Right in San Francisco

Economics Meets Politics

  Let me begin with an apology with the Nobel Committee which decided to award their economics prize to Paul Krugman - or maybe they should apologize to the rest of us. The assumptions underlying this week's blog are that, in the long run, a person or a society can only consume as much as it produces, and that free markets can make these decisions better than politicians can.  

   1. Problem I. The Baby boomer generation has grossly overspent, with the federal debt reaching 10 % of the Gross Domestic Product, the highest in the industrialized world. The political answer - an orgy of spending.  President Obama seems to understand the problem, but he's a much better speaker than a mathematician, and the new age of responsibility excludes 95% of the population.  

   2. Problem II. For a decade, people have been ecouraged to buy houses that they cannot afford - by their bankers, Fannie/Freddie, Congress, and the people who bundled and sold mortgages. The political answer - $275 billion (from the 80% who were prudent) to help the risk-takers restructure.

   3. Problem III. With the encouragement of Congress and relaxed laws, many banks took on broad risk which has not panned out. The need is to attract capital to the banking sector in terms of stock issues or bonds. The political answer - give the government priority as bondholders, and (if David Axelrod has his way) wipe out the equity position of any stockholder foolish to remain in the game, and require the banks to restructure bad mortgages and expand marginal lending.  Oh, and extend this to all banks, just in case - and wonder why private capital flees the financial sector.  

  4. Problem IV. Two of three remaining domestic car producers have driven into a ditch. The political answer - keep giving them more billions to protect the workers - whether they are working or not.

   It is small wonder that the markets have initially shown little confidence in the Obama administration. It's got nothing to do with the abominable personnel selections. It's even got little to do with the abdication of the "stimulus" plan to Nancy Pelosi and Harry Reid. It's got everything to do with uncertainty about how socialism will play out in the financial sector.  Bush left a mess, but the disconnect between the obvious economic answers and the politically-driven Obama responses is striking. 

    Lets hope that the "Responsibility Summit" and the promise (hope?) to cut the deficit in half reflect a victory for Advisor Volker, and a defeat for Advisor Axelrod.                                                          

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This week's YouTube reflects the new realities.  

A double-bonus YouTube is intended for those who missed their tax refund last time.

Bill Bowen - 2/27/09

Gregg v Emanuel

     Here's my fantasy for the week:

    As another example of the Obama administration's commitment to transparency, Robert Gibbs' press office has begun releasing the minutes of key interviews with new employees - kind of like the Nixon tapes without Rose Mary Wood's gaps.

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    "Senator Gregg- shall I call you Judd- it's a pleasure to meet you. And Welcome to Team Obama. The President has asked me to be sure that you feel comfortable with the group, and that there are no misunderstandings as we get going with your important role as Commerce Secretary."

    "Thanks Rahm. Judd it is. I have been looking forward to meeting you, and making sure that we're on the same page. It is a relief to a lot of my friends that the President wants the advice of conservatives to be part of major decisions."

    "Right, you've got nothing to worry about with us. I know that you asked about what happened to General Zinni - but it isn't really relevant here. We got a little ahead of ourselves with that, but Hillary ultimately thought that she should have a say on ambassadors - at least to Iraq.  I know it was a little embarrasing for Zinni, with us announcing that he would be the ambassador, and then that he wouldn't, but he's a good soldier, and we'll find something else for him. But that's got nothing to do with you."

    "Yeah, I was a little worried about that, and all of the tax stuff with Tom and the others. I'm as clean as can be, but I did just want to be sure we're on the same page on a few policy things."

    "Good thought. Barack and I have been hearing quite a bit from La Raza and the NAACP about your votes to cut the budget for the Census Bureau. What was that all about, anyway?"

    "A little bit of it is philosophy - how much do we really need to know about marital patterns, and migration trends - and there's a bit of management incompetence too - like the $2 billion IT project for handhelds. But what I'd really like to fix is this idea of "statistical adjustments" for alleged undercounts - particularly with all of the problems with ACORN in this last election. I'm a little old fashioned, but I think that a census should count the people who are here, and not those that we can't find."

   "It's good of you to be so honest. Bill Richardson would have been a good fit, and we weren't so sure about you on the census. You do know that Barack paid $800,000 to ACORN for their "get out the vote" effort, and they registered 1.3 million voters. And the census will determine house seats and distribution of lots of programs. So we're thinking of having the census run from the White House, and letting you work on other stuff."

    "Lets come back to that, Rahm. It's a big deal, but it's a one time thing; lets talk a little about Commerce's  main role of encouraging economic growth, and stimulating international trade. There's lots to do there. I've been thinking a lot about the "car czar", and what he needs to do."

    "Well, Judd, it's actually not going to work quite that way. Ron Gettelfinger over at the UAW doesn't really like the idea of one negotiatior for all of the companies, so we're going to leave that for Larry Summers and Tim Geithner to work on. It's really a financial question anyway."   

    "Well, at least there's a lot of work to do supporting exports. I'm sure glad that the President wanted the "Buy American" language out of the stimulus bill. At least everybody knows that protectionism had a lot to do with the Depression, and we need to do everything we can to keep trade up." 

    "You know, you can't really blame Barack for what happens in the House and Senate. There's lots of folks who don't want to be spending American tax dollars on Asian steel, so we're going to have to finesse this one, and let Harry and Nancy have their language. Your job will be to explain it to our trade partners, and we know that you're up to the task."  

    "Well, Rahm, I am sorry that we didn't have a chance to get together a little earlier. Busy schedules and all. We'll have to be sure to talk more often."

    "Good thought. It a good thing that we had a chance to clear the air. People tell me that you're a straight shooter, and that you can help get the Republicans on board.  We really want bipartisan help in carrying our program."

    Pause. "Thanks again, Rahm. we'll be talking soon."

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    This week's You Tube contains budget advice for California voters - particulalry the majority who voted in November for the first $10 billion payment toward a high speed rail system between San Francisco and San Diego.

Bill Bowen - 2/20/2009

  

Obamanomics 101

      President Obama got one thing right - today we are all economists. Perhaps we would be better off if we all gave up watching CNBC and crying over our 201(k)s, and instead went back to making our widgets and waiting on our customers.

    Some observations:

        1. The scope and size of governmental activity are overwhelming - the $800 billion "stimulus plan", first drafted by Nancy Pelosi's House, and pumped by Obama; the financial system plan presented (kind of) by Tim Geithner; Congressional testimony by Federal Reserve Chairman Bernanke; Congressional grilling (a la the auto presidents, and previously the tobacco guys) of the bank presidents - all of the Democratic congressmen got back from their retreat at a Williamsburg, Virginia resort in time to ask about corporate jets, and sales meetings. Too many shows to digest.

        2. Despite having a few months to think about it, this group doesn't have any better a grasp than the last group. As Representative Kanjorski (D - Pa) said at the Bernanke hearing, "Why cannot the executive branch just tell the American public what the problem is, and what is needed to fix it?" Instead, we get the "pending catastrophe" speech from Obama, and the "terribly complex; details to follow in a few weeks" speech from Geithner. In a clear reaction, Wall Street gave them a down almost 5%, or $750 billion of lost market capitalization. We are no closer to dealing with the toxic derivatives that started the mess, or a solution for the auto industry.   

        3. In Washington, it is all politics. Bernanke (whose job may be sought by Larry Summers) speaks about the good decisions, creative actions, and prudence of the Fed over the last six months; Geithner (currying Obama's favor) calls everything before January 20, a disaster, forgetting that as president of the NY Fed he was one of the prime architects. Obama claims that the Republicans want to do nothing. Republicans complain (successfully in the Senate where they have leverage) that the stimulus has too much pork. Of course the administration supports a strong dollar (huh?), and we will reverse course when the time is right (double huh?). There has been nary a comment from the politicians about the need for Mr. and Mrs. America to do more with less. If there is culprit, it is certainly the evil bankers (who, by the way, contributed more to Democrats than to Republicans in the last cycle), not the profligate Baby Boomers.

        4. Actually, things were getting better in the financial system. (Task I.) The first $350 billion of the TARP was successfully used to stop major bank failures; housing prices are coming down, as necessary, and sales are increasing; the stock market had stabilized; commercial interest rates were moderating; there were even a few IPOs and friendly take-overs. Now we can look forward to a federal "stress test" for all of the banks to see who might fail; a $ trillion program to support consumer lending; $500 billion to a $ trillion for a public/private "bad bank" to somehow buy up the bad mortgage-backed securities; and another $50 billion to refinance bad home loans. And, if David Axelrod, Obama's chief political advisor, has his way, the bank officers will be fired, stockholders will be wiped out, and salaries will be capped as a prelude to the new era of public-private cooperation. Does anybody wonder why the financial markets are so unstable? Details to follow.

        5. The real economy (Task II) continues to deteriorate, and is approaching the condition of the Carter years, at least in terms of unemployment. The stimulus bill will do some good in the short term - both by providing relief to people out of work, and by creating stuff like roads that we can use in the long run.  Unfortunately, as a Democratic friend of mine has observed, a crisis is such a terrible thing to waste, and it carries lots of spending for clean energy, education and healthcare that are more agenda than stimulus. The financial system stuff is largely loans which may get repaid with interest; the stimulus package is cash out the door, with much of it continuing for years.

        6. When asked how people should evaluate the success of his stimulus, Obama replied that job creation is the measure. A better measure would be whether our grandchildren wind up paying for it. The emergence of a new reality (Task III) must deal with deficits exceeding 10% of GDP, and the inevitible decline of the dollar amid high inflation as we try to finance the spending. At this point, we will get creation of universal health care coverage, and the environmentalist attack on the domestic energy/utility industry. The answers to Task I and Task II are a large part of creating Task III.

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This week's You Tube is a gaffe from Chuck Shumer, the Chair of the Senate Banking Committee - In politics, a gaffe is defined as saying what you really think.

Bill Bowen - 2/13/09

The Vision Thing

  It is at least a year or two too early to judge Barack Obama as an executive. There are a few indicators of process (trying to be bipartisan in form; hiring a lot of talent; deferring to Congressional leaders; flunking his claimed ethics standard), but meaningful results will take awhile. That said, he may have squandered the opportunity to lay out a clear vision, articulate the steps needed to achieve it, and rally the country to accept the behavior that will be necessary if we are to continue as the world's economic, military, and political leader. It was expected that we would see some of that in his innaugural address, but we are still waiting.

    On the economy, what is the vision - not just a choice of short-term tactics, but the destination that he would take us to? What is the outcome of the debates between Larry Summers, Tim Gaithner, Paul Volker, Ben Bernanke, and the others?  The hodgepodge of special interest-driven spending and tax cuts called a "Stimulus Plan" does not offer any guiding principles. Some things seem obvious:

    -  In the long run we need to reestablish a reasonable savings rate as individuals and as a country.  It is actually good that banks have tightened their lending standards, that consumers have started saving some of their incomes, and that some people are asking why the Congressional Budget Office is projecting trillion dollar deficits as far as the eye can see. We need to move toward balanced federal, state, and local budgets. But there has to be a message of sacrifice and constraints which the Baby Boomer generation has not yet heard. If not, our grandchildren will.

    - Private enterprise built our country's wealth, but we have moved toward extensive government participation in banking, housing, and the auto industry. What is the vision for the government's role once we get out of the current mess? Would he be more European?

   -  With apologies to my Republican friends, we need to share the wealth more evenly. This has implications for the tax code (why is there a cap on Social Security taxable income, for example?), norms (government mandates?) for executive compensation, and protections for lower income workers. The payback for union support may be a little more palatable if it is put in the context of a vision of the total workforce.

   -  We need to lead the global economy. Where is the president in the "Buy American" discussion?  Or the strength of the dollar? Or immigration and outsourcing? Or China trade?  President Bush was criticized for his purported Iraq unilateralism - but where is Obama on economic unilateralism?   

    On national security, there seems to be a drift to the left, but again without a clear vision.

    - Does the commitment to close Guantanamo without a plan imply muddling through, or a willingness to relax our defensive posture?

    -  What is the vision for the Middle East? Agree or not, George Bush had a vision of democracy overcoming the conditions that lead to religious fanaticism. Will we move on from Iraq with the end game in sight to Afghanistan with no realistic plan? And will Palestine, Israel, Iran, and the others all be tactical, one-off decisions?

    - And the general composition and use of the intelligence community and the military?  Obama's campaign posture was to work toward the elimination of nuclear weapons and a big downshift on weapons research, and his followers on the left would like to restrict the tools of the intelligence community. Are we to rely more on international organizations and good will? Would the isolationists prevail? Can we continue to afford spending 3% of our Gross Domestic Product on defense? What's the vision?

    There are lots of questions and he has only been in office for a couple of weeks, with a turbulent economy demanding priority attention. But he did campaign for two years and should be able to articulate the vision needed for leadership - Reagan's "Shining City on the Hill", Johnson's "Great Society", Kennedy's "New Frontier".  If the community organizer is too interested in a group hug in which nobody has to give anything up, we are all doomed.

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     YouTube I (snarky funny): This old campaign ad for Tom Daschle is particularly ironic. It is interesting that what brought him down was $140,000 in unpaid taxes, not the $5,000,000 he earned from a lobbying firm - much of it related to the healthcare industry.  The loophole in Obama's anti-lobbyist stance? Daschle never registered as a lobbyist.

    YouTube II (just plain funny) : And for some excellent humor on the future of the auto industry, compliments of Herb McClannan.

Bill Bowen - 2/6/09