Wednesday, October 14, 2009

The Case for Obama's Conservatism

What does it mean to be a conservative anyway? I don't know, but I prefer the definition that its a practical adjustment to events, with the intention of keeping the whole show on the road as coherently as possible. But that's probably being unfair to liberalism which could also fit into that definition. Many its a definition of a political moderate.

But when you truly feel that your country and nation is generally on the right track and you feel that you want to basically keep things as they are. Of course, nothing is perfect, and our country and our government, both those who serve and the institution itself, can be improved upon, can and should adjust to the challenges of a rapidly changing world. But by and large, I feel we have the institutions in place to do just that.

Which is why essentially I believe I am a conservative and its why I'm a supporter of Barack Obama because I feel that his style and substance matches closely to what our current global and national challenges require. His is a conservative approach, a pragmatic approach, which is why he is giving heartburn to those polarized on both sides of the political aisle.

For me its a good sign a politician is hated from both ends of the spectrum - it shows a willingness to compromise, a willingness to find the pragmatic center. Sometimes the center solution is not the right solution but its the best solution given the political winds that blow. Our political system is designed with two political parties diametrically opposed to one another, and especially on domestic issues where Congress has a lot of power, our political system sometimes requires the good instead of the best solution.

There's a good reason for this. So much better to mute a really good leader's ability to effect really positive change so that you can mute a really bad leader's ability to affect disastrous change.

Other times, the middle ground happens to be the exact correct solution. The Constitution was created as a result of many compromises - between big states and small, between those who wanted a strong federal government and those who wanted all of the power left to the states, and so on.

It struck the right balance.

So, call me a moderate, or a pragmatic, I call myself a political conservative.

On that note, I came across two links that strike just the right cord for me.

This post describes why the Obama administration acted in reality pretty timidly in response to the worst economic crisis since the Great Depression, both in respect to the bailouts and the financial crisis.

If you read progressive-minded economists like I do, they ripped Obama's (and Bush's) bailouts because they didn't go far enough. They wanted Obama to follow the Swedish model and to effectively take over the failing banks, recapitalize them with federal funds, and then turn them back over to the public sector (while first firing all of those blasted CEO's that got us into this mess).

And that is what, in fact, Christina Romer suggested was required:

"Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, 'The one thing that was absolutely clear was, we were not in a position to go back to Congress.'"

I've been having some pretty hardcore debates with some extreme progressives who wanted to see this kind of overt nationalization (temporarily) and many smart economists also favored this approach. But my argument was that it just wasn't possible politically even if it was the right thing to do.

And of course, most economists that I read believed the fiscal stimulus was far too small:

"I’ve seen a fair amount of commentary on the part of Ryan Lizza’s profile of the Obama economic team where Christina Romer recommends a $1.2 trillion stimulus proposal and they wind up with just a bit more than half of that out of deference to the tender sensibilities of the United States Senate. "

A significant portion of that stimulus came as tax cuts which were added as a way to win Congressional support no matter that they were the least effective portion of the stimulus.

So, on both accounts, probably the best response was a much more bold response. Obama instead was relatively tepid. The result was he did enough to avoid the worse and maybe enough to allow the economy to ever so slowly find the bottom and work toward a recovery, but not enough to really fully fix our most severe problems (our banks are still not lending, unemployment is still too high).

The side effects of a bank bailout that really did not lead to a necessary overhaul is that we have fewer banks (the smaller banks in trouble were allowed to fail via the FDIC nationalizing them for a very short time and reallocating their assets to other institutions), those banks are more powerful, and its unclear whether they've learned their lessons sufficiently to avoid another bubble/bust cycle.

But an overhaul would have been expensive and there's little chance Congress would have went along...

Now to the second link by Bruce Bartlett, a true conservative, one of the authors of the supply side economic philosophy that was so effective and such an important part of Reaganomics.

He outlines why tax cuts and other supply side aspects of Reagan's economic policies were so important in the early 1980's to address excessive demand in relation to supply, the resulting inflationary conditions and the high tax rates, and why those conditions do not exist anymore.

In many ways, George W. and Jimmy Carter are similar, both were inexperienced when they were elected president, both were ambitious and ideological, but unfortunately, neither ideology was appropriate for the problems they faced.

In so many ways Reagan was a breadth of fresh air. I was young when he was elected, but what he said made a lot of sense especially for the time he lived. Free trade introduced greater competition and brought more and better products into our markets. He had this sense of optimism and confidence and was able to face the communist threats effectively. He moderated his foreign policy stances at the right time, willing to reach out to previous adversaries when it made sense.

A while back I read this book about the history of North and South Korea post Korean war and I was impressed with the role Reagan played in helping South Korea make the transition from a military dictatorship into a free and open democratic country.

But the 1990's really was a transitionary decade and we live in a much different world now. And the economic problems we face right now are much more aligned to what we faced in the 1930's. But the Republican party has not evolved appropriately. Really, neither has the Democratic party.

But Obama really represents something new and in some ways is positioned to lead and evolution of the Democratic party into something contemporary and relevant. Currently there are no such leaders in the Republican party.

Bartlett makes many of the same arguments I've been making (not original with me, just a compilation of arguments I've accumulated from others that have made sense to me):

Bartlett first of all rips Bush's tax cuts and his economic policies in general:

"During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.

These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a "tax cut."

I think these sorts of semantic differences cloud economic decisionmaking rather than contributing to it. As a consequence, we now have a tax code riddled with tax credits and other tax schemes of dubious merit, expiring provisions that never expire, and an income tax that fully exempts almost on half of tax filers from paying even a penny to support the general operations of the federal government."

The Republicans post-Reagan (and really during Reagan) adopted this "starve-the-beast" philosophy that didn't work:

"Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. As I explained in a recent column, a key reason why deficits restrained spending in the past is because they led to politically unpopular tax increases. But if, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year."

He also argued that Keynes was a conservative, in the sense that he was trying to save capitalism and that fiscal stimulus is only necessary when you hit the zero bound of interest rates. You just don't tax and spend to tax and spend...

"What both Keynes and Fisher said was that when the economy is in a deflationary depression the collapse of private spending had to be compensated for by public spending, because that was the only way to get money circulating and make monetary policy effective. While monetary policy would drive the recovery it needed fiscal policy in order to work."

"It seemed obvious to me right from the beginning that there was a close parallel between the causes of the Great Depression and the current crisis. The principal difference is that the former was caused by a collapse of the money supply resulting from the closure of many banks and the disappearance of their deposits, while the latter was caused by a fall in velocity resulting from a sharp decline in consumer spending following bursting of the housing bubble. (Because GDP equals the money supply times velocity, a decline in velocity has exactly the same effect as a decline in the money supply--nominal GDP must shrink, which causes both prices and output to fall.)"

"That analysis led me to support a large fiscal stimulus. Without public spending on goods and services I didn't see any way for monetary policy to be effective, thus prolonging the deflation at the root of the economy's problem. I was disappointed that so little of the February stimulus package went to the purchase of goods and services, which drives spending, and so much into economically ineffective transfers, which don't. But I understood that time was of the essence and that taking the time to design a better package would have required even more effort to overcome the economy's inertia, not to mention the political obstacles."

His conclusions are here:

"But as I try to explain in my book, my views haven't changed at all; it's circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggest economic problem. Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don't understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it's simply become dogma totally disconnected from reality.

Nor do I understand the conservative antipathy for Keynes, who was in fact deeply conservative. He developed his theories primarily for the purpose of saving capitalism from some form of socialism. Same goes for Franklin D. Roosevelt, whose biggest economic mistake, I believe, was not that he ran big budget deficits, as all conservatives believe, but that he didn't run deficits nearly large enough until the war forced his hand. (I discuss these points in columns here and here.)"

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