The US Election: Economic Policy - do not vote for Romney or Obama

I have already written one post today, and thought I would start some research for another post. The subject of the next post was; analysis of the economic policy of Obama and Romney. The plan was a detailed analysis, point by point. It was going to be a lot of hard work.....or so I thought.

I thought it would be hard work, right up to the moment I visited the official websites for each of the candidates. On arriving at each of the sites, I looked at the links and clicked on the links for 'Jobs and the Economy' (identical names for both sites). I fully expected to find some soundbites, and some general waffle on the section home pages. They are both, after all, politicians.

What I did not expect was that both of the official sites go no further than waffle and soundbite. They are instead filled with vague and unsubstantial content that fails to tell you what you should know; the actual detail of their economic policy. Whilst some might argue that I should trawl through speeches, the endless commentator analysis, I would say one thing; an official website for a candidate for the US presidency should absolutely include the detail of the policy that they plan to enact. It is their official website, and should have, in 'black and white', details of their policy.

If I was a US voter, my answer is simple. I would not vote for any candidate who fails to give an accountable and clear description of exactly what they plan to do on economic policy, and they should do so on their own official campaign website. Neither candidate passes this test.

If you doubt what I am saying, take a look here for Obama, and here for Romney.

Although I say vote for neither, their official websites are not equal. Whilst Obama's site is horrifically bereft of any substantial content, at least Romney makes some attempt to flesh out his economic policy.This pathetic discussion is typical of the Obama website:

Made in America

forward

President Obama has a plan to bring jobs back to the U.S. by eliminating tax breaks for companies that ship jobs overseas, and creating incentives for businesses to bring jobs back to America.

Perhaps pathetic is too kind. This is an insult to the intelligence. A further insult is that the links to the policy sections is titled 'get the facts'. It reminds me of Obama's first presidential campaign. Whilst so many people around me were lauding him, I kept asking the same questions; what will he actually do? From my perspective, it appeared that Obama was going to be elected without any real policy commitments and/or would be elected with policy commitments that shifted with the audience for his speeches. His official website follows this pattern. Sorry if it sounds partisan, but it it pathetic.

As for Romney, I have said he is somewhat better. By this, I mean better than pathetic. Not much so. Instead of barely a paragraph of soundbite, there is some 'half-substance'. On the home page, there are some links to policy areas, and some detail of the policy discussion in each area. I have copied 'Mitt's Plan' on trade below in full as an illustration:

Mitt Romney believes that free trade is essential to restoring robust economic growth and creating jobs. We need to open new markets beyond our borders for American goods and services on terms that work for America.

Opening New Markets

Every president beginning with Ronald Reagan has recognized the power of open markets and pursued them on behalf of the United States. George W. Bush successfully negotiated eleven FTAs, encompassing sixteen countries. He also had the vision to commence negotiations with a number of allies around the Pacific Rim to expand significantly the Trans-Pacific Partnership. All told, these agreements have enabled people across the world to come together and build a better future. Economists estimate that the agreements have led to the creation of 5.4 million new American jobs and support a total of nearly 18 million jobs. Looking beyond just our FTA partners, our total exports support nearly 10 million American jobs. These are not just jobs; they’re good jobs, paying significantly above average, and more than one-third are in manufacturing.

• Reinstate the president’s Trade Promotion Authority
• Complete negotiations for the Trans-Pacific Partnership
• Pursue new trade agreements with nations committed to free enterprise and open markets
• Create the Reagan Economic Zone

Confronting China

China presents a broad set of problems that cry out urgently for solutions. It is time to end the Obama administration’s acquiescence to the one-way arrangements the Chinese have come to enjoy. We need a fresh and fearless approach to that trade relationship. Our first priority must be to put on the table all unilateral actions within our power to ensure that the Chinese adhere to existing agreements. Anyone with business experience knows that you can succeed in a negotiation only if you are willing to walk away. If we want the Chinese to play by the rules, we must be willing to say “no more” to a relationship that too often benefits them and harms us.

• Increase CBP resources to prevent the illegal entry of goods into our market
• Increase USTR resources to pursue and support litigation against unfair trade practices
• Use unilateral and multilateral punitive measures to deter unfair Chinese practices
• Designate China a currency manipulator and impose countervailing duties
• Discontinue U.S. government procurement from China until China commits to GPA

Well, there is some kind of half-substance in this. In the original document, the bullet lists are in the the colour normally used for links; I mistakenly assumed they were actual links that would take me to more detail.....but 'no', above is as much policy detail as you get. Not far from useless. For example, for point three of the last section, what punitive measures, under what circumstances, and under what legal framework?  We have no idea, just a vague commitment to so something 'punitive'.

So, given a choice, who would I vote for; neither. With a gun to my head, I would prefer Romney, as at least I have some vague notion of his official economic policy. But I emphasise, 'with a gun to my head'. As such, if you do not have said gun against said head, do not vote. You do not know what you are getting, and have no official 'in 'black and white' position to hold these comedians accountable. This is not democracy, it is a popularity contest with the depth of American Idol. For US readers, think hard about your political system; it looks broken. Don't support it with your vote.

Note: I have seen discussions in the media of their economic policy. Yes, they make speeches, they chatter, they answer interview questions, but where is the 'black and white' detail. The 'this is what I will do' presented in clear terms, as an official position.

If I have missed the location of this detailed policy plan, let me know, and I will correct this page. However, why would they not put such detail on their official campaign sites?  Also, neither website declares itself as an 'officially' endorsed website, but they certainly appear to be the official sites, and I have therefore treated them as such.

Nationalisation of Markets

Every once in a while, the Economist magazine gets it right. In this case, the point is made in the Buttonwood column, titled 'The Nationalisation of Markets':

EACH step taken by the authorities over the past five years has been designed to prop up the economy and save the financial system. But the cumulative effect has been the creeping nationalisation of markets. Central banks are the biggest players in many rich-world government-bond markets. Equity markets seem to perk up only when central banks are expanding the money supply. And banking systems are incredibly reliant on implicit or explicit government support.

It is a very worrying point, and reflects the discussion of Richard Duncan that I considered in a post a while ago. I summarised his position as follows:

The most interesting point about the talk is the dispassionate approach to the current and future situation. He simply accepts that, in a few years time, the world economy will have a horrendous crash, that states are now fully in the driving seat of the world economy, and most importantly that investment choices should now be based upon state action rather than market drivers. In simplistic terms, whenever a government prints money, his answer is buy, buy, buy!

When listening to Richard Duncan, some might suggest that his view is an outlier, or even outlandish. However, we know that, when the Economist reports the same thing (albeit in a column rather than an editorial), there has been a shift in broader perceptions about what is going on in the global economy. For regular readers of the blog, the idea that states are in the driving seats is nothing new. For example, in January 2010 I had the following to say, in a post titled 'Masters of the Universe':

I am not sure that anyone can actually pull apart the increasingly tangled knots between the financial system and the state. They appear to be mutually dependent, with the state providing guarantees, and the financial system funding the state with financial support through bond purchases to shore up their capital ratios, and so forth. How convenient that bank capital adequacy encourages the holding of government debt. Going back to Renaissance Italy, bankers were granted licenses and monopolies if they were willing to lend to the state on preferential terms. Nothing has changed. 

I described how governments were intervening in ever wider areas of their economies. I went on to say the following:

Ambrose Evans-Pritchard is right when he suggests that we should rip up the economics textbooks. What we are seeing is a grand experiment, in which economists and policymakers are attempting to structure wealth in economies by fiat. As each lever is pulled, as each policy is enacted, there are ripples through the world economy. Flooding $US into the markets whilst holding interest rates low sees the export of $US popping up and creating bubbles elsewhere. Backstopping the mortgage market sees foreclosures reduced, but at the risk of calling into question (contributing to doubts about) the financial viability of the state. Holding the value of the RMB down leads to greater trade imbalances. Each policy has a consequence, and each policy interacts with the policy pursued by every other government.

In other words, as each lever is pulled, the consequences defeat the intention of the lever puller. For example, if the trade imbalances destroy the economic stability of the destination of Chinese exports, where will this leave the Chinese economy? The more each state pulls on the levers, the greater the turbulence between each of the economies. The world economy is a dynamic system, such that policy in one country impacts on the economy of another country, which then reacts with its own policy provisions, which then impact upon other countries. It is an endless cycle of reactivity, with each reaction driving further reaction, and developing an increasingly unstable system as each country enacts ever more dramatic policy to counter or ameliorate the effects of the policies of other countries.

A simple example is the relatively recent Japanese policy of printing money to stave off deflation. With rock bottom interest rates, the newly printed money was simply exported into other countries in the so called 'carry trade'. Within Japan, deflation persisted, whilst the newly printed Japanese money appeared in other countries, contributing to the process of asset price inflation in the countries that were the destination of the carry trade. The policy levers were pulled, but the consequences were far from those that were intended.

What textbook might be able to predict the outcome of such a dynamic system? Despite this, we see the policymakers pulling on their levers, and offering confidence that they know what they are doing. Apparently, the masters of the universe are in control.

I wrote this a long while ago, and we can now see that states are now firmly in the driving seats of global markets. The problem that I long ago identified is now playing out on the world stage. The 'masters of the universe' kept pulling on their policy levers, the ripples radiated out, interacted with the ripples of other policy levers being pulled, and the result is ever more pulling on policy levers. That we are now in a position in which governments are driving markets is unsurprising, and was the inevitable result of the dynamic that states set into action.

The fundamental problem is that, as the world situation deteriorates, the policy actions are becoming ever more extreme. The LTRO was but one example of the escalation, and there is surely more to come. The worrying part of these actions is that those who are pulling the levers are doing so in the belief that they are taking actions to correct problems in their economies, when the reality is that they are now fundamentally in the driving seats of their economies, and the problems that they seek to resolve are problems that they, and their colleagues in other countries, are creating. The markets are now resting on government policy actions, and they created the situation where this was the case. It did not happen by magic, but specifically because the extremes of policy interventions were overtaking 'normal' market signals.

At this point, the sane response would be to pull back. However, as the 'masters of the universe', policy makers are simply too arrogant. They think that they know what they are doing. They cannot see that the current parlous situation is being derived from their own policy responses. They are dealing with a system of such huge complexity that each action that they take can never have a predictable response.  This has always been true to some degree, but the extremes of current policy have changed the degree of the outcomes, and the intensity and the complexity of the feedback from each policy provision. A very simple illustration can be found in the LTRO, as I discussed a short while ago:

The problem is simple. No external investors believe that there is any real commitment to policy that might allow borrowers to pay back their debts. The only way any sane person will purchase the debt is if it sold at fire-sale prices, which means big losses for current holder of 'periphery' European debt. Instead, the only way forwards is for the European Central Bank (ECB) to continue its backdoor bailouts, by continuing to lend to bankrupt European banks so that they can buy their home country sovereign debt, and thereby expose themselves to ever more bad debt.

Having bought so much euro zone debt, banks in the periphery are now major holders of their governments’ liabilities and will be sitting on losses, given recent selling of peripheral debt, according to Das.

“As with the sovereigns, the LTRO does not solve the longer term problems of the solvency or funding of the banks, which now remain heavily dependent on the largesse of the central banks,” said Das, who fears deep recession. “It is a government-sponsored Ponzi scheme where weak banks are supporting weak sovereigns, who in turn are standing behind the banks — a process which can be described as two drowning people clinging to each other for mutual support.”

The analogy in the quote is quite apt. For those that have not read about it, the LTRO (Long-Term Refinancing Operation) is the ECB's complete abandonment of Germanic prudence, whereby bankrupt European banks are being bailed out by the ECB. As one wag put it, the ECB is accepting bus tickets as security for the lending at below market rates. The really stunning part of this is that it is possible to find commentators and analysts who support this lunacy. I mean really, bankrupt sovereigns supported by bankrupt banks, which in turn are supported by bankrupt sovereigns? And this is a good idea?

A good idea? Pour money into banks in countries like Spain, encourage the banks to buy their own sovereign debt and this will fix both the states and the banks. The result of this madness can be seen emerging into the financial headlines. When we read those headlines, we absolutely must remember that someone in a meeting/presentation actually said this was a good idea. This person was one of the self-selected 'masters of the universe', undoubtedly supported their good idea with reams of economic theory, but nevertheless was unable to foresee that their actions have left, for example in Spain, governments and banks in worse condition than before they started.

And here is the rub. As the situation continues downhill, there will likely be another policy response. It will now, as a matter of necessity, have to be even more extreme response than the last policy response. The problem has grown larger, not smaller, and the only 'solution' to the ever growing crisis will be a larger and more extreme policy responses. The illusion of control of the situation continues, but those who think they are in control just do not have any idea (or acceptance) that they are the problem, not the solution.