What is Really Driving Policy?

4/26/09 – NFL Draft Day

In my never ending quest for total irrelevance I first want to congratulate Ryan Succop who was the last pick of this weekend’s NFL draft earning the title of “Mr. Irrelevant”. Secondly I want to share with you my complete lack of understanding as to how economic and energy policy is being made in this administration no less just what such policies are trying to accomplish. This is way beyond my pay grade, which, as an AARP member, is zero.

(Note: My first jobs after college were in the aerospace industry on various classified projects. These required a “need to know”. However, I realized that not only did I not have a need to know, but I didn’t really have a desire or a capability to know. Thus my current avocation as an energy economist and my complete lack of credibility on this subject.)

As a further caveat for the reader, I must admit to my political leanings. I am a born again capitalist who is a pro choice, pro death penalty, tree hugging environmentalist. Therefore, neither party’s core values appeal to me such that I would never be accepted with open arms to their cause.

This bias leads me to offer the following general observations.

• Conservatism resides with the silent majority and, therefore, is not really conducive to attracting a leader or a “Catalyst with Clout”. It believes in the Invisible Hand, rule of law and personal responsibility for unlimited, but not guaranteed, opportunity. (Note: Limbaugh is the face of the extreme right, not the Republican Party.)

• Liberals always have a cause and, therefore, passionate leaders. They believe that the masses are incapable sound decisions, and that these masses desire the strong hand of government to guide them in the wilderness.

Point to Ponder

  • Where do We the People fit in?

FDR adopted Thomas Jefferson (warts and all) as the founder of the guiding philosophy for the Democratic Party. Yet old TJ’s words, “An informed Democracy will act responsibly” seems to be totally out of step with the apparent idea that We the People need the strong and very visible hand of government. (Note: Google Susan Dunn’s 6/4/07 article “Is Thomas Jefferson still relevant to the Democratic Party” for a much more detailed discussion.) Geoffrey Stone from the Chicago Law School recalls Mr. Obama expressing that, “democracy could be dangerous” since majorities may be unsympathetic to issues such as the concerns of minorities regarding wealth redistribution, etc. While I may be missing the context in which this was made, even the hint that this thought exists scares the hell out of me.

Policy seems to be evolving by administrative fiat and pure strength of will. Even the Democrat controlled Congress seems to be out of the loop.

  • Is this just expedience?
  • Would the unavoidable hearings expose these policies to too much light, even if they would be passed by the majority?

We the People expect our elected representatives to be realistic and specific about what they are going to do. This includes admitting that this financial crisis is new territory, showing flexibility and confidence that they can pull it off. They cannot allow fear to take over.

I believe that We the People recognize that current issues are the financial crisis and security, where social wishes are secondary.

Patriotic and Practical Policy

Practical policy is, by definition, patriotic. It looks long-term and well beyond the next election. It looks for all the consequences of the potential policy before acting. Its what our elected representatives get paid the big bucks for. Policy only made to satisfy the “polls” for the next campaign should be an impeachable offense.

The Invisible Hand v. State Capitalism

The invisible hand concept sets up boundaries of law that are transparent to all within which the economy operates. It offers no guarantee of success, only the opportunity to succeed, yet has a social safety net. Here industries such as buggy whip manufacturers and mechanical typewriters along with the developers of Google all evolve over time. Some can no longer justify their existence while others grow and succeed. It is Joseph Shumpeter’s “creative destruction” and the comparative advantage that allows segments of the global economy to trade for the benefit of all. There is no policy or protection for the buggy whips, just society’s effort at retraining that keeps the economy going.

The closer one comes to these boundaries (pushing the envelope), the more visible the consequences of crossing those boundaries become.

  • Here, I have to ponder if those consequences of pushing these boundaries in the current financial crisis were well enough understood or appropriately enforced in a timely manner.

A government directed (mandated) economy is state capitalism. The boundaries are much tighter, yet from government’s perspective they do not have to be well defined. This is because much of the economy is actual or at least de facto public sector ownership with blatant regulations and limitations of the rest of the economy.

  • The current question, then is can the rule of law be changed without any compensation for those who relied on existing law? Is the reduction of value for debt in Chrysler or Bank of America a taking like a condemnation? Is government libel for such takings and subject to a class action law suite?

This really tests the concept of “the rule of law, not men” that our Constitution intended us to be protected from the whims of kings and the powerful. If all ranches of government are complicit, America as we and the world has known it will cease to exist.

  • In the last election, society voted for change. Change in part of the economic system that appeared to be out of control. Is Washington delivering the change we expected?
  • Is Obama socialism the “Brave New World” of Huxley? Will this “ambitious policy” come into conflict with economic reality? We shall see in either case as We the People go through the steps of: denial, then anger, followed by bargaining, depression, and finally acceptance.

Hope and Change

These were great selling points during the campaign. Now they must be translated into specific issues that the public (and the market) understands. Currently the market and therefore the public are voting “no confidence” from the lack of seeing any clear direction or if it thinks it sees the direction, it doesn’t like it.

Dreams (Hope) are not the same as a guarantee. They are great as goals and something to strive for, but we should not expect such campaign promises to be fulfilled.

However, an attempt should be tried to be meet these promises when elected. If promises were only campaign fluff and if could be proven that the elected individual had no intention to deliver, he should be impeached based on false advertising.

  • Grand sweeping promises need to be recast publicly in light of reality. For example the promise of shutting down “Gitmo” and never using extreme measures in intelligence gathering is facing such a reality test. Here we see the “Jack Bauer” exemption come into play. If push comes to shove, will this administration do what is necessary to protect We the People?
  • Reality is that the world is not conducive to idealism. We must be able to use all tools available when necessary. Transparency and honesty to the public requires the admission and support for flexibility.

Systemic Risk and Stimulus

  • Who determines and what are the standards that are systemically important? Who put together the stress test, and does either person or group represent We the People?

Here, the Obama and Geithner solutions show a very visible hand. The concept of a Public/Private Partnership encourages buyers of “toxic assets”. But are there any willing sellers?

Sufficient capital and coverage should have been a fiduciary responsibility, with the real consequences of jail time. Now we see what appears to be true government control without shareholder say. The TRAP (or Trap) money is a crammed down mandate, but so far has led to little lending.

  • Speaking of traps, the stimulus package has been poorly marketed with the administration appearing to be winging it. Maybe that’s the best that can be done in this “Brave New World”. Has the message of hope disappeared by lowering expectations?

Government predicts that the $787 B stimulus will save or create at least 3.5 mm jobs over 2 years. (By the way, what is the base for measurement especially for “saving”?) The assumed Keynesian 1.5 multiplier for governmental spending is fiction. It has never happened in history and we see no arguments why it should be this big now. What we do hear of the current plan is not short-term, stimulating, well thought out or consistent. Plans seem to be knee jerk, an opportunity to fill pent up Democratic Party priorities, and punitive.
The cost of bailout is socialized, and the benefits are privatized. Industry is a part of the solution not the problem

  • Note: I won’t be stimulated until 2010 for 2009 taxes and at my age non-financial stimulation is also questionable at best.

I think this should have been separate bills. First would be tax cuts. The second would be the long over due investment in infrastructure. Therefore, spending projects would have transparency: unless one wants to hide real intent.

  • Transparency and no pork promised in the campaign is what the public bought and voted for. Now we must be careful of what we wished for and take responsibility for casting those votes.
  • I’ll close this section with an observation by Norman Augustine, former CEO of Lockheed Martin in his book Augustine’s Laws. “Budgets have made the only practical use of the mathematics of a complex number. The imaginary part is readily obvious. The difficulty is with the real part.”

Ownership of Policy

We the People asked this administration to solve the current financial crisis regardless of how and who caused it. Failure cannot be placed on the past. It can only be remotely shared.

  • The current budget, while reflecting (pent up Democrat) demand of the past, is to fund current projects to be administered by the current administration.
  • While some concepts started with the past administration (TARP), is society so anti-Bush that this administration will be given a pass on its own actions?

R v. R

I have been asked if we should be comparing Reaganomics with Obamanomics. I think it to early for Obama to claim such fame or notoriety despite the fact that he will have to take ownership for current policy. Rather the comparison should be between Regan and Roosevelt.

Much of the implied current economic policy appears to be Roosevelt and Carter on steroids. However, concern over the size of government is only in the mind of the beholder. For some the porridge may be to hot to some and the porridge may to too cold to others. There is no just right for everyone. So live with what the election gave you, and change it at the next election if you don’t like the results.

The Economics of Envy discussed in Be Careful of What You Wish For seems to be the underlying philosophy of this administration’s economic policy. The fact that top 1% has 22% of the income or wealth under this policy is something that must corrected. (Pg 5 Budget: “It’s a legacy of irresponsibility, and it is our duty to change it.”)

Never is the Laffer curve of tax efficiency and supply side economics even considered. In the global economy, private sector money is very mobile. Tax it and it will leave. Nor is Churchill’s analogy, “Some see private enterprise as a predatory animal to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon” given any credence.

  • I am truly afraid that afraid that in the desire for expediency in this financial crisis, policy is looking to kill the goose that laid the golden eggs and eat both.

Hopefully the party in power has learned from the successes and failures of their preferred model and from the model they wish to change. I give Obama credit. His policies and hopes are totally transparent and assume that the electorate wants the strong hand of government to guide. This still leaves many questions.

  • Is the USA’s strength in its private sector estimated to be 75% of GDP?
  • Do the financial markets deserve a vote?
  • Does the private sector need more visible guidance?
  • Should the public sector have a direct role in the economy? (The assumption or justification is that the private sector exists to generate tax revenues, it shafts workers and pollutes.) The military would seem to be an acceptable public sector “business”. However, some of this is even outsourced to mercenaries or other governments.

Failure (Bankruptcy and Bankrupt ideas)

Again and at the risk of way too much repetition, Churchill notes “Freedom is the right to fail.” In economic policy, other than a low safety net, bad ideas need to fail. Mortgage failure still allows the public to rent. GM and Citi are morally, and as a business model, bankrupt and should have consequences with minimal impact on the public.

Housing

The housing crisis is a ponzi scheme allowed by governmental policy.

Please keep in mind that these views from someone who owns his house outright and paid off his mortgage some time ago. Therefore, I have zero credibility on this subject.

Problems come when the “American Dream” of home ownership, etc., are mandated and relied on. Who had the fiduciary responsibility to assure repayment of the loan? A mortgage is a contract between lender and borrower, where both parties are responsible.

Can the lender off load this responsibility by packaging the loan so it “looses” its identity or by selling the loan?

  • If home ownership is a social constitutional right, did the taxpayer sign on to support this mandate? The answer is probably yes, through our elected officials, but not the selling of the loan or lending to those who cannot be expected to pay.
  • What’s wrong with renting?
    So what went wrong? I believe that it was in part the bubble mentality of “Anchoring Phenomena” that home prices (values) would go up for ever. In addition the Fed low interest with high foreign savings buying US debt equaled a high PW (present worth) for the loan. Extended home ownership to low-credit, low income individuals were paid by the bubble and financed thru government Fanny and Freddie.

This inventory of questionable loans can only be cleared through working off the inventory of homes and those financing or refinancing those who can pay. New debt, buying and building delays the day of reckoning.

  • Did the American dream of “affordable” housing (or affordable financing) guidance from government have any culpability in the current financial crisis?

The New and Improved Expanded Deficit

Currently the trade deficit is actually down thanks to the weak global economy. It reflects a weakness in the global economy. In that I believe it will take a confidence in trade to turn the financial crisis around, this is not healthy. However, in the long run, more balanced trade form sound policies is required.

The real issue in the future spending deficit from all the policies to fix the financial crisis and the new domestic polices on the government’s shopping list. This deficit is funded by debt that our children and grandchildren must pay off. However, my parents said the same would come due for me. You can’t get out of debt by more borrowing.

  • Can an economy perpetually roll over its debt?
  • Saving is up because of a lack of interest in spending. Does this affect a recovery? What will fund investment that will be the foundation for renewed growth? Most economists agree that spending is necessary to stimulate the economy. Is there a balance for spending between the private sector and the government? Is any of this consistent?

New taxes to fund government spending offset any kick to the economy and governmental spending is not necessarily aimed at what a recovering market wants.

Long delayed governmental spending on needed or ignored infrastructure, etc., warrant expanded governmental spending as an investment regardless of any financial crisis and can help any crisis at hand.

Long-term saving must be built up to support sustainable private sector spending. This will delay recovery but will be cheaper in the long run. See Points to Ponder – Paradoxes 4/24/09 for a further discussion on the saving ethic.

A Closing Point

“History teaches the men, nations behave wisely once they have exhausted all other alternatives.” -- Abba Eban

Therefore, don’t throw in the towel and hide. You may feel that business and businessmen are under attack and even more so if you are a businessman in energy. This to shall pass. The free market economy is what made this nation the envy of the world (and is one reason immigrants, legal and otherwise want to come here). Such freedom is what fuels our economy. I have to have faith that even this administration shares this view.

Click here for more information about Confessions of an Energy Price Forecaster: A 12 Step Program to Enlightenment

Click here for John Tobin's full bio

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