An interview with former Reagan Budget Director David Stockman, with especially cogent observations about the current economy, his advocacy for tax increases notwithstanding.
17
Sep
10
David Stockman interview
The 2010 California Governor’s race presents a stark contrast of personalities and circumstance. The chief challenges facing California are its structural budget deficit and governance. The question, therefore, is who can get the job done.
Simply, California state government is overdue for a wholesale transformation. On the fiscal side, the state has made spending commitments beyond its willingness and ability to generate tax revenues. The tax structure is so steeply progressive that an overwhelming majority of Californians pay a negligible portion of the state’s taxes, and so have virtually no ownership of government.
On the governance side, the gerrymander has created safe seats for one or the other party. With the general election a foregone conclusion, the candidate from the safe party in his or her district must pander to the extremist fringes in that district to win the primary. The consequence is a legislature of wing nuts unable to compromise without losing the support of their respective fringe constituencies. Hardly a recipe for good governance. Fortunately, Schwarzenegger-era reforms of transferring redistricting to a bipartisan commission and approving open primaries should lead to more competitive races and a more moderated legislature in time.
California faces other governance challenges, however. One conspicuous challenge is the absence of checks and balances in campaign finance. The other is term limits. In particular, the powerful combination of unionization of public employees, closed shops, mandatory dues, and no worker option not to contribute to union political activities, has created a campaign finance leviathan. Every elected official knows that he or she will be wiped out in the next election if they cross this brute. The same is true of the Indian gaming tribes. Simply, no effective check or balance exists to counteract this concentration of economic, financial, and political power. The facile response is to point out business interests but these are highly fragmented and disorganized and are obviously no match. Term limits, while well-intentioned, only magnify office holders’ dependence on one or two campaign finance sources. Longer-term incumbents can diversify their constituencies, hold off special interests, and have greater incentives to compromise over time.
So again, given these challenges, which gubernatorial candidate can we expect to get the job done. Both candidates acknowledge the need for fiscal restraint, which is good. One candidate seems to offer the ability to change from the outside, while the other clearly offers the prospect of external discipline. Only one candidate appears to have the vision and character to succeed, however.
To date, Jerry Brown has hardly lifted a finger to campaign. Whether this is hubris or detachment, we hardly know what he stands for. The state is in crisis and his very campaign displays no sense of urgency even about itself. Sixty percent of California voters being registered Democrats, this race would seem to be Brown’s to lose. Nevertheless, he’s hardly lifted a finger to campaign. In contrast, Meg Whitman not only has been campaigning aggressively for months, but also has articulated a focused message and has been reaching out to strongly Democrat communities, opening offices and campaigning in those districts.
We also feel the candidates’ personal financial situations are particularly relevant. Jerry Brown has lived off a substantial inheritance his entire life. Politics are a hobby to him. He has never really held any meaningfully productive private sector role that we are aware of. He is accomplished as a public servant, granted. Nevertheless, this background breeds a mind-set oriented not toward opportunity, initiative, accountability, and reward, but toward entitlement. Jerry Brown’s egalitarian instincts are noble, but we get the sense that his mind-set is oriented to securing an entitlement for the little people just like the entitlement that was bestowed upon him.
Meg Whitman, on the other hand, is a billionaire and she made it all on her own. This experience is more likely to lead one to focus on opportunity, achievement, and accountability. While we are not impressed with her scanty record of voting in prior years’ elections, or with the limp nature of her current policy proposals, at least she’s in the fight.
For these reasons, The Western Economic Review endorses Meg Whitman for California Governor in 2010.
and structural financial and economic characteristics
Excerpted from his, “A Journey: My Political Life,” (Alfred A. Knopf 2010):
To summarize: I profoundly disagree with the statist, so-called Keynesian response to the economic crisis; I believe we should be projecting strength and determination abroad, not weakness or uncertainty; I think now is the moment for more government reform, not less; and I am convinced we have a huge opportunity for engagement with the new emerging and emerged powers in the world, particularly China, if we approach that task with confidence, not fear.
In short, we have become too apologetic, too feeble, too inhibited, too imbued with doubt and too lacking in mission. Our way of life, our values, the things that made us great, remain not simply as a testament to us as nations but as harbingers of human progress. They are not relics of a once powerful politics; they are the living spirit of the optimistic view of human history. All we need to do is understand that they have to be reapplied to changing circumstances, not relinquished as redundant.
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First, “the market” did not fail. One part of one sector did.
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Second, government also failed. Regulations failed. Politicians failed. Monetary policy failed.
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Third, the failure was one of understanding.
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Fourth, financial innovation is not bad per se. Actually, very often it is good: It increases liquidity and boosts economic activity.
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The role of government is to stabilize and then get out of the way as quickly as is economically sensible. Ultimately the recovery will be led not by governments but by industry, business and the creativity, ingenuity and enterprise of people. If the measures you take in responding to the crisis diminish their incentives, curb their entrepreneurship, make them feel unsure about the climate in which they are working, the recovery becomes uncertain.
This is even true of the financial sector, however heretical it sounds to say it. … What there should not be is a wholesale attempt to predict every potential crisis and construct rigid rules in advance to prevent it. That way we risk flattening our financial system, squeezing the innovation out of it, trying to return it to the world of yesteryear, which is neither sensible nor economically productive.
17
Aug
10
Build this Mosque
On the topic of whether to permit construction of a mosque in lower Manhattan near the scene of the September 11, 2001 terrorist attacks on the World Trade Center, President Obama is right. America should build this mosque.
The conflict brought by radical Islam on the West is between intolerance and tolerance. This conflict is being fought superficially with weapons but fundamentally this is a battle for the hearts and minds of Muslims globally. Twisted as this may seem in the West, the radical Islamic view is that the West is at war with them and their religion.
Few acts would both affirm American character and undermine radical Islamic myths about the West, more powerfully than would building this mosque. America should build this mosque. America must build this mosque, and then trumpet that fact to the world.
Reflecting on our earlier post handicapping the 2012 Republican Presidential primary field, we now segment that field on a preliminary basis. Broadly, the credible candidates (as named below) segment into two groups, which we shall for the time being describe as The National Republicans and The Governors.
The National Republicans are candidates who by reason of prior play at the national level or other reasons, have broad awareness nation-wide. These candidates include Jeb Bush (former Florida governor, brother of G.W. Bush and son of G.H.W. Bush), Newt Gingrich (former Speaker of the House), and Mitt Romney (former Massachusetts governor and 2008 Republican Presidential primary candidate). These candidates bring name recognition, gravitas, and political organization but may be regarded as yesterday’s news.
The Governors all are currently sitting governors. These candidates include Chris Christie (New Jersey), Mitch Daniels (Indiana), Bobby Jindal (Louisiana), and Tim Pawlenty (Minnesota). They are highly competent, full of ideas, well regarded in their own states and regions, fresh faces, and up-and-comers, but lack broad national name recognition and political organization.
We believe it too early to tell which of these candidates or segments will advance in the public’s awareness and favor but will continue to monitor them closely.
Recognizing that the midterm elections have yet to occur and that consequently, any evaluation of prospective Presidential candidates is early, we nevertheless undertake a preliminary evaluation of likely or potential GOP Presidential candidates.
We do this because President Obama’s agenda and its consequences appear highly unpopular, his party appears headed for a drubbing at the polls in November, and his own poll numbers continue to plumb new depths. Furthermore, the Republicans, after a well-deserved election cycle in the electoral wilderness, are seeing a large number of prospective leaders bubble up from state and local levels to national attention. Because America’s chief executive in a bit more than two years is likely to be one of these individuals, we judge it prudent and appropriate to begin the process of evaluation and measuring-up.
So, candidate by candidate (alphabetically by last name), we list our preliminary impressions and evaluations. Of course, as free and critical thinkers, we reserve the right to amend our views with respect to any individual and to add others as additional information emerges.
Generally, we are encouraged by the strength of this field. Nearly all are sitting or former governors with consequent executive branch experience. We compare this with the relatively low-quality of the 2008 Presidential and Vice Presidential field, comprised of three U.S. Senators and the sitting governor of a minor state.
Jeb Bush, the former Florida governor, son of President George H.W. Bush and brother of President George W. Bush. Pros: Very well regarded in Florida and the Republican party, many thought Jeb should run in 2000 instead of his brother George, then Governor of Texas. He brings seniority and gravitas, “adult supervision,” to coin a phrase. On the merits, he would play well to moderates and independents and so is likely to be electable. Cons: Simply, Bush fatigue. To succeed in a general election, especially against an incumbent swept into office by reason of the unpopularity of his brother and who continues years into his administration to criticize and vilify his predecessor, Jeb must distinguish himself from his brother and establish himself as his own man. We expect the likely Democrat campaign strategy to counter a Bush candidacy will be to avoid the issues and its own record and focus instead on the man and, indeed, his brother. Preliminary estimate: Jeb may lack the fire in the belly for the kind of ad hominem campaign that is likely to be waged against him.
Chris Christie, the current New Jersey governor. Pros: A relative newcomer to elective office, Chris Christie is gaining high marks for candor, slaying of sacred cows, and fiscal prudence as he has taken over as governor of a state with one of the highest tax burdens, worst structural deficits, and most hostile business environments. As a north-easter, he may help carry an otherwise heavily Democrat region. Cons: Relative inexperience. Preliminary estimate: A solid Vice Presidential candidate whose candor and effectiveness may capture both the imagination of the public and even the Republican Presidential nomination.
Mitch Daniels, the current Indiana governor. Pros: A well-regarded Midwesterner who has gained substantial credibility as a prudent hand on Indiana’s fiscal tiller. Cons: Less well-known and charismatic, he may not be able to match the incumbent’s celebrity and fabulousity. Preliminary estimate: One of the handful of serious potential candidates to watch.
Newt Gingrich, the former Speaker of the House of Representatives. Pros: Well-known generally and an eminence gris in the Republican Party, he is as a former professor an ideas-oriented candidate. As his 1994 Contract with America demonstrates, he is comfortable and effective with principles-based leadership. Cons: Divisive and out of office for over a decade, it’s unlikely that he would poll well in either the primary or general elections. Preliminary estimate: While he clearly enjoys the media attention generated by his refusal to take his name out of contention, he is unlikely to run. His standing in the Republican party positions him well as king- or queen-maker, however, with the political heft to clear the field of unelectable aspirants with counsel and influence. He also could have a strong influence on the Republican platform, helping to keep it focused on issues of appeal to mainstream voters. A potential cabinet member.
Mike Huckabee, the former Arkansas governor and 2008 Republican Presidential primary candidate. Pros: Huckabee plays well to the Southern Republican base with solid conservative credentials. As a Fox News commentator, he also has relatively wide public awareness. Cons: Huckabee’s conservative credentials may play well with particular elements of his base but less so with moderates and independents, especially on social issues. The country has been whipsawed by base-oriented leaders and likely will be more receptive to a fiscally responsible moderate. Southern social conservatives simply don’t connect with the rest of the country. Furthermore, there may be a bit of fatigue with southern governors in the White House. Carter (Georgia), Clinton (Arkansas), and Bush II (Texas) each were deeply unpopular with broad swaths of the electorate. Preliminary estimate: Huckabee will not advance in the primary by reason of his social conservatism and may not be the strongest Vice Presidential candidate either, given alternatives. A likely Cabinet member, however.
Bobby Jindal, the current Louisiana governor. Pros: Regarded as “scary smart,” Jindal is one of the brightest lights in the Republican party. Well-regarded in his home state, he is gaining public awareness and stature by reason of his sheer competence in responding to the BP oil gusher in the Gulf of Mexico, showing up even the President. Also, for people who care about this, his Indian heritage demonstrates that the Republican party is not limited to those of European descent. Cons: His botched response to the 2009 State of the Union address did not stand him well. He also has actively denied interest in running for President in 2012. Preliminary estimate: Perhaps not ready for the Presidential nomination in this cycle, he nevertheless would be a solid Vice Presidential candidate if drafted, and potential Cabinet member.
Sarah Palin, the former Alaska governor and 2008 Vice-Presidential running mate for John McCain. Pros: Gov. Palin can stir up the rural, blue-collar, and Southern elements of the Republican base. She also gave a stem-winder of a speech at the 2008 Republican convention. She is well-recognized and a true celebrity. Cons: Too many to list. Deeply divisive, she depends on the psychology of grievance for most of her policy views and is unlikely to attract many moderate or independent votes. Her educational background is lackluster, she is widely regarded to be an intellectual light-weight, and her policy views on national and global issues are only recently formed. While we note the high irony of her being more qualified for the Presidency than the head of the opposing ticket in 2008, if solely by reason of being a sitting governor, this qualification was itself quite thin. Preliminary estimate: Too light-weight for the big job, she nevertheless will poll well in the primaries unless discouraged by party elders and the financial lure of commentary and the lecture circuit. Conceivably a Vice Presidential pick if she polls well in the primary, she likely would be a liability on the ticket. Better to deploy her as a niche campaigner, perhaps with the reward of a minor cabinet or agency post in which she would present little risk of embarrassment.
Tim Pawlenty, the current Minnesota governor. Pros: Well regarded in the Republican party, Pawlenty has been on short lists of Republican Presidential prospects for some time. Cons: Not well known outside his home state of Minnesota, he may lack the political organization necessary to prevail in the primary. Preliminary estimate: While Pawlenty should be on the short list of serious prospects, he must create a greater identity among the electorate to stand out from a potentially crowded and competitive primary field.
Colin Powell, the former Secretary of State under President George W. Bush and former Chairman of the Joint Chiefs of Staff. Pros: Colin Powell is one of the most well-regarded and trusted public figures in America. He has functioned at the highest levels of the military and government. Cons: Powell has been out of the public eye for nearly eight years. Furthermore, Powell’s endorsement of Obama in the 2008 general election likely sits poorly with many Republican voters, and explaining why he is running against Obama in 2012 will require a convincing explanation. Furthermore, Powell’s wife Alma has been consistently against his running for President. While this view apparently has been grounded in a fear of assassination risk by reason of being African American and he would be the second, not the first, African American President, one imagines the Powells may have lost their taste for public life. Preliminary estimate: Secretary Powell likely is enjoying his retirement and lacks the fire in the belly necessary to campaign to win. His endorsement will carry significant weight with many voters, however, and any candidate would be well advised to seek it.
Condoleeza Rice, the former Secretary of State and former National Security Advisor under President George W. Bush. Pros: Secretary Rice is brilliant, articulate and well-regarded. Her being a woman and African American will appeal to broad swaths of the country. Cons: For all her accomplishments, Secretary Rice has not held or pursued elective office. She appears to enjoy and prefer academia and has kept out of the public eye after leaving the Bush Administration and returning to the Stanford University faculty. Presumably, she would have been a leading candidate in either the 2010 California gubernatorial or U.S. senatorial race but did not take the opportunity. Furthermore, however unfair or inconsistent, Dr. Rice is perceived by many as either a conniving neoconservative or ineffective in standing up to several of the powerful personalities in the Bush II administration (Cheney, Powell, and Rumsfeld, in particular). Preliminary estimate: While Dr. Rice would have been an outstanding Vice Presidential candidate in the 2008 election, her recent absence from the public eye is telling. We nevertheless believe that any serious candidate should seek her endorsement and active assistance in campaigning.
Mitt Romney, the former Massachusetts governor, 2008 Republican Presidential primary candidate, former chief executive of management consultant Bain and Company, and son of former Michigan governor George Romney. Pros: Romney ran a strong campaign in the 2008 Republican primary and has kept his political organization active since then. He was well-regarded in the business world as CEO of Bain and received generally high marks while governor of Massachusetts. A northerner, he is unlikely to embrace the social conservative agenda with any more fervor than is necessary to carry the Republican primary. Cons: Several-fold. Romney, while conservative-ish and unquestionably competent, has an untethered philosophical approach to government, which leaves him unexciting to voters. He can accurately be accused of flip-flopping on the abortion issue. [Note: The Western Economic Review expresses no view on the substance of the abortion issue. -Ed.] Furthermore, he enacted “Romney-care” in Massachusetts, a mini-version of the government-mandated “Obama-care” that Republicans can be expected to campaign against. Furthermore, Ivy League fatigue. The last several Presidents have been both Ivy League alumni and deeply unpopular with broad elements of the population. Finally, the Mormon thing. Many voters, rightly or wrongly, are suspicious of the Mormon church and its confessors. Preliminary estimate: Most likely the candidate to beat in the Republican primary by reason of political organization, stature, and desire, we wonder about his electability against this incumbent.
Meg Whitman, the 2010 Republican nominee for California governor and former eBay chief executive. Pros: Provided she wins the 2010 California gubernatorial election, she will have national prominence as sitting governor of a major state. She also has the credibility that comes with being a successful Internet CEO. Cons: Even if she wins the California governor’s race, she’ll only be a year into office when the Presidential election cycle begins. Even if she is the sitting governor of a major state, this will be the extent of her political experience. Preliminary estimate: Some in California believe she is running not for California governor, but to be Mitt Romney’s running mate. While plausible, we regard this as unlikely. Such a ticket would be too heavy on business executives and too oriented to the coasts. We estimate she will be an effective campaigner but that she will remain governor, provided she wins in 2010.
Conclusion. A solid crop of prospects overall. Our survey leads us to conclude that the leading candidates at this date are, or ought to be, Bush, Daniels, Pawlenty, and Romney. The Republicans will be well advised to narrow the field early on so as to create greater public attention on a more limited set of high-quality, electable candidates each of whom can articulate a clear, focused message. Certainly, the Republicans should avoid the 2004 spectacle where the Democrat party put forward the last man standing from an initially large field, to abysmal effect. The Republicans will be more successful if the primary process is the final screen, with party elders first providing guidance, counsel, and adult supervision to narrow the field to credible, electable candidates.
13
Jul
10
Economic Literacy and the Left
In what is perhaps one of the most portentous social studies in decades, George Mason University Economics Professor Daniel Klein finds that self-identified liberals and Democrats do badly on questions of basic economics.
Moving beyond predictable expressions of defensiveness or validation, this raises several questions:
– Can the left raise its game?
– Should the left raise its game? Does it not have a duty to do so?
– What is to be made of the left if it does not raise its game?
– Where do economically correct liberals fit in the broader political landscape?
06
Jul
10
If We Forget History …
“We are spending more money than we have ever spent before and it does not work. After eight years we have just as much unemployment as when we started, and an enormous debt to boot.
U.S. Treasury Secretary, Henry Morgenthau, Jr., May 1939
Portugal, Ireland, Italy, and Greece, the PIIGs, as it were, recently faced the prospect of being unable to borrow after having legislated astronomical governmental budget deficits for years and accumulating equally astronomical levels of government, a/k/a sovereign, debt. Whereas previously, each avoided fiscal accountability by inflating (i.e., devaluing) their currencies and thus their debts, this time the gig was up: Their membership in the Euro had ceded monetary sovereignty to the European Central Bank. Consequently, and for the first time for some of them, they are faced with the prospect of actually having to pay up.
Compounding the problem is that each economy already is fully taxed; further increases in taxation would be prohibitively destructive. The only remaining option is reductions in government spending. Given that structural deficits have ballooned in recent years, budget cuts must in most cases amount to approximately 10% of GNP, or one fifth to one third of government spending. Practically, this means not just snipping here and there to slow spending growth, but wholesale elimination of entire spending programs, indeed, an entire re-consideration of the role of government in society and economy.
The sovereign debt crisis is not limited to Europe’s periphery. Japan has been on this path for decades, sustained only by a captive domestic savings pool. America in the past two years has tipped heavily in Japan’s direction. And not least are many large American states, notably California, New York, Illinois, and New Jersey. Each case is characterized by high taxes, even higher spending, and vast structural deficits. For America in particular, the looming question is which entitlements must it live without.
The first lesson, however obvious to many but somehow beyond the grasp of others, is that governments must balance their budgets, structural deficits are not sustainable, and all government spending must be paid for out of taxes.
A further lesson is that taxes cannot be increased infinitely. In fact, as Arthur Laffer instructed us decades ago, there is an optimal level of taxation in any economy. Various sources indicate this is at most twenty percent of income. In addition, increasing taxation beyond this level becomes destructive: It establishes structural disincentives to economic activity, slows growth, restricts employment, and yields decreasing levels of tax revenues.
Taking these two together leads us to the final lesson, which is that at some point, Keynes must come to Jesus. That is to say, growing government spending beyond the practical limits of an economy to generate tax revenues will cause a national economy to fail. Put another way, an optimal (actually, a sustainably maximal) level of government spending exists. That level likely can be ascertained scientifically and with a high degree of certainty. Within that limit, some might say less is more, others might allocate that limit in different ways. This is a legitimate topic for the political process. Clearly, though, as the PIIGS have taught us and Japan, America, and many of its states may soon echo with deafening volume, we exceed that limit at our peril.
An afterthought, taking us to the next topic for consideration, is how, then, can a polity respond within the reality of these constraints, to insatiable demands for increased public expenditure? The answer, of course, is growth. Those demanding increased public expenditure will find their quest far easier if they succeed in demanding increased growth. For how to accomplish this, see our earlier post, A Primer on Economic Stimulus and forthcoming posts concerning specific policy prescriptions.
02
Jul
10
Elian Gonzalez “happy”
According to CNN, “[f]lanked at times by Cuban President Raul Castro and his father, Juan Miguel, Gonzalez said he ‘feels happy to be here [in Cuba].'”
He might as well have had a gun to his head.
Western Economic Review 