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Andrew O’Hehir’s latest essay in Slate is pretty damn provocative. It’s titled Welcome to the New Civil War and it pulls no punches.

So even though it’s a truism of American public discourse that the Civil War never ended, it’s also literally true. We’re still reaping the whirlwind from that long-ago conflict, and now we face a new Civil War, one focused on divisive political issues of the 21st century – most notably the rights and liberties of women and LGBT people – but rooted in toxic rhetoric and ideas inherited from the 19th century.

We’ve just emerged from a presidential campaign that exposed how hardened our political and cultural divide has become, and how poorly the two sides understand each other. Part of the Republican problem, in an election that party thought it would win easily, was that those who felt a visceral disgust toward both the idea and the reality of President Barack Obama simply could not believe that they didn’t represent a majority. As many Republicans are now aware, the party now faces an existential crisis. It’s all very well to go on TV and talk about attracting Latinos and downplaying cultural wedge issues. But the activist core of the Republican Party is neo-Confederate, whether it thinks of itself that way or not. It isn’t interested in common cause with Mexicans or turning down the moral thermostat. Just ask Rick Santorum: What it wants is war.

As anyone who has read this blog for a while knows, I believe in a certain power that comes from regionalism. I think the notion that California has a different economy and culture than Georgia is OK and that as Justice Brandeis said, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

But O’Hehir’s essay raises another larger question, which is what happens when individual states circumscribe the rights of individuals in areas like abortion or gay rights? As Alex Bowles wrote to me, “so while decentralization improves decision making in many, many areas, there are some things—like equality before the law—that are no longer subject to debate. To the extent that humanity is universal, there’s no need for regional considerations to enter the picture.”

So this begs the question. Is it possible to have the kind of decentralized regional experimentation that I think leads to innovation while still preserving that Federal power to enforce “equality under the law” for gays, women, immigrants and minorities? I think this is what has to happen, but it may take a showdown with the neo-confederates before it happens.

Sir Isaiah Berlin wrote a wonderful little book called The Hedgehog and the Fox: An Essay on Tolstoy’s View of History. Here is a quick version of Berlin’s thesis.

‘A fox knows many things, but the hedgehog knows one big thing’. This fragment of a verse by Greek poet Archilochus describes the central thesis of Berlin’s masterly essay in which he underlines a fundamental distinction that exists in mankind–between those who are fascinated by the infinite variety of things (foxes) and those who relate everything to a central all-embracing system (hedgehogs).

I think our current election pits a hedgehog (Romney) versus a Fox (Obama). I think the libertarians who comment on this blog are hedgehogs. I think Bob Dylan is a fox and Louis Armstrong and Picasso and Susan Sontag and Martin Scorsese and Steve Jobs and Mark Zuckerman are all foxes. I think Ron Paul is a hedgehog and Franklin Graham and Rush Limbaugh and Rick Santorum are hedgehogs. They see the world through a single lens, be it Austrian economics or fundamentalist religion.

But our world cannot accommodate hedgehogs, because “the infinite variety of things” is only exploding. The hedgehog is incapable of dealing with facts that contradict his world worldview. Take the whole inflation debate which our Libertarian correspondents have been telling us is coming down the pike at hyper speeds for the last four years, because the Treasury and the Fed are “printing money”. As Richard Duncan points out in his new bookThe New Depression: The Breakdown of the Paper Money Economy , that at the very point that Greenspan was unloosing the easy money, Globalization was causing “a 95% drop in the marginal cost of labor by bringing a billion people from the developing world into the global industrial workforce.”

How could you possibly have inflation in such a circumstance? Hayek is simply not able to account for this. So Ron Paul will never stop predicting hyper inflation and the suckers will never stop buying gold futures which PAY NO INTEREST.

Or take Paul Ryan’s insistence that an austerity budget like the Conservatives pushed through in Great Britain is the key to America’s future. Ryan continues to push his budget, which mimics the British one, despite the announcement this week that Britain has fallen back into a double dip recession.

Britain’s austerity experiment in particular has been judged by economists to have been ill-timed and poorly constructed at best. It is a reminder, in the consensus view, that the basic tenets of Keynesian economics – primarily, that government spending plays a key role in maintaining demand when the private sector is struggling in a severe financial crisis — remain as valid as ever.

So much for the hedgehogs. Never let facts get in the way of ideology.

But how are the foxes going to convince the country that their vision that we are at a Cambrian Moment–A time of radical evolutionary development–is a rational reaction to the end of the Interregnum. I am convinced that Liberals must embrace the experimentation that flows from Subsidiarity: the notion that matters ought to be handled by the smallest, lowest or least centralized competent authority. David Brooks writing about Jim Manzi’s latest book Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics, and Society, notes that experimentation is the key to rethinking our politics.

Manzi wants to infuse government with a culture of experimentation. Set up an F.D.A.-like agency to institute thousands of randomized testing experiments throughout government. Decentralize policy experimentation as much as possible to encourage maximum variation.

Here once again we return to the idea of New Federalism. As you know, I have been wrestling with this idea for years without coming to a satisfactory conclusion. I think as the school year ends this becomes my summer project.

I must admit that I am increasingly confident that Barak Obama will have a second term. The new poll from CBS/New York Times indicates as I have suggested before that Obama is in good shape.

Showing steady improvement since early December, Mr. Obama’s approval rating has reached the 50 percent mark in The Times/CBS News poll — an important baseline in presidential politics and his highest approval rating since May 2010 (excepting the brief bump he received after Navy Seals killed Osama bin Laden in May 2011).

It is clear that Axelrod and Co. have suckered the Republicans into a battle over birth control! How 1950′s. This may actually lead to Rick Santorum grabbing the nomination on platform that even Barry Goldwater would have thought too right wing.

So then my mind turns to the battles of a second term. I think they will revolve around defense, disruption and devolution.

On defense the battle lines are already being drawn, with progressives who want to make a once in a generation complete reordering of the Pentagon’s stranglehold on our discretionary spending, having already won giant cuts if Congress does nothing. On the other side are Panetta, and the Republicans railing against the coming cuts.

The overall spending was dictated by the budget agreement that Obama and congressional Republicans reached last August that calls for defense cuts of $487 billion over a decade. More troubling to Panetta and lawmakers is the likelihood that automatic, across-the-board cuts will kick in in January unless Congress can come up with at least $1.2 trillion in savings.

The additional $500 billion of cuts would still leave the U.S. Military far larger than any potential rival. Of course the new focus on the Pacific is designed to start another mindless arms race with the Chinese, just like the criminal waste of money from 1950-1989 on the Soviet Arms Race. This needs to be stopped. Read more…

The first post of this blog was exactly four years ago. It’s been a long strange journey and yet I’m struck by how much I feel the same mixture of hope and foreboding. As to hope, I am still struck by the creativity of my family and close colleagues. I am still in awe of a few artists who seem to be able to make music or films with a passionate commitment to truth and beauty. And despite the disappointments, I still have an essential faith in the humanity and intelligence of Barack Obama. And the foreboding that I felt four years ago, before the Great Recession had struck, still is in place.

And then you ask–so where does the aforementioned dread come from? It comes from a sense of profound economic peril. We have lived as a country off the rich inheritance of past generations and now the party may be coming to a close.

This has been a revolutionary year. Some would compare it to 1848, 1917 or 1968. Look at the Pictures of the year as organized by the New York Times and you can’t ignore the interregnum upheaval we are experiencing. I chose the photo of the young Egyptian revolutionaries at their computers as the quintessential image of “the old is dying and the new is struggling to be borne” that defines the Interregnum. These kids give me hope and I was struck by the words of their young Russian counterpart, Aleksei Navalny at the massive anti-Putin rally in Moscow yesterday.

“Where is this man?” Mr. Navalny asked. “Can you see him? Is he here?”

He added: “These days, with the help of the zombie-box, they are trying to prove to us that they are big and scary beasts. But we know who they are. Little sneaky jackals! Is that right?” The crowd roared. “Is that true or not?” Another roar.

Of course we have our own battles with the forces that control “the zombie-box” in America. For all our idealistic belief in the liberating power of the Internet, most of our citizens still get their information from television–Fox News, CBS, ABC and NBC. And of course there is the large minority that gets no news at all, but rather sits like Mr. Navalny’s zombies zoned out on the fake spectacle of Wrestling or the lives of the Kardashians. Near the end of a presidential campaign all the advertising goes to reach these zombies–people who for some reason in late October of a Presidential race have been paying so little attention that they are still “undecided”. WTF! These cretins get to decide a close political race?

And you can bank on it that Karl Rove’s $500 Million Super Pac will have some killer ads to wake these moron’s out of their stupor just long enough to get them outraged enough to drag their sorry asses to the polls on the first Tuesday in November. Somehow, I can guarantee you that Obama will be painted as “un-American” and the Know-Nothings will drink a couple of Red Bulls and be driven to the polls to pull the lever of Democracy.

So let’s hope we can be inspired by the young activists in Cairo, Moscow, Damascus, New York, Oakland and all the points around the globe where citizens are trying to make the word “democracy” have some meaning. For me, that means going back to Localism. Trying to make Los Angeles the most livable, just, optimistic and creative city on the planet.

Merry Christmas and Happy Holidays,

JT

I run an Innovation Lab at USC. It is supported by some of the most innovative companies in the world. I can tell you one thing with certainty—the truly innovative companies have learned to devolve power and flatten organization structures. If the United States is to survive as the design and innovation hub of the digital world, it is going to have to have a government structure designed for a 21st Century World. And that means that power and funding is going to need to devolve from the Federal level to the State and City level. I’ve been writing about this idea for almost five years, but I’m more convinced than ever that some sort of New Federalism is the only way out of the grinding political gridlock that is destroying our country. Democrats cannot fight this notion that power that is closer “to the customer”, is more efficient power.

But the problem with giving the states more responsibility is that you need to encourage mobility in America, not discourage it. If my 2050 version of Social Security is being managed at the state level, it’s just harder to move. The beauty of a Federal social insurance system is that there is never any impediment to get up and move to where the work is. Your social security number is good anywhere.

So let me specify what I think we need a Federal Government for:Departments of Defense, State, Treasury, Veterans Affairs and Homeland Security as well as  Social Security and Medicare benefits. Everything else should be a State matter. Certainly law enforcement agencies like the FBI and SEC would operate at the Federal Level to enforce Federal statutes, but the funding and the personnel for the departments of Education, Agriculture, Health and Human Services, Housing and Urban Development, Commerce, Transportation and Labor should primarily exist at the State level. Obviously both the Housing and the Agriculture departments in California and Mississippi would be concerned with very different issues. And of course as the Imperial Dreams of America come down to earth, the bloated Defense and Homeland Security budgets would shrink dramatically. Read more…

This morning it is deja vu all over again. In March of 2008, after having warned my readers for three months that a crash was coming, I wrote a piece about what I called Savage Capitalism. The short selling sharks had managed to crash Bear Stearns and now were swimming around with blood on their snouts looking for their next prey. It would be Lehman Bros. The whole notion that the great fortunes of the present day were made selling short, was a particularly dispiriting one.

I’m a boomer and I was raised in the 50′s with a healthy respect for the great companies and fortunes made from producing the goods America wanted. Whether General Electric, Ford Motor, AT&T, IBM, all were producing world class quality products. Even banks like Chase Manhattan and Bank Of America added great value to the American economy. But things are different now. The great fortunes get built betting on failure. John Paulson, who personally made $5 Billion in 2010, did it by shorting mortgage securities that he designed to fail. George Soros made $1Billion in 1992 shorting the British Pound.

At this very moment the school of short-selling sharks is circling the bonds of Portugal, Greece, Italy, Spain and Ireland. Their big score is if they can get one of those countries to default. Read more…

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way.-opening sentences of Dickens’ “Tale of Two Cities”

When I first started talking about the notion that we were in an Interregnum–Gramsci’s notion that “The old is dying and the new cannot be born.  In this interregnum there arises a great diversity of morbid symptoms”–I didn’t really suspect that it would get quite so morbid. A couple of days ago, a reporter, having read my Brave New World Redux post, called me up to ask about the reference to “Flash Robs” in the context of the London Riots. I made what I thought was a fairly uncontroversial remark about two facts. First, that in a world of increasing inequality, there is a group of unemployed young people who are totally untethered to the social norms. Second, those young people use social media for everything, including organizing vandalism and looting. Even though the reporter took a long discussion and boiled it down to one line, I still feel my comment was true. What I have seen since then is an onslaught of hate mail, much of it overtly racist, probably brought on by this blog post revealing me to be “an undisclosed new media leftist”. And here I thought I could return to my community and have a decent, civil conversation. Jeesh! Here’s an example of the kind of shit I read every morning. This one from one Dan Anthony.

Let’s tell it how it is.. These Mobs are Black Ghetto Welfare Slaves. Their parents and grandparents were also Welfare Slaves. A bunch of people caught in a cycle of no education, no ambition, and no morals. Stupid People breed Stupid People. If this was the best Economy in the history of the country , these people would still be doing this. The Economy up and downs do not effect Welfare Slaves. Maybe if people in this country told the truth without worrying about who’s feelings get hurt, we can move on and become a better society. Stay out in Cali with the rest of the elitest, leftwing nuts. You assholes out there are phooney, full of shit, Limo Liberals GO FUCK YOURSELF AND FUCK YOU JERK OFF.

I’m trying to figure out why my comments about the haves and the have nots has struck such a cord. Read more…

After Thursday’s stock market crash, we find ourselves staring into the abyss of a potential double-dip recession. Republican’s, having ignored the history lesson of the business lobby 1937 Austerity Push, which managed to push America back into depression, seem to be clueless to the fate of most Americans. Of course, As the New York Times reports, their financial base is doing very well and luxury spending is reaching new highs. But America’s economy lives and dies on the confidence of the average consumer. In the go-go years of the late 1990’s the concept of “mass affluence” and “affordable luxury” dazzled marketers into believing that “aspirational marketing” was the path to the streets of gold in which the majority of citizens would have 60” inch flat screen TV’s running 500 channels of cable TV and 100 MBPS Broadband services, even if they had to hock their house to get it. But, as a new White Paper from Ad Age entitled, “The New Wave of Affluence” points out, “In 2011 however, in the wake of a massive reset, it appears that mass affluence may be a thing of the past.” Ad Age goes on to suggest that marketers concentrate their attention on the 3% of the American population earning more than $200,000 per year, “who account for almost 50% of consumer spending.” The esteemed Telecom analyst Craig Moffett, in a report titled “How the Other Half Lives” chose to look at the darker side of this picture. “After paying for food, shelter, and transportation, the average bottom-40% family is left with…. wait for it…. just $1,215 per year, or $100 a month, for everything else.  That’s $100 per month for all discretionary purchases, telecom services, cable or satellite TV, movies…  and everything else.  Indeed, after Healthcare, the number drops below zero.” A recent report on consumer discretionary spending from the Federal Reserve Bank of New York shows “this time is different.” Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.” Read more…

For the last month, I have been gripped by the gnawing sensation that all of the conventional wisdom about our current economic crisis is wrong. I think we are facing a crisis of capitalism, not just a periodic bout of market failure. What was most startling about yesterday’s GDP drop, was that consumer spending literally stopped. We have been riding in a vehicle turbo-charged with leverage and we just hit a brick wall.

“The drop in spending was so fast, so rapid, that production could not be cut fast enough,” said Nigel Gault, chief domestic economist at IHS Global Insight. “That is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”

As I have said before, we are entering an Interregnum. Now the reason there was so much uproar about the Wall Street Bonuses this week is that the bankers didn’t realize this. The election of Barack Obama reintroduced the notion of a social contract. This is a very old notion as Karl Polanyi notes in his landmark book, The Great Transformation.

Take the case of a tribal society. The individual’s economic interest is rarely paramount, for the community keeps all its members from starving unless it is itself borne down by catastrophe, in which case interests are again threatened collectively, not individually. The maintenance of social ties on the other hand is crucial. First, because by disregarding the accepted code of honor, or generosity, the individual cuts himself off from the community and becomes an outcast; second, because in the long run, all social obligations are reciprocal, and their fulfillment serves also the individual’s give-and-take interests best.

Of course these notions of community and honor have long since vanished from the canyons of Wall Street, but that does not mean they have vanished from our society. But this leads me to the question of the crisis of capitalism. What I want to uncover is if there is some inherent flaw with the system that caused the Wall Street traders to push it to a breaking point?

There are very few things that Adam Smith and Karl Marx agreed upon–but one was the “tendancy of the rate of profit to fall”. This term is so well known by economists that they use TRPF as the acronym. Here’s Adam Smith from The Wealth of Nations .

It may be laid down as a maxim, that wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it; and that wherever little can be made by it, less will commonly be given for it. According, therefore, as the usual market rate of interest varies in any country, we may be assured that the ordinary profits of stock must vary with it, must sink as it sinks, and rise as it rises. The progress of interest, therefore, may lead us to form some notion of the progress of profit.

And here is a description of Marx’s TRPF theory.

Even as investment in constant capital (factories, technology,etc) increases productivity (i.e. the margin of surplus labor relative to regular labor, and thus of surplus value relative to variable capital), it reduces profits (i.e. the margin of surplus value relative to total capital). The capitalist then responds by investing more in raising productivity, which in turn reduces profits further, and so on and so forth, in a vicious cycle of diminishing returns.

This tendency, in concert with the other dialectically interrelated crisis factors developed in the course of Marx’s overall critique of capital, eventually leads to a catastrophic breakdown in the capital cycle.

So what do the theories of these two philosophers from the 18th and 19th Centuries have to do with our current crisis? When I arrived on Wall Street as a Merger and Acquisitions VP at Merrill Lynch in 1984, the age of the corporate raider and the leveraged buyout was just beginning. Up to that point debt to equity ratios in the S&P 500 companies were fairly conservative and the average investor was happy to collect dividends and hope for overall share appreciation (chart below)

But men like Henry Kravis, Boone Pickens and Ron Perlman were not satisfied with these steady returns and Mike Milken, the junk bond king showed how with a lot of leverage they could “juice” those 4% returns into the mid 20% level. So in 1985 when Kravis’ KKR bought the Beatrice Companies (Tropicana, Samsonite) for $6.1 billion, most of the money used was junk bond debt. They then sold off individual brands, retired the debt and made a 30:1 return on their investment. Now everyone wanted in on the leverage game. Pension funds, college endowments and private investors battled their way to get in on these deals. The new normal was that money should earn 10%+ per annum. Like Adam Smith said, this was unsustainable.

Next, this mentality began to affect the CFO’s of even the most successful business. Joseph Schumpter in his classic text, Capitalism, Socialism, and Democracy talks about the “vanishing of investment opportunity”. In 2003 even after the tech crash, Microsoft had cash holdings of $49 billion. But did they invest it in some new breakthrough technology? No–they used the money to buy back their own shares! So Bill Gates, our genius inventor, felt the investment opportunities had vanished and so he bought back shares to keep his stock price up. This same strategy was deployed in boardrooms all over the country, but on Wall Street, big hitters desperate for “Juiced returns” demanded even more leveraged product. And so the genius quants in the basement invented new derivatives to which 30:1 and 40:1 leverage could be applied.

So here’s my conclusion. If modern market capitalism can only be sustained through the “juice” of such leverage, then we are in a crisis. Just as the average consumer has now realized that her home equity is no longer an ATM and that carrying 10 credit cards is bad for your health, the whole economy is going to have to return to being content with a reasonable return on investment. Because for years our GDP was”juiced” in the same way that hedge fund returns were hyped, I imagine that total output will continue to drop for many quarters until we reach a sustainable level of debt to equity ratios on both corporate and personal balance sheets. And that is why groups like The Club for Growth, originally financed by Mike Milken and his ilk are so up in arms over the Obama election that they are running this contest.

Here are the proposals from the Club for Growth on how to solve our crisis.

Making the Bush tax cuts permanent
Death tax repeal
Cutting and limiting government spending
Social Security reform with personal retirement accounts
Expanding free trade
Legal reform to end abusive lawsuits
Replacing the current tax code
School choice
Regulatory reform and deregulation

It somehow escapes the pea-brains of these dinosaurs, that these are the very policies that have brought us to this crisis. So when a New York Times reporter has the temerity to question a Wall Street bank lawyer on Obama’s anger at his bonus, we get this.

“I think President Obama painted everyone with a broad stroke,” said Brian McCaffrey, 55, a Wall Street lawyer who was on his way to see a client. “The way we pay our taxes is bonuses. The only way that we’ll get any of our bailout money back is from taxes on bonuses. I think bonuses should be looked at on a case by case basis, or you turn into a socialist.”

This logic is so twisted it’s comical. If we don’t pay Mr. McCaffrey his bonus, then he won’t pay his taxes, so we won’t have the money to recover all the cash we put in his bank. OMG! And of course if we complain–We’re socialists.

It seems to me we are going to have a really interesting conversation about the nature of capitalism in the next few months. Regular readers of this blog know that I am not a fan of centralization and so classic notions of Socialism have no appeal for me. However the basic question of TRPF, vanishing investment opportunity and need for outsized returns depending on leverage juice remain. One of the questions we may find our selves wrestling with is the allocation of resources in a mixed economy. What if the states and cities take on the task of investing in our basic productivity infrastructure–roads, trains, broadband, electricity grid (solar, wind and geothermal) thus freeing private capital to provide the “value added” services where higher returns can be generated? Any investor in Google knows that their returns are not juiced by leverage. But on the other hand, Google could not succeed without a commodity broadband infrastucture. There is no reason that government run infrastructure should need the kinds of high returns that Wall Street demands.

All of these are questions I’m going to try to grapple with in the next few months. I don’t pretend to have the answers. What I do know is that the conventional wisdom is wrong and name calling from the The Club for Growth and Rush Limbaugh is not going to help us find a solution.

“The old is dying and the new cannot be born.  In this interregnum there arises a great diversity of morbid symptoms.”-Gramsci

“What the cynics fail to understand is that the ground has shifted beneath them.”-Obama

It is all well and good for our new President to acknowledge our interregnum moment, but I worry that his advisers think it’s rhetoric and not reality. Take the banking crisis for example.

If policy makers were even remotely honest, analysts said, they would force banks to take huge write-downs and insist on a high price in return for taking bailout money. For practical purposes, that could mean nationalization or partial nationalization for many banks.

So here are the choices for the economic team. Either you force the banks to acknowledge that many of the CDO’s on their balance sheet are worthless and nationalize the ones worth saving, thereby wiping out the equity holders. Or you persist in the fantasy (like Japan did for ten years in the 90′s) that these assets will “come back to par” in the distant future, because you refuse to cross the theoretical rubicon of Nationalization.

And here are the choices for the national security team. Either you acknowledge that our military was built to fight a war with another superpower that disappeared in 1989 and that radical transformation of the force structure is needed to defend against small, networked non state actors. Or you persist in the fantasy that one day in the future we will have to fight a nuclear and conventional war with a new superpower like China, because you refuse to accept that the world has fundamentally changed. 

Obama realizes the world has changed. Throughout the speech there were acknowledgements of this. But unless he is willing to allow radical new thinking “to be born”, we will be stuck in the Interregnum.