Thursday, March 24, 2016

2016: The Four types of Republicans

As the Republican party looks as divided as it has been in quite some time, with speculation of a brokered convention or even a political realignment, one should consider why this is happening. The Democratic Party is more uniform in its ideology and interests, where as the Republican Party is not. I believe there are four different types of Republicans in today's GOP, and the rise/fall of each of them is having a significant impact on the party. They are: fiscal conservatives, defense hawks, religious/ social conservatives, and blue collar populists. The former two tend to make up the so called establishment, the latter two make up the outsiders, with the last one the most recent phenomenon, having largely replaced Libertarians as the 2nd relative outsider group. There is some overlap, and the most politically successful Republicans, such as Reagan and Bush can appeal to all of them. However, candidates with too much overlap sometimes end up with no real base, being too many people's second choice prevents one from being enough people's first. Lets examine them in detail.

Fiscal Conservatives

Prior examples: Bob Dole, Mitt Romney, and John Huntsmen

In 2016 : Jeb Bush,  John Kasich, George Pataki and Chris Christie

Fiscal conservatives promote low government spending, low taxes, and free trade. They tend to have more moderate views on social issues than religious/social conservatives. The ones furtherest to the left on social issues, such John Katich and especially Jon Huntsman Jr, tend to have less success than ones that adapt the views of other parts of the party. This is because low taxes, free trade, and low government spending aren't as obviously in the interest of many members of the party, it alone only appeals to relatively few voters.

Defense Hawks

Prior Examples: George H. W. Bush, John McCain, and Dick Cheney

In 2016 : Lindsey Graham

Defense Hawks are often the most moderate on other issues, believing in immigration reform, more government spending than other Republicans (especially on the military), and are the most liberal on social issues. Especially with Reagan's military buildup, this group gained prominence in the GOP, becoming what was then the third leg to the GOP stool. However, they are no longer as unique as a group, for two seemingly paradoxical reasons. The first reason is the Iraq War, afterwards direct military intervention, especially troops on the ground became unpopular. Many defense hawks lost prominence in the GOP, and 7 years outside the White House meant that there were fewer active Republicans involved in military decisons. The 2nd is the rise of ISIS, which has created a sense of fear in much of the Republican party. As a result the policies of a true defense hawk, such as ground troops, is unpopular. However, moderately hawkish views are common enough that defense hawks do not stand out among the candidates in their rhetoric. Lindsey Graham's campaign ended up without much purpose, his positions on defense were held to a lesser extent by several others. Therefore his moderate views on social issues, such as immigration, became a greater liability.

Social Conservatives:

Prior Examples: Pat Buchanan, Mike Huckabee, and Rick Santorum

In 2016: Mike Huckabee, Rick Santorum, Ted Cruz, and Bobby Jindal

Social conservatives generally focus on religious issues, like gay marriage, abortion, and the role of religion in society. These often appeal to evangelical voters, such as in Iowa the southern states, and some western states, giving theoretically them a strong and consistent base. It is these voters, especially the more fiscally conservative ones, that were the backbone of the Tea Party wave in 2010.  There is significant variety on economic issues among social conservatives: Huckabee and Santorum were both quite moderate or even liberal on economic issues, such as Social Security, while Cruz is very fiscally, conservative, even proposing a flat tax.

Despite their strengths, true social conservatives have never actually won the nomination. Additionally, the influence of the these voters seems to be in decline, as gay marriage becomes increasingly accepted and America becomes less religious. The result is a shift among Evangelicals to the last defined group and the most recent phenomenon, blue collar populists.

Populists appealing to blue collar voters

Donald Trump(but probably many more in the future)

These candidates appeal to blue collar workers, angry about trade and immigration driving down their wages and causing them to lose their jobs. Rather than pointing out the immense benefits of both and that the manufacturing jobs that have been outsources are not coming back, they channel the anger. Populists appealing to blue collar voters only pay lip-service to the religious right, fiscal conservatives, and defense hawks, and sometime not even that. Economically, these candidates have significant similarities to Buchanan, Huckabee, and Santorum economically, and therefore are able to bring in large amount of evangelical voters who might have otherwise voted for a social conservative. Blue collar populists have large potential voter bases in the mid-west and northeast, but less so in western states that are religious and don't have large manufacturing bases. Another potential voter base is in the south and southwest for voters who are concerned about immigration. These candidates do especially well among voters without a college education.

As a result, these candidates have a potential voter base across nearly all states geographically, which provides a huge advantage in the primaries. However, this message, being so against the traditional Republican orthodoxy, will also fail to resonate among many conservative voters. Therefore, these candidates are high floor but relatively low ceiling. As a result, there could be significant resistance, although whether this will mean taking longer to rally around a nominee, staying and home, or actually voting against him/her in a general election is hard to say.

The hybrids

Prior examples: Ronald Reagan and George W Bush

In or was in 2016 Race: Scott Walker and Marco Rubio

These candidates try to appeal to more than one group. Every candidate does this to an extent, but these do it to such an extent that they can not be classified into any one group. Reagan and Bush appealed to fiscal conservatives, social conservatives, and defense hawks. This can work well in a small field and/or when there is not another strong candidate appealing to the other groups. In a best case scenario, the result is a united party behind a strong candidate.

However, the approach can also go very wrong, especially in a large field. There is a risk of being acceptable to everyone, but not being anyone's first choice. Scott Walker's early demise in a way foreshadowed Rubio's. Rubio was a stronger, more charismatic candidate, but each had the same problem, one foot in the establishment, one foot in the Tea Party. Rubio's best hope was to become the default anti-trump candidate, but after his horrible performance in Nevada it was clear this would not occur. After Super Tuesday, the writing was on the wall for a Rubio campaign that had only won one state, Minnesota, and did not have a clear path going forward. Ted Cruz was not going anywhere, and Kasich knew that he had a better chance winning his home state than Rubio did with his. The hybrid candidates are high ceiling but low floor.

What this means:

Trump almost certainly will have the most delegates by the time of the convention. He likely will be the nominee, eventually, but it will not be pretty. At the very least, he will not clinch it until after California votes on June 7, at the latest it will not be until after multiple ballots at the GOP convention in July.  There is even a chance that another candidate could be chosen, whether it be a Cruz-Kasich unity ticket, Kasich pulling off a huge upset (highly unlikely), or even a candidate who has not run yet, such as Paul Ryan.

Regardless, the likely result will be a divided party. If Trump does not win with a commanding delegate lead just short of a majority, these voters will be incensed, possible leading to a Trump 3rd party run. Trump at the head of the ticket would isolate many more moderate Republicans, possibly leading to a 3rd party option. And even if the party could untie behind him, Trump would be one of the most unpopular nominees among the general electorate in history.

As a result, Clinton will probably be the next president. It certainly did not help in having 16 other candidates besides Trump, and many strong "establishment" types. While in 2012 the party establishment rallied around Romney early, in 2016 it has remained divided for the entire primary, leaving it with two plausible options (Trump and Cruz). Neither are appealing to the establishment nor have a good chance at winning of they become the nominee. While some thought at first that having so many qualified candidates was a strength, it actually proved to be a profound weakness. Whether the party will learn its lesson, and do a better job narrowing the field early on, or whether it will continue to disintegrate is anyone's guess.

Friday, January 8, 2016

A brief note: Why the Fed should not have raised interest rates

Recently, the United States Federal Reserve decided to raise its key interest rate, the Federal Funds rate target, from 0%-.25% to .25%-.5%. This rise, while small, was not wise.

The federal funds rate is the benchmark rate for the Fed, decided by the FOMC(Federal Open Market Committee). The FOMC is made up of the 7 members of the federal reserve board, of which Janet Yellen is the head, and five federal reserve bank presidents, of which the president of the New York bank is always a member. It has control of key decisions, including raising the federal funds rate.

The federal funds rate is the rate at which banks and credit unions lend to other banks and credit unions over night without colateral. Lower interests rates result in cheaper borrowing, increasing consumer spending and investment, and thus aggregate demand, which results in higher inflation and GDP, as well as lower unemployment. Higher interests rates have the reverse effects.

There are a few reasons to raise interest rates. One is to lower inflation. However, as of now, this is not a problem. The Fed's target for inflation is 2%, but right now inflation is much lower. The Fed prefers the PCE price index to measure inflation. According to its most recent numbers total inflation increased .2% from a year earlier. However, this is unreliable because it includes volatile food and energy prices. Even when excluding them, inflation increased 1.3% from a year earlier. In fact, for over three years straight, inflation has been below the target. So as of right now, inflation is not high enough for concern.

Not only is inflation low, but there is little sign it will be of concern in the future, or even reach its target. Core inflation has been flat for several months, and the trend over the past few years is slightly down, not up. Wage growth is modest, but not high enough for worries about inflation.
In the period of solid growth, stretching from (January 2003-January 2007), average wage growth per month was about .34% in terms of average weekly earnings. Over the past year, average wage growth per month has been .17%. Clearly, wage growth is neither were it should be, nor does it indicate that there will be problematic inflation in the near future.

The economy, while recovering, is still not at full strength. I have already mentioned the lackluster wage growth. The U6, an alternate measure of labor underutilization and the one I prefer because it includes people who want a job but have stopped searching and people who want to work full time but can only find part time work, stood at 9.9% seasonally adjusted for the December 2015 jobs report. This is down significantly from its peak, and by an impressive amount from a year ago. However, it is still a couple percentage points above where it has been in past expansions (see previous posts). GDP growth is much lower than it has been historically during recent periods of robust growth.

The only other argument is fear of a bubble. At least in the U.S., however, this does not appear to be a problem. Housing prices are yet to recover from their peak. While the stock market is up significantly since its trough, it has stagnated in the past year. Continued low interest rates are not likely to cause a bubble, for the stock market had a correction with near zero interest rates. The most recent correction, occurring after the rate increase, while caused by a variety of factors, does not support the idea that the Fed made the right choice.

The problem with raising interest rates is that it makes borrowing more expensive. This reduces consumer spending and investment, which in turn increases unemployment and reduces growth. In fact, the last two major rate increases by western economies, Sweden in 2010 and the Euro-zone in 2011, were followed by interest rate decreases in the next few years because their economies struggled. While the U.S. economy now is stronger than either of those were, raising rates is still an unnecessary risk.

Overall, the feds interest rate rise is small, and definitely not catastrophic. However, with economic activity still not at full strength, it was not the right course of action either.

Tuesday, October 6, 2015

Bashar Al Assad- The lesser of two evils

          Right now Russia is launching strikes into Syria. Although its exact motives are disputed, it is clear that the U.S. has little control of what is occurring on the ground, and little control over the details of a solution. A change of strategy is needed.

     The current strategy has failed. The number of U.S. trained fighters a few weeks ago was reported to be only "four or five" by a top general despite having spent $500 million on a train and arm program, although it has increased since then. CNN stated "The government's plan to train moderate rebels has been a flop. The goal was to train 3,000 to 5,000 fighters a year. So far the U.S. has trained an estimated 75 rebels- some of whom were kidnaped as soon as they crossed into Syria" Over 1/4th of the military equipment has been given to the al-Nusra Front, an Al-Queda affiliate in Syria. Meanwhile, the most effective groups in Syria besides the regime are the al-Nusra front and IS(Islamic State). For well over a year, the 'moderate' opposition, including the Free Syrian Army, has been ineffectual. Some have disbanded all-together. Meanwhile, radical opposition is advancing on Assad.   Despite U.S. led coalition airstrikes, the war with IS(Islamic State) is either considered a stalemate or very small gains are being made. This is not very encouraging, and IS is still advancing on Assad. A strategy to train and arm the moderate rebels may have been viable in 2011, but is not now.

     A partition of Syria still could work, similar to one proposed in one of my earlier posts. Although the situation in Syria has changed, the basic premise remains sound: that it will be nearly impossible to ever stabilize Syria with its current borders. The partition is already de-facto, there should be a plan to make it de-jure for a post IS Syria.

     Knowing that a partition is still unlikely to happen, the best option appears to be Assad. Assad is a cruel dictator, but he is the least bad option. Unlike the Nusra front and IS, the Assad regime shows no indication of wanting to destroy Israel, the border had been quiet for nearly 40 years when the Civil War started.  When in power and not facing rebellion, Assad does not terrorize his people to nearly the extent that IS does. Unlike the al-Nusra Front, the Assad regime may use brutal warfare, but it does not commit terrorist attacks.  The most recent UN estimate of the death toll is about 220,000, but not all of it is Assad's fault. After all, pro-government fighters are dying as well, and not all civilian casualties have been caused by the regime.

     The question for anyone who wants to remove Assad is what do to next.  As seen in Libya and Iraq, once the government is removed, there is a power vacuum that needs to be filled, leaving the country highly unstable. Colin Powell had a rule known as the "pottery barn rule": you break it, you own it. Unless Americans are willing to send a large military force to Syria for many years at the costs of hundreds of billions of dollars, any further action to bolster the Syrian opposition is a bad idea.

     However, not fighting Assad may not be enough. If Russian intervention does not work and Assad loses, radical rebels or even IS could take Damascus and Aleppo, the two largest cities in Syria. In a scenario were Assad keeps losing, the U.S. may need to implicitly support Assad. Stated support would be a bad idea, because it would anger Sunni allies and much of the Muslim world.

     At the very least, any plan for peace will require Assad to leave only after a long period of time, if at all. If we truly care about the people of Syria, the Civil War needs to end soon. With a diplomatic solution looking more and more unlikely, unfortunately the world's best bet is with the regime.

     Just a side note, the proposed no fly zone is a terrible idea. With Russian planes in the sky, it would be either ineffective, possibly humiliating if the U.S. backs down, or extremely confrontational if Russia does not abide.

Friday, August 7, 2015

The U.S. economy: not as good as it seems

The unemployment rate now stands at 5.3%, which is good and close to the 4.8% in June 2006. However, this number does not show an accurate reflection of the labor market, nor the economy. Labor labor force participation is down 3.6% since June 2006 from 66.2% to 62.6%, but this isn't a particularly good number either.  It is not a good number because it doesn't factor in people retiring as the U.S. gets older, nor involuntary part-time workers. In the future most of the decrease will be because of demographics. However, I will argue that right now,  people focusing on the unemployment rate and not on alternate measures of under-utilization, and stating the U.S. economy is in good health should be less optimistic than they are. 

There are two reasons June 2006 is a good starting time. First of all, it was before the recession during good but not great economic growth. In the prior two quarters, average GDP growth was 3.05%. June 2006 should indicate what economic data should be in slightly above average times. Also, it is exactly 9 years before the latest statistics were available(when post was first drafted). This allows for comparison of statistics that are not seasonally adjusted.

To show that the drop in the labor force participation rate isn't solely due to aging, I will bring up an important statistic. Labor force participation ages 25-54 in June 2015 down 2.1% from June 2006, from 82.7% to 80.6%. 25-54 are the peak working years, so this number should not be shrinking even though the country is aging. This shows that even among people who are not out of peak work years, the labor force participation rate is shrinking. 

To more accurately determine the labor situation, I will use an alternate rate of labor underutilization, one provided by the BLS, referred to as U6. [It is calculated as all unemployed people + plus all marginally attached workers + all employed part time for economic reasons/ (civilian labor force + all marginally attached workers)] * 100.  It stood at 8.4% June 2006 (after revisions), but was 10.5% in June 2015. Both of the previous figures were seasonally adjusted. While this number has gotten better, it was at 17.1% in September 2010(after revisions) it is still significantly above that of 8 years ago. 
The less than stellar employment numbers are reflected in GDP as well. In 2006, GDP growth averaged 3.05% in the first and second quarters. This number is slightly below the year average during the fairly brisk expansion of the mid 2000s (2003-2006).  This is good relative to what the economy has done since the great Recession, but far below the growth seen in the mid-late 90s. Therefore, it is not such a high number that it is unreasonable to reach it during good economic times, but not so low that it can be reached easily. In the first two quarters of 2015, GDP growth averaged 1.45%. Although growth may pick up later this year, no annual GDP increases for the past 8 years have come within .65% of the number back in the first part of 2006.

    The economy has recovered significantly, but is not in good shape yet. Employment and GDP growth are far behind what they have been in the past in the middle of prior robust expansions. Fortunately, the economy could get better, as the general trend for economic indicators in the past few years is that they have been getting better. Unfortunately, better economic growth is not guaranteed. If this is the new good, the best days of America's economy are surely behind us. At the very least, anyone stating America's economy is back to normal is wrong, and the economy should be a much bigger issue in the election cycle than it has been so far.

(note:all statistics are accurate as of when this post drafted)

Wednesday, June 17, 2015

The ignored problem: the unsustainable U.S. debt

      For the most part, the deficit has faded from he headlines. It is ISIS, or Ukraine, or other things  that are in the news. The deficit is fairly low, running at around $880 billion annualized as of the end of the first half of of the 2015 fiscal year. It has plummeted since the recession of 2008, when the deficit(Sept, 2008-Sept. 2009) was nearly 1.9 trillion in today's money. However, the situation is not as good as it seems. Today, we are about 5 years after the end of the last recession. Recessions, or series of recessions, have occurred about every 9 years during the past 35. While it is difficult to predict recessions, the last 35 years suggest the next one should occur within the next 5.

     When the next crisis hits, it will be more difficult to make up for it using stimulus. On September, 30, 2007, shortly before the official beginning of the recession, the U.S.  government debt outstanding as a percent of GDP stood at about 70.5%, while between the official end of the recession, and peak unemployment, on September 30, 2009 the U.S. national debt as a percent of GDP was about 94.5%. It has somewhat stabilized, today at around 102.7% 5 years later. The concern isn't that the U.S. has debt, only once has the U.S. had no debt, and that was back in the 1830s. Running a deficit isn't too concerning either, times such as the surplus in 1990s are rare. Rather, the major concern is nearly 5 years after the last recession ended, during relatively good economic times, the total debt isn't shrinking as a percent of GDP. 

     With projections of the debt to GDP ratio at about 105.2% in 2019, the U.S. would probably use stimulus once again to increase Aggregate Demand and help lift the U.S, economy out of recession. However, the debt to GDP ratio is bound to increase significantly after this, making it harder to use stimulus. With Social Security and Medicare taking up a ever larger portion of the budget, the debt to GDP ration should continue to increase. After all, using a narrower definition of debt, to only that held publicly, the debt to GDP ration should increase from 74% of GDP in 2014 to 106% by 2039. The numbers are even worse if we use the total (public AND private) debt in our calculations, which the treasury, the debt clock, and most news networks do. Using the same ratio of public to private debt as today for 2039, the total outstanding debt would be about 146% of GDP.  This is higher than all of PIIGS(Portage, Italy, Ireland, Greece, & Spain) except Greece at the peak of the Euro crisis. Regardless of which projection method is used, the outlook it not good. This is all long term, and the U.S. has a huge advantage these countries don't, being able to borrow in its own currency. That being said, in a few decades, if another recession such as the previous one strikes, it will be much more difficult to use expansionary fiscal policy1or stimulus, an important weapon during the previous recession(up to 11.4 million full time equivalent employment years, which are a year of 40 works weeks, created or saved). Eventually, the U.S. will have to make some very difficult decisions about its budget. As we have learned from Greece, it is far better to do this sooner rather than later.

    1: According to the Economist(June 13-19th edition), the United State's wriggle room for dealing with a recession decreased by about 37.5% in the last 8 years. Since the deficit will increase in the future, its wriggle room will only decrease further.