Living in Tim Pawlenty’s Fantasyland

As we get ever closer to the 2012 primary season, I’m watching the GOP Presidential campaign with a growing sense of amusement. The announced candidates and the unofficial contenders are so profoundly unserious that I have a hard time believing they mean half of the things coming out of their mouths.

Still, words have consequences, and it looks like the GOP Presidential hopefuls are now in a mad dash to the Right in order to win over the Tea Party crowd. This leaves little hope for a moderate candidate in this race.

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Tab Sweep – August 2009 Edition

I’ve been reading of great articles on the web lately, and I thought I’d share some of the best with you, my dear readers. Enjoy.

  • Totally Wasted – Mother Jones’ epic special report on the War on Drugs. Damning evidence that our country needs a major shift in drug policies.
  • The Great American Bubble Machine – Rolling Stone magazine takes on Goldman Sachs and shows how it turned the U.S. into its own personal pump-and-dump scam to create pure profits for already wealthy individuals. I still get angry just thinking about this one.
  • How American Health Care Killed My Father – If you read only one article on the health care system, read this one. David Goldhill does a deep exploration of the health industry and shows why the current proposals for reform will serve to cement our broken system in place. Please – read this article.
  • Getting Real About the High Price of Cheap Food – Time magazine’s take on the hidden costs of America’s cheap food is a great introduction to the topic. For further reading, I recommend Food Inc and Michael Pollan’s books.
  • Fiji Water: Spin the Bottle – If you’re a fan of Fiji Water, you might not want to read this one. Because once you find out you’re supporting a military dictatorship, you probably won’t want to buy another bottle. Update: Via the comments, Fiji Water has issued a response to the Mother Jones article I linked to that is worth reading (as are the comments on that page).

Is North Dakota the Recession’s Big Winner?

Last night, Marketplace had a great story about the strength of North Dakota’s economy in this recession. In short, our state is thriving right now:

What is happening is a combination of planning and luck that’s left the state with something rare these days: a $700 million budget surplus and a big fat tax cut. Its banks mostly avoided the subprime mess, and North Dakota worked to bring in more businesses like Microsoft. Then, prices went up quickly for the state’s traditional strengths — energy and agriculture.

So now with thousands of jobs available, North Dakota officials have been traveling out of state to try to fill them. Jerry Chavez heads a development corporation for the small city of Minot. Since the beginning of the year, his group has been making monthly visits to job fairs in hard-hit Midwestern communities.

You can listen to the whole story below.

North Dakota’s unemployment rate for June 2009 was 4.2 percent – the lowest in the country. As of July, there were about 9,000 job openings throughout the state. Granted, many are retail and food service positions that don’t great pay or benefits, but there are plenty of good ones in government, manufacturing, and especially, energy.

It’s now clear that North Dakota’s slow-and-steady growth rate during The Bubble was a blessing in disguise. Combine that sustainable growth with growing demand for alternative energy (wind, ethanol) and commodities (oil, coal, natural gas, grain, etc.)  and I think North Dakota has the opportunity to emerge from this recession stronger than ever.

As for that $1.2 billion state budget surplus – let’s just not ask too many questions about where that came from…

Cascading Failure

As I watch our country slip deeper and deeper into economic depression (yes – this is a depression, like it or not), I often wonder how bad it’s going to get, how things will look on the other side, what will finally get us to the other side, and what this all means in the long run.

Short answer: Like everyone else, I have no idea.

Longer answer: Keep reading.

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The Future Will be Decentralized

onions2 uploaded by docman on June 13, 2005

More and more, I’m beginning to think that our success as a nation – and as a species on this planet – depends on us looking back to our ancestors for wisdom and insight for survival. And, I think that will lead us to one overarching theme: Decentralization.

As the human race became more modern and industrialized, it optimized almost every for low cost by pursuing “economies of scale”. Which means, in a nutshell, that it makes more economical sense for a small number of large firms to produce something than for lots of small ones to pursue the same goal. The market seems to have this embedded as a form of Darwinian survival of the fittest – weak, poor performing companies fail, while the successful ones grow until there is either a natural monopoly or, more likely, an oligopoly.

You can observe this in practically every industry. It’s why we have Microsoft, the Big Three automakers, and Walmart. It’s also why we now have an infinite number of niches that monopolized by an infinite number of businesses. Anyone for high-end discount (Target), organic groceries (Whole Foods), or technology books with cute animals on their covers (O’Reilly Media)?

One of the problems with concentrating too much market power in the hands of a few companies is one we witnesses just a few months ago with American banks- the Too Big to Fail phenomenon. Which actually means, as we’ve seen, that these huge corporations are not so big that they can’t fail, but that they’re too big for us to let fail. Hindsight now tells us that we shouldn’t blindly trust the market leaders of any industry, be it banking, automotive, retail, food, or energy. In other words, no business should be too big to fail.

Other, different examples of the perils of centralized power can be seen in the energy and food industries. Sure, it costs less to produce both of these in a few big spots (power plants, feed lots, etc.), but it creates plenty of problems too. Fewer, bigger power plants increase the chances of a catastrophic outage that affects large numbers of people and larger feed lots, slaughterhouses, and food plants exponentially increase the chance that food-born disease is spread to lots of customers in a large geographic area.

Less obvious are the transportation costs. Moving large amounts of grain and livestock hundreds or thousands of miles isn’t cheap, nor is shipping back the processed meats, breakfast cereal, or produce. Same goes for electricity. More energy output is required to transport it over longer distances, since resistance gradually reduces the available power.

To me, this all points to a move back toward decentralization. More, smaller power plants closer to consumers – including at the building level itself with solar, wind, geothermal, cogeneration, and other power generation technologies. For food, it could mean the return of small farms that grow a variety of livestock and crops, a flourishing local market, and possibly a vegetable garden in everyone’s backyard. It could also mean the return of machine shops and a real manufacturing industry in the USA.

Decentralization isn’t necessarily the low cost way to organize a system, but what it lacks in monetary savings it makes up in flexibility and the ability to survive a catastrophic failure. Taking Google’s various services as an example, it hosts everything on multiple server farms, each containing hundreds or thousands of individual servers. One or a dozen servers can (and sometimes do) fail at any given time, but because their system is so widely distributed and redundant, it doesn’t matter. Failure is isolated, and the damage (if any) is limited.

So, in the future, we might need to start becoming generalists again out of necessity. The days of just accountant will be gone, replaced by accountant, farmer, energy producer, and more. In other words, the Maker/DIYer will be King.

The Pragmatic President

Barack Obama Terrorist Fist Jab You may have sworn off politics for awhile after the extremely long election cycle that just ended, and I wouldn’t blame you if you did. If you do have any interest left in the subject though, I highly recommend setting aside some time to read through Newsweek’s epic seven part series, titled Secrets of the 2008 Campaign.

No Drama Obama

The parts about the Clinton and McCain campaigns were interesting, but I was continually struck by Obama’s evenness and discipline. His campaign reflected his refusal to dwell on the media flare-up of the day or engage in short-term tactics that would undermine long-term goals. And when it was appropriate, he engaged and embraced instead of ignoring and minimizing. From chapter 3 of the Newsweek article on addressing the Reverend Wright controversy:

Wright’s rants needed to be answered. But how? There was no great internal debate within Obama’s staff, in part because no one really knew what to do. But Obama did. Although, back in November, he had breezily told Donna Brazile and her “Colored Girls” group that he would not bring up race, in fact his own search for his racial identity was central to his being, and he knew that sooner or later he might have to broach the subject with voters. For several months, he had been thinking about giving a broader speech on the subject of race, and now the moment had arrived. Obama had his own sense of timing and purpose. He knew that Wright’s remarks could stir racial fears that could become a cancer on the campaign unless some steps were taken to cut it out, and that he was the only one skillful enough to attempt the operation.

Obama the Reflective

I am also impressed by how self-ware Obama is – how well he knows himself:

In late May 2007, he had stumbled through a couple of early debates and was feeling uncertain about what he called his “uneven” performance. “Part of it is psychological,” he told his aides. “I’m still wrapping my head around doing this in a way that I think the other candidates just aren’t. There’s a certain ambivalence in my character that I like about myself. It’s part of what makes me a good writer, you know? It’s not necessarily useful in a presidential campaign.”

I’m almost finished listening to the audio version of Barack Obama’s first book, Dreams from My Father, and will say without hesitation that he is an amazing writer. Written before he began his political career in Illinois, Dreams is honest and revealing in a way that a sitting or retired politician could never be . And listening to him tell the story of his childhood and the search for himself through the lens of his recent Presidential victory is a unique experience.

Obama the Pragmatist

Since winning the election just two weeks ago, it has become increasingly clear that, despite the claims of his harshest critics, Barack Obama is a political pragmatist. He holds a liberal philosophy, sure, but his political history – and now his cabinet and staff picks for his administration – show that he’s more interested in getting stuff done instead of fighting political battles and clinging to an ideology. See also: Joe Lieberman.

Earlier this year Obama brought up the possibility of a Team of Rivals cabinet, and it appears that he’s pursuing that strategy right now with Hillary Clinton as Secretary of State and the possibility of several Republicans on his team too.

Most recently in his 60 Minutes interview this week, Obama talked of a similarly pragmatic approach to addressing our country’s economic crisis (emphasis mine):

Two points I’d make on this. Number one, although there are some parallels to the problems that we’re seeing now and what we say back in the ’30s, no period is exactly the same. For us to simply recreate what existed back in the ’30s in the 21st century, I think would be missing the boat. We’ve gotta come up with solutions that are true to our times and true to this moment. And that’s gonna be our job. I think the basic principle that government has a role to play in kick starting an economy that has ground to a halt is sound. I think our basic principle that this is a free market system and that that has worked for us, that it creates innovation and risk taking, I think that’s a principle that we’ve gotta hold to as well. But what I don’t wanna do is get bottled up in a lot of ideology and is this conservative or liberal. My interest is finding something that works. And whether it’s coming from FDR or it’s coming from Ronald Reagan, if the idea is right for the times then we’re gonna apply it. And things that don’t work we’re gonna get rid of.

Optimism

It’s possible I’m being a little too optimistic with my thoughts here. Maybe Barack Obama will reveal the socialist/communist beliefs that some suggest he holds, and we’ll soon be nationalizing banks and insurance companies and giving away money to Wall Street and Detroit automakers. What’s that? That’s already happening?

So anyway, I’m cautiously optimistic about the incoming administration. I know there will be mistakes and disappointments, but Obama seems to be working toward a good start.

What To Do About Detroit?

Car Fire - Vehicle engulfed in flames uploaded by 7mary3 on January 1, 2007

Update on Nov 18 @ 9:30am: Jonathan Cohn at The New Republic makes a good case for an auto bailout with conditions. Without one, Chapter 7 (liquidation) might be Detroit’s only other option.

I’m deeply torn about what our government should do about GM, Ford, and Chrysler – a fact that doesn’t sit well with my Conservative sensibilities. I’m a big believer in creative destruction and Darwinian-style survival of the fittest when it comes to business, and it does seem that the American automakers simply cannot compete with Japanese (and now Korean) car makers. Still, I foresee VERY BAD THINGS if these companies are allowed to fail.

Point: U.S. Automakers Have Been Dying for Decades. End the Misery Now.

Spending billions on Big Auto now will only delay their inevitable bankruptcy. Let them fail and then restructure under Chapter 11 to rid itself of the monkeys on its back.

Ford, GM, and the privately held Chrysler are stuck in a very bad place. They are victims of brainless management who couldn’t innovate their way out of a box. At the same time, these companies are tied down by union labor costs and obscene legacy obligations (pensions and retiree health care) that put it at a severe handicap compared to foreign automakers. This, in turn, forced them into decisions which have further lead to their decline, as Megan McArdle so excellently put it:

Management has made a lot of mistakes. But making big cars wasn’t one of them. That’s because they couldn’t profitably make small cars in the United States. And the reason they couldn’t is that their labor costs were too high. All in, Detroit was paying about $30 more an hour than other companies to make cars. At that kind of differential, you have to concentrate on large cars with big profit margins, not economy cars where consumers fight to save $15 on the headlight bezels.

So, to sum up this argument: Let Detroit implode. They’ll restructure and continue to make cars, and someday they’ll be stronger and more competitive than ever.

Counterpoint: Letting the Big Three Die Would Devastate an Already Bad Economy.

The rust belt states already have some of the highest unemployment rates in the country. The three American automakers directly employee over a million people. Factor in part suppliers, car dealers, and other related jobs, and something in the neighborhood of three to seven million jobs. Given, not all of those jobs are in Michigan, Ohio, and Indiana, but the bulk of them are, and a sudden loss would accelerate the death spiral in those states.

Also, a bankrupt automaker would find itself facing a very skeptical market. Unless there are some very explicit guarantees put in place, customers are going to think long and hard about buying a $20k+ vehicle when there’s a good chance its maker won’t be around to honor the warranty and provide parts and service. From a New York Times article today (emphasis is mine):

A study of 6,000 consumers last summer by CNW Marketing found that 80 percent of them said they would switch companies if G.M. or Ford filed for bankruptcy protection in the United States, suggesting that only G.M. loyalists would stand by the automaker.

Practical Solutions?

If our economy weren’t already in crisis, I’d be inclined to let the Detroit automakers declare bankruptcy, rid itself of its baggage, and come back leaner and more competitive. But given that this is not our reality, I think some sort of infusion of bailout money is necessary. I believe it would be a huge mistake to give them a blank check without any oversight or restrictions (see also, the Wall Street bailout).

This week Thomas Friedman proposed what I think is a responsible and pragmatic model for a Detroit rescue plan. From Paul Ingrassia, he takes the following suggestions:

In return for any direct government aid, the board and the management should go. Shareholders should lose their paltry remaining equity. And a government-appointed receiver — someone hard-nosed and nonpolitical — should have broad power to revamp GM with a viable business plan and return it to a private operation as soon as possible. That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. After all that, the company can float new shares, with taxpayers getting some of the benefits. The same basic rules should apply to Ford and Chrysler.

Friedman also adds one other qualification:

Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.

Separately, former CEO and Vermont Transportation Secretary Tom Evslin made a novel suggestion that makes so much sense there’s no way it would ever be implemented:

The US government should order a complete replacement for its vehicle fleet to be delivered over the next four years. The new vehicles must be either plugin electric hybrid, pure electric, or possibly natural gas. Obviously retooling both at the manufacturers and suppliers is required to deliver this order so the government should be willing to prepay a significant part of it as it does for new weapons systems. That gets money into the system fast and creates/saves jobs almost immediately. It lets the suppliers retool as well as the final assemblers.

Pessimism

Sadly, I don’t have any hope that meaningful concessions will be demanded of the American automakers, or that the bailout will be a integral component of a comprehensive national energy/infrastructure project. Instead, it’s probably going to look exactly like the bank bailout and be exactly as effective. Which is to say, it won’t be.

Feeding the Monster (or, The End)

Wall Street Collapse

Update @12:30pm: I also recommend reading The New Trough by Naomi Klein on the Rolling Stone website.

The more time passes, and the more that I learn about America’s crumbling financial system, the more I think maybe we should just let it all burn. You know, start over from scratch.

Last month’s “rescue” plan – which I publicly supported given the dire circumstances – has done little to ease the credit markets because banks still aren’t lending to each other. Instead, the geniuses running these failing companies are using taxpayer money to merge with other troubled banks, give massive bonuses to executives who did nothing to deserve them, and fund hugely expensive executive “junkets” at exclusive resorts. The phrase “pissed off” doesn’t come close to describing how angry this makes me.

Via a Twitter post by Tim Bray, here’s your latest must read: The End of Wall Street’s Boom, by Michael Lewis. Michael, a Wall Street veteran of the excesses of the 1980’s, writes at length about a hedge fund manager named Steve Eisman – one of the few people who saw the anticipated the collapse of subprime mortgages and placed bets that their lenders would go bust.

Eisman’s revelations are both infuriating and depressing. The people running and working at the lenders and ratings agencies were some combination of naive, stupid, and evil. They created financial derivatives so complex (and backed up by almost zero assets) that nobody completely understood how they worked or their potential for disaster. They didn’t know what they were doing, but were so blinded by greed that it didn’t matter. And now everyone has to pay for it.

I believe a lot of people are to blame for our country’s current economic mess – gullible borrowers, greedy housing speculators, complaisant government officials. But none of these groups come anywhere close to Wall Street’s role. Fools or crooks, they are largely responsible.

The Republicans Are a Sad, Pathetic Political Party

Republicans Are Crashing
I was in the process of writing a long-ish post about why I’m voting for Senator Obama next month, and who knows – maybe I’ll still finish and publish it. But if you want a good idea, just go visit The Corner on the National Review Online site. The amount of pettiness, paranoia, and hate filling that page is simply appalling.

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Staring Into The Economic Abyss

I don’t know about you, but I’ve been riveted to the news the last few weeks as we watch our economy self-destruct. If you’re going solely by anecdotal evidence, or by watching the stock market indexes, things might not seem all that bad. But, if you start digging into the subject in-depth, you begin to realize just how scary our nation’s current economic problems really are.

The United States, and now Europe and other parts of the world, is very close to seeing a total freeze of the credit market. This affected just banks at first, but is now spreading into “main street”, as politicians and the media have taken to calling the rest of economy. Already, some big corporations can’t borrow money to build new factories or to buy equipment. This includes GE and McDonalds – not exactly who you would consider high-risk companies. Without intervention, this is likely to spread even further to small businesses and individuals – even those with perfect credit.

Right now, nobody knows what a given bank’s mortgage-backed assets are worth – even the banks themselves. So, everyone distrusts everyone else and refuses to lend them money in the event they are a cesspool of worthless mortgages This is, fundamentally, what the economic rescue/bailout plan is intended to address. If banks can unload their uncertain assets, trust should be restored, and it’s much more likely other banks will lend to each other. In theory, this prevents the crisis from spreading into the larger economy.

I understand people’s strong opposition to using taxpayer money to buy up bank’s bad assets. It’s not our fault, and it doesn’t seem fair that we should have to pay for their mistakes. There have been many calls to simply let bankruptcy take its course and let let free market forces take care of the problem “naturally”, but as I told one of my friends last week: we are now well past that point. Failing to head-off this credit crisis would be catastrophic. Talk of real economic depression wouldn’t be out of the question. Everyone needs to understand that.

The revised plan that was passed by both chambers of Congress and by the President last Friday is far from perfect, but it’s a start. I have no doubt that it will be revised and adapted as the conditions change. And while there’s no question that $700 billion is an enormous amount of money, it’s far less than what our nation could lose if a financial apocalypse takes place.

If you’re interested in learning more about what are likely the most important events since at least September 11th, 2001, I’ve got a couple of good places to start. First, check out last weekend’s episode of This American Life: Another Frightening Show About the Economy. If you read/listen/watch to only one thing on this crisis, please listen to this. It’s embedded below for those visiting my blog, but you can also listen to it on their site or on your iPod. I also recommend an episode from earlier this year (The Giant Pool of Money), that gives one of the best descriptions of the housing bubble I’ve ever heard.

In addition, the New York Times has a special series on the financial crisis called The Reckoning that explores the causes of the current mess.

Even if business, finance, or economics isn’t your thing, this crisis is too big and too important to ignore.