Streetwise Professor

November 10, 2012

No Joy in Mudville, Second Term Edition

Filed under: Economics,Financial crisis,Financial Crisis II,Politics,Regulation — The Professor @ 10:43 am

Soon after the 2oo8 election, I wrote a post titled “No Joy in Mudville” in which I prophesied numerous malign effects of the Obama election: the post got some notoriety, including a pickup by the WSJ Political Diary.  Although I was off on some of the specifics, I think I was right on the essentials.  Four years of cascading progressive statism, with a heavy measure of foreign policy incompetence as an added bonus.  And four years of moribund economic performance.

My pre-election appraisal was that defeating Obama was a necessary but not sufficient condition to stave off serious decline, and perhaps crisis.  I had little hope that Romney or the Republicans would have been able to address the deep structural problems the nation faces, especially if they had prevailed in a close election.  But I am nearly metaphysically certain that Obama and the Democrats won’t, in large part because they don’t perceive that we face serious structural problems arising from unsustainable entitlements, a fiscally incontinent government, and crushing regulatory burdens.  Indeed, they see these as features, not bugs. These were the main planks in Obama’s real platform: no substantive change in entitlements, more government spending-excuse me, “investment”-and more regulation.

Consequently, I predict continued sluggish economic growth-if we’re lucky-with a heightened risk of fiscal (and consequently financial) crisis, timing TBD.  The regulatory burden-most notably the Four Horsemen of Frankendodd, Obamacare, the EPA, and Other Assorted Insanity From Agencies You’ve Never Heard of-will make us pine for the growth rates of the 1970s.  Redistributionist-driven changes to the tax code which will raise marginal rates and particularly increase taxes on capital will create further drag, all the while doing nothing to improve the country’s fiscal situation (and in fact worsening it with non-trivial probability)

Slow growth, combined with continued high levels of government spending, a failure to address entitlement spending, and increased expenditures arising from Obamacare, will accelerate the deterioration of the nation’s fiscal condition.  Given the multiple equilibrium nature of government finances (where small changes in circumstances can lead to a jump from an equilibrium in which lenders are willing to rollover debt to one in which they aren’t), this deterioration increases the risk of a funding crisis that would make what is going on in Europe now look like a pleasure cruise.  (For those of you who take solace in the fact that other people might have it even worse, there’s always Japan, which would love to have our trivial problems.)  Any such crisis would inevitably be accompanied by a huge inflationary spurt, as inflation is de facto default: If it occurs before the Fed has trimmed its bloated balance sheet-and there is no sign that Ben will slim it down anytime soon-the spurt will be that much worse, as all those reserves (the Fed’s liabilities) that have been moving with virtually no velocity will start to turn over at an accelerating rate.

In other words, après nous le déluge doesn’t quite capture it.  Le déluge est maintenant. Well, perhaps not now now, but uncomfortably soon, and certainly en avant notre disparition, actuarially speaking.

There is widespread disquiet about the country’s fiscal and economic circumstances.  Indeed, if only economic and budgetary issues were in play in the election, it is my sense that the outcome would have been different.  But cultural, social, and religious issues prevented Romney from assembling a winning coalition.  The single issue cultural and religious right that blessed us with monstrosities like Mourdock and Akin-who became the poster boys of the Republican Party as a whole, due to the combined efforts of the Obama campaign and a supportive media-drove away many people with libertarian sympathies on both economic and social issues who would have been willing to vote for Romney if only economics and public finances were at issue.

Righteousness has a way of interfering with good judgment, and the ability to make rational calculation.  Cultural and religious conservatives have no way of prevailing on their agenda.  If anything should seem obvious in the aftermath of this election, that should be it.  Obama should have been extraordinarily vulnerable on the economic and budget issues that are conventionally believed to be decisive in national elections, but he prevailed nonetheless.  Why?  Social and cultural issues are the most likely explanation.

The result: a president and a Congress (especially the Senate) that is actively hostile to the agenda of the cultural and religious right instead of one that is at least not an enemy (even though it would be unable and unwilling-unless suicidal-to push that agenda), and inexorable movement towards fiscal catastrophe.

Well played.

If it were only about economics I would have some optimism-not much, but some-that we could address the growth, regulation, spending and entitlement issues.  But it’s not only about economics.  Social and cultural divides make it nigh on to impossible to assemble a coalition (under the aegis of the Republican Party) that can win a national election, and win it decisively enough to permit serious action on these budgetary and economic issues.

No Joy in Mudville, indeed.

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  1. The only problem with that theory is that there is nothing in the concern over abortion (always present) and religious liberty (freshly highlighted by Obama + HHS) that would have prevented making fiscal matters a major campaign issue. Romney did not spend so much of his time talking about the sanctity of Catholic hospitals that he never had time to talk about anything else.

    For reasons unknown to anyone on the outside, the Romney campaign just never focused on it.

    Comment by ThomasL — November 10, 2012 @ 12:15 pm

  2. @ThomasL. Romney didn’t talk about social/religious issues, but he was tarred with that stick by Akin and Mourdock. And the indications are that the evangelical vote was quite depressed this time . . . meaning that they drove away some potential Romney supporters, but didn’t step up themselves. The fact that Romney didn’t make an issue out of these things could well explain the lackadaisical evangelical support.

    The ProfessorComment by The Professor — November 10, 2012 @ 3:41 pm

  3. But if he had made a big deal out of it, that would have driven away even more of the mushy middle, libertarians, and others who fear theocratic tendencies. Which is *exactly* the Republican dilemma.

    The ProfessorComment by The Professor — November 10, 2012 @ 4:19 pm

  4. Feeling absolutely hopeless!

    Comment by voroBey — November 10, 2012 @ 11:04 pm

  5. Chin up, @voroBey. I keep consoling myself with two quotes: “There’s a lot of ruin in a nation” (Adam Smith). “There is a special providence for fools, drunkards, and the USA” (Bismarck).

    The ProfessorComment by The Professor — November 10, 2012 @ 11:36 pm

  6. Very true, unless GOP reaches out to the minorities and embraces diversity it will never win another Presidential election. But thankfully the Akin-Mourdock generation (and the rest of the crowd that went from Democratic to Republican after the Civil rights bill passage) is on it way out… I am somewhat more optimistic.

    Comment by Surya — November 11, 2012 @ 11:44 pm

  7. With all due respect, Surya, somehow I don’t think the problem is with the Akin-Mourdock generation as much as with the MTV generation – that is if we are looking at the issue from the long-term perspective. We have a shallow breed of young people coming up which has been indoctrinated in the concept of being entitled.

    This is largely an outcome of the conservative people not aspiring to be school and college instructors.

    Over the last 30 years or so the let has taken over the K12 schools and colleges. The indoctrination of students is being done in the most vicious ways in most of the academic establishments. And those who are not giving in to indoctrination are marginalizing themselves because if they express their views they are afraid for their grades and for being subjected to vicious aggression by their fellow students.

    In an increasingly materialistic society where the “coolness” is measured with the version of IPad or IPod in your possession or the brand of handbag you carry governmental “guarantees” sound appealing as it might be viewed as a mechanism of enhancing ones purchasing power – as naive as it might be if to think about it carefully. But careful thinking is not a collective thinking quality to the contrary of owning brand items.

    Much has been spoken about the election being lost because of the Hispanic vote. I think it is somewhat simplistic as other groups or a combination of them might’ve swung the election the other way – people under 30, single women, etc. In fact the generation under 30 scares me more in terms of what is to be expected than any other group.

    I think the problem is not the arithmetics but the erosion of culture.

    I have observed electoral process in a number of countries – developed or developing. At some places elections are rigged, at other places they result in bloodshed. But it is nowhere as ugly on a personal level as it is in the United States.

    Comment by MJ — November 12, 2012 @ 12:42 am

  8. […] predictions were right in […]

    Pingback by Breakfast Links - Points and Figures | Points and Figures — November 12, 2012 @ 6:21 am

  9. Agree with you on this. We have identified the problem, the solution is much harder as is seen in the comments. “Reaching out to minorities” is a broad statement. Even if Republicans ran an entire minority ticket with one woman on it, they would still be tarred and feathered. There is a tremendous social price to pay in the black community for being a Republican, Jewish too, and within some women’s groups. I suspect there might be a cost in other ethnic communities too.

    First the Republicans need to redefine themes, and then compartmentalize issues. For example, one theme might be economic liberty leads to individual liberty. Then the issue abortion takes a different frame. If we have good economic incentives, we will cause individuals to make different decisions. Secondly, if government is subsidizing or paying for abortion via Planned Parenthood-it affects everyone’s economic liberty so while we won’t overturn Roe v Wade-we can rightfully say we want all tax dollars everywhere to stop going for abortion. Then if you want to set up a 501(c)(3) to pay for abortions, have at it. But it’s each of our individual choices as to whether we support abortion or not.

    That’s where the party needs to go on every issue. Immigration is another one.

    Comment by Jeff — November 12, 2012 @ 6:32 am

  10. Obama ran as Santa Claus giving away Free Stuff from his Secret Stash.

    And on the idea that government is simply a big pharmacy which gives away contraceptive pills of all sorts to women.

    The Dimwitcrat party of Obummer is NOT the Democrat party of FDR or Truman – clearly.

    Even though Obummer the self-glorifying narcissist has proclaimed himself to be As Great As FDR – If Not Greater.

    But look at what the Entitlement Generations have created – the Obummerphone “lady.” Over 6 million view on You Tube (link provided on request).

    It was a close election.

    Every time the Dems have advice for the Repubs, it is to “diversify” and become — “Dems.”

    Since when did the federal guvmint, and especially the office of president, properly and in accordance with the constitution become : 1) a pharmacy 2) a wedding chapel, complete with a gay minister for gay marriages 3) dispenser of Obummerphones 4) dispenser of unemployment compensation 5) a hospital ward?

    The media hates Newt Gingrich because journalists, for the most part, with some brilliant exceptions, are lazy and stupid and limited to sound bytes, and Gingrich is able to articulate.

    Same with the Boston University professor who ran a few years ago for office.

    The Repubs ought to stop talking for the media, and start talking to the people via the media, whether the media likes them or not, and whether the media is biased or not.

    The Tea Party did it, and they are still around, despite the best efforts of liberal cohorts to scream them out of existence.

    Ronald Reagan also did it. The Governor of liberal Wisconsin did it. There are other examples.

    You are right, SWP, the deluge is now and Obummer, who is biracial and Arab (except for a tiny part Luo), by the way, not “African-American,” is not a leader. He is just a narcissistic prick.

    I am glad that there are checks and balances built into the Constitution.

    I am very glad that there is a Republican House.

    Comment by elmer — November 12, 2012 @ 8:12 am

  11. This is not well thought out, more of a working hypothesis-

    There are three main consituencies of the Republican Party

    1) Fiscal conservatives
    2) Foreign policy hawks
    3) Social conservatives

    with overlapping of these interests at the individual level.

    The Tea Party attempted to develop a coalition based strictly on fiscal conservatism. The Tea Party was criticized in the main by

    1) Democratic Party
    2) Media
    3) Foreign Policy Hawks/Republican Establishment (see John McCain and Lindsey Graham who I believe actually first coined the phrase angry white men in regards to the Tea Party)

    The social conservatives views are not widely held by the general voting population and so are an Achilles heel manipulated by the Democrats and the media to the detriment of the Republican Party.

    The Foregin Policy Hawks represent much of Republican leadership and see the key issue for the GOP as…Foreign Policy. This group of Republicans has done far more overtly to undermine fiscal conservatives than the Social Conservatives. But, the general voting public at thie time does not share their view on the relative importance of a foreign policy that doesn’t seem to provide any tangible economic or business benefit to the US.

    I doubt the GOP can progress until there is consensus about the balance between foreign policy costs and fiscal conservatism within the party istelf. Republican leadership also likes to play Santa Claus (h/t Elmer) and also to declare the air routes clean and green for Santa’s sleigh. Until foreign policy and fiscal conservatism are melded together into a consensus the party will remain divided (this in addition to the social conservative divide). It is difficult to convince the electorate that (in opposition to all previous experience) the party will be a wise and signicantly better steward of tax funds than the Democrats. So long as this is the case (good stewardship of money a wash) the electorate will decide based on other issues. Romney was easily attacked when he refused to detail what tax loopholes would be eliminated as part of his plan and that I am sure lead many voters to conclude-just more three card monty election year BS.

    I agree with MJ and others about the broader deeper problems and often think the US must sink lower than now prior to the start of a new broad growth cycle so that more of the electorate understands where this path leads and that it isn’t to middle class utopia but rather quite the opposite.

    Comment by pahoben — November 12, 2012 @ 11:30 am

  12. @pahoben. Very plausible hypothesis. Essentially what I mean when I say that the core of the Republican game is empty. No way to assemble a winning coalition because of incompatible demands/preferences.

    The ProfessorComment by The Professor — November 12, 2012 @ 11:35 am

  13. You are right and it is in all cases a more complex situation than just relying on envy and indolence to carry the day.

    Comment by pahoben — November 12, 2012 @ 3:48 pm

  14. I guess Kerry’s combat swift boat experience will be invaluable in Middle East/Afghan operations.

    Comment by pahoben — November 13, 2012 @ 9:56 am

  15. SWP, while I almost always agree with your analysis, I’m going to have to disagree on your post-election autopsy. Using Fair’s model but with 1992 adjustment for Perot, Romney and Obama got exactly what would be predicted. Why? There’s a 4.5% incumbent advantage. The Econ numbers driving the model aren’t great (or even good) but they aren’t terrible either, not enough to offset the incumbent advantage. A candidate with well-run campaign might do better by 1-2 percent (which would matter in a close election like this), but “social issues” don’t explain the low shares among Hispanics or Asians.

    Comment by BrianG — November 15, 2012 @ 11:22 am

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