The Tennessee Ernie Ford Solution

The markets took great comfort in Ben Bernanke's testimony to congress yesterday, reading it as a statement that the economy could recover by the end of the year. However, his statement was in the subjunctive mood, not the indicative; it was a conditional statement: IF all the bailout plans work by the end of the year, THEN the economy will recover. Well, duh. But as well-intentioned as the bailout plans are, there is good reason to believe that we are nowhere near the bottom. Further, all the plans do--if they do anything at all--is restore the pre-crash economy. But that economy was not viable; it was a house of cards to begin with, and restoring it will not place the economy in a secure position.
For example, a large portion of the capital of the banks is tied up in mortage obligations and, more importantly, "derivatives" based on those mortgages. But the housing values are nowhere near their bottom, if historical averages can be trusted.
If housing prices correct to their historical averages, which is likely, then the banks balance sheets will weaken and there will be a lot more "troubled assests" for the Troubled Assets Relief Program (TARP) to buy.
The President also laid out his plans last night. It is certainly a comprehensive and well-meaning plan, but I doubt that it will work. The problem with the plan is that it fails to recognize the structural problems in the economy. Obama hopes to restore American manufacturing through a heavy investment in "green" technologies. But even if this was successful, there is no reason to think that manufacturing of these new products won't be outsourced. This is the Tennessee Earnie Ford solution: in the end, we will be "another day older and deeper in debt," but we will not have accomplished anything.
A nation can only grow prosperous by making things. It can never grow properouse by speculation. Our economy is built not on real assets, but on speculative bets. But in speculation, for every winner there is a loser; one party's gains are precisely measured by another party's losses. Only making things can make the nation wealthy, only in the farms, fields, forests, fisheries, factories, and mines can we find our future. Bailing out the old economy will at best give us the old economy. At worst--and more likely--it will bankrupt us.
So what should the President be doing? There are many things he could do, but there are at least four things he ought to do over the course of the next four years:

1. Devalue the dollar. The worth of money relative to other currencies should reflect their trade balances. A country like the United States, with a constant trade imbalance should have a constantly "shrinking" dollar, which by itself is sufficient to bring trade back into balance. But we have the worst of both worlds: a strong dollar and a trade deficit. Devaluing the dollar over the next four years will make imports more expensive and exports cheaper.
   
2. Devaluing the dollar will make lenders more reluctant to lend. But this is not bad news, it is good news. Instead of borrowing the money for infrastructure improvements, we should just print it. While this seems radical, the fact is that we borrow it from people who just print it up themselves: the banks and the Chinese. The idea of "printing" money conjures up visions of hyperinflation. And if the money is just printed to finance tax cuts and operating expenses, this is a possibility. But if it is used to finance actual improvements, like roads, education, and the like, there need be no monetary inflation, so long as there are unemployed resources in the economy. In other words, we can invest our own money in our own future, and provide both jobs and real improvements along the way.
   
3. Finance the highways through weight and distance based tolls. Right now, the "free" ways constitute a subsidy to long distance shippers and the globalized economy. But if the shippers had to pay the full cost of transporting their products, local and regional manufacturing would suddenly have a great advantage over foreign producers, no matter how little they pay their workers.
4. Buy up and break up the institutions that claim to be "too big to fail" (see Buy it Up! Break it Up!.)

Whatever happens, nothing good will happen without a restructuring of the economy. Geithner, Bernanke, and company are trying to chase falling assets and prop them up, but they will fall faster then the government can build supports. It is like trying to "catch a falling knife"; you are likely to get cut. We cannot go back to where we were because where we were was nowhere. The nation will have a distributist solution, or no solution at all.

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George W. Obama?

A thread worth following on the Vermont Commons site.

I usually give a new President at least a month in office before I start dissing him; that's just part of my fundamental fairness. But Obama's cabinet has been a real disappointment. The economic team are all persons who were involved one way or another with the crash. And the effort appoint a lobbyist for the pharmaceutical companies to head Health and Human Services was a real shocker. Everybody was down on Daschle for his taxes; I would have put up with the taxes if it wasn't for the source of his income.
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Gaza-Israel Crisis in Context

Gaza currently has 1.5 million people running out of food, fuel, and water suitable for drinking. The region has been set ablaze with Israeli attacks, leaving hospitals unable treat the myriad of people in desperate need of care. As a recent editorial in The Nation pointed out, 75 percent Gaza is without electricity and their sewage systems are bordering ruin. Furthermore, the loss of a dozen Israeli deaths and just over a dozen injured, Gaza has been lost over 600, a quarter of them being civilian. To say that this is a mere crisis would be as grave an injustice as the conflict itself.

All of this has created a dividing line in the mainstream media punditocracy. Neo-conservatives, the Israel Lobby, Christian Zionists, J Street, Jewish Voice for Peace, and Peace Now have engaged in some of the most vitriolic debate many have had the misfortune of seeing in a long while. 

The worst has been directed towards those seeking a just peace, questioning the actions of Israel and proposing actions, ranging from conventional to the extreme, in hope of bringing this age-old crisis. Neoconservative writer Andrew Sullivan has compared The Nation’s Eric Alterman to the authors of The Protocols of the Elders of Zion. He writes, “Boston Globe columnist Cathy Young has accused me of blaming Hitler’s victims for Palestinian misery.” Statements just as striking can be found (predictably) in publications such as Commentary and The Weekly Standard.

All of this couldn’t come at a worse time. America is in shambles, and our credibility in the Middle East has been squandered on account of eight years of belligerent foreign policy, unjust wars, wrongful imprisonment, torture, and the perception that the US works only in the best interest of Israel. Attempting to play a vital role as the “middle man” will be take an extraordinary amount of finesse, not to mention the need to send a strong and clear message to the world that we wish only for justice and peace in the region. 

This is easier said than done. The US has a long history of failure in the area of Middle East diplomacy, and this is particularly true in regard to the Palestinian-Israeli conflict. More often than not, it is that the US and the international community lacks the resolve to implement and enforce agreements, while giving a wink and a pass to breaches of the agreements.

How, then, are we to overcome these obstacles? 

We must first begin with a change in perception. An example of such change would be US citizens overcoming the notion that Israel has for years been sacrificing land for peace. While it is true that land has been transferred, these plots are by no means sacrificial. The regions are settlements, having gone beyond it’s pre-1967 borders. In short, they are returning land that they confiscated and settled upon, forcing an outrageous number of Palestinians from their homes.

Doing this will force the US and the international community to hold both sides accountable for their former agreements. All sides endorsed UN Resolutions 424 and 338, the Oslo Accords of 1993, Bush’s “Road Map for Peace” in 2003, as well as those agreed upon at Annapolis. The only thing at play here is forcing both sides to be implement what was already agreed upon.

Secondly, the US must consistently apply their calls for democracy with the results of the democratic process of elections. The crusade for global democracy has resounded from Washington for some time, but leaders have been very selective when recognizing those democratically elected. If the goal is to have “the people” vote, and “the people” vote for a group that the US doesn’t particularly like (i.e. Hamas), the US must, if wishing to be consistent in their crusade for global democracy, recognize the decision of the people. To do otherwise is to be horribly inconsistent, fueling the Arab world’s impression that it isn’t so much democracy that we want, but rather to put leaders in power that have US interests and secular values at the forefront of their mind. 

It would do us well recognize the fact that without a resolve which favors a two-state solution and a complete (or almost complete) withdraw from illegal settlements, there will be further tension in other areas of the Middle East. Iran, al Qaeda, and Hezbollah have much to gain from a failed peace process. Recruitment will increase, policies will be justified, and alliances will be solidified.

The US must identify and condemn various actions committed by both sides. The difficulty in doing so rests, at least in part, with the fact that we are dealing with two radically different groups. 

Israel is a nation with a capitol, huge military and economic subsidies from the US, as well as a military force that rules the region like a colony, punishing a people collectively. As UN human rights representative of the territories has recently been quoted as saying, Israel’s treatment of the Palestinians is a “crime against humanity.” Women, children, and the elderly have been victims of attacks from Israeli air strikes. Palestinians are required to carry color-coded IDs and travel permits. Civilians have had their homes demolished. One must also include the barricades, checkpoints, and settler-only roads. 

On the other hand, the Palestinians left with little more than guerrilla warriors and the unconventional tactics often accompanying them. As Hamas leader Khaled Meshal said to Alya Rea of CounterPunch, “Unfortunately the insistence on violent repression by or assailants leads to innocent blood on the streets. Since 1996, 12 years ago, we have proposed to exclude civilian targets from the conflict on both sides. Israel did not respond to that. When Israel insists on killing our kids, our elders and senior citizens and women, and bombarding houses with the gunships, F-16s and Apaches, when Israel continues these attacks, what is left for the Palestinians to do? They are defending themselves with whatever they have.”

None of this is to say that targeting civilians is ethically permissible. All that is meant here is to put the situation into context. One country with a capitol, subsidized military and economy, the ownership of nuclear weaponry and a state of the art military over against a colonized people with little more than Qassam missiles, outdated artillery, and individuals willing to be human bombs in order to settle a score. 

President Obama has a tough road ahead, both on the home-front and internationally. But he must have the courage and wisdom to confront this age-old controversy in a way and with a resolve that former presidents have not. Unless he begins seeing the bigger picture, with all its complexities (i.e. religious, ethnic, economic, and militaristic), he will follow the same path as those who went before him. A path covered as much with the inhumane and unjust as much as it is with the blood and tears of the innocent.

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Buy it Up--Break it Up--Fund it Right!

The new president has hit the ground running and I wish him well. But I have my doubts. He is not at all like the stumble-bum he replaces, of course. Rather, he is a thoughtful and intelligent man. And on economic matters, “The audacity of hope” is backed up by an economic team of truly impressive credentials. Indeed, this may be the most highly qualified group of people ever to serve in government.

And that's the problem. All of them are super-competent to be sure, but they are competent in the very techniques that caused the problem in the first place. They will attempt to solve the problem at the level of thinking that created it. Their plan is for a massive stimulus, and it is easy to see why. They believe it will work for the simple reason that it has worked. Indeed, since at least the 30's, and certainly since the 40's, the economy has been dependent on massive government expenditures—a permanent stimulus economy. And in general, this approach worked for a long time; the economy was more or less stable and prosperous, and the periodic shocks were mild and short-lived by pre-war standards. Given that record, they may well be excused for believing that the Keynesian magic will work yet again.

But in truth, it will not work because, for some time now, it has not worked. No one since World War II has practiced fiscal stimulus as much as did George Bush. Think on this: In only eight years, Bush took all that debt accumulated from Andrew Jackson (the last time our debts were paid) through Bill Clinton, and doubled it. He added more than $5 trillion to the debt. Under such a tremendous stimulus package the economy should be booming; there should be labor shortages and resource scarcity and real—rather then merely monetary—inflation. But the economy is not booming, but bombing, and instead of inflation we have deflation, which is far more damaging. Instead of a real expansion, we got a mere credit bubble in housing. People thought they were richer because their homes cost them more, a strange kind of wealth.

In opposition to Obama's plan, the Republicans want more of the same. But the Republican stimulus plan differs only in the details. Stimulus by “tax cut” is still stimulus. And it really isn't cutting taxes because it doesn't really cut spending. It is not tax-cutting, but tax-shifting, from the current generation to the next; it is charging our children for benefits we receive. This is not only uneconomic, it is immoral at the deepest level.

The bubble did not make people richer (save for a few insiders), it just meant they were maxed out. Maxed on their mortgage payments, their credit cards, their car loans, their student loans. Their wages did not keep pace; in fact, the median wage declined and the economy was sustained by oceans of debt. The stimulus plans have introduced structural abnormalities into the economy such that it will no longer respond to stimulus. Reliance on the government as consumer of last resort has resulted in a structure that favored global production over national income, the FIRE economy (“finance, insurance, and real estate”) over the real economy (real production of goods), low wages over fair ones, and gargantuan size over human scale. It is this last point that is particularly troubling, since this gargantuan institutions have proclaimed themselves to be “too big to fail,” and exercise economic blackmail over the whole republic.

The problem with this claim is that it is correct. But the proper response is not to give into the blackmail, not to negotiate with crooks, but to make sure that the blackmailers are never in a position to control the whole economy, to demand trillions in ransom whenever they get themselves (and us) into trouble. Now, it would be mere carping by distributists to point out the problems if we could not offer solutions. But we do have solutions, and it is time to offer them, time to end the era of big business that depends on big government, on subsidies from the general public to private profits. I have nothing against profits—when they are earned; I have everything against profits that are the result of subsidies and privileges. The distributist solution to all of these problems can be summed-up in a few words: Buy it up! Break it up! Fund it right!

Too Big to Succeed

Citibank, the nation's largest bank, has received a $20 billion bailout, along with government guarantees for $300 billion of shaky assets; in addition to giving the bank an enormous amount of money, the public assumes all of the risks of being a banker, while Citibank gets to keep all the profits. That is to say, the profits are privatized but the risks are socialized, combining the worst features of capitalism and socialism in a toxic combination. Citibank is no ordinary bank. Together with JP Morgan/Chase, it owns the controlling interest in the New York Federal Reserve Bank, which in turn owns 53% of the Federal Reserve System. This makes the entire banking system sensitive to the needs of two New York banks. The President of the New York Fed has a permanent position on the board of the Federal Reserve. And who is that outgoing New York Fed President? It is none other than the new Secretary of the Treasury, Timothy Geithner.

But the banking system is more than New York and more than the Fed. Most of the regional banks did not engage in the risky behaviors of the New York banks. They made sensible loans. But Citi had no reason to be sensible; with their size and influence, they knew that they could not be allowed to fail. No matter what happens, they must be protected from the consequences of their own actions. Yet, their actions weakened the whole economy, which is weakening the books of even the most cautious banks; with the economy failing, even formerly reliable borrowers cannot repay their loans. The solution is not to bail out failure. Rather it is to ensure that no entity every again can be large enough to hold hostage the public purse. Don't bail it; that just reinforces a power structure that can no longer succeed. Rather buy it up and sell it piecemeal to the regional banks. The market capitalization of Citi was only $19B as of yesterday, or less than they received in the bailout. The toxic loans can be sold for whatever the market will bear; the healthy parts will make the remaining banks stronger, but none of them will be strong enough to dominate the banking business. Buy it up and break it up.

Of course, they may not want to be bought, and if they can find private investors to draw them out of this hole, that's fine too. But I doubt if they can find buyers without the government providing guarantees. In other words, everybody has found out what the distributists always knew: they are too big to succeed without the help of big government. They believe they can blackmail the public, but the truth is just the opposite: they are dependent on us and we may do as we wish.

The same plan holds true for other enterprises that need bailouts, such as the Big Three automakers. The obvious problem with these companies is that they are too big and there are only three of them. Japan, a much smaller nation, supports nine auto companies. The market price of GM was only $2.1B yesterday. If the public is taking their debts, then let us take possession as well. Buy them up, and then re-sell them to the workers in exchange for some of the long-term commitments. Break them up into the various sectors: engine companies, transmission companies, body works, etc. They could be converted over time into worker-owned companies.

Then, anybody who wanted to enter the automobile business could do so with a comparatively small investment; instead of manufacturing the whole car, they could purchase all the parts and assemble them according to their own designs and perceived market needs. Indeed, the auto companies have already laid the ground work for this by outsourcing so many of their parts and selling off so many of their plants. At some point, the central office losses any real power and its remaining functions can be duplicated by any number of start-ups for a relatively modest investment. At that point there is no reason we couldn't have nine automakers, or 19. Choices would go up, prices would go down, and local manufacturing would increase.

Fund it Right

In our industrial system, government is the consumer/employer of last resort. Government spending is $5 trillion of a $14 trillion economy, or more than one-third. Much of this spending constitutes a huge system of subsidies to large businesses, subsidies that are so in-grained that we no longer see them as such. For example, The “freeway” system is a huge subsidy to shippers and privileges global and national production over local and regional manufacturing. Indeed, without these subsidies, it would be difficult for global producers to compete with locally-made products, even with absurdly low-wages. But the transportation systems are the least in need of subsidies. It is easy to allocate these costs to the users through weight-based tolls. The “weight-based” portion is important because the greatest damage to the roadbeds comes from heavy trucks. With costs allocated to the cost-causers, subsidies disappear, and the dynamics of production change.

The most immediate result of tolls would not be a success, but a failure, namely the failure of the “big-box” retailers such as Wal-Mart. The distribution model of these companies depends on the current system of subsides and would not survive without them (see http://distributism.blogspot.com/2007/10/subsidizing-wal-mart.htm).

This huge system of subsidies also imposes high transaction costs on the economy. Even hiring a nanny requires a vast amount of paperwork and the payment of employment taxes. These transaction costs work against small businesses and in favor of giant ones. The transaction costs make it more difficult for start-ups to get started, but they are a mere nuisance to big corporations. The form an entry barrier which protect big businesses from competition. The greater part of the burden of taxation falls on labor and capital, when it should fall on the rentier (see http://distributism.blogspot.com/2009/01/chapter-xv-taxes-economic-rent-and.html)

But Will it Happen​?

Clearly the Obama administration is not thinking along these lines, and are unlikely to adopt any of the solutions of distributism. Does this mean that the discussion is merely theoretical with no chance of implementation? Not at all. The current system has reached its limits, and the attempts to save it will only make it worse. Distributism, in one form or another, is the wave of the future. The only question is how long and by what means will we get there. Distributists need to organize now, and to join whenever possible with similar and allied movements like Mutualism, Georgism, coop movements, and the like.

The current system has no future, and attempts to “stimulate” it will only result in an economic monster even more unstable than what we have. The “bail-outs” will only subsidize failure, and cannot long endure. There will undoubtedly be a time of great turmoil, with all sorts of solutions proposed. In such times, nearly anything can happen, including many unpleasant things. But we need to be in a position to show the nation the way forward, the only way that will work.

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A Seat at the Table?

Abortions, our liberal friends insist, ought to be “safe, legal, and rare.” Safety is, at best, a comparative term. As for legality, that is firmly established in this country, much to our shame. But rare? Alas, we have one of the highest abortion rates in the world. I bring this up in light of an initiative by the Obama Transition Team to solicit public comment on issues for the new administration. The transition team has set up a website, Change.gov, which allows the public to view policy documents which are being submitted by outside groups and to comment on them.

One of these documents has been submitted by a coalition of left-wing of feminist groups which calls for, among other things, increased access to—and public funding off—abortion and contraceptives. The proposal even goes beyond the so-called “Freedom of Choice Act (FOCA).” All of the usual suspects are have signed the document, Planned Parenthood, Catholics for Free Choice, The Guttmacher Institute, The National Abortion Rights Action League, etc. The proposal goes beyond just calling for federal funds for abortion, but will force private institutions that receive government support, such as colleges and hospitals, to provide abortions even in violation of their own consciences.

I believe that we should all protest this document, and let the Obama administration know the depth of the opposition to such radical pro-abortion policies, policies that would not only commit tax dollars to immoral policies, but which would force private citizens to subsidize abortions from their own funds. It is inconsistent for the left to treat this as a matter of conscience and then outlaw any dissent, which is what this document calls for.

But what should be our response? Obviously, what we would like is that all abortions be banned and all children be cared for. However, this is possible even with a Republican administration. According to a Fox News Poll, only 9% of Republicans consider abortion as an important issue. Indeed, according to a poll done for the Knights of Columbus, 50% of nominal Catholics consider themselves to be pro-abortion. And it is simply unreasonable to think that a Democratic administration would even consider outlawing abortion. Indeed, mild limitations on abortion failed in the last election in the Red State of South Dakota. So even among Republicans in Republican states, there is little chance of getting abortion outlawed.

However the President-elect has promised to be “the president of all the people” and pledged to listen to those who disagree with him even more closely than those who do agree. And while all politicians make similar claims, we should at least take him at his word on this and register both our objections and present alternative policies. With that in mind, here are some suggestions for a considered response to this proposal.

• While most people support limited rights to abortion, almost 84% want some restrictions. This proposal is undemocratic in that it ignores the will of the people by making abortion an unrestricted right.

• This proposal forces the government to fund all abortions, which is bad, but also forces institutions which oppose abortions to violate their own consciences; this is, self-evidently, unconscionable, and a misuse use—a tyrannical misuse—of government power.

• Abortion, whether one supports it or not, should always be considered a tragedy; and as with any tragedy, we should do our best to limit it. Instead, we have one of the highest abortion rates in the world.

• The problem is not a limit in access to contraceptives, as the document claims, since they are freely available, and carry no social stigma.

• If these policy recommendations are put in place, the rate of abortions, already one of the highest rates in the world, will increase. This is contrary to the President-elect's stated policy of reducing abortions.

• The culture of death implied by such a high rate of abortions cheapens life and cheapens the unique role of women; indeed, it is not merely anti-life, it is anti-women. If abortion really is a women's choice, something she can freely refuse, then it is difficult not to put the blame on women entirely if they choose to carry a baby to term. This creates social pressures on women to have abortions were the father does not wish to contribute to support of the children.

• The proper response to a culture of death is a culture of life. At a minimum, this means:

  • All children are welcome in the world

  • Women who find themselves “in a family way” should be supported. Currently, a poor women has a choice between inadequate pre-natal care, expenses that run between $30,000 and $50,000 dollars for carrying a child and delivering it, or a $1,000 operation that relieves them of all of these burdens. Economics alone favor abortion. This should not be.

  • There should be welcoming institutions for children, such as orphanages and adoption agencies. It is a strange phenomenon that we adopt so many children out of China while we abort so many children at home.

This is just my initial reaction. I am sure that the readers of this review can come up with more objections, objections that will be meaningful even to the new administration, and some more positive policy suggestions. What I suggest is that readers go the the “A Seat at the Table” section of Change.gov, review this terrible document, and post their suggestions here so that we can come up with responses that we can all share in drafting our own. I would hope that the transition team gets at least 100,000 responses from pro-life supporters. This would let them know how serious we are about working on this issue, and how much we intend to hold the President-elect to his pledges.

There are those on the left who do oppose abortion, however, they are a distinct minority. Nevertheless, we do agree with the nominal goal of the left that abortions ought to be rare. While this goal may be no more than a publicity stunt, we should hold them to account. While the public does not yet agree with us on outlawing abortion, they do agree with us on restricting abortions, and this we must re-iterate over and over again. Let us take our “seat at the table,” and even do a little table-pounding.

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The RINO Party

When Colin Powell endorsed Barrack Obama, Rush Limbaugh had a convenient explanation, shouted into the microphone: “It was all about race.” Of course, the whole point of a program like Rush's is to provide his listeners with sound bites so that they won't have to think; thinking is hard and it is simply more efficient to farm the task out to people like Limbaugh. It's a division of labor sort of thing. But others proposed another explanation, namely that Powell was a Republican In Name Only (RINO) and so his endorsement was hardly a surprise.

The RINO argument, though more coherent, breaks down in the face of the slew of defections from the entire spectrum of the Republican Party. Christopher Buckley, Ken Adelman, Christopher Hitchens, Scott McClellan, Bill Ruckelshaus, William Weld, Lilibet Hagel (wife of Senator Chuck Hagel), Jeffrey Hart, C.C. Goldwater, and a host of other life-long Republicans have switched sides, calling the RINO argument into question. Even Bruce Bartlett has called for conservatives to “reach out to Obama.”

Only part of the problem can be laid at the feet of the McCain-Palin ticket. True, McCain continues the Cheney-Bush policies of replacing taxes with borrowing, expanding the federal government and especially the powers of the executive (the so-called “unitary executive” theory), foreign adventurism, and a slew of other policies that cannot be reconciled with the traditional Republican stance. Even on social issues, McCain is unreliable. As Tom Piatak points out in Chonicles Magazine:

Even on abortion, McCain is unreliable. On February 3, The Washington Post reported McCain's statement that 'it's not the social issues [that] I care about.' And on August 19, 1999, McCain told The San Francisco Chronicle, '[C]ertainly in the short term, or even the long term, I would not support the repeal of Roe v. Wade which would then force X number of women in America to undergo illegal and dangerous operations.' I the same interview, McCain stated he would not have a 'litmus test' for judicial nominees. McCain's former senate colleague, Rick Santorum, an indefatigable champion of the unborn, has stated that McCain did his best behind the scenes to prevent pro-life legislation from coming to a vote on the floor. Robert Novak has reported that McCain has described Justice Samuel Alito as 'too conservative.' Novak has also reminded his readers that, back when Vermont Republican Jim Jeffords became an independent and began to caucus with the Democrats, McCain was in negotiations with the Senate Democrats to do the same thing. There is also McCain's support for federal funding of embryonic stem-cell research (ESCR), which cannot be squared with principled belief in the pro-life cause. Indeed, McCain has recently launched an ad touting his support for more federal funding of stem-cell research, and his campaign spokesman, Brian Rogers, has stated that the ad, which does not distinguish between ESCR and other types of stem-cell research, is intended to reiterate McCain's support for ESCR.

If the problem is not that the defectors are RINO, nor entirely with ambiguous nature of McCain's policies and campaign, what is the problem? Let me suggest that the Republican Party itself that is Republican in Name Only. The Party long ago abandoned its core principles. The problem began early in the Reagan administration, when the tax cuts did not lead to a smaller government; indeed, Reagan merely substituted borrowing for taxing. But borrowing is taxing; it is merely a tax shifted from the current generation onto the next; it is taxing our children for benefits that we enjoy, a kind of inter-generational theft that is counter to everything a pro-family party ought to do.

The government did not shrink under Reagan, and under Bush “(even excluding post-9/11 “homeland security spending) [domestic spending] has grown faster than during the previous two decades of divided government, and the incidence of pork-barrel projects has reached an all time high,” according to Christopher DeMuth of The American Enterprise Institute.

In abandoning its conservative principles, the Republican Party did not really become more Liberal. What it has become is more Corporate. That is, the Party has become captive of Corporate America, and it is run more and more for their convenience and profit, a profit they do not share with the rest of the nation, and are, indeed, even unwilling to pay for. As James Galbraith points out, the political world has become...

...divided into two groups. There are those who praise the free market because to do so gives cover to themselves and their friends in raiding the public trough. These people call themselves “conservatives,” and one of the truly galling things for real conservatives is that they have both usurped the label and spoiled the reputation of the real thing.

At this point we can ask, “What does the Republican Party need to do to change, to recover its principles?” And the answer is clear: It needs to lose, and to lose big-time. A marginal loss won't be enough to force a self-examination. Only a clear and crushing defeat will allow the Party to begin the process of recovering the Party's principles. Alas, it often happens that only pain leads to self-examination, and only confession leads to healing. If the Republican Party is really to become an alternative to Democratic statism, rather than just a substitute for it, it needs time out of power to re-focus on principles and practical responses to real problems, qualities which have been in short supply for the Party for the last 20 years.

The first thing the Party needs to do is to send the former Trotskyites who call themselves “neocons” back to the liberal darkness from whence they came. The next thing the Party needs is to convert the anti-abortion movement into a true “Pro-life, Pro-Family” movement (See “Pro-Life or Just Anti-Abortion?”).

In the interest of full disclosure, I must say that I am adding my name to the list of defectors. To the chagrin of many of my conservative, Catholic friends, I am voting—have already voted—for Barrack Obama. Since in the current crises, the Republican Party has little to offer the country, voting for Obama can do little harm, and may do much good. At least he seems to recognize a point that has escaped the Republicans, namely that our economic problems require the healing of the “real” economy, the economy of making things. In this, he can do no worse and may do much better. Indeed, conservatism should be more concerned with the real economy than the merely financial one, and currently the Republicans don't seem to know the difference.

But I am also voting Democrat for the good of the Republican Party. Unless it loses—and loses big—it will not change. And if it doesn't change, conservatives will have no real home in American politics.

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Blaming the Poor

You have, no doubt been wondering who to blame for the current market meltdown. Was it the greedy bankers, the venial politician, the Wall Street manipulators? Was it a free market failure? All of the above?

The right-wing blogosphere answers, “It was the poor.” And, of course, their powerful corporate and congressional allies. We all know how powerful the poor are; we just never heard before that they were capable of bringing down the whole financial system. But the right wing has uncovered the nefarious plot. For example, Grant Havers, at Takimag.com, states that the “Democrats insisted on a mass affirmative action program to help the poorest Americans acquire mortgages they could never afford.” Stan Leibowitz of the Independent Institute claims that in the drive to increase homeownership, “particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards.” Neil Cavuto of Fox News laments “Loaning to minorities and risky folks is a disaster.” And National Review Online proclaims “One of the reasons so many bad mortgage loans were made in the first place is that Barack Obama’s celebrated community organizers make their careers out of forcing banks to do so.”

What is the act that has all the right up in arms? It is an obscure law known as the Community Reinvestment Act (CRA) which was passed in 1977. How did this 30 year-old law cause the current crises? According to the mythology, community groups like ACORN used it to strong-arm banks and mortgage companies into the subprime business. Hence, the poor bankers, under threat from community organizers like Barrack Obama (yes, “that one”) were forced into a business they had no intention of entering.

The interesting thing about this claim is that none of the bankers and mortgage bankers are making it. In fact, most of the loans were made by organizations not even covered by the act, as Business Week points out. The CRA was originally passed to combat “red-lining,” the practice by which credit-worthy applicants were denied loans because they lived in certain neighborhoods which the banks had “red-lined.” In fact, loans made under the CRA “loans made under the CRA program were made in a more responsible way than other subprime loans,” according to Business Week.

So why the effort to blame the poor in this matter? The reasons are partly political and partly ideological. For the defenders of the free market, the subprime meltdown has been a big embarrassment. The fact that the market could err as badly as it did contradicts the theory of an all-wise and all-knowing market. “If only the market is unregulated, everything will work out fine.” Well, no, actually. The market is capable of great errors, errors the rest of us are expected to pay for.

The other reason is that the right is desperate. McCain's campaign seems to have stalled, and the economy is the biggest reason. Having someone to blame, and especially “minorities.” absolves the right and the Republicans of any responsibility.

Which is unfortunate. Understanding a problem is the first step towards fixing it, and misunderstanding guarantees that the “fix” will only make it worse. The left is out to blame the greed of the bankers, and the right the venality of the poor. Both answers are wrong. To be sure, there are those who are greedy, or venial, or both. But this is not the root cause of the problem. The real root concerns the way we create money.

Money is created by the banks (not, as the myth has it, by the government), who must keep creating money, even when there is no need for it. Ideally, banks would only lend to solvent borrowers for productive purposes. But suppose there is a shortage of productive investments. Suppose that the productive economy was actually shrinking, that jobs were being shipped overseas and not being replaced. Suppose that wages were stagnant or shrinking, so that demand was actually diminishing. In such circumstances, there would be little need for new money. But the banks must keep creating money in order to stay in business. In such circumstances, they will be forced to lend to weaker consumers to prop up demand and to speculators, whose demand for money is infinite.

This is, in fact, the circumstances in which the American economy finds itself. Median wages have been stagnant for the last 30 years and have actually shrunk since the start of the Cheney-Bush administration. The banks had to find borrowers, and the pool of prime quality borrowers was insufficient. So they went to subprime borrowers.

This actually worked pretty well. One thing must be clearly understood: the subprime market did not fail; it had a higher rate of foreclosures, but that was already priced into the higher interest rates. Most subprime borrowers are paying their notes, and will likely continue to do so until the economy collapses and they lose their jobs. They not the cause of the problem. Rather, the problem is caused by the vast market for “derivatives,” a series of side bets on the mortgage markets (See Economic Truth and the Bailout.)

One can legitimately critique the CRA on a number of grounds. One can certainly critique ACORN, or Obama, or the Democrats, or whatever. But to say that the CRA forced even a single subprime loan simply ignores the facts and keeps us from addressing the real problem. It may soothe our ideology, and may be useful in our politics, but it is sure to prevent us from addressing the very real problems we face. These problems have to do with rebuilding the real economy. Even the banks are victims in the current system; they did what they had to do to stay alive, and it killed them.

But even more importantly, this myth-making breaks the solidarity with the poor, and solidarity should guide all of our policy decisions.

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Swift-Boating Barry

Whatever one thinks of Hillary, Barrack, and the Democratic party, there is no question that yesterday was an milestone in America's history. The scene of first viable woman candidate for president in America's history calling for the nomination by acclamation of her rival, the first viable black candidate, was a touching moment, and there was weeping in the audience, not without reason. Tonight, the Democratic party celebrated in front of 70,000 cheering fans in a stadium and millions of the faithful on TV.

For all of that, Barrack has a big problem. The image of the Republican Party is tarnished by eight years of falling incomes, war, debt, and economic uncertainty. Yet Barrack barely leads in the polls, and sometimes trails. Why can't he “close the deal”? One reason may have to do with a conversation I recently had. It went something like this:

“I think that Barrack Obama is secretly a terrorist,” my friend said.
“A terrorist? That's a pretty strong charge. Why do you think that?” I asked.
“I am not saying,” he replied, “that all Muslims are terrorists, but I am saying that all terrorists are Muslims.”
“But Obama is a Christian.”
“Well,” he replied, “his father was a Muslim, and the apple doesn't fall far from the tree.”
“How about Timothy McVeigh?” I asked. “Was he a Muslim?”
“He had many ties with the Muslims.”

Asked about where this information came from, my friend admitted that he got his news mainly from right-wing web sites. Now, my friend is not an unintelligent person. He is a successful businessman, one who happens to do business with many Muslims. The right-wing sites are indeed pushing an Obama-Muslim connection, usually spoken of in terms of terrorism. And there are even those sites that will claim a connection between McVeigh and the Muslims. Since their story is that all terrorists are Muslims, McVeigh must be made into a latter-day Mohammedan to complete the logical circuit. But why should anyone believe these stories, particularly anyone as intelligent as my friend? The truth about humans is that stories are what they always believe; they do not believe in something called “facts,” they must have stories around which any set of “facts” can be organized. Indeed, there are no facts apart from the stories that connect them, as any good author or trial lawyer knows instinctively.

The truth about Barrack's story, however, is far more interesting than any of the stories written about him by either friend or foe. The product of Kansas and Kenya, black and white, Indonesia and Hawaii, given a first name that is odd to English ears, a middle name that is common in the Arabic world, common enough to be attached to our opponent in Iraq, and a last name similar to that of the world's greatest terrorist. His Kenyan father was raised as a Muslim but became an atheist. After his Kenyan father abandoned his family, his Indonesian step-father moved him to the other side of the world, where he attended both Muslim and Catholic schools, neither of which are likely to mollify the fundamentalists. When Indonesia didn't work out, he was raised by his white grandparents and spent his formative years in Hawaii. During that time he was known as “Barry.”

And that is the interesting thing about Barrack: he could have been Barrack or Barry. From the diverse materials of his youth, he had to choose his cultural identity. He had no driving tradition behind him to accept or reject. Rather, from a racial and cultural grab-bag he had to construct his own identity. And his choice is interesting. A Harvard-trained lawyer, with the whole world open to him, he chose to move to Chicago, a city to which he had no ties and no knowledge, and become an organizer on the famous (or infamous) South Side of that city. Obama is not an American Black in the same way that the people on the South Side of Chicago are. Barrack had to “integrate” into that community; he was not really part of it, but had to make it his own. He did, not by history but by choice. He joined the Black church, with a radical brand of liberation theology. He stayed there until it became politically untenable. He chose neither his father's atheism nor his stepfather's religious indifference. And whether he chose his religion out of theological conviction or cultural necessity, we cannot know and perhaps have no right to ask. We can only know that his choice was unforced, not dictated by his history. And he joined the church as Barrack rather than Barry. Barrack is the Arabic and Swahili form of “Baruch,” Hebrew for “blessed”; Barry is the American form of an indeterminate name with no particular meaning at all. He chose meaning over anonymity.

All of this gives Barrack both a certain chosen intimacy and a certain inherited distance from the American project. And to really understand anything about the world, one has to have both an intimacy and a distance. One has to be the intimate outsider to really see a people or a place. This is why young people often have to leave home in order to come back and find it again. Only the prodigal son who had traveled the world really knew his father; the dutiful son stood outside the tent in anger, not knowing that he too could have had a party whenever he wanted. Always living with his father, he did not know him. Only seeing the alternatives grants real knowledge.

But the question is, can the American people accept such an intimate outsider? The same historical materials that Barry used to become Barrack can be used by political operatives to make Barrack into whatever they like. It is hardly necessary to swift-boat Barrack with lies; his own history makes nearly any story plausible. What stories will the public believe? As of this moment, they have not made up their mind. Next week, the Republicans will start to construct their story of Barry, and sell it to the public. But the real work will be through other channels, shadowy but well-funded channels. These channels have already reached my well-heeled friend. How far into the public subconscious will they extend? I do not know, but I suspect they can be made very effective. Any good trial lawyer can make either a credible defense or prosecution from these same materials.

I always thought Barrack was too young, and likely to end up as another Carter, earnest but ineffective. But he will at least be interesting, in the way that outsiders are always interesting. I do not know if he will be a great president, or even a good one. But he will be interesting. Perhaps much too interesting ever to become president.

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Obama: The Black Kerry?

It is a bedrock belief in certain circles that the higher the incentives, the better the results. So for example, if you want more business growth, cut the taxes on capital gains and so increase the incentive to invest. Or, if you want more oil, give the oil companies higher and higher incentives by cutting their taxes, giving away valuable leases for free, granting generous depletion allowances, etc. Of course, there are excellent arguments for cutting capital gains taxes. The problem is that they are exactly the same arguments for cutting income and payroll taxes. This is not what the holders of large amounts of capital want. They want preferential treatment and the shifting of more of the tax burden to labor. Apparently, incentives stop at the assembly line.

The arguments for the view that more incentives lead to more production would seem to be intuitive. A glance at any supply/demand chart shows that the supply of any commodity increases with an increase in the price (its “incentive.”) However, things are never that simple. It turns out that there is an equally intuitive law called The Law of Diminishing Returns which works in the opposite direction; this law means, simply stated, that there is a limit to the effectiveness of incentives, or any other number in economics. “Diminishing returns” simply means that you can only throw so many “inputs” at a problem before the output starts to level off and then actually decline.

Because of the law of diminishing returns, all supply/demand curves are “backward bending,” although one never sees them drawn that way in the textbooks. In other words, that at some point, a higher price will actually bring forth less production, not more. At that point, the higher price becomes a “perverse incentive.” A perverse incentive is an inducement to “do the wrong thing.”

The sub-prime mess is a prime example of how perverse incentives work. Banks used to make their money lending money to borrowers who they felt could repay the loans. But they discovered that they could make even more money in a market composed of naïve borrowers by merely “originating” the loans, jacking up the loan fees, and selling the loans to investors. The virtuous incentives to be careful with the depositors money became a perverse incentive to be as reckless as possible. Then, as the market collapsed and the investors would no longer buy the suspect loans, the government, in an effort to “save” the housing market, shoved Fannie Mae into the gap. I never saw “moral hazard” work so fast. The mortgage companies kept on writing—and still write—the same bad loans that caused this mess. Now Fannie Mae needs to be bailed out, and the taxpayer will foot the bill. No one has a clue as to how big that bill will be. The bad loan practices continue to this day. Nothing has changed, except that the suckers buying these loans are now the taxpayers.

Another example of a perverse incentive is unfolding in the debate over off-shore drilling. The debate has a certain air of unreality to it because the oil companies already have leases on 34 billion barrels of oil and they could drill tomorrow, without so much as a nod to congress or anybody else. That is more oil than the leases under debate (about 18 billion barrels.)

So why the big push to get the leases in place before Cheney and Bush leave office? And why not punch a hole in the ground and take the oil out right now? Because the high price for oil is a perverse incentive not to drill, so long as they can be assured that they control the leases so that nobody else can drill either. $120/barrel oil is an example of the backward-bending supply curve. So long as they can be assured that some wildcatter or start-up outfit won't start sucking the oil out of the ground before big oil is ready to, there is no reason to drill now. With profits this high, punching more holes in the ground would only raise the supply and lower the price. Why do that? The oil is not going anywhere, and they can drill it as their present fields begin to run out, thereby keeping the prices sky-high for the foreseeable future. Since alternative energy sources won't be significant for at least a decade, if then, there is simply no reason to reduce their own return to investment by drilling more wells.

And the returns are impressive. Oil costs maybe $10-20/barrel to bring to the surface, but sells for more than $100. The oil companies advertise widely that they are only making 9%, but that is a highly deceptive number; in fact, if it were true, they could not get anybody to invest in the oil business. The truth is, their drilling operations earn closer to 50% return on investment, and even that is likely understated. If they can control all the leases, they can keep this up for years to come.

The same perverse incentives hold true in the refining business. The oil companies have not built a new refinery since the Ford administration. They like to claim that this is because of “regulations,” but that claim doesn't pass the smell test, for two reasons. One, most dangerous chemical plants operate under similarly strict regulations, but they have managed to keep up with demand for the past 30 years. And two, Big oil has actually bought out the smaller companies and closed their refineries. That's how perverse incentives work.

It is clear in this election that on this issue and many others, McCain is holding a pair of deuces against Obama's full house. Yet, McCain may be able to bluff his way into the White House. Obama is turning out to be a black Kerry, unable to respond to even the crudest charges. Kerry, a decorated veteran, was unable to respond to the scurrilous charges of a draft-dodger. Barrack seems similarly unable to respond to an empty but aggressive campaign. Obama is getting himself into a position where he will have to say that he voted against off-shore drilling before he voted for it. We already know how well that line of argument works.

Of course, the response is easy. Just tell the McCain-oil conglomerate that they can have a lease anywhere they like. But the lease has an expiration date. They must start sucking the oil out in five years, or the lease is automatically canceled and all lease payments forfeited. Further, the same rules apply to the leases they already have. Use 'em or lose 'em! Not only will there not be one single bid, but McCain will be instructed to quietly drop the whole issue, lest he endanger their control on the 34 billion barrels they already have but don't use. The Democrats have every natural advantage in this election, but that itself can be a perverse incentive to lose it. And so far, they are doing their best to do just that.

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