The New American Economy?

I recently read Bruce Bartlett's new book The New American Economy, which is a fascinating read if you're schooled in economic theory, or at least have taken an Economics class in college. What first struck me about this book is that Bartlett, a conservative, takes on conservatives and says they have it all wrong. I am not sure if I agree with Bartlett's observations, but I greatly respect his opinions, particularly since he puts much thought and research into what he writes.

Bartlett, like many other economists, states that the current financial crisis is much like the Great Depression. The most striking similarity is that we have experienced a largely deflationary cycle, which Bartlett demonstrates is just as bad as an inflationary cycle. His belief is that Keysian economic theory offers better solutions to the crisis than supply side economics. Although modern conservatives abhor Keynes's theories, Bartlett goes to great lengths to show that Keynes was quite conservative. After reading his book, I tend to agree that Keynes offers better solutions in this environment than supply side economics.

Right now, we need to back up a bit and explain the theories a bit. Lord Keynes believed that stimulating demand was the best way to grow an economy. He stated that this was done in two ways: 1) monetary policy, which includes large injections of capital into the economy by the central bank; 2) fiscal stimulus to increase the velocity of money. GDP is the product of the money supply and the velocity of money. Supply side economics focuses on the supply side of the demand/supply curve, as the name suggests. Supply side is concerned with stimulating supply to get the economy moving. In a general sense, Keynesian economics works best in a deflationary environment, supply side works best in an inflationary environment. With unemployment at 10%, with housing prices down, with auto sales in the dumps, with retail sales in general sluggish, demand needs to be stimulated.

What Part of George W Bush Was Conservative?
Where did we go so wrong as an economy in the first place? In general, I place more blame on the Republicans, particularly during the George W Bush years. Let's face it, we know Democrats like to spend taxpayers' money lavishly on crap that winds up with disastrous results. What is really disappointing is that Republicans took on this same persona during the GWB years. I laugh when people describe GWB as a conservative. I ask "What part of George W Bush was conservative?" I believe that the principles of conservative government involve three aspects: 1) Limited government (this above all else!); 2) Fiscal responsibility; 3) Judicial restraint. Limited government? Bush created a new cabinet level post that is still largely undefined to this day. Fiscal responsibility? Record deficits (although Obama has since obliterated this). 3) Judicial restraint? I hand you the Terri Schaivo case. The saddest part of the Bush years is that most of the self-proclaimed conseratives went along with all of it. So, the conclusion is that we went wrong as an economy because the Republicans abandoned their principles in the name of political expediency.

In the 2004 campaign, Bush proudly proclaimed "the ownership society" and used record home ownership as the shining example. However, this was a house of cards, built by Federal Reserve chairman Alan Greenspan's easy money, the purchase of Democratic politicians (particularly Senator Christopher Dodd and Rep. Barney Frank) by Freddie Mac and Fannie Mae, and the Republicans, led by Bush, playing along. Fannie and Freddie became Ground Zero in the housing crisis, fostered by Greenspan's easy money (which was too easy for too long), and Bush's "ownership society." Of course, I cannot help but laugh at President Obama trying to scold "greedy Wall Street bankers" for not lending money. Who are they going to lend to? Are the banks supposed to make the same stupid loans that got us all in this mess in the first place? Also, for the record, those "greedy Wall Street bankers" were the second largest contributors to Obama's 2008 campaign, behind only trial lawyers.

Stimulus and Republican Irrelevancy
Back to Bartlett's book, he states that the $787 billion fiscal stimulus passed by Congress earlier this year was the right thing to do for the economy. Further, he states that the Republicans will only become more and more irrelevant if they stick to their cutting taxes and cutting spending themes. He may be right for today, but what we are seeing from the Democrats today leads me to believe that we will have a huge inflation problem in a few short years.

Where Bartlett's book really falls short is in describing what all this means for the future. He does a great job of researching Keynes, and lays it out in reasonably good laymen's terms. But what the application of these theories holds for future growth is sorely lacking in this book.

Sub-Optimizing Growth
Historically, government is a terrible allocator of resources. To suggest that we are going to optimize long-run economic growth simply by government stimulus is pure fiction. As the government becomes more pervavise in the economy, we can only assume that long-run growth will be sub-optimized. Since the end of World War II, the US economy has grown by about 3.2% annually. However, a larger government sector can only lesson this long-run average. Waste, corruption, the power to tax and the power to run large annual budget deficits as far as the eye can see will ensure that the economy will grow at a lower level of annual growth, which will translate into lower standards of living for Americans across the board.

So, stimulate the economy to get us out of this mess. Flood the system with money. Then get the hell out of the way. Keynes believed in fiscal stimulus, but he also believed that government should pull all the stimulus and get out of the way as the economy recovered. Otherwise, get ready for another round of double digit inflation, combined with high unemployment and bring on the supply side economics.

10 Surprises for 2010

Those who work in the investment business anticipate a piece about this time every year from Byron Wien, former strategist at Morgan Stanley entitled "10 Surprises". His 10 surprises reflect events that he believes will happen in the upcoming year that, at the time of writing them, are well outside the consensus thinking. His events usually focus on financical market, economic and political events (for instance, he called Barack Obama's victory in 2008 while the consensus held that Hilary Clinton would be the Democrat's nominee for President). In that spirit I'll launch my top 10 surprises. I make no promises that my top 10 surprises are outside the consensus thinking. If you have any you'd like to add, feel free. Enjoy!

1. The economy will show a brief recovery before falling back into a "double dip" recession. Unemployment will stay persistently high, only dropping to about 9 percent before heading back up to 10 percent.

2. Inflation and interest rates stay at historically low levels. With the economy in the tank, bank assets continue to decline, easing any inflation fears and keeping interest rates in check. The price of gold will drop dramatically, while stock prices will decline 3 to 5 percent in 2010.

3. With opposition to health care reform high, moderate Democrats in the Senate will keep Congress from passing any meaningful health care reform, and the issue is essentially done for the remainder of President Obama's term.

4. At least one major department store chain will go out of business in 2010, likely a mid-range department store chain.

5. The American car companies, particularly GM, will show surprising strength in 2010, with sales coming in better than expected. Sales of imported cars will slow dramatically.

6. The U.S. housing market remains in the doldrums. Housing starts will rise slightly in the first half of the year, but housing prices will remain low. Housing starts will taper off again in the second half of the year.

7. The dollar will remain weak, the deficit will run at another record, and in the fall 2010, politicians, bankers and investors will be discussing the government's ability to borrow further, and fears of a government default on its debt will create a mini-panic on Wall Street.

8. The U.S. will remain mired in a stalemate in Afghanistan, with no discernible progress. President Obama will be pressured by his own party to get out, while the Republicans of all people will be supportive of his policy to remain in the worn torn country.

9. Republicans will pick up significant seats in both houses of Congress, but will fail to win a majority in either house. Republicans will pick up at least 25 seats in the house, and maybe 4 in the Senate.

10. Finally, 99 percent of us will break our New Year's resolutions within the first two weeks of the new year. But not to worry, for tomorrow is another day.

On Being A "Part Texan"

Recently, my grandmother passed away at the ripe old age of 91, and my Mom and sister went to her funeral in Amarillo, Texas. What struck me upon their return was the way my Mom spoke so fondly of Texans, and their friendliness in particular. Her nostalgia got me to thinking about my days in Texas and my recollections of Texans.

My memories of Texas are far different than my Mom's. She was born in Amarillo and spent much of her childhood there. I went to college in Waco, graduating from Baylor in 1989. Her world was west Texas, mine was central Texas. But even though those two towns are worlds apart, my guess is that our impressions of Texans are quite similar.

My biggest impression of Texans is that they are a very proud people. I remember the prevailing thinking of the Shawnee Mission South students from my high school days being "I can't wait to get out of here and get out of Kansas." Yet the Texans I knew did not want to leave Texas. They were proud of their state, and their heritage and they wanted to stay. Of course Texans are not perfect. They talk funny. For instance, they use the word "Y'all" a lot. In Texas, the word "fixin" means preparing, not repairing. For example, they would say they were "fixin" to go to dinner. I would start thinking "what's wrong with the dinner?" and how they would go about fixing it. Finally, the one natural resource that is most responsible for the wealth in Texas is oil (pronounced oy-ul). Yet Texans simply don't know how to pronounce it. They say "ul". You'd think they would know how to pronounce the name of the resource that is responsible for so much of the state's wealth! But my funniest memory is the time my Dad was introduced to the mother of my good friend, Chris Pattillo. She introduced herself by saying "Hi, I'm Janet Pattillo," in the thickest east Texas accent I've ever heard. My Dad didn't understand a word she said! I had to finally tell him what her name was. Clearly, my Dad was out of his element.

Of course my biggest memory from Texas was meeting my wife. That made all the lonely days away from home worthwhile. I also made some good friendships for which I am thankful. Other memories of Texas include kicker dancing, chicken fried steak, cowboy boots, and a religion known as high school football. To this day, I consider the Baylor campus my second home. This really hit me on a Spring Break trip in 2007, when I took my boys to the campus. I was so happy that the core of the campus was largely the same as I remember it. About the only thing that had changed is that the "rocket launcher" sculpture had been taken out. Pat Neff Hall looked as majestic as ever. I took a walk through the Hamkamer School of Business (Hamkamer High to non-business types).

No particular point to this except I'm waxing nostalgic about my past, an exercise we all do from time to time. I know that Kansas City is my home, but I also know that my time in Texas is a big part of who I am and I am thankful for that time in my life. I am a Kansan and I'm proud of that. In a way, I am also at least part Texan and proud of that as well.

Thoughts on Health Care

The health care debate continues to generate a lot of noise, which has caused me to stop and ponder what will work and what will not. I approach this from a number of different angles: as a business owner, as a matter of faith, and from my own education in the area of government and economics.

From a purely economic perspective, the idea of a single-payer health care system is a disaster waiting to happen. A government monopoly (or any monopoly for that matter) will become bloated, costly, inefficient and unresponsive. There is no incentive to behave otherwise. The beauty of competition is that keeps people sharp, ensures maximum effort, and keeps costs low. So when I hear the President or anyone in Congress tell us that a single-payer health care will save money, I don't know whether to laugh hysterically or hide my money under a mattress. A look at other government monopolies such as Medicare for the elderly, or the Post Office tell us that their history of operating monopolies is not good.

The other truth about government subsidies is that when a government subsidizes something -anything - you get more of it than you ever planned for. We subsidized retirement with Social Security, and now we have more retirement than we can handle as a society. We fought a "war on poverty" under the Johnson and Nixon Administrations with welfare - and poverty won! If the government subsidizes healthcare, we will get more demand for healthcare services than our system can handle. This will result in long waits for some procedures, and yes, it will inevitably lead to rationed healthcare. From a purely economic standpoint, single-payer healthcare is a loser.

But what about from a faith perspective. I was particularly intrigued when the pastor of my church, Adam Hamilton, urged the congregation to think about this from the prespective of Jesus who would admonish us to care for the sick and the poor. I do not believe that Jesus would have any comment about the economic ramifications, or the evils of single-payer healthcare. He really didn't have much to say about government, except pay your taxes. I have to admit, this is where I struggle because I do not know what contribution I can make. Perhaps my role as a business owner helps. I do offer my employees, and their families, health insurance. Not all of them take it. Under the Obama plan, my business would have to pay a 2-6% payroll tax, which would be crippling to my business.

Conservatives are right to criticize the President's plan. I do not believe that a government-run system is the answer. Opening up competition to more insurance companies, on a state-by-state basis, would be a good first step. The best way to reduce costs is by increasing competition. But what about increased access? Millions still cannot afford health care services. This conundrum between economics and faith leaves me twisted on the subject. If I follow my faith 100% on this, I would neglect the economic side. With the economy in a very weakened state, the added burden of increased healthcare costs could sink the entire system. But if I follow my purely economic instincts, then I am just plain cold hearted.

Bottom line, increasing access to the system will increase costs to society. It will also stress the healthcare system. We have addressed the subject of increasing access, but what about increasing suppliers of healthcare services (i.e. doctors)? If you are looking to cut health costs, it seems to me there is little incentive to go become a doctor, particularly a primary care physician. Increased demand combined with steady supply leads to shortages, long lead times (waiting 6 months for an operation), etc...and ultimately to rationed care.

There are no easy answers. Right now, I do not have the answer. I think I have a better idea of what I do not want to see versus what I do want to see.

A Good First Step

While I find I often do not agree with President Obama's policies, I applaud the tone of his speech today in Cairo. Our relations with predominantly Islamic nations has been badly frayed the last several years. The speech today was a first step. Just a baby step. But a step in the right direction.

Do we still need to fight a "war on terror"? I believe we do. Terrorists must be dealt with harshly. All they understand is the business end of a loaded gun. Remember, they are at war with us. Make no mistake about that. But, in order to successfully fight a war on terror we need the cooperation of predominantly Islamic nations and their governments. We cannot fight this war alone, nor should we.

It is unbelievable to think that back on September 12, 2001, we enjoyed the good will of every civilized nation on earth. The world all became Americans after the attacks on September 11, 2001. Unfortunately, President Bush and his Administration blew every bit of that goodwill. Clearly, a new approach is needed. Conceptually, a war on terror is a great idea. However, the Bush Administration so badly executed every phase of this, that many people now regard a war on terror as unnecessary. We were extremely fortunate that the US did not suffer another major terrorist attack after September 11, and the Bush Administration deserves credit for this. But, the overall management of the war on terror was a disappointment at best, and a possible disaster at worst.

Terrorists see themselves in the midst of a 1,000 year struggle against the West and against the Israeli nation. They see themselves as freedom fighters...and one man's terrorist is another man's freedom fighter. I'm sure many British citizens thought of our revolutionaries as nothing more than the 18th century equivalent of the modern day terrorist. However, today's terrorist knows no boundaries, is not governed by any nation, and has no qualms about killing innocent people. These people must be dealt with harshly. And this requires massive worldwide cooperation. Mavericks and lone cowboys will not win this war on terror.

What or who will win the war on terror? I believe peaceful people, who have the courage to fight when necessary will win. Who are these people? On the front lines are bankers, accountants, and intelligence investigators. I believe funding sources need to be cut off first. Since terrorists are not bound by any national government, they have no power to tax. Second, we need to present opportunities to oppressed peoples. People with no hope, people who only know oppression and endless poverty will join up with the terrorists. They have nothing to lose at that point. Make no mistake, these are long-term solutions. Soldiers and weapons should be our last resort in the war on terror, not the first.

We have a long way to go in the Muslim world. The Iranians hit it on the head when they noted deep resentment against the U.S. in the region. The resentment will not go away with a pretty speech or two. We will have to follow up with action. But we need to approach this more cooperatively, not unilaterally. Mr. Obama gave us a good first step.

What's Going On?

Ours is a nation in desperate need of an etiquette lesson. Where are the manners that our Mom taught us? On a national level, there is now an appalling level of personal attack that I hope does not trickle down to the rest of us. First, Rush Limbaugh says that he hopes that President Obama fails. Of course, an Obama presidency that fails will greatly benefit Mr. Limbaugh, but what about the rest of us? I admit that I did not vote for Mr. Obama, but I don't want him to fail. I want him to succeed and I want the rest of us to succeed too. Then, at the White House Corrospondents Association dinner, comedian Wanda Sykes called Rush Limbaugh the 20th hijacker on September 11, 2001, in an attempt to be funny. So now we find humor in accusing someone of being a hijacker on a day in which 19 hijackers killed 3,000 people? Then, there is the curious case of Carrie Prejean, with enough venom and hypocrisy on all sides to fill a 747.

My bigger concern is what about the rest of us? Most of know this is nothing more than hot air from a bunch of gas bags that don't really deserve our attention. But when these stories consume the news headlines, they are bound to creep into our own lives. How many times were school shootings in the 1990's followed up with another shooting or two? Headlines have a nasty habit of creeping into our own lives. Remember what we all learned as children: Do unto others as you would have them do unto you.

10 Things I Think...

It's been awhile since I last posted here and I'm due for an update. Here goes with 10 Things I Think. Of course, this type of a list is likely to change daily, but I won't update it daily. Without further ado, here goes....

1. March Madness is just around the corner and there is no better time of the year.

2. This coming on the heels of one of the best Super Bowls ever. 2008 was a great year for sports, and 2009 might eclipse it.

3. Is there a more arrogant and clueless group of people than Wall Street executives? $1 million to redecorate an office? Are you f*cking kidding me?

4. Speaking of Wall Street genuises, just how big is this mess they've got us into? If you spent $1 million per day, every day, since the time of Jesus Christ, you would have spent an amount of money equal to about 1/3 of the money Tim Geithner says we need to bail out the banks.

5. Speaking of which, Treasury Secretary Tim Geithner is clearly in over his head.

6. Is there a more poisonous politician today than Nancy Pelosi? I think she's in a race with Mr. Geithner to see who can sink Mr. Obama's presidency first. This woman clearly doesn't deserve to be anywhere near a leadership position.

7. Strange as this sounds, the best Mexican food I have ever eaten was in Chicago, the best barbeque was in a gas station and the best steak was in Las Vegas.

8. I am not surprised that Alex Rodriguez used steroids. My question is why did he stop taking them every October?

9. The Economist is the best magazine in the world. Period.

10. It's 5 o'clock somewhere.