Romney

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Weak Sales

The economy has clearly hit a weak patch. Today’s report on retail sales has them falling 0.5% in June. Not only is this much worse than most people had expected – the par expectation seems to have been for growth of around 0.2% – but it means that sales have fallen for three straight months. The last time we had three consecutive declines was in 2008 during the recession.

Obviously this is not a good thing.

The only upbeat aspect of the report is that gasoline sales fell reflecting the recent drop in oil prices. Consumers will benefit from this, but they show no inclination to spend what they save at the pump elsewhere. Very few retail sectors showed any increase, and this that did – clothing, food, liquor, and general internet stores – all made only very slight gains.

Since all three months of the second quarter saw falling retail sales I think it is safe to say that the overall economy weakened from the first quarter’s already weak growth. If the sales figures are reflected in the personal consumption data within the GDP calculation, remember: the relationship is not one-for-one, then they will act a significant drag on growth. Since the first quarter came in at only 1.9%, and rings appear to have slowed down since then, the overall pace will be somewhere in the 1.0% to 1.5% range, depending on how trade holds up, and on how much negative impact comes in from the slowdown in government spending.

The issue then becomes what we can expect for the second half.

At the present pace things are not looking good. There is nothing in the wings with any certainty of turning upthat we can look to as a positive factor. All then risks appear to be on the downside. Our domestic policy possibilities are now highly limited. The election has stalled our already stagnant policy activity. The Fed spoke last week about its concerns, but there are sufficient policy hawks there to stall action until things are much worse. So we are rudderless. Add in the extraordinary self inflicted wounds in Europe and their damage to trade and word business activity, and the range of positives shrinks to negligible proportions.

Given this gloom I think GDP growth of any more than 1.5% is a stretch. This is well below anything that might make a dent on unemployment. Indeed the possibility will emerge, if things stay the way they are, that unemployment could tick up later in the year.

Under normal circumstances such weakness would spell doom for Obama. His weakness in leadership, not so much in action, but in terms of making a strong case for stimulus, ought to bring him down. But Romney represents the past and a continuation of the Reagan/Clinton/Bush obsession with deregulation and market magic. Since it was that obsession that brought us to the crisis, electing Romney would merely postpone the date of recovery by four years. So even with a rotten economy mired in depression it might be that Obama wins re-election. Quite what that means I am not sure. Especially with the strong likelihood of a Republican Congress able to prevent any remedial action being taken.

We are adrift. And we look set to stay that way.

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Health Care Reform

Well that was a shock.

Although, perhaps, not as much of a shock that some people are suggesting. After all during the oral arguments in court Chief Justice Roberts did gently float that tax wheeze he relied upon to support the liberal justices in upholding the law. So we had a hint this might be the result. But that hint became lost, as so much is nowadays, in the welter of extremist rhetoric subsequent to the court arguments.

What now?

Some folk on the left have already – in typical fashion – sought to find reasons for being pessimistic. One line making the rounds is that Roberts pulled a neat trick. By arguing the way he did he handed Obama a temporary victory, but he also toughened the interpretation so-called commerce clause of constitution thus making future grand government plans more difficult to pass muster. I don’t buy this. Health care reform is a major piece of legislation. It will gradually settle into becoming a centerpiece of our social fabric. In contrast, the commerce clause has been invoked in opposition to relatively minor or incidental legislation. So toughening that clause versus allowing massive legislation to stand is hardly a great trade-off, and certainly not a great strategic win.

The Affordable Care Act, to give Obamacare its proper name, is deeply flawed. It is a kluge. Its roots are in the Republican Party’s efforts to prevent the most obvious and effective way to legislate cheaper health care. A simple extension of Medicare to everyone is the best solution to our spiraling health care cost crisis, but that prospect so scared and infuriated the right that they spent years coming up with alternatives. The ACA is based on the Romney legislation in Massachusetts, and Romney’s legislation was based on one of those Republican alternatives to universal Medicare. So the ACA is, essentially, a Republican plan. This, of course, is something the Tea Party and its extreme confreres want us not to realize.

My preference is still single payer insurance. Something along the lines of universal Medicare would do just fine.

But ACA it is.

The voting public has, in poll after poll, given a very negative verdict on the ACA. I suspect this is more a function of the effectiveness of Republican criticism and the ineffectiveness of Obama’s defense of it. One of the great and continuing criticisms of Obama that I have repeated here often enough – perhaps too often – is that he seems incapable of explaining what he’s doing. His message is inevitably swamped by a subsequent title wave of vitriolic and often inconsistent propaganda. He has failed repeatedly to use his position to get his point of view across. Indeed on more than one occasion he appears to have caved into the vitriol before even attempting to promote legislation. The stimulus of 2009 is a good example of such weakness.

Nonetheless he has now won a major battle on the ACA, and will now be forced to explain himself for the next four months as the Republicans, as they are now bound to do, make health care reform a central issue of the election.

So, is the upholding of the ACA actually a benefit for the Republicans? After all, as I just mentioned, it polls very badly whenever put to the public. No. I don’t think so.

The Republicans are now faced with a significant dilemma. If, as they have already started to do, they move the ACA onto center stage for the election they run the risk of downplaying or marginalizing the economy. And the economy is a much larger immediate threat to Obama than health care reform. The public is saturated, and probably fed up with, health care debate. But it is now settled law. By putting it back on the agenda so forcibly the Republicans could appear to be fixated about the past rather than being forward looking. It would leave the Democrats to make all the positive moves with regard to the economy and would simply highlight the constant negativism that has pervaded the Republicans during the Obama administration and which is voters have grown tired of. Don’t forget that despite the apparent unpopularity of the ACA, Congress generally is even more in the voter’s bad books.

As for the ACA itself. With the central plank of Republican opposition undermined, by a conservative justice no less, it will survive. There ins no chance it will be tossed out by a Romney administration, despite all the brave promises now being made. The Democrats may lose control of the Senate this year, but they will not disappear sufficiently that they cannot block repeal. More likely is that a number of revisions will make their way into law and I would argue that the cumulative effect of such revisions will improve rather than debilitate the law. This is because, over time, voters will see more benefit from the reform and will start to vote to support it. This is the trajectory followed by Social Security and Medicare. I see the ACA going the same route.

So, while Republicans will continue to hate – perhaps that’s an understatement – the ACA, they will become increasingly powerless to get rid of it. Opposition to it will become, along with Social Security and Medicare, an iconic measure of right wing ideological rectitude, but little more.

This does not mean that the next few months and years will be any more quiet than the last few. Indeed the election will now be even more hate filled and extreme. But health care reform stands.

Which means that a whole lot of average Americans won something very important. And that maybe, just maybe, we have a chance to get our health care system back from its current low status and accomplishment.

It would be nice if our health care system were about health and not simply profit. We have a shot at that now.

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Romney and His Taxes

This is a quiet day.

Except for Mitt Romney and his charge to the Republican nomination. A furor has broken out over Romney’s tax rate. He, like many very wealthy Americans, lives in a different tax code from the rest of us. Up there in the higher reaches of the income atmosphere tax rates are lower than they are down here on planet earth. Clodden folk pay higher marginal rates than the high flyers. We have known this for a while. So the outbreak over Romney’s tax returns is a brouhaha long in the making.

The facts are simple.

The US taxes income generated by labor at a variety of tax rates rising to a top rate of 35%. This top rate kicks at about $380,000. Allowing for the variety of deductions, credits, and other dodges, the average middle income tax payer ends up paying around 20% on their total wage bill. Remember this is Federal tax only. States and cities levy taxes on top of this.

Obviously Romney earns way beyond that $380,000 level. Yet his average tax rate is close to 15%.

How come?

His income consists largely of dividends, capital gains, and other “unearned” income. The top rate, at the moment, on these sources of income is 15%.

Why?

Because the source of that income has already paid tax on it in the form of corporate taxes, and so it is ‘unfair’ – so some people argue – to impose income taxes on that stream of cash twice. This so-called double taxation problem is at the heart of Republican arguments to abolish taxes on such gains in their entirety.

But this is a recent argument. Capital gains were taxed at much higher rates in the past without, apparently, dampening the flow of capital so any argument suggesting that high taxes on these sources of income are a disincentive defies history. They weren’t.

More importantly, though, is the hidden story. As we all know: most corporations do not pay taxes. They are able to exploit the convolutions of the tax code to reduce their liability to zero. So the cash stream that ends up as dividends is largely untaxed. So non-wage income is vastly privileged, and flows with much less of a burden. It is just one aspect of the three decade long development of our rentier style economy within which wages are squeezed while profits soar and feed into the cash flow that ends up in the hands of people like Romney. The gradual disappearance of corporate taxes as actual rather than theoretical payments invalidates the double taxation argument.

But it’s worse.

One of the most egregious tax dodges still on the books is the notion of ‘carried interest’. This is the outrage that allows hedge fund managers earning hundreds of millions a year to pay at the lower capital gains tax rate rather than at the higher income tax rates. Carried interest is a performance fee levied by money manages on the funds they manage. It is calculated as a percentage of profit after having paid back the original capital that investors invested, and any agreed target rate of return. The residual net cash flow is then either distributed back to investors or paid out to the fund managers as carried interest. So the cash flowing into the carried interest bucket is simply a fee carved out from the revenues of the business. There are plenty of businesses that pay their managers incomes from the residual cash flows. Usually they are accounted for as partnership income, salaries, or bonuses. But not in the shady world of high finance. Somewhere along the line the finance industry managed to re-name these payments as carried interest and get them taxed as capital gains.

Technically the source of the income is the gain on the capital invested. But – and this is the crucial point to keep in mind – it isn’t the capital of the fund managers. It is the capital of other people, the investors in the fund.

In other words, private equity and hedge fund managers are being paid fees – taxable as income under normal circumstances – and, by sleight of hand, counting it as capital gains – taxable at the lower rate. It isn’t their capital. It is one thing to support capital gains tax as appropriate on gains from capital; it is another to tax ordinary fee income as if it were a gain on capital. It is no such thing. It is an outright cheat.

Back to Romney: in his days at Bain he earned huge fees as a private equity fund manager, re-named those fees carried interest and thus reduced his tax bracket substantially below that of any regular person. Like the ones he was firing in order to create those capital gains for himself. He was not alone of course. The entire hedge and private equity fund industry pulled the same scam.

So.

Not only is Romney paying a lower rate on his current income – because it comes, predominantly, from dividend and capital gains, but he was part of the big carried interest swindle perpetrated on the regular taxpayers by the finance industry. Romney lives in that rarified 1% world were the rules are specially designed to keep the wealthy secure from the problems of the rest of us face routinely. It is no surprise to find that, over the past three decades, the high end business managers and financiers responsible for managing our economy have down so to their own advantage. The epic shift in wealth to the top tier is well documented. That they distorted the tax code along the way to keep more of the loot is less well known. It ought to be. Especially in these more straitened times when the management of that top tier has been exposed as a dismal failure. They steered the ship onto the rocks and made off with the money. They are bankrupt of ideas, but well-heeled in wealth. They in ovulated themselves ahead of their failure so as not to be harmed by it.

Romney is one of them.

As his tax returns, when and if we see them, will attest.

Whether people care is another question.

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Captain America?

The Economist’s astonishingly tone deaf editorial on Mitt Romney – “America’s next CEO?” – is partisan, wong-headed, and naive. The very title gives away the fundamental error: America does not need a CEO. The popular notion that business experience somehow makes for a more productive president is horribly misguided and displays a misunderstanding of politics that, frankly, the Economist ought to know how to avoid.

That many voters are tired of the gridlock in Washington is understandable. We are stuck in a deeply partisan era, forced on us, by and large, by a recalcitrant extreme wing within the Republican party. So far has that wing been able to shift the center of gravity of the Republicans that none of Eisenhower, Nixon, or even Reagan, would qualify any more as a suitable standard bearer of the GOP cause. The gridlock has not come, as the Economist and many others imply, from an intransigent left wing president. Obama is not a hard leftist. Indeed a major criticism often leveled at him is that he has trimmed too far to the center in order to attempt to reach reconciliation with the hard right. No, Obama is centrist, so the Economist’s comment that Romney’s erstwhile centrism would somehow haul Obama back towards the “ignored middle” is laughable. The middle has been long ignored by the hard right, so much so that the entire thrust of policy over the last thirty years has been designed to support business and upper income interests. Or, at least, that’s the way it has turned out.

Policy after policy, for three or four full decade,s has been designed to open up the economy and deregulate business. Taxes have been asymmetrically cut in favor of the very wealthy. Spending on programs that benefit the middle class most have ben either attacked or left to fade away. We have overspent on wasteful wars. We have underspent on domestic programs. We have to fight tooth and nail to keep cash flowing to the unemployed. We have bailed out banks with abandon. The list is endless. This is hardly testimony to a left of center leaning. It is exclusively a hard right agenda.

So why the need to call Romney’s putative centrism a mitigating influence on Obama?

None. It is simple partisan pleading.

As for the notion that Romney’s business experience will make him more effective – nothing could be less true.

In order for any president, on either side of the political divide, to be effective, the US governance system dictates that there is broad consensus in Congress. This is the very thing we are lacking at present. So no one, absolutely no one, can get much done. I very much fear that this election will change nothing.

The gridlock that ails us is a function of the deep flaws within the US political system itself. The vaunted and much admired – here at any rate – system of checks and balances is designed to prevent the emergence of a strong government. The Senate is deeply undemocratic in structure because it gives far too much power to states with small populations. So it is easy to cobble together opposition to practically any program, whether right or left. It encourages barter and back room dealing. It encourages pork barrel spending in order to buy the votes in order to create coalitions. And Senate rules – not the constitution – allow tiny minorities of Senators to obstruct any policy they object to.

None of this will go away were Romney elected. The Senate will still be an obstacle no matter what.

This is the way the Founders set the game up: they were so terrified of mid eighteenth century monarchical authoritarianism that they wanted to prevent the US from having a powerful central authority. Ever. So they condemned us to weak government. They wanted legislation to be labored and consequent to endless compromise. This was the central virtue they thought they bequeathed us: no one can get anything done unless we all can get along.

Which, when there is a vocal and extreme minority, we can’t. Right now the continued existence of the Tea Party is the single most important blockage to policy making. It is not the competency, or otherwise, of the president. As an example look at the disaster we went through in order to raise the debt ceiling. Romney would have faced the same set of circumstances.

In my opinion a Romney victory in November will not reduce, but enhance, the likelihood of policy gridlock. The extreme right will feel vindicated and will start, in the House of Representatives, to introduce extreme legislation. The Senate will grind to a halt as it debates that legislation. If the GOP controls the Senate it will attempt to pass along that extreme legislation only to face a filibuster by the minority Democrats. If the Democrats control the Senate, they will attempt to modify the extreme legislation, only to run int to a Republican filibuster.

Were legislation to find its way to Romney’s desk he will be faced with a dilemma: does he sign into law extreme right wing policies? Or does he veto his own party? Either he falls into the Obama trap and appears incapable of getting something done. Or he ends up as an enabler of the extremist wing of the GOP. By failing to recognize this trap, the Economist presents a naive and erroneous view of Romney’s prospects.

The conundrum is clear: either Romney falls down as someone who can execute. Or he falls down as being a centrist. In any case he is doomed to fail. The system dictates failure. It as designed that way. It is supposed to create gridlock in the brace of extremism.

Put it another way: Romney cannot be effective – getting stuff done – or centrist at the same time. Not in our current political climate. He has to pick which he wants to be. Just like Obama. There is no difference.

The Founders got it right. Much to our chagrin and frustration.

The solution is to get rid of extremism. Not to elect former executives.

Besides, as I have written about before, CEO’s are not at all adept in democratic circumstances. They are petty dictators. That’s how they get things done in corporations. They rule by fiat and centralized diktat. They have cadres of bureaucrats – aka management – at their bidding. They can make arbitrary decisions without having to face a vote. Popularity is not an issue. Employees cannot vote a CEO out of office because of opposition to an unpopular policy. Indeed many of our most famous CEO’s are proud of being unpopular. That’s how they earned their tough get things done image. At no point did they have to compromise. They trampled on employees to make a profit.

That is fundamental to business: every large corporation is run along the lines of a Politburo. Our CEO’s would be more at home in the old Soviet Union. The idea that a tough CEO can get stuff done in Washington is therefore mistaken. The US is not a corporate style dictatorship. It is run on compromise and public acceptance of policy. Popularity matters. So as soon as a CEO arrives in Washington they have to unlearn the very things that made them a successful CEO.

By the way: this is the same reasoning that exposes CEO hypocrisy about economics. None of them, not one, runs their company along free market rules. Every single one of them runs a Politburo management style. Yet they all endorse free markets outside the boundaries of their business. They seem quite happy with this dualist and internally inconsistent position. Efficiency at the business level requires dictatorship. It requires central planning and control. It is the antithesis of what orthodox economists advocate and model. Efficiency in a closed system is not attainable without ruthless centralization. Efficiency in an open system is simply unattainable due to the vagaries imposed by uncertainty.

I have said it before: in the face of uncertainty, things such as inefficiency, duplication, tolerance for redundancy and other horrors of potential ‘waste’ are essential to long term survival. Inefficiency, in an evolutionary sense, turns out to be a very good thing. It enables more effective adaptation to change. Ergo survival.

But I digress.

The point is that Romney’s business experience was gained in the wrong setting. It is worthless in national politics. Worthless. Romney’s ability to get stuff done as president – which seems to be the reason people are attracted to him – would not be a function of his experience at all. It would be a function of our ideological divide and the political system. Since that doesn’t appear to be going away or changing, he cannot be any different from Obama. Indeed, for the reasons I gave above, there is every likelihood he would be worse.

One last thing: people, seem also to assume that business leaders have an inside knowledge of economic policy. So, they are supporting Romney because he ‘understands’ how to create jobs.

Wrong. Many times wrong.

Macroeconomic policy is far more nuanced than running a business. For one thing there is no bottom line. The US is not a for profit enterprise, so it has no one, single, goal for economic policy. Creating jobs is a major goal, but low inflation is another. The two can conflict. Business does not suffer from this ambiguity, so solutions are easy, clean, and simple. So the Economist’s defense of Romney’s business history – Bain Capital’s success was largely driven by its ability to make arbitrary and narrowly focused decisions without reference to their repercussions on society at large – is both simple minded and misleading: it is a non-transferable skill set. It is enormously useful in the private sector. It is potentially massively damaging for the nation as a whole. You don’t have to quibble about Romney’s job generating history to make this point. It doesn’t matter how good he was at Bain. It is not relevant to being president.

So the Economist, and any other person or organization, arguing that Romney has superior skills to be president because he has been successful in business is simply wrong. They need to read up on American civics; and to get a better handle on the difference between business and economics.

Two things I would have thought the Economist was strong at.

Apparently not.

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Winding Down The Year

We have had a flurry of news this week causing the stock market to bounce around in near frenetic glee. If you to believe that the markets are even vaguely rational, which hopefully you are highly skeptical of, then have cause for optimism. If you’re like me and regard markets as deeply flawed and easily misled, then you end the year with more of a yawn.

The news, you see, adds up to more of the same.

Earlier in the week we heard that housing starts had risen from an annual rate of 628,000 in October to 685,000 in November. This set off a market rally presumably because the perennial optimists there wanted something to offset the gloom and despondency settling in from Europe. But a cursory look at those starts numbers tells a story of continued drift: they are weak, albeit not quite so weak as before. Yes, its true that recoveries sometimes start with small steps. And it’s also true that we have to pass through 685,000 on the road to the kind of numbers we associate with a healthy economy. So this week’s very modest uptick is, indeed, a good move. But it isn’t the end of the crisis. Far from it. Housing has a very long and painful road to haul before it reaches the safety of normal growth.

So why did the markets react so strongly?

Because there are other small signs that real estate has touched bottom and has started its climb out of the hole.

On Monday we read the monthly index of home builder confidence. It too was up from the prior month. In this case the most recent reading is for the beginning of December: the index now stands at 21, up from 19 in November. This is, of course, an almost derisory reading. This is one of those indices where a reading of over 50 is considered strong because at that pint over half of all respondents state they are experiencing better business conditions. So 21 is still pretty pathetic. But, yes, it’s better than 19. This is hardly the stuff of legendary growth though, so we are all entitled to look on the market’s reaction as one of clinging to even the slenderest of slender straws of hope, rather than as a sign of a great turn about in our fortunes. Still, we should note that the index has registered three straight improvements so there are signs of stirring.

Adding to the signs of life was the sales of existing homes release on Wednesday. It too rose, from an annual rate of 4.25 million homes in October to 4.42 million in November. Once again the cautionary note holds: this is still a lousy performance. Just not as lousy as before. The problem with this news report was hidden in the details. The National Association of Realtors, not exactly an objective source in the best of times, is the group compiling this report, and they used this month to alter their numbers going back to 2007. The adjustment knocked about 14% of the accumulated number of sales between 2007 and 2010. So the decline was more severe than we first were led to believe. This downward adjustment is in line with similar moves in other indices – recall that GDP itself was significantly reduced a few months back, meaning that the recession was much worse than we thought it was as we went through it. Since housing, and the ridiculous overvaluation of our property, was at the heart of the crisis, it was inevitable that housing sales were also over-reported during that same period.

The week’s real estate news ended this morning with the data on new home sales. Again there was a very slight uptick, from an annual rate of 310,000 in October to 315,000 in November. I won’t bore you by adding my well worn caveat. Just be aware that this, too, is pretty lousy.

Amidst all this real estate news we also heard that third quarter GDP was revised downward, from 2.0% to 1.8%. This seems not to have set off a negative move in the markets. Although it ought to have done. The main reason for the revision down was that consumer spending was 0.4% less than first estimated. Given that our hopes for a solid recovery hang, by and large, on consumer spending, this is not good news. Couple it with today’s report that personal spending and incomes were essentially unchanged – both grew 0.1%, weaker results than the prior month – and it is very difficult to articulate a credible argument that we about to spring to life and see GDP growing at the oft forecast rate of 3.0% next year. There just isn’t any momentum carrying us to those kinds of heights.

But the optimists keep on forecasting that way. Sooner or later I suppose they will be correct. Not yet.

Two other reports give the optimists support: weekly claims for unemployment assistance, and consumer confidence.

The claims data has shown a steady improvement in recent weeks. They are now down at 364,000, well below the rotten readings of 400,000+ we saw all summer long. And nowhere near the awful numbers we saw at the height of the crisis. This is an indication that the labor market is firming up a little. Before we get too far ahead of ourselves, though, we need to remind ourselves that claims should be a further level down before we can think of the labor market being healed. Typically we see claims below 325,000, sometimes much lower, in better times. So there is work yet to be done. Although we have clearly made a start.

That things are improving a little is also reflected in the modest upturn in consumer sentiment, which according to the monthly University of Michigan survey, rose to 69.9 in December, from 64.1 in November. More interestingly is the fact that each successive revision of the December figure has edged the total upward, implying that a trend is developing that might carry over into next year. Once more I warn you to be careful getting carried away with this news: in a good year this index regular scores above 90, so we have a long way to go. But, as with all this week’s figures, an improvement is welcome however modest it is.

So.

What does all this mean?

Well, not a great deal.

The economy is clearly improving. After all this time it darned well ought to. The debate now centers on the rate of growth that this improvement will lead to next year, and to the political ramifications that such growth may have.

This is where I remain on the cautious side. My view is that the economy is set for a very modest year. That means, in my mind, GDP growth between 2.0% and 2.5% for most of 2012. This contrasts with the more optimistic forecasts being produced on Wall Street where 3.0%+ is frequently mentioned. The key will lie in how consumption fares. With unemployment down, but still way too high; with wages flat; with debts still to be reduced; and with no sign of a burst of business investment around the corner, I just cannot see a source of strong consumption growth. If we throw in the plight of Europe, where recession surely beckons, and the possibility of slower growth in China, the outlook for trade to provide an acceleration is also reduced. Indeed, the international outlook provides a strong chance of damage rather than help to our growth prospects. Throw in the contraction in Federal and State spending we are most likely going to see next year, and nothing appears to provide a justification for anything other than a forecast more sideways than upwards.

Anyone, like me, who thinks that recoveries from crises centered in finance – as this was – are much more difficult to recover from, has to look at next year as another year of relative stagnation. Our banking system still is unwieldy and dangerous – our banks remain way too big, too powerful, and too subsidized for our economy to grow strongly without igniting another collapse. Our debt levels are still way too high. And households are still too fearful of the future to impel us forward. We, most likely, have another two or three years of adjustment to go before we arrive back in calm waters. Between now and then the risks are all on the downside.

Then there is the endless political farce being played out in Washington. This week’s ridiculous Republican attempt to raise payroll taxes back to there pre-stimulus levels is an example of the immense damage we could sustain from the radicals in Congress. So hell bent are they in overthrowing the last seventy years of settled policy that they nearly drove our economy over the cliff once again. We live in a time of absurdist politics, where a small group of extreme radicals can sustain an attack on our economy and use the chaos of the crisis as cover for their enormously regressive agenda. In many ways the uncertainty added to our outlook from this attack hangs as the darkest risk on the horizon. Political risk is something we are used to ascribing to minor economies the world over as unbalanced regimes extract a toll on their nations. We are not used to describing the US in those terms. Yet we ought to. In my view the greatest weakness we have, and a potential source of the greatest damage to our prospects, is the radical wing of the Republican party and its attempt to double down on Reagan era mistakes. That the GOP presidential candidates all have to bend to the radical’s will – no one has the courage to stare them down and lead the Republicans back to the center – tells me that, were one of them to emerge as president, we should expect more extreme policies and a period of greater instability.

Romney’s preposterous statement that Obama is undermining free enterprise demonstrates this problem. Romney is allegedly a centrist. His claim is an overt pandering to the radicals who seem not to realize that corporate profits are at all time highs right now. We will not solve our problems by giving more away to big business, and, more particularly, to managers of big business – especially the banks. As I have said many times before: these are great times to be a corporate CEO or shareholder. The economic game is rigged already in their favor. Change will almost inevitably have to be away from business towards the people if we are to improve our economy. So the radicals want to go in exactly the wrong direction. That Romney cannot resist them does not augur well for the country.

Which is a shame, because Obama surely needs a firm kick in the pants to get him to act decisively. An opposition based upon obstruction is neither loyal nor productive. We need sensible alternative policies for the nation to debate. We do not need the radical libertarian anti-social and deeply divisive policies that currently pass for the GOP platform.

So, as the year winds down the economic news is modestly on the upside. But the political risks are mounting. Hence our need for continued caution when we try to predict the economy’s performance over the next few years.

More of the same, in other words.

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