Sunday, November 30, 2008

Jonah Goldberg Is an Idiot

Okay, so it's not exactly news. But so long as Goldberg insists on obnoxiously intruding his idiocy on our attention, I consider myself privileged to point it out. This column is a prime example.

It begins by complaining about all the sycophancy Obama has been receiving in the mainstream press, a reasonable point. Goldberg is particularly offended at hearing Obama compared to Lincoln because he is attempting to model his cabinet on Lincoln's.

[W]ho looks at how Lincoln staffed his Cabinet as the defining feature of his residency? Saying Obama is the next Lincoln because the two men share staffing styles is like saying George Bush is Thomas Jefferson because they both liked chicken soup. If I wear a pointy hat, can I call myself John Paul II?
Coming from the author of Liberal Fascism, the chutzpah here is stunning. It's as absurd to compare Obama to Lincoln because of similar staffing styles as to compare George Bush to Jefferson because of their taste in food or Goldberg to the Pope because of their headgear, but perfectly reasonable to compare liberals and fascist because both eat organic food. Goldberg goes on to say that Lincoln's greatness came from saving the Union and ending slavery, two big non-issues these days, and that he fought a civil war that he has no desire to emmulate.

Let me try to explain this to Goldberg. Lincoln's defining accomplishments were saving the Union and ending slavery. What permitted him to achieve these two great feats was an outstanding political and leadership ability, combining firmness of principle with flexibility of action. It is possible to seek to emulate Lincoln's leadership style and apply it to situations other than fighting a civil war or ending slavery. Doris Goodwin's book Team of Rivals argues that an underrated aspect of Lincoln's leadership ability was his ability to reconcile with old rivals, and his incorporation of many of them into his cabinet.

That being said, one certainly be skeptical about the "team of rivals" approach. It worked for Lincoln, not because he recognized his rivals as the top talent in the Republican party. Any contemporary would have recognized as much. Lincoln's outstanding achievement was not in choosing such a cabinet, but in making it work. This meant listening to the conflicting advice of some of the most brilliant minds of the day and taking responsibility for making the decision. It meant giving each one enough autonomy to do his job, but not enough to run out of control. It meant conciliating the egos of the top leaders of the day and getting them to work together. It mean convincing men with far stronger resumes to take their orders from Mr. Nobody from Illinois. In short it meant, as this article puts it, instead of choosing a team of loyalists, choosing the best team around and then winning their loyalty. Lincoln could pull that off. Whether Obama can remains to be seen.

But returning to Goldberg, he goes from silly to delusional on the subject of FDR. Claiming that the glorification of FDR shows a longing for the Great Depression, Goldberg says:

If liberals really loved peace, prosperity and national cohesion, they’d remember the 1920s or 1950s more fondly. And yet they don’t. Why? Because liberals didn’t get to impose their schemes and dreams on the country in those decades. Behind all the talk of unity and bipartisanship and shared sacrifice lies an uglier ambition: power. The audacity of hope behind all this Lincoln-FDR-Obama blather is the dream of riding roughshod over the opposition, of having their way, of total victory.

The Chinese curse and cliche “may you live in interesting times” is on point. Liberals (and a few conservatives as well, alas) seem desperate to live in interesting times. Not me.

You know what I hope? I hope Obama is another Coolidge or Eisenhower. But I’m not holding my breath.
Where do I begin? In talking about Lincoln, Goldberg points out, correctly, that the era of Republican dominance that followed Lincoln was forged in blood and imposed by military force. But despite his alarmist talk of liberals "impos[ing] their schemes and dreams on the country" and goal of "riding roughshod over the opposition, having their way, of total victory," the period of Democratic dominance that followed FDR was nothing of the kind. Sorry, Jonah, but the New Deal was not something that FDR forced over on an unwilling population, nor did the Republicans spend so much time out of power because Roosevelt's stormtroopers crushed them by brute force. Quite simply, when FDR "imposed" his "schemes and dreams" he was enacting a highly popular program. If he was able to "ride roughshod" over Republicans to "total victory," it was because it took some time before Americans were willing to trust Republicans with the economy again, and because many people feared the Republicans would take away popular programs. In other words, FDR enacted a popular program that won the people's support for a generation. Goldberg fears Obama will do the same.

Furthermore, do actual facts on the ground mean anything to Goldberg? What we are hearing is not a desparate wish to live in "interesting times." It is the recognition that "interesting times" are upon us, whether we like them or not. Just in case Goldberg has been too busy defending Liberal Fascism to follow the news, we are currently in the midst of the worst financial crisis since the 1930's. Comparisons to FDR do not mean than anyone is longing for another Great Depression, they mean that people fear another depression may be at hand and hope for FDR-like leadership to get us through it. The reason that no one is invoking Coolidge or Eisenhower -- or, for that matter a more recent President who presided of general peace and prosperity, Bill Clinton -- is not a dislike for general peace and prosperity, but an acknowledgement that they do not seem to be in the cards right now. Maybe Goldberg should get out and pay some attention to the real world for a change.

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One Final Riff on Obama (Before He is Sworn In)

Finally, let me make one last, unfair criticism of Obama before he has the opportunity to act. It is gratifying to hear that he intends to shut down GTMO, try or release the detainees, and launch an investigation of indefinite detention, torture, and "extraordinary rendition." But there is one more Bush Administration policy he has been notably silent on, the only one he voted in favor of, but one that led to practices so illegal the entire top echelon of the Justice Department was ready to resign. I refer, of course, to warrantless surveillance. Does Obama intend to investigate that as well?

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Eliot Spitzer for SEC?

When John McCain said he would appoint Andrew Cuomo, the New York Attorney General noted for his aggressive investigations of Wall Street, as Chairman of the S.E.C., my thoughts immediately turned to another former New York Attorney General famous for is agressiveness toward Wall Street Eliot Spitzer. And now it appears that others have thought of that as well.

So, would Spitzer make a good choice for chairman of the SEC? Reluctantly, I must say no. Yes, Spitzer is an expert on Wall Street's dirtiest secrets. Yes, backed with the power of the federal government, he would make both an excellent enforcer of regulations, and an excellent advisor on what new regulations to enact. And yes, cleaning up our finances and putting them on a sound, long-term footing are far more important than how Spitzer wishes to get laid.

But it wasn't just the prostitutes that brought him down. Spitzer is also arrogant, authoritarian, vindictive, and prone to abuse his office to pursue personal vendettas. Given the importance of getting our financial institutions under a solid regulatory regime, even these defects might be forgiveable, but only in an office that could be kept on a right reign. Chairman of the SEC is not that office. As McCain quickly learned when he called for the Chairman of the SEC to be fired, the President cannot fire the Chairman of the SEC. The purpose of this provision is obvious; to safeguard the independence of the SEC and insure the President does not abuse it as a political tool. But that also means that the President cannot stop the Chairman of the SEC from abusing his own agency. The independence of the SEC makes it unsafe to entrust to Eliot Spitzer.

On the other hand, I would be happy to see Spitzer in some role overseeing banks so long as someone could oversee Spitzer. Let him be US Attorney for the Southern District of New York, or head of the US Attorney General white collar crimes division (if such a division exists). Either way, the Attorney General could reign him in. Or let New York Governor David Patterson appoint him to Hilary Clinton's seat in the Senate. He could serve on the Senate Banking Committee, exposing Wall Street shenanigans, but with enough colleagues to keep him from doing any serious harm. Others have proposed some sort of informal advisory role in a kitchen cabinet.

In any case, Spitzer certainly has much of value to offer in the current crisis, and he should be used. But only in a capacity that will keep him under someone else's authority.

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Obama and Finance

While I have no regrets about supporting Obama over McCain, I did regard McCain as superior in two regards. First, he opposed subsidies for biofuels (not a trivial issue at a time of world-wide food shortaged). Second, he offered at least some sort of policy for tackling the financial crisis. Obama is talking about a stimulus package and, although I have some criticisms, the basic idea seems sound -- for Main Street, i.e., the real economy. But what about Wall Street? Thus far Obama has not offered any sort of plan for dealing with the financial sector, other than a general hint that he will follow the Bush Administration's policies, unchanged. In case he didn't notice, that hasn't been working too well. So far we have pumped huge amounts of money into the banks without much to show for it, and now the banks are coming back for more.

By contrast, Congress has been smart in dealing with the auto companies. When the Big Three approached Congress asking for a handout, Congress said come back with a plan for actual recovery and then we'll talk about it. This was doubly a good idea. First, it called for accountability. Before Congress gives any money to car manufacturers, it wants assurances that it will not go to waste. Second, it lets the car companies work out their own recovery plans instead of imposing one on them. Whether Congress accepts these plans or treats them as the initial basis for negotiations, at least we will know how taxpayer money is being used and will have some assurances it is not simply being thrown away.

It's time we started taking the same approach with banks. When a bank comes to the Obama Administration, hat in hand, asking for money, the Administration should require them first to come up with some sort of recovery plan that will account for how it will be used. Granted, banks are not entirely equivalent to the auto industry. Ultimately, we could let our domestic car industry fail. Everyone knows we will not let our domestic finance industry fail. But instead of the threat of failure, how about the threat of nationalization. We already nationalized Fannie and Freddie, as well as AIG. Why not tell the banks to start getting their financial houses in order, or Uncle Sam is taking over?

Besides requiring our banks to get their houses in order as a precondition for getting any more federal money, we should have regulators crawling inside every body cavity of every institution that needed bailing out, figuring out what went wrong. And then we should be creating a new set of regulations to protect banks from themselves and keep them from getting us into this mess again. We should be beefing up enforcement sectors of the government, both to enforce these regulations and to spot any new problems the future finance industry may be making for itself so we can act quickly to head them off. And quite probably we should be changing bankruptcy law to allow home buyers to renegotiate mortages instead of the all-or-nothing choice of pay or foreclosure.

Does the Obama Administration intend to do any of these things, or just to pass a stimulus package and continue its precedessor's financial policies? I don't know. But if Obama does intend to make any of these changes, he had kept mighty quiet about them.

One final word to Congress. Keep up the good work with the auto industry. Don't release any money to Henry Paulson. And when the Obama Administration comes asking for the remainder of the $700 billion, demand an accounting before releasing it.


Keynesian Economics: AWOL Over 25 Years

So, it appears that Obama is going to revive Keynesian economics and attempt a large-scale stimulus (in the half-trillion dollar range) in the to revive the economy. I certainly hope that it works, but share an old conservative misgiving – how are we going to pay for it all. After all, Keynesian economics is not simply an excuse for all-out profligacy. Properly applied, Keynsian economics calls for a whole lot more fiscal responsibility than we have been seeing lately.

Keynes in good times.

Classic Keynesian economics calls for keeping the budget balanced or with a slight surplus in good times. From the severe recession of the early '80's squeezed inflation out of the system until the current financial crisis, we have had approximately 25 years of prosperity and rapid growth, with only two mild recessions. According to Keynes, we should have been running balanced budgets throughout that time. Instead, throughout the 1980's and first half of the '90's, we ran huge, seemingly intractible deficits. In the latter half of the '90's, by a combination of rapid growth, increased taxes at the top as growth concentrated at the top, a booming stock market, and capital gains tax, we were able to shrink and finally erase the yawning deficits and begin running surpluses. Upon coming to power, the Bush Administration promptly cut taxes and restored the deficits, which since 2001 have been running high, with no one caring.

Then again, the main reason Keynesian economics calls for balanced budgets in good times is the belief that large deficits during economic expansion are inflationary. Yet since the end of the '80's disinflation, we have combined rapid growth, large deficits, and low inflation. So clearly Keynes was not infallible. But despite low inflation rates, there has been a price for high deficits. The price was most obvious in the '80's. During the '80's, restrictive monetary policies drove interest rates to all-time highs. The combination of high deficits increasing the national debt and skyrocketing interest rates raised debt service ever higher. The longer deficits remained high, the more of the federal budget was dedicated to debt service, and the less could be spent on anything else. Over time, debt service came to be larger than the deficit itself. During the Clinton surpluses, the US government began paying down the debt very rapidly and realizing an ever greater "solvency dividend" as debt service consumed less and less of the budget. Panicked Republicans, fearing Democrats would use the surpluses for social spending, hastened cut revenue and return us to deficits as soon as they came to power in 2001. Debt service has been less of a problem this time round, thanks to expansionary monetary policies and low interest rates. On the other hand, in the '80's, most of the national debt was in American hands and therefore was not an overall fiscal drain. Today, the Chinese hold more and more American debt, which poses a financial drain on the economy and gives China disturbing leverage over us. And now we are proposing increasing deficits and debt to unimaged height, with unknown effects.

Keynes during ordinary recessions.

Keynesian economics does call for deficits and stimulus during ordinary, mild recessions, such as the recession of the early '90's or following the dot-com crash. However, no great profligacy is needed. Rather, there are automatic, self-adjusting counter-cyclical tendancies within the system that can provide adequate stimulus during ordinary recessions. Tax revenues will fall as a result of reduced economic activity. Claims for unemployment insurance, food stamps, and other forms of aid will rise. These increased expenditures will provide a counter-cyclical stimulus with no need for any further action. Of course, a deficit will result, but if the government has maintained adequate fiscal discipline, the deficit will be modest and self-correcting when the economy improves. Any attempt to avoid the deficit by raising taxes or cutting spending will worsen the recession and should be avoided.

Many state constitutions have balanced budget requirements, which tend to have a perverse, pro-cyclical effect. In other words, if states do not maintain strong fiscal discipline in good times, during recessions they will be forced to either raise taxes when the state can least afford them or cut services when they are most needed. But if state governments understood this basic theory and had the discipline to follow it (and explain it to the public), they could achieve a counter-cyclical effect. Quite simply, in good times, state governments should resist the temptation to splurge or cut taxes and instead keep running surpluses to build up their cash reserves. When recession hits, states can then draw on their cash reserves and have a counter-cyclical effect (though on a smaller scale than the federal government).

Some parts of the Obama stimulus package, like extending unemployment insurance and food stamps or aid to states are ordinary countercyclical spending that will automatically diminish with economic recovery. Even the bailout, if successful, can be justified as a one-time countercyclical measure. This is why many people are advocating that the bailout take the form a stock purchase, so that if it suceeds, the government can sell the stock at a profit and use the proceeds to pay off the debts the bailout has caused. The bad news is that ordinary counter-cyclical measures, and even bailouts may still not be enough.

Keynes during severe downturns.

Of course, Keynes did not become famous for his recommendations during goods times, or even ordinary recessions. He developed his theories in response to the Great Depression, an economic catastrophe. Opinions differ on how severe the current economic crisis will be, but conventional economic wisdom holds that it will be more than ordinary counter-cyclical adjustments can handle. A large extrinsic stimulus, of the type Keynes recommended in the 1930's, is called for.

This leads to a paradox that even Keynes found troubling. The primary purpose of stimulus spending, under Keynesian theory, is to stimulate, rather than to actually build anything. Furthermore, the amount of spending should be calibrated by the amount of stimulus called for, rather than any extrinsic need. The practical upshot of this is that stimulus spending is more appropriate to the extent that it is useless, or at least superfluous.

Even the most profligate spenders are generally reluctant to blow money on a project precisely because it is useless. The Obama Administration, for instance, is proposing to spend on infastructure. It pitches this, not only as a stimulus, but as a useful investment in the future that will increase our future wealth. This is good investment logic, but not good Keynesian logic. If spending is being done for the sake of spending, then if the infastructural projects do not provide enough stimulus, then we should increase expenditures, even if it means wasteful duplication and useless bridges to nowhere. If the economy does get rolling again, Keynesian logic calls for halting infastructural spending, even if it means leaving half-finished highways everwhere. In other words, there is no guarantee that need for stimulus and need for infastructure have anything to do with each other. Which one will receive priority? Do we prefer unfinished projects, or ever-growing deficits? And this is to say nothing of Obama's health care plan, which is being pitched, not as a temporary stimulus, but a permanent project.

Now we've blown it. How do we pay for it?

If we had exercises financial discipline during the prosperous times of the 1980's and '90's, indeed, if we had kept the Clinton surpluses during the last six or seven years and paid down debt, we would not owe such huge sums to China and would not have to worry just how much more debt we could sell, or how much we could afford to service. The "good" news is that neither of those appear to be serious problems at present. In the current climate of uncertainty, investors are buying US treasury bonds even at a rate of zero for the sake of security. The bad news is that whenever the world economy does pick up, interest rates will rise, treasury bonds will have more competition, and there will be the devil (or the Chinese) to pay.

The Republican strategy since 1980 (whether intentional or inadvertent) has been to bust the budget in order to prevent Democrats from enacting social programs. And in this, if nothing else, they have succeeded beyond anybody’s wildest dreams. And now the bill is coming due.