After the revolution – Notes to Brad Delong

One problem that revolutionaries have is that they often are the last to be able to adapt when the revolution happens.  I’ve been reading Brad Delong’s blog, and it’s gotten less interesting since he is still bashing Republicans when they really don’t matter much to the health care debate.  The big battles are between “Business Democrats” and “Progressive Democrats” with Obama being a “Business Democrat” and the “Progressive Democrats” being the opposition party.

What basically happened in the 1980’s until 2008 is that Reagan put together a coalition of big business, religious conservatives, and Cold War hawks, and that coalition lasted until 2008 when it totally broke apart.  After the Cold War, the hawks became neo-conservatives, and the Iraq war destroyed them.  The other big realignment is more interesting.  After the crash of 2008, there was a huge shift in the interests from big business from the Republicans to the Democrats.  If you want to understand the current debates, follow the money…..

http://www.opensecrets.org/

Look at who the insurance companies, big pharma, and banks have given money to.  It’s not the Republicans, and so the current health care debate is basically an argument within the Democratic Party.  It’s even more striking if you look at the trend numbers.  Through out the 1990’s and up until the last election, business interests were overwhelming Republican.  Now the split is 55-45 favoring Democrats.

This also explains why the Republicans seem “nutty” to anyone that is on the outside.  As long as you had the Reagan coalition, you had different people, and so the Republicans had to appear “not nutty” to get the support of different groups.  If you have a small group of ideologically similar people, they are going to appear weird to outsiders.  In 2000-2006, the Republicans had an incentive to look “sane”, but right now they don’t.

After the Great Obama Realignment

http://delong.typepad.com/sdj/2009/08/todays-must-read-ezra-klein-health-care-is-not-a-negotiation-but-a-campaign—-the-liberal-revolt.html

The Republicans at this point have become irrelevant. The real argument within the Democratic Party between the “Rubin Democrats” and the “Nader Democrats.” Right now you have the White House for the most part run by “Rubin Democrats” and the “Nader Democrats” are the opposition party. Ronald Reagan created a coalition of the religious right, corporate and financial interests, and Cold War hawks. Obama destroyed that coalition.

The big shift in the last election was that corporate and financial interests basically gave up on the Republican Party and voted Democratic in a big way, which means that the only people left in the Republican Party are fanatics, which can make a lot of noise, but are otherwise irrelevant.

The big debates in health care are between various groups of people within the Democratic Party. The Republicans aren’t part of the equation at all.

Hedge funds not going boom

One thing that is interesting about the mess on Wall Street is how hedge funds didn’t go boom like they did in 1987.  There are reasons for this, the main reason of which is that hedge funds are nowhere near as leveraged as they were in 1987, and without leverage, it’s less likely that you will end up with a financial crisis, and much, much less likely that you will end up with a financial crisis quickly.

The interesting thing is why hedge funds are less leveraged, and a lot of that has to do with prime brokers that lend hedge funds money.  Prime brokers are a lot less willing to lend hedge funds large amounts of money sight unseen than they were when Long Term Capital Management blew up, and the main reason for this is that the prime brokers are overseen by government regulators such as the Federal Reserve and the SEC.

Now the world seems to be saved for the moment, and we start turning over to what worked and what didn’t, and what sort of regulatory scheme that we need, and I think one thing we need to look at is how hedge funds generally didn’t manage to blow up.

Whew

Had a bad evening last night when it seemed that the bailout bill was falling apart.  Fortunately it looks to be like your standard political mess.  Once thing that is somewhat both refreshing and scary about the bailout bill is that this is the first time in a long time “real politics” has made it to the front pages of newspapers.  Usually what ends up in newspaper is just “show” in professional wrestling terminology, where the only thing presented is very carefully tweaked image.  But this week because time was short, we actually got to see the real legislative process in action in all of its messy detail.

One of the more bizarre things was that Charles Krauthammer actually wrote an editorial which I thought was very well thought out and which I agreed with.  I can feel hell freezing over.

Anyway, the big boss where I work came in for a “let’s celebrate that we made it through the week” gathering and ordered everyone to relax for the weekend, which I can do since it appears that the world will not end next week.  Since the world will not end next week, I’ve been trying to think what this means for the months and years later.

One cool thing is that no one knows.  No one knows since everything is still a work in progress.  Things are going to be massive torn down over the next few months and built up.  It’s going to be interesting to see what gets created and to be a part of that creation.  One thing that I consider pretty amazing is that given how close we came to total financial meltdown, how little this disruption has spread to the rest of the economy.   But I’m pretty sure that New York City will come out well from this.

Freddie and Fannie and the End of the Era of Humiliation

There’s been lots of talk about the Freddie and Fannie bailout in financial terms, but no one has talked about the implications of the bailout in terms of world history and global politics.

http://www.nytimes.com/2008/09/08/business/08fannie.html?hp

I think that we can declare the end of the the “Era of National Humilation” for China with the Olympics and the problems that the US faces in the mortgage market.  History hasn’t ended but a lot of the operating assumptions that people have are changing.  There are two big changes that the Freddie Mae and Fannie Mae bailout has made.

1. The United States no longer has an economic model or ideology to export to the world. Starting with the 1980’s, the United States was exporting an economic model which was based on privatized markets and minimal government intervention.  The Reagan-Thatcher model was based on reducing the role of government in the economy with the belief that “big government is the problem.”  With the Freddie Mac and Fannie Mae, that model is dead.  You can’t have the Secretary of Treasury basically fire the heads and board of directors of private companies, and essentially nationalize such large mortgage securitizations comes, and talk about non-interference in markets. Now one can argue that the basic problem was due to excessive government intervention in the markets, and it would have been better had the government not created the GSE’s in the first place.  Maybe.  But societies are imperfect, and what you have a mess, then you need a government to come in to prevent a catastrophe.  Even if the only role of the government is to act as undertaker and pick up the pieces of a dying company, that still is a huge intervention in the economy.

What’s interesting about the Fannie Mae and Freddie Mac bailout is that there is now no clear roadmap for what happens next.  Ideology fails us, because we are seeing something that ideology says is impossible, and once the impossible happens, it’s hard to figure out what to do next.  I suspect that there will be a lot period of trial and error, of experimentation, and of “crossing the river by feeling the stones.”

2. We can no longer assume that the economic system of the United States is automatically better than the economic system of China. There are both good things and bad things about the state of the US economy and the state of the Chinese economy.  China has huge problems with its banks and financial system, but we can no longer assume that those problems are worse than whatever problems exist in the US economy.  Sharing experiences and learning from your own mistakes and other people’s mistakes is a good thing.  However, we are longer at a point in which the United States can speak about economic and financial matters with unquestioned moral superiority, and we can no longer simply assume that the Chinese economy has worse problems that the US economy.

Eras come and go, but history doesn’t stop and when times change, there are always new challenges and difficulties.  The two new challenges in particular.

1. China needs to avoid arrogance and assuming that it has moral superiority. We can no longer assume that the United States economy is better than the Chinese economy, but assuming that the Chinese economy is better than the United States economy than the  is an equally serious mistake.  Victory leads to overconfidence and arrogance which leads to defeat.  This is particularly a difficult situation to deal with when you have a new generation that has only seen victory and never felt humilation.  The hard work and tragic sacrifice that lead to victory are forgeting and people start thinking in terms of destiny.  It’s important to realise that an era has come and gone not so that you can declare a permanent victory, but to recognize that yesterday’s problems are no longer important to look forward to solving tomorrow’s problems.

2. The United States needs to limit the ideological damage to economic ideology. When the impossible happens then everything starts to be questioned, and one thing that I worry about is that the fact that the United States no longer has an economic ideology that it can export will lead to questioning of the political and legal ideas that it has which I think are still valuable.  United States banks and mortgage securitization companies look bad, but its courts and Constitution still looks good, and so the United States needs to prevent those institutions and ideologies from being damaged.

I have always believed that it is a mistake for the United States to try to promote democracy and rule of law by lecturing to the Middle East and China.  The best way that the United States can promote democracy and rule of law is to completely ignore what happens in the Middle East and China and make democracy and rule of law work in the United States.  If you make democracy and rule of law work in the United States, you don’t need to say anything but just lead by example, and people will naturally follow.  The collapse of the credit markets is not a particularly serious problem for the political system to solve, and I think it is important for promotion of democracy that the United States just roll up its sleeves and just fix the problems, which I think it is going to do.

There is a lot show and theater in politics and people spend a lot of their time screaming at each other over issues that aren’t that important because they aren’t that important and you can scream at each other about them.  It’s interesting how both parties have reacted to the bailout of Freddie Mac and Fannie Mae by not trying to score political points, and this is because everyone knows how deadly serious this is.  A nation’s power is based on its financial system and if people mishandle the GSE situation, it could destroy the United States as a global superpower and wreck the world economy, and I think everyone in the political realizes this.  So it’s nice to see that when politicians really have to act like adults, they can do it.

How Biofuels Could Starve the Poor… Not….

http://www.foreignaffairs.org/20070501faessay86305/c-ford-runge-benjamin-senauer/how-biofuels-could-starve-the-poor.html

http://blogs.cfr.org/setser/2008/06/05/really/

Personally I think that the Runge and Senauer paper is non-sense. It ignores the fact that most people in developing countries are food producers (i.e. peasant farmers) and not food consumers, and so that rising food prices are a *good thing* since they will be able to sell their crops at a higher price.

High food prices do hurt the urban poor, but since the urban poor are the first to riot, developing world governments tend to keep them busy and well fed.

One might want to read “The Road to Hell: The Ravaging Effects of Foreign Aid International Charity”. The book argues that food exports to the developing world are generally a bad thing, since they leave the developing world dependent on agri-business and also put lots of farmers out of work. One should note that the policy agenda of the developing world at the WTO has been to get developed countries to *reduce* subsidizes for agricultural production.

This has some impact on Chinese decision making. One thing that I’ve noticed is that the Chinese government doesn’t seem to be making food inflation a huge priority and that is largely because by letting food prices rise and fixing prices of oil and fertilizer, you have wealth going into rural areas which is the number one priority of the Chinese government.

One other thing this points out is how complex economic decisions really are.  One thing that I’ve noticed is this generalization in which you point out how biofuels are hurting some poor people and from these situations one assumes that biofuels and high food prices hurt all poor people, which they don’t.  If you are a poor urban dweller, then yes high food prices will hurt you.  If you are a poor farmer, then high food prices will help you.

One thing I do before I write something is to do a quick google to do a fact check, and the nice thing about doing this is that I usually learn something new in the process.  For example, the reason I wrote some of this was because I was reading in Bloomberg magazine about the riots in Haiti over higher food prices, and how this proves that biofuel subsidies are destroying to poor of the world.  So to justify my statement that most poor people in the world are farmers, I did a quick google check, and what I found was quite interesting.  Most poor people in the world are farmers, but I was struck at how different the economies of the world were from each other.  For example, most people in China, India, Mali, and Mozambique are farmers, but most people in Peru, Algeria, and most significantly Haiti, aren’t.

Here is a map that I found….

http://www.fao.org/es/ESS/chartroom/gfap.asp

One thing that this does tell you is how extraordinarily different the economies of different places are, and how generalizations about things will or won’t work have to be made very carefully.

Why bureaucracies win….

Being an “angry youth” at a demonstration is quite an experience.  You are full of youthful energy and idealism uncorrupted by real world experience.  You think you are going to change the world, and sometimes you just might.

The problem with passion and energy is that it quickly burns itself out.  After a month of demonstrations, you just want to get some sleep since changing the world is just plain exhausting.  At this point the bureaucracies start to win, because bureaucracies are slow, plodding, and boring, but they don’t get tired.  In a bureaucracy, you come in, you write reports, you file papers, and then you leave.  This is why bureaucracies are so effective.  They don’t get tired because they don’t get emotional.

To quote the fictional Star Trek character Khan Noonien Singh

“Improve a mechanical device and you may double productivity. But improve man, you gain a thousandfold.”

What Singh misses is that if you improve the relationships between people who can improve productivity a million-fold or destroy it all together.  There is a story about Lu Xun in which he was studying to be a doctor and then saw a film in which Japanese solidiers were executing Chinese, and then became a writer because what was the point in saving lives as a doctor if you could save thousands as a writer.  That sort of enters my thinking which is why I’ve ended up spending a great deal of time studying bureaucracies and being a bureaucrat myself.  The worst serial killers in the world can kill dozens of people by themselves, but put one in charge of a bureaucracy and tens of millions of people die.  But it works in reverse, a doctor can maybe save hundreds of lives, but an efficient healthcare bureaucracy can save tens of millions.

A one paragraph summary of the Bush administration

Part of the grand bargain that happened in 2004-2007 was mainly not to overturn agreements and understandings that had been made earlier. In the 1940’s, Roosevelt came to some understandings with King Saud and Chiang Kai-Shek. In the 1970’s, Nixon and Kissinger came to some understandings with OPEC and Chou En-Lai. Bush the younger came in with a domestic and foreign policy agenda that involved revolutionary change. He wanted to vastly reduce the size of the US Federal government while at the same time making the world safe for democracy which would have involved eventually overthrowing the House of Saud and the Chinese Communist Party and replacing them with liberal democracies. Iraq was merely the first step in the global march of freedom. The trouble was that what they were doing made no economic sense, but the people making these plans weren’t listening to anyone with any economic sense. By 2005, it became pretty obvious that all of these massive plans were coming to nothing, and at that point the Bush administration changed their policies to go back to the understandings that had been reached in the 1970’s.

http://www.rgemonitor.com/blog/setser/252597/

Keep your enemies close but your friends closer

One problem with the idea that “we are good and you are evil” approach to politics is that it ignores that fact that there are a lot of idiots on your side and some pretty smart rational people on the other.  There is the “traitor reflex” that when people suddenly get nationalistic it’s easy for people that call everyone else “traitors” to gain attention even if they can’t really get power.

Fortunately, in the case of China, the “call everyone traitor” group gets a lot of internet exposure, but they aren’t in a position to get power.  It seems that the Chinese government is calling on people to be “rational” which also fits in with the fact that it’s really, really difficult to sustain anger and fury for long periods of time.  So we are probably on the tail end of the anti-anti-China demonstrations.

The classic example is the dangers of “idiot nationalism” is Serbia.  If you are a nationalist, then presumably you want your nation to be rich and powerful, and if you look at Serbia now, its much less rich or powerful than it was in the late-1980’s.

How to rule the world

I’m actually getting a bit tired of talking about Tibet, so let me talk about something related.

How does a group manage to stay in power and end up ruling the world?

In the 19th century, there were two groups that were elites that managed to control their bit of the world. The Protestant Ascendency in Ireland and the Boston Brahmins in New England. No one hears about the Protestant Ascendency anymore (even in Northern Ireland, the Church of Ireland Ascenency lost control to the Prespertyerians that run it now), but it turns out that the ideological heirs of the Boston Brahmins managed to end up ruling the world.

The center of Brahmin power was Harvard University, and rather than fight the inclusion of new groups (like the Irish), the people running things came up with a new definition of “elite” that ended up incorporating any group that could possibility challenge them. Gradually, one ended up with an institution that ends up being one of the centers of power for the groups that rule the world.

Conspiracy theorists are right that the world is basically run by a rather small number of people (at most 10000 people on a planet of 6 billion). Where they get things wrong is they underestimate the ability of the people that run the world to get the cooperation of the remaining people in the world. Most middle class parents in the United States (and in fact most in China) are trying to get their kids in Harvard rather than trying to overthrow it. Also the most successful conspiracies are “hidden in plain sight.” Harvard has a website, with rather detailed instructions on how you can have your son or daughter join the people that run the world.