Deepish Thought

The President has received a lot of Republican “feedback” on his statement that, “Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that.”

Leaving aside the astonishingly inept phrasing, the President’s larger point is not unreasonable.  If you own a successful business you do benefit from things the government provide (rule of law, security, infrastructure, healthy educated workforce, basic research, etc).  It is really the logic that flows from this obvious truth that differentiates the President form his Republican critics.

The President appears to believe that success flows from what the government provides.  Therefore the government is justified in taking the fruits of that success.

Republicans tend to believe what the government is a necessary, but not sufficient, condition for individual success (even if they don’t generally state it in this way).  Therefore the government has only a limited claim on the earnings of successful individuals.

Beliefs about the relative importance of government have broader implications.

The President’s apparent belief that prosperity flows from government, implies that more government equals more prosperity.  From this viewpoint the cost of government is almost irrelevant.

The Republican view that things provided by government are merely one of the preconditions for prosperity leads logically to the focus on providing these things at minimum cost.

Unfortunately, we’re unlikely to see much thoughtful debate about the relative merits of these two viewpoints.   Hammering the President for the dimwitted quote above is much more fun.

Interesting insight on how people become billionaires in different parts of the world.

Many Americans appear to believe that they are the victims of a hopelessly corrupt economic system run by and for 1% oligarchs.  Before buying this narrative it might be a good idea to look at countries that actually have hopelessly corrupt economic systems run by and for oligarchs.

Now look at Russia, where one hundred billionaires control fortunes worth an astonishing 20 percent of national GDP. Russia has nearly as many billionaires as China but they control twice as much total wealth in an economy one-fourth the size. Just as striking, Russia is missing not only a middle class but also a millionaire class; according to Boston Consulting Group, China ranks third in the world for number of millionaires, while Russia is not even in the top 15 for millionaires.

The growing business influence of the state is reflected in the fact that 69 of those billionaires live in Moscow, the largest concentration for any city in the world. Protected by their patrons, the richest face little competition. Eight of the top 10 are holdovers from 2006. More than 80 percent of the wealth of Russian billionaires comes from non-productive industries like real estate, construction and especially commodities, namely oil and gas, in which political ties can sustain fortunes indefinitely. In no other developing nation is this share greater than 35 percent. Even in Brazil, a commodity economy at the same income level as Russia, the non-productive share of billionaires’ wealth is just 12 percent.

House Democrats have decided to make a great show of refusing to support the President’s deal on extending the Bush tax cuts.  It is difficult to understand why any remotely competent politician would take on such a clearly untenable position.  The inevitable climb down is clearly going to be deeply humiliating.

At the present time Democrats currently have two plausible alternatives:

1. Pass, however grudgingly, the President’s tax deal
2. Dig their heals in and ensure that:
   1. The President is severely damaged (What use is a President who can’t even rally his own party?)
   2. Democrats take the blame for everyone’s taxes going (Can’t avoid that when you willfully torpedo a bipartisan deal)
   3. The replacement deal to extend the Bush tax cuts will be done by the next Congress, in which Democrats will have even less leverage (Because that’s what happens when you lose the house)

Since most Democrats are not actually certifiable, it is only a matter of time before they back down and take option 1.

There are a fair number of people who seem to believe that, if they stick to their guns, house Democrats will somehow be able to negotiate a better deal.  This is pure fantasy.  The Democrats have precisely zero leverage in this situation.  Republicans already have a deal they like.  If the Democrats refuse to get on board they will be more than happy to blame Democrats for a tax hike, then force an even better deal next year.

Since all of the above is obvious to pretty much everyone involved, the political tactics being employed by house Democrats seem thoroughly mystifying.

One plausible explanation is that this little piece of political theater is aimed, not at the general public, but at Democratic primary voters.

Democrats who are losing their seats are taking the opportunity to position themselves as true guardians of the faith, just in case they want to run in 2012.  While those Democrats who survived the recent slaughter certainly don’t want to open themselves to a potential primary challenge from the left by being seen as too willing support a deal that the folks who vote in Democratic primaries aren’t too fond of.

Everyone knows a climb down is coming, but precisely which Democrats are held responsible for this humiliation by the party faithful may have a big influence on a lot of Democratic careers.

Some things just lend themselves to smart ass responses:

• New York Jets fans are demanding that Mark Sanchez be immediately inducted into the hall of fame.  Sure he hasn’t really done anything yet, but he takes a nice picture and seems to be much less of a jerk than the last guy.
• Apparently Angela Merkel was also considered as short listed for the Nobel Peace Prize.  The fact that she has only bought one bankrupt car company probably counted against her.

Megan McCardle has pointed out that the ‘successful’ cash for clunkers program has resulted in a rather nasty hangover for automakers.  Her argument is that:

Cash for Clunkers moved a bunch of auto sales forward, causing people who thought they might replace their car in the next year or two to rush into the showrooms.

This is a true but incomplete explanation.  The Cash for Clunkers sales likely came from several sources:

1. Once the program was announced many buyers likely postponed purchases until they could take advantage of the subsidy.  So sales in the period immediately prior to the start of the program were artificially lowered.
2. As Megan points out, people who intended to buy a car in the next year or so likely brought forward their purchase in order to take advantage of the subsidy.  So sales in the period after the end of the program were (and will continue to be) artificially low.
3. People who were weighing up possible purchases opted to buy a car, as opposed to say new appliances or a trip to Disneyland, in order to take advantage of the subsidy.  So higher car sales were balanced in part by lower sales in other parts of the economy.
4. People who might otherwise have saved or paid down debt opted to purchase a car in order to take advantage of the subsidy.

Sales resulting from explanations 1 and 2 were simply a direct wealth transfer from future taxpayers to car buyers.   There wasn’t any real impact on the number of cars sold, just the timing, so the car companies aren’t really better off.  Any stimulative effect on economy would be the result of car buyers choosing to spend rather than save their subsidy windfall.

By contrast, sales resulting from explanation 3 were rather more insidious.  In addition, to the wealth transfer from future taxpayers to car buyers these sales also include a wealth transfer from non-car companies to their automotive brethren.  In other words, politically favored companies got some increased sales at the expense of those with less political pull.

Overall, these sales don’t represent any increase in aggregate demand.  Again, any stimulative effect on economy would be the result of car buyers choosing to spend rather than save their subsidy windfall.

The subset of sales driven by explanation 4 was the most economically useful.  Additional cars sold without an offsetting loss of sales in other parts of the economy actually represent an increase in aggregate demand.

So the utility of the program as a Keynesian stimulus depends on the proportion of sales driven by explanation 4 and the extent to which the windfalls enjoyed by car buyers driven by explanations 1, 2 and 3 were spent rather than saved.  It is possible, even likely, that the effective stimulus was substantially less than the $3 billion plus the program cost.

Taking a broader view, this program suffers from the same problem that dogs most stimulus initiatives.  A small fraction of the economy will experience direct benefits.  The remainder of the economy will simply see future costs in the form of higher taxes, interest rates and inflation, and a more politicized economy.   For this reason, stimulus efforts that aren’t linked to future productivity improvements are, at best, a questionable idea.

In the high profile lobbying contest to win hosting rights to the 2016 Olympics Brazil’s President Luiz Inacio Lula da Silva has completely shellacked President Obama.

In the grand scheme of things the location of the 2016 Olympics isn’t of great importance. In fact, Chicago is probably better off for having lost. However, Obama’s involvement in Chicago’s bid displays in microcosm one of the key problems with the Obama presidency.

Having stood aloof from the selection process, the president swooped in at the last minute, made a pretty speech and expected to swing the vote.

By contrast, the rather more effective President Lula da Silva was far more engaged. He apparently understood that the result would be decided well before the TV cameras were turned on. Lula was so confident he had the votes that he supposedly pressed the Obamas to go to Copenhagen.

President Obama’s approach to the Olympic selection process mirrors his approach to the far more important issues being decided on Capitol Hill. Stand aloof from the messy politics and trust that golden voice to swing the necessary votes.

It appears that we have an applause line President. He looks great on TV and gives a great speech. These are fine qualities in a politician, but fall well short of what is require to make an effective leader. When it comes to shaping legislation and winning diplomatic fights he is doing about as well as you would expect for a guy with a whole half term of Senate experience.

From the Stand-up Economist:

If I had to pick an animal to describe the US economy right now I’d have to go with the hamster.  But like a really tired hamster that has been running around its cage for like seven years.  Right now it’s exhausted.

As a micro-economist I would say that the hamster needs some rest.  Macro-economists, of course, look at the hamster and think that it needs some methamphetamines.

Now, I’m sure that they are right.  Over the past month I’ve learned that the three most terrifying words in the English language are, “macro-economists agree that”.

I’m sure they are right about the hamster needing methamphetamines.  But all I’m saying is that in two years that is going to be one ugly hamster.

Bill Clinton apparently believes that the “vast right-wing conspiracy” that undermined his presidency (Did Republicans smuggle buxom interns into the White house?) is diminished but not dead.

This vast right-wing conspiracy theory is just as dopey as the vast left-wing conspiracy theory that remains very popular on Fox News.

Isn’t it about time that America’s leaders came to to accept that some people will inevitably oppose their policies, dislike them personally, or find some other reason to make their lives as difficult as possible?  It is a mystery to me why American politicians feel that they ought to be handled with kid gloves.

In the UK (also New Zealand, Australia, Canada and India)  the Prime Minister is required to front up in parliament on a weekly basis and answer the best verbal assault that the opposition parties can muster.  This forces the leaders of these countries to develop nice thick skins.  It also removes any illusions they might have about entitlement to deferential treatment.

By contrast, American leaders, who generally avoid unscripted situations whenever possible, are complete wusses.  Perhaps weekly ‘President’s Questions’ in Congress might toughen up the denizens of the White House so they don’t feel the need to cry like little girls when people don’t treat them nice.

It appears that some liberal Democrats are so incensed by President Obama’s unreasonably centrist tendencies and willingness to compromise with Republicans that there is talk of Obama facing a primary challenge before the 2012 election.

It’s no wonder that so many in the liberal base are falling out of love with the president. So much so that there is even faint talk of an insurrection if Obama doesn’t straighten up and fly left. Recently, during an appearance on a cable TV show, Washington Post columnist Gene Robinson discussed the political costs for Obama if the public option is dropped from the health care bill. They included the possibility of a primary challenge in the 2012 presidential election. Said Robinson, “You don’t want to see the progressive caucus in a foul mood.”

A interesting question is whether the Obama re-election team would consider a primary challenge from the left a bad thing.  If you were trying to get a relatively liberal president re-elected, a wild eyed progressive challenger playing up how crazily centrist and bipartisan your guy was might actually be an asset.

The only scenario in which this might be negative is if the president is so weak in 2012 that a primary challenger actually has a chance of winning the nomination.  In that case President Obama might be forced to publicly tack left in order to win the primary, which might be the thing that costs him the general election.

Brad DeLong has written a pretty interesting piece on his reminiscences of the health care battles of the mid nineties.  As Mr DeLong tells it, there was never any hope of getting a Democratic plan through the Senate. Key Democratic Senators weren’t going to let a “hick from Arkansas” push through health reform.  Even a reform they might otherwise support (charming).

All hope actually rested on an eventual compromise coauthored with Bob Dole. Apparently, this plan was sabotaged by “Gingrich and company”, who allegedly made opposition to any Clinton health plan a condition of supporting Mr Dole’s presidential aspirations.

The moral according to Mr DeLong is:

I have drawn what I think are appropriate lessons from it. First, Democratic senators do themselves no good either in the next world or in this  when they block sensible initiatives from Democratic presidents. (But what lessons are Democrats Landrieu, Nelson, and Lincoln drawing?) Second, Republican senators do themselves no good either in this world or in the next when they block sensible initiatives from Democratic presidents. (But what lessons are Republicans Grassley, Voinovich, and Hatch drawing?)

I don’t know how accurate Mr DeLong’s recollections are, however his conclusions are a little iffy.

On the subject of Democratic Senators Mr DeLong may have at least half a point.  All elected Democrat’s have a vested interest in making the President appear  successful.  Perceptions of how the President is doing will inevitably hang over every race in the coming mid-term elections.  On the other hand, getting the President’s bills passed is hardly a guarantee of electoral success.  The Democrats may well have lost control of Congress in 1994 even if they had passed health care reform.

Regardless, the situation in 2010 will be very different from 1994.  The 1994 election was a decisive swing against a decades long Democratic majority that resulted in Republicans picking up many marginal or even liberal leaning seats.  The 2010 election will probably be more like 1996, 1998 and 2000 when the Democrats picked up seats as the Republican tide ebbed.

This time around disgust with the Bush administration resulted in a Democratic flood in 2008.  With the focus of anti-Republican feeling long gone, this tide too will begin ebb.  The marginal Democrats who survive 2010 may well be the ones who recognize that the President is rather more liberal than their constituents and vote accordingly.

On the subject of Republican Senators, my guess is that they are drawing conclusions exactly opposite to what Mr DeLong would prefer.  By Mr DeLong’s own admission, the real political winners in the health care struggles of the early nineties were the Republicans who led the charge against ‘Hillarycare’.