On the Contrary

In my consulting travels I spend a lot of time with true conservatives.  I try my best not to say anything because we have a job to do and we should not get distracted into politics that will, quite frankly, takes us nowhere.  But I am always intrigued at how they think.   There are not two sets of facts in the world and contrary to conventional wisdom, both sides don’t equally equivocate.  By and large, progressives pretty much tell it like it is and conservatives twist it mercilessly.

Oh sure, you can find the anecdotal case where some left wing nut job is off the deep end, but take a step back and consider where we are today and what conservatives are telling us.  Global warming?  Doesn’t exist except of course that every respectable scientific body today endorses it.  Evolution?  Oh why go there.  Lower taxes will spur the economy, except as a percentage of GDP they are the lowest in 60 years and where are the jobs?  High tides lift all ships, except the vast majority of us are losing ground while we have the mass transfer of wealth to a small percentage of our population.  We have the best medical care in the world, except we don’t and it costs twice as much as what others pay for better outcomes.  The market place will create jobs if government will just get out of the way, except it got out of the way and the financial Masters of the Universe almost destroyed us. These are all indisputable facts supported by tons of data, and yet conservatives are in denial about it.  Why?

Well a conversation I had recently may shed some light.  Remember with conservatives, pointing out the actual data just gets them frothing at the mouth and does no good.  You have to understand that this is a visceral thing.  It is highly emotional and rationality doesn’t have a chance.  It is all about order and justice.  They believe in it.  It is at the core of their belief system.  It is a the core of their terror.  Many studies have shown that Progressives are more open to change than Conservatives, hence the term conservative.  At some deep psychological level we are either predisposed to handling innovation and change or we are terrified of it.  This has, I think deep roots in our survival as a species.  Being too adventurous in a hostile world could get you killed.  But not trying new things and being open to change, could also destine you to the trash heap of evolution.  Seen any Neanderthals lately?

So conservatives like to keep it simple and we are back to order and justice.  If things are ordered and you follow the rules, justice follows.  It is as simple as that for Conservatives.  It allows them to order anything and understand their place in that order.  That is why Conservatives are so arrogant about their place in life.  They earned it, they deserve it, and those that are less fortunate, well hell, it has nothing to do with fortune, but with discipline and rule following. Paying taxes simply allows government to reward those who don’t deserve it.   It orders the world’s chaos by blaming the victim.  One has to think no farther than looking at Conservatives and their religious beliefs that tend to be dogmatic and rigid, uninformed by the injustice of those beliefs in the real world.  The market place is the ultimate objective decider of fates if you just let it operate without interference.  If things are bad, blame the government as interfering and making it bad.  Never question the basic assumption about the market place, or for that matter, their religious tyrannical beliefs.

Okay back to the conversation.  It was a simple statement, but it embodied all of the above.  “What this economy needs is just to let entrepreneurs operate freely and they will create the jobs and economy that will take off.”  See, that mean old government is keeping us from excelling.  Order is out of whack because government interferes with the natural order of things.  Except, during the Bush years regulations simply weren’t enforced, tax rates were the lowest in 60 years and the middle class tanked.  Or even more salient today, innovate all you want, bring on great products, but if the middle class doesn’t have sufficient income to support a thriving economy, there will be no one to buy it.  It really is the chicken and the egg.  Which comes first, the goods people want to buy (supply), or the pent up money people have to spend (demand).  The answer which Conservative don’t want to hear, is demand.  And demand means first creating jobs so people have disposable income to buy stuff.  That would force you to admit that government has an important role to play and that brings into question the whole justice and order thing.  Could it be that no matter how carefully you follow the rules and regulate your life, shit happens?  If that is the case, is it not government’s role to keep the playing field level?  Oh my God, heresy.

So for Conservatives, chaos reigns if those they perceive as deserving of their fate get a helping hand from government.  It interferes with the natural order and justice in the world.  It terrifies them and allows them to try to reinvent reality to maintain their belief system.  Until shit happens to them, they are oblivious to it, and then it is a special case.  How do you explain the Log Cabin Republicans (gay Republicans)? Because they are Conservatives in that they believe in the order and justice thing, and just see the Conservative denial of their rights as an aberration instead of a logical extension of their belief system.  How do you explain a Conservative who sees the light on gay rights after their own child comes out?  Until it becomes personalized, they can simply shut it out in a whirl of denial or reinventing reality.

My favorite is austerity.  Yes, that was part of the conversation too.  Europe just had to get things back in order and they can’t afford all the entitlements they want.  Austerity is enforcing the natural order of things.  It means that justice will prevail if you follow the rules and the free loaders are put back in their place.  Evil doers must be punished to realign the natural order of things.  Except it doesn’t work.  Every nation that has gone on an austerity kick has seen their GDP not recover, but decline further.  While it violates in a basic way, Conservative ideology about blame the victim, ECON 101 and the data from our experiment with austerity has shown a disastrous outcome.  In order to get out of debt, you have to grow the economy and austerity simply depresses it.  Paul Krugman put a wonder graph out about what happens to countries that forgot everything we learned in the last 80 years or so and decided on punishment as the way forward (Austerity and Growth).  The data is incontrovertible and overwhelming, yet Conservatives will twist themselves into pretzels to try to explain it away because it violates their whole concept of the natural order of things.  Bad things only happen to bad people right?  And if you do bad things, you must be punished.

I guess I can rest my case with watching the Republican Presidential Primary where up is down and down is up, where facts are so distorted that only true believers could accept these people as rational humans, much less as leaders of our country.  It is where this conservative logic has finally taken us to maintain its basic underlying beliefs, into the world of fantasy.  Melissa Harris-Perry, on her new show on MSNBC, made a wonderful point the other day.  Our democracy needs a strong and vibrant two party system to work.  When one party gets out of hand, as power always corrupts, the other side is there to right the balance with new ideas.  But the problem we face with the Republican Party is that they have no new ideas.  They only have the old failed ones that they cling to with all their might, while reinventing reality to make that possible.  They have got theirs and they selfishly don’t want to risk having to share.  Until they actually become a rational and thinking political entity again, we have a real problem in this country.  I only hope the rest of America sees the absolute failure of conservative ideas and puts them out of their misery.

I would comment on the Republican candidates, except they are superfluous.  They, and the political discussions around them, are just more of the problem.  They offer us no solutions and just a continuation of what we have done.  Their whole political approach is based upon feeding anger with outrage, and of course blame.  But when it comes to a new direction, it is just more of the policies or lack thereof that has caused our problems. Here are a couple of examples of our real life experiences that point out our going nowhere.  Sadly, until we personally experience the consequences of our policies, most of us are oblivious.

A few days ago I heard about a young Hispanic man I was acquainted with who was asked to go to a border town to straighten out his papers, and then they deported him. He was two when his parents brought him here.  He was a good student and a smart, hard working contributor to our society.  America is his home and we deported him.  It is so unfair, it is so wasteful, and yet this is what REPUBLICANS have wrought (DREAM Act).  Got to punish those evil doers, right?  Meanwhile I picked up the paper Sunday to read in the Sacramento Bee, “Colleges forced to cut key courses“.  In California our junior colleges have been the route for many who have stumbled in high school or beyond, who have to work and can’t attend college full time, to get on track and get the education they need to become successful.  With the massive cuts in education, we can no longer educate our future.  How dumb is that? Here is some data that Paul Krugman presented on the impact of the cutting of spending from state and local governments:

“But it’s even worse than he says. Why? Because if you look at what’s being cut, it’s heavily focused on investment:”

As Paul said, “That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.“  This austerity is insane, we should know better, and we have been stampeded into fearing the debt by the Republicans with some help from feeble minded Democrats (or just pandering to the mob), and in effect, we are eating our seed crop.  I would sum up with another quote from Paul:

“It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.  What an utter disaster.”

An utter disaster is an understatement.  The way forward is not rocket science,  As I pointed out yesterday, we will all have to pay (no pain, no gain).  That path was laid out by economist (one of many who we are ignoring) Michael Spence, a Nobel Laureate, and professor at NYU:

“I am sure you have heard this, but the great depression came to an end in WWII and two things happened at that point.  One, there was a huge fiscal stimulus because we could not finance a war effort on current income, and then we got rid of it over time, and the second one was that we went to the people and said you know what, it is a war and we are going to have to invest a huge amount of our resources in this and your consumption levels are going to have to go down because we can’t keep them up and make this big investment.  We just don’t have the resources and because it was a war, people said okay.  And so we created this powerful engine that not only took us through the war, but took us into the post period in pretty high gear…If we really wanted to overcome this one fast, then what would happen is a political leader would go and say this isn’t a war, but it is that sort of challenge and create recovery (war) bonds…I mean that is pretty politically unrealistic, but that would really put a jet engine behind this thing over time.”

It isn’t hard.  We need to start investing massively in the future, and making all of us pay for it.  But Republicans offer a free ride saying lets just do austerity, just remove regulation and government interference, and let us all keep our money and it will just magically happen.  Democrats tell you that we just need to tax the rich, and oh yes, austerity for all.  Sorry, they are all lies.  We need to get serious about moving forward and we all will have to pay.  Suppose you could get elected with that message?  Maybe when things get bad enough or we just get tired of standing in one place.  I will tell you this.  Republicans will never get you there.  Democrats have an inkling, but lack the courage.  Maybe the 99% can get their act together.  Remember, just being angry is not enough.

My guess is that most of you have read the articles in the New York Times about why Apple shipped their manufacturing to China (How the U.S. Lost Out on IPhone Work), and about the horrible conditions in the plants there (In China Human Costs are Built into IPad).  Note I am writing this on an Apple NoteBook, read the articles on my IPad2, and have my trusty IPhone at my side.  But these two articles raise important questions about who we are and where we are going.  And even more important, they raise interesting questions about our conventional wisdom about our problems off shoring jobs and leadership.

Lets start with the first one about why we couldn’t do the work here.  The first article points out a couple of important things.  First the added labor costs are small compared to the total price of the IPad so that was not the driving factor.  What is the driving force is flexibility and speed:

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

…In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

Okay, so it comes down to supply chains, and industrial clustering as it is called in the economics world.  Paul Krugman addresses some of this in one of his blogs, Chinese Manufacturing and the Auto Bailout.  There is no question that this kind of organization of people and resources is highly efficient.  But that misses the whole point raised by the other article, is that really where we want to go?

The second article basically points out the human cost of this kind of organization:

However, the workers assembling iPhones, iPads and other devices often labor in harsh conditions, according to employees inside those plants, worker advocates and documents published by companies themselves. Problems are as varied as onerous work environments and serious — sometimes deadly — safety problems.

Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.

Is that where we really want to go?  In fact, should the companies whose products we buy be allowed to tolerate those kinds of conditions.  Apple touts its “ supplier code of conduct that details standards on labor issues, safety protections and other topics. The company has mounted a vigorous auditing campaign, and when abuses are discovered, Apple says, corrections are demanded.”  Yeah right.  As the article points out:

Some former Apple executives say there is an unresolved tension within the company: executives want to improve conditions within factories, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products. Tuesday, Apple reported one of the most lucrative quarters of any corporation in history, with $13.06 billion in profits on $46.3 billion in sales. Its sales would have been even higher, executives said, if overseas factories had been able to produce more.

Nothing drives the train like greed and profit and if we learned nothing from the BP oil spill, it is that even the best intentions sooner or later get subverted to the bottom line.  Without a government enforcing worker safety and health requirements, they slide.   But my favorite insight is what I have always known starting as a lowly Captain flying in Vietnam.  Generals, Admirals, CEOs, and yes even Presidents rarely really know what is going on even with the best of intentions:

In 2010, Steven P. Jobs discussed the company’s relationships with suppliers at an industry conference.

“I actually think Apple does one of the best jobs of any companies in our industry, and maybe in any industry, of understanding the working conditions in our supply chain,” said Mr. Jobs, who was Apple’s chief executive at the time and who died last October.

“I mean, you go to this place, and, it’s a factory, but, my gosh, I mean, they’ve got restaurants and movie theaters and hospitals and swimming pools, and I mean, for a factory, it’s a pretty nice factory.”

Yeah, for a prison Mr. Jobs.  We see what we want to see when we are successful and we make excuses like this is a better life than they would have had, but then some get killed and don’t have any life at all.  And the question is, if this is the model for success, do we really want that kind of success?  As one current Apple executive said:

“You can either manufacture in comfortable, worker-friendly factories, or you can reinvent the product every year, and make it better and faster and cheaper, which requires factories that seem harsh by American standards.  And right now, customers care more about a new iPhone than working conditions in China”

Somehow I find that troubling.  Is the next new shiny toy worth that cost?

This is not a new post since I have prognosticated on this before.  Europe or the Euro in the peripheral countries is doomed.  This will hurt our economy and by how much is uncertain.  But I think more than many think because so much lending and unrecognized debt is out there (from U.S. banks) that it could send us reeling again.  I can make this really simple and others like Paul Krugman have been outlining this forever.  There are three problems:  Austerity, lack of any stimulative spending or easing of the money supply, and the inability to devalue the Euro country by country.

The first two kind of go together although they are all interconnected.  The belief that austerity, that governments who cut back and raised taxes to deal with their burgeoning debt, would allow confidence to grow in that stewardship and debt costs (the cost of the perceived risk) would go down and business would develop the confidence to start reinvesting in their economies, has not panned out.  Actually it has never panned out and the whole idea that it would work, although conventional wisdom, was not born out by history.  It has never worked and in the near term you can look at U.S. Depression, Japan, England, and of course any country in Europe and you have all the data you need to show that this was an illogical idea.  But as Paul Krugman likes to say, it is what all the really Very Smart People (VSP) were saying would work.

The problem is two-fold and is a function of the belief that supply drives the economy, not demand. First as a government starts to reduce benefits, layoff workers, and raise taxes, demand in terms of people having an income to buy goods and services to stimulate their economy sharply declines.  Businesses aren’t going to supply products because they think the economic state of the state is improving until there are real people with cash to spend on a product (Demand drives supply, not supply drives demand).  So there is no business investment that might grow the economy.  Second, as things worsen, and there is no stimulus spending to help with the constricting economy, this become politically untenable. The economy just gets worse and worse and debt cost continue to rise, while the need for funds (borrowing) in a depressed economy grows as their economy falters further.

This austerity might have had a chance if there was stimulus spending to, in the word of an old Vietnam veteran, provide a light at the end of the tunnel.  If austerity in terms of higher taxes to pay down debt had been coupled with job creation through stimulus spending, the austerity forced by higher taxes and some cuts in programs could be offset somewhat by at least having a job and being able to survive.  Then as the debt was slowly reduced, people could still have work and be able live and see some hope in the future.  But there was none of that and by the way, that is our way forward in the U.S., but Republicans won’t allow it.

Now comes the real sticker in all this, unequal economies with the same currency, the Euro.  This is probably the part that is hardest for most people to understand.  If a country has its own currency, then its value can change in regard to other currencies making its goods and services either cheaper or more expensive than other competing countries.  Everybody loves a strong dollar because when we travel in Europe, we can buy more stuff, but our stuff costs more and depresses our exports.  The other part of this is the cost of borrowing.  If a country on the Euro goes bankrupt, well, kiss your investments goodbye.  If a country has their own currency and printing presses, they simply print more money, albeit devalued.  The prime example of this is Sweden and Denmark.  They have similar economic markers, GDP, debt of GDP ratio etc., but Denmark gets much better borrowing rates because  while they are not on the Euro, they are pegged to it, but could crank up the printing presses if necessary.

So if you are a net importer nation, like the periphery countries, to become an exporter country and create jobs you cannot devalue your currency to make your exports more competitive, you have to deflate your economy.  That means you earn less and your cost of living is lower.  Once again we are reducing demand by decreasing currency in people’s hands and we are are the spiral downward.  Note that Germany likes to think they showed the way with their austerity program after the 2007-2008 recession.  The difference is they were a net exporter, and their economy continued to grow because they were in the favorable position.  They could afford their austerity.

So when you add forced austerity, no stimulus spending, and deflation of the economy because of the common Euro currency, Europe is headed for the rocks.  It is past doing anything about it.  The Euro might have been saved if actions to stimulate along with austerity were put in place a year ago, but we have past the point of no return.  The Euro might survive in the interior countries, but for the poorer countries, their only salvation is to bail out.  Hopefully the Obama administration has a plan for when all this occurs, maybe more shovel ready spending?  Let’s hope they have a little more strategic plan this time.

Anyway that is how a guy who knows nothing about economics but lives on a isolated hill in the middle of a vineyard sees it as he is not inundated with the groupthink of the modern culture.  But what do I know?

That’s the defense of Bain and Mitt we heard this weekend.  Creative destruction (CD) is the concept that as technology progresses and markets advance, businesses have to reinvent themselves and this could be a painful process, but in the end it is a benefit to all of us.  Kodiak comes to mind as a company that did not make the transition from film to data.  CD was used by Fareed Zakaria on his show GPS when interviewing Paul Krugman about what he felt was Paul’s unfair attack on Bain in Paul’s column on Friday.  It was also used by George Will on This Week with George Stephanopoulos.  Each in order.

On Fareed, Paul stood his ground pointing out that “it’s actually wrong to think about Bain as having either created or destroyed jobs. On balance, it led to the destruction of relatively good jobs and replaced them with jobs that are worse.   No different. This is what private equity has done, to a large extent, in the U.S. economy. I don’t – I don’t think Bain stands out as an especially bad member of that industry, but that industry is – is doing stuff that is good for corporate bottom lines, but not terribly good for workers. “  He went on to point out that “the main point is that Romney is saying I should be president because I know how to create jobs, and he actually does know how to make a lot of money in private equity, which is not at all the same thing as creating jobs. It’s not all the same thing as – as what’s involved in – in running macroeconomic policy.”

So in the first use of the CD defense, what is pointed out is the jobs that are left are poorer paying, with less benefits, and in an economy that is screaming for demand, this won’t help.  As Paul points out, this may be a great way to make money, but making money is not the same as creating jobs, and if this happens across the board, i.e. in the macroeconomy, yikes.

On This Week, George Will took up the CD defense:  “And I think the American people understand this. George, the part of our society that has seen the most creative destruction is the intensive industry of agriculture. A hundred years ago, 30 percent of the American people were working in agriculture. Today it’s less than 2 percent. I don’t think the Americans are upset by that. was a reality for our farmers where 30% of our population use to be in the profession and today there is less than 1% (his numbers), and nobody seems to mind.”  I find this rather funny in the sense that in Greece where their austerity has killed their better paying jobs, Greeks are returning to the land to eek out a living (NYT).  George is trying to paint the picture that this is just the healthy process of capitalism.  But I would argue that there is creative destruction, and then their is creative destruction.

Paul Krugman did a good job of drawing this distinction:  “…the fact of the matter is that creative destruction is a great thing when the economy is near full employment and when the issue is clearing away the deadwood and getting new companies, we can make that case.  But that’s not the world we’re living in right now. We’re living in a world that is kind of in a low-key version of the Great Depression, an economy with 13 million people out of work, with 4 million people out of work for more than a year.  What you really need, substantively, is you need something that is about creating demand, about expanding employment. We don’t want ruthlessness.”

Understand what Bain was all about, making money, and it did handsomely from taking over companies, restructure them to be more profitable by reducing wages and benefits, taking out their profits through creating debt in the company, and then if the company survived, an additional profit selling that off.  How does that translate to improving the overall economy, unless we think good employment is everyone with a reduced standard of living.  No, the Mitt rendition of CD is not how we ought to restructure our economy and the lessons Mitt learned from it have nothing to do with running our nation.  If you want to look at an example that worked and saved jobs, look to the restructuring of the auto industry that we bailed out and brought back to profitability.  The point here was to save jobs and keep an industry in the U.S.  Remember who was dead set against that?  Our boy Mitt.

On another note on our economy:  The conventional wisdom seems to be shifting with an understanding that austerity by itself will not help either Europe or us.  The new conservative language is austerity with “smart” investment.  Another no-Duh moment where the stupidity of shovel ready jobs comes back to haunt the Democrats and President Obama when their stingy  stimulus program was not carefully planned for our future.

Ever since I was an young engineering student, I always wondered what “I get it” really means.  In other words what does it mean to really understand something.  Many times I would come across concepts that I just could not grasp in an intuitive way.  I could do the work, but I did not have a gut feel for why it worked.  Then I began to wonder what the real nature of knowledge was.  I am a left brain person meaning I am more analytical.  I need to understand the workings of the pieces instead of a more holistic approach to understanding something (right brain).  My favorite example of right brain activity is the savant who can do amazing calculations in their head and have no idea how they do it.  The answer just appears and they know it is right.  But then when I started analyzing my own way of knowing something, eventually I would arrive at something I just accepted as true and then built the edifice from there.

So I came to the conclusion that familiarity with a concept is sometimes the basis of our acceptance of it.  More important is that familiarity is the basis of our understanding of the concept. I guess that is why it is so hard to “think outside the box”.  If I study something that was confusing to me long enough, the concept became more acceptable to me because I became familiar with the concepts.  Here is an example:  I struggle sometimes with economic concepts.  Sometimes Professor Krugman says something that I just don’t get.  It is not intuitively obvious to me.  Then I have to work through examples in my mind that demonstrate the concept.  Sometimes I find out that my concept of a term is different from what economists mean, but finally I build a model in my brain of how things work.  Then based upon this model, I can not only understand the concept, I can extend it to other issues.  As Shakespeare once said in Hamlet, “Aye, there’s the rub”.

The rub is that this model in layman terms is an analogy of how things work and how we understand them, and sometimes we apply this model where it doesn’t work so we draw the wrong conclusions.  For our economy this can be disastrous and the critical two areas we are applying the wrong analogy is to government debt, and the idea that government should run like a business (and by extension, best run by a businessman).  On the debt issue I have tried to show how the family model of how to deal with debt, the way most of us understand it, is radically different than government debt (One More Attempt at the False Analogy of the Home Budget).  Paul Krugman did me one better in his op-ed, Nobody Understands Debt.  If you follow these discussions you can see how easy it is to misunderstand how government debt is different than our concept of personal debt and why with this misunderstanding, we are doing all the wrong things.  The idea of austerity and starving the beast is just going to make our government debt worse.

The other false analogy is that government should be run like a business or the extension, the next President should be a CEO.  I might mention Arnold Schwarzenegger’s record in California or Meg Whitman’s trumping at the polls.  It doesn’t say a CEO could not be a good leader, but most are not.  Mitt Romney is touting his business experience as making him eminently qualified to be President.  Now I am not going to use this space to point out that his record as a businessman reflects the raping and pillaging of other businesses to make a buck or that his net record is a destruction of jobs as others have done this nicely (Romney on Jobs).  What I really want to do is to show how our analogy of a well run and profitable business does not necessary transfer to government.  I am not saying that government cannot be more efficiently run, I am saying that the goals of government and business are not the same.

There are probably two real problems with this analogy.  The first is that a business runs to make a profit for the owners.  Governments run to serve all of its citizens.  So a business might want to outsource many tasks to reduce costs to enhance the bottom line.  It might suit them to offload healthcare or severely reduce the benefits.  To make sure they maximize their productivity, they will make sure that they have skimmed off the cream of employees.  Imagine if a government did this for many of the services it provides.

Well, actually that is how the Republicans want government to function.  They want to outsource education to private providers who will skim better performing students to improve their performance.  They want to shift the burden of health care for the elderly more and more to seniors who can’t afford it.  But it does improve the bottom line of government and requires less taxes.  Remember when partnership with businesses on regulation seemed to be the best way to go and then we find that pharmaceuticals were controlling the FDA approval process?  Government has a role to ensure the well being of all of it citizens, business could care less as long as the bottom line keeps growing.

The second problem is that government is responsible for the macroeconomy, the aggregate well being of the whole economy.  Businesses work on a microeconomic level, what is best for them.  It might be very prudent for a business to reduce the workforce and move some work overseas.  If all businesses did this we would have a very weak jobs market and a real problem with balance of payments as more and more of our work goes overseas (our present condition).  Business would like a reduction in regulations to reduce their costs (and certainly some regulations are burdensome), but government is not in the business of the bottom line, but the welfare of all of its citizens so all those burdensome environmental and safety requirements might just protect the general welfare.  So while a “business oriented” president might be good for business, the real lesson here is that what is good for business might not benefit the nation.

In caring about the aggregate health of our business climate, government will need to invest in education, health care, and infrastructure to improve the competitive environment for U.S. businesses.  They need to invest in research and development where the short term interest of a business prevent it from doing so.  There needs to be long term planning in energy and climate change to prepare for our future.  These are major investments in our country for which there is no discernible return on investment except in the welfare of its citizens and future higher tax revenues as businesses thrive in a more competitive environment.  What we have seen from businesses is that these are costs to offload, focusing on the highest rate of return in the short term.  So who is going to do it, and how is a business focused CEO qualified to do this strategic planning, political selling, and leadership?

So the next time you hear someone say, “I know how to balance my budget at home so why can’t the government figure it out”, or “Why can’t government work more like a business”, think about it.  Government debt is not the same as personal debt and even more to the point, governments have to think bigger than businesses.  The people who utter this nonsense haven’t really thought it through and they are living in the echo chambers of their own ideas.

UPDATE 10 JAN:  I would like to think Paul Krugman reads my blogs, but of course I dream.  But he makes my point about running government as a business and the extension, we need a business leader to run government in his blog this morning:  Businessmen and Economics.

Back in the first month of 2009 when the President and his motley crew were struggling with the stimulus package, Paul Krugman said the following (Stimulus Arithmetic) (6 January 2009):

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

He didn’t have it wrong.  So here we are are now with Obama supporters claiming he got all he could get and more troubling, the Administration claiming they didn’t see how big the problem was.  All they had to do was listen.  Krugman was right then, he is right now, and they still aren’t listening.

It was reported in the New York Times today that “Astronomers Find Biggest Black Hole Yet.”  Apparently they have been studying the Republican “debates” or listening to news analysis.  I went down to the mail box to get the paper this morning at o’dark thirty (the mailbox is about a 1/4 mile from the house) and the first thing I see is that a third of voters now do not support high speed rail here in California.  “Well its costs are growing.”  No shit Sherlock and they will continue to grow until we build it and then we will wonder why we waited so long.  It is just amazing to me how small we can think now and the whole idea of American exceptionalism is a joke.  The America that conquered the west, built the intercontinental railroad, the Hoover dam, the national highway system, sent a man to the moon no longer exists.  Ask yourself how we get to the international space system and that will tell you all you need to know about American exceptionalism.

Some of this is because we are in the “lessor depression” and people are frightened, but as I hope to show in my blog on the economy and the real Great Depression, the fear and failure to think big is the problem.  But quite frankly I lay most of the blame on our news media today.  Around about the year 2000 the news media quit fact checking.  George Bush made a wonderful discovery for the Republican Party.  Say anything you damn well please and the media will simply repeat it.  Thus began the he said/she said news coverage that informs no one.  Remember the Bush Tax cuts were to benefit the middle class?

Now as Paul Krugman pointed out in his blog today (Policy Indifference), reporters have very little understanding of policy so they just repeat what is said.  In order to be successful you need access and to get access you don’t ruffle feathers by pointing out what the person just said is nonsense.  That is why so many people depend on Jon Stewart for their news.  At least a comedian takes the time to point out their absolute lies for the humor in it.  The news media can’t be bothered.

Last night in my blog I made the point about how one political consultant to MSNBC was explaining to Pretty Face (PF) (news anchors who are fun to look at, but have nothing going on in their brains in terms of critical thinking) that Obama has the opportunity to “reach across the aisle” to get something done on the payroll tax and maybe build bridges to do bigger things before 2012 because the economy won’t wait.  PF took that all in and moved on instead of challenging that conventional wisdom that there really is any common ground anymore or that the Republicans will allow anything useful to happen.

See, the narrative is that both sides are just being partisan and if they would just work together to find some non-existent middle ground everything would be peachy, and reality is not going to intrude on that because it is more fun (and profitable) to continue that lie instead of an objective assessment of the Republicans failure to move the country or the failure of their policies.  For instances why aren’t they asking over and over why the historically low tax rates we have today are not creating jobs?

Why aren’t they asking why England, who has been on the austerity path for two years, has not improved and the outlook is worse in the future?  Why aren’t they asking why all the studies of small businesses, the “real job creators” shows that regulations are not impeding them, but lack of customers is?  Why aren’t they asking serious questions about the proposed policies of the Republican candidates (9-9-9, child labor, more tax cuts, abolishing EPA, et al) instead of the never ending reporting of who is ahead, who slighted who, what the Donald says?  Are you starting to see why we have one of the most poorly informed electorate in the history of this country?

But back to Paul Krugman.  He was pointing out “the awful decision of Politico to give Paul Ryan an award as healthcare policymaker of the year.”  The fact that the whole plan has been debunked, would increase health care costs, and make care less available to elderly and poor did not enter into the equation.  It got everybody talking.  So back to my original point.  Who ever said the most outrageous thing is our media’s man of the year.  American exceptionalism died with our journalism.  American exceptionalism my ass.  We are too selfish to pony up taxes to see our kids get a proper education or build a high speed rail for the future, but maybe we should bring back work houses for the poor kids. Hey what about debtor prisons?   That is the “exceptionalism on display these days.  What a sorry ass country we now live in.

Paul Krugman posted a paper by Irving Fisher who was one of the great economists of the 20th century who was one of the first to see the real causes of The Great Depression (over indebtedness and deflation).  It is a great read, and it is amazing how accessible it is to the lay reader.  I did not know Harvard Professors could write in such clear and simple style.  When you get done with it, you start wondering what the hell we are doing with all the austerity and if we could force a second Great Depression.  Click on this link:  Irving Fisher Rules, and then click on the embedded link and it will download the pdf.  Yes Professor Krugman, he does rule.  Thanks.  Here is a small sample:

“In particular, as explanations of the so-called business cycle, or cycles, when these are really serious, I doubt the adequacy of overproduction, under-consumption, over-capacity, price-dislocation, maladjustment between agricultural and industrial prices, over-confidence, over-investment, over-saving, over-spending, and the discrepancy between saving and investment.

I venture the opinion, subject to correction on submission of future evidence, that, in the great booms and depressions, each of the above-named factors has played a subordinate role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price level disturbances.

In summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this, in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either via laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.”

Conservatives want to take us back to the 19th century before great thinkers like Irving Fisher identified the path forward and lets hope we can learn the lessons this thinker has taught us instead of doing what we are doing right now, ignoring them and doing just the opposite.

I woke up at about four thirty this morning and this blog was composing itself in my mind.  We are oh so screwed and sadly it is our own fault.  The world economy is collapsing around us.  Oh I know, the markets were up yesterday on rumors the Europeans would help themselves, but that is just a symptom of our sickness.  We are grasping at straws.  The EU as we know it will collapse.  The Euro will maybe exist in a few countries with similar economies, but for most, they will revert to their own currency (See Simon Johnson:  End of the Euro).  Economic stagnation will be the result and it did not have to be this way.

Europe is in a mess because they refused to do what history has taught us to do in these crises.  To sum up a complex problem, disparate economies were combined under a common currency without a commitment to back each others debts.  When we (yes we) crashed their economy and reduced their incomes, their debts became unsustainable (Greece is a separate issue whose debt was always unsustainable).  Then the Europeans, like our own economic policy makers, went on a Calvinistic moral crusade to punish the sinners.  Those with high debts must suffer through austerity.  Somehow austerity was going to instill confidence in these government’s and the reinvestment will happen.  But what happened and predicted by our better economists like Paul Krugman and Simon Johnson and…, well the list goes on and on, is that it made things worse, much worse.

But economics is not about morality, it is about what works and what was required was for the whole EU to pull together.  The rich were going to have to bailout the indebted by backing their debts through the ECB (European Central Bank), and stimulus spending to get the economy moving again.  That would keep interest rates for the troubled countries manageable, and provide some growth through stimulus to allow the peripheral countries economies to pay down their debts.  Except they couldn’t bring themselves to do it.  What was politically possible was failure because of resentment, selfishness, and a false sense of moral superiority.  Does this sound familiar, “Why should we bail you out when you have spent yourself in debt?”.  Certainly there had to be belt tightening in the troubled (peripheral) countries, but the austerity that was enforced simply depressed their economies further, making their debts even further unsustainable.  People have to have hope.

Okay, Europe is going to crash in a bed of their own making.  It will also bring us down.  Think back to late 2007 and early 2008 and that is where we are going back to.  And once again we have nobody to blame but ourselves.  The way out of this mess was blazoned back in the Great Depression and yet we embarked on a great austerity kick ourselves.  People were just overcome by fear of the growing deficit and their was no real analysis of it in terms of our historic economic past.  Like the Europeans, we let the conservatives stampede us into believing in the confidence fairy (if we cut everything, markets will have confidence and start investing again).  I have given some thought to why this is and I have come up with two plausible solutions:  First we have the same Calvinistic tendencies as the Europeans, we must be punished for our sins or we must punish those for their perceived sins; and second we are tripped up by our own false analogies.

The first explanation is almost self-explanatory.  We feel we have been on a spending spree (Remember it is all those foolish people who took out bad loans according to many conservatives?), and we have been on a spending spree, although more private spending than public.  The public debt we have is really a function of falling revenue after the housing bubble popped and the banks crashed, and our failure to pay taxes.  So we demand suffering for our sins.  Spendthrifts should not be rewarded! Nice thought, wrong solution as noted in the European mess.

The second explanation shows how far we have fallen intellectually.  Americans are not critical thinkers.  Sadly if they think they know something,  it is because they “feel” it is true.  If everybody is saying it, then it must be true.  When faced with what we perceived or were convinced was our overwhelming debt, our operative  analogy, our understanding of how to handle debt, came from our own personal experience.  Who hasn’t heard the claim, “I can manage my own debt.  I can live within my means, so what the hell is wrong with the government?”.

The problem is that it is a false analogy.  If you live on a fixed income or salary, and your debts get out of hand, the obvious solution is to cut back on your spending and focus on paying off your debts.  It is what you know in your gut will work because it has and it just takes discipline so why can’t the government do it?  Well there are many complexities, but the simple answer is that when you cut back on your spending, your income is not affected, but when government cuts back on its spending in a repressed economy, its income decreases.  The more frugal you are, the more you reduce your ability to pay off your debts.  What we feel in our guts is the right solution has been proven in our economic history (actually the world’s economic history) as exactly the wrong thing to do.  But it is exactly what we have done and things are not improving.  Worse the Republicans want to do more of it only harder and expect a different result (definition of stupidity).  You can explain this over and over (Poor Paul Krugman has tried), but most stick with their gut instinct even in the face of repeated failure.

Is there a way out?  Politically no.  What goes as policy discussions in the media and in the halls of Congress today doesn’t even begin to address the problem.  With the Republicans on some moral crusade against actually paying for what we need and want (taxes), with Democrats unable to propose anything bolder than moderate Republican (circa 1990) solutions, and a President who even Ezra Klein of the Washington Post describes as a moderate Republican, we are going nowhere and the double dip will soon be on us.  But yes there is a way out, however I suspect that we have to be truly down and out before we will actually show all that exceptionalism everyone blathers on about and the discipline to pull together and sacrifice to actually accomplish it. We aren’t there yet, but we are getting closer.

Let’s face it, there is no going back to the economy of yesterday.  What that means is that we have systemic problems with the way our economy is running and we need major changes.  Right now the 99% are telling us that the transfer of the wealth to the wealthy that has been going on now since Ronald Reagan is not working.  Add to that, we no longer live in a world where we dominate competitively anymore.  So the challenge is to restructure our economy to make it fair for everyone, to provide the backbone for a 21 century economy, and to regain our competitive edge.  So what does that mean and how do we do that, and no Virginia, it does not mean lower taxes, less regulation, and smaller government.  Going back to the 19th century as the Republicans are trying to take us, will simply make things worse except for the 1% and in the long run, they will suffer too.  As noted in my last blog (It’s the Conservatives Stupid) the solutions are not new, rocket science, or mind shattering.  They are where we have been before.

We need to realign the tax code, massive investment in infrastructure and our human resources, and make government smart government which partners with industry (not a lap dog) for planning our future.  If you followed Michael Spence, a Nobel Laureate Economist and professor at NYU’s explanation on Fareed Zakaria’s GPS Sunday, he laid it out in the simplest terms possible.  We need a real energy policy that forces us to innovate, we need to rewrite the tax code to raise revenues and to be fair.  And we need massive investment in infrastructure and our people.  Here is what he said and it is the only way forward if the future for our children is going to be brighter that what the Republicans have planned for most of us unless you are one of the “special” people in a state of grace (read 1%):

“I am sure you have heard this, but the great depression came to an end in WWII and two things happened at that point.  One, there was a huge fiscal stimulus because we could not finance a war effort on current income, and then we got rid of it over time, and the second one was that we went to the people and said you know what, it is a war and we are going to have to invest a huge amount of our resources in this and your consumption levels are going to have to go down because we can’t keep them up and make this big investment.

We just don’t have the resources and because it was a war, people said okay.  And so we created this powerful engine that not only took us through the war, but took us into the post period in pretty high gear…If we really wanted to overcome this one fast, then what would happen is a political leader would go and say this isn’t a war, but it is that sort of challenge and create recovery (war) bonds…I mean that is pretty politically unrealistic, but that would really put a jet engine behind this thing over time.”

And that is where we are now.  As a country we need to make massive investments in our future through investments in infrastructure, education, and R&D.  In order to do that we are going to have to “invest a huge amount of our resources in this and your consumption levels are going to have to go down because we can’t keep them up and make this big investment.”  What that means is that either through taxation or “recovery bonds” we, the people, are going to invest in this.  Don’t misunderstand.  With the investment will come jobs, but the sacrifice and self-discipline is that we as a people will be spending less on ourselves and reinvesting that money in our country and our future either through bonds or taxes.  It is the only way out of this morass, and in order to have the political will to do it, we will have to be looking into the abyss.  But don’t worry, with our present policies, and with the Republican’s help, the abyss is just around the corner.  Or as I like to say at the end of my Vine/Wine posts, Carpe Diem (Seize the Day) because unless we change course, there may not be many more to seize.

But then, what the hell do I know.  As I like to refer to myself as no one in particular (N.I.P.), what gives me any particular insight into our problems except a glass of wine and a beautiful vineyard to overlook while I ponder our present condition?  Oh, and I read a lot which might set me apart from most Americans.  I mean, after all, aren’t our leaders doing a bang up job of it so far?  So I will go back to kibitzing about the daily soap opera masquerading as news and serious policy analysis (who has Herman Cain slept with now and how is Newt doing in the polls) and I will leave you with Bobby McFerrin’s insightful singing back in the 1980′s that applies so well today, Don’t Worry, Be Happy: