When I started this blog almost one year ago, I promised myself that I would stick to matters of investments and economics and steer clear of political commentary. That has been impossible to do in an election year where the central issue is our troubled economy, and I have broken that promise more than once. With so much at stake in the 2012 election, I will offer one more look at this intersection of politics and economics, with the goal of peeling back the layers of political shenanigans and scripted talking points. As is true with most elections, the candidates probably would agree on where they want to see the country (lower unemployment, better jobs, more opportunity), but disagree vociferously on how to get there. The electorate has a choice this election year of two different paths to that elusive promised land of prosperity, and those differences will be our focus here. Maybe I am naive to think that we can discuss political issues without
being political, but I'm certainly going to give it a shot.
We'll start with an observation about the primaries. President Obama was most fortunate in not having to face a challenger for his party's nomination, but that is not always the case. I am convinced that Ted Kennedy started hammering nails into President Jimmy Carter's political coffin long before Kennedy passed the hammer to Ronald Reagan in the 1980 election season. In order to win his or her party's nomination, a candidate must recognize that the more activist (including the fringe) elements of the party are the ones calling the shots because they are casting the votes. This is true for both Republicans and Democrats, and it is why we are treated, most recently, to the likes of Rep. Michelle Bachmann (R-Minn.), who would have less of a chance in a general election than I would. The conventional wisdom is that the candidate will sound more partisan (Democrats more liberal, Republicans more conservative) while securing the party's nomination, and then move to the center for the general election campaign. Every candidate does this, and I won't hold anything against Governor Romney for saying things today that he would never have said during the primaries--in fact, this move to the center is quite refreshing. The nature of the primary process, though, is the main reason why we will never have a general election candidate who is both a staunch supporter of free markets/ limited government and relatively progressive on social issues. That is unfortunate, because I think that is where the political heart of America resides.
One of the more frustrating aspects of the election is that neither candidate will honestly address the budget deficit issue, because that means getting into the subject of entitlements. There is a good reason why Social Security is called the "third rail of American politics"--if you touch that rail, you die. The first candidate to tell the truth here will be pilloried by his opponent as someone who wants to push Grandma over a cliff. The fact, though, is that the system was established when people didn't live as long as they do today, and we simply cannot afford to start paying retirement benefits when people hit the age of 65 (maybe 65 is the new 50). Because people in and near this age category are some of the most reliable voters out there, no one will dare offend them. The deeper reality is that we have become addicted to borrowed money. The Asian countries, for example, seem quite willing to buy our bonds, at least for now. As soon as they lose that willingness, interest rates will have to rise (and bond prices fall) to entice buyers. If you want your bank to keep loaning you money, you are going to have to demonstrate to your banker some consistent improvement in your ability to pay back that loan.What the bond market needs to see is some long-term plan for our government to control spending. It would be irresponsible to pursue major cuts immediately, because our economy (aggregate demand) is weak enough as it is. In the case of Social Security, the retirement age could be raised gradually, exempting those currently receiving benefits (those near retirement would be exempt as well). Such a plan would give the bond market confidence that we are getting our fiscal house in order.
One thing that drives me crazy is a lack of logical consistency, often a euphemism for hypocrisy.
New York Times columnist and Obama supporter Paul Krugman is against most cuts in government spending, actually for the same reason I mentioned above--too much of a reduction in spending immediately would undermine the struggling economic recovery. However, Mr. Krugman has no problem championing tax increases, especially if levied on "the rich." The problem here is that tax increases of any kind are a bad idea given the state of the economy. President Obama's arguments that the "rich" should pay their "fair share" may make good political sense, but this is not good economic sense. The centerpiece of President Obama's campaign message, when it comes to the economy, seems to be one of exploiting economic illiteracy. There are plenty of otherwise smart people out there who don't seem to know the difference between a balance sheet and a fitted sheet, and this leaves a swath of the electorate susceptible to the President's class warfare arguments.
Let's look at a couple of examples of this approach in action. Recall the big stink over Warren Buffet's secretary, who supposedly pays taxes at a higher rate than does her boss. No one has bothered to point out here that the argument fails to note the difference between
marginal and
average tax rates. One's tax bracket refers to one's marginal tax rate, the rate at which the last dollar of income is taxed. Even if someone is in the 35% tax bracket, the chances are that their average tax rate (total tax paid divided by total income) is somewhat lower because the rates are progressive--some income is taxed at those lower marginal rates--and because of deductions. Also, Romney's 15% tax rate is due to the fact that most of his income is from capital gains and dividends. Is this unfair? The truth is that dividend income has already been taxed at the corporate level, so it makes economic sense that dividends would be taxed at a personal tax rate lower than the rate on other income, which has not already been taxed. Romney is constrained from pointing out these realities because too much attention here might reinforce his image as "the rich guy who doesn't understand ordinary people," precisely the brush with which the Obama campaign has painted him. Never mind the fact that anyone who is a candidate for President of the United States is not exactly an "ordinary guy." A greater degree of economic literacy would have this demagoguery tossed out the window.
On energy policy, I fail to understand Obama's opposition to the Keystone pipeline, which would take oil from Canada to refineries in Texas. Some people have questioned the additional jobs that the pipeline and hydraulic fracturing ("fracking") would create, but this misses the larger point. The truth here is just a matter of supply and demand--if we can increase the domestic supply of oil and gas, the price we pay will come down. What we are not getting is the full story of how this will benefit the economy, because it is about much more than additional jobs in the energy sector. Every business and every household in this country uses energy, so an across-the-board reduction in energy costs would free up more money for businesses to invest and for consumers to spend or save. Yes, there are risks associated with fracking, but what no one takes the time to do here is put the potential costs and benefits side-by-side to see which prevails. The hard-core environmentalists seem opposed to any energy source that feeds a combustion engine. And, to be fair, the proponents of these new extraction technologies are not prone to elaborate on any potential risks--but, there are safeguards and regulations already in place. President Obama's vision of newer, renewable energy sources is great, but the problem is that widespread adoption of power from solar panels and windmills is decades away, because the economics don't work yet. In the meantime, we have to meet our energy needs today and for the foreseeable future, and the smartest approach is to encourage whatever has the potential to lower those costs. The pursuit of cheap energy is the ultimate egalitarian policy, because everyone benefits--and those with lower incomes actually benefit proportionately more, because they tend to spend a greater percentage of their income on necessities such as energy and food. Will the energy companies benefit as well? Of course they will. Anything that is important and successful will have someone behind it taking risks and making profits--that is true of everything from the automobile to the iPhone. When government tries to deny the basic market forces of the economy, we end up with bankrupt green energy companies on the taxpayers' bill.
When Governor Romney was asked by a questioner in the recent town hall debate to describe how he is different from President George W. Bush, I wish that Romney had started off by saying, "I was Governor of Massachusetts and President Bush was Governor of Texas." One of the most impressive segments from the first debate was Romney's explanation of how he worked with a predominantly Democratic legislature to get things done, and voters this year seem to be craving that particular type of leadership. If we explore this in detail, a sharp contrast emerges between Governor Romney and the President. It is Obama, not Romney, who is the ideological candidate, despite the Obama campaign's relentless efforts to paint the former Massachusetts Governor as a fire-breathing, free-market zealot who seeks only to cut taxes for the rich. Mr. Romney actually comes across as more of a pragmatist, a leader with a successful business and leadership past who will do whatever it takes to get the economy humming again. Do you think this is true of President Obama? Actually, Obama has had four years to be a pragmatist, yet his leadership remains beholden to his ideology. Obama, admittedly, was dealt a bad hand with the recession and financial crisis. His attention, though, focused on getting his health care legislation (Obamacare) passed. (I will bet that a President Romney would end up keeping some parts of Obamacare.) The way to get the economy out of the ditch is to unleash the wealth-creating, job-stimulating power of the private business sector, not to impose upon business more uncertainty, more taxes, more regulations. I think that in his true heart and mind, President Obama really does not have much faith in the private sector. His faith is in government, not in free markets.
It is really ludicrous to use the term "outsourcing" in a pejorative fashion. Outsourcing is a broad concept that simply means that a business chooses to contract out a function that it could conceivably handle in-house. If you have a business and choose to hire a professional security firm instead of putting security guards on your company's payroll, that is outsourcing. To twist this into an "us vs. them" drama is yet another example of exploiting economic illiteracy. If firms did not behave in a way that saved them the most money, they would go out of business--and the people they employed would no longer have jobs. And this notion of bringing manufacturing jobs back to our shores? The manufacturing jobs that are here tend to require much greater skill, which is really good news because those jobs pay higher wages. The low-skilled manufacturing jobs are gone, partly due to technology and partly due to the lower wages overseas. As an example, companies that were once in the textile manufacturing business are now in the brand business. The jobs here are in design, marketing, management. Those clothing designs are sent overseas to be made into dresses, pants, and shirts. We can't change that, and any attempt to do so would do irreparable harm to the dynamism of our economy. So what is the solution? Our educational system needs to be as dynamic as our economy, so what is keeping it from being so? President Obama has had four years to show some leadership on this issue.
President Obama's now infamous comment that "You didn't build that" has, admittedly, been taken out of context. What the President was saying was that every enterprise in this country relies on a public infrastructure of roads, bridges, transportation terminals, fire and police departments, etc. in order to operate successfully. That, of course, is true. What is telling here is how easily the Republicans have been able to use this against him. The campaign version of "You didn't build that" fits perfectly with Obama's larger ideology where successful private business is the villain and government is the savior. What would be laughable were it not so serious is how the Obama campaign portrays Romney's experience with the private equity firm, Bain Capital, as if the former Governor were a real-life Gordon Gekko lining his pockets through the destruction of virtuous mom-and-pop businesses. This is at best a distortion, but really an outright lie. Every day across this country, thousands of business decisions are made that are all about redeploying capital away from inefficient uses and towards more efficient applications. When capital is used inefficiently, sooner or later the business will suffer, and ultimately fail. That failure means lost jobs and idle resources. What Governor Romney did at Bain Capital was the same thing that all businesses do, just on a larger and more prominent scale: reallocating capital to where it could generate the best returns. In the real world, subsidizing failure just leads to greater failure. When the government gets involved, whether through picking winners and losers or through burdensome regulations and taxes, there is no mechanism for evaluating the return on invested capital. We, the taxpayers, have no say in how our tax dollars are invested once we have forked that money over to the government--our only say is in the voting booth. Now, if you think this is some sort of conservative rant, I'll present the concept in a different way: What if the plan of going to war in Iraq had been subject to a rigorous private equity type of analysis? Do you think there might have been more questions raised about the intelligence regarding Saddam's weapons of mass destruction? Do you think there might have been a thorough consideration of other ways the resources--human and tangible--could have been deployed? The irony here is that Romney's private equity experience has been used against him by the Obama campaign, when in fact that experience may very well be his greatest asset in solving the economic problems now facing the country.
There are two big-picture questions to keep in mind as the election approaches. First, the re-election campaign of any incumbent needs to be judged by the electorate in light of the candidate's track record in office. Second, those who favor income and wealth redistribution typically forget that there has to be something to redistribute. In other words, we need to focus foremost on ways to grow the economy. Putting these two concerns together, I conclude that President Obama has had--and squandered--four years to champion policies that would foster economic growth through the private sector--on taxes, regulations, energy, government spending. Only the private sector can create wealth--government cannot. And in the drama that is this economy, which so desperately needs more business investment, the ultimate villain may be uncertainty. The prospect of the fiscal cliff--higher taxes and drastic cuts in government spending--has businesses sitting on their hands (and their piles of cash) because of this lingering uncertainty. Where is President Obama's leadership? The argument that he inherited a bad economy really falls apart when we realize that he has stubbornly refused to empower the private sector, when he has had countless opportunities to do so. We cannot afford to be governed by big government ideology any longer. Four years is enough.
Next time we will leave politics behind and get back to the topic of investments. I promise.
Life is short. Get busy--and vote!
Jim
