New School Politics

If you're a first time visitor, you may want to subscribe to our RSS feed, which will keep you up to date with all the latest New School Politics posts. Thanks for visiting!

I am currently reading Imperial Life in the Emerald City: Inside Iraq’s Green Zone, a book written by the Baghdad bureau chief of the Washington Post that gives a striking account of the utter failures of the Bush appointed civilian leadership on the ground in Iraq. For those who do not have time to read the book, I just came accross this article from Matt Taibbi of Rollingstone.com that raises exposes (in a somewhat graphic manor) the failures of privatization of the warzone.

As I said before, the article is somewhat graphic in its language, but I recomend that anyone interested in the war read it.

Here is the link followed by the first few paragraphs from the article.

“How is it done? How do you screw the taxpayer for millions, get away with it and then ride off into the sunset with one middle finger extended, the other wrapped around a chilled martini? Ask Earnest O. Robbins — he knows all about being a successful contractor in Iraq.

You start off as a well-connected bureaucrat: in this case, as an Air Force civil engineer, a post from which Robbins was responsible for overseeing 70,000 servicemen and contractors, with an annual budget of $8 billion. You serve with distinction for thirty-four years, becoming such a military all-star that the Air Force frequently sends you to the Hill to testify before Congress — until one day in the summer of 2003, when you retire to take a job as an executive for Parsons, a private construction company looking to do work in Iraq.

Now you can finally move out of your dull government housing on Bolling Air Force Base and get your wife that dream home you’ve been promising her all these years. The place on Park Street in Dunn Loring, Virginia, looks pretty good — four bedrooms, fireplace, garage, 2,900 square feet, a nice starter home in a high-end neighborhood full of spooks, think-tankers and ex-apparatchiks moved on to the nest-egg phase of their faceless careers. On October 20th, 2003, you close the deal for $775,000 and start living that private-sector good life…”

Popularity: 39% [?]

“By now you may have heard of the economic questions regarding using corn for ethanol production, but less attention has been paid to the environmental impact of using ethanol as an alternative to gasoline. Is ethanol more of a pollutant than gasoline? Surprisingly, the science says yes.”

Here is the link to the article

Popularity: 56% [?]

Richard Nixon is one of America’s most infamous presidents, people find it hard to forget Checkers, trade with China, Vietnam, and of course Watergate. Yet, not many recall that Richard Nixon was the first Republican candidate to successfully exploit the southern Christian vote. Nearly forty years after Nixon it seems that the powerful Southern and general Christian Conservative voting block is loosing strength in the Republican Party.

Southerners joined the Democratic Party after the civil war in order to oppose Lincoln’s new dominant Republican party. Yet, a dramatic shift occurred in the 1960s and 1970s. There are two key reasons why there was a dramatic demographic shift between the two parties; both of which were linked to a common cause. During the two decades of the Vietnam War and Civil Rights movement one group of people stood on the front of the protest lines; white, upper-middle class, college students. Yet the most important characteristic of these people of change was their political denomination, they were self-declared liberal democrats. While non college educated southerners fought in Vietnam, northern white college students protested the war, demeaned the soldiers, and then told the citizens of the south that they had to change their ways and let the black man have equal rights.

Of course I am not suggesting that only southerners fought in the war, and I know many men who went to northern colleges and patriotically volunteered for the war as officers. In addition, we should be blessed at the steadfast nature of those college kids who fought intolerance and violence in places like Montgomery so that people they did not even know could have access to the rights they deserved. What I am trying to convey is that white liberals were opposing the fundamentals of the lives of many southerners during the 60s and 70s. It would not be possible for these two ideologies to coexist in one party, and Nixon exploited those fundamental differences.

As Kevin Phillips, Nixon’s Republican strategist put it, “The more Negroes who register as Democrats in the South, the sooner the Negrophobe whites will quit the Democrats and become Republicans. That’s where the votes are. Without that prodding from the blacks, the whites will backslide into their old comfortable arrangement with the local Democrats.” While Phillips did not create this southern strategy, it was not until his work for Nixon that the Republicans began to carry the south. After forty years of Republican dominance in the South, is it possible that the 2008 election will mark the beginning of the end of the Southern and overall Christian Vote?

The Southern vote has been a bastion of Republican support for years, and along with the southern vote came the massive nationwide voter block of Christian conservatives. They rally to cries of the right to life and outlawing Gay marriage, and while presidents from Reagan to Bush have relied on this voter block for support, it is becoming apparent that they are beginning to loose faith in the people they have elected. Perhaps they are beginning to realize that the Bush clan and other political elites use them to garner votes and do not actually share their values, perhaps they are just tired of spending time in caucus; whatever the reason, the traditional base of the Republican party is decreasing in size and reliability.

Will this decade mark the first major shift in voting demographics for the last forty years?

More than nine thousand people voted for president George W. Bush in the Iowa straw poll in 2000, yet seven years later the first, second, and third place candidates had barely ten thousand votes between them.

Every true Democrats’ piñata, Karl Rove recently retired from the Bush administration to spend “more time with his family.” Yet, despite Rove’s brilliant utilization of the Christian vote to keep Bush in office, his boss may cause a major backlash from the base as he failed to follow through on many of his promises. The Christian conservative and southern base is furious at their former poster child. The man they once all wanted to have a beer with is now the man they feel stole a beer from them.

Bush failed to stop illegal immigration which his Evangelical and southern (different groups) base both thought he would do, he did not keep “liberal” states from legalizing gay marriage or adopting civil union laws, and he failed to change the status quo regarding Rowe v. Wade. To add insult to injury, many of the sons, husbands, and fathers from these two voter blocks are fighting an unpopular war and spending longer tours away from their families.

Many of these once diehard Republican voters are now asking themselves an important question, “why should we keep voting for members of this party if they are never going to serve our interests?”

While some of the new Republican candidates seem to represent the middle classes’, “traditional” values voters on certain issues, they falter at others. Rudy Giuliani appeals to their patriotic instinct, yet he like Mitt Romney has been ousted for his liberal stances on abortion, gay marriage, and gun control. To make matters worse, Giuliani has been torn apart recently regarding the level of illegal immigration he permitted in New York City while he was mayor. Even John McCain, once thought to be the Messiah of the conservative movement betrayed his base by co-authoring an atrocious illegal immigration bill.

While many on the right are hoping that Hillary receives the Democratic nomination in the hope that it will energize the base, I have to raise the question, will they care? I believe that 2008 could indeed turn out to be a year of unprecedented voter apathy from the “family values” voters of the Republican Party. Many of them may be asking themselves what the Republican nominee can offer them over the Democratic challenger. More importantly, perhaps many of the people in this demographic feel that none of the candidates in 2008 will serve their interests once elected.

They raise a valid question, because even I am starting to wonder what the differences between the parties’ front-runners are.

Popularity: 84% [?]

In a editorial in the Financial Times, Barack Obama makes the case for more government regulation in response to the subprime mortgage bust currently being experienced. A couple of his main points, I believe, were very off the mark. One,

Over the past several years, while predatory lenders were driving low-income families into financial ruin …

First of all, “predatory” is clearly just a smear word and has no true meaning as it pertains to the economics of the situation. Second, there is no logical reason why lenders would desire to drive subprime borrowers into “financial ruin.” That would essentially require lenders to conspire against their own investments. It is pretty simple, if the borrower fails then the lender fails because the lender will no longer be paid out on their investment and moreover it discourages third party investment in that lender’s business itself. This is plainly evidenced by the exact troubles we face now: lenders made bad loans, borrowers defaulted, and both lost lots of money. As Senator Obama clearly does not recognize, in the free market the interests of creditor and debtor are mutual.

Two,

We need to help struggling borrowers to weather this storm. One way to protect innocent homeowners - at least until this crisis passes - is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud.

This is exactly the thing not to do. It completely manipulates the incentives for optimal standards in home ownership. For one it relieves home owners of accountability by absorbing the costs of any foolish financial decision they make. It gives borrowers greater incentive to be careless and accept loans that they at their present level of time preferences simply cannot handle.

On the other hand Obama also proposes to punish businesses in a manner that discourages them from investing in home ownership such that it burdens lenders with overflow costs from failed investments that they have already once paid for. If Obama wants to reduce the rate of homeownership in America, especially for those who struggle the most to afford it, he has certainly got the right idea. By forcing creditors to absorb an inordinate amount of the consequences of defaulted loans they will respond by reducing their willingness to issue mortgages proportionally.

Popularity: 41% [?]

CNN reports:

In an editorial in Cuba’s communist party newspaper, Granma, the ailing dictator said the pairing of the two White House hopefuls seemed “invincible,” according to an English translation on the paper’s Web site.

Its not entirely clear whether that’s an endorsement, however he is seemingly impressed by their prowess to persuade people to vote for them (a trait that Castro never had/needed).

But Comrado Castro does raise a couple of interesting points, including,

1. Is that ticket unbeatable?

2. Assuming Clinton gets the nomination–which, she will–and Obama finishes second–which, he will–is Obama Clinton’s best option to round out the ticket?

My answers are no and probably not.

First, I do not think that the Democrat’s choice could be beaten by any Republican save Rudy Giuliani. I believe that because the GOP is in overall bad shape and because the Republicans running for president are, in all, not nearly the politicians that the Democrats candidates are. Rudy does not suffer from the same symptoms because (a) he is not in the mold of the “cultural conservative” who essentially runs the party and bore the brunt of voters’ wrath in ‘06. Additionally, he is an exceptional politician, who has acquired a very positive national reputation of his own. General election polls reinforce my view; Giuliani is the only GOP candidate who has polled even or better than either Clinton or Obama in the past two months (he has done so against both).

It may be difficult to answer the second question right now, but at face value I think the Clintons are smarter than to pick another Senator, from another blue state, with so little experience, who happens to be another “first” (first black VP). I think it would be more sensible to pick a veep who is well, “normal.” By that I mean someone from Middle America, with experience, without particularly liberal views, preferably a Governor, and probably a white man. I think smart choices include Evan Bayh (Governor and Senator, IN), Mark Warner (Gov, VA), and Richardson.  

Popularity: 26% [?]

The WSJ writes:

Since the Bush tax cuts of 2003, the budget deficit has fallen by $217 billion mostly because of a continuing torrid pace of revenue growth. …For the Bush tax cuts to have been a give-away to the rich, people paying the higher marginal tax rates would have to be carrying a smaller share of the income tax load. But the IRS data indicate that they are not paying less. Instead, they are paying more — lots more. More surprisingly, the richest 1%, 5% and 10% of the taxpayers are shouldering a larger percentage of the income tax burden at the federal level than the tax estimators said they would had the Bush tax cuts never materialized. …The amount of tax paid by those earning more than $1 million a year increased to $236 billion in 2005, up from $132 billion in 2003, the year of the tax cut. This was a 78% increase in taxes paid by millionaire households.

…[L]ower tax rates on capital gains and dividends also caused a huge jump in reported income. The National Bureau of Economic Research found an “unprecedented surge in regular dividend payments after the 2003″ Bush tax cut. Likewise, the lowering of the capital gains tax was followed by a 150% increase in the amount of capital gains unlocked by the 15% tax rate. Lower tax rates expanded the tax base.

This is a textbook manifestation of the Laffer Curve and it is surely an effect of tax cuts such as those under Presidents Reagan and W. Bush. However, the Laffer curve remains a weak justification for cutting taxes. Of first importance is that growth in revenue is only a direct result of economic growth caused by tax cuts. Remember that the only reason revenue can increase at the same time that taxes decrease is that the economy is growing more rapidly at the margins than taxes are being reduced. If taxes are cut enough–below the optimal rate–revenue is theorized to fall (all things remaining equal) however it could not compensate for the fact that tax cuts would still cause the overall national income to grow (not to mention that since all things do not remain equal in the real world, revenue would eventually grow because of augmented economic growth).

But even if all things did remain equal, I would still choose to tax far below the optimal rate because under such conditions we are essentially dealing with the question of how to allocate funds in the economy. Thusly it is a question of incentives–how to distribute money, how to spend money most efficiently, how to minimize wasteful costs, and how to properly establish time-preferences are all issues encompassed therewithin. My answer to all those questions, especially the overriding one, is that by allowing people to keep what they earn we encourage hard work, inventiveness, thriftiness, and investment, all of which are vital to economic health.

The underlying dilemma in using the Laffer effect as a justification for tax cuts is that the curve is actually a double edged sword. If you argue for cutting taxes when they are above the optimal rate you must also argue for raising taxes if they are below it. Tax reform should not be used as a means to bolstering the Congressional purse but rather as a means of reducing its relative scope and creating incentives to generate economic progress.

Popularity: 36% [?]

After about a week of standing firm and not pump priming amidst the credit crunch as well as pleas from many investors to do so, Fed Chairman Ben Bernake injected the market with extra “liquidity” through Open Market Operations and a cut in the Discount Rate. Here is what the WSJ editorialized about the decision:

Financial markets were roiled again yesterday, with the Federal Reserve and other central banks stepping in to bolster liquidity in the wake of the subprime credit seizure. Serving as lender of last resort in these conditions is the proper function of central banks. But going further–with an emergency rate cut, as some in the market seem to be anticipating or hoping for–carries the risk of introducing even greater moral hazard into the financial system.

It’s worth recalling in this connection that the root cause of this credit correction was the Federal Reserve’s willingness to keep money too easy for too long. The federal funds rate was probably negative in real terms for close to two years between 2003 and 2005. This led to a misallocation of capital into real estate and certain mortgage instruments that is currently being worked off. For the Fed to take its eye off the price-stability ball now in response to short-term market gyrations would only compound the original policy mistake.

I couldn’t agree more. The recent boom in the housing as well as stock markets can, to a significant extent, be explained by the Fed induced monetary expansion which inevitably created a great demand for borrowing money. Now, borrowing money is natural economic phenomena, however, it must be understood that the borrowing cannot just occur, but rather it need be supported by proportionate amount of savings. Thus, for the economy as a whole, the demanded amount of loanable funds need be compensated by an equilibrated amount of savings, otherwise there will be a shortage of funds. In this way–like in any other market–supply and demand work together to find the correct price level.

(Back to the story) What appears to be happening currently is that the Federal Reserve kept the effective price of borrowing money too low and alas’ the market is realizing that there is actually a shortage of loanable funds. As I have pointed out before there is just not a sufficient amount of savings in our economy to justify low level of interest rates that we have been experiencing and we experience still today. The effect of the situation is an ”overinvestment” by businesses and individuals in lines of production that are essentially too expensive and too risky to be financed by the actual supply of savings–which is lower than the low interest rates led us to believe.

The peril of Fed policies are currently being experienced now. The current “credit crunch” is the reallocation of funds which includes the liquidation of many investments; it is also the source of the downward tumble of the markets. Nevertheless, the credit crunch is necessary and vital for the economy. Although at first glance it may appear to be the root of the problem, it is indeed the remedy to our economic imbalance. The deflationary pressure is nothing more than the market readjusting its price level towards equilibrium so that the relation between savings and investment do not continue to yield the same insolvencies.

The late economist Murray Rothbard explains the theory of this phenomenon very well:

In sum, businessmen were misled by bank credit inflation to invest too much
in higher-order capital goods, which could only be prosperously sustained
through lower time preferences and greater savings and investment; as soon
as the inflation permeates to the mass of the people, the old
consumption-investment proportion is reestablished, and business
investments in the higher orders are seen to have been wasteful.[8]
Businessmen were led to this error by the credit expansion and its
tampering with the free-market rate of interest.

He continues by explaining the significance of the ”boom” as well as the “bust” periods:

The “boom,” then, is actually a period of wasteful misinvestment. It is the
time when errors are made, due to bank credit’s tampering with the free
market. The “crisis” arrives when the consumers come to reestablish their
desired proportions. The “depression” is actually the process by which the
economy adjusts to the wastes and errors of the boom, and reestablishes
efficient service of consumer desires. The adjustment process consists in
rapid liquidation of the wasteful investments…In short, and this is a highly
important point to grasp, the depression is the “recovery” process, and the
end of the depression heralds the return to normal, and to optimum
efficiency. The depression, then, far from being an evil scourge, is the
necessary and beneficial return of the economy to normal after the
distortions imposed by the boom. The boom, then, requires a “bust.”

Of course, it would be very difficult for Rothbard to describe the present turbulence in 2007 since he died in 1995. The excerpt is from his book America’s Great Depression in which applies the Austrian theory that monetary policy is the prime cause of fluxuations in the business cycle to explain the cause of the Great Depression. Certainly, the peril of fiat money as experienced in the 1930s is far greater than what is happening today but the fact remains that when a governmental body is the dictator of an economy’s credit imbalances are likely to proceed.

It is a mistake that Bernake’s Fed is now moving to loosen credit at the same time that the market is moving in the opposite direction. In the grand scheme of things, they have not acted very radically so far, but their actions nevertheless will have consequences. The central bank should not cut the interest rate when they meet next on September 18 as many inversters hope they will. Perhaps the residual of the Fed induced bubble as well as the Feds inflationary crisis management will be small, however I assume that our credit problems are not yet solved and that we could witness a minor economic downturn within the next two years.

Popularity: 42% [?]

When considering policy–or anything for that matter–remember how people react to incentives. Assuming “you” are the decision maker:

 1. When you bear the costs for someone else’s benefit, you mind the measure of the costs but not the benefits.

2. When someone else bears the costs for your benefit, you mind the measure of the benefits but not the costs.

3. When one person bears the costs of another person’s benefit, you mind neither the measure of the costs nor the benefits.

4. But when you bear the cost and the benefit, you will mind both the cost and the benefit.

Seems simple enough, no? Then why do so many insist of distorting healthcare to mimic numbers 1, 2, and 3 rather than leaving it to 4.

Popularity: 31% [?]

This was an interesting article from the NewYork observer. In a strange way, it appears that it is not Rudy’s past social choices that are stirring up resentment among conservatives, but it is his past policy choices on immigration. Remember, John McCain’s campaign was shattered on the imigration issue after a massive backlash by his longtime supporters for his attempt to pass his awful immigration bill.

Here is an exerpt with a link.

After months of watching him wriggle out of tight spots on issues like abortion and gun control, opponents of the front-running former mayor say that his reversal on immigration policy has finally brought down the mayor’s impenetrable defenses and opened him up to attacks on everything from the consistency of his record, to his personal life, to the veracity of his remarks about Ground Zero.

Popularity: 45% [?]

Here is the most recent cover story from Time. It questions the present allocation of educational funding, wondering whether enough is invested in the brightest of students. Here is a taste:

American schools spend more than $8 billion a year educating the mentally retarded. Spending on the gifted isn’t even tabulated in some states, but by the most generous calculation, we spend no more than $800 million on gifted programs. But it can’t make sense to spend 10 times as much to try to bring low-achieving students to mere proficiency as we do to nurture those with the greatest potential.

That is really a jaw-dropping statistic, but it shouldn’t surprise anyone who has been in a public school more than once in the past year. And of course it makes me sound heartless, but allocating so much more funding to the mentally retarded than to the mentally gifted is just…retarded. It is simply a bad investment. When it comes down to it, all of us, especially the disabled, have the greatest interest in the geniuses of the world.

The brightest among us are the ones who invent the technologies that make our lives earlier, who pick the most productive of companies to invest in, and who find ways to deliver products at cheap prices to billions of customers across the globe at once. Much of the wealth around us can be attributed to the ideas that originated from very innovative men and women, and were shared and capitalized upon with others.

Without the vast resources produced by the world’s geniuses, we would never be able to support the disabled to the extent we do. As I see it, we owe it to the mentally retarded among us to invest more in our most gifted of children as they will be the most productive in the future.

Popularity: 46% [?]