This post discusses the election, what I expect to happen, and my views on fiscal and monetary policy. This is a normally politics-free blog, but economic policy impacts markets in a big way, and investors who believe myths about the nature of debt and money put themselves at a disadvantage. Comments engaging with the substance of the arguments below are welcome; the rest will be deleted.
I predict Obama will win the election by at least 33 electoral votes. My electoral map is attached.
Predicted 2012 Presidential Electoral Vote. Source: Condor Options, 270toWin
I won’t be surprised if Romney wins Virginia, and as I explained early on Monday, voters of every party can hope that the election does not hinge on Ohio. You really have to squint to make the data look positive for Romney, and in the end, Sen. Lindsey Graham (R-SC) will have had the best analysis of the election: “The demographics race we’re losing badly…We’re not generating enough angry white guys to stay in business for the long term.”
The reason I am voting for Obama is that I live in a swing state and the President’s economic policies would be better for everyone. I’m not a religious conservative, so I favor Obama on any social issues. Foreign policy is probably a wash, though Romney might actually be able to take a more dovish stance on Iran (i.e. Nixon in China). I’m very unhappy about the abuses of civil liberties under Obama, but I don’t expect any Republican administration to do better. Obama has been marginally better on environmental/energy policy and on education than I would expect from a Romney administration, but neither campaign has focused on those issues. That leaves economic policy.
The idea that the economy would improve if only we could extend tax cuts for high earners is at odds with the last few years of economic data. This is not a high wage, tight-capital economy in which the solutions of the supply-siders make any sense. Our biggest problem has been weak demand, and the solution to weak demand is to strengthen it. While both Obama and Romney would pursue broadly Keynesian policies, demand-side measures will be more effective than tax cuts.
I won’t vote based on the budget blackmail argument.*
People who think that economic policy under Obama has been too loose don’t understand the modern monetary system. Politicians talk as if the U.S. federal budget is similar somehow to an ordinary household budget, but they’re not actually similar at all. Households don’t issue and use their own currencies; the U.S. does. For the same reason, it is literally impossible for the U.S. to end up against its will in a situation like Greece, Ireland, or Spain. Those countries are all users of a currency they do not control: practically speaking, things would not be much different for them if they were on a gold standard. But the U.S. controls, issues, and uses its own currency, so there is no danger of our economy facing the Greek fate.
There are so many false metaphors and lazy slogans involving monetary policy, it’s hard to dispel each one individually. References to “can kicking,” “sugar highs,” “debt forced on our children,” “slavery to China,” and similar ideas are all signs of a conception of money and debt that was never really true and has not been respectable in academic or smart investing circles for years. The idea popular among both centrist Democrats and the whole Republican party right now, that our debt and/or the budget deficit is an urgent problem that must be addressed relies on this same misunderstanding of the nature of money, debt, and the economy. For people who think that deficits matter, the time to address them is during the boom phase of an economic cycle, not during a tenuous recovery.
The post-Keynesian scholars working under the label of “modern monetary theory” have ideas that make the most sense to me in light of basic facts about our system. The theory is not partisan and has adherents across the political spectrum. But even if you opt for conventional monetarist or Keynesian views, the political rhetoric around fiscal and monetary policy probably strikes you as wrong-headed. For the rest – the Austrians and austerians and fans of tight money – I’ll just say that when your theory requires you to abandon empirical evidence and ignore the signals from the bond market, then as a rule something has probably gone wrong with the theory.
Responsive monetary policy under the Obama administration helped avoid a double-dip recession (or worse), and along with a very modest fiscal stimulus package helped establish a floor in the economy from which we have started to rise steadily. Inflation has been a non-issue. You will never hear savers and budget hawks worry about deflationary shocks because people who are already wealthy fare even better in a down economy: their money becomes worth even more. Tight monetary policy is just covert class warfare, and stabilizing prices is immoral, anyway.
If we want to give a critique of economic policy under Obama, it has to be that the fiscal stimulus package was too small and was too indirect (channeled through banks and intermediaries instead of going to Roosevelt-style public works infrastructure projects) and that monetary policy was probably too tight early on.
So the fact that Bernanke and his likely successor would continue the current path – taking the unemployment mandate seriously instead of just the price stability part – is an independent reason to vote for Obama.
* The budget blackmail argument goes like this: if Obama wins, House Republicans will do everything in their power to block any meaningful legislation and will threaten to tank the economy at every turn via fiscal cliff, debt ceiling, etc. situations. If Romney wins, he will be able to pursue helpful Keynesian economic policy (in the form of tax cuts and some spending increases) with the cooperation of Democrats and moderate Republicans. The idea that we should elect Presidents based on the threats of extremist goldbugs is morally odious. We should not negotiate with economic terrorists.