Ronald Reagan won the 1980 Presidential Election by campaigning against government. After almost 50 years of uninterrupted government growth had created a bloated beauracracy, his argument that "government is not the solution to the problem, it is the problem" had traction. In 2008 Barack Obama was swept into office by a sudden populist desire for more government. When about 30 years of deregulation and hands-off federal policy culminated in a financial crisis that came very close to destroying the world economy, the American public wanted the government to remedy the situation. I generalize here because in both cases there were a significant number of the electorate who dissented from the majority opinion, but in a democracy the voice of the majority of the people does mean something. I suggest that in the United States, this is how our system works. It is ugly and imperfect, leaving many dissatisfied and angry, but we first veer to one extreme and then to the other, with no attempt to correct our course until things get bad enough to force action.
These lurching shifts are due to the way the parties in our two party system have chosen to define themselves, namely Republicans wish to limit government and Democrats wish to increase it. There is no thought in either party of tempering or altering these philosophies as the situation demands. While office holders may govern in a sensible way, they are not allowed to campaign honestly, their constituents demand strict adherence to the party doctrine. So for instance, President George W. Bush bailed out Bear Stearns and AIG, in total violation of party ideology, because it was necessary given the situation. However, a Republican could not run for office promising to do something like this.
I have startling news for you: the people on the other side are not idiots. They have good reasons for believing as they do; their beliefs hold a part of the truth. It's too bad they can't use the other part too. I say this about both Democrats and Republicans, conservatives and liberals.
So Reagan's 1980 policy was right for the time and situation, but it would not have worked in 1932, and he certainly could not have gotten elected then had he run the same campaign. There were problems created by Reagan's policies, as there were problem's created by New Deal policies, and no doubt will be by Obama's actions. But as I said, our system is ugly. It is necessary from time to time to change course, and this is how we do it. While you might not agree with these specific examples, I don't see how you can deny that the continual practice of either party's pure doctrine will eventually lead to catastrophe.
Monday, October 26, 2009
Tuesday, September 15, 2009
The Change That Is Coming
For the past several months our country has been having a fight (debate is definitely the wrong term and even argument is charitable) over whether we should change our health care system. In some ways this is a fight about change versus keeping things the same. Alongside the health care issue is the looming shadow of the economic breakdown that has been part of our national life for about a year now. There has been great disagreement about how to best deal with this crisis, but unlike health care, on economic matters everyone's objective has been how to keep things the same. Not the same as it is now, but the same as it was in 2006 or maybe the late 1990's. This is all that the Obama adminstration is trying to do with the stimulus and bailouts, they have no hidden plan to socialize the country, they would give anything just to get it back to what used to be normal. And those who oppose President Obama's approach still want the same thing as he, literally a return to "business as usual".
It is ironic then, that the area where there is so much consensus is the one place where there will be drastic change at odds with that consensus. This change cannot be avoided, only delayed, and even that for not much longer. As Jay Leno said recently, at some point we need an economy that actually makes something that people will buy. What will we make that can't be made cheaper somewhere else in the world? The proof of this is all around you whenever you go to the store. America is no longer in a position of strength in the world economy. What we do have going for us is the world wide dependency on the U.S. as a purchaser of goods. This cannot be changed over night without causing problems for the producing countries as well as for us. So it is really in no one's short term economic interest to stop loaning money to the United States; this gives us a window to transition to a national self-sufficiency that will now be necessary in this new economic order.
All of the above is true regardless of the possible economic and political scenarios that may play out. Say the economy recovers and we manage to pay down our national debt. What sort of jobs will people be doing? They won't be working in things connected with real estate and the financial industry. They won't be manufacturing things to export to other countries unless they're willing to work for maybe a tenth of what they have been used to. They may be manufacturing things for domestic consumption but only if those items are sold for a much higher price than what we are used to paying for imported goods, which means the market for these high priced items will be small. Suppose we elect a fiscally conservative president in 2012? This will make no difference to the sort of jobs that will be available to americans now and in the future.
We are going to have drastic change in the sort of work we do and our standard of living, and the only thing we can do is get ready for it. This is where good leadership can make a difference. We do have a limited time to prepare before this happens. A leader who is willing to talk about such a politically poisonous topic and be honest and yet encouraging can make the difference between preserving the structure of society or a chaotic collapse.
It is ironic then, that the area where there is so much consensus is the one place where there will be drastic change at odds with that consensus. This change cannot be avoided, only delayed, and even that for not much longer. As Jay Leno said recently, at some point we need an economy that actually makes something that people will buy. What will we make that can't be made cheaper somewhere else in the world? The proof of this is all around you whenever you go to the store. America is no longer in a position of strength in the world economy. What we do have going for us is the world wide dependency on the U.S. as a purchaser of goods. This cannot be changed over night without causing problems for the producing countries as well as for us. So it is really in no one's short term economic interest to stop loaning money to the United States; this gives us a window to transition to a national self-sufficiency that will now be necessary in this new economic order.
All of the above is true regardless of the possible economic and political scenarios that may play out. Say the economy recovers and we manage to pay down our national debt. What sort of jobs will people be doing? They won't be working in things connected with real estate and the financial industry. They won't be manufacturing things to export to other countries unless they're willing to work for maybe a tenth of what they have been used to. They may be manufacturing things for domestic consumption but only if those items are sold for a much higher price than what we are used to paying for imported goods, which means the market for these high priced items will be small. Suppose we elect a fiscally conservative president in 2012? This will make no difference to the sort of jobs that will be available to americans now and in the future.
We are going to have drastic change in the sort of work we do and our standard of living, and the only thing we can do is get ready for it. This is where good leadership can make a difference. We do have a limited time to prepare before this happens. A leader who is willing to talk about such a politically poisonous topic and be honest and yet encouraging can make the difference between preserving the structure of society or a chaotic collapse.
Saturday, August 15, 2009
In defense of President Obama and government
This is a "Guest Opinion" submission to the Salem Statesman Journal; we'll see if they print it, and how many words they allow - I'm not sure if they've ever given me more than 200 words in the past. (Correction - letters to the editor are 200 words, I believe they have given me 400 words for an opinion. However, I'm wondering if we'll see any "Opinions" giving the other side on this issue).
Since the Statesman Journal recently gave around 400 words to Allan Erickson's attack on government in general and the Obama administration in particular, I hope they will give equal time to an opposing viewpoint.
I believe there is a role for government in our society, particularly in times of crisis such as the economic meltdown of the past year. If both the Bush and Obama administration had taken a laissez-faire approach during this time we would now be experiencing social chaos with homeless shelters overflowing and millions of people in bread lines. As Paul Krugman said, thanks to big government we have avoided a second Great Depression. If you read Krugman's column in the NY Times you will be familiar with the logic behind deficit spending by the government when private spending has dried up. This is exactly the situation now, the lack of available credit is having a powerful deflationary effect. Increasing unemployment is causing even people who are good credit-risks to lose their houses, driving the housing market further down and adding to the risk of bank failures. If unchecked, this continues a downward spiral of wages, business profits, and tax revenues.
The idea behind government stimulus spending in times like these is to stop the downward trend and create economic activity artificially until it can start happening unaided again. It has the added benefit of avoiding the social dislocation created by massive unemployment and homelessness. Even a "fake" job can keep someone in their house and put food on the table.
So President Bush took action to save the financial part of the economy and President Obama continued this and also passed the stimulus bill to save the every-day working part of the economy.
There is one problem with all this: you can only save an economy if there is something there to save. Unfortunately no one seems to have figured out that having 70 percent of our economy depend on consumerism won't work when the consumers can't borrow money anymore. This idea was ridiculous in the first place, but it worked for about 20 years. The stimulus spending has provided temporary relief, but when the economy does not respond (because this kind of economy can't exist anymore) we will be in trouble unless we have used our spending to transition to something else.
We should give President Obama credit for keeping things from getting a lot worse, but we should demand that he provide leadership for a new kind of economy that makes sense and provides for our needs.
Since the Statesman Journal recently gave around 400 words to Allan Erickson's attack on government in general and the Obama administration in particular, I hope they will give equal time to an opposing viewpoint.
I believe there is a role for government in our society, particularly in times of crisis such as the economic meltdown of the past year. If both the Bush and Obama administration had taken a laissez-faire approach during this time we would now be experiencing social chaos with homeless shelters overflowing and millions of people in bread lines. As Paul Krugman said, thanks to big government we have avoided a second Great Depression. If you read Krugman's column in the NY Times you will be familiar with the logic behind deficit spending by the government when private spending has dried up. This is exactly the situation now, the lack of available credit is having a powerful deflationary effect. Increasing unemployment is causing even people who are good credit-risks to lose their houses, driving the housing market further down and adding to the risk of bank failures. If unchecked, this continues a downward spiral of wages, business profits, and tax revenues.
The idea behind government stimulus spending in times like these is to stop the downward trend and create economic activity artificially until it can start happening unaided again. It has the added benefit of avoiding the social dislocation created by massive unemployment and homelessness. Even a "fake" job can keep someone in their house and put food on the table.
So President Bush took action to save the financial part of the economy and President Obama continued this and also passed the stimulus bill to save the every-day working part of the economy.
There is one problem with all this: you can only save an economy if there is something there to save. Unfortunately no one seems to have figured out that having 70 percent of our economy depend on consumerism won't work when the consumers can't borrow money anymore. This idea was ridiculous in the first place, but it worked for about 20 years. The stimulus spending has provided temporary relief, but when the economy does not respond (because this kind of economy can't exist anymore) we will be in trouble unless we have used our spending to transition to something else.
We should give President Obama credit for keeping things from getting a lot worse, but we should demand that he provide leadership for a new kind of economy that makes sense and provides for our needs.
Wednesday, July 22, 2009
CIT Update
CIT did obtain a loan from its bondholders after the government refused to step in. However, the terms of that loan make me think their prospects are bleak and that they are still very likely to declare bankruptcy. A Bloomberg headline said the interest rate on the loan was more than 25 times the LIBOR rate. From that story:
"“This is called Don Corleone financing,” Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, “The Godfather.” “You can’t lose money on this deal.”
Outside of the “urban underworld,” Egan, 52, said he couldn’t recall seeing a loan backed by as much collateral that paid interest rates so high. “These terms would make a pawn- shop operator blush.”
"“This is called Don Corleone financing,” Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, “The Godfather.” “You can’t lose money on this deal.”
Outside of the “urban underworld,” Egan, 52, said he couldn’t recall seeing a loan backed by as much collateral that paid interest rates so high. “These terms would make a pawn- shop operator blush.”
Tuesday, July 21, 2009
Why I'm not worried about inflation
No matter how much money is printed it can't cause inflation if it's not in circulation, i.e. being spent by individuals and businesses. So as long as people keep losing their jobs and banks continue to issue very few loans, there's no way for available money to get out there where it can be used. Obviously the money supply isn't simply increased by the printing press, there are many things that can have the same effect: lower interest rates, making credit easier to get, etc.
When someone who is unemployed gets a job, suddenly they have more money to spend. When we are close to full employment you are more likely to get a pay raise, and again have more money to spend. In this job market you are likely to get a pay cut and be thankful that you still have a job, which means you have less money to spend. If you can get credit easily then you're more likely to buy a car or a house, etc. If a business can get credit and it knows that people are spending money because they can get credit then that business is more likely to expand, adding jobs, and putting more spending money in people's hands. But right now we see unemployment increasing and credit hard to come by. So I have no fear of inflation any time soon.
With one big caveat: inflation is no threat to our domestic economy, but the devalued dollar (a direct consequence of our soaring national debt and our increased money supply) has huge implications for our import trade. As you know we are dependent on imported oil in order for our society to function. And it seems that we have become dependent on imported food judging by the contents of the local supermarket, in spite of the fact that we could be producing our food locally. A devalued dollar will mean that at some point we won't be able to import oil and food, at least not in the quantities we are accustomed to. This will adversely impact our domestic economy by making it grind to a halt. This will then result in "inflation" in the sense that goods will become very scarce as production and imported goods greatly decrease. This inflation will occur regardless of the money supply, it will be based on unavailability of goods.
So I suggest that we go into debt now (increase the national debt) but that we use that money to become self-sufficient as a nation. Add public transit and train systems to reduce our dependence on oil. Encourage small local organic farmers who can raise food with very little petroleum input in the form of fertilizers, pesticides, and tractor fuel. Restore our manufacturing base so that we can produce the items we need in this country. This will take some time, but eventually will produce a healthy economy. At that point we can worry about inflation.
When someone who is unemployed gets a job, suddenly they have more money to spend. When we are close to full employment you are more likely to get a pay raise, and again have more money to spend. In this job market you are likely to get a pay cut and be thankful that you still have a job, which means you have less money to spend. If you can get credit easily then you're more likely to buy a car or a house, etc. If a business can get credit and it knows that people are spending money because they can get credit then that business is more likely to expand, adding jobs, and putting more spending money in people's hands. But right now we see unemployment increasing and credit hard to come by. So I have no fear of inflation any time soon.
With one big caveat: inflation is no threat to our domestic economy, but the devalued dollar (a direct consequence of our soaring national debt and our increased money supply) has huge implications for our import trade. As you know we are dependent on imported oil in order for our society to function. And it seems that we have become dependent on imported food judging by the contents of the local supermarket, in spite of the fact that we could be producing our food locally. A devalued dollar will mean that at some point we won't be able to import oil and food, at least not in the quantities we are accustomed to. This will adversely impact our domestic economy by making it grind to a halt. This will then result in "inflation" in the sense that goods will become very scarce as production and imported goods greatly decrease. This inflation will occur regardless of the money supply, it will be based on unavailability of goods.
So I suggest that we go into debt now (increase the national debt) but that we use that money to become self-sufficient as a nation. Add public transit and train systems to reduce our dependence on oil. Encourage small local organic farmers who can raise food with very little petroleum input in the form of fertilizers, pesticides, and tractor fuel. Restore our manufacturing base so that we can produce the items we need in this country. This will take some time, but eventually will produce a healthy economy. At that point we can worry about inflation.
Tuesday, July 14, 2009
More on CIT Group
Referring back to yesterday's post about CIT Group facing collapse, CIT Group is important right now because it is one of the few sources of short-term credit for businesses. In spite of the government TARP assistance or even after returning the TARP money, banks are not making loans. Maybe they have rightly concluded that the potential clients are in fact poor risks in this economy. This is part of the reason why CIT is in trouble; their loan clients have been defaulting.
Even for very simplistic business models you can see how a restaurant, for instance, would need credit to pay for this month's supplies and maybe even employee salaries in order to be open for business and make money. I suppose they could save up a cash buffer first before starting (probably some economic arguments for why this is unlikely) but in the real world this is not the reality. So if CIT goes away, things like restaurants and retailers go out of business very quickly (I would guess within a month or so). This means many more people unemployed and further reduced revenues for cities, counties, and states; in short, continued severe economic contraction.
So Paul Krugman is right, at least in the strictly mechanical sense of how our economy works: we really do need more money quickly thrown into the system to keep this from happening. The Fed is powerless to do this since interest rates are already zero, so options like the government stimulus are about all we have. If the money is not provided, I guarantee that we will see the great economic contraction; it is like a law of physics applied to our economic system.
Where I part with Krugman is on whether it is desirable to keep the system going. If it is, then it doesn't matter if the stimulus money does anything useful or not. Keynes made this point blatantly when suggesting the benefits of burying bottles of coins in the ground so mining companies could dig them up, providing jobs and profits. The whole idea is that any kind economic activity and available credit will get the system moving again so it can return to its former task of doing useful work and providing value. Our problem, as I have pointed out before, is that our system was not doing useful work or providing value even before it seized up, and the changed global economic environment makes returning to that previous model impossible anyway.
Since a further stimulus seems politically impossible, we should expect economic contraction.
A third way would be to scrap the former economy and start designing a new one. We would still have the contraction, so people would have to be basically kept alive during this period by massive government direction and intervention. There is no way to avoid this anyway, before too long social services will start to be stressed to the breaking point by the large numbers of unemployed. But if we are intentional about it we could do useful work towards the new economy while meeting these needs.
Even for very simplistic business models you can see how a restaurant, for instance, would need credit to pay for this month's supplies and maybe even employee salaries in order to be open for business and make money. I suppose they could save up a cash buffer first before starting (probably some economic arguments for why this is unlikely) but in the real world this is not the reality. So if CIT goes away, things like restaurants and retailers go out of business very quickly (I would guess within a month or so). This means many more people unemployed and further reduced revenues for cities, counties, and states; in short, continued severe economic contraction.
So Paul Krugman is right, at least in the strictly mechanical sense of how our economy works: we really do need more money quickly thrown into the system to keep this from happening. The Fed is powerless to do this since interest rates are already zero, so options like the government stimulus are about all we have. If the money is not provided, I guarantee that we will see the great economic contraction; it is like a law of physics applied to our economic system.
Where I part with Krugman is on whether it is desirable to keep the system going. If it is, then it doesn't matter if the stimulus money does anything useful or not. Keynes made this point blatantly when suggesting the benefits of burying bottles of coins in the ground so mining companies could dig them up, providing jobs and profits. The whole idea is that any kind economic activity and available credit will get the system moving again so it can return to its former task of doing useful work and providing value. Our problem, as I have pointed out before, is that our system was not doing useful work or providing value even before it seized up, and the changed global economic environment makes returning to that previous model impossible anyway.
Since a further stimulus seems politically impossible, we should expect economic contraction.
A third way would be to scrap the former economy and start designing a new one. We would still have the contraction, so people would have to be basically kept alive during this period by massive government direction and intervention. There is no way to avoid this anyway, before too long social services will start to be stressed to the breaking point by the large numbers of unemployed. But if we are intentional about it we could do useful work towards the new economy while meeting these needs.
Monday, July 13, 2009
Watershed week for financial system?
I'll take a page from Paul Krugman's book in not making a prediction here, just raising the question. About a year ago (I think in June 2008) Krugman hedged his forecast of a global economic catastrophe by presenting it in the form of a fictional column from one year in the future. It turned out that he was correct, but this sort of thing is hard to call because of the many ways to forestall the inevitable.
I have no doubt that things will get worse, not better, based on economic fundamentals, but the question is always "when?".
This morning on NPR's "Marketplace Morning Report" they pointed out that earnings reports for the financial institutions were coming out this week, and also ran an interesting story about CIT Group, a major player in the revolving credit market, that keeps places like Duncan Donuts running from month to month. The government was in talks with CIT Group over the weekend (sound familiar?) because of a feared run on their capital.
If the earnings reports reveal anything close to the truth then the illusion that we have a sound banking system should be shattered once and for all. The CIT group problem could have an immediate effect on the real economy, the part that people like you and I will notice.
I have no doubt that things will get worse, not better, based on economic fundamentals, but the question is always "when?".
This morning on NPR's "Marketplace Morning Report" they pointed out that earnings reports for the financial institutions were coming out this week, and also ran an interesting story about CIT Group, a major player in the revolving credit market, that keeps places like Duncan Donuts running from month to month. The government was in talks with CIT Group over the weekend (sound familiar?) because of a feared run on their capital.
If the earnings reports reveal anything close to the truth then the illusion that we have a sound banking system should be shattered once and for all. The CIT group problem could have an immediate effect on the real economy, the part that people like you and I will notice.
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