Monthly Archives: October 2011

Consumer Deleveraging Is A Good Thing

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Americans’ Debt Cutting Hampers Growth – WSJ.com.

Jon Hilsenrath and Ruth Simon of the WSJ echo and fortify what David Brooks was saying in The New York Times last week: three years after the start of the global financial downturn, Americans are starting to liquidate their consumer debt, down 8.6% in over the past 38 months. Any fiscal conservative would take that as good news: the people of the United States have taken a small but important step toward becoming a nation of savers and investors again.

But for some reason, the article (starting with the headline) seems to take a negative view of the trend:

Credit squeeze

Consumers are starting to squeeze back. Wall Street is not happy. (Image by alancleaver_2000 via Flickr)

The national belt-tightening, known as deleveraging, comes as the U.S. economy struggles to fend off a double-dip recession. Paying off bills slows consumer spending on appliances, travel and a slew of other products and services. Home sales, the engine of past economic recoveries, remain depressed.

This is all true,  no doubt, and a lot of us are revisiting our Keynesian roots these days. But short-term pain is better than long-term pain. The sooner American consumers learn to live within their means and stop competing with enterprises for increasingly tight credit, the faster we can begin to rebuild an economy that need not rely on financial manias to drive prosperity.

What is more, it is still an exaggeration to say that Americans as a whole have rediscovered the virtue of thrift. Much of the “de-leveraging” is the result of credit default. It will take some time before we can really judge the extent to which behaviors have changed for the better, or whether Americans will return to their spendthrift ways just as soon as they think they can afford it.

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Innovation and Regulation

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Google Executive Chairman Eric Schmidt (Image via CrunchBase)

Crovitz: Google Speaks Truth to Power – WSJ.com.

An interesting column by L. Gordon Crovitz at The Wall Street Journal, wherein the writer suggests that the “growing regulatory state” has reached such proportions that even an Obama supporter like Google executive chairman Eric Schmidt has to rail against it in public.

“Regulation prohibits real innovation, because the regulation essentially defines a path to follow,” Mr. Schmidt said. This “by definition has a bias to the current outcome, because it’s a path for the current outcome.”

Leave aside for the moment the irony implicit in a WSJ editorial that defends Google, a sworn enemy of News Corporation in the battle over who owns online information. Schmidt is right: regulation prohibits innovation.

What we have discovered, however, is that there are places in the economy where we want innovation (the Internet, technology, energy, etc.), there are sectors where it must be regulated for the sake of public welfare (healthcare, aviation, architecture, agriculture etc.) and there are places in the economy where innovation can be a four-letter word (finance and  lobbying leap to mind.)

And we have learned the hard way that monopolies can be bad. Theodore Roosevelt spent much of his career fighting the market and political power of trusts. As long ago as that effort took place, I am certain we do not want to revisit that battle.

Thus the point Mr. Crovitz seems to miss is that all regulation is not created equal. The failure of the political dialogue in this country is rooted in our increasing reliance on Paleolithic mantras like “Capitalism Bad!” “Regulation Bad!” or “China Bad!” It is frustrating to see this kind of thinking on protest signs, but it is inexplicable that it would be coming from an educated wordsmith like Mr. Crovitz or a talented executive like Mr. Schmidt.

Politicians will always attempt to curry favor with their constituencies by putting reins on industries and phenomena that they do not understand, and by extension scare them. Trying to fight bad demagoguery with worse demagoguery is self-defeating. The smart thing to do is to expose one’s detractors as demagogues and raise the level of the debate.

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Fix Infrastructure – But Not With Blank Checks

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Repairing infrastructure can help repair economy – The Washington Post.

Barry Ritholtz, author of Bailout Nation and finance blog The Big Picture offers his list of infrastructure projects that the U.S. needs to undertake in order to ensure our future competitiveness.

While he draws some of his data from a report by The American Society of Civil Engineers (which, apart from being a professional association, is also a lobbying organization with a political point to make), Ritholtz is correct when he notes:

We still enjoy the benefits of the interstate highway system, which allows goods to be moved cheaply around the nation. Innovations at NASA led to many new products and industries, including innovations in the semiconductor, satellite and mobile computing sectors. And DARPAnet? You might recognize that as today’s Internet. All three are massive economic wealth generators, filling a role that is too long term and too expensive for the private sector. [Emphasis mine]

Ritholtz makes an essential point. Whatever the virtues of the private sector, long-term vision and a willingness to make investments of this nature are not among them. Nor should they be. Some infrastructure and research needs to be government-driven, or it simply would not happen, to the detriment of us all.

What we should not do, however, is write checks for infrastructure projects without thinking through the process and oversight first. The nation has plenty of money to spend on roads, ports, the grid, and future-oriented research, but it does not have a single penny to waste. As important as infrastructure reconstruction is to this country, a massive project of this nature can all to easily turn into a morass of waste, inefficiency, corruption, and worse.

History has proven that organizations both public and private will, if left to their own devices, become bogs of lousy performance, especially when the taxpayer is paying the bill. We need to stop trusting both businesses and bureaucracies to do things right: we need to build performance standards into every contract, and painful penalties for failure to perform.

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Returning Finance to the Service of Capitalism

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As we confront the systemic malfunctions that have led first to the Global Financial Crisis and now to the popular reaction of Occupy Wall Street (OWS), conservatives need to step away from our unqualified endorsement of markets and recognize that there are times where markets create perversity and contradiction that harm society. The answer is neither to consign capitalism to the waste basket nor leave the problem to correct itself, but to fix the chunk that is broken. Martin Wolf, the respected economist who serves as associate editor at the Financial Times (nobody’s idea of a lefty rag, pink paper notwithstanding) noted in an editorial from early 2009:

Among the possible outcomes of this shock are: massive and prolonged fiscal deficits in countries with large external deficits, as they try to sustain demand; a prolonged world recession; a brutal adjustment of the global balance of payments; a collapse of the dollar; soaring inflation; and a resort to protectionism. The transformation will surely go deepest in the financial sector itself. The proposition that sophisticated modern finance was able to transfer risk to those best able to manage it has failed. The paradigm is, instead, that risk has been transferred to those least able to understand it. As Mr Volcker remarked during a speech last April: “Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the marketplace.”

The heart of the problem the economy faces is a financial system that, like a nuclear reaction freed from containment, has spun out of control. In this case, the proper reaction is to restore the core to a newer, better containment vessel, allowing it to give of heat but ensuring that it is never again allowed to spew damage and destruction across the face of the American and global system.

We do not like regulation very much: every conservative and most Americans nurture a tiny libertarian within. Our economy, however, was not meant to be the playground of Austrian-school theorists. The price of civilization is the judicious, careful surrender of a degree of liberty in return for the benefits of living in a society that allows us each the freedom to find our own level. The alternative is chaos that places liberty at risk.

The financial sector has been allowed its unshackled freedom, and in Paul Volcker‘s words, has failed the marketplace. The time has come to return the beast to the bridle, allowing it to resume its rightful role serving the nation and the aspirations of all, rather than serving itself and the desires of a handful of oligarchs.

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The Other Movement

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The Great Restoration – NYTimes.com.

In a thought-provoking editorial, David Brooks suggests that while the Wall Street Occupiers make visceral the widespread disgust with the worst excesses of the past three decades, other Americans are conducting their own quieter but equally significant movement. Americans, he says, are returning to a set of values that would have resonated more strongly with our grandparents, but that are deeply relevant in the face of “the new normal.”

More Americans are returning to a lifestyle where they spend within their means, where they admire those whose rewards are commensurate with their effort or contribution, and where loyalty matters once again.

This is encouraging, but it must be seen for what it is: a good start. As Dennis Prager notes in a speech from 2008 (regrettably seated next to Governor Palin), the greatest danger the nation faces is that we have stopped teaching the principles and values that form the foundation of our American civilization.

It is time we all start to recall what we believe those principles are, debating them if necessary. Is that not a more important debate than what happened in Las Vegas last night?

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A Note on our Sources

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While conservatives, we here at The Pacific Bull Moose do not hesitate, in the words of author Richard Bach, to “quote the Truth wherever we find it.” No individual or group in American politics or economics, right, left, or center, enjoys a monopoly on insight, on solutions, or on good ideas. What we are obliged to do, however, is to measure those insights, solutions, and ideas against our heritage and experience, and to chart a measured but determined path to a better future. What is more, we believe that the pollination of ideas across both sides of a political fence often reveals heretofore undiscovered common ground.

For that reason, here at the Pacific Bull Moose we are as happy quoting Mother Jones, Prospect, or Rolling Stone as we are quoting Commentary, The Economist, or The American Conservative when making our points. Indeed, we have found it essential to draw on such diverse sources as we attempt to forge a new, forward-looking path for conservatives and for the nation.

If we quote from a source, however, do not take that to mean we wholeheartedly support everything written in that article, by that author, or on the publication in question. The state of our political dialog in the United States is such that gems of insight must often be pried from the rock face of an ideological polemic. We will always endeavor to do so with full respect to context, but we would rather err on the side of including an insight than leaving it aside.

America, after all, needs all the good thinking it can get.

Beyond “Moderates”

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In a passage that hints at why we have started The Pacific Bull Moose, co-editor Paul Starr of The American Prospect makes what I think is an astute observation about conservative side of America’s political spectrum.

The Republicans, in contrast, have virtually cleansed themselves of moderates and are poised to move the country sharply to the right if they win the 2012 election. The source of the party’s shift is a mysterious death that may be the single most important contemporary political development—the demise of the moderate Republican in national politics.

He is correct, of course, and that leaves the American right captured by extremists – a situation we at the Moose abhor and are endeavoring to rectify.

Part of the problem, I fear, is diction. The term “Moderate” implies a lack of passion for anything in particular, and a wavering commitment to a set of beliefs. Another diction problem is that the left has grabbed the term “progressive” and made off with it, turning it into a Frankenstein of their own such that the phrase “progressive conservative” seems an oxymoron.

We are going to try to rectify that, in part by waking the ghosts of Theodore Roosevelt, Hiram Johnson, Earl Warren, and other progressive conservatives of the past, but more critically by articulating a belief system that has too long lain dormant in the American body politic. It is possible to be conservative and yet believe passionately that many things need to be changed. Indeed, if it were ever possible, it is possible today.

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Bloomberg to Bankers: Hush Up and Take It

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Bankers’ Objections to Volcker Rule Fail on the Merits: View – Bloomberg.

For a company that makes a substantial portion of its revenues from the banking and finance industry, Bloomberg and its editors have taken a courageous and principled stand with this editorial. This is welcome proof that there are indeed those in and around southern Manhattan who have retained a balanced view of government regulation.

Gratuitous regulation on any industry – especially in a global economy – risks a loss of some degree of competitiveness. But to see all regulation of industry as equally bad (the less regulation, the better) or equally good (the more regulation, the better) is to substitute Doo-doo economics for common sense. If corporations are to exist as legal entities in a democracy, they, like people,  must be subject to such limitations on their freedom of action so as to ensure the actions taken for their own benefit do not damage others.

The principle we should use to judge whether regulation is excessive is to ask whether a statute or administrative rule deprives a company of a fair reward in return for the risk taken when taking into account all costs involved, both public and private. Federally-insured banks have their risk absorbed by the American public. Their rewards should be limited accordingly. We use the same principle with public utilities: in return for a monopoly, returns are limited in the form of rate controls. Private risk, private benefit. Public risk, public benefit.

This is pure common sense. As opposed to, say, self-interested rhetoric.

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Joseph Stiglitz on Capitalist Fools

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As long as we are putting corporate American under the microscope (with a view toward fixing it, not tearing it down), we may as well take a look at some of the other viruses plaguing the institution of the joint-stock company. One such institution, suggests Nobel Laureate Joseph E. Stiglitz, is the stock option:

Stock options have been defended as providing healthy incentives toward good management, but in fact they are “incentive pay” in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.

This is not the sort of thing, I would imagine, that is compelling the Occupy Wall Streeters to set up their tents. But as we grope toward a series of polices that will kill the maladies afflicting our institutions, this is one that could use some attention.

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David Brooks Sees Our Problem

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The Lost Decade? – NYTimes.com.

I don’t always agree with David Brooks, and in particular he and I part ways when it comes to his somewhat superficial understanding of China. I agree with him more often than not, however, and I can forgive him his ignorance of China if he will forgive me my similarly thin understanding of New York.

In what was possibly one of his best editorials yet, Brooks was motivated by the prospect of a “disastrous double-dip recession” to call out both Republicans and Democrats for their singular failures and, to borrow a phrase from Star Trek II: The Wrath of Khan, their “two-dimensional thinking.”

The prognosis for the next few years is bad with a chance of worse. And the economic conditions are not even the scary part. The scary part is the political class’s inability to think about the economy in a realistic way.

He really gets to the heart of the matter a few grafs further down when he notes:

Yet the ideologues who dominate the political conversation are unable to think in holistic, emergent ways. They pick out the one factor that best conforms to their preformed prejudices and, like blind men grabbing a piece of the elephant, they persuade themselves they understand the whole thing.

It is a balanced, intelligent essay, and one that should be read, digested, and internalized by everyone who cares about the future of the United States.

Bravo, David.