Monday, February 23, 2009

Manic Depression

Those of us who worry about whether the White House and the Congress are doing the right things to end the recession as quickly as possible could use some reassurance.

So far it seems as though, wherever people have behaved irresponsibly and blown huge amounts of money, the government's solution is to give them more money. Bankers make zillions of loans to people who likely cannot repay them? Give them more money. Car companies run their business at a loss that shows no sign of abating? Give them more money. People take out mortgages for homes they cannot afford? Give them more money. Congress runs up huge deficits during the Bush years? Then run up even bigger deficits during the Obama years.

Okay, I'm oversimplifying. Obviously, people who look at things the way I have just described are not sophisticated enough to understand how the economy works. The experts tell us that government spending and relief for people in bad mortgages are necessary to improve things. Or, even if they aren't, then they are still better than doing nothing. If only I was smart enough to understand.

Okay, I'm not that stupid. I get it. Sometimes in your personal life you have to go into debt to buy yourself some breathing room to dig yourself out. You then work like a dog to support yourself and service your debt, but it's something you've got to do to avoid losing the roof over your head or starving. And sometimes in a crisis, people who are doing okay have to help out other people who aren't doing okay. And maybe it's not exactly fair, but we do it because it's the right thing. After all, the next time it might be us who are the ones that need help, and we have to hope that someone else will help us out if and when that time comes. I think we all get that.

So, let's put aside the question about whether the stimulus package and the mortgage bailout plan are fair. Let's just focus on whether they will actually work. Will they help the economy recover more quickly? Will they cause less harm than simply doing nothing? And, most importantly, what will enable the most people to support themselves and enjoy a rising standard of living?

If only there was some country that had gone through a similar situation and had tried a similar solution. Maybe we could learn from that experience. Even better, what if there were two countries that had similar situations and two different solutions were tried and we could see which one worked better? Wouldn't that be helpful?

Wait, there are two such countries. Wait, no, they are actually both the same country. And they are both us, the United States. We have actually been through this at least two times before. And the government dealt with the crisis very differently in each case. In 1920 there was a recession when Warren G. Harding was president. National productivity fell by 24 percent and unemployment shot up. Harding cut taxes, decreased regulation and lowered government spending. The recession ended after a bit less than three years. Now that seems like an awful long time to suffer through a bad economy. But there was an amazing period of growth from 1923 to 1929. Then another recession hit, and President Herbert Hoover raised taxes, increased government spending, regulated industry and jacked up tariffs. From 1933 Franklin Roosevelt essentially continued and extended Hoover's policies, and the bad economy lasted until at least 1939, i.e. a full decade.

The problem with comparisons like this is that there is always some difference between the two situations that proponents of one economic philosophy or another can cite to claim that the current situation is somehow materially different. Supporters of increased government spending as a solution argue that the Great Depression lasted so long, not because of increased government spending, but because FDR did not spend enough or spend it fast enough. And since it is virtually impossible to prove a negative, there is no way to say absolutely that they are wrong.

But here is something that we can say. If President Obama's strategy works, it will be the first time a government has spent its way to national prosperity. In spite of all this spending, the president has promised to cut the deficit in half by 2013. For this to work, he has to be counting on some major growth despite the fact that the government has tied up so much of the GDP. Or he is planning to close the gap by raising taxes, presumably on the wealthiest 5 percent (since he has promised that 95 percent of us will have lower taxes) or on businesses. But experience shows clearly that this is a disincentive to productivity and growth. It's hard to see how we are not headed for a decade or more of depression.

Normally, a bad economy is considered the kiss of death for a president, but the irony is that Obama might come out of this okay politically. After all, if we remember President Harding at all today, we remember him for something called the Teapot Dome scandal. And FDR is not remembered so much for how long the Great Depression dragged on under his watch but for how much he cared about the people suffering through it.

Tuesday, February 17, 2009

Beam Me Up

Okay, so I thought I was so incredibly clever to have noticed the strange resemblance between Barack Obama and Lt. Commander Tuvok on television's Star Trek: Voyager. I like to think that I capture quite a bit of what is being said out there in the political realm as well as the sci fi realm, and since no one I correspond with or read had commented on this, well, I decluded myself that I had some unique grand insight. If I had bothered to do something as simple as do a Google search on the names Tuvok Obama, I would have discovered very quickly that there is a whole cottage industry out there of entire web sites devoted to this strange resemblance and what it means. I guess I should have known. This is, after all, the internet. If you can find web sites questioning whether Obama was born on American soil, then it should be no surprise that there would be some questioning whether he was even born on this planet.

For the record, the chatter seems to be evolving from whether Obama is a space alien, specificually a Vulcan, to whether he is not a hologram. That is, is he a projection of light and force fields generated by a computer to convincingly simulate a real human being? I suppose this is a form of flattery, suggesting that Obama is a bit too perfect to be real. But it can also be seen as dismissing him as an empty suit with his ideas and rhetoric pre-programmed by someone else. Presumably by Nancy Pelosi?

Friday, February 13, 2009

Econ Test

In his inaugural speech, President Obama memorably declared, "We will restore science to its rightful place." That was great to hear. The last thing we want or need in this dangerous world is politicians that set public policy based on emotion, blind faith or superstition.

I have a humble suggestion for which science in particular his administration ought to begin restoring to its rightful place. It is the one called economics.

Now the problem with restoring economics to its rightful place is the same problem that every branch of science has. And that is the fact that not all of the scientists agree with each other. Lots of learned people with impressive sounding academic credentials keep studying the world's economies and they all keep coming up with different ideas about how it all works and what the best ways are for managing them. That is because there are limits to humans' ability to understand things as complex as the universe, the earth or what happens when lots of people start interacting with each other. But there is something that makes up for an individual human being's inability to grasp all the detail and interaction of the world around him. It is the marketplace of ideas. In other words, the fact that we don't all see things the same way or believe the same things is actually a strength, not a weakness. In the marketplace of ideas, different views of how the world works get debated and argued and their weak points get examined and then these various ideas get tested and everyone can see which ones seem to work and which ones don't.

Now, some people don't like the free marketplace. Maybe they have a particular idea they are attached to and they don't want to risk hearing or seeing that maybe it isn't right, or that there's a better one out there that would require them to give up their own cherished view of things.

Over the past several months, the reputation of free markets has taken a beating. When the housing bubble burst and when the credit system froze up and started causing the economy to strangle, a lot of people said that this just proved what they had always known or suspected: that unfettered free markets are not necessarily in the best interest of most people. More extreme people started asserting that this actually proved that capitalism was not a viable system after all and that it was finally crumbling under its own weight, just as Karl Marx had predicted.

The problem with this view is that the current situation, while aided and abetted by human greed and collective irrational behavior, can be traced directly to government intervention. That is, a government policy of encouraging and pressuring banks and mortgage companies, through Fannie Mae and Freddie Mac, to liberalize loan standards to capture as many new homeowners as possible, regardless of suitability for mortgages, drove up housing prices and resulted in the widespread irresponsible lending practices that got us where we are today. To call this a failure of the market is to call a grocer's errant thumb a failure of his weighing scale.

The real irony is that the government's solution for the economic situation we find ourselves in, which was caused by too many people spending money they didn't actually have is, well, you are probably way ahead of me. It is for the government to do the same thing but on a much larger scale than ever before. History shows that such a course can work if it is targeted and temporary, but the president's and Congress's stimulus bill is neither. Frighteningly, we seem headed down the same course as Japan in the 1990s.

It is a bit late in the day for it, but President Obama might want to look at the precedent of the last Democratic president. Bill Clinton presided over the best economy of modern times. And how did he do it? The man who famously declared in a 1996 radio address, "The era of big government is over," working with a Republican Congress, pulled back on the size of government and, for a brief time, balanced the budget. The Clinton economy did more to improve more people's lives than all the programs in Obama's bloated so-called stimulus bill ever will.

Thursday, February 12, 2009

Political Enterprise

During the presidential campaign, I got into the habit on my movie web site of referring to Barack Obama as Lt. Commander Tuvok because of the uncanny resemblance in appearance and personality between him and the Vulcan character played by Tim Russ on the TV series Star Trek: Voyager. I just noticed that someone else has seen Obama's Vulcan characteristics. On the Human Events web site, this amusing bit of artwork appeared with an article by Jed Babbin called "Trekonomics." Finally, I feel vindicated. On the other hand, I don't understand how I failed to notice that Harry Reid is really Dr. "Bones" McCoy. Will he be the one to deliver the bad news (as he did on the Iraq war) about the economy? "It's dead, Jim."

Friday, February 6, 2009

No time to waste?

If you have made very many major purchases in your life - or if you have just spent more than a few minutes on the phone with a telemarketer - then you have probably copped on to the fact that, when the salesman tells you that you have to commit to the purchase right this minute or else, then it's probably a good idea to take a breath and refuse to be pressured.

And, if you do give in and go along with the salesman about closing the deal right this minute and then he says, oh, by the way, could you make the check out to "cash," well, then the warning bells should really go off.

George W. Bush's Treasury secretary Henry Paulson sounded like one of those high-pressure used car salesmen back in October when he went on all the Sunday interview shows to tell the country that something really, really bad would happen if he didn't get an $700 billion to use as he pleased right away. And most congressmen, as well as the two presidential candidates, fell right in line.

Now we learn that Paulson used $254 million of that money to buy equity in companies that, at the time, was worth only $176 billion, according to a Congressional oversight panel. It would be nice to find this news surprising, but it just goes to show what many of us already know well. People just aren't nearly as careful with other people's money as they are with their own. And spending large sums of money in a panic is a good way to waste some or all of it.

Does this mean that I think that Congress should be doing nothing about the economic situation? Of course not. But the country needs to be careful about doing things in a panic. One bad sign: instead of getting those emails telling me how I can get rich by sending cash to someone in Nigeria, I have lately been getting emails telling me how I can get some of the stimulus money.

Unfortunately, President Obama has been adding to the atmosphere of panic, exhorting Congress members of both parties to get on board with the stimulus plan without delay, even while reasonable people keep finding major problems with it and public approval of the plan keeps dropping. I understand why the president is doing this. He knows well that if something this large isn't done quickly, it will drag out longer and longer and become more difficult to get passed. And he probably understands that perhaps the biggest benefit of a stimulus package is, more than its financial impact, its psychological effect, that it calms markets and investors and consumers because they are reassured that the government is doing something.

But Obama is spending way more energy on trying to get something passed than he seems to be on making sure that it's a good bill. It's as if he doesn't care what's actually in the bill, just as long as enough other people like it. And by being so forceful about how dire things are and how they will get worse if a bill isn't passed, he is actually increasing jitters rather than calming them.

The fact is that we are headed for a period of more economic pain whether a huge spending bill is passed or not. And the government's ability to affect the amount and duration of the pain exists more on the side of prolonging and deepening it, by doing the wrong thing, than on the side of being able to fix it sooner. So there is probably no harm in taking a bit more time to make sure that the bill is as good as it can be under the circumstances. But it would be easier if Obama were acting more as a leader rather than a facilitator.

When politicians get wildly impatient about passing this kind of legislation and about spending this much money, it makes me think that their biggest fear is that the economy might start improving without them.

Thursday, February 5, 2009

Bait and Switch

Here's a good example of what is frustrating about politicians. It's the old bait and switch.

Yesterday President Obama pushed back against criticism of the stimulus bill, essentially erring on the side of increased government spending over tax cuts. "In the past few days I’ve heard criticisms of this plan that echo the very same failed theories that helped lead us into this crisis –- the notion that tax cuts alone will solve all our problems," said the president, "that we can ignore fundamental challenges like energy independence and the high cost of health care and still expect our economy and our country to thrive. ... I reject those theories, and so did the American people when they went to the polls in November and voted resoundingly for change."

Clearly, voters did react positively to Obama's change message. But the problem with his formulation is that, if the average consumer of news and political advertising remembers anything from Obama's campaign sound bites, it was the constantly repeated mantra that 95 percent of Americans would get a tax cut under his administration. If he made any campaign speeches promising to boost spending (over using tax cuts) to stimulate the economy, I don’t think they filtered out to too many media consumers. Obama basically ran, and ultimately won, on promises to cut taxes for the vast majority of people. The irony is that he defeated an opponent with a long and consistent history of supporting low taxes. But John McCain's message was so garbled that regular people couldn't be sure what he was promising to do.

Now, to be fair, the additional tax cuts Republicans are pressuring the president to support are for small businesses and not individuals. And, of course, the economic situation is more dire than it seemed even during most of the presidential campaign. And presidents are not obliged by any law to keep any or all their campaign promises anyway. My only gripe is that he is using the "I won" argument to justify something different than what many, if not most, people probably thought they were voting for. (People who pay close to attention to these things, on the other hand, will not have been surprised.) The irony is that, for all his talk of change, the stimulus plan not only promises more of what we had during the past eight years, i.e. running up the deficit, but does so on a more massive scale.

To the president's credit, he has not shown himself to be at all stubborn. When Canada and the European Union began whinging about the protectionism in the House version of the stimulus bill he supported, he adjusted his stance and began extolling the virtues of free trade. When he realized he had one too many tax evaders going into his cabinet (perhaps a negative editorial in The New York Times had something to do with it), he cut Tom Daschle loose and went on every TV network to take responsibility. This flexibility is either reassuring, mainly if you like his reversals, or worrying, if you are starting to think that he bends too easily out of a lack of serious personal convictions.

Tuesday, February 3, 2009

The Die Is Cast

Anyone who has worked in a corporation and has at least a bit of gray in their hair knows the feeling. You've worked your butt off for years. You've paid your dues. You've done a good job. Then that big promotion or plum assignment comes up, and you just know it's rightfully yours.

But then some flashy young guy gets it. He doesn't have half your experience and hasn't actually accomplished anything to speak of. But he looks good and sounds good and the powers that be go with him because he has them dazzled.

This is certainly how Hillary Clinton felt during the primaries. (You don't have to be a woman to know how this feels, but it probably helps.) And it is certainly how John McCain must have felt in November. But that's how it goes. The presidency isn't some reward for longevity or good work or public service or even being a hero. This is a democracy, and the president is whoever the American people want at that particular moment, which comes every four years. And in November they chose Barack Obama.

With Obama's inauguration, we are at an extraordinary moment. We have elected a president who is relatively young, as presidents go, and who has an astonishingly limited amount of government service under his belt. Not only has he no previous executive experience, but he has precious little legislative experience, especially at the federal level. On the positive side, he brings much less political baggage with him than any other president in modern times. That gives him extremely wide latitude to take bold new initiatives and to build different kinds of coalitions than we have seen for a while. On the negative side, the U.S. has less idea what to concretely expect from its leader than at any time in memory. Obama has no real track record to tell us realistically what he will do. We have his campaign position and public statements, but they tend to range from the vague to the self-contradictory. In his campaign, he played to the left, but that was what he had to do to get elected. Since the election, he has sounded more pragmatic, almost like a technocrat. He has even made overtures to conservatives. The fact is, we still don't know what Obama really believes. Not in the way that we knew what Ronald Reagan, for example, really believed when he became president. In essence, we have thrown the dice and hoped for the best in a very risky period in terms of the economy and world events.

It's still early days, but the first indications are not particularly encouraging. I'm not talking about the withdrawal of cabinet nominees like Tom Daschle and Nancy Killefer or even backsliding on promises to be more transparent than previous administrations. All that is pretty much par for the course for any new administration.

I'm talking about the so-called stimulus bill passed by the House. There are economic arguments for stimulating the economy by pumping money into the hands of consumers and/or business via tax rebates or tax cuts. But only Washington politicians can be brazen enough to justify a 30 percent increase in federal spending on pet projects and call it a stimulus. The bill is so bad that not a single Republican felt uncomfortable about opposing it, even though it meant going against a popular president and risking getting blamed for a worsening economy. Obama called for bi-partisanship, but the bi-partisanship he got was in opposition to, not in favor of, the bill since even some Democrats couldn't stomach it. Meanwhile, governments in Europe that had been toasting the new president went into a panic when they realized that the bill includes protectionist provisions, directly threatening European and other economies. The fact is that, in the long run, protectionism is bad for the American economy as well.

What concerns me is not that the bill represents Obama's political and economic philosophy but that, so far, there is no evidence that he actually has one. He has ceded free rein to the House Democrats on this critical piece of legislation. This is leadership? Despite the blowback, however, Obama seems serene, saying he is confident that the bill will be improved in the Senate and in conference. Let's hope he is right and that he is crazy like a fox and will end up getting something out that will actually help the economy and not make it worse. But, at this point, that is only a hope.