The Decline of Angry White Guys

Tue, Nov 6, 2012 | Jared Woodard

Economy, Fed, Politics

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.

Fiscal 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.

Monetary policy

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.

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8 Comments For This Post

  1. isomorphismes Says:

    You’ve stated your position well. I would add that it’s not just 2005-2012 that argues against trickle-down economics but from Reagan’s presidency forward, income has not increased as much for the lower quantiles as the higher quantiles.

    http://upload.wikimedia.org/wikipedia/commons/a/a6/IncomeInequality7.svg

    Romney’s main argument for why he should be POTUS seems to be: “The economy is bad”. But he hasn’t effectively argued that he would have done a better job right after a O($10 trillion) collapse in worldwide wealth, or that Obama did a poor job considering the circumstances. Of course asking how Romney would have done during 2008-2012 is like asking how Al Gore would have handled 9/11: we just can’t know. But debt reduction at ~0% interest rates with a contracting economy is obviously stupid, and the plausible theory that incenting higher earning leads to higher earning, hasn’t worked out in practice.

    The following is pretty shocking: http://en.wikipedia.org/wiki/Wealth_in_the_United_States#Distribution_of_wealth If one partitions household wealth into white-nonhispanics and all other races, then the WNH group reliably holds 7 to 8 times the wealth of the other racial groups. (And if you want to bring up e.g. that Hispanics and African-Americans are younger than WNH on average: the difference between 35-44 age group and 45-55 age group is only a factor of two.)

    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.

    Bank of Sweden laureate William Vickrey argued this point in 1996 here: http://www.columbia.edu/dlc/wp/econ/vickrey.html. Analogies to the family (“saving”) or to the body (“hangovers”, “sugar highs”) are visceral but fail to capture important facts about bond markets and macroeconomics. For example the paradox of (global) thrift. A family can never save more than it can invest–and perhaps neither could Iceland–but the United States can do so.

    From the MMT link:

    The modern floating exchange rate system helps to maintain equilibrium and flexibility in the global economy.

    Did somebody communicate this to Thailand?

    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.

    Totally agree, and I’m unaware of any counterarguments that address why the US’ borrowing rate is so low.

  2. isomorphismes Says:

    All right, I’m trying hard to come up with a counterargument to why the US shouldn’t use its low borrowing rate to increase public spending on science, infrastructure, cost-effective preventive healthcare, GAO, and/or public works projects with a long-term value added.

    Here’s one: rates can turn a lot faster than tax rates can rise or government spending can fall.

    Obviously a crisis of confidence could do this, and what to investors looks like profligacy could undermine confidence in Uncle Sam. But also, the world is hoping that investment alternatives better than negative-yield bonds present themselves. If the U.S. or one of its trading partners is successful in restarting economic growth, we should expect that demand for US Treasuries will subside back to levels familiar from other time periods.

    Taking that view, perhaps the 0% interest rate should be viewed as a grace period rather than an invitation to carry-trade parked money for infrastructure investments.

  3. Jared Says:

    Really great stuff here, I had totally forgotten about that Vickrey paper.

    Rates don’t move that quickly, not by the magnitude that would require big changes in spending. Taxing is just a means of destroying money, so the same thing could be accomplished by reducing debt issuance in real time.

  4. Fred Says:

    Your argument relies on the fact that politicians or government can be relied upon to enact effective counter cyclical policy. Yeah….

    Japan has also tried to fill their output gap again and again, and had the yen/dollar gone down about 50% since ’90 and the GDP has gone where?

    Finally, a 2% real GDP growth rate is something like $300B in new wealth created for the USA versus a $1300B deficit this year. That doesn’t sound like a net positive deal to me.

    Christina Romer herself estimated that a 1% increase in taxes by GDP for the purpose of offsetting inherited debts leads to a 3% GDP decrease.

  5. Jared Woodard Says:

    Fred: There are scores of examples of governments enacting successful counter-cyclical policy. We could start with the most recent efforts since 2008 and work backwards.

    Re Japan, I find Richard Koo’s work on balance sheet recessions persuasive.

    Could you explain why you think that 2% real GDP in the slow part of a recovery after a financial crisis is “not a net positive deal” just because it involves a budget deficit? Are you saying you think budget deficits are only permissible if they are temporally matched by year/year growth? Requiring economies to operate without credit is kind of nuts, so I assume you mean something else, but I can’t tell.

    I don’t advocate increasing taxes to pay off public debt, certainly not in a weak economy, so I’m not sure to whom/what your last comment is in reference.

  6. isomorphismes Says:

    Fred: Most of the $1300bn deficit is entitlements, not countercyclical spending by the government. Also $300 bn is not the growth that’s attributable to government spending.

    Can governments spend their way out of a recession? CCC and fixing roads/bridges. Throw some more money to science research. It’s the reverse of socks stocks and shocks. At a negative borrowing rate it’s hard to fail here, at least in a linear neighbourhood around the current level.

    Jared: I don’t understand your point about reducing borrowing in real time. If I raise G spending from $X to $1.1X, then rates rise (on new issuance and secondary market buyback) then I still need to come up with the $1.2X to pay all the people I promised to pay, including the creditors? If I reduced my bond issuance then I wouldn’t have the money to pay someone. No?

  7. Jared Woodard Says:

    Only if all of the proceeds from current borrowing were going to debt service, right?

  8. isomorphismes Says:

    Assume the proceeds of bond sales were going to either [1] debt service or [2] salaries of people running current programmes.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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