Waiting For Clarity on the Bailout? Don’t Wait Too Long

I don’t want to sound too alarmist, but among the circle of economists whose countenance I keep, the question now is whether it will even matter in a few more days who wins this election.

A day in which all of the major US equity indices were down by amounts ranging from six to ten percent is a bad day on Wall Street in the eye of even the most un-astute follower of these things. However, what most people don’t realize is that every time an equity market loses value the margin traders in our midst must react by selling even more equities to cover their positions.

Therefore, tomorrow is the day to watch for a major sign: if equities are down another eight percent, there could be no coming back for the foreseeable future; there just isn’t enough liquidity to cover those kinds of positions. Two or three more days like this one and the banking sector will pretty much come totally unglued. A week of these kinds of losses, and–I never thought I’d say this–the question of whether Barack Obama or John McCain reaches 270 electoral votes will not make the slightest difference to the national agenda.

On The Small Matter of Government

Among rather a lot else, the first Presidential debate included a lengthy discussion of Senator McCain’s continued embrace of tax relief, specifically tax relief as a means of stimulating the economy. “Tax cuts are the best recipe,” said he, as though this were a declarative statement of fact and not an ominous homage to the tepid policy responses of two consecutive Presidents Bush. Still, the idea has traction with a substantial subset of the electorate (including many clever folks on the Editorial Staffs of the Wall Street Journal and the National Review), and thus, if for no other reason, it would seem topical to revisit the question of the proper role for government in a modern, mixed-industrial society like ours.

To begin with, few professional economists are prepared to argue the Ayn-Rand-extremist view that all modes of government intervention in the behaviors of markets are inherently pathological. Even Gregory Mankiw, the economic adviser who many say was forced to resign from the present Administration in disrepute after touting the virtues of outsourcing, argues in the first chapter of his own college-level economics textbook that “governments sometimes improve market outcomes.”

All market transactions include both private and social benefits and both private and social costs, and while the market does an excellent job of appropriately valuing the private aspects of both sides of this ledger, the social consequences pass through its membrane completely unaccounted. When the divergence is big enough (say, for example, when a hog rendering plant wants to open across the street from an orphanage), the government steps in to force internalization of the external benefits and costs. I usually tell my economics students that the next time someone tries to tell them how much better off the markets would be without a government, they you ask that person if they think football would be a better game without referees.

As some people already know, Senator McCain has been no friend to this permanent role for government during his tenure in Washington, tireless as he has been in his efforts to repeal government oversight authorities and deregulate entire industries during his various episodes as Chair and Ranking Member of the Senate Commerce Committee.

But even if Mr. McCain were to suddenly reverse his deregulatory course both in action, as well as in words, this belated getting-of-religion on the matter would have precious little impact on the tax-relief centerpiece of his economic plan, precisely because oversight is an acyclical role for government, while Mr. McCain is proposing to use tax-relief as a counter-cyclical measure to encourage renewed spending in the near term. There isn’t one, but two roles for government in our modern mixed-industrial economy.

The good news for McCain is that the verdict on conservative stabilization policy is decidedly less straightforward. Few can argue in good faith that Ronald Reagan’s approach to the matter was anything other than unambiguously beneficial for the time and circumstances in which he served (and never mind the inflation-fighting contribution of Paul Volcker at The Fed, over whom Mr. Reagan had no jurisdiction). The tax and regulatory burden of the late 1970s was an added disincentive to business investment at precisely a time when disincentives to business investment could be accidentally stepped in if a person weren’t careful when walking down the sidewalk.

But something else was true in the late 1970s, that isn’t true now: the government had just concluded the thick end of three decades spent investing a substantial sum of money on job-creation and human-capital development, much of it with semi-permanent effect on infrastructure.

Travelers to the developing world are in the habit of noticing with jarring forcefulness not the host country’s inability to embrace free enterprise–free enterprise is alive and well in places like Bangkok and Lagos and Port Au Prince–but rather the stunning absence of our comfortably taken-for-granted infrastructure: You can’t take a train, you can’t take a bus, you can’t drink the water, and if you did, there’s no health care. These are the things that suffer when a candidate for the Presidency pledges to slash the nation’s already gutted tax code, and these are the things that show up in the national consciousness as exported jobs, outbreaks of T.B, and collapsed bridges in the host cities of its National Political Conventions.

If it is true that this second role for government is fluid with the changing times, as I would seem to have argued, then it is equally true that this is hardly the time for us to start paring down our investments in education, transport, and health care. Just as the American business owner needed to know that his return on investment wouldn’t be taken from him in 1979 before deciding to build an addition on his factory, so today he must know that the factory will be reachable by his employees, that they will show up healthy and trained and ready to work, and that the products he produces will have a vigorous market full of prosperous families with  roofs over their heads.

In the final analysis, Mr. McCain is allowed to believe that these things will somehow arise as indirect consequences of his plan to hamstring the government’s ability to provide them, but he’s not allowed to claim the principles of modern market economics as his justification. Because this time around, they are with the other guy.

What If? The 269-269 Scenario

Lurking behind the event-driven noise of this unusually noisy election, the routine business of state-by-state polling has continued apace. Few people are looking, of course, but the state-level polls have actually shown unexpected strengths for both candidates in unusual places. For Mr. Obama, both Indiana and North Carolina have polled improbably well, while Mr. McCain does well in both Pennsylvania and New Hampshire.

Assuming for the moment that Obama holds Pennsylvania and McCain ultimately carries Indiana and North Carolina, along with other swing states such as Ohio, Florida, and Virginia, a wide assortment of 269-269 scenarios involving a possible flip of New Hampshire (4) have emerged. Notably, if Mr. Obama wins all of the Kerry states besides New Hampshire (248 electoral votes), plus Iowa (7), New Mexico (5), and Colorado (9), where he is comfortably ahead, Mr. Obama and Mr. McCain would both end up with 269 electoral votes. So what happens if the electoral vote is tied?

On one level, the answer is known and is obvious: the race “goes to the House.” Most tenth graders know this much, of course–but many fewer people understand what this expression precisely means, and just how much chaos might well ensue if it should happen for the first time in modern history.

Most of us assume that each House member gets a single vote, but in fact it is each state that gets a single vote, based on internal negotiations for which there are no preset rules. At the moment a casual “whip count” from assembling all of the close House races would seem to be suggest that Democratic majorities are likely in anything from 22 to 27 of the delegations, while the Republicans can only count on 14 solid votes when the time comes. Even if the Republicans win all of their solids, all 6 of those currently leaning their way, and all 3 of the truly up for grabs, their count would still fall two votes short, 23-27. To make a 26-vote majority outright, the Republicans would probably need to win back control, something few experts are prepared to grant as even an outside possibility this year.

The complicating factor is that several states are expected to have Democratic majorities in Congress, but with popular-vote majorities for McCain (in some cases quite large majorities at that). Of the Democrat’s projected 27 state majority in the voting, two states (North and South Dakota) are represented by single Democratic congresspersons and will almost certainly go hard-red on election night, while a third (Mississippi) is only represented by four House members, one almost certain to be Republican.

Naturally all Democratic congresspersons in such a position would be lobbied aggressively by both campaigns–particularly if Mr. McCain were to win the national popular vote. McCain would promise electoral vengeance for anyone daring to buck the will of the people, and Obama would reply with promises of cushy jobs in the Administration for anyone who suffered this fate.

If in consequence, the House simply fails to arrive at a 26-vote consensus, the job falls to the Senate, which elects the Vice President (one-man, one-vote), deciding the Presidency by default after the House’s decision to leave the top job vacant.  This raises the bizarre spectacle of a President Joe Biden. (Many pundits have suggested that Biden would pick Obama to be his Vice President and then resign, but he is under no constitutional obligation to do so.)

After the events of the past two days, this sort of bedlam seems increasingly possible, if not downright foreordained. The real question is what each of us will do about it, in our capacities as letter-writing, protest-organizing, rank-and-file citizenry.  Will the galvanized voters of the extreme right-wing prevail, as they did in 2000, on the basis of having stronger and longer lasting will? Or does the incumbent party always have the harder sell for four more years?

Mercifully, that aspect of the larger question is always, always, always left to each of us to decide for ourselves–regardless of who carries the single electoral vote that goes with winning the Omaha suburbs,* which could (even more bizarrely) decide the outcome of the entire election.

*Nebraska and Maine award electoral votes by congressional district. A candidate wins two electoral votes for carrying the state and one electoral vote for each congressional district

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