A Plan for Economic Recovery

The cries for relief from the economic recession reached a state of pure, irrational cacophony with the recent request by the pornography industry for a government bailout. While many will likely reject the very idea of such a request out of hand, it fits in with the popular focus of how to pull us out of this significant downturn. “Saving jobs” is all anyone seems to care about. While it is annoying and painful to lose a job (I lost my own job in November partially as a result of the crisis), the job loss is the symptom, not the disease. Even the “credit crunch”, which caused so many closures in fringe firms and industries, is still an intermediary between the disease and the symptoms. While I will not get into the precise cause of what I have termed the “disease” here, which has a multitude of possible causes being widely discussed by professional and academic economists, I will go into how the new administration should deal with improving the economy in the medium to long-run over short-run “solutions” that will come back to bite us later.

1. Raise Interest Rates. It is well-documented empirically that it takes somewhere between eighteen and twenty-four months for a change in the money supply to fully work its way through the economy. Interest rats where they stand now are at an unstable level, whereby the Fed is effectively giving money away to banks. That form of subsidization distorts the economic realities banks face. To lower interest rates to the level they are at right now, the Fed continually needs to expand the money supply at ever expanding rates, which results in some of the highest annualized inflation rates in almost two decades (upwards of 6%) that we’ve seen in recent months.

Bernanke must return to the “inflation-targeting” philosophy he has promulgated in the past. While I don’t agree with Bernanke’s economics on any level, the spirit of such a philosophy applies to exactly these types of situations. While he may not be afraid of using the keys to the printing press, inflation above a “normal” level isn’t going to help anything in the medium run.

When he takes office, Obama must not look to the Fed as a revenue source. He cannot expect the excessive liquidity provided by the fed to continue and should support its elimination. Funding of greater government spending must come from taxation, not from the printing presses.

2. Eliminate Public Debt. There have been frequent complaints that the remaining solvent banks have not been willing to loan money as quickly as they have been in the past. The fallacy of such complaints is twofold: One, that the ease to which banks lent in years past was very likely one of the factors that got us here in the first place and what banks are doing right now makes sense, and Two, that the government can easily make a dent in the credit crunch simply by eliminating its debt. The “true” cost to the government borrowing lies in that, through the sale of treasury bills, it takes money (crowds out) from private bonds. The treasury bills, since they are riskless, effectively set the floor below which no private bond will ever be sold. If debt is eliminated and this floor drops, the option of raising money by floating a bond, which beforehand was unprofitable for a firm, may now make sense. Eliminating this debt is very simple and requires no further bureaucracy to get set up; just swap a few items in the treasury’s ledger. While the debt is Bush’s fault and his mess, Obama must be the one to clean it up.

3. Get out of Iraq. We need to reduce military spending drastically. Once that state is stable enough, or it is determined that we can no longer do any good, we need to pull out completely. Each dollar spent there could go towards a tax cut, elimination of our debt, or building infrastructure, all of which improve the economics of taxpayers far more directly than marginal improvements to the security of the new Iraq state. To Keynesians who believe that our spending there helps in the same sense that paying someone to dig a hole and fill it helps unemployment, I disagree since I see little evidence that our economy is in such an extreme situation. A tax cut will go straight towards the areas of consumption taxpayers have had to give up in recent months (such as retail), spurring job growth, or to paying down debt, keeping the banking system solvent and increasing its profitability. Paying down the debt would help growth even more directly through the means I mentioned above. While the current recession may appear more closely to the Great Depression during which Keynesian methods were supposed to have worked versus the cost-push stagflation during which Keynesian methods failed, those methods appear to me to be cosmetic. We are far from needing to resort to spending for the sake of spending, whether it be in the military or in social programs, in the current economic situation.

4. This is an ok time to build infrastructure, but don’t be stupid about it. With all that being said, now does seem to be the time to use government spending to spur internal improvements, but I only say so with significant caveats.

1. Don’t determine a certain amount of money to spend and keep spending until you hit it. Congress must force good opportunities to come to it instead of seeking them out. We want the public spending first to help citizens in real, genuine ways that private firms have problems providing. We should not be spending arbitrarily just so someone can have a job.
2. Don’t use this as an opportunity to support green infrastructure. These forms of technology are only asked for right now in areas of relative affluence, and as such, support of them is a subsidy to the rich. Green infrastructure must remain in the hands of local governments in the interests of their constituents rather than a holistic macroeconomic plan.
3. Don’t do anything the states can’t do themselves. If something only benefits one or some states directly, the state can make the judgment on its own whether it is worth to tax and spend on the infrastructure. Anything else quickly degenerates into pork belly-seeking situations.

5. Let the industries and firms fall. If the market says too many cars are getting produced, the government should not be in the business of promoting such a level of production. Not all industries are failing right now; such failure says something about whoever does. An unprofitable business model has no place in society unless someone is willing to support it charitably. Let the market determine where those people are best utilized elsewhere. We have had no problems letting that happen in 2001 with tech firms. Perhaps that was because it was so easy, in hindsight, to see why dot coms were so stupid. If the business models of the auto makers, retailers, financial firms, and pornography studios have been unable to withstand the crisis, the market is rejecting their usefulness. We need to stop looking at the jobs being lost and instead remember that all jobs must ultimately serve a purpose. The purpose of many of the firms within those industries has ended.

The economic downturn is ultimately a systemic problem. However, we don’t have clear evidence has to what exactly caused the system to fail, but we can fix the intermediary factors that contributed to such a failure and avoid screwing it up more. The question should not be about eliminating job loss, but about ensuring that the system is set up in such a way that the remaining private firms can find new, better roles for them as soon as possible without causing further problems later.

The Power of Political Diversity

Jared Diamond’s seminal Guns, Germs, and Steel provides a holistic thesis on the origins of all political history from pre-history into the modern era. His argument is a modified form of Climatic Determinism, which means, as he presents it, that environment determines history in the long run. Certain areas of the world, especially Eurasia, possess a greater variety of and more effective crops and livestock. These factors allowed Eurasians to build civilization the fastest and then conquer cultures living on other continents through the accumulation of technology and deadly germs. Crops and livestock allowed technology and germs to develop by facilitating greater population density and classes of people performing work besides the production of food. These factors explain history up to the sixteenth century, at which point European dominance became established.

Diamond stresses history since then far less. The general road history was about to take seemed predestined by the time Spain effortlessly exerted its control over the civilizations of South and Central America. One diatribe he does allow himself is the explanation as to why it was Europe and not China that succeeded in projecting dominance across the world. After all, China had been at the forefront of nearly all technological advance for several thousands of years. It was not until the early modern era that Europe pulled ahead. Diamond asks why that shift took place, given that there were seemingly no environmental factors that would push the societies in opposite directions.

The conclusion Diamond eventually comes to was that the natural political unity of China, which had at times provided ample opportunity for technological innovation, would occasionally stifle change significantly. To make this point, he cites an analogous situation in Japan. At one point in history, Japan had the best firearms in the world. However, culturally, they were scorned since they allowed a lowly peasant to take down a mighty Samurai. This subversion of social custom caused Japan’s government to take action, gradually eliminating guns altogether from the island. The key element to this is the Japanese government’s ability to make such a decision. Elsewhere in the world, such as the Fertile Crescent or Europe, any government that makes such a self-defeating decision (given that guns are innately more effective weapons than even the best sword) is either forced to reverse course at the risk of getting conquered by a nearby competing government. China faced a similar impediment; while it was not an island, China did not face major competition from any other competing, centralized power.

There were points in history that China did begin exploration. In short time, however, a competing faction within the government ended any such experimentation. Exploration was never again allowed until Europeans forced their way in. China’s centralization permitted it to act stubbornly and self-defeating. If there was another nearby competing power, or if China was naturally split into several smaller factions, one of them may have chosen to continue exploration, followed by a run of East Asian dominance throughout the world.

The geography of Europe took its inhabitants on a different path. At no point ever in history has more than half of the continent been held by a single power. While parts of Western Europe are somewhat flat, the geography of the continent is characterized by an unending coast of peninsulas. In contrast to China, this makes conquering every area a difficult task. Europe’s natural condition involves a multitude of competing powers. Again, in contrast to China and Japan, this means that if one begins using guns, they all must begin using guns to defend themselves. All nations are pushed towards progress under threat of destruction.

The best example of this, and one that Diamond cites especially well, is that of Columbus. Portugal, Genoa, and Venice all initially turned the funding for Columbus down. Spain as well left Columbus hanging for two years until finally agreeing to support him. If only a single government ruled Europe, would that single arbiter funded him? Based on Columbus’s experience and the tepid interest in East Asia, such action hardly seems likely.

The force that gave Europe its power was its lack of a single decision-making body speaking for all its peoples. The lack of supernational power gave Europe its power. Such a fact runs completely against the intuition of the historians studying this era, who see centralization of states as the cause of the rise of certain European nations (England, Spain, Austria, and France) over the unorganized states of Germany, Poland, Italy. Yet, this is only the cause of the relative power of states over others. Furthermore, the centralization only pertains to the ultimate subjugation of the noble’s power bases to a single government, not steps of centralizing authority within Europe as a whole. The lack of a central authority within Europe gave each of its members greater strength from and absolute perspective.

Imperialism, science, the Industrial Revolution, capitalism, and any small improvement thereof forced its way through Europe, rapidly providing it with the means to rule the globe. This is the power of political diversity. When there are multiple perspectives available, such the differences of opinion amongst the various European despots, a greater variety of strategies and options can be pursued. No matter how a single government attempts to construct itself to remain open to new opportunities, the intrinsic insularity of set single voices will result in bias. At that point in history, any given European nation could decide to begin experimenting with some new form of mercantilism or representative body. In doing so, all of its neighbor nations had the opportunity to gauge independently its effectiveness. While the nation may hope that its commitments and experiments were those that succeeded, its population still gained tremendously when a nation elsewhere found another solution.

The diversity and dissolution of power in Europe as a whole brought it wealth and prosperity. The technological level of the world would be set back seven hundred years had the decentralization of power not existed. These gifts, of course, are ones that can keep on giving. While the mixed-market capitalism and political systems of Westernized nations are all roughly comparable at this point, we still have the opportunity to experiment and watch one another. Perhaps no better modern example is that of the failure of economic planning within China and the Soviet Union. The world as a whole fortunately did not have to resort to a universal change in political philosophy to see it in action. Had Marxism worked, all other nations could then take advantage of that knowledge. Now, even the remaining socialists are able to take into consideration the difficulties the Soviets faced when further developing their own ideas.

While in the past many logistic barriers impeded the spread of a single government over the Earth effectively impossible, it now is seemingly feasible should the peoples of all existing nations accept it. The growth of the EU and the murmurs of a similar (although remarkably unlikely) North American state demonstrate that. Yet, what history tells us about the power of political diversity does not recommend further movement in that direction. The EU has not yet run into this problem very much given their rightful infatuation with subsidiarity, but greater impediments placed on the powers of the member states will quickly inhibit Europe’s -and humanity’s- ability to experiment with different methods in doing anything from escaping the current economic quagmire to achieving greater social justice. At this point in time, whatever our opinions are, we cannot know how to fix our financial mess and grease the wheels of exchange once more. It is an unambiguous positive that there are many independent nations that can seek their own solution to the problem. The importance of this power cannot be understated.

Even more damaging to political diversity is the viewpoint of those such as George Soros who wish to unite the world under a single government. While arguably this could lead to a reduction in war and genocide, it will also strangle our ability to experiment with new social structures. Nothing is keeping a world government from making a self-defeating decision except our hope that its decision makers approach godlike prescience. The current institutional technology we possess such as democracy and the mixed-market economy would be frozen in place, or at the most advance should the single decision making body agree to change. The world may still continue developing marketable technologies as it has done in the past, but there is little possibility in further optimization of the structure of society that facilitates those technologies to begin with.

There is, of course, no hard evidence demonstrating that the systematic improvements continually brought about by political diversity will outweigh the stability and peace which a one world government promises. At the same time, it is a very real factor that separates the affluence of today from the poverty of the early modern era. Any discussion about merging political powers must take political diversity into consideration. The greater number of independant entities there are willing to commit to new societal structures, the more everyone knows about what real effects those structures will have. With more political exploration, even if we’re not the ones doing it, we’re all better off.

Liberty for the Left

The modern Republican party in America is composed of a well-known coalition brought together by Ronald Reagan. Specifically, those who vote Republican tend to fall into one of three categories: fiscal conservatives, “value” voters, and those who favor a strong, active military.  Obviously there is a significant deal of overlap and there are exceptions, but these categories provide a thoroughly accurate portrayal of the Republican party.

I find it very strange that there is no analogous coalition on the left side of the political spectrum. I know of no attempt to categorize factions of American Democrats in such a way. There are somewhat informal groupings you can throw together ad-hoc, such as socialists, hippies, and left-populists, but those represent ideologies, not voting blocks.  The only group that the press and pundits regularly recognize is perhaps the Greens, but they are a political party themselves.

This may seem silly to get hung up about, but the lack of an accepted classification makes discussing topics about the left unnecessarily difficult. As celebirty chef and TV host Alton Brown once wrote,

To my mind, the greatest analytical tool in the world is classification. Classifying things leads to enlightenment, and enlightenment to deeper meaning. For instance, I used to make really lousy cheesecake until I realized that cheesecake is not a cake, it is a custard pie. Now I treat cheesecake like a custard pie and everything is fine. There was a time when I did not enjoy Steven Seagal movies. Then a friend pointed out that they are all post-modern Jerry Lewis movies. Now I just can’t wait for Glimmer Man III to hit DVD. That’s classification at work.

There has been little effort to frame conversations about American Democrats, and I think that has led to complete ignorance of a large faction of voters who vote Democrat and has left them without a voice. These Democrats are those who fight for a very specific, but also almost entirely inarticulate, brand of liberty.

I propose that in reality there are two primary factions on the left. Just as Republican factions do, they share a large overlap on issues, but the emphasis is completely different.

1. Mainstream Democrats, who believe the purpose of government is to ensure the greater common good and provide more equity than what there is on the free market. If something is morally wrong, the government should fix it.

2. Those who are for individual liberty, but do not agree with the traditional concept of liberty.

(2) has an entirely different emphasis. The issues that I see associate with it include pro-choice; anti-organized religion; strong suspicion of corporations; anti-intellectual property; legalization of drugs. The logical extreme of these positions is leftists anarchism. Democrats who fall into group (1) may agree on certain issues such as abortion, but the logical extreme of their emphasis is socialism, a very different outcome.

I do not have any empirical evidence for this and it is entirely based on anecdotal knowledge I’ve built up quizzing friends and acquaintances over the years. (I did, however, once create a political test that would graph you, and a surprising number of people fell into the anti-government/liberal values quadrant) Still, another way to describe group (2) is to say it is those who want the government to stay out of their lives but do not trust capitalism. To me, that seems like an apt description of a significant number of people, especially young adults. [It's easy to call this social liberalism and call it a day, but it's quite a stretch to think of intellectual property and the role of corporations as social issues]

Furthermore, I do not believe this group is even conscious of the fact that they differ in emphasis from mainstream Democrats. It’s easy to find a voice for any group of Republicans (the religious right, the old right, neoconservatives, etc), but who speaks for these Democrats? Nader is the closest I can think of, but that is a huge stretch. What academics or thinktanks out there are formalizing the core of policy issues I listed into a workable theory? Who is fighting for liberty for the left?

With the talk of liberty, it might seem easy to think of them as “Left-Libertarians“, a label I gave them in the political test I mentioned, but upon further consideration, it seems like a pretty poor classification. The “liberty” fought for by left-libertarians maintains a veneer of classical liberalism, whereas (2) has no such groundings. Left-libertarians may feel empathetic towards it, but the sensibilities and goals of their respective liberties differ substantially. Of course, it must still be said that left-libertarianism is an especially amorphous concept with many competing and contradictory definitions. Some of those definitions do in fact align reasonably well with (2)

Regardless, few in the Democratic party are even aware of left-libertarianism and rightly associate libertarianism with capitalism. Furthermore, even the forms of left-libertarianism that share many standpoints with (2) take a very extreme position. Between it and mainstream Democrats exists an enormous void. For Republicans, paleoconservatives and the “Old Right” (e.g. William Buckley, Russell Kirk) eloquently symbolize such values. While conservatives have many avenues of competing paradigms supporting different forms and expressions of liberty, the Democratic party ignores this altogether.

Democrats must stop skirting the issue of which philosophical principles underscore their idea of liberty. All Democrats need not endorse it, but without a discussion of those ideas and serious academic examination, argument with the right on these issues is severely inhibited. The concept of personal property holds the traditional idea of liberty together. What holds it together for the left? By which process is freedom of choice guaranteed amongst the multitude of social interactions within the state? What are the philosophical underpinnings for such a combination of liberty and equity, where each are continually at one another’s throats?

Health Care: The New Castle in the Air

Back on September 25th, I advised anyone reading this blog to get out of the stock market ASAP and to put any assets they had in something as “real” as possible, preferably a diversified mix of precious metals. Although the market had already begun its perciptuous decline, those (if any) who had followed my advice would have saved a lot of money. Yes, me pointing this out is a bit of both confirmation bias and self-calling, but part of the reason I started this blog was to keep any projection I had permanent both to keep myself honest and to increase my credibility.

In the previously linked-to blog, I claimed that it would be my only investment advice ever. I suppose that was untrue. Despite the recession, I believe a new bubble is forming. Like the housing bubble, tech stocks, tulips, or what have you, semi-informed people have become enamored with this industry. Supposedly, it is fundamentally “different” from any other group of firms, immune to downturn, and about to take advantage of rapidly expanding demand. This industry is health care.

This is not to say that health care has nothing going for it. Certain factors mentioned, such as the coming surge in demand, are in every sense real. However, since everyone is aware of these factors, a sober, rational adjustment has already been made to the prices of those stocks. Further increases in price in the absence of other information will not match the firm’s “fundamental” value (after taking into account a simple “normalization” of the prices of all stocks should overall economic conditions improve). Despite this, health care stocks are poised to increase rapidly in value if confidence can be restored in the economy. In contrast to the “alchemy” of financial firms, hospitals, drug companies, and related firms do something tangible and “real”. With the collapse of both real estate and finance, health care may well appear to be an excelletn place to park one’s money as the population ages.

The conditions necessary for a bubble to spontaneously manifest are met. Common people, who only get wrapped up in active portfolio managing during bubbles, are happily perpetuating stories about how getting training in health care is a “smart” move. That may well be the case, but the awareness alone of the growth potential of a certain industry unnnecessarily directs attention and dollars in its direction. Wallstreet and the unarticulated market have already made its judgment on the growth potential of health care firms. Any attention by the non-professional will only skew pricing. Compare your attitude towards health care firms today to what your attitude towards tech firms was in 1997, right before the bubble formally began taking shape. The parallels are likely striking.

This is not to say that I believe that a bubble in health care stocks is inevitably going to form. Systematic errors by the market are exceedingly difficult to identify; as such, my observation here is only anecdotal and conjecture. Regardless, a tactic of taking a small portion of your assets and putting them in a mutual fund built around health care right now seems like a low relatively low cost move. If I’m wrong, which, I’ll face it, with projecting something like this, is a strong possibility, you might lose compared to what you would have made in an index fund. The gains, on the other hand, of getting in right before a bubble forms are staggering. Ultimately, what I recommend is to invest a small portion of your savings into such a mutual fund (or a well-diversified collection of stocks, if you can manage it), and sell it two years from now, no matter what happens. If a bubble is going to form, it will form by then, and it’s better to get out half way through a bubble then after it pops.