In a recent conversation with a good friend and self-described liberal democrat, the discussion turned to economics.  My economic position, well-known to my friend, is relatively straight-forward.

• I tend to view income as labor and find appealing the idea of a flat tax for everyone beginning above some threshold.  I don’t have a percentage in mind, but if that comes out to 20%, then everyone is contributing about 400 hours per year to our government even if one person’s 400 hours brings in more revenue than another person’s.  For me, there is something intuitively fair about such a set up.
• In my personal financial life, I avoid non-investment debt and I avoid borrowing money unless I have a clear plan to pay it back.  Consequently, I don’t like deficit spending and I am nervous about the scale of recent borrowing on top of an already huge national debt.
• I am neither socialist nor laissez-faire – and for the same reason: I see both as impractical and ineffective.  If socialism could compete with capitalism in terms of productivity or innovation, I would not oppose it as strongly as I do.  If complete deregulation provided sufficient guarantees against exploitation, I would not oppose it as strongly as I do.
• In an economic sense, I see the nations of the world in a (hopefully friendly) competition for resources.  To the extent that we fail to make wise fiscal decisions, we will fall behind other nations that make prudent economic choices.

The purpose of this article is not really to promote the aspects of my (current) economic philosophy or its application to any particular situation.  I realize that honest, intelligent people can differ regarding optimal spending or monetary supply.  I can oppose bailouts or the stimulus package while still appreciating the arguments from the other side.  My point is actually much simpler: to many people (including my friend), a desire for a fiscal policy along the lines laid out above is not merely incorrect, unrealistic, or impractical… it is radical.  It is viewed as extreme to the point of denigration and dismissal.

And therein lies the problem… a perspective based on understandable axioms that seeks a practical and sustainable solution to our national economic problems is designated (and honestly perceived) as “nutty” or “the fringe” by wide swaths of the American public and unworthy of further consideration.  As if this were not bad enough, the same thing comes up with virtually any issue that is hotly debated today.

Note how the markets dove in the early Obama presidency and have risen sharply since early March:

This trend closely aligns with Rasmussen’s approval ratings of Obama.  In the early going, Obama garnered strong approval ratings and appeared to have control of the agenda in Washington.  When his stimulus bill passed on Feb. 17, his net approval was +15 and his overall rating was a healthy 61 percent. 

However, around late February and early March is when Obama starting charting below 60 percent approval rating in Rasmussen.  That’s also exactly when the Dow started to climb.  It took off when, on March 6, Obama plunged from a +15 approval gap to a +8.  He hasn’t been above +10 for more than a day at a time since. 

Even more revealing, the steepest climb in the Dow which occurred starting in early July also coincided with Obama sinking to a net negative approval rating on Rasmussen’s tracker.  On June 30, Obama went into negative territory for the first time.  The Dow began its steep climb right after the 4th of July weekend and went up sharply for the next two weeks, just as Obama’s negatives rose to a net -12 in Rasmussen.

What to make of all this?  I think it’s pretty simple:  The markets see the stimulus as a political failure, the budget deficits are scaring people (thus creating an impetus for future reduction in said deficits), the Climate Bill is dead on arrival and the proposed health care plan is wildly unpopular.  

So the markets are rising because they see Obama turning into a weak President.  They are betting that as Obama’s approval ratings go down, the prospects for the American economy will go up.  

At this point, it looks like a safe bet.

In most tellings of the Robin Hood story, the hero and his Merry Men were attempting to stop runaway taxation upon the public.  Robin Hood “stole” from Prince John and (depending upon the tale) either returned the money to the unfairly taxed or held it for the absent King Richard.  Fundamental to the moral of this fable is the idea that those whom Robin Hood robbed deserved their punishment for their wicked ways – the government was robbed, but not honest merchants, farmers, or craftsmen who happened to be successful.  To accept the application of this aphorism to universal health coverage, we must accept that those who will be taxed higher have unjustly taken from the poor who will benefit.  To see the government as Robin Hood, we would have to see a medical doctor husband and attorney wife as the analogies to Prince John and the Sheriff of Nottingham.

A more honest analogy (and not necessarily a pernicious one) would be to paint the administration as “Slick Willie” Sutton.  Sutton was another notorious thief who was asked by reporters why he robbed banks.  Sutton allegedly replied, “Because that’s where the money is.”  I have no idea how well this level of honesty would play with the public (“We intend to increase taxes on the wealthiest Americans, fair or not, because we really want universal health coverage and we can’t think of another way to pay for it that the majority of the public would accept.”) but I’d love to find out.

It can be intelligently debated whether or not increased taxation on the wealthiest Americans is necessary to pay for universal health coverage or even if it is a desirable thing.  It is, however, dishonest to both the moral and the story to claim that increased taxation on the wealthiest Americans to pay for health care is “just” in the sense of Robin Hood.  In the present case, it seems that the Robin Hood analogy is the precise opposite of the picture the administration wants to paint.  Then again, it’s catchy and easily spun which really is the point of soundbites, afterall.  And it’s almost certainly better than the soon-to-be spun, “Give unto Washington what belongs to Washington.”

Stimulus?

Its things like these that erode credibility when it comes time for the American public to be asked to write checks for something like Obamacare.

The President’s four year term offers shelter but all you have to do is watch Congress to see how well the public is handling things.  What we’re seeing is representatives backing down from the grander ambitions of the Obamacare plan especially since the Administration has apparently tried to shelter itself by leaving members of Congress up to the task of writing the legislation (some leadership, eh?).  You can get away with that with 60 percent approval ratings and while the public is still mightily angry with your predecessor, but those in Congress are under the gun with re-election thoughts never far from view.

All the more reason to embrace the tremendous wisdom and foresight of the Forefathers who set about to build a government that would work agonizingly slow and deliberately, with a strong bias towards consensus rather than accelerated change.

But when it comes to the economy, he is doing things that are unprecedented and that would not hold up under scrutiny if he were any other President.  Could you imagine the howls in the media if Nixon, Carter or Reagan abrogated bond contracts while nationalizing large chunks of a major industry?  Could you imagine the scandal if George H. W. Bush or Bill Clinton put a 31-year old with no business experience in charge of GM?  Could you imagine if any other President produced a $1.8 trillion deficit, $600 billion more than what he inherited?  What if George W. Bush crowed that he ’saved’ 150,000 jobs during a time when the unemployment rate was almost 9 percent?  Oh, the outrage!

There is an amazing double standard at work here.  The main complaint against George W. Bush was that in his reaction to 9/11, he overreached.  This is a notion that can be faithfully debated by both sides.  But at least there is a debate.

So far, there is almost ZERO debate in the mainstream media when it comes to Obama’s policies.  Oh sure, there are murmurs of discontent here and there, but they are unusually muted considering the scope of his ambition.  Amazingly, while the economy transforms, we find the media still obsessing over issues that happened under Bush.

Part of the problem is the marginalization of the GOP and the Conservative movement.  The mainstream media gives short shrift to much of the Right’s opposition.  They are, after all, the opposition party, yet the media acts like they are being nattering nabobs.  In fact, any party in opposition serves at least the minimum purpose of playing devil’s advocate to the proposed policy of the majority party.

But given the current lack of power on the Right, it now falls even more on the media to be a watchdog, a check and balance to what Obama is trying to do.  It’s ironic that in a time of declining media revenues, the one thing that could help revive the media would be to actually fill this role in a faithful manner.  But the truth is that the mainstream media approves of what Obama is doing.  And so they go lockstep down this path and miss the opportunity to actually act like a responsible Fourth Estate.

Yes, there was and is a very deep recession.  There was a financial crisis.  But bipartisan steps were taken to alleviate that crisis.  But since taking office, Obama has used this financial crisis as an excuse to consolidate unprecedented economic power in the hands of the federal government.  In the process, he has turned fiscal policy on its head, printing money as a response to the financial crisis, which in turn is creating a new fiscal crisis.

The natural decline of the financial crisis is occurring now, which is why we see the market reviving somewhat.  We have stepped back from the brink in that regard.  But the fiscal reckoning is baked in the cake and will come home to roost soon.  Obama can only blame Bush for so long.

This is not a presidency content with small things.  This is not Bill Clinton asking for Midnight Basketball funding.  This is not Jimmy Carter asking Americans to turn down their thermostat.  This is not George H. W. Bush asking for a kinder, gentler nation.  This is serious stuff.

Obama is going for broke.  He is not tinkering at the margins.  Whether he is right or not, there MUST be a serious debate on the direction he wants to take us.  This is missing right now in our national discourse.  Instead, the media is talking about Uighurs and Palestinians and whether Dick Cheney is evil or not.  Major magazines like Newsweek are being guest-edited by comedians.  All this while Obama is accumulating unprecedented executive power.

No doubt, Obama doesn’t mind keeping the focus on the twin issues of terror and torture, where he can dazzle people with empty rhetoric and moralize over the supposed failures of the previous administration.  It prevents the public from focusing on what he really cares about:  his desire to turn the country into a European-style social democracy, with a bloated welfare state and a unionized labor force.

Maybe that’s the way to go.  Maybe it’s not.  But let’s have the debate.  If George W. Bush can be lambasted for overreaching on national security, there’s no reason Barack Obama shouldn’t be lambasted for overreaching on the economy and its relation to the federal government.

The faiures of GM and Chrysler, and looming failure of Ford, are hardly novel for the transportation industry.  As detailed in this informative piece in the Wall Street Journal, the auto industry meltdown closely resembles the pattern leading to the failure of the rail industry — which died in the late ’70s:

First, the contemporary industry of popular transportion (rail in the late 19th century; cars in the 20th century) is thrust into financial prominence.  

Then, not long thereafter, government enacts broad regulatory proscriptions, attempting to transfer costs onto the industry, limiting competition, and resulting in barriers to entry — in the case of rail, it was the Interstate Commerce Act and other price controls; in the case of auto, it was the Wagner (i.e., the National Labor Relations) Act and CAFE standards.

The next step — after many years of survival — is the eventual wholesale collapse of the industry.  The rail industry finally collapsed during the Ford and Carter Administrations; the auto industry is collapsing now.

And, the final step is mass government subsidy/takeover aimed at keeping the industry afloat and, perhaps more importantly, its labor force employed: for rail, Conrail and other insolvent lines were eventually subsumed by Amtrak; for auto, the feds have already bailed out Chrysler and have now bought GM.

The effect of rail nationalization is well-documented: popular routes are overpriced to subsidize the less popular ones; cost-benefit decision-making and efficient pricing is cast aside in favor of political expediency; and, the nationalized monopoly obstructs any prospective competitor from entering the market.

In sum, an industry emerges, is then regulated into oligopoly, eventually collapses under the weight of regulation, and is finally coverted into a national monopoly, where politcal considerations are paramount to market forces.  In the end, the American public loses, and loses BIG.

The day that Barack Obama was sworn in as President of the United States, the Dow Jones Industrial Average closed at 7,949.09 and the S&P500 was at 805.22.  These two indices are used, often blindly, to gauge the “health” of the US business environment.  On March 9th, 2009 these indices both reached their recent lows closing at 6,547.05 and 676.53 respectively and we heard reports of $11T losses.  Today, the markets are at 8,500.33 and 919.14 suggesting that the $11T that had gone missing in the wilderness by March had wandered back to civilization dragging a few new friends with them.  Putting aside for the moment the joyous reunion with our prosperity and not worrying about who is at fault, how are the markets really doing so far during the Obama presidency?

The DJIA dropped over 17.5% between January 20th and March 9th and then rose nearly 30% from March 9th to today for a net gain of 6.93% during this administration.  Similarly, the S&P 500 dropped 16% before gaining 36% to net a 14.15% gain.  The natural conclusion is that things have improved substantially since President Obama took office.  You can’t blame him for what happened before he took office and who wouldn’t want their investments to grow 7-14% in such a short time?

The problems with this conclusion are legion, but the one I want to focus on is PERSPECTIVE.  To American eyes which measure in U.S. dollars, the market has grown 7-14% so far.  But the value of the USD also fluctuates; it is a measuring stick marked on a Slinky.  By the time of the March 9th bottom, the USD was relatively strong compared to just about every other measure and it has weakened substantially against them since.  So how do the eyes of the rest of the world view our markets?

The POUND is up more than 15% against the USD since Inauguration Day.  Consequently, to British eyes the recovery we’ve witnessed since March 9th only appears to be one-third to one-half as robust.  Overall, our friends on the Blessed Rock disagree completely about the DOW under Obama: we think it has grown 7% but they think it has fallen 7.6%!  Similarly, while we think the S&P 500 has grown 14%, they feel it has shrunk 1.35%.

The Continent takes an intermediary view.  With the USD down 9.3% to the EURO, the DJIA measured in EURO is down 2.2% while the S&P 500 has grown only 4.43%.

Not everyone takes such a dismal view of our markets.  To Japanese eyes, both the DOW (up 13.34%) and the S&P 500 (up 20.98%) are booming!  Of course, this is driven by the fact that the YEN has fallen over 5.6% to the dollar.

So who is right?  In a sense, everyone is.  Or more accurately, the idea of measuring something tangible (parts of corporations) against fiat currencies is inherently misleading.  But we can also measure these indices against other tangible things, like commodities.

On January 20th, an ounce of GOLD would buy a little more than 1 unit of the S&P 500 and that’s about what it costs today.  Similarly, a unit of the DOW cost 9.3 ouces of GOLD then but only 8.7 ounces today – a drop of 6.47%.  In ounces of SILVER, the DOW has fallen 22% and the S&P 500 almost 17%.  Against PLATINUM the drops are 14% and 8% respectively.  Then there’s OIL.  The price of OIL has risen dramatically this year.  Measured in barrels of OIL, the DOW is down 37.5% since Obama took office and down 7.8% during the recovery.  The S&P is likewise down 33.3% against OIL for the year and down 3.5% since March 9th.  If your paydays for 2009 involve you receiving compensation in barrels of OIL, you’re a happy person right now.  Not so much if you get paid in YEN.

Measured against the USD or especially the YEN, the U.S. Markets appear to be doing well under Obama.  But measured against other currencies like the EURO or POUND they do not seem to be doing particularly well and against other tangible assets they are doing quite poorly.  This, in my opinion, is a critical point that is lost in the rhetoric surrounding the current financial crisis – we are measuring our markets with an ever-shrinking stick.  As more dollars enter circulation, we can expect to see the price associated with our markets rise and people will rejoice in the good news reported – even while others around the world wonder what all the fuss is about.

I’m not going to tussle with the fact that many in the media are cheerleading for an Obama economic recovery.  They should cheer any recovery under any President–if it is actually happening.  I certainly recall that in 1991-1992, the media willfully ignored the strong recovery that was underway under the first President Bush and in fact often gave legs to the Clintonian notion that it was ‘the worst economy in 50 years’.   Every time ol’ Bushie said things weren’t so bad during the early stages of that recovery, he was decried as ‘out of touch’.  But Obama brings up ‘glimmers of hope’ in the middle of what really is our worst downturn in 50 years and most of the media takes it at face value.

Nonetheless, it is worthy to note that the 1st quarter GDP was just revised from a decline of 6.3 percent to 5.7 percent, at an annualized rate.  This is not cause for much optimism, as the expected revision was to 5.5 percent.  Still, this report on the revision contained some rather optimistic notions (Less than first thought!, beamed the headline regarding the revision), mainly that the recession has bottomed out and that the economy should ‘only’ shrink at a 1.8 percent rate in the second quarter. 

Again, I think it’s great that the press is willing to be optimistic.  I hope they cheerlead the country to a massive recovery.  Much of what ails us economically is related to our overall perception of what’s happening out there, so the press has some influence in this department.  But it would be nice if they applied this standard evenly across the board, no matter who is President.