Sunday, November 28, 2010

How Many Investment Bankers Does it Take to Make a Functioning Economy?


I saw an interesting article in the New Yorker about the debatable social utility of the finance world. The article has a lot of resonance.

To be clear, any advanced economy has a need for a financial sector. Banks lend capital to businesses that then develop goods and bring them to the marketplace. If the business does well, then jobs will be created, and these new workers will spend part of their earnings, which will lead to a virtuous cycle of more jobs and more consumer spending. Good financial institutions are no doubt good at picking up on the fundamentals of a good company and directing capital efficiently to those who are most likely to produce results.

Moreover, the financial sector can perform a valuable service when it manages investments prudently. Many non-wealthy individuals such as policemen, firefighters, and teachers have pensions that are invested in part with hedge funds or Wall Street firms. If these firms can get a positive return on the investments, they are insuring a decent quality of living for many working and middle class professionals.

The problem, as this article demonstrates, is the way the financial industry has functioned in recent years. Traders are often rewarded on a quarterly or annual basis for bets that may in the long run lose money for their clients. The article provides a good discussion on rampant rent seeking in finance, when firms use their resources to obtain an economic gain from others without providing any tangible benefits back to society through wealth creation.

Over the past decade or so, many of the nation’s brightest students from its most prestigious universities have sought jobs in finance. Even when the financial industry is actually useful, it may not make sense to have our best minds in it. Instead, they could be doctors finding a cure for cancer, entrepreneurs building the next Apple or Facebook, or educators building quality schools for the next generation. But why would young people spend several years working in those careers before breaking through when they could make a huge salary in finance upon graduation?

Shouldn’t a meritocratic economic system reward those who create the most value? If that isn’t the case, it should at least reward those who bring in the most money or create the most wealth. And while there is good reason to doubt that those in finance create the most wealth for society, it is a fact that they make much more than those in other professions that also require industriousness, intelligence, and ambition. The article notes:

From the end of the Second World War until 1980 or thereabouts, people working in finance earned about the same, on average and taking account of their qualifications, as people in other industries. By 2006, wages in the financial sector were about sixty per cent higher than wages elsewhere. And in the richest segment of the financial industry—on Wall Street, that is—compensation has gone up even more dramatically…

In other words, during a period in which American companies have created iPhones, Home Depot, and Lipitor, the best place to work has been in an industry that doesn’t design, build, or sell a single tangible thing.

Is that a healthy trend? As we think about ways to insure economic recovery, I’m sure that is a question we will continue to answer in coming years.

Wednesday, November 24, 2010

The Tea Party's Mandate


There is no question that the Congress that comes in next January will be more conservative than the current one. But just what will it have a mandate to do? The answer to that question is far from clear.

Tea Partiers would have us believe that they have a mandate to dramatically slash government spending even while holding the line on taxes. But exit polls do not bear this out. A majority of voters said the most important issue facing the country right now is the economy. And indeed the economy is in poor shape with high unemployment plaguing many Americans. The Democrats were in power for the past two years when the economy was bad and haven’t been able to significantly improve it even if they have staved off a depression. Those who thought the economy was in poor shape supported Republicans 68%-28%.

It is true that 40% of voters said the biggest issue facing the next Congress will be reducing the deficit, and that they broke heavily for the Republicans. But a very close 37% said Congress should spend more money to create jobs. When we get specific, there is no decisive mandate to repeal Obamacare. Americans said the new law should be repealed 48%-47%. Even that is a bit misleading. Among every group except senior citizens, at least a plurality wants to keep the law. When it comes to tax cuts, Americans want to repeal them for the wealthiest Americans by a margin of 53%-38%.

With members who want to sharply cut government spending, I wonder if tea partiers are in the process of over-interpreting their mandate from voters.

Wednesday, November 17, 2010

Should Obama be a One-Termer?


Democratic pollsters Douglas Schoen and Pat Caddell have an interesting suggestion for President Obama: he should decline to seek reelection and announce his intent to serve for only one term as President. They reason that this will give him political freedom to oppose entrenched interests and renewed credibility with independents. I disagree that this will help solve major problems.

It is a no-brainer that Democratic interest groups will oppose certain deficit-reduction measures on principle. If that were not enough, they now will have no practical incentive to work with the President. If Obama were running for a second term, he could say in effect “I’m going to do some things you don’t like now, but if you support me, I’ll make sure you get something in return during my second term.” Now, those interest groups will have no chance of future concessions in return for momentary support of the President’s agenda.

Republicans are unlikely to go along either. As an ideological progressive, Obama is likely to offer some tax increases in any scheme to reduce the deficit. Tea partiers who want to extend all Bush tax cuts and even cut taxes further in some ways will not support this. Even if politicians in Washington were willing to go along, base conservatives whom the party needs in 2012 will have trouble swallowing any tax increase. Republicans will oppose Obama’s likely moves on the deficit out of principle and politics.

Moreover, if Obama chooses to step aside in 2012, there will be a divisive Democratic primary that increase the chances of a Republican ultimately winning office. Such a President will be under pressure to push for the repeal of Obamacare and other Democratic initiatives. If Caddell and Schoen support the Democratic agenda of the past two years, they should oppose anything that makes a Republican victory more likely. I think Obama allowing a divisive primary to happen could be one such thing.

In order to really move on the deficit, Obama is going to need people to perceive him to have power and influence. If he is running for reelection, and is seen to have a decent shot of winning, few Democrats will want to oppose him lest they lose out when he wins. If he then provides voters with a reasonable proposal, he can get independents to support it and the odd Republican. He can use the powers of party discipline to get wavering Democrats in line.

Some might say that stepping aside allows Obama to say he was someone who stepped aside for the sake of country and that history will therefore remember him well. I have a feeling though that stepping aside will signal weakness on his part. Voters and historians may perceive that he declined to run because he thought he had no chance of winning a la Lyndon Johnson in 1968. Instead of fighting for his agenda, he got out when things got tough. That might be the verdict history renders.

Thursday, November 11, 2010

Two Black Republicans Join Congress


One of the most under-reported consequences of the midterm election has been the election of two black Republicans to Congress, the first since JC Watts in the 1990s. There are a couple of interesting questions to be asked?

1. Does the presence of these blacks immunize the tea party to charges of racism?

I doubt it. Conservatives have faced charges of racism since they used the southern strategy to solidify a hold on Southern states in the 1960s. In the 1990s, there was still a feeling in the black community that conservatives were hostile to blacks even though JC Watts was in congress.

One of the larger reasons the tea party suffers from allegations of racism is the demographics. There is no question that the movement skews towards older whites. So the visual that we get is a group of older white men engaging in strong opposition and occasionally charging that Obama is the new Hitler. The fact that Obama is a black man being berated by a mostly white group is never lost. Even once two black Republicans join congress, the tea party will still be almost all white, and it will be united in opposition to the first black President who also happens to be a source of immense pride for the black community. This is a recipe for ensuring that there is always some suspicion of racism on the part of blacks.

2. Will these congressmen join the Congressional Black Caucus (CBC)?

The last night time a black Republican was elected to Congress, he refused to join the caucus. The caucus currently consists of all Democrats who hold liberal positions on racially tinged issues such as affirmative-action. It’s hard to see these congressmen feeling completely at home in this body. One has said he will join, while the other is leaning against.

3. Does the election of these congressmen signal a shift in political preferences for Blacks?

Not for the near future. As long as President Obama is in power, he will likely retain a strong bond with black voters that will not be broken absent a major event. Indeed, 89% of black voters supported Democrats during the midterms, which is the same percentage that supported John Kerry in 2004.

If there is no change in black political preferences in the present in the offing, perhaps younger generations will come to differ from their elders. The presence of these two new black Republicans might make that prospect more likely. Younger blacks may not see black Republicans as an anomaly in quite the same way their parents did. This is all speculative of course. I predict that only after President Obama leaves the scene will Republicans have a real chance to make inroads with black voters.

Sunday, November 7, 2010

How Dare Nancy Pelosi Run for Minority Leader?



Nancy Pelosi has surprised political observers by announcing her intention to run for House minority leader for the next Congress despite the fact that Democrats lost between 62 and 65 seats with her as speaker. It makes logical sense that one who presided over such an electoral catastrophe should resign, right?

I’m not so sure she’s actually responsible. Democrats lost on Tuesday because of the poor state of the economy and a public perception that Democrats pursued deficit spending policies that did nothing to improve the lives of regular Americans. Democrats were perceived to be distracted tackling issues like healthcare when they should have been focusing on jobs.

But this perception would likely be there no matter who was speaker of the house. President Obama would have pursued his signature of healthcare no matter what as well as the stimulus bill. In fact, Obama’s persistence in sticking with healthcare even when it proved unpopular is probably responsible for its ultimate passage. Since President Obama played such a large role in pushing for the agenda, voters saw him and not Pelosi as the face of the agenda. Indeed, exit polls bear this out. In house races nationwide, 61% of voters said their votes were intended to express either support or opposition to President Obama.

Moreover, if Pelosi had not become speaker, someone of her ideological bent likely would have. After a progressive wave came in 2008, it is hard to see Democrats accepting a blue dog or a moderate in such a powerful role as speaker. Such a move would have cost Democrats needed support from their liberal base at a time when those liberals seemed to be ascendant. Any speaker from the progressive wing of the party working with President Obama would have come up with a similar agenda to that which was ultimately produced.

So we cannot assign responsibility for midterm losses to Pelosi. There is of course an argument to be made that as a San Francisco liberal with a polarizing public image, she was a bad face for the party who could only cost the party seats. But that assumes that the average voter was really seething with rage against Nancy Pelosi when he or she went into vote on Tuesday, an analysis which the aforementioned exit polls do not support.

Perhaps Pelosi has lost the confidence of the Democratic caucus because of the losses, and the party would function better with a new leader with whom it had greater confidence. Although this would be merely perceptual, it would have real consequences. Wavering Democrats might be more likely to toe the party line for a leader they thought would advantage them electorally. This might ultimately be the best argument for not making Pelosi minority leader.

But those looking to blame Pelosi for her party’s defeat need to look elsewhere.

Wednesday, November 3, 2010

Social Issues and the Midterm Elections


One of the more interesting developments of the Tea Party wave that crested yesterday was the potential for realignment among the two parties.

Cultural issues have traditionally been a significant dividing line between Republicans and Democrats. Democrats are largely pro-choice and more pro-gay rights while Republicans are pro-life and anti-gay rights. The tea party however stands for the decentralization of government power. Will people who want the government to stop spending their money tolerate it in their bedrooms? I doubt it.

The new dividing line could well be public finances. One party will advocate for a robust welfare state and an important role for the state while the other will argue for the opposite. People who believe in certain stands on social issues might not have to choose a party based on those stances. A pro-choice woman with a libertarian bent need no longer be a Democrat solely to preserve her right to an abortion. A pro-lifer who supports universal healthcare may need no longer vote Republican to voice his opposition to abortion.

It has not always been the case that the parties were so polarized by ideology. The progressive era found both Democrats and Republicans who wanted to regulate trusts and expand the power of government to solve social problems. On a more negative note, both the Democratic and Republican parties had plenty of members who supported segregation during the great civil rights battles of the 1960s.

Of course, one can argue that fiscal differences ultimately come down to culture. Fiscal conservatism can have a moral strain: the welfare state breaks down people’s character, and big government robs people of their freedom, which is the desired state of man. And there will always be overlap as well. Evangelical conservatives believe government providing entitlements ultimately makes traditional families less necessary since the government can play the role of a father.

I will have more to say on this as we see the results of the tea party wave unfold.