The Way Out, pt VI

What he said. I like especially how Kling focuses on profits. A lot of the current economic commentary is about credit, and financial institutions. And we do need credit to have profits. But to a large extent we shouldn't be worrying about (or spending money on) financial institutions with the hope that they will provide the credit to the broader economy.

One thing that's largely been missing in most of the recent economic commentary is that we are likely to be in the middle of a substantial sector shift. People have obviously rethought their expenditure patterns with new budgets and ordering of wants. Capital allocation will reflect that, and we know from Hayek that government cannot pull that off. Ie, now more than most times, there is no "aggregate" demand.

If the government can enter the market as a consumer, it can legitimately try to goose growth a little bit by cheating the process toward more expenditure. But the most important thing on the government side is to be relatively conservative of its debt levels.

Whither Stimulus?

In perfect timing with the theme of my last post, Matthew Yglesias argues (at tip to Ross Douthat) that we shouldn't sweat exactly what's in the stimulus because there's a decent chance that it's either stimulus for the economy or good for the country as a whole. I don't think Republicans should hyperventilate over this. The liberals would want these programs whether the economy was in recession or not, and now that they're in power they're going to try to get them. Instead, we should get them off the fence: the amount of money in the bill is so large that its proponents ought to be able to justify why they want it. It's very likely that we should oppose some or most of it anyway, but we won't know why necessarily until the other team has had the chance to make a case in favor of it. In particular, we should see just how much belief the other side has in the neo-Keynsianism they've been arguing for the last few months. It's very possible that it's less than we've been led to believe.

Bandwidth

The concept of bandwidth has gotten a lot of attention since the beginning of the Internet Age. In it's literal meaning it's a computer geek thing of course, but the general concept, ie, the amount of information that can be successfully sent across a channel at any one time, extends to any form of communication. Occasionally you can even hear management-guru types talk about the desirability of "high-bandwidth relationships."

In any case, what I'm interested is the application of bandwidth in political sphere. It's a subject that's gotten little or no attention, but it should. The ability of a politician or pundit to make his audience hear as he intends to be heard is a very valuable commodity, and in many cases a scarce one. Anyone who has had the misfortune to be a conservative or a Republican recently has been affected.

Let's recap. Starting from the middle of 2006 or so, the American people fundamentally tuned out President Bush (and by extension the Republican Party). It's not so much that they disagreed with him about this or that, as much as they simply quit listening. Conservative politics have carried an ethos of make-believe ever since. No has to care what Mike Huckabee or Rush Limbaugh says, because nobody's listening anyway. This lasted until the selection of Sarah Palin as bottom half of the GOP Presidential ticket. Gov. Palin was clearly fresh on the scene and had nothing to do with President Bush. For two glorious weeks or so, the Republicans weren't forced to carry the dead weight of the Bush Administration. Unfortunately, when the Republican party finally got the chance to be heard on its own terms, it turned out that John McCain didn't have much to say about the economic crisis. The world went back to ignoring the Republicans, and that more or less settled the election.

And here we are. President Bush is now former President Bush, and Democrats have subsantial majorities in both chambers of Congress. President Obama proposes $819 Bn, $1.2 trillion, 43 quintajillion whatever "stimulus" package. The amount of money is so large that the Republicans are actually back in the game a little bit. So, right away Michelle Malkin calls this the "Generational Theft Act of 2009." Congressional Republicans have complained that the bill is comprised mostly of giveaways to favored constituencies. I have some sympathy for their arguments but I fear that this is the sort of knee-jerk reaction that will continue to get ignored.

If I were in charge of the Republican message, the first thing I would point out is that the original TARP plan passed Congress was intended to respond to a particular kind of crisis. Ie, do something or else the world's financial system will collapse in two days. We might still be in a crisis but if we are it's a different sort: getting out of our current economic jam is going to be a long hard slog. Whatever the economic remedy is, we need it done right more than fast. Second, I'd point out that President Obama and the Democrats haven't told us what this plan is supposed to accomplish. I'd try to get the Democrats out in front for what this package is supposed to do and hold my fire until then.

In any case, the Democrats are the majority and they will get to set the agenda for a while. Whatever attention the Republicans get from the American people, they should use carefully and wisely.

Oh Yeah....That'll Work

One thing we've seen over the last month or so is the attempt of various left-of-center types claiming to have "won" by default the debate over stimulus economics, present past. Here's a couple specimens. As much as libertarians and conservatives like to complain about the chilling effects of PC and such, this particular example variation of it is more comical than anything. Nobody is going to be intimidated by it, and in the year of Our Lord two thousand and nine nobody except doctrinaire liberals are heavily invested in FDR/New Deal mythology.

For me, it's one reason things aren't as bad as they look for my team. There is no wizard of liberal Oz, just a little man behind a curtain.

Environmental Fantasy, pt II

The world goin' one way, people another. - Poot, The Wire

I'm not going to get too far about any particular topic on this blog without talking about the political consequences. For the last week or so, one theme has been that the situation isn't as bad as it looks for conservatives and conservative ideas, even as the Republican party is far out of office as it's ever been.

The more I think about it, environmentalism is a two-edged sword. The motivations behind are going to weaken a little bit because everybody's attention will be taken by our various non-environmental crises. There was a famous poll taken last year which claimed that the American people weren't willing to pay one cent per gallon gasoline tax to solve or alleviate global warming (at a time when gas was over $4/gallon).

But precisely because environmentalism operates at a quasi-religious level, the attitude shift will be slow. What's worse, contra David Frum, Rod Dreher and others, it can't be coopted either for the same reason. Even if we wanted to, we can't do the environmental agenda like we could build a bridge or a jobs program. And because a fair bit of the Republicans' poor standing has to do with a credibility crisis, it's not a good time to promise things we can't deliver on.

Environmental Fantasy, New Appreciation for Reality

The only thing we have to fear is fear itself. - FDR

It's a very pleasant experience when something we can see than some supposedly ominous threat turns out to be more or less inconsequential. Well, it's put up or shut up time for the environmental movement. The political environment (no pun intended) is friendly, so if the Obama Administration doesn't enact a carbon tax or a cap-and-trade system, can we safely conclude global warming was complete crock from the get-go?

Not necessarily, to answer my own question. But I think we will see a shift in perception. It's harder to get motivated about a hypothetical crisis fifty or a hundred years from now when we're in the middle of an actual one. We don't even have to convince ourselves that anthropogenic global warming can't happen. We may decide that it's something we can adapt to, or even like it.

Several conservative commentators have argued that modern environmentalism is more like a religion than a science, or just special interest pleading for the cynical-minded. If this is true (and I for one believe it is), this hasn't gotten a lot of mainstream traction. But if we try to argue that environmentalism is just religion for postmodern liberals, we have to acknowledge that it's relatively short on rituals, priests and Scriptures. Instead let's acknowledge that the epistemology of environmentalism is aesthetic: harmony and tranquility are good, mindless noise and consumerism are bad. And on its own terms, the environmental aesthetic is at the very least unobjectionable, and often praiseworthy. But there are other aesthetic goods, (eg happiness, elegance, justice, etc.) and in our lives we usually rely on judgment and context to fit them in as best as we can.

On a more concrete level, the inductive logic between the environmental aesthetic and what we recognize as environmental advocacy today is very flawed. And slowly but surely I suspect it will increasingly be perceived to be flawed.

Demand for Aggregate Demand, pt III

Hat tip to Reihan Salam for this one. A blogger from the other team essentially translates what I'm getting at here, here and here into Left-liberalese. Here is the key point:

The real danger of this moment for the Republicans is structural reform, fundamental changes to the American welfare state, or labor law, or regulation of carbon.That's where we'll see the big league, scratch and claw, any means necessary opposition. - Chris Hayes

Let's just add to this that structural reform is the operative danger for the Democrats too, they just haven't caught on yet.

Me to California: Drop Dead

In 1975, the municipality of New York had a severe crisis and required outside assistance to prevent default. The city received a loan from New York State and when that was not sufficient, asked President Ford for assistance. Ford was slow to offer assistance, prompting the New York Daily News to print the headline Ford to City: Drop Dead. Of course that was something of an exaggeration, because in early December of that year President Ford signed a bill authorizing loans of up to $2.3 Bn per year for the following few years. But, the conditions that were attached were very important: tax increases, wage freezes or cuts, staff cuts, and all the rest of it. And equally as important, the terms of the loan also commadeered the city's revenue streams to pay back the feds before the city's political establishment could get a hold of it.

We are again in period of debt crisis, of course. As big as it is, New York City is only one municipality. We are now in a situation where several states and many municipalities are danger of bankruptcy. But California is the worst case. And it's inconceivable that Congress and the Obama Administration will not bail out a state that gave 55 electoral votes to Obama and elected umpteen Democrats in the House of Representatives. Therefore, let the Congressional Republicans get out in front: yes, we'll propose the government loan California (and implicitly every other state) whatever it needs to stay afloat, with similar terms that President Ford bailed out New York City. By circulating the idea first, the GOP can frame the issue on their terms instead of merely offering some less of the same alternative.

The operating principle is that we ought to help our states and municipalities if we can, but the terms of assistance should be onerous enough, especially to the political classes there, so that they should never plead poverty to the feds if there's any chance they can make it without federal money.

The other team is the majority of course, and they might choose to give California money instead. Everybody really knows, that the GOP is, relatively speaking the party of fiscal conservatism. George W. Bush was an expensive exception, but an aberration nonetheless. We might as well take the opportunity to remind everyone.

Shovel Ready

Like Steve Sailer and others have pointed out, the Obama Administration (and liberals in general) would like to use federal stimulus money to fund big new infrastructure projects and big Green infrastructure projects in particular. Unfortunately, the planning and design stages for such things take years and years, therefore defeating the notion such projects will do anything to stimulate economic growth. Wait till the liberals figure out that the stimulative projects that are shovel ready are the ones that have little or no environmental impact to wade through, ie, new weapons systems for the Pentagon, or are built in the middle of a barren desert, ie, the fence across the Mexican border.

Demand for Aggregate Demand, pt II

Like I mentioned before, I have a gut feeling that the political foundations of the American welfare state are the weakest that it's been in my adult lifetime, therefore there is a compensating increase in interest in the nuts and bolts of Keynesian economics. But, one aspect that's gotten relatively little attention, especially with respect to it's political implications, is that the Keynesian theories of fiscal stimulus are very business cycle dependent. For now, everything's kosher because we're in a business cycle trough so aggregate demand is weak so government fiscal policy will supposedly stimulate it. But of course that hasn't always been the case in recent memory and hopefully won't be the case again sometime reasonably soon.

Furthermore, whereas the ability to finance the stimulus used to be an academic triviality, is reasonably likely to be in jeapordy before before we are clearly in a recovery. It is not going to go without notice, either by our current creditors or our prospective ones, that Iceland has already defaulted on its government debt and several other European countries including the UK are on the verge of it. Whatever happens, voters are not likely to forget soon, just as the political impact of the Great Depression took forty years or so to dissipate. Whoever can propose credible cuts in formerly sacred cows of government spending might get a more respectful hearing now than ever before.

The Way Out, pt Ia

Today, Megan McCardle has a great post on a subject I brought up a while ago, ie, the inefficiency in shopping from the wares of the Education Establishment to prepare for success in the labor market. (Perhaps coincidentally, Instapundit put up a link to this as well.) If anything, I'd quibble that the ivy-and-quad campuses are less efficient than the for-profit vocational "colleges." A Democratic Administration notwithstanding, Americans tend to be more responsible than most for working through their own problems. By the end of this economic crisis, education in America might look a lot different than it does now.

Demand for Aggregate Demand

(Mostly borrowed from a comment on another blog.)

Bryan Caplan has noted that Keynesian aggregate demand theories are enjoying a resurgence at the moment, but wonders why. My theory is that the political foundation of the American welfare state is in greater flux now than it has been for a long time. Let's go back a little bit. The philosophical and practical justification for the New Deal was to save people from complete destitution. As time passed, the welfare state grew but the justification behind it shifted away. Sometime between 1979 and 1993 say, the political establishment almost entirely gave up the idea that the point of spending on social programs is to help the poor.

The American people have adjusted to the idea that the safety net is there is smooth away the rough edges of life in a capitalist economy. (No comment on the underlying truth of that proposition, only that the perception of it is the political foundation of the contemporary American welfare state). That foundation is getting weaker. People are starting to figure out that what really want out of the economy is the opportunity to earn a living instead of welfare state protections. The academic and political left-of-center want to protect the welfare state, and Keynesian theories of aggregate demand is the tool for that particular job. Nobody needed that tool before now because the welfare state was built on political foundations that didn't require it.

This has, for me at least, some interesting consequences. Among other things, while Republican political strength is the lowest now that it's been in my adult lifetime, the mix of issues is the best it's been for five years at least.

One other thing: some of us cynics tend to view the typical theories of aggregate demand, deficit spending and fiscal surplus as an intellectual fig leaf for an assertion of social control by the political establishment over the population through government giveaways. And that is a substantial part of the story, though it's important to note, not all of it. So for that, we should thank libertarian economists like Tyler Cowen and the authors of Econlog, to sort through them on their own terms (as well as their political motivations).

Blue State Blues

Since the election it's been mostly the same ol', same ol'. So far the big news has been political corruption in Illinois, highlighted by the arrest of Gov. Rod Blagojevich and the allegations by US Attorney Patrick Fitzgerald supporting the arrest. In California, the state budget deficit is expected to reach $40 Bn by 2010, to the point where the state will have to get emergency assistance from the federal government or go bankrupt. Finally, the Detriot Big Three are more than bankrupt, they would have run out of cash altogether except that they too, got bailout money from the feds.

There's something in common in all three of these. If were a professional Republican politician or pundit, I'd be pointing out what it is.

The Way Out, pt V

Nobody has a real good handle on how all this is going to shake out, but I strongly suspect that one of the things that will be a part of a hypothetical recovery is the combination of low unemployment and lower (than present) wages.

We need people working to maintain stability in our economy and standard of living, and the more the better. But we also have to cope with the process of revaluation. Certain things that we had previously thought were valuable in better economic circumstances will turn out to be less valuable. Therefore the people who make these things need to be paid less. But, there are other things, some of which we know about and others we don't, that will turn out to be more valuable than we anticipated. As we go down the road of figuring out which is which, typical workers seeking a raise naturally migrate from low-value labor to higher-value labor. That is, they will if the capital flows are more or less transparent.

All this sounds good and antiseptic. Unfortunately, there is likely to be substantial pressure to keep inefficiently deployed capital where it is to mitigate the disruptive impact of moving it somewhere else. Obviously this has been most prominent recently with respect to the car company bailouts, but that's admittedly an extreme case.

More generally, labor does better relative to capital in an expansion, because most people are employed so labor is scarce and the demand for it is high because there's opportunity available in the economy to produce high returns. Capital does better relative to labor in a recession because those things don't hold and also because capital tends to be more maneuverable whereas labor tends to be stuck where it lives. But, people tend to resent capital in the best of times and even more now since "capital" or "capitalism" gets the blame for the Wall Street failures and the subsequent bailouts. The temptation for demogoguery will be high.

The Pirate King

"It is, it is a glorious thing to be a pirate king" - Gilbert and Sullivan

Hat tip to Naked Capitalism for this one from London Banker.

The Banker is clearly right that the biggest risk we face now is the lack of access to credit for the US gov't. That is a real possibility now for the first time in my life, and one that might impose fiscal discipline on the government where generations of Republicans failed. On the other hand, it might not, and then we will in truly interesting times indeed.

I like how the Banker describes the deleveraging of the US financial sector as financial piracy against East Asia and the Gulf States. Unfortunately, he's just wrong on that score. The reason that the US (and to some extent the UK) got its role as the world's banker is because it has the a strong tradition of property rights and the Rule of Law. It is only in that environment that a private banking sector as we know it can develop. These other countries don't have these things, that's one of the reasons why they have to send the money over here. That's something to bear in mind, "...Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance..." If, as a result of this bubble bursting, they were to develop these things it would be best for all concerned.

There's also the fact, as Spengler would surely note, that US has the risk-taking young people willing to borrow. The greying populations of East Asia don't so it's not exactly clear who's going to be able to generate the "reasonably predictable positive return" the Banker requires.

Finally, the Banker doesn't dwell on it too much in that post, but he also likes to hate on the knowledge economy. For all the talk about sustainability, it ought to be clear that the knowledge economy is much more sustainable than the alternatives, usually taken to be agriculture or manufacturing. The trend in that direction has been going for decades, arguably centuries. Not only are manufactured goods cheap to produce, there also not worth very much. What's worth more to you, a correctly filled prescription by a reputable pharmacist, a new iPod, or a twenty pairs of socks. I'm guessing there's not too many people who would choose the last.

Trahison des Clercs

One of the most depressing facts of this Presidential cycle is the wholesale loss of the intellectual class to Obama and the Democrats. Both Slate and Reason published quasi-endorsements from all of their contributors, and put together they form a particularly gloomy spectacle. Everybody wants to be able hold the red-state bourgeois accountable for the supposed failings of America, but nobody wants to do anything to help.

The Achilles Heel of Islam

http://www.atimes.com/atimes/Front_Page/JK18Aa01.html
http://www.atimes.com/atimes/Front_Page/EH05Aa01.html

Spengler is a pseudonym of a columnist for Asia Times. In the links above he hits on a pet theory of mine that I have not seen very much public discussion of. Islam in many ways is much weaker than she appears, something that has obvious consequences for the future of jihad in the next decades.

Spengler emphasizes the weak textual foundation of the Koran as sacred scripture. I think the larger point goes way beyond that. That is, that Muslim apologetics, the ability to pronouce the reasons for belief in religious teachings and persuade others of them, are embarrassingly weak to the point of being something of a joke. In fact, that's almost the point of the matter. The teachings of Islams aren't things to be believed as much as submitted to, because Allah is greater than us.

In my view, this is the religious expression of the tribal nature of society in the Middle East and other places where Islam reigns, and captures the crucial anthropoligical insight there: survival is a collective accomplishment. There is no individual so strong or smart so that he can guarantee his own security. So, he must depend on various group loyalties (to family, to clan, to tribe) to protect him. And because he is dependent on them at the level of his very existence, he submits to the group's will. Fortunately for us, we have developed strong traditions of the Rule of Law, property rights, and impartial police. Otherwise we'd be in the same boat.

But there is more to religion than that. It also functions on a historical and teleological levels. And it is very likely that viewed in these ways, Islam is simply not true, and not perceived to be true by people who consider the question closely. This is a huge vulnerability whose impact we haven't seen yet, but likely will.

The Political Wire

A couple of weeks ago, Ross Douthat hit on a topic that I've been wanting to bring up for a while: the politics of The Wire (the HBO miniseries). Ross makes the key point when he writes:

In this sense, The Wire is the rarest and most precious of beasts: A work of art that's intensely political but rarely devolves into agitprop.

On the surface, it might be taken as a liberal show, as its creators are certainly liberals and there are no recognizable conservatives the show. More importantly, if there were, they would appear as hopeless squares in that environment, which validates how liberals tend to think of conservatives in general. But it's more complicated than that.

First of all, the show explodes any notion of being culturally simpatico to the modern black underclass, the staple of liberal inclinations on urban issues for decades. Clearly for those of us in the bourgeois world, those people are not us. The greatness of the show is that they are compelling in their own right.

I think there's an implicit contrast with The Sopranos. In general, the narrative of black people in America is much more prominent than Italians. But this doesn't necessarily extend to the criminal class, where The Godfather is a major touchstone of American culture. The consituents of Baltimore's drug wars are forgotten people. We want law enforcement to enforce some measure of quarantine on them away from bourgeois America, and as soon as that happens we won't spare them a second thought. Nonetheless, protagonists of The Wire are completely compelling anyway, while at the same time not making any excuses or rationalizations of their criminality. Through this prism we see that what happens to them is important, even if in real life it's not important to us.

The Message

Let's grant to David Frum that politics is a game of addition. Who do we add to Joe the Plumber to make a winning coalition? If we go after wealthy coastal voters, we have to be able to demonstrate greater credibility on economic issues than the Democrats. Depending on what happens in the Obama Administration, I suspect that might be very plausible soon enough.

I don't think it will work to shave the values issues. Politically speaking, the differences are too wide, as Ross points out. Not only that, there's nothing we can deliver on anyway. For the bluebloods and the bobos, much of the values conflict (environmentalism in particular) is an attempt to maintain superior social status over the red state bourgeios and those that represent them, ie, the Palins. Given that the Palins are exactly the sort of people who keeping us from being a typical useless Euroweenie country, we gotta have their back. And if it were up to me, this is exactly the argument I'd make to the bluebloods. For whatever is wrong with the USA, it should be clear that it's in better shape than the major Western European countries, every which way it's possible to measure.

The First Thing....

....the conservative movement needs is a message that it's willing to be held accountable for. David Frum is one of the most astute conservative commentators out there, but this wasn't one of his better efforts. If we have a message, we have to propagate it. If we don't, the few Senate seats that are "saved" won't accomplish very much.

If we throw in the towel on the McCain campaign (this was three weeks ago, mind you) the message we're sending is "we surrender" which is definitely not our intent.