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Saturday, December 29, 2012

Most Democrats Should Want to Go Over the Fiscal Cliff

Hey, guys. I'm back. And 2 days before the New Year!

If Congress can't agree to a deal before the New Year arrives, then a few things happen all at once. The Bush tax rates get repealed, the sequestration budget cuts agreed to in 2011 kick in, and the new taxes on investment income from the PPACA (aka Obamacare) go into effect, and the payroll tax cut unwinds. This is known as the "fiscal cliff", a term popularized by Fed chief Bernanke in his frequent testimonies before Congress on the matter.

As President Obama likes to say, elections have consequences and his side won this November. He's seeking concessions on revenue and spending that the House Republicans are unwilling to give. And although it's widely expected that some form of "patch" will get hurried through to the President's desk before midnight on December 31st, it only forestalls the greater ideological clash: determining the size and scope of the government.

After the Republican Revolution gave Republicans control of the House and Senate for the first time 4 decades, President Clinton declared that "the era of Big Government is over" and then beat the Republicans at their own game of budget balancing and welfare reform. But now it seems like there are countervailing winds and Big Government seems, once again, to be back in vogue in the media, Capitol Hill, and the general public sentiment.

Given all of this, it should be revealing that the Democrats don't have any faith in their own economic ideology. The intellectual heart of the Democratic Party, the opinion pages of the New York Times, has frequently argued that the government needs to spend more and more money. And it needs to deficit spend more than ever to make up for the weak demand of the private sector.

If that's the case, then most Democrats should want to go over the fiscal cliff. Because it would raise more revenue for the government. And that means they have more room to deficit spend. Many Democrats are fond of trumpeting (that last one really isn't a Democratic source, but hey...San Francisco) that each dollar spent by the Federal government has a GDP multiplier of somewhere between 1.5-2 dollars.

Keynesian economics state that when demand is low in the private sector, it's up to the government sector to make up for it by spending a lot of money. If the government has more money, it can increase its deficit spending by the same proportion of revenue increases. The only political risks involved to the Democratic Party are electoral losses in the short term if government spending is unable ramp up quickly enough to offset the loss in private sector wealth.

In the long term, it's already been demonstrated that Federal spending never decreases. So Democrats will eventually get what they want, which perhaps explains the White House's intransigent negotiating position. Personally, I think both parties should go over the cliff just to see what happens, both in the short and long term. I wouldn't mind if the Republican Party goes into the political wilderness for a decade and we essentially had 1 party rule according to Democratic ideology.

When you half-ass government policy, it produces mixed results and whoever has the better spin operation lives to muddle through with a slight upper hand for the next election cycle. That is what's killing American dynamism. It's better to take your licks now and thrive later than to just muddle through.

Tuesday, December 11, 2012

An Unexpected Hiatus

I guess you guys have noticed that updates haven't been very forthcoming for the past couple of weeks. I've decided to suspend the blog for about 3 weeks to take a break. Right now I'm pretty busy with some things in my personal life and my willpower to write has been steadily slipping as we enter the holiday season , but once we're back in the New Year, I'll be back.

Until then, buy index funds and never sell. Oh, and fixed income is in a bubble.

Thursday, December 6, 2012

The Importance of Being Burnished

I was at a friend's Thanksgiving party about two weeks ago and one of my friends was talking about when he learned about the importance of being cool, calm, and collected when it comes to getting your point across. He was in college and talking about some issue about the Middle East with a friend. And as he kept talking, he grew louder, more insistent, and seemed on the verge of losing his composure.

He was around a few other friends and by the time they finished talking, everybody thought the other guy had won the "debate". It turns out that the other guy actually agreed with my friend, but he purposely played Devil's Advocate to troll my friend into rage and near-incoherence. It was at that point that my friend realized that it doesn't do him any favors by being louder, more insistent, or passionate than the other guy. It's about projecting an image of confidence and composure.

In the movie Thank You For Smoking (one of the most intelligent movies of the 20 aughts), there's a scene where the main character and his son are talking about debating. You can see the clip below:


It's brilliantly played by both actors and it reveals what debate is really about. Debating isn't about staking out a position in the sand and defending it to your dying breath. It's about establishing an opinion, throwing in some misdirection, and coming to a reasonable conclusion that is palatable to the audience, not the other debater. This is closest approximation of the mythical "happy warrior" that the chattering classes want in a politician: Defend your beliefs and go on the attack. But always do it with a smile and a laugh.

In other words, polish counts. There's a reason why doctors wear lab coats and lawyers wear suits. They're trying to project an image of confident, serene authority in matters of actual importance. It's why consultants are always better dressed than the hiring company's employees. It's harder to take advice from a person who looks sloppier than you. Your mind is subconsciously thinking "why the hell am I listening to this clown?"

On TV and in print, there are two proven ways of getting an audience. The first one is easier and much more degrading. Let's call it the "Glenn Beck method". Be loud and insistent and craft your argument in a way that appeals specifically to a certain demographic. This is throwing red meat to the base. Tell them what they want to hear and then redirect their enthusiasm (and anger) into the "enemy".

The second route is becoming less and less popular. Let's call it the "CNN method". Exude professionalism and knowledge and talk in a calm and measured voice. It's becoming less popular because CNN is declining in ratings. What they missed out on is that cable news isn't about staying informed. It's about being entertained. And a guy in a suit talking at you is much less entertaining than a maniac foaming at the mouth about some issue you care deeply about.

CNN still has a core audience: the world weary liberal. And that particular demographic is the decisive bloc of the Democratic Party. A Democratic column put it best: 
"...MSNBC had apparently called the race for Obama. The entire crowd exploded, a fireworks display of fist pumps and bro hugs, but still our attention stayed on Wolf Blitzer’s fuzz-beard. It may have been over, but we had waited all evening for CNN’s call and CNN’s call was what we wanted."
 Both parties have their useful idiots. On the Democratic side, it's black voters and union officials. The Republicans have the uber religious and white angry males. The useful idiots are there to provide your base of support. They're the people you want to target using the Glenn Beck method. Feed them red meat and keep them in the dark.

But once you have your base, you need the people who can provide the tipping point. And those people aren't low hanging fruit that can be persuaded by people like Glenn Beck. They need CNN. Right now, the Democrats have an electoral advantage because the traditional Republican electorate is shrinking while the traditional Democratic electorate is growing.

Our most recent Presidential election was not a blowout. It was decided by a margin of less than 4% of the electorate. But those margins will only grow if the Republicans keep doing what they do and the Democrats keep doing what they do.

But there is an opening for Republicans. And it revolves around CNN and the people watching CNN. Sooner or later, the Democrats are going to screw up and when that happens, their supporters will start to wonder what went wrong. And blaming opposition intransigence can only go so far.

And that's when you need the man in the suit with the calm and reasonable voice. What the Republicans need to realize (and what the Democrats learned a long time ago) is that statements aren't made in a vacuum anymore. What plays in Peoria isn't only heard in Peoria. It gets heard everywhere, especially if it suits the opposition.

Mitt Romney gave a speech at the NAACP during the campaign season. Privately, many Republicans were thinking "why bother?" But that is precisely what the Republicans need to do now. They need to walk into a hostile crowd armed with nothing but a smile, an argument, and a show of respect. Do it enough times, and they'll come over to your side at a moment when you need them the most.

Wednesday, December 5, 2012

Georgia Tech Wins!

On any other day (although that's not necessarily true, since there are quite a few days in which I don't write anything of substance), you would be reading an intelligently written and thought provoking piece on something related to economics, finance, politics, or culture.

But tonight, the Georgia Tech Yellow Jackets triumphed over the Bad Guys and I am unable to think of anything worth writing of. Check back tomorrow!

Tuesday, December 4, 2012

A Case Study in Short Term Bias

One of my friends smokes. He first got started when he was in an underdeveloped market when he was really bored (no internet access and an extremely unreliable electricity grid will do that to you) and found out that cigarettes cost about 50 cents a pack.

When he came back, he started to cut back on the habit. But he didn't quit completely. He would only smoke in social situations, and only with cigarettes that he bummed off other people. Then he started buying his own cigarettes. Went from 5 cigarettes a day to a half pack. Eventually he graduated to a full pack a day smoker.

The way he first started smoking is what really struck me. He was in a foreign country and was really bored. That just boggled my mind. My friend is not a stupid person. Quite the contrary. He's actually very intelligent. But he has very poor self control and apparently his intelligence does not extend to his own personal affairs. Because he's aware of the deleterious effects of smoking and he still does it.

This is a classic example of short term bias. Because any perfectly self interested person would not smoke. And if they were previously irrational and then suddenly turned self interested, they would strive to quit as fast as possible. Because smoking leads to debilitating and fatal diseases such as emphysema, lung cancer, and heart disease. Any person who cares about their life would simply not smoke.

But those diseases and conditions come later on in life. And there isn't a guarantee that a smoker actually gets them. There are a lucky few who can smoke like a chimney and never have those complications. But the benefits of smoking a cigarette in the present, the buzz, the nicotine, and the stress relief are immediate and guaranteed. So that's why smokers keep on smoking. Because they see an immediate benefit while the negative effects occur in the future.

I read a book called Gang Leader for a Day and it was about this Chicago School economics major who embedded himself in an inner city gang for a few years. And in one of the chapters, the gang leader is talking to the author and they're talking about whether it's smarter to buy drugs from a supplier with a discount now or in the future. The author says something like "well it depends on the difference between the immediate discount and the future discount. The gang leader replies with "no, you take the discount now. Because you don't know whether that dude is gonna be in jail or shot or something".

We're hardwired to think in the short term. While saving for the future or modifying your present behavior for future benefit (proper diet, exercise, studying, etc) are relatively new concepts, they are absolutely essential for success in modern society. But we put it off because it's always more immediately gratifying to view yet another lolcat meme instead of studying for a test that's two days in the future.

There are plenty of people who think the best way to educate our children is to immediately reward them for routine things like doing homework, getting good test grades, and attending class. Giving them an immediate short term benefit while also allowing them to gain the long term skills needed to function in the economy makes a ton of sense. It's sort of like tricking them for their own benefit.

This is what humans are programmed to do. And it's important for policy makers to consider our short sighted nature when they try and pass programs for our ostensible benefit.

Sunday, December 2, 2012

Noise in Preparation

Why is it that when two men fight a duel, one of them inevitably dies? I first encountered a variation of that quote in a fantasy series called A Song of Ice and Fire. Two members of the nobility, one a knight, the other a queen, were discussing matters of warfare. And the answer to that question is the ultimate differential between two civilizations.

In 19th century Japan, Commodore Perry of the US Navy forced open Japan to international trade on the strength of his fleet. When Japan's upper class saw what happened, they were determined to bring Japan into the modern world and were resolved into turning their country into one of the Great Powers of the world. What followed was a period called the Meiji Restoration.

During that period, the Japanese copied anything and everything about Western culture. They recruited Western businessmen, military officers, and political leaders to teach them the ways of the West. Ranging from things like military organization, technology, and even culture, the Japanese completely reinvented their society. Japan even adopted baseball as their national sport. Because their leaders were so unsure of what really made Western society superior to the traditional powers of the East, they wanted to copy everything in Western society. They even shed their traditional kimono for the traditional suit.

And it worked. 40 years later, Japan fought and decisively beat the Russians in the Russo-Japanese war. With their modernized army and strong internal economy, they were able to martial the resources, the weapons, and the men needed to overpower the Russian Empire in Korea and Manchuria. The Western powers took notice and grudgingly accepted Japan as a great power in the prevailing Westphalian system.

The real question is what was the real "secret sauce" that enabled Europe and the United States to completely dominate world affairs? In other words, what were the things that Japan had to emulate in order to become great themselves, and what were the things that they didn't really need to do. For example, it was probably unnecessary to adopt baseball and suits. But the technology, business organizational philosophy (Taylorism, in particular), and military training were probably indispensable in Japan's quest to become a great power.

Whenever two opposing organizations become locked in combat, one will eventually prevail. And then the postmortem begins for both sides (and independent observers). People will attempt to explain why one side won and why one side lost. But hindsight, in these instances, is not 20/20. Take for example the post-election analysis we currently see being churned out by the triumphalist media (who were in the tank for Obama from the very beginning). It's full of truisms, cheap shots, and jeering.

But the problem is that nobody can be proven right or wrong on the issue. You can't rerun the 2012 general election over and over again, change some inputs and variables, and then see the end result. You only get one shot at it. So when one side wins, they tend to believe that everything they did was necessary to push their candidates over the top. When reelection rolls around, the people riffling through their rolodexes are going to call upon the operatives and advisers of successful political campaigns.

It's why people like George Stephanopoulos and James Carville still have gigs on TV. They put Clinton over the top and Clinton was seen as the modern Democratic success story. His success casts an aura of success over the top advisers and operatives who worked on his campaign. So people will naturally think "those guys knew what they were doing and they probably know what's what now". Even if that's not really what happened.

In the book, the knight told the queen that sometimes it's impossible to tell what really causes one person to win a duel over the other. It could be the meal that they ate the night before. Or a wet patch of grass that one of them slips on. Or it could be that one is simply a better fighter than the other. But once the postmortem is conducted, the winners will inevitably conclude that it was mostly their skill and virtue that carried the day, even if it was mostly chance and circumstance.