Monday, October 27, 2008

Red State, Blue State: Poor State, Rich State?

Over $100,000 in income, you are more likely than not to vote for Democrats. People never point that out. Rich people vote liberal. I don't know what that's about.

--Tucker Carlson, conservative TV commentator, 2007

Andrew Gelman didn't believe Tucker Carlson. And he didn't believe NYT columnist David Brooks' simple "red state, blue state" political-alignment hypothesis, either. And so, Professor Gelman, a political scientist and statistician at Columbia University, set out to debunk these apparent public misperceptions. His quest is chronicled in a new book, Red State, Blue State, Rich State, Poor State: Why Americans Vote the Way They Do, and reviewed in a Chronicle of Higher Education article, "Peeling Back Paint-by-Numbers Politics."

Gelman covers a lot of familiar ground, venturing into established scholarly work about party polarization, religion, regionalism, and how to define the white working class. But he also found this: in the 2004 election, high-income individual voters tended to vote for Bush, but states with high average incomes tended to vote for Kerry.

Thirty years ago, there was apparently no correlation between states' average income and states' presidential preferences. It has evolved over the last few decades. And Gelman is now more respectful of Brooks' observation, saying he "was doing what thoughtful journalists are supposed to do. He noticed a pattern that increased over a few decades and became very dramatic in 2000."

At the heart of the book is the red-state/blue-state paradox. If rich voters prefer Republicans, why do rich states tend to lean Democratic?

Gelman's answer is this: In states with relatively low median incomes, individuals' income strongly predicts their voting behavior. In Mississippi and Montana, for example, Bush won among upper-income voters in 2004 by vast margins, won among middle-income voters by smaller margins, and lost among lower-income voters. In rich states, by contrast, the relationship between income and voting is much weaker. In states like Maryland and Delaware, Bush won among upper-income voters, but only narrowly. And in four wealthy states — California, Connecticut, Massachusetts, and New York — Kerry won outright among upper-income voters.

It is that anomalous behavior among relatively affluent voters in relatively rich states that needs to be examined, Gelman suggests.


Gelman explores several popular explanations for the phenomenon, finding a few to have some possible influence, but most not enough to explain what is happening by themselves. One, for example, is education levels, which have so-far shown only a weak correlation with red state, blue state voting patterns. But one explanation does seem to him compelling.


Affluent people have sorted themselves into two opposing camps. This, Gelman believes, is close to the heart of the matter. There is reason to believe, he says, that affluent people are self-consciously arranging themselves into insular liberal and conservative communities. Among affluent people, religious participation (or its lack) is a very strong predictor of voting. And — as the journalist Bill Bishop and the sociologist Robert G. Cushing argue in their recent book, The Big Sort: Why the Clustering of Like-Minded America Is Tearing Us Apart (Houghton Mifflin, 2008) — there is evidence that counties are becoming more politically homogeneous. (Imagine a new college graduate from Iowa deciding whether to move to Brooklyn or the Dallas suburbs.)

But the sorting is not just geographical, Gelman notes. It also has to do with political-party identification. Evidence suggests that Americans — especially affluent Americans — have gotten better since 1980 at "correctly" choosing the political party that matches their policy preferences. In part, that is because the parties themselves have become more polarized and ideologically predictable; to take the best-known example, there are fewer abortion-rights Republicans and anti-abortion Democrats in Congress than there were in 1988.

Still, according to Gelman, most Americans hold more complicated, unpredictable combinations of policy preferences. And often they don't fit neatly into either party's standard platform positions. He notes with implied irony that, "Only half of abortion-rights supporters, for example, also support universal health insurance. And only 62% of universal health insurance supporters also support abortion rights." The exception? That's right.


But, significantly, Gelman says, there is evidence that one group of Americans is becoming polarized in ways that the political parties would recognize: the rich. 'Americans who are wealthier look more like politicians in terms of the ideological consistency of their beliefs,' he writes. 'The same is not true for those with college degrees as opposed to those without. Nor is it true for Southerners versus non-Southerners, or religiously observant people versus nonobservant people.'

But Gelman knows that the voter landscape is still changing, and so he awaits the results of November's election--and more, perhaps, the exit poll data that will be released in the days thereafter.


There's some suggestion in polls today that younger voters and highly educated voters will break heavily for Obama," he says. "which would contradict our view that age and education are weak predictors. So that's something we'll be looking at carefully. I'll be staying up late that night, like everyone else.


For the times they are a changin'. They really are, and likely will be for some time to come. And for the good, I believe. Let's hope so.

Tuesday, October 14, 2008

The Infinite & the Infinitesimal: Space Exploration, the Hadron Collider & Mankind's Perspective

From the cosmos and astrophysics to the subatomic world and quantum mechanics, physicists search for the context and history of what we are, where we came from, and where we might be going. It's only a piece of the puzzle, we know, and the work of evolutionary biologists and paleontologist most often seems to have more relevance to the earthly origins and existence we can better relate to. But it is the work of physicists in the infinite expanse of the cosmos, and the infinitesimal world of the subatomic--the beyond-our-world science (and science fiction)--that so captivates our imagination.

Other than Albert Einstein, Stephen Hawking may be the best known physicist in the world today. This is because of his notable professional accomplishments, of course, but also his popular, illustrated books on physics and the universe--and his much-publicized, extreme physical disability from Lou Gehrig's Disease. So, when he makes a public stand in the area of space exploration policy, he more likely finds recognition and an attentive audience.

Hawking believes it is important that we again make manned space travel a policy priority in the US and around the world. And in a Cosmos magazine article, "The Final Frontier," he makes all the arguments for the proven importance of expanding space exploration and renewing our commitment to manned space travel, including the always-titillating possibility of finding extra-terrestrial life. But he adds another which could be a little unnerving:
The human race has existed as a separate species for about two million years. Civilisation began about 10,000 years ago, and the rate of development has been steadily increasing. But, if the human race is to continue for another million years, we will have to boldly go where no one has gone before.

But as Hawking looks outward across the universe for greater knowledge and a better perspective of life on earth, many of his cousin quantum physicists peer into the physical world of the very smallest things, the world of subatomic particles. Colliding subatomic particles--protons, for example--fired at each other near the speed of light through miles-long "accelerators" have intrigued physicists and provided new insights and understandings about the world of quantum mechanics for many decades. And for some time now, the European nuclear research organization CERN has been about building the largest of all accelerators, the Large Hadron Collider near Geneva, Switzerland. And after getting past some concern that theoretically, at least, a small "black hole" could be created, the physicists of the world appear unabashedly giddy about the prospect that sometime in 2009, we may have a much better understanding of the conditions in the universe less than a second after the Big Bang, the beginning of everything as we understand it. A CNN.com article, among many others, and Wikipedia chronicle the background of the collider and the possibilities for the work that will soon be done there.

After the plain language explanations of process, purpose, and possibilities, however, I am quickly lost in the arcane scientific jargon and mathematics. Perhaps that is your experience, too. But some things, at least, seem clear to me. The more we know, and the greater the perspective we gain on the reality of the larger worlds that extend infinitely outward and the smaller world that extends indefinitely inward, the more we should feel compelled to understand and address the realities and limitations of this very small earth-world we live on. The more commonly shared these understandings, the more common ground may be found for coordinated action with the collection of nations and peoples who share this little globe with us. Together, then, standing at the crossroads of understanding the greatest and smallest things--miraculously, wonderfully evolved and reasoning creatures that we are--aren't we more likely to meet our collective responsibilities in managing our place and future together?

And more, can't we better test and assess how well our various religious, philosophical, or day-to-day experiential perspectives serve humanity and God--or the truth, purpose and potential of creation and existence, however understood? Faced with the advancing scope of these unfolding realities and implications, shouldn't there be a greater sense of humility and transcendence of place occasioned by our search for meaningful identity, and recognition of our fragile existence in this much greater scheme of things?

http://www.cosmosmagazine.com/node/2209/full

http://www.cnn.com/2008/TECH/09/10/lhc.collider/

Friday, October 10, 2008

Better Regulated Capitalism is Better Capitalism

An MSNBC article today asks whether this worst financial crisis since the Great Depression will bring about "The End of American-Style Capitalism?" Of course, your answer depends on how you define and how you view America's brand of free-market capitalism. Not all of us agree.

Much of the American marketplace is well and wisely regulated. We've learned over the years--the decades--that unregulated business and markets are decidedly not in society's interest. Yet, let's be clear: given human nature, it is undisputed that a market economy provides the strongest, healthiest, and wisest incentives for a productive society. The opportunities and incentives bring out the most creative and productive qualities of individuals and business organizations in society. But, regrettably, they also bring out the most aggressive, selfish, winner-take-all attitudes and behavior, which too often move them toward and past the borders of professionally, ethically and publicly responsible behavior.

Over the last century or so, industry after industry, in one marketplace after another, have too often proved their lack of accountability to society and its citizens: workplace safety, fair wages, environmental responsibility, market manipulation, truth in advertising and selling, quality and safety of products, among other areas of abuse. And some of these issues continue to pose occasional problems even today. After all, the nature of man and the dynamics of markets remain dominant factors, even with some level of regulation in most all these areas. And now, many of today's businesses are looking for ways to abandon any responsibility for employee pensions and health care.

And yet, throughout my 24 years as a corporate tax and financial executive, my conclusion has been that business and market players most often play by the rules set out for them. And they play to win; they have to. For very often, if they don't win, they lose, or their company loses, and their employees and shareholders lose. That's the nature of a very competitive marketplace, and the well understood natural rules that obtain there. The stakes are often large and very personal.

Human nature and these natural market dynamics often move participants to compete as aggressively and as close to the legal and ethical boundaries as they can. Naturally, they oppose new laws, taxes, and regulations that would constrain them or reduce profitability, and they lobby and contribute as much money as possible to sympathetic legislators who might support them. Then, together, they contest and attempt to eliminate existing laws or regulations wherever possible. They employ public advocacy to assert that the limitations and burdens of more regulation will weaken American business, the American economy, and American employment. But, in most cases, it is just not so. It's not about what is best for society. It is about what is best for them. They are playing to win, and aggressive legal and public advocacy are part of how the system works.

The only problem is that the advocates for society's broader interests are not as strong, well-financed, or as effective as business interests. They emphasize, as well as they can, that a particular economic model enjoys support by a society only when it best serves all the interests of that society. One might reasonably think it should be those broader public interests and the health of society--all elements of society--that define how business and markets will best serve them, not visa versa. Yet, business interests and free-market ideologues too often advocate quite unabashedly and unrepentantly for the opposite--that the best societies grow out of the most unregulated marketplaces. That is, what is best for the market, is best for society. And their definition of "best" is a "free," unregulated market where "trickle-down" economics define social responsibility. To the extent that remains the view of many Americans, it is an increasingly isolated view in today's modern world.

Unfortunately, predictably, when the competitive environment of a poorly regulated marketplace grows white-hot, greater "creativity" and "productivity" (read that, profitability) is too often found only in rationalized ventures beyond the reasonable boundaries of the law, professional ethics, or public responsibility. And the rationalizations are just as creative.

And as this volatile, often destructive process has played out again and again, needed, prudent regulation has often proceeded in its wake. But one area where regulation has a spotty and uneven history is the financial markets: S&Ls, mortgage companies, banks, and particularly the investment banking houses. Free-market conservatives and ideologues, when in power, have sometimes successfully deregulated in these market areas, as well as turning back needed new regulation. Such was the case with regulation of institutional leverage limits and some of the more exotic and risky derivative financial instruments which are at the heart of the current market crisis. We can only hope that will now change.

A healthy market economy is essential to the most successful and healthy societies. But prudent market regulation is also essential to control for the excesses of human nature under such powerful incentives. Aggressive, unregulated free-market ideology is today an anachronism. It is a conceptual vestige of the 19th and mid-20th century. By now, we should be beyond all narrow, limiting ideologies. Let's hold fast to the best ideas about market processes and productivity, and how markets best reward effective producers, yes, but also insist that the role of the market's institutions and ambitions be understood as subordinated to a societal obligation to finance and provide--directly and indirectly--for the greater needs and interests of an advanced and humane society. For, at best, the market is the economic engine that provides for the needs of the greater society, no more, no less.


http://www.msnbc.msn.com/id/27112481

Thursday, October 9, 2008

Treasury Mulls Cash for Bank Stock

Cash for stock. Straight up. That's what Treasury is considering now. It's simpler, to be sure, and would take us out of the business of pricing, owning, managing, and reselling all those junk securities, and the additional cost, I might add. I believe it was my own RI Sen. Jack Reed who pressed for getting stock warrants with any purhcase of distressed mortgage-backed securities--although it was not clear to me just how that would work or how the two elements would tie together from a value/pricing perspective. But I don't remember hearing about unequivocal authority to simply, directly infuse capital into financial institutions for equity shares. Perhaps they just reasonably infer that authority as a functionally equivalent alternative way of putting money into the system: just take back the equity shares, but leave the junk securities behind.

I've read references to research indicating a history of success with such an approach in a lot of cases in smaller economies, many academic economists also now back it, and Britain announced such an approach yesterday. So I am actually relieved that we may take this simpler, more streamlined approach, and not get mired in valuing, managing and reselling all those distressed securities--at least in appropriate cases. They would have to be confident that the chosen institutions will survive or else the equity shares can become worthless, and the taxpayers would have been better served by owning the distressed securities that in the aggregate will likely be worth near what we pay for them. And I assume that as soon as the banks are healthy again--and our equity shares show a nice profit--the Treasury (we) will get out of the business of owning financial institutions, and into the business of better regulating them.

We're doing a lot of things right: increasing FDIC insurance, buying corporate commercial paper where necessary, and leading a coordinated international interest rate reduction. And while I really like Bernanke's and Paulson's current emphasis about getting it right, as well as getting it done as fast as practicable, I'll feel better when we actually get some significant infusions of cash into the financial system.

http://www.msnbc.msn.com/id/27094961/

Monday, October 6, 2008

60 Minutes: Crisis Phase 3, "Credit Default Swaps"

I think you should see and understand this. CBC's "60 Minutes" last night exposed in understandable terms the most complicated and incredible last shoe to drop in this increasingly frightening financial crisis. It is about the last irresponsible act of investment banking's principal role in a drama they primarily authored.

They encouraged and exploited the unprincipled expansion of the sub-prime mortgage market by buying and packaging portfolios of these mortgages and selling high-risk securities backed by them. You know that. And I discussed their evolution in my e-mail/blog post of 9/29/08. But then to shore up the marketability of these high-risk, sub-prime mortgage-backed securities, they also bought and sold a form of complicated hedging/"insurance" contract to cover them called "credit default swaps (CDSs)." They were like insurance, but with no reserves to back them up. "60 Minutes" called it the "Shadow Market," and it's nominal value may be as high as $60 trillion--give or take $10 trillion or so. Yes, trillion, but they are very difficult to value reliably. And whatever their value, it is disappearing fast as they too are being defaulted on.

In my earlier e-mail/blog article, which was primarily about supporting the rescue plan, I focused only on the principal offenders (the investment bankers) and their central weapon of choice (the sub-prime mortgage-backed security), trying to keep to basic themes in what was alread a long article. But it was pointed up to me that I should have addressed the complicit role of government, and it also became clear from my reading that the credit default swaps were playing a bigger role than I realized. So I edited my 9/29 post to add some coverage of the sad supporting role of the federal government, but primarily to add this paragraph about CDSs:

And the hedging/insuring vehicle of choice for the mortgage-backed investments was often the so-called "credit default swap" (CDS), a non-regulated, highly complex "insurance" instrument that could be structured, valued and understood, if at all, only using space-age mathematical models. Then speculative players started buying them, too. The investment banks, commercial banks and insurance companies that created and owned them (without any regulatory requirement for adequate loss reserves) eventually had no meaningful way of dealing with or representing what the value at risk in these huge portfolios might be. Warren Buffet referred to them as "financial instruments of mass destruction."

So, as the housing market fell and mortgages defaulted, the sub-prime mortgage-backed securities market also defaulted and failed, in turn so did the credit default swaps in the face of the huge obligations with no reserves to cover them. The failure of these instruments played a major role in the failure or weakness of many of these institutions, including Bear-Stearns, Lehman Bros., and particularly in the demise of AIG. (Hyde Park's Corner, http://www.hydeparkgh.blogspot.com/2008/09/bail-out-bastards-we-have-to.html )


But from the piece by "60 Minutes," I can only conclude that I still failed to appreciate how frightening a role the CDSs are playing. Steve Croft interviews several with insider knowledge, including James Grant, who for many years has been one of the most respected and knowlegeable commentators on credit markets (Grants Interest Rate Observer). He unflinchingly, matter-of-factly characterized our situation: "This is a full-blown financial storm and one that comes around perhaps once every 50 or 100 years. This is the real thing."

You can see the entire "60 Minutes" piece as reported by clicking on the link below, then clicking on the video picture that says "Wall Street."

http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml

Thursday, October 2, 2008

The Rescue Plan & Implications: Charlie Rose interviews Warren Buffet

Last night, I happened on a live, hour-long Charlie Rose interview with Warren Buffet on PBS. It is worth seeing, whether you are as big a fan of Buffet as I am, or not. Is the situation as serious as so many people are treating it? Buffet calls it "an economic Pearl Harbor." He talks candidly about the rescue plan/"bail out" and why he thinks something like it is necessary now, and about the related economic issues and implications now and in the future. And importantly, he asks us to bear in mind that the rescue plan will likely avert financial market and economic disaster, but will not keep us from continuing down the road of recession we are now on--and likely will be for some time. Good stuff.

You can see it by clicking here or on the link below and then clicking on the video screen with the picture of Mr. Buffet. If you are not that familiar with Warren Buffet or his background, accomplishments and philosophies, your can find a pretty informative summary on Wikipedia.com.

http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett