Saturday, December 20, 2008

Manifest for a U.S. Parliament
Part 2 - Every Vote Counts

A political system is only as good as the voters make it. If voters don’t take responsibility for the workings of their system they will inevitably be taken advantage of by the politicians that they vote for. People who choose to go in to politics are always highly driven individuals, and unless the political system is set up in such a way that the interests of the voters is the foremost concern at all times, politicians will make the system work primarily for themselves. A system that allows large-scale monetary contributions to individual politicians, such as the American system, is hence a recipe for disaster. Likewise, a system that only allows two parties, will foster collaboration between those two parties to the effect that no other party can be allowed in to the political system, and very large parts of the population will be shut out of politics in terms of their wants and needs.

I will now continue this second part of the manifest with prescriptions for how the American political system can be made better and truly work on behalf of its voters, whatever the needs and convictions of those voters are.

Proportional Representation

What makes the American political system different from most other political systems (save for some other Anglo-Saxon countries) is the lack of proportional representation. If 49% of voters in a given constituency vote for a certain party, those voters could receive 0% representation in the legislature. This is not an anamoly either; it happens all the time. In a system with proportional representation, if 49% of voters vote for a certain party, that party receives 49% representation from that constituency in the legislature, no more, no less. How could anyone seriously say that proportional representation is unfair, unjustified, or in any way unsuitable? It directly transcribes what the voters want!

The votes would be counted according to the D’Hondt method (more on that some other time), and a party must receive at least 8% of the national vote in order to be represented in Parliament. That rule ensures that extremist parties are not represented in Parliament.

The Inception of a U.S. Parliament

The two houses of Congress would be merged into one unicameral Parliament, with a fixed number of seats, perhaps 501. Elections would be held every 4 years. Each state would be awarded a number of seats based on population size, in the same way as the present electoral college awards votes for President based on population size. Each vote in the Parliament would be decided by means of a simple majority, with the exception of a vote of no confidence in the President or the governing party or coalition, which would be decided by a two-thirds majority. Filibustering would be removed as a tool entirely.

The Usage of a Mixed Personal and Party Vote – The Party-List Ballot

One of the common objections to a political system that is based on political parties, as opposed to individual politicians, is that such a system takes away the ability of the voter to vote for a politician that he or she particularly likes. This problem can be remedied by the party-list ballot. In such a system, the voter takes a ballot for the party that he or she likes, and on that ballot, the party has listed the politicians that it considers best suited for the job of being a member of Parliament. The party lists politicians in order, 1, 2, 3, and so on. Any politician on the list can be ticked off, and the vote would go to that party, and that specific politician who has been ticked off. If the voter chooses not to tick an individual off, the vote goes to the party, and the person who is number 1 on the party’s list. When all the votes are counted, the voters may have defied the choices of the party, and number 1 and 2 on the list, may have been exchanged for number 5 and 12 as the party’s representatives in Parliament.

End the Role of Money in U.S. Politics

As I wrote in my last post, the ability of individuals, corporations and organizations to make large contributions directly to individual politicians is making a mockery of the political process. All such contributions must be made illegal immediately. Period. Political advertising on TV and elsewhere must also be ended, and campaigns should be conducted purely through debates in the media. Each political party would be given a set amount of money from U.S. taxpayers, end of story.

Decrease the Power of the President

There’s really only one appropriate word to describe someone who is head of state, head of government and commander-in-chief: King. No other modern country has this configuration, and for very good reasons. To give one man such vast powers is simply dangerous, and as we have seen during the last 8 years, it can have truly disastrous consequences. However the role of the President would be changed, at least one of the three roles would have to be given to someone else in order to safeguard the country against a semi-dictatorship.

Increase Voter Participation by Practical Means

The main reasons behind the fact that voter turnout is the lowest in the U.S. among all industrialized countries is obviously that there is no point for most people to vote because there is no proportional representation. But there is also large-scale voter-suppression, fraud and other tactics that keep voters away. This must obviously be dealt with mercilessly. In addition, there is a number of practical measures that can be taken to make it easier for people to vote, such as:

- conduct all voting on Sundays

- automatically register every U.S. citizen as a voter on the person’s 18th birthday

- create a national ID card which is sent to every U.S. citizen when the person turns 18

- allow mail-in ballots in every election

- End all electronic voting and create completely uncomplicated, nationally standardized paper ballots

If you agree with me, spread the word. If you disagree with me, leave a comment. (You can also leave a comment if you agree with me)

Wednesday, December 17, 2008

Manifest for a U.S. Parliament

Part 1 - J’accuse!

Over the last few months the United States has gone through a historic election and has entered the first stages of a depression, so the underlying focus of this blog, which is fair and proportional representation of the American people in the political process, has been largely ignored. More than anything, however, institutional and constitutional issues affect economic factors, in that these factors highly affect the successful implementation of an economic and/or legal agenda. The crisis we are seeing right now is, I believe, a direct result of a non-working political system.

In two parts, I will present a manifest for constitutional change, beginning with an indictment of the current system, and continuing with a blueprint for a new one.

Below I will attempt to identify the main problems with the American political system:

* The U.S. Congress is in a state of permanent deadlock due to the bicameral system

The idea of a bicameral system where one body can overrule the other is, in reality, an idea of permanently limiting political change. The result is that it becomes almost impossible to bring about fundamental political change as society changes, and the fundamental situation that existed at the time of the creation of the bicameral system will, in essence, be preserved indefinitely. At the time of the creation of the American political system, wealthy older men were the only citizens who were allowed to, and were ever supposed to be, involved in the political process. That is largely unchanged to this day, all things considered. Even when one party controls both the house and senate, the process of making law is still very much impaired because of the almost complete lack of party unity and the democratically ridiculous practice of filibustering.

* The differentiated voting cycles between the House and Senate creates divided governments

As a result of not holding elections for the House and Senate at the same time, those two houses of Congress tend to go to different parties, as the ruling party usually gets punished by voters after a while in the majority. As a result of this, every piece of legislation that politicians try to introduce will be either shot down, watered down or changed beyond recognition. Result: a do-nothing government.

* The winner-takes-all voting system produces a two-party system

It is an undeniable fact that awarding 100% of the seats in a legislative body to a party that receives the most votes in a given constituency produces a system where only two parties are ever politically viable. Theoretically, a party could very well receive 25% of the votes and still get 100% of the seats, and this has happened before in Anglo-Saxon countries. That anyone can even try to make the case that this is fair to the voters is laughable. In many cases, a majority of the voters in the U.S. cast votes that are wasted, as a majority was in the 2000 Presidential election. Also, how can it be argued that two specific parties that take turns ruling in perpetuity, is in any way a good idea in an ever changing world? And why should there only be two parties? Do the Democrats and Republicans all stem from an eternal breed of geniuses?

* The vast powers of the President make all other politicians all but irrelevant

The United States is the only industrialized country where one person is the head of government and head of state at the same time. In addition, the President is the commander-in-chief and has veto power in Congress. In other words, the President has the ability to control almost every level of American society. As we have seen during these last 8 years, it is definitely not difficult for a U.S. President to usurp vast powers. It would not be an exaggeration to say that this country is vulnerable to dictatorship, just like Russia.

* Small states have too much power in the Senate

The fact that all states have an equal voice in the Senate is frankly absurd. If acres of land could think or feel pain, then this system might make sense, but in our world it does not. I completely understand the need for regional considerations, but the legal independence of U.S. states more than makes up for potential negative effects of populous states being more influential on a federal level. U.S. voters must realize that there is a time and place for everything. The U.S. Senate is not the place to discuss the construction of a local playground, and The Montana Senate is not the place to discuss the moral implications of abortion.

* In the United States, large-scale corruption and bribery is completely legal

The financial aspects of U.S. politics are alien and preposterous to most non-Americans. The idea of both local and national politicians going around the country begging for money from wealthy people, corporations and organizations is simply unbelievable. Most U.S. politicians don’t even try to claim that they have guiding principles for the benefit of their voters, naturally because that would be too transparent in light of billions of dollars in campaign donations. In ancient Rome, votes could be bought openly, and it is frankly not much different in the U.S. today. That U.S. voters continue to accept this is beyond me.

* The United States has, by far, the lowest voter participation out of the OECD countries

This is, of course, a testament to a non-working system. Most U.S. voters obviously feel that there is no point in voting, and many of them are consistently and strongly prevented from voting, legally and illegally. Voter suppression is so rampant that it is worthy of a banana republic. Here are some numbers of voter turnout in OECD countries between the years 1945 and 2005:

The Netherlands: 84.8%

Sweden: 83.3%

Israel: 80.0%

Germany: 80.0%

Great Britain: 73.0% (fundamentally the same voting system as the U.S.)

Canada: 66.9% (fundamentally the same voting system as the U.S.)

United States (midterm): 40.6%, (presidential) 55.1%

As you can see, the three countries with the lowest numbers all have one thing in common: they all have the winner-takes-all voting system in which very large parts of the population are shut out of the political process completely.

It’s not a working system, and it needs to be changed.

Do you disagree with me? Please leave comments, and feel free to use generalizations and accusations every bit as sweeping as mine!

Monday, December 15, 2008

Obama's Healthcare Plan

Obama is a mysterious man. Ever since he started talking about his healthcare plan, I have not really understood what the plan actually is and how it is supposed to help Americans. He has made vague statements about lowering healthcare costs by implementing changes to make medical records electronic, increasing regulation and so on. The overall goal is supposedly to bring “affordable healthcare” to every American. Moreover, this affordable healthcare is supposed to be purchased by individual citizens or companies.

Obama has said that he believes that healthcare is a right. That is a very significant statement, the essence of which every modern country in the world except for The United States has long ago put into practice. The cost saving measures I mentioned above will do absolutely nothing to reach the goal of bringing healthcare to all Americans, for one simple reason:

Everything medical in this country comes with a 15-20% mark-up

That, and that alone is the thing you need to know when trying to compare the American healthcare “system” to that of any other country. If you go to the doctor, or if you need surgery in the hospital in France, Germany, Japan, Canada, Italy, Australia etc, there isn’t anyone slapping on 15-20% at every stage in the process. The mark-up there is usually closer to 0%. In The United States, from the time that you gaze upon the face of the hospital receptionist, to the time when you file for bankruptcy because of high medical bills, private companies have profited from your illness in every conceivable way.

Recently, tangible details about Obama’s future plans for American healthcare have started to leak out. It turns out that the plan is not as lame and useless as it first appeared, but cunning and circumventing in what seems to be the Obama style of doing politics when he’s in charge. It remains to be seen if he will be able to get this through Congress, but, in essence, what Obama wants to do is to create a new healthcare provider that is 100% owned by the government! Obama did mention this during the campaign in small ways, but he certainly did not make a big deal out of it, and now it seems that this is where he aims to put the emphasis. It is a brilliant plan, in that it directly addresses the issue of mark-ups on medicine in general.

Obama has said that he also wants to increase regulation of healthcare providers, define quality of healthcare, and more, but those measures will have very little effect compared to government health insurance that directly competes with private health insurance. Why would anyone buy something with a 20% mark-up if you can buy the same thing with a 0% mark-up?

If the U.S. Government made it so that both individuals and companies could buy high quality healthcare with 0% mark-up, the health insurance companies would be in big trouble very rapidly. If you also couple that with stricter regulation, the health insurance companies would have no choice but to lower premiums, increase coverage or get out of the business. It all hinges upon whether or not Obama would be able to scale up such an insurance enough, so that it would grab a sufficient market share to corner the market. A 0% mark-up health insurance would surely come in handy for a lot of struggling companies right now.

No sane person in this country should defend the health insurance companies. They have tried everything in the book to squeeze as much as they possible can out of sick people while attempting to give them as little care as possible for decades now. What’s left for a health insurance company when they’ve done all that? They support a referendum on assisted suicide in Vermont for one simple reason:

you dead = more profit

Thursday, December 11, 2008

New Banks - A Pragmatic Solution

I would like to offer a pragmatic solution to the underlying problem of the current crisis: the creation of completely new banks, unrelated to all the current ones. As I wrote in my most recent post, I believe that the true cause of the economic crisis, and coming depression, is that the financial industry has spun itself off from the financial economy and created a shadow economy, what I called the “third economy”. The third economy is hidden from everyone, including Wall Street investors and banks, and is made up of the types of assets that we now know all too well, such as packaged sub prime mortgage securities. The third economy sold this to everyone, in one way or another, and spread its “assets” around the world. The third economy was able to coat crap with gold, funnel enormous amounts of money into itself, and create a global crisis.

The reason that new banks have to be created is that all the current banks are contaminated by the third economy, as if they had been contaminated by radio activity. Write-downs of assets, marking toxic assets to “market” (I put that in quotes because there is no market, and hence the assets are worthless), or any other market function does not even come close to correcting the problem. If you’ve been contaminated by radio activity you’re supposed to take a shower, but that won’t stop your cells from disintegrating.

The TARP plan was meant to accomplish something similar to what I am proposing, but again, because of the scale of the problem, all such efforts are futile. In theory, money from the TARP plan would take all those assets away from the banks and create a new, shiny bank. Another idea has been to a create a “good bank - bad bank” solution, which would accomplish the same thing: an untainted financial institution we can all trust. However, that cannot be done because the situation is far too serious as of now.

In no way is this solution a creation of my brilliant mind - it has been used before. Dennis K. Berman recently wrote in the Wall Street Journal about this, and provided a historical context. The first Bank of the United States was created under Alexander Hamilton in order to instill confidence in the financial system. The second Bank of The United States was created in 1816 specifically to deal with a currency crisis. The important thing to remember is that confidence in the financial system is evaporating quickly, and we have to do something about that. With the help of the U.S. government, new banks can be created, with new people running them, and we can partly start with a clean slate. The old banks will have to continue to struggle, and if they survive, it will be because they can free themselves from the shackles of the third economy.

The following is a simple explanation of how this could be done. Instead of spending money on contaminated banks, the government should sponsor the creation of new banks directly. Let’s say the government creates “The New Bank”, and injects $20 Billion into it that can be used to lend to the public. The creation of The New Bank would be coupled with strict regulation in the bank’s charter with respect to leverage ratios, lending standards, codes of ethics and the like. By putting it in the charter of the bank itself, a lengthy legislative process can be avoided. The U.S. government could also implement an “investment matching” procedure, meaning that if a private investor invests one dollar in The New Bank, the government could match that.

All this would create instant confidence on the part of the financial market in this new, clean and dependable bank. Also, this type of investment actually has a very great potential of making taxpayers money, as opposed to all the other bailout attempts that had absolutely no prospects of even breaking even at any point in the future.

Furthermore, new banks with prudent standards and well-capitalized business models would necessarily create a new standard in the industry, which would enhance the stability of the American economy in the future. At least until the next wave of deregulation comes along…

Tuesday, December 9, 2008

The Third Economy

Unfortunately, it seems that we are heading into a depression. My prediction is that the depression will begin early next year, and that it will last for at least for 2 years. I’m going to define the beginning of a depression as the point where unemployment exceeds 10% of the workforce between 18 and 65 years of age. I hope I’m wrong.

Some time has passed since the beginning of this crisis, and more can now be understood in terms of the causes behind it. Many economists have been scratching their heads, wondering why they did not see this coming. Few, however, have been publicly talking about what they actually missed. In the public mind, and in the media discussion, everything is still centered on the problem of housing. Although that is significant, it is only a result of what I believe to be the real, broader, reason behind the crisis: the creation of a shadow economy.

Traditionally, you talk about two “economies” as existing in a country: the “real economy” and the “financial economy”. The real economy is comprised of things that concern ordinary people in their daily lives, or issues that are often referred to as “Main Street” issues. The financial economy is comprised of the business of banks and other investors, known as “Wall Street” issues. The line between the two has, as everyone knows, been seriously blurred in the last few years because of ordinary people’s increasingly severe reliance on Wall Street for their well-being. This is also an important reason behind the crisis, and this reliance will make the crisis much worse on a human level.

At some point in the early 90s, the financial economy started to change. The traditional role of this industry was to provide capital for new ventures and new investments in the real economy. Capitalists would hence invest money in things that they believed would be desired by people in the real economy in the future, and would be duly rewarded if that turned out to be true. Capitalists were, in essence, rewarded for betting on the right horse. Few people argue with the wisdom of this scheme, and even Marx regarded it as a pre-requisite to his final vision.

Then came financial deregulation. Financial regulation is something that has been around for thousands of years in human societies. The idea that someone with a lot money should not be able to profit from someone who does not have a lot of money, through deception or predatory practices, has usually been among the first things articulated in law when laws first came about in Europe, the Middle East and Asia. One of the most famous examples of this is the prohibition against charging interest that long existed in Christian countries, and still exists in Muslim countries. Ancient peoples always realized that we need laws that protect us from ourselves, such as a prohibition on murder. Likewise, they understood that we needed to protect us from ourselves when it came to financial crimes.

Financial deregulation in the United States made it so that acts that were formerly defined as crimes, became defined as completely legitimate, and even greatly encouraged by the government. It’s hard to imagine a situation where physical assault is decriminalized, and consequently encouraged by the government. What I’m saying is that, just because people have trouble understanding financial regulation doesn’t make that type of regulation any less important. (A case for intelligent politicians perhaps? Anti-intellectualism is still, unfortunately, celebrated in the United States)

At some point in the 1990s, the financial markets had been sufficiently deregulated and set free so that they could begin to create an entirely new business model that was not based on the traditional sources of revenue: interest on lent money and return on invested capital. When this happened, with the help of computer technology, what I call the “third economy” (the shadow economy) was created. This third economy was built almost entirely on borrowed money, a.k.a. credit.

By relaxing regulation with respect to capital ratios, leverage, accounting standards, ratings agencies, oversight, consumer protection, and much, much more, actors in the third economy were able to create a whole new, but fictitious, sector where a strange type of value-added financial service created a financial product. Traditionally, a so-called value-added service is something like taking a piece of wood and turning it into a chair. Everyone can understand that.

In the third economy, the actors would take a product from the real economy, such as a mortgage, and add its “value”-added service to it, and then sell it back to the financial economy and the real economy. Someone in the real economy would be a person with a mortgage. Someone in the financial economy would be Bank of America. Someone in the third economy would be Lehman Brothers. Lehman Brothers would take all these assets (they wouldn’t really buy them because they didn’t actually have much money), bundle them together, slap on a AAA-rating, and sell them.

In essence, the service that Lehman Brothers supposedly added, had no value at all. Because Lehman Brothers had access to so much credit, they could perform this trick over and over again, while giving off the illusion that they were adding a service. The combination of a worthless service sector employing millions, and non-existent capital created a giant bubble, and a new sector in the economy.

Going back to the example of the wood and the chair. Imagine that a carpenter buys a piece of wood, which he turns into a chair. A company contacts him and tells him that it will buy chairs from him at a higher price than what he could charge his customers. The company intends to add a special solution to the chairs which will make the chairs much more durable. The carpenter agrees, and starts selling all of his chairs to the company. He notices that a lot of people are buying the chairs, so he decides to buy some of them back, after they have been treated with the special solution (he does not know or own the formula, so he cannot apply it himself). He then sells the improved chairs to his own customers. This becomes greatly profitable for the carpenter, so he closes his production facility and starts only selling the chairs that have been treated with the special solution (now manufactured by someone else). After a little while, it turns out that the special solution not only does not increase the durability of the chairs, it reduces it from ten years to one year. Nobody wants to buy the chairs anymore, and customers are demanding their money back. The carpenter goes bankrupt and the company with the special solution is long gone. This is an analogy of the relationship between, for instance, Lehman Brothers and Bank of America. It could be extended by saying that the forestry company from which the wood originates also goes bankrupt, because the demand for wood has gone down the drain. The forestry company could be likened to the home owner.

Almost nobody knew about the third, shadow economy, in which borrowed money was used to add fictitious services, which in turn created the potential for more money to be borrowed by everyone. The third economy made it seem as if there were more money in the economy than there really was, and that it had been spread around for the benefit of all. The impact on the economy as a whole is as simple as it is brutal. Imagine that you thought you had $10,000 yesterday, but today you know for a fact that you only have $1,000. How would you act tomorrow?

Thursday, December 4, 2008

Unclaimed Property - States Turn to Robbery to Fix Budgets

As the economic crisis continues to spread, we are seeing more and more signs of states being in serious economic trouble. Last week, California’s Governor Arnold Schwarzenegger, declared a fiscal emergency, and the governor of New York has also warned of a coming budget crisis. Job losses are increasing, and the unemployment rate may very well go above 10% in the beginning of next year, which, by some definitions, would mean that we would be in a depression. One of the more instantly visible results of job losses in the American economy is state budget shortfalls, because tax revenue decreases dramatically when job losses occur. This also has a more direct effect on the daily lives of people, as they see services cut and libraries closed. In addition, states rely on loans and other types of financing for day-to-day operations, which is obviously highly questionable, but that source of liquidity has dried up. The states must, then, try to turn to other sources of revenue, and out of desperation, they have turned to something that most Americans have never heard of: unclaimed property.

Unclaimed property, sometimes called abandoned property, is governed by an old type of English law known as escheat. The King of England at some point in the middle ages declared that any property that does not have an owner belongs to him. For example, if someone died without heirs, the dead man’s house would become the property of the King. Fast forward a few hundred years and across the Atlantic, and we have the same laws still in place. Back in the 1970s, some people realized that the states actually had vast powers to seize all types of valuable property, and started promoting this idea. The idea was very attractive to politicians, because it could provide money for the state without them having to collect taxes. Sounds great, but where does the money come from?

Here’s a fact that should have a lot of people running to the bank: in every state, the state treasurer has the right to take your money right out of your savings account and put it in its own general fund, if you don’t touch your money in 5 years. Again, if there is no activity on the bank account for 5 years, meaning no withdrawals or deposits, the state can take your money. The same goes for stocks and contents of safe deposit boxes. The state is then usually required, by law, to publish your name somewhere in a local newspaper before they go ahead and use your money in the state budget. This is so that you can claim it back, but the states usually try to make it so that people never find out about this money.

This source of unclaimed property is nothing, though, compared to what the states get from uncashed checks. If an employer writes a check to an employee, and the employee forgets to cash it, the employer is supposed to give the money to the state after 5 years. If the employer does not do this, it becomes subject to stiff penalties, and must pay the original amount as well. The state gets the most money from starting audits of corporations. Most companies, like most Americans, have never heard of unclaimed property, so they are usually unprepared, which is what the states want. What happens in such an audit is that the corporation is contacted by the state, and is asked to provide information on voided checks going back 20 years. A check can be voided for a number of reasons, but the states usually consider any amount on any voided check as rightfully belonging to that state.

So, what happens then is that the state looks at how many voided checks the company has for a given year, and the assumes that the situation has been the same going back 20-30 years. Then it adds penalties and interest. This might be a little hard to grasp, but in essence what happens is that if a company, for example: writes 10 checks for $50, and the ten employees for whom the checks were for forget to cash them, then the company could have to pay several hundred thousand dollars to the state only five years afterwards!! This is no joke, this is legalized robbery, and I’ll provide some statistics below.

In light of the economic crisis, many states have stepped up their efforts to seize unclaimed property, and many of them have publicly stated this. Here are a few very recent examples from around the country:

Nevada - The state treasurer will “increase aggressive unclaimed property collection”. This year, Nevada was so aggressive in collecting that it more than doubled the amount it projected that it would be able to collect. So far, it has collected over $44M.

Washington State - “Increase collection to over $100M”. The state changed it’s laws specifically to be able to collect more money in recent years.

California - This state was so aggressive in seizing money from people’s bank accounts and safe deposit boxes, that it was ordered by an injunction to stop all collection efforts. Among many other things, the state seized stock certificates that a man living in England had put in a safe deposit box in California. The man was going to use the money when he retired, and never thought that the state of California would steal it. He sued the state, and the case Taylor v. Chiang, consequently changed a lot of California’s law on the subject.

California currently holds $5 Billion (!) of these funds, and collects an average of $400M per year.

Delaware - This state is the worst offender. Because almost half of U.S. corporations are incorporated in Delaware, this state can perform audits on companies all over the country. Delaware seizes unclaimed checks, gift certificates, unused airplane tickets and much more, from people all over the country. 10% of Delaware’s income comes from unclaimed property! At one time, Delaware was trying to define tips for maids in hotel rooms as unclaimed property between the time that the guest left them there to when the maid picked it up. Before the maid picked the money up, the state treasurer of Delaware could have gone in and pinched it first, according to the state. Interesting policies.

This type of behavior is yet another piece of evidence of how twisted both local and federal economic policies have become. Should grandma’s pearls in the safe deposit box or some poor teenager’s forgotten check after a summer job be what provides us with roads, buses and libraries? What may be even worse is that this type of revenue collection leads to a situation where politicians don’t need to make as many tough choices, and are hence able to abdicate from responsibility for a sustainable economic situation. Relying on private charities for poverty relief and other related issues has the same effect.

Wednesday, December 3, 2008

Unite and Conquer

Obama’s latest announcements of people who will make up his administration has left many scratching their heads. There must be a thousand quotes from the campaign when Obama criticized the old ways of Washington and the people responsible, including Bill and Hillary Clinton. Obama repeatedly promised change in terms of political policy on almost every major issue, and this defined his campaign more than anything else. Why then, are we seeing something that almost amounts to a restoration of the Bill Clinton administration? A lot of people thought that Obama had a secret agenda during the campaign, but who would have thought that he was actually a “Bill” in disguise?

Until Barack Obama came along, I thought I had a pretty good handle on figuring out the desires and motivations of most politicians. There are usually a number of things you can point to, like party affiliations, geographical origin, personal history, education and so on. However, Obama has spent most of his career hiding his personal agenda behind a shield of pragmatism, so most of us are left in the dark when it comes to the knowledge of the full spectrum of his actual convictions. Actual convictions are, of course, a much better indicator of what is going to happen when a politician takes office than are campaign promises.

I am going to base my analysis of the issue of Obama’s true convictions on a few things that stand out about him as an American politician. I am further taking it as a given that the American political system, in its present state, does not allow a progressive political movement in the form of a political party. The examples should be seen as functional analogies. Not much else is possible in the world of comparative governmental policy analysis.

Here are a few important examples: Obama worked as a community organizer after having graduated from Harvard, when he easily could have earned an enormous salary soon after graduation at a big law firm. Obama believes that healthcare is a right, and he believes in a more equitable distribution of income in society through a progressive tax code. These examples pertain to some of the most important convictions in what has always been the true essence of domestic politics: the economics of distribution.

Had Obama been a politician in, for instance, Germany, he most definitely would have been a member of the Social Democratic Party. (The Democratic Party would have been labeled as a conservative party in Europe, whereas The Republican Party is so far to the right that it does not have any equivalent anywhere in the rest of the industrialized world).

Conclusion: I am basing my analysis on the assumption that Obama is a progressive Democrat. As such, his true convictions should guide him towards goals such as: increased market regulation, consumer rights, free higher education, guaranteed pensions and so on (it would obviously be a stretch for me to claim that, deep down, Obama believes in all these things, but you get the picture). So why is he filling his administration with people who don’t believe in these things?? (meaning people like Gates, Geithner and Romer) There are only two options. He is either:

1. Weak and/or stupid, or

2. Cunning and/or opportunistic

1. Let’s first seriously explore the first option. Ever since Obama was elected, the political establishment and the press have been screaming about the dangers of too much change. We have heard countless calls for Obama to “govern from the center”, “reach across the aisle” and to “be a centrist”. All these comments are thinly veiled attempts of saying: “don’t pursue an un-American, progressive agenda”. Obama ran on political change, and there can be little dispute over the fact that he ran on change towards the left, not towards the center.

Is it possible that Obama has faced a storm of criticism from politicians, lobbyists and other influential people that has made him bow down to the pressure and abandon large parts of his campaign agenda? Or maybe he thinks that the current economic crisis is so severe that the Democratic “business-as-usual” is a safer play? Does he think that he won’t be able to get Congress on board with his agenda? All are, unfortunately, possibilities. If any of these examples are true, then Obama’s weakness and/or lack of understanding (aka stupidity) of the current political and economic climate has guided him to select people for his administration that have agendas that significantly differ from his own.

2. Obama’s agenda always differed rather greatly from the those of the other significant Democratic Presidential candidates in that it was more progressive, all things considered. Contrary to what I mentioned above, an opposite explanation is possible:

- maybe Obama never really thought that he would be able to push his progressive agenda through, until the economic crisis came

It certainly wouldn’t be the first time that such a development came to pass. The story of FDR’s ability to create a host of institutions and pieces of legislation in order to help the common man, as a direct result of the Great Depression, is known to most Americans. However, The United states never went as far as European countries with respect to the creation of a social safety net, and later completely reversed what had been created by FDR. As a result, the social situation with respect to income distribution, consumer rights, poverty relief, healthcare, childcare, eldercare, is currently almost identical to what it was in both The United States and Western Europe in the 1920s.

During the Great Depression, the need for political changes towards a more citizen-friendly country became apparent, and the changes were carried out comparatively swiftly. In America today, there are more parallels to the time of the Great Depression in terms of the political climate. Then as now, the influence and reverence of the capital class was in steep decline. The public disgust of Wall Street firms and executives is a good indicator of this. This tends to create a climate where political need meets political will amongst politicians and voters alike, even if the political system is in a state of permanent gridlock, which is arguably the case in The United States. I come, then, to a stipulation of a general political rule of mine for this country’s political climate:


Presidents in the past, such as Jimmy Carter, have wanted to push through progressive agendas
by appointing outsiders who share their convictions, to important posts in their administrations. What has often become apparent after a while, though, is how difficult it can be to actually get legislation through Congress without Washington insiders. With outsider firebrands, you might have a more philosophically coherent administration, but with political insiders, you might be able to get things done. HOWEVER, if you appoint people who disagree with you, you must make sure that the various views of these people do not translate into legislation that you may not agree with, at the end of the day. Can anyone say “Dick Cheney”? In order to control his administration, Obama must rule the people in it with much authority.

To conclude this rather complicated reasoning: I think it would be pretty hard to say that Obama is stupid, or that he is a complete pushover. By appointing Washington insiders it seems that Obama is seeking efficiency of political action. Obama ran on political change, even though he may not have believed that such change would be possible. The economic crisis has given Obama an opportunity to pursue his true agenda.

Obama is on a quest to unite and conquer.

Monday, December 1, 2008

Rubinomics Revisited and Rejected

There seems to be a lot of ideological, philosophical and institutional confusion going on at the moment as the new President is awaiting inauguration amidst an economic crisis. That may not be so surprising, considering the simultaneous seismic shifts in Washington and Wall Street, but if early indications are any guide, change and renewal seem to have been replaced by old patterns of behavior. The economic lessons of the 90s are seemingly being remembered, but rejected in favor of the attempts of the 70s. Both of these decades offered seriously misguided economic policies in this country, and those policies should not be recycled; they should be remembered and amended.

Robert Rubin was Bill Clinton’s Treasury Secretary, and he became famous for an economic formula, Rubinomics, that advocated the following:

1. Balanced budgets

2. Free trade

3. Deregulation

This formula was used by a number of governments, with significant variations, in the 90s, such as Great Britain, Germany and Sweden, in addition to the United States. The formula has often been seen as one that set the stage for sustained economic growth. It is not an easy formula to implement, because it is often unpopular with voters because of the spending restraint it requires. Germany’s Gerhard Schröder lost his position as Chancellor as a result of pushing for ever more reforms and spending cuts. The way that economic policies in the West manifested themselves in the 90s, whether the policies were directly responsible or not, was generally through: lower prices of goods, greater access to credit and lower government spending.

Obama has recently appointed, for the most important economic posts, three disciples of Robert Rubin, namely: Timothy Geithner, Peter Orszag and Lawrence Summers. The President is, after all, the policy maker, but these appointments nevertheless clearly make Rubinomics the most prominent current in terms of economic philosophy in the coming Obama administration.

However, the three goals that I mentioned above do not seem to correlate very well at all with Obama’s campaign issues with respect to economic policies, and even less so in light of recent statements and the evolution of ideas among commentators close to Obama. A renewed, composite view of what I believe to be Obama’s economic policies at the present time looks something like this:

1. Budget deficits (as a result of a much higher amount of government spending to stimulate the economy)

2. Less free trade (as a result of re-negotiations of free trade treaties, energy policies, new focus on domestic production, and more)

3. More regulation (which most people realize the United States needs like the desert needs the rain)

A lot of prominent economists, such as Paul Krugman, are currently calling for the government to run budget deficits and spend its way out of the crisis. The problem of the deficit can simply be dealt with later, it is felt. In a recent New York Times piece, Krugman describes these deficits as something completely benign, and money that “we owe ourselves”. He’s right about the last part, but is that so benign? No it is not, and at the current pace of incurring government debt, this almost amounts to the government taking out a sub prime mortgage. In the end, all the government can pay for, in this situation, is amortizations on its debts. It’s a simple question of plus and minus.

I believe that there are some important lessons to be learned from Rubinomics, and the most important one being fiscal restraint. Whether you’re left or right, everyone knows deep down that you can’t actually have the cake and eat it too (otherwise you really don’t understand the issue). Both the political left and right tend to run budget deficits to please voters. If you want real, lasting political change, or if you want any kind of coherent and long-lasting strategy for the future, the answer is not to shackle the country’s future to mortgage payments that will inhibit spending everywhere else. With large budget deficits, the government becomes cash poor, and hence unable to take effective action on all issues. Politics becomes the art of the permanent crisis management. So, again, whether you’re left or right, your government will not be able to realize your political dreams in a state of permanent budget deficits. “He who is indebted is not free”, said the Prime Minister of Sweden in the 90s, and proceeded to turn the country’s budget deficit into a permanent budget surplus.

With respect to free trade, that was one of the unique aspects of the 90s. After the end of the Cold War, a whole new world of trade opened up, and a globalization that had not been seen since before WW I created lower prices on many goods and commodities. Because of the unique nature of the 90s’ free trade opportunity, I believe that free trade as an economic factor tends to be exaggerated in models and discussions of policy. The main problem with the economic models that we have is that they can only look backwards, which is why they don’t work. Economists are currently pointing to the importance of free trade as a result of what happened in the 90s, which I believe was an almost unique, one-time occurrence.

Barack Obama has, rightly, during his campaign focused on increased local production of goods and services through infrastructure investment and other measures. I believe that much more goods could be produced well, and cheaply in the United States, as opposed to in Asia. This would create jobs, make products safer, reduce global warming, help local economies and housing prices and renew domestic infrastructure. Who said less free trade was such a sin?

I need not even speak of financial regulation to anyone but the most delusional reader. But to he or she who still believes that the unfettered markets can bring the answer to your prayers, I say:

- Financial deregulation is solely responsible for this crisis, which may lead to a depression. No matter what happens, we need a massive new wave of regulation to restore what has been destroyed, and expand regulation to protect us from ourselves in the future. If you know anything about people, you must know that voluntary self-restraint seldom works, especially not in the country of lavish spending and material dreams: The United States of America.

I offer, then, the blueprint for the future economic philosophy that I believe should guide Obama and his team over the next few years, with the same three-step plan:

1. Balanced budgets (“He who is indebted is not free”. In order to achieve a balanced budget, 2 things need to happen: 1. cut military spending drastically, and 2. increase tax revenue by taxing the rich)

2. Less international trade (as a result of a push to increase domestic production as a substitute for imports)

3. Much, much more regulation

Monday, November 24, 2008

A Terrible Mistake?

Today it was announced that Citigroup, previously the largest banking concern in the United States, is going to be bailed out by the government. Upon hearing this, I immediately thought about a phone conversation that I had with a phone salesman in 2006. He had called me up to try to get me to buy gold bullion (pure gold coins) as an investment. I was somewhat interested, but was taken aback by the large mark-ups. The conversation continued in the following way:

Salesman: where do you have your money invested right now?

Jacob: in a savings account at Citibank.

Salesman: banks can go bust at any time!

Jacob: well, it is the biggest bank in the United States, and one of the biggest in the whole world, so I’m just going to stick with that.

Salesman: you’re making a terrible mistake!

Jacob: goodbye

It turned out that the salesman was completely right in doubting the viability of Citibank, although I’m not sure he knew why he was right. At the time, the summer of 2006, his ominous words of financial destruction would have sounded ridiculous to most people. At the time, housing prices had never been higher and the stock market was roaring towards the sky. Gold and savings accounts were only for losers and weirdoes.

The salesman sounded more like someone from the 1800s, when banks were printing their own wild cat money and really did go bust all the time because there was no regulation, and not even a central bank. More surprisingly though, towards the end of the 1800s, banks did get heavily involved in complex securities via bonds, not unlike those we are trying to deal with today. This started off a deep recession across the country in 1873.

Citigroup has a lot of problems right now, and although I suspected that the problems were big, I did not think they were this big. It appears that the estimated value of the toxic assets at Citibank is around $690 Billion! That’s almost the size of the entire government bailout package ($700 Billion). All these firms that have now been bailed out on a large scale have had the same pattern of behavior this year, and it goes something like this:

1. firm’s stock starts plunging 2. firm says that the financial state of the company is totally fine, and in fact, better than ever 3. stock starts plunging more, and firm blames it on short-sellers 4. firm requests government bailout and says it will go bankrupt within a week if it doesn’t get it.

This was roughly the pattern for Bear Sterns, Lehman Brothers and AIG. Last week, Citibank said that short-sellers were responsible for the plunging stock, but a detailed analysis of the trades revealed that only 2% of the volume was made up of short-sellers, so this could not possibly have been the case. In other words, Citibank was desperate. At any rate, the government approved a bailout of Citibank extremely swiftly, and has now injected $45 Billion into the bank, and is guaranteeing over $300 Billion worth of losses. I think this had to be done, but for the future, this must be discussed further. The most important thing to remember is that:

the government has no idea what it is buying

When the government decides to “guarantee” toxic securities for companies such as AIG or Citibank, it does not actually go through what it is guaranteeing. If the government says that, for instance, AIG has $100 Billion in toxic assets that need to be guaranteed, it has no idea whether $100 Billion is the correct number, or what these assets are made up of. The reason is that, because these bailouts supposedly need to happen right away, there is not nearly enough time to go through the books of the companies. If the government were to have gone through AIG’s assets to see what was toxic and what was not, it literally would have taken many months, if not over a year. So, what actually happens when a company like Citibank asks for a bailout, is that government representatives and bank representatives sit down and discuss the assets without actually looking at the books.

Consequently, the government has to take the bank’s word for how many toxic assets there are and simply give them the money. There’s no other way now that things have gone so far. This leads one to the obvious conclusion that there is no way to know: 1. whether the bailout is going to work, or 2. whether more bailouts are going to be needed (which is almost always the case because the banks are lying to protect themselves).

These toxic assets have made their way into almost every diversified investment portfolio in America, from pension funds, college savings accounts, mutual funds, bond funds, and even treasury bonds funds. How did this happen? Well, a lot of these types of investments, such as pension funds, can only legally invest in products that are rated “Triple-A”. That basically means that the product is supposed to be a solid investment. The toxic assets that are now worthless were rated Triple-A, which can be a little hard to believe. The complexity of these toxic assets was the key to getting them this highest of ratings.

Just like the government, the ratings agencies did not bother going through the products that they were rating, because it would have taken too long. Also, the institution that was offering the toxic asset was paying the ratings agency for the rating, and probably bribing it on many occasions. Result: almost the entire American population lost money that it could not afford to lose on this giant pyramid scheme, and after that became clear, the taxpayers had to pay to clean up the mess. Hence, many taxpayers are paying to cover their own losses, and are being hit twice.

Reagan decided to start taking the country back to the 1800s in terms of financial regulation, and by the time Bush and Greenspan had had their say, the country was almost back where it was in the time of Andrew Jackson (a very strong opponent of regulation). It is surprising to me that all confidence in the financial markets is not lost as of yet. The American people still seems to believe that things can go back to the way they used to be. Trust me, for the next 10-20 years, they cannot, and will not. In the meantime, we need to learn a few lessons from the banking customer of the 1800s: be extremely skeptical of banks, and don't invest a dime in the stock market. For the future, we need an enormous amount of new and uniform financial regulation, new taxation on all kinds of investments in financial products, and an entirely new infrastructure for financial oversight.

The good news for Citibank’s customers is that their deposits will be safe, for the moment, through the FDIC insurance. It turns out that I did not make “a terrible mistake” after all, like the salesman warned, but I came pretty close.

Thursday, November 20, 2008

Homeowner Help?

Lately, there has been a lot of talk about helping homeowners who have mortgages that they cannot afford, and risk going into foreclosure. A lot of anger has, rightly, been directed at politicians who authorized $700 billion for a financial bailout, while much less, if anything tangible, has been done for homeowners.

During the course of this year and the last, many different proposals have been thrown around as ways of altering mortgages so that homeowners would be able to pay them. These proposals have usually included measures such as the following:

- negotiating with lenders to reduce interest rates

- negotiating with lenders to switch to fixed interest rates

- negotiating with lenders to reduce the principal of the loan

- negotiating with lenders to allow homeowners to stay in their homes until a payment plan can be devised

None of these efforts have been successful, for one simple reason:

They are unconstitutional

The reason for that is, if banks were to try to alter the lending contracts (mortgages), they would be in violation of the contracts that they have with the people who also own all these mortgages, and by extension, a part of all the homes. This was clearly and eloquently expressed in a Senate hearing yesterday by Senator Charles Schumer. For 20 years, mortgages have been broken up and sold in pieces to thousands of investors, so that lenders don’t own the mortgages anymore. The ones who really own them are hedge funds, pension funds, mutual funds and other Wall Street firms. Trying to force lenders to alter mortgages is useless, because they can’t do it even if they wanted to. If this were 20 years ago, negotiating with banks might have worked.

Imagine if 5 neighbors on a block got together and bought an expensive lawn mower by means of a loan. They don’t really need to mow that often, and by pooling their resources they can get a nicer machine than they otherwise would have been able to get. They agree to make equal payments monthly until the lawn mower is paid for. One day, one of the neighbors tells the others that he does not think the lawn mower is worth what they paid for it, and says that, as a result, he will decrease his monthly payment by 30%. Obviously, the other neighbors are angered by this, because, regardless of the actual value of the lawn mower, the bills still have to be paid based on what the original price of it was.

That is a similar situation to what would happen if banks were to modify any mortgages to make them cheaper for home owners. Because the banks don’t own the whole amount, they cannot unilaterally change the terms of the payments. If they did, it would be a unilateral breach of contract, hence unconstitutional, and the banks would be sued by the hedge funds and other owners of the mortgages.

There is only one solution to the problem of making expensive loans cheaper: to alter the bankruptcy laws, so that when a homeowner files for bankruptcy, the bankruptcy judge can alter the mortgage and make it cheaper. That would not be unconstitutional. This has been suggested by Senator Durban, and supported by Senator Schumer as well as Barack Obama. The present prediction is that, by early next year, this proposal will go through. A bankruptcy judge can do this same thing with other forms of loans today, such as loans for farms, so it’s a procedure that is well established. This could potentially help tens of thousands of homeowners and maybe stabilize the housing market somewhat. At the very least, it would save some houses from being abandoned and eventually torn down.

So what are the problems with this proposal? Well, because the ownership of the mortgages is so spread around the country and around the world, a lot of people would have to take a loss if the values of the mortgages were to be written down. If one day, a certain investment were worth $100, it could be worth $50 the next, after a bankruptcy judge has altered mortgages. Obviously, this will make the stock market go down further, and a lot of hedge funds and other investment firms would go under.

I say, let that happen. These firms are already on the brink of collapse, and Wall Street is so thoroughly corrupt that the solidity of the assets that people in the financial industry sell, can barely even be likened to a house of cards. The United States must move forward without any sort of reliance on Wall Street. That means: no more 401(k)s with stocks in them, no more college savings accounts with stocks in them, higher fees and taxes on buying stocks, no more advertising of financial products and so on and so on.

To illustrate the point of the weak content of financial products these days, consider the following story of a home that was bought in Bakersfield, California in 2005: a Mexican strawberry picker who did not speak any English and made $14,000 per year got a loan to buy a house for $720,000…

Loans such as this one are what make up many “assets” in people’s retirement portfolios these days. Happy retirement!

Monday, November 17, 2008

On the Proposed Auto Bailout

It seems that GM is actually about to go bankrupt. Whether it’s Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy, it would be a disaster for American workers and federal and state tax revenue. It would also be very bad for American competitiveness in the entire industrial sector, as a lot of innovation and technical skills would disappear forever. Some might say that a lot of companies go through Chapter 11 reorganizations all the time and come out fine, but for many reasons, this is rather different.

Should the government bail out GM? That’s a very tough question, because GM’s problems can probably not be solved within a time-frame that is short enough for the bailout to work. In other words: if 50 Billion dollars gives you 1 year to continue operations, are enough of the problems going to be solved after 1 year for the company to be viable and strong again? I believe that GM has three main problems, which I will outline below:

1. Overcapacity in the industry

The American auto industry has, over the years, built up an enormous production capacity. It is currently able to produce 17 Million cars per year in this country. However, the demand for American cars in this country is only about 10 Million per year. Naturally, the 7 million car excess production capacity is costing a lot of money, and is a big part of GM’s problem. The likelihood of demand for American cars nearly doubling so that supply can meet demand must be considered to be almost zero. A lot of customers cannot get car loans, and a renewed focus on public transportation is expected from the new administration in Washington, so if anything, driving in America is likely to go down in the foreseeable future. Nobody knows what’s going to happen to oil prices, but let’s just settle for the fact that they are volatile, and cannot be depended upon to be low. Even if GM were to make it through this crisis through divine or governmental intervention, a lot of people would still have to be laid off around the country.

2. Product line - GM does not build what customers want

It sounds like a cliché at this point, but the reliance on SUVs that GM has had, and still has, is deadly. The SUV will probably one day be almost as iconic to the current economic crisis as the sub prime mortgage. The SUV is a product that depends on the American people’s propensity to indulge themselves through credit when times are good. Consumers were able to buy bigger, more expensive cars, because gas was cheap and because their home values kept going up. GM makes many times more money per SUV sold, as compared to a normal car, so just like consumers got hooked on credit, GM got hooked on SUVs. The SUV market collapsed in 2008 because of high gas prices, and even though gas has become cheap again, the SUV is not likely to return in a big way.

It is more likely that the American consumer, once the dust of the financial crisis has settled, will buy normal cars with much better fuel efficiency. This is very bad news for GM, though, because the company cannot compete with Asian and European automakers in this market. These foreign automakers have spent decades perfecting their product lines of normal, fuel efficient cars as a result of high gas prices in the majority of their markets. In short, the extremely cheap gas in the United States (about 5 times cheaper than in the EU), has crippled the American auto industry for a very long time. If gas prices had been kept high by taxes, as is the case in the rest of the western world, I probably wouldn’t be writing this article right now. European car makers offer normal size vehicles that run on diesel that get 50 mpg, and small vehicles like the Volkswagen Polo that get 70 mpg (not for sale in the U.S.) and Japanese car makers offer hybrids that get 45 mpg. GM doesn’t have anything that comes close to this, and I won’t hold my breath for the Chevy Volt…

GM cannot simply turn around and all of a sudden churn out a whole new line of cars that will click with consumers. This transition would take years, as it has for all the others.

3. GM's quality is poor

Every 5 years or so since 1980, GM has come out and made public statements, saying that GM has finally caught up to, and surpassed its competitors in terms of quality. Lately, the company has increased the amount of times that it publicly insists on this fact. What is often used to “prove” this, is the dubious measure of “initial quality”. That metric only means that, for the first short period in a car’s life, there aren’t that many problems. But who expects a car to last for only one year? I can’t say that I know why GMs quality is so poor, but I’m guessing it has something to do with the corporate culture. It’s not like American autoworkers are unable to build good cars, they’re doing it in Toyota factories for crying out loud! Whatever the problem is, I know only this: it’s not going to be easy to fix. Just like with the product line, you cannot just snap your fingers and have quality. The problems would take years to fix.

In addition to these three problems, something has to be said about the auto unions. The unionization of workers in America has a unique pattern. Whereas most workers are not unionized at all, and efforts to unionize are usually illegally suppressed, the ones who, after all, are unionized make up a kind of “working class aristocracy”. This follows the pattern of “exclusive unions” common in other western countries in the 1800s. These types of unions were based on the medieval tradition of guilds, and would protect and insulate only those inside the unions. When labor movements became successful in Europe in the late 1800s, there was no longer any need for these exclusive unions, and “inclusive” unions were started instead. Inclusive unions would not be restricted to working for the needs of the members of the specific union, but would also have a focus on all working class people in general, and were instrumental in the creation of welfare societies. Some European countries have degrees of unionization in excess of 80% of the workforce, also including non-working class people.

The autoworkers at GM are part of this working class aristocracy, and hence their high cost is choking GM. Why should one working class person, such as an autoworker, make five times as much money as another working class person, such as a restaurant worker??? The autoworkers unions should start over, abdicate from the throne of the working class aristocracy, which is now only to their own detriment, and start working towards the creation of inclusive unions in America.

It would cost billions and billions for GM to go through Chapter 11 bankruptcy reorganization, and I don’t know who would bet so heavily on a losing horse, especially in a climate where nobody is lending any money for deals such as this one. In 2008, wealthy investors from America and abroad, have been convinced to invest in losing businesses, such as Citibank and Goldman Sachs, only to see their billion dollar investments evaporate a few weeks later. When investors are now not even investing in companies that, on paper, are doing extremely well, why would they invest in businesses that are, on paper, doing extremely poorly? For GM to even start going through a bankruptcy process, the company would need government assistance. Although I would very much like to see GM saved by a bailout, I don’t think that it can be done. I don’t even think that GM could be reorganized. Sadly, it seems that the only option that remains is bankruptcy liquidation.

GM wound up in this position because of misguided political policies on energy and financial regulation, and because of poor corporate governance on the part of GM. To make sure that this doesn’t happen again, here are a few more suggestions for the future:

- institute a gas tax in such a way that the price cannot go below $7 or $8 per gallon

- allow the growth of inclusive unions through new legislation so that there is no longer a need for exclusive unions that demand excessive salaries

- dramatically sharpen the regulation regarding fuel efficiency and quality of cars produced in the United States

- build an electrical infrastructure that is fit for a wide adoption of electrical cars

- allow low-sulfur diesel passenger vehicles to be driven in all 50 states

Thursday, November 13, 2008

Advice for Republicans: Split Up!

The recent political developments and the recent election have shown how deeply split the Republican Party is on a whole range of issues. In my view, the Republican Party could very well be split up into five or six different parties. The Republican Party’s internal dynamics has, for a long time, been based on the philosophy that “my enemy’s enemy is my friend”. This has brought together a group of people whose inherent philosophical differences are many, and whose different convictions are sometimes even contradictory in nature.

The merging of the motley crew that consisted of white Southern racists opposed to civil rights, stock brokers on Wall Street opposed to regulation, fundamentalist Christians opposed to science and Catholics opposed to women’s rights, somehow created a powerful formula that would, for the most part, control national politics for four decades. They were all against something that would benefit society as a whole, and united in order to destroy it. The very notion of a “society” was to them a spurious one.

The beginning of the end of the motley crew alliance started with Bush. The complete failure to govern during the Bush years was not isolated to the financial markets, disaster relief, health care or education, it spanned across all the sectors that the government was previously supposed to manage. The Bush administration believed that the government should not govern, and hence did not.

Apart from the politicians in the administration who held these anarchistic views, the administration appointed, throughout the country, administrators who shared these views. Appointing anti-government administrators is like making an atheist the Pope. As a result, banks were told to regulate themselves, food importers were told to inspect themselves and vendors in government procurement deals were told to give the American tax payers a good price without competition. We all know that you can’t have a fox run a hen house, so the outcome was always rather predictable: a government in shambles and a country in deterioration. The fox ate the hens.

This intentional failure made Bush and his administration more unpopular than any administration in history, and put into serious question the oldest of conservative mantras: small government. The intellectual wing of the Republican Party is currently asking itself: why didn’t small government work? The answer they usually come up with is that what we had was not, in fact, small government, it was BIG government, and that’s why it didn’t work. Unsurprisingly, yet another erroneous analysis has come out of an anti-intellectual “intellectual” movement.

Then came John McCain. As a self-styled “maverick” and Republican Presidential candidate, history may judge McCain as the ultimate divider of the Republican Party. McCain was never part of the mainstream of the party, nor was he a part of the fringe on either side. Having a political maverick as a leader of a party is sure to divide a party simply because such a person will inevitably have limited appeal to everyone in it. In a best case scenario, a maverick could have broad appeal, but that broad appeal would probably still be limited in terms of intensity. The social conservatives didn’t like him because he wasn’t socially conservative. The Wall Street conservatives didn’t like him because he didn’t understand, and had no interest in, economics. The fundamentalist Christians didn’t like him because he was lukewarm about faith, and the list goes on.

Then came Sarah Palin. The amazon in the shape of a 1960s culture warrior emerged, preaching small-town values and anti-intellectualism with the eloquence of a 10-year-old. In the end, she appealed only to the least educated, most bigoted and backwards elements of the Republican Party. This obviously turned off tens of millions of voters around the country and greatly upset many elements of the Republican Party. The intellectual wing of the Republican Party was in uproar about Palin, and David Brooks famously described her as a “fatal cancer” to the party. He was probably partly right, but as we have seen, Palin was far from the only problem facing the Republicans. What did Palin actually stand for? I’m not sure, but she seemed to hold in high esteem, activities that included drinking beer and playing ice hockey. There’s nothing wrong with that, ask any Canadian, Swede, Finn or Czech, but most people don’t see these issues as critical to national politics.

Then came the economic crisis. It came down on America like a ton of bricks, and created further divisions between Republicans. A strong division started to show between the social conservatives in the South and the Wall Street conservatives in the North. The Wall Street conservatives argued for an enormous bailout of Wall Street that would save individual companies, individual investors, and enable Wall Street to continue to play a main role in the American economy as a whole. The philosophies of Wall Street conservatives are usually linked to a modern, diluted form of anarcho-capitalism, represented by people such as Alan Greenspan and Larry Kudlow. Although social conservatives and others have usually gone along with these philosophies as a part of the alliance of the motley crew, when the time came to vote for a bill that would endorse these philosophies to the tune of 700 billion dollars, it was too much. Social conservatives in the South who represent poor people with a low degree of education had never benefited from anarcho-capitalist philosophies. Those who actually benefited lived in Manhattan and not Alabama. The split became apparent when the first bailout bill was struck down by the House of Representatives, much as a result of social conservatives in the South.

Then came Obama’s victory. Obama was able to further split up the Republican Party, not by sowing seeds of division in their ranks, but by making people unite and flock around him. He spread an almost entirely positive message and introduced new solutions to problems, problems that the Republican Parties had considered non-issues that could hence be handled by the market. It turned out that voters did not want the market to provide them with health care or infrastructure. Obama’s message was, in essence, that the market could not do this. Obama offered solutions, the Republicans did not.

I’m saying that the Republican Party should split up. I’m saying that conservative ideology is not as much an ideology, as it is the absence of one. If your political goal is to leave most things in place, without having guided them there in the first place, which is in essence what conservatism means, then I would not call that much of an ideology. It is precisely because of that that I don’t think that the motley crew that is the Republican Party can stay together. The crew does not really have anything to rally around as a group, and will be unsuccessful if it tries because of the inherent contradictions and philosophical conflicts within the party. Only as a coalition of different parties can these political elements move forward. Inspiration can come from other conservative parties around the world, and I will now give a few suggestions on the formation of new parties:

- A Christian Conservative Party. There are several examples of these parties all over Europe. It seems to me that a party such as this would be very appealing to a lot of people in the South and mid-west. Social and religious issues are very important to these parties.

- A Moderate Conservative Party. This type of party usually advocates healthy budgets, entrepreneurship, lean government and low taxes. No importance is placed on socially conservative issues. Examples: The Tory Party in England, and Moderaterna in Sweden.

- A Libertarian Party. I know this already exists in America, but it could be re-vamped by the splitting of the Republican Party. There are hardly any examples of these parties anywhere else in the world.

- A Regional Southern/Rural Party. There are parts of the southern United States that have such different views based on regionalism as compared to the rest of the country, that the only way to accurately represent these views would be to create a regional interest party. There are many examples of these parties around the world, some more ”interesting” than others.

The future success of American conservatism hinges on splitting up.