Larry Summers Is Not the Main Problem

I'm as pleased as anyone that Larry Summers has withdrawn from consideration as the next Chair of the Fed. I thought he would do a terrible job. But Summers himself was never the real problem. His candidacy was only a symptom. The real problem is that we have a President who wanted to nominate Summers in the first place. Obama does not understand what's wrong with the American economy, and five years into his term, he persists in some basic misunderstandings.

There are two basic Democratic narratives to explain the 2008 financial meltdown, and they contradict each other. When Obama took office, he had to choose which story to believe. The first story is that the economy thrived under Clinton, and Bush's people screwed it up. I'll call that the Democrat vs. Republican story. It's partisan, but not ideological.

The other story is that Clinton's economic policies led to a short-term boom, but set us up for the long-term bust that started in 2008. The toxic securities that crashed the system in 2008 were deregulated under Clinton. Deregulation of banks started under Clinton. Clinton thought Alan Greenspan was a genius. The list goes on. The Bush people, at worst, only exaggerated what Clinton's people had already been doing. Their basic emphases (favoring investors over workers, worrying more about inflation than unemployment, etc.) were the same. Call this the Left-vs.-Right story. It's ideological, but not partisan.

You can't believe both of these stories if you're going to actually come up with a plan to improve the economy. You have to pick one. If the Democrat-vs.-Republican story is the right one, the best thing to do is to put Clinton's old academic advisers back in charge. But if the Left-vs.-Right story is true, then putting the old Clinton guys back in charge is the LAST thing you should do. Clinton's economic policies, devised by Robert Rubin and the so-called "Rubinites" associated with him, are either the way out of our country's economic mess or a way further into that mess. It can't be both.

Obama clearly chose the "Clinton knew how to run the economy" story at the outset of his first term. That makes sense. Obama had never had a strong personal vision for economic policy. (Read the economy chapter in The Audacity of Hope and you'll see what I mean.) He was immediately forced to take responsibility for a national economic crisis that had hit late in his election campaign, giving him almost no time to think our economic problems through or develop new policy ideas. And he had to stop the bleeding somehow. Going with the Democrat-vs.-Republican story gave Obama a ready-made team to put in charge and a set of basic policies to follow. (Larry Summers, Clinton's old Treasury Secretary, is one of the main Rubinites.) Going with the Left-vs.-Right narrative would have meant coming up with a completely new team and a completely new set of ideas. But who would he have picked? How would he distinguish good policy advice from bad? Accepting the Left-vs.-Right narrative meant moving into uncharted territory during a national emergency. Throwing out the old playbook and starting over is a much riskier move, and Obama hates unnecessary risks. Electing Hillary Clinton instead of Obama would not have avoided this problem. Hillary would have relied on Bill's old economic advisers, too.

While Obama's original choice might have been reasonable at the time, it has also turned out to be wrong. Five years later, growth is still sluggish, unemployment still high, and income inequality more rampant than ever. We've had five years of the Rich Man's Recovery, where the tiny fraction at the top have started growing even richer than they were in the Bush II years, but the rest of the country is still nowhere close to getting back to economic health. Not only is that not success, it's potentially a recipe for much bigger failure. The high levels of inequality make the whole system less stable and more prone to catastrophe.

Sure, we are almost certainly better off than we would have been if McCain, rather than Obama, had been calling the shots, and better off than we would be under President Romney. A move to the kind of Austrian economics that people like Rand Paul favor would have been a disaster. Obama understandably wants credit for keeping the economy from going off the rails completely and for whatever recovery has taken place over the last five years. He's committed on some level to defending his earlier decisions, and doesn't feel he has any room to maneuver on his left. He's right as far as that goes: his centrist policies are surely healthier than hard-right economic ideology would be. But "better than crazy" is not good enough. And while Obama's policies fit reality better than the right wing's do, the actual economic reality is still far to Obama's left.

Centrism is almost never the long-range solution to a fundamental crisis. A major crisis is usually a sign that a set of policies have major underlying problems. Sticking to the middle of the road makes sense in the good times, but disasters as big as 2008 are reality's way of telling you that you are on the wrong road. Proceeding cautiously down the wrong road and obeying a reasonable speed limit only changes how fast you get lost. To actually get out of trouble, you have to turn around and go in a different direction. That Obama wanted to put Larry Summers, the chief advocate of deregulating the exotic securities that caused the 2008 crisis, in charge of the Federal Reserve, shows that Obama still thinks that he can keep going down the Clinton/Bush economic road and it will all be okay if he just drives carefully enough. That he wanted to have Larry Summers riding shotgun with him is bad. But even if Summers isn't officially navigating, Obama is still following the wrong directions.

cross-posted from Dagblog

Obama's Veto and Mortgage Fraud

cross-posted at Dagblog

If you've been looking for a fight in the lame-duck session, we may be about to see one: this Wednesday, November 17th, the House is going to have a veto override vote on the so-called "Interstate Recognition of Notaries Act," H.R. 3808. (h/t John Cole) What is the Interstate Recognition of Notaries Act, you say?

A law that would basically make mortgage fraud by interstate banks legal. Let me rephrase that: a law that would make documents notarized out of state immune to challenge no matter how they were notarized, meaning the criminal shenanigans that mortgage servicers have gotten up to, such as swearing under oath to the accuracy of documents they've never seen, would become both legal and practically unassailable. [UPDATE: I was blogging in anger when I wrote this, and became a weaker blogger because of it. The bad documents would not become legally unassailable, but they would become harder to assail. The point of the law is to legalize the banks' slipshod electronic records service, MERS, and the general effect would be "solve" the problem of illegal record keeping by changing the law to the banks' benefit. And that is both immoral and foolish.]

If that's still too complicated, let me put it this way: this law would allow the banks to just make up documents and use them to take your house, even if they couldn't actually find the title to your house (because they'd sold your mortgage, say, or because you don't have a mortgage). And there won't be a damned thing you can do about it. The banks will no longer be accountable to the law. [UPDATE again: This was hyperbole on my part. There are other ways to challenge perjured affidavits, and notarizing perjury doesn't make it immune to challenge. But the general thrust of the law is to make that systematic perjury easier, and raise the bar to challenging it. That's a terrible, terrible idea.]

Now, President Obama vetoed this abomination in October. The shocking part is that it got to his desk at all. It got there on a voice vote in the House and unanimous consent in the Senate, meaning that they didn't actually count the votes.

This bill got through both Houses of Congress without the Democrats having any real idea how it would affect the financial crisis, or what its ramifications were. (To be fair, many of the horror stories about mortgage fraud and routine perjury by mortgage companies had not yet come to light when the bills passed.) Basically, it was the Administration that caught this one in time and killed the bill. That should give you an idea of how carefully our representatives generally think about the oversight of big finance, and of how thorough and terrible the influence of banking lobbyists on the Hill is.

The veto-override vote might only be symbolic; Obama tried to straddle some legal ambiguities on this one, and make his veto immune to challenge, by doing a kind of double veto strategy. He pocket-vetoed it, because pocket vetoes cannot be overridden, but also sent the usual veto memo to Congress, to protect against any claim that Congress was technically in session when he chose not to sign it (if the President doesn't sign a bill while Congress is in session, it automatically becomes law; Obama wanted to guard against that). And now that the Democrats have realized what the law would actually do, I don't think there's going to be a two-thirds majority in favor of it.

Tell your representative to vote against this monstrosity, even so. And keep count of who's willing to be counted as favoring it. If this vote ends up being only symbolic, let's remember what's being symbolized.

FINAL UPDATE: According to D-Day at FDL, this vote is actually an expression of procedural displeasure with Obama over the double-veto-failsafe trick. Sigh. I understand that. But it's hard to cheer for Congress after they originally passed this bill without paying any attention to what it said. Obama's procedural caution happened because he was forced to play backstop for a Congress that hadn't done its job.

Libertarian Wonderland Is Not So Great

cross-posted at dagblog

It is a truth universally acknowledged that lower taxes and smaller government lead to economic growth, while higher taxes and bigger government hold the economy back. And like many truths that are universally acknowledged, it is frequently contradicted by easily observable facts and that makes no difference. Economics especially seems to be full of these ironclad universal rules that only hold true some of the time, in elegantly controlled micro-economic examples. The rest of the time these "truths" are obviously not true, and no one would be fool enough to behave as if they were true except when it's time to set crucial government policy. Then, anyone who argues against the Universally Acknowledged Truth is just "not facing facts."

Now, since many of our lawmakers, policy wonks, and media pundits still believe in the fact that low taxes make stronger economies, and that this fact is true in virtually all cases, let me propose a small thought experiment that I will call "New Hampshire."

New Hampshire, of course, has no broad-based taxes of any kind: no state income tax, no sales tax, and no politicians with a prayer at state-wide office unless they take "The Pledge." What Pledge? The Pledge not to have any sales or income taxes, ever, you pinko. This basically means that New Hampshire is Galt's Granite Gulch, and libertarianism is a major part of the state's political culture. (Maybe twenty years ago I was in a bookstore a couple of blocks from the Capitol Building in Concord, and my first thought was: That's more Ayn Rand than I've ever seen in once place.) And of course everyone knows, deep in the granite of their bones, that having almost no state taxes is good for the economy.

New Hampshire's southern border is with Massachusetts or, as we called it in the 1980s, "Tax-a-chusetts," which has state income tax AND state sales tax AND all kinds of other state licenses and fees: like Cuba with cranberry sauce, really. You may remember this from the Bush/Dukakis election of 1988, when The Elder Bush pointed out to America what kind of punitive socialist redistributionist joint Dukakis was running, and everyone agreed that we'd all be crazy to want any part of that. New Hampshire's taxes are of course lower than those of its other neighbors (Maine, Vermont, Canada, and the Atlantic Ocean) but the contrast with Massachusetts is especially sharp, especially since the vast majority of New Hampshire's population lives in the southern part of the state, close to the Massachusetts border.

Naturally, New Hampshire's low-tax, small government environment should long ago have left Massachusetts' creaky outmoded welfare state in the economic dust. But reality, evidently, lacks common sense. Because New Hampshire's economy is much, much smaller than Massachusetts' is, and isn't gaining on it. Low-tax Libertarian Wonderland is poor. Taxachusetts prospers.

Really, my experience growing up wasn't so much that New Hampshire had an economy as that it was allowed to borrow Massachusetts' economy on weekends. Massachusetts was the main economic engine, and southern New Hampshire basically an adjunct to that economy. A huge percentage of southern New Hampshire's population actually work in Massachusetts or else serve clients and customers from Massachusetts; one way or another, the income comes from south of the state line. The big economic strategy is to put a big mall, sales tax free, right across the state line in order to lure Massachusetts shoppers. That's really it. When I was fourteen, I thought it was clever to respond to the slogan "Make It in Massachusetts" with "Spend It in New Hampshire." My excuse for that was that I was fourteen. What's unfortunate is that my shallow 9th-grade jeer was actually the plan at the top levels, and still is. New Hampshire's main approach is to try to drain off what it can from the bigger and more productive economy to the south.

Now, some of the economic differences are surely about size and about pre-existing development. Boston wasn't created overnight, and you don't create an equally attractive and economically developed city just by cutting taxes in Nashua and waiting. The universally acknowledged truth that lowering taxes and "getting out of business's way" is the optimal plan simply denies reality; getting out of the way of businesses that doesn't exist isn't even a plan. But even if you control for size and existing development, taxless New Hampshire isn't pulling away from high-tax Massachusetts, and it isn't just Boston that New Hampshire can't compete with. Portsmouth, NH may not be able to slug it out with Boston, by can't it outshine Newburyport, MA? Manchester, Nashua and Concord should be more economically vibrant than Worcester, Springfield, or Lowell. But they aren't so much. Even the inglorious mill towns in northeastern Massachusetts, declining places whose factories closed in the 1960s, are still economically more powerful than their Granite State neighbors, the center around which New Hampshire border towns orbit. And the high-tech businesses along Route 128 in the Boston suburbs somehow stay where they are, instead of migrating an hour up the interstate.

When I lived in New Hampshire we all simultaneously believed the Universally Acknowledged Truth about low taxes and acted as if precisely the reverse were true (because it is). If you'd asked us, we would have told you that New Hampshire was clearly whipping Massachusetts, because living tax free was so much better than being one of those poor overtaxed socialist drones. But we also acknowledged in virtually everything we did that the real source of the money and economic energy was overtaxed socialist Massachusetts. That was clearly where everything was going on, and where our own economic lives were made possible. After all, that's where the jobs were.

New Hampshire libertarianism only makes sense if many of the people talking about the free market and economic opportunity actually want exactly the opposite of what they claim. New Hampshire and its tax laws make a lot of sense if you actually want to keep it economically underdeveloped. If what you value about the place is that it is rural, and generally inexpensive, then making sure that it doesn't develop either much of an economy or much of a public infrastructure becomes a comprehensible goal. When people say "Low taxes are good for the economy," they mean precisely the opposite; they want to keep one side of the border a relative backwater. They're not lying. They're simply expressing an ideology, a Universally Acknowledged Truth that they experience as always true, especially when it is not.

If you dislike cities and crowds and other signs of economic progress, a nice libertarian enclave is just the place for you, and when you say "a good economy" you really mean lots of undeveloped land and not many jobs. Of course, if you put your libertarian enclave too far from an economically developed area, you won't be able to make a living yourself, so it's ideal for libertarians to commute.

Most American libertarianism is like this, in one way or another: economically dependent upon the very things that it claims are holding the economy back. Libertarianism is essentially the pretense that your suburb would be better off on its own. Of course, without the big dirty leftist city the suburb wouldn't exist at all. Libertarianism isn't really a philosophy. It's a theme park.

Seeing the Airplane

One day I was sitting in an airport terminal, waiting for a flight, while another passenger stood at the window with her daughter, trying to show her the airplane we were about to board. But the little girl couldn't see it. See could see the fueling trucks on the tarmac, she could see the baggage carts and the airport staff on the ground. But she couldn't see the airplane itself.

"Where's the plane?" the little girl kept asking. "Where's the plane?"

The problem was scale. The child couldn't recognize the shape of the aircraft standing there in plain view, because she was looking for a much smaller shape. She simply didn't have any precedent, or any cognitive model, for an object of the size she was looking at, so she couldn't connect the sight of metal or paint or tire rubber into the larger outline of the plane. She didn't link the bits she was seeing into a picture of the whole because she didn't expect and couldn't imagine that such a whole might exist.

Lately I've been thinking about that little girl every day. She's a good illustration of how we process information, as human beings, and of how difficult the big and unexpected can be to process. When confronted with something too large and too strange, we can fail to apprehend it at all.

Most of our handling of the financial crisis boils down to one real question: who has seen the plane yet, and who has not? There have been furious daily stories in the news about this or that detail of the large, terrible shape overshadowing us. But it becomes increasingly clear in each day's news that most of the players, and certainly most of the journalists, haven't managed to perceive that shape, or even its shadow.

A CEO of a major bailed-out institution who can not only defend exorbitant employee compensation but get self-righteous about those employee's deserts has not seen the plane yet. CNBC pundits trying to defend their own performance and scapegoat others have not seen the plane. Congressmen who obsess about spending cuts or even spending freezes during a massive economic contraction really have not seen the plane. It's not simply denial, although there is a measure of that. It's a basic and all-too-normal failure to apprehend the largest and most important part of the landscape, precisely because it is so incredibly large.

Most people, with the normal human mix of benign and selfish intentions, are trying to keep doing the things that worked for them, and even seemed virtuous to them, before the situation changed, because they haven't yet grasped that this is a new, and very different situation. There need not always be a Goldman Sachs; entitlement spending is not the biggest fiscal challenge the nation faces at the moment; CNBC's business model is not necessarily viable any more. It takes a certain amount of time to grasp fundamental change, perhaps especially for the experts who are trained to deal with intricate details of a large and commonly-understood model. It takes longer to see the plane if you're trained at analyzing tire treads, and you're looking for a car. And once you've seen the plane, you have to begin the long, difficult process of thinking about what it means.

It's very clear from his banking plan that Tim Geithner, for all his expertise, has yet to see the plane. Barack Obama has not seen it clearly either. That's not good at all. Obama planned his campaign, and his administration, for a different set of problems. And like most of the other key players, what Obama tends to say is what Obama tended to say before the crisis. The economic plan that he recommends is the plan he stumped on in the primaries. That's not dishonesty or stupidity: it's simply a sign of not yet having taken on board the basic facts of the new environment.

Obama, to be fair, could not have been elected already seeing the plane; the plane only came into view a few months before the election, and anyone who had been predicting a crisis such as this earlier would not have been able to achieve the nomination. (You can't win a broad-based election based on priorities that the vast majority of the country does not share.) His success or failure will not be linked to his foresight, but to his adaptability. The question isn't whether Obama has a plan. Any plan he might have would be based on assumptions that aren't viable any more. The question is how quickly he realizes he needs to throw the plan away, and think of something new.

The child never did spot the airplane that day. She wasn't ready yet. But she had to ride in its belly, just the same. And so do we.