Saturday, September 20, 2008

What Might an Obama President Look Like?

In his Politico column Wednesday, American Enterprise Institute scholar John Fortier asked what an Obama Presidency might look like. Given the current trend back toward Obama in most of the polls, this is a question many may be pondering between election day and January 20th, 2009.

Specifically, Fortier considers what is likely to be the political dynamic in 2009 (a strongly Democratic, fairly unified Congress) in conjunction with Obama's political record to date.
Obama’s legislative career has been spent mostly in the minority (ed: thus making it harder to accomplish goals)...He has modest but bipartisan accomplishments (italics added)...[as a state Senator] he championed a measure to expand health care, state legislative ethics reform and an anti-racial profiling bill that won unanimous support. In the U.S. Senate he worked on anti-nuclear proliferation efforts with Sen. Dick Lugar (R-Ind.) and on government accountability measures with Sen. Tom Coburn (R-Okla.), a conservative stalwart.
In this regard, he is similar to Senator McCain. Whereas McCain is quick to rub his bi-partisanship in his party's eye, though, Obama does so in a lower key manner that doesn't ruffle his party's feathers, says Fortier.

Another key "tell" for Fortier is that the Obama campaign has been very professional. It's been cohesive, lacking the leaks and backbiting that mark many presdiential campaigns. This bodes well for a smooth executive branch under President Obama.

As a President with liberal majorities in both Houses of Congress, Obama won't need to work very hard to reach out to Republicans. In fact, his biggest critics may be some in his own party who feel he doesn't go far enough:
But Obama would face some difficulties. He has bipartisan instincts, but political circumstances point neither to him courting GOP lawmakers nor at Republicans reciprocating. His chief difficulty is raised expectations. An Obama win, combined with strong congressional gains in 2006 and 2008, would embolden Democratic activists to push for an ambitious agenda. But the cost and complexity of health care reform, continuing costs of keeping troops in Afghanistan and even Iraq, and the reality that only a few agenda items can be tackled in the first year may frustrate the base or perhaps cause Obama to push for too much, only to disappoint. Managed correctly, a plan that gets 75 percent of what Obama wants on health care or energy would be a major victory, even if some see it as unambitious.
This is something I have thought for a while. There's so much excitement around the Obama campaign, and so much expectation, that if he is seen as failing to deliver quickly on key promises such as bringing US troops home from Iraq, he may find his strongest supporters becoming his biggest critics.

Tomorrow, we'll look at Fortier's take on a McCain presidency.

Friday, September 19, 2008

Reality and the Next President

Whoever the next President is must accept that much of his agenda will need to be set aside given today's new realities.

George Bush did not come into office talking about fighting a war on terrorism. Nor did he plan to take over large segments of the US financial sector. Don Rumsfeld went to the Pentagon to downsize and retool our fighting forces away from those suited to a large ground war towards a lighter, more agile force concerned with containing small outbreaks at a moment's notice.

Then came 9/11, Iraq, the financial crisis, and the rest is history.

Similarly, Franklin Roosevelt was elected to fight the Depression and wound up fighting World War II. The ability to change with conditions was what historian Doris Kearns Godwin labeled as the 4th trait of great Presidents.

Neither Senator Obama nor Senator McCain are particularly well equipped to handle the situation Wall Street finds itself in, nor the threat it poses to the economy.

Let's admit that up front.

Obama's strong point is social policy, e.g. health care and McCain's is foreign policy and defense. McCain once famously admitted to not knowing much about economics, and Obama was simply politically saavy enough not to admit the same.

In today's Wall Street Journal, political veteran David Seib notes that the new reality will impose serious limits on the politcal agendas of both candidates:
The domestic agenda of the next president is shrinking. Nobody, anywhere, knows how much of a financial burden the federal government has taken on in the past few weeks, but the cost of bailing out Fannie Mae, Freddie Mac and American International Group Inc. -- to say nothing of the potential cost of riding to the rescue of American auto makers, which looks increasingly likely -- could conceivably run into the hundreds of billions...

Tax increases will be harder to sell. Sen. McCain is right: A period of a shaky economy is a bad time to talk about increasing taxes. And the economy as well as the markets figure to still be shaking in January from the shocks delivered. That's a problem for Sen. Obama's proposal to increase the capital gains tax.

But tax cuts get problematic as well in this environment. Though tax cuts to juice up a lagging economy make a lot of sense, the amount of tax revenue the feds bring in also will be a bigger issue -- especially if the Chinese and world financial institutions grow leery of continuing to loan money to finance American spending. Can the government afford to both bail out financial giants and take the big hit to its own revenues that would come from, say, eliminating the alternative minimum tax, as Sen. McCain proposes? Or are the government's needs for money now just too great? Either way, the next president's path on taxes is getting more complicated.

Instead of spending billions on a national health care system or anything else, we'll need to have a debate on the role of government in the economy:

The mega question -- what is the role of the U.S. government in the nation's economy? -- isn't just on the table, but at the center of the table. The next administration will have to decide not just what financial firms the government ought to own and run, but how heavy the government's hand should be. These are questions the country faced in the Great Depression, and to a lesser extent during the savings-and-loan crisis of the 1980s, but they are back with exclamation points, and will be dumped in the lap of the new president.

Whoever the next President is must accept that much of his agenda will need to be set aside to deal with these questions, as unprepared as they are to deal with them.

Energy and the Candidates

Before there was a financial crisis, there was an energy crisis. It was essential that candidates pour forth ideas on energy, because to not have an energy "plan" meant you "didn't care."

And, as we know, there's nothing worse than a candidate who doesn't care.

Unfortunately, according to one analysis, the candidates put more work into producing plans than the thought in them. The American magazine lambasts both for producing ideas that are "inconsistent with economic reality" to put it nicely.

Among the "Worst Energy Ideas of 2008" according to The American are:

1. Energy Independence - the notion that we should strive to end any foreign trade when it comes to energy (because to trade means you are dependent on your trading partner).

2. Use It or Lose It - the notion that energy / oil companies should waste their resources drilling on current leases where they don't think there's a lot of oil and gas before asking for leases on the properties where they DO believe it to be.

3. Disguised Subsidies - called "market based payments," we're still talking about spending tens of billions of dollars to subsidize technologies that aren't commercially feasible despite the high costs of energy.

4. Green jobs - this sounds nice, but in operation is "a laundry list of new ways the government can give money to various constituents. It attempts to fix multiple problems at once, but would likely fix very little."

This article is a shorter version of a think piece put out by The American's publisher, the American Enterprise Institute (AEI). A more complete analysis is here. The bottom line on both candidates' position is labeled, unfortunately, "Incoherent At Best."

Perhaps the most interesting part of that paper isn't its look at the various policies offered by the candidates and how they contradict themselves, but rather how they came to do it:
While both candidates showed signs of having coherent energy policies at the beginning of their campaigns, the pandering as Election Day nears has produced incoherent platforms that signify a deep lack of seriousness.
In short, they started making sense, but political "realities" (or the perception thereof) caused them to change course, offering ideas that made little sense in light of their previous positions. At the end of the political season, then, here's where we are:
If there is a dominant pattern in the energy platforms of the Obama and McCain campaigns, it is one of profound lack of serious thought, rampant confusion, and transparent pandering. Each candidate now has a fistful of mutually contradictory goals: reducing GHG emissions while expanding fossil fuel production, opposing subsidies except when they are supporting subsidies, embracing energy sources they caveat to death, and wanting to reduce energy use while lowering prices.
Recall Senator Obama once talked about renegotiating NAFTA, only to retreat, blaming his earlier statement on the heat of the campaign. When our system of electing leaders causes them to move from sensible positions to insensible positions, something is seriously broken.

Thursday, September 18, 2008

McCain and Earmarks

One of Senator McCain's chief rallying cries is his strong opposition to earmarks. Accordingly, I thought it might be useful to discuss what earmarks are and why we should support a President who wants to reduce or even eliminate them.

First, what an earmark actually is depends largely on who you ask. But, generally, they are restrictions placed by Congress on spending that, in essence, steers money towards a particular project.

Earmarks are not necessarily bad. They can be worthy and non wasteful. Many, however, are likely wasteful - wasteful earmarks are what we refer to when we talk about "pork barrel" spending. And earmarks are more likely to be wasteful than if they were spent through a competitive bidding or grant process conducted by the executive branch civil servants because they are awarded based on political pressure rather than merit.

A better way to think of an earmark than the formal definitions offered by government agencies such the Government Accountability Office and the Office of Management and Budget is to recall our civics 101. After all, Congress has the "power of the purse" but to what detail? $1 billion for national defense is pretty clearly not an earmark. $27,430 for construction of a parking lot at a DoD facility in Fort Worth clearly is. Note that the former is an end - the latter a means.

In short, my own definition of an earmark is the appropriation of funds that specifies the means by which a legitimate government purpose shall be executed (or something like this).

Congress should decide that government should do, and the executive branch should decide the methods. For example, Congress should decided to spend taxpayer money to cure cancer, but the contracts and grants should be made by the executive branch. This is because of their institutional capacities. Congress has the political legitimacy to decide how much to spend and on what ends, and the executive branch has the expertise and disinterestedness to make sure that the money goes to the best suited entities who can perform the research rather than those with the most political power.

An earmark, then, is a violation of this principle. It directs money specifically, sometimes in such a manner that there can only be one recipient.

An earmark in a bill itself is the law of the land, and the President must abide it. Most earmarks though appear in a committee report, however,and are just Congressional "wishes" that an agency feels pressure to comply with (given that it would like more money from Congress in the future). Legally, though, such wishes can be ignored. President Bush directed agencies to ignore such earmarks, which is wise (although he's really late to the party and only started doing so after Congress changed hands to the Democrats).

Yesterday's Politico has a story about how Senator McCain may find eliminating earmarks difficult. The thrust is that even Republican members would revolt if McCain tried to take away what lawmakers call "legislatively directed spending." What it omits however is that these warnings come almost exclusively from members of the Appropriations Committees rather than rank and file members. It's those members who would have the most to lose politically if earmarks were curtialed.

I'd note that even though Senator McCain has been the biggest critic of earmarks, it was Republicans who turned everyday earmarks into the Christmas in Washington the system has become. Democrats came into power in 2006, taking Control of Congress and promisong to fix this, but they quickly changed their tune once elected, so this is a bi-partisan disgrace.

To the degree that the next President can reduce the amount of federal dollars spend pursuant to earmarks or "directed spending," the better.

Wednesday, September 17, 2008

Happy Constitution Day!

Today is the 221st anniversary of the signing of the Constitution.

Happy Constitution Day!

In celebration, take the Constitution Day quiz here.

Also, please visit the website of the National Constitution Center, which is a wonderful place to visit if you're in the Philadelphia area.

The Line in the Sand...

apparently just got wiped out by the tide.

Yesterday, Treasury Secretary Hank Paulson was gaining kudos for his refusal to bail out Lehman Brothers. He had drawn a "line in the sand" and we'd all be better off for Treasury's "tough love":
All summer, U.S. Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke talked about "moral hazard." Firms need to be careful, they said, because the government is not going to come to the rescue of just anybody.
But then came Bear Stearns, and Fannie and Freddie:

But in March, the Federal Reserve swept in with a $30 billion credit line to help JP Morgan Chase scoop up Bear Stearns. And just a week ago, the Treasury announced it was spending billions to take over Fannie Mae and Freddie Mac.

Observers, such as Former Fed Chair Alan Greenspan, who cautioned that Washington was getting too close to viewing the Fed as "a magical piggy bank," wondered if Paulson and Bernanke had the stomach to let a big bank fail.

Seems they do.

As one EPSN football analyst likes to say: Not So Fast My Friend.

Today, we learn that the Fed has bailed out insurance titan AIG:

The U.S. government seized control of American International Group Inc. -- one of the world's biggest insurers -- in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.

Congratulations. As an American taxpayer, you now own an insurance firm.

Here's the Economist's take:
They may have had no choice. Markets did not completely fall apart after Lehman’s bankruptcy, as some had feared, but they were highly agitated...Officials worried that the collapse of AIG, with its $1 trillion balance sheet and operations in 130 countries, could send the financial system into a tailspin....The AIG bailout shows how hard it is for America’s financial authorities to steer a straight course through a crisis that is piling one systemic threat onto another.
Former Labor Secretary Robert Reich (Clinton) captures the political irony:
Ironically, a free-market-loving Republican administration is presiding over the most ambitious intrusion of government into the market in almost anyone's memory. But to what end? Bailouts, subsidies, and government insurance won't help Wall Street because the Street's fundamental problem isn't lack of capital. It's lack of trust.
Meanwhile, amidst the noise, comes some clear thinking from the New York Sun:
The Treasury Department and the Federal Reserve don't appear to be operating under any clear principles as they go about seizing or saving companies or refusing to...What has become clear is that Mr. Paulson's decision suddenly to seize Fannie Mae and Freddie Mac without so much as a shareholder vote or even a clear capital crisis hasn't exactly inspired confidence in the rest of the financial sector. Rather than stopping the trouble, it spread it, so that Lehman Brothers failed, AIG cratered, and Merrill Lynch ceased to be independently viable.
The Sun goes on to note the imbalance that now exists in the insurance marketplace:
But what does it mean for the rest of the insurance industry that the federal government may now own 80% of AIG? If you are Geico or Aflac or New York Life, how are you supposed to compete with a company that has the power of Uncle Sam behind it?
And finally, after all we've heard about moral hazard (the risk that a bailout will cause others to act without regard to risk thinking, they too, will be bailed out:
And what is the message sent about other big companies in the financial services industry that AIG has qualified as too big to fail? Then the other financial giants such as Citigroup, JPMorgan Chase, and Bank of America almost certainly fall into that category and now become implicitly federally backstopped institutions in their own right.
The Sun is asking the right questions at least. Someone at Treasury had better have good answers.

Tuesday, September 16, 2008

The Candidates and Wall Street

With Wall Street in disarray after the bankruptcy of one giant and the takeovers of two others, the two candidates for President are struggling to reassure voters that they have the magic solution.

The good news is that neither has argued that the government should have stepped in to save Lehman Brothers. Although that may cause some short term pain, it's a road that can only lead to worse things if large firms decide that there's not a price to be paid for failure in the marketplace.

While Politico has this topic as their "Arena" question (where they ask their slate of experts for their thoughts), there's not likely to much useful to be found there as most respondents aren't economists or financial experts.
I thought it might be useful to link to some more interesting perspectives:

Here's First Trust's Brian Wesbury:
The US is moving through its deepest set of financial market difficulties since the 1980s and 1990s, during the banking and S&L crisis. The key thing to remember here is that the emphasis belongs on the word financial. These financial market problems are not a result of widespread economic weakness, otherwise known as a recession.

An international perspective from the London Times:

By deciding essentially to wipe out shareholders in Fannie Mae and Freddie Mac and acting even more harshly to the shareholders of Lehman Brothers this weekend, Mr Paulson has sent the clearest possible message to investors around the world: do not buy shares in any bank or insurance company that could, under any conceivable circumstances, run short of capital and need to ask for government help; if this happens, the shareholders will be obliterated and will not be allowed to participate in any potential gains should the bank later recover.

Here's Paul Krugman, who's always worth reading on technical economic issues even if his political commentary is off kilter:

Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain... The real answer to the current problem would, of course, have been to take preventive action before we reached this point. Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?
There are many, many more perspectives being offered. A good roundup is at Real Clear Markets, sister site to Real Clear Politics.

Sunday, September 14, 2008

What Makes A Great President?

Doris Kearns Godwin, author of two highly regarded studies of the Lincoln and Roosevelt administrations, offers 10 personality traits of great presidents based on her life time study of Presidents, beginning with her working with LBJ.

They include:

1. The Courage To Stay Strong: "A President needs the ability to withstand adversity and motivate himself in the face of frustration."

2. Enough self confidence to surround yourself with first rate people: "Good leadership requires you to surround yourself with people of diverse perspectives who can disagree with you without fear of retaliation."

3. The ability to learn from mistakes: "To lead successfully, you must be willing to acknowledge and learn from your mistakes."

4. A willingness to change: "Conditions change, and Presidents must respond."

5. Management skills (what she calls emotional intelligence): "A President must encourage his closest advisers to give their best and remain loyal."

6. Self control: "Great leaders manage their emotions and remain calm in the midst of trouble."

7. A popular touch: "The best Presidents have an intuitive awareness of public sentiment, a sense of when to wait and when to lead."

8. A moral compass: "Only strong leaders have the courage and integrity to follow their convictions when the risk of losing popular support is great."

9. A capacity to relax: "FDR held a White House cocktail hour every evening. Its cardinal rule: Nothing was to be said of politics or war... Lincoln possessed a life-affirming sense of humor and a legendary ability to tell long, winding tales"

10. A gift for inspiring others: "One of the key qualities of a great President is his ability to communicate national goals to the people and to educate and shape public opinion."

You can read about these attributes in more details and with examples from Lincoln and Roosevelt in her article.

A New Twist On Income Ineqaulity

One of the biggest condondrums for a politician is how to deal with a problem when the reality and the public's perception don't fully mesh. Income inequality is arguably one of these types of problems. Even if its not, is inequality a problem in and out itself? Perhaps its only a problem when the economy is stagnant?

When I first went to work on Capitol Hill, I read Robert Samuelson's The Good Life and Its Discontents and it influenced my thinking heavily on this very problem about reality vs. perceptions in economic policy.

Published in 1995, it addressed the question of why there was so much discontent with things in America at a time when we had never been so prosperous as measured by traditional economic yard sticks (athough now out of print, it can still be had for a song through
Amazon's Z-shops).

The most important lesson from the book that I learned was that there was a large gap between reality and perception in many important areas of public policy, particularly economics. We could feel like we weren't doing well even though, in fact, by all traditional indicators we had never been doing better. Of course, this isn't to say we shouldn't feel the way that we do. Merely that how we feel about our economic situation can't always be explained in wholly rational terms.

For instance, in his review, economist-turned-NY Times Rock Star Columnist Paul Krugman noted:
The spectacular growth in inequality is given barely two pages, while a 15-page chapter is devoted to what Samuelson regards as excessive demands for equality. Rising poverty and homelessness are mentioned largely to question whether things are as bad as they seem in the statistics; the huge rise in poverty among children (a rise that is partly obscured in the overall poverty statistics by the decline in the number of elderly poor) goes unmentioned.
In his other writings, Krugman has made a similar point: equality is an essential part of happiness. To him, people are happier if they're like everyone else in their neighborhood than they are if they became better off than they had been, but their neighbors' prosperity exceeded theirs. So, the name of the game for the past couple decades hasn't been actual life quality per se, but inequality, which is widely acknowledged to be growing (with disagreement as to the causes).

Or has it? Perhaps, again, it depends on your yardstick.

A new study posits that we've only been looking at one half of the equation - income - without considering what's happening in terms of costs. While the things the wealthy have purchased (generally serves) have increased in price, the things lower income Americans purchase (commodities) have fallen:
high-wage households spend a greater share of their income on services and a smaller share on “non-durable” items, such as food, clothing, footwear and toiletries. For most of the past three decades, the price of non-durable goods has been falling relative to the price of the service —investment advice, personal care, domestic help and so on—that the rich spend more of their money on. If these differences between the inflation rates faced by the rich and the poor are taken into account, the rise in inequality is reduced and may even vanish.
Once again, things aren't as bad as they seem.


Stay tuned.

Of course, none of this addresses the government's responsibility to remedy what some might call an uneven distribution of income and others might label an uneven earning of income. What is that responsibility and how do we rememdy this?