Purple Nation

Review of "Freefall" by Joseph Stiglitz

2010-10-29T13:27:00.000-07:00

Freefall by Joseph Stiglitz:

Even if one disagrees with Stiglitz's ideological biases, this exposition of recent economic events is excellent, both accurate and fair in its criticisms. Stiglitz also provides a good discussion of the trade imbalances that afflict the world economy, as globalization is his specialty. Best is the challenges he presents to his fellow economists. But it's not without its blemishes. Since I have given the book five stars I will skip over the kudos and address its weaknesses.

Stiglitz sets up a weak strawman in market "fundamentalism," as most serious free market advocates eschew dogma and see a limited role for government, especially to insure open and competitive markets. Stiglitz himself admits the dominant role of markets and only argues for a subjective "balance" between govt regulation and markets. This continuum can be freely debated, as many of the recent market failures stemmed from circumventing free market principles. Most of the violations Stiglitz cites boil down to inside actors using political or economic power to secure "heads we win, tails you lose" outcomes. This is what happened across the banking system as we privatized the returns and socialized the risks with bailouts. A functioning market economy relies on trust and must prevent blatant violations of the rules of voluntary exchange. Thus the crisis was not a repudiation of free markets, it was both a failure of risk management and a warning regarding the abuse of market principles.

The policy debate over govt regulation too often slips into the idea of the regulatory bureaucrat rather than the dynamics of self-regulation based upon competing interests. Our political democracy relies on competing interests and a governing structure for checks and balances, with minimal monitoring. Our market structures should strive to do the same with competitors policing each other. Stiglitz mostly steers clear of this distinction while conceding that much of the blame for the financial crisis was the agency problem that befell not only the private sector, but also the public sector. Regulatory "capture" is a serious concern for regulating the financial sector.

Stiglitz correctly castigates the Bush and Obama administrations for laxness and ineptness in managing the crisis, but whitewashes the Clinton years, when much of the financial deregulation was enacted. The Clinton regime was instrumental to the Democratic courtship of Wall Street and Stiglitz himself was a prominent Clinton economic adviser. Obama has picked up where Clinton left off, reappointing many from his team. (Hope and change turned out to be more of the same.) For its part, Wall Street is an equal opportunity player in Washington.

The most controversial issue is probably Stiglitz's unwavering support of Keynesian demand stimulus. There is reason to suspect this cure-all for a deflating economy, but Stiglitz dismisses all doubts. However, the effectiveness of demand stimulus depends on the Keynesian multiplier, which in turn depends on a healthy banking system extending credit in response to credit demand from the private sector. In the aftermath of a debt deflation, both of these conditions fail in robustness. With a balance sheet recession, it may well be that the Keynesian multiplier is closer to zero than the hoped for 1.5. Another way to look at this is that Keynesian policies may be appropriate after a collapse in prices due to massive deleveraging but much less effective in preventing that collapse. The Japanese experience suggests that propping up a zombie banking system can dangerously prolong the post-bust correction. In this context the Fed's policy of reflation is likely to yield more crippling asset bubbles.

The most productive discussion is when Stiglitz turns on his fellow economists. His criticism of the dominant neoclassical paradigm is spot on, especially when it comes to macroeconomic theory. Our current macropolicies are so confused because our theoretical tools are less useful in a nonlinear world and this is especially true in the world of finance. Rational actor assumptions have limited value in a real world where people are loss averse, heterogeneous and adaptable in their preferences, and show a tendency to herd behavior. Our most intractable policy problems are those of skewed or maldistributions, whether they be income and wealth inequality, global warming, health care, hunger or energy. Mathematical models based on fixed preferences, simultaneous equations, and equilibrium conditions are not amenable to distributional dynamics. Thus, the solution to inequality always regresses back to initial conditions, like education or material endowments. Instead, our policies should be addressing the access and distribution of financial capital and the dynamics of our financial markets. The rich are getting richer off their leveraged capital and political influence, not their good looks or brains.

Given that managing uncertainty may be the best we can do in public policy, Stiglitz correctly argues for the dominant role of risk management. But he also fails to consider how risk and uncertainty is most effectively managed through decentralization and diversification. This is accomplished through wide and deep markets. Social insurance pooling may be an important corollary to private risk management where private markets are incomplete, but is far less efficient and prone to unmanageable moral hazard costs. Think how many would choose to cash in their 401(k) or private pension for Social Security promises, or their private health insurance for Medicare? The bottom line is that health care and retirement funding are private goods and forcing them into the public goods model only hampers their production and distribution. We may need a safety net, but that's as much as the empirical data supports. Entitlement reform will require private substitutes and this makes it critical we insure that markets function as intended. This may be the best argument for financial market reform.

I suppose one could write a book instead of a review, but Stiglitz has already written one that offers the reader much food for thought. I suggest not taking anything for granted, as Stiglitz has his own ideological agenda to hoe. But he does a very commendable job in debunking much of the partisan-motivated bloviating.

Geithner's Gamble

2010-07-19T08:52:00.000-07:00

The recent G-20 summit in Toronto has provoked a contentious debate over world economic policy. The US economic troika of Treasury Secretary Geithner, NEC director Summers, and Fed Chairman Bernanke are pushing a reluctant European Union to accelerate fiscal stimulus and rescue the debt-laden economies of its weakest members. In their eyes, the singular objective is strong, balanced, and sustainable growth as they conjure up fear of another Great Depression. The Europeans counter that such advice is economically unreasonable and politically inappropriate. Furthermore, it demonstrates a profound lack of understanding of European realities. Faced with the unsustainable public spending of Greece, Spain, Portugal and Italy, they argue that sustainable growth cannot be not based on governments injecting cash they don't have, with mere hopes of fiscal restraint. Probably thinking more of the Weimar Republic than the Great Depression, their voting publics seem to agree.

Thus, the debate appears to have reached an impasse. But the Europeans are likely to blink first when confronted with the pain of near-term deflation and deleveraging. Unfortunately, the Geithner plan (or GSB for short; for conspiracy theorists, the acronym's resemblance to "Goldman Sachs bank" is purely coincidental) looks more and more like a Hail Mary pass in a game of fantasy policymaking. It embraces a stark contradiction between unrestrained fiscal stimulus in a political environment that is panicking over excessive debt. So GSB asks for credible plans to stabilize debt-to-GDP levels, while warning against withdrawing fiscal stimulus. It reminds one of St. Augustine's lament to God: "Give me chastity and continence, but not just yet."

Regrettably, these macroeconomic debates are distracting us from some stubborn economic truths that become more apparent at the micro level. In other words, what people are doing at the individual and firm level in their daily lives. I will argue that the GSB plan is unlikely to succeed because it fails to directly address the gross incentive distortions of these underlying behavioral functions that underpin all macroeconomic models.

We know for economies to grow, people need to work, save, invest, and consume, no matter what national flag they fly. However, we hear that the citizens of developed countries save too little and consume too much while those in emerging nations do the opposite. Macroeconomics assures us these will balance out in the long run – reality tells us in the long run we are all dead, maybe sooner. Look closely: GSB warns how imbalances must be corrected, but then advocates policies that reinforce the wrong behaviors. For example, US consumers need to pay down excessive debt by saving more and consuming less. But that has negative consequences for GDP and job growth. So US economic policy subsidizes low interest rates, punishing savers and rewarding profligate debtors. At the same time our leadership has recklessly increasing fiscal spending and borrowing, incurring new liabilities for taxpayers with bailouts that prevent prices from reaching an equilibrium. Without accurate prices, people who need to decide the proper mix between consuming, saving, and investing are flying blind. The result is that any surplus funds sit idly in the piggy bank rather than being invested.

One doesn’t need an economics degree to figure out the consequences of distorting incentives to such a degree: less saving, more consumption, and excessive liquidity that doesn't find its way into new production. This yields few new jobs and anemic GDP growth that more reflects trading in asset bubbles rather than the production of new goods and services. On an international basis, this only encourages export-led countries like China, India, and Germany to continue providing credit in order to buy their export goods. The game goes on until the next collapse. With each failure, politicians demand more power and control to do the wrong things. Yes, uncertainty and loss of confidence bedevil the best intentions.

Is this really the best course we can follow? Hardly.

First, the Geithner spin on the current financial environment is probably overly optimistic. Low interest rates and low Treasury rates are less a sign of confidence than a costly premium on liquidity in an environment that is deleveraging in the private sector and exploding with new debt in the public sector. GSB cannot speak to these truths until it becomes politically expedient, but if the stock market recovery is real, we should expect a broadening of support across all sectors and firm sizes. If it reverses or narrows with mergers and acquisitions, the booming market is more likely a sign of excess liquidity.

Second, yes, we run a real risk of a sustained deflationary environment, but the fears of deflation and deleveraging causing the next Great Depression are overblown. Most scholars conclude that the Depression was not caused by lack of spending, but overly restrictive monetary policy and that the fiscal stimulus of the New Deal most likely prolonged the downturn. Bernanke insures us under his command there is little chance of overly restrictive monetary policy. His hand will only be forced by the bond market and Treasury yields.

More important, the policies of the last twenty plus years have rewarded debtors and asset holders to the detriment of savers and workers. It's time to redress this imbalance if we wish to return to a sustainable path. We may need controlled deflation rather than controlled inflation. While certain financial interests (i.e., debtors and debt leveraging) will strongly object to changing the rules of the game, financial prudence has been on the short end of national economic policy for far too long.

Lastly, the most challenging political task is to advocate for an international economic model that recognizes and reinforces the basic formula for wealth creation: hard work, restrained consumption, and prudent saving and investing. National success is less about maximizing GDP growth than it is about the distribution of resources across time and across populations to insure sustainability and stability over the long run. A sustainable market system must be able to manage demographic and technological cycles, but our abilities are only hampered by credit-debt cycles that are engineered purely through bad policy.

This goes for emerging economies like China and India as well. A society that does not consume, has little reason to save and invest, and a society that does not save and invest has little to consume. This probably means slower but more stable growth with fewer reversals. It probably means more equity investment than debt. But we have seen the alternative and it is a casino. A return to fundamentals is the only way we can fulfill our commitment to raise living standards across all countries far into the future.

The Politics of Risk and the Risk of Politics

2010-06-23T14:10:00.000-07:00

Barack Obama has reached for the mantle of a transformative presidency, aspiring to recast our national social contract in the interest of greater equality and fairness. In cooperation with a Democratic-controlled Congress, he has pursued this goal by expanding Federal authority in response to economic crises and supporting interventions into finance and banking, automobile manufacturing, health care, and environmental policy. This strategy adopts the “statist” philosophy of economic risk management by centralizing governmental authority and control over private markets.

Ironically, this Europeanization of US public policy is occurring exactly when sovereign debt crises and taxpayer bailouts are casting an ominous cloud over the European model. It seems public sector risk may turn out to be more dangerous than private sector risk. But if we can connect recurring financial crises to the long-term erosion in the economic health of states, we should seriously question whether statism offers the best array of policies to manage the uncertainties of the modern world.

Let us begin with the international financial crisis. A surplus of world savings channeled by excess credit creation drove people in the developed world to overborrow and concentrate debt and risk in overpriced housing assets. Banks then distilled these risky assets in securitized debt obligations and sold them to investors worldwide. What ensued was risk mismanagement on a colossal scale, as the concentration of leveraged debt made the crash far worse than dotcom or tulip bulb mania. This shell game violated all we know about prudent risk management and sucked in politicians, central bankers, financiers, the housing industry, and citizens alike.

The response has been to substitute massive public credit for shrinking private credit, while seeking new means to regulate financial risk and reward. This sounds a bit too much like the dog that bit us. In terms of public policy it means more centralized political control over central banks and the financial sector, with unpredictable market distortions yielding more liabilities and burdens for taxpayers. The net result will be an increase in systemic risk exposure.

Let us now turn to the crisis of welfare statism. The modern social welfare state is more accurately labeled the social insurance state, as its spending priorities are dominated by programs related to old age pensions, health care, and the risks of unemployment and poverty. Social insurance has been the developed world’s primary political response to systemic risk. Regrettably, it may impose the least efficient means to manage risk, with the most costly consequences.

Financial risk is managed by saving, pooling, hedging and, most important, asset diversification. The key concepts are savings and diversification, as these underpin the logic of insurance pooling. A financially sound insurance pool must align contribution and benefit ratios according to known actuarial data and demographic trends. The Bismarckian model of social insurance faces the same criteria.

The inconvenient truth is that our social insurance programs, like Social Security and Medicare, are not really insurance pools, but pay-as-you-go transfer schemes. We tax younger workers to immediately pay out benefits to older, retired citizens. This design inflicts a host of problems and costs.

First is the agency problem. Pay-as-you-go means our Social Security and Medicare taxes have not been saved in a “trust” fund, rather they are doled out in benefit promises and used to fund other political priorities through general revenues. This is the problem of political and bureaucratic “agents” following their own short-term incentives. This is also how we get “too big to fail” and runaway budgets.

The second problem is moral hazard. Because taxes to fund entitlement transfers crowd out private savings and lead us to believe the government is saving for us, private savings decrease. This means we cannot adequately fund the economic growth necessary to fund future social insurance liabilities. The alternative has been to borrow from abroad, mostly from the Chinese.

The third problem is demographics, as birth rates decline and longevity increases. We have heard how the “trust” funds will run out or overburden younger workers as baby boomers age.

We can readily measure the consequences of our policy failures in societal risk management. Household savings rates in the U.S. have dropped from an average of 10% in the 1970s to less than 1% just before the financial crisis in 2008. The immediate response to the crisis jumped the rate to 6%, but this was offset by roughly a trillion dollars in new public debt. (Estimates for China’s household savings rate range from 25-50%)

US public debt as a percentage of GDP now fluctuates around 80%. This compares to Japan at 192%, Italy at 115%, Greece at 108%, France at 80%, and Germany at 77%. Chile, which privatized its social insurance three decades ago, services a public debt at 9% of GDP.

Our current account deficit, which measures how much more we import than export, persists at 3% of GDP while China runs a 6% surplus. In simplest terms, the Chinese are lending us money to buy their goods.

A recent survey by the Peter G. Peterson Foundation of US political leaders from both parties found unanimous agreement that US structural deficits due to entitlement programs would cause a financial collapse of US public finances within ten years unless the programs were reformed.

The reality is that a true national insurance program cannot be a shell game that transfers resources from one group to another. The nation must accumulate real savings to be invested to fund future needs. The danger of our current treatment of risk management through entitlements is that we are not really insuring against our risks, but merely passing them on to others. This is neither moral, nor economically viable.

Our only chance of solving these problems must focus on managing economic risk by boosting savings and promoting the widespread diversification of assets. The increased concentration of political, economic, and financial power currently dominating the developed world is antithetical to such solutions and financial reform should not risk reinforcing a Wall Street-Washington oligarchy. This gets us back to the regulation of finance and banking.

The unfocused blame put on markets for our financial crises is disingenuous. The heavy reliance on credit and debt, the opacity of financial technology, the capture of regulatory agencies by the industries they regulate, and volatile asset markets are all symptoms of misguided policies. History and theory have both shown how functioning private markets are most efficient in allocating and managing diversified risk. The best financial regulation, then, is not another politicized agency, but the continued promotion of open, competitive, and transparent financial markets. The caveat for financiers is that failure and bankruptcy are essential features of free markets.

A world described by risk and uncertainty is like a sea full of hidden icebergs. Politicians like to reinforce social solidarity and national cohesion by claiming we are all in the same boat and must pull together. Mr. Obama seems to favor this metaphor, but, in terms of systemic risk, it also fits the Titanic analogy. A more useful metaphor is that we are all in different boats on the same sea. This can apply to countries, states, cities, markets, workplaces, and families. The multiplicity and diversity of institutional structures is a lesson conveyed by nature through biodiversity—all we need do is apply the lesson.

As one Greek citizen was quoted on his country’s latest crisis: “It could be a chance to overhaul the whole rancid system and create a state that actually works.”

The Cast of Villains in the Financial Crisis

2010-04-27T08:12:00.001-07:00

Good article in the NYTimes outlining the full cast of characters in the financial crisis. A full cast still on the stage...
This is what I call Casino Capitalism and Crapshoot Politics.

Tea Parties = CAP

2010-04-19T10:17:00.000-07:00

Michael Barone's article addresses the nature of the anti-political backlash of the Tea Parties. It's is the same thing I have described as American citizens' political demands for choice, autonomy, and minimal protection from risks they can't control.

The media portrayal of the Tea Party phenomenon is misleading and can only hurt those who dismiss TPs as a fringe movement in the coming elections.

Let's Get Real.

2010-04-08T15:39:00.000-07:00

I love this excerpt from Peggy Noonan's article in the WSJ:

This week's Financial Industry Inquiry Commission hearings were so exciting, such a public service. The testimony of Charles Prince, former CEO of Citigroup, a too-big-to-fail bank that received $45 billion in bailouts and $300 billion in taxpayer guarantees, was riveting. You've seen it on the news, but if you were watching it live on C-Span, the stark power of his brutal candor was breathtaking. This, as you know, is what he said:

"Let's be real. This is what happened the past 10 years. You, for political reasons, both Republicans and Democrats, finagled the mortgage system so that people who make, like, zero dollars a year were given mortgages for $600,000 houses. You got to run around and crow about how under your watch everyone became a homeowner. You shook down the taxpayer and hoped for the best.

"Democrats did it because they thought it would make everyone Democrats: 'Look what I give you!' Republicans did it because they thought it would make everyone Republicans: 'I'm a homeowner, I've got a stake, don't raise my property taxes, get off my lawn!' And Wall Street? We went to town, baby. We bundled the mortgages and sold them to fools, or we held them, called them assets, and made believe everyone would pay their mortgage. As if we cared. We invented financial instruments so complicated no one, even the people who sold them, understood what they were.

"You're finaglers and we're finaglers. I play for dollars, you play for votes. In our own ways we're all thieves. We would be called desperadoes if we weren't so boring, so utterly banal in our soft-jawed, full-jowled selfishness. If there were any justice, we'd be forced to duel, with the peasants of America holding our cloaks. Only we'd both make sure we missed, wouldn't we?"
--------
OK, Charles Prince didn't say that. Just wanted to get your blood going. Mr. Prince would never say something so dramatic and intemperate. I made it up. It wasn't on the news because it didn't happen.

It would be kind of a breath of fresh air though, wouldn't it?

Alan Greenspan on the Financial Collapse

2010-04-01T10:01:00.003-07:00

Have to agree. Greenie gets it only half right. Bubbles thrive on leveraged credit. The Fed can easily dampen excess leverage and also send the right signals to the shadow banking system to reduce moral hazard. We didn't get the "Greenspan Put" from the Easter Bunny.

Alan Greenspan on the Financial Collapse

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Debt Crisis = A Failed Policy Paradigm

2010-01-07T12:36:00.001-08:00

The financial crisis of 2008 paved the way for the employment crisis of 2009, which has now paved the way for the upcoming public finance crisis of 2010. Most federal, state and municipal budgets are strained to the breaking point while the economy still has not found its footing. Meanwhile our national politics is obsessed with expensive overhauls of environmental policy and healthcare reform. Our latest policy strategy is an attempt to borrow and spend our way to prosperity, ala Japan of the past twenty years.

It’s tempting to point to a few simple causes of these economic misfortunes, such as mortgage subsidies, loose credit standards, or excess financial leverage, but the truth is that we are experiencing the fallout of a failed policy paradigm.

This paradigm was rooted in the past century with the creation of the Federal Reserve in 1913, the Employment Act of 1946 and the Humphrey-Hawkins Full Employment and Stabilization Act of 1978. It’s a paradigm dependent on many admittedly useful policy tools, including both Keynesian demand stimulus and the Austrian school’s theory of money and credit, the monetarism of Friedman, as well as the supply-siders of the 1980s.

So, in what ways have these approaches failed?

The policy goals are clearly stated: stable GDP growth and full employment. But the economic results have been decidedly mixed: the growth of real incomes laden with an exploding entitlement state, structural budget crises, widening wealth disparities, a catastrophe-prone banking system, and volatile asset markets. We’ve heard the term “systemic risk” bandied about the recent financial crisis, but this report card captures the true risks of the system we’ve created.

Politically and socially, Americans clearly want a society where a growing middle class thrives, opportunity exists for individual success and advancement, and a prosperous elite accepts the responsibilities of power not to exploit the weak and disadvantaged. Instead, our political economy is hollowing out the middle class, creating more dependency among the poor, and fostering a culture of corruption and irresponsibility among the elites . Elsewhere I’ve characterized this current state of affairs as Casino Capitalism and Crapshoot Politics.

Second question: why has our democratic politics failed to deliver? The short answer: Our government is doing too much of what it shouldn’t be doing and not enough of what it should.

Free market economies are very good at producing wealth by harnessing the incentives of market participants. Market prices are valuable information signals that tell everyone how much of each good to produce. Governments, however, no matter how enlightened, cannot attain this efficiency. But, due to the political imperative to “do something” in response to countless demands, they feel compelled to try. Thus the focus on “growing the economy” and “creating jobs.”

Unfortunately, these goals often demand incompatible policies, highlighting the differences between the private and public sectors. Private firms earn profits (i.e., create wealth) by increasing productivity, often by reducing labor costs. However, the public sector follows no profit criteria, so the government increases employment without attention to productivity. Thus, with more public sector jobs we create more employment while producing less. At the same time, the growth of the public sector empowers a politically powerful public union interest in its continued expansion. This is no way for a nation to grow rich.

When we peal away the logic we find the true goal of public sector job creation: political redistribution of the economy’s wealth-creating capacity in order to mitigate the effects of markets. This is not an unworthy societal goal, but our public policies adopt counterproductive means to achieve it.

To be fair, the political problem arises because private markets are agnostic towards the distributional effects of their success. Inequality, poverty, pollution, environmental degradation, the concentration of economic and political power—all these are unfavorable distributional effects of markets that give rise to political demands. The question is over how government should meet these demands.

The 20th century attempt to tax and redistribute wealth has landed the modern welfare state in a cul-de-sac of exploding budgets, rising costs of living, slower economic growth and structural unemployment. We’re robbing Peter to pay Paul and neither – except for a relative handful of bureaucrats and rent-seeking capitalists - is better off for it. This adds up to less opportunity all around. Again, the problem is with our failed paradigm. We need to align our policies with behavioral incentives without surrendering our policy goals to an agnostic market mechanism.

To construct a new paradigm we might do best to return to first principles of what Americans want: freedom, opportunity and justice. In order to enjoy these principles, citizens need to be empowered with choice, autonomy, and protection from unmanageable risks. Only functioning free and competitive markets can provide the necessary resources.

So, what should be the proper role for government?

The maldistribution of resources can be mitigated if citizens participate in the wealth creating process as more than an input labor cost. Public policy should cease deficit spending to promote employment and instead look to creating the necessary environment for private risk-taking, saving, investment, and production. This includes insuring market competition and mitigating the effects of economic risk and uncertainty. Tax and regulatory policies should promote the widespread accumulation, diversification, and access to capital to empower individuals and families with the necessary resources to build wealth and insure themselves against uncertainty. Where private insurance markets are incomplete, there is a role for limited social insurance to fill the gap.

Numerous specific policies flow from this general paradigm shift, for example, we can stop penalizing savings through overly loose credit and onerous tax policies on interest and dividend income. There is no reason not to have a tax-free threshold for capital income that reflects the desired savings level of the median annual income household.

Why have we stuck with a failed policy paradigm? Part of the answer is the Kuhnian nature of scientific revolutions, but the pursuit of power and influence by narrow interests is certainly a determinant factor. Economically and socially, we know where we need to go. Getting there politically is another matter. Our present political leadership (of both parties) certainly is not taking us in that direction.

Debt Clock

2009-11-19T08:24:00.000-08:00

A YouTube video on our exploding national debt...

Return to Red vs. Blue - With a Vengeance

2009-10-27T09:34:00.000-07:00

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

2009-08-18T10:19:00.000-07:00

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.

2009-08-14T08:28:00.000-07:00

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

2009-08-06T09:57:00.000-07:00

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?

2009-08-04T11:05:00.000-07:00

...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.

2009-06-20T11:29:00.000-07:00

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?

2009-06-20T11:17:00.000-07:00

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

2009-06-17T17:16:00.000-07:00

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

2009-05-14T08:50:00.000-07:00

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?

2009-04-07T07:49:00.000-07:00

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?

2009-03-05T10:47:00.000-08:00

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?

2009-02-21T09:00:00.000-08:00

Good one.

Scared of the 800-lb. Gorilla?

2009-02-19T14:27:00.000-08:00

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?

2009-02-10T11:23:00.000-08:00

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

2009-02-04T09:08:00.001-08:00

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?

2009-01-31T18:04:00.000-08:00

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

2009-01-16T15:42:00.000-08:00

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

2009-01-07T17:48:00.000-08:00

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

2009-01-02T14:08:00.000-08:00

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.

Foreclosure Myths

2008-12-22T14:34:00.000-08:00

Barron's recently published their proposed plan to solve the housing financial crisis: "Mortgage Relief for Everyone." Here is the four step plan summarized:

I've been reading a lot of this kind of nonsense in the popular press but was a little flabbergasted such a proposal was coming from a free market publication and was compelled to reply. They actually printed the letter below:

Dear Editors:

I must respectfully disagree with all four points of your plan. First, low, subsidized financing is what turned real estate investment into a financial asset akin to an option on a bond. Low mortgage rates recapitalized housing based on the debt service required to buy overvalued housing assets on the margin. The temptation of easy financing caused buyers to view housing as a sure thing with quick turnover. But all one-sided gambles soon end and now we’re saddled with a severe balance sheet problem where incomes and rents are insufficient to service outsized mortgages.

By reducing lending rates your plan merely addresses the balance sheet insolvency problem by artificially inflating the servicing of mortgage debt. This is like a little hair-of-the-dog to cure a hangover. But in the case of an asset bubble, this can only prolong the pain because your plan merely seeks to maintain these overvalued assets, while a functioning housing market going forward needs to correct them. Equity returns on overpriced housing will continue to be negative and buyers will choose to put their funds elsewhere, if they’re at all sensitive to yield. I, for one, do not want my most important asset to have a negative return for the next 5-10 years and I certainly wouldn’t borrow money at any rate to buy such overvalued assets.

It’s necessary to return housing prices to some rational level consistent with personal incomes and implicit rents. It’s time to manage the losses, not deny them. The only other option is to inflate incomes until the real value of housing equals the depreciated nominal value of mortgage debt. But this comes at the cost of all other investment alternatives, especially savings. It would also sacrifice the credibility of the dollar – an economic risk that may be incalculable.

This kind of fuzzy thinking can only be cleared up if we burst a few myths about foreclosures. Let's say someone bought a house at $600K with 5% down plus closing costs and financed the rest with a $570K loan. After a 25% decline in housing prices that house is now worth $450K and the owner is looking at a $150K loss of which his/her equity is only $30K. Does this person want to avoid a foreclosure? I think not. If fact, they're begging to push that $120K loss off on somebody else - i.e., the banks and investors who underwrote the mortgage-backed securities - and walk away.

These investors and lenders in turn would also like to push the loss off on somebody else - say, back to the original owner or the taxpayer. This argument about saving peoples' houses is really an argument on how to stick them with a really bad housing investment for the life of their mortgage. This may sound like just deserts, but how are these buyers, many of whom came from the lowest income brackets, going to save for the future when an overpriced house sucks all their disposable income down a black hole? They are going to be even more dependent on government benefits in the future. This was not the way to promote "an ownership society." The political rhetoric about "helping poor folks stay in their houses" is no benevolent altruism. The better route would be to let people foreclose and then manage the losses across the financing chain. The sooner housing falls to a realistic level, the better off our economy going forward will be. And inflation is definitely the stupidest route out of this cul-de-sac.

In the next housing phase, where most homes will be looking like a capital loss rather than a gain, we need to return prices to an economically rational level ASAP. Housing is paid for out of incomes and rents. There is a reasonable multiple of income, usually roughly 4x to borrow against for residential home purchases. There is also a reasonable multiple of gross rents that imply a fair housing value. Living in a world where there is no rational connection between these fundamental cash flow values and the price of the underlying real estate means we will be living with a dysfunctional market for a long time to come. There's only one thing worse in real estate than owning a house you don't want - having it own you.

Why Blue Needs Red (and Vice-Versa)

2008-12-02T15:01:00.000-08:00

Pundits and casual observers have come up with all sorts of ‘theories’ to explain the red-blue divide in our politics. But the voting evidence tells a different story than the exit polls and media narratives. There are many cross-cutting divisions in our politics, but the red-blue divide is best explained by three coinciding factors: lifestyle, party and ideology. Since the 1960s the lifestyle differences between urban and rural have become aligned with liberal and conservative ideologies. This alignment has then been amplified by partisan electoral strategies and governing platforms that target these divisions. The result is that rural communities have become more conservative and Republican while urban communities have become more liberal and Democrat. Suburbs are now the tipping point, or battleground, if you prefer. Both election campaigns were well aware of this and Obama had considerably more resources to campaign in the suburbs nation-wide than did McCain. Money and the economic crisis is what delivered the election to Senator Obama.

So, will it be a battle that’s always going to be fought to a win-lose rather than win-win result? Last time country rubes, next time city slickers? The majority of the voters voiced their displeasure with this distraction and both candidates did their best to campaign on their bipartisan credentials.

But here’s the rub. The split between rural and urban values differs across many political issues and policies. These differences are eminently legitimate and beneficial to our national identity. However, our mainstream media and most of our commercial culture is heavily biased in one direction. These media industries are based in urban America and tend to reflect urban values. This is not necessarily malicious, but the reason we have few conservative reporters, TV news analysts or Hollywood script writers is because these professionals have predominantly come to reflect their urban liberal preferences.

“So,” liberals might ask, “what’s the problem?” The problem is that broad swaths of the country are founded on more traditional, conservative values. These Americans may enjoy entertainment fare from the city, but they have no desire to embrace the same values and lifestyles. Many of these traditional values are also shared by urban and suburban dwellers, but the small towns of America provide the roots from which American culture spreads its many diverse branches. Rural areas also offer a respite from the rat race, the impersonal and stress of urban living. They provide the necessary link to nature, our neighbors, and the land.

I would argue these traditional values provide an important touchstone for our national culture that promotes the diversity and colorful experimentation that goes on in the more fluid, progressive, urban environment. Americans are not really black-and-white conservative or liberal – they are tolerant and traditional. Our liberal ideology emphasizes the tolerant while our conservative ideology emphasizes the traditional. If either of these were to be snuffed out I'm sure we would be poorer in soul and spirit for it.

Big Business + Big Labor + Big Government = Universal Health Care?

2008-11-19T12:35:00.001-08:00

If history is any guide, Rahm Emanuel has revealed the Obama administration’s strategy to cajole big business into supporting universal health care as the foundation of a New New Deal (See the WSJ: “Emanuel Sets a Challenge,” Nov. 19). The strategy implies a radical expansion of the Federal government’s commitment to social insurance mandates. National unemployment insurance and public pensions, the harbingers (or Trojan horse) of the social welfare state, were passed with similar political strategies in almost every developed democracy during the crises at the end of the 19th century and in the 1930s.

Today, corporate CEOs’ first preference is to remove rising health care costs from their income statements and the attendant liabilities from their balance sheets. Their second preference is to have somebody else pony up to help pay for it. The Democrats’ gambit is to close off the first option and leave the second as the only alternative to doing nothing. Obviously the political architects believe the triumvirate of big business, big labor and big government can steamroll universal health care over special interest opposition. This at a time when the electorate has expressed the lowest approval ratings in history for large public institutions – a level of mistrust that applies to both parties’ stewardship.

Of course, these special interests include individual taxpayers, consumers, and anyone unaffiliated with the big three, which means small business, entrepreneurs and the self-employed--who’ll all get flattened in this scenario. Every taxpayer will be subsidizing the inefficient provision of corporate and public health care and we’ll be told it’s for our own good. The only possible consequence of mandates is the loss of consumer choice and control needed to contain costs. This makes little sense in an expanding world market for private health care. Costs are best reduced by maximizing consumer choice and providing incentives to economize all around. Social insurance should only play a limited role in cases of catastrophic illness or accident. It looks like it’s time to pay attention to what change in Washington will really mean.

A Failure of the Free Market Model?

2008-11-17T14:46:00.000-08:00

It's quite heady reading the international press these days. The proclamations of the demise of free market capitalism are proliferating like kudzu. The formerly sober Nikolas Sarkozy has been one of the most vocal in pronouncing a New World Order (based on the French model, one presumes), while talk of a New New Deal is all the rage on this side of the Atlantic. This past weekend's G20 meeting in Washington DC was a lovefest of cooperation and self-congratulation, even if George Bush wasn't quite bussed on the cheek.

But perhaps we should all take a deep breath.

Exactly what do these folks from around the world think brought them together? Was it good fellowship and neighborly concern? No. It was an interdependent network of international capital and product markets. We inhabitants of earth have just rediscovered that our fates are inextricably intertwined! But it's the global capital and trade markets that have accomplished this wondrous feat.

It's market specialization and free exchange that make the candlestick maker dependent on the watchmaker dependent on the shoemaker dependent on the banker dependent on the lawyer dependent on the farmer dependent on the grocer and so on in an endless web of interdependency. Interconnected capital markets combine one woman's savings with another man's labor and both become better off - without ever even sharing a hug. Such interdependence makes cooperation more rewarding and conflict more punishing.

Oddly enough, that great altruistic theory of state socialism accomplishes the exact opposite. In socialist societies people become isolated and suspicious, business relationships become arbitrary, honesty and transparency become clouded. People and nations cease trading to become self-sufficient. And everyone becomes poorer in a dangerous downward spiral.

So, tell me now: Are we truly going to abandon free markets and embrace statism? Are we going to be governed by who we know and what favors we owe? Will we abandon accountability and responsibility to survive on the whims of politicians? Will we pretend to work, while they pretend to pay us?

Come now, ...not bloody likely.

2008: Not an Ideological Realignment?

2008-11-12T15:30:00.000-08:00

Interesting article in today's WSJ on the recent election, putting it in historical context. (article here - subscrip req'd)

Ms. Marisco basically compares the 2008 election with other realigning elections, specifically FDR's win in 1932. She also gives a good comparison of 2008 to 1980, arguing that both elections resulted from the failures of the previous administrations. (I'm not sure FDR wasn't also running against "4 more years of Herbert Hoover.")

In any event, the 2008 election indicates a repudiation of government failures, which implies a desire for competence, not expansion of incompetence. The calls for a New, New Deal are misguided in so many ways, as I have argued previously.

Like Reagan, the shift of independents to Obama is motivated by the candidate and his ability to reassure voters of his competence and leadership qualities. Ideology and positions on the issues are a completely different matter.

How We Vote?

2008-11-03T10:23:00.000-08:00

Read an absurd op-ed in the NYTimes yesterday titled, "What is Your Vote Worth?" criticizing the Electoral College system, again. I reprint here it in full:

“The conception of political equality from the Declaration of Independence, to Lincoln’s Gettysburg Address, to the Fifteenth, Seventeenth and Nineteenth Amendments can mean only one thing — one person, one vote,” the Supreme Court ruled almost a half-century ago. Yet the framers of the Constitution made this aspiration impossible, then and now.

Under the Constitution, electoral votes are apportioned to states according to the total number of senators and representatives from each state. So even the smallest states, regardless of their population, get at least three electoral votes.

But there is a second, less obvious distortion to the “one person, one vote” principle. Seats in the House of Representatives are apportioned according to the number of residents in a given state, not the number of eligible voters. And many residents — children, noncitizens and, in many states, prisoners and felons — do not have the right to vote.

In House races, 10 eligible voters in California, a state with many residents who cannot vote, represent 16 people in the voting booth. In New York and New Jersey, 10 enfranchised residents stand for themselves and five others. (And given that only 60 percent of eligible voters turn out at the polls, the actual figures are even starker.) Of all the states, Vermont comes the closest to the one person, one vote standard. Ten Vermont residents represent 12 people.

In the Electoral College, the combined effect of these two distortions is a mockery of the principle of “one person, one vote.” While each of Florida’s 27 electoral delegates represents almost 480,000 eligible voters, each of the three delegates from Wyoming represents only 135,000 eligible voters. That makes a voter casting a presidential ballot in Wyoming three and a half times more influential than a voter in Florida.

This system, along with the winner-take-all practice used to allocate most states’ electoral votes, creates the potential for an absurd outcome. In the unlikely event that all 213 million eligible voters cast ballots, either John McCain or Barack Obama could win enough states to capture the White House with only 47.8 million strategically located votes. The presidency could be won with just 22 percent of the electorate’s support, only 16 percent of the entire population’s.

The authors here (a sociology grad student and two graphic designers?) adopt the logic of reductio ad absurdum to argue their case, though one wonders if they are even aware of it. They assume modern definitions of political equality mean “one person, one vote,” and then argue this principle was thwarted by the framers of the Constitution. Then they cite the remotest mathematical possibility as proof of the absurdity. They seemed to have missed the point by a mile.

Our democracy has established the principle of “one person, one vote,” but the concept of political equality and justice are not violated by the Electoral College, the Senate, or the apportionment of House seats. The objective of a social choice mechanism, which is what voting is, is to arrive at a result acceptable to the majority of voters while adhering to accepted notions of equality and justice. A direct vote with a simple majority does not necessarily accomplish this as it would strongly favor the tyranny of absolute numbers, which may only affirm the narrow interests of that majority. In other words, high population states and regions would dominate our national politics. Is this fair or just? Not to those in small rural states.

Furthermore, when that majority is geographically based, as it is today and often has been in our past, the incentive for inhabitants of regions that are persistently dominated is to secede from such a tyranny. Such secession movements are fairly common, especially in today’s world. (Just ask a Québecois.)

The intent of the framers of the Constitution was not to insure some individual notion of fairness based on equal weighting on the outcome. Rather it was to develop voting rules that reinforce the cohesiveness of a disparate, voluntary union of states. This is critical in choosing a national leader who is meant to represent the entire nation and is insured by making the geographic distribution of votes across the states as important as the raw count of votes. (Besides, the EC only really comes into play when the popular vote is too close to make a clear determination.)

Our voting system has accomplished its objective more successfully than any other political experiment in world history. It has done this while also reinforcing the concept that every vote counts—and it does, just not in the way some people have wrongly assumed. It would be very wise for us to keep this in mind, because it is a strong union, not an individual sense of importance, that ultimately defends our rights and liberties.

Election at the Crossroads

2008-10-31T09:10:00.000-07:00

Daniel Henninger has a good essay in the WSJ on what this "historic election" is really about - whether America will turn towards it's creative, innovative impulses or towards its security and protectionist impulses. He subtitles his essay, "Shifting America's animating idea from creation to protection." [Here, subscription req'd]

He concludes that an Obama presidency would

...transform the animating American idea -- away from creation and toward protection.

Many voters -- progressive Democrats, the asset-safe rich, academics and college students -- regard this as where America should go. They explicitly want America's great natural energies transferred away from unwieldy economic competition and toward social construction. They want the U.S. to reduce its "footprint" in the world. Monies saved by stepping down from superpower status can be reprogrammed into "investments" (a favorite Obama word) in a vast Euro-style hammock of social protection programs.

Economist Alan Reynolds estimates this would cost upwards of $4.3 trillion, and wonders where and how these funds will materialize. In a WSJ Letter to the Editor Nobel economist Vernon Smith provides the answer, which I quote in full here:

I think the answer to Alan Reynolds's excellent question and article ("How's Obama Going to Raise $4.3 Trillion?," op-ed, Oct. 24) is that Barack Obama is not going to raise $4.3 trillion, and he is not going to perform on his rhetoric. He excels as a rhetorician -- common to both the great and the least of past presidents -- but performance cannot run on that fuel. Inevitably, I think his luster will fade even with his most ardent supporters as that reality sets in. We also have seen luster fade time after time with Republican presidents. The rhetoric of a smaller and less invasive government always leads to king-size performance disappointments. This weakness is as central to the reality of our political economy as are its strengths. With all its foibles, its strengths become transparent when you compare it, not with our various idealizations, but with the litter of human experiments in political economy that have delivered far more suffering and murder than human betterment to the citizens of those economies.

Of course it is entirely likely that Mr. Obama will succeed in going for higher business, capital gains and income taxes, but it is an economic illusion to think for a minute that this will benefit the poor. All our wars on poverty have been lost by failing to help the poor help themselves. Higher business taxes, which ultimately can only be paid by individuals anyway, will simply export more economic activity to the world economy. Higher capital gains and income taxes will primarily reduce savings and investment at the expense of greater future productivity, which is at the heart of cross-generational reductions in poverty. A dozen countries, including the third largest economy, already have zero taxes on capital gains, and eight of them score high on the Economic Freedom Index and high in gross domestic product per capita.

I favor making all individual savings and direct investments deductible from income for tax purposes. In that world there would be no need to make any distinction between ordinary income and capital gains. By adding a negative feature to such a net consumption tax, the poor would not only receive redistribution benefit, but have an incentive to save and accumulate capital. Some poor will see this as an opportunity to help themselves.

We swung this way politically from 1965 to 1980. In France, they tried it under Mitterand from 1980 to 1988. Neither experiment worked out very well. It won't this time either. One would hope that it didn't have to be either/or on creation vs. protection, but advocates for either direction choose to ignore the trade-off. In Vernon's last paragraph he signals the way out - which is to help the poor help themselves by becoming integrated into the capitalist accumulation process rather than on the outside looking in, hoping an afterthought of noblesse oblige opens the door a crack.

My own response to Henninger's essay was to note that we are stumbling into making a simple error of risk management, which is rooted in human nature and what all this protection is about. For lack of clearer alternatives, we have convinced ourselves that the best protection against risk is national insurance pooling. Essentially, this says we're all in the same boat and we sink or float together. Yet, the best natural survival strategy against risk in this world is to be proactive, i.e. creative and productive, in the face of change. This strategy depends heavily on the incentive structures we face. Unfortunately, the cradle-to-grave welfare state reinforces all the disincentives to manage our fears and uncertainties effectively. Pray we pull back from that long slow decline into complacency and torpor.

PPP = CAP

2008-10-29T11:38:00.000-07:00

A mysterious looking equation perhaps. Economists might mistake PPP to stand for purchasing power parity, but in this case it refers to post-partisan politics. Both our presidential candidates have been struggling to advance themselves as the preferred standard-bearer of post-partisan politics, but what that means is anybody's guess. My own reading of the American electorate from a non-ideological perspective is that citizens are interested in a politics that offers policies and institutions that adhere to three principles. These are choice (C), autonomy (A) and protection (P), hence the acronym, CAP. (I've posted on this before here.)

Americans have grown used to a consumer world of choice - from goods to media to services. This extends to the world of social choice and voters don't expect a one-size-fits-all narrowing of choices from their politics. This appears more like a step backwards for a developed society. This pertains to universal social insurance programs like Social Security, Medicare and possibly health insurance.

Second, the strain of independence and autonomy runs deep in American culture. Capitalism and democracy are both meant to empower autonomy and policies that encourage dependency on public institutions run counter to this. (Yes, there are exceptions, covered in the next paragraph.) The recent financial crises have reinforced this suspicion of dependence and lack of trust in unresponsive public or private institutions. The ground for an FDR-style New Deal has shifted.

Lastly, a counter-balance to this desire for freedom and autonomy is a strong demand for protection from contingencies (like 9/11, Katrina or the credit and housing meltdowns) over which individuals have little or no control over their own fate. In most cases, contingency risks are managed by private insurance pools, but in cases where private markets are incomplete we rely on social insurance. This is where the demand for working social institutions comes in, where legal constraints and regulatory oversight play an important role. But, this demand for protection is predicated on the conditions of the previous two principles of choice and autonomy. The idea is to maximize choice and autonomy subject to the constraints of protection and security.

So, to sum up a simple rule on government policy and legislation, we would be wise to remember: PPP = CAP.

Left vs. Right + Rural vs. Urban = Red vs. Blue

2008-10-15T02:57:00.000-07:00

Dennis Prager published an essay I found today on RealClearPolitics titled "There Are Two Irreconcilable Americas." He writes:

It is time to confront the unhappy fact about our country: There are now two Americas. Not a rich one and a poor one; economic status plays little role in this division.

There is a red one and a blue one.

He identifies these along ideological lines:

Right and the left do not want the same America.

The left wants America to look as much like Western European countries as possible. The left wants Europe's quasi-pacifism, cradle-to-grave socialism, egalitarianism and secularism in America. The right wants none of those values to dominate America.

This is the ideological component of our political divide - the explanation for the tight polarization of the country into a 50-50 nation. I estimate it explains about one-third or slightly more of our recent electoral outcomes. This ideological component has been dominated by the center-right ever since the Reagan years and it seems to prevail still, though it can be trumped by other factors. We see this in the tension over this election. Neither Obama nor McCain has transcended this divide, but the Bush years and the financial crisis has changed the playing field.

If we look at the politics of the last 40+ years we can see how ideology and party platforms have coincided with geography, which explains the pattern of red vs. blue across the nation. These patterns reflect real differences in lifestyle preferences and values. This is nothing unique to America or our times. For example, Thailand seems to be experiencing the same division in its politics:
"In Thai Protests, a Divide Between Urban and Rural."

The challenge for our politics is to reconcile these divisions and I have to say I'm a bit more optimistic than Prager, who believes one or the other ideological world must win out. America is not like Europe and never will be; trying to make it thus only invites a backlash. Besides, in practical matters European societies have been moving away from state socialism toward markets for years. The developing world is moving that way even more deliberately.

But there are important aspects of a developed society that the traditional right needs to acknowledge - things like a competitive market in health care and spreading the benefits of capitalism by promoting equity participation and defending the rights of ownership. The corporate scandals and moral hazard of the financial sector have dealt a terrible blow to these preconditions.

October Surprise?

2008-10-06T03:04:00.000-07:00

It seems like the credit meltdown and financial crisis has delivered the October surprise that caught both campaigns unawares. The public reaction among independents has strongly favored Obama and with the McCain campaign's political bumbling it might be enough to award Obama the election.

However, neither McCain nor Obama has adequately addressed the financial crisis and what policies they will advocate to correct. It seems a bit ironic that free market capitalism is being blamed for what has predominantly been a government-induced mortgage bubble and House members seem to be ducking under the radar. But it falls to market advocates to explain how and why and so far political conservatives have been quite disoriented.

Daniel Henninger of the Wall Street Journal wrote a decent article on Oct 2 about the larger political context of moral hazard (link here - subscription may be req'd). He writes:

This subject -- risk and political moral hazard -- should be at the center of our derailed presidential campaign and its debates. Liberals don't like to hear moral-hazard arguments raised against social-policy goals. The current mortgage nightmare, however, grew primarily from Congress's insistence on increasing home ownership by reducing its risks.

Barack Obama's core proposals on health insurance, trade policy and tax credits all seek to reduce an array of economic risks. John McCain's ideas on health, education and the tax code tilt toward "choice," or letting individuals make judgments about economic risk-taking.

Most of the time, moral hazard is simply academic. Not after this week. Our presidential candidates should have a talk about it.

This is what this election should be about, but it doesn't seem like the political establishment is able to focus.

The result may give us the only purely liberal US president of the post-60s modern age. This combined with a House and Senate that is far more liberal than the population. It will be interesting to see how a center-right polity reacts to future policy proposals that reflect a left-leaning ideology. A bunch of counties on the border between CA and OR want to secede and form their own state. Good luck with that.

Culture in Politics

2008-09-22T16:23:00.001-07:00

A recent article in the WSJ addressed the "culture wars" that seemingly define our electoral politics. Find it here (subscription req'd). Mr. Siegel writes:

...one stark distinction stands out among the differences between contemporary liberals and conservatives (the real differences, not the manufactured ones). Liberals always think that there is something broken in politics. Conservatives always think that there is something wrong with the culture.

After explaining why conservatives dominate the electoral dynamic that flows from this, he concludes:

No, there is no culture war. There is only the Republicans' unilateral mastery of the cultural strategy. The Democrats consider any attention to the practices and prejudices of everyday living a mendacious diversion from the "issues," while the GOP, the party of the status quo, has proven itself astoundingly skillful at using its cultural antennae to adapt to new times. Who knew? The Republicans may or may not be the party that will effect change. But they are certainly the party that knows how to ride it.

Naturally, Mr. Siegel's argument attracted all kinds of negative reactions from liberal dissenters, but this is exactly the problem he's elucidating. Urbanites don't seem to understand that outside the metro lines culture is how people define their lifestyles. Another reason why Thomas Frank misses the big picture.

Urban Myopia

2008-09-08T13:15:00.000-07:00

An article today in the London Financial Times gets at the heart of what's been driving red and blue politics for the past few elections. I reprint it in full here because it's just so on the money in addressing the problems the Democratic Party has had for the past forty years. I think the most critical point for Democrats is that their refusal to acknowledge the political preferences of a majority of Americans in "fly-over country" means Republicans have not had to respond to problems of widespread economic insecurity. This is the most serious weakness of our current political divide.

Democrats must learn some respect

By Clive Crook

September 7 2008

This article is not the first to note the cultural contradiction in American liberalism, but just now the point bears restating. The election may turn on it.

Democrats speak up for the less prosperous; they have well-intentioned policies to help them; they are disturbed by inequality, and want to do something about it. Their concern is real and admirable. The trouble is, they lack respect for the objects of their solicitude. Their sympathy comes mixed with disdain, and even contempt.

Democrats regard their policies as self-evidently in the interests of the US working and middle classes. Yet those wide segments of US society keep helping to elect Republican presidents. How is one to account for this? Are those people idiots? Frankly, yes – or so many liberals are driven to conclude. Either that or bigots, clinging to guns, God and white supremacy; or else pathetic dupes, ever at the disposal of Republican strategists. If they only had the brains to vote in their interests, Democrats think, the party would never be out of power. But again and again, the Republicans tell their lies, and those stupid damned voters buy it.

It is an attitude that a good part of the US media share. The country has conservative media (Fox News, talk radio) as well as liberal media (most of the rest). Curiously, whereas the conservative media know they are conservative, much of the liberal media believe themselves to be neutral.

Their constant support for Democratic views has nothing to do with bias, in their minds, but reflects the fact that Democrats just happen to be right about everything. The result is the same: for much of the media, the fact that Republicans keep winning can only be due to the backwardness of much of the country.

Because it was so unexpected, Sarah Palin’s nomination for the vice-presidency jolted these attitudes to the surface. Ms Palin is a small-town American. It is said that she has only recently acquired a passport. Her husband is a fisherman and production worker. She represents a great slice of the country that the Democrats say they care about – yet her selection induced an apoplectic fit.

For days, the derision poured down from Democratic party talking heads and much of the media too. The idea that “this woman” might be vice-president or even president was literally incomprehensible. The popular liberal comedian Bill Maher, whose act is an endless sneer at the Republican party, noted that John McCain’s case for the presidency was that only he was capable of standing between the US and its enemies, but that should he die he had chosen “this stewardess” to take over. This joke was not – or not only – a complaint about lack of experience. It was also an expression of class disgust. I give Mr Maher credit for daring to say what many Democrats would only insinuate.

Little was known about Ms Palin, but it sufficed for her nomination to be regarded as a kind of insult. Even after her triumph at the Republican convention in St Paul last week, the put-downs continued. Yes, the delivery was all right, but the speech was written by somebody else – as though that is unusual, as though the speechwriter is not the junior partner in the preparation of a speech, and as though just anybody could have raised the roof with that text. Voters in small towns and suburbs, forever mocked and condescended to by metropolitan liberals, are attuned to this disdain. Every four years, many take their revenge.

The irony in 2008 is that the Democratic candidate, despite Republican claims to the contrary, is not an elitist. Barack Obama is an intellectual, but he remembers his history. He can and does connect with ordinary people. His courteous reaction to the Palin nomination was telling. Mrs Palin (and others) found it irresistible to skewer him in St Paul for “saying one thing about [working Americans] in Scranton, and another in San Francisco”. Mr Obama made a bad mistake when he talked about clinging to God and guns, but I am inclined to make allowances: he was speaking to his own political tribe in the native idiom.

The problem in my view is less Mr Obama and more the attitudes of the claque of official and unofficial supporters that surrounds him. The prevailing liberal mindset is what makes the criticisms of Mr Obama’s distance from working Americans stick.

If only the Democrats could contain their sense of entitlement to govern in a rational world, and their consequent distaste for wide swathes of the US electorate, they might gain the unshakeable grip on power they feel they deserve. Winning elections would certainly be easier – and Republicans would have to address themselves more seriously to economic insecurity. But the fathomless cultural complacency of the metropolitan liberal rules this out.

The attitude that expressed itself in response to the Palin nomination is the best weapon in the Republican armoury. Rely on the Democrats to keep it primed. You just have to laugh.

The Palin nomination could still misfire for Mr McCain, but the liberal reaction has made it a huge success so far. To avoid endlessly repeating this mistake, Democrats need to learn some respect.

It will be hard. They will have to develop some regard for the values that the middle of the country expresses when it votes Republican. Religion. Unembarrassed flag-waving patriotism. Freedom to succeed or fail through one’s own efforts. Refusal to be pitied, bossed around or talked down to. And all those other laughable redneck notions that made the United States what it is.

Can Obama Govern?

2008-09-08T13:13:00.001-07:00

The Obama phenomenon seems tough to pin down. Shelby Steele does a pretty good job in his book A Bound Man. I recommend the book for a more thorough reading, but in a nutshell Steele argues that Obama is bound by the bargains he's made to get to heights he's climbed in American politics.

He's implicitly promised the black community that he will not betray their social and political agenda in return for their votes. To date he has chosen to work within the narrow confines of traditional post-60s liberal politics. Steele argues that Obama wears this mask to reassure his black support.

At the same time, to attract mainstream majority support from whites, Obama has made the bargain not to challenge whites on racist grounds. White supporters in return retain the innocence of racial fairness. By bargaining with whites, Obama raises suspicion among blacks (witness Jesse Jackson's bitter outburst). But pandering to black challengers like Jackson and Jeremiah Wright risks scaring off white supporters. This is Obama's personal bind.

My own question refers to his governing bind. As I've discussed previously, polls show American voters see themselves slightly to the right of center on political ideology. This means no big government programs to solve their personal problems. They also perceive Obama and Clinton far to the left and Bush off to the right. John McCain comes closest to how they view themselves. Let us first assume that this is not Obama's true position, that it's mostly a reflection of primary politics. This is a generous assumption given Obama's legilative record to date.

Let us also assume Obama is able, purely by force of personality and charisma, to win the presidency. Surely the Democrats will retain a large majority in the Congress and perhaps even a filibuster-proof majority in the Senate. How will Obama tack to the center on policy given liberal control in both houses of Congress? After also having bound himself to the liberal demands of the minority community?

Is seems virtually impossible for Obama to govern a center-right polity from the position he's anchored himself. He will have to take his marching orders from the liberal wing of the legislature or risk getting bogged down in intraparty rivalries. Think of the first two years of the Clinton candidacy but without a grace period. Liberals will claim the country really is not center-right, but given the evidence that appears to be mostly wishful thinking.

Red vs. Blue Redux

2008-09-04T14:18:00.000-07:00

If you've been following the discussion here at Purple Nation you know that what explains our political divide is a little bit of ideology based on a whole lot of differences rooted in urban, rural, and suburban lifestyle preferences. The real divide is exaggerated by the party platforms (as Democrats appeal to urbanites and Republicans appeal to ruralites and suburbanites), and all this gets loudly amplified by the media.

In a previous post I showed how the data on 2008 Democratic primary voting reveals the same red-blue dynamic as the 2000 and 2004 elections.

Now with the conventions behind us we can see how the parties and media are splitting into red-blue tribes and escalating the race along those lines. Obama and McCain can only ride this wave, they're helpless to contain it. I expect we'll have another red-blue election and four more years agonizing over it. I wonder if the experience will be traumatic enough to change our patterns of behavior.

Rocky Mountain Party Shift?

2008-08-25T09:33:00.000-07:00

An article today by Thomas Edsall at the Huffington Post looks at the demographics of the Rocky Mountain states to make a case for a shift that favors the Democrats. The reason is the increase in the population of white college-educated professionals and Hispanics.

The problem I see with this analysis is that it assumes these two groups favor the urban liberal orthodoxy. If the ideological differences of our parties are based on lifestyle preferences rather than racial and ethnic identity or education, then these voters may vote more conservatively than their counterparts in urban areas. Edsall concedes that these voters are more libertarian than liberal, which points out why it's unlikely they will vote in lockstep with urban coastal voters. Gun control and redistributive tax policies come to mind.

It's unclear to me how liberal ideology can prevail in a country that still views itself as center-right.

Doha and a Better Deal for trade

2008-08-20T12:51:00.000-07:00

Jagdish Bhagwati wrote an op-ed in todays Financial Times on Doha and the failures of US trade policy.

I would agree with his basic analysis of the US hegemonic role in international trade and how to square these with the WTO. His basic points:

Change is indeed in order, although along totally different lines. It must reflect a holistic view of the new reality that the US confronts. In particular, the economic anxiety that overwhelms US workers today stems from the increased fragility of their jobs.

First, as with Japan in the 1930s, when one-dollar blouses flooded the world, India and China today are growing and exporting rapidly. They are like Gullivers in a Lilliputian world economy. They create tsunamis for specific industries where their exports concentrate.

Second, competition has intensified. As exemplified by the Boeing-Airbus saga, the margins of competitive advantage have shrunk. No chief executive or any of his workers in tradable industries leads a happy life any more as there is always someone, from somewhere, breathing down his neck. I call this new phenomenon “kaleidoscopic comparative advantage”. It leads to volatility of jobs, as you have an advantage today and can lose it tomorrow.

Third, labour-saving technical change continuously threatens assembly-line jobs for the unskilled. The assembly lines continue but increasingly do not have workers on them; they are managed from a glass cage by skilled operators whose jobs increase instead.

The agenda for institutional change has to address this fragility of jobs, enabling unskilled and skilled workers to face the new uncertainties. To illustrate: higher education will have to be recast to reduce the proportion of time spent on specialisation: this would enable an easier response to shifting skill requirements as the kaleidoscope turns. Unskilled workers will have to be helped and encouraged to acquire skills and therefore increase their ability to shift to other jobs, even as they continue to work.

Then he adds a curt assessment of Obama's campaign prescriptions:

Senator Barack Obama does not quite get this. By asking, as part of his agenda for change, that the US should now impose even more draconian labour requirements in future PTAs, and that the North American Free Trade Agreement should be revised to incorporate yet tougher labour requirements, he is making export protectionism, and the reputation of the US as a selfish hegemon, worse, not better. Some change.

In previous posts I've made the case that we need new thinking for the domestic management of trade. The key objective is flexibility and adaptability to manage a fast changing, uncertain, but open, world economy. This goes beyond wage incomes, benefits, training and skill sets. It requires greater diversification of income sources that distribute the benefits of trade more widely. Diversification beyond labor incomes mitigates against fast changing competitive advantages that can concentrate losses on a single industry and its workers.

Neither party, obsessed with short-term electioneering, seems particularly attuned to the larger institutional context this will require. We don't need a new New Deal, we need a Better Deal that reflects the technological changes of the 21st century.

Why A Wiki?

2008-08-19T08:18:00.000-07:00

In a previous post I suggested that wikis might be good tools for democratic processes. Here I explain in more detail how a policy wiki might work and why:

What is a Wiki?

A wiki is an Internet-based technology that facilitates mass collaboration among peers. A wiki is a collection of web pages designed to enable anyone who accesses it to contribute or modify content, using a simplified markup language. Wikis are often used to create collaborative websites and to power community websites. Some defining features:

• A wiki invites all users to edit any page or to create new pages within the wiki Web site, using only a plain-vanilla Web browser without any extra add-ons.
• Wiki promotes meaningful topic associations between different pages by making page link creation almost intuitively easy and showing whether an intended target page exists or not.
• A wiki is not a carefully-crafted site for casual visitors. Instead, it seeks to involve the visitor in an ongoing process of creation and collaboration that constantly changes the website landscape.

Advantages of Wikis

1. Low cost organization – free software and hosting
2. Enables mass collaboration – ground-up creation process
3. Open participation  sense of ownership and control over product
4. Easy to make and correct mistakes
5. Converges solutions: thesisantithesissynthesis
6. Solves collective action problems by reducing costs and raising benefits of participation
7. Integrates ideas across many levels and issues
8. Promotes public goods public commons
9. Many-to-many network
10. Favors populism over elitism by offsetting organizational power, money and fame.
11. Power and control resides with the users
12. Saves history of changes, reversible, archival

Why a Policy Wiki?

A wiki enables mass collaboration among peers by reducing the costs of collaboration and providing the necessary incentives for participation. This changes the costs and benefits of collaboration and facilitates collective action. This is especially significant for the provision of public goods.

Government policy design, implementation and adaptation is a public good that requires mass collaboration of citizens, experts, NGOs, government agencies and those involved in the political process. This collaboration is costly, requiring subsidies from a variety of sources including philanthropic foundations, research and educational institutions, ideological or partisan organizations such as unions, political parties or business organizations, politicians, and bureaucrats. The process is top-down and suffers many disadvantages of institutional dynamics while citizen participation is minimal.

A policy wiki will be bottom-up, virtually cost-free and administered with a minimal of effort. It will be a network of dynamic intelligence integrating many different issues and levels of analysis. A policy wiki will not be a forum for partisan propagandizing. The wiki will link local, state, and federal levels of policy so that users can quickly locate the specific issue they wish to address. It will engage the public in a much more direct and effective way than traditional methods of political activism or writing to one’s congressperson. In a sense, the wiki will be like a local to national community bulletin board that constantly informs and adapts. An important advantage is that by establishing a collective online history, a wiki is long-lived, reducing the problem of reinventing the wheel. Most critical, a policy wiki will be productive by converging on solutions rather than splintering policy debates into various opposing camps.

The initial administration will require a ‘board’ of policy experts to provide informed oversight on policy ideas and promote convergence through empirical testing. Eventually, this professional oversight can give way to a participant board voted on by popular nomination based on reputation. In essence, a policy wiki creates a competitive and productive open marketplace for ideas.

Illustrations of Moral Hazard

2008-08-15T09:25:00.001-07:00

The NY Times has an editorial today that illustrates perfectly the problems of moral hazard for social insurance: low savings.

The Economist has an article pointing out the consumer choices people will have for elective health issues through low cost international health care facilities.

Problems with Expansion of Social Security, Medicare

2008-08-12T13:50:00.000-07:00

In a previous post on a "New New Deal" for globalization I argued why this should be approached with a good deal of circumspection. The lessons of the 20th century, and the New Deal especially, may not be what they seem. Frankly, I would argue that the New Deal was appropriate in its time and national social insurance programs should probably now be considered only as the last line of defense against economic insecurity and non-systemic risk. This is contrary to what many pro-government advocates have been proposing for the twin problems of retirement and health care funding through employer mandates under centralized government control. Expanding such programs as Social Security and Medicare are probably the wrong way to go for the following reasons:

First, do we really want to treat retirement and health care as social goods? It seems to me these are private goods and demand can be mostly fulfilled by functioning, competitive markets. Our modern financial technology and the scale and breadth of financial markets is such that many of the reasons for socializing risk through government programs no longer apply. Want to insure against a weak North American economy? Buy an Asian mutual fund. Financial markets together with IT offers all kinds of solutions to manage and hedge risks across time and space. There is a role for government here, but it is not the provision of these goods—it’s to insure functioning, competitive asset markets and promote the completeness of private insurance markets.

Second, there are all sorts of disadvantages to national social insurance programs that should weigh in the debate:

1. Moral hazard – Moral hazard is a structural problem of insurance pooling where the economic incentives encourage the risky behavior insurance is attempting to manage. Does Social Security reduce private savings and encourage a “live for the day” mentality? Does easy or cheap medical care encourage people to abuse their health?

2. Regulatory costs – These include not only the excessive monitoring costs to counteract moral hazard, but also the introduction of all kinds of inefficient bureaucratic incentives. Think USPS. Regulatory promises, such as those that will supposedly police our financial markets and health providers, cannot manage the moral hazard problem. Moral hazard is a structural problem while regulatory oversight targets implementation. If we have rampant moral hazard, regulatory oversight can’t save us, but policy designs that reduce moral hazard mitigate the demand for regulatory oversight. Let’s get the cart before the horse here.

3. One-size-fits-all government policies – It seems to me that one sign of progress in a democratic capitalist society is greater freedom of choice. The demand for health care and pension plans is as varied as anything else in a market economy and I fail to see how universal mandatory policies will enhance efficiency or greater satisfaction. The added value of markets for individual choice is that costs and benefits are internalized and thus align with the desired economic incentives. It’s an age-old financial truth that if it’s your money, you tend to be more careful with it.

4. The imprisonment of employment – Who wants to be married to their job or corporation just for reasons of benefits? This is what occurs too often now – people who would be inclined to be entrepreneurs or career risk-takers fear losing their security. We should remember that the reason to enhance economic security is so that people can take on more socially desired risks, like innovation and creative endeavors.

5. Increasing direct labor costs in a competitive world economy – What good does it do to reduce business competitiveness in a global economy? The bottom line is that health care and retirement security are goods we must earn, individually and collectively. They cannot be granted by government fiat. The question is what policy design will maximize and distribute national wealth so we can afford all these necessary benefits?

6. Socializing a private good – Why? I would prefer policy that rewards my propensity to save and my desire to take good care of my own health. Then I can buy reasonably priced private insurance to cover unforeseen contingencies and catastrophic illness. Our government policies in many cases mitigate against private solutions to economic security; we should start by correcting these. How about rewarding savings and asset accumulation? How about health insurance that rewards diet and exercise?

Weighing the costs and benefits of big government solutions against alternatives makes me think we should be figuring out how to get out of the way of creative private solutions to our policy dilemmas. Government can then perhaps play the much more circumscribed role of being the umpire on the field, rather than trying to field the team and then make all the rules.

Election Geography 2008

2008-07-24T14:11:00.000-07:00

For the past eight years our politics has been riven by the red versus blue state narrative. While the popular media cast red versus blue as a culture war rooted in the ‘60s, subsequent research shows our divisions have much to do with geography. As Obama and McCain distance themselves from partisan stereotypes, many hope the upcoming election will break this pattern, but recent primary results should give us pause. (We should note that explaining overall election results is different than explaining geographic patterns. For instance, all women voters could vote the same and since women voters are a majority of the electorate, that would explain how their candidate won. But since women are fairly evenly distributed across the population, no geographic pattern would emerge.)

Our political geography has been deciphered by several studies by the Metropolitan Institute at Virginia Tech, political scientist James Gimpel with The Christian Science Monitor’s Patchwork Nation website, and journalist Bill Bishop in his book titled, The Big Sort. All these studies show how the basic divisions plays out among urban, rural, and suburban communities. The best way to examine this phenomenon is with census demographic data by county.

The following table shows how presidential voting in 2000 and 2004 broke down by county characteristics. The relevant county data include population per sq. mi., median family income, share of married households, share of female heads-of-household, as well as shares of white and black households.

Regression analysis confirms that population density and marriage status explain most of the differences in voting patterns. One might guess that race was a more significant factor, but female heads-of-household and black households were very highly correlated—at .81, where 1.0 is perfect correlation—and female heads-of-household dominated the racial factor.

Fast forward to 2008 and this is where it gets interesting. We apply this same methodology to recent hotly contested Democratic primaries and what we discover about how different communities voted may surprise those banking on a new post-partisan geography.

The following table displays the county profiles of three state primaries in Pennsylvania, North Carolina and Indiana compared to the national profile. Amazingly, these 259 counties offer almost a perfect demographic sample for the total set of the nation’s counties, so these three primaries taken together offer a good proxy for the national profile.

Comparing the primary results for these three states to the election results for the same counties in 2000 and 2004, yields the following results.

We see that the voters in these three states’ counties voted in a distinct red vs. blue pattern. Counties that voted for Obama align closely with those who voted for Gore and Kerry and those that voted for Clinton align almost perfectly with Bush. But remember, all these voters were Democrats! So partisanship has been taken out of the equation and what we’re left with is political preference based upon lifestyle, economic, and community interests.

Regression results are a bit more mixed for these votes because of how identity groups voted. For example, black households and female heads-of-household were even more highly correlated (.9), but black women tended to vote for Obama and white women tended to vote for Clinton. In general, exit polls confirmed that urban, black and college-educated voters favored Obama while older women, suburban and rural, working class whites favored Clinton.

Unless something else changes, the upcoming presidential campaign’s increased ideological rhetoric will likely push voters toward their communal red vs. blue comfort zones. It’s doubtful the personal strengths and campaign strategies of McCain and Obama will be enough to overcome this. Rather, campaign incentives to win at any cost will probably seek to exploit it.

Can Wikis Save Democracy?

2008-07-16T16:47:00.000-07:00

Recent polls show President Bush's approval ratings are languishing at a historic low. The only thing worse is the all-time low approval ratings for that wild and crazy gang over on Capitol Hill. Their approval ratings are 10 points lower! Only 16% of those polled say the country is moving in the right direction.
Have we lost all faith in our democracy? Have we decided that no matter who runs things they're going to run them into the ground? The dissatisfaction with our government institutions has reached a nadir (and I don't mean Ralph Nader either). Perhaps there's some audacity for hope (and I don't mean Barack's either).

Our problems of creating a government by the people and for the people may be solved by social network power and a little idea called a wiki. You know, like Wikipedia.

What is a Wiki?

A wiki is an Internet-based technology that enables mass collaboration among peers. It's a collection of web pages designed to enable anyone who accesses it to contribute or modify content, using a simplified markup language. Wikis are often used to create collaborative websites and to power community websites. Some defining features:
• A wiki invites all users to edit any page or to create new pages within the wiki Web site, using only a plain-vanilla Web browser without any extra add-ons.
• Wiki promotes meaningful topic associations between different pages by making page link creation almost intuitively easy and showing whether an intended target page exists or not.
• A wiki is not a carefully-crafted site for casual visitors. Instead, it seeks to involve the visitor in an ongoing process of creation and collaboration that constantly changes the website landscape.

Advantages of Wikis

1. Low cost organization – free software and hosting
2. Enables mass collaboration – ground-up creation process
3. Open participation  sense of ownership and control over product
4. Easy to make and correct mistakes
5. Converges solutions: thesisantithesissynthesis
6. Solves collective action problems by reducing costs and raising benefits of participation
7. Integrates ideas across many levels and issues
8. Promotes public goods public commons
9. Many-to-many network
10. Favors populism over elitism by offsetting organizational power, money and fame.
11. Power and control resides with the users, i.e., not the elites
12. Saves history of changes, reversible

Why a Policy Wiki?

A wiki enables mass collaboration among peers by reducing the costs of collaboration and providing the necessary incentives for participation. This changes the costs and benefits of collaboration and facilitates collective action. This is especially significant for the provision of public goods.

Government policy design, implementation and adaptation is a public good that requires mass collaboration of citizens, experts, NGOs, government agencies and those involved in the political process. This collaboration is costly, requiring subsidies from a variety of sources including philanthropic foundations, research and educational institutions, ideological or partisan organizations such as unions, political parties or business organizations, politicians, and bureaucrats. The process is top-down and suffers many disadvantages of institutional dynamics and citizen participation is minimal.

A policy wiki would be bottom-up, virtually cost-free and administered with a minimal of effort. It would be a network of dynamic intelligence integrating many different issues and levels of analysis. A policy wiki would not be a forum for partisan propagandizing. It could engage the public in a much more direct and effective way than traditional methods of political activism or writing to one’s congressperson. The wiki would link local, state and federal levels of policy so that users could quickly locate the specific issue they wish to address. In a sense, the wiki would be like a local to national community bulletin board that constantly informs and adapts. Most critical, a policy wiki would be productive by converging on solutions rather than splintering policy debates into various opposing camps.

Two Parties Too Few?

2008-07-09T10:01:00.000-07:00

In a Townhall article today Michael Medved argues against the idea of third parties in our two-party political system (article here).

The reader comments posted reveal how little people understand the two-party system and what trade-offs are involved compared to other possible party systems. First, there is the context. The USA is not Switzerland, France or Germany. National scale matters. The USA is also much more ethnically and culturally diverse than nations like Germany, France, Japan, India or China. The plurality of interests that make up American society means possible political differences are significantly greater and this has implications for how the political system arrives at single national policy outcomes. (Think about the red-blue divide we currently experience? Would a multi-colored rainbow divide be better?)

A second major assumption is what we wish a party system to do - what is the main objective. Public comments suggest that the primary objective is to validate individual voters preferences and reward their participation. But is this really the primary objective? Is not the primary objective to govern a free democratic society in a way that strengthens the nation to insure those constitutional principles under which we choose to live together? Our elections are not about making voters happy - it's about finding candidates that can represent and lead the entire nation, from sea to shining sea.

The third caveat is how the party system is a function of the electoral rules. We have a two-party system by design with an electoral system based on single-district, simple plurality, winner-take-all rules. This means the election strategy is to capture the middle where one can win a simple plurality of the votes. This election strategy forces candidates and parties towards the center where only two parties can be left or right of each other. A third party would have to frog leap over one of the two parties to capture the necessary votes to prevail. To make third parties viable over the long term would require changing the electoral rules.

Under these three conditions, a two-party system provides the best of all worlds or, if one chooses the glass half-empty attitude, the least of all evils among alternative electoral systems. A two-party system forces a highly diverse polity to converge on an acceptable policy. It forces the extremes to move toward compromise at the center. In contrast, a multi-party system allows interests to diverge into many small camps where compromise becomes impossible. Then the government must be stitched together from many small coalitions that have failed to compromise over policy. It's a recipe for chronic instability, as one can witness in countries with proportional representation and multi-party coalition governments.

So, what does this mean for third parties? The system is not static, and one of the two major parties can fail and be replaced by a third party. If Obama loses in November one might expect the Democratic party to split and dissolve, where the centrist Democrats would repudiate the left wing radicals and vice versa. If the Republicans lose one could expect the same split unless the party recalibrates its ideological identity. But absent an abject failure and collapse of one of the two parties, there is no real need or benefit from a third-party movement in American politics. There are many other ways to fiddle with electoral processes to introduce more choice, like instant run-offs or weighted preferences, but the point is still to converge on one candidate with a national mandate. The party system doesn't exist for the happiness and satisfaction of we voters. Time we got over it.

No We Can't?

2008-07-03T17:14:00.001-07:00

Dan Henninger cites the example of the WTC 9/11 site in NYC to show how dysfunctional our self-validating democratic politics has become (article here). He writes:

Given a choice between unity and politics, we chose the indulgent pleasures of politics.

...as a case study of system malfunction, the Port Authority report on unbuilt Ground Zero is a warning shot to our acrimonious national politics. A can-do tradition is losing ground to can't-possibly-do. Barack Obama's appeal rests heavily on the belief that he'll bring back can-do. He's one man. The answer lies deeper, with a people who have to choose between politics that moves its system forward or a politics that just wants to have fun.

This is what this blog and the companion website are all about. The self-indulgence of our politics has cost us dearly and will continue to until we, the voters, choose otherwise. There are two additional resources I recommend to readers to delve past the nonsense about how we vote: Bill Bishop's book The Big Sort and this new website I've added to my blogroll: New Geography.
Drop your biases and explore...

Confidence Lost

2008-06-30T09:59:00.000-07:00

Take a look at this chart from Gallup on confidence in US institutions:

You can read the Gallup report on this poll here.

But let's think about what this poll is telling us. Interestingly, the military, most small business, the police and the Church are tightly controlled hierarchical organizations - in other words they are not democratic. The perception of trust and confidence tells us that people think these non-democratic organizations work pretty well.

Now let's look at the bottom: Congress at 12% is now considered the most ineffective institution in American society. And yet it's supposed to represent our democracy. Not such a good sign, do ya' think?

Look at the media - down there below our poor beleaguered president. Now that's a slap in the face. Organized labor and the justice system? Regulated HMOs? Ouch. This tells me our "liberal" institutions are hurting real bad in terms of public confidence. Perhaps we can blame this on the Bush presidency, but somehow that explanation doesn't appear to account for enough. It seems more likely we're having a problem with the self-regulation of our public institutions. The public--which these institutions are supposed to serve--see the politicians, CEOs, labor leaders, judges and bankers as part of the problem rather than the solution.

What's the solution? I'd guess something like citizen wikis. I recently read up on wikis and though their application to private goods and business seems very limited, their real value lies in the provision of public goods. Think about Wikipedia and how it may become the repository of all knowledge that dwarfs the great universities and libraries of the past. Wikipedia is still fairly unreliable, but the process by which it grows is self-correcting and thus the knowledge base is constantly becoming more accurate and valuable. Think of applying this to public institutions where information flows from the bottom up rather than from the top down. Perhaps this is the way we can make public institutions work for the people they're meant to serve.

I think Obama is hip to the power of the network and he may ride that network power to the presidency. But it doesn't really matter whether it's President McCain or Obama because citizen wikis could render the power hierarchies superfluous and purely symbolic, and that includes the presidency and the Congress. Think the royal family in Britain.

It's Not Just Ignorant Voters

2008-06-23T16:27:00.001-07:00

It was an interesting coincidence that the day I finished reading a new book a publisher had sent me gratis, I picked up this week’s copy of USNWR and found an article summarizing that book’s argument with an interview from the author. (See here) Such serendipity demands affirmation, and so I comment.

I found Mr. Shenkman’s book engaging, quite succinct and convincing in its general parameters. He documents well the failures of our society reflected in the public’s selected awareness of politics. These include the failures of an educational system to teach, and students to learn, fundamental civics and how our republic functions. One must assume this also includes the history of our civic institutions and a wide range of current events beyond Lindsey and Britney.

A second factor he cites is the role of the media in all this – both print media and television. We may be able to correct the educational deficiencies, but we’ll have to learn how best to manage the effects of media technology and entertainment because it’s not going back in Pandora’s box. Media is entertainment is drama is simple conflict. If news people want to be taken for something of greater consequence they must learn to distinguish between reporting the facts and interpreting events. The first is reportage, the second is commentary.

However, I do believe Mr. Shenkman’s story then begins to veer into murkier waters. First off, his example of the public’s knowledge of the Iraq war as a sign of stupidity is fatuous. I daresay none of us know very well what is going on in the Middle East beyond what we see on TV and read in the headline news. Our foreign policy is run by a small cadre of Washington elites that include the Department of State, the DoD, the military corps, and the presidency and cabinet, with oversight by both houses of Congress. Even well educated political professionals must evaluate this information against their pre-ordained mental frameworks.

What Mr. Shenkman attributes to stupidity on WMDs is in fact a loss of confidence and trust in the media and the political establishment. Because both parties have politicized Iraq, the public has decided to believe what confirms prior beliefs and disbelieve whatever contradicts those priors. So, anti-war groups refuse to believe reports from General Petraeus or the administration and hawks refuse to give credence to reports from the NY Times, Washington Democrats or the Iraq Survey Group. This loss of trust is not stupidity; for the average voter it’s a lesson well learned.

Mr. Shenkman should be castigating a news media that has politicized reporting and misinformed to the point where everybody chooses to believe whatever they want. The tarnished reputation of the NY Times is the most serious casualty here. Next, Mr. Shenkman should train his sights on the educational establishment that has elevated political correctness over truth and self-criticism. We have let ourselves become defined by our racial, ethnic and sexual identities and this has poisoned our politics. The major political parties have been front and center on this and the Democrats can shoulder much of the blame for stitching together a coalition based on race, ethnicity, gender and sexual orientation. This has yielded the red vs. blue subculture nonsense that now defines our politics. If we vote our immutable identities, how can we possibly compromise?

There is no indication in the current election cycle that voters are ready to discard this self-defeating calculus. In fact, Democratic primary voters divided themselves up, with the eager prompting of both Clinton and Obama, into camps of red v. blue conflict with nary a Republican operative in sight. It was working class whites, women and Hispanics against blacks, academic and urban elites. In this sense, we voters are stupid to allow our identities to cast our votes. This is the change we should demand of ourselves, but one that neither Obama nor McCain can deliver.

My last quibble is with Mr. Shenkman’s idea that to correct our politics we must strengthen labor unions. Huh? In an information economy that is becoming highly entrepreneurial and fluid, it makes absolutely no sense to focus on peak labor organizations. I can only think this is nostalgia for a New Deal past talking. Both manufacturing’s share of national employment and union participation rates are approaching the low teens as a percentage of the labor force. Why should we focus our national attention on such a rapidly shrinking share of the population?

Unions have a positive role, but in developed countries this role should be focused on securing equity participation for its members, not restricting the supply of labor to increase bargaining power. Let organization membership drives and the empowerment of labor versus capital migrate to developing countries, but foreign worker unionization can hardly be a high priority for smart American voters.

I found it unfortunate that Mr. Shenkman’s argument is a bit tainted by a left liberal bias because it will diminish serious consideration by those who disagree. This does not mean I believe Mr. Shenkman is a rank partisan or that he is trying to slip a liberal screed by us. I take Mr. Shenkman at his word concerning objective intent, but we should recognize that those of us who live in professional, academic and urban enclaves tend to view the world through a narrow self-referential prism. Toleration, diversity, negotiation, privacy, civil rights, government regulation, etc. all appear inherent to our chosen lifestyle preferences and we view those ideals as the American norm. Thus, they appear eminently reasonable and centrist, certainly not biased. With this mindset liberals appear mainstream, conservatives appear out-of-sync, and the NY Times appears as the epitome of right reason.

However, US electoral politics have been divided up according to rural, suburban and urban interests and the parties have targeted their appeals to these different segments. I would recommend a book by Bill Bishop titled The Big Sort that explains how this political geography has happened. It is important for any serious student of American politics to understand the grassroots details of American voting patterns and the complexion of political tradition and not rely on the NY Times or Fox News to interpret it.

Instead of liberal-conservative, Democrat-Republican, red-blue, I prefer to classify the dominant political ideology in America as what I would call “tolerant traditionalism.” It’s a less charged conceptualization that captures the vast crossover territory between the two extremes and thus becomes more useful to understanding our varied political preferences.

Another caveat is that opinion polls and sampling never reveal a truth as accurate as what people do, rather than say. Voting is hard data, polling is soft data; when they disagree the hard data wins.

Does the "liberal" message really play?

2008-06-23T11:36:00.000-07:00

Here's a very interesting post from the WSJ's political blog that outlines the ideological path our politics has taken over the last 40 years: "Is the Democrats' Message Flawed?".

Peter Brown argues:

After the 1980, 1984, 1988, 2000 and 2004 elections, Democratic leaders argued that the American people had not rejected their ideas or governing philosophy. Instead, they said, their nominee had not effectively communicated the party’s core message. It wasn’t the American people rejecting those views and values, they contended.

Whether that was an accurate reading of the electorate or a self-serving analysis by the party’s elites, it has made wonderful cocktail party fodder for years. But it has also been used as a rationale by those who didn’t see the string of defeats as a call to retool the party’s message.

My own studied view is that the liberal political agenda has needed retooling for a generation, but the true believers who cling to an updated version of FDR's New Deal coalition refuse to accept the lesson of lost elections. Republicans have been the beneficiaries of this monumental self-referential myopia, but conservatives have also failed to redefine their own agenda in the face of new challenges. (One would hope they will be quicker to respond to electoral defeat. See Paul Ryan's proposals under my "Policy Futures" post.)

You'd think the Obama-McCain choice would resolve the issue once and for all, but I have my doubts. The problem as I see it is that both partisan ideological extremes misinterpret mainstream America. I would say that the average non-partisan voter is neither liberal nor conservative and would eschew those labels for what might be better termed "tolerant traditionalism." But left partisans stereotype the "traditionalism" as ignorance, bigotry or religious fakery, while right partisans stereotype tolerance as licentiousness and moral degeneracy. These stereotypes are inconsistent and rejected by those to whom they are meant to be applied. However, we do have the empirical lessons of dozens and dozens of social and economic policies here and abroad that we can evaluate with objective judgments - it's more revealing when we refuse to accept those judgments.

The reason why this election may not resolve this issue is because Obama might be elected and his policy agenda may fail. McCain may win, and fail as well. Or both candidates may completely bastardize their respective ideological agendas, and succeed or fail on their own. The worst case would be for McCain to win and discredit conservatism, while Democrats lay the blame for electoral failure on racism. Then we'll be back at this same point 4 and 8 years from now, probably having learned nothing new about what we believe politically.

Wiki-wiki to the White House?

2008-06-19T09:16:00.000-07:00

As the Obama saga develops many have taken note of what has empowered a relatively unknown and inexperienced politician to his present heights. Geraldine Ferraro is probably right and serendipity plays a large role in our fortunes, but the more important factors that will continue to propel Obama's campaign forward go beyond race and luck.

The focus of many analysts is on Obama's prescient application of new technologies that employ the power of networks. "It's the Network, Stupid" is the paraphrased mantra of this campaign. (A couple of articles here and here.)

It's the new media MySpace Facebook YouTube viral campaign. And it's worked.

What's significant about this is that Obama has managed to raise more than $250 million so far, most of it from small contributions over the Internet. This is the Howard Dean campaign finance model perfected. His success has led him to reject public financing, as was just reported today. Big surprise. But citizens voting with their pocketbooks is a lot more meaningful than polling. This suggests Obama has a significant edge in the level of commitment of his support.

Beyond the money is the organizational power. Web-based technologies can organize faster at much less cost than the old methods through social and economic institutions like unions and churches. It appears that Obama has powered his campaign at minimal cost through the phenomenon known as crowdsourcing.

Crowdsourcing is a form of mass collaboration when the masses contribute their efforts to the common cause for little or no remuneration or the possibility of winning a prize. Think reality TV. This is the current rage in business circles, but the open commons has its limits in economics. It really only works when the product is shared by all, not just the owners of the business. We might think of crowdsourcing as a more modern form of feudalism, where the serfs get to contribute to welfare of the lord.

However, with the public good of democracy, it may just be a viable strategy and this is the promise Obama is selling. (Of course, as president he will be Lord of the Manor, but it's a dirty job and somebody has to do it.)

The danger here is that wikipolitics may just empower a minority to win an election over a less well-organized majority. (Hmmm, just like non-democratic politics of the past.) This result would be similar to Bill Clinton's win in 1992 with only 43% of the vote, though that was due to the three-way split between Clinton, Bush and Perot.

But if Obama is able to win the presidency with minority positions on the issues we can probably expect the same kind of backlash Clinton got in in his first term in office. It remains to be seen how committed Obama is to the liberal agenda he's followed in the past, but the country is ideologically center-right, and that, my friends, has not changed.

The Economic Policy Vacuum

2008-06-11T11:38:00.000-07:00

Last week David Brooks had an article in the NYTimes "Calling Dr. Doom." He cautioned against the optimism of both parties and candidates' campaigns, citing the obvious vulnerabilities of both and the dearth of ideas to combat the numerous policy crises we face.

The economic proposals seem particularly hollow and shortsighted. Neither candidate has a strong conviction about how to break the downward spiral of declining house prices, rising inflation, increasing health care costs, a collapsing dollar, rising energy prices, stagnant incomes, increasing debt burdens and slackening world demand. The only real way out of this is not by some clever sleight of hand, but by getting people to work more productively, increase their savings and investment, and pay down their debt. Concomitant to this is a necessary price correction for bursting asset bubbles. In the immediate case, this means housing prices. (This was a mistake that needs correcting, sooner rather than later.)

So Obama wants to jiggle the tax code to redistribute the tax burden in ways that seem more "fair." He proposes to increase income, capital and Social Security taxes on income for the rich (over $250K) and reduce taxes on those making less than $50K. McCain wants to maintain the income tax cuts but reduce corporate taxes and raise exemptions for dependents.

This feels an awful lot like Nero fiddling while Rome burns.

How will the economy respond to increased taxes on production? We already know the answer to that one, so why is Obama proposing it. Obama's policy guidelines follow some subjective notion of "fairness." But if fairness is desired, why not eliminate taxes on savings and capital returns for those under a certain income threshold, say $75K? He wants to raise corporate taxes, but these just reduce shareholders returns and aggravate the divide between haves and have-nots by subsidizing corporate expenses. Better to eliminate the corporate tax completely and recapture those revenues after they are paid out to owners.

Obama's proposals seem to adhere to a postwar philosophy of rewarding labor incomes over capital incomes, but that resigns workers to participating economically solely as an input cost. International wage pressures make that look like a bleak proposition. Besides, that's not how a poor Obama achieved his new wealth. Senator Obama is an entrepreneur who markets his intellectual capital, so why not encourage such activities through tax reforms?

His spending proposals, on the other hand, portend an ever increasing tax bite to pay for them. By necessity this will fall on middle class incomes. His trade objections have been written off to campaign politics, but what message is he sending and what expectations is he creating?

McCain's proposals seem to fiddle at the margins without negatively impacting production, but they sound too timid. If the economy tanks, his proposals will be sorely inadequate to deal with the problem. His spending restraints would go a long way to decreasing the burden on earners, but it remains to be seen for an administration of either party to actually decrease the federal budget.

Both Obama and McCain seem to lack the boldness required to open up our economic system and make capitalism work for every citizen. Liberalism suggests that we can move the tax burden around to reward certain deserving groups over others, after the fact. But this most often results in reducing inequality by making us all poorer. It would be nice if this fallacy was admitted and we focused on rewarding certain economic behavior that adds to the public good and found ways to encourage that behavior across all groups--rich, poor and middle class.

Want fairness? Introduce a low flat income tax, a national consumption tax with a high threshold, and some form of wealth tax that might be folded into an inheritance tax with a reasonably high threshold. Let's reward productive activity, whether it's labor or capital productivity and grow ourselves out of these doldrums. Yes, we can.

The DNC's Dilemma

2008-06-04T06:36:00.000-07:00

The primary results are in the bag and Barack Obama holds a clear advantage in delegates over Hillary Clinton, essentially winning the nomination prize. Now the ball moves into the Democratic leadership's court.

The Clintons have made it plain that they expect a quid pro quo to rally their supporters to the cause and no one claims to know the voters' minds on this. Dick Morris presents the negative case here: "No Ménage-à-trois for Obama."

At the recent rules committee hearing over the FL and MI delegations, Hillary supporters were vocally opposed to any compromise short of awarding full delegations that favor Clinton. One wonders how prevalent are the sentiments expressed by one participant quoted in an article yesterday by Froma Harrop titled "White Women Take the Gloves Off":

"Obama will NOT get my vote, and one step more," Ellen Thorp, a 59-year-old flight attendant from Houston told me. "I have been a Democrat for 38 years. As of today, I am registering as an independent. Yee Haw!"

The Democratic leadership has been walking a tight rope for the past two months, with superdelegates refusing to declare for either candidate to avoid alienating either white women, working class Hillary supporters, or the black vote for Obama. In so many words, they were desperate to save the party from itself.

So, this is the dilemma: does the DNC force the issue of Clinton for VP to save a fragile party coalition, or do they give Obama free rein to try to win the election on the strength of his "new politics" message? There are risks and uncertainties to either option. Putting Clinton on the ticket pleases certain Democratic constituencies who fantasize of a "dream ticket," but it contradicts Obama's message of a new style of politics. Most likely he loses many moderate and independent voters who cringe at the idea of eight more years of Clintons. Thus, the result is probably a wash.

On the other hand, if the DNC disses Clinton, will we see a mass defection of Reagan Democrats to John McCain? Might this defection overwhelm any advantage Obama may have among independents?

So, does the DNC try to save the party and risk the election, or do they go all out for the election and risk destroying the party?

The way out of this dilemma is for the DNC to navigate it's way out of fractious identity politics and reform a winning coalition based on cross-over liberal principles rather than group spoils, but this is impossible to do without risking the meltdown of the existing coalition. This has haunted Democratic presidential candidates for forty years and was only solved by Carter's evangelical conservatism and Bill Clinton's DLC triangulation.

There are other options that offer a possible escape: award Clinton something short of the vice-presidency in return for her support. Perhaps another shot at health care or a high cabinet post? Senate majority leader? These various options have their upsides and downsides, but the immediate risk the party faces is real and the leadership is certainly feeling the heat.

Electoral College Math? Same Old Same Old.

2008-06-02T18:10:00.000-07:00

Robert Novak had a recent post from the Evans-Novak report. The report gives a state-by-state breakdown of EC predictions. The national map looks remarkably like the last two presidential elections, with the tally predicting McCain winning with 270 votes to Obama's 268. Support for Democrat Obama is in the northeast, Great Lakes and Pacific regions, with the big red "L" defining red state support for Republican McCain. So much for a new political configuration.

Of course, the actual result will be different, but the voting and polling data already support another red-blue, polarized 50-50 election. I don't expect either McCain or Obama would necessarily govern as President Bush has, but our political polarization is a reflection of voters' behavior, not governing style. All the evidence points to this, yet people would still like to find a scapegoat in the media, the parties, the Talk Radio pundits, the Bush Republicans, or the culture warriors. But it's the voters forcing the candidates and the parties into uncompromising ideological positions, despite the candidates' promises of a new page in our politics.

As we have seen in the primaries, neither McCain nor Obama can deliver a new politics. Only the voters can reject their own identity politics, listen to the opposition, and learn to compromise on the issues. As James Carville might say, "It's the voters, stupid."

Politics and Pastors

2008-05-25T13:50:00.000-07:00

First it was Barack Obama and Rev. Jeremiah Wright, then Rev. John Hagee and John McCain. Given the fallout we might wonder about the precarious relationship between spiritual and political leaders, but this would be the wrong lesson to apply.

The role of religion in post-60s American politics has turned into a one-sided affair, with the Republicans reaping the rewards of an important orthodox and evangelical constituency. Meanwhile, secular Democrats decry this relationship as a violation of some sacrosanct separation of church and state. Leaving aside the constitutional argument, the political one is usually less well understood.

The partisan turning point among evangelicals and other orthodox religious denominations occurred during the Carter presidency. Most evangelicals voted for the Southern Baptist Jimmy Carter over Gerald Ford in hope that he would be sympathetic to their social conservatism. But Carter ignored them in office and then threatened to deprive Christian religious schools of their privileged tax status because of discrimination. Feeling unjustly attacked, evangelicals voted overwhelmingly for Reagan in 1980 and they've been voting conservative ever since. But they were always traditionally conservative and secular Democrats have done little to appeal to these groups beyond scolding them for their participation in politics. In so doing, Democrats have mistakenly attributed religious voters' motivations to religious orthodoxy rather than recognize their legitimate political agenda. For example, evangelicals virtually ignored Pat Robertson's 1980 presidential bid in favor of a more secular, divorced, Hollywood actor.

Republican strategists, first Lee Atwater and later Karl Rove, quickly recognized the political potential of the conservative church-going population. Being strategists, they realized the true power of evangelism was organizational, not doctrinal. In a sense, mega-churches play a role for the political right that most approximates labor unions for the left — they educate, inform, and instruct. In recent decades this organizational capacity has benefited Republicans as evangelical congregations have expanded while labor unions have shrunk. But the bottom line is that religious faith has been inextricably intertwined with American politics since the beginning and religious voters' political preferences are as legitimate as any other in society.

This gets us back to pastors. The track record of ambitious spiritual leaders has been mixed and the list of prominent failings include Ted Haggard, Jim and Tammy Faye Bakker, Jimmy Swaggart, and the political fortunes of Pat Robertson and Ralph Reed. The error Barack Obama made was to have his political career so closely linked with the volatile Rev. Wright. John McCain is not so personally linked with Rev. Hagee, but his strategic error was to seek the easy endorsement of the leadership in order to shore up support among the congregation. True believers are suspicious of subordinating their faith to earthly politics and their politics can often diverge from their pastors. But their political power is not found in their religious beliefs, it's in their regular church-going behavior. One can get a targeted political message out more effectively than with an atomized constituency and the lesson here is that McCain should eschew high level endorsements of preachers and pastors in favor of a grassroots appeal to conservative religious congregations. This is a strategy not really available to or easily countered by Barack Obama. (However, Obama's advantage may lie in his successful use of the Internet.)

Democratic? What's democratic?

2008-05-22T14:43:00.000-07:00

I read an article on the Democratic party's nomination process on RealClearPolitics today: "Democrats Should Be More Democratic," by Froma Harrop.

Ms. Harrop states

...the Democrats' discussion of delegate math is already moving to Electoral College math, and here the skies turn cloudier for their likely candidate. One fear is a repeat of 2000, when Democrat Al Gore got a plurality of the popular vote, but Republican George W. Bush won on the basis of the Electoral College tally. Not very democratic, was it?
If Democrats ever intend to again argue that the raw numbers should determine the next president -- and not an archaic system that can frustrate the democratic will -- they might start by setting a better example.

Ms. Harrop criticizes the Democrats for abusing a certain definition of democracy in their primary process, basically that the most popular votes is democratic and just. This is odd and harkens back to those misconceptions about how we choose presidents that proliferated after the 2000 election.

We don't have direct majoritarian democracy in the USA because in many respects it can be judged unjust. I repeat, democracy so interpreted can violate our liberal principles of justice. Certainly Ms. Harrop and those disgruntled anti-Bush Democrats are not arguing for an unjust system. But maybe, just maybe, they don't know it. I try to explain this in a previous post (What's Fair?), but I'll apply the main points here.

First off, the party primary system is a simple social choice mechanism to arrive at the presidential nominee most likely to win the election. It's not really about giving registered partisans an equal voice, unless of course the party so chooses to make that another of its objectives. (Unfortunately, as we've seen this year, these two objectives may conflict - then what do we do?)

Democrats chose primary rules that tried to split the difference between these two objectives: a widely participatory system of states' primaries with delegates apportioned according to the popular vote. (There is an odd inconsistency between caucuses and primaries, but that is a complexity that varies by state and goes beyond this simple summation.) To complement the primary process, the party also chose to award superdelegate voting status to certain party elites and backroom cigar smokers, just in case the first process went wrong. In other words, the Democrats wanted to give their registered voters a say in the selection process, but not so big a say that they might mess it up. Now, with the Obama-Clinton faceoff, the entire process has become a messy snafu.

Contrast this with Republicans, who award delegates on a winner-take-all basis. Fair? Unfair? It's a silly question. Their objective to choose a candidate was arrived at efficiently and most analysts believe McCain looks to be the perfect choice for the beleaguered Republican party's nominee in 2008. We'll see how well this holds true in November.

But my point is that a simple majoritarian voting rule is not inherently more "fair" than any other voting process. It all depends. In the presidential voting process the objective is to exercise the will of the people in selecting a national leader. If 60 million voters vote one way, and 60 million voters vote another, does the 120,000,001th voter's preference determine with any comfortable certainty what the will of the people is? When the popular vote is so close, it means the peoples' will is unclear. That's when the Electoral College rules become critical, as they should. When the popular vote is unclear, the default objective becomes how widely each candidates' support is spread geographically across the nation's 50 states. One may disagree with this objective, but it seems to make good sense given our nation's frequent historical divisions based on regional geography.

Policy Futures

2008-05-22T13:50:00.000-07:00

A couple of articles caught my attention this week.

The first one was in the WSJ on May 19, "The Next American Frontier" by Michael Malone. Malone explains the economic transformations our society has experienced over the past generation and the implications this has for social and political organization. Our capitalist culture has become more entrepreneurial, breaking down some existing institutions of business and labor, while empowering individual innovators. This resulting shift toward apolitical market metrics for success and failure is lamented by some nostalgic for the past, writers like Thomas Frank. But the transformation is occurring because it plays to the wealth-creating strengths of a free society. We are becoming more a society of ideas than one of control over resources. We should figure out how to embrace the change for its opportunities, rather than impede it because of its uncertainties.

The second article appeared two days later in the WSJ by Paul Ryan, a Republican congressman from Wisconsin, titled "How to Tackle the Entitlement Crisis." Rep. Ryan suggests a principled program of policy reforms to address health insurance, Medicare and Medicaid, Social Security and the tax system. He offers an excellent roadmap for aligning our politics with the transformation outlined in the Malone article. In essence, his reform proposals focus on empowering the individual and freeing citizens to provide for most of their own needs. This is falsely derided as the YoYo society (for You're On Your Own) by the Democratic left, but individual initiative and self-reliance have always and still do underpin the American frontier spirit. We need only realign our more recent entitlement culture.

In a previous blog post (How to Win in 2008....and Beyond), I argued how our future politics would need to meet citizens' demands for individual autonomy, freedom of choice, and protection from risks we can't control, what is called systemic risk. (Such risks would include financial meltdowns, terrorist attacks, environmental disasters, currency runs, disease epidemics, etc. - all other risks can be managed by private insurance and asset diversification.) Technology has empowered our sense of autonomy, free choice and control. It's how we conduct our lives in product and service markets and what an entrepreneurial society demands from government. The protection aspect is where we've got more thinking to do.

In this respect, Rep. Ryan's proposals provide a consistent vision and any voters who believe we are headed in the wrong direction today should really give serious consideration to how they envision the future differently. No matter what anyone thinks, the New Deal is not coming back - it makes no sense in 21st century America.

No New Deal for Globalization

2008-05-15T06:49:00.000-07:00

In their July/August 2007 issue, Foreign Affairs published an essay by Kenneth Scheve and Matthew Slaughter (a political scientist and an economist) titled, "A New Deal for Globalization." Their main argument was that increased globalization and open trade would require an expansion of national redistribution schemes that would compensate the losers (primarily labor) by taxing the beneficiaries of trade. I wrote a pointed critique at the time based upon my extensive research into the wide variation of national unemployment insurance across advanced industrial democracies (see Michael Harrington, 1998: Trade and Social Insurance: the Development of National Unemployment Insurance in Advanced Industrial Democracies, UCLA). My findings help reveal what were the true causes of the political responses to increased trade during the 20th century and contradict the basic premises for what Scheve and Slaughter advocated in their essay. I reprint that critique here:

Kenneth Scheve’s and Matthew Slaughter’s “A New Deal for Globalization” is an odd mismatch of a couple of old deals. As measured by the expansion of international trade, this is not the first go-round for globalization and their analysis of the politics would greatly benefit from historical comparisons. This is important both for similarities and differences between the present and the past.

At the turn of the last century industrializing European nations had been struggling with the economic and social effects of globalized markets for more than a generation. Many small European nations, like Belgium, the Netherlands, and Switzerland had trading sectors that greatly depended on foreign markets over which their governments had very little control. As trade fluctuated, so did domestic employment, giving rise to political demands for protection. The Grand Compromise, to which the authors allude, was a trade-off of labor compensation subsidized by public and private contributions to universal social insurance schemes in return for increased trade openness.

The conventional narrative claimed these compromises were engineered by trade unions and left labor parties. In actuality, a cross-national case study comparison reveals that international manufacturers and resource exporters had more important political influence in fostering these compromises. Trading industries favored the cross-subsidization of labor compensation schemes that primarily benefited their industries’ share of national wealth. The result was a significant expansion of world trade and economic growth so successful that it attracted imperialist regimes to pursue expansion by other means. The resulting war confounded trade agreements leading to the disaster of 1930s protectionism, but the lesson of managing trade was learned. However, the logic of these programs was not income redistribution, as that would not have attracted the support of capitalists. Rather, these schemes promoted national savings pools to manage the ups and downs of trade over time. They’re like saving for a rainy day.

Countries that were less trade dependent, such as the United States and Japan, instituted their own social insurance schemes much later for reasons stemming from the world depression. These were primarily redistributive schemes that had little to do with globalized trade. Scheve and Slaughter try to conflate these two logics, which is why I say theirs is a mismatch of two old deals.

The question is how can we apply the lessons of history to our current difficulties over globalization? The authors suggest a redistributive scheme of more progressive taxes on all labor incomes. Now, there are probably many good reasons to reduce the regressive tax burden on labor, but globalization is perhaps the least compelling. In fact, redistributive taxes on labor may do nothing to promote trade while simultaneously risking a decline in domestic investment, production and economic growth.

The true problem of globalization results from the maldistribution of the gains and losses from trade across the national, and indeed even the international, economy. But it’s not at all clear that globalization is the primary cause of growing income disparities, so the connection between income distribution and globalization is tenuous at best. A more likely culprit is the winner-take-all economy and the concentration of the returns to capital, of which globalization is but one contributing factor. However, the effects of redistributive tax schemes are well-known: they restrain investment and distort the allocation of labor and capital resources. The inevitable result is lower national wealth – the question is whether this political-economic trade-off is optimal. I will argue it is not as there are better trade-offs to be made.

First, historically, the politics of trade openness only compensated those directly hurt by trade with generous unemployment benefits and retraining. This is the proper nature of social insurance programs and why they make more economic sense than pure tax transfer schemes. Why should a general scheme that redistributes income from high to low for all workers be associated at all with the costs and benefits of trade? Why would such a scheme ever cause workers to stop favoring protectionism? A more rational strategy for workers would be to demand redistribution and protectionism in tandem.

Second, it is highly unlikely that reducing labor taxes will allow American workers to compete on labor costs with the international labor pools in China, India and Central America. More likely it will cause more jobs to be created in the non-tradables sector at equal or lower wage levels, increasing production and profits in these sectors. Workers gain little and we get more workers whose taxes don’t pay for their social benefits.

Third, progressive labor taxes are easy to avoid. At the management level it is a simple matter to substitute alternative compensation schemes to avoid labor taxes altogether. As the authors note, “income growth at the top is being driven by corporate profits, which are at nearly 50-year highs…” Top CEOs now make more in one day than the average worker makes in a year. Even if one believes this is not an economic problem, it most certainly is a political one. So let us accept that the increase in income inequality and the most direct effects of globalization are both reflected in the rise in profits. This cannot be overemphasized. The big gain in incomes in the last two decades has come through profit participation through stock options. (High salaries also come from the same slush fund of corporate profits.) When options are exercised, the income is all capital gain. For example, Steve Jobs’s salary in 2006 was $1, but his total compensation was $646 million, the value of his options. Increased labor taxes will not have much of an impact on Mr. Jobs and the compensation packages of all large earners will most definitely adjust to avoid redistributive taxes. Thus, the $256 million of tax revenues that the authors expect will likely never materialize and the median wage income threshold will fall to even lower levels. (For true redistribution, what the authors really want is a wealth tax, perhaps in the form of a flat consumption tax with a high threshold to protect lower income classes. But this has nothing to do with trade.)

It is time to think outside the box. The future of globalization will not be a return to national universal income compensation schemes based on wages and salaries. The problem we need to overcome with globalization is the mobility of capital relative to labor. We can see the disorderly response to this problem in illegal immigration and outsourcing. But compared to a century ago, the difference today is that labor incomes are the wrong focus for developed nations. Citizens of capital-rich, highly skilled labor economies need compensation schemes that enable them to participate in the profits gained from the international rationalization of production. Yes, labor taxes at the lower levels should be reduced, but the reason is to empower ordinary workers to accumulate capital assets. As citizens, all workers need to be shareholders in national wealth, not mere labor costs. Perhaps George W. Bush was right with his Ownership Society.

How this participation is accomplished is the subject of entirely different policy argument, but the direction should nevertheless be clear.

Frank Gets it Wrong Again

2008-05-14T16:30:00.000-07:00

Thomas Frank, author of What's the Matter with Kansas, had an op-ed published in today's Wall Street Journal titled, "Our Great Economic U-Turn." But, just as he misinterpreted red state politics in Kansas, Frank mischaracterizes the transformation in the US and world economy. By his essay’s very title Frank implies we can make a 180-degree turn to some idyllic post-war Golden Age of laborism. But the mid-20^th century period was the historical anomaly. With the developed world outside the US devastated by two horrific wars, the US economy alone stood unchallenged. US capital and labor shared the rewards because they could afford to and wage benefits expanded. But this age ended in the early 1970s and will not return, as Frank suggests, with a few policy changes in Washington. The rest of the world has joined the game and US relative economic dominance is reverting to a more balanced norm. This is not a bad thing, as the developing world will attest.

In the US, the lost decade of the 1970s led to popular demand for the structural economic adjustments unleashed by the Reagan revolution. What Frank correctly identifies are the distributional challenges this has forced upon our economic and social institutions. Simply put, capitalism rewards capitalists and labor is an input cost. So, the opening of the world economy has weakened the bargaining power of organized labor to extract high wages. But the idea that government should tip the scales toward labor is a notion at odds with economic reality. A return to New Dealism will only restrain our competitiveness and accelerate our relative economic decline. Instead, our policies should unleash wealth creation by empowering citizens to participate in capitalism as something more than an input cost. Rather than reverting to age-old class divisions, Frank should focus his attention on how policy can apply the logic of capitalism to encourage workers to accumulate capital assets and participate in the world economy as true capitalists. We do this indirectly with retirement assets, but applied directly, shared wage and capital incomes can moderate distributional inequalities.

Lastly, Frank should reserve his ire not for the plutocrats, but for the political class that has obstructed private ownership and capital accumulation for the “have-nots” in favor of government-driven redistribution and political dependence. They have dismissed these ideas as the YoYo (You're On Your Own) society rather than the self-reliant DIY society consistent with the true American spirit. And their promise of European social welfarism is certainly a false one.

Yes, the rules of capitalism do favor the capitalists, so let’s open up the game to those truly in need. Is that not an American liberal value?

A Tale of Three Primaries

2008-05-08T17:32:00.000-07:00

With the most recent primaries in Indiana and North Carolina the pundit class has closed the books on the Democratic nomination, crowning Senator Obama with an unassailable lead. Of course, this is based on strategic calculations of the super delegates’ political logic rather than the clear preference of the voters. In this they are probably right, baring some unforeseen disaster for Obama. But there are some interesting details hidden in these votes we should carefully note before we leave the scene.

Most of our received wisdom on elections comes from exit poll sampling, often a highly subjective and error prone art. Exit polls also tend to bias explanations toward identity characteristics of voters—things like race, age, gender, income, and religion—because these data are more easily collected in surveys. A more fruitful and complementary approach is to compare votes to census data at the county level. This gives us a complete population dataset, rather than a sample approximation.

The last three primaries give excellent insights into the political mood of the country when compared to the last two presidential elections. In addition, they’ve occurred at a turning point in the Democratic primary season when both candidates have been tested and voters are paying close attention. While none of the individual states of PA, IN, or NC are truly representative of the nation (they all tip Republican), taken together their county profile is remarkably in tune with the average profile of all three thousand-plus US counties. This applies to mean population density (240 vs. 245 inhabitants/sq. mi.), median family income ($45K vs. $42K) percentage of white (86% vs. 85%) and black households (10% vs. 9%), median age (37 vs. 37), and percentages of married households (56% vs. 55%) and female heads-of household (10% vs. 10%). In other words, the 259 counties in these three states look remarkably similar to the national profile. So, taken together, they make an ideal sample for the nation as a whole.

What does this method of analysis tell us? First, it tells us that voting preferences are unfolding in patterns uncannily similar to the past two polarized elections, with a few notable, though not necessarily encouraging, differences.

In the 2000 and 2004 elections we had the red-blue pattern of county results that largely owed to divisions between rural and urban, married and unmarried or female heads-of-household, and a residual attributed to ideology (article here). In the tri-state primary votes these divisions still hold but have been overwhelmed by divisions of class, race and gender. The same old red-blue pattern holds fairly true. (In case you haven’t guessed, Clinton is the red candidate and Obama the blue—another reason we should expect Obama to decisively close out the nomination.)

This interpretation is confirmed by many analytics and comparative statistics. Clinton counties are strongly and positively correlated with Bush counties, while Obama counties are strongly correlated with Gore and Kerry counties. A simple regression equation matching county characteristics against vote outcomes across all 259 counties shows almost all of the voting choice can be explained by white and black households, married households, female heads-of households, median age, median family income and population density. The most significant variables were black households, median family income and female heads-of-household. These results are confirmed by exit polling showing that Clinton captured lower and middle class whites, women, and older married voters living in rural and outer suburban communities. Obama won among young voters, blacks, and single urbanites.

So, what does this mean in terms of the general election? One, though Democratic primaries only capture Democrats, it seems they vote in many ways similar to the entire electorate. Two, Democratic voters are largely divided by identity politics: race, gender, age and marital status. This makes for a hazardous coalition in national elections where the white, married, middle class is the dominant group. Three, Obama’s weakness was most glaring among working class married whites. Four, Clinton’s strategic error was to look past the primaries and gear up for the general election by moving towards the center on the issues. This left her vulnerable in primaries that are driven by more pure ideological partisanship. Both Clinton and Obama are perceived as far to the left of the general electorate, but without the Obama challenge Clinton could have portrayed herself more left-of-center against McCain’s right-of-center. Five, despite the rhetoric of post-partisanship and unity from both presumptive nominees, one wonders if we’re actually headed for the same polarized 50-50 election where electoral politics once again trumps more important issues of governance.

Pew Research Poll on Ideological Positions

2008-05-02T08:50:00.000-07:00

Pew recently released a poll on voter opinions of the Democratic nomination race. (Link here.) Polls give us momentary snapshots of voters attitudes that can change from day to day, but this one had an interesting result on ideology that's been unwavering since the 2008 presidential race began. This is the perception of ideological positions of the different candidates. Most know that in a two-party system the candidate closest to the median voter on the issues stand the best chance of winning a plurality in the election. We see the table below what the problem has been from the start for Democrats: both of their candidates are ideologically identical and yet far to the left of the electorate.

So, from the self-assessment of voters, America is a center-right country, as has been true for the past 27 years. Yet moderate Democrats have been eliminated from contention by left-wing activist groups. On the Republican side, McCain prevailed over more ideologically pure conservatives and thus stands much closer on the issues with the median American voter. It doesn't mean he will win, but it does mean he is much better positioned for the general election than either Clinton or Obama. Of course, when the Democratic nomination is decided, the winning candidate will tack quickly toward the center on the issues, but this necessary flip flopping doesn't bode well for how candidates are perceived by moderates and independents.

PA Voters Display the Red, (White) & Blue

2008-04-28T10:44:00.000-07:00

Last week's Dem primary in PA revealed some familiar results: it was red voters vs. blue voters with Hillary representing red and Obama blue. It was the same old urban vs. rural and suburban we've come to know so well, with a few additional twists. The empirical evidence:

In both 2000 and 2004 George Bush won with the strong support of rural and married voters. In Pennsylvania, Clinton has done the same. The mean population density for Bush counties was 108 inhabitants per square mile in 2000 and 110 in 2004. This compared to 739 inhabitants for Gore and 836 for Kerry. In Pennsylvania, counties won by Clinton have a mean density of 238 inhabitants versus 2290 for those won by Obama. Married voters strongly preferred Bush by 53% against 47% for Gore and 57% against 42% for Kerry. Likewise, as measured by county census shares, married households leaned toward Clinton.

A few other factors came into play in Pennsylvania: race, age, income and gender. In 2000 and 2004 black and white populations were correlated with the vote, but a regression model revealed that the proportion of female heads-of-household had greater explanatory power than the proportion of blacks voting Democrat. In Pennsylvania this was no longer true as race rendered female heads-of-household meaningless as an explanatory factor. This was mostly due to the overwhelming number of blacks who voted for Obama (92%), regardless of household status, and the concentration of black voters in PA urban centers.

On income, Clinton counties had a median family income of $44K while Obama counties had a median of $54K. Age was skewed as older voters preferred Clinton while younger and more educated voters favored Obama. As expected, older white women identified and voted heavily for Senator Clinton. On religion, exit poll data shows that religious voters supported Clinton, especially among more orthodox Catholic and Jewish voters.

To parse this all out we can use a simple regression equation matching county characteristics against vote outcomes in 67 Pennsylvania counties. The results reveal that the most important demographic factors determining the results were population density, median family income, and race.

Sounds familiar, no? It seems the two Democratic candidates somehow managed to slice and dice Pennsylvania into red and blue enclaves with nary a Republican strategist or Bush conservative in sight. It’s tough to blame this on Karl Rove.

How could this happen? The answer is the same as it was in 2000 and 2004. Our partisan polarization is not determined by party ideologies, strategists or media stereotypes, but by more enduring lifestyle choices that vary between cities, suburbs and small towns. (See research at www.redstatebluestatemovie.com) Clinton and Obama line up perfectly on the ideological scale and their differences in policy are negligible, but the competitiveness of a tight nomination race pressured both candidates to divide and conquer Pennsylvania’s Democratic voters by introducing wedge issues like guns, religion, race and gender into their campaigns. Thus, Clinton became the candidate of an older, white, embittered working class “clinging to guns and religion,” while Obama became the black urban elitist who cannot grasp small-town American values. Applying these wedge issues pushed voters towards ideological extremes most consistent with their lifestyle preferences. Voilà– red vs. blue all over again. Silly? Certainly. Guns and church attendance are correlated with rural traditions, not determined by partisan ideology.

Senator Clinton clearly won the Pennsylvania primary because she was able to take the outer suburbs by almost a 20% margin. With the overwhelming support of rural areas she was able to claim 60 of 67 counties across Pennsylvania. If this had been a national election with Clinton as the conservative and Obama as the liberal, she would have won in a landslide.

So, will liberal activist Democrats absorb the lessons of Pennsylvania? After the Bush presidential elections it was accepted wisdom among urban liberal elites that the Bush Republicans were solely to blame for polarization. But such rationalizations have been far too convenient and self-serving. Pennsylvania’s results reveal serious damage to Obama in identifying himself so closely with urban liberal and identity group interests. The Wright episode and the chiding of gun owners and church-goers will continue to haunt him unless he’s able to demonstrate that he understands and has learned from these mistakes. It should even be more disconcerting to liberal sensibilities that race played far more of a factor in a Democratic primary than it did in the past two presidential elections.

Red and blue polarization in American politics is more prevalent and deeply rooted than we suspect. And it has become fundamental to electoral politics. The escape route must bridge disparate communities through ideological positions based on more universal principles that can transcend narrow identity politics. But the most recent results prove candidates, parties, media pundits and most important, voters have yet to demonstrate they will reject this electoral dynamic, despite the obstacles it creates for democratic governance. An appreciation for these realities is perhaps the first step toward change.

Voter Sorting

2008-04-22T09:59:00.000-07:00

There's a good review of an excellent book on political polarization in the WSJ today . It's a book by Bill Bishop of the Austin-American Statesman called The Big Sort and the analysis is spot on. The red-blue divide in our politics is by county geography and is largely due to sorting behavior and constituent targeting by parties and political campaigns. But the sorting behavior is not driven by ideology, it's mostly driven by innocuous lifestyle choices. The ideology has been deliberately applied as a strategic afterthought by parties and political activists. Thus, if one chooses rural living, there's a high propensity to enjoy hunting as a pastime, be a homeowner or own a small business. But an ideological conflict over gun control or tax policy then pushes this voter towards the Republican party. This is even more true for some of the more divisive issues identified by party strategists. (Note: Morris Fiorina homogenizes most of these differences by analyzing exit polls at the state level.)

The way out of this is for parties, politicians and voters to recognize these real divergences in preferences and focus on policies that bridge the divide. These policies must be built on broader principles that transcend identity politics. The problem is that electoral politics often rewards the divide and conquer strategy, while the media inflates these conflicts. Both Obama and McCain promise to overcome this, but it will take more than a good captain to turn this ship.

Why Polarization Will Likely Persist

2008-04-17T15:09:00.001-07:00

Read an interesting book yesterday on the Red-Blue divide, Common Ground by Cal Thomas and Bob Beckel, based on their opinion column of the same name in USAToday. The book, subtitled How to Stop the Partisan War That is Destroying America, is filled with commendable analyses of the historical and structural explanations of the bipolar disorder that currently afflicts American politics.

They have several chapters devoted to prescriptions for how to end polarization, mostly aimed at candidates and parties. The authors also argue how the voters are frustrated and fed up with the dysfunctional politics of partisanship and this certainly seems confirmed in this election cycle with the success of both Barack Obama and John McCain. Polarization works very well for electoral campaigns until it doesn't and it's to Obama's credit that he recognized we were reaching that point. McCain is arguably far closer to the ideological center than Pres. Bush, while Obama has also made conciliatory politics the cornerstone of his campaign. (Unfortunately, Obama's brief public biography doesn't yet give evidence of that commitment, forcing him to spend considerable energy defending himself against charges of orthodox left liberalism. But this is the kind of opposition he'll face if nominated and elected--the nation is nowhere near as liberal as Barack Obama appears.)

My only caveat to this book and its authors is that recent polarization in American politics is not a complete fabrication of the polarizers. It's based on some real differences in lifestyles and ideology that do line up with geography. True, the Red State-Blue State narrative is mostly myth, but the tension between red rural/suburban and blue urban is real and significant--those county maps are not fabrications of pundits' imaginations. This configuration is rooted in the voters preferences, as Obama and Clinton have discovered in rural PA, so it won't be easily wished away by whoever becomes president. The rural-urban divide is between different voting constituencies and any compromises will need to draw both extremes toward the center. Both Obama and McCain expect their opposition to do most of the moving, but no matter who prevails, the future president will need to do a little pulling of his own party base as well as pushing against the opposition.

To stake out the center requires the strong support of independents and moderates to counterbalance extremists like MoveOn on the left or James Dobson on the right, who can significantly influence close elections. So far McCain has demonstrated his independence better than Obama, but this is partly a reflection of nomination pressures on the Democrats' side. The battle between Clinton and Obama is so tight that neither one can risk offending any constituency within the base. This has prevented them from moving toward a more centrist general election campaign strategy.

Anyway, when it comes down to Democrats vs. Republican I'm pretty sure we'll be hearing a lot more noise about guns, religion, gays, abortion, race, the war, etc. and these spats will sound as partisan as ever. But recognition of the rural-urban divide can help remove many of these wedge issues, especially differences over guns, religion and gays. The question is how many of us will be willing to see past the party, the man and our ideological prejudices to the issues we face? If not, we'll be driven into our respective corners again and have only ourselves to blame. If you're a knee-jerk liberal or a jerk Republican, take heed.

Obama’s Wrong Wright Message

2008-04-14T16:21:00.000-07:00

Senator Barack Obama has impressive skills as an orator with a charismatic personality. He also displays a ready and willing intelligence. Such talents have propelled him from a relative unknown to international political celebrity in little more than three years. But this rapid rise has only raised greater curiosity about his personal history and values. Now, seeping facts about his biography have begun to define him in ways that undermine his winning message. First there was the flap about his pastor, Rev. Wright, and his casual refusal to adopt common patriotic symbols such as flag pins. Now there is more evidence that he adheres to the conventional liberal conceit that rural folks cling to cultural habits out of bitterness. We haven’t even gotten yet to his 1960’s style of policy prescriptions.

All of this was foreshadowed for anyone who read his memoir, Dreams From My Father. In his book Obama reveals a young man obsessed with a search for racial identity during his coming of age. Early on he seems to have decided to adopt the identity of his African father over that of his white mother or Indonesian stepfather. He seems to have viewed the white half of his heritage as the “other,” which is difficult for those of us of a single racial background to comprehend.

When he chose his political career path he seemed more determined to assert his black identity in his adopted hometown of Chicago. There, his ambitions as a community organizer and ward politician led him to Trinity Church and Rev. Wright. In this black church Obama could assert his credentials for black authenticity. It is this psychological need for identity and his conscious choice to be “black” that explains why he attended Trinity Church for twenty years and never saw the need to contradict Rev. Wright’s views on America. Unfortunately, this experience also contradicts his newfound desire to be a national political figure and the entire logic of his campaign. Obama promises to turn the page on divisive politics of the baby-boom era, to unite Americans for a common cause, but the only test of this commitment suffered twenty years of benign neglect in his relationship with his spiritual mentor. If Obama cannot bring a revered "uncle" back into the fold over a period of twenty years, or not even try, how will he create a big tent that encompasses red and blue voters? And how many of Trinity’s congregation have been sidetracked by Wright’s separatist racial values over the years? Now Obama has belatedly discovered that what works in the wards of Chicago’s South Side doesn’t play so well in rural Pennsylvania or suburban Florida. In fact, this week he also discovered that what plays well in the salons of San Francisco also doesn’t resonate well in the rustbelt. It is beginning to sound more like Obama's vision of unity is based more on persuading conservatives of the supremacy of liberal values - good luck with that.

The true divide in American politics is between liberal progressives and rural traditionalists, with the suburbs at the tipping point between inner suburbs leaning Democrat and outer suburbs leaning Republican. The mistake Obama fell into was the urban progressive attitude that rural traditionalists are out of touch with their inner selves due to economic transformations or Republican brainwashing. But Thomas Frank has it all wrong – these are deliberate lifestyle choices. Over the past twenty-eight years Republicans had the great fortune to have these constituencies delivered to them by Democratic blunders on religion, guns, crime, family values and abortion. Now Obama seems to have botched it again. Not because he misspoke or used the wrong words, but because he just doesn’t get it. Urban progressives really need to reprogram their conceits about American politics.

The sad reality is that Obama defined himself as the urban, “black” candidate long before the Clintons tried to pin the label on him by comparing him to Jesse Jackson. The rest of us in awe of Obama’s rhetorical magic are just discovering this. And the unfortunate reality of which few will speak is that defining American society through a racial division of black and white is rapidly losing its relevance in 21st century America. Hispanics, East Asians, South Asians, Russians and Middle Eastern immigrants have little desire for a national conversation on race that focuses solely on blacks and whites and so blacks’ opportunities to focus the debate on problems unique to their communities are slowly fading. We see this is in broad support for Clinton among these other groups. This is why it is imperative for a candidate like Obama to transcend his black African heritage and become the first mixed race candidate, rather than the first black candidate. As Shelby Steele has argued in his book on Obama, this may not be possible. If so, it is a missed opportunity, but the viability of his candidacy is still a notable achievement. The worst lesson to take from this would be for blacks and whites to conclude he lost because of racism rather than because his appeal was limited and his policy positions out of touch with the majority of Americans.

Border Follies

2008-04-07T10:23:00.000-07:00

Political debates on illegal immigration and border control can quickly veer off course, miring the discussion in a swamp of recriminations. This is where we currently find ourselves. To escape the quagmire we should acknowledge some recurring myths and fallacies:

Frequently we lump together lawful immigration and illegal immigration, but there is an important political distinction between the two: There is wide public support for lawful immigration, but little tolerance for illegals;

The illegals themselves are the wrong focus. Attacking or catering to illegal immigrants and migrants only invites distracting charges of racism or pandering. Illegals are responding rationally to the incentives in place; to change their behavior we need to change the incentives. This, as opposed to mass deportation, is within our control;

This is not a partisan issue between Republicans and Democrats, or liberals and conservatives. The costs and benefits of uncontrolled immigration fall along the lines of elites vs. non-elites. Both political and business elites benefit from a free flow of labor, while ordinary taxpayers and workers get stuck with much of the bill. The power of the ballot box is the only recourse these citizens have;

All countries benefit economically from open markets (this includes capital and labor markets as well as goods markets), but the costs and benefits of trade are unevenly distributed across society. A political solution must allow for the distribution of these costs and benefits in some manner that insures free and open trade. It’s foolish to throw the baby out with the bathwater;

To increase border security we must first control the flow of economic labor migration and this can best be addressed by changing the incentives.

The nature of the problem is two-fold: an economic disequilibrium between the US and less developed countries in their stocks of capital and labor and their growth rates; and a stark disparity in the provision of social benefits between rich and poor countries. These two related issues color both the economics of trade and politics of labor migration.

The way forward is to remove structural barriers to the cross-border rationalization of the supply and demand for goods and services. This means allowing price changes by removing price subsidies and tariff protection for industries on both sides of the border, which requires political fortitude from US and foreign governments alike. Only market price adjustments can affect the flow of capital and labor across borders. The result will be that some goods and services prices in the US will rise and some US industries must migrate to low wage countries to survive.

The second problem requires a clear recognition of the social and political consequences of trade. Illegal labor migration is a rational response to greater demand for labor in the US and the increased social benefits this labor can earn, such as education and health care. But these gains must come from increased labor productivity, which requires a substitution of capital for labor. Illegal migration impedes this substitution as industries find it easier to use cheap workers instead of investing in more expensive capital equipment. This inefficiency must be subsidized, and this is where the taxpayer gets hit paying for the socialized benefits we provide citizens and non-citizens with public education, first-rate health care and social welfare services.

Resolving immigration is critical to our national politics and the foregoing analysis suggests the following policy guidelines for comprehensive reform:

Establish a system of temporary labor migration and identification to facilitate the economic adjustment period;

Secure the borders with a controlled flow of legal immigration and temporary migration;

Reduce industry prices supports, protectionist tariffs and non-tariff barriers in the

and apply political pressure to trading partners to also liberalize their economies;

Establish a reasonable enforcement mechanism to sanction employers who hire illegal labor. We know which industries these are and a decreasing supply of these workers will push wage and price increases in these industries;

Target social adjustment benefits for dislocated labor toward retraining and relocation assistance;

Revise current immigration and citizenship laws to be consistent with a policy of controlled immigration;

Reform entitlements consistent with the reality that social benefits ultimately are earned through economic productivity, not political redistribution. There is no Santa Claus in Washington.

These guidelines are economically and politically consistent and can help restrain the partisan politicization of immigration that bogs us down. The US is the world’s beacon for immigration and as globalization continues marching forward most people around the world would welcome US leadership on the issue.

The Case for Partisanship?

2008-04-07T10:04:00.000-07:00

In this month's Atlantic magazine Matthew Yglesia makes a case for partisanship and polarization by drawing on historical comparisons. [link here]

But his analysis blurs important distinctions between current and past polarization in American politics. The good and bad of polarization must distinguish between its functional effects as our current divisive politics has served electoral politics well but hampered the process of governing. We can observe this in the dynamics of the Bush-Clinton years where partisanship has defined voter differences but impeded important legislative compromises on entitlements, health care, national defense and immigration. One can assume citizen frustration with this experience is a large factor in Senators Obama and McCain’s support.

Our current partisanship has been detrimental because of an historical anomaly where voters’ ideological and subcultural identities have coincided, yielding Red and Blue America. As James Carville might say, "It's the voters, stupid." This coincidence - which is illustrated best with geography, hence the Red and Blue maps - has been exploited by parties as well as mass and new media. What this has meant is a hardening of political identity and less room for candidates to cross party lines (re: Lieberman). Ideological identity has been harnessed by candidates and parties to win elections, but this only works to a point. It was Obama’s moment to recognize the growing frustration with this dynamic and change his electoral appeal to post-partisanship. We’ll see how well it works as the underlying topology of red and blue remains.

Mr. Yglesia mentions the growing frustration with the two party system, but majoritarian winner-take-all rules force compromise and centrism necessary to win elections and enact legislation within a diverse polity. Multiple parties would only yield fragile party coalitions with the illusion of political effectiveness (re: Green, Freedom and Libertarian parties). As Mr. Yglesia concludes, we’re probably better off dealing with the frustration of the current system as it has served the nation well and its present dysfunction is most likely temporary.

Democrats' Dream Ticket?

2008-04-01T14:46:00.000-07:00

With the Democratic primary race looking more and more like a stalemate there's been buzz around liberal salons about a 'Dream Team' ticket with both candidates on it. This seems like a reaction to some serious concerns by pulling a rabbit out of a hat. One recent poll shows 28% of Clinton supporters would rather vote for McCain if Obama wins the nomination, and 19% of Obama supporters would rather switch if Clinton wins the nomination. So, as Obama and Clinton tear into each other, there's a fear that this may be the only way to salvage the general election against McCain.

One wonders. First, it would have to be at the point of a gun for Obama, who has no interest in having a Clinton tag team in the White House. Not only does it create potential for power struggles, it violates Obama's main argument to independents and moderates for his candidacy: turning a new page from the Bush-Clinton, baby-boom culture wars. And Senator Clinton must have little interest in playing second fiddle since she's been doing that for forty years. Now is her time.

On the other hand, Clinton would be more amenable to having Obama as VP, but that presents quite a gamble for him. Just consider what a Clinton VP slot did for Al Gore? An independent Obama would be much better off in the Senate and eventually running for governor of Illinois before taking another shot at the presidency.

More important though is to consider if the two together really represent the strongest ticket against McCain. An African-American and a woman on the same ticket seems to ask moderates and independents to take a gamble on two historic firsts at once. These voters are usually more conservative. It also appears the Democratic primary battle has been hog-tied by identity politics and this would raise identity politics to the forefront of the campaign. How many voters would just decide that McCain would be the safer bet? Certainly older women and Hispanics might lean that way.

The most significant reason why the 'Dream Team' may be more suspect is that both candidates are more liberal than the general electorate and this will not go unnoticed for long. The usual VP strategy is to round out the top spot with a candidate that brings different assets to the ticket - such as a candidate strong on defense experience, economic centrism or a different regional appeal. If we can get past the identity thing, on the issues Obama-Clinton really look more like mirror twins, which concentrates rather than spreads the risk of being out-of-sync with large groups of voters. One thing we learned from the past two elections is that there are some significant geographical differences in voter preferences across the nation.

Given these caveats, it would seem that a "Dream Team" is rather unlikely and, if pursued, risks turning into another presidential election nightmare for Democrats.

A Political Awakening?

2008-03-25T17:14:00.000-07:00

Playwright David Mamet wrote an interesting essay in the Village Voice on March 11 that belatedly came to my attention: Why I Am No Longer a 'Brain-Dead Liberal'

In his amusing way Mamet confesses a sudden revelation that he has been living in two different worlds - the functioning world of everyday life with work and play and family and fellowship versus the imaginary world where all was teetering on the brink of disaster due to some dark satanic conspiracy of the corporate-government-military complex. He equates the first with a democratic capitalist society and the second with the liberal fantasy world. In his words:

As a child of the '60s, I accepted as an article of faith that government is corrupt, that business is exploitative, and that people are generally good at heart.

His revelation was that reality was the exact opposite and he had always recognized this in his work. People are greedy, lustful, duplicitous, corrupt, inspired—in short, rich and complex human characters. And the constitutional genius of our society has pit the evil wizards of the military industrial government complex against each other, rendering these institutions much more benign than he imagined. Thus, left to our own devices, we somehow muddle through.

Mamet, though coming from the liberal, top-down, government-imposed mindset, has come to see the spontaneous order of a free society and how this insures the autonomy of the individual that permeates the American character and reinforces the community. This is the unifying idea that transcends our political ideologies and prevails over our political destiny. (This is the idea that would have propelled Obama to the presidency.)

I quote this article because this same idea is the basis of my argument in my last post: that the American people want policies and leaders that empower them with autonomy, choice and security from risks they can't control. Other than that, they prefer government to get out of the way so they may pursue their own slice of happiness, however they define it. If there is any "....and yet" for liberals to espouse, it should be to insure that this idea of empowerment and opportunity bubbles up for every member of our society.

How the Voters Win in 2008…and Beyond

2008-03-12T13:12:00.000-07:00

As the primary race becomes more conflicted by the day, it’s easy to get caught up by campaign tactics and strategic voting scenarios. Are voters are really so uncertain or confused on the issues that matter? Are we Americans fickle and unpredictable at the ballot box, twisting and turning on personalities and media spin? I would guess not. In this respect, we may gain a better perspective on where the nation is headed from a recent op-ed written by that old liberal warhorse of times past (and future?): George McGovern. In not so many words, Senator McGovern shed some needed light on the middle ground of the electoral battlefield.

On the major issues voters converge on choices that satisfy three guiding principles: freedom of choice, individual autonomy and insurance or protection against life’s contingencies over which they have little or no control. These three principles transcend ideology and partisanship and their application to public policy follows a new paradigm of individual autonomy and communal interdependence. Americans will reject cradle to grave security if it means giving up freedom of choice and personal independence. And they eschew the unchecked promise of free markets and personal responsibility if it means exposing them to risks they can’t control—things like market manipulation and embezzlement, as well as the lack of asset diversification. Nobody wants to see his or her retirement savings evaporate with Enron.

New Deal ideologues may disagree, citing public support for universal health care and entitlements like Medicare and Social Security, but measurable social and economic transformations over the past half century suggest these sentiments are more likely the residual of mid-20^th century politics than a return to same.

After World War II, national politics was dominated by peak associations comprised of labor unions, business associations and government. John Kenneth Galbraith called these “countervailing powers” that provided checks and balances over the “new industrial state.” But the economic landscape has changed drastically since then. Today union members have declined to 15.4 million, which represents only 12% of total workers. In the private sector their share has fallen below 8%. Corporate business also underwent radical transformations with the rise of entrepreneurship and the proliferation of small businesses as new technologies favor the small and nimble. Of course, the government behemoth only grows ever larger, but invites greater skepticism and scrutiny from the post-60s generations.

This paints the big picture of national political trends, but the new paradigm is also confirmed by more narrow policy preferences. Let’s start with health care. Recent surveys show health care ranks up there right with Iraq as a concern. But the problem is not health care per se, but access through affordable health insurance. The quality of care is extremely satisfactory (cancer survivor rates are the highest in the world) – but only if you can navigate the system’s maze to get that care. Recent polls also show that 64% believe government should guarantee health insurance for all, but only 30% think government would do better than the private sector in providing coverage. Americans already experience how a centralized, bureaucratic system works every time they go to the post office or pay their taxes and they’re not dissuaded by selective fictions about socialized medicine. They don’t want a universal program controlled by government—they want a multiplicity of viable options from which to choose according to their individual preferences. Right now their choices are so limited that the “none” option is being exercised to the disadvantage of all.

Next, education. Do the urban poor want free public education that leaves their children mired in ignorance and a cycle of poverty? No—they want choice and the freedom to make that choice. Just ask them. In financial matters Americans eschew unfettered markets that lead to more financial uncertainty and volatility in their lives. Does anybody really want to ride out roller coasters like the S&L crisis, the Long Term Capital meltdown, international currency collapses, the dotcom bust or the most recent housing bubble? Americans also want protection from criminals and foreign threats, especially something as unpredictable as terrorism. And they expect their government to deliver that protection at almost any cost.

Socially, Americans have become more laissez-faire and tolerant in their attitudes toward sex, divorce, drugs and alternative lifestyles, but at the same time many reach back to traditions and family to maintain a sense of continuity and community. There’s no inherent contradiction between these two tendencies as they both reinforce the three principles outlined above. I’d call it tolerant traditionalism.

The bottom line is that American citizens are fairly confident they can take care of most of life’s contingencies themselves and believe the proper role of government is to empower them to do so. They need to acquire resources and then have independent control over those resources. George Bush called this the Ownership Society, but then failed to address its uncertainties and risks; Hillary Clinton mistakenly calls it the “You’re On Your Own Society” and instead imagines a modern New Deal. We’re not sure yet where Senator Obama stands.

Maybe they should all take a tip from George because if one candidate gets it right, he or she will have little trouble attracting votes and the real winner in 2008 just may be the American voter for a change.

A Different Politics?

2008-03-11T18:14:00.000-07:00

Think politics will be different this time around? This article should give you a clue. Substance? Hardly. Apparently "taking umbrage," feigning outrage, and politicizing every word is the "new" old politics.

What's Fair?

2008-03-10T14:13:00.000-07:00

That's what Democrats are asking now with the increased possibility of the Clinton-Obama contest going all the way to the convention in August. On Chris Matthews yesterday Ron Allen said this was most important factor in picking the nominee, especially if Obama wins more pledged delegates with the popular vote while Clinton wins more superdelegates and insider party support. Then Matthews teased, "You mean, the Democratic party should be democratic?!?"

This is a bizarre box the party has put itself in again and again. E.J. Dionne wrote another article last week laying this out, "Dems' Agonizing Obsession with Fairness." Interestingly, the article's html title of the web page is: "The Dems' Losing Obsession."

The real problem is that our political elites, especially Democrats, have never explained how every social choice voting mechanism is flawed in some way, even majoritarian direct democracy. This has been demonstrated by Arrow's impossibility theorem and Condorcet's voting paradox.

So, what's fair? That depends. In democracy models the outcome usually depends on procedural rules. Unfortunately, the myth persists that merely tallying up all the individual votes across the nation somehow yields the most 'fair' result. The Democratic party has propagandized this view to its own detriment.

A voting mechanism should be chosen according to what the desired result is and then reverse engineered. In democracy the best result is one that arrives most efficiently at a single choice that gains the acceptance of a majority of the participants. The desired result is NOT the maximum happiness of the greatest number of people and there's an important difference. There are winners and losers in elections and everybody's not going to be happy. And in a country divided up so that no candidate gets a majority of the popular vote, such a result is virtually impossible.

We should understand from the difficulties of both Obama and Clinton that identity coalition politics is a disaster for a majoritarian voting system based on such a foggy notion of fairness. The Republicans don't seem to have this procedural problem, even though they seemed more fractured when the nomination process began. In short order they settled on John McCain as the nominee. How? Because they designed a nominating system of winner-take-all, closed primaries yielding a clear winner to most Republican voters. Are all the Republicans happy? Hardly, but they have a nominee the majority can accept. This is going to be difficult for the Democratic party if the split between Obama and Clinton is roughly 50-50. Half the voters are going to feel cheated and nobody knows how they will react. So much for unity.

Another clear case of how Democrats misinterpret voting is the 2000 election result and the subsequent backlash against the Electoral College. The objective of presidential voting is not making the maximum number of US voters happy - it's to pick a president that the broadest representation of American interests will willingly accept. The ultimate objective again is not voter "fairness," but the enduring strength of the union of states. This is why the geographic distribution is just as important as the magnitude of the popular vote. And when the popular vote is split 50-50 (i.e., indeterminant), the distribution becomes the most important factor. This is as it should be, but why that's so is a topic for another discussion.

McGovern's Revelation?

2008-03-07T13:54:00.000-08:00

Wow! The Wall Street Journal today has printed an op-ed by George McGovern (paid subscription). The 1972 presidential candidate that sent the liberal left on its long 40 years into the political desert has now admitted to a refreshing new perspective on US politics. To quote a few lines:

Nearly 16 years ago in these very pages, I wrote that "'one-size-fits all' rules for business ignore the reality of the market place." Today I'm watching some broad rules evolve on individual decisions that are even worse.

...Since leaving office I've written about public policy from a new perspective: outside looking in. I've come to realize that protecting freedom of choice in our everyday lives is essential to maintaining a healthy civil society.

...The nature of freedom of choice is that some people will misuse their responsibility and hurt themselves in the process. We should do our best to educate them, but without diminishing choice for everyone else.

This is truly staking out new territory for a Purple Nation!

No more Red and Blue maps in 2008?

2008-03-07T13:13:00.000-08:00

There was a very interesting article by Michael Barone a week ago, Throw Out the Maps in 2008, where he argued that the red and blue state maps of 2000 and 2004 were obsolete and the picture would be quite different in November.
In his reasoning he argued that,

The demographic factor most highly correlated with voting behavior in 2000 and 2004 was religion, or depth of religious belief.

But this is not exactly accurate. In studies of demographic factors comparing census data with voting results by county we find that population density, in other words if you live in an urban vs. rural or suburban community, was far more significant in explaining the geographic pattern of the vote. Next came marrieds vs. singles. Exit poll data does not capture the geographic factors, so other attributes of these different lifestyles appear significant, like guns or music preferences.

Church attendance was one significant factor the media pundits latched onto, but this was likely correlated with the two more determinant factors of urban/rural and married/single (which are also correlated). People in rural communities go to church for social as well as religious reasons. Married people with children are also more likely to attend church. To say that church-going is the primary factor of people voting red may be as inaccurate as saying urbanites vote blue because they're single and go to Starbucks on Sunday.

For religious faith there are two components that make it more likely to translate into politics. First is the ideological component between orthodoxy and modernism. We see most Christian denominations have split along those lines and this is what the evangelist movement is all about - returning to orthodoxy. But the secular world is split this way as well between traditionalists and progressives.

The second component is organizational - people who meet in a prearranged place on a regular schedule are much easier to rally to a political cause. Workers' parties discovered this a long time ago and the rising significance of church groups is a reflection of unions' decline and the rise of orthodox mega-churches.

Anyway, nothing has changed much in our national politics that would predict big changes in the geographic distribution of partisan support. The best we can say is that McCain may appeal to many urban Democrats who formerly voted blue. Both Obama and Clinton represent the left liberal governing philosophy shared by Al Gore and John Kerry.

A better interpretation of our situation was offered by Michael Medved a few days later in his article, Our 50-50 political world. Medved recognizes that the US electorate has been residing on a knife-edge split between alternative ideologies for a long time. The party platforms that developed over the past two generations have lined these ideologies up with geography by appealing to different locational constituencies. In other words Republicans have appealed directly to married ruralites and suburbanites while Democrats have appealed directly to single urbanites. While McCain is a slight twist for Republicans and Obama represents a stylistic change for Democrats, reds and blues are sticking to their guns on most substantive policy issues.

Even if they don't know it.

Obama the Uniter?

2008-02-25T13:08:00.000-08:00

The Democratic primary battle is coming down to the wire. If you've been following the candidates you know Barack Obama has promised a new style of politics. He seems to say our differences have been manufactured by divisive politics in Washington. If you've been following the discussion on our website, www.redstatebluestatemovie.com, you know this is only partly true.

Our political parties, together with the media, hype red-blue conflict, but they don't create it. The problem Obama will have if he wins the nomination is that he has participated mostly on the left side of this divide.

Here's a good article from the Rothenberg Political Report today, "Obama's Appeal Depends on Your Definition of Change," that explains the inconsistency of Obama's message. And the inconsistency is not only with the reality of Washington politics, but with the preferences of the national polity. In other words, the differences lie with the voters and the parties merely reflect this.

A president can mediate these differences through his legislative agenda, but navigating that minefield requires knowing how to pick and choose the right battles. A president should be guided by a clear political philosophy and Obama has indicated that his governing philosophy pretty much flows from orthodox liberalism of the Ted Kennedy variety. But Great Society liberalism is out of sync with the recent voting patterns of national elections in the US, especially since 1980. Thus, an Obama presidency that mirrors his legislative experience to date would rightly meet some very strong headwinds. The sooner Senator Obama addresses these inconsistencies as a candidate the better his chances in a general election, but if his supporters believe a President Obama will deliver a liberal progressive agenda wholesale, many will be sorely disappointed sooner or later.