Monday, September 29, 2008

Debate thoughts: The economy

Although billed as a foreign policy debate about 1/3 of the time was devoted to economics and the financial crisis. Let's go to the transcript:

On the financial crisis:

Obama: Now, we also have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain, a theory that basically says that we can shred regulations and consumer protections and give more and more to the most, and somehow prosperity will trickle down.

This is nonsense. The last significant deregulation of the financial sector that occurred was the repeal of the Glass-Steagall Act under President Clinton's watch. Furthermore I have seen few commentators argue that the repeal of this act is even partly responsible for the current financial disruptions.

The truth is that the Bush Administration actually proposed increasing the oversight of Freddie Mac and Fannie Mae a total of 17 times. McCain also played a major role in this effort back in 2005 and I was astonished that he did not immediately blister Obama for his opposition to legislation that would have reformed these two institutions.

McCain: But I want to emphasize one point to all Americans tonight. This isn't the beginning of the end of this crisis. This is the end of the beginning, if we come out with a package that will keep these institutions stable.And we've got a lot of work to do. And we've got to create jobs. And one of the areas, of course, is to eliminate our dependence on foreign oil.

These are a bunch of generalities that are difficult to criticize but the bit about foreign oil struck me as weird. First off, politicians have spoken about the need to eliminate our dependence on foreign oil since at least the 1973 Yom Kippur War, and we are no closer to it now than we were then. It simply won't happen as long as oil remains a superior energy source.

I oppose efforts to stop the foreign oil addiction on three grounds:

* Government efforts to develop energy alternatives are likely to be dismal failures whose chief purpose are likely to be political patronage (e.g. ethanol).

* If we don't buy foreign oil someone else will. The Saudis are going to get paid either way, regardless of whether the money comes from us or not.

* Everyone thinks that all of our imported oil comes from nasty Middle East regimes. A look at the top 10 sources of imported oil reveals that only 3 are Middle Eastern: Saudi Arabia (#2), Iraq (#6) and Algeria (#9). Indeed, outside of Saudi Arabia the top 3 consists of Canada and Mexico.

Financial crisis follow-up:

Obama: But we're also going to have to look at, how is it that we shredded so many regulations? We did not set up a 21st-century regulatory framework to deal with these problems. And that in part has to do with an economic philosophy that says that regulation is always bad.

This really gets at the heart of what Obama believes -- that this comes down to a failure of government to pile on enough regulation. This is nonsensical. Allow me to defer to David Brooks for a more comprehensive explanation:
...The idea that our problems stem from light regulation and could be solved by more regulation doesn’t fit all the facts. The current financial crisis is centered around highly regulated investment banks, while lightly regulated hedge funds are not doing so badly. Two of the biggest miscreants were Fannie Mae and Freddie Mac, which, in theory, “were probably the world’s most heavily supervised financial institutions,” according to Jonathan Kay of The Financial Times.

We don’t even have a clear explanation about the past, yet we’re also going to need regulators who understand the present and can diagnose the future.

We’re going to need regulators who can anticipate what the next Wall Street business model is going to look like, and how the next crisis will be different than the current one. We’re going to need squads of low-paid regulators who can stay ahead of the highly paid bankers, auditors and analysts who pace this industry (and who themselves failed to anticipate this turmoil).

We’re apparently going to need an all-powerful Super-Fed than can manage inflation, unemployment, bubbles and maybe hurricanes — all at the same time! We’re going to need regulators who write regulations that control risky behavior rather than just channeling it off into dark corners, and who understand what’s happening in bank trading rooms even if the C.E.O.’s themselves are oblivious.

...We’d need regulators who could spot a bubble and squelch a boom just when things seem to be going good, who can scare away foreign investment and who could over-rule popularity-mongering presidents. (The statements by the two candidates this week have been moronic.)
McCain meanwhile gives a weird, meandering answer that invokes Dwight Eisenhower, criticism of greed, excess and corruption along with a promise to hold unspecified people accountable. In other words, populism.

Yet more follow-up, including Lehrer's stated desire for the two candidates to talk directly to each other:

Obama: And unless we are holding ourselves accountable day in, day out, not just when there's a crisis for folks who have power and influence and can hire lobbyists, but for the nurse, the teacher, the police officer, who, frankly, at the end of each month, they've got a little financial crisis going on.

They're having to take out extra debt just to make their mortgage payments. We haven't been paying attention to them. And if you look at our tax policies, it's a classic example.

I admit that this part got me a bit animated. Maybe if these people can't make the mortgage payment they shouldn't have bought the house! Talk about greed and excess -- people who bought more house than they can afford are part of the root of this problem! And yes, our tax policies contribute as well by encouraging people to buy houses -- although a repeal of the mortgage interest deduction I doubt is what Obama had in mind when he said that.

McCain's response consists of yet more railing against greed and excess, use of the phrase Main Street and Wall Street, and some sunny Reagan-esque rhetoric about how American workers are the best in the world and our best days are ahead of us which struck me as utterly phony, contrived and formulaic. But maybe I am just cynical.

"Fundamental differences" between the two candidates on the financial crisis:

McCain: You know, we spent $3 million to study the DNA of bears in Montana. I don't know if that was a criminal issue or a paternal issue, but the fact is that it was $3 million of our taxpayers' money. And it has got to be brought under control.

As president of the United States, I want to assure you, I've got a pen. This one's kind of old. I've got a pen, and I'm going to veto every single spending bill that comes across my desk. I will make them famous. You will know their names.

Now, Senator Obama, you wanted to know one of the differences. a million dollars for every day that he's been in the United States Senate.

Good. This part actually made me happy.

Obama: But let's be clear: Earmarks account for $18 billion in last year's budget. Senator McCain is proposing -- and this is a fundamental difference between us -- $300 billion in tax cuts to some of the wealthiest corporations and individuals in the country, $300 billion.

Now, $18 billion is important; $300 billion is really important.

And in his tax plan, you would have CEOs of Fortune 500 companies getting an average of $700,000 in reduced taxes, while leaving 100 million Americans out.

So my attitude is, we've got to grow the economy from the bottom up. What I've called for is a tax cut for 95 percent of working families, 95 percent.

Obama is correct that $18 billion is relative small potatoes, but then he goes on to discuss his plan to cut taxes on "working families." As Ken Blackwell states:
The statistics speak for themselves. Only 62 percent of Americans pay federal income tax, meaning that 38 percent get a 100 percent refund of any taxes withheld. So Mr. Obama's 95 percent that will receive money from the government includes roughly 33 percent of Americans who pay no income tax. One-third of Americans pay no income taxes yet would receive a government check of perhaps $1,000 or more.

That is pure income redistribution. Some pundits argue that this is Keynesian demand-side economics. It is not. Having the government take money from business entities or affluent individuals and giving it to those who pay no federal income taxes is not Keynesian. It's Marxist.
Exactly. Obama further compounds the nonsense in his follow-up, in which he declares "...absolutely, we need earmark reform. And when I'm president, I will go line by line to make sure that we are not spending money unwisely."

Of course, this power does not exist as presidents do not have line item veto authority.

McCain, in one of his more inspired moves, follows up with this:

Well -- well, let me give you an example of what Senator Obama finds objectionable, the business tax.

Right now, the United States of American business pays the second-highest business taxes in the world, 35 percent. Ireland pays 11 percent.

Now, if you're a business person, and you can locate any place in the world, then, obviously, if you go to the country where it's 11 percent tax versus 35 percent, you're going to be able to create jobs, increase your business, make more investment, et cetera.

I want to cut that business tax. I want to cut it so that businesses will remain in -- in the United States of America and create jobs.


As president, as a result of whatever financial rescue plan comes about and the billion, $700 billion, whatever it is it's going to cost, what are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan?

Obama doesn't really respond to the question, instead listing a bunch of stuff he wants, including more spending on education, energy independence in 10 years (absurd), infrastructure and health care.

McCain actually answers it, citing the need to end ethanol subsidies (which will probably cost him more votes than he will gain). When Lehrer presses them further on the topic McCain proposes a spending freeze while Obama responds by stating that "The problem with a spending freeze is you're using a hatchet where you need a scalpel."

That's interesting coming from a guy who thinks that $18 billion is no big deal. By the way, federal discretionary spending in the most current fiscal year was over $1 trillion. Only a guy that believes in the power of big government could believe that holding spending to $1 trillion constitutes use of a hatchet.

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