On Bailouts and American Industrial Policy

First the financial industry needs a handout, now the auto industry. Events like this make policymakers start to wonder how long the line of handout requests is going to get. .  When we think about why a it might be attractive to bail out a large industry like the automakers, the main arguments are:

1) Symbolic:  the auto-industry is one of the symbols of american manufacturing strength, and letting it collapse feels like we just don't care to compete globally and we are collectively "letting ourselves go."

2) Contagion: if the auto industry collapses, it undermines confidence in other industries, which may experience equity declines and bankruptcies.

3) Employment:  if these giants go down, tens of thousands (or more) of auto workers (and potentially feeder companies that make parts, etc).

Of these reasons, #3 is clearly in the public interest, #2 is potentially a public concern, and #1 is an issue that - while not truly in the public interest - is difficult for politicians to ignore.  The fear of being punished at the ballot box for "having let the auto industry die," is almost certainly palpable for our elected officials.

From a policy perspective, therefore, what we need to do is ensure that displaced autoworkers have some kind of future that is in line with the aspirations of similarly educated and qualified Americans elsewhere across the country.  In the short term, that means helping with unemployment benefits and retraining/retooling costs.  

A main concern should be:  what if education or retraining is not enough?  Since globalization and outsourcing and offshoring became a big issue, the policy prescription has been to "create a more flexible workforce, and enable rapid retraining/retooling."  But, if auto workers are going to be unemployed, what is it, exactly, that these workers are going to be able to do, cheaper than anyone on the planet, that Americans and the rest of the world will want to buy/use?  I don't know what that is, and I don't necessarily think that government should pick choose the industry in great detail, but I would feel much more optimistic if one could at least imagine more than a very few possibilities.  Renewable energy and local infrastructure investments might be able to absorb some of these workers, but I can't it absorbing all of them.

To address, #2, we should also look into ways that we can help financial markets distinguish between economically sound industries and dying ones.  Most likely, this means not just having an industrial policy, but clearly articulating what it is and its implementation, so that market participants can correctly judge what industries might be pulled forward with government resources and which ones will be left to adapt or perish.

Thinking about point #1, what is the public interest specifically in saving the auto industry?  As Amit Etzioni points out, one might try to help auto workers by keeping their employers afloat, but is that money going to be spent efficiently?  Perhaps it would be cheaper simply to take money and send it directly to the workers. In that case, the question is whether the national interest is best served in maintaining this industry for the sake of having the industry vs. letting the industry decline and use our public resources for managing the fallout and helping new creativity rise from the ashes.

The problem is that the American auto industry has shown cannot produce quality automobiles cheaply enough to remain in business without external funding.  There is little to suggest that 50 billion dollars will probably change that over the long term.  It is true that there may be divisions producing cars that can serve future needs, and those divisions may be worth saving - but the industry as a whole is unable to compete globally.  We would do far better to find industries that can compete globally and - if we are going to use public monies to support industries - spend our money developing them.

Shortsighted management has much blame to shoulder here, but organized labor bears some of the responsibility as well. Union contracts for auto workers have been quite generous when compared with compensation for similarly educated and capable workers elsewhere in the economy. Organized labor is essential for protecting the interests of laborers, but labor costs make it extremely difficult to produce a car that the American consumer can afford in times of tight credit and rising high gas prices. Union leadership appears to have decided that management was bluffing when it showed concern about competitiveness, but the bluff might not have been a bluff after all. Although I am lax to blame labor first, if costs cannot be contained, neither management nor labor will come out with anything to show for their efforts. [Revision: Unions have indeed made a number of concessions to reduce labor costs for automakers, but they aren’t scheduled to go into effect until 2010]

It is worth remembering that bankruptcy does not destroy all value accumulated by a company.  It simply is a recognition that the company is unable to generate cash flows that will maintain or increase the firm’s economic value, which is ultimately linked to its product’s social value. The reason for bankruptcy is a recognition that maintaining the business actually destroys value and therefore the business should cease and either be reorganized or have its assets liquidated for other uses so that no more economic and social value is destroyed.

A midway solution may be to let the companies enter bankruptcy, then capitalize a holding company to strip away those parts of the companies that have a strong change of delivering a competitive global automobile that is efficient and runs on energy sources of the future:  in other words, a company compatible with national industrial policy interests.  If the government were to simply take over the company now, it would catch blame for the inevitable shedding of divisions and jobs.  Instead, the decline of the auto industry as we have known it should be handled as one would handle a terminal cancer patient - try to make the decline as painless and natural as possible.

Obama and Financial Markets

My last post was about the significance of Obama for United States race relations, and was a departure from my usual financial markets oriented posts. Today I want to reflect on what an Obama administration might mean for financial markets. I see four main issues that together are likely to determine the financial market going forward. These are:

1. Market reallocations in anticipation of a new tax and regulatory environment.


2. Weakness in economic fundamentals that may still need to be digested before markets can return to any kind of growth trajectory.


3. The degree of uncertainty and/or panic in various parts of the investment community.


4. The content and effectiveness of Obama’s economic policies.

Short Term Market Reallocations (short term downward pressure)

I happen to think that Obama is likely to be a very good president, but there is no doubt that a number of his policy positions will be bad for markets in the near term. My judgement on Obama in general is based on my sense that there is much more to being a good president than ensuring that financial markets go up.

Raising capital gains rates will - other things equal - make US securities less attractive than they were in comparison to foreign securities (which is different than saying they are less attractive in an absolute sense). In addition, an Obama led administration is likely to raise corporate income taxes, which means that corporate earnings available for distribution to shareholders will decrease (although corporate debt will likely be slightly more attractive than before because the interest payments are tax deductible). Each of these suggest that the earnings streams available to stockholders will be falling, thus their net present value will drop, and so the stock price.

The financial crisis has also increased the call for financial regulation, and the pendulum is likely to swing to include regulations in other sectors, certainly environmental regulations, and potentially others. Again, regulations are not necessarily all bad, but markets don’t generally like them, and recoil at the prospect because - in the short term - most regulation imposes both compliance and change costs, which reduces earnings.

All of these factors suggest that investors will be allocating smaller portions of global portfolios to US equities, and within US assets, there will be some shift out of equities into fixed income and cash. The reduced attractiveness of US assets in global portfolios will - other things equal - put some downward pressure on the dollar.

The degree of the equity hit may be mitigated by a few factors:

1. Legislation takes time to produce and pass, so taxes and regulations will affect cash flows further out in the future, and therefore be discounted more.


2. Economies in recession typically have fewer profits anyway, less will therefore go to taxes, and so near term effects on cash flows are less substantial than they would be in a booming economy.


3. Obama’s high polling numbers in the final stages of the campaign suggest that much of “the Obama effect” on asset prices is already priced in to securities. All the election results did was to eliminate the 10% chance (according to intrade.com) that future economic policies would be McCain’s rather than Obama’s.

Weakness in Economic Fundamentals (medium term downward pressure)

Regardless of whether Obama or McCain had been elected, the economy has a good deal of toxic waste to digest and eliminate before it can resume any kind of long term growth trajectory. Non-performing mortgages and the fear that these will spread and infect other assets are only the tip of the iceberg. There are a great many credit derivatives swaps outstanding with no reserves backup to ensure payment if called upon. Hedge funds may be selling massively in the face of client redemptions, and even well performing funds may face client redemptions so that clients can rebalance their portfolios to target allocations. Auto loans and credit card loans may face similar problems as the mortgage market. The US consumer has been facing job losses, housing losses, tapped out credit, and more, and it is not clear what and how much they will be buying. Credit for consumers is (rightly, for the most part) becoming harder to find, which in turn means that companies that sell to these consumers may find revenues falling, which spirals into greater unemployment, less purchasing, more unemployment, and so on.

Although the new President may have plans to address these problems, they still exist, and this means that corporate earnings are likely to decrease in the near to mid-term future.

Although it’s really very difficult to say for sure, I believe that the market’s downward trend in the days since the Obama election is mostly the recognition that there are simply a lot of economic problems to resolve, and that none of them will likely be solved overnight.

Degree of Uncertainty/Panic in the Markets (reduced volatility in medium term, small lift in prices)

There is no doubt that recent markets have been more volatile than they have been in a very long time. The Chicago Board of Trade’s VIX volatility index has reached some of the highest values since it was introduced in 1993. Volatility is bad because, even in normal markets, increased volatility eats away at total return. In panicked markets, volatility represents increased uncertainty about what things are really worth, what the future really holds, and can lead to self feeding spirals of panic.

The election of Barack Obama is likely to reduce market volatility somewhat, although volatility is still likely to be quite high. This is because we live in one of those times of crisis where the market may have become so paralyzed it cannot recover without government assistance. During the campaign, senator John McCain seemed very concerned about the economy, but was noticeably at a loss as to what to do about it. By contrast, Barack Obama appeared to have a relatively detailed set of proposals and was able to provide the sense of a “steady hand at the tiller.” It remains to be seen whether these policies will actually work, but the mere fact that there appears to be a proactive hand in government, along with a supporting coalition in the Congress, should reduce the extremes of current market volatility.

Content and Effectiveness of Obama’s Policies (mid-to-long term rise, if effective)

Accusations of socialism aside, the biggest threat to the global economy is the collapse in the American consumer’s purchasing power. Consumerism is not necessarily a good thing for society, but it has been good for financial markets over the short term and advocates of reduced consumerism (I am one) do need to understand that these reductions need to happen gradually through changes in tastes and spending habits, and not suddenly as the result of simultaneous crises.

The American consumer drives - by some estimates - around 60% of US GDP, which in turn drives much of American business, as well as large portions of world exports and commodity sales. The US consumer, most of whom are working and middle class, has been undermined by several simultaneous pressures:

1) stagnant real wage growth, measured by median household income
2) increasing employment risk, indicated by shortening mean employment length
3) decline in housing prices and the home equity effect on net worth
4) decline in value of other invested assets in the wake of the financial crisis
5) increase in net debt levels, measured by credit card and personal loan debt
6) increase in the cost of health care

Basically, this means that consumer income is level or down, reserve assets are devalued, credit is drying up, and key expenses are rising. It is hard to see where 60% of US GDP is likely to find excess discretionary purchasing power to drive corporate profits. If corporate profits fail, companies will start fail, increasing unemployment, reducing purchasing power further, and starting a vicious circle.

A central part of the Obama campaign involves revising the US tax code to make it more progressive. The tax cuts for families making less than 1/4 million seek to add (some) purchasing power to the middle and working classes. To reduce the pressure of a tax cut on the federal budget, families and individuals at the top end of the income spectrum will pay a slightly higher marginal tax rate. The net effect on revenue and spending will depend on the details and on economic performance, but the idea as proposed is designed to have an approximately neutral effect on net revenues.

More than just tax revisions

In my opinion, the tax changes alone - though sensible and a change oriented in the right direction - are likely not enough to match the size of the challenges we face. Middle class families can certainly use some tax relief, and this might stimulate consumption enough to stave off business bankruptcies, but five thousand dollars or so is ultimately small change in the face of collapsing home prices, battered stock and retirement portfolios, rising debt burdens, and substantial unemployment.

Many tax benefits will also take time to arrive - the changes in the tax code have to be designed, debated, and passed by the Congress, the IRS needs to incorporate the legislation into its tax forms and tax administration. Many of the benefits to families won’t be apparent until April 2010, although there may be minor reductions in tax withholding in 2009, and one can’t rule out a one-time tax credit earlier on to try to get spending money into consumers’ hands more quickly.

The increased tax burden on the wealthiest will likely have the immediate effect of shifting some assets overseas, where they might be better sheltered, but despite conservative claims, it is unlikely to remove the incentive for wealthy entrepreneurs to work. What drives most successful entrepreneurs is the satisfaction of creation and having built something, rather than the question of wether they are keeping 67 vs 72 cents of each dollar’s profit. For businesses which are marginally profitable or at risk of failing, tax rates will not rise, since only profit is taxed, not operating costs or total revenue (other than sales tax, which is not a federal tax, and is effectively deductible).

Fiscal Stimulus, Structural Adjustment, and Regulatory Changes

Given that changes to the tax code are likely insufficient to replace the consumer’s spending power, an Obama administration will probably need to use fiscal policy to stimulate beyond the effect of tax changes. This stimulus will likely be debt financed and will probably create long term inflationary consequences. Nonetheless, inflation is probably preferable to a long term depression, because inflation can potentially be controlled with monetary policy.

This financial crisis is the kind of historical event that may well signal a structural shift in the global economy. It very likely spells the end of US economic hegemony, and an Obama administration is likely to have to spend time planning for a US role as only a major economy, rather than the central global economy. Obama is fortunate in that his temperament and orientation is toward this kind of planning at precisely the time that the US economy needs it. It is true that socialist economies also engaged in economic planning, but it is important to point out that socialist economies had economic plans, economic planning does not, in and of itself, require socialism.

It is very likely that fiscal stimuli will be oriented toward changing the energy and environmental profile of the US economy, repairing national infrastructure, and reinvesting in educational models. In fact, both of these are critical investments for America’s future. The needs to reorient the economy - not only environmentally, but also to rework our global competitiveness - provides an opportunity to use fiscal stimuli not only for addressing middle and working class purchasing power, but also to serve important strategic goals for the US economy.

Traditionally, strategic economic planning and industrial policy was a tool for developing and recovering economies trying to “catch up” to developed economies like the United States. The US, as the pre-eminent economy in the world, had the luxury of developing in whichever way was most convenient or available. These days, the US needs to investigate and identify its most productive role in the global economy - something other than simply being a source of consumers for the rest of the world’s goods and services - and this task will require economic planning and policies more traditionally associated with structural adjustment.

It may be that Washington will have to come to terms with the Washington Consensus.

We are entering an economic and political environment that is more amenable to economic regulation, and there are important investment implications to this. Financial regulation will obviously be one of the key areas, but the regulatory playing field will also be shifted in favor of environmental types of regulation.

I had hoped to discuss some of the investment implications of likely fiscal stimuli, regulatory and structural adjustment policies, but for reasons of time and space, I will need to take these issues up in a future post.

Obama and Financial Markets

My last post was about the significance of Obama for United States race relations, and was a departure from my usual financial markets oriented posts. Today I want to reflect on what an Obama administration might mean for financial markets. I see four main issues that together are likely to determine the financial market going forward. These are:

1. Market reallocations in anticipation of a new tax and regulatory environment.


2. Weakness in economic fundamentals that may still need to be digested before markets can return to any kind of growth trajectory.


3. The degree of uncertainty and/or panic in various parts of the investment community.


4. The content and effectiveness of Obama’s economic policies.

Short Term Market Reallocations (short term downward pressure)

I happen to think that Obama is likely to be a very good president, but there is no doubt that a number of his policy positions will be bad for markets in the near term. My judgement on Obama in general is based on my sense that there is much more to being a good president than ensuring that financial markets go up.

Raising capital gains rates will - other things equal - make US securities less attractive than they were in comparison to foreign securities (which is different than saying they are less attractive in an absolute sense). In addition, an Obama led administration is likely to raise corporate income taxes, which means that corporate earnings available for distribution to shareholders will decrease (although corporate debt will likely be slightly more attractive than before because the interest payments are tax deductible). Each of these suggest that the earnings streams available to stockholders will be falling, thus their net present value will drop, and so the stock price.

The financial crisis has also increased the call for financial regulation, and the pendulum is likely to swing to include regulations in other sectors, certainly environmental regulations, and potentially others. Again, regulations are not necessarily all bad, but markets don’t generally like them, and recoil at the prospect because - in the short term - most regulation imposes both compliance and change costs, which reduces earnings.

All of these factors suggest that investors will be allocating smaller portions of global portfolios to US equities, and within US assets, there will be some shift out of equities into fixed income and cash. The reduced attractiveness of US assets in global portfolios will - other things equal - put some downward pressure on the dollar.

The degree of the equity hit may be mitigated by a few factors:

1. Legislation takes time to produce and pass, so taxes and regulations will affect cash flows further out in the future, and therefore be discounted more.


2. Economies in recession typically have fewer profits anyway, less will therefore go to taxes, and so near term effects on cash flows are less substantial than they would be in a booming economy.


3. Obama’s high polling numbers in the final stages of the campaign suggest that much of “the Obama effect” on asset prices is already priced in to securities. All the election results did was to eliminate the 10% chance (according to intrade.com) that future economic policies would be McCain’s rather than Obama’s.

Weakness in Economic Fundamentals (medium term downward pressure)

Regardless of whether Obama or McCain had been elected, the economy has a good deal of toxic waste to digest and eliminate before it can resume any kind of long term growth trajectory. Non-performing mortgages and the fear that these will spread and infect other assets are only the tip of the iceberg. There are a great many credit derivatives swaps outstanding with no reserves backup to ensure payment if called upon. Hedge funds may be selling massively in the face of client redemptions, and even well performing funds may face client redemptions so that clients can rebalance their portfolios to target allocations. Auto loans and credit card loans may face similar problems as the mortgage market. The US consumer has been facing job losses, housing losses, tapped out credit, and more, and it is not clear what and how much they will be buying. Credit for consumers is (rightly, for the most part) becoming harder to find, which in turn means that companies that sell to these consumers may find revenues falling, which spirals into greater unemployment, less purchasing, more unemployment, and so on.

Although the new President may have plans to address these problems, they still exist, and this means that corporate earnings are likely to decrease in the near to mid-term future.

Although it’s really very difficult to say for sure, I believe that the market’s downward trend in the days since the Obama election is mostly the recognition that there are simply a lot of economic problems to resolve, and that none of them will likely be solved overnight.

Degree of Uncertainty/Panic in the Markets (reduced volatility in medium term, small lift in prices)

There is no doubt that recent markets have been more volatile than they have been in a very long time. The Chicago Board of Trade’s VIX volatility index has reached some of the highest values since it was introduced in 1993. Volatility is bad because, even in normal markets, increased volatility eats away at total return. In panicked markets, volatility represents increased uncertainty about what things are really worth, what the future really holds, and can lead to self feeding spirals of panic.

The election of Barack Obama is likely to reduce market volatility somewhat, although volatility is still likely to be quite high. This is because we live in one of those times of crisis where the market may have become so paralyzed it cannot recover without government assistance. During the campaign, senator John McCain seemed very concerned about the economy, but was noticeably at a loss as to what to do about it. By contrast, Barack Obama appeared to have a relatively detailed set of proposals and was able to provide the sense of a “steady hand at the tiller.” It remains to be seen whether these policies will actually work, but the mere fact that there appears to be a proactive hand in government, along with a supporting coalition in the Congress, should reduce the extremes of current market volatility.

Content and Effectiveness of Obama’s Policies (mid-to-long term rise, if effective)

Accusations of socialism aside, the biggest threat to the global economy is the collapse in the American consumer’s purchasing power. Consumerism is not necessarily a good thing for society, but it has been good for financial markets over the short term and advocates of reduced consumerism (I am one) do need to understand that these reductions need to happen gradually through changes in tastes and spending habits, and not suddenly as the result of simultaneous crises.

The American consumer drives - by some estimates - around 60% of US GDP, which in turn drives much of American business, as well as large portions of world exports and commodity sales. The US consumer, most of whom are working and middle class, has been undermined by several simultaneous pressures:

1) stagnant real wage growth, measured by median household income
2) increasing employment risk, indicated by shortening mean employment length
3) decline in housing prices and the home equity effect on net worth
4) decline in value of other invested assets in the wake of the financial crisis
5) increase in net debt levels, measured by credit card and personal loan debt
6) increase in the cost of health care

Basically, this means that consumer income is level or down, reserve assets are devalued, credit is drying up, and key expenses are rising. It is hard to see where 60% of US GDP is likely to find excess discretionary purchasing power to drive corporate profits. If corporate profits fail, companies will start fail, increasing unemployment, reducing purchasing power further, and starting a vicious circle.

A central part of the Obama campaign involves revising the US tax code to make it more progressive. The tax cuts for families making less than 1/4 million seek to add (some) purchasing power to the middle and working classes. To reduce the pressure of a tax cut on the federal budget, families and individuals at the top end of the income spectrum will pay a slightly higher marginal tax rate. The net effect on revenue and spending will depend on the details and on economic performance, but the idea as proposed is designed to have an approximately neutral effect on net revenues.

More than just tax revisions

In my opinion, the tax changes alone - though sensible and a change oriented in the right direction - are likely not enough to match the size of the challenges we face. Middle class families can certainly use some tax relief, and this might stimulate consumption enough to stave off business bankruptcies, but five thousand dollars or so is ultimately small change in the face of collapsing home prices, battered stock and retirement portfolios, rising debt burdens, and substantial unemployment.

Many tax benefits will also take time to arrive - the changes in the tax code have to be designed, debated, and passed by the Congress, the IRS needs to incorporate the legislation into its tax forms and tax administration. Many of the benefits to families won’t be apparent until April 2010, although there may be minor reductions in tax withholding in 2009, and one can’t rule out a one-time tax credit earlier on to try to get spending money into consumers’ hands more quickly.

The increased tax burden on the wealthiest will likely have the immediate effect of shifting some assets overseas, where they might be better sheltered, but despite conservative claims, it is unlikely to remove the incentive for wealthy entrepreneurs to work. What drives most successful entrepreneurs is the satisfaction of creation and having built something, rather than the question of wether they are keeping 67 vs 72 cents of each dollar’s profit. For businesses which are marginally profitable or at risk of failing, tax rates will not rise, since only profit is taxed, not operating costs or total revenue (other than sales tax, which is not a federal tax, and is effectively deductible).

Fiscal Stimulus, Structural Adjustment, and Regulatory Changes

Given that changes to the tax code are likely insufficient to replace the consumer’s spending power, an Obama administration will probably need to use fiscal policy to stimulate beyond the effect of tax changes. This stimulus will likely be debt financed and will probably create long term inflationary consequences. Nonetheless, inflation is probably preferable to a long term depression, because inflation can potentially be controlled with monetary policy.

This financial crisis is the kind of historical event that may well signal a structural shift in the global economy. It very likely spells the end of US economic hegemony, and an Obama administration is likely to have to spend time planning for a US role as only a major economy, rather than the central global economy. Obama is fortunate in that his temperament and orientation is toward this kind of planning at precisely the time that the US economy needs it. It is true that socialist economies also engaged in economic planning, but it is important to point out that socialist economies had economic plans, economic planning does not, in and of itself, require socialism.

It is very likely that fiscal stimuli will be oriented toward changing the energy and environmental profile of the US economy, repairing national infrastructure, and reinvesting in educational models. In fact, both of these are critical investments for America’s future. The needs to reorient the economy - not only environmentally, but also to rework our global competitiveness - provides an opportunity to use fiscal stimuli not only for addressing middle and working class purchasing power, but also to serve important strategic goals for the US economy.

Traditionally, strategic economic planning and industrial policy was a tool for developing and recovering economies trying to “catch up” to developed economies like the United States. The US, as the pre-eminent economy in the world, had the luxury of developing in whichever way was most convenient or available. These days, the US needs to investigate and identify its most productive role in the global economy - something other than simply being a source of consumers for the rest of the world’s goods and services - and this task will require economic planning and policies more traditionally associated with structural adjustment.

It may be that Washington will have to come to terms with the Washington Consensus.

We are entering an economic and political environment that is more amenable to economic regulation, and there are important investment implications to this. Financial regulation will obviously be one of the key areas, but the regulatory playing field will also be shifted in favor of environmental types of regulation.

I had hoped to discuss some of the investment implications of likely fiscal stimuli, regulatory and structural adjustment policies, but for reasons of time and space, I will need to take these issues up in a future post.

Oba Obama!

Today we are living through a truly historic moment, and so I will shift from my usual posts about markets and investing to talk about politics and the meaning of this moment.

Symbols matter!

Yesterday, I set out to vote. I knew who I was going to vote for. I knew who is likely to win. And I had voted before. At the same time, I had forgotten just how empowering the simple act of voting can be. It is strange, in a way, because everyone knows that - except in the rarest of circumstances - one single vote seldom changes the course of an election. And yet, the feeling that you as a citizen have done some part to determine the course of a country in crisis is something so precious and validating that one can understand why people fight and die to secure these rights.

It was only last night, as I was watching the election returns on television, that it dawned on me - in an emotional way - how significant this moment is in our collective history. I started to realize that this was a truly historic moment and I was there participating in it. If September 11 was our generation’s equivalent of Pearl Harbor or assassination of Kennedy, this moment is a triumphant experience, something like the fall of the Berlin Wall, or landing a man on the moon. It is a tremendous achievement: the election of America’s first black president.

It is one of the things that gives even more meaning to the campaign’s call “Yes, we can!”

Whether Obama’s presidency is ultimately a success or not, this moment will go down in history as a milestone on the American journey. Future schoolchildren will read about this moment and reflect on what it means for America’s history, and what it means for the hope and promises of opportunity that are part of what it means to be an American or to admire America.

As a white man, I am deeply proud that we have come to the point where we can elect a black man to be the leader of all Americans. He was not elected because he was black. He was not placed in this position because the traditional majority felt guilty or wanted to placate demands of a minority group. Barak Obama was elected because, in a time of deep crisis, he gained the trust of those who voted for him, and at least 50% of the country, myself included, felt that he was the most qualified for the nation’s highest office.

I thought John McCain's concession speech was very gracious - pointing out to Republicans that even if they lost the race, as Americans we can still be proud of what this means for bleaching the stain of slavery that has shamed us from our very beginnings. John McCain is a deeply honorable man, and I could see himself extracting himself from the campaign machine, and returning to the kind of person he wanted to be. The electoral process forced him to be a mudslinger, and I had always gotten the feeling that his advisors pushed him further and further in that direction. What I saw last night on the Republican side was the re-emergence of John McCain, the great man, the man that I admired and even considered as “the best hope for the Republican party” at the start of the race.

This election has not been about race, which is probably a good thing. But the results means so much about race in a country that is still struggling with the legacy of slavery. Individually, I do not think I have actively discriminated against anyone because of their race, but I am aware that I have in many ways benefited indirectly from a system that has denied benefits to others based on their race. Although the election of a black president does not mean the end of race as a real issue in American society, it does meaningfully send a message from the white community to the black community that says, “despite our differences, and our not entirely resolved history,” we are capable of looking beyond skin color, even for this, the most powerful office in the land.

As a white man, this election says to the black community in a forceful way: look, we are not all bigots. We trust the black community enough to have a black man as our leader. Having a symbol like that is an important tool for addressing the fact that so-called “white guilt” is part of what impedes conversations that are “healing” between the races, and help traditionally discriminated groups assume both the benefits and the responsibilities of equal citizenship.

By “white guilt,” I mean the the nagging discomfort many whites feel about their implicit connection to past slavery and current discrimination, and a discomfort along the lines of “should I really be talking about this,” that comes up any time there is a discussion about race in a mixed audience. I confess to feeling some discomfort and uncertainty right now as I write this, and yet for healing and a better society it is essential to be able to have a conversation where members of different races can air their questions and concerns, and do it in a way that is respectful. Misunderstandings will come up, but it is important to recognize in each other good faith efforts to come to a mutual understanding. We need to create an environment where mis-steps and misunderstandings are treated as topics for reconciliation, and not points for attack, name-calling, and finger-pointing.

On the one hand, most modern generation whites I know try hard not to discriminate against african americans or other racial groups, and yet it is clear that racial inequality (and some discrimination) still exists. Many whites wonder “how angry is the black community at us for the sins of our predecessors,” “do we have responsibilities of atonement, even if we never directly contributed to the inequality we see today?” If there is atonement, is this a collective atonement for the past, accomplished between communities through policy tools, or are there individual demands on me? To what extent can I give voice to things that I find hard to digest about the black community - such as the depiction of black women in many rap videos (this issue is not exclusive to black culture, but is illustrative of the kind of difficulty I might have) - or should I, being white, just keep quiet about that? Are there norms that were considered acceptable for the black community as an oppressed minority that should now be revised for use in a new role as equal citizens?

Citizenship is a combination of both rights and responsibilities. Clearly it was a gross injustice to deny a minority community the rights they are due as citizens - indeed denying citizenship itself - but are there responsibilities that go along with citizenship too? And do those new responsibilities have any implications for what we as united Americans see as laudable or topics for criticism? Do the crimes of past generations of whites mean that present generations of whites have no place in that discussion? If there is a place for the white community there, what are safe and non-threatening manners of bringing such topics up so they can be discussed and resolved? What are the items that we can come to an agreement on, and what items can we simply decide to “agree to disagree” on?

The Republican campaign’s shameless exploitation of the Jeremiah Wright video in the final stages of the campaign was in many ways a direct attempt to turn nagging white guilt into white fear and thereby swing the vote away from a black candidate. Thankfully it did not work for the majority. It stoked the question that may run through many white minds, progressive or otherwise, asking “does the black community just want to be treated fairly, as they surely deserve, or is there a collective desire for revenge.” Certainly the Wright video sounded full of anger, disgust, and maybe a call for vengeance - and for many white viewers it raised the question “is that how ‘they’ feel about us?” (I hope not) “is this a momentary outburst of frustration, or is a deep seeded resentment?” (hopefully just understandable frustration) and “should we be scared of a black president” (I hope not). More thoughtful white viewers may have also asked “how representative is this?” (truth be told, I have no idea, and I consider myself one of the more informed)

I thought it was a low blow for the Republican campaign to try to do this, but the fact that it seems to have fallen mostly on deaf ears is a sign of progress.

It has been so long since there has been any attempt for a national discussion on race, and so instead of resolving these tensions, they have simply gone underground, ready to erupt like unexploded land mines in the face of unexpected events.

I admit that I am a little afraid to publish this post. Will it be misinterpreted? Will it cause anger? If so, will that anger come from the black community, the white community, or some other community? I am not trying to offend, point fingers, lay blame for anything. I am just trying to figure out how to come up with a set of norms and understandings that allow us to live together comfortably and as equals. We are in desperate need of a conversation among the races to resolve these issues, to come to a kind of “rules of the road” that we can all comfortably live by and feel that past grievances have been (at least mostly) resolved. This conversation should not be the central effort of our politics - there are so many issues threatening all of us right now - but it should be a part.

And our election of Barak Obama is a unique opportunity to do that.

There is something else that is special about Obama’s election - his ability to inspire most of our better natures, and his ability to lead. In a time of crisis, this is perhaps his most important asset, but I will leave that discussion to another post because, for today, the advance that this country has made in on the racial front is the most historically significant achievement of this cycle.