On the Contrary

As my usual habit I watched the Sunday news shows and once again was appalled.  Meet the Press had a good interview with Secretary Gates about Iraq and Afghanistan, although entirely predictable.  What could have followed was a discussion of what is really possible there with some experts on Iraq and Afghanistan.  But, alas, we then get the pundit echo chamber discussing both this topic and the economy.  Too much personality and not enough intellectual substance.  I could have turned off the sound and been 100% correct on what each would say.  Reliable Sources is suffering the same fate.  As long as they use journalists to discuss how journalists are performing we are going to get circular and self-reinforcing arguments based upon their political leanings and the conventional wisdom of Washington.  Okay, Okay.  Wisdom and Washington used together is an oxymoron.

When I say echo chamber what I mean is the same old political arguments that most of us are past, but the media is still focusing on, repeating the talking points of each side.  I yearn for a subject matter expert’s view of the policies instead of political flacks or pundits.  There were several exceptions however.  I got part of the interview of CNN’s John King with Democrat Neil Abercrombie of Hawaii where John just let Representative Abercrombie answer the questions without interrupting him with questions.  It was refreshing to hear complex questions being posed, and the guest allowed to fully respond in a full and reasoned way.  Maybe John King should have moved to NBC and taken over Meet the Press.

As usual the real information and learning was with Fareed Zacharia of CNN’s GPS.  Fareed’s two focuses were the Taliban/Jihadists and the economy.  He asked a really profound question about if we should have two different approaches to the Taliban and Al Qaeda.  His view was that he lumped under the Taliban all the fundamentalist Muslims who want to implement the Sharia but are not interested in attacking the West, and under Al Qaeda, all those jihadists who want to wage warfare with the West.  His point was that lumping them all into one group and waging war against them might be counterproductive.  The ensuing discussion made clear that there is no coherent agreement on the Muslim community from there is something inherently wrong with the underlying religion to all Taliban are jihadists.  Think about this discussion another way:  The way forward in Afghanistan is dependent on how we see this issue.

But real clarity both on the economy, Afghanistan, and conservatism came in the next discussion with Martin Wolfe and Canada’s Prime Minister, Stephen Harper.  Martin Wolf is associate editor and chief economics commentator at the Financial Times, London.  He made short work of his criticism of the Obama administrations economic recovery plan.  To Wit:

• The stimulus package is required, but too small.  We need to spend $700 billion this year alone to stimulate a $4 trillion deficit in spending.  It is a world recession and we can’t think small or parochial.  This year we just need to get money in people’s hands and next year do the infrastructure thing when appropriate projects are shovel ready.  He did not say, but implied that tax cuts to business were a waste of money since without demand, they are not going to expand.  This crisis is not going to be solved by private demand and spending
• The banking bailout has been too little too late with no clear direction.  Banks have to be recapitalized and although he shuns the world nationalization, they have to be taken over and restructured, which in essence is the same thing.  The Obama administration has been way too timid and needs bold action before the situation gets much worse (See The Bank Problem)
• The mortgage crisis cannot be solved by just adjusting interest rates and must address principal balances.  Depending on your social goals, you can do this one of two ways, either through the foreclosure route (people lose their homes), or through a program of renegotiating the loans with adjusted principles based upon market evaluations.  Either way, principal balances have to be brought down to the reality of their deflated worth

Note that all of the above indicate bold action and we have yet to see that out of Washington.  Mr. Wolf’s view is that the economy won’t wait.  I could not agree more (See Fire the Generals).

Fareed had invited Prime Minister Harper, the leader of the Conservative Party in Canada, because Canada is in much better financial shape than the United States.  Mr. Harper was blunt about why.  The current crisis was because the lessons of the 1920’s went unheeded.  Unregulated capital markets will lead to pyramid schemes sooner or later.  In Canada, not only do they much more strictly regulate the banks so they couldn’t over leverage themselves with risky investments, but they regulate the mortgage industry so the types of risky loans that finally came back to haunt us were not allowed.  He also made the point that while he is not a Keynesian, he understood that the problem is global, protectionism is counter productive (buy America), and that private spending is not going to solve the problem, and he supported the stimulus package.

Think how different this is from our own conservatives who hate the stimulus package and were the leaders in laissez-faire government.  Could it be that there is another model of conservatism that is, uh, should I say, conservative?  How refreshing.  Here is the prime example of the difference between a true conservative that we use to know, and our brand of conservatism in this country today that is just radicalism (hate government, cut taxes, and protect my share of the pie at all costs).

But finally Mr. Harper left us with one other thing to mull over in regard to Afghanistan.  When asked if he would contribute more support to Afghanistan, he said he would have to know what our strategy was and what our end game was.  His reading of history had told him that there have been ongoing insurgencies in Afghanistan throughout history and no matter what we do, it will continue.  If this is true, what is an acceptable end game?  Isn’t it interesting that the conservative party in Canada is making sense and asking important questions while here in America they have gone off the deep end?  Just another rainy Sunday listening to the talking heads and thinking about where we go from here.

Paul O’Neil, then Secretary of State for George Bush, has told us that when he warned the Bush administration of a looming economic crisis in 2002, Dick Cheney replied, “Ronald Reagan proved that budget deficits don’t matter.” During the Carter years, the federal deficit had averaged $54.5 billion annually.  During the Reagan era, deficits skyrocketed, averaging $210.6 billion over the course of Reagan’s two terms in office.  Overall federal spending nearly doubled, from $590.9 billion in 1980 to $1.14 trillion in 1989. In those eight years, the United States moved from being the world’s largest international creditor to the largest debtor nation.  (Washington Post)

Right now we are in a real economic crisis and we have already authorized over $1 trillion in bailouts ($700 million for the banking crisis, and over $300 million for AIG). What many of us are calling for is a massive investment in infrastructure, alternate energy, R&D, and support of state programs to kick start our economy and get us back on track.  So if we are in such massive debt where is this money going to come from?  The answer is that we are going to borrow it.  Right now, deficits don’t matter.

Now there are a couple of reasons for this.  First it is one thing to create massive deficits so that you can cut taxes while partaking in frivolous foreign adventures, i.e. the Dick Cheney approach.  It is totally another thing to create a large deficit to invest in your future.  One is a free ride that will someday have to be paid for and the other is an investment in our future that should pay the dividends to pay for this investment.  Maybe this example will help.  Some students, especially doctors take out six figure loans to get through school.  For most of them it is a good investment, because in the future their income will allow them to easily pay off that loan and it will secure their future.  As James K. Galbraith, the economist professor at the LBJ School of Public Affairs at The University of Texas, stated in his interview with Bill Moyers last week:

“One of two things can happen. The government can take action and help stabilize the economy in which case we will have more spending but also more employment.  Or the government cannot take action and let the economy collapse in which case we will have much less tax revenue. The deficit is going to be larger either way. There is no way of avoiding that. The only question is do you work to have a good economy or do you accept a terrible economy?”

The second point is that the deficit, although larger than it was in the Bush or Clinton years, is not significantly growing as a percentage of GDP (Gross Domestic Product).  That is kind of like saying when you buy a home if your monthly payment is below a certain percentage of your monthly income, the bank figures you can afford the loan (these were the rules they blew off to create the current housing crunch).  Or as Professor Galbraith pointed out:

“Well, the deficit isn’t beyond sight. The deficits in the Bush administration in relation to the size of the economy were never all that large. They were certainly larger than they were under Clinton, but that was in part necessary because of the changed economic situation, the collapse of the dot-com bubble in 2000.”

And where are going to get that money?  It turns out that the dollar is remaining the anchor currency of the world economy; right now the euro is falling rapidly as the dollar rises.  Again as Professor Galbraith points out:

“Uncle Sam’s credit is excellent. Uncle Sam can borrow short term for practically nothing these days. Everybody wants to have Treasury Bills and bonds because they’re safe. Uncle Sam can borrow for 20 years at 4.3%. That’s the same rate that the United States could borrow at for 20 years in the last month of the Eisenhower administration. So from our point of view, we’re actually well placed, I mean, as the government of the United States is well placed to take the lead in pulling the country and the world out of this crisis.”

The biggest problem is going to have the political courage to stand up and convince America that the way out of our crisis is in the short term to increase the deficit.  Note that in all the debates the moderators all tried to push the question, what are you going to cut so you can afford your spending program.  The right answer is only those programs that do not work or are wasteful but we are not going to worry about the deficit right now.  If either candidate had said that, although exactly what we need to do, there would have been a media circus and attacks from the other side.  I am not the only one who thinks this way. Martin Wolf, the widely read columnist for the “Financial Times,” and the author of a new book, “Fixing Global Finance,” said (Fareed Zakaria GPS):

“ I do actually think that, though governments are heavily indebted, we are going to spend ourselves out of the recession. We’re going to have fiscal deficits in the Western world as a whole, which are going to be, as it were, unimaginable for some years. And the markets will swallow it, because they’ve got no other assets to buy now which they trust.”

It is going to be an uphill battle convincing our citizens and getting Republicans who have been nothing but obstructionist for the last 2 years, to understand this new dynamic and go along with it.  Hopefully Barack understands this and the voters will neuter the Republicans.