The main critique I have of the Obama Administration thus far is one that has been noted by many but which I believe has led him to embrace some seriously flawed policy positions: the advisors who most shape his policy are better at winning campaigns than actually governing and that his policies both foreign and domestic have generally reflected self-serving political calculation over advancing the economic, social and strategic goals of the nation as a whole. In my opinion it seems that the short-term political fortunes of a man who is temporarily occupying the Oval Office and his political allies in Congress have trumped the long-term interests of all Americans in living in a country that is defined by personal freedom, economic prosperity and international security. In my opinion, the result of having an Administration whose governance embodies a permanent-campaign weltanschauung is that politically inconvenient facts that can be glossed over when crafting a 90 second sound bite for use in a campaign debate are ignored, to the country's detriment, when charting the course of actual policy, where such realities become crucially important. What is politically popular and possible to implement, say, in a law passed by a partisan Congress must ultimately bow to the costs and benefits of the legislation in reality, and those who ignore that fact do so at their own peril. Nobody likes the sad fact that some fraction of society has always lived in poverty, but in retrospect you would be hard pressed to find someone who would not foresee the failure of LBJ's Great Society with the benefit of hindsight.

In his speech tonight where he pledged, albeit with some small hedges, to increase troop strength in Afghanistan to take the fight to the Taliban and Al Qaeda and strengthen our alliances both with the barely nominally legitimate government in Kabul as well as the much more geopolitically important regime in Islamabad. By committing more troops to "the good war" in Afghanistan at long last he finally seemed to embrace a policy that comes with no obvious political benefit, and which embodies the fact that sometimes there is no guarantee that a problem that faces our nation is soluble, let alone easily soluble. Presidents must sometimes stake themselves to positions that are fraught with risk of failure, are politically unpopular, and yet represent the best, most viable policy option to take. Until tonight I had not seen Obama tread this obviously much more perilous road, even though both domestically and politically he has had opportunities to tackle problems head on and instead has deferred to politically easy "solutions" that will create problems for the country down the road.

I do not believe that this steely resolve to deal with the facts, no matter how unpleasant they may be has been present much, if at all, previously on the signature domestic and foreign policy challenges his Administration has tackled. Briefly consider, for example, how he has handled his signature domestic issue: reforming health-care policy. It has long been a dream of those in his political base to implement some form of nationalized health-care, or something functional identical, that guarantees health-care as part of the safety net offered to all American citizens--or all American residents, to some. It would seem obvious to anybody in the "reality based community" that extending care to millions of new people who don't get it now regardless of their ability to pay for it must necessarily come at some large societal cost, and that a frank discussion of what that cost will be and how we will pay it would be necessary to responsibly implement such a reform. Be it by decreasing the quality or nature of care generally, increasing the cost that most middle class people pay for that care either directly through higher premiums or indirectly through lower take-home wages or higher taxes, rationing non-emergent care, or some combination of all of the above, a realistic appraisal of the situation would admit that some cost will be borne. Instead, Obama took a hands off approach towards creating what he hoped would be a defining achievement by promising what a man as intelligent as he must have known could not realistically be possible: anybody who had care they liked would be able to keep it, we'd pay for the millions of new people whose health-care would be subsidized solely from cutting out inefficiencies in the current system, and that we'd do all this without increasing the deficit. Basically, we'd get something for nothing in a way no other country does--other countries pay doctors less, have rationing of all sorts of elective procedures, sometimes do not have the latest and most expensive treatments for certain afflictions available for all patients. When you're on the campaign trail promising a painless increase in health-care access to those who currently fall through the cracks is popular and can be relatively harmless if you don't tie yourself to a specific policy; actually promising to implement a policy that is essentially a free lunch--we'll expand health-care access but in a way that doesn't change anything if you like your current set-up and is deficit neutral--is reckless negligence since there is obviously some promise that will not be kept.

Similarly on foreign policy Obama has translated campaign slogans into an incoherent set of policies that are guided by domestic political impulses, seemingly, rather than a cogent geopolitical strategy to advance American interests. Presidential visits to foreign countries have largely come to be an opportunity for highly public, self-flagellating contrition, a belated apologia for George Bush's foreign policy decisions whose diplomatic purpose is unclear at best: no powerful country's history is pretty, and Obama is both not responsible for Bush's decisions and his election represents the fact that the American people had come to reject Bush and his approach to foreign policy. This has meant that he has given speeches whose intended audiences might have thought portended policy changes that were not actually forthcoming. These were political apologies for domestic consumption, a fact that might have been lost, for instance, on Arabs who were initially wowed by the debonair, young, worldly President but who have now become impatient as his initially contrite words have not been mirrored by substantive changes in U.S. policy on Israel. Contrition towards Latin America for Yanqui imperialism, from Monroe to Bush II, apparently, might have pleased the MoveOn.org crowd but it has also emboldened Hugo Chavez and his disciples to no clear benefit to the U.S. Campaign promise rhetoric to support human rights here and abroad has resulted in spite-your-face domestic policies like very publicly rehashing America's unsavory interrogation methods like waterboarding, which again serve no clear purpose in advancing America's interests, while the two most clear cases of human rights violations in Obama's Administration ran afoul of political and pragmatic needs of the Administration. In China there was the need not to alienate our biggest creditor and most disturbingly the political need not to commit a Bush era taboo by demonizing Iran meant the President sat mute even while the Ayatollah's goons cracked skulls to rig an election.

So it was refreshing, after Obama's months-long deliberation over Afghanistan, for him to finally take a policy stance that will not be politically popular that seems basically motivated by embracing the best policy after weighing, realistically, the costs, benefits and interests that our nation prioritizes. Finally, here, is a break with his governing-as-campaign school of decision making. Committing to any policy decision in either direction in Afghanistan would seem to mean running aground his administration on some politically unfavorable island, but he made the correct decision nonetheless, even though it was the more politically toxic policy in the short-term as it angers his anti-war base and puts young Americans in harm's way in what could be a failed campaign.

Going forward with the recommendations from his military advisors and his centrist campaign rhetoric that the Afghan war was "the good war" and that additional troops should be deployed there will anger his progressive supporters--especially since President Obama faces a much more dire and deadly situation for American troops in Afghanistan than Candidate Obama. Taking the suggestions of people frankly less familiar with the situation on the ground than others like Generals McChrystal and Patraeus giving counsel to double down, exemplified by Joe Biden who suggested we might remove our ground troops and fight the Taliban and Al Qaeda essentially remotely, e.g. with drones and cruise missiles, seems like it would have been a completely unworkable strategy. While it might have been temporarily popular for bringing the troops home and certainly would have been sweet nectar to the anti-war left, it almost certainly would have failed so utterly in advancing American strategic interests that all but the most doctrinaire pacifists would eventually have been horrified: think of the ineffectiveness of the Clinton era campaign in the Balkans, except where the target was not Slobodan Milosevic but Osama bin Laden.

Finally, it seems, even though it came with some hedging in the form of a tentative timeline for withdrawal and a politically motivated statement that our troops would very likely start coming home in less than two years, Obama made a decision in the foreign policy realm that is unlike those he has taken on domestic policy. The key difference is that he has stepped up to the plate when none of the options were obviously or immediately good, a situation that the Administration seems to believe exists distressingly little of the time. At home he has not only passed up making hard decisions that would address problems that existed before he took office (wrangling with burgeoning Federal debt) but supported policies that would create new problems that will be kicked down the line to be addressed by some future President who will "inherit" an untenable imbalance of insufficient revenue to fund new growth in entitlement obligations and market distortions (ObamaCare and increased power for unions.) As I outlined above I believe that thus far his foreign policy has been similarly averse to tackling real, difficult problems that offer limited political benefit but has rather been limited to ineffective and largely rhetorical gestures that seem to function mainly as counterpoints to the Bush Administration as opposed to decisions that genuinely advance the U.S.'s interests.

Here, though, as Obama himself said, the status quo on the ground in Afghanistan is not tenable--not just politically, but in fact, regarding American strategic interests to beat back Islamic extremism in those places where it might take a safe haven to attack the U.S. again or to undermine a critical, hugely populous, nuclear-armed ally that faces a radical fringe that threatens to undermine its democratic government, such as it is. Obama's outlining of what our interests are, what the costs will be, and what is reasonably attainable with the military resources we have and can dedicate to this conflict was a perfectly rational way to arrive at the conclusion that the status quo of piecemeal deterioration of our counter-insurgency mission in Afghanistan was fine, and frankly I have been astounded that this sort of frank, empirically guided decision making has been so utterly lacking in other spheres, where decisions have been taken for doctrinaire and partisan reasons.

The War on Terror is more important than health-care reform, and I am glad that President Obama has taken a rational approach to Afghanistan that was not guided by what will appease his base. That said, the current health-care reform bills could be hugely destructive and why such a frank accounting of unsustainable consequences, and a reasonable counterbalancing of costs and benefits is not so forthcoming. I think it's too late to hope for Obama to change course on health-care (although it's not too late to reasonably hope that a bill will not pass) and while I still think that drastically reducing Congressional Democrats power would be a very good thing for the country, as 9 painful years of experience have shown that political monopolization of the executive and legislative branches by either party is awful, Obama's Afghanistan policy is, essentially, the correct one.

Labels: obama, politics, war

When the popular narrative of our 44th President coalesces, it will no doubt start with the following: President Obama "inherited" the worst financial crisis since the Great Depression from President Bush and that much of the increase in Federal spending that ensued was an attempt to inject capital into the economy to jump-start economic growth. What even happens in reality has yet to unfold, let alone how it will be remembered in the public consciousness, and issues like whether the stimulus was a Keynesian policy (let alone whether it was a good decision or if the stimulus funds were spent wisely) or whether it was justified by newer theories of economics, like those that emphasize the importance of irrational behavior of market participants, emphasizing how our "Animal Spirits" can function to impel us foolishly towards the cliff, en masse. While I quibble with the idea that anyone who undertakes the arduous, lifelong project of becoming a successful politician and then knowingly seeks and wins every phase of an arduous, nearly two year process to become President can "inherit" anything, and I would argue that no single person or even a single President was responsible for the economic crisis, one thing that seems certain is that Obama will be judged largely for how he fixes the economy, both in terms of spurring it to recovery and in preventing such "bubbles" from rocking the foundations of our economy ever again.

Americans are a fickle bunch, as evidenced by the fact that they seem to blame or credit Presidents for macroeconomic events that often had little or nothing to do with their fiscal policies (did Herbert Hoover cause the Depression in his 10 months in office before the market crashed? Did Bill Clinton cause the internet to cause a massive expansion in productivity and wealth? Did George W. Bush cause investors to overestimate just how productive and wealthy the internet would make us?) They also give answers to pollsters that at best would be described as confused, if not indicative of societal cognitive dissonance: 63% of Americans like the idea of expanding health-care to those who can't afford it, but only 28% are willing to pay higher taxes to achieve that goal. It may be what the polls say is wanted, but it is not a very brave or prudent policy stance to say that you favor free lunches, unfortunately.

That seems to be what we are being promised, however. Engaging in fraudulent "creative accounting" to deceive the public into thinking your organization is fiscally solvent when it's not or running an elaborate, long-term billion dollar Ponzi scheme are infuriating crimes when done by corporate types like the guys at Enron or Bernie Madoff, but apparently they are an acceptable way to attempt to buy votes when they are done by elected officials in Washington. Giving the very high quality medical care received by most Americans who have health insurance to the millions of people who currently only get health-care when they are so sick they have to go the emergency room will be very, very costly. The numbers given to the public about what that cost will be are huge, but even still are almost certainly underestimates of the actual cost, both because if an accurate, objective assessment of the cost was given the bill would die but also if you look historically at Medicare and Medicaid, long-term estimates of those costs were off by nearly an order of magnitude. As I mentioned, the government has created several Ponzi schemes, namely Medicare and Social Security: a relatively small payroll tax on the relatively small number of workers under 65 cannot pay for even a fraction of the costly health benefits and direct cash payments to all of the elderly now, let alone as the demographics change so that the ratio of elderly to working age people shrinks and the elderly live longer and collect more and more in benefits. This is absurd, and anyone who knows the key variables--the amount we owe, what we take in, the number of projected workers and retirees-- would recognize that it's a Ponzi scheme and the only question is when did people who continue to participate in the system turn from the winners who got in on the Ponzi scheme early to the pigeons who don't get back anything they pay. I certainly have no expectation that the money that comes out of my paycheck for Social Security or Medicare is money that is being set aside for me somewhere that I will someday see again and anyone my age who believes that is a fool.

And "creative accounting," I mean, jeez, we're told this is "deficit neutral" even though a key feature of the first ten years of the programs is that the taxes run for all 10 years but the benefits only start after 4 years. Despite having all of the general qualities of these other massively indebted social programs that are huge, failing Ponzi schemes we're supposed to believe this thing won't add a dime to the debt. So much of what the Government does now that has been developed as the Federal Government grew exponentially in the 20th Century is to function as a sort of the world's most massive charity that gives out cash to promote specific social goals and the interests of small but politically influential groups, except its "donors" don't give by choice, they can't choose how much they give and they can go to jail if they don't pay what they're told.

And for some time we got away with it. Aside from a one year respite in the Clinton Administration we've accumulated debt continuously since the Roosevelt Administration due to bipartisan,non-stop government social engineering and vote buying. This "charity" likes policies that are politically popular in their results (Social Security recipients like getting checks) but doesn't like paying for the stuff it gives away (those recipients would dislike cuts in the size of their checks and workers would dislike a payroll tax hike.) It was a looming problem, but economic growth kept pace, give or take, with entitlement spending and debt growth and meant that while our debt was getting bigger our creditworthiness was never really becoming more questionable. Things have changed, quickly.

Debt as a fraction of annual GDP stayed under 2/3, and generally was much lower, from when we were still paying down all those WWII war bonds in the early 1950s until last year. Now we're on pace to go to over 100% before Obama leaves office. It's unprecedented and staggering to comprehend the magnitude of the change. At the start of the 90s the debt was a little more than $3 trillion, total. A dozen years later in 2002 debt had doubled to $6 trillion. By the time Obama took office, in the midst of the financial crisis, at the start of 2009 another doubling had taken place this time in less than 7 years as debt had climbed to about $12 trillion. By the end of Obama's first term we'll hit 100% of GDP at $16.5 trillion and by the end of the Obama's second term or the first term of the next President debt is projected to be somewhere at or above $20 trillion.

A lot of the deficit spending that took place during and immediately after the period of chaotic financial instability when huge Wall Street firms were flaming out, being bailed out or having shotgun weddings to keep from going under was meant to prevent an economic meltdown (Bush's TARP) and to inject capital into the broader economy to try to insulate main street from the massive beating Wall street had just taken (Obama's stimulus). As time has gone on, despite an unprecedented, very destabilizing amount of debt, a good enough reason for deficit spending has been watered down from making sure the economy doesn't implode to making sure Americans don't have to deal with the consequences of the bad fundamentals in the economy to just generally pursuing liberal social and political goals. The consequences of the recession would be painful: the big three auto makers and other inefficient companies would go out of business and those people would have to try to find new jobs, just like the people who are being laid off from companies that are downsizing to try to cut costs. The government seems intent on not allowing permanent reallocation of capital to more productive uses (in other words to let the market figure out if renewable energy is actually a profitable thing for Americans to spend their time working on in the 21st century, and if not, what is) since it will be painful for those who lose their jobs and more importantly it would be politically unpopular.

We've essentially nationalized two unprofitable buggy-whip auto manufacturers, we provided a subsidy to those companies and consumers by hastening people's decision to buy cars with "Cash for Clunkers", and now we're trying to offer palliative care to make sure nobody suffers adverse consequences from a disaster with seemingly interminable unemployment benefits, Obamacare and changing the rules so Big Labor can make unions bigger. And we also want to pay for "green jobs" the market didn't demand and increase the cost of energy for environmental reasons. The plan to terraform Mars will be unveiled any day.

There's a problem or two, though. (Surprising.) A seemingly completely political obedient Federal Reserve, as opposed to acting independent of political goals and serving as a guardian of the strength of the U.S.'s currency, is irresponsibly both printing huge sums of money and keeping its lending rates rates very, very low, seemingly at a level that will keep market interest rates artificially low, apparently thinking it will know exactly when to flip off the switch on the printing press when there's just enough dollars chasing just enough goods. What are we doing? A few very shallow economic indicators look positive, with the Dow now back over 10,000 and GDP growth having gone positive in the 3rd quarter. But virtually all that GDP growth was due to increased productivity of people who were already employed, as businesses trimmed the fat and got more output from less labor as they fired presumably the least cost-effective portion of their work-force, capital investment was not particularly robust--nobody's out there building factories or buying huge new equipment to expand their business--and clearly employers weren't keen on taking on new workers as unemployment has now gone over 10%. This when at the beginning of the year unemployment was around 6% and Obama laid out 8% as a benchmark for success of the stimulus. Perhaps he should put himself in a business owner's shoes for a second: the government might raise my personal income taxes and take away more of the profits I make, I may be forced to either provide health-insurance that will cost a lot more than it does now for any and all employees I have or pay a penalty (or both) and I don't know what my energy costs will be, but oil will likely not be cheap and electricity could go up by a little or a lot. If you were facing all those uncertainties do you think your mindset would be "I see an opportunity here" or "It's time to hunker down and try to keep what I have?" Do you think you'd be expanding and creating jobs?

A few tax hikes will hit: the Bush tax cuts will "expire" (as if only tax increases count as permanent changes to tax rate) and the capital gains tax on the wealthy will go up significantly (up a third from 15 to 20%) but with the weak economy a set of tax hikes that make our tax system ever more progressive and seek to raise revenues from capital gains will likely do little to raise revenues to a level that makes a big dent in future deficits. This fiscal policy will also likely end up working completely at cross purposes to the goal of our expansionary (and inflationary) monetary policy as tax hikes discourage both labor and investment at the margins, and if the wealthy are given an additional 5.4% surtax on both income and capital gains to fund Obamacare if it passes, this effect could be significant. One might say well that surtax will effect only a very small minority of the public, which is true, but generally it is the wealthy who have the ability to give people jobs. Is anybody thinking about it like this: if that tax passes and the rate of capital gains tax on those who have lots of money to invest increases from 15% to 25.4% then risky investments like decisions to throw money behind an idea for a new small business or to invest in a small business that seems poised to grow will need need to be something like 10% more profitable per unit of risk to make worthwhile the kind of capital investment that you know, creates jobs.

So, what could be the worst outcome here? Stagflation and implementation of a more European panel of social policies, meaning permanently higher rates of taxation, lower rates of GDP growth and a higher "natural" rate of unemployment? That would seem to be the best case scenario. However, if real economic recovery does start to come, or even if it does not, the combination of drastically increasing the money supply along with increasing the amount of government borrowing, which could crowd out whatever amount of private demand for loans there is, could mean that inflationary pressure and aggregate demand for loans could cause interest rates to rise dramatically. A frightening set of possibilities appear to be taking shape: if you're feeling conspiratorial perhaps the Obama Administration has figured out that the most realistic way for the Federal government to ever get out from under its tremendous debt (which is mostly held by foreigners and which will not involve a very politically unpopular policy combination of increased taxes and massive cuts in entitlement spending) is to simply devalue the dollar so much that our $15 trillion dollar debt that was worth $10 trillion euros in 2009 can go to 20 trillion nominal dollars in 2015 at which point it's worth $8 trillion euros, and similarly devalued against all other major currencies; in real terms the debt has gone down! So too, of course, has the net worth of everyone who has a bank account with dollars in it or owns dollar denominated assets. Buy gold. Hell, buy real estate.

More realistically and less out on the fringe is the idea that Obama and Congressional Democrats simply are ignoring or prioritizing as less important than systemic reforms that can only be enacted during some sort of societal crisis the fact that a few positive economic indicators may mask a reality that is far more dire than they believe. They may also fail to believe some of the following, which of course, I might be wrong about: that the costs of their social policies are far greater than they believe, that the "bold, persistent experimentation" that their agenda embodies has put a large amount of uncertainty into the business community at large which will hurt GDP growth and delay a sustained recovery, and that the combined effect of trying to put ever more goodies on the national credit card, proposing new taxes which may or may not come to be and doing so while the government's cash flow dries up means that the the figurative repo man is coming for the car.

The irony here is that the Obama Administration's attempts to provide stability in the life of the individual where you're guaranteed ever more just for being alive (at the cost of ever more personal and economic freedom) are so expensive to the national treasury and have unbalanced our books to such an extent that we could wind up doing severe damage to the creditworthiness of the country, the dollar could mirror the fate of the Yen in the 80s and 90s or worse suffering damage that would destroy vast amounts of American wealth and could end the reign of the dollar as the de facto global currency, and consequently could knock the United States off its pedestal as by far the most important economy in the world. Ours may be a fate like that of the British Empire at the end of World War II, except that unlike the decline in their economic and military supremacy, ours will not come from having made very important and noble decisions: to borrow exorbitant sums of money to destroy Nazi Germany and abandoning its policy of colonizing and exploiting the resources of foreign lands. Our debt will not be from having killed Hitler's empire, it will be from decades of being unwilling to be responsible and pay for the things we want in our domestic policy, and the end of American exceptionalism, unlike the end of British exceptionalism, will have been both deliberate and avoidable.

That's a hell of a double dip. Are you willing to risk the (already shrinking) value of your savings account, the #1 spot in global geopolitics and economics, the solvency of our government, and another sustained period of economic contraction so that we can have Obamacare and Cap and Trade?

Labels: ballyhoo, economics, obama, philosophy, politics