Foreclosure Myths

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)

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?

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?

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?

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?

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

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

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

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?

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

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

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?

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

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?

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

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?

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

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

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

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?

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?

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?

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

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

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?

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?

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

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

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.

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

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.)