Jonathan Rauch has a piece up in the National Journal in which he, reluctantly, endorses the current Senate Health Care Reform Bill. Clive Crook and Andrew Sullivan both concur, but it’s Rauch who makes the best argument, and he makes it from the Deficit and Cost perspective:

Although long-term budget projections are squishy, the Congressional Budget Office’s are the best we have to go on. Notably, CBO scored the Senate bill as deficit-neutral (actually, it would slightly reduce the deficit) over the reform’s second decade after enactment, which is well beyond the window of cost-shifting and timing gimmicks. We could do worse, and possibly will do worse next time around.

And what about bending the cost curve? Health care inflation devours wages, burdens employers, and could eventually bankrupt the government. A reform that fails to grapple with the cost problem, the critics say, is not worth having. I agree.

…

Most economists believe that two pervasive market distortions fuel health cost inflation. The first is Medicare’s fee-for-service payment system, which pays providers based on the number of procedures they perform, rewarding inefficiency. The second is the tax deductibility of employer-provided health insurance, which subsidizes high-cost policies, hides the costs of those policies from employees, and denies employees the opportunity to shop around.

Both distortions inhibit market discipline, and both originate with bad government policy. If socialized medicine is state payment for most health care, then the country is there already: When the value of the employer tax subsidy is included, the government (federal and state) pays for almost 60 percent of all U.S. health care, according to Paul Van de Water, an analyst with the Center on Budget and Policy Priorities. Dealing with Medicare and the employer tax deduction is therefore crucial to cost control.

…

As for the employer tax break, the Senate bill docks it. Not a ton. Only high-premium policies covering a minority of workers would be taxed. But even the limited tax is very important, for several reasons.

Crucially, the threshold for taxation would not rise as fast as health inflation. Translation: Gradually more and more employer-provided policies would be taxed. The change would be incremental, even glacial — but slow seems to be the only pace with which Americans are comfortable.

Moreover, after reform is enacted, the taboo on taxing employer-provided health benefits will be shattered once and for all. From then on the question will be how much to tax, not whether. A door that had been welded shut will have been pried open. The country will be able to have a new kind of discussion, one in which the tying of health insurance to employment — which is insane, when you think about it — is no longer sacrosanct.

…

Taken together, these measures could set in motion a virtuous cycle. As health costs rise, more employer-provided health plans become taxable, giving employers an incentive to find cheaper plans. As employer-provided plans grow less generous, more employees have an incentive to take a tax credit and shop around, and, as premiums rise, more qualify to do so. Little by little, insurance coverage shifts toward an individual-based, consumer-driven market. And the faster health insurance costs rise, the faster the transition happens. The disease triggers its own antibodies.

Again, no guarantees. The transition would be very gradual, and political blowback could easily disrupt it. But the point is that the reform contains a pathway to sanity. No one can say that about the status quo.

This is much better way of making the argument I was attempting to make here.

If the GOP were serious in their Health Care Reform critique, socialism!, they would propose how to slowly END Medicare. But that’s not their position; no Scott Brown, Michael Steel, and Jim deMint have all made defending Medicare, of any cuts, a central tent pole of their argument. I suppose that this is to be expected from the people whom passed Medicare Part D, which as it happens cost MORE than the bill currently before Congress. Yet, Medicare Part D was passed without a funding mechanism, blowing a ‘doughnut’ hole in the deficit.

So our option is pass this bill, or stay with the status quo.

If we pass this bill there is a decent, better than even, chance that Health Care costs can be contained, and those costs will be funded, without a huge and growing deficit. (Yes, taxes will be higher) If we do not, we will ASSURDELY have an exploding deficit, and Health Care related costs will continue to retard the growth of the economy, until most likely, a posse of Bond Traders from China and the Middle East shout ‘No Joy’ and all those economic calamities that the GOP is warning about, dollar collapse, stagnation, inflation, unemployment, ect., come into full fruition.

Pass. The. Damn. Bill.

It looks the NYT’s wants to raise a pay-wall starting in 2011. Borrowing from the FT-model, the NYT will allow lite-users the ability to read a number of articles a week/month for free, and then ask for payment beyond that. As you may know, I am skeptical that this will work.

First and foremost, as many others have said before, the FT and the WSJ, the only two papers to have successful online pay models, offer a monetizable news/information service. Bloomberg, another monetizable information provider, gets the vast majority of its revenue from very expensive terminal subscriptions. The key to these services is that only a very small cadre of people care about the stories that get reported; at the WSJ they even have a saying, the smaller the audience the more valuable the information. It’s so valuable, that typically these information providers have their subscriptions paid directly by the companies on which they report, who then turn around and report the subscription cost as a business expense.

However, the NYT doesn’t provide this type of journalism. It provides general interest stories, which are also covered by countless rivals. In fact, as most bloggers point out, there is almost no story in the NYT that isn’t also covered at least by Reuters, AP, and AFP as well. Because of the overcrowded market for general interest news, Reuters has actually taken to paying large traffic-directing aggregators, like The Drudge Report, to favor linking to their stories over the competition; the diametric opposite of a pay-wall.

Yet, despite all that, it seems that Arthur ‘Pinch’ Sulzberger, Jr. is playing follow the leader, and imitating Rupert Murdock’s plung into the pay-wall.

Which brings up my second criticism, that there is no business logic behind this move, other then they need more money. Historically, subscription revenue, $600-a-year for the NYT, do not even cover the paper and delivery costs associated with their production. (Econ: Price = MC) It was the combination of classified and display ads that subsidized the entirety of the Newsroom, and helped defray the printing costs. The problem, as I have laid out in detail before, is that digital ad prices are drastically lower then print ad prices per-impression. So while the NYT, the Post, the IHT, ect have never had a larger readership in all their history, they are going broke faster than they can grow.

This economic reality is not addressed by either Murdock or Sulzberger.

For Murdock it does not matter, his papers can be subsided by the rest of the News Corp, as I understand Fox News is raking it in, and Avatar is busting the box office coffers in full 3D glory. As the FT reported when Murdock announced the pay-wall idea at the end of Q3, News Corp is a family operation:

Profits staged a double-digit rebound in the three months to September 30, with 85 per cent of operating income now coming from cable channels including Fox News and its Hollywood studio…

Group revenues fell 4 per cent, dragged down by a $300m decline in its newspaper portfolio, which stretches from the Sun in London to The Wall Street Journal in New York. Operating income from newspapers and information services fell from $134m to just $25m, or 2.4 per cent of total profits.

…

The cable networks division secured its place as News Corp’s biggest profit engine, raising operating income by 41 per cent to $495m, owing largely to Fox News.

Fox film studio profits rose 56 per cent from the box office success of Ice Age: Dawn of the Dinosaurs and DVD sales of X-Men Origins: Wolverine. (Bolds Mine)

Lucky for the WSJ, The Times, The Sun, and The Post Murdock loves newspapers, and will prize them above all else as long as he is alive. It’s just in the man’s blood.

Sulzberger, on the other hand, does not have that luxury, even if he shares Murdock’s blood-for-ink preference. No, the NYT lives and dies on it’s own. Which is why the absence of a REAL business plan and rational for this pay-wall is so troubling. It does nothing to address the advertizing decline. They have not answered how this pay-wall will be more successful than its ill-fated Times-Select, which held opinion behind the pay-wall. And yet, here we go again, and it’s the same guy making this decision as made the last pay-wall decision, that all went nowhere; and who also made the call to buy a huge chunk of Manhattan Real Estate, burdening the company with massive debt, that it can ill afford. And for these reasons, I have to agree with Michael Wolff, that Pinch has to go, if the NYT is expected to save itself. Just because your family owns the paper, does not mean you know how to run the paper.

Finding a way to drive subscription revenue from online sources is not a bad idea, I’m simply saying that borrowing the FT-model and hoping it will auto-magically work, ain’t a good plan. Adding value and charging for that, might work. Creating new ad units, or interactive advertizing, also might work. But rather then innovating, or trying something new, they are dusting off the old, calling it new, and praying that it will work…somehow.

…good luck with that.

Building off my earlier post, William D. Eggers & John O’Leary have a piece up at Reason’s Hit-n-Run Blog that really lays out where I think Libertarianism has been hurt by the type of arguments that they make:

1. Bad government leads to bigger, badder government. Today, only 23 percent of Americans trust government to do the right thing. At first blush, this would seem to be an encouraging statistic for those opposed to “big government.” After all, the less citizens trust government, the less willing they should be to give it big new responsibilities, right?

Wrong.

An important recent academic study called “Regulation and Distrust” shows that, paradoxically, the worse government performs, the more citizens demand greater government intervention. The authors’ explanation for this curious finding is that in societies where people distrust large institutions—whether government or big business—the demand for more regulation and for more government is higher, even when government is incompetent or downright corrupt.

2. To shrink government, you need to love government. Most liberals believe deeply in government. As a result, they sit on school boards, city councils, and regional planning boards. They become expert at navigating through the bureaucracy and know which bureaucratic levers to pull to make their policy vision reality.

Many conservatives and libertarians come from the world of business. They don’t particularly like government. They view it as merely a necessary evil. As a consequence, they rarely immerse themselves in the intricacies of governing, preferring to make their case from a safe distance.

Once in power, they tend to have far more difficulty navigating the complex terrain of the public sector. The result? From Ronald Reagan’s Grace Commission to the 1995 government shutdown by a GOP Congress, most high-profile attempts to shrink government fail.

Until small-government types better master the nuts and bolts of the public sector—how to design policies that work in the real world and how to execute on large public undertakings—their initiatives to downsize government will continue to disappoint.

3. Market-based reforms are not self-executing. Fans of limited government are quick to point out the shortcomings of “big government” policy initiatives. But market-oriented policy prescriptions will also fail if they aren’t well implemented.

The deregulation of the airline and trucking industries were two of the biggest and best things done by government in the 1970s. Well-designed and well-executed, they demonstrated the benefits of choice and competition. Consumers saved billions.

In the late 1990s, free-market think tanks were pushing the idea that competition could cut costs in the stodgy, monopolistic world of electricity. So what happened when California actually tried electricity deregulation?

Within just a few years, the new law caused soaring prices, rolling blackouts, and the recall of Gov. Gray Davis. Consumers lost billions.

What went wrong? The short answer is that energy companies such as Enron exploited design flaws in the legislation to game the system. Competition could work in electricity, but California’s poorly designed “deregulation” was a disaster.

Without a keen appreciation of the process by which legislation and programs are designed and implemented, efforts to move from monopoly to markets carry a high risk of failure.

4. Government bashing alienates those you want to reach. According to many libertarians, politicians are corrupt, bureaucrats are lazy, and public unions are a collection of thugs. The whole enterprise of government is a moral cesspool filled with Randian villains scheming to drain every bit of life, cash, and liberty from the noble John Galts of the free market.

This view is so at odds with the daily experience of millions of Americans that libertarians are easily dismissed by the average citizen. The distorted worldview in which government performs no useful functions—ever—is silly.

Incessant government-bashing may make you feel good, but alienates most everybody who knows and loves a police officer, firefighter, teacher, social worker, anyone who has ever collected an unemployment check, and anyone who saw NASA put a man on the moon.

In the short term, a philosophy of “government never works” might sell to the base but it’s not an effective strategy for building a broad-based electoral coalition or actually governing. Voters won’t trust people who hate government with the keys to City Hall.

5. Nobody will care what you know until they know you care. Many voters today may indeed want smaller government, but what they want most of all is competent government. In addition to pointing out the flaws of government, free-marketers also need to communicate a genuine interest in the effective performance of the important duties of government.

After all, what is it that gets you so worked up about the current state of affairs? It is the human potential squandered by a government that isn’t the best that it can be. The ultimate goal is the pursuit of happiness, and when a properly limited government does its job well, it fosters freedom, peace, and prosperity. That is a noble goal. Why not embrace it?

All these points have merit, and is a much better way of phrasing my own critique: libertarian minded people can’t let themselves be pigeon-holed as those who ‘hate taxes, but like pot’. A perfect example, since it is still mainly in the news, is healthcare reform.

Many libertarian minded people, specifically those whom gravitated to the Tea Party movement, argued that any reform was tantamount to socialist market control. Conveniently ignoring the fact that the government run healthcare options, Medicare, Medicaid, and the VA, represent the largest single healthcare insurer, as it stands today. First off, it looks like you don’t care, second it ignores the market reality, and third it’s nihilistic alternative would allow great harms (gov’t deficit, death, and bankruptcy) that they themselves raised, but offered no solution towards. Their argument runs mostly, the government programs created the healthcare inflation crisis, so there is no way they can fix it. Nothing they do can be good. Which may be true, but it also doesn’t fix the problem, or answer the question of: what do we do now/next? (that apparently doesn’t matter)

To be clear I am a policy libertarian. Meaning that I think government policy should based on data. Theory is where policy is born, but we promote and empower based on results that can be measured. I agree with Mao, all political power grows from the barrel of a gun, and all political pressure is at base coercion.

But we live in a society where the vast majority has agreed, by consent, to live within and abide by the social contract. Therefore, the government will always exist, and will always respond to the interest of the majority. Our job is to make the best decision as to which policy, such that it limits the amount of coercion, and empowers/benefits the most people. That is the most we can do, and thus is what we ought to do.

As with most people, my introduction to libertarian thought began with Ayn Rand. But unlike many people it didn’t end there either. Rand’s books have always been semi-popular; ranking in the lower triple digits on Amazon and constantly in print. But with the rise of the Tea Party Movement, her books are back in center stage, pushed by the times and by conservative book of the month clubs, that flog Beck, Levitt, Kristol, Palin ect. to the heights of the best-seller lists.

At the time of publication, her work stood athwart global currents that all seemed to be pushing relentlessly towards a centrally controlled economic Leviathan as an ‘ideal’ way to organize society. Because of her vantage point as an economically-advanced Jew living in Ukraine during the rise of Soviet power, her books are filled with a moral indignity that served well to expose the inhumanity of the socialist model and popularize her idealized moral-captain of Industry.

However, Rand had two fatal flaws, which in her lifetime limited her appeal into the political mainstream. One was her personality, which has been noted far and wide for its ability to peel the paint off any room she entered. It drove away admirers and gave critics an easy target to screed against. The other was that she was a dyed in the wool atheist. And this made her untenable to much of the GOP movement, at the time centered on Barry Goldwater, with whom she shared an ardent anti-Communism sentiment.

And thus, Libertarianism was regulated to the ‘other parties’. It became a popular fringe movement that associated, and became associated with, other fringe movements. Like the neo-leftist New Party AND the American National Socialist Workers Party in Delaware! But as allies are apt to do, the shortcomings were overlooked and the movement keeps moving, but never growing.

Meanwhile, in the Ivory Towers libertarian thought took on a new respectability with Hayek winning the Nobel in 1973 and Milton Freedman shortly after that. Other notable academics included the great Ludwig van Mises. Together they started the study of Austrian Economics, funded the Reason Foundation, and opened the CATO Institute.

But alas, two other Academics, Murry Rothbard and Lew Rockwell, saw an opening in 1992, and sought to establish a viable 3^rd party they only way they saw possible, by combining all the ‘fringe groups’ under one banner. And who was the standard bearer of that banner? Pat Buchannan.

And here is my problem with Libertarianism. As an academic, moral, and political philosophy it is very convincing and powerful. I would even argue it is ‘true’. But as a political movement ideology it has toxified itself by association. Far too often libertarian arguments are employed to defend racists and unjust policies. Often times, the speaker isn’t even aware of the full implications what they are saying. Furthermore, Rand, Hayek, Mises, and Friedman all recognized that the government does exist, and should be dealt with as such. To pretend like every government action is a stepping stone to absolute state control is asinine. Ever since Rome, the government has built the roads. Three of the biggest insurers in America are Medicare, Medicaid and the VA. Then to argue that the US Healthcare SQ is great, but that the government should not play a role is to willfully deny reality.

After reading my Rand, following up on Hayek, and understanding what it means to be ‘conceived in liberty’, to me, Libertarianism says that the IDEAL world is one where government is no longer necessary. But we don’t live in that world. And as such, the better libertarian thinkers, like David Freedman, have been proposing libertarian minded policy; like ending the ‘War on Drugs’, reforming our penal system, or proposing Free Trade in both goods and labor to update NAFTA and US immigration. Yet, the people reading Ayn Rand today, who shout Socialism! at the top of their lungs, wouldn’t even consider a single one of those Freedman suggestions. ‘War on Drugs’ is tough on crime, prisoners OUGHT to be raped (it’s a feature not a bug), and why do we need more brown people?

To put it in a phrase: everyone favors liberty until their privilege is in jeopardy, and then no one does.

After the euphoria of the 2008 elections, Obama’s first year in office was going to feel like the end of a sugar-high no matter what he did or how well it was done. In the era of 20min news cycles a year can seem like an eternity, but in reality it’s a very short-time. Even so, after 12 months of hard slogging Obama’s promise seems quite dulled by political reality. All the while certain segments of American Society either believe the end of America is imminent, or are willing its end to be, if only to hang it on Obama’s (and the liburls) head.

The feeling now might be that Obama is down in the polls and the Dems are heading for a gutting in November. Part of this is simply the magnitude of problems faced upon entering office. But can anyone name one thing that Obama wanted that he didn’t get? (Maybe the public option, but he never fully committed to the idea publicly). A new Supreme Court Justice, a stimulus, and eventually (after 30 years and many months) a landmark healthcare reform; it hasn’t been easy, or neat, or clean, but ‘he will has been done’.

Though far from perfect and incomplete; 2009 seems to be a hugely successful year.

The Domestic Economy

The TARP, the auto-bailout, ‘stress-tests’, and the stimulus were all measures taken to stabilize an economy that was still mostly in a panicked freefall when Obama first entered office last January. That panic has now subsided, the market has rebounded.

This may seem like a small thing but it’s not; namely, because it ‘cost’ almost nothing. The TARP specifically has come back almost in full, with the exception of the money that went towards the Auto-bailout. These measures, combined with the stress test, did one thing: suture the large banks structural wounds.

It was in fact the Treasury and the Fed, under the TAF, that extended the real lifeline to unload trillions of dollars worth of mortgages, aka the transfusion. In a rough and ready sense, the Fed became the new Fannie and Freddie, buying up all of the mortgage securities off the bank’s balance sheets. This allowed them to fix their capital positions, but we have no idea what these MBS’s are worth, or what was paid for them, nor to whom. This is quite worrying, but the Fed’s intransience has been a problem for nearly 100 years now, and this is nothing new. (Though, in light of the unending revelations regarding AIG use of bailout money to pay off counter-parties at 100 cents on the dollar, this problem could come under a bright light very soon, see below.)

Yet, any fears that we ‘spent’ trillions of dollar is simplistic, we lent trillions of dollars, mostly to home owing American Residents. Worst case the Fed *could* hold the mortgages until maturity, and vast majority will pay-out.

Because of its balance sheet expansion, and its Zero-Interest-Rate-Policy (ZIRP) the Fed has also devalued the dollar relative to the rest of the world (save China). This has let housing get a floor under itself, and allowed for the first expansion of American Exports in nearly 20years. Some say that Fed actions have only served to re-inflate a real estate bubble that they largely created themselves. Perhaps true, but the immediate worry is the Fed’s ability to deal with yet ANOTHER crisis, if it doesn’t unload at least some of the assets it has taken onto its balance sheet, and interest rates still at zero, this is an acute worry.

In other words, the fire is out, but smoke and water damage remain and there is no more water in the tower, to fight another fire. This has not been dealt with at all. Many people, from Barry Ritholtz to the Cunning Realist have been livid with the Obama administration’s lack of cleanup in the financial sector. These are the ‘independents’ whom supported Obama last year, but where likely Regan-iets 20 years ago. This to me, is the issue where most of the independent support has left the great Hope-n-Changer, to disillusionment.

Healthcare

The reason why it has not been dealt with was twofold, first the economy is/was still fragile, and second health-reform was put upfront in year one, where it was deemed politically safer to make concessions to get a bill completed.

Healthcare was placed first because it, like the banks, was declared ‘too-big-to-fail’. It was a Dem goal since the 1970’s and was the main unifying feature of the Democratic Primary. It was the one thing all Democrats wanted. But as a result of healthcare being a ‘must-pass’ priority you also allow yourself to be extorted, and that has been the biggest failing of this whole process. Repeatedly, things have been removed (Medicare expansion, public option) or added (no abortion funding for anyone ever from any plan that receives any government money) that make the legislation better for ONE person, regardless of what the other supporters think. Thus, the least committed are the most influential.

Once the tea-party protests in August hit fevered pitch, it became impossible for any member of the GOP to vote in favor or help in anyway. Cutting themselves out has meant that NO GOP proposals entered the legislation. Tort reform, interstate competition, even expanding HAS’s were never mentioned. The GOP believes that this stance will pay dividends in the Congressional races later in 2010, perhaps it will; but it still seems like winning a battle but losing the war.

Healthcare reform will pass and entitlements have this funny habit gaining popularity, see Social Security and Medicare. Furthermore, the crux of the GOP argument has centered on the expense and the deficit. By all accounts, including the CBO, the bill reduces the deficit, and starts to ‘bend-the-cost-curve’. If EITHER happens, the Democratic Party can claim victory, and cast the GOP as a do-nothing party, that would allow us to slowly bleed to death, rather than take corrective action. (Framed as a policy doctor, this will be a damaging line of attack)

The GOP can only win the war, hold POTUS and a majority, if everything fails. But since this was a must win/will win for Democrats this isn’t going to happen. The bill will pass, Obama will sign it, and short of catastrophe will reduce the deficit and will reduce costs. This will be certifiable. The more you yell socialism the less impact it will have, especially in light of expanded coverage/reduced cost reality.

The 2010 Elections

Lastly, Obama decision to move healthcare first, and let financial reform wait until 2010 has a brilliant political strategy implication; true the economy was weak this past year, and yes healthcare reform was more politically fraught, but financial reform has a wonderful populist feel to it.

Healthcare had to be passed by Congress; it’s simply the name of the game, and rules we live by. But Obama runs the executive branch and all its departments. Many things can be changed by executive order and fiate through the SEC, the FTC, Treasury, FDIC, ect. Congress on the other hand gets to play the role of vender of constituent anger. A few round of banker-bashing and popular sentiment is apt to switch sides rather quickly. If the GOP joins in the bashing fine, but the Dems still control congress and will be running the show. If they don’t, and play defenders of the rich (or defenders of capitalism, or fighters of socialism) it would square nicely with a narrative of protecting corp interest, along with their obstinacy on healthcare reform.

In other words, the GOP will have to be onboard with the Dem financial reform agenda or risk a rift within the party between the Tea Party and the GOP faithful. (Which they may face anyway if they go along with the Democrats) The point is this: financial reform is Uber-popular and populist. By pushing it to 2010, Obama has given the Dem a rallying call to unite behind after the monumental effort it took for healthcare. But this particular call helps to not only gin-up the Dem base, but it places the GOP on tenuous footing. Go along and lose the Tea Party Base, or fight and most likely lose independents.

It’s a beautiful divide and conquer strategy.

Of course one should still account for the unknowns. Namely, that Obama has Ben up for reappointment to the Fed, and Tim Geithner was his first choice to head up Treasury. It the hearings start to tarnish those two and their major roles in putting out the fire, this could al backfire on the Dems and the Administration. Only time will tell.

Check, but not Mate

As the out party the GOP has made quite a stir in the media, and whipped their base into activity on par with what Obama was able to achieve in his campaign run. Yet, policy wise they have stopped, improved, and hindered nothing. Furthermore, by stoking the base as they have, base elements have come to personify the party in the public imagination. Old and white are the adjectives most likely to be used to describe the GOP. In 1980, that won the election, in 2009 your John McCain.

Based to pure political tectonics, the GOP will pickup seats in 2010. It will be a limited victory. But look to 2012 and the picture darkens again. The one true leader of the GOP, is giving the Keynote at the 1^st ever Tea Party Convention, which is looking more-and-more 3^rd party, everyday. Then you have Mittens, Huck, and Tim each of whom is untenable to at least one major GOP constituency. Suddenly, in a flash of neon colors it says 1992 all over again.

There is a nice profile of Larry Summers and the rest of the Obama Economic crew in the New Yorker by Ryan Lizza, while its long and buttery in sections, the interplay between Obama’s economic advisors was fascinating in showing how the various policies were shaped, especially the stimulus, the Public-Private-Partnership, and the auto bailout. These policies have all been broadly unpopular across the board, and the internal debate shows that not even the entire staff has been on board with some of these policies. But those doubts were voiced, and the prevailing arguments are laid out for the first time, that I know of, in this piece.
For the record, I was mostly supportive of the stimulus, as a one-off cost it’s fiscally negligent since with inflation overtime, and dollar denominated debt, over time is gets smaller and smaller; it’s the kind of the deficit that “doesn’t really matter”. However, the size of it was questioned, and this exchange is great in how it shows Christina Romer actually proposed a $1.2 Trillion stimulus package, but that it was never even proposed as a option, due to political realties:

The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”
There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”
There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future.
Summers brought a third argument to the debate, one that echoed his advice to Bill Clinton sixteen years earlier, when his Administration was facing persistent budget deficits that Summers believed were suppressing economic growth. He, like Romer, was guided by an understanding that in financial crises the risk of doing too little is greater than doing too much. He believed that filling the output gap through deficit spending was important, but that a package that was too large could potentially shift fears from the current crisis to the long-term budget deficit, which would have an unwelcome effect on the bond market. In the end, Summers made the case for the eight-hundred-and-ninety-billion-dollar option.
Summers, Romer, Geithner, Orszag, Emanuel, and Jason Furman huddled in the corner to lock down the number. Emanuel made the final call: six hundred and seventy-five to seven hundred and seventy-five billion dollars, with the understanding that, as the bill made its way through Congress, it was more likely to grow than to shrink. The final legislation was for seven hundred and eighty-seven billion dollars.

Of course, the output gap is difficult to measure, some say it was more, others less. Regardless, the true constraint was always political. Even before they took office, the administration was bending over for public opinion, and in many ways went against Romer’s theory that ‘overwhelming force’ was needed to fill the output gap. Right now, it looks like the political advisor’s were right, and the insurance has keep us above water. Yet, by this point in the Great Depression everyone though we were out of the woods too, thanks to New Deal’s Alphabet programs. Lets reassess the effectiveness in two more years time.

So while Romer was tasked with saving the economy, Time Geithner was tasked with fixing the source of the crisis, the banks.

I’ve written about Tim Geithner’s policies towards the banks before. At the time I expressed confidence that his plan would work, if only for the shear ‘head I win, tails you lose’ aspects. Personally, I would have liked to have seen an FDIC-style take-over/’nationalization’ of the weakest big banks, shown that “Big-Banks can fail”, and sold off the carcasses piecemeal. It’s hugely expensive up-front, but you usually end of getting your money back, and can even turn a profit in some cases. This approach was rejected in favor of the ‘Public Private Partnership’, and I finally know the logic why:

On Sunday, March 15th, Geithner was summoned to the White House for a meeting with the President and his senior aides about whether Obama should adjust Geithner’splan—or scrap it and come up with something else. Geithner did not go unprepared: he brought with him his advisers Lee Sachs and Gene Sperling, who ran the N.E.C. during the Clinton Administration, and six other staffers. Geithner had a line he often used that summed up how he and his colleagues at Treasury would prevail: “Plan beats no plan.” The meeting lasted seven hours. Obama’s advisers were so divided that he left them in the Roosevelt Room after the first two hours, saying, “You guys work this out, and when I come back I want you to tell me what your agreed-upon approach is.”
Romer believed that the banks wouldn’t lend again until they were well capitalized. For banks in severe stress, she favored creating a government-backed “bad bank” to take the toxic assets off the banks’ books and then recapitalize them with government funds—essentially a version of nationalization, and what the Swedish government had done during that nation’s financial crisis of the early nineties. This argument was quickly rendered moot because of the cost. There wasn’t much money left in the TARP kitty, and any chance of getting more from Congress had ended with that morning’s news: A.I.G., which had received a hundred and seventy billion dollars in federal money, had handed out multimillion-dollar bonuses to the executives responsible for the company’s demise. Axelrod said, “The one thing that was absolutely clear was, we were not in a position to go back to Congress.”
Summers played the role of “the ultimate murder board,” according to Sperling, making the Treasury officials defend their ideas the way a Ph.D. student must defend a dissertation. He challenged and provoked Geithner to make sure that he had thought through every aspect of the plan. They argued back and forth, as they had done in the Clinton Administration, and their intensity was often jarring to the other Obama advisers. Summers didn’t trust the regulators, and was particularly worried about whether the stress tests designed by them were sufficiently tough on the banks. He pointed out that, in the days before Lehman, Bear Stearns, and Washington Mutual crashed, the same regulators had said that capital at those institutions was more than adequate.
In the end, though, Summers acknowledged that there were no better options, and Geithner’s plan survived intact. On March 31st, Summers sent the President a page-and-a-half memo outlining the reasoning behind the decision not to nationalize any banks. Obama was on his way to the G-20 meeting in London, and he wanted to be prepared with the best case against it.
The memo was divided into four sections. First, Summers explained that there was no legal authority to take over large bank-holding companies like Bank of America and Citigroup. Next, he pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As Sperling often argued, “You might come out and say, ‘I’m gonna take over Bank of America and Wells Fargo, but everybody else is safe!’ Maybe they believe you. And maybe they don’t. But if you get this wrong the Dow’s at thirty-five hundred! You’re the worst economic manager in the history of the United States!”)
Furthermore, Summers said, there was a medium-term risk that nationalized banks would lose value, in the same way that the act of foreclosure decreases the value of a home. Summers pointed to the example of Sweden, which was regularly cited by economists who favored nationalization. But Summers noted that Sweden didn’t nationalize for two and a half years, by which time the situation had become so severe—interest rates had reached a hundred per cent—that there were no other options. In addition, Nordbanken, the largest bank nationalized in Sweden, was already eighty per cent government-owned. Summers concluded by emphasizing that nationalization was a strategy that governments turn to only after it is very clear that nothing else can work.

We also know that David Alexrod was displeased with the Bank Bailouts in particular saying: “I ran a small business for twenty-three years,” he said, referring to his political-consulting firm. “If I went broke, nobody was going to come in and save me, and if I didn’t do well in a given year then I didn’t take a large bonus and neither did anybody else. And that’s the way most Americans operate.” In this instance, policy beat out politics. Banks and Bankers are hugely unpopular. While the stimulus can have an effect in people’s everyday lives, bakers are seen as responsible for the mess, and they are. Any program that looks to benefit them is not going to be popular. The cathartic process of shutting down big-banks and firing the management, was one of the lesser, but very real reasons I favored ‘nationalization’ /pre-packaged bankruptcy. Yet, as I read this it would seem that lack of available funds was the only constraint placed on Geithner’s plan. This may be a large part of the reason why the banks have come back fastest and strongest, dispite being the most pummeled and epicenter of the crisis.

… yeah that pisses me off just a bit. To this day the biggest failing of the Obama administration has been it’s failure to hold anyone to account for their contributions in creating the crisis in the first place. (By say… letting them go bankrupt). Maybe he is waiting for the economy to recover before aggressively going after financial regulation, but until I see action, this was morally unacceptable. Even if economically sound.

And speaking of bad ideas, we come to my least favorite policy – the auto bailouts.

Summers called for a vote: who thought Obama should save Chrysler? The group was deadlocked. Four were in favor and four were against. Summers abstained, but he believed that Chrysler should get another chance at survival, especially since the Italian automaker Fiat had announced that it was willing to take over the company. Austan Goolsbee, who is both the staff director of the PERAB and one of Romer’s deputies at the C.E.A., cast the strongest of the no votes, arguing forcefully that saving Chrysler would damage the long-term prospects of G.M. and Ford, and for that reason Chrysler should be allowed to go bankrupt and be liquidated. Summers and Goolsbee had argued the issue for weeks, and the debate had become a source of friction between them.
At a morning meeting in the Oval Office on March 26th, Summers pressed Obama to make a decision. Romer told Obama of Goolsbee’s dissenting opinion, and he was brought into the meeting, which delayed the decision. “Half an hour to decide the fate of the auto industry?” Obama said, according to an account by Bloomberg News. “We need more time than this.” The group, plus several other advisers, reconvened at six o’clock in the evening. At one point, Robert Gibbs, the President’s press secretary and confidant, showed the group a map of Midwestern counties and their current levels of unemployment. He said, “We talk a lot about avoiding twenty-five-per-cent unemployment, like we had in the Great Depression, but in a lot of these places we’re already there.” When the debate was exhausted, Summers, perhaps recognizing that he had misbehaved at the morning meeting, faithfully summarized the views of everyone at the meeting, including Goolsbee. Obama asked Steven Rattner, the head of the auto task force, who had been one of the four to vote yes in Summers’s office, “What do you think the percentage likelihood is that, if we give this deal a chance, it will succeed?” Rattner didn’t make the decision any easier. “Fifty-one per cent,” he said. “But, Mr. President, in my experience, deals get worse, not better, over time.”
In the end, Obama sided with Summers over Goolsbee, but Goolsbee believes that his case against Chrysler did push Obama to impose the condition that, if the Fiat deal fell through, the government would offer no help. Over all, the episode suggests that there was enough internal dissension to make sure that the President’s options weren’t constrained. Goolsbee told me, “History has not been kind to Administrations where everybody agreed with each other and all they ever had to say was, Good idea, boss.”

It does my heart wonders to know that someone with the presidents ear was arguing my perspective with regards to the auto bailout generally, and Chrysler specifically. On this I think that Obama made a big mistake economically, because I think he made the decision politically to ’save jobs’. Given the time line progression, because so much had gone towards saving the banks, its my hunch that Obama felt he needed to do more for the ‘common man’ because he had already done so much for the banks already. Comparatively speaking the auto-bailout, and Chrysler in particular, were and are chump-change. But saving one industry, and another, but not this third is illogical, and bad policy.

No, i don’t think anything Obama has done is even close to ’socialism’. Rather, I fault him for the same thing that all government officials do in modern westernized countries. He has not allowed discipline to correct the market in anything: Housing, autos, banks, ect. I believe markets are most efficient at destroying inefficient and hubristic players. The ‘bitch-slap’ of the invisible hand is what makes a market work, take that away, and you have not capitalism, but corporatism. Where, ‘too big to fail’ depends on the size of your lobbing network.

Regardless, its nice to know that at least these thoughts are reaching the president’s ears. Here’s hoping they were right, and I was wrong…

Elliot Spitzer, as the New York State Attorney General gained a lot of enemies by taking on a number of Wall Street Titans, and dragging them to earth. (Some say these enemies are the ones who first leaked his scandal) For this he was vilified by many libertarians and other pro-business/free market types. While I consider myself to be a strong libertarian, I also recognize that Free Markets require harsh consequences to function properly, and Spitzer was a needed Stick.

The thing is I never saw Spitzer as out to destroy Wall Street, or as an enemy of the free market; and in his most recent column for The New Republic discussing market regulation he illustrates why I have this view:

To understand the shape of our response to the crisis, we must understand the crisis itself. We have experienced a failure of capitalism–not the failure of capitalism. We know markets are still the best way to allocate resources and to set prices and wages. But the first and essential corollary to any theory of markets should hold that they are fragile and must be protected. No matter how frequently large swaths of the world loudly shout, “We love the market!,” virtually nobody does. In the absence of rigorous enforcement of rules, market players seek monopoly power and unfair advantages… their actions demonstrate that self-interest, unbridled by enforcement of rules, will destroy the very market so many people so ostentatiously claim to adore.

But there was supposed to be another group designed and empowered to root out malfeasance and protect the commonweal: a large cadre of government regulators. There’s a widespread assumption that these regulators were improperly armed to adequately protect the public, without sufficient statutory firepower or resources.

The truth is that multiple existing agencies already have, as part of their core responsibility and legal authority, the obligation to protect consumers and oversee financial markets. Take the Fed’s failure in addressing the issue of excessive leverage, which posed a “systemic risk”; or the Securities and Exchange Commission’s inaction while blatant abuses stared it in the face. The regulatory failures of the past decade were in large part failures of will and ideology, not power.

Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players. Too many of our regulators have been tarnished by the culture of Washington, where the constant movement between government and the private sector has created a fear of disrupting the status quo. It is an environment where stringent enforcement–the very type we needed–jeopardizes future confirmations, alienates potential clients, and engenders social ire. This cozy world isn’t exactly corrupt. Rather, it perpetuates an insidious process of socializing the regulators and the regulated alike. Everyone emerges accepting a way of doing business that ultimately fails the public and the economy. Groupthink has prevailed, leading to an ideological conformity that forecloses challenges and alternative theories….

But, once again, we’re missing the opportunity. Instead of adding bureaucracy, we should be using the government to help invigorate shareholders to police companies. They should be empowered to control executive compensation, eliminating all the conflicts that now encumber those decisions.

Shareholders, like all stakeholders, will make a better determination about the use of their capital than bureaucrats who don’t ever suffer the downside of a bad investment. We need to facilitate opportunities for shareholders to actually participate in key decisions, and to deny those whose interests are not aligned from hijacking them. Strangely, we’ve heard a lot about executives and bureaucrats in this moment of reform. But shareholders, a force integral to the integrity and vitality of markets, have largely been left out of the discussion. We need them now more than ever.

The phrase ‘regulatory capture’ has not been uttered nearly enough, but that is exactly what happened, and is exactly why a natural downturn was allowed to grow out of all proportion. His point that stronger regulation can have chilling affect on Capital is an important one to recognize least we over-reach, al la Sarbanes-Oxley. Yet, rather than blather on about the evils of greedy humanity, because that’s not going to change, he actually makes the most pro-market suggestion I have yet to encounter anywhere.

It’s not more power, its enforcement of existing rules, and a diversification of enforcers that we need. There is a saying in Linux community that ‘many eyes revel all flaws’. Strong centralized power is quite corruptible and easy prey to vast moneyed interest. But an army of millions of stake-holders with real-but-diffuse power can be both potent and viscously efficient. This is applying basic free-market theory, and turning it back in on itself, it’s exactly the type of ‘libertarian policy’ that I think we need to see more of and I applaud Spitzer for his work and words in this regard.

And I’m not the only libertarian to like this column either.