Tuesday, December 27, 2011

Marx my words

It was intensely frustrating that the 30-year experiment in economic conservatism could collapse so spectacularly and yet liberalism seemed to have so little to offer as a counter ideology. Some occupiers decry what they call "neo-liberalism", by which I think they mean post-Carter moves by Democrats to liberalize international trade and moderate regulation, but that's a painfully simplistic argument. The problem with the left isn't that it has evolved improperly, but rather that it hasn't evolved enough.

Too much leftist thinking relies on an outmoded Marxist framework where the most significant economic dynamic is a fundamental clash between the owners of capital and the owners of labor. But things have changed in the 140 years since Das Kapital was written, including a shift in business structure to shareholder-owned corporations. The result has been a complete dissolution of the distinction so crucial to much leftist ideology. Consider, for example:

Workers hold a significant ownership stake in corporations, and their retirement savings are driving much of the financial activity that seems to upset some would-be reformers. I'm not arguing that Marx's theories should be entirely dismissed - I don't have the energy or smarts for that - but the left would do well to broaden its intellectual underpinnings. One notable attempt to do so is in Cornell economist Bob Frank's highly recommended latest book, in which he makes a compelling argument for the explanatory power of Darwinism to understand our economic state of affairs.

Thursday, December 22, 2011

Equal opportunity, my hat

Some conservatives (I'm looking at you, Mitt Romney and David Brooks) try to sound even-keeled by describing their ideological differences with liberals as being the difference between being concerned with equal economic opportunities versus being concerned with equal economic outcomes. In other words, instead of playing Robin Hood, let's focus on making sure everyone has a fair shake. Sounds nice and it has a simple elegance, but do not be fooled: it's utter malarkey.

As an example of the problem here, ask how someone dedicated to creating conditions for equal opportunity can object to affirmative action, a policy pilloried by the right, yet one squarely aimed at providing historically disadvantaged people a hand getting up to the starting line? I suspect that what conservatives are really trying to express is ultimately a libertarian fantasy centered on the misguided notion that games would be played more fairly if only the referees would get out of the way.

This wouldn't be such a problem if the stakes weren't so high. Consider the shocking disparity outlined in the chart below (courtesy of Pew Research Center) and try to imagine a credible and fair solution that involves less government. We should remember this if at any point in the next year any of us catch ourselves wondering if Romney wouldn't be so different from Obama.

The end of capitalism

It is reasonable to question the economic system that brought about the fiasco of the last few years, and many op-ed pages and activist movements have been obliging us. Still, there are two important aspects of this that tend to get overlooked and as a result end up distorting the picture.

First, debates about taxation and regulation are not debates about capitalism. Sometimes people point to the Western European nations as being socialist states, but that's ridiculous. Their economic systems are pretty much the same as ours; the differences are incremental levels of taxes and resulting government services. Similarly, the effort to reform financial services regulation is more accurately described as being about about two things: replacing the regulation Clinton and Bush dismantled and modernizing the oversight framework.

Second, I haven't seen much serious discussion about alternatives (and for good reason, as we'll get to in a second). There's plenty of media questioning capitalism, but they tend to have a common thread of getting small when it comes to solutions. A lot of people are raising questions and are challenging the assumptions underpinning our society - as well they should be, always - but in general I'm hearing a lot more questions than answers. Maybe I'm just missing out - let me know if you are seeing different.

To be sure, these debates are a healthy reaction to what could be fairly described as a massive systemic failure, but the proposed solutions tend to be more about tweaking the current system to address its now obvious shortcomings than about actually changing the nature of how resources are owned and allocated in our society. Both the reformers and their opponents would be well-served to keep this in mind as we move forward. Indeed, the absence of credible alternatives strengthens the premise. I think this quote from Economist editor Matthew Bishop (from this recommended set of interviews by David Brancaccio) sums things up nicely:

"I think the worst thing we could do would be to actually throw out capitalism and I think the second worst thing we could do would be to actually fail to reform it."

Sunday, December 11, 2011

The bull case for US stocks

Despite what you might hear, it is pretty much impossible to consistently generate outsized investment returns. It's not enough to be skillful in evaluating complex economic situations; it also requires a deeply contrarian attitude, because essentially what you doing is trying to predict a change in everyone else's predictions. Basically, to beat the market you have to be the Quixote whose windmill turns out to really be a dragon. How often does that happen?

With that caveat (that is, if you are smart, you will stop reading now), I think US stocks offer a better than average long term investment opportunity right now. Popular opinion has been slow to acknowledge our improving prospects and at the same time is overly concerned with the potential impact of Europe's problems.

The US economy is improving. Almost every economic indicator in the last couple of months has come in better than consensus expectations. The "conventional wisdom" is only slowly coming around to this, but unless you are a soft-serve ice cream aficionado, you must admit it's been a while since you heard talk of a double dip. I won't go through all of the data here, but I would like to briefly discuss one statistic that has been the source of recent hand-wringing: the labor force participation rate. 

Bears note that a major driver of the recent improvement in the unemployment rate is that people are dropping out of the labor pool at a historically high rate. To the extent these drop-outs are occurring out of frustration, it's a big problem. However, most of the media coverage I have seen omits the impact of the nascent wave of baby boomer retirements. This insightful Pew Research Center report observes that starting this year, on a daily basis 10,000 boomers are reaching traditional retirement age and will continue to do so until 2030. It may be reasonable to expect boomers to retire later than previous generations, but still the overarching trend is undeniable: without substantial immigration, the labor force participation rate will decline. And while this is a serious threat to our long run growth prospects (see: Europe, Japan), assessments of the health of our current labor market need to take this factor into account, and I haven't seen many that attempt to do so.

Europe's problems may not be as big a threat to the US economy as people seem to think. The euro is facing an existential threat, and last week's summit deal doesn't inspire confidence. However, not only is it hard to say how a euro break-up might affect the US economy, I don't think China would let it happen in the first place. 

To my thinking, there are two areas where the fallout will be felt in the US if the EU breaks up: trade volume and credit availability. This WSJ blog post argues that the crisis has had little effect on US trade so far, and that's not surprising, given that only about 10% of our exports go to Europe. Furthermore, the longstanding trend, recently bolstered by Obama's efforts to boot Asian trade, is for decreasing reliance on exports to Europe in the future. Moreover, most of our trade with Europe is with the stronger countries, so even a profound recession in Europe isn't likely to tank overall US export demand. 

The other potential issue is with a potential credit freeze if what's been a slow-motion run on European banks accelerates. The reason why I don't think this is likely to be as significant a problem as it was when Lehman went down is simply that US policymakers and financial institutions more or less just spent the last 3 years learning how to deal with liquidity panics, so they are likely to be more aware of the warning signs and better equipped to manage them than they were the first time around. 

Meanwhile, China's prosperity is heavily dependent on trade with Europe. Not only does China's economy generally rely more on exports than the US economy does, the 27 EU nations are collectively China's biggest export destination. China can't afford for Europe to slide off a cliff and thus when push comes to shove it's likely China will deploy their massive cash reserves to forestall any of the more extreme scenarios.

US stocks are relatively cheap. It's next to impossible to determine the intrinsic value of a stock, but there are some indications that stocks are cheap relative to other types of investments. One indicator I find useful is to compare the dividend yield on stocks to the yield on 10-year US Treasury debt. In other words, comparing the immediate income potential of owning stocks to that of owning bonds. Right now, and for most of this year, the yields have been pretty much the same, and this is unusual. Since the 1950's, government bonds have had higher income yields than stocks, usually significantly so, as investors look to be compensated for the fact that stock investors have more potential for capital appreciation and less exposure to inflation risk. 

Maybe my argument boils down to nothing more profound than the suggestion that if you're feeling quixotic, take a tilt at US stocks. What's your take? How do you see things playing out in the US economy?

Friday, December 9, 2011

Why I passed on the 24 CD audiobook of Rumsfeld's memoir at the Border's liquidation sale

In reading this review of Condoleeza Rice's memoir, I was reminded of the moral bankruptcy of Bush's foreign policy. No wonder the GOP presidential candidates focus on domestic issues - as hard as it must be for Conservatives to maintain the cognitive dissonance necessary to promote a failed economic ideology, can you imagine trying to bear the mental weight of the disastrous neocon agenda? And as long as it may take the Conservative movement to evolve its take on economics, it's going to take them that much longer to come up with a new set of foreign policy principles - they are very much in the "stove-hot!" phase of that process.

That I could forget speaks to how successful Obama was in turning the page (cue: Seger). And while some felt he turned it too quickly in not prosecuting Bush's henchmen, I like to think in that decision was some consideration for the voters that reelected Bush. As much as I wanted to move on, these people's sense of self-worth demanded that we do so. Do you remember how pained they were in the later years of the Bush administration? I used to get sympathy migranes just talking to those among my friends and colleagues who had the courage to fess up.

At this point you may reasonably conclude that I don't really know what I'm talking about when it comes to foreign policy, so let me upgrade this post with a smarter offering from a smarter economist, a recent tweet from Richard Thaler: "What exactly is wrong with 'leading from behind'? isn't that what great QBs and point guards do?"