Monthly Archives: March 2009

Big Spender or Economic Reformer?

Originally published on March 5, 2009 at care2.com

 

In the midst of this economic downturn, the president has proposed a budget that gives further definition to his vision for American progress.  In some ways it may not be the best time to propose something new, as many people, shocked by financial insecurity and instability, investment and pension losses, and business and job distress feel the need to hunker down and survive, rather than experiment and take risks.

On the other hand, the government is stirred to take significant steps to repair a major crisis, and while thinking big, there is opportunity to take bold action.  That, I think, can be said of President Obama’s political vision.  The question is, what kind of action is it?

Probably the most sensitive issue at the present time, is the issue of government spending.  Americans are mistrustful of congress’ ability to spend responsibly and are deeply concerned with the deficit.  How should Obama’s grand, if evolving, plan be looked at from this perspective? 

Is he the big-spending liberal, willing to meet any “progressive” goal with tax-payer dollars, giving only secondary consideration to the harm to the economy of tax increases, redistribution of wealth, and deficit spending? 

If we turn to conservatives for an answer, we hear the harsh critique of a socialist redistribution of wealth.

Even moderates, such as David Brooks, find the size and target of the fiscal stimulus legislation and budget proposal too big and too progressive, while expressly embracing parts of the program such as education.

If we ask liberals, they may very well see an increase in public spending on education, health care, and alternative energy that bespeaks progressive values, liberal causes and Democratic agenda.

I disagree.  Mr. Obama is a financial reformer, using public funds as necessary to do what government truly needs to do, but intent on cutting waste, corruption, and mismanagement out of the workings of government?

The main thrust of the vision is still investment in parts of the economy that need repair:  a struggling education system that is needed to produce a work force on which our prosperity will be based; an inefficient health care system that uses too much of our national budget, is a drag on our businesses large and small (unless like Walmart did they force these costs on private individuals and on state tax-payers when private citizens use public resources) and is too expensive for too many to afford; and energy that is imported at great cost to our economy and national security.  These are issues of fundamental importance to our economic prosperity, our business climate, our capitalist system.

Couldn’t we call what Obama is doing long-range economic reform? 

It might even make a good Republican agenda, as they are rooting around for one. 

Let us not quarrel with the targets of public spending as they are, in fact, economically productive and necessary.  Let us not quarrel with the amount of funds because they are realistic and necessary.  Let us organize and fight for the right use of these funds so that every dollar engenders in our children the philanthropic, creative, entrepreneurial and leadership qualities of business and civic leaders like Bill Gates, Steve Jobs, Warren Buffet and Colin Powell. Let’s make sure our businesses and citizens can afford economical health care benefits, and our citizens receive worthy care, and let us, using the scientific and entrepreneurial genius among us, develop alternative energy or at least efficient energy that is home grown, as clean as is reasonably possible, and marketable to the world.

Is that liberal?  Really?

President Obama’s First 50 Days

Originally published on March 11, 2009, at http://www.care2.com

 

 

The first 50 days of the Obama Presidency have seen a flurry of major legislative activity, historic signing ceremonies, substantial policy speeches and high-stakes politics. In fact, “hit the ground running” doesn’t do it justice, as the President began giving press conferences about his economic plans — sensing the markets were collapsing into the vacuum — in the days leading up to his inauguration.

When Barack Obama was sworn in January 20, 2009, the financial crisis had already engulfed the global economy and given direction to his presidency. The celebrations of the 232 year-old democracy, of its first African American President, and of the orderly and ceremonial transition of authority were quickly consigned to history. Mr. Obama made clear that he believed the current crisis to be a historic one, and that he intended to put the considerable financial resources of the American government in play to stabilize the financial system, support the economy, and aid citizens in need.

That said, what has been astonishing, in reviewing Mr. Obama’s first 50 days, is the speed, force and size of the President’s early efforts. While an assessment should also mention stumblings on high-level appointments and near unanimous Republican opposition to the President’s legislative agenda, this pales in comparison with the scale of Mr. Obama’s accomplishments:

January 20 — In his inaugural address, Mr. Obama pressured congress to put stimulus legislation on his desk in record time.
February 17 — The resulting 787 billion dollar American Recovery and Reinvestment Act contained no congressional earmarks, per the President’s request, yet provides for more than five hundred billion dollars in government spending and hundreds of billions in tax cuts and support of state programs.
February 26 — The administration introduced an annual budget dramatically shifting federal spending priorities towards education, health and energy policies and launched health care reform with 600+ billion in funding.
By executive action the President has raised ethics, transparency, and lobbying standards, begun new policies on treatment of enemy combatants, and ended restrictions on stem cell research funding.
March 10 — As if he wanted to start of the next 50-day sprint off with a bang, the President called for sweeping changes in education.

Elements of Power

Beyond the honeymoon authority of all incoming presidents, Obama’s substantial power results from several factors; the chief among them undoubtedly is the economic crisis. Fed. Bank Chair Ben Bernanke, a scholar of The Great Depression has opined that the U.S. government’s initial failure to act was a contributing cause of the Depression’s depth and length. Bernanke and Former Treasury Secretary Henry Paulson saw in the credit freeze of late 2008 the potential that the cyclical downturn, compounded by financial collapse, could lead to a much larger protracted economic crisis without government intervention.

Persuaded by this analysis, President Obama came into office prepared to act. Mr. Obama never campaigned for shifting economic power to the public sector or achieving reform of health care in record time. But neither did he display timidity. His ambition and soaring rhetoric bespeak a desire for bold action and significant achievement.

The overwhelming congressional Democratic victory in November offered Mr. Obama a crucial legislative base. Roughly 58% of both houses of Congress are aligned with the President and a few Republican moderates have been willing to work with the Democrats, thwarting the impediment of a filibuster in the Senate.

Also increasing the President’s power is the fact that he has the Federal Reserve, Treasury and economic advisers, an unrivaled economic analysis powerhouse, close at hand on issues that are highly complex and fluid. Congress, too, has hearings and testimony by experts, and the press has access, but this is no match for the President’s daily meetings with advisors. Some Congressional and press deference is likely the result.

Conversely, this may, in part, be responsible for the nearly unanimous opposition by congressional Republicans. As the recent and much derided Republican response by Louisiana Governor Jindal revealed, Republican positions are based on conservative theory, but do not show in-depth analysis of current conditions.

Another important factor is that Mr. Obama has chosen powerful and experienced professionals for his foreign policy team. Secretaries Clinton and Gates and Diplomats Richard Holbrooke and George Mitchell bring star stature, sober experience, and appropriate diplomatic skill sets to the foreign policy agenda. Secretary Clinton has already held discussions on North Korean and Iranian nuclear disarmament, yet the President has not been called away from his efforts on the domestic agenda.

Finally, polling has given Mr. Obama approval ratings above 60%. While presidents are not beholden to pubic opinion polls, positive approval ratings do support presidential authority. Journalists get out a president’s message far more effectively when approval is up and focus more on opposition to the president when approval is down. The cumulative result is an administration engaged with experts and open to contrary advice, but with great power to advance the President’s agenda.

Bailout Protests Take a Page from History

Originally published on March 5, 2009, at politicsunlocked.com

 

The memory of the Boston Tea Party was revived last week as Americans in more than thirty cities gathered to protest financial and automobile bailouts, record-breaking stimulus spending, and Democratic leadership in general. Street demonstrations like this are something new, as far as the financial crisis is concerned: both the current and the former president’s actions have inspired anger and mistrust among some, but until now, that dissatisfaction had registered mainly in polls, man-on-the-street interviews, and letters to Congressional offices.

Now, though, a more visible movement appears to be underway. Beginning with calls during Januaryfor a mass-mailing of teabags to government leaders, and later with a series of small public protests around the United States in February and scheduled through at least July 4 of this year, organizersare channeling frustration and fear into protest.

The original Boston Tea Party, in 1773, was an action against British colonial authority over the American colonists. Colonists rejected British control of trade and taxes and argued that taxation without parliamentary representation was unlawful. In protest, colonists dumped a substantial quantity of highly valuable British tea into the harbor. The event angered the crown and united colonists in solidarity against perceived injustice of the crown’s authority.

Current anger over the burden of taxation and fears about the squandering of public funds have made the Tea Party an apt reference point for present-day protest organizers. A group called the Political Exploration and Awareness Committee PAC appears to have played a central role in scheduling and promoting the recent spate of tea parties. The group, whose website was initially full of laudatory references to CNBC correspondent Rick Santelli, has since clarified that Santelli has nothing to do with the site or movement, though their sentiments seem to be aligned. (Santelli was lately made famous for his February 19th on-air tirade about the bailout plan, in which he exhorted a Chicago trading floor, “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.”)

The tea mail-in campaign hasn’t netted extensive news coverage, but a number of the recent protests have gotten write-ups — particularly the larger gatherings, like the crowd of about three hundred that congregated in Atlanta last Friday. Several journalists and bloggers have called into question the grassroots authenticity of the protests, alleging that they may have been financed, organized, and publicized, to an unknowable extent, by professional conservative advocacy groups or corporate interests with ties to same.

There is another tea-bag mailing scheduled for April 1.

Ponzi Scheme or Free Market?

Originally published on March 3, 2009, at politicsunlocked.com

A pyramid scheme or “Ponzi scheme” (named after legendary swindler Charles Ponzi) is the name given to a bit of financial trickery in which early investors are rewarded with big returns from money put in by later investors. The promise of big returns lures more and more people to keep adding to the pot, until the public is spooked, the market for funds tapped, or the game shut down by authorities. At that point, the later contributors, who greatly outnumber the early participants thanks to publicity and word of mouth (hence “pyramid”), are left empty-handed, as the funds have already been paid out to the first investors who generated buzz and paid off the scheme’s instigators.

Stock market

Compare this with the stock market, where investors bid against other investors for shares in companies. The more people are willing to pay for shares of a company, the higher the price, according to supply and demand. The company uses the investment funds as capital to finance their operations, and successful businesses reward stockholders with dividends, higher share prices, or simply confidence that the business will grow and the stock will increase in value. In a successful business, even if shareholders abandon the stock, one could retain shares — albeit with little value — until a later time where the stock might again come into favor.

Real estate

Real estate is similar in that people purchase land at a price based on supply and demand. The price goes up if many people want to buy and are willing to pay more in order to have what’s being sold. Price goes down when there is less demand, but if you own the land, you really own it and it has some value as a home or as land to be developed.

Added leverage

Unfortunately, it’s not that simple. In recent years, stock prices have gone up so fast, and real estate values have increased so much, that many people wanted to invest even after they had no more money to invest. But interest rates were lower than the profit they believed they could make, so they borrowed money and invested it in stock and real estate. This is called leveraging, and it’s perfectly legal: borrow money, buy stock or real estate, sell stock or real estate, pay back interest, keep the profit.

An individual who had ten thousand dollars to invest might borrow another ten or twenty or hundred thousand and invest the total. If they doubled their money in a year, they would have sixty thousand dollars, minus the thousand they had to pay in interest to borrow the funds for one year. Institutions did this with millions of dollars; one million to invest might be added to ten million or thirty million borrowed.

Then something happened. Was it the price of oil sucking the profits out of companies large and small? Was the limit of leverage as everyone willing to borrow heavily to invest had already done so and there were no more people lining up to play the game? Was it fear of the growing deficit (2006), the flailing war effort in Iraq (2007), or the pending presidential election exacerbating tension and uncertainty (2008)? Risks went up and the expectation of reward fell. The real estate market slowed; the stock market topped.

People began to sell, to take their profits.

Prices started to fall, and economic clouds darkened. People who borrowed money to invest were still paying interest. They had to make the calculation. Was the fast run-up in prices going to continue? Would a gradual gain in prices outpace the cost of the funds that they borrowed? Was it worth the risk? The answer was likely “no.”

“Deleveraging”

As prices fell, the stock and real estate prices fell below the purchase price for many investors. Now they were taking a loss on their borrowed funds. Paying back the bank became more difficult. Banks started to find that the risk of default was going up.

Ponzi scheme or free market? The bank’s fault or the investors? Where is all this going?

These days, financial experts are looking for the bottom. At what point is the speculation gone, the deleveraging complete, and the more authentic supply and demand for productive use of land and capital remaining?

Public v. Private: Which part of “of the people, by the people, for the people” don’t you get?

Originally published on February 26, 2009, at care2.com

 

Thomas Jefferson -- photo by chadh, licensed creative commons

Thomas Jefferson -- photo by chadh, licensed creative commons

If it were possible to take a step back from the current focus on the economic crisis with its financial breakdown, housing glut, contracting commerce, growing unemployment, and menacing deficits, we could make out an even broader political picture:  the failure of the me-only private vision of civic life and its replacement by a public-private partnership of sound leadership.

Take the four areas that President Obama has now committed to reform:  finance, education, energy and health care.  In each area, those whose political philosophy is that public vision is necessarily faulty, and private interest is all, have pushed and pulled their version of reform through the Republican Revolution of 1994, talk-radio over-simplification, and anti-government rhetoric.  This is not to say that Republicans, per se, embrace a private-only solution to reform, as they don’t, but many who have sought to gut the government and replace all regulation and public funding with self-interest and free-markets have done so at least masquerading as conservatives.

In the financial arena, faith was placed in the market to regulate itself.  Instead, short-term self-interest led too many to take fatal risks requiring government bailout to protect the larger economy.

In public education, anti-government vision led to stripping schools of resources, spurring many who could afford it to choose private schools with outstanding resources and leaving others to suffer emaciated public education.

Our energy system allowed the market to dictate the most economically efficient energy despite the consequent flow of money to nations who act against our national interests.  Short- and long-term environmental costs associated with self-interested energy choices were shifted to the public from the private sector.

Finally, health care expenditures press business and family budgets and leave many under-served, yet there is resistance to public supervision of the health care system, where industry money influences elections and portrays government action as the problem, despite huge inefficiencies in the current system.

Critics of the new president’s budget and priorities attack the plan as “big government.”  This is nonsense.  Limited regulation, adequate funding for education, and limited macro-management of sectors of the economy with strategic and economic national importance are not big government but good government. Calling spending “socialism” because it increases the budget is pure political rhetoric. We need to balance the budget, but we need education as well.  Good government provides oversight, restricts harmful actions, and promotes positive ones.

There are, of course, inefficiencies in the system.  President Obama has in no way acted to protect and preserve government waste.  Improvements are also part of good government.  But the fact that members of the government, whose philosophy was “hands off,” failed to regulate the financial sector, is hardly an indictment of the ability of Americans to benefit from government of the people, by the people, for the people.  Good public leadership and judgment has tremendous potential, not to take over for private action, but to guide private enterprise to serve democratically determined purposes and to fill the vacuum created in public decision-making by those seeking to gut, rather than reform government.