Premeditated Thought

Three Cheers For David Brooks

I'm not sure I could have said it better about the fixes for the economic conundrum we find ourselves in than the centrist David Brooks in today's New York Times (Money For Idiots).  I recommend reading the whole thing, but here's a clip explaining why we must hold our nose while we throw money at the industries and people who were most responsible for the current crisis.

Right now, the economic landscape looks like that movie of the swaying Tacoma Narrows Bridge you might have seen in a high school science class. It started swinging in small ways and then the oscillations built on one another until the whole thing was freakishly alive and the pavement looked like liquid.

A few years ago, the global economic culture began swaying. The government enabled people to buy homes they couldn’t afford. The Fed provided easy money. The Chinese sloshed in oceans of capital. The giddy upward sway produced a crushing ride down.

These oscillations are the real moral hazard. Individual responsibility doesn’t mean much in an economy like this one. We all know people who have been laid off through no fault of their own. The responsible have been punished along with the profligate.

Brooks also makes the point that government is not the ultimately in the Final Judgment business, and has a responsibility to all its citizens, not just the ones that make good economic decisions.  Of course, this implies a delicate balance since our economy is fundamentally based on rewarding individuals for good decisions.

Growing a company without capital

Nadav Manham from SeekingAlpha posted such a simple but profound thought on when companies can grow without capital (The Tyranny of Corporate Capital Allocation: Who's Really the Investor?)

With very few exceptions, a company's ability to grow its intrinsic value over time is basically equivalent to its ability to allocate capital. The growth in [ intrinsic value ] tracks closely the amount of capital added to the enterprise over time, which in turn depends on how much capital the enterprise generates, how much it retains, and the return on the capital generated and retained (and reinvested, etc. etc.), which in turn is what we mean by "the ability to allocate capital."

I can think of only three exceptions to this rule. One is companies like eBay that benefit from network effects--once they get their mousetrap going, it grows without their having to add more capital to it. Another is companies like Dell in its heyday, who have such good working capital dynamics that their customers essentially provide the capital needed to grow. The third is companies that can simply raise prices year in and year out, like newspapers once upon a time.

Simple and elegant.

What's the Republican Position?

I find myself puzzled this morning by John McCain's comments that the large stimulus bill will leave Americans saddled in debt for generations to come.  I agree that we will need to pay for all this borrowing in the future, but McCain ignores the basic tenet of what we are trying to do: stimulate the economy through deficit spending.  Even Republicans want to do that, but with a heavier emphasis on tax cuts than on spending.  In the end, this is a compromise bill with lots of tax cuts and lots of spending.

If someone can explain to me how McCain intended to address the current situation without increasing the deficit, I'm all ears.

Stimulus debate

One of the most annoying aspects of our political system is that we can seldom get beyond rhetoric and soundbites to have an open discussion of what we want to achieve and how best to achieve it.  Add the need for a good public flogging and political theater and you end up with the current debate around TARP and the stimulus bill.

O.k, the Republicans believe the best thing to do is to cut taxes.  The Democrats are following the Keynesian dictate for deficit spending to make up for the lack of private spending.  Note Republicans are a bit disingenuous arguing against deficit spending - they just prefer to do it by cutting taxes.  I haven't heard any proposal from them to cut taxes and reduce spending.   But what are they trying to do?  What is the affect they are looking for?  How will success be measured. 

Huh, you ask?  We are trying to heal the economy.

But the answer is not as simple as that.  As a starter, here are two alternatives that don't lead to the same policy decision: a) are we trying to grow the economy, or b) are we trying ensure the vast majority of people are better off tomorrow than they are today?  Unless you still believe in trickle-down, these are very different, even if they are correlated.

So what are some of the possible goals that we are inherently discussing today:

• Grow the economy, regardless of income distribution.  This tends to be how the Republicans think of the economy, and also tends to be where most popularly-known macro-economic theory focuses.
• Provide a cushion for the unfortunate.  This is where Democrats spend a lot of time and leads the welfare state.  Republicans would classify some of the unfortunate as "unable" - in terms of ability - and "unwilling" to this list.  Democrats favor this goal even if it comes at the expense of some economic growth.
• Create jobs.  This is like the second bullet, but not the same.  Everyone likes to create jobs because it is easy politically; not everyone agrees how to do it.
• Stabilize the stock market.  This is not the same as the first bullet.  The market is not the economy.  The market represents, in the long run, a reflection of the earnings and earnings growth of public companies.  But the economy can do well in terms of GDP when a greater share of revenues are going to employees than to the bottom line.  Still, this is an important category because so many Americans rely on the stock market for their nest egg.  In a different society that provided more of a social safety net, this may be less important.
• Stabilize particular industries.  This can be important for a variety of reasons.  The banking industry touches so many aspects of our economy that we decided we could not let the market dictate its health.  The auto industry was deemed critical in part because of how many people it employs.  As a policy motive, arguments about aiding particular industries is rife with political theater.  
• Do things we expect government to do. Have you flown to JFK, been through customs, and tried to get to Manhattan via public transportation, all the while using a cell-phone or surfing the internet?  Our infrastructure is quickly becoming second-rate.  I'm always shocked coming back to NY from Europe.

The Stimulus and TARP bills touch on each of these bullets.  That is not a problem, but it is a problem for a political system that is polarized and talking at one another, not to one another.  We don't admit the competing or mixed agendas that goes into the creation of these bills.  And the result is a hard-to-understand bill that does not satisfy any ideology.