Monday, April 20, 2009

Teabag Parties

As most of the world knows already, on April 15, there were "Tea Party" protests in hundreds of places across America. As might be expected, they were the occasion of some polemic back-and-forth. Doctrinaire Leftists and various other parties with an axe to grind against Middle America complained on various grounds: the protests had no grass roots support, the protesters were too quiet about government spending when Bush was President, and so on. Just another day at the office in our culture wars.

This particular episode has at least one interesting wrinkle though. A substantial number of the critics have insisted on calling the protests "Teabag Parties, " either implicitly or explicitly associating the protests with a kinky sex act. The whole thing is kind of a stupid distraction. The Boston Tea Party was a tax protest, the 2009 Tea Parties were tax protests. The sex act underlying the joke has nothing to do with either one. Nonetheless, there are a couple of things worth mentioning.

First of all, the whole thing was in bad taste. As a red-blooded male who's seen my share of Beavis and Butthead, I'll concede that responses like this are overdone. But repeatedly airing this particular gag on supposedly mainstream TV like CNN and MSNBC is cheap, not necessarily because the precious three-year-olds are watching, but because there are adults watching who might want to escape the forced sexualization of the culture, and current events cable ought to be one place to be able to do it.

The second point is a little more subtle. We're living in difficult economic times of course. And it's becoming more and more difficult, for people on various rungs of the social or economic ladder, to achieve financial security. What little security there is, is protected by the nuclear family, ie, the bonds created by getting married and having kids are strong enough to weather some bad times. It's the people who have those bonds who are protesting at the Tea Parties. They're not looking to the government for help, they want the government to get out of the way of earning a living.

The other side, the people who don't get married, don't have kids, are in palpable danger of being hung out to dry in this recession. Therefore they have to rely on political power to protect government transfer programs, which require high taxes. Unfortunately for them, the American tax base simply isn't big enough to support the government in the place where the Obama Administration is leaving us at any tax rate. They can make jokes about teabags if they want to but in the end the joke is on them.

Thursday, April 16, 2009

The Reset, pt II

Let me fill in a couple gaps from my last post. Much of the economic commentary over the last couple of weeks at least has been focused on the banks. Are they solvent or not? In this context it's important to emphasize that even though we are obviously in difficult economic times, the nature of the problems is different than it was as recently as six months ago. At that time, it looked like there was a decent chance all lending and most other economic activity would come to a screeching halt. We should count ourselves fortunate that that didn't happen.

Numerous commentators have complained that in spite of all the government help the banks have gotten, they are still not lending in the volume we would like to see, instead they are ratholing the money away to shore up their balance sheets. This is true, but it's only half the picture at best. Because we are in a recesssion, the demand for credit from creditworthy borrowers is contracted as much as the supply. The quality borrowers that do want credit are able to get it on reasonable terms.

Therefore let's ignore the banks for a while. Frankly we don't know whether the banks are solvent or not. They are fine on a cash flow basis now. Whether or not they fail in the future depends on the extent to which there will be too many defaults in the their loan portfolio, on loans which have been performing up till now.

What we really need is a sector shift, a trend toward the production of goods and services which will be valuable in the future, and may not have been in the past.

Edit: in an important way, we can't help the banks anyway. More than most industries, in finance perception is reality. That is, whether or not the banks actually are insolvent, they are perceived to be insolvent at the moment at least. They are having serious problems borrowing from anyone else except the government. Therefore they have a strong incentive to hoard the capital they do have. If the government gives more financial support, that will help the perception as well as the reality, but only to an extent. Many of our bigger banks, especially Citi, have glommed together so many things and made so many deals, that it's very difficult to get a definitive handle on their financial status. And in this environment, what you don't know definitely can hurt you. Therefore the banks' financial conditions needs to be simpler as well as stronger, and that takes time.

Tuesday, April 14, 2009

The Other Reset Button

On macroeconomic things, I tend to be free market enthusiast of the George-Gilderite type. As far the web goes, this school of thought is probably best personified by Larry Kudlow, Rich Karlgaard, and James Pethokoukis. Unfortunately, my team has been taking it on the chin over the course of our current economic problems. The natural optimism of this school has fallen flat, as the gap between what is and what ought to be gets clearer and bigger.

I mention this because I like very much like a post Rich Karlgaard has up in Forbes. Frankly it's a great deal more credible than some other things he's written. Though Rich makes it seem boldly contrarian, there's actually a whispering consensus that the US economy will return to positive (though small) growth in 4Q 2009 and 1Q 2010. This is in itself an important development that will have, or at least ought to have, significant consequences for how we handle economic issues in public debate. Our problems are still severe, but no longer nearly as urgent. Therefore we should engineer economic policy with a strong determination to get it right, instead of getting something plausible in operation right away.

But the bigger issue is, let's say we're in a weak recovery by the end of the year, then what? Once people have adapted to the new economic reality and stabilized their financial situation, what will they buy? Nobody knows (and that's actually quite important). We have some idea of what things might look like financially but it's all a big cipher qualitatively and aesthetically. It's uncharted territory. In Rich's case, it means tooling around Northern California in a new a $4000 bicycle, which can be rationalized to be actually cheap compared to the jet plane he's forgoing.

This is the sort of thing we have to find out for ourselves, individually and collectively. And we will if we get the chance. But there is a powerful tendency among liberals and bobos to deploy capital towards market failing but politically favored ends. If this happens our economy will stay where it is at best, or deteriorate further. A substantial part of the political dogfighting in the next year or so will be about whether this happens or not. And if so, to what extent.