The Obama presidency will be shaped in many ways by how it spends this stimulus. I am sure he will articulate the right goals. But if the means — the price signals, conditions and standards — that he imposes on his stimulus are not as creative, bold and tough as his goals, it will all be for naught. In sum, our kids will remember the Obama stimulus as either the burden of their lifetime or the investment of their lifetime. Let’s hope it’s the latter.
I think Tom Friedman understates matters here (which is unusual for him). Aside from some unexpected crisis (which of course is likely), Barack Obama’s presidency will not merely be “shaped” by how it spends this stimulus – but it’s historical significance will be determined by how it spends it. As David Brooks reccomended last week, channeling David Porter of Harvard Business School: “do nothing in the short term that doesn’t serve a long-term goal.”
Health care. Green energy. Energy infrastructure. Transportation infrastructure. Education. Barack Obama has laid out clear goals in all of these areas except the latter.
A crisis is always a time of opportunity – for mischief or ill gains if used exploitively; for needed reform if used wisely. Coming into office, Barack Obama will have more opportunity than any president – I would argue – in history. What Obama is able to accomplish with this opportunity will be his legacy.
[digg-reddit-me]Jon Stewart pointed out against last night how non-constructive the political debate regarding the bailout of the Big Three Automakers has been:
Clearly, politicians are applying a double standard. But I think the hypocrisy is worse than Stewart suggests – because the product financial companies are supposed to be creating is profit with the risks associated thoroughly managed and quantified. Their product has proved to be far more defective than the cars produced by the Big Three, as the financial products have not just malfunctioned, but acted as a virus spreading the failures around to everyone.
Stewart previously pointed out how the first story regarding the bailout of the Big Three focused almost exclusively on the method of transportation used by the CEOs of the auto companies to get to hearing instead of any substantive issues. The real controversy has barely been discussed:
Corporations, whose primary purpose is to amass wealth by any means available for their owners (and who always manage to simultaneously amass wealth for the managers) cannot be trusted with public money. There is no public purpose to such profit-making. The public value of a corporation comes from it’s incidental activities – the means by which it is able to amass it’s profits. By bailing out General Motors, the government would be giving it’s money away for no public purpose. But the government does serve a public purpose by keeping General Motors’ factories churning out cars – by keeping people employed, by providing stability, by keeping the economy going and producing usable items.
Within that distinction lies the difference between outrageous abuse of taxpayer funds and a valid public purpose. The more difficult question is how to avoid the abuse while serving the purpose. [edited slightly from my original]
Which is why I think a bailout should be postponed – to attempt to find the least worst of all the options – rather than to cause great problems with hasty solutions. If the automakers won’t survive without an instant cash infusion though, the government needs to step in one way or another.
1. Transporting Americans is and should be one of the most important functions our government must address. And because we are facing a massive economic, energy and environmental crisis, the new president and Congress must do what Franklin Roosevelt did when he was faced with a crisis (and ordered the auto industry to stop building cars and instead build tanks and planes): The Big 3 are, from this point forward, to build only cars that are not primarily dependent on oil and, more importantly to build trains, buses, subways and light rail (a corresponding public works project across the country will build the rail lines and tracks). This will not only save jobs, but create millions of new ones.
2. You could buy ALL the common shares of stock in General Motors for less than $3 billion. Why should we give GM $18 billion or $25 billion or anything? Take the money and buy the company! (You’re going to demand collateral anyway if you give them the “loan,” and because we know they will default on that loan, you’re going to own the company in the end as it is. So why wait? Just buy them out now.)
3. None of us want government officials running a car company, but there are some very smart transportation geniuses who could be hired to do this. We need a Marshall Plan to switch us off oil-dependent vehicles and get us into the 21st century.
Moore’s solution seems like what was done with the railroad industry in the 1970s – when it was taken over by the government, revamped, and then privatized again. I think Moore’s almost got it right. But not quite. Moore’s solution seems very 20th century – like India’s Five Year Plans or other centralized, government-sponsored attempts to solve large problems. Instead, I think Moore could take a lesson from Nassim Nicholas Taleb, the philosopher, economist, and former hedge fund manager who has been explaining the underlying weakness of our financial markets since he made a killing in the 1987 crash. Taleb understands that if you put a bunch of geniuses in charge, you might get something great. But as he points out, the truly game-changing developments happen by accident. The computer, lasers, the internet – all of these innovations have accidentally changed the world in a way that could not be anticipated. He refers to this type of game-changing development as a Black Swan.
And a Black Swan is exactly what Michael Moore, Barack Obama, and the rest of us know we need to jump start the green energy industry. The best way to catch a Black Swan in Taleb’s parlance is to tinker.
In that spirit I propose to create a government-affiliated entity, the Detroit Investment Group (DIG). ((Dig.gov is not being used by any government agency at the moment.)) DIG would be a modern-day government intervention in the market that would take inspiration from the Tennessee Valley Authority (especially it’s regional focus), the Manhattan Project (it’s think tank aspect), NASA’s moon shot (in the specificity of it’s goal and it’s timeline), and the Department of Defense (in how it creates incentives for inventors to create new technologies with the promise of contracts.)
Government intervention is necessary as the marketplace has failed to invest in the long-term development of green energy. This tendency of the market to focus on short-term profits over long-term projects has certainly been revealed to be a significant flaw in our current economic structure, as, for one common example, corporate managers seek instant profits which lead to huge bonuses and leave before the long-term effects of their actions hit. Not knowing how to fix this tendency to focus exclusively on the short-term, a government agency can create incentives within the market to focus on long-term issues that are essential to our nation’s security and stability. This would be the purpose of DIG – to supplement the market rather than to impose it’s own hierarchical structure.
DIG would be given goals and rules rather than a typical bureaucratic organization. It’s goals would:
To spur the creation of new green technologies and a green energy industry in America; and
To rejuvenate Detroit and the surrounding areas.
To accomplish both of these goals, DIG would make Detroit the place to go for green industry – the way Silicon Valley is for computer technology. DIG would not have a specific method of encouraging green industry – but would use an infusion of cash and people to tinker and innovate and generate solutions. It would need quite a number of tools to spur this growth and innovation:
It would need the authority:
To offer government contracts to license green technologies or buy green products;
To sponsor a think tank of top experts in various fields to come up with technologies;
To offer prizes for creating products that meet certain benchmarks or accomplish certain ancillary goals;
To have input into a cap-and-trade program not managed by DIG;
To buy companies with worthwhile technologies or resources (including General Motors for example) and continue to operate them.
The point is – DIG would try everything. It’s task would not be to follow certain procedures, but to achieve it’s goals. It would be structured in such a way as to create market incentives and to centralize planning – on two alternate tracks – and let each influence the other. If this problem is fixable, then DIG would unleash the money and human resources to find the fix – and it would be agnostic about the ideology of it’s solution.
Here’s a look at some different time periods the number of days the S&P 500 has moved up or down more than 5% during the trading day:
1950-2000: 27 days
2000-2006: 7 days
Jan. 1-Sept. 30, 2008: 20 days
Since Oct. 1, 2008: 22 days
This data suggests a follow-up:
Is the real economy moving that much faster just this past year? or
Are financial markets responding to new data that much faster? or
Are the financial markets untethered from the real economy?
I don’t know that anyone knows the real answer yet.
[digg-reddit-me]As in the financial crisis generally, the executive branch, the media, and the Congress have all focused on the corporations whose brands are at stake rather than the people affected. This is understandable. Stalin’s famous aphorism that a million deaths are merely a statistic, while a single death is a tragedy, can be adapted to economic hardship as well. A million bankruptcies by individuals are a mere statistics, while the bankruptcy of a famous brand such as Chrysler or Citibank is a tragedy, affecting each of our lives – as signs come down, commercials stop airing, and the products and services we receive now have a different branding.
But saving a brand name should never be the business of our government. In a government intervention into the market, a brand name might be saved – but this should never be a policy goal. Yet, this is precisely the manner in which this question is presented to the public: Should the government bail out Citibank? Or Chrysler? Or Starbucks? Framed in this manner, the answer should always be, “No.”
The real issue concerns the proper role of government in a market economy.
In this crisis, the issue of how involved the government should be in the economy has largely been resolved. “Do nothing,” doesn’t seem to be a realistic option in the midst of a crisis. In times of panic, we are all Keynesians. The unwinding after the crisis promises to re-ignite a fight about the proper role of government in the economy.
The real issue at the moment then, is the follow-up question: how to balance market forces and stability in a market economy – and specifically, in the midst of this crisis. Mitt Romney, in a New York Times editorial that proved especially influential, made the case for why our current system can effectively deal with the bankruptcies of the Big Three Automakers. Paul Krugman took what has become the consensus liberal view: if only we weren’t already in a credit crisis, bankruptcy would be a good option.
For the past year, this has been the argument – with the same people sometimes switching sides depending on the particular company. Capitalism inevitably involves creative destruction – but in the midst of a crisis of confidence, any destruction becomes seen as potentially catastrophic, as the collapse of Lehman Brothers demonstrated.
But government intervention should avoid saving corporations. The government should, when it intervenes in the market, strive to change the forces at work rather than to inject money into corporations themselves.
Corporations, whose primary purpose is to amass wealth by any means available for their owners, and who always manage to simultaneously amass wealth for the managers, cannot be trusted with public money. There is no public purpose to such profit-making. The public value of a corporation comes from it’s incidental activities – the means by which it is able to amass it’s profits. By bailing out General Motors, the government would be giving it’s money away for no public purpose. But the government does serve a public purpose by keeping General Motors’ factories churning out cars.
Within that distinction lies the difference between outrageous abuse of taxpayer funds and a valid public purpose. The more difficult question is how to avoid the abuse while serving the purpose.
The Bush administration has failed to do this – which is why there is fresh outrage at every million dollar junket by AIG executives or private jet ride by auto executives.
Al Gore, in his book, Assault on Reason, described a media and political focus on “gotcha” journalism, on gaffes, on irrelevancies and personal scandals, on the Freak Show – rather than a focus on long-term issues, on character, and on principles as one of the major factors that has led to our current crises. “News” coverage is dominated by questions of whether this or that politician has a mistress (he probably does) or whether this or that entertainer is secretly going out with this or that sports star. Our news has become tabloid.
If, as the drafters of our Constitution believed, a well-informed citizenry is essential to the proper functioning of any nation, then our nation clearly cannot be functioning properly.
This lack of good information, this focus on the trivial over the significant, was evident when the CEOs of Ford, Chrysler, and General Motors went to Washington to beg for handouts. As Jon Stewart sagely observed in a pox-on-all-your-houses bit:
Unable to understand the actual problem, Congress seizes on tangential details for grandstanding purposes.
[Cue tape of various Congressmen expressing various types of outrage in semi-novel ways regarding the fact that each CEO flew to Washington in a separate private jet.]
The media coverage did manage to convey a few things:
All these big shot CEOs travel by private jet.
The Big Three automakers support, directly and indirectly, some 2.5 million American jobs.
These American car companies made a big mistake by focusing on gas-guzzlers on the assumption that oil prices would remain low indefinitely.
Everything else was clouded in some confusion – not all of which is the media’s fault. Many economists asserted that they would normally want the government to avoid bailing out these automakers, but in this economy, believed the government must act. Some opinion-makers blamed the automakers troubles primarily on union-negotiated legacy costs – on the various deferred wages and other forms of deferred compensation the automakers entered into contracts to provide. But what seemed lacking from either the Congressional hearings or the media coverage was any serious and sustained attention to the problems themselves.
Alex Tabarrokat Marginal Revolution points out the downside to wind power at those times when “the market value of the power is zero or negative.” He points out a story of how wind farmers in Texas were actually paying the council in Texas that regulates the electric grid to take their electricity so that they would be eligible for tax credits.
Certainly this is ridiculous – but I don’t think the only conclusion to take from this is that we need nuclear power plants. Tabarrok acknowledges that the reason the market value of power is so long in certain locations is the poor state of our energy infrastructure – which loses a large amount of energy that is transported over long distances. He writes that nuclear plants would be as clean as and less expensive than “costly and inefficient transport networks.”
But he doesn’t deal with the issue of nuclear waste – which makes nuclear power far from clean. He doesn’t discuss – and you can see why as this is just a short blog post – the positives of having a more flexible energy infrastructure.
Whether nuclear is the only feasible option comes down to two questions Tabarrok doesn’t address:
What is the cost of upgrading our energy infrastructure?
This New York Times piece by Matthew L. Wald doesn’t make it seem as if the problem requires new technology as much as an upgrade of a very old system: “The basic problem is that many transmission lines, and the connections between them, are simply too small for the amount of power companies would like to squeeze through them. The difficulty is most acute for long-distance transmission, but shows up at times even over distances of a few hundred miles.”
Do you have a long-term strategy for dealing with the radioactive pollution generated by nuclear reactors?
To date, I don’t think there are any good solutions to this.
A third question might concern the safety of nuclear power plants. But I think this threat – whether of a meltdown due to terrorism or error – is largely overstated.
[digg-reddit-me]Think calmly and well, upon this whole subject. Nothing valuable can be lost by taking time. If there be an object to hurry any of you, in hot haste, to a step which you would never take deliberately, that object will be frustrated by taking time; but no good object can be frustrated by it.
In a time of crisis, sometimes, much can be lost in the time required for due reflection. But not often. And much more often, hasty decisions lead to unanticipated side effects, often worsening the original condition. Our current media environment punishes daily the patience Lincoln counsels – and rewards the patience, if ever, only on occasion. This has been the case at least since Bill Clinton, as every prominent political figure is forced to respond to scandal after scandal – and in the midst of this, the bigger picture was lost. John McCain’s and Hillary Clinton’s campaign got lost amidst their daily attempt to win the media war and quash brewing scandals. Barack Obama managed to stand apart from the daily grind. He kept his campaign’s course amidst the tumult. This wasn’t always to his benefit – as it led him to take too long to address the Reverend Wright scandal for example- but in the end, his response worked more effectively than a day-to-day attempt to distract and quash the story would have.
This patience and deliberation is Obama’s strength. Now, he must maintain it while he manages his transition and in his administration.
I’ve been hearing that the Detroit bailout won’t be able to pass in this lame duck session of Congress. I hope this is true – because I think a smart rescue plan for Detroit will work better than the current proposal for a hasty bailout. We need to ensure that this bill doesn’t succeed just because – as George Will pointed out – it follows “the supreme law of the land…the principle of concentrated benefits and dispersed costs.”
Yet at the same time, I am not quite as cavalier as many others who have suggested we let these companies simply fail. It may be just – but it is not prudent in this financial climate. In a just world, certainly, Lehman Brothers would have failed – but if it were prudently preserved, this financial crisis may not have been precipitated. Can we risk letting these companies fail now? I don’t believe we can, so we need some kind of rescue plan.
But this rescue plan should be crafted to avoid the exact moral hazard that accompanies any help to an ailing industry. The plan should be punitive towards the management of these companies. It should not prop up the companies directly. My thought is that Obama could propose some Tennessee Valley Authority type project for Detroit – in which the government could offer contracts for green industry jobs in the area – specifically attempting to utilize many of the structures and factories and workers in the area. They should allow any company to apply for these contracts – and structure it in such a way that they could attempt to buy up the necessary facilities after applying.
The goal of this legislation should not be to prop up General Motors, Chrysler, and Ford – but to rejuvenate the car industry in the area and to utilize as much of the infrastructure and employees already built in the area.
This legislation will not be able to be crafted and debated in the next week. This will need a new Congress and a new president.
There are many troublesome paths that can be taken here. To choose the least bad will require patience and deliberation. Which is why this matter must wait until after January 20th.
Mint.com’s blog has a handy visual guide to the financial crisis on a recent entry. I just discovered Mint.com a few days ago – and I’ve enjoyed using the site itself to keep track of my personal finances. I especially like the nice pie graphs they make to track your spending.
Here’s why I don’t think we’re entering another Great Depression.
First, my understanding of the Great Depression is that it was – in essence – a crisis in the financial markets caused widespread fear and panic unchecked by the government. And as people lost faith in the financial system, it led to a paralysis of the entire economic system. The problem was not as much in the “real economy” – the economy whose primary purpose is to create products and services for uses other than creating profit – but in the financial economy – the part of the economy whose primary purpose is to redistribute excess wealth to create profits. The Great Depression was also worsed by the physical calamaties that hit America at the same time – most especially the Dust Bowl which devestated America’s farming belt – but at it’s core, the Great Depression was a matter of a broken financial system.
Since that time, a few factors have changed financial markets:
there has been a dramatic increase in liquidity, as money is able to be transferred almost instantaneously anywhere in the world;
the entire financial system has become remarkably interdependent and interconnected – so much so that the failure of one relatively small company directly effects most of the world’s financial institutions;
enormous amounts of data are collected and analyzed about the economies of the world and each particular company – including often by the companies themselves;
an implicit government guarantee backs large portions of the financial system.
The first three items on that list seem to demand a corollary to the Feiler Faster Thesis – promoted by Mickey Kaus – which explained how “political trends that used to last for weeks now last for hours.” This thesis was used recently to explain in part why Barack Obama’s and Hillary Clinton’s big moments in the campaign never seemed to give them any momentum – or more precisely why their momentum in the press and in public polls lasted for days rather than weeks as political reporters had come to expect. The corollary related to the current financial situation would be that as players in financial markets are bombarded with increasing amounts of data and are able to make trades and move money faster, the markets themselves speed up. This helps explain the dramatic ups and downs of Wall Street in the past few months – as the indices swung from positive to negative and back to positive in an unprecedented manner. The Feiler Faster thesis also could be said to have speeded up the real economy – as computerized inventory, logistical innovations, and more precise estimates of needed supplies have made many retailers and suppliers more responsive to economic conditions. But it seems clear that though these effects have speeded up the real economy at the margins, the financial markets have begun to move exponentially faster. The Great Depression – which lasted for over a decade – could be considerably shortened by this speeding up of the financial markets relative to the real economy – and to the extent that the effect of this volatility in the financial markets on the real economy could be mitigated, the results of this crisis would be minimized. The crisis will and already has effected the real economy – but so far, while the financial markets have fallen almost 30% from their relatively stable position in August, the real economy has only marginally slowed down.
The final item on the list should also give hope to those who fear we are entering another Great Depression. Unlike in 1929, we have a government willing to act and experiment in order to jumpstart the economy. And we will soon have a government led by Barack Obama that is more pragmatic and less ideological in proposing solutions. At the same time, various national and internationals reforms instituted by governments to protect against the kind of instability that caused the Great Depression have proved their worth in the past few months – as deposit insurance, regulation, coordination between central banks, a social safety net, and prompt government action have all contributed to mitigate the crisis.
Right now, the various governments’ decisions to act as a backstop against financial instability have helped begin to rationalize the markets – and prevented fear from entirely dominating. It has been argued that if Lehman Brothers had not been allowed to fail, this fear and sense of distrust pervading the financial markets could have been contained. Of course, few would have predicted the collapse of Lehman Brothers would have such a cascading effect – except now, after the fact, as it seems obvious.
It seems likely to me that the next Great Depression will likely be catalyzed not by a market collapse – but by the collapse of a nation, especially America. As long as governments are willing to place themselves as backstops against financial instability, the markets will go up and down – but the system will hold. It may be reformed. It may evolve. But the key characteristic of the Great Depression was the hoarding of financial resources caused by a lack of trust in the market. As long as the market is able to be backed by the government, it cannot truly fail – unless the government goes first. The paradox is that a government is only as strong as it’s economy is – which brings us back to trust.
Of course, as an alternative to all this – one might propose an effective tax on hoarding, inspired by the Austrian town of Worgl’s actions during the Great Depression – perhaps with exemptions for the first $100,000 of savings per person so as not to discourage saving.
[T]he next few years aren’t shaping up to be an especially promising time to be a governor. A governor presiding over an economic boom can cut taxes while increasing spending, and thus develop a reputation as a popular can-do pragmatist. Think of George W. Bush, George Voinovich, Christie Todd Whitman, and other classics of the 1990s…[R]ight now [Jindal]’s looking at the need to cut $1 billion in spending. Not his fault (though the decision to make up the budget shortfall with a mix of 100% service cuts and 0% tax cuts reflects the intellectually and morally bankrupt nature of contemporary conservatism) any more than the “free money for everyone” governors of the nineties were really geniuses, but it’s going to make it difficult for him to rack up the sort of Record Of Accomplishments that you’re usually looking for in a presidential candidate.
