Edith Too

I’ve been puzzling about how Congress and the White House have been playing Russian Roulette with the Financial markets and how everyone seems to have dual agendas. Most everyone seems to view the bailout as necessary. The Financial System is teetering. But the politics of it are going the other way. Here is analysis from the News Hour last Friday.

MARK SHIELDS: Ray, you talk to people on the Hill, which I've done this week, and they say, "Look, nobody wants to cast a vote on this, nobody." I don't care who it is, I mean, Barney Frank or Mike Pence.

Nobody wants to cast a vote on it because it is -- I mean, it's controversial if you do -- I think a vote against it probably gets you through the election OK.

But voting for it is -- you want to avoid difficult, painful, torturous votes, especially this close to an election. And George Bush is a weak ally for the people who are trying to push it. I mean, he hasn't been able to deliver anything.

Let’s consider the magnitude of the bailout relative to the size of the economy. GDP in 2007 (the last year where the figures are available) was about $13.8 trillion. Total government spending (Federal, State, and Local) in fiscal year 20007 was about $4.9 trillion. So government spending is about 35% of GDP. The bailout is 1/7 of government spending or about 5% of GDP. That’s a lot. It’s very frightening. The scale of the bailout speaks to the enormity of the problem it aims to address.

The politics of this is all about the income redistribution consequences of the bailout – from taxpayers to holders of illiquid securities. So the populist view is to be against it. The argument for it is that it will shore up the World Economy and avoid shrinkage of the size of the pie, enough so as to make the bailout worthwhile. Unfortunately, nobody knows whether that will happen. The macroeconomic consequences with the various feedback loops involved are hard to understand. There has been much discussion of the Swedish solution from the early 1990s. But decline or growth of the Swedish economy creates barely a ripple in the World economy.

There has been much less discussion about the timing of this intervention. R. Glenn Hubbard, former Chairman of the Council of Economic Advisors to President Bush, said we should have done this intervention some time ago. I’m inclined to agree with him. We’ve witnessed a cascade of historic interventions to save particular institutions and only when that didn’t seem to have arrested the problem have Ben Bernanke and Hank Paulson opted to go this extra mile with the bailout. But many serious economists question the bailout entirely, and worry whether the cure is worse than the disease. Certainly, as in Ed Leamer’s piece, they argue for due caution in getting a plan that is reasonable.

The memory of how we got into the War in Iraq is casting a long shadow on these deliberations. There is no question that we should have debated that move much more seriously than we did (which was not at all). Nobody wants to make the same mistake twice. But in a fundamental way the two problems are quite different. Nobody saw the WMD and we had to go on faith that the intelligence truly indicated they were there in Iraq. Everybody sees what is happening in the markets – the wide fluctuations in the Dow, the bursting of several very large financial institutions. There is a smoking gun and everyone has witnessed it.

Now we have the irony that Congressional Democrats and the Bush Administration are seemingly on the same side of the bailout with House Republicans playing the populist role. If you’re in the minority and can’t really determine the outcome, you have freedom to speak your mind. Democrats, on the other hand, need the political cover of a bipartisan bill, playing the Ben Franklin card. Even with the bailout the economy is likely to remain in turmoil for some time to come. There will be a lot of finger pointing in a few months and many of these people who vote for the bailout plant are up for reelection.

I wonder with this if there a lessons for all of us in the work that we do. Recently, I’ve been involved with Leadership education. And the question I’m asking myself is, “what does leadership look like and would we know it if we were staring right at it?” The movie The War Lover was on TCM a week or two ago. John McCain, who has been getting a lot of press as of late, seemingly shares many characteristics with Buzz Rickson (played by Steve McQueen). Barack Obama is more of an Ed Bolland (played by Robert Wagner). In the story, after some early success with impetuous moves that defy authority, Rickson ultimately goes over the deep end. Seemingly, the lesson is that leadership requires understanding our limits and staying within them.

There’s a different way to explain the behavior the two Presidential candidates rather than focus on their animal spirits. The alternative comes purely from choice calculus. (I wrote up a formal argument of that some time ago. You can find links to it here.) Favorites tend to play it safe; they have the lead and want to nurse it till the game ends. We all know that. Similarly, underdogs take risks. They expect to lose. If the gamble pays off then they are no longer underdogs. For example, had the election been held the week after the Republican convention, the Palin pick might have done just that for McCain. Taking a series of gambles, however, is likely to increase the chance of losing. That’s what seems to have happened to McCain the past couple of weeks.

There may very well be a difference between the perception of what leadership is and actual leadership. Still a different definition is that leadership is getting things done by allowing others to receive the credit. Most of us are still immature and look to get the credit ourselves, but like the members of Congress who must vote on the bailout, we don’t want to accept the blame when things go awry. Paul Krugman asked, Where are the Grown-ups? That’s a good question.

Increasingly frequently, I find myself asking the same question, within the learning technology field and more broadly within Higher Education. My campus has a recurrent structural deficit, about 4% of is operating budget. But this year there’s been more construction on Campus than I can ever recall previously, and we’re far from done yet.

The Protestant Ethic is dead. Optimism has taken its place, the revenge of Alfred E. Neuman.