tag:blogger.com,1999:blog-82534294066194599072024-03-08T12:45:15.347-08:00Purple NationA discussion of US party politics from a non-partisan ground-up view.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.comBlogger79125tag:blogger.com,1999:blog-8253429406619459907.post-61086550472152520382010-10-29T13:27:00.000-07:002010-10-29T13:32:18.067-07:00Review of "Freefall" by Joseph Stiglitz<a href="http://www.amazon.com/Freefall-America-Markets-Sinking-Economy/dp/0393338959/ref=sr_1_1?ie=UTF8&qid=1288384161&sr=8-1">Freefall</a> by Joseph Stiglitz:<br /><br />Even if one disagrees with Stiglitz's ideological biases, this exposition of recent economic events is excellent, both accurate and fair in its criticisms. Stiglitz also provides a good discussion of the trade imbalances that afflict the world economy, as globalization is his specialty. Best is the challenges he presents to his fellow economists. But it's not without its blemishes. Since I have given the book five stars I will skip over the kudos and address its weaknesses. <br /><br />Stiglitz sets up a weak strawman in market "fundamentalism," as most serious free market advocates eschew dogma and see a limited role for government, especially to insure open and competitive markets. Stiglitz himself admits the dominant role of markets and only argues for a subjective "balance" between govt regulation and markets. This continuum can be freely debated, as many of the recent market failures stemmed from circumventing free market principles. Most of the violations Stiglitz cites boil down to inside actors using political or economic power to secure "heads we win, tails you lose" outcomes. This is what happened across the banking system as we privatized the returns and socialized the risks with bailouts. A functioning market economy relies on trust and must prevent blatant violations of the rules of voluntary exchange. Thus the crisis was not a repudiation of free markets, it was both a failure of risk management and a warning regarding the abuse of market principles.<br /><br />The policy debate over govt regulation too often slips into the idea of the regulatory bureaucrat rather than the dynamics of self-regulation based upon competing interests. Our political democracy relies on competing interests and a governing structure for checks and balances, with minimal monitoring. Our market structures should strive to do the same with competitors policing each other. Stiglitz mostly steers clear of this distinction while conceding that much of the blame for the financial crisis was the agency problem that befell not only the private sector, but also the public sector. Regulatory "capture" is a serious concern for regulating the financial sector. <br /><br />Stiglitz correctly castigates the Bush and Obama administrations for laxness and ineptness in managing the crisis, but whitewashes the Clinton years, when much of the financial deregulation was enacted. The Clinton regime was instrumental to the Democratic courtship of Wall Street and Stiglitz himself was a prominent Clinton economic adviser. Obama has picked up where Clinton left off, reappointing many from his team. (Hope and change turned out to be more of the same.) For its part, Wall Street is an equal opportunity player in Washington.<br /><br />The most controversial issue is probably Stiglitz's unwavering support of Keynesian demand stimulus. There is reason to suspect this cure-all for a deflating economy, but Stiglitz dismisses all doubts. However, the effectiveness of demand stimulus depends on the Keynesian multiplier, which in turn depends on a healthy banking system extending credit in response to credit demand from the private sector. In the aftermath of a debt deflation, both of these conditions fail in robustness. With a balance sheet recession, it may well be that the Keynesian multiplier is closer to zero than the hoped for 1.5. Another way to look at this is that Keynesian policies may be appropriate after a collapse in prices due to massive deleveraging but much less effective in preventing that collapse. The Japanese experience suggests that propping up a zombie banking system can dangerously prolong the post-bust correction. In this context the Fed's policy of reflation is likely to yield more crippling asset bubbles. <br /><br />The most productive discussion is when Stiglitz turns on his fellow economists. His criticism of the dominant neoclassical paradigm is spot on, especially when it comes to macroeconomic theory. Our current macropolicies are so confused because our theoretical tools are less useful in a nonlinear world and this is especially true in the world of finance. Rational actor assumptions have limited value in a real world where people are loss averse, heterogeneous and adaptable in their preferences, and show a tendency to herd behavior. Our most intractable policy problems are those of skewed or maldistributions, whether they be income and wealth inequality, global warming, health care, hunger or energy. Mathematical models based on fixed preferences, simultaneous equations, and equilibrium conditions are not amenable to distributional dynamics. Thus, the solution to inequality always regresses back to initial conditions, like education or material endowments. Instead, our policies should be addressing the access and distribution of financial capital and the dynamics of our financial markets. The rich are getting richer off their leveraged capital and political influence, not their good looks or brains.<br /><br />Given that managing uncertainty may be the best we can do in public policy, Stiglitz correctly argues for the dominant role of risk management. But he also fails to consider how risk and uncertainty is most effectively managed through decentralization and diversification. This is accomplished through wide and deep markets. Social insurance pooling may be an important corollary to private risk management where private markets are incomplete, but is far less efficient and prone to unmanageable moral hazard costs. Think how many would choose to cash in their 401(k) or private pension for Social Security promises, or their private health insurance for Medicare? The bottom line is that health care and retirement funding are private goods and forcing them into the public goods model only hampers their production and distribution. We may need a safety net, but that's as much as the empirical data supports. Entitlement reform will require private substitutes and this makes it critical we insure that markets function as intended. This may be the best argument for financial market reform.<br /><br />I suppose one could write a book instead of a review, but Stiglitz has already written one that offers the reader much food for thought. I suggest not taking anything for granted, as Stiglitz has his own ideological agenda to hoe. But he does a very commendable job in debunking much of the partisan-motivated bloviating.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-27381383074551359402010-07-19T08:52:00.000-07:002010-07-19T08:54:16.367-07:00Geithner's GambleThe recent G-20 summit in Toronto has provoked a contentious debate over world economic policy. The US economic troika of Treasury Secretary Geithner, NEC director Summers, and Fed Chairman Bernanke are pushing a reluctant European Union to accelerate fiscal stimulus and rescue the debt-laden economies of its weakest members. In their eyes, the singular objective is strong, balanced, and sustainable growth as they conjure up fear of another Great Depression. The Europeans counter that such advice is economically unreasonable and politically inappropriate. Furthermore, it demonstrates a profound lack of understanding of European realities. Faced with the unsustainable public spending of Greece, Spain, Portugal and Italy, they argue that sustainable growth cannot be not based on governments injecting cash they don't have, with mere hopes of fiscal restraint. Probably thinking more of the Weimar Republic than the Great Depression, their voting publics seem to agree.<br /><br />Thus, the debate appears to have reached an impasse. But the Europeans are likely to blink first when confronted with the pain of near-term deflation and deleveraging. Unfortunately, the Geithner plan (or GSB for short; for conspiracy theorists, the acronym's resemblance to "Goldman Sachs bank" is purely coincidental) looks more and more like a Hail Mary pass in a game of fantasy policymaking. It embraces a stark contradiction between unrestrained fiscal stimulus in a political environment that is panicking over excessive debt. So GSB asks for credible plans to stabilize debt-to-GDP levels, while warning against withdrawing fiscal stimulus. It reminds one of St. Augustine's lament to God: "Give me chastity and continence, but not just yet."<br /><br />Regrettably, these macroeconomic debates are distracting us from some stubborn economic truths that become more apparent at the micro level. In other words, what people are doing at the individual and firm level in their daily lives. I will argue that the GSB plan is unlikely to succeed because it fails to directly address the gross incentive distortions of these underlying behavioral functions that underpin all macroeconomic models. <br /><br />We know for economies to grow, people need to work, save, invest, and consume, no matter what national flag they fly. However, we hear that the citizens of developed countries save too little and consume too much while those in emerging nations do the opposite. Macroeconomics assures us these will balance out in the long run – reality tells us in the long run we are all dead, maybe sooner. Look closely: GSB warns how imbalances must be corrected, but then advocates policies that reinforce the wrong behaviors. For example, US consumers need to pay down excessive debt by saving more and consuming less. But that has negative consequences for GDP and job growth. So US economic policy subsidizes low interest rates, punishing savers and rewarding profligate debtors. At the same time our leadership has recklessly increasing fiscal spending and borrowing, incurring new liabilities for taxpayers with bailouts that prevent prices from reaching an equilibrium. Without accurate prices, people who need to decide the proper mix between consuming, saving, and investing are flying blind. The result is that any surplus funds sit idly in the piggy bank rather than being invested.<br /><br />One doesn’t need an economics degree to figure out the consequences of distorting incentives to such a degree: less saving, more consumption, and excessive liquidity that doesn't find its way into new production. This yields few new jobs and anemic GDP growth that more reflects trading in asset bubbles rather than the production of new goods and services. On an international basis, this only encourages export-led countries like China, India, and Germany to continue providing credit in order to buy their export goods. The game goes on until the next collapse. With each failure, politicians demand more power and control to do the wrong things. Yes, uncertainty and loss of confidence bedevil the best intentions.<br /><br />Is this really the best course we can follow? Hardly.<br /><br />First, the Geithner spin on the current financial environment is probably overly optimistic. Low interest rates and low Treasury rates are less a sign of confidence than a costly premium on liquidity in an environment that is deleveraging in the private sector and exploding with new debt in the public sector. GSB cannot speak to these truths until it becomes politically expedient, but if the stock market recovery is real, we should expect a broadening of support across all sectors and firm sizes. If it reverses or narrows with mergers and acquisitions, the booming market is more likely a sign of excess liquidity.<br /><br />Second, yes, we run a real risk of a sustained deflationary environment, but the fears of deflation and deleveraging causing the next Great Depression are overblown. Most scholars conclude that the Depression was not caused by lack of spending, but overly restrictive monetary policy and that the fiscal stimulus of the New Deal most likely prolonged the downturn. Bernanke insures us under his command there is little chance of overly restrictive monetary policy. His hand will only be forced by the bond market and Treasury yields.<br /><br />More important, the policies of the last twenty plus years have rewarded debtors and asset holders to the detriment of savers and workers. It's time to redress this imbalance if we wish to return to a sustainable path. We may need controlled deflation rather than controlled inflation. While certain financial interests (i.e., debtors and debt leveraging) will strongly object to changing the rules of the game, financial prudence has been on the short end of national economic policy for far too long.<br /><br />Lastly, the most challenging political task is to advocate for an international economic model that recognizes and reinforces the basic formula for wealth creation: hard work, restrained consumption, and prudent saving and investing. National success is less about maximizing GDP growth than it is about the distribution of resources across time and across populations to insure sustainability and stability over the long run. A sustainable market system must be able to manage demographic and technological cycles, but our abilities are only hampered by credit-debt cycles that are engineered purely through bad policy.<br /><br />This goes for emerging economies like China and India as well. A society that does not consume, has little reason to save and invest, and a society that does not save and invest has little to consume. This probably means slower but more stable growth with fewer reversals. It probably means more equity investment than debt. But we have seen the alternative and it is a casino. A return to fundamentals is the only way we can fulfill our commitment to raise living standards across all countries far into the future.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-70023956882480639082010-06-23T14:10:00.000-07:002010-06-23T14:15:16.606-07:00The Politics of Risk and the Risk of PoliticsBarack Obama has reached for the mantle of a transformative presidency, aspiring to recast our national social contract in the interest of greater equality and fairness. In cooperation with a Democratic-controlled Congress, he has pursued this goal by expanding Federal authority in response to economic crises and supporting interventions into finance and banking, automobile manufacturing, health care, and environmental policy. This strategy adopts the “statist” philosophy of economic risk management by centralizing governmental authority and control over private markets. <br /><br />Ironically, this Europeanization of US public policy is occurring exactly when sovereign debt crises and taxpayer bailouts are casting an ominous cloud over the European model. It seems public sector risk may turn out to be more dangerous than private sector risk. But if we can connect recurring financial crises to the long-term erosion in the economic health of states, we should seriously question whether statism offers the best array of policies to manage the uncertainties of the modern world. <br /><br />Let us begin with the international financial crisis. A surplus of world savings channeled by excess credit creation drove people in the developed world to overborrow and concentrate debt and risk in overpriced housing assets. Banks then distilled these risky assets in securitized debt obligations and sold them to investors worldwide. What ensued was risk mismanagement on a colossal scale, as the concentration of leveraged debt made the crash far worse than dotcom or tulip bulb mania. This shell game violated all we know about prudent risk management and sucked in politicians, central bankers, financiers, the housing industry, and citizens alike. <br /><br />The response has been to substitute massive public credit for shrinking private credit, while seeking new means to regulate financial risk and reward. This sounds a bit too much like the dog that bit us. In terms of public policy it means more centralized political control over central banks and the financial sector, with unpredictable market distortions yielding more liabilities and burdens for taxpayers. The net result will be an increase in systemic risk exposure. <br /><br />Let us now turn to the crisis of welfare statism. The modern social welfare state is more accurately labeled the social insurance state, as its spending priorities are dominated by programs related to old age pensions, health care, and the risks of unemployment and poverty. Social insurance has been the developed world’s primary political response to systemic risk. Regrettably, it may impose the least efficient means to manage risk, with the most costly consequences.<br /><br />Financial risk is managed by saving, pooling, hedging and, most important, asset diversification. The key concepts are savings and diversification, as these underpin the logic of insurance pooling. A financially sound insurance pool must align contribution and benefit ratios according to known actuarial data and demographic trends. The Bismarckian model of social insurance faces the same criteria. <br /><br />The inconvenient truth is that our social insurance programs, like Social Security and Medicare, are not really insurance pools, but pay-as-you-go transfer schemes. We tax younger workers to immediately pay out benefits to older, retired citizens. This design inflicts a host of problems and costs.<br /><br />First is the agency problem. Pay-as-you-go means our Social Security and Medicare taxes have not been saved in a “trust” fund, rather they are doled out in benefit promises and used to fund other political priorities through general revenues. This is the problem of political and bureaucratic “agents” following their own short-term incentives. This is also how we get “too big to fail” and runaway budgets.<br /><br />The second problem is moral hazard. Because taxes to fund entitlement transfers crowd out private savings and lead us to believe the government is saving for us, private savings decrease. This means we cannot adequately fund the economic growth necessary to fund future social insurance liabilities. The alternative has been to borrow from abroad, mostly from the Chinese. <br /><br />The third problem is demographics, as birth rates decline and longevity increases. We have heard how the “trust” funds will run out or overburden younger workers as baby boomers age. <br /><br />We can readily measure the consequences of our policy failures in societal risk management. Household savings rates in the U.S. have dropped from an average of 10% in the 1970s to less than 1% just before the financial crisis in 2008. The immediate response to the crisis jumped the rate to 6%, but this was offset by roughly a trillion dollars in new public debt. (Estimates for China’s household savings rate range from 25-50%)<br /><br />US public debt as a percentage of GDP now fluctuates around 80%. This compares to Japan at 192%, Italy at 115%, Greece at 108%, France at 80%, and Germany at 77%. Chile, which privatized its social insurance three decades ago, services a public debt at 9% of GDP. <br /><br />Our current account deficit, which measures how much more we import than export, persists at 3% of GDP while China runs a 6% surplus. In simplest terms, the Chinese are lending us money to buy their goods. <br /><br />A recent survey by the Peter G. Peterson Foundation of US political leaders from both parties found unanimous agreement that US structural deficits due to entitlement programs would cause a financial collapse of US public finances within ten years unless the programs were reformed.<br /><br />The reality is that a true national insurance program cannot be a shell game that transfers resources from one group to another. The nation must accumulate real savings to be invested to fund future needs. The danger of our current treatment of risk management through entitlements is that we are not really insuring against our risks, but merely passing them on to others. This is neither moral, nor economically viable.<br /><br />Our only chance of solving these problems must focus on managing economic risk by boosting savings and promoting the widespread diversification of assets. The increased concentration of political, economic, and financial power currently dominating the developed world is antithetical to such solutions and financial reform should not risk reinforcing a Wall Street-Washington oligarchy. This gets us back to the regulation of finance and banking.<br /><br />The unfocused blame put on markets for our financial crises is disingenuous. The heavy reliance on credit and debt, the opacity of financial technology, the capture of regulatory agencies by the industries they regulate, and volatile asset markets are all symptoms of misguided policies. History and theory have both shown how functioning private markets are most efficient in allocating and managing diversified risk. The best financial regulation, then, is not another politicized agency, but the continued promotion of open, competitive, and transparent financial markets. The caveat for financiers is that failure and bankruptcy are essential features of free markets. <br /><br />A world described by risk and uncertainty is like a sea full of hidden icebergs. Politicians like to reinforce social solidarity and national cohesion by claiming we are all in the same boat and must pull together. Mr. Obama seems to favor this metaphor, but, in terms of systemic risk, it also fits the Titanic analogy. A more useful metaphor is that we are all in different boats on the same sea. This can apply to countries, states, cities, markets, workplaces, and families. The multiplicity and diversity of institutional structures is a lesson conveyed by nature through biodiversity—all we need do is apply the lesson. <br /><br />As one Greek citizen was quoted on his country’s latest crisis: “It could be a chance to overhaul the whole rancid system and create a state that actually works.”Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-35640016983987292892010-04-27T08:12:00.001-07:002010-04-27T08:15:08.975-07:00The Cast of Villains in the Financial CrisisGood <a href="http://www.nytimes.com/2010/04/27/opinion/27mclean.html?th&emc=th">article</a> in the NYTimes outlining the full cast of characters in the financial crisis. A full cast still on the stage...<br />This is what I call Casino Capitalism and Crapshoot Politics.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-90795566996881034492010-04-19T10:17:00.000-07:002010-04-21T10:51:07.607-07:00Tea Parties = CAPMichael Barone's <a href="http://www.realclearpolitics.com/articles/2010/04/19/tea_partiers_fight_culture_of_dependence.html">article</a> addresses the nature of the anti-political backlash of the Tea Parties. It's is the same thing I have described as American citizens' political demands for choice, autonomy, and minimal protection from risks they can't control.<br /><br />The media portrayal of the Tea Party phenomenon is misleading and can only hurt those who dismiss TPs as a fringe movement in the coming elections.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-22911870080095686752010-04-08T15:39:00.000-07:002010-04-08T15:43:08.790-07:00Let's Get Real.I love this excerpt from Peggy Noonan's <a href="http://online.wsj.com/article/SB10001424052702304198004575172251738485686.html">article</a> in the WSJ:<br /><blockquote>This week's Financial Industry Inquiry Commission hearings were so exciting, such a public service. The testimony of Charles Prince, former CEO of Citigroup, a too-big-to-fail bank that received $45 billion in bailouts and $300 billion in taxpayer guarantees, was riveting. You've seen it on the news, but if you were watching it live on C-Span, the stark power of his brutal candor was breathtaking. This, as you know, is what he said:<br /><br />"Let's be real. This is what happened the past 10 years. You, for political reasons, both Republicans and Democrats, finagled the mortgage system so that people who make, like, zero dollars a year were given mortgages for $600,000 houses. You got to run around and crow about how under your watch everyone became a homeowner. You shook down the taxpayer and hoped for the best.<br /><br />"Democrats did it because they thought it would make everyone Democrats: 'Look what I give you!' Republicans did it because they thought it would make everyone Republicans: 'I'm a homeowner, I've got a stake, don't raise my property taxes, get off my lawn!' And Wall Street? We went to town, baby. We bundled the mortgages and sold them to fools, or we held them, called them assets, and made believe everyone would pay their mortgage. As if we cared. We invented financial instruments so complicated no one, even the people who sold them, understood what they were.<br /><br />"You're finaglers and we're finaglers. I play for dollars, you play for votes. In our own ways we're all thieves. We would be called desperadoes if we weren't so boring, so utterly banal in our soft-jawed, full-jowled selfishness. If there were any justice, we'd be forced to duel, with the peasants of America holding our cloaks. Only we'd both make sure we missed, wouldn't we?"<br />--------<br />OK, Charles Prince didn't say that. Just wanted to get your blood going. Mr. Prince would never say something so dramatic and intemperate. I made it up. It wasn't on the news because it didn't happen.<br /><br />It would be kind of a breath of fresh air though, wouldn't it? </blockquote>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-45711909315551161332010-04-01T10:01:00.003-07:002010-04-08T15:44:22.090-07:00Alan Greenspan on the Financial CollapseHave to agree. Greenie gets it only half right. Bubbles thrive on leveraged credit. The Fed can easily dampen excess leverage and also send the right signals to the shadow banking system to reduce moral hazard. We didn't get the "Greenspan Put" from the Easter Bunny. <br /><br /><a href=http://www.fool.com/investing/general/2010/03/23/alan-greenspan-on-the-financial-collapse.aspx>Alan Greenspan on the Financial Collapse</a><br /><br />Posted using <a href="http://sharethis.com">ShareThis</a>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-64321058915526932302010-01-07T12:36:00.001-08:002010-01-15T18:53:53.761-08:00Debt Crisis = A Failed Policy ParadigmThe financial crisis of 2008 paved the way for the employment crisis of 2009, which has now paved the way for the upcoming public finance crisis of 2010. Most federal, state and municipal budgets are strained to the breaking point while the economy still has not found its footing. Meanwhile our national politics is obsessed with expensive overhauls of environmental policy and healthcare reform. Our latest policy strategy is an attempt to borrow and spend our way to prosperity, ala Japan of the past twenty years. <br /><br />It’s tempting to point to a few simple causes of these economic misfortunes, such as mortgage subsidies, loose credit standards, or excess financial leverage, but the truth is that we are experiencing the fallout of a failed policy paradigm. <br /><br />This paradigm was rooted in the past century with the creation of the Federal Reserve in 1913, the Employment Act of 1946 and the Humphrey-Hawkins Full Employment and Stabilization Act of 1978. It’s a paradigm dependent on many admittedly useful policy tools, including both Keynesian demand stimulus and the Austrian school’s theory of money and credit, the monetarism of Friedman, as well as the supply-siders of the 1980s. <br /><br />So, in what ways have these approaches failed? <br /><br />The policy goals are clearly stated: stable GDP growth and full employment. But the economic results have been decidedly mixed: the growth of real incomes laden with an exploding entitlement state, structural budget crises, widening wealth disparities, a catastrophe-prone banking system, and volatile asset markets. We’ve heard the term “systemic risk” bandied about the recent financial crisis, but this report card captures the true risks of the system we’ve created. <br /><br />Politically and socially, Americans clearly want a society where a growing middle class thrives, opportunity exists for individual success and advancement, and a prosperous elite accepts the responsibilities of power not to exploit the weak and disadvantaged. Instead, our political economy is hollowing out the middle class, creating more dependency among the poor, and fostering a culture of corruption and irresponsibility among the elites . Elsewhere I’ve characterized this current state of affairs as Casino Capitalism and Crapshoot Politics.<br /><br />Second question: why has our democratic politics failed to deliver? The short answer: Our government is doing too much of what it shouldn’t be doing and not enough of what it should. <br /><br />Free market economies are very good at producing wealth by harnessing the incentives of market participants. Market prices are valuable information signals that tell everyone how much of each good to produce. Governments, however, no matter how enlightened, cannot attain this efficiency. But, due to the political imperative to “do something” in response to countless demands, they feel compelled to try. Thus the focus on “growing the economy” and “creating jobs.” <br /><br />Unfortunately, these goals often demand incompatible policies, highlighting the differences between the private and public sectors. Private firms earn profits (i.e., create wealth) by increasing productivity, often by reducing labor costs. However, the public sector follows no profit criteria, so the government increases employment without attention to productivity. Thus, with more public sector jobs we create more employment while producing less. At the same time, the growth of the public sector empowers a politically powerful public union interest in its continued expansion. This is no way for a nation to grow rich.<br /><br />When we peal away the logic we find the true goal of public sector job creation: political redistribution of the economy’s wealth-creating capacity in order to mitigate the effects of markets. This is not an unworthy societal goal, but our public policies adopt counterproductive means to achieve it. <br /><br />To be fair, the political problem arises because private markets are agnostic towards the distributional effects of their success. Inequality, poverty, pollution, environmental degradation, the concentration of economic and political power—all these are unfavorable distributional effects of markets that give rise to political demands. The question is over how government should meet these demands. <br /><br />The 20th century attempt to tax and redistribute wealth has landed the modern welfare state in a cul-de-sac of exploding budgets, rising costs of living, slower economic growth and structural unemployment. We’re robbing Peter to pay Paul and neither – except for a relative handful of bureaucrats and rent-seeking capitalists - is better off for it. This adds up to less opportunity all around. Again, the problem is with our failed paradigm. We need to align our policies with behavioral incentives without surrendering our policy goals to an agnostic market mechanism.<br /><br />To construct a new paradigm we might do best to return to first principles of what Americans want: freedom, opportunity and justice. In order to enjoy these principles, citizens need to be empowered with choice, autonomy, and protection from unmanageable risks. Only functioning free and competitive markets can provide the necessary resources. <br /><br />So, what should be the proper role for government? <br /><br />The maldistribution of resources can be mitigated if citizens participate in the wealth creating process as more than an input labor cost. Public policy should cease deficit spending to promote employment and instead look to creating the necessary environment for private risk-taking, saving, investment, and production. This includes insuring market competition and mitigating the effects of economic risk and uncertainty. Tax and regulatory policies should promote the widespread accumulation, diversification, and access to capital to empower individuals and families with the necessary resources to build wealth and insure themselves against uncertainty. Where private insurance markets are incomplete, there is a role for limited social insurance to fill the gap. <br /><br />Numerous specific policies flow from this general paradigm shift, for example, we can stop penalizing savings through overly loose credit and onerous tax policies on interest and dividend income. There is no reason not to have a tax-free threshold for capital income that reflects the desired savings level of the median annual income household. <br /><br />Why have we stuck with a failed policy paradigm? Part of the answer is the Kuhnian nature of scientific revolutions, but the pursuit of power and influence by narrow interests is certainly a determinant factor. Economically and socially, we know where we need to go. Getting there politically is another matter. Our present political leadership (of both parties) certainly is not taking us in that direction.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-64903015002701517942009-11-19T08:24:00.000-08:002009-11-19T08:32:56.954-08:00Debt ClockA YouTube video on our exploding national debt...<br /><br /><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.blogger.com/video.g?token=AD6v5dzF370uXPTdPbqQmBfrE241LhaIwxH9oJT0kaGsnJPW751DBUtorhvY6LCGNva7GjxusbpagVU6isKqSUvCVw' class='b-hbp-video b-uploaded' frameborder='0'></iframe>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-16555866035686585312009-10-27T09:34:00.000-07:002009-10-27T09:45:30.409-07:00Return to Red vs. Blue - With a VengeanceIt's remarkable, though not surprising, how quickly Obama and Rahm Emanuel got back on track with Red vs. Blue politics. (I'm not sure they ever left, as the campaign promises of bipartisanship and compromise were pretty hollow.) <br /><br />As this blog has argued persistently, red and blue politics is rooted in far more than campaign politics. In addition, the two parties and the media thrive off partisan conflict, so the temptation to carry that battle directly to the media was too powerful to resist for the Obama administration. The attack on Fox and talk radio are attempts to diminish the appeal of these media outlets while heightening the divisions between alternative and mainstream media.<br /><br />Voters should not be fooled by this and my guess is that most independents are not. I also suspect the media see little to gain by moving the battleground away from politics to their home field. If an administration can de-legitimize one network, why not another? This is so much white noise.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-58013305840072159332009-08-18T10:19:00.000-07:002009-08-18T10:31:04.720-07:00Ideologues Crash and BurnOne has to wonder about the political competence in Washington DC. First the disaster of the Bushies in the second term and now the face plant of the Obamacrats after only six months in office. My guess is that it is less about a lack of intelligence and more due to the insularity of the political class. One wonders if any of these folks know anything about the real America. <br /><br />Jay Cost of the <a href="http://www.realclearpolitics.com/horseraceblog/">HorseRaceBlog</a> provides a good critique of the Obama administration's failure to date to understand the country they're trying to lead. I include it here in full:<br /><blockquote>August 16, 2009<br />Obama Misread His Mandate<br /><br />After a rough week for health care reform, Democratic leaders appear to be pulling back on their demand for a public option. It remains to be seen whether liberal Democrats, especially in the House where they are more numerous, will go along with this. But this is still a step in the right direction to get something passed this year.<br /><br />The public option was an overreach. The White House's erroneous belief that it could get it through the legislature - or at least that it could let four out of five congressional committees push it - was a misinterpretation of last year's election results. It has already made a similar mistake with cap-and-trade, backing a House bill that appears to have no chance of success in the Senate.<br /><br />Bismarck once commented that politics is the art of the possible. So far, the White House has not exhibited a good understanding of exactly what is possible in this political climate. It has been acting as though the President's election was a major change in the ideological orientation of the country.<br /><br />A lot of liberals certainly saw it as such. All the strained comparisons of Obama to Franklin Roosevelt were a tipoff that many were talking themselves into the idea that the 2008 election created an opportunity for a substantial, leftward shift in policy. Yet the election of 2008 was not like the 1932 contest. It wasn't like 1952, 1956, 1964, 1972, 1980, 1984, or even 1988, either. Obama's election was narrower than all of these. FDR won 42 of 48 states. Eisenhower won 39, then 41. Johnson won 44 of 50. Nixon won 49. Reagan won 44, then 49. George H.W. Bush won 40. Obama won 28, three fewer than George W. Bush in his narrow 2004 reelection.<br /><br />This makes a crucial difference when it comes to implementing policy. Our system of government depends not only on how many votes you win, but how broadly distributed those votes are. This prevents one section or faction from railroading another. It is evident in the Electoral College and the House, but above all in the Senate, where 44 senators come from states that voted against Obama last year. That's a consequence of the fact that Obama's election - while historic in many respects, and the largest we have seen in 20 years - was still not as broad-based as many would like to believe. Bully for Obama and the Democrats that they have 60 Senators, but the fact remains that thirteen of them come from McCain states, indicating that the liberals don't get the full run of the show.<br /><br />For whatever reason, the Obama administration has acted as if those hagiographical comparisons to FDR were apt. It let its liberal allies from the coasts drive the agenda and write the key bills, and it's played straw man semantic games to marginalize the opposition. For all the President's moaning in The Audacity of Hope about how the Bush administration was railroading the minority into accepting far right proposals - he was prepared to let his Northeastern and Pacific Western liberal allies do exactly the same thing: write bills that excite the left, infuriate the right, and scare the center; insist on speedy passage through the Congress; and use budget reconciliation to ram it through in case the expected super majority did not emerge.<br /><br />This might have flown during FDR's 100 Days. But this is not 1933 and Barack Obama is no Franklin Roosevelt.<br /><br />Now that his legislative agenda is stalling, we're seeing the predictable critiques about the outdated United States Senate, which is the real source of the bottleneck: the Connecticut Compromise was meant to protect the interests of small states, but not states that are this small. Rhode Island, yes. Wyoming, no! These arguments will be conveniently tabled whenever the Democrats return to minority status, so I won't bother to address their merits. The bigger question is: what did they think was going to happen? It's one thing to bemoan the fundamental unfairness of the Senate; it's another thing to overlook it when you're formulating your legislative program. The map is what it is: that big swath of red that runs through the middle of the country then swings right through the South should have been a tipoff that the stage was not set for coastal governance.<br /><br />The President should have realized what was possible and what wasn't, and he should have used his substantial influence to push the House toward the kind of centrist compromise the Senate will ultimately require. That's called building a consensus - something he promised he'd do but has not yet made a serious effort at.<br /></blockquote>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-19338029460964738772009-08-14T08:28:00.000-07:002009-08-14T08:45:56.762-07:00Obamacare Won't Work - These Ideas Will.The health care system in America needs reform. It works for 85% of the people, but the dysfunctional parts have long ago become the tail that wags the dog. Now the reform is becoming a strident partisan and ideological issue. This is truly unnecessary.<br /><br />I am amazed how little rationality is applied to the political debate. But I have come across some fruitful ideas that make sense. I include them below. These are culled from WSJ: the first by John Mackey, CEO of Whole Foods and the second by John Cochran, a professor of finance at the U. of Chicago. What's more important is that these reforms are politically feasible because they address the major concerns of the center majority of those people who have health insurance but want to solve the systemic problem for people who don't.<br /><blockquote>• Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs). The combination of high-deductible health insurance and HSAs is one solution that could solve many of our health-care problems. For example, Whole Foods Market pays 100% of the premiums for all our team members who work 30 hours or more per week (about 89% of all team members) for our high-deductible health-insurance plan. We also provide up to $1,800 per year in additional health-care dollars through deposits into employees' Personal Wellness Accounts to spend as they choose on their own health and wellness.<br /><br />Money not spent in one year rolls over to the next and grows over time. Our team members therefore spend their own health-care dollars until the annual deductible is covered (about $2,500) and the insurance plan kicks in. This creates incentives to spend the first $2,500 more carefully. Our plan's costs are much lower than typical health insurance, while providing a very high degree of worker satisfaction.<br /><br />• Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits. Now employer health insurance benefits are fully tax deductible, but individual health insurance is not. This is unfair.<br /><br />• Repeal all state laws which prevent insurance companies from competing across state lines. We should all have the legal right to purchase health insurance from any insurance company in any state and we should be able use that insurance wherever we live. Health insurance should be portable.<br /><br />• Repeal government mandates regarding what insurance companies must cover. These mandates have increased the cost of health insurance by billions of dollars. What is insured and what is not insured should be determined by individual customer preferences and not through special-interest lobbying.<br /><br />• Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year. These costs are passed back to us through much higher prices for health care.<br /><br />• Make costs transparent so that consumers understand what health-care treatments cost. How many people know the total cost of their last doctor's visit and how that total breaks down? What other goods or services do we buy without knowing how much they will cost us?<br /><br />• Enact Medicare reform. We need to face up to the actuarial fact that Medicare is heading towards bankruptcy and enact reforms that create greater patient empowerment, choice and responsibility.<br /><br />• Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance and aren't covered by Medicare, Medicaid or the State Children's Health Insurance Program.</blockquote><br />And this about pre-existing conditions:<br /><blockquote>What to Do About Pre-existing Conditions<br />Most Americans worry about health coverage if they lose their job and get sick. There is a market solution.<br /><br />By JOHN H. COCHRANE<br /><br />Even if you don't like the massive health-care package being considered in Congress, you have to admit that health insurance and health care in this country are not working well. There are two basic problems:<br /><br />First, if you get sick and then lose your job or get divorced, you lose your health insurance. With a pre-existing condition, new insurance will be ruinously expensive, if you can get it at all. This, the central defect of American health insurance, explains why most Americans are happy with their current coverage yet also support reform.<br /><br />Second, health care costs too much. Yes, we get better treatment, but the cost-cutting revolution that has swept through manufacturing, retail, telecommunications and airlines has not touched health care.<br /><br />The problems are real, but the proposed remedy—even more government intervention—is counterproductive. A market-based, deregulation-focused reform is possible, and it will work.<br /><br />Health care and insurance are service-oriented, retail businesses. <span style="font-weight:bold;">There is only one way to reduce costs in such a business: intense competition for every customer.</span> The idea that the federal government can reduce costs by negotiating harder or telling businesses what to do is a triumph of hope over centuries of experience.<br /><br />Take the claim that centralized record-keeping can cut costs. In his July 22 press conference, President Barack Obama noted that a new doctor today might run a test again rather than ask for records of a previous result. That seems silly. But maybe it isn't. Maybe the test is cheap, the condition changes, the test can fail, and the cost of setting up an integrated record system between these two doctors isn't worth two tests a year.<br /><br />The cost-cutting revolutions in other industries didn't settle questions like these with acts of Congress, expert commissions, armies of regulators, or via a "public option"—while leaving in place a system in which consumers have little choice, aren't spending their own money, and suppliers are protected from lower-cost competitors. That approach has never spurred efficiency, and for good reasons. Cost-cutting is painful. Even in Mr. Obama's trivial example, lab technicians and secretaries will lose their jobs to computer programs, and they will complain. Patients might have to get tests at inconvenient times and locations. They will do this when their money is at stake—what people will put up with from airlines for a few dollars is truly amazing—but they will never accept it from the government.<br /><br />But what about pre-existing conditions?<br /><br />A truly effective insurance policy would combine coverage for this year's expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A "guaranteed renewable" individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so. And insurers are getting more creative. UnitedHealth now lets you buy the right to future insurance—insurance against developing a pre-existing condition.<br /><br />These market solutions can be refined. Insurance policies could separate current insurance and the right to buy future insurance. Then, if you are temporarily covered by an employer, you could keep the pre-existing-condition protection.<br /><br />Some insurers avoid their guaranteed-renewable obligations by assigning people to pools and raising rates as healthy people leave the pools. Health insurers, like life insurers, could write contracts that treat all of their customers equally.<br /><br />The right to future insurance could be transferrable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums. Better, this sum could be occasionally placed in a custodial account. If you got sick but had something like a health-savings account to pay high premiums, you could always get new insurance. Insurers would then compete for sick people too.<br /><br />Innovations like these would catch on quickly in a vibrant, deregulated individual insurance market.<br /><br />How do we know insurers will honor such contracts? What about the stories of insurers who drop customers when they get sick? A competitive market is the best consumer protection. A car insurer that doesn't pay claims quickly loses customers and goes out of business. And courts do still enforce contracts.<br /><br />How do we get to a competitive market? The tax deduction for employer-provided group insurance, which has nearly destroyed the individual insurance market, is a central culprit. If we don't have the will to remove it, the deduction could be structured to enhance competition and the right to future insurance. We could restrict the tax deduction to individual, portable, long-term insurance and to the high-deductible plans that people choose with their own money.<br /><br />More importantly, health care and insurance are overly protected and regulated businesses. We need to allow the same innovation, entry, and competition that has slashed costs elsewhere in our economy. For example, we need to remove regulations such as the ban on cross-state insurance. Think about it. What else aren't we allowed to purchase in another state?<br /><br />The bills being considered in Congress address the pre-existing condition problem by forcing insurers to take everybody at the same price. It won't work. Insurers will still avoid sick people and treat them poorly once they come. Regulators will then detail exactly how every disease must be treated. Healthy people will pay too much, so we will need a stern mandate to keep them insured. And this step further reduces competition.<br /><br />Private, competitive insurance markets are a superior way to solve the pre-existing-conditions problem, and the only hope to lower costs. </blockquote>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-43674788823251737242009-08-06T09:57:00.000-07:002009-08-06T10:04:02.412-07:00Red vs. Blue StatesFroma Harrop writes this article ("<a href="http://www.realclearpolitics.com/articles/2009/08/06/no_red_states_are_not_better_than_blue_states_97790.html">No, Red States Are Not Better Than Blue States</a>") about the fallacies of the red state vs. blue state narrative. Of course, we already know red vs. blue politics is not about state borders, but about population density. The narrative of red and blue states is a myth promoted by the media and the parties...Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-47358961753541898022009-08-04T11:05:00.000-07:002009-08-04T11:12:24.914-07:00The End of Red and Blue?...Yeah, right. I reprint below an article by Andrew Wilson from the WSJ about ideology and politics around the family dinner table. As predicted, a Democratic Obama presidency has done little to bridge the divide.<br /><br /><blockquote><span style="font-weight:bold;">Politics for Dinner</span><br />Debate at home has turned ugly since November.<br /><br />When it comes to waging battle over the stimulus bill, health care and cap and trade, the folks on Capitol Hill have nothing on my family.<br /><br />Before escalating to stronger language, my older brother Harry sometimes calls me a “mental defective” in conversations about politics. He thinks that I have been Bush-whacked. I think that he has been L’Obamatized. That is the highly scientific condition of having half of your brain removed and the other half turned into jelly with no off/on switch to control veneration of the 44th president.<br /><br />Harry and I grew up as the second and third kids in a family of seven children. Loud and heated political argument at the dinner table was a family tradition. That’s continued and become an extended family tradition at gatherings over Thanksgiving and Christmas that often number up to 32 people—including siblings, spouses, children, and grandchildren.<br /><br />But never before have our debates been more likely to stray into acrimony and ugliness. And never before have the differences of opinion between family members been so striking.<br /><br />We used to take great pride as a family in having freewheeling, no-holds-barred discussions about politics and world events. Now it’s come to the point that all of us must exercise some self-censorship in order to maintain an amicable level of discourse.<br /><br />The most outspoken among us, my younger sister Dodie, has been urged by her own kids to tone down her libertarian, anti-Obama rhetoric. Though her children agree with her sentiments, it embarrasses them in front of their friends. (This is especially so for the two children now at a prestigious college where public criticism of the current occupant of the White House is almost verboten).<br /><br />One could liken the situation inside my extended family to a second War of the Roses, with Lancastrian Obamaites on one side and Yorkist Bushites on the other. Harry, the leading Lancastrian, and a lawyer by trade, inveighs against the negativity of those supposedly afflicted with “Obama derangement syndrome.”<br /><br />But what of the “George W. Bush derangement syndrome”— the notion that Mr. Obama must be Superman to make up for the colossal blunders of his predecessor? The president certainly never misses a chance to belittle the former president. Following Obama’s cue, the Obamaites in my family heap every kind of blame on George W., and then pin the Bushite label on the rest of us who disagree.<br /><br />In fact, this is a false label. None of us could be described as an avid and devoted follower of George W. I, for one, believe that he made an awful mess of things in the closing months of his presidency when he endorsed the idea of bailing out big banks and auto companies.<br /><br />So it goes in the extended Wilson family. We squabble. Or, for the sake of family harmony, we muzzle our old instinct to engage in honest debate.<br /><br />In the midst of the so-called Great Recession, there are some in my family who see Barack Obama as hero and savior. Others tremble at the massive extension of government power and the winnowing down of freedom, personal responsibility and belief in private enterprise as the one true engine of economic growth and progress.<br /><br />Harry and I will go on being brothers and good friends. But like the American people as a whole, we are politically estranged in a way that marks a real departure from the past.</blockquote>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-11803813309662372292009-06-20T11:29:00.000-07:002009-06-20T11:36:29.547-07:00Divided We Stand.The following article is by Paul Starobin and was published June 13, 2009 in the WSJ. An analysis and comment will follow in the next post.<br /><blockquote>Remember that classic Beatles riff of the 1960s: “You say you want a revolution?” Imagine this instead: a devolution. Picture an America that is run not, as now, by a top-heavy Washington autocracy but, in freewheeling style, by an assemblage of largely autonomous regional republics reflecting the eclectic economic and cultural character of the society.<br /><br />There might be an austere Republic of New England, with a natural strength in higher education and technology; a Caribbean-flavored city-state Republic of Greater Miami, with an anchor in the Latin American economy; and maybe even a Republic of Las Vegas with unfettered license to pursue its ambitions as a global gambling, entertainment and conventioneer destination. California? America’s broke, ill-governed and way-too-big nation-like state might be saved, truly saved, not by an emergency federal bailout, but by a merciful carve-up into a trio of republics that would rely on their own ingenuity in making their connections to the wider world. And while we’re at it, let’s make this project bi-national—economic logic suggests a natural multilingual combination between Greater San Diego and Mexico’s Northern Baja, and, to the Pacific north, between Seattle and Vancouver in a megaregion already dubbed “Cascadia” by economic cartographers.<br /><br />Patrick Henry declares ‘give me liberty, or give me death’ in his 1775 speech urging the colonies to fight the British.<br />Devolved America is a vision faithful both to certain postindustrial realities as well as to the pluralistic heart of the American political tradition—a tradition that has been betrayed by the creeping centralization of power in Washington over the decades but may yet reassert itself as an animating spirit for the future. Consider this proposition: America of the 21st century, propelled by currents of modernity that tend to favor the little over the big, may trace a long circle back to the original small-government ideas of the American experiment. The present-day American Goliath may turn out to be a freak of a waning age of politics and economics as conducted on a super-sized scale—too large to make any rational sense in an emerging age of personal empowerment that harks back to the era of the yeoman farmer of America’s early days. The society may find blessed new life, as paradoxical as this may sound, in a return to a smaller form.<br /><br />This perspective may seem especially fanciful at a time when the political tides all seem to be running in the opposite direction. In the midst of economic troubles, an aggrandizing Washington is gathering even more power in its hands. The Obama Administration, while considering replacing top executives at Citigroup, is newly appointing a “compensation czar” with powers to determine the retirement packages of executives at firms accepting federal financial bailout funds. President Obama has deemed it wise for the U.S. Treasury to take a majority ownership stake in General Motors in a last-ditch effort to revive this Industrial Age brontosaurus. Even the Supreme Court is getting in on the act: A ruling this past week awarded federal judges powers to set the standards by which judges for state courts may recuse themselves from cases.<br /><br />All of this adds up to a federal power grab that might make even FDR’s New Dealers blush. But that’s just the point: Not surprisingly, a lot of folks in the land of Jefferson are taking a stand against an approach that stands to make an indebted citizenry yet more dependent on an already immense federal power. The backlash, already under way, is a prime stimulus for a neo-secessionist movement, the most extreme manifestation of a broader push for some form of devolution. In April, at an anti-tax “tea party” held in Austin, Governor Rick Perry of Texas had his speech interrupted by cries of “secede.” The Governor did not sound inclined to disagree. “Texas is a unique place,” he later told reporters attending the rally. “When we came into the Union in 1845, one of the issues was that we would be able to leave if we decided to do that.”<br /><br />Such sentiments resonate beyond the libertarian fringe. The Daily Kos, a liberal Web site, recently asked Perry’s fellow Texas Republicans, “Do you think Texas would be better off as an independent nation or as part of the United States of America? It was an even split: 48% for the U.S., 48% for a sovereign Texas, 4% not sure. Amongst all Texans, more than a third—35%—said an independent Texas would be better. The Texas Nationalist Movement claims that over 250,000 Texans have signed a form affirming the organization’s goal of a Texas nation.<br /><br />Secessionist feelings also percolate in Alaska, where Todd Palin, husband of Governor Sarah Palin, was once a registered member of the Alaska Independence Party. But it is not as if the Right has a lock on this issue: Vermont, the seat of one of the most vibrant secessionist movements, is among the country’s most politically-liberal places. Vermonters are especially upset about imperial America’s foreign excursions in hazardous places like Iraq. The philosophical tie that binds these otherwise odd bedfellows is belief in the birthright of Americans to run their own affairs, free from centralized control. Their hallowed parchment is Jefferson’s Declaration of Independence, on behalf of the original 13 British colonies, penned in 1776, 11 years before the framers of the Constitution gathered for their convention in Philadelphia. “The right of secession precedes the Constitution—the United States was born out of secession,” Daniel Miller, leader of the Texas Nationalist Movement, put it to me. Take that, King Obama.<br /><br />Today’s devolutionists, of all stripes, can trace their pedigree to the “anti-federalists” who opposed the compact that came out of Philadelphia as a bad bargain that gave too much power to the center at the expense of the limbs. Some of America’s most vigorous and learned minds were in the anti-federalist camp; their ranks included Virginia’s Patrick Henry, of “give me liberty or give me death” renown. The sainted Jefferson, who was serving as a diplomat in Paris during the convention, is these days claimed by secessionists as a kindred anti-federal spirit, even if he did go on to serve two terms as president.<br /><br />The anti-federalists lost their battle, but history, in certain respects, has redeemed their vision, for they anticipated how many Americans have come to feel about their nation’s seat of federal power. “This city, and the government of it, must indubitably take their tone from the character of the men, who from the nature of its situation and institution, must collect there,” the anti-federalist pamphleteer known only as the Federal Farmer wrote. “If we expect it will have any sincere attachments to simple and frugal republicanism, to that liberty and mild government, which is dear to the laborious part of a free people, we most assuredly deceive ourselves.”<br /><br />In the mid-19th century, the anti-federalist impulse took a dark turn, attaching itself to the cause of the Confederacy, which was formed by the unilateral secession of 13 southern states over the bloody issue of slavery. Lincoln had no choice but to go to war to preserve the Union—and ever since, anti-federalism, in almost any guise, has had to defend itself from the charge of being anti-modern and indeed retrograde.<br />But nearly a century and a half has passed since Johnny Rebel whooped for the last time. Slavery is dead, and so too is the large-scale industrial economy that the Yankees embraced as their path to victory over the South and to global prosperity. The model lasted a long time, to be sure, surviving all the way through the New Deal and the first several decades of the post-World War II era, coming a cropper at the tail end of the 1960s, just as the economist John Kenneth Galbraith was holding out “The New Industrial State,” the master-planned economy, as a seemingly permanent condition of modern life.<br /><br />Not quite. In a globalized economy transformed by technological innovations hatched by happily-unguided entrepreneurs, history seems to be driving one nail after another into the coffin of the big, which is why the Obama planners and their ilk, even if they now ride high, may be doomed to fail. No one anymore expects the best ideas to come from the biggest actors in the economy, so should anyone expect the best thinking to be done by the whales of the political world?<br /><br />A notable prophet for a coming age of smallness was the diplomat and historian George Kennan, a steward of the American Century with an uncanny ability to see past the seemingly-frozen geopolitical arrangements of the day. Kennan always believed that Soviet power would “run its course,” as he predicted back in 1951, just as the Cold War was getting under way, and again shortly after the Soviet Union collapsed, he suggested that a similar fate might await the United States. America has become a “monster country,” afflicted by a swollen bureaucracy and “the hubris of inordinate size,” he wrote in his 1993 book, “Around the Cragged Hill: A Personal and Political Philosophy.” Things might work better, he suggested, if the nation was “decentralized into something like a dozen constituent republics, absorbing not only the powers of the existing states but a considerable part of those of the present federal establishment.”<br /><br />Kennan’s genius was to foresee that matters might take on an organic, a bottom-up, life of their own, especially in a society as dynamic and as creative as America. His spirit, the spirit of an anti-federalist modernist, can be glimpsed in an intriguing “mega-region” initiative encompassing greater San Diego County, next-door Imperial County and, to the immediate south of the U.S. border, Northern Baja, Mexico. Elected officials representing all three participating areas recently unveiled “Cali Baja, a Bi-National Mega-Region,” as the “international marketing brand” for the project.<br />The idea is to create a global economic powerhouse by combining San Diego’s proven abilities in scientific research and development with Imperial County’s abundance of inexpensive land and availability of water rights and Northern Baja’s manufacturing base, low labor costs and ability to supply the San Diego area with electricity during peak-use terms. Bilingualism, too, is a key—with the aim for all children on both sides of the border to be fluent in both English and Spanish. The project director is Christina Luhn, a Kansas native, historian and former staffer on the National Security Council in Ronald Reagan’s White House in the mid-1980s. Contemporary America as a unit of governance may be too big, even the perpetually-troubled state of California may be too big, she told me, by way of saying that the political and economic future may belong to the megaregions of the planet. Her conviction is that large systems tend not to endure—“they break apart, there’s chaos, and at some point, new things form,” she said.<br /><br />The notion that small is better and even inevitable no doubt has some flavor of romance—even amounting to a kind of modern secular faith, girded by a raft of multi-disciplinary literature that may or may not be relevant. Luhn takes her philosophical cue not only from Kennan but also from the science writer and physicist M. Mitchell Waldrop, author of “Complexity: The Emerging Science at the Edge of Order and Chaos.”<br />Even for the hard-edged secessionist crowd, with their rapt attentiveness to America’s roots, popular texts in the future-trend genre mingle in their minds with the yellowed scrolls of the anti-federalists. “The cornerstone of my thought,” Daniel Miller of the Texas Nationalist Movement told me, is John Naisbitt’s 1995 best seller, “Global Paradox,” which celebrates the entrepreneurial ethos in positing that “the bigger the world economy, the more powerful its smallest players.”<br /><br />More convincingly, the proposition that small trumps big is passing tests in real-life political and economic laboratories. For example, the U.S. ranked eighth in a survey of global innovation leadership released in March by the Boston Consulting Group and the National Association of Manufacturers—with the top rankings dominated by small countries led by the city-state republic of Singapore. The Thunderbird School of Global Management, based in Arizona, has called Singapore “the most future-oriented country in the world.” Historians can point to the spectacularly inventive city-states of Renaissance Italy as an example of the small truly making the beautiful.<br /><br />How, though, to get from big to small? Secessionists like Texas’ Miller pledge a commitment to peaceful methods. History suggests skepticism on this score: Even the American republic was born in a violent revolution. These days, the Russian professor Igor Panarin, a former KGB analyst, has snagged publicity with his dystopian prediction of civil strife in a dismembered America whose jagged parts fall prey to foreign powers including Canada, Mexico and, in the case of Alaska, Russia, naturally.<br />Still, the precedent for any breakup of today’s America is not necessarily the one set by the musket-bearing colonists’ demanded departure from the British crown in the late 18th century or by the crisis-ridden dissolution of the U.S.S.R. at the end of the 20th century. Every empire, every too-big thing, fragments or shrinks according to its own unique character and to the age of history to which it belongs.<br /><br />The most hopeful prospect for the USA, should the decentralization impulse prove irresistible, is for Americans to draw on their natural inventiveness and democratic tradition by patenting a formula for getting the job done in a gradual and cooperative way. In so doing, geopolitical history, and perhaps even a path for others, might be made, for the problem of bigness vexes political leviathans everywhere. In India, with its 1.2 billion people, there is an active discussion of whether things might work better if the nation-state was chopped up into 10 or so large city-states with broad writs of autonomy from New Delhi. Devolution may likewise be the future for the European continent—think Catalonia—and for the British Isles. Scotland, a leading source of Enlightenment ideas for America’s founding fathers, now has its own flourishing independence movement. Even China, held together by an aging autocracy, may not be able to resist the drift towards the smaller.<br /><br />So why not America as the global leader of a devolution? America’s return to its origins—to its type—could turn out to be an act of creative political destruction, with “we the people” the better for it.<br /><br /></blockquote>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-8125559540259026012009-06-20T11:17:00.000-07:002009-06-20T11:37:37.129-07:00Secession?People who deride the Electoral College in favor of the popular vote misunderstand the dynamic it creates to keep the union stronger and prevent regional secessionist movements. They often dismiss this argument by saying secessionist movements are archaic and unthinkable in modern times. Nothing could be less true. The Wall Street Journal and Associated Press reported on this issue recently and I reprint both articles in full:<br /><blockquote><br /><span style="font-weight:bold;">Fighting to Secede</span><br /><br />From Texas to Hawaii, these groups are fighting to secede<br /><br />American secessionist groups today range from small startups with a few laptop computers to organized movements with meetings of delegates from several states.<br />The Middlebury Institute, a group that studies and supports the general cause of separatism and secessionism in the U.S., has held three Secession Congresses since its founding in 2004.<br /><br />At the most recent gathering, held in New Hampshire last November, one discussion focused on creating a new federation potentially to be called “Novacadia,” consisting of present-day New Hampshire, Vermont, Maine, New Brunswick, Prince Edward Island and Nova Scotia. An article highlighted on the group’s Web site describes Denmark as a role-model for the potential country. In the months following the convention, the idea “did not actually evolve into very much,” says Kirkpatrick Sale, the institute’s director.<br /><br />Below the Mason-Dixon Line, groups like the League of the South and Southern National Congress hold meetings of delegates. They discuss secession as a way of accomplishing goals like protecting the right to bear arms and tighter immigration policies. The Texas Nationalist Movement claims that over 250,000 Texans have signed a form affirming the organization’s goal of a Texas nation.<br /><br />A religious group, Christian Exodus, formed in 2003 with the purpose of transforming what is today South Carolina into a sovereign, Christian-run state. According to a statement on its Web site, the group still supports the idea, but has learned that “the chains of our slavery and dependence on Godless government have more of a hold on us than can be broken by simply moving to another state.”<br /><br />On the West Coast, elected officials representing greater San Diego County, Imperial County and Northern Baja, Mexico, have proposed creating a “mega-region” of the three areas called “Cali Baja, a Bi-National Mega-Region.”<br /><br />Hawaii is home to numerous groups that work toward the goal of sovereignty, including Nation of Hawaii. The group argues that native Hawaiians were colonized and forced into statehood against their will and without fair process, and therefore have the right to decide how to govern themselves today. In Alaska, the Alaska Independence Party advocates for the state’s independence.<br /><br />There is also a Web site for a group called North Star Republic, with a mission to establish a socialist republic in what today is Minnesota, Wisconsin and Michigan.<br /><br />A group of American Indians led by activist Russell Means is working to establish the Republic of Lakotah, which would cover parts of North Dakota, South Dakota, Montana, Wyoming and Nebraska. In 2007, the Republic presented the U.S. State Department with a notice of withdrawal.<br /></blockquote><br />These efforts seem quixotic only because our national voting system helps mitigate the red-blue divide in our politics. But secession movements in the US would quickly become real if either the urban coasts or rural fly-over states were able to consistently dominate national politics. The EC helps prevent this by requiring a president to appeal geographically across regions.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-32751866994071469892009-06-17T17:16:00.000-07:002009-06-17T17:18:33.108-07:00Redistribution Even a Conservative Could LovePresident Obama has made it clear in his campaign promises and his policy proposals that flattening economic inequality is an expressed goal of his administration. He has promised tax reductions for the bottom 50% of the population to be paid for by closing tax loopholes and raising taxes on the wealthy. The recent Chrysler workout seems to favor the UAW over shareholders and senior creditors. And in his pronouncements on Supreme Court appointments Obama stated he is looking for “pragmatic” candidates who will make judgments based on “empathy,” presumably for the have-nots or weaker members of society. One can only wonder how far these subjective, “political” judgments will go.<br /><br />While noble in its oblige, Obama’s ideological stance has raised a vocal opposition to failed tax and redistribution schemes of the past and accusations of a socialist mentality. While “socialist” may be hyperbole, past failures of liberal tax and redistribution schemes are real. One can argue that robbing Peter to pay Paul will change Peter’s productive behavior, making them both poorer. Certainly this is what we observed with the command and control economies, as well as with the welfare states of Europe. So, how do we flatten inequality in a free market society without throwing the baby out with the bathwater?<br /><br />The solution lies in recognizing the basic law of capitalist finance that risk and reward are positively correlated. More risk leads to higher expected returns or potential losses. This is a natural law of human behavior that we break at grave risk of unwelcome consequences – as we have experienced with the current credit crisis. It is the moral foundation of our contract law – responsibility is meted out so that the innocent should not pay for the mistakes of the guilty. It’s why we are so offended by bankers playing “heads we win, tails you lose” with other peoples’ money.<br /><br />If risk and reward are positively correlated and we want to distribute the rewards more broadly, it stands to reason that the risks of capitalism must be spread more broadly as well. This doesn’t mean widows and orphans should be trading derivatives on Wall Street, but it does mean that the equity risks in a capitalist society must be spread in order to close the inequality gap. To do this by expropriation of the haves to give to the have-nots is a gross and unjust violation of the law stated above.<br /><br />The best and most just way to redistribute wealth is to empower capital accumulation and diversification—in other words, encourage the have-nots to buy equity from the haves at the market price. No one can object to this voluntary transaction and we would be surprised how easy it could be accomplished by removing some of the tax disincentives to both parties (Zero capital taxes on the poor? Lower labor taxes, higher consumption taxes?). It is also concomitant that the law vigorously defend the rights of ownership, so those with power and influence cannot abuse shareholders’ interests. The regulatory authorities have failed in this capacity too often for us to take it for granted.<br /><br />The left in the capitalist societies have too often associated shareholding with rich capitalists, but the public corporation spreads equity ownership to the masses – workers hold it now in their pensions and retirement funds. As workers they already carry the risks of the capitalist enterprise with unemployment, risks they rarely get paid for. In any event, labor is a cost on the wrong side of the profit equation. Thus, wage earners are constantly fighting international wage levels in a world of capital mobility. It’s time for the left to realize how the have-nots can buy membership into the capitalist club, rather than trying to storm the barricades or sneak through the backdoor.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-31293789252730955682009-05-14T08:50:00.000-07:002009-05-14T08:53:40.945-07:00Riding the Wave of UncertaintyThe financial crisis has become a national “Whodunit?” and our public watchdogs have finally fingered the prime suspect. It’s been contained in a little black box labeled “systemic risk.” The forensics team has lifted thousands of fingerprints and the national media is doing its part rounding up the culprits. Yet, systemic risk is still an abstraction and a tough explanation to get one’s mind around.<br /><br />Systemic risk technically refers to the risk that is not “specific” to one company or industry, but to the larger market or economic universe over which no one has direct control. Nature gets hit by systemic risk in the form of ice ages and meteors that wipe out whole species. But mankind created exchange markets, not God or nature, so blaming systemic risk is essentially acknowledging that the entire “system” we created and in which we operate is rotten.<br /><br />There is some truth to this. During this past <span style="font-style:italic;">annus horribilis</span> the people who should have known better engineered and amplified systemic risk. The blame falls far and wide and has incited populist rage against capitalism and free markets. But, like guns, markets don’t kill people; they are little more than highly efficient information generators and allocation mechanisms. Instead, the fault lies with some of the financial and political rules and practices we’ve adopted that impede competition, obscure information, distort incentives, and constrain our abilities to manage our economic affairs. It doesn’t help that many people made out quite handsomely exploiting this degenerate state of affairs. But let’s not miss the forest for the trees.<br /><br />The political buzzwords of the day are “uncertainty” and “lack of confidence,” spoken as if all we need do is conjure up a larger Hope that will slay our fears. But uncertainty is an ever-present fact of life. It’s the concomitant of change and it’s not going away. The heightened sense of uncertainty we face today is a function of the rapid pace of technological change, which most futurists expect to accelerate. Our economic crisis truly stems from our failure to adequately manage this change. Through mistakes of both ignorance and hubris, we’ve unnecessarily magnified the risks and uncertainties of our modern world. Just think of the difficulties of valuing a house these days—with a toxic mortgage? This is what’s holding up the world economy? Certainly the Romans must have had an easier time of it. Ultimately, we need to recognize that our problems result from violating the most basic rule of nature: in a world of change, if you want to adapt and survive, diversify.<br /><br />When we talk about finance we’re talking about an industry that grew out of the need to manage the risks of uncertainty. Banking began with the risks of transporting goods and money across great distances, giving rise to letters of credit. Capital markets started by pooling funds to underwrite the capital investment and risks of fleets of ships laden with goods traveling halfway around the world. Today’s financial derivatives are innovative attempts to repackage risks and allocate them according to the preferences of market participants. When we successfully manage and lower risk, risk-adjusted returns are enhanced, creating value and wealth. This is the logic behind the insurance industry as well. But when we botch it, well, we get financial contagion marked by a sharp contraction of inflated credit and economic activity. After the reset, we begin again at lower valuations.<br /><br />So how do we avoid botching it? By more diligently applying the lessons of Mother Nature. The recent meltdown of mortgage-backed securities has supposedly discredited the theory of financial asset diversification. But this is a false conclusion. According to Harry Markowitz, Nobel Prize winner and father of modern portfolio theory, the financial wizards who bundled complex mortgage-backed and other collateralized debt obligations violated the first principle of asset diversification. "Diversifying sufficiently among uncorrelated risks can reduce portfolio risk toward zero," he says, "but financial engineers should know that's not true of a portfolio of correlated risks."<br /><br />Basically, securitization is meant to pool uncorrelated risky assets—when one asset goes down in price it’s just as likely that another will go up, insuring the overall valuation of the pool. But since these instruments were all backed by the same worldwide housing bubble driven by low interest rates, all the risks were correlated and the securities went down like a row of dominoes.<br /><br />Other critics have mistakenly applied the logic of portfolio diversification to firm diversification – arguing that diversified financial firms became too big to fail. But the era of conglomeration taught us there’s always an economic trade-off between diversification and specialization at the firm level. Unfortunately, financial firms were encouraged with implied government guarantees to test the limits of their business models. This was not the fault of diversification or caused by the repeal of Glass-Steagal.<br /><br />Diversification means not putting all your eggs in one basket. It means not having all your financial wealth in your house, or one stock, one company, or one highly specialized job or skill. Diversification means investing in a varied skill set, a broad education, and social and political capital. Diversification means developing family and community networks. It means taking care of your health, buying insurance, and building self-insurance with savings.<br /><br />On the national level, diversification means individuation, open competition and exchange markets – a country that marches in lockstep should set off alarm bells in our heads. This applies to economic policy as well as politics. Diversification means freedom, free will and sometimes being different. A diversified society is an interdependent, yet resilient society—it benefits from a diversity of ideas and cultures. It’s not one big cradle-to-grave social insurance pool, but the anti-thesis of universalism and nationalization. Diversification is what makes America great and what saves mankind from going the way of the dodo.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-4105379793875340122009-04-07T07:49:00.000-07:002009-04-07T08:00:49.029-07:00Change We Can Believe In?Jay Cost, over at RealClearPolitics, had an excellent post yesterday on his HorseRace Blog (the site link is on my link sidebar). You can read it <a href="http://www.realclearpolitics.com/horseraceblog/2009/04/obamas_polarized_america.html?utm_source=newsletter&utm_medium=email&utm_campaign=rcp-today-newsletter">here</a>.<br />This is his lead-in:<br /><blockquote>The recent Pew poll has found that President Obama's job approval is the most polarized for any new President in forty years:</blockquote><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_WMP3tivmF2w/Sdtpd8achVI/AAAAAAAAAFU/aDv8piiIKI8/s1600-h/Pew+Poll+Data.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 350px; height: 242px;" src="http://1.bp.blogspot.com/_WMP3tivmF2w/Sdtpd8achVI/AAAAAAAAAFU/aDv8piiIKI8/s400/Pew+Poll+Data.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5321963347822544210" /></a><br />He's got a lot more data that shows how this partisan polarization is still driving our politics. As we have long maintained here, this will not be changed from the top down by Obama or anyone else, but only from the bottom up with a change in voters' attitudes and a reconciliation of values across urban and rural spaces.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-28147578812444528142009-03-05T10:47:00.000-08:002009-03-05T10:52:06.594-08:00Making Homes Affordable?The US Treasury released guidelines to the new “Making Homes Affordable” scheme. Making homes affordable? So, they are priced too high? <br /><br />Memo to Washington: Let the prices drop.<br /><br />What kind of Orwellian world are we living in?Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com1tag:blogger.com,1999:blog-8253429406619459907.post-782022516037394662009-02-21T09:00:00.000-08:002009-02-21T09:02:52.003-08:00Bipartisanship?Good one.<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_WMP3tivmF2w/SaAzcB3Ce9I/AAAAAAAAAE8/kgAWNFokTl4/s1600-h/Pearls+agree.gif"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 127px;" src="http://1.bp.blogspot.com/_WMP3tivmF2w/SaAzcB3Ce9I/AAAAAAAAAE8/kgAWNFokTl4/s400/Pearls+agree.gif" border="0" alt=""id="BLOGGER_PHOTO_ID_5305296917671082962" /></a>Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-33709418930860117482009-02-19T14:27:00.000-08:002009-02-19T15:04:08.102-08:00Scared of the 800-lb. Gorilla?Went to an interesting symposium on the economic crisis and the Obama policy response/spending bill yesterday. Two economists, Tom Campbell and Barry Eichengreen, gave their interpretations. What struck me was that nobody, especially nobody in politics, seems to want talk about the 800-lb. gorilla in the room. This beast is the pervasive <span style="font-style:italic;">uncertainty</span> associated with price discovery roiling all markets and asset classes. This 800-lb. gorilla is partly psychological but also real, so perhaps we can talk about the big gorilla and his even bigger shadow.<br /><br />Policymakers don't want to bring too much attention to the gorilla for fearing of scaring the public with his imposing shadow. But in so doing they seem to be pushing a form of denial that is also reflected in the proffered policies. Most of these policies seem targeted to further obscure prices or prop them up. Obama's proposal to throw another $275 BILLION at foreclosures in the housing market is a case in point. <br /><br />The necessity of price discovery is crucial to clean up the banks and get credit flowing again. What do we think these toxic assets are? They're assets that nobody can agree how to value (most of them based on unrealistic housing prices). The market has depreciated these assets to 30-40 cents on the dollar, but the owners (banks) think they're worth more, but can't sell them and are hoping the government (i.e, sucker taxpayer) will buy them at par. At least that pig didn't fly. But if we don't discover prices on this toxic dump we can expect years of zombie banks in our midst. Expect some nationalizations and then break-ups.<br /><br />True price discovery is also crucial to getting the housing market off the mat. Nobody is going to buy overpriced housing no matter how cheap and available credit is, and nobody is going to convince them that prices have stabilized by virtue of directives or hopeful words from Washington. What's a house worth anyway? The "bigger fool" strategy is history for now. Let's try a historical metric of cashflows off implicit rents or median incomes and we'll get an idea. A house that rents for $5000 a month is worth maybe $900K. Rents for $1500/mo. = $270K. But policymakers want to stabilize house prices based on inflated mortgages. Ain't gonna work. Just more wasted dollars...<br /><br />But why? How are we helping things by encouraging people to buy or stay in overpriced homes they can't afford and then sticking them with the bill over the next 20-30 years? Are we searching for new ways to impoverish these people? How are they going to pay for the expenses of old age? Wonder how that's gonna work with our entitlement reform?<br /><br />Bottom line is that nobody wants to adjust housing prices to the downside. But there's no other way out of this mess. Securitized mortgage money is gone...buying power is a fraction of what it was in 2006. Let's get real instead of throwing good money after bad. Indications are this is gonna take longer than we think.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-5777222894819177102009-02-10T11:23:00.000-08:002009-02-10T11:28:06.947-08:00Joe the Renter?Date: February 6, 2009<br />Re: A memo from Joe the Renter<br /> <br />Dear Congresspersons, Senators and Mr. President,<br /> <br />We are in the midst of a serious economic correction and the causes are quite complex. As a prospective home buyer allow me to narrowly focus on the state of the housing market. There have been many calls from the Capitol to save home owners facing foreclosure – a moratorium on foreclosures, new government-subsidized fixed rate mortgages, loan renegotiations, and bailouts for lenders. (BTW, these owners underwater don't want to be saved and tethered to their bad investments - they want to be liberated.) But precious little has been focused on the people who can afford and wish to buy a home. Don’t we want buyers to re-enter the market?<br /> <br />For a home buyer, I have the desired qualifications: middle-aged, recently married, with a combined income that varies between $80-150K, zero debt, a credit score over 800 and roughly $300K cash that could be put toward equity. What matters most to me is the size of the mortgage and the prospects for price stability or, better yet, long-term appreciation. In the long-term it doesn’t matter that I might get a $7500 purchase tax credit or a low interest rate because these factors will just keep asking prices higher and increase the size of my mortgage principal owed. You could offer me limitless funds at 0%, but I still will not borrow to buy an asset that is overpriced based on cash flow fundamentals. <br /> <br />The problem in a nutshell is our national housing stock is overvalued by almost any economic measure we use, whether it be median incomes, imputed rents or national GDP. Currently we rent a 2200 sq. ft. home for $2800/mo. Comparable houses in the area of Los Angeles where we live have asking prices of $1.2-1.5 million. Buying just doesn’t compute. Because we live in a dense urban area of Southern California I know many other families in the same predicament – on the sidelines with cash waiting for a rational market to return. In the current environment we will all continue to rent and put our investments elsewhere.<br /> <br />You might think my take on this is self-interested, and I would wholeheartedly agree. But my actions have been financially prudent. I need to save money for retirement, not throw it away on overpriced housing. I did not “roll the dice” on subsidized housing with other peoples’ money. But the nation is in the same boat.<br /> <br />We made bad investments in an asset bubble. We need to correct these prices, not distort all the other prices in our economy. Otherwise we will be in a deeper hole when it comes to financing our retirements. We can make housing affordable in this country if we stop subsidizing it over other investment classes and let it return to true market value. The political challenge will be how to manage the losses this will incur to those who were not so prudent – buyers, lenders, banks and investors. I suggest you leave us taxpayers out of it as much as possible.<br /> <br />Sincerely, Joe the Renter<br /> <br />P.S. While I am an average citizen and home buyer, perhaps I am not the typical voter. I’m a macroeconomist, finance MBA and political scientist. I hold doctoral, masters and bachelor degrees in these three disciplines, all from top-ranked schools. Thus, I am one of the so-called “experts” you often consult for policy advice. Please take it into consideration.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-65401141013613908132009-02-04T09:08:00.001-08:002009-02-19T15:07:22.219-08:00A Crisis in PricesDick Armey wrote an <a href="http://online.wsj.com/article/SB123371237124446245.html">op-ed</a> in today's WSJ applying the lessons of Hayek to the financial crisis. In this case, Hayek provides the right diagnosis - the problem we have is in the price system. Government spending can and usually does distort the price system in unintended and counter-productive ways. And it does little to address the immediate problem of flagging confidence.<br /><br />The present crisis is marked by the distortion and uncertainty of prices that has instigated a lack of confidence in risk-taking behavior. When prices readjust, confidence will slowly return, but we can't wait that long. A stimulus bill focused on demand will not correct prices and affect the crisis in confidence until it affects the real economy a year or two out, but we can't wait that long. Think how long it took for New Deal policies to have a positive effect on the Great Depression. Anybody want to wait that long? <br /><br />Policy should be directed at those signals that will have an immediate psychological impact: permanent reductions in taxes on productive activity. Commitment to compensate for the dislocation costs of this economic correction through automatic stabilizers can also help alleviate consumer and employment fears. The system's imbalances need to correct, but it's the continued uncertainty that will exact a greater cost. <br /><br />Our current crapshoot politics and best-guess economic policy may be the worst alternative that may come all too soon.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0tag:blogger.com,1999:blog-8253429406619459907.post-68270026725285040292009-01-31T18:04:00.000-08:002009-01-31T18:17:50.758-08:00Mortgage Slaves?Finally, someone has spoken the unspeakable on the foreclosure crisis. In today's WSJ there's an op-ed titled, "<a href="http://online.wsj.com/article/SB123336541474235541.html">Why Be a Nation of Mortgage Slaves?</a>" (subscription req'd). <br /><br />The politicians have been spouting off for months on this--how it's horrible that homeowners have been the victims of the mortgage crisis and how they need a bailout or foreclosure moratorium to stay in their homes. These pols are blowing smoke. Nobody, I mean nobody, in their right mind wants to be forced to pay an oversized mortgage for an undersized house for the next 30 years. The question is who takes the haircut on these white elephants? The homeowner, the lender, the investor, or the taxpayer? Morally, I think the taxpayer should be absolutely last on this dance card. <br /><br />I wrote on this before in my blog on <a href="http://policriticblog.blogspot.com/2008/12/foreclosure-myths.html">Foreclosure Myths</a>. Hopefully we can move the public conversation towards some kind of economic logic. If we want to make houses affordable, all we need to do is stop subsidizing them and let prices fall to a natural level based on comparable rents. We've got a long way to go.Policritichttp://www.blogger.com/profile/12183335044590596537noreply@blogger.com0