Archive for November, 2010

Time for Political Responsibility

The elections last night seem to show an almost schizophrenic American public.   In 2008 they embraced change, giving Barack Obama a massive victory and convincing many on the left that the US was embracing a progressive agenda.  In 2010 the public embraced change again, giving the GOP control of the House by a healthy margin, convincing many on the right that the public was embracing conservatism.    The good news is that the two sides now share power, and that’s a necessary condition to being able to have the long term capacity to solve the problems we face.  The bad news is that this would require the two parties to do something they haven’t been adept at: compromising to pass legislation making tough choices.   Now is the time for political responsibility.

Those reading this blog since 2008 know that I have been intensely bearish on the US and global economy.   I believe we are in the midst of what I’ve labeled “Global Depression II,” the effects of which can be masked for awhile with fiscal and monetary policy moves.   Ultimately we have to deal with a  massive debt, and an imbalance between too much consumption and too little production.   The US in some ways has a harder task than many other industrialized countries.   While other countries have debt — the entire world is in tremendous debt — our imbalance between consumption and production is intense.  Germans still produce more than they consume; we’ve been consuming far more than we produce.

This was not a problem President Obama and the Democrats could fix, and the belief that the stimulus would work makes some sense.  If you stimulate the economy by investing in projects that will increase future production then you might boost growth enough to start restructuring the economy.   However, the drawback of such an approach is increased debt, which risks inflation and currency devaluation.   Since we accumulated so much debt by deficit spending in booms (1982-90; 2002-07), the risks of increasing debt are magnified.

The Republican solution — to balance the budget and live within our means (though that requires more cuts than they’ve suggested) — is good in theory for addressing the debt problem.  Ultimately our debt level is unsustainable, and we need to restructure our spending to take into account economic realities.   However, cutting spending during a recession could drag the economy down further.   One thing Republicans are wrong on is that tax cuts would help.   Tax cuts are an inefficient stimulus, likely to simply increase consumption of foreign goods.   Over consumption of foreign goods is part of the problem.

Simply, the world is in an unprecedented crisis.   Never has so much debt been globally accumulated, and never have domestic policy tools seemed so unable to deliver a solution.    Not only that, but it’s a global crisis, so even if the dollar should lose value due to high debt, the alternative currencies are also weak.   Ultimately, this may be a grand restructuring of the global political economy to the detriment of the US and Europe in favor of Asia and Latin America.    If so, we are only in the first phase.

So what does this have to do with the election?  The public, quite simply, doesn’t understand the depth of this crisis.  They’ll go to Obama in 2008 then to the GOP in 2010, and seem impatient that nobody can fix the problem.   People want things to get back to “normal.”  The opposition arguments, be they Democratic in 2008 or Republican in 2010 are persuasive because chosen policies are if not failing, show no appearance of working.

Although there is no obvious solution to the crisis, a few factors seem clear: a) the US needs to increase production, creating jobs in sectors that produce stuff people want to buy.   This not need be traditional manufacturing jobs — it could be intellectual property or high tech — but it has to be something that can be sold on the world market; b) US debt (and the debt of the industrialized world in general) is unsustainable and must be cut; and c) US consumption of foreign goods must be cut (but not via protectionism).

A Republican claim that tax cuts can grow us out of debt is non-sensical.  Tax cuts could have a positive effect back in the early sixties when we still had primarily a national economy, but even by the 80s and 00s the Reagan and Bush tax cuts were augmented by higher debt.   Tax cuts in a globalized economy lead to higher consumption of foreign goods.   Yet Democratic dreams of expanded government programs and spending also is unrealistic.  In fact, the traditional Democratic “go to” arguments — we will protect social security and medicare — have to called into question.   It’s unrealistic to alter the economy without entitlement reform of some sort.   In fact, it may be necessary to both increase taxes and cut spending.

The problem is that such an “austerity program” would be hugely unpopular.   Republicans who vote for something like that would be in jeopardy in 2012, and Barack Obama would face a serious primary challenge and perhaps become unelectable if he signed something like that.   When the medicine tastes bad, the public yearns for a message “psst, here’s some yummy stuff that will fix you up just fine with no pain.”   Politicians first pay attention to their own careers, and unpopular decisions are avoided.

There is one way it can happen.   A core group of Republican and Democratic leaders — including younger ‘stars’ from each party — need to focus on finding a way to pass legislation that can try to achieve the above goals.   While the Democrats may want an activist government focused on investments and stimulus and the Republicans prefer to leave it all up to the market, they need to find a middle ground.   Military spending needs to be slashed, perhaps requiring a complete rethinking of US foreign policy.    Entitlements need to be reformed and perhaps means tested.   Tax increases may be necessary, both to repay the debt and to cut over-consumption of foreign goods.  Spending cuts on discretionary spending need to be thoroughly reviewed.

Simply, both parties need to agree to sacrifice some of their holy cows.   Both parties have to compromise their core principles.   Both parties have to stop pretending that there is an easy solution — that the market will magically fix things, or government policies will undo the damage.

The result will be a severe recession.   People will suffer.  The hang over from the thirty year party we started around 1982 will be intense.   Structural transitions are heartless.   Republicans will have to accept that we need to care for the people being displaced by the recession, Democrats will have to recognize that this can’t just be transfers of wealth.   In fact, we need to create new productive capacities, and that needs to involve government investment and training.   (To “let the market do it” may not only not work, but could cause unrest and political instability).  Ultimately, the transition will take place.   We can put it off with political theater and electoral shifts from right to left to right to left, or our political leaders can come clean about the scope of the current crisis, and the need for the country to rethink the conventional wisdoms of the last thirty years.   As with any problem, the longer we put off dealing with it, the greater the difficulty in overcoming it.

Too gloomy?   Too extreme?  I hope so.   But I don’t think so.


GOP Wave or Cultural Groupthink?

I’m hoping the Democrats defy all odds and hold the House, though not primarily because of politics.   True, I like Obama and Pelosi, and would prefer the House in Democratic hands.  But given the economic condition of the country and the need for policy change, it’s probably a good thing for the Republicans to share policy responsibility.    Moreover, this is normal — when the economy gets bad, voters want change.

What I’d really like to see is the collective reactions of all the prognosticators if they got this election so wrong.   I’ve scoured the news for any optimism about Democratic possibilities and have found only one, a New York Daily News article about the possibility of high black and Latino turnout changing election dynamics.   Democratic insiders and Republicans alike are quoted as expecting loses of 50 to 70 seats.   Most think the Senate will remain in Democratic hands, but see the possibility it won’t.   There is remarkable consensus, and little if any Democratic wishful thinking.   People consider this a done deal.

Yet the polls are very close in most individual races, and at least 70 to 80 races still show leads so small that a slight mistake in methodology or miscalculation in turnout dynamics could give us a GOP gain of a range from 20 to 80 (or even 0 to 100, but that gets in very improbable territory).   We could be watching a case of cultural group think in place, and it would be wild and entertaining to watch an election night where that got thrown asunder.

But can the experts all be wrong?   If pollsters/analysts from Rothenberg to Cook to Rasmussen to Gallup all expect massive GOP gains, and Nate Silver hurls everything into his computer model and predicts 53 seats (though, to be fair,  he’s been consistent in warning about the uncertainty in this election), who can doubt that the Republicans will pick up massive numbers of seats?   After all, the pollsters were right about Obama in 2008.

Yet, there is some reason to doubt.   First, the Republicans (and the pollsters/analysts) are assuming a “wave.”  A wave happens when all the races break one way — the toss ups go almost completely Republican, and ones with small Democratic leads (2 to 4% in late polls) swing GOP as well.   Waves happen; in 1980 and 1994 the GOP enjoyed a classic wave election.   Yet most waves aren’t predicted in advance by so many people (in ’94, when the GOP picked up 52, most prognosticators thought they were set to win 20-25), and sometimes expected waves peter out (e.g., 1982).   So the breadth of the assumption that all these close races will go Republican may be off base.   In 2008 I published a state by state prediction of the Presidential race, predicting Obama would ride a wave.   He didn’t, and I over-estimated his margin of victory by about 40 electoral votes.

If there is no wave, the Democrats could still lose the House, but it would be close.  If there is a small wave, we get into the 45-55 seat loss margin (which is what the most cautious prognosticators seem to expect), and if there is a massive wave, GOP gains could be over 70 (which is what many Republicans expect, and Democrats fear).    Given the dynamics of the race, it looks like a wave year, so it’s rational to assume a wave probable.    But it’s not certain.

There are a couple reasons why the wave may be small or non-existent.  First, Republicans peaked early, and Democratic malaise was intense most of the election season.  Only recently do Democrats seem to be paying attention, and it’s hard to increase GOP enthusiasm from what it’s been for months.   Granted, independents are tending Republican and they are the “stuff” of the wave, but in very close races with previously popular incumbents, I don’t think you can assume a tsunami.

Second, groupthink can be contagious.  Look how many financial analysts predicted housing price increases back in 2007, declared fear of economic breakdown as misplaced in 2008, and told Americans that the economy was healthy and sound.  They believed it, and the consensus was so broad that naysayers were laughed at or ignored — or presented as a token opponent of the consensus (a ‘devil’s advocate’) — and the public was shocked by the depth of the crisis.

Cultural groupthink is different than standard decision making groupthink.  In the standard version, internal group cohesion makes unanimity a goal, and leads to self-censoring and a lack of realism.   Decision making in the Bush White House in 2002-03 on Iraq showed traditional Groupthink, even to the point that Vice President Cheney and UN Ambassador Bolton distrusted CIA information and sought their own, so certain they were that they were right.

Cultural groupthink involves the mass media and experts who for various reasons grab the same narrative.   Democratic leaning pollsters and analysts don’t want to be accused of wishful thinking so they embrace what seems to be a very clear electoral analysis.   Others see that too, and it gets echoed in media, blogs and the like.    On the right, blogs talk about the “wave” as inevitable, a force of nature as certain to hit as a category five hurricane bearing down on a city.   On the left there had been hope in early October that things would turn around, but now there is resignation, as if they’re attitude is ‘two years ago we had a great time with an awesome election, they say, now it’s the Republicans turn.  2012 will be different.’

Yet early voting does not show a wave (yet does not show a Democratic resurgence either).  It’s ambiguous.   Late polls are ambiguous.   So what do we know?   We know that there are up to 100 seats in play, and most of these are held by Democrats.  Its not rocket science to realize that makes the Democrats very vulnerable.    About 40 races look promising (or even certain) for the GOP, so if they win what they’re expected to win, they’ll have a good night.  If they win their fair share of the toss ups, they’re in 50 – 55 seat territory.  If they sweep the tossups, it’s a wave and Democrats then have to worry about the seats they’re expected to win.   If the GOP wins many of those, it’s the Republican tsunami.  The Democrats would have to run the table on the toss ups to keep the House, and pick off close races now leaning Republican.

I see no reason to expect the Democrats to keep the House — the consensus does exist for a reason, the signs point to a massive victory for the Republicans.   Hope that late enthusiasm or perhaps the “Restore Sanity” rally would provoke a late Democratic mini-wave seems implausible, but we really don’t know.  It would be entertaining to see what happens if the Democrats defied the pundits and held the House.   Everyone looked back and said, “what the hell did we get wrong?”  And, to be sure, it’s in the voters hands.  Enjoy the election!  (Here is my guide to the competitive election night races).

UPDATE: Another entertaining scenario is put forth by Nate Silver who sees the possibility that the Republicans may win in such a landslide that it confounds the Democrats and goes beyond conventional wisdom in the other direction.   Indeed, that “GOP Tsunami” theory is more likely than the Democrats keeping the House.  And that’s why, ultimately, this election is so much fun to observe.  The range of possibilities is immense.  After the fact it will seem like a sure thing (and those who predicted it will say “duh, it was obvious to me,” but in reality the realm of possibility going into tomorrow is greater than in most off year elections.

UPDATE 2: Silver gives a second scenario similar to what I describe above, focused on potential flaws in polls leading up to the election.   Now, let the voting begin!

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