The Exhaustion of American Ideologies

         There is an air of defeatism and desperation to Keith's "After November" piece. The tone reflects what seems to have become the attitude of a growing number of Democrats who give the impression of having already written off their chances for holding their political ground in the upcoming elections. This is a massive come-down from their self-assurance a mere four years ago when Barak Obama swept into Washington and drove Republicans before him like a broken army. At the time, Democrats talked confidently about a possibly permanent progressive realignment in America along the lines of FDR's post-Depression coalition.

So what alien counterforce is it that has now emerged? To hear Keith and his fellow Democrats tell it, the main problem is Big Money, which Republican plutocrats can always bring to bear and which they are now pouring in like hot fire against President Obama and the other honest progressives in government.  Keith has even carried the argument so far as to claim media bias against them, resurrecting a favorite bugbear of the Right and turning it on its head.

This narrative, however, doesn’t run very deep.  The Democrats too are funded by Big Money, and in the last presidential election cycle by even more of it generally than that which backed the Republicans. In my own home state,  for example, Representative Chris Shays, who had for many years represented the Fourth District of Connecticut as a moderately conservative Republican, lost to a former Goldman Sachs executive, who outspent him several times over.  This pattern played itself out on a grand scale as Democrats concentrated abundant financial resources on tightly contested races across the country.  On a national level – Fox News aside – the mainstream media covered the Obama campaign as though it harkened back to some wondrous combination of FDR’s brain-trust, JFK’s glamour, and  MLK’s moral gravitas.

Yet only those Republicans in the most extreme state of denial would have imagined they lost elections because of money and media bias. They lost because their ideology had run out of steam. Ronald Reagan's program of lower taxes and lighter regulation of business had been a constructive formula for addressing the serious  economic problems the country faced during the 1970's and early 80's. Giddy with success, however, Republicans allowed this formula to harden into an ideology. They behaved as though they believed the American economy had reached a state of permanent prosperity that could sustain momentum forever if supported by ever-lower taxes and ever-lower interest rates. Remarkably, Republicans even stopped worrying so much about the growth of Government, which continued its relentless pace during the Bush years, so long as higher taxes weren't necessary to pay for it.

There were warning signs along the way. One was the 1998 collapse of Long-Term Capital Management, a hedge-fund following an investment strategy governed by two Nobel-laureate economists who were on the on the LTCM payroll. Their quasi-mystical faith in the accuracy of free-market pricing lured them into a disastrous cul-de-sac. Another danger sign was the 2001 bankruptcy of Enron,  a company whose founder Kenneth Lay was also an apostle of free-market dogma. The Enron failure was part of a much bigger breakdown at the time,  as puffed-up technology stocks, having fed on free markets, suddenly deflated. This spectacle exposed,  as market crashes always do, the weakness in the "efficient market" thinking favored by right-leaning economists.

As prosperity and rising markets resumed in the early years of the new century, these problems for a while appeared to be little more than blips in the receding past. The blips, however, were revealed as foreshadows in 2008,  when our financial markets came crashing down and threatened to take with them our banks and our general economy. People's livelihoods were at risk now,  and the general public took notice. Since 2008 was also a presidential election year, voters did their jobs and threw out the people in power. More than that, the general public seemed to have picked up an intuitive grasp of where the crisis came from.  While the Democrats had been active collaborators in much that had gone wrong, it was Republican ideology that had fueled the immediate triggers to the crisis. Big Money and media bias did little more than exaggerate what would have been a landslide victory for the Democrats in any event. They came to power fairly and with an indisputable mandate.

Unfortunately, it became immediately clear that the Democrats had learned very little over preceding decades.  Interpreting the election results as proof that  they had been entirely right all along about the powers of Government, and their political enemies entirely wrong,  they developed a romantic and atavistic obsession with FDR's legendary "First Hundred Days". They set about designing a complex of the new government programs, economic stimulus and regulation that emulated the policies of  the 32nd President, albeit dressed up now with a modernistic focus on Green Energy and environmental science.  Like FDR's people, Obama's administration was determined to drive their work home quickly while they still had the power.  The two hallmark pieces of legislation to emerge from their two years of virtually undisputed control over government were the Patient Protection and Affordable Care Act and the Dodd–Frank Wall Street Reform and Consumer Protection Act, overhauling health care and finance respectively. While both of these Acts addressed genuinely glaring problems, both were massively over-engineered and were from the start doomed to bog down in a minefield of unintended consequences. More ominously, the money to pay for it all drove the federal budget deficit, already arguably at unsustainable levels, to unprecedented heights.

 And just as the Republicans in better days had their ideological apostles, so do the Democrats now. The most visible of these in the economic sphere probably is Paul Krugman, yet another Nobel Laureate ruined by fame. He has labored mightily to convince his party, and all of us, that the only problem with our current outsized budget deficit is that it isn't outsized enough. His most recent book entitled "End This Depression Now!", complete with exclamation point, sounds as though it could be the work of a self-help guru promising all good things to anyone bold enough to follow the formula and not ask stupid questions. We’re being instructed to keep pounding the fiscal pumps like real men and abandon worrywart concerns about deficits.

The voting public, however, isn’t having much of this and is asking lots of questions, many of them not as stupid Dr. Krugman would have us believe. With their momentum now stalled, the Democrats have good reason to worry about the coming election. Campaign finance is a legitimate issue for discussion,  but it is largely a red herring in the current environment. If the Democrats lose more ground, it will be not because any financial disadvantage, but because,  as with the Republicans last time around, their policies are failing and they’ve run out of ideas.

I suspect the Democrats, having over-estimated their standard-bearer in the last election, may be underestimating him now. He is, in my opinion, one of the most gifted politicians and orators of our era and is likely to overwhelm Mitt Romney in debates. Obama may have a weak record to defend, but so does Romney,  who cannot escape answering for the dysfunction of his own Party. There is a very good chance the President will regain the loyalty of his wavering followers, even if not their bright-eyed enthusiasm,  and that he will win over a fair number of Independents.

Contrary to the usual most-important-election-ever rhetoric now emanating from both sides, however,  I personally don't think it makes a great deal of difference who wins in November. Whoever emerges with the Presidency and control of Congress will face the same set of intractable problems that exists now. And since both parties remain beholden to tired ideologies, our next crop of leaders will find themselves mostly trying to re-shuffle a deck of weak cards that have already been played.

Keith mentions the possibility of a third party emerging in the U.S.  There's surely no comfort in the prospect of a third party on the extreme right or left. Such a development would lead us even further down the road than we already are towards a mass-scale version of the morass now enveloping Greece. I agree, however, that a different kind of third party could be welcome. This would be not so much a bland "centrist" party as one that  would pick and choose strong but non-ideological core values and then take bold steps to address problems. Such a party would be genuinely committed to financial prudence and fairness at the same time. It would embody the spirits of pragmatism, efficiency and innovation, and would have no affinity for political grudges, dogmas or grandstanding. While there seems little immediate prospect for such a force materializing, we can all hope that the "better angels" of American democracy are still secretly at work somewhere, ready to exert a benign influence when the time is right. Unfortunately, an extreme crisis may prove to be the necessary catalyst. 

After November

The overwhelming financial advantage of the Republicans, their ability to undermine Obama by sabotaging the US recovery, the weak Democratic political campaign, and the grinding problems of Europe ensure a Republican sweep in November. Romney will be the new President, and he will have a majority in the Senate as well as overwhelming control of the House--and they of him. The question, then, is what will happen over the next 3-4 years.

The Republicans believe that economic recovery requires, first, an unpleasant period during which we get our fiscal house in order by cutting back on entitlements and government spending, and second, government support for private investment. They do not believe in government investment as such, apart from the military and police sectors. Consequently, a dramatic remake of the federal budget will be enacted, as they forthrightly promise. A balanced budget without tax increases on the investor class--that is, corporations and the wealthy--will be the goal, and will include increased defense spending. The Obama healthcare bill will be repealed, and the Republicans will seek to replace Medicaid and Medicare with a voucher system whose levels are geared to reducing federal deficits. Most other social programs, including the EPA, welfare, and industrial regulation will also face drastic financial reductions or total elimination. Farm welfare and tax incentives for carbon-based energy production will survive, however, and probably even increase.

Although Democrats will protest and use parliamentary maneuvers to block what they can, and the surviving liberal press will likewise fuss and fume, they will be talking only to themselves, and a continuing din of right wing advertising and media favoritism will largely drown out their objections. Nor can Democrats at local, State, or federal levels realistically hope to regain office, because the Republicans have a permanent and overwhelming monetary advantage, which has been demonstrated to be highly effective with the electorate, and they will also continue to benefit from voter eradication strategies in the States, of which they will control many more in the Romney sweep.

As  economic theory predicts, and the experience of Europe is now demonstrating, the austerity program that Romney promises will not actually restore fiscal order, and it will very clearly increase disparities of wealth. We can expect an increasing number of Americans to become jobless, members of the underground economy, dispirited, disqualified for 21st century jobs, and, in more and more cases, very angry. Although similar trends will grow throughout the world, the highest performing levels of the US economy should be able to sustain their sales and increase profits through their international operations. Similarly, those businesses that cater to the wealthy should thrive, and a flood of people moving down the income ladder might sustain sales and profits at the businesses like Walmart or Dollar Stores that cater to those with low income.

I say that US corporations should be able to sustain international sales, but that possibility would disappear if Romney pursues the beligerant foreign policy he has suggested. Even if he does not start a shooting war with Iran, however, anything like a return to the W. Bush policies would probably trigger international trade wars that could go far toward dismantling the free trade measures that have prevailed since World War II. Since that would, of course, be very problematic for the corporate world I tend to discount the possibility that a Romney foreign policy would resemble his campaign positions.

Some writers have posited that Romney's election and a sweeping Republican triumph in November would lead to something like permanent oligopolistic rule, with the only significant disagreements being within the ruling class. That does seem to me a possible endpoint of what must be a devolution that takes several election cycles. Several conceivable scenarios could seriously derail that development, such as warfare, civil chaos, Democratic resurgence, the formation of an effective new political party, plague or other cataclysmic natural disasters, or technological breakthroughs that overturn the existing economic structure.  So there is always hope.

The Wisconsin Recall - Another View

           Keith below presents a well-reasoned and fairly balanced discussion of the recent recall election in Wisconsin. His main purpose seems to be to chide his fellow Democrats against misconstruing the political significance of this development. The circumstances surrounding the recall, however, I think reveal a problem more fundamental than partisan political strategy.

          At the risk of sounding like the kind of idiot who quotes himself, I’m going to quote myself here. The excerpt is from a review I did of Michael Lewis's Boomerang, a recent compilation of his earlier reportages on several of the world's financial flashpoints. He writes on Greece, Ireland, and Iceland, but it's his take on the American state of California that has the most direct relevance to the present imbroglio in Wisconsin. This is the way in which I attempted to summarize the picture that Lewis paints.

“I'm pretty sure that Michael Lewis is a Democrat, but he writes without ideological blinders. He obviously admires the Republican Schwarzenegger (Lewis reports on  a bicycle jaunt and meeting he has had with the former California governor) for his intellectual honesty, optimism and relentless energy. However, even the redoubtable strongman, by his own admission, proved helpless against the problems of California. The state's voters embraced him initially and then eight years later threw him out of office, his approval ratings having crashed through the bottom of the floor. In Lewis's rendition, the travails of California sound depressingly like those of Greece. A land of shallow idealism mired in administrative incompetence, California promises everything but is willing to pay for little. The state's perpetual budget crisis seems to be without the slightest hope of being resolved at any point in the foreseeable future. Arnold seems disappointed but has taken it all in stride and moved on with his life. He says he had fun trying.

"Lewis realizes he could visit just about any city in the state and find a relevant crisis to observe, so he picks a few. The mayor of one of them - San Jose -  (a Democrat by the way) sums up pretty well the problems of his city and most of the others when he points out that he could terminate every single current employ in his government and not save enough money to pay the pensions and post-retirement benefits of the former employees. He could then tax his wealthy citizens into oblivion and, having thus destroyed his tax base, still not put much of a dent in the problem. Apparently believing themselves much richer than they were - particularly during the Fin de siècle boom years - government officials had fecklessly backed away from confrontation with the public service unions, who were thus able to assume a largely free hand in crafting pay and benefit packages. The day of reckoning came much sooner than even pessimists had imagined.

"On his way out of the Mayor's office, Lewis asks as couple of his aids for suggestions about where, given his investigative focus, he should go next. Without hesitation they both point him to Vallejo, and Lewis makes a beeline for the place. Three years earlier, Vallejo became one of the few municipalities in the United States ever to file for bankruptcy, overwhelmed by reckless promises made in happier times to its public employees. By the time Lewis gets there, the city has few active public employees left and is a shell of itself. Many of its homes are in foreclosure and its taxable population is drifting away. Street maintenance is non-existent, and crime is rising.

"Paradoxically, though, it's in reporting on Vallejo that Lewis discovers more glimmers of hope than he has managed to find elsewhere, for much the same reason that former drug addicts can sometimes be inspirational: hitting absolute rock bottom creates a certain clear-sightedness about problems and a motivation to correct them. Lewis meets the recently-hired city manager, Phil Batchelor, who has come reluctantly out of retirement to take the job. A sober, unassuming man, his one precondition for doing so was that the city council members all sign a written pledge to him they will start behaving in a civil manner towards one another. It seems someone had recently thrown a severed pig's head onto the floor at one of their meetings. Having been able to discharge most of their debt in bankruptcy and renegotiate their labor contracts, Vallejo has the chance for a fresh start, and Batchelor is determined to make the best of it. He's not interested is apportioning blame to anyone for past failures and is pragmatically focused on solving problems one at a time.

"Lewis also spends time with a 41-year-old Vallejo fireman named Paige Meyer. Meyer has seen his compensation and benefits cut sharply, but is nonetheless still passionate about his work. He treats fighting fires as though it were a calling, and is re-inventing the job to make do with fewer resources, even though Vallejo apparently has many more fires than other comparable communities. He seems to have no bitterness and to enjoy his life despite the financial devastation around him.

"Putting all these stories together, it's not hard to get Lewis's vision of what has happened to our developed Western economies. He doesn't preach, but rather like Dickens' Ghost of Christmas Future, he lets the grim facts unfold and speak for themselves. The common denominator here is the illusion of easy money, which our modern financial markets have conjured up for us and which has fooled everyone from multi-millionaire bankers to municipal street cleaners into thinking that everything they want is there for the taking. Lewis doesn't say it directly, but he appears to regard the problems of places like Greece and Vallejo as indicative of what lies in store for all of us who fall prey to illusions that life is easy and money is free."

          Certain American commentators nowadays seem never to tire of pointing out sagely that the United States is not Greece. They might also remind us, fairly enough,  that Wisconsin is not California. Nonetheless, all of these crises have common roots, and all are symptomatic of a global breakdown in the model governing the world's developed economies.  This model is neither "capitalist" nor "socialist", in the nineteenth-century lingo that economists sometimes still employ, but a hybrid in which market-oriented production entities co-exist with monopolistic government service providers. And while market forces still provide a degree of restraint over the private sector (with banking a partial exception), no such organic discipline exists to reshape ineffective and inefficient government services. As a result, following the course of least resistance, politicians continue to fund old programs even as they create new ones, and they tend readily to accede to employee demands for growing compensation and benefits. All of this ensures that government's share of the economy will grow relentlessly, as indeed it has throughout most of the last century.

          Various Catch-22 problems ensue. The most obvious one is that the growing tax burden needed to pay for government  weakens the private sector, contributing to unemployment and other private-sector failures which in turn increase the demand for more government spending. The less noted Catch-22 is the problem that the essential services of government itself become squeezed as money is diverted towards non-essential and wasteful ends. As Keith points out, the anger that many people feel towards government stems less from a belief that they are spending too much money on government than from a knowledge that they are receiving inadequate services in return. I would suggest that this problem in general does not result from incompetence  among of people in government, but rather is inherent in the nature of government monopoly.  And the problem would seem only to get worse as time progresses.

          Analyzing such a system on a theoretical level, it would seem inevitably inclined towards a terminal breakdown at some stage in its existence. To borrow a Marxian notion, the system would appear doomed by an inescapable internal contradiction. In the United States, the most serious long-term problem exists at the federal level. Here, however,  a temporary safety valve is provided by the ability to incur debt-financed deficits, and the concurrent ability the support this debt with unconstrained quantities of fiat money. Our powerful Federal Reserve Bank has now learned how to utilize "quantitative easing" and other monetary gimmicks to repress the rise in long-term interest rates normally be expected from such practices. All this may well postpone the day of reckoning for a while longer at the federal level.

          It is, however, our state and local governments that sit on the cutting edge of the current crisis. Like Greece, they lack control over their own currency, and additionally many of them face hardwired legal constraints on most forms of deficit financing. Hence, unlike their federal brethren, they must face reality and either cut services or raise taxes. And increasing taxes in many cases risks undermining the economic basis on which even existing taxes might be paid in the future.

          Scott Walker has applied a blunt instrument in attempting to grapple with the problems of Wisconsin. The impact of what he has done is indeed cruel and unfair to those people who have built their lives around the honest assumption that they could count on a certain level of financial well-being for their lives. But is the fault his, or that of earlier politicians who made unsustainable promises in the first place?  He has won his victory operating through democratic channels and has overcome an opposition that has been every bit as vicious as the rightwing "lunacy" that Keith decries.

          I certainly have not studied the problems in Wisconsin in any depth, but I suspect that Scott Walker may be protecting his people from a much more painful resolution at some point in the future. We might soon see a cautionary foreshadow in what's probably about to happen to the people of Greece.

Meaning of Wisconsin Recall Vote

The Wisconsin vote for Scott Walker should make liberals think. Democratic commentators, as on MSNBC, try to dismiss this vote as due entirely to the funding differences, which will not be as great in the Presidential race. But the WI voters are among the most union-friendly and progressive of all in the US, Walker is a certifiable villain, and despite Walker's 71/2:1 spending advantage the ground campaign that the Democrats waged surely provided all voters with plenty of information. I think, therefore, that the result accurately expresses an actual voter preference--not just a triumph of rhetoric, framing, or advertising.

But what is that preference? Let me suggest that many voters are siding with Republicans because they don't think government is giving value for their money. It's not that they object to most government programs, but that they don't think government carries out any programs very well (except for military and, perhaps, police functions, for which they have little information). They question Obamacare not for insuring people, but because it's a government program, and while few people have had a bad experience with a health insurer, almost everyone has experienced frustration and waste when dealing with a government agency.

In saying this I do not mean to minimize the role of Republican propaganda and policy. Since Reagan, Republicans have starved the government of the money it needs to do its job well, and then blamed government bureaucrats for functioning badly. I am sure this trickery, along with propaganda, has played a substantial role in the public perception that the government isn't performing well. But there is also a real problem of government accountability. Government is a monopoly, and we all know how difficult it is to deal with such an entity. With only one mayor, governor, or President, and hundreds or thousands of government departments, the problem of making government truly responsive and accountable is a very difficult one to solve. In the experience of most voters, it hasn't been solved, and Republican propaganda takes care of any doubts.

Bottom line: I think the vote in Wisconsin, and the amazing support that Republicans have gained despite the lunacy of their ideology and the horrible track record of their leadership, owes more to the fact that only Republicans are saying "enough" about government, and less to any support of their actual policy objectives.

Overburdened Linchpins And The Rest Of 2012

          It's odd that so many people in the financial community seem already to have lost track of what really happened in 2008. The reason perhaps is that the year has by now been politicized and over-analyzed to where most of us are tired of the commentary and are no longer paying attention. Yet 2008 is still with us in a very immediate way, as is 2001, 1998, 1994 and all the other points of sharp market inflection that have occurred within the career-spans contemporary players. Financial historians will want to look back still further to at least the 1913 founding the American Federal Reserve system, a development that would over time give rise to the dollar-based international monetary system. The institution that was supposed put an end to financial panics, as they were called in those days, instead helped lay the groundwork for systemic instability, a more contemporary term-of-art for roughly the same thing unfolding through high-speed modern markets.

         I want to focus on 2012 and not torture history any more than necessary. Past chains of events, however, always suggest clues to the future and are thus usually worth the time to consider. Several common factors have percolated through past crises, but the one that stands out to my mind above all others is the existence of linchpin events. These are small developments that seem minimally significant upon first appearance, but that spin out of control and, through obscure interconnections, trigger improbably large events.

          Looking back to a couple of years prior to 2008, for example, mortgage analysts will remember that the default rates for subprime mortgages began creeping upward and were soon outside the "worst case" boundaries established by the investment bankers who were structuring mortgage securities. Insiders began taking note, but few people on Wall Street or in Washington were overly concerned, because the problem appeared to be manageable. It was only manageable, of course, until it wasn't, when projected financial losses began to extend beyond the relatively small sub-prime mortgage sector. Then suddenly awareness dawned about how leveraged the entire financial system had become. The succeeding chain of events needs no recounting here, but the end result after a couple of years was the virtual nationalization of supposedly indomitable banks in the U.S. and Europe, political realignments on both continents, and the dawn of what journalists later dubbed the "Great Recession".

         For the past three years the search for new linchpin events has been a favorite dinner-party sport among retired financial types, and a survivalist challenge for people still on the front lines. Now in May of 2012 a couple of developments have appeared that to my mind suggest themselves as serious candidates.

         First is the latest devolution of the situation in Greece. This crisis, of course, has been with us for the past three years. Hardly a slow news day has gone by without pundits attributing either small market upticks to new optimism that a Greek resolution is in the works, or else downticks to erosion of optimism that had supposedly been there the day before. As with a slow-moving cancer, Greece has found its way to the periphery of consciousness for most of us, but will not to go away. The news now is that new elections will be necessary due to the evaporation of whatever frail national consensus there had been to go on collaborating with the northern Europeans. We should remember that what we're dealing with here is not a normal country, however pretty its Aegean islands may be. Greece faced a communist insurgency in the years following WWII, suffered a fascist coup d'etat in 1967, and was living under military dictatorship as late as the 1970's. Political turbulence is not street theater for these people but serious business. The thought of elections in the current climate, with extremist parties gaining strength again, is unsettling.

         I'm no sovereign expert, but it doesn't take a weatherman to know which way the wind blows here. The Greeks and the Germans can no longer tolerate one another, and at the very least it seems we can expect that Greece will exit the eurozone. At that point a couple of ugly genies will be out of the bottle. First, the ties that bind the eurozone together will no longer appear sacrosanct to other member states who might be quietly considering the same option. Secondly, once they have their own currency back, we can expect the Greeks quickly to exercise their new prerogative to debase it. That, after all, is the point of monetary sovereignty for a failed nation. To a continent, and a world, overburdened with debt, little Greece will have demonstrated how easily fiat money can lighten the load. The re-appearance of hyperinflation in Europe, even in a small country, will reverberate loudly.

         The second potential linchpin event currently in the news is the J.P Morgan situation. In a matter of a few days, there has already been too much commentary about this from people with little information about it, and I'll try not to add to the noise here. However, the sudden announcement that even Jamie Dimon's bank doesn't know how to execute a hedge is devastating news for market participants who had been hoping that adults were back in the room and that our modern capital markets were regaining their equilibrium. As Dimon knows, he will now be compelled to hand over his sword to the politicians who, in a presidential election year, are more eager than ever to demonstrate their zeal in punishing Wall Street.

        And for anyone who takes comfort in the prospect of increased regulation, I can only point to the dog's breakfast that still sits largely uneaten on the table in the form of the 2010 Dodd Frank legislation. Paradoxically both over-engineered and unfinished, this body of law arms regulators with powers that are as vague as they are powerful. Implementation will now proceed with a renewed directionless vigor. Regulators will find themselves operating in waters that are dark and over their heads, but they will nonetheless feel compelled to act boldly. None of this bodes well for financial stability.

         For investors, the main lesson of 2008 was that in the midst of systemic instability, a decade's worth of hard-earned gains can be wiped out in a matter of weeks. In my view, the conditions are now in place for another collapse of equal magnitude, perhaps without the sovereign willpower this time to engineer another quick recovery. Investors, however, have no clear safe havens. Gold, the classic panacea for dangerous times, lost money in 2008 and, after big gains during the recovery, is losing money again now. Inflation and low interest rates are eating away at cash and bonds. Short strategies can be disastrous if the timing is wrong, and obvious trends rarely follow obvious timetables. Problems could easily come to a head by the end of this year, but could still drag on, depending mainly on political variables.

Why I Disagree with Doomsters

There are 3 main fears driving the current stock market decline. I think each of them may materialize, but either the odds are against them being serious impediments to future growth, or the impact of their occurrence is exaggerated. This discussion therefore focuses on those reasons:

Risk 1. Europe The fear is that Greece will reject the EU deal and drop out of the Eurozone, thereby triggering the same from Portugal, Italy, Ireland and Spain. Any significant part of that avalanche would destroy the euro and severely damage the entire European economy, plunging Europe into a major depression.

I think that the new Greek government and the Germans will not chase each other over this cliff, but rather the deal previously made will get adjusted. Basically, the German and French banks are now eyeball to eyeball with the Greek people, and I think I just saw Merkel and the German voters blink. Moreover, an adjustment would be appropriate. The current deal is based on a moralistic view of what happened in Greece and how Greek public employees, tax avoidance, and corruption are to blame for the mess. Consequently, the northerners felt justified in imposing economically senseless austerity requirements. In reality, I think the bankers who made loans without evaluating risks properly are just as blameworthy, and therefore the draconian requirements of the Greek deal are severely unfair.  That moves the issue from morality to politics, where fairness is a major concern. And the political reality is that if the northerners want to save the euro, which has been tremendously beneficial for them, they must bow to political reality and make a fairer deal. They seem to be moving that way, and since they have more to lose by refusing, I am pretty sure they will do so.

Even if the Greeks do drop out, the direct impact on the rest of Europe would be minor. So, that leads us to the contagion issue. The other countries at risk are very different than Greece. They do not face the same moral onus, and of course the risks to the northerners are much, much greater should the defaults spread. Accordingly, especially in light of the very substantial funds that have been allocated to protecting Europe from further financial disaster, I think the possibility of continued demands for austerity, and contagion, is quite low. There will, of course, be much shouting and finger pointing, and the words could get ugly, but in the end I still think the northerners will cut a deal that the southerners and Irish regard as fair.

Bottom line: I think there is only about a 15% chance that Europe will swirl itself into a new depression.

Risk 2: China The risk here is that China’s growth rate slows and, longer term, that China’s potential political, environmental, and economic difficulties become unmanageable. In other words, that it ceases to be a growth engine for the world.

Although China is huge, and manufactures an enormous amount of what the world consumes, it is not as economically important to the world as its population and manufacturing capability would indicate. It consumes far less than its size, population, and manufacturing prowess might indicate. Moreover, short of civil war, a most unlikely possibility, China’s slowing growth rate would have little effect on the manufacturing sector as far as the rest of the world is concerned. And if necessary, much of that manufacturing could quickly shift to other countries, including the US, as it certainly will anyway over the next couple of decades. China is a huge factor in world trade because of its manufacturing sales abroad, and the shipment of materiel into China to support that manufacturing. But as a market, China remains much smaller.

The Chinese economy, slightly larger than Japan’s in GDP ($5.9 trillion to $5.5), depends much more heavily on trade. Specifically, its imports total $1.587 trillion compared to $2.592 for the EU and $2.336 for the US. Most of what it imports, however, goes back out in exports. As WTO data notes, Trade is 55.2% of China’s GDP compared to 29.8% for the EU and 27.8% for the US.  By contrast the consumer markets in the EU and the US are much larger, with GDPs of $16 and $15 trillion compared to China’s $6 trillion. Back out the share of GDP represented by trade and the differences are even greater: $11.23 trillion for the EU, $10.83 trillion for the US, and $2.69 trillion for China.[1]  So while a serious slowdown in China seems 50% possible, and would have an impact, the impact would not prove especially large or scary.

Risk 3: Congress The third, and in my estimation the largest risk of all, is that US politics will prove extremely destructive to the economy.  The risk comes basically from gridlock on two matters.  First, if Congress fails to decide on the debt ceiling in a timely way, it will create major uncertainties for domestic and foreign firms, causing a serious decline in investment spending, perhaps private consumption, and public tax revenues and spending. Second, the draconian tax increases that would take effect if the politicians cannot reach a budget agreement would significantly reduce US purchasing power, a problem exacerbated by reductions in public spending at both state and federal levels. The impact on perceptions and the willingness of firms and consumers to spend (a failure of economic demand that leads to depression) could be even greater.  It is hard to estimate the severity of the economic decline that these failures would trigger, or even the timing, but given the track record of Congress, the positions the candidates and politicians are announcing, and the ideological fervor that many are showing, the risk seems quite large.

As with Europe, however, I cannot believe that the politicians will pursue insanity to the ultimate degree of economic destructiveness. With a Presidential election looming, I think their incentives cut both ways. That is, the Republicans would like the economy to slump because it would hurt Obama’s election chances. On the other hand, they don’t want the blame by appearing intransigent. My best guess is that they will find compromises to “kick the can down the road” and let the election and the next President handle the issues. In other words, they will not let economic catastrophe overwhelm their candidate’s chances at the end of 2012. Consequently, I rate the possibility of economic disaster occurring in the near future because of Washington gridlock as no higher than 50-50. But this is the only one of the three main present risks that I find gravely troublesome.

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[1] Source: World Trade Organization, Country Profiles. http://stat.wto.org/Home/WSDBHome.aspx?Language=E accessed 5/18/12. Note: EU trade data excludes trade within the EU.

The January 22, 2012 NYT article about Apple's jobs, along with Davidson's piece in The Atlantic about automated factories, point the way to a reality that will soon engulf China and other developing nations as much as it has engulfed the US. That reality is that, as with farming, we can now manufacture whatever we want with a very small fraction of the working population. Even the prescient Obama is not coming to grips with this.

I suggest that instead of trying to emulate what many others can do more inexpensively and just as well, instead of pushing to return to a manufacturing base, we as a nation should look to what we do better than anyone else: namely, invent and innovate. We have the cultural orientation, the employment flexibility, the institutional base, and the devotion to freedom of action that foster innovation, and by paying careful attention to the policies that inhibit invention and innovation we can build on those capabilities. We also have the wealth to spend on the necessary education.

Can innovation alone provide work for all? Quite possibly. Although Apple employs few people in the US, its enormous profits support a vast amount of labor providing entertainment, culture, education, and other services to those employees and to Apple's happy stockholders. To properly measure the economic impact of our innovators, we need to count those service providers who depend on the high salaries and profits of innovation. After all, what is America's largest industry? Entertainment.

Liberals and Conservatives: Who Are They Really?

Keith's commentary (American Counterpoint - 11/14/11), along with the NYT article he encapsulates, raises an elusive question: who are liberals and conservatives? What defines them as such, and what makes them so contrary to one another?

For me the most useful part of what Keith has to say is his analogy between our modern political groupings and sports teams. Considering this I think can help elucidate at least one dimension of the current political impasse in the United States. A substantial portion of our voters identify themselves as either "liberals" or "conservatives", and once they've done so, have a tendency uncritically to swallow political notions officially emanating from their "side". At the same time, they quickly disparage notions arising from across the field, regardless of possible merit.

Anyone who has had the experience of sitting in the wrong set of bleachers at a high school football game understands the dynamic at work here. You can be a perfectly nice person and still get a drink poured down your neck if you're wearing the wrong color jersey. This may be OK in sports, where blind boosterism is part of the fun. It's less OK in politics, where rational discourse is necessary for achieving progress on issues of great importance to everyone.

Keith made his "team" analogy only in passing, however. In the actual substance of his commentary, he drifts onto less insightful territory. To define conservatives as "authoritarians" who "opt for isolation, force, and simple solutions" is stereotypical at best. Then to state, in the next breath, that liberals "rely almost exclusively on rational thought, without much concern for emotions" veers close to delusional thinking, if the point is meant somehow to apply to liberals in general. Moreover, I'm sure that many liberals themselves would take issue here, since they're often proud of their willingness base political views in part on emotional considerations. In fact, they see rationalism as more a conservative proclivity, tending as it does to put abstract reason above humanistic values.

I've thought a great deal about what the defining characteristics of liberalism and conservatism really are. These are, of course, old terms that have carried different meanings in different places and eras, and my focus here is on what they've come to mean in our contemporary United States. I've concluded that in order to answer the question, it's necessary to engage in a two-stage inquiry. First, we have to examine the laudatory self-definitions both groups are prone to using. Then we need to observe the actual political behavior of the opposing groups and its impact on the welfare of the nation. Only after we have probed both subjective self-definitions and objective practice can we can begin to understand the true contrasting political identities.

For this inquiry to be worthwhile, it is in my opinion necessary to start from the proposition that there are intelligent, sincere people on both sides who have constructive views. It follows then that rational dialogue among these people, including at times fierce debate, will lead to better public policy than will a process conducted by politicians operating from within a closed set of ideas. We also have to recognize that both groups contain people who are not sincerely principled or really committed to establishing good public policy. These are the people prone to using ideology as a cover for hidden agendas. Liberals and conservatives both at times talk as though they believe somehow that all the principled people reside in their camp, with all hypocrites and wreckers banished to the other. It is this degraded perception that leads to the kind of intellectual apartheid that the author of the NYT article appears to consider the common state of affairs. Such would be the case only for a nation preparing itself for partition or civil war.

So, let's start with the liberals. They see inclusiveness as their core mission. They consider personal happiness an imperfect goal so long as others are excluded from it on the basis of social class, race, sex or other innate conditions. Like conservatives, they generally believe in hard work, but they want the resulting rewards to be shared as widely as possible. Because inclusiveness is not a universal human virtue, liberals look to government as the necessary vehicle for forcing it on people otherwise intent on selfish lives. Higher taxes on the wealthy, and even middle-income people, are almost always justified if necessary to fund programs that help disadvantaged people improve their lives. Wealth is more the by-product of lucky circumstances than of hard work, and simple justice requires it's equitable distribution.

While some liberals are religious, many are suspicious of organized religions for promoting spiritual elitism, and for encouraging monetary donations and outward acts of piety as substitutes for social responsibility. With respect to foreign policy, liberals are often open to listening to America's detractors, in the belief that their enmity may turn out to be justified. It may in fact stem from the very worldview that American liberals themselves promote, which sees our nation's wealthy elite as plundering the Earth's resources for private gain. If geopolitical conflict can be understood through this lens, the obvious solution is for liberals of good conscience everywhere to push their greedy conservatives aside and come together in honest negotiation. The money now being wasted on military preparedness could then be diverted into beneficial social programs.

Turning to the conservatives, they see self-reliance as their core mission. Conservatives believe that through hard work and responsible living, anyone can succeed and receive rewards commensurate with their achievements. Some will benefit more than others, of course, as is befitting an economic system that differentiates among people according to their varying contributions. The prospect of gaining wealth is the vital incentive that motivates talented people to work hard, innovate and take the risks necessary for the nation's economic development. It's the labor of these high-achievers that provides the jobs and creates the bountiful flow of goods and services which is the foundation of everyone's prosperity. Allowing these people to grow rich is a small price for society to pay in return for their services.

On the other side of the coin, conservatives regard the threat of poverty as a necessary discipline for dissuading people from lives of sloth and dissipation. While not everyone has the talent to become wealthy, they all can find places in society and earn a decent living in accordance with what they contribute. If, however, overly-generous government programs eliminate the economic consequences of lassitude, too many will be tempted onto the course of least resistance and never find productive roles for themselves or pull their weight in the economy. Conservatives see free markets as the ultimate arbiter of value. Markets attach relative value to the labor of people and to the goods and services they produce. Since market value is by definition "true" value, the judgments of the market are sacrosanct and should never be countermanded by government policymakers or social engineers.

Many conservatives are religious. They tend to view our variegated social structure as the natural order of things and regard wealth as a sign of God's favor. At the same time, they tend to accept social Darwinism as the mechanism by which the social structure evolves, with God helping those who help themselves. In foreign policy matters, conservatives generally advocate a muscular response to the encroachments of foreign adversaries. They see other nations as being jealous of America's economic success and often seeking to undermine it because comparison puts an unflattering spotlight on their own national failures.

With such self-definitions in view, it's then not hard to see how both conservative and liberal ideals can inflate themselves into counterproductive ideologies. When that happens, political discourse becomes dysfunctional. Convinced of their own virtue and wisdom, liberals and conservatives alike become angry and defensive when confronted by limitations. They blame their adversaries for everything that goes wrong and refuse to consider contradictions possibly inherent in their own favored policies.

The central crisis of the present moment is paralysis of the global financial system and the lethal threat it poses to the real economies of all developed nations, including the United States. People's jobs, savings and way of life are at stake. Conservatives and liberals, of course, have their diagnoses of the problem and their proposed solutions, mostly rooted in their respective ideologies.

Conservatives tend to blame everything on welfare-state economics. They see generations of government give-away programs, most importantly the big "entitlements", as having finally pushed the nation to a breaking point. The money to pay for these compounding obligations cannot be raised through taxes, and the debt being used instead has become a millstone around the neck of what would otherwise be a vibrant American economy. Further aggravating the problem are the regulatory and tax burdens that hobble private enterprise and make it impossible for America's growth engine to gain its footing again and create the surplus needed to restore fiscal balance. Conservatives see liberal ideology as, at least in part, a cover for crony capitalists, tort lawyers, high level bureaucrats, public service union kingpins and others who cynically benefit from the inexorable growth of government.

Liberals tend to blame everything on private greed and social negligence. In fact in their view, far from being the source of our problems, the welfare state needs expanding at the present time. Despite the liberals' best efforts over the years and despite all the federal money that has been spent, poverty, social inequity, environmental degradation and healthcare inadequacy all appear to be getting worse. And the only thing wrong is that America's wealthy elite seem intent on hoarding their riches rather than paying the taxes needed to fund the programs that could fix all this.

Furthermore, in accordance with the Keynesian doctrine they favor, liberals consider increased government spending as the key to economic recovery. During hard times such spending becomes an end in itself, because it stimulates a stalled economy. Liberals largely dismiss the value of the supply-side nostrums favored by Republicans. They're less worried than Republicans about budget deficits and suspect handwringing over this issue of being little more than political theater.

They see financial instability and economic weakness as being largely the fault of conservative ideologues anyway. In one of their favorite narratives, the enlightened Keynesian policymakers who engineered America's post-WWII prosperity were expelled in a palace coup during the Reagan years. Free-market zealots took their places and twenty years later finally ran the economy into the ground. The laissez-faire doctrines of this new crowd were nothing but cover for their crooked Wall Street cronies bent on manipulating and looting financial markets for their own profit.

And so it goes. Getting away from their constructive principles, liberals and conservatives have come to paint one another into corners. Once on the defensive, both groups can start actively embracing the caricatures laid on them by their adversaries. When that happens, they all become very ugly people and a political death spiral is underway.

Luckily we're not there yet. The upside of all this is that liberals and conservatives can bring out the best in one another if constructively engaged. Inclusiveness and self-reliance, the core principles of each group respectively, are complementary rather than mutually exclusive. Liberals would do well to remember that social problems can be addressed effectively only within the context of a robust economy. This in turn is only possible when talented managers and entrepreneurs are allowed appropriate incentives and the necessary freedom to so their jobs.

Conservatives, for their part, might do their cause a service by stepping back to ponder the religious principles so many of them claim to espouse. They need to remember that inclusiveness is the foundation of Judeo-Christian ethics.

If the two sides can come to appreciate one another's legitimate priorities, they can work together to address the present crisis more effectively than has so far been the case.

Response to a NY Times article on the gulf of morality in politics

I have a very different frame of reference than do the November 13, 2011 NY op ed and the study it refers to, copied below. Perhaps this is because I agree, to at least some extent, with every single conservative tenet that is stated, and yet am and would be considered a very liberal voter and thinker. In other words, I don't think the study puts the differences very well at all. George Lakoff put it better when he wrote, some time ago, that the conservative mindset is basically authoritarian, while the liberal is much more multifaceted. In speaking of "mind," by the way, I don't think he meant the logical part of the brain, and I certainly don't. The electorate is divided into teams, and most people have the same devotion to their team that sports fans do, arising from the same relatively primitive parts of the brain. Within that context, we can see the basic differences: the authoritarian brain, confronting a bewildering and threatening new world, opts for isolation, force, and simple solutions based on instinct. Unfortunately, these work primarily as destructive impulses. The liberal brain, confronting the same world, tends to rely almost exclusively on rational thought, without much concern for emotions. So we have better policies; the Republicans have better ads and slogans. We have the rational Obama; they drag their heels about nominating a Romney, forget about Huntsman. This is not to claim that conservatives lack rationality. My co-author on this blog is highly rational. But his instincts are in the authoritarian direction, so conservatives are his team, and it takes a lot of disgust and misery to get him to root for the other side. Same with me, from the opposite perspective.

The Gulf of Morality

By THOMAS B. EDSALL

“There’s a gulf as wide as the ocean between the average politically active conservative and the average politically active liberal. We don’t just have political differences; we view the world through very different eyes.” So wrote John Hawkins, who runs Right Wing News, at the beginning of the year.

He’s right. The left thinks so too. George Lakoff of the linguistics department at the University of California at Berkeley argues that “conservatives believe in individual responsibility alone, not social responsibility. They don’t think government should help its citizens. That is, they don’t think citizens should help each other.”

Rush Limbaugh counters that “the left, the Democrats, can do anything — they can employ strategy and policy which is destructive — and be excused for it on the basis that they had good intentions. And, by the way, that’s how they skate on virtually every bit of destructive policy, which is every policy they have.”

I could go on, but you get the idea. Left and right look at each other with disdain and incredulity: what planet are these people from?

Electoral politics determine the distribution of valuable resources, and moral commitments can mask otherwise naked resource competition.

Perhaps the most illuminating examinationof these differences in values can be found in the work of Jonathan Haidt of the University of Virginia, and a number of his colleagues, including Ravi Iyer of the University of Southern California.

Using extensive data collected from online surveys, Haidt, Iyer and their colleagues have found that self-identified liberals and conservatives differ by very large statistical margins on questions of policy preference and political allegiance.

The liberal mind-set is defined by favorable responses to a variety of statements touching on economics, war and crime. Liberals agree that it feels wrong “when an employee who needs their job is fired”; “that it’s morally wrong that rich children inherit a lot of money while poor children inherit nothing”; and they describe themselves as often having “tender, concerned feelings for people less fortunate than me.”

Those on the left also agree that “peace is extremely important.” They believe that they have “understanding, appreciation and protection for the welfare of all people and for nature” and they feel “close to people all over the world.” Liberals generally “believe that offenders should be provided with counseling to aid in their rehabilitation.”

On all of the above statements, conservatives — no surprise — disagree with liberals. They believe that employees who “contribute more to the success of the company” should “receive a larger share” of the pie and they value “social status and prestige, control or dominance over people and resources.” The differences of opinion on war and peace are extreme, reflecting the importance of the hawk-dove split between the parties. Many on the right agree with few qualms that “war is sometimes the best way to solve a conflict” and that “there is nothing wrong in getting back at someone who has hurt you.”

Conservatives believe “that ‘an eye for an eye’ is the correct philosophy for punishing offenders,” and they endorse the view that “the ‘old-fashioned ways’ and ‘old-fashioned values’ still show the best way to live.” It feels wrong to them when “a person commits a crime and goes unpunished.” From the beginning, “respect for authority is something all children need to learn.”

This might all seem obvious, but actually seeing how the world looks to the most representative members of the left and the right helps us understand why the gulf between the sides is so deep. They talk right past each other. Analyzing the hurdles facing Democrats, Haidt attempts to explain to progressives why roughly half the population votes Republican in presidential contests.

People who call themselves strongly liberal endorse statements related to the ‘harm/care’ and ‘fairness/reciprocity’ foundations, and they largely reject statements related to ‘in-group/loyalty,’ ‘authority/respect,’ and ‘purity/sanctity.’ People who call themselves strongly conservative, in contrast, endorse statements related to all five foundations more or less equally. We think of the moral mind as being like an audio equalizer, with five slider switches for different parts of the moral spectrum. Democrats generally use a much smaller part of the spectrum than do Republicans. The resulting music may sound beautiful to other Democrats, but it sounds thin and incomplete to many of the swing voters that left the party in the 1980s, and whom the Democrats must recapture if they want to produce a lasting political realignment.

Conservatives and liberals speak different languages, so much so that they can hardly hear each other. “We have a moral responsibility to address the problems we face. That means working together to cut spending and rein in government,” John Boehner, the Republican Speaker of the House, told the National Religious Broadcasters on Feb. 27. “We have a moral responsibility to deal with this threat to freedom and liberate our economy from the shackles of debt and unrestrained government.”

Nancy Pelosi, the Democratic House Minority Leader, argued from a diametrically opposed position. “This legislation will destroy American jobs while harming middle class families, young adults, seniors, and yes, even our veterans,” she said:

Consider what the Republican legislation we debate today would do to diminish our investments in education, halt innovation, destroy good-paying American jobs and make our neighborhoods less secure. Indeed, not even homeless veterans are spared by the Republicans. Our federal budget, as I said, must be a statement of our national values.

While there are obviously many Americans who fall between the poles represented by Boehner and Pelosi, strong views animate primary voters, the most ideological partisans. Candidates facing primary constituencies — Democrats as well as Republicans — must signal agreement with positions held by their most ideological supporters, moderating as they approach the general election. Republicans will be pushed to embrace compassion just as Democrats will be compelled to advocate national defense and ‘personal responsibility.’ Whoever makes the better case will pick up the center.

But moral reasoning is inhospitable to “split-the-difference” pragmatism, and never more so than when material benefits are at stake. Electoral politics determine the distribution of valuable resources, and moral commitments can mask otherwise naked resource competition.

Voters on the left and right can now use social-cultural issues as signifiers for their positions on distributional policies. Opposition to abortion or gay marriage is a way to identify office seekers who oppose progressive levels of taxation, just as support for reducing penalties for the possession of crack cocaine or advocacy of a ‘low-carbon future’ mark a politician who will vote for more generous unemployment compensation and higher wages for women.

The intensification of disagreements over moral values not only makes compromise difficult to achieve, but sharpens competition for scarce goods at a time when austerity dominates the agenda. If, as is increasingly the case, left and right see their opposites as morally corrupt, the decision to cut the benefits or raise the taxes of the other side become easy – too easy — to justify.

Thomas B. Edsall, a professor journalism at Columbia University, is the author of the forthcoming book “The Age of Austerity: How Scarcity Will Remake American Politics.”

Wall St. Journal's Mistake

Perhaps the Murdochs and the WSJ editors are distracted by their News of the World difficulties. Or maybe there was a lapse in building security at the Journal's headquarters. Whatever the cause, it appears that a sane person somehow got into the place, and wrote most of today's (September 8, 2011) lead editorial.

This editorial raises in an intellectually valid fashion, the question of why the Obama stimulus failed to work. "Failed to work" is itself, of course, a controversial concept. According to Paul Krugman and many other observers, the stimulus did work, to the extent that it could, but fell short of hopes because it wasn't large enough. The Democrats generally argue the unverifiable case that the stimulus did work, preventing more jobs from disappearing. On the other hand, the results have certainly been disappointing. They have not been what President Obama clearly expected, and have fallen far short of what the public needed. In that sense, at least, I think most people could agree that the stimulus failed.

I think that a serious debate about Keynesian economics in the face of this experience is very worthwhile. The WSJ editorial is based on two somewhat anecdotal academic studies from George Mason University (a largely right wing think tank), which it takes to suggest that the stimulus money did not create nearly as many jobs as projected, and that some of the money went to highly unproductive uses. In my terms, if we take the study findings as believable and generalizable, it suggests that this was one government spending program that accomplished less than projected, and that at least some of it was actually wasteful. What a shock!

I think that a more serious question should be considered: namely, whether Keynes's idea about the psychological impact of government spending is still workable today. The fundamental idea behind Keynes's spending proposal was psychological. A depression, he noted, created the public perception of an endless downward spiral of demand. The desire for production disappears, and credit dries up. Only the government can invest. If it does so, it can lift the public depression, creating demand and hope. As animal spirits revive, so does private investment and consumption. Rising tax revenues then pay for the credit that the government used.

But Keynes was writing in a day when information was far more limited than today, and more controlled as well.  The elites who guided economies in his time were close mouthed and relatively homogeneous in outlook. Those conditions no longer prevail. As we have seen during Obama's Presidency, the psychological impact of the stimulus package was immediately undercut by Republican and conservative opposition, which got more publicity and attention than the stimulus itself.  While there clearly was some effect as jobs got saved and new spending materialized, I bet that a study of public attitudes would show that the psychological effect on which Keynes was relying proved far weaker than anticipated.

It may also be the case that intervening factors overwhelmed Obama's efforts. The economy did in fact appear to be recovering through late 2010, albeit more slowly than hoped. At that point, however, two major changes in the environment took control of events. One was the success of Republican propaganda and opposition to Obama, leading to the Tea Party and Republican control of the House in 2011. The other was the eruption of the sovereign debt problem in the EU.

With the Republican opposition granted veto power, Obama's poor skills at deadly political combat ensured a crippling standoff, bringing public policy solutions to a halt. It was no longer possible to pursue policies that would repair deficiencies in the stimulus program. In fact, a highly regressive and economically disastrous set of policy proposals came to the fore. In many states, constrained by constitutional requirements for balanced budgets, there were sharp immediate cutbacks on employment, which the federal government could no longer offset, and also sharp reductions in public employee compensation.  On the federal level, Obama repeatedly made concessions to the Republicans that implemented or set in motion to implement important aspects of their regressive proposals. Instead of stimulus and continued economic recovery, these political changes produced severe cutbacks on government spending and the disemployment of hundreds of thousands of public employees.

Because Europe is an important trading partner of the US, its economic difficulties weigh on US prospects as well. When the euro came into existence in 1992, the politicians understood that in the longer run it would be necessary to strengthen the central government if the euro were to survive. But the politics of the moment being what they were, a stronger central union was not then feasible. All EU countries could borrow on terms that were suitable only for the wealthiest, and so Greece, Italy, Portugal, Spain, and Ireland did exactly that, with the collusion of northern European and American banks. The crisis of 2007 gradually made it clear, however, that many of these loans were worthless, or far less valuable than expected. Europe's creditors, like America's, had lost a huge percentage of their wealth. They were much poorer than they thought. In the US, the creditors turned to the federal government, which bailed them out. In Europe, however, there is no such benevolent savior. The central government is weak, and the constituent elements like the Dutch and the Germans are not too willing to bail out the fraudulent and spendthrift southerners; nor is it clear that they can actually do so. In short, Europe's loss of wealth is similar to that of the US, and they are both experiencing an economic slowdown to account for it.

On Partisan Vitriol and What It Means In The Current Environment

Keith's attack on Martin Feldstein's June 8 article in the Wall Street Journal is remarkable, although to me less for its substance than its tone. Stripped of the invective, Keith's commentary is a cogent but fairly routine defense of President Obama's economic policies since arriving in office. Feldstein's article, for its part of course, is little more than the opposite number: a routine critique of those same policies. Both are predictably partisan.

I'm not going to try to support Dr. Feldstein here, since his article in my opinion does indeed drift onto shaky ground in places. But what I do want to do is ask a question about Keith's commentary: since the debate has become largely ritualistic, why such bitter heat? Why, first of all, must we disparage Feldstein as a "partisan hack"? And if such he is, what partisan writers today can really escape this obloquy? If Keith's point is simply that Feldstein's article is essentially a recitation of current-day conservative dogma regarding the state of the economy, I would not disagree. By that standard, however, to take one prominent example, most of what Paul Krugman has written during the past three years could be dismissed as "partisan hackery" too, written from the liberal side of the fence. His articles, well-crafted though they generally are, boil down to mono-maniacal repetitions of standard neo-Keynesian economic doctrines. While it's becoming increasingly hard to learn anything new from them, I would avoid the temptation of labeling Dr. Krugman's work as hackery. He's actually pretty good, even if a bit trapped by his ideology.

And why do we have to disparage readers of the Wall Street Journal as suffering from "grotesque ignorance and gullibility", or describe the American economy as an "economic stinkpile" somehow entirely the fault of the miscreant George Bush - still the villain two and a half years after leaving office?

What I want to focus on here is not so much the economic issues under discussion as the political issue of the tone to which the debate has descended, and the causes of this devolution. I've read enough articles and blog posts from both liberals and conservatives that I'm confident in my judgment that the degree of vitriol is roughly equivalent on both sides at the present time. And while rightwing bile may be comparable in its intensity, it's of a different nature and would require a longer article to characterize. Since my purpose here it to respond briefly to my friend and brother-in-law, I'm going to focus on why I think it is that our liberals are in such a lather.

Much of it in my judgment stems from the unrealistically high hopes they had when President Obama assumed office at the beginning of 2009. Having spent much of eight years demonizing George Bush and his congressional supporters as the source of all economic and political failure, Democrats were handed what appeared to be a great opportunity when the financial system, along with the general economy, imploded with these rightwing types seemingly in charge of everything. As normal in the aftermath of such a fiasco, incumbents were swept out of power everywhere and the opposition swept in. Democrats indisputably had a mandate.

Barak Obama, in addition to being the first Afro-American president in the nation's history, was an intelligent and highly articulate champion of enlightened big government, for generations the central totem of liberal politics in America. Liberals expected great things. Backing Obama up would be the Democratic legislators who now had taken control of both houses of the U.S. Congress. Together the new president and his allies would re-populate the administrative and regulatory agencies of our government, so thoroughly ravaged during the Bush years. They would follow the infallible Keynesian playbook and pull the right levers to "get the economy moving" again. They would leave behind the amateurism, or alternatively the malicious greed, of the free-market enthusiasts who had been allowed to do so much damage under Bush.

Of course, certain veteran Democrats suspected the political trap they were setting for themselves and tried to warn that so much work would take time. However, nearly all appeared to be highly optimistic and to believe that the nation was now on the road to a stable prosperity, one to be fairly distributed and administered by wise government stewards. Righteous soldiers were marching into battle.

Unfortunately little that followed worked out in line with the script. The new governing alliance quickly attempted much of what they had promised, administering a massive fiscal stimulus to the economy, buttressed by the most accommodative monetary policy in our history. Such an overwhelming assault could hardly have failed, at least temporarily, to arrest the economic implosion that had been underway. Yet few of the underlying problems seemed to have been resolved, or even addressed in a sustainable way. The unemployment rate, the key touchstone of Keynesian economics, defied hopeful forecasts and stayed unnervingly high. The rate of economic growth, typically robust after so deep a recession, was anemic. A relapse into recession seemed not outside the realm of possibility. Furthermore, the cost of the stimulus package had been enormous and had been funded in the debt markets. Thus, the federal budget deficit, a chronic worry for much of the past generation in the U.S., soared to record levels with no workable option in sight for controlling it. Federal debt was compounding even as economic growth sputtered.

Motivated by the glamorous mythology long recalled of Franklin Roosevelt's first Hundred Days in office, exultant Democrats crammed even more work through Congress while they still had a monopoly on power. They passed massive legislative packages purporting to reform both the healthcare and banking systems. No one, of course, could make credible arguments against either of these efforts in the beginning. The American financial system had just come close to destroying itself and threatening he stability of the general economy. Healthcare in America, while already more expensive than anywhere else in the world, was grotesquely unfair to unemployed and underemployed Americans who had limited access to it. Something had to be done in both areas. Yet the bills ultimately signed into law by the President were dog's breakfasts that virtually no one in or out of government seemed fully to understand. The risk of unintended consequences was enormous, and yet there was limited confidence that the targeted problems were in fact being addressed.

Finding themselves with what looked like possibly a worsening mess on their hands after two years in power, the Democrats struggled for explanations. Everything they came up with boiled down essentially to variants on two arguments:

1) The depravity of Bush and his allies was far worse than anyone had imagined in the beginning. The problems created by incompetent, malicious or stupid (take your choice) Republicans were far too deep to be easily remedied. The damage was now going to take years, maybe even a full generation, to repair.

2) Democrats had refrained from fully wiping the Republicans off the political map when they had the opportunity. Now as a result, the surviving remnant was sabotaging everything Democrats, in their wisdom, were trying to do.

Most Democrats seemed to believe one or the other of these arguments. Many talked as though they somehow believed both. However, the party's experienced political hands fully understood that such excuses were not going to play well with the voting public. They, of course, did not, and the Democrats lost control of the House of Representative in the mid-term elections. If conditions don't improve, it's not out of the question that Obama, not long ago the heroic knight marching on Washington, might end his political career as a one-term president.

Having ridden such a rollercoaster over the past couple of years, it's not hard to see why liberal Democrats have become testy. For many of them, the only acceptable criticisms of President Obama are that he wasn't extreme enough in the solutions he tried to impose, or that he's been too polite in dealing with his opposition. Any suggestion that the ideology of modern liberalism is somehow at fault, and that it might no longer be up to the task of providing a governing framework in the United States, is anathema. Most Democrats don't want to contemplate it and are ready to fight anyone suggesting it.

I intend to follow this article up soon with another one describing how I see Conservatives as having arrived at parallel cul-de-sac in their thinking. This will attempt to explain why, like their liberal antagonists, Republicans are also acting so irresponsibly thin-skinned.

Then, if I get around to it, I hope to write a third article probing what I see as the deeper problems that none of our politicians are coming to grips with. These are the underlying issues currently escaping the shallow reaches of both conservative and liberal orthodoxies.

Of course, don't expect from me any practical solutions to the issues. Sitting here as a mere citizen, I have the luxury of not offering any, as does Keith. Hopefully, clarifying some issues may offer a bit of help. That's why we write. Eventually it's the politicians who have to do the work. That's why we elect them.