US Elections: Grand Plans versus Reality

WASHINGTON – America is in a deep funk. We have this unprecedented financial crisis whose dimensions, potential reach and likely duration we are still not sure about. Hence fear, if not outright panic. But, whatever the many countermeasures already undertaken and the chances of avoiding the worst regarding this plague, we should also keep in mind that this upheaval hit an economy already in bad shape, weakened by low growth, unsustainable leveraging, excessive consumption and negative personal savings.

The painful reality is that, quite apart from surviving the financial crisis, in order to recreate some balance and chances for future growth, we have to accumulate fresh capital for new productive investments. And this will take time, given the need to pay off the mountain of debt. There has been too much borrowing for unproductive purposes. Highly indebted individual consumers will have to cut spending for a number of years. This means recession, given the oversized relevance of personal spending as an engine of growth in the US. Prolonged spending cuts will spell disaster all over and especially in the huge services sector that depends on consumers. And all those clerks and waiters and salesperson who lose their jobs will also stop consuming, causing more contractions and more misery.

In all this, we have a presidential election. But the curious thing is that, while the candidates talk about this crisis, they sort of skip and jump, without seriously pointing out that this is going to mean prolonged pain throughout. In a rather disingenuous way, while the candidates admit the problem, they peddle their “plans” as magic remedies that will fix everything in almost no time, omitting the simple fact that, as we are already deeply in debt, the Government’s options will be severely constrained. Given the huge financial commitments that we have just created through various emergency programs, piled on top of already unsustainable public spending, realistically we have no real money for anything new.

Yet, the glaring contradiction between the current fiscal predicament and the electoral promises which promise more spending, strident as it is, goes essentially unnoticed. If a candidate gives a coherent 5 point solution to take care of this or that, well, this is “His Plan”. It does not matter that the solution is premised on increased spending that is just not available. The armies of commentators simply omit to mention this. Or, if they do so, they say it timidly. “Oh well, will candidate X be able to implement the overhaul of health care under the present fiscal circumstances”? Well, reason tells us that, no, he will not be able to do this. But, since the media and the analysts love someone coming along with a comprehensive solution, forcefully presented, they do not seriously challenge the fact that this or that program is based on unlikely premises of fiscal solvency.

Overall, it seems clear that, starting with the elites who shape the national commentary, people do not demand the “truth”, whatever that may be. The educated elites like to listen to a good doctor who seems to have the good cure, what it takes to fix the problems quickly and (maybe with magic) with little or no pain. There is no deep analysis of the assumptions, as long as the cure is well presented in an earnest and convincing way. And the winner is the one who sounds more persuasive. And if the solution is well articulated in 4 or 5 steps that, at least in principle, seem to follow some logic, well this is a “Real Plan”.

Barak Obama has come up with many such Plans. He sounds in control and thus intellectually ahead of his more disorganized opponent who seems to be all over the place and who has failed to articulate an equally compelling “Grand Strategy”. Besides, the bedside manners of Dr. Obama are clearly superior to those of Dr. McCain. Barak Obama successfully morphed from Messianic, visionary new leader who would transform the entire substance of the political dynamics in Washington, to the steady, reliable hand who can talk ably about grand policy plans and be believed in so doing. Hence he wins points for being  calm, while McCain appears flustered and unduly aggressive. Not bad for a freshmen Senator who was derided by his Democratic opponents during the primaries as naïve and inexperienced, someone whose career could be condensed in a couple of paragraphs. While one might argue that Senator Obama has grown through the grueling campaign process, we should not make the mistake that equates personal charisma which worked as a magnet to attract unprecedented funding for a well managed campaign with good governing skills. Right now the name of the game is persuasion. While governing certainly includes the ability to persuade, it is about persuading about doing “the right things”. And that is another matter.

On the other side, the feisty McCain-Palin Maverick Team has sputtered. Its message appeals mostly to its traditional base, a disoriented Republican constintuency that has become narrower and smaller in recent years. The strategy of appealing to the millions of uncommitted through an unconventional message that would transcend tradional politics has essentially failed. Their basic theme of “going to Washington to clean up the mess”, (including the mess caused by fellow Republicans), may sound good to some; but it is not reassuring to the millions who want “things” to be done, now, “for me, the suffering citizen”. McCain has not created a message that truly broadens his party’s political appeal and he does not have the polished plans that would include “things” to be delivered; or if he does, he does not communicate them well. His plans do not resonate.

Whereas Dr. Obama has a solid list of therapies and remedies, (remedies that include tangible benefits), targeted to the middle and lower middle class. And he explains them in a calm and steady way. He sounds “in control” and thus believable. And he is believed. He will tax some people; but, hey, not you and me. He will find money to reform health care, and, by modernizing antiquated administrative systems, he will manage to realize substantila savings, thus diminishing medical cost for all. He will get those millions of outsourced jobs back. He will give you what you need for work, child care, access to university, retirement. On top of that, he will retool the economy, revamp Detroit and create millions of new jobs by turning America into an efficient energy producer and consumer through massive investments in renewable energy. And he will end all the wars. He will finally catch Osama bin Laden and he will talk to foreign leaders, so that we can finally regain respect and good will in the international arena. Yes, he will do all that, deficits and economic meltdown notwithstanding.

Dr. McCain may have a few interesting points here and there; but his presentations are not compelling and they are not smooth. It all looks a bit confused. His good intentions are not necessarily in question; but his ability to keep it all together is in doubt. He has not convincingly articulated a “Grand Policy Plan” that will help Middle America. Besides, he is getting old. When he talks, his delivery is not secure and his voice not as silky as the other physician’s. His number two, Sarah Palin may be interesting. But she is too right wing for most independents and very green in terms of experience. Besides, McCain is too closely associated with the Republican Team in charge as the economic disease developed. Thus, one more reason to ditch the Republicans and try a fresh approach.

Of course, nothing, absolutely nothing in the record of either candidate indicates probability of success by choosing one or the other. While McCain has been around longer, showing some propensity to be a pragmatist, neither of the two Senators has had significant executive experience of any kind. They are politicians. They have not “run” anything. True, Obama’s smooth performance, his well oiled campaign, his long list of distiguished advisors would indicate an ability to manage and to plan. Yet again, quality of execution when governing is another matter.

But the national elites seem to have made up their mind based on appearance, debating skills and cleverness of delivery. But, most of all, the intellectual elites are instinctively in favor of social engineering. The consensus now being that the machinery of free enterprise is broken, they believe that now is the time to implement complex regulations that will bring about discipline and accountability. They are instinctively convinced that society needs to be fixed and that it is up to the technocratic elites (as they know better) to come up with the good solutions which they (the enlightened ones) will implement for the benefit of us all. And, as the intellectual consensus now is that the current crisis shows the perils of deregulation, the elites love the idea of being in charge of the plans to fix everything, while correcting injustices and finally creating a more equitable society.

So, the elites have already decided for Obama. Once the country digested the notion that a racially mixed candidate is quite alright, Obama’s talent as an articulate, thoughtful public speaker, seems to have done the trick. And the citizens are comfortable. Obama’s cure, at least on the surface, appears more detailed, better researched and more ably presented. Hence his lead in the opinion polls.

But does “The Plan” match reality? As I said, the question is not asked. For some reason a Big Plan is better than a Small Plan; even if it is based on questionable fiscal assumptions. This is the triumph of good presentation and clever delivery of a well scripted policy book; even if completely divorced from the unpleasant reality of fiscal emergency in which we are, due to the current crisis. Obama wins because of well articulated presentations and because of the appeal that programs laced with goodies have with the suffering middle and lower middle class. But the truth is that most of what either candidate recite, however smart and intriguing, is largely a rhetorical campaign exercise.

Most of it will not be done, as there is no money.

Let’s clarify this. Well before the financial emergency, the federal government was already on an unsustainable pattern of rapidly increasing debt that goes back to the very beginning of the Bush presidency, almost 8 years ago. Lower taxes, runaway spending and two prolonged wars have massively increased public debt. Fiscal year 2007-2008 that just ended on September 30 got us the highest federal deficit in the history of the United States: 455 billion dollars. While this is bad enough, the raft of emergency measures just undertaken to contain and hopefully stop the bleeding caused by the consequences of the financial insanity of the last decade amount to an additional trillion, (and we are still counting) of new spending. This means that the projected deficit for Fiscal Year 2008-2009 (which just started on October 1) is about a trillion. These are fantastic inbalances, even for the world’s largest economy.

And if we look further down the line at the aggregate fiscal implications of larger numbers of older people who will be collecting pensions, while requiring medical care, we are told that America has already accumulated unfunded liabilities in excess of 50 trillion dollars. And this was before the extraordinary new expenses forced by the need to contain the consequences of the financial tsunami! In other words, unless the national priorities are drastically changed, quite apart from the present contingency, we are headed towards financial catastrophe. Given all this, with this gigantic and growing fiscal shortfall, the new President will see that the already constrained policy options will be severely limited.

The truth is that we have almost no discretionary spending left, as the revenue is both insufficient (hence the need to borrow heavily) and already committed. From the general revenue that Washington gets, first we must take out money to be paid as interest on the debt (which must be handed over to all those Treasury bonds holders). Interest is going to increase as a percentage of total outlays in light of the additional borrowing. Then take out from the pool of available funds all the large and growing (due to an increasingly older population) entitlement programs: Social Security, Medicare, Medicaid, veteran benefits. All these programs run on autopilot. These obligations must be paid, along with built in cost of living adjustments. And with this, we have already eaten up more than two thirds of the total revenue. Then we have Homeland Security spending. It will be difficult to cut from Immigration, Border Patrol, Airport Security and the like. If anything, the experts tell us that we should be spending more to make the country more secure. And finally we have defense spending. Of course, we can play a little with it. But not too much, with two wars underway. You may cancel, delay and stretch some of the weapons programs and other procurement. Maybe you could save a few billions. But, contrary to popular opinion, most of the defense money goes to salaries and funding for current operations. It will be difficult to maintain a fighting force and save significant money at the same time, even assuming a successful fast track out of Iraq.

Simply stated, what is left for “non defense discretionary spending” which includes most of what government does, beyond the entitlement programs and national security, is very little, very little indeed. It is roughly 15 per cent of the total kitty. That’s right, when you take out interest on the debt, entitlements, homeland security and defense, the rest is about 15 per cent of all the dollars that Washington can allocate. And even this relatively small slice of the total is pretty much spoken for. Unless we want to eliminate or downsize entire departments or agencies, (how about cutting down 50 per cent from Commerce, NASA, NIH, or Agriculture?), unless we want to significantly cut foreign aid or close down embassies, most of the discretionary money goes to run operations for the entire federal government at current levels. The wiggle room is minimal. Senator McCain talks  forcefully about the exponential growth of earmarks, that is money allocated for projects that do not really serve the public good. Still, we could eliminate all earmarks today and the basic fiscal picture would not change that much.

And so, this dire financial scenario means that the convincing delivery of detailed cures and remedies that supposedly will take out of this mess under the reliable care of Dr. Obama is mostly that: good delivery of good intentions. The hospital has run out of almost everything. The fancy new therapies require new money. The electoral programs are about reintroducing fairness, about giving more to those who do not have a seat at the table. But the ability to engineer these complex reforms assumes extra funds; and we do not have any.

The fact is that both Dr. Obama and Dr. McCain know this. All of Washington knows this. The media pundits know this. And yet, somehow, the game of make believe, whereby the candidates engage in debates about things that in reality cannot be done, continues. And the complicit pundits give high marks to whomever sounds better; the one who can deliver the clever line with a secure tone of voice, showing to have better command of the issues and better stage presence, along with the necessary gravitas or humor, depending on the need of the moment. Whoever “seems” to have the policy that “seems” to meet the needs, well presented and artfully delivered, will win. Obama is better at this. No question. And he will probably win because he appears more in command, while his promises have broader appeal.

But Obama is not auditioning for the part of President in a new movie. This is the real thing. Taking for granted that both candidates have a modicum of intelligence and perspicacity, to be more personable, as Obama is, is a good trait for any human being and in politics it certainly is a plus. To be inspiring and reassuring, as he is, is even better. But, while these qualities can engender trust, neither of them are substitutes for real governing skills. Simply stated, complex governing programs that promise fixes, assuming financial resources that will not be found, is either a dream or a hoax, depending on your preferences.

As I said, this is not a movie about Washington, this is the real thing. No money will make it impossible to implement these complex ideas, at least not as stated. What will actually be possible, given the uncertainties of the cost of the current crisis and the paucity of fiscal resources, has not been seriously discussed. But, for the moment, the national elites have decided that they like the sophisticated policy plans, as many of them dream to be in charge of implementation, showing thus their superior talent. In step with the national intelligentsia, the frustrated people seem to have decided that the one who has the best of list of promises and who unquestionably looks better on stage is the one to be trusted.

The “Fundamentals” of the US Economy

WASHINGTON – Senator John McCain has been repeatedly mocked by his opponent, Senator Barack Obama, for having stated very recently that the “fundamentals of the US economy are strong” –or words to this effect. Of course, in light of the significant slowdown, with rising unemployment and now the unfolding, disastrous Wall Street and Main Street meltdown, McCain’s sunny optimism sounds dumb. But, whatever it was that McCain really meant, there is an obvious distinction between “the fundamentals” of the US economy and the present contingency faced by America. The present contingency is as bad as it can be. The dominance of finance over economic activity –intended as production of new wealth– with financial wizardry having turned into recklessness, has dragged the whole edifice down. So, the current situation is bad, if not awful; and the severe damage may be felt for years.

The real fundamentals

But what about “the fundamentals”? And what can we say about them? If we really focus on the fundamentals, is McCain’s optimism as silly as Obama describes it? Well, here the evaluation is not as clear cut. A reply to this –indeed—”fundamental” question needs to be nuanced, as the fundamentals have changed –and not for the better. 

They used to be good

Until not too long ago, it could be argued that the basic elements of the US economy were, if not excellent, quite good. America routinely ranked in the very top tier in most international comparisons on competitiveness and easiness to do business. The positives included a truly free society; a reasonably educated, mobile and flexible workforce, depth of capital markets. America had and still has a system in which the rule of law is usually dependable, in which contracts are enforced. But, most importantly –and this is truly the envy of the world– America had a system that favored healthy synergies between outstanding academic institutions producing basic research, significant public and corporate R&D spending, entrepreneurship and venture capital.

Rewarding innovators

This future oriented mix made it possible, indeed always desirable, to push the envelop, to think and do outside the box, with the expectation of being financially rewarded for developing new products and bringing them to market. So, the system would brew innovators who could find the money to commercialize their inventions; while the market place rewarded success, creating thus more incentives for others to do the same.

Good results

And we see the results. It is not due to random accident that the most significant innovations of the unfolding knowledge economy have been hatched here, in the USA. A competitive environment, in turn, encouraged established economic sectors to adopt the cost saving, efficiency enhancing, new technologies, with the objective of making their businesses leaner and more productive. Because of these investments, the overall economy has become more efficient and more productive. More could be said, but these are some of the critical “fundamentals” that other nations wished they had. This was the picture until not too long ago.

Can public policy make a difference?

Sure enough, public policy does matter in this context, as it affects the basic environment in which economic actors operate. But if we would want to take literally Senator Obama’s scathing critique of McCain’s apparently uninformed optimism, concluding –as Senator Obama asserts– that the fundamentals of the US economy are bad, then public policy, whatever its goals, would face tremendous obstacles, assuming bad fundamentals.

…It can fine tune; but it cannot make things happen

Indeed, if the fundamentals were really bad, well, public policy alone, however thoughtful and inspired, would make small inroads, as it would fall on an unreceptive terrain. To name just one variable, should there be all of a sudden a dearth of entrepreneurship in America, with no new companies launched, how could we have growth and how could we bring innovation into the market place?

Or, on a different level, should morality all of a sudden take a fall, with most people becoming corrupt, public policy could not turn this around. Forgive the extreme example: you can have the best public policy in the Congo DRC, but results would be small, as the country, unfortunately, still lacks most of the fundamentals. Public policy can strive to create an environment more favorable to enterprise, but it cannot make it happen on a significant scale, just by fine tuning the rules and creating fiscal incentives. If we do not have the fundamentals, or if the fundamentals are skewed by other factors, (take social ties that constrain economic behavior in Japan), governmental action will have at best a limited impact.

Good public policy can help unleash enterprise but it cannot create it

Good policies, and let us assume that Obama’s ideas are excellent, can have a truly positive impact if the “fundamentals” are good. If the society is educated and healthy, if there is respect for the rule of law, if sophisticated skills exist and are constantly upgraded, if people on balance are law abiding, if the courts are impartial, then we have the basic ingredients. In short, “good fundamentals” are the preconditions for a performing economy. Good public can help optimize performance; but it cannot create the system. This is why, lacking the fundamentals, good policies will have a modest impact.

Fundamentals stem from societal values

The fundamentals come into existence as part of the culture, of the value system of a given society. Sure enough what governments do does matter; but public policy alone, divorced from broader efforts aimed at creating or sustaining values will do little. Creating those fundamentals is immensely difficult. And there is no clear road map. It is a matter of complex cultural transformations grounded on belief systems tested over time through experience and results. There is no clear recipe, no one size fits all.

Repeated failures of attempts to “import” fundamentals

And the evidence of how difficult it is to create the culture underpinning and sustaining the fundamentals is in the repeated and in some cases catastrophic failures of development economics aimed at introducing, via new policies, the good underpinning and the values that would sustain them –all these constituting the good fundamentals– in parts of the world that never had them.

The bad record of development economics

Hundreds and hundreds of billions and hundreds of country strategies later, the results in international development efforts are modest. And this is not for lack of persistence. Disappointing results simply underscore how difficult it is to create and sustain what  development experts fondly call “the enabling environemnt”. A good “enabling environment” assumes many if not most fundamentals to be already in place and vibrant. All this does not mean that, with good fundamentals in place, there will be no crises, even though the present one gripping America is exceptional because of its depth and reach. But a society in which the fundamentals are still basically sound can overcome massive crises like this one.

Lacking values, good policies rarely create fast transformations

Thus, it should be clear to all that, aside from exceptional contingencies like the present one, in most cases, an overall bad economic environment, characterized by lack of development or disappointingly modest rates of growth, is due to the lack of fundamentals. These fundamentals unfortunately cannot be quickly wished in place by wise and well meaning policy experts. While bad policies can contribute to bad economic outcomes, the reverse is not necessarily true. Good policies alone cannot rapidly create a healthy situation, if the “fundamentals” are not in place.

If new policies were enough, Africa would be booming

Indeed, if good intentions and well meaning effort alone (see above) would suffice to will the fundamentals in place, then Africa should be booming, as it has been the focus of relentless attention by development planners and strategists for decades. But growth in Africa has been disappointing precisely because many of the fundamentals are not yet there, or at least not there in the measure that is required to create the virtuous cycle of healthy growth begetting more growth. Of course, change is possible, and there are some encouraging examples. But change is usually slow and uneven.

In Europe: loss of an old pro-growth culture

And if we look at Europe, we see countries that are developed –in fact countries that historically invented development– but whose growth, overall, is disappointing. Well, the causes could be debated. But many would argue that low growth is due to a change in the culture, that is a change in the societal disposition with all the attendant repositioning of values and economic and social priorities.

Conserving what exists, rather than create new things

In Europe today, on balance, there is a stronger emphasis on equality and the creation of guaranteed good conditions for all. And so we have a concern for keeping people in their existing jobs, even if these economic activities are less competitive, rather than stimulating risk taking with the possibility, albeit not the certainty, that more competitive jobs will be created. Overall, a dependable status quo seems preferable to a risky, free for all system in which some will win but many may be losers. So, the delivery of social services comes before enterprise creation. While the goals of social policies are laudable, as they are aimed at minimizing disruptions, they detract resources from investments and growth.

Demographic trends: more older people and retirees

Furthermore, given the demographic shift in Europe to older and older populations, the focus on social programs will mean that a larger and larger percentage of whatever wealth is produced will be spent on the needs of the older people who are growing as a percentage of the total population. With more resources absorbed by the no longer productive elderly, there will be less for anything else. Unless a new economic engine is created that will produce spectacular new wealth, this will mean even slower growth.

European fundamentals: not optimal for growth

This does not mean that the “fundamentals” are bad in Europe. It means that they are not optimal for growth. There is more social equality, while fewer people fall through the cracks, but less wealth overall. While public policy could change some elements of this picture, the underlying issue is a political culture more focused on justice, stability and distribution than on wealth creation. These values have consequences. They affect, indeed they shape priorities and thus the fundamentals.

What about America?

So, after saying all this, can we just conclude that, current financial crisis notwithstanding, we should congratulate ourselves, because the fundamentals of the US economy are basically sound and good? Well, not so fast. As I said at the beginning, there used to be almost total unanimity as to the soundness of America’s economic fundamentals. But some key elements in the picture have changed –and definitely for the worse.

Deterioration of human capital: a worrisome trend

As I have discussed elsewhere, one of the fundamentals, in fact a key fundamental that is increasingly becoming the foundation for everything else in knowledge economies, the quality of human capital, is deteriorating in America. And this is a systemic crisis surprisingly ignored or played down, even by those who should know better. Unless quality education is fully restored, indeed upgraded in the country as a whole, we have to conclude that the fundamentals, although still better than elsewhere, are deteriorating in America, with long term systemic consequences frankly far worse than the impact of the current financial panic. Bad quality of education will translate into low quality labor force and this will affect the future wealth generating capacity of the country as a whole. Panics come and go. But if a country loses its edge in skilled people, it may take generations to reconstitute this asset.

Not enough care for education

Without getting into too much detail, a future thriving knowledge economy is not founded on the quality of truck drivers and store clerks in shopping malls, but in the inventiveness and sophistication of software programmers, biochemists and molecular biologists, electrical engineers, physicists, corporate managers and venture capitalists. Their quality, their worldliness, thier knowledge and their ability and willingness to push forward into unknown territory and to come up with state of the art solutions that will have a market is “the” fundamental that, in the long run, will determine which country will be on top of its game.

Secondary education in crisis

And here we have a great deal of evidence that America has lost and keeps losing ground. Broadly speaking, the US secondary public education system is mediocre at best, abysmal in many instances. This fact is known. But the outcry is muted. No sense of crisis. Who knows, maybe some think cynically that it is fine to have a significant percentage of America’s youth functionally illiterate, as these low skills or no skills people will perform menial jobs that are after all still needed (even though many of them are performed by immigrants, legal or illegal). 

But, if this is the idea, it is an awful, unjust and stupid idea.

No real outcry

Lack of education for millions of Americans is terrible for them, as it amounts to a virtual sentencing to be and stay at the bottom of the pyramid; there perpetuating a situation in which “birth is destiny”. Furthermore, having millions of uneducated Americans in its midst will deprive society of the necessary skills that would contribute to national growth.

No real accontability at the root of the financial crisis

Of course, a lot more could be said about the need to improve on many other fundamentals. The current financial crisis indicates that, as a minimum, we do require much more transparency and accountability in economic transactions. The fact that top tier financial institutions massively engaged in inherently speculative and risky activities, without proper margins and safety measures, while regulators and enforces did not know or would not act, tells us about the loss of accountability standards, within a system whose health is predicated on their existence. 

Myth of easy money

And there is more. Something odd and dangerous happened to America alongside with our disregard for good education as the critical engine of future growth. Whatever the reasons, we were lured into a dream of perpetual wealth that would be generated magically by our little personal cornucopias in the guise of our homes from which we thought that we could extract equity forever, without any problem or downside.

Money has to be made via activities

In other words, we thought that we could sidestep the pressing issue of retooling ourselves in order to improve our wealth generation potential because we “discovered” that we were already much wealthier than we thought. If you sit on top of your own inexhaustible gold mine, well, you are fine. If the cost of keeping your gold mine, (your mortgage) is low and, in any event, it can always be renegotiated at a low or lower level, while the gold production of your mine keeps growing, well, you got it made! The amount of gold (the equity in your home) that you can extract will always outstrip the cost of keeping the whole enterprise going. This way you will always be ahead. You can have the extra cash to do much more than the income derived from your labor would warrant –and all this is risk free, and it will go on forever!

Collective folly in the real estate bubble

OK…It was not exactly as crass and as stupid as described here. But close, very close. Which is to say that the real estate bubble, coming along just at the time in which the US labor force, as a whole, was feeling the pressure generated by the new Asian low cost competition, provided a comfortable, if temporary, hallucination. “Hey, we do not produce as much wealth as we used to. But, not to worry. Our home values make up the difference, and then some!”

Spending forever

So, we had the temporary delusion that we could spend at will, even though our labor derived incomes for the most part were stagnant. We could spend with abandon all those home equity lines of credit, as “the market” would guarantee forever rising real estate value, and so we could extract more equity and spend more of it in the following years. Well, we know what happened……

Go back to the notion that innovation not rent produces real value

What does all this have to do with the fundamentals? A lot. One of the key fundamentals of a healthy, modern capitalistic society is that wealth needs to be produced, it cannot be willed into place by blowing up beyond reason the idea that one can live off one’s equity. Sure enough asset values do matter. If oil is found on my land, that changes my economic circumstances. If the city planners decide to have a subway stop next to my property, well its value will go up.

But by and large, the real health of a knowledge economy cannot rest on the delusion that for most people finite fixed assets will yield an endless stream of income that will be used use to finance consuymption and life style, forever. This is true in many cases featuring property owners collecting rent; but it cannot be a national economic plan. And in reality most spending was not coming from rent but from extracting cash from overvalued equity. So, this was about spending capital that was not recreated. Even assuming a large bank account, one can draw from it. But not forever. Borrowing more and more against an absurdly overpriced home is sheer folly.

Lessons from the Spanish kingdom 

Long ago the Spaniards thought that they had a good economic model founded on the looting of South America’s gold and silver. Well, aside from unleashing inflation in Europe, in the long term, this avalanche of gold did not help Spain a bit, as it was not used for modernization or productive investments in Spain; but to finance expenditures. And, the underlying fundamentals having stayed the same, when the gold finished, Spain was still feudal and backward, minus the gold. Without enterprise and captive of a lingering feudal culture, Spain was left behind; becoming afterwards one of the most stagnant economies in Europe. All the gold ans silver used to finance current expenditures did not do much good.

Back to us, the dimension of the real estate fantasy represented an unhealthy departure from some of the key fundamentals. Rule one should be the notion that real wealth is based on production rather than borrowing against assets. Whatever the value of those properties, (in hindsight we know that it was less than estimated), it was finite. Once it has been used up, there is no more –just like the looted Latin American gold.

Can America rediscover its values?

Assuming that the lesson from the real estate bubble will be learned, (let’s hope), a poorer and humbled America, all else being equal, should go back to the fundamentals and thus tend to the nurturing of human capital. This should be job one, as this –high quality human capital–is the real cornucopia, the source of future innovation and wealth creation. This is the key fundamental that is now in need of serious care and repair. It is often said, and it is indeed an accepted “Truth” that anything is possible in America.

American dream?

Anybody here, assuming determination and will power, can achieve anything they want, no matter their formal education or where they come from. While there is some truth to this, for large segments of the population, lack of eduaction opportunities in fact translates into lack of life opportunities. Hard work alone cannot overcome a huge knowledge divide. So, the restoration of this notion of America as a Land of Opportunity is predicated on spreading the gift of knowledge.

Spreading knowledge

Of course, this requires public policies. But it really requires a societal redifinition of what equality of opportunity should be. Meaningful efforts and the consequent reallocation of resources so that good education becomes truly available is predicated on a transformation of our value system. Hopefully, a new administration in Washington will be able to set the tone for a productive national debate on how best to define our goals and how to accomplish them.

Separating the fundamentals from the current crisis 

So, in the end, Senator Obama’s criticism of McCain’s optimism is justified, albeit not for the reasons that would appear to be self-evident: that is the current gigantic crisis. Leaving aside, if we can, the ongoing financial upheaval and the wasteland that it will leave in its wake, there are other, deeper, reasons for concern over the long term health and viability of the US economy. In a word, the “fundamentals” while still more than passable, have been seriously impaired for reasons not directly connected to the current hurricane. 

Fix education

The systemic flaw represented by the serious, progressive deterioration of the American education system needs to be exposed, addressed and remedied very fast. Assuming action and success, the fundamentals of the economy can be good again; but, until we reverse course, there is no guarantee.

Senator Obama thus is right in criticizing Senator McCain, but only if he truly understands this human capital shortcoming and if he has a better plan that would target education as a top priority and would engineer a societal consensus as to the need to reverse our decline in education standards and quality. Without such a plan and a new national determination and enthusiasm to implement it as soon as possible, the “fundamentals” will stay flawed.

The November winner will have to reverse the downward trend

Whoever will win, and Barack Obama looks the favorite, quite apart from the aftermath of the current financial crisis, he will have to reverse the downward trend that will eventually yield a diminished, sluggish, uncompetitive and ultimately poorer America –an America that will lack its trade mark optimism and consequently the means to be a force for good in world affairs.

McCain’s Ethical Crusade For A Frightened America?

WASHINGTON – Senator Barack Obama has a clear theme to draw appeal to his quest for the White House: the recreation of economic fairness in a society in which the current Republican leaders have taken care of those on the top and failed to do the same for those in the middle or lower. And this is the latest variation on a philosophy that proclaims that all should have a “fair share” of the pie, whatever the going perception of “fair” may be. This is not exactly a socialist program; but it is an aspiration to a more egalitarian society. While there is more than just wealth redistribution in this plan, the raw political message is: “Given growing unfairness, tax the rich and give more to the struggling middle class and the poor”. Reasonably appealing to begin with, in the midst of the current severe financial crisis, Obama’s message of “I’ll take care of you” has had an even stronger impact. The disoriented and frightened voters now lean decisively towards the Democratic contender and his reassuring message of a benevolent government that will finally take care of all those who have been left behind.

On the opposite side, Senator John McCain may have an economic and social agenda. Certainly he has articulated some thoughts about retooling America, about a new energy policy etc. But there is no “Grand Plan” founded on a policy program . His fundamental message is about ethics. It boils down to a vision of politics as ethical mission in which the first order of business is to clean up the mess caused by corruption and lax morals. Overall, today’s problems, according to McCain, are not so much the outcome of flawed, bad policies but of bad, unethical people who ultimately have corrupted the system. Whatever the political affiliation of unethical office holders and business leaders, their choices, whatever the ideological disguise, are inspired by personal greed and favoritism. And so the Common Interest is lost.

Hence the paramount importance of personal character in politics. Policies that look good in principle do not mean much in practice unless implemented by an Ethical Leader. And this Leader, once in office, will pursue the bad people, he will expose them and he will get rid of them. This action, in an as of itself, should cleanse the system and make it more responsive to the needs of the larger society.

Fine. But what about everything else? Well, for everything else, for governing that is, the Good Leader will rely on good judgment founded on ethical foundations coupled with seasoned experience. These qualities will tell him what can be done to get a consensus on this or that and get something “done” in the interest of the People. 

With the exceptions of a few general principles, such as the need to maintain a vibrant private sector based economy, the need for reforms that would increase the level of skills, the need for a new less carbon based energy policy, the need to make America more competitive and –in foreign policy– the need for vigilance against old and new threats, to be achieved also through rejuvenated alliances and coalitions of democracies, there are not that many more specifics that define a carefully crafted “McCain Plan”.

McCain’s basic political message is about a Moral Crusade that will restore the preeminence of the Public Interest. And McCain’s choice of Sarah Palin as running mate is a way to underscore this point. Whatever her moral conservative credentials that energized a dispirited Republican Christian wing, with this choice McCain wanted to create the “Maverick Team”. There is the lady from Alaska who rose to the top of her state’s politics mostly because of her record as the brave crusader against entrenched interests. She is portrayed as the classic anti corrupt establishment leader who will fight the good fight to restore confidence in a discredited political process by finally acting in the interest of the people.

So, Sarah Palin is a younger, female version of Senator McCain. By choosing her he also wanted to show that this ethical approach to politics is not just his own pet project but a real broad based plan that can have wide appeal across geography, demographics and gender. Of course, we now know that the appeal of the “Maverick Team”, significant after Palin came on stage, has waned. The initial questions about her thin credentials have turned into a broadly shared conclusion that, whatever her crusading record in Alaska, she is really not well qualified for high office.

Still, even assuming no questions about Palin’s resume, is this all there is in McCain’s message? Throw the rascals out and then do what is sensible by creating bipartisan coalitions in passing reforms such as immigration, energy and medical services?

Well, this stripped down approach that fundamentally says to America: “Trust me because I am moral and I have experience and I am pragmatic enough to find non partisan solutions for complex problems” is certainly not the joy of policy wonks who want to analyze complex platforms replete with multi-layered, interconnected policy solutions. This looks pretty thin, doesn’t it? Can this be the basis of an electoral program for someone who is running for the highest office in the most complex industrial democracy?

Well, yes; at least in principle it could be. It all depends on the quality of execution which rests on the (assumed) good instinct of a leader in terms of broad direction and the actual policy choices made under the guidance of his (assumed) ethical pragmatism. Let’s explain a little more. In American politics, with very few exceptions, complex political programs supported by ponderous policy briefs labored on by hundreds of experts in the end amount to not much, as these complex policy programs are soon disregarded, correctly judged to be impractical, unless substantially watered down and modified.

For example, who remembers that then candidate Bill Clinton centered his electoral message in 1992 on the need to craft a “National Economic Strategy” for America, a strategy to be fashioned following the (then winning) models of Japan (yes, Japan) and Germany? Well nobody remembers any of that, because the whole thing was quietly abandoned as soon as Clinton came into the White House. By the same token, Ronald Reagan’s pledge to abolish the Departments of Energy and Education, viewed by him as examples of unnecessary government meddling, went nowhere after he became president. Likewise, the partial implementation of Reagan’s agenda to shrink government and lower taxes led to the cutting of taxes without managing to achieve commensurate cuts in public spending, with the ensuing huge structural budget deficits that characterized his presidency. So, the frugal Republicans turned out to be the kings of the deficit and fiscal irresponsibility. Which is to say that Grand Plans, whatever their electoral appeal, do not work very well in America.

In this very fragmented, if not fractured, institutional system it is not easy to fashion strong and lasting coalitions that can lead to the implementation of radical change. In this inherently balkanized framework with multiple centers of power, the complete victory of one clearly defined ideological view point over another is next to impossible. And even when sweeping victories of one point of view occur, they are short lived. They are easily undone by a different coalition, usually within a short period of time.

Which is to say that, whatever the pristine visions offered to followers in the primaries and in the general election campaign may be, in the end there are not that many revolutions in American politics. On balance, the country is governed from the center, via non ideological compromise. Individual politicians may get attention by clamoring for radical positions on this or that (Congressman Tancredo: tough on immigration; Congressman Kusinich: end the war, impeach Bush), but the country is governed from the middle by people who, regardless of their political affiliations, agree on basic principles.

To the extent that a president is or appears to be strident and uncompromising on whatever issue, (think of George Bush) his leverage dwindles and, along with that, his popularity and his ability to present himself as the symbol of national unity. By the same token, a legislative branch guided by a majority with a strong, uncompromising program, will not go very far. The Republicans stunned Washington with their surprise victory in 1994 under the guidance of the extremely sophisticated and articulate Newt Ginrich. And that victory sprang from a platform of radical change. Well, despite some promising beginnings, the whole enterprise soon unraveled and Ginrich in the end resigned in defeat. Worse yet, the same Republican party that marched to victory in 1994, ten years later was a spent force with no distinguished leaders and a lot of corrupt members in jail; while it had completely abandoned its core principles of limited government, unleashing instead an era of unrestrained public spending.

Which is to say that McCain’s notion of a government of “good people” who would do “sensible things”, while thin on details, is frankly quite alright for America. If, in a centrist, non ideological, environment a New Leader would forcefully reinstate healthy principles of ethical behavior, fighting corruption and the influence of special interests, while pushing ahead sensible middle of the road reform, we could get a great deal more accomplished. So, John McCain, a seasoned Senator who has anti-special interest credentials, who is not an ideologue and who has a credible record as a maverick coalition builder should have a fair shot at the White House.

In principle, may be. But this is not the likely outcome of these elections. The country is frazzled and tired. The unfolding of the financial panic on top of an eeconomic downturn just weeks before the general elections have reinforced the idea that America now does not need someone with an “Ethical Government Plan” but someone with a “Rescue Me Plan”. Beyond the current tempest, the perception is that the troubles of the battered middle class spring from the mean spiritedness of the outgoing Republican president. While a maverick, John McCain is still a Republican and thus guilty by association of George Bush’ sins. Senator Barak Obama, the Democratic candidate promising fairness (translated into English: “more money to you”) to the exhausted middle class, has more direct, practical appeal than the candidate promising to fight corruption and special interests in order to restore the notion of government as selfless action in the name of the Public Good.

McCain’s promise of an ethical crusade may sound nice. But “money talks”. And when the distribution of aid, subsidies and help is also presented as ethical, as the need to reintroduce fairness, this is most likely a winning combination. Says McCain: “I shall do the right thing for you”. Says Obama: “I shall do the right thing for you; and, incidentally, here is the list of what I shall give you”. In these extremely difficult times, a vision of new ethical fairness accompanied by goodies is most likely preferable to new ethics without tangible presents.