to make more money. If the economy is geared toward riding over-valued assets (bubbles) or toward company's yielding the best returns by the utilization of cheap foreign labor...trickle down economics may continue to work...but only for the countries with whom we run large trade deficits.
A Democratic society cannot exist as a nation of a few rich and very many poor. The poor will use their vote to acquire social programs that substitute for what the private sector is not providing them...and the wealthy will be stuck with higher and higher taxes to pay for it. On the other hand, if wealth is spread over the more numerous middle class, then the vote aligns with economic policy...and the middle class shares the tax burden.
Obama's pieces are aimed at an economic restructuring, both to rebuild the American infrastructure and to compete better globally: health care, education and energy independence.
But if loses on Round 1...the rest will be far more difficult.
Sunday, August 23, 2009
Thursday, July 23, 2009
Obama and the Health Plan
Ah...a frustrating day on the Internet trying to explain how government works.
Background: The founding fathers feared primarily two things - too powerful a government and mob rule. To take care of the first, they gave us checks and balances; to take care of the second, they fore go direct democracy and gave us representative government.
They intended that the two chambers of Congress to off-set one another...sort of a check and balance within Congress, as well as the others between branches. Te House was elected from numerous districts and directly by the people. Roughly, this the House equates to Britain's House of Commons, as it used to be. The House was intended to be "the people's chamber." It was designed to be larger than the Senate on purpose...to make it more difficult to get consensus. To off-set this, they gave them the "right" to propose appropriations (and more difficult to get them).
The upper chamber, the Senate, was elected via the Sate legislatures...not directly by the people. This was the equivalent of Britain's House of Lords, as it used to be. Although there was no inherited aristocracy, the F/F's recognized American elites, in the form of successful businessmen, planters, and a professional class (doctors, lawyers, etc.). By electing the Senate through the State legislatures, they created a barrier for the popular election of a demagogue and expected the Senate to represent these elites. Being a smaller chamber, it also was intended to be more collegial and more conservative than the lower chamber.
Although we abandoned, through Constitutional amendment, state legislature election of the Senate and went to direct popular elections, many of the basic intentions of the F/F's remain today in regard to the "nature" of the separate chambers.
In other words, the F/F's foresaw that legislation coming out of the House would be more representative of the "people" and perhaps transitory in nature. The brake on momentary popular fads was the requirement that legislation pass both chambers and be signed by the President before coming law.
Subsequent evolution enhanced rather than reduced these peculiar chamber orientations. The seniority system coupled to the gerrymandering of "safe districts" for both parties, virtually ensured that bills coming out of the House would represent the extremes of the Parties' positions. In other words, Committee Chairmen tend to be those who have been elected and reelected from safe districts and as such represent the views of either the most Republican of Republican districts or the most Democratic of Democratic districts.
All of which brings me to Obama and health care...but keep in mind the above.
One reason Obama is appearing to "rush" the House toward a vote is that he understands the legislative process and the above. He knows that whatever comes out of the House will not be the same bill that is eventually sent to him for signature.
The Senate will review the House bill and propose, in their own bill, less radical and more conservative alternatives. Both bills will then go to a Conference Committee, composed of representatives fom the House and Senate, for resolution of the differences. If Obama is reluctant to read every word of the thousand page House bill, it is with the understanding that there are two additional thousand word bills that lie ahead and that he will only have to put his name to the last one out of Congress. So, his impatience is in the vein of "let's get on with the process."
The second factor lies in how he reached the Presidency in particular. Remember that the real election in 2008 was fought out in the primaries for the Democratic nomination. The party was split very closely between himself and Clinton and one of their most pronounced differences was in the health plans each presented. So, he recognizes that there is a wide difference within the Democratic Party as to just what is meant by universal health care...and he must tread carefully to arrive at a Party consensus.
The third factor lies in his position within the Party itself. Clinton was, for the most part, the choice of the Party establishment, taken over from Bill (and with notable exceptions in the left wing who never forgave Bill for blowing his opportunities over...well, we all know that story...moving toward the center after his election and losing Congress in the 1994 elections). Indeed, many in the left of the Democratic Party had the same reaction to Bill as many on the right in the Republican Party had to George Bush and John McCain...i.e. they were not successful because of their lack of faithfulness to he cause.
I've digressed. In sum, Obama knows he must unify the Party and "prove" himself to Party pros. Many of these "pros" are old timey Democratic politicians, who now head up Committees and want to make sure Obama shows them proper respect, understands the limits of his authority, etc. I suspect, this is the major reason he has been vague with Congress on exactly what he wants, instead of sending them a detailed draft bill. He is "deferring" to them and the legislative process.
However, some form of universal health care has been on the Democratic agenda since Harry Truman. Additionally, he is right about the need for reform and future costs (more on that tomorrow). He'll wait it out to year end and expect something to reach his desk before then. In this way, no one gets mad on the Democratic side (and since they have the votes, it doesn't matter if Republicans get mad or not). And, he comes out the winner. When history forgets who held what committee chairmanship, he will be remembered as the Democratic President that enacted Health Care Reform...and if he handles all of this well, he'll gain respect among those same Chairman, who will be so quickly forgotten.
Background: The founding fathers feared primarily two things - too powerful a government and mob rule. To take care of the first, they gave us checks and balances; to take care of the second, they fore go direct democracy and gave us representative government.
They intended that the two chambers of Congress to off-set one another...sort of a check and balance within Congress, as well as the others between branches. Te House was elected from numerous districts and directly by the people. Roughly, this the House equates to Britain's House of Commons, as it used to be. The House was intended to be "the people's chamber." It was designed to be larger than the Senate on purpose...to make it more difficult to get consensus. To off-set this, they gave them the "right" to propose appropriations (and more difficult to get them).
The upper chamber, the Senate, was elected via the Sate legislatures...not directly by the people. This was the equivalent of Britain's House of Lords, as it used to be. Although there was no inherited aristocracy, the F/F's recognized American elites, in the form of successful businessmen, planters, and a professional class (doctors, lawyers, etc.). By electing the Senate through the State legislatures, they created a barrier for the popular election of a demagogue and expected the Senate to represent these elites. Being a smaller chamber, it also was intended to be more collegial and more conservative than the lower chamber.
Although we abandoned, through Constitutional amendment, state legislature election of the Senate and went to direct popular elections, many of the basic intentions of the F/F's remain today in regard to the "nature" of the separate chambers.
In other words, the F/F's foresaw that legislation coming out of the House would be more representative of the "people" and perhaps transitory in nature. The brake on momentary popular fads was the requirement that legislation pass both chambers and be signed by the President before coming law.
Subsequent evolution enhanced rather than reduced these peculiar chamber orientations. The seniority system coupled to the gerrymandering of "safe districts" for both parties, virtually ensured that bills coming out of the House would represent the extremes of the Parties' positions. In other words, Committee Chairmen tend to be those who have been elected and reelected from safe districts and as such represent the views of either the most Republican of Republican districts or the most Democratic of Democratic districts.
All of which brings me to Obama and health care...but keep in mind the above.
One reason Obama is appearing to "rush" the House toward a vote is that he understands the legislative process and the above. He knows that whatever comes out of the House will not be the same bill that is eventually sent to him for signature.
The Senate will review the House bill and propose, in their own bill, less radical and more conservative alternatives. Both bills will then go to a Conference Committee, composed of representatives fom the House and Senate, for resolution of the differences. If Obama is reluctant to read every word of the thousand page House bill, it is with the understanding that there are two additional thousand word bills that lie ahead and that he will only have to put his name to the last one out of Congress. So, his impatience is in the vein of "let's get on with the process."
The second factor lies in how he reached the Presidency in particular. Remember that the real election in 2008 was fought out in the primaries for the Democratic nomination. The party was split very closely between himself and Clinton and one of their most pronounced differences was in the health plans each presented. So, he recognizes that there is a wide difference within the Democratic Party as to just what is meant by universal health care...and he must tread carefully to arrive at a Party consensus.
The third factor lies in his position within the Party itself. Clinton was, for the most part, the choice of the Party establishment, taken over from Bill (and with notable exceptions in the left wing who never forgave Bill for blowing his opportunities over...well, we all know that story...moving toward the center after his election and losing Congress in the 1994 elections). Indeed, many in the left of the Democratic Party had the same reaction to Bill as many on the right in the Republican Party had to George Bush and John McCain...i.e. they were not successful because of their lack of faithfulness to he cause.
I've digressed. In sum, Obama knows he must unify the Party and "prove" himself to Party pros. Many of these "pros" are old timey Democratic politicians, who now head up Committees and want to make sure Obama shows them proper respect, understands the limits of his authority, etc. I suspect, this is the major reason he has been vague with Congress on exactly what he wants, instead of sending them a detailed draft bill. He is "deferring" to them and the legislative process.
However, some form of universal health care has been on the Democratic agenda since Harry Truman. Additionally, he is right about the need for reform and future costs (more on that tomorrow). He'll wait it out to year end and expect something to reach his desk before then. In this way, no one gets mad on the Democratic side (and since they have the votes, it doesn't matter if Republicans get mad or not). And, he comes out the winner. When history forgets who held what committee chairmanship, he will be remembered as the Democratic President that enacted Health Care Reform...and if he handles all of this well, he'll gain respect among those same Chairman, who will be so quickly forgotten.
Monday, July 13, 2009
Grading Obama
Dear Friends and Family:
We're experiencing a rainy day in the midst of a month of sunshine here in Seattle. Seems like an appropriate time to return to this blog.
I've also spent more than a few evenings arguing Obama's case on internet forums. I consider this my "community service." Although I completely understand some of you are NOT Obama fans, I am looking forward to somewhat more positive responses.
OK...grading Obama.
As of the closing days of July 2009, I think I give him something between a B- and a B. Considering that he is probably facing the most difficult times of any President since FDR, that isn't all that bad. Without judging the policies themselves, I grade him down a bit in his post-election movement toward the center. While this was envitable for practical political reasons, the movement IS a departure from the campaign rheotric that stirred the liberal wing of the Party (e.g. ending the wars, prosecuting torture, White House transparency, etc.).
I keep reminding myself, however, of the three major platform planks: energy self-sufficiency, health care and education (more on the economy in a moment). Pleasantly, he does not appear, IMO, to have moved his focus much from these issues. I suspect giving ground elsewhere may, in part, be due to the necessity of lining up conservative and moderate Democratic Congressional votes to push these substantive issues through in the first two years.
Aside from some R&D money and what may be up and coming tax code changes, the mainstay of energy self-sufficiency seems to lie in the cap and trade proposals. The recent G-8 meeting, wherein he appartently received less than overwhelming support from developing nations for similar global cap and trade programs was, unfortunately a set-back for his domestic proposals. I even heard a "clean coal" advocate using the old AFL-CIO slogan regarding "free trade," in effect saying "what the American Energy Industry needs is a Level Playing Field."
Hmmm? Where were these guys when the issue was labor?
The developing countries reluctance on top of our carbon intensive domestic energy producers may put the issue on the Congressional back burner (even though the House has passed its own version already). When we do finally get something, I am beginning to suspect it will include all sorts of waivers and be generally watered down. On the positive side, I think Obama understands what he is taking on and will take what first steps he can politically, with the intent of slowly whittling away at the problem during an economic recovery. So far, he has been the most pragmatic President in my memory.
I think he'll be somewhat firmer on health care (even trading some of his immediate cap and trade desires for some health care gains). His proposal is already somewhat to the right of the Clinton primary proposals and consequently he does not have much "room" to move further right and still hold Democratic support. Further, health care costs are hitting American pocketbooks on a daily basis, whereas cap and trade, although needed, is pretty much assured to raise energy costs over the short term. Aside from the broader economic problems, I would bet (at the moment) health care will be the major accomplishment of 2009-2010.
A few things have already been done in education (Pell Grants, teacher retention via the Stimulus Package, etc.). My own feeling is that any substantive push on education improvement will ultimately involve meeting the teacher's union head-on (standardized testing for BOTH students and teachers). This will require some very fancy footwork and I believe he'll delay big changes in this sector until he has a better track record on other major issues (i.e. basically more power within his own Party).
On the economy front, despite the whinning about earmarks and pork, I am impressed with the way he has linked his core platform issues with use of Stimulus money...i.e. more bang for the buck. On the banks, he side-stepped the trap of "nationalization," and refused to nationalize, even when people as far on the right as Libertarian Alan Greenspan were calling for nationalization. And, adding compensation limits to loan terms was smart and a virtual 100% guarantee that the loans would be repaid as quickly as possible.
Overall, on the economy, I see Obama as using government to encourage the re-direction of private investment. "Change" comes hardest to those who have profited most from the status quo...and it will be an uphill battle, but if he can, through tax policies, grants, R & D funding, etc., make it actually more profitable to private investors to invest in his policies, that will lay the groundwork for a meaningful economic recovery. Tough job...more on this point and foreign policy next time.
We're experiencing a rainy day in the midst of a month of sunshine here in Seattle. Seems like an appropriate time to return to this blog.
I've also spent more than a few evenings arguing Obama's case on internet forums. I consider this my "community service." Although I completely understand some of you are NOT Obama fans, I am looking forward to somewhat more positive responses.
OK...grading Obama.
As of the closing days of July 2009, I think I give him something between a B- and a B. Considering that he is probably facing the most difficult times of any President since FDR, that isn't all that bad. Without judging the policies themselves, I grade him down a bit in his post-election movement toward the center. While this was envitable for practical political reasons, the movement IS a departure from the campaign rheotric that stirred the liberal wing of the Party (e.g. ending the wars, prosecuting torture, White House transparency, etc.).
I keep reminding myself, however, of the three major platform planks: energy self-sufficiency, health care and education (more on the economy in a moment). Pleasantly, he does not appear, IMO, to have moved his focus much from these issues. I suspect giving ground elsewhere may, in part, be due to the necessity of lining up conservative and moderate Democratic Congressional votes to push these substantive issues through in the first two years.
Aside from some R&D money and what may be up and coming tax code changes, the mainstay of energy self-sufficiency seems to lie in the cap and trade proposals. The recent G-8 meeting, wherein he appartently received less than overwhelming support from developing nations for similar global cap and trade programs was, unfortunately a set-back for his domestic proposals. I even heard a "clean coal" advocate using the old AFL-CIO slogan regarding "free trade," in effect saying "what the American Energy Industry needs is a Level Playing Field."
Hmmm? Where were these guys when the issue was labor?
The developing countries reluctance on top of our carbon intensive domestic energy producers may put the issue on the Congressional back burner (even though the House has passed its own version already). When we do finally get something, I am beginning to suspect it will include all sorts of waivers and be generally watered down. On the positive side, I think Obama understands what he is taking on and will take what first steps he can politically, with the intent of slowly whittling away at the problem during an economic recovery. So far, he has been the most pragmatic President in my memory.
I think he'll be somewhat firmer on health care (even trading some of his immediate cap and trade desires for some health care gains). His proposal is already somewhat to the right of the Clinton primary proposals and consequently he does not have much "room" to move further right and still hold Democratic support. Further, health care costs are hitting American pocketbooks on a daily basis, whereas cap and trade, although needed, is pretty much assured to raise energy costs over the short term. Aside from the broader economic problems, I would bet (at the moment) health care will be the major accomplishment of 2009-2010.
A few things have already been done in education (Pell Grants, teacher retention via the Stimulus Package, etc.). My own feeling is that any substantive push on education improvement will ultimately involve meeting the teacher's union head-on (standardized testing for BOTH students and teachers). This will require some very fancy footwork and I believe he'll delay big changes in this sector until he has a better track record on other major issues (i.e. basically more power within his own Party).
On the economy front, despite the whinning about earmarks and pork, I am impressed with the way he has linked his core platform issues with use of Stimulus money...i.e. more bang for the buck. On the banks, he side-stepped the trap of "nationalization," and refused to nationalize, even when people as far on the right as Libertarian Alan Greenspan were calling for nationalization. And, adding compensation limits to loan terms was smart and a virtual 100% guarantee that the loans would be repaid as quickly as possible.
Overall, on the economy, I see Obama as using government to encourage the re-direction of private investment. "Change" comes hardest to those who have profited most from the status quo...and it will be an uphill battle, but if he can, through tax policies, grants, R & D funding, etc., make it actually more profitable to private investors to invest in his policies, that will lay the groundwork for a meaningful economic recovery. Tough job...more on this point and foreign policy next time.
So much to comment on; so little time
Seems I haven't written anything for a few months...will begin using this again shortly...please stay tuned.
Wednesday, February 18, 2009
Recent Developments in the Economic Crisis
In addition to Obama's Mesa, Arizona speech unveiling his plan to mediate housing foreclosures, Fed Chairman Bernanke today addressed the National Press Club (a rare event for a Fed Chairman) and took questions from reporters following his speech (an apparently even more rare event for a Fed Chairman).
I noted one disturbing, in-passing answer to a question relating to Geithner's "stress tests" for the major banks. While he largely dodged the question, by correctly pointing out that Geithner should answer the question, he did give his own interpretation. He said he thought it was part of an effort to understand all of the assets and liabilities of the banks and then "test" their financial positions against a variety of worst case scenarios.
Uh...was that an indirect admission by the Chairman of the Federal Reserve that we have given these same institutions some $310B in emergency taxpayer funding WITHOUT understanding their exact financial situation? If so, this seems to support my idea that the reason Paulsen turned away from the original intention of using the TARP funding to acquire bank bad assets and sell them (much like the Resolution Trust Company, established for bankrupt Savings and Loans) is due to one of three things or a combination of the three: 1) in a generally declining economy and falling house prices, banks don't know how to value either assets or liabilities, 2) they know, but don't want to tell the government, or - worst case - 3) they aren't sure what they have.
Other item on the front page of tomorrow's NYT regarding UBS's decision to cooperate with the U.S. and turn over the names of U.S. citizen's who were evading U.S. taxes in UBS accounts. UBS stands for United Bank of Switzerland. UBS has already admitted to the accounts and their intent, but have to date refused to release the names, which presumably include numerous U.S. VIP's. This has the potential to become a huge scandel. UBS has said they made $200M/yr just on the fees charged to manage the accounts, which may run into billions. The IRS is said to be looking at 19,000 names.
Look for Phil Gramm's name. He's the former Chairman of he Senate Banking Committee and largely responsible for eliminating most of the safeguard's put into the regulatory system over banks following the Great Depression. [Most recently notable as John McCain's senior economic advisor until his famous "Americans are a nation of whinners" remark.
Following his Senate success at deregulating the banks, Gramm joined the board of UBS and became a VP within its U.S. operations, at roughly the same time the bank now admits it's special U.S. accounts were started. His first assignment with UBS was to oversee their acquisition of Paine Webber, for which he received an estimated $750,000.
Gramm's wife, Wendy, was head of the Commodity and Futures Trading Commission. One of her last acts there (they both left Washington about the same time) was to "deregulate" commodity futures trading, for among other things, natural gas. Within a year of her departure, she was named to the board of a Houston, Texas company that was at the time the largest distributor of natural gas in the country - ENRON.
Ah well..we're all innocent until proven guilty, but it would not surprise me if both of them found themselves in a federal prison by 2010.
I noted one disturbing, in-passing answer to a question relating to Geithner's "stress tests" for the major banks. While he largely dodged the question, by correctly pointing out that Geithner should answer the question, he did give his own interpretation. He said he thought it was part of an effort to understand all of the assets and liabilities of the banks and then "test" their financial positions against a variety of worst case scenarios.
Uh...was that an indirect admission by the Chairman of the Federal Reserve that we have given these same institutions some $310B in emergency taxpayer funding WITHOUT understanding their exact financial situation? If so, this seems to support my idea that the reason Paulsen turned away from the original intention of using the TARP funding to acquire bank bad assets and sell them (much like the Resolution Trust Company, established for bankrupt Savings and Loans) is due to one of three things or a combination of the three: 1) in a generally declining economy and falling house prices, banks don't know how to value either assets or liabilities, 2) they know, but don't want to tell the government, or - worst case - 3) they aren't sure what they have.
Other item on the front page of tomorrow's NYT regarding UBS's decision to cooperate with the U.S. and turn over the names of U.S. citizen's who were evading U.S. taxes in UBS accounts. UBS stands for United Bank of Switzerland. UBS has already admitted to the accounts and their intent, but have to date refused to release the names, which presumably include numerous U.S. VIP's. This has the potential to become a huge scandel. UBS has said they made $200M/yr just on the fees charged to manage the accounts, which may run into billions. The IRS is said to be looking at 19,000 names.
Look for Phil Gramm's name. He's the former Chairman of he Senate Banking Committee and largely responsible for eliminating most of the safeguard's put into the regulatory system over banks following the Great Depression. [Most recently notable as John McCain's senior economic advisor until his famous "Americans are a nation of whinners" remark.
Following his Senate success at deregulating the banks, Gramm joined the board of UBS and became a VP within its U.S. operations, at roughly the same time the bank now admits it's special U.S. accounts were started. His first assignment with UBS was to oversee their acquisition of Paine Webber, for which he received an estimated $750,000.
Gramm's wife, Wendy, was head of the Commodity and Futures Trading Commission. One of her last acts there (they both left Washington about the same time) was to "deregulate" commodity futures trading, for among other things, natural gas. Within a year of her departure, she was named to the board of a Houston, Texas company that was at the time the largest distributor of natural gas in the country - ENRON.
Ah well..we're all innocent until proven guilty, but it would not surprise me if both of them found themselves in a federal prison by 2010.
Thursday, February 12, 2009
The Catch 22's of the Economic Crisis
A generation of Americans grew up with "Catch 22," but for those older and younger, a brief explanation is due. "Catch 22," was a popular book, written by Joseph Heller, on the contradictions and absurdities of human behavior. Specifically, Heller's book was about a group of the U.S. Army Air force, stationed on an island off the Italian coast during WWII. The overall absurdity is the life they lead on the island and the violent death and destruction they are exposed to on their bombing runs over Nazi occupied Europe. Among the other absurdities are the supply Sergeant who corners the world market in some commodity and becomes a multimillionaire; the squadron commander, whose name is Major Major Major and will grant squadron members interviews in his office only when he's not in his office, etc., etc. The book was written in 1955, but didn't reach the peak of its popularity until the sixties.
So, the term "Catch 22," generally refers to a seemingly reasonable situation wherein it is impossible to get from Point A to Point B, but no one wants to admit it.
There are several very large Catch 22's in today's economic crisis, which I believe have to be resolved before we'll see improvement; this post explains a few of them.
1) Regulation and oversight. Virtually every sane person involved in the crisis, from former Secretary of the Treasury Paulson, to current Federal Reserve Chairman Bernake, agrees that the lack of efficient regulation and oversight has been a major contributing factor to today's crisis. I use the term "efficient regulation and oversight," because a few believe that statutes on the books are adequate and the problem is simply that they weren't enforced. Most, however, believe that there must be a substantial overhaul of the entire regulatory structure. The new Secretary of the Treasury Geithner has explicitly called for a "reshaping of the financial industry." Given the Congressional tendency to "over correct" on problems they've ignored for too long, I believe there is anticipation within the industry and among investors that there will be fundamental changes composed of new regulation, increased transparency, and a re-structuring of oversight functions (eliminating some of the existing ones and replacement by a more centralized, uniform government organization).
Unfortunately, this is a huge task, involving large numbers of special interests and very careful thought. As such, it will require considerable time to accomplish and that "time" is not available due to the urgency of the economic situation.
The Catch 22 here is that until investors understand the new "rules," they will be hesitant to re-enter the markets, and neither tax cuts or stimulus packages can eliminate this reluctance. In other words, any tax cut or government spending plan is likely to fail to jump start markets until the new rules are promulgated. But, the urgency of the situation does not allow for such promulgation prior to government intervention, so tax cuts and government spending will be effected under the old rules, which everyone acknowledges were largely responsible for the crisis in the first place. Catch 22. We can't get from Point A to Point B.
2) Valuation and Mark to Market. Discussion of the current crisis is centered around the valuation of assets. Mark to market is simply the present accounting requirement for all financial institutions to "value" their holdings on daily market prices. This valuation is, in turn, used to establish sound capital-to-debt ratios, which are requirements of the bank industry (or, if you are an individual investor, how much you can borrow "on margin"). Yesterday's testimony of banking CEOs before the House Financial Services Committee may illustrate the problem. Bank of America CEO, Ken Lewis, complained when asked about his bank's ratio of capital-to-debt, because he had already stated that the Bank of America had been a profitable bank for numerous years. He gave the answer (a conservative 10.3%), but implied that as long as he ran a profitable operation, his capital-to-debt ratio was no body's business.
These ratios are established to protect investors (individuals or banks) in exactly the type of situation in which we find ourselves today, falling values. Just as the lack of effective regulation and oversight is generally acknowledged as a major cause of today's crisis, it is also generally acknowledged that "over leveraging" was also a major factor in the crisis. Over leveraging is just another way of saying that the capital-to-debt ratios were far, far overextended. Thus, given today's environment, the question to Lewis was germane.
Here, perhaps, a word or two on "banker mentality" is in order. With rare exception (such as the crisis of the moment), bankers have spent their entire careers in generally favorable investment climates and are, consequently, usually optimistic about the global economic future and assets, which in such a climate, are "bound to rise." From time to time, there may be a temporary retrenchment, but over the long haul - say 10 to 20 years - it is inevitable that global wealth will increase and, as a result, current assets are also "bound to increase in value." [There are limits, of course. Certain things wear out or become obsolete and are replaced, but ultimately that simply generates new assets, with increased value.]
In such an up-market environment, mark-to-market accounting valuation is seen as "conservative," because it is believed that overall assets will only increase in value. It may be that "off balance sheet" investments and commitments, which have become so prevalent today are in many instances used to "correct" what was believed to be "under valued" assets in the mark-to-market valuation requirement. It would be interesting to know if Bank of America's 10.3% ratio includes off-balance sheet items.
The point is that mark-to-market valuation works generally to every one's satisfaction in an "up market," based on the psychological premise that it is better to underestimate your worth than overestimate it and that if you are sure that you are becoming wealthier, it really doesn't matter as much about how much wealthier you are becoming, than it does in a "falling market," when you are becoming poorer.
To some extent, ENRON played this game by carrying "bad assets" off balance sheet, but simultaneously convincing Wall Street that these were, in reality, "good assets" and everybody would make a killing once they were brought back on balance (it worked for awhile).
In a falling market none of the above works and it's much the reverse. To maximize wealth today in a falling market, you would need to substitute mark-to-market valuation with an alternative that "price's in" past valuations, which of course, were higher than present valuations.
In sum, on this point, to get a "real time" picture of a company's true financial status, we would insist that all assets and liabilities be brought on balance sheet and price them mark-to-market.
There is one problem with this; if we did it, I suspect a dozen or so of the world's largest banks, including several of our own, would be evaluated as "insolvent" and the global financial system would collapse. Catch 22. Returning to economic reality = economic disaster.
The second element to this, but within the same above principle, is the difficulty in establishing ANY valuation in today's market. The economic system is so complex, with so many significant unregulated financial instruments, intertwined with one another, no one is quite sure what any of them are really worth, but also aware of the general proposition that whatever they are worth, they're probably worth a lot less than they were yesterday. This is why Paulson found that he really couldn't use the first phase of the TARP money to buy up bad assets and simply had to pour money into the banks and hope for the best. This is also why banks saw their immediate task as not to make bad assets good, but rather to pay dividends, acquire other financial institutions, and retain employees, who understood the transactions better than the Board, through bonuses. In more vulgar terms, the first and foremost step in creating financial stability was, from the banks perspective, CYA.
In other words, to go back to Catch 22, you may only see the banker when he isn't in.
3) Globalization, the New Economy and Post-Industrial Society. I have written so much on this topic in prior posts, that it is probably unnecessary to go into depth here. Much of the promise of these concepts have failed the average American. Over the last thirty years or so, wealth in the country has been increasingly concentrated in the top few percentiles. Reason? For all of these new "concepts," the global economy still runs pretty much on the production and transfer of goods and, to a far lesser extent, services. For all of their gains in productivity, American workers cannot off-set the differences in labor costs in Mexico, China, India, Indonesia, et al. except in agriculture (via Big Agra Business) and that isn't enough to offset the other.
The annual trade imbalance (now falling due to a lack of consumer spending) approached $1.0 trillion/year. The only way we could sustain this mounting debt was to, basically over value our national assets and sell-off the country. Outside of that giant Ponzi scheme, we hold no particular advantage over our global economic competition in other sectors of the post-industrial global economy.
The Catch 22 is that it is ironic that a country, that for most of its trading history built its industry and positive balance of payments on reasonable tariffs, is now throwing it all away for the theory of "free trade." Federal Reserve Chairman Bernake, hardly a "socialist," recently testified before Congress, that in his opinion, the prime "cause" of the current crisis was not the housing market itself, but rather consistent negative balances in international account balances, which led to a surge of overseas capital flowing back into the United States. The housing bubble was largely an outgrowth of U.S. financial institutions trying to accommodate that flow, through the creation of new and untested financial instruments.
I would add to this the perception of Republican and Democratic politicians who looked at this as a "win-win proposition."
Neither Party has yet suggested a reevaluation of these concepts might be beneficial in resolving the present crisis. In fact, it seems likely that a simple "Buy American" provision in the current stimulus package may be withdrawn before passage due of fear by both parties that such might bring "retaliation."
On the other hand, it seems clear to me that a first step toward resolving the current crisis is to bring national goals in line with national resources and to stop trying to be Masters of the Universe. Immediately, this will require more government spending to assist in the redirection of private investment. It will also require new incentives in policy, including the tax code, to encourage the reconstruction of a sound and self-sustaining national economy.
A few final words on the Stimulus and Geithner Plans. First, the latter. I suspect that when Geithner talks about a fundamental restructuring of the financial industry, he ultimately has in mind specific changes that will not be seen by those still living in a fantasy world as "good" for the economy. Announcing those plans in the present crisis environment would only worsen the present situation and that's the reason for "lack of detail" (aside from the time necessary to work out those plans, noted above).
The stimulus plan is "the least worst temporary solution." It passes on massive debt to future generations. It will create new government bureaucracies, etc., etc. But, I again suspect the alternative is a high risk to social stability. California is virtually in bankruptcy. Other states will follow. This is the major reason Republican Governors are backing the plan. Given the differences that have occurred since 1929 in our overall culture, I do not think we can afford another Great Depression. The social instability, which may today result from 20-25% unemployment rates, will make the Bonus March on Washington look like a walk in the park.
[The bonus march occurred during the Great Depression (1932), when thousands of WWI vets descended on Washington, D.C. insisting the government pay them vet bonuses promised earlier by Congress and not delivered. They were broken up by a call out of the U.S. Army. The March probably helped FDR become elected in the fall of 1932 and led to the creation of FDR's Corps of Conservation Camps. Ultimately, Congress agreed to the bonuses in 1936 and to a subsequent GI Bill, in 1945, for returning WWII vets.]
Additional tax cuts, on the other hand, may be of minimal stimulus value. The poor and middle class are so far in debt that small and relatively insignificant tax cuts will not appreciably change their situation. Nor do these economic classes "create jobs." Further tax cuts to the wealthy will go the same way as the Bush cuts, either into another "bubble" or be withheld entirely pending the fundamental changes to overall financial structure of the country. Worse case is that the debt to Gross Domestic Product will approach or slightly exceed the immediate WWII ration of approximately 120%. I believe that the current ratio is approximately 77% (about 10 trillion in debt, with 13 trillion in annual GDP. The difference is that in the post WWII era, when we ran tremendous balance of payment surpluses and had the world's strongest manufacturing industry, we quickly recovered. If, as a result of an increased indebtedness combined with a falling GDP, we hit 120% again, the imbalance will have a greater impact and require a far longer period of recovery. I do not expect the United States to regain its prior economic significance for at least a generation, if ever, but this does not mean we cannot have a sound, but smaller economy beneficial to all of us.
So, the term "Catch 22," generally refers to a seemingly reasonable situation wherein it is impossible to get from Point A to Point B, but no one wants to admit it.
There are several very large Catch 22's in today's economic crisis, which I believe have to be resolved before we'll see improvement; this post explains a few of them.
1) Regulation and oversight. Virtually every sane person involved in the crisis, from former Secretary of the Treasury Paulson, to current Federal Reserve Chairman Bernake, agrees that the lack of efficient regulation and oversight has been a major contributing factor to today's crisis. I use the term "efficient regulation and oversight," because a few believe that statutes on the books are adequate and the problem is simply that they weren't enforced. Most, however, believe that there must be a substantial overhaul of the entire regulatory structure. The new Secretary of the Treasury Geithner has explicitly called for a "reshaping of the financial industry." Given the Congressional tendency to "over correct" on problems they've ignored for too long, I believe there is anticipation within the industry and among investors that there will be fundamental changes composed of new regulation, increased transparency, and a re-structuring of oversight functions (eliminating some of the existing ones and replacement by a more centralized, uniform government organization).
Unfortunately, this is a huge task, involving large numbers of special interests and very careful thought. As such, it will require considerable time to accomplish and that "time" is not available due to the urgency of the economic situation.
The Catch 22 here is that until investors understand the new "rules," they will be hesitant to re-enter the markets, and neither tax cuts or stimulus packages can eliminate this reluctance. In other words, any tax cut or government spending plan is likely to fail to jump start markets until the new rules are promulgated. But, the urgency of the situation does not allow for such promulgation prior to government intervention, so tax cuts and government spending will be effected under the old rules, which everyone acknowledges were largely responsible for the crisis in the first place. Catch 22. We can't get from Point A to Point B.
2) Valuation and Mark to Market. Discussion of the current crisis is centered around the valuation of assets. Mark to market is simply the present accounting requirement for all financial institutions to "value" their holdings on daily market prices. This valuation is, in turn, used to establish sound capital-to-debt ratios, which are requirements of the bank industry (or, if you are an individual investor, how much you can borrow "on margin"). Yesterday's testimony of banking CEOs before the House Financial Services Committee may illustrate the problem. Bank of America CEO, Ken Lewis, complained when asked about his bank's ratio of capital-to-debt, because he had already stated that the Bank of America had been a profitable bank for numerous years. He gave the answer (a conservative 10.3%), but implied that as long as he ran a profitable operation, his capital-to-debt ratio was no body's business.
These ratios are established to protect investors (individuals or banks) in exactly the type of situation in which we find ourselves today, falling values. Just as the lack of effective regulation and oversight is generally acknowledged as a major cause of today's crisis, it is also generally acknowledged that "over leveraging" was also a major factor in the crisis. Over leveraging is just another way of saying that the capital-to-debt ratios were far, far overextended. Thus, given today's environment, the question to Lewis was germane.
Here, perhaps, a word or two on "banker mentality" is in order. With rare exception (such as the crisis of the moment), bankers have spent their entire careers in generally favorable investment climates and are, consequently, usually optimistic about the global economic future and assets, which in such a climate, are "bound to rise." From time to time, there may be a temporary retrenchment, but over the long haul - say 10 to 20 years - it is inevitable that global wealth will increase and, as a result, current assets are also "bound to increase in value." [There are limits, of course. Certain things wear out or become obsolete and are replaced, but ultimately that simply generates new assets, with increased value.]
In such an up-market environment, mark-to-market accounting valuation is seen as "conservative," because it is believed that overall assets will only increase in value. It may be that "off balance sheet" investments and commitments, which have become so prevalent today are in many instances used to "correct" what was believed to be "under valued" assets in the mark-to-market valuation requirement. It would be interesting to know if Bank of America's 10.3% ratio includes off-balance sheet items.
The point is that mark-to-market valuation works generally to every one's satisfaction in an "up market," based on the psychological premise that it is better to underestimate your worth than overestimate it and that if you are sure that you are becoming wealthier, it really doesn't matter as much about how much wealthier you are becoming, than it does in a "falling market," when you are becoming poorer.
To some extent, ENRON played this game by carrying "bad assets" off balance sheet, but simultaneously convincing Wall Street that these were, in reality, "good assets" and everybody would make a killing once they were brought back on balance (it worked for awhile).
In a falling market none of the above works and it's much the reverse. To maximize wealth today in a falling market, you would need to substitute mark-to-market valuation with an alternative that "price's in" past valuations, which of course, were higher than present valuations.
In sum, on this point, to get a "real time" picture of a company's true financial status, we would insist that all assets and liabilities be brought on balance sheet and price them mark-to-market.
There is one problem with this; if we did it, I suspect a dozen or so of the world's largest banks, including several of our own, would be evaluated as "insolvent" and the global financial system would collapse. Catch 22. Returning to economic reality = economic disaster.
The second element to this, but within the same above principle, is the difficulty in establishing ANY valuation in today's market. The economic system is so complex, with so many significant unregulated financial instruments, intertwined with one another, no one is quite sure what any of them are really worth, but also aware of the general proposition that whatever they are worth, they're probably worth a lot less than they were yesterday. This is why Paulson found that he really couldn't use the first phase of the TARP money to buy up bad assets and simply had to pour money into the banks and hope for the best. This is also why banks saw their immediate task as not to make bad assets good, but rather to pay dividends, acquire other financial institutions, and retain employees, who understood the transactions better than the Board, through bonuses. In more vulgar terms, the first and foremost step in creating financial stability was, from the banks perspective, CYA.
In other words, to go back to Catch 22, you may only see the banker when he isn't in.
3) Globalization, the New Economy and Post-Industrial Society. I have written so much on this topic in prior posts, that it is probably unnecessary to go into depth here. Much of the promise of these concepts have failed the average American. Over the last thirty years or so, wealth in the country has been increasingly concentrated in the top few percentiles. Reason? For all of these new "concepts," the global economy still runs pretty much on the production and transfer of goods and, to a far lesser extent, services. For all of their gains in productivity, American workers cannot off-set the differences in labor costs in Mexico, China, India, Indonesia, et al. except in agriculture (via Big Agra Business) and that isn't enough to offset the other.
The annual trade imbalance (now falling due to a lack of consumer spending) approached $1.0 trillion/year. The only way we could sustain this mounting debt was to, basically over value our national assets and sell-off the country. Outside of that giant Ponzi scheme, we hold no particular advantage over our global economic competition in other sectors of the post-industrial global economy.
The Catch 22 is that it is ironic that a country, that for most of its trading history built its industry and positive balance of payments on reasonable tariffs, is now throwing it all away for the theory of "free trade." Federal Reserve Chairman Bernake, hardly a "socialist," recently testified before Congress, that in his opinion, the prime "cause" of the current crisis was not the housing market itself, but rather consistent negative balances in international account balances, which led to a surge of overseas capital flowing back into the United States. The housing bubble was largely an outgrowth of U.S. financial institutions trying to accommodate that flow, through the creation of new and untested financial instruments.
I would add to this the perception of Republican and Democratic politicians who looked at this as a "win-win proposition."
Neither Party has yet suggested a reevaluation of these concepts might be beneficial in resolving the present crisis. In fact, it seems likely that a simple "Buy American" provision in the current stimulus package may be withdrawn before passage due of fear by both parties that such might bring "retaliation."
On the other hand, it seems clear to me that a first step toward resolving the current crisis is to bring national goals in line with national resources and to stop trying to be Masters of the Universe. Immediately, this will require more government spending to assist in the redirection of private investment. It will also require new incentives in policy, including the tax code, to encourage the reconstruction of a sound and self-sustaining national economy.
A few final words on the Stimulus and Geithner Plans. First, the latter. I suspect that when Geithner talks about a fundamental restructuring of the financial industry, he ultimately has in mind specific changes that will not be seen by those still living in a fantasy world as "good" for the economy. Announcing those plans in the present crisis environment would only worsen the present situation and that's the reason for "lack of detail" (aside from the time necessary to work out those plans, noted above).
The stimulus plan is "the least worst temporary solution." It passes on massive debt to future generations. It will create new government bureaucracies, etc., etc. But, I again suspect the alternative is a high risk to social stability. California is virtually in bankruptcy. Other states will follow. This is the major reason Republican Governors are backing the plan. Given the differences that have occurred since 1929 in our overall culture, I do not think we can afford another Great Depression. The social instability, which may today result from 20-25% unemployment rates, will make the Bonus March on Washington look like a walk in the park.
[The bonus march occurred during the Great Depression (1932), when thousands of WWI vets descended on Washington, D.C. insisting the government pay them vet bonuses promised earlier by Congress and not delivered. They were broken up by a call out of the U.S. Army. The March probably helped FDR become elected in the fall of 1932 and led to the creation of FDR's Corps of Conservation Camps. Ultimately, Congress agreed to the bonuses in 1936 and to a subsequent GI Bill, in 1945, for returning WWII vets.]
Additional tax cuts, on the other hand, may be of minimal stimulus value. The poor and middle class are so far in debt that small and relatively insignificant tax cuts will not appreciably change their situation. Nor do these economic classes "create jobs." Further tax cuts to the wealthy will go the same way as the Bush cuts, either into another "bubble" or be withheld entirely pending the fundamental changes to overall financial structure of the country. Worse case is that the debt to Gross Domestic Product will approach or slightly exceed the immediate WWII ration of approximately 120%. I believe that the current ratio is approximately 77% (about 10 trillion in debt, with 13 trillion in annual GDP. The difference is that in the post WWII era, when we ran tremendous balance of payment surpluses and had the world's strongest manufacturing industry, we quickly recovered. If, as a result of an increased indebtedness combined with a falling GDP, we hit 120% again, the imbalance will have a greater impact and require a far longer period of recovery. I do not expect the United States to regain its prior economic significance for at least a generation, if ever, but this does not mean we cannot have a sound, but smaller economy beneficial to all of us.
Saturday, February 07, 2009
California Almonds and Free Trade
Totally "free trade" exists only in economic theory. We have a long list of tariffs we currently impose on a variety of imports ranging from shoes to agricultural products, as well as tariffs imposed on American exports by various other countries. So, in large measure, "free trade" is a relative term - relative to where we've been, where we are and where we're going. [I would suggest most ideological constructs are similar; not absolutes in themselves, but relative to particular points in history. "Truth" has always been more the purview of faith than science.]
The United States was initially a net importer at the beginning of our history and as we built our manufacturing base we generally utilized tariffs to protect our start-up industries. WWI changed that and between WWI and the late 1960s we were net exporters. For the following thirty years (1960s - 1990s), we more or less stabilized the trade deficit at around $100B/year. In the late nineties, we began a sharp decline to our present status, which is approaching $1.0 T/year. A lot of things were occuring in the late nineties while we were focused on "I did not have sex with that woman" and the Clinton impeachment. Another notable change was the deregulation of banks and the end of the safeguards imposed after the Great Depression.
Today, there are specific sectors of trade where we still run actual surpluses: aircraft (thanks to Boeing, Cessna, et al), agriculture, chemicals and machine tools. In all other areas of manufacturing we import more than we export (I would assume the entertainment industry is also a net exporter, but not of significance). Since most of the annual imbalances are based on the inflow of consumer goods, historically, our trade balance gets better in recessions - i.e. we buy less.
Supply-side economists (the free trade/free market people) tell us that a negative trade imbalance is not necessarily a bad thing in a global economy. Many of our traditional American manufacturers are still here in name, but from the perspective of an American manufacturing worker, have become no more than distributors of products made in American owned plants abroad (owned wholly or partially). The products these "American" plants produce are counted against us in the balance of goods and services, but strengthen the U.S. economy through taxes and dividends paid in the U.S. Ah...the House of Cards. American investors get rich off Indonesian workers in American plants, who sell their products to U.S. workers who live on credit, granted to them by U.S. investors....hmmm? Nice, but what happens when the credit runs out? Investors are now finding out. [Note: From one perspective, the subprime mortgage disaster was simply the "tipping point" facet of the broader credit problem.]
I would point out that this is very similar thinking to a reliance on foreign energy imports (oil). I believe the political party line went something like: "We need energy independence because we now depend on those who may not have our best interests in mind." Perhaps we need to ask why this same logic does not apply to manufacturing?
The Smoot-Hawley Tariff of 1932 is probably the most frequently quoted event of supply-siders as "proof" that tariffs don't work. They're right; but for the wrong reason. Ravi Batra (an economist from, of all places, Southern Methodist University, home of the Bush library and not particularly known as a "liberal institution," pointed out in a 1993 book, "The Myth of Free Trade," that the Smoot-Hawley tariffs were reversed in two years and unemployment continued to rise. Further, he points out that the key reason they didn't work was that we had become a "creditor nation," exporting more than we imported and by resorting to tariffs, which encouraged retaliation, we were cutting our own throats. This seems to me, a reasonable explanation: the best time to be a free trader is when you are exporting more than you are importing to protect your exports from tariffs in your export market and not the reverse.
Today, among Democrats as well as Republicans, the most common retort to the suggestion that a tariff or two might not hurt is: "No, because any tariff we imposed on others would be met with retaliation." That thought took me to a little research on just what that retaliation might be, which took me to our leading export of agricultural products and a revisit to the Batra book. And, from there, we get to California almonds.
As I was passing by the TV, from my library shelf, there was someone talking about California almonds and his new book. California almonds are apparently the most intensive "bee pollination" fruit on earth. Each year, a healthy percentage of the nation's bee keepers descend on the almond growing valley in California for several weeks. It's a like a giant bee rock concert or, as he put it, the first days of kindergarten, where bees from all over the country are "rented" to the almond growers for pollination services. And, the bees mix and mingle, they catch and carry their various "bee diseases" home with them.
In other words, by bringing the bees to the almonds, instead of the almonds to the bees we may have inadvertently endangered the bee communities, which are in fact dying off in the jillions. Without bees, much of our agricultural surpluses (and exports) disappear.
So, California almonds may be another reason to begin thinking about tariffs and bringing home some of that manufacturing capability we so easily and carelessly gave away.
OK, Boeing and the aircraft sector might be hurt, but anymore than they are being hurt today? And, agriculture? If we can solve the bee problem (probably one of those stupid government research grants the Republicans tossed out of the stimulus package), what's basically more important, consumer goods or food?
Let's think this through. We decide that we're going to reestablish the TV industry in the United States (I believe, today, we manufacture exactly zero TVs). To help that industry start-up, we place a high tariff on TVs from Japan (who probably get most of their subcomponents from China). The Japanese cry "foul" and retaliate by shifting some of their U.S. grain purchases to Russia and Chinese rice and telling us they won't buy as much of our debt as they have in the past.
Although this is not the way we'd all like the global economy to work, it is doubtful that such a move would instigate an all-out trade war. The Japanese sell a lot more here than TVs. Plus, with or without tariffs, U.S. unemployment and a failing economy will probably have more negative impact on total Japanese imports than a TV tariff. Positively, we begin to build back our own manufacturing capability, reestablishing our middle class, take more in in taxation and spread the tax burden more equitably.
Here's why we might think about running the risk of a tariff or two: just like individuals in this economy, the country can stand only so many trillion dollar bailouts before our credit runs out. The primary reason the rest of the world was willing to buy U.S. debt was because of our consumer market and their ability to import more product to us (in oil and Wal-Mart goods) than we sold to them. If that market goes away with a return to sane credit standards, their willingness to purchase our debt will go with it.
In short, as the post WWII era developed and the global economy recovered, and with the end of communism, the only way we could remain at the center of the global economic stage was through the lie of cheap money and over-valued assets.
The longer we postpone this return to a sound economy and a strong middle class, via bringing some of the old jobs home, creating new ones and enforcing New Economy value through cross-border intellectual property rights, the worse the shock to the "global economy."
This is a new economic approach begging for an author, not yet to be found in either political party.
Finally, for this post, there is another non-economic reason for the U.S. to remain a "Superpower," which is our military. Bush did neither us or the rest of the world a favor in largely squandering that power in Iraq. Obama must beware that he does not do the same in Afghanistan. Without our "superpower" status, will the Chinese stay out of Taiwan...or Japan? Will Russia forsake a return to imperial ambitions? To a degree, our influence through military force has been replaced by the influence of a debtor. The last thing the people who hold that debt want is to have to foreclose. Although largely exposed militarily and economically as a Paper Tiger by the ill-advised policies of over-reachers within the Bush administration, I do believe that because of our diversity, our rule of law (which has been a bit tarnished as of late) and our relative stability, we serve as an important factor in global stability. In this sense, a modest retrenchment of our manufacturing capability for the sake of our economy, and a general "cleaning up of our act," (politically, economically and socially) coupled with a restoration of our military capability would be welcomed abroad, as well as at home. And, of course, as we lose "debtor status" the international environment may change. It pays to be nice to people who owe you money as well as vice a versa.
Globalization is for the most part already here, but we have reached it practically, without much of the structure that may be necessary to sustain it. Stepping back from it for the national good is, in my opinion, in the long run better for the end product of globalization, which is some form of world government. If we are more successful as a nation now in rebuilding a sound economy and curing some the inequities of our own society, then when (and if) the time for world government comes, it will more closely mirror our own. In other words, "recalling" some of manufacturing base is more a matter of emphasis than new direction or isolationism; we stay in the U.N.; we stay in the WTO and IMF, etc. We don't re neg on present international commitments, but temporarily postpone making new ones. I believe we are genuinely at a critical point in our history in that much of the world is beginning to feel they've been scammed by the United States in the current economic crisis. True, many of the "scammed" willingly went along with us for profits they didn't think they could make elsewhere, but it started here. We were the financial geniuses, the people whose system was so flawless we didn't need regulation or oversight, etc., etc.
Given this environment, systemic reform must be, this time, more than whitewash...more than prosecuting a company or two or showing we're "serious" by putting a Martha Stewart in jail for a while. More on this in my next post.
[Note: I see no conflict between being a patriotic American and the understanding that global social, material and technological progress will probably eventually lead to some form of world government focused, hopefully, on human rights and ecological survival. Initially, I would see this something along the lines of "states rights" at an earlier point in our own history. Eventually, that too would pass into a sort of Star Trek environment, a culture based on science, knowledge and exploration, wherein individual beliefs are respected (religious or otherwise), but do not conflict with the overall goal of preservation of the species. I believe that to a large degree that latter stage may also involve further human evolution, so we might be looking at thousands of years from the present, assuming we can survive without it until then, and that human evolution is for the most part positive. In the meantime, I believe the U.S. should at least strive to be the "model" and see no Constitutional issues that would prevent it. Admittedly, current trends are not encouraging to this outcome. If all of that seems a bit far fetched, imagine Thomas Jefferson anticipating laptops and a global Internet and the fact that once I click the "publish" button on the screen, the above becomes virtually accessible to some 2 billion people.]
The United States was initially a net importer at the beginning of our history and as we built our manufacturing base we generally utilized tariffs to protect our start-up industries. WWI changed that and between WWI and the late 1960s we were net exporters. For the following thirty years (1960s - 1990s), we more or less stabilized the trade deficit at around $100B/year. In the late nineties, we began a sharp decline to our present status, which is approaching $1.0 T/year. A lot of things were occuring in the late nineties while we were focused on "I did not have sex with that woman" and the Clinton impeachment. Another notable change was the deregulation of banks and the end of the safeguards imposed after the Great Depression.
Today, there are specific sectors of trade where we still run actual surpluses: aircraft (thanks to Boeing, Cessna, et al), agriculture, chemicals and machine tools. In all other areas of manufacturing we import more than we export (I would assume the entertainment industry is also a net exporter, but not of significance). Since most of the annual imbalances are based on the inflow of consumer goods, historically, our trade balance gets better in recessions - i.e. we buy less.
Supply-side economists (the free trade/free market people) tell us that a negative trade imbalance is not necessarily a bad thing in a global economy. Many of our traditional American manufacturers are still here in name, but from the perspective of an American manufacturing worker, have become no more than distributors of products made in American owned plants abroad (owned wholly or partially). The products these "American" plants produce are counted against us in the balance of goods and services, but strengthen the U.S. economy through taxes and dividends paid in the U.S. Ah...the House of Cards. American investors get rich off Indonesian workers in American plants, who sell their products to U.S. workers who live on credit, granted to them by U.S. investors....hmmm? Nice, but what happens when the credit runs out? Investors are now finding out. [Note: From one perspective, the subprime mortgage disaster was simply the "tipping point" facet of the broader credit problem.]
I would point out that this is very similar thinking to a reliance on foreign energy imports (oil). I believe the political party line went something like: "We need energy independence because we now depend on those who may not have our best interests in mind." Perhaps we need to ask why this same logic does not apply to manufacturing?
The Smoot-Hawley Tariff of 1932 is probably the most frequently quoted event of supply-siders as "proof" that tariffs don't work. They're right; but for the wrong reason. Ravi Batra (an economist from, of all places, Southern Methodist University, home of the Bush library and not particularly known as a "liberal institution," pointed out in a 1993 book, "The Myth of Free Trade," that the Smoot-Hawley tariffs were reversed in two years and unemployment continued to rise. Further, he points out that the key reason they didn't work was that we had become a "creditor nation," exporting more than we imported and by resorting to tariffs, which encouraged retaliation, we were cutting our own throats. This seems to me, a reasonable explanation: the best time to be a free trader is when you are exporting more than you are importing to protect your exports from tariffs in your export market and not the reverse.
Today, among Democrats as well as Republicans, the most common retort to the suggestion that a tariff or two might not hurt is: "No, because any tariff we imposed on others would be met with retaliation." That thought took me to a little research on just what that retaliation might be, which took me to our leading export of agricultural products and a revisit to the Batra book. And, from there, we get to California almonds.
As I was passing by the TV, from my library shelf, there was someone talking about California almonds and his new book. California almonds are apparently the most intensive "bee pollination" fruit on earth. Each year, a healthy percentage of the nation's bee keepers descend on the almond growing valley in California for several weeks. It's a like a giant bee rock concert or, as he put it, the first days of kindergarten, where bees from all over the country are "rented" to the almond growers for pollination services. And, the bees mix and mingle, they catch and carry their various "bee diseases" home with them.
In other words, by bringing the bees to the almonds, instead of the almonds to the bees we may have inadvertently endangered the bee communities, which are in fact dying off in the jillions. Without bees, much of our agricultural surpluses (and exports) disappear.
So, California almonds may be another reason to begin thinking about tariffs and bringing home some of that manufacturing capability we so easily and carelessly gave away.
OK, Boeing and the aircraft sector might be hurt, but anymore than they are being hurt today? And, agriculture? If we can solve the bee problem (probably one of those stupid government research grants the Republicans tossed out of the stimulus package), what's basically more important, consumer goods or food?
Let's think this through. We decide that we're going to reestablish the TV industry in the United States (I believe, today, we manufacture exactly zero TVs). To help that industry start-up, we place a high tariff on TVs from Japan (who probably get most of their subcomponents from China). The Japanese cry "foul" and retaliate by shifting some of their U.S. grain purchases to Russia and Chinese rice and telling us they won't buy as much of our debt as they have in the past.
Although this is not the way we'd all like the global economy to work, it is doubtful that such a move would instigate an all-out trade war. The Japanese sell a lot more here than TVs. Plus, with or without tariffs, U.S. unemployment and a failing economy will probably have more negative impact on total Japanese imports than a TV tariff. Positively, we begin to build back our own manufacturing capability, reestablishing our middle class, take more in in taxation and spread the tax burden more equitably.
Here's why we might think about running the risk of a tariff or two: just like individuals in this economy, the country can stand only so many trillion dollar bailouts before our credit runs out. The primary reason the rest of the world was willing to buy U.S. debt was because of our consumer market and their ability to import more product to us (in oil and Wal-Mart goods) than we sold to them. If that market goes away with a return to sane credit standards, their willingness to purchase our debt will go with it.
In short, as the post WWII era developed and the global economy recovered, and with the end of communism, the only way we could remain at the center of the global economic stage was through the lie of cheap money and over-valued assets.
The longer we postpone this return to a sound economy and a strong middle class, via bringing some of the old jobs home, creating new ones and enforcing New Economy value through cross-border intellectual property rights, the worse the shock to the "global economy."
This is a new economic approach begging for an author, not yet to be found in either political party.
Finally, for this post, there is another non-economic reason for the U.S. to remain a "Superpower," which is our military. Bush did neither us or the rest of the world a favor in largely squandering that power in Iraq. Obama must beware that he does not do the same in Afghanistan. Without our "superpower" status, will the Chinese stay out of Taiwan...or Japan? Will Russia forsake a return to imperial ambitions? To a degree, our influence through military force has been replaced by the influence of a debtor. The last thing the people who hold that debt want is to have to foreclose. Although largely exposed militarily and economically as a Paper Tiger by the ill-advised policies of over-reachers within the Bush administration, I do believe that because of our diversity, our rule of law (which has been a bit tarnished as of late) and our relative stability, we serve as an important factor in global stability. In this sense, a modest retrenchment of our manufacturing capability for the sake of our economy, and a general "cleaning up of our act," (politically, economically and socially) coupled with a restoration of our military capability would be welcomed abroad, as well as at home. And, of course, as we lose "debtor status" the international environment may change. It pays to be nice to people who owe you money as well as vice a versa.
Globalization is for the most part already here, but we have reached it practically, without much of the structure that may be necessary to sustain it. Stepping back from it for the national good is, in my opinion, in the long run better for the end product of globalization, which is some form of world government. If we are more successful as a nation now in rebuilding a sound economy and curing some the inequities of our own society, then when (and if) the time for world government comes, it will more closely mirror our own. In other words, "recalling" some of manufacturing base is more a matter of emphasis than new direction or isolationism; we stay in the U.N.; we stay in the WTO and IMF, etc. We don't re neg on present international commitments, but temporarily postpone making new ones. I believe we are genuinely at a critical point in our history in that much of the world is beginning to feel they've been scammed by the United States in the current economic crisis. True, many of the "scammed" willingly went along with us for profits they didn't think they could make elsewhere, but it started here. We were the financial geniuses, the people whose system was so flawless we didn't need regulation or oversight, etc., etc.
Given this environment, systemic reform must be, this time, more than whitewash...more than prosecuting a company or two or showing we're "serious" by putting a Martha Stewart in jail for a while. More on this in my next post.
[Note: I see no conflict between being a patriotic American and the understanding that global social, material and technological progress will probably eventually lead to some form of world government focused, hopefully, on human rights and ecological survival. Initially, I would see this something along the lines of "states rights" at an earlier point in our own history. Eventually, that too would pass into a sort of Star Trek environment, a culture based on science, knowledge and exploration, wherein individual beliefs are respected (religious or otherwise), but do not conflict with the overall goal of preservation of the species. I believe that to a large degree that latter stage may also involve further human evolution, so we might be looking at thousands of years from the present, assuming we can survive without it until then, and that human evolution is for the most part positive. In the meantime, I believe the U.S. should at least strive to be the "model" and see no Constitutional issues that would prevent it. Admittedly, current trends are not encouraging to this outcome. If all of that seems a bit far fetched, imagine Thomas Jefferson anticipating laptops and a global Internet and the fact that once I click the "publish" button on the screen, the above becomes virtually accessible to some 2 billion people.]
Miscellaneous Thoughts
Before continuing with my broader review of the economy and where it needs to go, a post on current events.
The economic crisis must be even worse than I thought. When I turned on TV this Saturday morning, I found the U.S. Senate debating the stimulus package. Wow! When Senators work on the weekend something is very seriously wrong.
My prior posts have pointed to some of my own dissatisfaction with the House package. In general, I believed it was spending heavy and job creation light, and there was some truth to the Republican complaints that Democrats had included a "shopping list" built up over the eight years of the Bush Administration and the twelve years of a Republican Congress (1992-2006).
That said, Republicans haven't offered much alternative, other than corporate tax cuts and the necessity to restrict spending and consequently "debt."
Of course, any one who isn't brain dead understands that's like the kettle calling the pot black. What ever Congress does with this package, it will be relatively small compared to the debt created by Bush and the Republican Congresses noted above.
I am particularly irked by two points Republicans seem to want to forget: 1) the stupidity of passing tax breaks in time of war and 2) the stupidity in pursuing free trade policies without regard to the fact that the country is running huge trade deficits.
OK, OK, debate is the way the system works. Presumably, the Republicans have all of a sudden found Jesus and want to get back to fiscal conservatism, now that they no longer have the votes to pass their own earmarks. For six years, Bush never saw an appropriations bill he didn't like. But, I don't object to them having their day in court. In fact, I believe if I were Reid, I believe I'd give them the weekend to continue to complain and then take it to a vote.
The Democratic effort to get 60+ votes for the package is based on two things: Obama's desire to make it appear a bi-partisan effort and avoid a Republican filibuster (which is actually what we have going on this weekend; it takes 60 votes in the Senate to "close debate," but only a bare majority to pass legislation).
[Actually, the Senate procedure is more complicated than the above. Filibusters may be prevented through "reconciliation" on budget issues. The "Byrd Rule" further defines exactly when reconciliation may or may not be used. The Byrd Rule may be overturned, but it requires (you guessed it) 60 votes. When all of this is said and done, I believe, Reid could invoke reconciliation and take the package to the floor for a vote, and pass it with a simple majority. Presumably, the only reason he does NOT do this - Republicans invoked reconciliation in each of the three Bush tax cuts - is the broader Obama play-nice and appeal for bi-partisanship approach, which of course wears thinner with each passing day.
My "guess," is that Obama will not ask Reid to use reconciliation to pass the package, until following next week's announcement of his plan for the second tranche of the Wall Street bail-out and will then refuse to bring that legislation forward until the stimulus package gains more Republican support (i.e. the 60 votes).
There are trade-offs in the approach. Obviously, there are items in the stimulus package that can be cut and Obama could have strongly suggested to House Democrats cuts that would have made the whole thing more palatable to Republicans. My opinion is that he has two goals, exclusive of the economic crisis itself, which he feels comfortable with tagging Bush and Republicans. 1) He doesn't want to alienate the House, which he undoubtedly recognizes as further to the left collectively than the public mainstream. He will need these people (Plosi, Wrangel, Conyers, Waxman, Frank, et al) later for other programs. 2) He's perfectly willing to give the Republicans enough rope to hang themselves as "obstructionists." To date, Republicans seem sort of lost in ideology...without any real alternative stimulus package and without focused leadership. If the economy gets worse without a stimulus package, it will be easily blamed on Republicans; if it doesn't and gets better, Republicans will get credit for saving money. The key, however, is that the economy has only a very remote chance of improvement for at least 6-12 months, according to the most optimistic economists (I've given my arguments in prior posts for a time frame of more like a generation, if then) at which time the public will have long forgotten about the current debate. In other words, the Republicans may be talking themselves into a grave.
The economic crisis must be even worse than I thought. When I turned on TV this Saturday morning, I found the U.S. Senate debating the stimulus package. Wow! When Senators work on the weekend something is very seriously wrong.
My prior posts have pointed to some of my own dissatisfaction with the House package. In general, I believed it was spending heavy and job creation light, and there was some truth to the Republican complaints that Democrats had included a "shopping list" built up over the eight years of the Bush Administration and the twelve years of a Republican Congress (1992-2006).
That said, Republicans haven't offered much alternative, other than corporate tax cuts and the necessity to restrict spending and consequently "debt."
Of course, any one who isn't brain dead understands that's like the kettle calling the pot black. What ever Congress does with this package, it will be relatively small compared to the debt created by Bush and the Republican Congresses noted above.
I am particularly irked by two points Republicans seem to want to forget: 1) the stupidity of passing tax breaks in time of war and 2) the stupidity in pursuing free trade policies without regard to the fact that the country is running huge trade deficits.
OK, OK, debate is the way the system works. Presumably, the Republicans have all of a sudden found Jesus and want to get back to fiscal conservatism, now that they no longer have the votes to pass their own earmarks. For six years, Bush never saw an appropriations bill he didn't like. But, I don't object to them having their day in court. In fact, I believe if I were Reid, I believe I'd give them the weekend to continue to complain and then take it to a vote.
The Democratic effort to get 60+ votes for the package is based on two things: Obama's desire to make it appear a bi-partisan effort and avoid a Republican filibuster (which is actually what we have going on this weekend; it takes 60 votes in the Senate to "close debate," but only a bare majority to pass legislation).
[Actually, the Senate procedure is more complicated than the above. Filibusters may be prevented through "reconciliation" on budget issues. The "Byrd Rule" further defines exactly when reconciliation may or may not be used. The Byrd Rule may be overturned, but it requires (you guessed it) 60 votes. When all of this is said and done, I believe, Reid could invoke reconciliation and take the package to the floor for a vote, and pass it with a simple majority. Presumably, the only reason he does NOT do this - Republicans invoked reconciliation in each of the three Bush tax cuts - is the broader Obama play-nice and appeal for bi-partisanship approach, which of course wears thinner with each passing day.
My "guess," is that Obama will not ask Reid to use reconciliation to pass the package, until following next week's announcement of his plan for the second tranche of the Wall Street bail-out and will then refuse to bring that legislation forward until the stimulus package gains more Republican support (i.e. the 60 votes).
There are trade-offs in the approach. Obviously, there are items in the stimulus package that can be cut and Obama could have strongly suggested to House Democrats cuts that would have made the whole thing more palatable to Republicans. My opinion is that he has two goals, exclusive of the economic crisis itself, which he feels comfortable with tagging Bush and Republicans. 1) He doesn't want to alienate the House, which he undoubtedly recognizes as further to the left collectively than the public mainstream. He will need these people (Plosi, Wrangel, Conyers, Waxman, Frank, et al) later for other programs. 2) He's perfectly willing to give the Republicans enough rope to hang themselves as "obstructionists." To date, Republicans seem sort of lost in ideology...without any real alternative stimulus package and without focused leadership. If the economy gets worse without a stimulus package, it will be easily blamed on Republicans; if it doesn't and gets better, Republicans will get credit for saving money. The key, however, is that the economy has only a very remote chance of improvement for at least 6-12 months, according to the most optimistic economists (I've given my arguments in prior posts for a time frame of more like a generation, if then) at which time the public will have long forgotten about the current debate. In other words, the Republicans may be talking themselves into a grave.
Wednesday, February 04, 2009
What to Do?
I see very little hope for avoiding a major restructuring of the American economy. While Republicans don't seem to be capable of getting off the "tax cuts solve all" band wagon, Democrats seem unable to depart from their reputation among conservatives as "tax and spend liberals." To a large degree, there is much true in the criticisms of each party of the other, without either party having any reasonable solution.
Since Democrats appear to have the votes, whatever "stimulus package" that emerges will probably be "more Democratic than Republican."
I suspect, however, that the Democratic package, slightly modified, to pull in a few moderate Republican votes to reach the magic number of 60 in the Senate, will ultimately simply disappear into the Federal Government much as the first $350B of the $750B stimulus package of last October, simply "disappeared" into the banks.
The Democratic package does, however, have the advantage of creating jobs faster than tax cuts.
While these jobs are not the "ideal jobs" and undoubtedly contain a lot of inefficiencies, which contribute only vaguely to the "sound economy" we should be building, they will add as a stop gap solution to keep people off the unemployment rolls, maintain some degree of social stability, etc.
The sad thing, in my mind, is that neither the Democratic congressional stimulus package, not the Republican tax cut solutions do much, over the long run, to bring about the paradigm shift necessary. Neither Republicans or Democrats seem capable of rejecting the illusions, which for the most part, brought us to the present crisis, namely mindless free markets and free trade, all under the umbrella guise of globalization.
Capitalism has a well known (and positive) destructive element. As new technology replaces the old, those who deny it suffer at their own peril. As capital shifts to the latest and greatest means of production, outmoded techniques and the companies who insist on retaining them are "destroyed." Hence, Dickens's famous opening line written in an era similar in many ways to own own: "It was the best of times; it was the worst of times." For some, "change" is beneficial; for others (a textile worker in North Carolina or a UAW assembly line worker in Detroit) it may be a disaster. It is the duty of government, in my own opinion, to intervene to mitigate the pain for whom it is the worst of times.
For the certainly the last sixteen years (and probably going back to Reagan), the government has largely ignored this role. Both parties have largely put economic efficiencies, globalization, free trade and free markets ahead of national interest. This is not to say these concepts are not good goals; I believe they are. But, the trick is to arrive at them with minimal disruption to our own people, most of whom were/are middle class blue collar or first line white collar supervision, who for the most part were sacrificed on the alter of globalization.
We can continue, rightfully, to continue to pursue these goals, albeit at a slower pace and without the sacrifices...or, at a minimum, with far fewer sacrifices. We needn't abandon the goals of free trade, and global free markets; we need only to control (or regulate) the pace of the changes such brings.
A strong argument may be made to the rest of the world, which holds a great deal of our debt, that, in the long run, it will be better for the goals of free trade and global free markets, if the United States calls a temporary "time out" and puts its own house in order. That task isn't going to be easy and involves, in part, the following, with the understanding that volumes could be written on each topic.
1) Cleaning up our political system. Campaign financing, ethics, competitive re-districting, etc. Unless these things are reformed, we'll only continue on our slide to Third World status.
2) Immigration. Other than felons, those presently in prison or living on welfare, I have no desire to send people home, disrupt families, etc. We need border enforcement and some form of amnesty for those who are illegal, but have otherwise tried to behave as good citizens. That may sound incredibly naive if you are the U.S. Chamber of Commerce, or a University sociologist, but I think it may be that simple. We may continue to grant work visas in various categories (from fruit pickers to Microsoft programmers), but with revised procedures ensuring that the work visa programs are not being used to hold down wages.
3) Wall Street. Following the Great Depression, the Glass-Steagel Act separated investment banking from commercial banking. One essential reason was that investment banking is what it says it is, namely it facilitates deal making. By eliminating the distinction, investment banks moved first into insurance and then into the underwriting of the deals themselves, continuing to take enormous commissions for a) the initial advice regarding a merger or acquisition and b) the financing of the merger or acquisition. This is like expecting a vacuum salesperson to recommend that maybe what you really need is just a broom.
The recent economic crisis has really not separated the two. Now we have very few investment banks and the few big names (Morgan Stanley, Goldman Sachs) have just become commercial banks, which I suppose means that they will now take extraordinary risks with deposits and that whatever risks they take will be backed by government bailouts? I can't think of a surer path to more serious economic dislocations in the future. We need to go back to a clear division between commercial and investment banking, limiting and overseeing what each does.
Note: I've mentioned it in earlier blogs, but in some ways banks today are to a globalized economy, what John D. Rockefeller was to American industry in his day. Although Rockefeller received a lot of negative popular press, much of this was inspired by regional competitors he had effectively put out of business. Rockefeller used new "tools," largely distribution tools to take the oil industry from one dominated by smaller regional/state interests to a national and international level. Rockefeller was the positive "destructive force of capitalism" of his day. And, eventually, became so successful in eliminating any and all competition that government had to step in and break up Standard Oil. Similarly, with this economic crisis, banks may have shown that they have become too large and powerful for the ultimate good of the whole. I do not completely discount their argument that they have to be big to compete globally, but when they become "too big to fail," then they've invited substantial more government intervention, even if that intervention does not result in "trust busting."
4) Education - It begins and ends here. Whatever the reason (unions or too much decentralization via school districts), education in America is not keeping up with the rest of the world (or at least much of it). Unless we figure out a way to substantially fix the system, it won't matter how many jobs are created, if our "graduates" or drop-outs are too dumb to fill them. This is an issue of enormous cultural and economic ramifications. For every value-positive reinforcement provided by our entertainment industry, there must be at least 10 or 20 negative reinforcements, because "that's what sells." This is not just a "black issue"; it extends equally to the entire community. Although I completely support public education, I have sympathy for the pro-voucher and home-schooling adherents.
There is another area of education, seldom, if ever, discussed: the tendency to equate social science progress with scientific progress and expect the same results. Paul Volcker, along with others, have pointed out that a prime cause of the present economic crisis was the faith responsible people (from CEOs to Alan Greenspan - my words, not Volcker's) put in "economic engineering" in regard to risk management. It may sound "elitist," but I suspect than as education becomes more universal, it in fact, losses some of its "quality." This is a topic worthy of a volume to itself.
5. Redirection - This involves the "pause" in free market, free trade and globalization processes noted above. And, both politically and economically, this may be the most difficult to really achieve. I think one begins by re-defining capitalism and economics as a sub-set of society as a whole. If you are somewhere near the top of the economic strata, it may be very difficult to disassociate the two...democracy and capitalism. But, if you are closer to the bottom than the top, it really doesn't matter much where or how your income is coming to you, as long as you have enough for subsistence. An individual, out of a job and facing foreclosure on their home, doesn't care too much about "the big picture" and how all of the pursuit of these principles (free trade, free markets, globalization, etc.) will "eventually" be better for him or her self. The perspective of that individual is that for him or her there may be no "eventually." In this, rigid adherence to some theoretical economic principle, which is not working for most people endangers capitalism itself and ultimately democracy.
Big Government...and by that I mean really Big Government, where say 75% of the work force is employed by government, may be unwise economically over the long haul, but if that is the only choice people have between eating and starvation, between employment and unemployment, that's where they'll turn and economic theory be damned.
In sum, without middle class jobs, and as a result of those jobs, less concentration of wealth, and a more equitable across the board tax burden, I don't see how tax cuts per se help create a sound economy. Where would the additional investment capital go? I would suggest that the answer to that is that without substantial redirection of the economy as a whole, into another category of overvalued assets (this time probably commodities). That, coupled to the end of the great Ponzi scheme called "loose credit" and we are in store for substantial long-term unemployment, less tax revenue, failing entitlement programs and a great deal of social unrest, perhaps as long as a generation. And, that's the "good news." Worse, it is more likely that the American electorate would turn to someone with "quick fixes." Scrap our international commitments, cancel our foreign debt, and throw out Congress - in other words, the quick and easy short term solution of a dictatorship.
The point is that I really see no reasonable alternative toward embarking on a new economic direction aimed at restoring a substantial American middle class and that any alternative to doing so places both democracy and capitalism at high risk.
I am not suggesting we do this overnight. It took 20-30 years to get rid of most of our manufacturing industry and it will take as long or longer to bring it back. And, during that period, one would hope for improvements in basic infrastructure, health care, and education whereby it would not be necessary to bring all of it back. What is required is not necessarily "manufacturing" per se, but an economy based on well paying middle class jobs and one not dependent upon increasing debt via credit. It is possible that with vast improvements in education, a genuinely self-sustaining post-industrial economy would work. However, post-industrial "service" economies tend to be heavily reliant on intellectual property rights, which are acknowledged internationally. I don't think we have this yet. The nature of the New Economy or post-industrial economy is essentially "non-physical." It is a lot harder to be "cheated" if your wealth, say 50% of it, is based on big, heavy, expensive "stuff" (e.g. factories and machine tools) than on a single computer disk, the contents of which can be shifted anywhere in the world in milli-seconds.
Note: Of course, that was the beauty of over-valued American real estate. It couldn't be transplanted. But, that scam seems unlikely to return. I see no alternative to the international acceptance and policing of intellectual property rights as the foundation of a genuine post-industrial economy. We were stupid to have given away our manufacturing capability prior to securing those rights.
In closing, I think it possible to pursue multiple economic goals simultaneously. Step #1 is maintaining employment, even if it is through direct government employment or government contracted employment. Step #2 is an overhaul of oversight and regulatory functions, both domestically and internationally. A re-emphasis on creating a self-sustaining domestic economy does not preclude further progress at arriving at international standards for accounting, the intellectual property rights noted above, etc. Step #3 and Step #4 are simultaneous, overhauling our educational system and the creation of well-paying, immovable domestic jobs, such as in alternative energy, health care, etc.
Next Time: Evaluating the Service Economy: When is a service job genuinely value added and when is it just make work?
P.S. Before I forget it. Re. CEO Compensation. The United States has the highest executive compensation in the world. Comparing the lowest company salary to the top, Japan is something like 20X, Western Europe something like 40X, the U.S. is somewhere around 300X and rising. Why has no one asked our CEO's to take pay cuts "in the interest of making us more globally competitive?"
Since Democrats appear to have the votes, whatever "stimulus package" that emerges will probably be "more Democratic than Republican."
I suspect, however, that the Democratic package, slightly modified, to pull in a few moderate Republican votes to reach the magic number of 60 in the Senate, will ultimately simply disappear into the Federal Government much as the first $350B of the $750B stimulus package of last October, simply "disappeared" into the banks.
The Democratic package does, however, have the advantage of creating jobs faster than tax cuts.
While these jobs are not the "ideal jobs" and undoubtedly contain a lot of inefficiencies, which contribute only vaguely to the "sound economy" we should be building, they will add as a stop gap solution to keep people off the unemployment rolls, maintain some degree of social stability, etc.
The sad thing, in my mind, is that neither the Democratic congressional stimulus package, not the Republican tax cut solutions do much, over the long run, to bring about the paradigm shift necessary. Neither Republicans or Democrats seem capable of rejecting the illusions, which for the most part, brought us to the present crisis, namely mindless free markets and free trade, all under the umbrella guise of globalization.
Capitalism has a well known (and positive) destructive element. As new technology replaces the old, those who deny it suffer at their own peril. As capital shifts to the latest and greatest means of production, outmoded techniques and the companies who insist on retaining them are "destroyed." Hence, Dickens's famous opening line written in an era similar in many ways to own own: "It was the best of times; it was the worst of times." For some, "change" is beneficial; for others (a textile worker in North Carolina or a UAW assembly line worker in Detroit) it may be a disaster. It is the duty of government, in my own opinion, to intervene to mitigate the pain for whom it is the worst of times.
For the certainly the last sixteen years (and probably going back to Reagan), the government has largely ignored this role. Both parties have largely put economic efficiencies, globalization, free trade and free markets ahead of national interest. This is not to say these concepts are not good goals; I believe they are. But, the trick is to arrive at them with minimal disruption to our own people, most of whom were/are middle class blue collar or first line white collar supervision, who for the most part were sacrificed on the alter of globalization.
We can continue, rightfully, to continue to pursue these goals, albeit at a slower pace and without the sacrifices...or, at a minimum, with far fewer sacrifices. We needn't abandon the goals of free trade, and global free markets; we need only to control (or regulate) the pace of the changes such brings.
A strong argument may be made to the rest of the world, which holds a great deal of our debt, that, in the long run, it will be better for the goals of free trade and global free markets, if the United States calls a temporary "time out" and puts its own house in order. That task isn't going to be easy and involves, in part, the following, with the understanding that volumes could be written on each topic.
1) Cleaning up our political system. Campaign financing, ethics, competitive re-districting, etc. Unless these things are reformed, we'll only continue on our slide to Third World status.
2) Immigration. Other than felons, those presently in prison or living on welfare, I have no desire to send people home, disrupt families, etc. We need border enforcement and some form of amnesty for those who are illegal, but have otherwise tried to behave as good citizens. That may sound incredibly naive if you are the U.S. Chamber of Commerce, or a University sociologist, but I think it may be that simple. We may continue to grant work visas in various categories (from fruit pickers to Microsoft programmers), but with revised procedures ensuring that the work visa programs are not being used to hold down wages.
3) Wall Street. Following the Great Depression, the Glass-Steagel Act separated investment banking from commercial banking. One essential reason was that investment banking is what it says it is, namely it facilitates deal making. By eliminating the distinction, investment banks moved first into insurance and then into the underwriting of the deals themselves, continuing to take enormous commissions for a) the initial advice regarding a merger or acquisition and b) the financing of the merger or acquisition. This is like expecting a vacuum salesperson to recommend that maybe what you really need is just a broom.
The recent economic crisis has really not separated the two. Now we have very few investment banks and the few big names (Morgan Stanley, Goldman Sachs) have just become commercial banks, which I suppose means that they will now take extraordinary risks with deposits and that whatever risks they take will be backed by government bailouts? I can't think of a surer path to more serious economic dislocations in the future. We need to go back to a clear division between commercial and investment banking, limiting and overseeing what each does.
Note: I've mentioned it in earlier blogs, but in some ways banks today are to a globalized economy, what John D. Rockefeller was to American industry in his day. Although Rockefeller received a lot of negative popular press, much of this was inspired by regional competitors he had effectively put out of business. Rockefeller used new "tools," largely distribution tools to take the oil industry from one dominated by smaller regional/state interests to a national and international level. Rockefeller was the positive "destructive force of capitalism" of his day. And, eventually, became so successful in eliminating any and all competition that government had to step in and break up Standard Oil. Similarly, with this economic crisis, banks may have shown that they have become too large and powerful for the ultimate good of the whole. I do not completely discount their argument that they have to be big to compete globally, but when they become "too big to fail," then they've invited substantial more government intervention, even if that intervention does not result in "trust busting."
4) Education - It begins and ends here. Whatever the reason (unions or too much decentralization via school districts), education in America is not keeping up with the rest of the world (or at least much of it). Unless we figure out a way to substantially fix the system, it won't matter how many jobs are created, if our "graduates" or drop-outs are too dumb to fill them. This is an issue of enormous cultural and economic ramifications. For every value-positive reinforcement provided by our entertainment industry, there must be at least 10 or 20 negative reinforcements, because "that's what sells." This is not just a "black issue"; it extends equally to the entire community. Although I completely support public education, I have sympathy for the pro-voucher and home-schooling adherents.
There is another area of education, seldom, if ever, discussed: the tendency to equate social science progress with scientific progress and expect the same results. Paul Volcker, along with others, have pointed out that a prime cause of the present economic crisis was the faith responsible people (from CEOs to Alan Greenspan - my words, not Volcker's) put in "economic engineering" in regard to risk management. It may sound "elitist," but I suspect than as education becomes more universal, it in fact, losses some of its "quality." This is a topic worthy of a volume to itself.
5. Redirection - This involves the "pause" in free market, free trade and globalization processes noted above. And, both politically and economically, this may be the most difficult to really achieve. I think one begins by re-defining capitalism and economics as a sub-set of society as a whole. If you are somewhere near the top of the economic strata, it may be very difficult to disassociate the two...democracy and capitalism. But, if you are closer to the bottom than the top, it really doesn't matter much where or how your income is coming to you, as long as you have enough for subsistence. An individual, out of a job and facing foreclosure on their home, doesn't care too much about "the big picture" and how all of the pursuit of these principles (free trade, free markets, globalization, etc.) will "eventually" be better for him or her self. The perspective of that individual is that for him or her there may be no "eventually." In this, rigid adherence to some theoretical economic principle, which is not working for most people endangers capitalism itself and ultimately democracy.
Big Government...and by that I mean really Big Government, where say 75% of the work force is employed by government, may be unwise economically over the long haul, but if that is the only choice people have between eating and starvation, between employment and unemployment, that's where they'll turn and economic theory be damned.
In sum, without middle class jobs, and as a result of those jobs, less concentration of wealth, and a more equitable across the board tax burden, I don't see how tax cuts per se help create a sound economy. Where would the additional investment capital go? I would suggest that the answer to that is that without substantial redirection of the economy as a whole, into another category of overvalued assets (this time probably commodities). That, coupled to the end of the great Ponzi scheme called "loose credit" and we are in store for substantial long-term unemployment, less tax revenue, failing entitlement programs and a great deal of social unrest, perhaps as long as a generation. And, that's the "good news." Worse, it is more likely that the American electorate would turn to someone with "quick fixes." Scrap our international commitments, cancel our foreign debt, and throw out Congress - in other words, the quick and easy short term solution of a dictatorship.
The point is that I really see no reasonable alternative toward embarking on a new economic direction aimed at restoring a substantial American middle class and that any alternative to doing so places both democracy and capitalism at high risk.
I am not suggesting we do this overnight. It took 20-30 years to get rid of most of our manufacturing industry and it will take as long or longer to bring it back. And, during that period, one would hope for improvements in basic infrastructure, health care, and education whereby it would not be necessary to bring all of it back. What is required is not necessarily "manufacturing" per se, but an economy based on well paying middle class jobs and one not dependent upon increasing debt via credit. It is possible that with vast improvements in education, a genuinely self-sustaining post-industrial economy would work. However, post-industrial "service" economies tend to be heavily reliant on intellectual property rights, which are acknowledged internationally. I don't think we have this yet. The nature of the New Economy or post-industrial economy is essentially "non-physical." It is a lot harder to be "cheated" if your wealth, say 50% of it, is based on big, heavy, expensive "stuff" (e.g. factories and machine tools) than on a single computer disk, the contents of which can be shifted anywhere in the world in milli-seconds.
Note: Of course, that was the beauty of over-valued American real estate. It couldn't be transplanted. But, that scam seems unlikely to return. I see no alternative to the international acceptance and policing of intellectual property rights as the foundation of a genuine post-industrial economy. We were stupid to have given away our manufacturing capability prior to securing those rights.
In closing, I think it possible to pursue multiple economic goals simultaneously. Step #1 is maintaining employment, even if it is through direct government employment or government contracted employment. Step #2 is an overhaul of oversight and regulatory functions, both domestically and internationally. A re-emphasis on creating a self-sustaining domestic economy does not preclude further progress at arriving at international standards for accounting, the intellectual property rights noted above, etc. Step #3 and Step #4 are simultaneous, overhauling our educational system and the creation of well-paying, immovable domestic jobs, such as in alternative energy, health care, etc.
Next Time: Evaluating the Service Economy: When is a service job genuinely value added and when is it just make work?
P.S. Before I forget it. Re. CEO Compensation. The United States has the highest executive compensation in the world. Comparing the lowest company salary to the top, Japan is something like 20X, Western Europe something like 40X, the U.S. is somewhere around 300X and rising. Why has no one asked our CEO's to take pay cuts "in the interest of making us more globally competitive?"
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