Signs of Recovery

That five day burst of enthusiasm that was the week just passed was nothing if not a collective “Aha!”, a realization that for the global economy, May was a mere speed bump rather than the start of an increasingly rough and rocky road. The road got smoother in June, and looks to get even more so in July and beyond. This week saw a tipping point, a burgeoning accumulation of outlooks by corporations that confirmed that the “double-dip” scenario is not meant to be. It was really not much of a surprise. The combination of what looked for all the world to be accelerating energy costs, along with business decision-makers rightly waiting out the full implications of Japanese supply chain disruption, did indeed produce something of a “soft patch”. As June progressed, however, it became apparent that it was just a patch, and that it is behind us. The Greek tantrum was really just a sideshow, a handy diversion jacked up by the owners of the channels who compete for our attention. Global economic recovery continues unabated, and this was the week that the Market figured it out.

Musings managed to tune the first few days of it out by taking a trip down to the coast. While the winds have moderated some, months of unrelenting southerly winds seem to have pushed the water up to a level well above ideal for flats fishing. This did not stop us from connecting with a few unsuspecting redfish and otherwise enjoying the natural splendor. I have tried to make this trip more than once or twice a year for the past several, and in doing so have gotten quite familiar with a thin slice of the thoroughly rural country between Austin and Aransas Pass. Observant old cuss that I seem to be, whatever changes occur between trips seem to stand right out. On this trip, I noticed two starkly different sorts of change that could be described as economic stimulus at work. Passing through the orbit of San Marcos/Seguin, I was struck by the plethora of road signage that has sprouted up since the last trip. A whole lot more marginally paved side roads have big signs or even lights. Coupled with various construction projects along the way, this is yet another partial answer to “So where did the $700B+ in stimulus spending go?” It is pretty obvious that it filters down through counties and other local, politically connected authorities. It rubs off on those politically connected enough to get the contracts to put up the signs and otherwise perform all that activity that passes for work along the by-ways. (Leasing those big plastic barriers, for who knows how many $$/day each, must be a great way to dip one’s snout into the public works trough, a political “in” well worth playing dirty to obtain.) Of course, some of the money goes to the politically connected sign manufacturers. Last but not least, the politically connected (in a low-rent sort of way) folks who belong to the political influential union whose members are allowed to put up the signs (when they are not leaning on shovels or taking a break) get a slice of the pie. So there is some perceptible economic activity, but once the signs are up it is not long before it has pretty much fizzled out.

A much different sort of stimulus is evident as one traverses Karnes County, towns like Karnes City, Kenedy and Panna Maria. This is where the highway passes over the Eagle Ford shale play. Three years ago, these little towns struck one as somewhere between sleepy and slowly dying. They are now positively alive with economic activity. Aside from having to pass a six vehicle drilling rig convoy going just under the speed limit, it was a delight to see. There are all kinds of new businesses, or spiffed-up, expanded businesses that a couple of years ago looked to be on death’s door. Pipelines are being laid, which should supplant the endless procession of tanker trucks now shuttling back and forth to the Corpus Christi refinery complex. There seems to be a complementary uptick in activity down on the coast, though more on the shipping and refining end of things. And lunchtime in Karnes County saw nearly full parking lots at every eatery we passed. Looking at the map and seeing just how tiny a speck this intersection of shale play and highway is in the grand scheme of recent discoveries around the country, it is hard not to feel a bit more optimistic about economic recovery.

Well, maybe a little hard. The technological breakthrough that is shale development (both gas and oil) is but one of many good things that the Texas economy has going for it. Of all the states that could use a boost, Texas is pretty close to the bottom of the list. Contrast this with New York, a state that needs all the help it can get. Sitting atop a reputedly even larger gas play, the used-to-be Empire State has opted to remain in the thrall of whatever influences seek to keep that gas off the market. (Anyone worrying about chemicals a couple of miles below the surface somehow getting into the water table, or an increased likelihood of earthquakes, isn’t thinking too clearly.) Texas and Pennsylvania get it, New York doesn’t have a clue. What is striking about this contrast at this particular point in time is what we can hope will be a salient if not preeminent issue in the upcoming election. To the extent that the governor of Texas gets into the race, we will be hearing about and hopefully talking about it. It is in my estimation just about the only prospect around which hope of undoing the current fiscal mess might be grounded.

We should be greatly encouraged if this election prompts a sustained revisitation of the Tenth Amendment to the Constitution. If we are to escape from the mire of debt and open ended liabilities that might otherwise swallow us up and diminish us, it will be from a concerted effort to reassert that “the powers not delegated to the U.S. by the Constitution, nor prohibited by it to the States, are reserved for (and must be returned to) the States respectively, or to the people.” This is not to be seen as an ideological imperative, though it has elements of that, nor as deference to the wisdom of the Founders (that some of them were slave holders is a non-issue, a condition to which they were born. That they struggled with this issue and failed to resolve it is a shortcoming, not an indictment. That they laid the groundwork for something that has succeeded a well as it has for as long as it has is a miracle.) It is a management issue. What we seem to have learned in the past few decades of our 235 year grand experiment is that while States are for the most part manageable entities, capable of turning themselves around when bad policy and other circumstances turn against them, the federal government as it has recently evolved is not. It seems to able to conduct that inherently wasteful activity that is war, in a boundlessly deep-pocketed sort of way, of course, and to undertake special project like Apollo or the Interstate Highway system, but everything it does seems to cost way too much and deliver far less than promised or hoped for. We cannot afford this anymore. It’s time to restructure, and that means devolving power to entities that at least have a shot at being manageable.

Almost every state was dealt a tough blow by the economic tsunami that was 2008. A good number of them seem to have responded quite effectively. States with strong executives and serious minded legislators seem to be able to find ways to cut costs and balance their budgets. If New Jersey of all places (where I lived for nine years), can right its boat, what state can’t? Probably three or four of them. Upwards of 45 states are what could be deemed “manageable entities”, i.e., capable of planning for growth and executing on it, and responding effectively when adversity upends those plans. These states are either undergoing a turnaround or, like, North Dakota, didn’t really wobble in the first place. The exceptions would be California, Illinois, New York and (possibly) Nevada, which almost doesn’t count as a state. All of these are largely rural in terms of space but dominated by megapoli, which in turn have deeply rooted traditions of corruption. These states might not be able to fix themselves. The rest of us should not be stuck with having to enable their obdurate dysfunctionality.

The beauty of federalism as demarked by the Tenth Amendment is that it pushes power toward the manageable entities and away from those entities that are too large, complex and as is inevitable with the passage of time corrupt to be manageable. It is entirely consistent with the venerable Catholic principal of subsidiarity, which recognizes that functions which subordinate or local organizations perform more effectively belong more properly to them than to a dominant central organization. This has been entirely at odds with the Progressive notions of government that have erupted like so many cold sores from time to time over the past 100+ years. An electoral campaign that is in large part a conversation about the inherent profligacy of unfettered federalism and the need to shift power back to more manageable entities should be taken as a sign of encouragement. Similarly, the recognition that the status quo on entitlement spending is broken and unsustainable. The “they’re feeding granny to wolves” demagoguery isn’t getting the traction it might have in the past. This is only because it is demonstrably not true. It is because a preponderance of the grannies understand, if only intuitively, the mess that will befall their beloved grandchildren if the open-ended obligations that were conceived a couple of generations ago are not reined in.

As I ponder the future, it is relatively easy to see a few more quarters at least of “good enough” economic growth (good enough to sustain earnings growth for well-situated global companies, not necessarily good enough to bring down unemployment to normal levels). Given the revenue prospects and open-ended obligations that the federal government finds itself up against, it is way to easy to default to pessimism further down the road. However, if we see movement toward becoming more a union of states, most of which will conduct themselves like FL, IN, NJ, VA and WI have in recent months (their growth no doubt spurred by in-migration from the recalcitrant few states that can’t get it together, i.e., that right to “vote with one’s feet” that overblown federalism forecloses) and less like a vast, mostly rural space dominated by the singularly corrupt megapolis which straddles the Potomac, there just might be a basis for longer term optimism.