Krugman, Palin, and the Real America

In Paul Krugman's recent post to his NY Times blog, he decided to take Sarah Palin's bait and react to her disparaging remark about the eastern U.S.  Following is my response, which I hate to admit serves to explain much of the Tea Party sentiment being embraced in the west.  Where I diverge from the Tea Partiers, however, is that I propose a different response (not to mention a very different outlook on most issues).

While I can't declare hatred against any region, I think that people in most of the western states should indeed take greater ownership of their states' economies and resources, rather than continuing to operate through the old guard on Wall Street.  Here's why I think we should become a little feistier and provincial out in Palin's "Real America:" We need to wean ourselves off of our absentee landlords.

So rather than snapping back at Palin for her crude lashing, I hope I can convince you to consider that our present economic situation (and commensurate rise in so-called populism) has several parallels to the outcomes of past eras marked by significant growth in the western U.S. -- most notably in the late 1800s (see "People's Party").

As a resident of Arizona, it's tough to ignore how the housing bubble was essentially the greatest transfer of wealth in my lifetime here -- in the end, most benefiting the bankers who facilitated the mortgage transactions, and with the most heinous acts (or lack thereof, i.e. oversight) occurring behind the scenes in our nation's banking capital far away from here.  From about 2003-2006, many homeowners foolishly bought into and helped contribute to the rapidly escalating housing bubble, thus trapping themselves into an unreasonable personal debt situation without any contingency plans for when the market abated or crashed (and now even being convinced by the banks that walking away from their overpriced mortgages is immoral, despite having legal protections to do so).  We generally acted like pawns who were convinced to ignore common sense and our own self interest, while charlatans took payments for services rendered and then turned around to the broker dealer community to unload much of the underlying investments on "qualified investors."  In this sense, there were two primary demographic groups most impacted: the young adults who traditionally enter the housing market at whatever time in life society deems them as having "arrived;" and then their grandparents who once had a nice nest egg in their pension plans or advisor-assisted/controlled accounts, until they or their fund administrators were convinced to invest in MBS assets.

[Note: The foreclosure crisis will likely continue, according to this article: http://bit.ly/cs1Lof]

Then there's the commercial real estate sector, where many developers ran into their own bubbles, whether in retail, hospitality, office space, or some sort of commercial mixed-use concept.  Ultimately, rental rates skyrocketed to a point that small local businesses could no longer afford to expand (or else, they too ended up biting off more than they could chew), regional banks collapsed (or at least some of those remaining after the S&L crisis did), and national retail chains pulled back on their expansion plans before getting into too much trouble -- thus helping to accelerate the decline of speculatively developed small retail projects, which were a favorite of smaller regional development companies.

Now that the market has crashed and it has become a buyer's/renter's market again, debt and capital investment sources are scarce and employment opportunities have systematically declined in Arizona (yes, thanks largely to a non-diversified economy and uneducated workforce).  The often overlooked entrepreneurs who start up little sandwich shops or dry cleaners can no longer borrow against their homes as was the norm, and accomplished professionals of the baby boom generation who might venture out on their own lack the resources and market opportunities to justify the risk.

[Note: This article provides industry-specific numbers for job loss: http://huff.to/9UTP2n]

So we now have an entire population that feels victimized and powerless.  Worse yet, most people paying attention will observe that, without drastic changes to business as usual, the ones most likely to get in on the ground floor of an economic recovery are again the established elite.  This means that some form of social unrest should have been highly anticipated (as called for by Ravi Batra in The New Golden Age).

[Note: McCain doesn't appear genuinely interested in helping his constituents, and he's beginning to attract greater attention from national press for his lack of sincerity: http://bit.ly/aWNnZ6]

While I can't vouch for 100% accuracy of the above analysis, I will say that watching the scenario unfold in historically independent yet transient and growing Arizona is very interesting.  My affluent and educated gen X/Y cohorts see entrepreneurial opportunities all around them, while others view the world through a lens of outrage and seek a place to direct it.  But our best bet is for the two sides to agree on the most pragmatic and proactive idea, which fundamentally boils down to "hey, let's avoid this sort of calamity in the future."

This means investing in a sustainable local economy by supporting local businesses over national chains, thus helping prove the concept and push more money through our local economies.  It means balancing our state/municipal budgets while still investing in long-term growth and education programs to ensure an educated workforce and future economic opportunities. It means economic diversification, better planning, value engineering, etc.

It's a lot of hard work to fix what's broken; Palin's approach seems so much easier.