We Hardly Knew Ye…

Sarah Palin drops out.  Her pick as VP was catastrophic, and her disastrous interviews reinforced the image of know-nothing, clueless Republicans.  She could have used her position as governor to build something, but she’s now given up that option.

This is great.  Momentum is moving away from the eccentric crazies–the Sanfords and Palins–and towards the pragmatic statemen–the Romneys and Daniels of the world.  They need to win if the Republicans will ever lift themselves out of this slump.  The next step would be to get rid of the O’Reilleys of the world.

Another One Bites the Dust

Mark Sanford just admitted to carrying out an affair with a woman in Argentina.

Tragic for his family.  Also for his political career.

Who do we have left to run in 2012?  Palin is still in, but remains radioactive among independants.  Romney is rehabilitating his image, but is still seen as plastic and opportunistic–2008 was his best shot.  Few Senate or House members are likely to distinguish themselves in the next few years.

This leaves the traditional crop of Presidential aspirants: other state governors. And Daniels has pretty well solidified his stature in this group with his electoral and governance record–the media hype will follow.

Keynes on Keynes

Keynes once said, “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”.  In an ironic twist of fate, this statement now applies to the Administration and its economist boosters, who adopt Keynes as a figure of faith in supporting massive spending deficits.

The amount of deficits that are accruing over the coming years is unprecedented.  The CBO estimates these at $9.3 trillion from 2010-2019, with a debt-to-GDP ratio of 82% at the end of that period.

To be sure, some of this reflects an overhang after the financial crisis, or spending on the stimulus.  But by 2019, after all of these effects are long gone, the goverment will still run a permanent $1.2 trillion deficit per year.  Largely, these deficits are the result of reckless spending combined with further tax cuts, and do not take into account further spending in healthcare or defense.

And yet the Democrats and their boosters don’t appear particularly troubled by these events, as they draw blindly upon Keynes just as the Republicans used Laffer. According to Krugman, the world is still facing a massive savings glut, and can therefore finance deficits of any magnitude without worrying about inflation. According to the Orzag consensus, the real problem with the budget lies in out-of-control healthcare spending, which can in turn be contained through massive spending in this sector.

This is crazy. The world will not finance American debts in perpetuity–even the British are finding trouble lining enough investors for their debts, while the Chinese are raising hell on this issue.  One day, investors will look at the high returns offered by tax-exempt munis, corporate bonds, etc. and decide that a 2-3 percent yield is insufficient reward for holding Treasury assets from a government more reckless than Argentina.   This will happen at the same time that the Fed will need to sell lots of Treasuries as well to unwind their financial operations.  Already, there is talk of lowering America’s AAA financial rating.

The situation on the health front doesn’t look great either.  To think that simply spending billions will curb runway cost increases reflects a technocrat utopian view that has repeatedly failed in tackling healthcare.  Health care definitely needs reform, but to achieve massive cost savings will require substantial cuts in treatment. That’s not going to happen either.

Obama well be the Democrat Reagan.  Unfortunately, he is also set to replicate Reagan’s history on fiscal deficits.

Attention: Deficit Disorder

The new Democratic Administration has been marked by a flurry of policymaking and legislation, crisis-management and confidence building, international diplomacy and domestic firefights.  If successful, it will mark a radical reorganization of America’s domestic and foreign priorities.  If successful, the financial crisis will be dealt with in a systematic way, and the foundations for a new era of American growth will be laid down through a series of investments in energy, health care, and education.  It will affirm the positive goal of government, the managerial chops of technocrats, and the transformative power of the American Presidency.

The danger, as always, is that in their hubris to do everything at once, nothing will be done well while racking up an enormous bill.  

The biggest casuality of the hummingbird approach to the economy is the financial system.  Geithner neither has the money or people to do a serious job at solving the banking crisis.  At the same time, there is enormous political pressure to prevent the failure of a single institution.  Given these constraints, the government’s actions resemble the failed investment banking practices–guarantee massive quantities of flawed debt, slice and dice risk into tranches (the Treasury gets the equity bit, the Fed the rest), conceal risk and liability through structured finance, and rely on the same private actors who caused the crisis to oversee it all.  Arbitrary and inconsistent government actions, as well as constant fear-mongering and denouncement of bankers, have led to a flight of private capital from this area, and prevent bankers themselves from improving the situation.  The United States is now running the world’s largest hedge fund, and the failure of these initiatives will bring catastrophic failure to the economy.

Coming to grips with the largest financial upheaval since the Great Depression ought to be the primary responsibility of the government.  Bizzarely, the administration is risking the chance that the problems will largely go away on their own, and have largely focused their energies towards capitalizing on the crisis to pass sweeping reforms on the domestic front.   These reforms are predicated on the notion that the American economy is fundamentally healthy, but the gains are a little too concentrated on the top end.  In that, they fundamentally ignore the huge changes we’ve seen over the past year.

So you see an energy policy focused on reducing oil dependence and raising renewable resources.  Aside from the other problems with this approach, it also does not make a lot of sense given the massive fall in energy prices.  While Obama has offered great rhetoric on the need for education reform, his education plan essentially assumes that you can fix a leaky pipe by increasing the water pressure by throwing more money at the same failing schools.  Massive sums are on the line for health care reform, but even these understate the true cost, while the experience of Massachussets suggests that offering health reform by increasing coverage will continue unsustainable cost acceleration.  Mind you, these changes are going on under a backdrop of unsustainable entittlement spending in Social Security and Medicare.

These problems can be linked to the speed requirements under the stimulus plan.  When Congress is given a few days to spend a trillion dollars, they will do so in ways that further long-held Democratic aims, not in ways that fundamentally improve the economy.

Will this work?  Ask the Europeans–they have largely refrained from costly stimulus, perhaps because they realize that deficit-fueled spending binges are not the road to growth.  In the urge to fix everything bad about the economy, we are going to take up unprecedented amounts of debt.  To be sure, the current crisis calls for the government to pick up some slack.  But even if you think that the economy will recover quickly, you’re looking a gap between spending and revenues that will not be closed.  With more normal predictions, the CBO estimates a trillion dollar deficit every year,out for the next ten years.  

This is flat-out unsustainable.  There are plenty of buyers for government debt now, in a flight to safety, but how long will this continue?   At some time in the future, the Fed will have to sell Treasuries to mop up money supply and prevent hyper-inflation.  This will happen at the same time that private investors will ditch low-yielding Treasury bonds for higher-yielding investments like corporate bonds.  And China will look to diversify its foreign currency holdings away from the dollar as well.  An unsustainable domestic public financing problem, combined with weak foreign demand for bonds, can only go horribly badly.  The only answer for our debt problem will be massive inflation and taxation.  Compounding the inflation problem is problem of how the Fed will wind down their enormous money operations without hyper-inflating the economy or pushing us into another recession.  

The hubris of this Administration in tacking every problem under the sun will be answered in the form of a financial tsunami which will make us wish longingly for the present situation.

Apologizing

It’s been absolutely insane to watch people give a complete pass to Obama’s decisions because he observes various niceties.  Are people really this shallow that they’ll respond to the polite gestures while ignoring the substance?  Apparently so.

For instance, many people, not just me, are up in arms about the decisions of the new Democrat Administration.  The campaign was run on bipartisanship, paving a new way forward, and many criticized Bush’s bailouts.  Then theygained office, steamrolled the opposition by passing unprecedently liberal bills, while letting the banking problem fester until they decided to try Bush’s plan–but with more giveaways to hedge funds.  They’ve done a lot to capitalize on the economic crisis for their own goals, but have done little to solve it.  In fact, their populist screeches and high-minded ethics requirements have been major impediments to staffing the Treasury Department and spending the money to fix things.

Obviously, passing judgement after a few months can be a little harsh.  But the reason we usually do that is because nothing generally happens in the first three months; we’ve actually now seen about as much action as an average President could do in a single term.  Should people not have an opinion about radically different new programs, simply because they happen to pass in a short amount of time after a person takes office?  Should we resist commenting on the new GM chief executive because, after all, he’s just settling in?

When confronted with instances of mistakes, Obama’s response is generally to immediately take responsibility and apologize.  When the happens, the media forgets about the whole story.  Is it really that simple?  Can you really disown any responsibility simply by accepting responsibility?  I mean, I’m constantly in awe of this ability to game the media.  But it’s a little sad that journalists really aren’t after fixing problems or dealing with issues–they just want people to observe protocol.  I can’t imagine how the response to the Bush Administration would have been had they had a half-decent PR person  who knew how to actually spin the media instead of simply always looking guilty and crooked.

Healthcare

Affordable access to quality healthcare for all Americans should be a political priority.  That said, there’s quite a bit of dispute on how to get there.

Obama’s health care agenda has so far been straightforwardly liberal–drastically expand coverage through increased government spending.  This will be paid for by soaking the rich and technocratic cost-cutting moves.  

But the rich, as you may have noticed, are a dwindling breed.  It’s naive to suppose that the enormous entitlements that the Democrats are racking up only require sacrifices from a small, evil, few.  This discrepancy between spending and taxing is currently being made up by deficit spending on an order of magnitude that would make even Reagan blanch.

Well, there are other ways to cut costs.  Covering more people lowers the average cost per person, and then there are improvements in electronic billing and preventative care.  While the last two are certainly good, there’s really no clear evidence that they can really lower the cost of care–in some cases, they may even raise it.  As for expanding coverage–we’re doing that in Massachussets.  And the result has been spiraling costs that are devastating the state’s budget.

Many European countries have enviable healthcare platforms.  But the path of American care is more likely to follow the trend set in MA–more coverage, higher costs.  Now, spending more money for better treatments is great, and covering the uninsured is a desirable goal.  But much of this spending is for unnecessary treatments, and is being added to already unsustainable government finances.  This will mean massive taxes in the future or government-rationed care.

There’s another way out of this mess–massive deregulation of the industry to allow the cost-cutting forces of competitive markets hold.   Lousiana Governor Jindal’s plan to institute a medical homes system lowers costs while improving consumer choice and qualitiy of care.  The idea is that you give physicians incentives to treat patients well, while allowing coverage plans to compete on the basis of improved quality of care and less wasteful spending–not by denying sick people treatment.

Mitch Daniels’ signature health plan covers Indiana citizens while containing costs.  Under a Health Account System, consumers are price-conscious for small treatments–pressuring doctors to lower costs, as they’ve done in dramatically lowering the cost of Lasik surgery.  But coverage is there for major health problems.  The plan also accounts for holistic-health services like screenings, preventative care, and anti-smoking messages.  

Improving insurance coverage, while promoting health, improving choice, and cutting costs?  That’s change I can believe in.

School Vouchers

Results from the third year of DC’s voucher program are in–and they’re very positive.   Going to a voucher school improves student performance (half grade increase in reading) and parent satisfaction, at a lower cost than public school education–about a fourth as much, actually.  This is impressive when you consider the short amount of time the program has been around, the transition shock of moving to a new school, and the fact that since few people get vouchers, you don’t push competition-fueled change system-wide.

You’d think this would be great news for Obama’s education reform.  He’s set himself up as a results-oriented pragmatist on education, willing to support things like vouchers if the evidence was there.  Well, here it is.   And if you’re willing to look outside of the U.S., Columbia, Chile, Sweden, Denmark, and the Netherlands all have extensive experiments in school choice.  All tend to be pretty positive.

Instead, we’re getting a Congress that’s denying poor residents of D.C. the same right that Obama and Biden take for granted with their children.  We’re passing something like $100 billion in education stimulus that throws more money at a rotten system.  If there’s anything we’ve learned from education research, it’s that you need to reform the system, not subsidize failure even more.  It’s also something to take away from Obama’s speeches on education reform–which are great.  But it would be even greater if that rhetoric was actually matched by action.

The Budget

It’s hard not to read budget projections like this one, by Stanford Economist Boskin, and be worried.  The Democrats are increasing spending faster than just about any previous administration–almost five trillion dollars above baseline–without paying for it.

Suppose that Obama is reelected and serves until 2016.  The financial crisis, plus the military commitments in Iraq and Afghanistan should be long gone by that point.  But because of all of the increased spending, we’re looking at about $700-800 billion in government deficits by that point.  That’s huge, and reflects a permanent shift in the government’s accounts.  

In fact, that figure is possibly conservative–it reflects the assumption that the economy recovers relatively quickly.  More importantly, it assumes that military spending will decline to levels we’ve never seen it at.  But America goes to war at least once a decade, and can almost surely assume that one of the various hot-spots around the globe will erupt sometime in the next eight years.  How are we going to pay for that?

This is not spending that can be cut, either.  Taxes are going to have to go to pay for it, and narrowly targetting the (ever-smaller) rich isn’t enough.  The middle-class is going to have to pay for the growth in entitlement programs.  

Much of the spending growth will happen through healthcare.  Extending health coverage to all American, regardless of employability needs to happen.  But the manner in which we do so should be open to debate.  Right now, the dominant plan mirrors Massachussets by simply extending government coverage to more people.  But the results of that experiment suggest that increasing coverage doesn’t do anything to lower health costs, while it does strain the government’s budget.  Either taxes will have to go up to pay for this, or health care will be rationed.  

Look, if you believe that government should be larger, fine; increase spending and find a way to pay for it.  But to spend years decrying the Republicans for destroying the budget, promise fiscal responsibility, and then go ahead and radically raise the government’s obligations, expecting someone else to foot the tax bill later on–that’s not change.

Energy Policy

A key plank of Obama’s campaign was a theme that we need to “reduce our dependence on foreign oil.”  This was really more of a populist crowd-puller, and I assumed that it would kind of go away once oil prices came back to Earth.  Instead, this call to action is informing tens of billions of dollars in spending on a variety of renewable energy projects.  

Thing is, this really makes no sense.  Foreign oil is bad because it pulls us into Iraq-like conflicts?  That only tells you that invading Iraq was a bad idea–every other country on Earth manages to survive on imported oil just fine.  In fact, every other nation is also dependent on others for some sort of energy, even Saudi Arabia.  Energy autarky is a dangerously misguided notion.  

But maybe it’s bad because of the whole carbon thing, and we should also get rid of coal energy as we go along.  If that’s the problem, then put in a carbon tax–as Norway did, with amazing results–so we properly price carbon and use less of it.  While some sort of cap-and-trade may be in the works, the dominant tactic for achieving this goal seems to lie in massive subsidies for researching ‘green’ technologies.  

Of course, nuclear energy–one of the cleanest and cheapest technologies around, one that America is perfectly willing to export to the rest of the world–doesn’t count, because the Senate Majority Leader is from Nevada, where the waste would go.  Hydro power doesn’t count either.  Natural gas exists in abundance in this country and can be cheaply imported in liquid form.  Many countries are switching over to gas for their cars and buses because it’s cheaper and pollutes far less.  Yet Obama’s budget punishes natural gas drillers.  For some reason, our technocrats have determined that our economy needs to shift to an entirely different mode of power because, well, windmills look awesome and take away our guilt.  A lesser person than I, one far more cynical, would think that green-boosters are more interested in manufacturing a crisis to meet a pre-existing agenda rather than finding the most cost-effective solution to a well-defined problem.  

The economics aren’t quite there either.  Wind and solar consume massive quantities of land far from major population centers and are terribly unreliable and unprofitable.  Government subsidies may speed the process of discovering cheaper forms of these technologies, but the billions of government dollars spent so far on these technologies have come up with essentially nothing.  Private players are, however, rapidly spending on improving these technologies.  Rather than spend billions in subsidies, pricing carbon would allow utilities to make the best long-term economic decisions on the mix of energy they want to produce.  

And the millions of green jobs these programs are going to generate?  Models suggest that the net job impact of switching to renewable energy would be negative.  The key issue here is that every kilowatt we get from wind means an equivalent loss from some traditional job-generating sector of the economy.  

The last bit to take on is the social nationalism portion of the agenda; the idea that America is “falling behind” other countries in our production and consumption of green goodies.  As far as consumption goes, of course: Make something cheaper, and you get more of it.  That’s no reason for America to adopt a technology before it becomes economically feasible.  And as far as production goes, China remains a major supplier of solar cells, despite the fact that little is installed domestically.  Production will go wherever costs are cheapest; that hasn’t degraded America’s massive comparative advantage in high-skill manufacturing, services, and marketing.  More fundamentally, you should never do something just because everyone else is doing it.  It didn’t work in elementary school, and it shouldn’t be an argument fit for national discourse.  

Mitch Daniels supports technology to turn polluting coal into clean natural gas for power generation.  His plan leverages our large deposits of coal, while keeping pollution to a minimum.  And he doesn’t require a subsidy; his ideas are profitable.

The Neolibs

Suppose you have an ideologically-closed group committed to certain goals.  Once a crisis comes along, they claim that their long-held beliefs are, in fact, the best response to the crisis.  They convince the administration to realize their plans instead of doing what every non-interested expert suggests and deal with the problem.  This is the standard explanation for why we are in Iraq.

Thing is, it’s also what the Democrats are doing right now.  The severity of the financial crisis has been apparent for quite some time, yet we still lack a coordinated federal response.  Geithner’s most recent plan, a public-private partnership to buy toxic assets, is not substantially different from the plan that Paulson delievered to Congress back in November.  The broad outlines offered could have been delivered basically any time going back a year.  

Yet the Administration has been busy this whole time.  But instead of dealing with the financial crisis by coming up with a plan to resolve the credit crunch, they have left the Treasury understaffed while announcing grand plans in the fields of foreign policy, energy, health care, and education.  The last three have been greatly boosted by the fact that the Administration spent its political capital on a massive stimulus bill.  Many of these programs, by design, will likely not be temporary, but rather permanent additions of government.  Capitalizing on this crisis by passing long-held Democratic goals, instead of dealing with the crisis–That’s not change.  

Mitch Daniels has a clear stance on the stimulus.  He’s promoting transparency and accountability in spending his state’s money, which will be spent on investment programs like infrastucture and energy efficiency which will yield lasting gains after this short-term money (hopefully) runs out.  Thankfully, due to Daniels’ fiscal prudence, Indiana has paid down debt, boasts a balanced budget, and has ample reserves to handle a downturn.  If only the same could be said of the country.  Well, soon enough…

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