Wednesday, February 25, 2009

The President and the Fat Tail

Well, I said in my last post that the next bailout would be sadder, and boy was I right.

Since my last missive of 12/19/08, our Congress has passed a "stimulus" bill of $787 billion dollars. The Democratic Congressional leaders have made the prudent observation that during times of fiscal crisis it is important to pay your debts, and so right out of the chute they first debts they paid were political ones -- a Christmas Tree like no other. The reasons and justifications for this manifold and ultimately silly (though frightfully expensive) exercise really don't bear repeating, though the worst argument I heard was to the effect that their party interests had been shafted since Reagan, so they were evening the scales a bit. For anyone who believes this I would challenge you to look up the expenditures by government department in 2000 (Clinton) and in 2008 (Bush). Non-defense spending increased dramatically, Bush's major failing as a President was his inability to stop his GOP Congress from spending money like, well, Democrats.

You'd think $787 Billion (yes, that's a B) would have been enough, but you're wrong. The next appropriation bill coming down the pike is an Omnibus (when you see that word, hold onto your wallet) bill to fund several departments whose appropriations for 2009 (until the end of the federal fiscal year on September 30) could not be agreed upon by Congress and President Bush. There is more pork in this bill than in the entirety of the State of Iowa, and it leverages UP the baselines that will be used by the Obama Administration to set budget levels in their budget proposal for government actions starting in 2010. This bill, already passed by the House, bumps up domestic spending by 6.7%, the Obama budget will only increase it more, despite his recent pledge to halve the deficit to "only" $500 billion -- in four years. Despite Obama brushing off McCain's anti-pork attacks and promising a bottom-up review of government to find waste and inefficiency, this stinker of a bill is apparently not going to be even remotely opposed. The Democratic House Leadership essentially wrote the stimulus bill, apparently getting your shot entitles you to...getting another shot. Hey, we're all entitled now.

We haven't even begun to talk about the goodies that are hidden in these two bills, two bills that nobody will ever read, except the people who wrote them to advance specific purposes. Those purposes will be revealed in time, but not in time for us peons to have any say in changing those purposes. Much of the welfare reform that was the best thing to come out of the Clinton years has allegedly become undone, the Tiahrt Amendment banning states from using gun purchase records for anything other than law enforcement reasons (the other reasons being frivolous lawsuits against gun manufacturers) may not survive reauthorization or may be repealed outright.

We have not been governed recently, we have been dictated to, with the pretense of democracy. I'm really not sure how else you describe people voting on a bill they can't possibly read, making laws out of text that a minority of the majority concocts in camera. Democratic process does not make a democracy, and we barely have the process, or have for the last few weeks. The idea of a star chamber that is somehow legitimized by having people vote to approve their decisions largely sight unseen is laughable, or at least, it should be in America.

The argument that is frequently advanced by the White House or Democratic leadership is that this is a critical period and we must act quickly. I beg to differ. We get fewer points for getting an answer out quickly than we do for getting the right answer, the difference I believe is substantial and we all will pay for the push for speed. The nonpartisan (at least by reputation) Congressional Budget Office had a rather dim view of the stimulus -- in separate statements they predicted that the recession would end by 2010 and that the stimulus as written had more long-term downside than short-term upside. This does not suggest to me that the stimulus is the right answer, and so the "crisis" will continue. I predict that this crisis will not be declared to have come to an end until the political goals of our current overlords are well and truly met. There will always be the spectre of economic backsliding into recession to goad people into supporting the latest attempt to patch our societal and social dikes with money borrowed from the Chinese. I believe I've said it before, that when you hear "government spending" you should interpret that as "borrow from the Chinese".

If you need any more proof that this isn't the same country it was ten or twenty years ago, then I can't help you. In some ways it's good that this isn't the same country as it was in the past. Electing a minority man with a funny name as President is not the first way our country shows it's getting beyond racism, I believe it rather shows that we're well down the path. But part of the problem we're facing today is that our leadership is proving itself wholly unsuited to the tasks before it. This will not be the same country in 2012 that it is now, and will change further by 2016.

Richard Fernandez at Belmont Club (a great blog, you should read it) makes this point, along with Fabius Maximus (another great blog, if a little more depressing). If it seems like the world is changing, they argue, it's because it really is, and more fundamentally than at any point in my 40 living years. Chaos is taking the reins and we are in for some momentous times.

I only wish the crowd in the White House and House & Senate leadership appeared to be ready for the times. In their defense, I don't know that anyone could be, but there is certainly no lack of confidence from those quarters. They have the plan that will make it all better, fix all our woes -- um, pardon the language but the hell you do. The financial turmoil is beyond the ken of Barack Obama and Timothy Geithner. Their performances have demonstrated this convincingly. Quite frankly, decades of economic assumptions are unravelling at breakneck speed, and if the former New York Federal Reserve governor doesn't know the easy answer, then there isn't one, and Mr. Obama needs to quit telling us that he Has A Plan. He has assumptions, and even those are probably wrong.

People want to make this out into a "Bush vs. Obama" question, but that's not the issue. It is a gross simplification to assume that doing the opposite of the Bush Administration policies are automatically the right answer, the world is far more complex than that. The Obama Administration has its own set of answers -- and these will be wrong, too. The reason is that circumstances have exceeded the ability of the government to control, and the solutions that the Obama Administration and Democratic majority in Congress are applying are political solutions to economic problems. It's hard to blame them, they are after all politicians and it's natural for them to field a political solution, it's the only tool in their toolbox.

We have left the realm of realtively stable economic times and moved into the world of the fat tails, a reference to the Bell Curve and a situation where low-likelihood and high-impact events happen more often than they "should", it's exactly this kind of non-linear behavior that triggered the implosion of the financial world. Everything that has been proposed so far is demonstrably linear -- reviving old programs, pouring money in and expecting commensurate results, investing years into the future when we do not really know what the future will bring. I think that the government's actions are rational, but they are being applied to an irrational, chaotic situation where many of our basic assumptions are changing or about to change. How successful is that likely to be? The rate of success lies in the ability to predict the question that you're trying to answer, if the economy is a game show the stimulus package is punching the button on Jeapordy and giving Alex Trebek your first ten answers without hearing the questions. That's not the kind of change I can believe in. The fact that Obama says the word "change" does not mean that he's ready for it on this scale, and the Back-To-The-Future stimulus bill only reinforces to me the folly of old school solutions for new and novel problems.

The conceit of the day is that our government's fiscal and monetary policy will shape our world during this time of change, and it is a only conceit, not a plan. Normally I wouldn't mind watching a liberal and borderline socialist go down in flames, but this particular liberal happens to be the President of my country and the bet he's making is with my (real) tax dollars and those of my kids. The well from which our government can draw resources is much shallower than the Obama Administration seems to believe it is, things will go south quickly when we can no longer sell debt to foreign countries. This is not a time to centralize power, whether economic or political power. It's a time to allow flexibility, to allow individuals to change their circumstances to match the changes that occur.

I'm pretty sure that the tax burdens implied by the huge price tags on the stimulus, the House appropriations bill, the huge 2010 budget to follow, TARP II and the nationalization of healthcare (not to mention the nationalization of banks) are not what is meant by giving the American people "flexibility". It's just the wrong road, and we're already passing through a period with a lot of quakes. I don't know that anyone else could do a better job, but there are plenty of people who could be more humble. People who could admit that fixing our economic problems is beyond the ability of the government, rather than proposing government spending that increases the size of the government.

I'll be honest. I'm reflecting more and more on each day on the things I enjoy about my life, because I'm pretty sure things are going to really, really change. I wonder when my grandparents realized that things were going to get bad and stay bad for a while back in the late 1920s and early 1930s. I see this time as a twilight. I don't know how long it will last, it may me months or even a few years, but the big drop on the rollercoaster feels like it's coming.

And I haven't even read Atlas Shrugged yet.