Buyer's Remorse

From Jim Cramer's open letter to the White House yesterday:

I favored Obama over McCain because I thought Obama to be a middle-of-the-road Democrat, exactly the kind I have supported all my adult life, although I will admit to being far more left-wing during my teenage years and early 20s.

To be totally out of the closet, I actually embrace every part of Obama’s agenda, right down to the increase on personal taxes and the mortgage deduction. I am a fierce environmentalist who has donated multiple acres to the state of New Jersey to keep forever wild. I believe in cap and trade. I favor playing hardball with drug companies that hold up the U.S. government with me-too products.

But these are issues that we have no time for now, on the verge of a second Great Depression. This is an agenda that must be held back for better times. It is an agenda that at this moment is radical vs. what is called for. I am proud to have voted for the Obama who I thought understood the need to get us on the right path, and create jobs and wealth before taxing it and making moves that hurt job creation — certainly ones that will outweigh the meager number of jobs he’s creating.

Most important, I believe his agenda is crushing nest eggs around the nation in loud ways, like the decline in the averages, and in soft but dangerous ways, like in the annuities that can’t be paid and the insurance benefits that will be challenging to deliver on.

So I will fight the fight against that agenda. I will stand up for what I believe and for what I have always believed: Every person has a right to be rich in this country and I want to help them get there. And when they get there, if times are good, we can have them give back or pay higher taxes. Until they get there, I don’t want them shackled or scared or paralyzed. That’s what I see now.

The photo of Jim Cramer accompanied his essay on his Mainstreet.com site.

The Election

Why Obama Won

In two words: The economy.

According to The Political ("Exit polls: Economy top issue"),

The economy dominated voters’ concerns at historical levels in the presidential election Tuesday, according to preliminary exit polls conducted by The Associated Press and the major television networks.

Fully 62 percent of voters said the economy was the most important issue, six times more than cited the war in Iraq (10 percent), health care (9 percent) or terrorism (9 percent).

In a few posts last month (e.g., "Contingency and Causation" and "More from 'The Irrational Electorate'"), we referred to an article by Larry Bartels in The Wilson Quarterly, "The Irrational Electorate". In that article Bartels noted,

...studies of economy-driven voting almost invariably find that voters are strongly influenced by economic conditions during the election year, or even some fraction of it, but mostly ignore how the economy performed over the rest of the incumbent’s term.

The acute worsening of the financial crisis in mid-September erased Senator McCain's small lead in the polls and Senator Obama never looked back.

What sort of economic policies will President Obama pursue?

Broadly speaking, Obama supporters have fallen into two groups: those who voted for him because they thought he was an orthodox liberal (as some of his earlier statements, his background, and his voting record might suggest) and those who voted for him because they thought he was more of a pragmatic centrist (as some of his statements during the campaign, and some of the advisers he surrounded himself with -- e.g., Robert Rubin, Paul Volcker -- might suggest). We'll find out which group was right soon enough.

Is this a historic realignment?

Some pundits have claimed this, but I'm skeptical. Clearly, the Republican brand has been damaged, but the bursting of the credit bubble won't leave Democrats unscathed either. Democrats have benefited from invidious comparisons between the economy and budget under President George W. Bush and President Clinton (e.g., a budget surplus under Clinton and deficits under Bush), but going forward the basis for comparison is going to be a lot different. The deficits during the first years of the Obama administration are going to be easily more than twice as large as the largest deficit during the Bush years. Unemployment rates, and eventually, inflation and interest rates, will probably look significantly worse too. Granted, this will be due largely to the continuing effects of the credit bust, but then the surpluses under Clinton were largely due to the dot-com bubble. Presidents, and their parties, get the blame or the credit for economic conditions when they are in power.

Investment Implications

The conventional wisdom is that green energy and, perhaps to a lesser extent, infrastructure will be beneficiaries of President Obama's policies. That sounds reasonable. A big winner will probably be the venture capital firm Kleiner Perkins¹, which has been savvy enough to get in early on the green tech bubble and sign on Al Gore as a partner. Unfortunately, Kleiner Perkins isn't publicly traded, and if does go public in the next few years, its IPO will probably be a signal that the green tech bubble is about to burst.

A commenter on CNBC today mentioned another investment idea -- life insurers -- which should benefit from the reinstatement of the estate tax (since the wealthy often buy life insurance policies to cover their estate tax liabilities).

If Jim Rogers and others are right that the yawning deficits ahead will eventually lead to much higher interest rates, than it might make sense to short Treasury bonds, as Rogers says he is doing (or to invest in a fund such as RRPIX that inversely tracks Treasury bonds).

The photo above of Obama and McCain is from The Dallas News.


¹A small venture capital firm that is publicly traded, Harris & Harris Group (Nasdaq: TINY), has about 41% of its portfolio invested in what it calls "Cleantech". This page on Harris & Harris's website lists its Cleantech portfolio companies, and provides links for more information about each of them. I've owned a few shares of Harris & Harris since the early 1990s, before it became focused on nanotechnology, and then Cleantech.

Politics at McCormick & Schmick's

Above is a photo of last week's election season happy hour menu at McCormick & Schmick's.

A Tale of Two States: Utah versus Rhode Island

An article in last week's Economist (The Mormon work ethic: Why Utah’s economy is soaring above its neighbours") noted that Utah's unemployment rate is 3.5%. A few days later, a New York Times article ("Leading in Job Losses, Rhode Island Struggles On") noted that Rhode Island's unemployment rate is 8.8%. A number of factors contribute to this disparity, but a smart Republican strategist would focus on two of them: energy costs¹ and taxes on businesses². According to The Tax Foundation, among the states, Utah ranks 17^th in business tax climate, and Rhode Island ranks 50^th. According to the Energy Information Agency, Utah had the 5^th cheapest industrial electricity rates in July, with an average cost of 5.26 cents per kilowatt hour, and Rhode Island ranked 47^th, with an average cost of 15.53 cents per kilowatt hour.

Neither article mentions the Tax Foundation or EIA data I just cited, but the Economist does mention Utah's low energy costs, noting that "The state has experienced a minor semiconductor boom in part because of its cheap, coal-fired power", and the New York Times article mentions taxes, noting that "Many economic analysts and state officials say Rhode Island has long had a high tax burden for businesses, discouraging them from moving here."

¹Energy is one issue the GOP initially had some traction with a couple of months ago (e.g., "Drill here, drill now, pay less"), before the steep correction in oil prices.

²Republican candidates, such as McCain, generally focus on personal income taxes, which doesn't give them much traction anymore, since the federal income tax code is so progressive that most Americans pay little if any net federal income taxes, and Democratic candidates can always promise to make the income tax even more progressive, as Senator Obama is currently doing. Better to focus on business taxes, and explain how high taxes on business discourage job creation.

McCain's Base

In the 2000 Republican presidential primary, Senator McCain and his campaign staffers used to joke that "the press is our base". McCain had long had favorable relations with the press, particularly when he bucked his party on various issues, and that continued during his insurgent primary campaign against then-Governor George W. Bush. McCain enjoyed some favorable press during this year's Republican primary as well, but once the general election campaign between McCain and Senator Obama began, McCain's press 'base' largely deserted him. The Pew Research Center study released last week provides some evidence of this (see: "Canvasing Campaign Media: An Analysis of Time, Tone and Topics"; the histogram above comes from this study). According to the Pew study,

In the six weeks following the conventions through the final debate, unfavorable stories about McCain outweighed favorable ones by a factor of more than three-to-one [...]

The Pew Research Center study summary report asks whether media bias has played a role in this negative coverage,

One question likely to be posed is whether these findings provide evidence that the news media are pro-Obama. Is there some element in these numbers that reflects a rooting by journalists for Obama and against McCain, unconscious or otherwise?

Maybe not, says Pew:

The data do not provide conclusive answers. They do offer a strong suggestion that winning in politics begets winning coverage, thanks in part to the relentless tendency of the press to frame its coverage of national elections as running narratives about the relative position of the candidates in the polls and internal tactical maneuvering to alter those positions.

Many conservatives have long complained that since most journalists tend to be Democrats, the mainstream media is inherently biased against conservatives (although they are sometimes more tolerant of liberal Republicans). This week the Washington Post Company's online magazine Slate was open enough to publish a piece detailing who its staff members and contributors were supporting in the upcoming presidential election. The results won't do anything to assuage conservative complaints of media bias: 55 Slate staff members and contributors are supporting Obama, versus 1 (Deputy Managing Editor and Copy Chief Rachel Larimore, who hopefully doesn't have to eat lunch by herself) supporting McCain (you can read their explanations of their votes here, "How we're voting: Obama wins Slate in a landslide").

McCain Should Bring Back the Straight Talk Express

Can a Republican married to a beer distributorship heiress win the presidency by railing against Wall Street and otherwise engaging in populist demagoguery? That doesn't seem to me to be a promising strategy. Why not engage in a little of his famed straight talk and point out that one of the causes of the current crisis was that millions of Americans borrowed recklessly and then walked away from their obligations?

Obama has followed a similarly dishonest populist tack, as even his ardent supporter Andrew Sullivan acknowledges,

Instead of telling Americans in no uncertain terms that their recklessness has consequences, he too is peddling populist blather. He too will spend money the government doesn’t have to protect small-time borrowers from the consequences of their folly. He too blames companies that operated within the rules as dictated by Congress for maximising their profits by irresponsible lending.

All the more reason for McCain to try to differentiate himself by not pandering, but that would require smarter positioning than his campaign has demonstrated over the last week. The smart thing to do now is to be statesmanlike and express support for the bipartisan rescue being negotiated this week. No more stream-of-consciousness musings about firing administration officials -- if anything, express confidence that we're in good hands with Paulson and Bernanke. The next step is to start looking ahead, for the next bounce of the ball. That means acknowledging, as Mark Cuban mentioned in his blog, that this rescue will be a fiscal game changer¹. The economic proposals made by McCain and Obama that were unrealistic before won't become any more feasible after Congress allocates ~$700 billion to buy up distressed mortgage debt.

McCain can benefit from recognizing this reality first. That may require him to walk back some of his tax cut proposals, but that will probably cost him less politically than it will cost Obama to walk back his promises, simply because Obama has made more generous promises to a broader cross-section of the electorate. A Republican candidate who maintains even the faintest claim to fiscal conservatism, as McCain once did, can't beat a Democrat in a Santa Claus contest anyway, so why try? Why not propose policies that will lead to a stronger, stabler economy in the long run, and trust the American people to vote for them instead of trying to promise them a bigger free lunch than the other fellow?

¹It's also important to distinguish between the fiscal response to the current crisis, which needs to be hammered out within days, and the regulatory response, which doesn't and which would benefit from a thoughtful deliberation by the next administration and the next Congress.

The Atlantic's Megan McCardle on the Politics of the Financial Crisis

Excerpted from Megan McCardle's Atlantic column, "The Blame Game":

Naturally, the two presidential candidates are moving quickly to deal with this crisis -- that is, to blame it on everyone except themselves. John McCain and his surrogates are pushing the dubious notion that the primary problem is a lack of transparency and accountability. He might send someone down to Lehman's trading floor to ask the people packing up their desks whether they feel they've gotten away with something.

Meanwhile, Barack Obama is pointing the finger at John McCain, or at least Senator McCain's ideas:

The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store. Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression.

I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to.

This may play well on television, but it is rather disappointing coming from the man who promised us a new kind of politics. There have been no significant changes to the financial regulations in the last eight years that might credibly have created this crisis (the one major alteration, Sarbanes-Oxley, moved things in the other direction). And it's hard to blame loosened oversight when the entire market systematically overvalued the now-toxic securities. Lehman Brothers was not, after all, trying to put itself into receivership for the sheer joy of molesting taxpayers.

Worth reading the rest of it.

It's a little disconcerting to have both major party candidates running as populists. Of the primary candidates in both parties this year, I think the one who might have been best-qualified to deal with the financial crisis was Mitt Romney. He didn't have the sorts of qualifications the American public seems to prefer this year though: he wasn't raised by a single mother, didn't spend any time in a POW camp, didn't live until age ten in Scranton, PA, didn't seem like he actually liked hunting, etc.

New York Times Book Reviewer: A Vote for McCain is a Vote for Apocalypse

Author Robert Stone, hired by The New York Times to review the book Forever War by NY Times war correspondent Dexter Filkins, offers his calm assessment of the consequences of a McCain victory in November's election:

As for the 2008 presidential election, Stone had this to say: “If, in this campaign, illusion triumphs over what we must believe is reality, we will fail as a nation. There is, after all, a point of no return. If McCain wins, history is here big time, scythe, sackcloth and all four horsemen.”

An Astute Comment

On his Atlantic blog, Marc Ambinder posted an open thread for Obama supporters, inviting them to answer the question of how the Obama campaign should respond to the Palin selection. Ambinder has received 437 comments in this thread so far. One, by a commenter calling himself "Gamechanger", was astute. Unlike some professional pundits who have written that McCain was foolish to pick Palin because it weakened his advantage in experience, "Gamechanger" analogizes the selection to an exchange of pieces in chess:

The themes of the campaign this year are change and experience. The democrats had only to run against Bush to win, and Obama proved to be the most effective anti-Bush democrat. McCain, on the other hand, has to run against Obama AND Bush, and also has to radically remake his party (to expand the Republican voter base by adding independents and others).

This situation favored Obama and he entered his convention slightly ahead of McCain. And here is where strategy comes in.

In chess a player sacrifices a pawn or other lesser piece to execute a winning strategy. In this case McCain sacrificed his strongest issue, experience, in order to steal the change theme from obama.

Why did he do this? Two facts are clear:
1. everyone who was going to vote for Mccain on the issue of experience was already on his side

2. He was losing to Obama

Hillary Clinton tried the experience theme (the 3AM ad) and although it slowed Obama, she lost. Similarly, although McCain was running a decent race, the terrain was so unfavorable that given the high level of enthusiasm of Democrats, the huge number of new voters, the desire for change was going to overwhelm concerns about experience.

So, he tore up the game plan (which was to run as a moderate and try to get independent/moderate voters who worried about experience, while hoping not too much of the conservative base sits it out) and wrote a new one -- the all-Western reform ticket.

Missing from McCain's Speech

Another area where there seems to be little daylight between the major party candidates is in the conceit that government-sponsored training or education is an all-purpose solution for economic advancement. McCain had a better real-life example of economic advancement in the audience, in his running mate's husband Todd Palin. Todd learned one of his trades from the company he worked for, BP -- not from a government-sponsored training program (I doubt he learned his other trade, commercial fishing, from a government program either). McCain could have used the opportunity to point out that allowing more domestic energy production will create more high-paying jobs like the one Todd Palin had, but I guess that would have conflicted with the line elsewhere in his speech where he made bogeymen of big oil companies.

Although increasing domestic energy exploration and production will create more high-paying jobs, of course it won't be a panacea either for those whose jobs are lost to outsourcing. That said, the idea that the government is going to retrain laid off workers for jobs that "won't go away" isn't serious. How would the government know what skills will be needed five or ten years down the road? A better approach from the government would be to enact policies that will encourage more companies to set up shop and hire people in this country.

Unskilled Immigration and Economic Statistics

Robert Samuelson ("The Real Economic Report Card") brings up a point that ought to be obvious but isn't made more often: unskilled immigration makes economic statistics such as poverty levels and the number of those without health insurance worse. It seems like common sense that if you import more poor people whose likely jobs (landscaper, busboy, non-union construction worker) usually don't include health insurance, you will end up with more poor, uninsured people in the country than you would otherwise. Perhaps the reason this point isn't made more often is that immigration is one area where there currently is no significant policy difference between the major party presidential candidates.

It makes some sense, from a political perspective (if not from an economic perspective), for Democrats to be in favor of increasing unskilled immigration. If unskilled immigrants become citizens, they are more likely to be net recipients of government benefits, and thus more likely to vote for the party that favors more progressive taxation and more generous spending on social services. Unskilled immigration makes less sense politically for Republicans, but it makes economic sense for certain Republican constituencies, e.g., the small business owners who hire the busboys, landscapers, etc. From the perspective of these small employers, the GOP offers the best of both worlds: support for cheap labor and support for pro-business policies such as lower taxes. Of course, over the longer term, it's hard to see how an embrace of unskilled immigration won't consign the GOP to permanent minority status, unless somehow these immigrants are never given a chance at citizenship, which seems unlikely.

The real estate bust, by drying up the demand for residential construction laborers, seems to have put this issue on the back burner for now, which helps John McCain, since his stance on immigration is one of the areas where he is against his base.

Are High Energy Prices Shifting Attitudes on Energy Policy?

A Conservative Newspaper's Point of View

The editors of Investor's Business Daily argue in favor of increased domestic energy production in this editorial, "Energy Myths". Excerpts:

Many in Congress seem either disconnected from reality or intentionally disingenuous about our energy crunch. They have well-honed negative responses to common-sense ideas about solving our energy crisis, particularly drilling for more oil.

These responses are based on a number of widely held myths. Sadly, they've become the backbone of the Democrats' energy policy. They include:

• "We can't drill our way out of our energy crisis."

Actually, we can. As we've noted before, conservative estimates put the total amount of recoverable oil in conventional deposits at about 39 billion barrels. Offshore, we have another 89 billion barrels or so. In ANWR, 10 billion barrels.

[snip]

ANWR alone is expected to yield 1 million barrels of oil a day. Now make the highly conservative assumption that we're able to get a like amount of oil from the other sources — for a total increase of 3 million to 4 million barrels of oil a day.

That's an enormous rise in oil output. Today, we produce just under 8 million barrels of oil a day from domestic sources. So we could, in effect, boost our energy output 50%, and thus our energy independence, by bringing an additional 4 million barrels of oil to thirsty world markets each and every day.

By the way, those calculations don't include the trillions and trillions of cubic feet of natural gas found in the same locations, which, along with nuclear power, could be used to fire our power plants.

Are more Americans coming around to the IBD's point of view?

Apparently yes, according to the results of the Pew Poll released this week. As energy prices have gone up this year, support for domestic energy exploration and production has increased:



More interestingly, support for these policies has apparently more than doubled among self-categorized liberals:



Implications of this Shift in Attitudes

The first question is whether this shift in attitudes will lead to a shift in federal energy policy, and if so, when. I imagine that if energy prices stay high long enough, and support builds among the public for increased domestic energy exploration and production, federal policy will eventually change accordingly. There are a few factors that could delay this process though:

- A cyclical correction in oil prices could reduce the political pressure and keep this issue on the back burner.
- Those who have placed their bets on alternative energy may continue to oppose expanded domestic oil & gas production. Politically-savvy alternative energy entrepreneurs such as Vinod Khosla and Al Gore likely will continue to advocate for increased federal funding for alternative energy instead, as will large companies that have been positioning themselves to benefit from an expected surge in green energy initiatives (e.g., GE).
- Affluent political donors tend to be to the left of the general public on energy issues. See, for example, the Rockefellers' recent proxy challenges against Exxon Mobil.
- The current political environment. Recent polls favor Obama to win the presidency, but even if McCain wins, his views on energy policy don't appear to be radically different than Obama's, notwithstanding McCain's recent flip-flop in favor of offshore drilling. McCain still opposes drilling in ANWR, and McCain styles himself as a 21st Century Teddy Roosevelt, the Conservationist, Progressive president who busted up Standard Oil and created scores of national parks. In either case, Congress is likely to have a stronger Democratic majority next year, and the current Democratic Congressional leadership remains opposed to expanding domestic energy production.

The second question is, assuming the political stars align, and policy changes to expand domestic energy exploration and production, what effect will that have on energy prices? The IBD editorial I excerpted above predicts that this would immediately lower energy prices, since it would raise expectations about future supply. I'm skeptical about this for a couple of reasons. First, once new federal lands and waters are opened to exploration, it might take a couple of years of mapping and exploratory drilling to get a better sense of the probably supply; second, large oil finds in recent years (e.g., the discoveries off the coast of Rio de Janeiro) haven't seemed to put much downward pressure on oil prices.

The upshot of all of this, from my perspective, is that although shifting attitudes on energy policy may bode well for increasing energy supplies in the U.S. over the long-term, it doesn't seem that they will have much impact on supplies or prices over the next five years. So I remain confident that, although we'll probably have a cyclical correction or two along the way, the secular bull market in oil will continue for the next five years.