Populist Panderings, the Candidates and Real Solutions
Well the last of the debates are tonight and THE focal issue, as it should be, is the state of the
economy. In our last post (Wobble Wheels Wakeup: Crisis, Response, Policy, Execution) we discussed the situation beyond the various worldwide rescue and re-vitalization efforts. In particular a key point we'll re-iterate is that once we get the wheels bolted back on the wagon we need to keep careening down a rather icy mountain sloped. A serious recession is pretty much in the cards and locked-in. The only real debate is how deep and how long; and this one is likely to be longer and deeper than anything many folks have seen for a long time.
One of the "interesting" anecdotes making the rounds in the financial community is that all the advisers aren't getting any phone calls ! It would seem that people are so shell-shocked that they're still trapped in the 1,000-yard stare syndrome. For my own part the contacts from family, friends and network more than reinforces that. We saw a more than generational collapse in the markets all collapsed into basically week. They come by their shock very....very honestly. We had to talk a bunch of folks out of selling their existing portfolios on Mon. open - which meant they would have missed the run up that mostly recovered the worst day from last week. We're far from out of the woods yet. In the readings the first one, finally, puts the emphasis where it needs to be - all these worldwide interventions are NOT quick fixes. Now we've been talking up the economy as THE central issue in this election for months (WRFest 20Jan08(Economics): Oops...Recession Ahead,The Coming Economic Crisis,Standing Corrected: Education 2nd Avoiding Economic Collapse 1rst) and outlined our sketch of a multi-faceted program that moves beyond arresting the immediate problems to looking at what needs to be done next and then beyond that. Which we thought we'd review here a little more.
Comprehensive & Strategic Economic Program
Given all that what should we be doing - and therefore what should be looking for in tonight's debate. Well two things. One as close to this outline as possible and two minimal populist pandering, bearing in mind "nobody can handle the truth". That said in both his acceptance speech and the last debate Barry basically walked right down our reccy's while Johnboy appears to be improvising as he goes and throwing out one offs - not an integrated program. You might/ought/should invest the time to listen to this interview very carefully - from the guy who's called it for three years now !
Nouriel Roubini, New York University, Economics Professor Nouriel Roubini, an economist who predicted the depth and magnitude of the current financial situation before the decline of Bear Sterns, discusses the indicators he saw and his recommendations for stemming the financial downturn.
Step 1: Get Credit Flowing Again - we've been discussing this almost exclusively for the last several posts. While it's still very early days yet we think that the basic elements are in place and being acted on as rapidly as possible.
Step 2: "FIX" Housing - we're not going to get the economy back on it's feet while Housing continues to drag so much. At the same time too many people bought too many houses for unsupportable prices with funny money. Until prices come down significantly MORE it won't start self-correcting. In other words we need for the homeowners and the lenders to take another 15% haircut, write it off and re-negotiate the loans to something more sensible. And it'll need a serious institutional framework.
Step 3: Major Fiscal Stimulus - the last so-called recovery was put together on the Housing ATM and was pumping $500-700B/year into the economy at least. The economy will fall into a major serious recession unless we stimulate it and that stimulus needs to be of the same order of magnitude. This also needs to be quick, targeted and temporary - not another political boondoggle (fat chance I know but....). Tax cuts won't do it. On the other hand the impact on the deficit is irrelevant for a lot of reasons (still be low as a % of GDP, worse w/o stimulus). Things like extended unemployment benefits, more rebates, and direct spending programs fit the bill. Lots of very...y good economists like Larry Summers have tabled excellent proposals (btw - Barry's econ team is non-pareil and Larry's on it. See below).
Step 4: Infrastructure Investment -the US has let it's electrical, waterway and transportation infrastructures deteriorate to the point of...well never mind. A massive decade long infrastructure rebuilding project would see us get new electrical grids, new highways and transportation systems and possibly new power plants and alternative energy supplies. This would have the benefit of providing enormous fiscal stimulus, i.e. creating jobs and making a major long-term investment for things we know how to do. BtW - major sidebar. The long boom of the '80s and '90s was primarily built around two things. Supply side is utter nonsense. Reagan got it going the old-fashioned way with deficit spending and Clinton got lucky and also cut the defense budget. Bingo, that's it.
Step 5: Strategic Investment (Energy, Biosystems, Materials) - we need new industries and we need to get off of our oil dependencies. There's things we can do in each and both. For example by increasing conservation as well as mandating enormously higher mileage thru better materials and engineering we could get a huge jump for the next ten years. Then we need to build new power plants, particularly nuclear, we need to open up our own offshore deepwater to oil exploration and we need more refineries. That all togeter takes us into the next decade. Beyond that we need some major alternatives - and don't believe 'em. We don't have the knowledge or technology do magic yet. For example we should really be heavily emphasizing coal but need major new technology not the Rube Goldberg fixes running around. So a concerted national effort (does the word Manhattan Project ring any bells) to create major new energy sources and technologies would stimulate the economy, create new industries and provide us several paths to the future.
Combine that we major parallel investments in new life sciences and materials, both because they offer the best hopes for the Next Big Things and because they are synergistic with energy investments. For example if we pie-in-the-sky about Fusion we need the new materials for the reactor vessels. Or new lightweight composites for high-temperature turbines. Similarly new bio-sciences offer up their own benefits not least of which is designed alternative energy crops as well as way to control and manage environmental problems. The real beauty of this is that it doesn't take a lot now because it's all at early stages.
Step 6 - Education Investment: the decline in average income is due more to natural evolutionary shifts in the kinds of labor demanded by an increasingly technical economy. When the US Economy really started on its' accelerated path after the turn of the 19thC few know that a key ingredient was the widespread development of high-schools and the resultant upgrading of the skills and knowledge of the population. Education is the co-dependent imperative along with creating new industries IMHO. (Readings(Education): the Single Most Important Domestic Policy Issue) 
So there you have it in a nutshell :) A complete now to futures strategic economic policy recommendation. Believe it or not it's at least a decent strawman based on reality, the ways things actually work instead of fantasies and offers some real benefits. Test it against the candidates if you like. The results might be interesting ! The guy you want to vote for is the one that comes closet to ticking off this strategic agenda, doesn't offer up utter unsinn (German for nonsense and Supply Side III more than qualifies), has the best team and sounds like he's got a better grasp. We highly recommend you at least skim the readings to get a feel for how they stack up therein. And also to help you decide on where you think economic policy lies on the importance spectrum. We happen to think it is the sine qua non and will dominate the next Presidential term and outweigh almost any other issue short of a major shooting war.
Policy Issues
Federal bank buy-in no economic quick-fix With any luck, the government's quarter-trillion dollar cash infusion in banks will get them lending again, but the radical move won't quickly turn around the tottering economy. The pain will almost certainly drag on as vanishing jobs, shrinking paychecks and nest eggs, and slumping home values continue to force millions of Americans to pull back. Sales at the nation's retailers are expected to drop in September even as they get a break from record-high energy prices. Uncertainty about the economy -- and their own financial fortunes -- probably will force consumers and businesses alike to hunker down further, spelling more problems for the already troubled economy. Anxiety about the economy is the No. 1 concern of voters. With the presidential election just weeks away, Democrat Barack Obama and Republican rival John McCain are working furiously to convince people that each is the best choice to steer the economy through these perilous times. In addition to September retail sales numbers, other economic data out Wednesday is expected to show that even though the recent retreat in energy prices calmed inflation at the wholesale level bit, costs are still high and are squeezing businesses. Many economists believe the country is on the edge of -- or already in -- its first recession since 2001. If the government's new plan works -- it will merely cushion the blow. Democrats on Capitol Hill are pushing for another round of stimulus that could cost as much as $150 billion, an effort to provide additional relief and lift the country out of the doldrums.
Examining the candidates A survey of academic economists by The Economist finds the majority—at times by overwhelming margins—believe Mr Obama has the superior economic plan, a firmer grasp of economics and will appoint better economic advisers. Does their opinion matter? Economics is just one of the many things the next president will have to worry about; voters still seem to prefer Mr McCain on foreign policy. And even on the economy, economists may not have the same priorities as the population at large. Arguably, what a president says about economics on the campaign trail is less important than how he responds to the unexpected challenges that inevitably arise once he is in office. Yet economists’ opinions should count for something because irrespective of any party affiliation, most of them approach policy decisions with the same basic tool kit. Their assessment of the candidates’ economic credentials and plans represents an informed judgment on how well they will handle difficult trade-offs between efficiency, equity, growth and consensus-building. Regardless of party affiliation, our respondents generally agree the economy is in bad shape, that the election is important to the course of economic policy and that the housing and financial crisis is the most critical economic issue facing America. A candidate’s economic expertise may matter rather less if he surrounds himself with clever advisers. Unfortunately for Mr McCain, 81% of all respondents reckon Mr Obama is more likely to do that; among unaffiliated respondents, 71% say so. That is despite praise across party lines for the excellent Doug Holtz-Eakin, Mr McCain’s most prominent economic adviser and a former head of the Congressional Budget Office. “Although I have tended to vote Republican,” one reply says, “the Democrats have a deep pool of talented, moderate economists.” Where the candidates’ positions are more clearly articulated, Mr Obama scores better on nearly every issue: promoting fiscal discipline, energy policy, reducing the number of people without health insurance, controlling health-care costs, reforming financial regulation and boosting long-run economic growth. Twice as many economists think Mr McCain’s plan would be bad or very bad for long-run growth as Mr Obama’s. Given how much focus Mr McCain has put on his plan’s benefits for growth, this last is quite a repudiation. Poll Results Graphic
Obama cautious, vague in economic crisis Sen. Barack Obama has taken a commanding lead in the race for president not because of any dramatic gesture, but because of a signature political trait: his caution. The nation's economic crisis triggered Obama's sharp rise in what had been a tight race. But Obama hasn't tried to seize the kind of central, national leadership position for which Sen. John McCain grasped, and fell short. Nor has he been touting — Bill Clinton-style — a highly detailed plan for what he'll do the moment he takes office. The result is that while virtually all observers agree that he has benefited from the crisis, his allies and critics alike remain a bit hazy on what exactly he would do if he takes office Jan. 20, 2009. "He's certainly laid out all the right elements that are needed for an economic recovery, but nobody's sure at this point which ones will be at the very top of his priority list when he takes office," said Thea Lee, the chief economist for the AFL-CIO. "To my knowledge, he's said absolutely nothing about what he would do," said Glenn Hubbard, a former chairman of President Bush's Council of Economic Advisers who is now the dean of Columbia Business School.
Obama has often thrived in this campaign by talking in foggy terms about his plans, here and abroad. It frustrates critics — and some voters looking for clear indications of how he would lead — but also provides tremendous flexibility for adjusting positions now and in the White House if he wins. In fact, Obama has talked about the economy — only softly. Many of his key plans — for economic stimulus, for attending to the troubled housing market and for financial regulations — are policy prescriptions he and other Democrats have been discussing for months or more. Several became urgent — and in some cases passed into law — when the crisis deepened last month. Publicly, though, he's said little, repeatedly answering a question in the first debate about what priorities would have to be set aside owing to the cost of the bailout with a list of the many programs he'd nonetheless provide. McCain was hardly more specific, though he did finally say he'd seek to freeze almost all federal spending. "Steady leadership is not just about having ideas — it's about having consistent ideas and working to make them happen," said Obama's director of economic policy, Jason Furman.
Ok, You Two, What Would You Do to Solve This Mess? Obama and McCain have taken different tacks to handling the meltdown. It's not by accident. How their economic gurus shape their views. Barack Obama was in "governing mode," says one of his aides. In a small room next to A basketball arena at the University of Miami, Fla., the Democratic nominee had convened an emergency session of his new economic brain trust. It was a remarkable gathering for a candidate who, during the primaries, had relied largely on an obscure, baby-faced University of Chicago economist named Austan Goolsbee. With Obama in the room were Bob Rubin and Larry Summers, both Clinton-era Treasury secretaries credited with lifting global financial markets out of the "Asian contagion" of 1997; Paul Volcker, former chairman of the Federal Reserve; Laura Tyson, Clinton's Council of Economic Advisers chair; Gene Sperling, Clinton's national economic adviser; and Dan Tarullo, also a key Clinton go-to man on trade and G8 issues. Piped in on a conference phone were legendary investor Warren Buffett, Nobel Prize-winning economist Joe Stiglitz and Obama's would-be veep, Joe Biden. The topic at hand: what to make of Treasury Secretary Hank Paulson's $700 billion rescue plan, which was to be announced later that day (Sept. 19). "There's a comfort level in having someone able to say, 'This is a little like what we faced 10 years ago'," says the aide, who would divulge details about the session only on condition of anonymity. "But Obama was running the show. Twice he cut some people off when they started to talk about what message he should deliver [to the public]. He said, 'Hold it, we'll do that later. You guys are here to help me figure out what we should be doing' " to solve the crisis. In a phone call that day, Paulson had pleaded for time to sell his plan. Obama obliged by saying only that he supported giving Treasury and the Fed broad authority. Even though, behind closed doors, he was going into detail about his own possible solutions—mulling the virtues of the Depression-era Home Owners Loan Corporation and the response to the S&L crisis of the '80s—Obama supplied few specifics on his thinking. Nor has he revealed much more three weeks later, other than to talk about "protecting the taxpayer." While no one at the meeting would confirm they had advised the candidate to keep to generalities, Obama's approach did conform to the old Rubin-Summers philosophy from the '90s: loose talk by politicians just makes things worse, aggravating markets and upsetting negotiations. While both men have now backed major government intervention, Obama and McCain are getting different kinds of economic advice. Since the crisis began, Obama has gotten close to the Clinton "A-team" that helped to reassure markets in the '90s—Summers, Rubin and Tyson now routinely travel with him—whereas McCain continues to take the looser approach he's used as senator. McCain conducts occasional phone conferences with anywhere from seven to 30 business people and economists who review his campaign material; otherwise, the senator funnels their advice through Holtz-Eakin, a former staff member of Bush's Council of Economic Advisers and later director of the Congressional Budget Office. "I'm the chief bureaucrat," says Holtz-Eakin. "We've got lots of people out there. He likes to just listen to the various points of view … He really does operate in a style reminiscent of his time as chairman of the commerce committee." Many of McCain's advisers are Fortune 500 CEOs like Meg Whitman of eBay—he named her at the second debate as a possible Treasury secretary—rather than denizens of Wall Street or Washington (though he does speak with John Thain of Merrill Lynch regularly). McCain's chief financial-market expert, former Treasury undersecretary John Taylor, is regarded in the economic community as a brilliant thinker and analyst but a less-than-effective administrator. (The McCain campaign declined to comment.) Jack Kemp, chiefly known as a passionate advocate of tax cuts, also travels with McCain, says Holtz-Eakin.
Who's to Blame? Go Back to Bedford Falls - If the global economy survives the autumn and our cable-TV companies are still in business come Christmas, Americans surfing the channels for classic Yuletide movies may finally figure out exactly whom they have to blame for the housing bubble and everything that has followed. Forget the predatory lenders, Wall Street sharks and their government enablers: It all started with George Bailey. Yes, that George Bailey -- the hero of Frank Capra's "It's a Wonderful Life," the most popular man in Bedford Falls, the man so indispensable that he earned a private visitation from a guardian angel just to show him how dreadful a world without him would have been. It's easy to forget, so potent is the supernaturally charged final act of Capra's classic, that before he was visiting looking-glass worlds where he'd never been born or scampering through the snow and shouting "Merry Christmas!" till his lungs burst, Jimmy Stewart's George Bailey was actually a pretty savvy businessman. And it's even easier to forget the precise nature of his business: putting the downscale families of Bedford Falls into homes they couldn't quite afford to buy. This is the substance of the great war between Bailey and Lionel Barrymore's Mr. Potter, the richest, meanest man in Bedford Falls. Potter is against easy credit and the suburban dream, against the rabble moving out of his tenements and buying homes, while the Bailey Building and Loan exists to make suburbia possible. The Bailey vision is economic and moral all at once.
There Is a Silver Lining The crisis has forced the United States to confront bad habits developed over the past few decades. If we can kick those habits, today's pain will translate into gains. The whole country has been complicit in a great fraud. As economist Jeffrey Sachs points out, "We've wanted lots of government, but we haven't wanted to pay for it." So we've borrowed our way out of the problem. In 1990, the national debt stood at $3 trillion. (That sounds high, but keep reading.) By 2000, it had almost doubled, to $5.75 trillion. It is currently $10.2 trillion. The number moved into 11 digits last month, which meant that the National Debt Clock in New York City ran out of space to display the figures. Its owners plan to get a new clock next year."Leverage" is the fancy Wall Street word for debt. It's at the heart of the current crisis. Warren Buffett explained the problem in his inimitable way on "The Charlie Rose Show." "Leverage," he said, "is the only way a smart guy can go broke ... You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it's reinforcing when the people around you are doing it successfully, you're doing it successfully, and it's a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it's more and more fun, you think, 'Why the hell should I leave at a quarter to 12? I'll leave at two minutes to 12.' But the trouble is, there are no clocks on the wall. And everybody thinks they're going to leave at two minutes to 12." If there is a lesson to be taken from this crisis, it's a simple and old rule of economics: there is no free lunch. If you want something, you have to pay for it. Debt is not a bad thing. Used responsibly, it is at the heart of modern capitalism. But hiding mountains of debt in complex instruments is a way to disguise costs, an invitation to irresponsible behavior. At some point, the magical accounting had to stop. At some point, consumers had to stop using their homes as banks and spending money that they didn't have. At some point, the government had to confront its indebtedness. The United States—and other overleveraged societies—have now gotten the wake-up call from hell. If we can respond and change our behavior markedly, this might actually be a blessing in disguise. (Though, as Winston Churchill said when he lost the election of 1945, "at the moment it appears rather effectively disguised.")
McCain, Obama Push Populist Approaches to Solve Wall Street Credit Crisis Barack Obama and John McCain, both laying claim to the populist ground, have different approaches to implementing the financial markets rescue plan. The Democrat is focused on recapitalizing banks while halting foreclosures and creating new jobs, while the Republican wants to purchase and refinance mortgages of troubled homeowners. Obama promoted a package yesterday aimed at the middle- class, including temporary tax breaks on retirement savings, and federal loans for small businesses. McCain today proposed reducing taxes on long-term capital gains to 7.5 percent in 2009 and 2010, expanding on his plan to devote $300 billion to cutting mortgage payments for over-extended homeowners. Two weeks after both senators voted for the $700 billion federal financial-rescue plan, the presidential contenders are pushing different priorities to voters who've been reluctant to spend billions to rescue Wall Street.