Liberal or Conservative, the same rules apply

All this partisan talk from the right about Barack Obama being a "socialist" who wants to "spread the wealth around" ignores some basic commonsense principles. I don't believe the ground rules change whether a government is "liberal" or "conservative". And this is nothing specific to the US. It applies equally to any country.

Advice to the liberals:

Tax and spend all you want, but maintain a balanced budget. Don't spend more than you can earn.

Advice to the conservatives:

Cut taxes and cut spending all you want, but maintain a balanced budget. Don't give up more in tax cuts than you give up in spending.

Fiscal responsibility is the watchword. You could call it "true conservatism" if you want. I'm a true fiscal conservative, because I abhor budget deficits. They borrow from the future, provoke inflation and reduce our future wealth.

(Somehow, I think Barack Obama will be fiscally conservative, not irresponsible. It will of course take any future US administration years to recover from the trillion dollar deficit created by George W Bush, but I believe Obama will make things better, not worse.)

Separated at Birth - 1

Twins, separated at birth, both associated with humour and depression. One attained renown as a comedian who struggled with personal depression that found expression in his trademark brand of humour, and the other has now unwittingly become a laughing stock whose past actions (and inaction) now threaten to bring on a severe recession, possibly even a Great Depression.

I give you Woody Allen and Alan Greenspan!





[Incidentally, I don't believe that the entire concept of the "free market" has been repudiated, only one definition of the word "free" in the term "free market". Once again, let me harp on my distinction between "free" as in a lack of controls, and "free" as in protection from the acts of others (i.e., a liquid market with no player large enough to impact the market by themselves). A truly liquid market would not be suffering from the failures of a few players, as has happened in our oligopolistic system with no effective controls on their behaviour.]

US Election - My Prediction

Less than two weeks to the US election! It's no big deal predicting that Obama is going to win. Everyone's saying that. The real deal is in predicting the margin. I think it'll be an absolute landslide. Obama will pick up more than 400 votes out of 538.

(Here's my reasoning. As of 24-25 October, ABC's electoral map gives Obama 311 votes to McCain's 163, with 64 being too close to call. I believe the states that are labelled 'moderate Republican', 'marginal Republican' or 'too close to call' will gradually be won over by Obama before election day, so I've counted only the electoral votes of strongly Republican or very strongly Republican states in favour of McCain. That only yields a total of 134 votes for McCain, leaving 404 for Obama. See map and table below.)



And why do I think the moderate Republican states will ultimately swing to Obama? Many reasons - Colin Powell's endorsement, Sarah Palin's un-hockey mom wardrobe that should speak louder than her pro-American rhetoric to undecided voters, the lingering fears of an economic collapse and a recession that alienate voters further from the Republicans whose cronies and appointees are perceived as having caused the whole mess, attacks on President Bush by McCain and Palin (!) that may put some Republican voters off voting altogether, my expectations of a high voter turnout that's usually a good sign for the Democrats, and my belief that there is a 'reverse Bradley effect' at work that prevents many people in conservative neighbourhoods from openly backing Obama in opinion polls, understating his actual support.

We've seen a generation of "Reagan Democrats". Welcome to the Obama Republicans. I believe they're called Obamicans.

One more reason to vote for Obama

Well, Obama's locked up the geek vote, at any rate.

When visiting Google's headquarters last year, he was reportedly asked a question that would have stumped even a few techos: "What's the most efficient way to sort a million 32-bit integers?"

In the thoughtful, deliberate way we've come to admire so much, the Democratic candidate answered that he thought the bubble sort would be the wrong way to go. I'm sure he'll arrive at the correct algorithm with the help of his advisers, but it's good to know that his instincts were correct, as always. And there's at least one country that he could be President of in a heartbeat.

It could be disastrous to elect a person with a poor sorting policy, especially in these difficult economic times when we can't afford to waste resources. I'm told McCain couldn't answer the same question when he visited the Google campus a few months earlier. And I'm sure Sarah Palin's answer would have involved stacking the numbers as far right as they'd go...

Resumption of India-Pakistan Trade - Good News or Bad News?

With the noise of the US election rising to a crescendo, a development in a faraway part of the world is understandably going unnoticed. After sixty years, a trade route between India and Pakistan has tentatively opened. Reports by the Voice of America, The Guardian and The New York Times cover slightly different aspects of the story.

I have three simultaneous reactions to this development:

There's naive internationalist liberal me: "This is great news! Trade bonds between nations strengthen peace. When countries become economically interdependent, the chances for conflict between them recede. This is the first step towards peace in our time. How wonderful that India and Pakistan can finally enjoy normal relations! South Asia as a whole will now prosper."

Then there's paranoid me: "This isn't about trade between India and Pakistan. It's a lifeline to Indian-controlled Kashmir to help it support itself through trade with Pakistan-controlled Kashmir. Never a big fan of India (in spite of the Indian taxpayer-funded largesse continuously poured into that province), Kashmir probably now sees a way to cement its ties to "the other side". It's a wedge that Pakistan is driving between India and Indian-controlled Kashmir. This is the economic unification of Kashmir at India's expense. There's nothing here for India or Indians to rejoice about."

Finally, there's geopolitically cynical me: "India is squandering the chance to do to Pakistan what Reagan's America did to the Soviet Union - exploit its bigger and faster-growing economy to bankrupt its military rival and dictate peace on its own terms. Why throw a lifeline to someone who doesn't like you? As Ray Kroc of McDonald's said, when you see a competitor drowning, you stick a hose down his throat. India should throw Kashmir out into the cold, even into Pakistan's waiting arms, then force the pyrrhic victor to come crawling back a few years later to sue for peace and beg for a chance to share in the prosperity of its (by then) superpower neighbour."

So what do I finally think? I don't know. A little of each of the above, I guess. One thing I'm sure about - Indians are too sentimental a race to elect a Reagan. Even the biggest hawks in the previous Hindu right-wing BJP government turned out to be doves on Pakistan, a reality that India's smaller neighbour cunningly understands and exploits. So fortunately for Pakistan, India will never press home an advantage even against a proven enemy.

Enemy? Surely that's a tad harsh? Well, Pakistan's civilian president blurted out the truth in a rare moment of candour (i.e., that India has never been a threat to Pakistan). If only the reverse was also true...

As always, I'm hopeful about peace in our time and all that, but not optimistic.

The Effect of Race in the US Presidential Election

I like to think I'm post-racial, and I also like to think the US election has progressed beyond considerations of race. But this comment by Realista over at Boston.com has startled me into understanding just how potent a factor race still is.

Essentially, it's a set of hypothetical questions - what if certain characteristics of Sen. Obama and his Republican opposite numbers (McCain and Palin) had been switched around? Would people still look at the two candidates the same way?

I'm going to repeat those questions verbatim here, because they're so hard-hitting:

What if the Obamas had paraded five children across the stage, including a three month old infant and an unwed, pregnant teenage daughter?

What if John McCain was a former president of the Harvard Law Review?

What if Barack Obama finished fifth from the bottom of his graduating class?

What if McCain had only married once and Obama was a divorcee?

What if Obama was the candidate who left his first wife after a severe disfiguring car accident, when she no longer measured up to his standards?

What if Obama had met his second wife in a bar and had a long affair while he was still married?

What if Michelle Obama was the wife who not only became addicted to pain killers but also acquired them illegally through her charitable organization?

What if Cindy McCain graduated from Harvard?

What if Obama had been a member of the Keating Five? (The Keating Five were five United States Senators accused of corruption in 1989, igniting a major political scandal as part of the larger Savings and Loan crisis of the late 1980s and early 1990s.)

What if McCain was a charismatic, eloquent speaker?

What if Obama couldn’t read from a teleprompter?

What if Obama was the one who had military experience that included discipline problems and a record of crashing seven planes? (My note: I understand it was 3 planes, not 7)

What if Obama was the one who was known to display publicly, on many occasions, a serious anger management problem?

What if Michelle Obama’s family had made their money first bootlegging, then from beer distribution?

What if the Obamas had adopted a white child?

Amazing, isn't it? Any or a small set of the negative aspects of McCain/Palin might have ended Obama's candidacy prematurely if they had been his flaws. Conversely, any of the positive things about Obama might have been trumpeted far more loudly had it applied to McCain/Palin.

What's often said about women (i.e., that they have to work twice as hard as a man to get the same recognition) may also apply to minorities.

I'm afraid we're still in Kansas, Toto.

Is the War on Greed as misdirected as the War on Terror?

George W Bush had a response to the September 11 terrorist attacks on the US. He declared a "War on Terror". We all know how well that's going.

I'm not advocating that the US should have done nothing in response to the September 11 attacks. I'm saying that when you suspend clear thinking and honest debate in favour of blind belief and misguided loyalty, you get the totally misdirected Iraq war rather than the focus on Afghanistan (the home base), Pakistan (the training ground) and Saudi Arabia (the financier) that the response should have comprised. A proper response would have been messy and complicated, to be sure. It would have involved embarrassing investigations into two nominal US "allies" and brought out into the open the obvious failures in US foreign policy over the years. I believe that the longstanding US policy of cozying up to dictators instead of strengthening ties with democracies led ultimately and inexorably to 9/11. Yet nobody who knew better could talk sense to President Bush, because those who weren't with him were against him, remember? The world is in a fine mess thanks to expediency and moral certainty, combined with a knee-jerk reaction to crises.

Are we in danger now of reacting to the recent financial crisis with similarly misdirected populism? Australian Prime Minister Kevin Rudd today essentially announced a "War on Greed", by attacking the excessive pay packets of corporate executives as one of the negative aspects of what he called "extreme capitalism". And sure, he's got a point, a very valid point. But he's also in danger of being way off the mark, to the detriment of all of us.

Attacking excessive remuneration appeals to everyone (everyone, that is, except those in the top levels of the corporate world). Last year, Macquarie Bank's CEO Alan Moss took home 33 million big ones. This year, Macquarie caused quite a few jitters among investors. CEOs take home the big bucks, and when their enterprises threaten to fall over, governments have to rush in and prop them up with taxpayers' money, because the economy will suffer otherwise. It's like the fat cats have a gun to everyone's head.

So attacking executive remuneration understandably attracts animal howls of approval from the gallery. (Mind you, many of those in the gallery don't even pay taxes! They've nothing at stake, and it's probably just petty jealousy at work.)

Let me make my position clear. I'm a taxpayer, and my money is being used in these bailouts, so I have a legitimate right to voice my opinion about the way the system is run. But perhaps surprisingly, I'm against placing limits on executive remuneration. It indicates a mercantile mindset that believes in rationing out scarce resources. What we need is a capitalistic mindset that recognises wealth to be potentially limitless. The capitalist worldview recognises the need for appropriate systems that incentivise us to apply our ingenuity and industry to continue to create wealth out of nothing, exactly as we have been doing since we left our caves thousands of years ago.

Having said that, there are clearly limits to executive compensation that exist, not absolute dollar limits, but limits that are dictated by the ability of the enterprise in question to pay those salaries and bonuses. If an enterprise pays its top executive $466 million and then collapses, then in hindsight, it clearly couldn't afford the payout.

Many people may miss a crucial portion of Rudd's statement: "Regulators should set higher capital requirements for financial firms with executive remuneration packages that reward short-term returns or excessive risk-taking." (emphasis mine) I agree with the way Rudd is proposing to tackle the problem, which is to impose higher standards of capital adequacy on firms that show short-termism or risky behaviour in pursuit of profits, but there is a deeper aspect to the problem, which I'll come to in a moment.

I do believe that one of the fundamental things wrong with the brand of capitalism practised today (apart from its hostility to competition) is that it rewards companies for showing short-term profits. It encourages CEOs (who serve relatively short tenures) to under-invest in the future and show unnatural returns in the short term, then depart with huge payouts as a reward for such stellar performance. Every new CEO announces that things have been left in very bad shape by their predecessor (true), and then proceeds to write off huge losses at the start of their tenure. Not only does this clear the decks of all past losses, it also takes the share price to a comfortably low level, so that the new CEO can demonstrate impressive share price gains from this low point. Repeat ad nauseam. The enterprise and its shareholders bear the brunt of this short-term and self-serving behaviour. The technical term for this is "agency risk". The goals of the agent (the management) are not aligned with the goals of the principal (the shareholders).

To my mind, the problem of "extreme capitalism" (as Rudd would call it) is the tendency to reward short-termism. So it's not executive salaries per se. If a way can be found to link executive remuneration to an enterprise's long-term performance, then by all means, shower your executives with gold. For example, go ahead and give your CEOs generous stock options, but ensure that they vest only after 5 years or later. That'll make them more careful about the long-term effects of their decisions.

So I've no real argument with Rudd's proposal, as far as that goes.

Is this the root of the problem, though? Perhaps there's really no agency risk here! Perhaps the agents' goals are in fact perfectly aligned with their principals' goals.

We need to look within ourselves as shareholders. What kind of shareholders are we? Are we true investors, who buy stock and hold on to it, wanting a share of the profits of the enterprise in the form of dividends? Or are we just speculators, who buy shares in the hope that we can sell them at a higher price? Speculators don't care what happens to an enterprise after they sell their shares.

I think short-term performance benchmarks rule the market because the market is dominated by speculators.

If we want enterprises to be healthy, we need to encourage long-term behaviour from all concerned. The goals of the principals (the shareholders) must themselves be aligned with the long-term health of the enterprise rather than its short-term performance. Then the goals of the agents (the management) of these enterprises will automatically be tuned to the long term.

Executive remuneration is the Iraq of the War on Greed. It's an expedient target, but likely to prove a costly diversion. The real problem is more messy to target. It's short-termism, and we're all guilty of it as speculative shareholders. To quote Walt Kelly, we have met the enemy, and he is us.