Debt Clock

A YouTube video on our exploding national debt...

Return to Red vs. Blue - With a Vengeance

It's remarkable, though not surprising, how quickly Obama and Rahm Emanuel got back on track with Red vs. Blue politics. (I'm not sure they ever left, as the campaign promises of bipartisanship and compromise were pretty hollow.)

As this blog has argued persistently, red and blue politics is rooted in far more than campaign politics. In addition, the two parties and the media thrive off partisan conflict, so the temptation to carry that battle directly to the media was too powerful to resist for the Obama administration. The attack on Fox and talk radio are attempts to diminish the appeal of these media outlets while heightening the divisions between alternative and mainstream media.

Voters should not be fooled by this and my guess is that most independents are not. I also suspect the media see little to gain by moving the battleground away from politics to their home field. If an administration can de-legitimize one network, why not another? This is so much white noise.

Ideologues Crash and Burn

One has to wonder about the political competence in Washington DC. First the disaster of the Bushies in the second term and now the face plant of the Obamacrats after only six months in office. My guess is that it is less about a lack of intelligence and more due to the insularity of the political class. One wonders if any of these folks know anything about the real America.

Jay Cost of the HorseRaceBlog provides a good critique of the Obama administration's failure to date to understand the country they're trying to lead. I include it here in full:

August 16, 2009
Obama Misread His Mandate

After a rough week for health care reform, Democratic leaders appear to be pulling back on their demand for a public option. It remains to be seen whether liberal Democrats, especially in the House where they are more numerous, will go along with this. But this is still a step in the right direction to get something passed this year.

The public option was an overreach. The White House's erroneous belief that it could get it through the legislature - or at least that it could let four out of five congressional committees push it - was a misinterpretation of last year's election results. It has already made a similar mistake with cap-and-trade, backing a House bill that appears to have no chance of success in the Senate.

Bismarck once commented that politics is the art of the possible. So far, the White House has not exhibited a good understanding of exactly what is possible in this political climate. It has been acting as though the President's election was a major change in the ideological orientation of the country.

A lot of liberals certainly saw it as such. All the strained comparisons of Obama to Franklin Roosevelt were a tipoff that many were talking themselves into the idea that the 2008 election created an opportunity for a substantial, leftward shift in policy. Yet the election of 2008 was not like the 1932 contest. It wasn't like 1952, 1956, 1964, 1972, 1980, 1984, or even 1988, either. Obama's election was narrower than all of these. FDR won 42 of 48 states. Eisenhower won 39, then 41. Johnson won 44 of 50. Nixon won 49. Reagan won 44, then 49. George H.W. Bush won 40. Obama won 28, three fewer than George W. Bush in his narrow 2004 reelection.

This makes a crucial difference when it comes to implementing policy. Our system of government depends not only on how many votes you win, but how broadly distributed those votes are. This prevents one section or faction from railroading another. It is evident in the Electoral College and the House, but above all in the Senate, where 44 senators come from states that voted against Obama last year. That's a consequence of the fact that Obama's election - while historic in many respects, and the largest we have seen in 20 years - was still not as broad-based as many would like to believe. Bully for Obama and the Democrats that they have 60 Senators, but the fact remains that thirteen of them come from McCain states, indicating that the liberals don't get the full run of the show.

For whatever reason, the Obama administration has acted as if those hagiographical comparisons to FDR were apt. It let its liberal allies from the coasts drive the agenda and write the key bills, and it's played straw man semantic games to marginalize the opposition. For all the President's moaning in The Audacity of Hope about how the Bush administration was railroading the minority into accepting far right proposals - he was prepared to let his Northeastern and Pacific Western liberal allies do exactly the same thing: write bills that excite the left, infuriate the right, and scare the center; insist on speedy passage through the Congress; and use budget reconciliation to ram it through in case the expected super majority did not emerge.

This might have flown during FDR's 100 Days. But this is not 1933 and Barack Obama is no Franklin Roosevelt.

Now that his legislative agenda is stalling, we're seeing the predictable critiques about the outdated United States Senate, which is the real source of the bottleneck: the Connecticut Compromise was meant to protect the interests of small states, but not states that are this small. Rhode Island, yes. Wyoming, no! These arguments will be conveniently tabled whenever the Democrats return to minority status, so I won't bother to address their merits. The bigger question is: what did they think was going to happen? It's one thing to bemoan the fundamental unfairness of the Senate; it's another thing to overlook it when you're formulating your legislative program. The map is what it is: that big swath of red that runs through the middle of the country then swings right through the South should have been a tipoff that the stage was not set for coastal governance.

The President should have realized what was possible and what wasn't, and he should have used his substantial influence to push the House toward the kind of centrist compromise the Senate will ultimately require. That's called building a consensus - something he promised he'd do but has not yet made a serious effort at.

Obamacare Won't Work - These Ideas Will.

The health care system in America needs reform. It works for 85% of the people, but the dysfunctional parts have long ago become the tail that wags the dog. Now the reform is becoming a strident partisan and ideological issue. This is truly unnecessary.

I am amazed how little rationality is applied to the political debate. But I have come across some fruitful ideas that make sense. I include them below. These are culled from WSJ: the first by John Mackey, CEO of Whole Foods and the second by John Cochran, a professor of finance at the U. of Chicago. What's more important is that these reforms are politically feasible because they address the major concerns of the center majority of those people who have health insurance but want to solve the systemic problem for people who don't.

• Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs). The combination of high-deductible health insurance and HSAs is one solution that could solve many of our health-care problems. For example, Whole Foods Market pays 100% of the premiums for all our team members who work 30 hours or more per week (about 89% of all team members) for our high-deductible health-insurance plan. We also provide up to $1,800 per year in additional health-care dollars through deposits into employees' Personal Wellness Accounts to spend as they choose on their own health and wellness.

Money not spent in one year rolls over to the next and grows over time. Our team members therefore spend their own health-care dollars until the annual deductible is covered (about $2,500) and the insurance plan kicks in. This creates incentives to spend the first $2,500 more carefully. Our plan's costs are much lower than typical health insurance, while providing a very high degree of worker satisfaction.

• Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits. Now employer health insurance benefits are fully tax deductible, but individual health insurance is not. This is unfair.

• Repeal all state laws which prevent insurance companies from competing across state lines. We should all have the legal right to purchase health insurance from any insurance company in any state and we should be able use that insurance wherever we live. Health insurance should be portable.

• Repeal government mandates regarding what insurance companies must cover. These mandates have increased the cost of health insurance by billions of dollars. What is insured and what is not insured should be determined by individual customer preferences and not through special-interest lobbying.

• Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year. These costs are passed back to us through much higher prices for health care.

• Make costs transparent so that consumers understand what health-care treatments cost. How many people know the total cost of their last doctor's visit and how that total breaks down? What other goods or services do we buy without knowing how much they will cost us?

• Enact Medicare reform. We need to face up to the actuarial fact that Medicare is heading towards bankruptcy and enact reforms that create greater patient empowerment, choice and responsibility.

• Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance and aren't covered by Medicare, Medicaid or the State Children's Health Insurance Program.

And this about pre-existing conditions:

What to Do About Pre-existing Conditions
Most Americans worry about health coverage if they lose their job and get sick. There is a market solution.

By JOHN H. COCHRANE

Even if you don't like the massive health-care package being considered in Congress, you have to admit that health insurance and health care in this country are not working well. There are two basic problems:

First, if you get sick and then lose your job or get divorced, you lose your health insurance. With a pre-existing condition, new insurance will be ruinously expensive, if you can get it at all. This, the central defect of American health insurance, explains why most Americans are happy with their current coverage yet also support reform.

Second, health care costs too much. Yes, we get better treatment, but the cost-cutting revolution that has swept through manufacturing, retail, telecommunications and airlines has not touched health care.

The problems are real, but the proposed remedy—even more government intervention—is counterproductive. A market-based, deregulation-focused reform is possible, and it will work.

Health care and insurance are service-oriented, retail businesses. There is only one way to reduce costs in such a business: intense competition for every customer. The idea that the federal government can reduce costs by negotiating harder or telling businesses what to do is a triumph of hope over centuries of experience.

Take the claim that centralized record-keeping can cut costs. In his July 22 press conference, President Barack Obama noted that a new doctor today might run a test again rather than ask for records of a previous result. That seems silly. But maybe it isn't. Maybe the test is cheap, the condition changes, the test can fail, and the cost of setting up an integrated record system between these two doctors isn't worth two tests a year.

The cost-cutting revolutions in other industries didn't settle questions like these with acts of Congress, expert commissions, armies of regulators, or via a "public option"—while leaving in place a system in which consumers have little choice, aren't spending their own money, and suppliers are protected from lower-cost competitors. That approach has never spurred efficiency, and for good reasons. Cost-cutting is painful. Even in Mr. Obama's trivial example, lab technicians and secretaries will lose their jobs to computer programs, and they will complain. Patients might have to get tests at inconvenient times and locations. They will do this when their money is at stake—what people will put up with from airlines for a few dollars is truly amazing—but they will never accept it from the government.

But what about pre-existing conditions?

A truly effective insurance policy would combine coverage for this year's expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A "guaranteed renewable" individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so. And insurers are getting more creative. UnitedHealth now lets you buy the right to future insurance—insurance against developing a pre-existing condition.

These market solutions can be refined. Insurance policies could separate current insurance and the right to buy future insurance. Then, if you are temporarily covered by an employer, you could keep the pre-existing-condition protection.

Some insurers avoid their guaranteed-renewable obligations by assigning people to pools and raising rates as healthy people leave the pools. Health insurers, like life insurers, could write contracts that treat all of their customers equally.

The right to future insurance could be transferrable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums. Better, this sum could be occasionally placed in a custodial account. If you got sick but had something like a health-savings account to pay high premiums, you could always get new insurance. Insurers would then compete for sick people too.

Innovations like these would catch on quickly in a vibrant, deregulated individual insurance market.

How do we know insurers will honor such contracts? What about the stories of insurers who drop customers when they get sick? A competitive market is the best consumer protection. A car insurer that doesn't pay claims quickly loses customers and goes out of business. And courts do still enforce contracts.

How do we get to a competitive market? The tax deduction for employer-provided group insurance, which has nearly destroyed the individual insurance market, is a central culprit. If we don't have the will to remove it, the deduction could be structured to enhance competition and the right to future insurance. We could restrict the tax deduction to individual, portable, long-term insurance and to the high-deductible plans that people choose with their own money.

More importantly, health care and insurance are overly protected and regulated businesses. We need to allow the same innovation, entry, and competition that has slashed costs elsewhere in our economy. For example, we need to remove regulations such as the ban on cross-state insurance. Think about it. What else aren't we allowed to purchase in another state?

The bills being considered in Congress address the pre-existing condition problem by forcing insurers to take everybody at the same price. It won't work. Insurers will still avoid sick people and treat them poorly once they come. Regulators will then detail exactly how every disease must be treated. Healthy people will pay too much, so we will need a stern mandate to keep them insured. And this step further reduces competition.

Private, competitive insurance markets are a superior way to solve the pre-existing-conditions problem, and the only hope to lower costs.

Red vs. Blue States

Froma Harrop writes this article ("No, Red States Are Not Better Than Blue States") about the fallacies of the red state vs. blue state narrative. Of course, we already know red vs. blue politics is not about state borders, but about population density. The narrative of red and blue states is a myth promoted by the media and the parties...

The End of Red and Blue?

...Yeah, right. I reprint below an article by Andrew Wilson from the WSJ about ideology and politics around the family dinner table. As predicted, a Democratic Obama presidency has done little to bridge the divide.

Politics for Dinner
Debate at home has turned ugly since November.

When it comes to waging battle over the stimulus bill, health care and cap and trade, the folks on Capitol Hill have nothing on my family.

Before escalating to stronger language, my older brother Harry sometimes calls me a “mental defective” in conversations about politics. He thinks that I have been Bush-whacked. I think that he has been L’Obamatized. That is the highly scientific condition of having half of your brain removed and the other half turned into jelly with no off/on switch to control veneration of the 44th president.

Harry and I grew up as the second and third kids in a family of seven children. Loud and heated political argument at the dinner table was a family tradition. That’s continued and become an extended family tradition at gatherings over Thanksgiving and Christmas that often number up to 32 people—including siblings, spouses, children, and grandchildren.

But never before have our debates been more likely to stray into acrimony and ugliness. And never before have the differences of opinion between family members been so striking.

We used to take great pride as a family in having freewheeling, no-holds-barred discussions about politics and world events. Now it’s come to the point that all of us must exercise some self-censorship in order to maintain an amicable level of discourse.

The most outspoken among us, my younger sister Dodie, has been urged by her own kids to tone down her libertarian, anti-Obama rhetoric. Though her children agree with her sentiments, it embarrasses them in front of their friends. (This is especially so for the two children now at a prestigious college where public criticism of the current occupant of the White House is almost verboten).

One could liken the situation inside my extended family to a second War of the Roses, with Lancastrian Obamaites on one side and Yorkist Bushites on the other. Harry, the leading Lancastrian, and a lawyer by trade, inveighs against the negativity of those supposedly afflicted with “Obama derangement syndrome.”

But what of the “George W. Bush derangement syndrome”— the notion that Mr. Obama must be Superman to make up for the colossal blunders of his predecessor? The president certainly never misses a chance to belittle the former president. Following Obama’s cue, the Obamaites in my family heap every kind of blame on George W., and then pin the Bushite label on the rest of us who disagree.

In fact, this is a false label. None of us could be described as an avid and devoted follower of George W. I, for one, believe that he made an awful mess of things in the closing months of his presidency when he endorsed the idea of bailing out big banks and auto companies.

So it goes in the extended Wilson family. We squabble. Or, for the sake of family harmony, we muzzle our old instinct to engage in honest debate.

In the midst of the so-called Great Recession, there are some in my family who see Barack Obama as hero and savior. Others tremble at the massive extension of government power and the winnowing down of freedom, personal responsibility and belief in private enterprise as the one true engine of economic growth and progress.

Harry and I will go on being brothers and good friends. But like the American people as a whole, we are politically estranged in a way that marks a real departure from the past.

Divided We Stand.

The following article is by Paul Starobin and was published June 13, 2009 in the WSJ. An analysis and comment will follow in the next post.

Remember that classic Beatles riff of the 1960s: “You say you want a revolution?” Imagine this instead: a devolution. Picture an America that is run not, as now, by a top-heavy Washington autocracy but, in freewheeling style, by an assemblage of largely autonomous regional republics reflecting the eclectic economic and cultural character of the society.

There might be an austere Republic of New England, with a natural strength in higher education and technology; a Caribbean-flavored city-state Republic of Greater Miami, with an anchor in the Latin American economy; and maybe even a Republic of Las Vegas with unfettered license to pursue its ambitions as a global gambling, entertainment and conventioneer destination. California? America’s broke, ill-governed and way-too-big nation-like state might be saved, truly saved, not by an emergency federal bailout, but by a merciful carve-up into a trio of republics that would rely on their own ingenuity in making their connections to the wider world. And while we’re at it, let’s make this project bi-national—economic logic suggests a natural multilingual combination between Greater San Diego and Mexico’s Northern Baja, and, to the Pacific north, between Seattle and Vancouver in a megaregion already dubbed “Cascadia” by economic cartographers.

Patrick Henry declares ‘give me liberty, or give me death’ in his 1775 speech urging the colonies to fight the British.
Devolved America is a vision faithful both to certain postindustrial realities as well as to the pluralistic heart of the American political tradition—a tradition that has been betrayed by the creeping centralization of power in Washington over the decades but may yet reassert itself as an animating spirit for the future. Consider this proposition: America of the 21st century, propelled by currents of modernity that tend to favor the little over the big, may trace a long circle back to the original small-government ideas of the American experiment. The present-day American Goliath may turn out to be a freak of a waning age of politics and economics as conducted on a super-sized scale—too large to make any rational sense in an emerging age of personal empowerment that harks back to the era of the yeoman farmer of America’s early days. The society may find blessed new life, as paradoxical as this may sound, in a return to a smaller form.

This perspective may seem especially fanciful at a time when the political tides all seem to be running in the opposite direction. In the midst of economic troubles, an aggrandizing Washington is gathering even more power in its hands. The Obama Administration, while considering replacing top executives at Citigroup, is newly appointing a “compensation czar” with powers to determine the retirement packages of executives at firms accepting federal financial bailout funds. President Obama has deemed it wise for the U.S. Treasury to take a majority ownership stake in General Motors in a last-ditch effort to revive this Industrial Age brontosaurus. Even the Supreme Court is getting in on the act: A ruling this past week awarded federal judges powers to set the standards by which judges for state courts may recuse themselves from cases.

All of this adds up to a federal power grab that might make even FDR’s New Dealers blush. But that’s just the point: Not surprisingly, a lot of folks in the land of Jefferson are taking a stand against an approach that stands to make an indebted citizenry yet more dependent on an already immense federal power. The backlash, already under way, is a prime stimulus for a neo-secessionist movement, the most extreme manifestation of a broader push for some form of devolution. In April, at an anti-tax “tea party” held in Austin, Governor Rick Perry of Texas had his speech interrupted by cries of “secede.” The Governor did not sound inclined to disagree. “Texas is a unique place,” he later told reporters attending the rally. “When we came into the Union in 1845, one of the issues was that we would be able to leave if we decided to do that.”

Such sentiments resonate beyond the libertarian fringe. The Daily Kos, a liberal Web site, recently asked Perry’s fellow Texas Republicans, “Do you think Texas would be better off as an independent nation or as part of the United States of America? It was an even split: 48% for the U.S., 48% for a sovereign Texas, 4% not sure. Amongst all Texans, more than a third—35%—said an independent Texas would be better. The Texas Nationalist Movement claims that over 250,000 Texans have signed a form affirming the organization’s goal of a Texas nation.

Secessionist feelings also percolate in Alaska, where Todd Palin, husband of Governor Sarah Palin, was once a registered member of the Alaska Independence Party. But it is not as if the Right has a lock on this issue: Vermont, the seat of one of the most vibrant secessionist movements, is among the country’s most politically-liberal places. Vermonters are especially upset about imperial America’s foreign excursions in hazardous places like Iraq. The philosophical tie that binds these otherwise odd bedfellows is belief in the birthright of Americans to run their own affairs, free from centralized control. Their hallowed parchment is Jefferson’s Declaration of Independence, on behalf of the original 13 British colonies, penned in 1776, 11 years before the framers of the Constitution gathered for their convention in Philadelphia. “The right of secession precedes the Constitution—the United States was born out of secession,” Daniel Miller, leader of the Texas Nationalist Movement, put it to me. Take that, King Obama.

Today’s devolutionists, of all stripes, can trace their pedigree to the “anti-federalists” who opposed the compact that came out of Philadelphia as a bad bargain that gave too much power to the center at the expense of the limbs. Some of America’s most vigorous and learned minds were in the anti-federalist camp; their ranks included Virginia’s Patrick Henry, of “give me liberty or give me death” renown. The sainted Jefferson, who was serving as a diplomat in Paris during the convention, is these days claimed by secessionists as a kindred anti-federal spirit, even if he did go on to serve two terms as president.

The anti-federalists lost their battle, but history, in certain respects, has redeemed their vision, for they anticipated how many Americans have come to feel about their nation’s seat of federal power. “This city, and the government of it, must indubitably take their tone from the character of the men, who from the nature of its situation and institution, must collect there,” the anti-federalist pamphleteer known only as the Federal Farmer wrote. “If we expect it will have any sincere attachments to simple and frugal republicanism, to that liberty and mild government, which is dear to the laborious part of a free people, we most assuredly deceive ourselves.”

In the mid-19th century, the anti-federalist impulse took a dark turn, attaching itself to the cause of the Confederacy, which was formed by the unilateral secession of 13 southern states over the bloody issue of slavery. Lincoln had no choice but to go to war to preserve the Union—and ever since, anti-federalism, in almost any guise, has had to defend itself from the charge of being anti-modern and indeed retrograde.
But nearly a century and a half has passed since Johnny Rebel whooped for the last time. Slavery is dead, and so too is the large-scale industrial economy that the Yankees embraced as their path to victory over the South and to global prosperity. The model lasted a long time, to be sure, surviving all the way through the New Deal and the first several decades of the post-World War II era, coming a cropper at the tail end of the 1960s, just as the economist John Kenneth Galbraith was holding out “The New Industrial State,” the master-planned economy, as a seemingly permanent condition of modern life.

Not quite. In a globalized economy transformed by technological innovations hatched by happily-unguided entrepreneurs, history seems to be driving one nail after another into the coffin of the big, which is why the Obama planners and their ilk, even if they now ride high, may be doomed to fail. No one anymore expects the best ideas to come from the biggest actors in the economy, so should anyone expect the best thinking to be done by the whales of the political world?

A notable prophet for a coming age of smallness was the diplomat and historian George Kennan, a steward of the American Century with an uncanny ability to see past the seemingly-frozen geopolitical arrangements of the day. Kennan always believed that Soviet power would “run its course,” as he predicted back in 1951, just as the Cold War was getting under way, and again shortly after the Soviet Union collapsed, he suggested that a similar fate might await the United States. America has become a “monster country,” afflicted by a swollen bureaucracy and “the hubris of inordinate size,” he wrote in his 1993 book, “Around the Cragged Hill: A Personal and Political Philosophy.” Things might work better, he suggested, if the nation was “decentralized into something like a dozen constituent republics, absorbing not only the powers of the existing states but a considerable part of those of the present federal establishment.”

Kennan’s genius was to foresee that matters might take on an organic, a bottom-up, life of their own, especially in a society as dynamic and as creative as America. His spirit, the spirit of an anti-federalist modernist, can be glimpsed in an intriguing “mega-region” initiative encompassing greater San Diego County, next-door Imperial County and, to the immediate south of the U.S. border, Northern Baja, Mexico. Elected officials representing all three participating areas recently unveiled “Cali Baja, a Bi-National Mega-Region,” as the “international marketing brand” for the project.
The idea is to create a global economic powerhouse by combining San Diego’s proven abilities in scientific research and development with Imperial County’s abundance of inexpensive land and availability of water rights and Northern Baja’s manufacturing base, low labor costs and ability to supply the San Diego area with electricity during peak-use terms. Bilingualism, too, is a key—with the aim for all children on both sides of the border to be fluent in both English and Spanish. The project director is Christina Luhn, a Kansas native, historian and former staffer on the National Security Council in Ronald Reagan’s White House in the mid-1980s. Contemporary America as a unit of governance may be too big, even the perpetually-troubled state of California may be too big, she told me, by way of saying that the political and economic future may belong to the megaregions of the planet. Her conviction is that large systems tend not to endure—“they break apart, there’s chaos, and at some point, new things form,” she said.

The notion that small is better and even inevitable no doubt has some flavor of romance—even amounting to a kind of modern secular faith, girded by a raft of multi-disciplinary literature that may or may not be relevant. Luhn takes her philosophical cue not only from Kennan but also from the science writer and physicist M. Mitchell Waldrop, author of “Complexity: The Emerging Science at the Edge of Order and Chaos.”
Even for the hard-edged secessionist crowd, with their rapt attentiveness to America’s roots, popular texts in the future-trend genre mingle in their minds with the yellowed scrolls of the anti-federalists. “The cornerstone of my thought,” Daniel Miller of the Texas Nationalist Movement told me, is John Naisbitt’s 1995 best seller, “Global Paradox,” which celebrates the entrepreneurial ethos in positing that “the bigger the world economy, the more powerful its smallest players.”

More convincingly, the proposition that small trumps big is passing tests in real-life political and economic laboratories. For example, the U.S. ranked eighth in a survey of global innovation leadership released in March by the Boston Consulting Group and the National Association of Manufacturers—with the top rankings dominated by small countries led by the city-state republic of Singapore. The Thunderbird School of Global Management, based in Arizona, has called Singapore “the most future-oriented country in the world.” Historians can point to the spectacularly inventive city-states of Renaissance Italy as an example of the small truly making the beautiful.

How, though, to get from big to small? Secessionists like Texas’ Miller pledge a commitment to peaceful methods. History suggests skepticism on this score: Even the American republic was born in a violent revolution. These days, the Russian professor Igor Panarin, a former KGB analyst, has snagged publicity with his dystopian prediction of civil strife in a dismembered America whose jagged parts fall prey to foreign powers including Canada, Mexico and, in the case of Alaska, Russia, naturally.
Still, the precedent for any breakup of today’s America is not necessarily the one set by the musket-bearing colonists’ demanded departure from the British crown in the late 18th century or by the crisis-ridden dissolution of the U.S.S.R. at the end of the 20th century. Every empire, every too-big thing, fragments or shrinks according to its own unique character and to the age of history to which it belongs.

The most hopeful prospect for the USA, should the decentralization impulse prove irresistible, is for Americans to draw on their natural inventiveness and democratic tradition by patenting a formula for getting the job done in a gradual and cooperative way. In so doing, geopolitical history, and perhaps even a path for others, might be made, for the problem of bigness vexes political leviathans everywhere. In India, with its 1.2 billion people, there is an active discussion of whether things might work better if the nation-state was chopped up into 10 or so large city-states with broad writs of autonomy from New Delhi. Devolution may likewise be the future for the European continent—think Catalonia—and for the British Isles. Scotland, a leading source of Enlightenment ideas for America’s founding fathers, now has its own flourishing independence movement. Even China, held together by an aging autocracy, may not be able to resist the drift towards the smaller.

So why not America as the global leader of a devolution? America’s return to its origins—to its type—could turn out to be an act of creative political destruction, with “we the people” the better for it.

Secession?

People who deride the Electoral College in favor of the popular vote misunderstand the dynamic it creates to keep the union stronger and prevent regional secessionist movements. They often dismiss this argument by saying secessionist movements are archaic and unthinkable in modern times. Nothing could be less true. The Wall Street Journal and Associated Press reported on this issue recently and I reprint both articles in full:

Fighting to Secede

From Texas to Hawaii, these groups are fighting to secede

American secessionist groups today range from small startups with a few laptop computers to organized movements with meetings of delegates from several states.
The Middlebury Institute, a group that studies and supports the general cause of separatism and secessionism in the U.S., has held three Secession Congresses since its founding in 2004.

At the most recent gathering, held in New Hampshire last November, one discussion focused on creating a new federation potentially to be called “Novacadia,” consisting of present-day New Hampshire, Vermont, Maine, New Brunswick, Prince Edward Island and Nova Scotia. An article highlighted on the group’s Web site describes Denmark as a role-model for the potential country. In the months following the convention, the idea “did not actually evolve into very much,” says Kirkpatrick Sale, the institute’s director.

Below the Mason-Dixon Line, groups like the League of the South and Southern National Congress hold meetings of delegates. They discuss secession as a way of accomplishing goals like protecting the right to bear arms and tighter immigration policies. The Texas Nationalist Movement claims that over 250,000 Texans have signed a form affirming the organization’s goal of a Texas nation.

A religious group, Christian Exodus, formed in 2003 with the purpose of transforming what is today South Carolina into a sovereign, Christian-run state. According to a statement on its Web site, the group still supports the idea, but has learned that “the chains of our slavery and dependence on Godless government have more of a hold on us than can be broken by simply moving to another state.”

On the West Coast, elected officials representing greater San Diego County, Imperial County and Northern Baja, Mexico, have proposed creating a “mega-region” of the three areas called “Cali Baja, a Bi-National Mega-Region.”

Hawaii is home to numerous groups that work toward the goal of sovereignty, including Nation of Hawaii. The group argues that native Hawaiians were colonized and forced into statehood against their will and without fair process, and therefore have the right to decide how to govern themselves today. In Alaska, the Alaska Independence Party advocates for the state’s independence.

There is also a Web site for a group called North Star Republic, with a mission to establish a socialist republic in what today is Minnesota, Wisconsin and Michigan.

A group of American Indians led by activist Russell Means is working to establish the Republic of Lakotah, which would cover parts of North Dakota, South Dakota, Montana, Wyoming and Nebraska. In 2007, the Republic presented the U.S. State Department with a notice of withdrawal.

These efforts seem quixotic only because our national voting system helps mitigate the red-blue divide in our politics. But secession movements in the US would quickly become real if either the urban coasts or rural fly-over states were able to consistently dominate national politics. The EC helps prevent this by requiring a president to appeal geographically across regions.

Redistribution Even a Conservative Could Love

President Obama has made it clear in his campaign promises and his policy proposals that flattening economic inequality is an expressed goal of his administration. He has promised tax reductions for the bottom 50% of the population to be paid for by closing tax loopholes and raising taxes on the wealthy. The recent Chrysler workout seems to favor the UAW over shareholders and senior creditors. And in his pronouncements on Supreme Court appointments Obama stated he is looking for “pragmatic” candidates who will make judgments based on “empathy,” presumably for the have-nots or weaker members of society. One can only wonder how far these subjective, “political” judgments will go.

While noble in its oblige, Obama’s ideological stance has raised a vocal opposition to failed tax and redistribution schemes of the past and accusations of a socialist mentality. While “socialist” may be hyperbole, past failures of liberal tax and redistribution schemes are real. One can argue that robbing Peter to pay Paul will change Peter’s productive behavior, making them both poorer. Certainly this is what we observed with the command and control economies, as well as with the welfare states of Europe. So, how do we flatten inequality in a free market society without throwing the baby out with the bathwater?

The solution lies in recognizing the basic law of capitalist finance that risk and reward are positively correlated. More risk leads to higher expected returns or potential losses. This is a natural law of human behavior that we break at grave risk of unwelcome consequences – as we have experienced with the current credit crisis. It is the moral foundation of our contract law – responsibility is meted out so that the innocent should not pay for the mistakes of the guilty. It’s why we are so offended by bankers playing “heads we win, tails you lose” with other peoples’ money.

If risk and reward are positively correlated and we want to distribute the rewards more broadly, it stands to reason that the risks of capitalism must be spread more broadly as well. This doesn’t mean widows and orphans should be trading derivatives on Wall Street, but it does mean that the equity risks in a capitalist society must be spread in order to close the inequality gap. To do this by expropriation of the haves to give to the have-nots is a gross and unjust violation of the law stated above.

The best and most just way to redistribute wealth is to empower capital accumulation and diversification—in other words, encourage the have-nots to buy equity from the haves at the market price. No one can object to this voluntary transaction and we would be surprised how easy it could be accomplished by removing some of the tax disincentives to both parties (Zero capital taxes on the poor? Lower labor taxes, higher consumption taxes?). It is also concomitant that the law vigorously defend the rights of ownership, so those with power and influence cannot abuse shareholders’ interests. The regulatory authorities have failed in this capacity too often for us to take it for granted.

The left in the capitalist societies have too often associated shareholding with rich capitalists, but the public corporation spreads equity ownership to the masses – workers hold it now in their pensions and retirement funds. As workers they already carry the risks of the capitalist enterprise with unemployment, risks they rarely get paid for. In any event, labor is a cost on the wrong side of the profit equation. Thus, wage earners are constantly fighting international wage levels in a world of capital mobility. It’s time for the left to realize how the have-nots can buy membership into the capitalist club, rather than trying to storm the barricades or sneak through the backdoor.

Riding the Wave of Uncertainty

The financial crisis has become a national “Whodunit?” and our public watchdogs have finally fingered the prime suspect. It’s been contained in a little black box labeled “systemic risk.” The forensics team has lifted thousands of fingerprints and the national media is doing its part rounding up the culprits. Yet, systemic risk is still an abstraction and a tough explanation to get one’s mind around.

Systemic risk technically refers to the risk that is not “specific” to one company or industry, but to the larger market or economic universe over which no one has direct control. Nature gets hit by systemic risk in the form of ice ages and meteors that wipe out whole species. But mankind created exchange markets, not God or nature, so blaming systemic risk is essentially acknowledging that the entire “system” we created and in which we operate is rotten.

There is some truth to this. During this past annus horribilis the people who should have known better engineered and amplified systemic risk. The blame falls far and wide and has incited populist rage against capitalism and free markets. But, like guns, markets don’t kill people; they are little more than highly efficient information generators and allocation mechanisms. Instead, the fault lies with some of the financial and political rules and practices we’ve adopted that impede competition, obscure information, distort incentives, and constrain our abilities to manage our economic affairs. It doesn’t help that many people made out quite handsomely exploiting this degenerate state of affairs. But let’s not miss the forest for the trees.

The political buzzwords of the day are “uncertainty” and “lack of confidence,” spoken as if all we need do is conjure up a larger Hope that will slay our fears. But uncertainty is an ever-present fact of life. It’s the concomitant of change and it’s not going away. The heightened sense of uncertainty we face today is a function of the rapid pace of technological change, which most futurists expect to accelerate. Our economic crisis truly stems from our failure to adequately manage this change. Through mistakes of both ignorance and hubris, we’ve unnecessarily magnified the risks and uncertainties of our modern world. Just think of the difficulties of valuing a house these days—with a toxic mortgage? This is what’s holding up the world economy? Certainly the Romans must have had an easier time of it. Ultimately, we need to recognize that our problems result from violating the most basic rule of nature: in a world of change, if you want to adapt and survive, diversify.

When we talk about finance we’re talking about an industry that grew out of the need to manage the risks of uncertainty. Banking began with the risks of transporting goods and money across great distances, giving rise to letters of credit. Capital markets started by pooling funds to underwrite the capital investment and risks of fleets of ships laden with goods traveling halfway around the world. Today’s financial derivatives are innovative attempts to repackage risks and allocate them according to the preferences of market participants. When we successfully manage and lower risk, risk-adjusted returns are enhanced, creating value and wealth. This is the logic behind the insurance industry as well. But when we botch it, well, we get financial contagion marked by a sharp contraction of inflated credit and economic activity. After the reset, we begin again at lower valuations.

So how do we avoid botching it? By more diligently applying the lessons of Mother Nature. The recent meltdown of mortgage-backed securities has supposedly discredited the theory of financial asset diversification. But this is a false conclusion. According to Harry Markowitz, Nobel Prize winner and father of modern portfolio theory, the financial wizards who bundled complex mortgage-backed and other collateralized debt obligations violated the first principle of asset diversification. "Diversifying sufficiently among uncorrelated risks can reduce portfolio risk toward zero," he says, "but financial engineers should know that's not true of a portfolio of correlated risks."

Basically, securitization is meant to pool uncorrelated risky assets—when one asset goes down in price it’s just as likely that another will go up, insuring the overall valuation of the pool. But since these instruments were all backed by the same worldwide housing bubble driven by low interest rates, all the risks were correlated and the securities went down like a row of dominoes.

Other critics have mistakenly applied the logic of portfolio diversification to firm diversification – arguing that diversified financial firms became too big to fail. But the era of conglomeration taught us there’s always an economic trade-off between diversification and specialization at the firm level. Unfortunately, financial firms were encouraged with implied government guarantees to test the limits of their business models. This was not the fault of diversification or caused by the repeal of Glass-Steagal.

Diversification means not putting all your eggs in one basket. It means not having all your financial wealth in your house, or one stock, one company, or one highly specialized job or skill. Diversification means investing in a varied skill set, a broad education, and social and political capital. Diversification means developing family and community networks. It means taking care of your health, buying insurance, and building self-insurance with savings.

On the national level, diversification means individuation, open competition and exchange markets – a country that marches in lockstep should set off alarm bells in our heads. This applies to economic policy as well as politics. Diversification means freedom, free will and sometimes being different. A diversified society is an interdependent, yet resilient society—it benefits from a diversity of ideas and cultures. It’s not one big cradle-to-grave social insurance pool, but the anti-thesis of universalism and nationalization. Diversification is what makes America great and what saves mankind from going the way of the dodo.

Change We Can Believe In?

Jay Cost, over at RealClearPolitics, had an excellent post yesterday on his HorseRace Blog (the site link is on my link sidebar). You can read it here.
This is his lead-in:

The recent Pew poll has found that President Obama's job approval is the most polarized for any new President in forty years:

He's got a lot more data that shows how this partisan polarization is still driving our politics. As we have long maintained here, this will not be changed from the top down by Obama or anyone else, but only from the bottom up with a change in voters' attitudes and a reconciliation of values across urban and rural spaces.

Making Homes Affordable?

The US Treasury released guidelines to the new “Making Homes Affordable” scheme. Making homes affordable? So, they are priced too high?

Memo to Washington: Let the prices drop.

What kind of Orwellian world are we living in?

Bipartisanship?

Good one.

Scared of the 800-lb. Gorilla?

Went to an interesting symposium on the economic crisis and the Obama policy response/spending bill yesterday. Two economists, Tom Campbell and Barry Eichengreen, gave their interpretations. What struck me was that nobody, especially nobody in politics, seems to want talk about the 800-lb. gorilla in the room. This beast is the pervasive uncertainty associated with price discovery roiling all markets and asset classes. This 800-lb. gorilla is partly psychological but also real, so perhaps we can talk about the big gorilla and his even bigger shadow.

Policymakers don't want to bring too much attention to the gorilla for fearing of scaring the public with his imposing shadow. But in so doing they seem to be pushing a form of denial that is also reflected in the proffered policies. Most of these policies seem targeted to further obscure prices or prop them up. Obama's proposal to throw another $275 BILLION at foreclosures in the housing market is a case in point.

The necessity of price discovery is crucial to clean up the banks and get credit flowing again. What do we think these toxic assets are? They're assets that nobody can agree how to value (most of them based on unrealistic housing prices). The market has depreciated these assets to 30-40 cents on the dollar, but the owners (banks) think they're worth more, but can't sell them and are hoping the government (i.e, sucker taxpayer) will buy them at par. At least that pig didn't fly. But if we don't discover prices on this toxic dump we can expect years of zombie banks in our midst. Expect some nationalizations and then break-ups.

True price discovery is also crucial to getting the housing market off the mat. Nobody is going to buy overpriced housing no matter how cheap and available credit is, and nobody is going to convince them that prices have stabilized by virtue of directives or hopeful words from Washington. What's a house worth anyway? The "bigger fool" strategy is history for now. Let's try a historical metric of cashflows off implicit rents or median incomes and we'll get an idea. A house that rents for $5000 a month is worth maybe $900K. Rents for $1500/mo. = $270K. But policymakers want to stabilize house prices based on inflated mortgages. Ain't gonna work. Just more wasted dollars...

But why? How are we helping things by encouraging people to buy or stay in overpriced homes they can't afford and then sticking them with the bill over the next 20-30 years? Are we searching for new ways to impoverish these people? How are they going to pay for the expenses of old age? Wonder how that's gonna work with our entitlement reform?

Bottom line is that nobody wants to adjust housing prices to the downside. But there's no other way out of this mess. Securitized mortgage money is gone...buying power is a fraction of what it was in 2006. Let's get real instead of throwing good money after bad. Indications are this is gonna take longer than we think.

Joe the Renter?

Date: February 6, 2009
Re: A memo from Joe the Renter

Dear Congresspersons, Senators and Mr. President,

We are in the midst of a serious economic correction and the causes are quite complex. As a prospective home buyer allow me to narrowly focus on the state of the housing market. There have been many calls from the Capitol to save home owners facing foreclosure – a moratorium on foreclosures, new government-subsidized fixed rate mortgages, loan renegotiations, and bailouts for lenders. (BTW, these owners underwater don't want to be saved and tethered to their bad investments - they want to be liberated.) But precious little has been focused on the people who can afford and wish to buy a home. Don’t we want buyers to re-enter the market?

For a home buyer, I have the desired qualifications: middle-aged, recently married, with a combined income that varies between $80-150K, zero debt, a credit score over 800 and roughly $300K cash that could be put toward equity. What matters most to me is the size of the mortgage and the prospects for price stability or, better yet, long-term appreciation. In the long-term it doesn’t matter that I might get a $7500 purchase tax credit or a low interest rate because these factors will just keep asking prices higher and increase the size of my mortgage principal owed. You could offer me limitless funds at 0%, but I still will not borrow to buy an asset that is overpriced based on cash flow fundamentals.

The problem in a nutshell is our national housing stock is overvalued by almost any economic measure we use, whether it be median incomes, imputed rents or national GDP. Currently we rent a 2200 sq. ft. home for $2800/mo. Comparable houses in the area of Los Angeles where we live have asking prices of $1.2-1.5 million. Buying just doesn’t compute. Because we live in a dense urban area of Southern California I know many other families in the same predicament – on the sidelines with cash waiting for a rational market to return. In the current environment we will all continue to rent and put our investments elsewhere.

You might think my take on this is self-interested, and I would wholeheartedly agree. But my actions have been financially prudent. I need to save money for retirement, not throw it away on overpriced housing. I did not “roll the dice” on subsidized housing with other peoples’ money. But the nation is in the same boat.

We made bad investments in an asset bubble. We need to correct these prices, not distort all the other prices in our economy. Otherwise we will be in a deeper hole when it comes to financing our retirements. We can make housing affordable in this country if we stop subsidizing it over other investment classes and let it return to true market value. The political challenge will be how to manage the losses this will incur to those who were not so prudent – buyers, lenders, banks and investors. I suggest you leave us taxpayers out of it as much as possible.

Sincerely, Joe the Renter

P.S. While I am an average citizen and home buyer, perhaps I am not the typical voter. I’m a macroeconomist, finance MBA and political scientist. I hold doctoral, masters and bachelor degrees in these three disciplines, all from top-ranked schools. Thus, I am one of the so-called “experts” you often consult for policy advice. Please take it into consideration.

A Crisis in Prices

Dick Armey wrote an op-ed in today's WSJ applying the lessons of Hayek to the financial crisis. In this case, Hayek provides the right diagnosis - the problem we have is in the price system. Government spending can and usually does distort the price system in unintended and counter-productive ways. And it does little to address the immediate problem of flagging confidence.

The present crisis is marked by the distortion and uncertainty of prices that has instigated a lack of confidence in risk-taking behavior. When prices readjust, confidence will slowly return, but we can't wait that long. A stimulus bill focused on demand will not correct prices and affect the crisis in confidence until it affects the real economy a year or two out, but we can't wait that long. Think how long it took for New Deal policies to have a positive effect on the Great Depression. Anybody want to wait that long?

Policy should be directed at those signals that will have an immediate psychological impact: permanent reductions in taxes on productive activity. Commitment to compensate for the dislocation costs of this economic correction through automatic stabilizers can also help alleviate consumer and employment fears. The system's imbalances need to correct, but it's the continued uncertainty that will exact a greater cost.

Our current crapshoot politics and best-guess economic policy may be the worst alternative that may come all too soon.

Mortgage Slaves?

Finally, someone has spoken the unspeakable on the foreclosure crisis. In today's WSJ there's an op-ed titled, "Why Be a Nation of Mortgage Slaves?" (subscription req'd).

The politicians have been spouting off for months on this--how it's horrible that homeowners have been the victims of the mortgage crisis and how they need a bailout or foreclosure moratorium to stay in their homes. These pols are blowing smoke. Nobody, I mean nobody, in their right mind wants to be forced to pay an oversized mortgage for an undersized house for the next 30 years. The question is who takes the haircut on these white elephants? The homeowner, the lender, the investor, or the taxpayer? Morally, I think the taxpayer should be absolutely last on this dance card.

I wrote on this before in my blog on Foreclosure Myths. Hopefully we can move the public conversation towards some kind of economic logic. If we want to make houses affordable, all we need to do is stop subsidizing them and let prices fall to a natural level based on comparable rents. We've got a long way to go.

Mass Confusion in Washington

Perhaps Washington's policy confusion will take a brief 2-day holiday next week, but then it's back to the hair of the dog that bit us. The confusion seems to be about what to do about the economy. All the talk is about which "stimulus" plan will give the most bang for the buck. Should we spend big on infrastructure? Pump up the private credit markets? Save homeowners? Increase social insurance payments? Increase tax cuts to business? Subsidize "green" energy? Bail out failing industries? Drop dollars from helicopters? All of the above? (If you're expecting our new president to magically come up with the right answers, you're living on a whim and a prayer.)

These folks seem to be missing the lesson the market has taken great pains to teach us. Almost all these options focus on pumping up collapsed demand - yet the demand collapsed because it was running on hot air. The real problem is that quibbling over whether a dollar of infrastructure spending or unemployment insurance yields more than a dollar of tax cuts is like rearranging the deck chairs on the Titanic. Now the Fed is even considering targeting a positive rate of inflation, so people can be assured that their balance sheets will gradually strengthen as their real wealth slowly vanishes.

Instead we should be focusing on how to get people back to acting on their risk-taking animal spirits. (People, mind you, private individuals--not government or its servants.)

We need to reexamine some simple economic truths:
1. Governments don't create jobs, private entrepreneurs and businesses do.
2. Governments don't create industries either, risk-taking investors and businesses do.
3. Inflating demand that is not built upon increased productivity and production is a form of illusion. Giving people money they can never pay back to buy stuff they don't need isn't going to fill anyone's coffers with profits, only losses.
4. National economies grow when people work more, produce more, save, consume and invest. Government can't accelerate this train by pumping up one or another of these activities.
5. The best any government can do is set up the rules of the game and the playing field so private citizens can produce wealth. Then get out of the way.

We can see that very few of the policy proposals square with these fundamental economic truths. The problem we face now is that we've allowed behavioral incentives to become distorted to favor some actors over others. We bred excess and then fed it. Now government is leaving its big paw prints over everything. This only counteracts any positive incentives that may arise from this financial correction.

Asset prices, especially housing, have been totally distorted by the vicissitudes of policy. Public pronouncements of what prices "should" be can only add to the uncertainty. Some corporate and private balance sheets are flush with cash, but as long as the distortion and uncertainty goes on, the longer they will stand on the sidelines and wait. The bigger danger of the housing market is that it will take years to reach economically rational prices, not that it will get oversold.

We should be providing clear positive incentives to all economic actors that directly bear upon their risk-return calculations and reduce their perceptions of uncertainty. Naturally, I favor tax cuts targeted to productive effort. No subsidies, bail outs or guarantees on outcomes. And it would be reassuring to know a dollar will still be worth a dollar next year.

As our policy-makers dither over different proposals to put Humpty back together again I hope they will focus on answering one question: will this policy encourage actors to take prudent risks without engendering moral hazard?

If the answer is not a resounding yes, let's skip it and leave well enough alone.

Comprehensive Election Analysis

Jay Cost and Sean Trende of RealClearPolitics posted the first installment of their 2008 election analysis today. You can find it here and it's pretty accurate in its interpretation. Their manipulation of the data cuts through most of the nonsense promoted by the media.

In short, there is still a significant urban-rural red-blue divide and Obama benefited mostly from the racial vote, both black and white. Thus, there is probably no real ideological shift within the electorate and Obama's fate will probably rest on the economy and any national security surprises. This is consistent with my own findings.

Party and Election Analysis

Excellent analysis in RCP on the current state of party politics in the US by David Paul Kuhn: "Democrats' Year: Less Change Than Chance." This is as close to the reality as I've seen as Kuhn points out the strengths and weaknesses of the Obama phenomenon.