Representing All Americans

A unfortunate tenet on the left and on some segments of the right, is to accept that the government can justly represent just a small slice of the electorate; one's supporters, or base, interest groups, and political allies. But the reality is that for there to be any true level of justice in our political system, our leaders must truly represent all Americans. They must design policies and laws with this fundamental principle at the forefront of their minds; because, while as a political system we believe in majority rule, we also have a strong commitment to minority rights. No in-group or out-group should be offered special privileges or unfair treatment. Every American should be treated equally under the law.

It seems like a relatively simple principle when stated in a succinct manner, yet unfortunately it is frequently and readily ignored by America's politicians. It is a staple of the Obama administration's political ideology. For those on the left it is more than simply appealing to their base or providing pork to associated special interests, but a deeply enmeshed belief that the government has a responsibility to treat individuals differently in certain circumstances. Government, from this perspective, serves to ensure specific outcomes, or at least push the outcome in the desired direction. Explicitly, it accepts the notion that a just government should focus on the end result, aiming to create some arbitrary notion of equality—an impossible and unjust task.

When Obama lauds his success, as he recently did at a United Auto Workers' conference, of "saving" the auto industry, this ideology is displayed in its most unflattering light. If one was the chairman (or czar) of the auto industry, he would surely applaud the preservation of his interests. An individual, in the role of autoworker or auto company owner, may be ecstatic at receiving special dispensation, tacitly ignoring both those that paid for their rescue and those who were not rescued. But receiving such perks of money, influence, or connection, however historically common it may be, does not make it the proper way our system should be run.

However the argument here is not about the economic efficacy of such policies—there are plenty of economic rejoinders that would challenge those that tout such bailouts as fiscally sane, which can be addressed elsewhere.^[1] What is at question is the ideology that the government has the right to treat one group differently than another. These type of policies support the incorrect belief that the government can (justly) protect or injure certain segments of society using arbitrary criteria (and yes, regardless of how logical such criteria may be to one or another, they are arbitrary when they discriminate between different individuals). 

The problem, to be fair, is not singularly one of the left, but also unfortunately present on the right. When Rick Santorum stands on the podium arguing for special treatment for manufacturers through tax incentives, he concedes reliance on the same backward philosophy. When congressmen from agricultural red states fight for special subsidies to farmers, they too erode the just role of government. When oilmen or bankers (or union-members) are given carve-outs, the same philosophy is at work.

This is an issue that goes beyond the charges, often correctly made, of "picking winners and losers," which is certainly problematic. The problem is the vision of government that does not consider all Americans as equal before the law. That is an ideology that, for whatever electoral or political reasons, believes that a politician can treat different Americans in different ways. 

While the political roots of this problem are understandable, the long-term consequences are potentially disastrous. Our system has moved a long way from its foundations, where the government was supposed to serve as an impartial arbitrator, as an entity that facilitated the common space but did not try to fill that space, to a near feudal model of patronage and special privileges. The system, historically speaking, may never have worked as philosophically as it strove to—there are certainly too many examples of its failure—but historically (or maybe its simply an effect of rose-tinted lenses) the philosophy seems to have greater popular currency. Today, it appears to be rarely thought of or discussed. 

American politicians need to strive to represent all Americans and the electorate should hold them to that standard. If the people eschew demands for special treatment, the politicians will have to change their electoral strategy. If privilege to the few at the expense of the many becomes anathema in the American political system (right now it is only anathema if the "few" are not you), it will help rebirth the idea that the government needs to represent all Americans, providing a system that is nimble, light, and does not impede the individual. The alternative is a bloated, heavy, and cumbersome system (daresay European) that struggles under the weight of entitlements and carve-outs. The latter is a system that not only veers away from the correct formulation of a just government but will crush the unique spirit that has made America great.

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[1]Did an investment in the auto industry reap the best return for the government's investment when compared to other options? Could that money have been used to create or save even more jobs in other sectors or been better used by the taxpayers? Is having a large auto industry really in the best long-term interest of our economy? Would it have been smarter to facilitate structural changes in the economy rather than prop up a failing industry? Certainly, demonstrating that the auto industry is alive today and that jobs have been "saved" in isolation, as proponents are wont to do, does little to answer if the bailout was a smart financial decision.

Some Sense Regarding the Housing Market

It is about time someone talks honestly about the economy. According to The Wall Street Journal, Mitt Romney commented about the housing market and foreclosure:

One is, don't try and stop the foreclosure process. Let it run its course and hit the bottom. Allow investors to buy homes, put renters in them, fix the homes up. Let it turn around and come back up. The Obama Administration has slow-walked the foreclosure processes that have long existed, and as a result we still have a foreclosure overhang.

Number two, the credit [that] was given to first time homebuyers was insufficient and inadequate to turn around the housing market. I think it was an ineffective idea. It was a little bit like the cash-for-clunkers program, throwing government money at something which was not market-oriented, did not staunch the decline in home values anymore than it encouraged the auto industry to take off.

The Journal went on to say:

How's that for refreshing? After five years of politicians trying without success to postpone disclosures and levitate the housing market, Mr. Romney dared to tell the truth. Parts of the U.S., including Nevada, still have too many homes, and that supply needs to be sold off and fixed up so the market can find a bottom before home prices can start to rise again. The faster that process proceeds, the faster the recovery will take hold.

While the personal plight of many individual Americans is heart-wrenching on the personal level, meddling in the housing markets is the sort of disastrous policy that helped push the economy to its current state. Why can so many correctly criticize the bailout of big banks, insurance companies, and auto manufacturers, but not realize a bailout of Main Street is just as dangerous? The government's expressed desire to "prop-up" or "boost" the ailing housing markets are simply other terms for "create a new bubble."

By distorting incentives the government encourages individuals and institutions to incorrectly calculate risk. Inevitably, this will lead to sub-optimal outcomes. As difficult as it may be to watch the nefarious outcome of poor risk management, it is sometimes better for all to simply do nothing. The government not only does not have the ability or resources to "help" everyone, but it creates awful drags on the economy, as current policies have demonstrated, and breed future problems when it foolishly tries to become a superhero.

Fed Up!

The economic meltdown was caused by the underestimation and mispricing of risk. The small town broker,  the average family, and the Wall Street banker were all responsible for taking on too much risk. The government has correctly diagnosed the ailment – in part. While the Fed and Treasury both point to the excessive risk taking, they only seem to place the blame on Wall Street.

As The Financial Times reports, the Federal Reserve has unveiled new rules aimed at limiting and controlling executive pay at all institutions under its purview. This follows sharp controls from the Treasury for executive pay at institutions who still have bailout money.

The Fed defends the proposed rules by claiming they will reduce the excessive risk taking that caused the meltdown. Chairman Ben Bernanke, stated that “…compensation plans that encourage, even inadvertently, excessive risk-taking can pose a threat to safety and soundness.” The argument implies that economic downturn was the direct result of risk taking that was driven by high-pay packages for greedy executives.

This perspective is downright foolish. It is unquestionable that mismanagement and so-called ‘fat cat’ bankers played a role in causing the economic mess. However, they are no more culpable than ‘covetous’ housewives who took out a home-equity loan to buy the flat-screen TV or new Mercedes or the ‘greedy’ loan originator who turned a blind eye to the proper documentation in order to make a quick sale. The fact of the matter is all of America is to blame. Most Americans – individuals and companies – did not make smart investment decision.

The Fed’s new pay policy is simply an attempt to make it appear like the government is doing something productive. In reality, it is simply to appease voters who, egged-on by the finger-pointing Obama, are looking for a scapegoat. It is politically and logistically easier to go after a few, big-target banks, than a million or so credit card owners.

Unfortunately government meddling in executive pay will not make things better. It is the wrong medicine for the correct diagnosis. Such a narrow shot at poor risk-management completely misses the fundamental problem. It obscures the fact that the underlying issues are not and will not be addressed. Even more concerning is the fact that it nestles the government far too deep into the private sector.

Not only will the plan fail to address systemic problems, but it will most likely fail to solve the problem at companies. In fact, it is more likely to exacerbate problems. CBS News reports, that talent is already being driven from top firms. Furthermore, individual executives will find ways around the system. They will find alternative ways of compensation or establish unconventional institutions that do not fall under the purview of the Fed. This will move the main banking industry out of the regulatory eye of Bernanke. At the end of the day the risk will still be incorrectly accounted for and nothing will have changed.

Bernanke is correct that excessive risk is to blame. But let’s step back and stop pointing fingers. Smarter policy that is not punitive and spiteful needs to be designed. Flashy regulations that scapegoat a few individuals while absolving the rest of America from responsibility are counterproductive and will only lead to the next bubble and burst. This is particularly true if our government is simultaneously diminishing risk by bailing-out companies. Any market distortions will misprice risk – why doesn’t the Fed understand this?

What Are They Thinking?!! – Socializing and Destroying Our Economy

On Friday, the House voted to give the government sweeping control over pay in the private sector. This plan continues the radical-leftist Congress’s assault on free enterprise and the capitalist system. Essentially the bill, H.R. 3269, prevents large companies from rewarding their employees in ways that may cause excessive risk taking. What excessive risks are is undefined.

Such a power grab greatly hampers the abilities of companies to structure their businesses according to what works best. While companies certainly have, and will continue, to make mistakes, there is no reason to assume that the government can make better decisions. In fact, there is much reason to believe that government interest does not coincide with what is best for a company. Governments have a whole host of groups that they must pander to; including, constituents, lobbyists, party members, and others.

Government meddling in corporate business strategy can only lead to bad situations where politics trump good business sense, sapping initiative and dampening the industrious and innovative American spirit. In such instances, the government role is inefficient, impractical, and downright foolish. It brings politics into a realm where they don’t belong. The very motivation for greater government involvement is completely imbued with political motivations. Such bills are precisely motivated by the populist rage that the Congressional Democrats are nurturing and harnessing, rather than any objective logic. Destroying the fictitious ‘fat-cat Wall Street’ apparently wins votes, even if it hurts the very Americans who cry for blood.

The damage that this bill could cause is foreshadowed by the government’s meddling in the relationship between Citigroup and one of its prime breadwinners, Andrew Hall. Hall, who runs a division of Citigroup called Phibro, which often earns a large chunk of revenue for the company, is admittedly a well compensated man (he owns a castle). He is now demanding a contractually committed bonus of $100 million. Citigroup, which received a lot of taxpayer cash through the bailout, is under immense pressure to renege.

The tensions in this are obvious. However, whether he is right or wrong, Hall, and his massive amounts of revenue, will leave Citigroup if his contract is not upheld. Citigroup is naturally in a tough position– stuck between the same populist anger that is pressuring the government and a large capital outlay that may reap future rewards. This tough decision is only complicated by the presence of government decision makers who, motivated by reasons not necessarily in line with Citigroup’s financial success, can severely influence what happens.

Proponents argue that government intervention is necessary to mitigate excessive risk taking on Wall Street. However, the excessive risk taking that this bill attempts to eradicate, is the very same excessive risk taking that Congress has helped build into the system. The financial bailout and other such programs encourage risky behavior. After all, if one knows one will not have to suffer the consequences, one will be more likely to take risks. When the suffered consequences do not match the risk level it encourages individuals to have a surplus of hazard. The bailout encourages just that.

Congress is in the process of establishing such a backwards system. If a system cushions the consequences of missteps, it simultaneously encourages missteps to be taken. Ultimately, people and institutions need to be able to feel the pinch in order to learn to avoid behavior in the future. The only alternative to eradicate risk is to have one party dictate every action– compensation, production, consumption. This is a failed political system often called communism.

Welfare Moms and Bailout Banks

Unfortunately, it has become far too acceptable, in modern American society, to expect government handouts. Through a long history of increased government assistance and programs, society has developed an inflated notion of entitlement. This problem is clearly seen in two nearly dichotomous phenomena in the news today- Nadya Suleman (the invitro-welfare mother of 14) and the economic bailout. In both instances, we see the excess of government “entitlements” run rampant.

The key parallel is that in both instances the government is serving as an enabler of poor behavior. By serving as an overinflated safety net, the government is encouraging future individuals or groups to behave in a similar fashion. Clearly, Suleman has seen no incentive to stop having children despite her past (and current) status of being on welfare (which she ironically denies is welfare). Likewise, what incentives will future investment bankers have to avoid taking on too much risk (or more properly, mispricing risk)? The government’s actions today essentially limit the downside risk an individual or group can face. This risk assessment is naturally a huge factor when an individual or group is making a decision. If they foresee less risk, because they know the government will bail them out, they will be more willing to make risky, poor decisions. This in turn spirals downward, increasing the role of the government and negating the individual’s personal responsibility.

Do not make the conclusion that I am calling for a complete end to social welfare or that I believe the government should completely be laissez-faire in dealing with the economic crisis. I don’t believe either. What I do believe is that government policies should be more principle-based (rather than rules-based). This is particularly true in the case of welfare. Abuse of the system should be punished harshly; thereby, precluding people from taking advantage. Welfare should only be available to those who absolutely need it AND who are taking steps not to need it any more. Abusers such as Suleman should not only be precluded from collecting any form of government aid but should be punished for their abuse. It would be worthwhile to consider charging her with child abuse (in regards to her current children and for purposefully and irresponsibly bringing 8 new children into the world when she does not have the means to support them). [The doctor who performed the procedure should at a minimum have a moral, if not a legal responsibility, not to perform elective procedures that will become a burden on the state- but this is a separate discussion]. Government resources should be used for the truly needy, in a more discretionary fashion that allows greater scrutiny in distinguishing between abusers and the truly disadvantaged.

Likewise, the economic bailout needs to be focused in more general fashions. I do believe that the government has a role to play in righting the economy. But, it does not mean just throwing away money to failing industries. The auto industry is a prime example. Giving a largely unrepentant, inflexible, and poorly structured industry a vast some of money only incentivizes it to continue its broken ways. What reason would GM have to make radical new changes if it gets money when it messes up? Furthermore, by supporting the old dinosaurs we squash the new upstart innovators that may have better and more efficient products and methodologies (and those we don’t squash will just set up shop in other countries). There will certainly be costs if the auto industry fails- but a few short term costs are much better if they enable a long term fix. We suffer more harm by building on a broken foundation rather than just tearing down the building and starting anew. (This is partially our own fault by having policies which encourage anticompetitive industries that are too heavily reliant on two or three companies).

The bottom line is that the government has to step back- let people and corporate entities fully assess the risk of a situation without the promise of bailout from Uncle Sam. If each actor knows they might have to fend for themselves, they’ll take the appropriate responsibility to make sure they are heading down the right path. Maybe it is simply tough love- after all, we would all ridicule a parent for doing their child’s homework because the child struggles. Sometimes failure is necessary to ensure that individuals learn the correct way to act, and thereby prevent future failure.