Right in San Francisco

The Have's and the Have Not's

    Reality bites. The rich continue to get richer while the middle class and the poor are falling behind. That's the Democratic narrative, and it is true. Some of this is a continuation of long term trends driven largely by globalization and technology; some is an aftermath of the 2008 Financial crisis; some is a result of Obama administration policies such as Obamacare's disincentive for small-businesses to grow and hire. Small wonder that we have Downton Abbey and a remake of The Great Gatsby.

    The history:

   Income: From World War II into the 70s all layers of society progressed at about the same pace with after-inflation family income roughly doubling over three decades. From 1973 to 2008 the top 5% is up another 50% while the middle group is up 20% and the bottom 20% is essentially flat. The ascendancy of the super rich is stunning, with the top 1% tripling their real income between 1979 and 2007 and garnering almost 25% of the national income - about the same as the Roaring Twenties and up from 10% in the sixties and seventies.  Many factors are present - the growth of two income families; global competition for low income jobs; the knowledge society; the decline of private sector unions; a favorable tax code. The trend crossed parties lines and business cycles.     

  Wealth: Family wealth - the result of past income - is even more concentrated, with the top 1% controlling 35% of the national wealth in 2007, while the bottom 90% of the people control just 27%.  Wealth is more concentrated than in any European country or Japan; China is actually a bit more concentrated than we are.  

  The poor: The poverty rate (an income of about $22,100 for a family of four in 2010) has declined significantly since the 50's. Between 1984 and 2004 the number of families below 150% of the poverty line declined from 36% to 25%, largely due to the Earned Income Tax Credit and the Child Tax Credit. Reagan, Clinton (welfare reform), and the Bushes all deserve credit.

    The present: There are confusing cross-currents.

        -  The stock market is at record highs, home prices have recovered to an average of 70% of inflated 2007 levels; unemployment for college graduates is under 4%; sales increases for Louis Vitton are back in double digits.

        -  Unemployment is "down" to 7.5%, in large part because discouraged workers have left the official numbers. Workforce participation - the portion of working age folks actually working in the above-ground economy - is down to a 34 year low at about 63%, with some 90 million folks on the sidelines. A bit of this is democraphics with Baby Boomers retiring, but not much.

        -  Almost 5% of workers between 18 and 64 are now on Social Security disability.  In April there were nearly 11 million people collecting federal disability payments, up from 1.3 million at the end of 1968 as a legal industry has emerged to help people get settled in to lifetime incomes of about $13,000 plus Medicare.

        - For many in the middle class the decline has yet to hit. With IRAs and 401k plans largely replacing company-sponsored pension plans, prudent retirement planning calls for a portfolio with 50% or more in bonds. With the fed holding rates near zero indefinitely and a high probability of significant inflation at some point, those who endured the dot.com bust and the frinancial crisis of 2008 are due for another shock.

    And what is to be done?

        For a start, Republicans should not fall on their swords to protect tax rates for the top 1% - many of whom vote Democratic anyway. Then it's the usual stuff - education reform; Research and Development; support for small business and foreign trade; entitlement reform; trusting the individual to make the decisions that determine their success rather than relying on the goverm=nment to do what it cannot. Unfortunately, it is another few years before we can get on the path.

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    This week's video is for those who wanted to see Newt Gingrich debating Barack Obama - Ted Cruz grilling Eric Holder. The issue is that we have used drones to kill American citizens in Yemen without a finding of probable cause or an imminent threat. Rand Paul and others had been unable to get the administration to commit that this would be illegal on US territory.

bill bowen - 5/9/13

 

 

Keystone XL Paralysis

    Not since his year-long dithering before agreeing to double American troop strength in Afghanistan with a commitment to withdraw by a date certain has President Obama so clearly demonstrated his inability to make important decisions. In the interim there have been many examples of his vacillation - budget negotiations with John Boehner, the Libyan revolt, the Benghazi fiasco, and the drip, drip, drip in Syria come to mind - but the endless hand-wringing over the XL Pipeline clearly demonstrates the downside of avoiding makeable decisions.

    The factual setting:

        -  The debate was seriously begun in 2008 when Transcanada Pipline LTD proposed the $7 billion, 1700 mile route from Alberta through Nebraska and Oklahoma and on to refineries on the Gulf - an extension of several other projects which have proceeded with little opposition.  Since the pipeline crosses a border the State Department has been the lead federal agency, approving plans for facilities at the border in 2008 and, in a revised Environmental Impact Statement in August of 2011, finding "no significant impacts". The Ogallala aquifer under the Sand Hills of western Nebraska has been the emotional touchpoint; after considering many options, Transcanada has chosen a route approved by the Nebraska government.  Nevertheless, the Environmental Protection Agency is responding to its clients and continues to throw up roadblocks, trying to prevent the president from acting on the State Department's direction.   

        -  There are approximately 175 billion barrels of oil located in Alberta in a highly viscous form mixed with clay, sand, and water - enough to meet the total requirement of the United States and Canada for 20 years. The United States uses about 19 million barrels per day; with fracking and horizontal drilling U.S. production is projected to increase to about 8 million bpd next year. Keystone XL would increase capacity by 830,000 barrels per day, on top of current imports from Canada of 2.7 million barrels per day. The alternative is more imports from places like Venezuela, Saudi Arabia, and Nigeria.  

        -  Extraction of the oil has three environmental impacts: use of large quantities of water, release of 12% more CO2 than conventional oil extraction, and the concentration of heavy metals (chromium, silenium, cobalt, etc.) which have been trapped in the sand. Scientists argue the details, but the general contention of environmental contamination within Canada is clear, and the Canadians will go forward with or without us.  

        -  The United States is criss-crossed by two million miles of energy pipelines, some 50,000 miles of which carry unrefined oil, and many of which already cross Nebraska. The alternatives if Keystone XL is not built? Canadian railroads are now moving about 100,000 carloads of oil per year; rail shipments from the booming Bakken fields in North Dakota (along the proposed XL route) have helped drive US rail shipments to 600,000 rail cars per year; and Canadian pipeline companies are working on routes to west coast ports for China and Canadian east coast refineries. Keystone XL is the least cost, least environmental risk option.

    To the environmental movement which is disappointed with Obama's failure to prioritize "cap and trade" legislation, their inability to slow down the state-regulated fracking revolution, and failure of several years of international "climate change" conferences,  Keystone XL has become the cause celebre. (Lest one feel too sorry for them, they have decimated the coal industry and prevented a once-promising nuclear renaissance.) All of the usual suspects are railing against the pipeline - The Sierra Club, The National Wildlife Federation, The National Resources Defense Council, Friends of the Earth. The objective is to shut down carbon-based energy at its source; from there the logic breaks down completely.

    Poor Barack. If he had said OK back in 2009 this could have been a non-issue. As it is, he has the ideologues screaming for him to stop the river from flowing. And the poor fellow must do something.

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   This week's video shows Senator Ted Cruz' perspective on President Obama's effort to scuttle the immigration bill - as he did as a senator in 2006. All else is possible, if Republicans are not faced with millions of new Democratic voters in the next few years.

bill bowen - 4/26/13

Seeking Optimism

    At a recent large family outing I got cornered by a liberal Democrat who was lamenting the growing disparity between the rich and the poor and the bleak prospects for the younger generation. With the hard-earned lesson that one doesn't seek converts in such settings, we steered off to the steep financial bifurcation in sports, music, and writing. Here is what I would have liked to say:

    1. These things come and go. It helps to study the presidencies since World War II to see the impact of different policies, personalities, and management approaches. Particularly look to Eisenhower, Kennedy, Reagan, and Clinton (with help from Gingrich) as leaders of energetic growth - and Carter and Obama as overseers of decline. Partisans and ideologues can parse the causes, but it is clear that America is strong enough to overcome an ineffective president who does not understand or appreciate the vitality of the free enterprise system.

    2. We all want peace and prosperity, we just start with different approaches. Democrats, particularly of the Obama variety, start with "fairness", wanting to build the social safety net with resources taken from those who have done well. Republicans want to provide the opportunity for all to rise, believing that society prospers when it captures the talents and initiative of all, without limits. Equal results versus equal opportunity.   

   3. On an individual basis, Rick Santorum had it right. We know the keys to a successful life:

        - Get an education. Income levels jump and unemployment levels plummet when one gets a high school degree, and further again with a college degree.

        - Get a job. Don't expect to start as president of Google. Everybody in my family worked in restaurants at one time or another, learning self discipline, customer service, and the value of a dollar.

        - Get married before you have kids. The hill is steep enough for moms and kids to not be part of the trend where half of today's births occur in one parent families.

    I doubt that any of this would have had an impact on a life-long San Francisco Democrat. Nor would adding data - Jimmy Carter's 12 % inflation; Obama's $17 trillion debt; Reagan's 18% growth in after-inflation per capita GDP; the top 10 % currently paying 71 % of federal income taxes with 43 % of the income; the difference in growth in Red states versus Blue states. Maybe the history of the country's transition from agricultural employment to industrial employment, to office employment, to the new information age would have fostered some optimism - so long as it wasn't couched in terms of success of individuals and the free market system rather than the government' accomplishment - as in "you didn't build that."

    The next time I will bring the baby pictures.

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    In this week's video the "Iron Lady" addresses the gap between the rich and the poor.

    And as a bonus, a tribute to the other female world leader to die this week.   

bill bowen - 4/12/2013  

 

We Are All Cypriots

    Back in the 60's when Berlin was surrounded by 20 Soviet Army divisions in East Germany, President Kennedy, acting as the leader of the Free World (a quaint anachronism in itself) famously declared "Ich bin ein Berliner" - "I Am a Berliner". For the moment, the front line for our Western system of individual rights rests in Cyprus. Ironically, the attack comes from the European governments and the strongest defenders are the Russians.

    Quickly, how did we get here?

        - This is Act XXV of the Eurozone drama. Since 2008 one country after another has needed bailouts for their financial institutions which are inextricably tied up with excessive government spending. To many this seems like an inevitable outcome of trying to combine a common currency with separate national budgetary authorities. That's a subject for another day, better covered by more knowledgeable writers not named Krugman.  

        -  Tiny (1,200,000 population; $18 billion GDP) Cyprus saw the opportunity to expand their financial industry by applying low taxes and loose oversight to become a conduit for businesses, government officials, and gangsters in Russia and the former Soviet republics to get their money into the Eurozone, with much being recycled back into Russia to buy companies and real estate there. (Russian deposits in Cypriot banks total about $30 billion; about $14 billion of annual direct investment in Russia comes from Cyprus.)

        - Like Ireland, Spain, Portugal, Greece, and Italy, Cyprus spent beyond its means, benefiting from low borrowing rates of the German-backed Eurozone with loans from its own banks, banks throughout the zone, the European Central Bank, and the International Monetary Fund. Cyprus also borrowed $3 billion from Russia.

        - The bill has come due. Cyprus needs a $13 billion bailout from the internatonal banking system who - in the form of the Europeran Central Bank, major country financial ministers, and the International Monetary Fund (e.g. the U.S.) - are demanding that Cyprus come up with $7.5 billion, which they can only do by confiscating a portion of the $90 billion in deposits in the banks. Traditional rules would have the bank owners wiped out first, bank bond holders second, and uninsured deposits third. To get to the $7.5 billion, the European Union czars jumped right to the depositors, insured or not, and totally ignored any consideration of the account holder's total wealth or income.  

        -  From there, the question was how new center-right government of Cyprus would allocate the confiscation between large depositors (like the Russians) and the small depositors (like the voters.)  In any case it would be a confiscation, which Russian Prime Minister Dmitri Medvedev likens to the behavior of the Soviet era. The long battle for the security of the individual from arbitrary, after the fact assaults by the government has taken a significant step backward.

        - At this point the resolution is unclear. The Cypriot parliament has rejected the plan, ostensibly foregoing any further European loans and resulting in a hard bankruptcy, but creative minds are looking at other options - closing one bank; selling rights to drill for natural gas off of the coast; a loan from Russia; anything.  

    And let's provide a little American context:

        -  We have not fixed the fundamental flaws in our banking system that led to the crisis in 2008, and our government continues with fiscal policies driving Greek-style debt. We will not be as powerless as Cyprus, but the debtor does not get to set the rules.

        -  During the 2008 crisis there was attention to insurance for small bank deposits, and the arguments were about allocation of risk among the bank owners and bond holders, with the government throwing money at the industry, not confiscating deposits. Even the MF Global fiasco, which represented a politically-connected crook getting away with stealing customer deposits, did not involve government seizing deposits.

    A year or two ago nobody would have thought it possible in the Western financial system - from Europe, to North America, to Japan - for the government to confiscate bank deposits. But most in America would not have thought that the federal government could force a citizen to purchase a service like health insurance that they didn't want or that the federal government could force a church (or any person of conscience) to directly or indirectly pay for contraceptives and morning after pills. But they can, and they do.

    Ich bin ein Cypriot.

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   This week's video bonus, from a reader in Virginia, is a libertarian take on ordering a pizza in a data-intensive world.

bill bowen - 3/22/13  

Obama's Evolving Sequester Strategy

    President Obama's sequester strategy has progressed through several phases:

        1. Stand fast with his base in refusing any change to entitlement programs and demanding further tax increases on the rich by elimination of loopholes. That has worked several times; why not again? Plan A failed when the Republicans were surprisingly willing to accept arbitrary cuts to the military, allowing sequestration to go into effect.

        2. Build up the story that this Republican idea came about because Boehner and his Tea Party allies will not accept a "balanced approach." Plan B failed when Bob Woodward loudly proclaimed that the sequester was a White House idea, and John Boehner repeatedly made the point that Obama had received his $650 billion in (10 year) tax increases in January. It also ignored the fact that the House has passed two bills to provide a more flexible way of applying the cuts - bills that the Senate ignored and the White House threatened to veto.

        3. Scare the public - and the Republican House members - with a litany of all the bad stuff that will happen. Plan C failed when planes didn't fall from the sky. Obama's message has changed to the gradualism of the pain, and the administration is doing what it can to make it real by doing things such as releasing thousands of illegal immigrants, furloughing meat inspectors, cancelling White House tours,  and holding back on military deployments. But the reality is that we can absorb cuts of 2.4% on a $3.6 trillion budget without calamity, no matter how hard Janet Napolitano and Ray Lahood try.

       4. Scare the public and the markets with fear that the Republicans will shut down the government by not passing another "Continuing Resolution" to authorize keeping on when the current resolution expires on March 27. Plan D failed when the House passed a bill on Wednesday to authorize spending through September at sequestration levels, with language that allowed some judgement as to how the military cuts would be implemented. The Senate will apparently pass it, and Obama will reluctantly sign it. (These Continuing Resolutions are necessary because for years the Senate and Obama have not done legally required budgets.) And the markets? Record highs.

    What has the Commander in Chief been thinking? That he could engineer a Democratic capture of the House in 2014 by blaming the Republicans for gridlock and a loss of government services?  He seems, however, to have had a different result.  A public which once believed Obama's claim that he could extend free healthcare to 30 million people without costing anyone "one thin dime" (a $6.2 trillion error, according to the GAO), is catching on to the flim flam. With the Washington Post giving Obama Pinnochios for claims about who proposed the sequester, layoffs of  teachers, and paycuts for Capitol Hill janitors some press integrity has returned, and the President's approval ratings have dropped well below 50% with about equal numbers holding Obama and the Republicans to be at fault.  

    While it feels good to have some financial discipline return, the reality is that year over year spending has flattened out but we remain at the heightened levels which began with the stimulus plan in 2009, and the heavy lifting of entitlement reform, tax reform (lower rates; fewer deductions; corporate and individual), and healthcare cost containment remains ahead. If Obama continues to pursue campaigning over governing - and he likes to do what he is good at while ignoring what he's not -  progress on the big stuff will remain elusive until 2016.    

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This week's video is an effort by Joe Scarborough to rehabilitate himself after his 2012 sell-out to Mika, by going after Paul Krugman.

bill bowen - 3/8/13

Shining a Light on the Senate

    Praise be !!!   In military terms, it is a flanking move.  With the President hardly mentioning ongoing extraordinary unemployment, trillion dollar deficits, and bankrupt entitlement programs while throwing down the gauntlet of his liberal agenda in his second inaugural address, someone in the House (Budget Chair Paul Ryan) has realized that the Democrats' weak spot is the Senate where for three years Harry Reid has managed to table any financial discussions which might put the president on the spot or cause his Democratic members to make hard choices.  

    The specific challenge: The House will delay the enforcement of the $16.4 trillion debt ceiling until May 19, allowing the Senate until April 15 to propose a blueprint for taxes and spending. The stick - no blueprint, no pay. (The House has passed such, legally required blueprints since Republicans re-took the House in 2010.) In the meantime, automatic sequestration cuts of $70 billion for discretionary programs and $50 billion for defense are scheduled to kick in on March 2, and the current Continuing Resolution Authority - Congress' annual approval to "keep on keepin' on" in the absence of a budget - expires on March 27.     

    The media may want to talk about guns, immigration, and the rest of Obama's second term agenda, but the Republicans are betting that the public will agree that you shouldn't have a long term increase in the debt ceiling without a long term plan to control spending. They'd also like to remind voters that they've already given Obama a $65 billion tax increase, but that's last month's news.  

     Whether the Democrats and the media like it or not, the people will see something other than John Boehner caving in in this financial confrontation. Prominently on the stage will be:

        -  Harry Reid in his first prime time appearance since the Obamacare sausage making. Perhaps we'll get a reprise of the Cornhusker Kickback, Louisiana Purchase, and a litany of procedural misconduct.  With Congress' approval at 7%, it will be good to place Harry at center stage.

         -  And his supporting cast:  Barack Obama's senior senator from Illinois, Dick Durbin, the majority whip who may retire in 2014;  the third ranking Democrat, Chuck Schumer of New York; new Budget Committee Chair Patty Murray of Washington who talks of little but tax hikes on trhe rich and protection of entitlements. .

         -  The Republicans have their own baggage in Minority Leader Mitch McConnell who seems to have gone to sleep after his October 2010 comment that his primary objective was to see that Obama did not get reelected.  McConnell slides along in the clubby Senate, but a bad performance here will result in a Tea Party supported primary opponent in his 2014 reelection bid.

         -  The rest of the Republican cast offers quite a bit of upside. Party leader Jeff Sessions is forceful, if a bit sleepy, but the exposure of members Kelly Ayotte, Ron Johnson, Pat Twomey, Mike Crapo, Rob Portman, and John Thune offer a nice blend of experience and photogenic youth.

    In both parties, behavior will be affected by the looming 2014 elections in which the Republicans will defend 10 seats to the Democrats' 23. One objective of the Republicans in this budget fight, and throughout the term, will be forcing seven mostly mediocre Democratic Senators from states carried by Mitt Romney - Jay Rockefeller of West Virginia; Mark Begich of Alaska; Mary Landrieu of Louisiana; Mark Pryor of Arkansas; Tim Johnson of South Dakota; Kay Hagan of North Carolina; Max Baucus of Montana - to take a position for Obama or for their constituents.

    There is a reason that Harry Reid and Barack Obama have kept all matters financial from reaching the Senate floor. No more.   

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    This week's video is a snippet from Hillary Clinton's "What does it matter?" testimony at the Senate hearing. For a discussion of the unanswered questions, see my December 20 post.   

bill bowen - 1/25/2013 

 

 

Whither the Tea Party?

    Recent polling shows that just 8% of voters now consider themselves to be Tea Party members, down from 24% shortly after the passage of Obamacare. Peggy Lee's 1969 classic "Is That All There Is?" comes to mind. (Do watch the video for the full impact.) What happened?

    At it's height, the Tea Party tried to define itself in the mission statement of the Tea Party Patriots: The impetus for the Tea Party movement is excessive government spending and taxation. Our mission is to attract, educate, organize, and mobilize our fellow citizens to secure public policy consistent with our three core values of Fiscal Responsibility, Constitutionally Limited Government and Free Markets. Nothing about guns, illegals, abortion, or foreign wars. In that mode, they were the energy behind the Republican wave that gained 63 House seats, 6 Senate seats, 22 state legislative chambers, and 5 governorships in 2010. 

    In two short years the leaderless movement has almost dissolved. The 49-member Tea Party Caucus in the House, led by Michelle Bachmann, has been unable to stop party leadership from agreeing to the January 1, Obama tax increases or the $60 billion grabbag Hurricane Sandy "stimulus lite", with its AmTrack upgrades, national highway reconstruction, and all manner of unrelated spending. Financial conservatives have been removed from the Financial Services and Budget committees. None of the Tea Party members in the Senate - Rand Paul of Kentucky; Mike Lee of Utah; Jerry Moran of Kansas - bothered with a filibuster on the tax increases.

    The Republican Party is a coalition of interest groups - evangelicals, small business owners, national security hawks, libertarians, gun owners, financial elites. In 2010 the Party leaders welcomed the Tea Party numbers and energy, fearing a "worst case" third party revolt. In 2012, they nominated a patrician who, I believe, would have been a great president, but whose campaign did not articulate or personify the mantra of fiscal responsibility and limited government. We true believers expected that an organized effort and a "fiscal prudence" theme would produce a great turnout. It didn't. Romney's defeat was particularly crushing to the amateurs who first became engaged in politics just two years ago. And the media's constant drumbeat has caused the public to identify "Tea Party" with any form of extremism.

    Where to now? Obama apparently believes that he has the measure of John Boehner and the House Republicans and that he can get massive debt limit increases and more tax increases without giving on entitlement reform or general spending reductions. Some 63% of Republican voters think that Republicans in Congress have lost touch with the values of their electorate. Meanwhile, the media have grown tired of the fiscal cliff and ignore the impending automatic spending cuts, having moved on to the more interesting issue du jour, the debate over gun control.

    Maybe if there is a bolt out of the blue there will be a rebirth of concern about debt and inflation sometime in the next couple of years, but a better bet is to follow Peggy Lee's nihilistic advice and "let's keep dancing."   

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    This week's video is candidate Obama's 2008 demagogueing against President Bush's $4 trillion in deficits over 8 years - about half of his pace.

bill bowen - 1/18/2013        

 

Fiscal Nausea

    When future historians write about the Great Obama Inflation their milestones will include the $800 billion stimulus plan, Obamacare, and the Fiscal Cliff - the compilation of all of the GOPs futile efforts to limit taxes and spending. Obama would have none of it and the Republicans in Congress whiffed.

    The Emotion.

        -  The Congressional Republicans are Linus to Obama's Lucy van Pelt. The President really does want to be financially responsible, we just have to give on the taxes now in exchange for future spending constraints. Trust him. Again.

        -  The populist beat the aristocrat in the election. Obama has had little to offer other than "tax the rich".  When Congress members talk to their constituents, lo and behold, they like the idea of having somebody else pay the bill. And what's the big deal if 2% of the people have their marginal tax rate go from 35% to 39.6%? Petty change.

        -  The big deal is that the quid was negotiated away for no quo. And trillion dollar deficits are a big deal. And at least half of the people do know that.

        -  It must be OK; the stock market likes it. A bit less uncertainty is good - for the moment.

        -  It is not as painful as the election, but it hurts to see folks like Paul Krugman, Nancy Pelosi, and Joe Biden taking victory laps. 

    The Facts.

        - So, what's in it?

            --  Lots of tax increases: rates  for families making over $450,000; higher rates for dividends and capital gains for wealthier households; personal exemptions phased out for families over $250,000; higher estate taxes; expiration of the 2% payroll tax holiday.

            --  Lots of cost increases: an extension of the Medicare "doc fix"; a farm bill extension; tax credits for working families and favored businesses; a year's extension of unemployment insurance; indexing of the Alternative Minimum Tax.

            -- Cost reductions? Well, a congressional pay freeze. In the immortal words of Porky Pig, "That's All Folks".   

        - The Senate voted 89 to 8 in favor. Tom Coburn, Pat Toomey and a few others voted no, but it was token and nobody tried to filibuster. Capitulation.

        - The House voted 257 to 167 in favor, with 85 Republicans joining 172 Democrats in support. The Republicans were pleased to be allowed to vote however their constituents wanted, and promptly re-elected John Boehner Speaker of the new House. Capitulation.

    The Future.  

        Sequestration ($1.2 trillion of automatic cuts over 10 years to defense and discretionary spending) was deferred until March 1, about the time that gimmics to put off the $16.4 trillion debt ceiling breach will reach their limit. Having won the battle and taken the measure of the Republicans, Obama has declared that he will not negotiate spending cuts in exchange for increasing the debt ceiling. Prior offers to fix the inflation calculation in Social Security or increase the eligibility age have been withdrawn.  Nyet! Nyet!

     The Republicans are off to lick their wounds at a strategy session, but will probably determine that the inertia of automatic tax increases was heavily to Obama's advantage, and the inertia of automatic spending reductions is to theirs if they can find a backbone.  And maybe the tone will change when people realize that Obama's victory solved about 10% of the problem. The debt limit? Up she goes.  

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    This week's video is an assessment of President Obama's objectives by Bill O'Reilly. Pretty depressing, Miss van Pelt, but in a democracy people get what they want.  

bill bowen - 1/4/13

 

The Fiscal Cliff: Negotiating Lessons

    Several years ago, along life's wonderous journey, I had the responsibility for buying stuff - bottles, flour, spices, filling equipment, transportation services, and the like -for a couple of large corporations.  In the process I learned some universal truths about negotiation- some obvious; some not  - and tried to pass on some of the difficult lessons to my junior purchasing agents. In politics some is different, but most is not. Would that John Boehner had been in the class.

Lesson Number One: You have to be sure that the guy you are negotiation with has the capability and inclination to deliver on an agreement.

         -  Boehner gets this. By sending a letter signed by Eric Cantor and Paul Ryan outlining his demands, he has the House on record that increased tax revenues are OK, not only with him (as per his 2011 effort), but also with the fiscal hawks. 

        -  Obama is less clear. By sending lame duck Treasury Secretary Tim Geithner to deliver his absurd opening position ($1.6 trillion tax increase; another round of stimulus spending; elimination of the concept of a debt ceiling) he missed the chance to empower a credible deal maker. Last time Obama walked away from an agreed deal - presumably after getting push back from other Democrats. Somewhere it would be good to get a signal that Obama will deliver the Pelosi/ Reid cohort this time.  

Lesson Number Two: You have to know what is most important to your adversary.

        -  For Boehner it is comprehensive agreements that will rein in budget deficits and make entitlement programs sustainable. Comprehensive revision of the tax code is important, primarily to make it more efficient. The end of the year matters less than the entire package.

        -  Obama is simpler. He wants higher tax rates for the rich as a legacy. Forget that the same result could be obtained by limiting deductions.  He has been campaigning for a year on a platform of taxing the rich (and not much else), and needs to nail that pelt to the wall with symbolic rates, not just eliminated deductions. Forget the other 90% of the budget problem - that is all negotiable as long as you don't touch the heart of Obamacare.  

Lesson Number Three: You have to be clear with yourself about who you need to please.

        - In the corporate world it is the boss, the users of the supply or service you are buying, and the top finance guy. Here's where politics is a bit different.

        -  Boehner has the more serious calculation. On the one hand he has a lot of members in his caucus who really believe (and have constituents who really believe) that trillion dollar deficits and insolvent entitlement programs are a big problem. Republicans also lost a presidential election because of their steadfast support for the 2% of the voters who already pay most of the bill and create most of the jobs. Boehner understands that Romney and company made the case and lost. Grover Norquist, who Democrats love to demonize, is not to be feared. Conservatives have been purged from key House committees.  Deficit hawks matter; tax hawks not so much.

        -  Obama would like to please his father, his early mentors, and his friends on the Left by leveling the field. Nobody knows how to deal with the root causes of growing inequality - globalization and technology - but taxes are pretty easy to understand - and popular with the 98% who are not being asked to pay more. Yet.  

Lesson Number Four: You need a flexible plan, including clear objectives, a timetable, priorities, and a communication strategy. Recognize that in America "fairness" generally results in meeting about half way.

        -  Both sides recognize that this is a multi-step process. A comprehensive agreement on taxes, entitlements, budget cuts, and the debt limit will require the buy-in of many constituencies and will not happen in 2012, but a year-end patch is necessary to head off pre-ordained calamity. One hopes that the staffs are working behind the scenes on the patch.  

        -  By agreeing to a revenue increase on the day after the election and offering a comprehensive plan starting about where the last negotiations broke off in 2011, Boehner ceded much ground for nothing in return. That may sound fair to the media and the public, but it adds pressure on House Republicans to not give much more.

        - By being so focused on a tax rate increase, Obama leaves much to give on entitlements and budget cuts- once he realizes that Boehner's first offer is serious and near his limit. (It is, isn't it? We'll know if Boehner cedes tax rates or a large debt ceiling increase as part of the year end patch.)        

Lesson Number Five: You have to be willing to walk away. Alternatively stated, it is "the principle of least interest" - the party who cares less about reaching an agreement has the most leverage.

        - For Boehner there is the ghost of Newt Gingrich who shut down the government in 1995, thus helping to drive Bill Clinton's budget surpluses and a public residue of ill-will toward Republicans. Boehner has to be ready to take the lion's share of the blame from Democrats, the pliant media, and even some Republicans if everybody's tax rates go up and everybody's favorite government program gets cut - even if temporarily. 

        -  Obama? In four years the "leading from behind" president has rarely done the hard work of governing. By nature or calculation he has rarely taken a courageous position on contentious issues (immigration reform and gay marriage as well as the Arab Spring and budget deficits) and is unlikely to risk a recession which he cannot blame on Bush if he gets his tax rate for the rich. And it is just possible that he does not want to be remembered for a second four year term with the lowest growth and highest unemployment since the 30s - and realizes that Boehner can help him avoid this distinction.   

       By agreeing to revenue increases and the framework of the Simpson-Bowles proposals Boehner has made a strong case for putting the blame for failure at the feet of Obama. The irony will be if - after a year-end patch and comprehensive 2013 negotiations - Boehner stands strong (but throws in a small rate increase as a deal clincher), our financial deficits start to heal, and the credit goes to the incumbent. That wouldn't be all bad.     

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    This week's video reminds us that there are more important things than getting a political win.   

bill bowen - 12/7/12

Surveying the Wreckage

    Like many of my friends I am still shocked and depressed that the American voters would not be much concerned about our rapidly escalating $16 trillion of federal debt or the President's ineptitude and deliberate deception about Benghazi. But we've got to move on; taking an inventory might be a good, if painful, starting point.  

    Nationally, we're stuck for four more years with a left wing president who is a very good campaigner and a lousy executive. It was a narrow but clear victory (51% - 48%), won not on his record or his vision for the future, but on dividing the country on economic, ethnic, age, and gender lines. Our candidate could have been a great president, but allowed himself to be painted as a negative caricature, shied away from drawing sharp policy contrasts, and ran a poor get out the vote effort.  

    Republicans missed a lay-up in the Senate, losing a net two seats (for a 55-45 disadvantage) when 23 of the 33 seats up for election were Democratic. We will have the same opportunity in 2014. Pray for McCain/Graham/Ayotte to remain vocal. 

    Republicans lost at worst eight (three Tea Party)  seats in the House, retaining a 235 - 200 majority. The redrawing of districts after the 2010 census helped, and will remain in effect for a decade. Pray for Boehner/Ryan/Cantor.

     Republicans gained a net one governorship (North Carolina), bringing their total to 30. Pray for local wisdom to deal with Obamacare and public employee unions.

    In California the public voted to further raise the nation's highest taxes and to create Democratic super-majorities in the Assembly and Senate which can operate with few restraints. Republican voter registration fell below 30%, and we have instituted a "cap and trade" tax/regulatory system to punish what remains of our industrial base. There's nobody to pray for.

    In San Francisco we lost the leading moderate on the Board of Supervisors to term limits (a liberal ideologue beat a union official to represent this relatively conservative district) and voted out the one reformer on the Board of City College (which faces loss of accreditation for decades of mismanagement).  The Board did vote to ban public nudity - except at street fairs. Ditto to California on the prayer front.   

    There, that's it. My therapist tells me that I also need to separate what is temporary from what is permanent and focus on what can be done. More than a few friends from afar have suggested that a moving van might be a good start, but first I've got to sort through the "temporary / permanant" thing and get a grasp on "what can be done".  I apologize in advandce if the next few weeks feel like my therapist's couch.

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   This week's video is an Erskine-Bowles outline of what is necessary to resolve the country's financial crisis. John Boehner is starting to sound as if he is in tune with last week's post.  

bill bowen - 11/30/12       

(Slightly) Beyond the "Fiscal Cliff"

    The financial and political papers and blogs are full of the question of whether a deal will be found to avoid the "fiscal cliff" at year end. Many commentators miss the point ... the real question is about the first half of 2013.

    Let's make sure that we are on the same page. Wanting to get through the November 6 election, and being unable to resolve big issues, politicians of both parties (the president, the Senate, and the House) agreed to a group of deferrals:

        -  They couldn't agree on taxes, so the Bush tax cuts ($330 billion annually; $42 billion for "the rich") were extended to this December 31;

        -  They couldn't agree on a budget or reductions to the trillion dollar deficits, so a set of very painful automatic cuts (about $55 billion in defense and $75 billion in other discretionary, annually) were set to kick in on January 1;

        -  The  two-year reduction of Social Security taxes, limiting the employee portion of the tax to 4.2 % rather than 6.2 % at a cost of some $200 billion, will expire on December 31; 

        -  They haven't been able to minimize deficits, so it will be necessary to increase the debt ceiling (now $16.4 trillion) around the end of the year.

    As to the cliff at the end of the year, there is some reason to be concerned that the hotter heads might prevail, as they did during the first effort to pass the Troubled Asset Relief Program (TARP) back in 2008 when the stock market went down 7% in a day before the Republicans relented, or during the argument over increasing the debt ceiling in 2011 which led to S&P downgrading US debt. With President Obama and Speaker Boehner making accomodating noises, the consensus is that a deal will be found and happy times will be here again.

    Not! The symptoms may be masked, but the disease rages on.

    Nothing has changed about the reality that we continue to run trillion dollar deficits, Social Security and Medicare remain on the short road to bankruptcy, the corporate and individual tax codes are riddled with inefficient favoritisms, and government policies (Obamacare; EPA; Dodd-Frank; etc.) continue to hold back the economy. No year end deal will solve any of these problems.

    So, what really will happen? 

    1. There will be a very limited deal to push solutions into 2013.

      -  Obama will want to raise taxes on the rich as part of a deal to kick the problem into 2013 - his successful mantra from the campaign, and just about his only coherent thought on matters financial. Boehner will probably give him a reduction in exemptions on high wage earners (and maybe a rate increase if Obama demands symbolism) and will want a commitment to address entitlements along with comprehensive tax reform and spending cuts in the first half of the year. If the past is prologue, Boehner will give something in exchange for a promise.

        -  There will be an agreement that nobody wants the sequestration plan for automatic cuts to defense and discretionary programs to take effect. Both sides will agree to push that into next year, perhaps with a fig leaf of minor Democratic concessions in exchange for some defense cuts.

        -  The consensus is the Social Security taxes will go back up - after all, the program is going broke, the recession officially ended in 2009, and AARP wants to protect the seniors.  

    2. The Republicans will make careful use of their hammer, the debt ceiling limit - which will be breached in December, but can be extended into 2013 by creative accounting.  Treasury Secretary Geithner is whimsically recommending that the concept of a limit be eliminated; the Republicans will probably re-set it for a mid-year clash at about $17 trillion to force action on debt-reduction negotiations.

    3. Paul Ryan will be the center of negotiation for a "Grand Bargain" on taxes, spending, and entitlement programs. Beyond taxing the rich, Obama doesn't seem much interested; Geithner will probably be moving on; and spending bills are supposed to originate in the House anyway. (Note that full acquiescence to Obama's "tax the rich" strategy would close less than 10% of the budget gap, even assuming that it didn't hurt the economy. Much, much more is needed.) Look for something resembling Bowles-Simpson with cuts far exceeding taxes, particularly if Erskine Bowles were chosen to replace Geithner.

    There is a relatively narrow window of opportunity before the next political cycle.  If House Republicans don't force action by late 2013, the chances for anything approaching financial solvency approach nil. In any case they will get the blame, they might as well do it right.

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  This week's video is the real story of General Petreus' resignation.

bill bowen - 11/26/12     

The Coming Tax Crisis

Income tax day brings out a lot of easy symbolic stuff - Tea (Taxed Enough Already) Party rallies; hopeless Senate "Buffet Rule" votes; hopeless House "Small Business Tax Cut" votes - but the heavy damage will come at the end of the year with a lot of things that President Obama deferred until after the election. For that discussion it is worth remembering what taxes are for, beyond demagoging. Three perspectives.

1. We need to pay for government and, as Justice Holmes noted, "taxes are the price which we pay for a civilized society." We seem to have temporarily found a way around this as 42 cents on the dollar of what the federal government spends is borrowed as a result of the "Bush tax cuts", Obama's increase in federal spending to 24% of GDP, and the ongoing Obama economic malaise. The Grover Norquist view is that we need to shrink government back to 19% rather than increase any taxes; the Simpson-Bowles Commission recommended three for one spending cuts over tax increases. With a $15 trillion dollar deficit, conservatives want a Balanced Budget Amendment like almost all states have. Most discussion is on the Republican side of mid-field.

2. We need a tax code which stimulates rather than inhibits the economy. Our corporate rates are the the world's highest (for those who pay them) and encourage companies to keep their foreign profits offshore. Republican orthodoxy sometimes claims that the Laffer Curve (lower rates lead to higher economic activity and more tax revenue) offers much opportunity, but we are probably around the break-even point now. (Pick your economist.) The personal tax code (which also applies to most small businesses) also contains decades of lobbyist-driven complication - deductions; credits; capital gains rates; dividend rates; estate taxes; alternative minimum taxes; income from Limited Liability Companies; health savings accounts; estate taxes; gift taxes; and on and on. Nobody but the lobbyists and paid tax-preparers likes it.

3. Unequal taxes can make an unfair society a bit more fair. As it is, globalization and technology have greatly increased income inequality in most countries, and we have responded by exempting almost half of our workers from paying any income taxes. (In fairness, all do pay Social Security, Medicare, and sales taxes.) A majority of voters believe that high end earners should pay a larger share than their current 35% - a historically low rate unless you add up to 10% state levies in many Deep Blue states. Increasing taxes on somebody else is quite popular. Advantage Democrats.

The good news for Republicans, taxes will be a big issue as Romney turns from Santorum et al to Obama:

-- Paul Ryan and Mitt Romney recommend that we eliminate loopholes which distort economic activity and reduce rates to be about revenue neutral. If Romney wins and has a Republican Congress, there will be a battle for the right balance between the "lower the taxes" and "lower the deficit" constituencies. IMHO the Tea Party will be in the latter camp, accepting some net increases.

-- The Obama alternative - an automatic increase of $600 to $700 billion per year as all of the "Bush tax cuts" expire on December 31, Social Security taxes go back up, the Obamacare Medicare tax kicks in, capital gains and dividend taxes double or triple, estate tax levels escalate, and a whole passel of other Obama rulings take place.

The period of easy demagoguery will soon move to a real policy debate for which Romney seems the much better prepared.

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My apologies for the negativity of last week's "Deliberate Mean-Spirited Distortions" posting. Here's David Axelrod endorsing Mitt Romney. Well, almost.

And a bonus for those who look to California to see America's future - an opinion piece from the former mayor of San Diego.

bill bowen - 4/20/12

Economic Metrics - Political Style

Over the next seven months there will be endless reports about the direction of the economy - some designed to elucidate; many designed to confuse. Here's a primer:

The short term business cycle.

Specific metrics to consider include:

1. Unemployment - We lost 8.3 million jobs in 2008-2009 and have gained about 3 million in 2010-2011.Unemployment has slowly declined from a high of 9.7% to 8.3% (15.2% "all in"); economists project job creation for 2012 will slightly exceed the 150,000 monthly increase needed to cover population growth. Few think it will get much below the 8% ceiling promised with the Stimulus Plan.

2. Housing - prices are projected to decline 3 to 5% in 2012, on top of the 40% decline since their 2007 peak. Home ownership crested at almost 70 %, has returned to its pre-Clinton mid-60's, and promises to go lower as foreclosures continue. Government-owned Fannie and Freddie have cost taxpayers some $135 billion with losses projected to nearly double. This won't be much better by November.

3. GDP - since recovery began in mid 2009 GDP growth has averaged about 2.5%, slightly below the historic 3.25% average and well below the usual rate following recessions.

4. Inflation - gas prices are such an easy target. They may decline a bit if Iran settles down, but with the declining dollar and global economic growth they'll be twice what they were when Obama took office.

The Obama plan - continue deficit spending until after the election; blame Bush, Europe, or whoever; talk about something else. The Republican plan - try not to appear to be rooting for a downturn. Mitt Romney notes that President Obama taking credit for the business cycle is like a rooster taking credit for the sunrise.

Long term patterns.

This is where the economic discussion should really take place. Since Farheed Zakharia wrote "The Post-American World" in 2009, he and Thomas Friedman have been writing best sellers about the decline of the United States. Many pile on with the inevitable ascendancy of China's government-run economy, the hollowing-out of America's manufacturing economy, and the fatal flaw of unequal income distribution. Others stare into the mirror of Europe and see the administration's Greek-like debt.

For serious discussion it is useful to get a few shibboleths out of the way:

1. The United States remains the world's largest manufacturer with a 20% global share - about 45% more than China. We enjoy unquestioned leadership in the medical and technological fields which will dominate the 21st century. The structural employment problem is that we have automated agriculture, manufacturing, and now the office and need to figure out what to do with the people.

2. The United States is at the top among the industrialized nations in spending on K-12 education. Our universities lead the world in broad public education, graduate schools, and research. We still dominate the ranks of Nobel Scholars. Money isn't the problem.

3. Exports (some agricultural, but mostly industrial) represent about 12% of GDP and are growing (helped by a dollar which has declined by one third in the past ten years. Unfortunately, imports represent 15%, resulting in an unsustainable annual trade deficit of $550 billion.

Economically, 2012 will be what it will be, but beyond that there is a stark difference between the Republicans and President Obama: will we seize the very real opportunity for North American energy independence?; will we reform Social Security, Medicare, and Medicaid which threaten to bankrupt the country?; will we get close to sustainable balanced budgets?; will we reform federal, state, and local public employee pensions which threaten to squeeze out all other spending? can we become more competitive in a world with lower-priced labor?

If the Republicans are smart, the election will be about whether a more intrusive government or a freer citizenry can best address the long term questions, and not so much about the spin on the latest Bureau of Labor Statistics report.

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Here's some recent Senate testimony in which the cabinet secretary responsible for implementing Obamacare, Kathleen Sibelius, claims not to understand the cost of the program, the increase in consumer costs, or the 1700 waivers that her department has granted to companies that would have cancelled their employee insurance.

bill bowen - 3/9/12

Energy: Clear Policies and Plain Symbols

So President Obama's advisers note that $4 gasoline is a problem; on Friday he gives a speech representing a "grab bag of excuses and outright falsehoods" according to Investors Business Daily; and on Saturday Newt Gingrich provides a detailed policy response to a California Republican Convention audience. The Sunday talk shows? - Rick Santorum's views on a college education, Ann Romney's Cadillacs, and the ongoing complaint that the Republicans don't deal with substance. This energy subject is so teed up ... it just needs a simple presentation with a few symbols.

1. Clear policy. Energy Secretary Chu proclaimed in 2009 and reiterated in 2011 and 2012 that "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe" - now about $10 per gallon - in order to make alternative energy sources competitive and to force people into smaller cars. For those who think that Chu simply misspeaks, Secretary of the Interior Salazar - while testifying that he opposed drilling on federal land even if gas prices reached $10 per gallon - related "it’s time we replace oil altogether as America’s fuel of choice." Try to spin that, Jay Carney.

2. Symbol 1. Solyndra. It is not necessary to get into the weeds, but some $16.4 billion of the $20.5 billion in loans for "alternative energy" under the Stimulus Plan went to companies owned or run by major Obama financial backers in a program driven by a major Obama bundler, Steve Spinner, and called by the Government Accountability Office "arbitrary", "lacking transparency", and "lacking performance measures". People can understand that the $535 million loss on Solyndra is the tip of the corrupt iceberg.

3. Symbol 2. Keystone XL. There is no way to put any lipstick on this pig. Obama's domestic political considerations have cost thousands of jobs and a key element of North American energy independence. The best he can do is note that approval would not affect gasoline prices right away.

As the campaign unfolds, the administration will argue that they cannot affect the a global oil market (true in the short run, although there will probably be a release from the national petroleum reserves in an effort to drive down gas prices before he election), that US oil production is actually up (yes, due to development on private lands in North Dakota approved by the Bush administration), and that they have helped consumers by mandating that fuel efficiency standards be increased to 35 mpg in 2016 and 54 mpg in 2025 (yes, the government can force movement away from the public's preferred larger cars and trucks.)

There is some Republican concern (and Democratic hope) that voters will be pacified by a moderately improving economy and that they don't really care about Obama's huge debt, but gasoline inflation is a raw nerve with many story lines - the effect of Obama's "leading from behind" policies in the Middle East; Harry Reid's stonewalling of nuclear energy development; the administration's continued opposition to offshore drilling; data/data/data. For the masses the clear statements by administration leaders and the symbols of Solyndra and Keystone say more than enough. Lets not try to get too fancy - even the sychophants at MSNBC agree that the messiah's energy policies are a bust.

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This week's video is a compelling ad for the new Chevy Volt.

bill bowen - 3/2/12

Romney's Michigan Gamble

For the moment candidate Romney has ceded the airwaves to the Obama - Santorum firestorm about social issues. Charles Krautheimer has written the definitive piece on Obama's attack on the first amendment's dictate that "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof", the unprecedented requirement that (insurance) companies provide free services to a favored class of people, and the unconstitutional mandate that individuals buy a service which they may not want. That will sort itself out in the courts, but within the Republican party the contraception/sterilization/abortion mandate has propelled Santorum to the top - quite likely the Obama campaign's intended outcome. In the broader public, the administration has succeeded in framing the debate as a "woman's right to choose" which seems to trump freedom of religion. Oy vey. Sorry Charles.

Meanwhile, candidate Romney takes the principled but unpopular-in-Michigan stand that traditional reorganization in bankruptcy would have been a better solution to Detroit's problems in 2008 than government ownership. What was he thinking - in his 2008 New York times op-ed, and in his recent Detroit News piece? Why double down?

On the substance:

- The $80 billion bailout, overseen by the ethically-challenged Steven Rattner, represented an unprecedented intrusion of the federal government into private industry, protecting the UAW at the expense of bondholders and the non-union staff of General Motors and Chrysler. The end result has been survival with Chrysler, now majority-owned by Italian Fiat, and General Motors, still partially owned by the US government and the UAW pension fund. GM has been slimmed down with four US brands remaining (Chevrolet, Buick, GMC, and Cadillac) and 70% of its sales outside the country. Most of the government's bailout funds have been returned - except for the remaining 27% stake in GM and a $12 billion stake in Ally Financial, the former financing arm of GM. In an extraordinary step, the IRS issued a special ruling to allow the new GM to keep $45 billion in tax losses from the pre-bankruptcy GM - a gift lost in the administration's accounting.

- On an ongoing basis the federal government is an awkward partner in the auto industry. Federal subsidies for each Chevy Volt amount to $10,000 for a vehicle with little consumer demand and a short history of battery fires, downplayed by the safety authorities. Labor negotiations have been problematic with the UAW primarily targeting Ford in the 2011 negotiations.

On the politics:

- Michigan has voted Democratic in the last five presidential elections, and has declined in population to 16 electoral votes (similar to Georgia or North Carolina.) It is not a key state in the Republican map - although Romney's roots and endorsement by Republican Governor Rick Snyder should give him an edge there.

- Michigan is also small in the Republican nomination calculus. On the numbers, Michigan will have only 30 delegates (out of 2286)to the convention due to a 50% penalty for going earlier than the Republican National Committee allowed, and those will be split proportionally. But the optics matter.

- Romney's primary opponents and much of the media have claimed that a Romney primary defeat in Michigan would spell his doom, and the volatile polls have shown a Santorum surge, particularly among the religious conservatives of western Michigan and union members. As a window into the thinking of the White House, the national Democratic party has been holding news conferences around the state and an Obama-oriented PAC is running ads to criticize Romney for his opposition to the auto bailout. (Santorum, Gingrich, and Paul also opposed the bailout, but get a pass in the Democratic anti-Romney blitz.)

- The broader calculation should reward Romney for his principled stand. Nobody understands the restructuring of the auto industry better than the son of the president of American Motors who made his fortune growing and restructuring companies. Outside of Michigan he has strong agreement within the party and is positioned to make crony capitalism a major issue in a campaign against President Obama. His Michigan stand should add some "cred", as did his refusal to follow Gingrich's pandering to the space industry in Florida.

For Romney the Santorum values surge came at a bad time in the context of the Michigan primary, and any momentum may carry over into Super Tuesday. If so, the contest becomes a grueling delegate count which may stretch until Utah's 40 delegates are selected in the final primary on June 26. In the end, Romney's money and organization should prevail as the painful process moves to the large, more moderate states of the Northeast and the West Coast. But it would be much better to allow the Republicans to unify and pivot to face President Obama well before the August 27 Tampa convention.

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This week's video of the White House press secretary claiming that Obama didn't turn down the Keystone XL pipeline calls to mind Bill Buckley's famous rejoinder "I'm not going to insult your intelligence by pretending that you believe what you just said."

bill bowen - 2/24/12

 

Assessing Bain

I'll start with the punchline: with 70% of the voters thinking that the country is on the wrong track, and most thinking that our best days are in the past, we need a turnaround expert.

I'm in the small camp that thinks that Newt Gingrich's "King of Bain" video (well, technically his "independent" PAC's video) is a good thing. It was easily discredited as blatantly distorted, even by the Washington Post which gave it four pinnochios; the attack on capitalism rallied Republicans around Romney; and, it started an education process which will be needed to defeat President Obama's primary campaign theme of income inequality and class warfare.

Back in my corporate days I lived the video's story. I was a senior operations guy for a national brewery and then a major food company, going through numerous acquisitions and figuring out what plants to keep and close, what staff to keep and let go, which suppliers to standardize on and which to terminate. I myself was "made redundant" when the brewery was acquired. Some learnings:

- There are four classes of "private equity" companies:

1. Venture capitalists who build things from the ground up. Today these are mostly in technology and come in all sizes; Bain's focus from 1984 to 1989 was venture and included Staples, DoubleClick.com, and Shopping.com among many others.

2. Leveraged buyouts and growth capital which are heavy in restructuring both finances and operations of sick companies. Particularly in the 80's and 90's there was a wave of capitalism's "creative destruction", largely engineered by a shifting consortium of firms - Kohlberg, Kravits, & Roberts; the Blackstone Group; Goldman Sachs; Bain; and others who aim to grow their businesses. Among Bain's couple hundred deals (many after Romney left in 1999 to turn around the Salt Lake Olympics and enter politics) were Burger King, Dunkin' Donuts, the Hospital Corporation of America, and many mundane manufacturers. Mitt Romney's contribution included a beneficial restructuring of Bain itself and a rigorous analytical process (The Bain Way) for analyzing companies and markets. Many individuals got hurt; more prospered.

3. Scavengers who can extract value from a dying brand, decaying facilities, over-funded pension plans, and the like - Rick Perry's "vulture capitalists". Names like Carl Icahn , Victor Posner, Nelson Peltz ,and Paul Kalmanovitz come to mind, as do hostile takeovers and extreme financial leverage. Bain did not play on this field.

4. Purely financial alchemists which don't have much to do with facilities, markets, and people who make real companies go. Think Michael Milken, and Ivan Boesky, and the Wall Street investment banks, not Bain.

- Sometimes the "how" is as important as the "what". Some consolidators provide severance, honor pensions, provide outplacement, encourage retraining, and offer relocation. Others don't. (My last official act at the brewery was to gather up the artwork that the company owned to send it to the acquirer's home - "scorched earth". On the other hand, the food company helped employees at a closed plant obtain financing to begin operations as an independent company.) Displaced people need to be encouraged to relocate, get retrained, and accept (at least temporarily) lesser jobs. Objective stories from Bain - if there can be such a thing - may tell something about Romney.

In any case, Romney does know business and he knows turnarounds. He's not a Herman Cain who was successful in a couple of related businesses - he has been successful over 70% of the time across a broad range of industries, across a broad geography. His first few years at Bain were as a management consultant. He understands finance, operations, marketing, and personnel - and what makes companies successful.

And perhaps equally importantly, he has the analytical ability and personal fortitude necessary to undertake the restructuring and downsizing that the federal government requires. All of the Republican candidates talk about getting back to "small government". Romney is the only candidate to have demonstrated the executive experience and temperament to do it.

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This week's video is an advertisement by one of the Political Action Committees vying in South Carolina - Americans for a Better Tomorrow, Tomorrow - Steven Colbert's creation.

bill bowen - 1/19/2112

Keystone XL: Voting "Present"

When the brief history of the Obama administration is written - perhaps as part of a Zakharia "Decline of America" sequel - there will be chapters on corruption (Solyndra; Siga's small pox boondoggle; Congressional insider trading), flailing (stimulus plan), and incompetence (Fast and Furious; "leading from behind"; true Wall Street reform), but the essence of his administration will be captured in the mismanagement of the Keystone XL Pipeline. Consider:

- The 1700 mile pipeline to bring almost 1 million barrels of oil a day from northern Alberta to the refineries of the Gulf Coast has been in development since 2008. In August the EPA's second evaluation determined that it would have "no significant impact" on the environment if agreed procedures were followed.

- We have some 300,000 miles of natural gas pipelines and 168,000 miles of oil pipelines criss crossing the nation. We couldn't fill up a car's tank or heat a house without them. We know how to do this. The science is clear that there is no real risk, but it is easy to rile up NIMBY sentiment and who can trust science anyway? (Oh excuse me, it is the conservatives who are anti-science.) Whatever, the pipeline owner has agreed to reroute the pipeline around the Ogallala aquifer - no matter, no decision will be made until after the election and the 10,000 jobs can wait another year.

- The NYT argument that we don't need the oil anyway ignores the fact that we import 10 million barrels a day by tanker from places like Venezuela, Saudi Arabia, and Iran. When we consider sanctions on Iran, they consider blockading the Persian Gulf.

- The real objective of the environmentalists? This is a crude way to attack the Alberta tar sands operations which use a significant amount of water and leave pools which cannot be fully remediated. As good citizens of Al Gore's planet, we cannot be bound by national borders and defer to the crass commercialism of the Canadians.

- And here's where environmentalist self-satisfaction loses to economic reality - there will be a pipeline to British Columbia to feed tankers bound for China, we will have damaged our Canadian relationship, we will import our 10 million barrels a day from despots, and the Chinese won't really much care about the scenery in Alberta.

For those who wonder whether the Al Gore crowd understands the economic trade-offs, a look at California is instructive. Californians (by ballot initiative as well as legislation) choose high electric rates over nuclear power, no risk of off-shore drilling over state revenues and lower gasoline costs, protection of fish over water for farmers and cities, and claim to the world's tightest air emission controls and high taxes at the expense of a bottom ranking for business friendliness. In each case there is debate about the numbers, but California's choice is clear. To the true believers the problem is that we have too many people. And as for the pipeline - we use too much oil.

And for the 2012 election, this is vintage Obama. He is caught between a core constituency on the Left and a crystal clear chance to create good jobs, lower energy costs, and support the relationship with our closest ally. And he does what has worked for him for his entire career - he votes "Present". Just maybe the American people are not as stupid as his Illinois constituents - at least not the second time around.

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This week's bonus is a fascinating extended radio interview with Jon Huntsman. His "rich kid" persona has not worked in the mass debate format, but he does have strong credentials as a conservative governor, a diplomat, and a smart guy - as well as an understanding of business. Cain and Perry supporters should pay attention before jumping to Newt.

bill bowen - 11/18/11

Pelosi's Crony Socialism

    Solyndra; SunPower; California environmentalists; the Stimulus Plan. It is no accident that so much of this corruption is out here on the Left Coast. Lets connect the dots.

    First, the Pelosi Democrats were brilliant in adapting the trash collection model to the energy industry.  Politicians don't have to raise taxes to create pools of money; they can set the rates which you pay your local trash hauler or - the California adaptation - they can mandate that a portion of electric generation must come from uneconomic "renewable" sources and approve whatever rates that drives.  California's  mandate that a percentage of electricity used by the major utilities come from renewable sources began in 2002 and now sits at a 33% level by 2020. How to get from today's 15% without building any more dams or nuclear power plants?  And whose companies can get a piece of the action?

    Thank you American Investment and Recovery Act of 2009, a grab bag of pork designed by Ms Pelosi and her Congressional allies with $79 billion targeted for "renewable energy, energy efficiency, and green transportation".  The friendly press touted the boon to small companies and start-ups as well as the use of loan guarantees - tax credits don't help companies that are not making money.

    With California Republican Darrell Issa's House Oversight and Governmental Reform Committee on the case, the Solyndra (a Bay Area company) case is widely known - a $535 million loan guarantee to the company of a prominent Obama bundler; White House pressure in the face of OMB reservations; company leaders taking the 5th Amendment; a likely-illegal reworking of the guarantee to place the bundler ahead of the government in any recoveries. Next we find a $737 million loan guarantee for a Nevada solar farm connected to Pelosi's brother-in law. Then we find a $1.2 billion loan guarantee for SunPower which plans to build a large solar panel farm in San Luis Obispo and a new manufacturing facility in Mexico; the top lobbyist is the son of George Miller, a key Congressional ally of Pelosi, also from California.   Had enough? In the rush to beat a September deadline, the Energy department approved several other projects worth just a few billion of your dollars, some of which are being sold and resold within the energy industry.  

    The big point is the twin dangers of a government which makes decisions about which companies to support and a one party state like California where complaining voices are shut out and deals can easily go to political allies.  During the Dartmouth presidential debate there was a brief discussion about two funds in Texas - originated on Perry's watch -which have made some $750 million in loans, some to contributors. (In fairness, some 20 states have such funds to attract and grow companies.)  If Governor Perry remains a viable candidate, questions will come from the Left about crony capitalism and from the Right about the proper role of government.  As for California, nobody out here seems to care as long as it is federal money and it is green.   

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    This week's video is a brief explanation of the Lord's Resistance Army which has been terrorizing central Africa for two decades. Late on Friday, October 14, President Obama sent a letterto the President Pro Tem of the Senate and the Speaker of the House announcing that he was deploying 100 combat troops to support local armies pursuant to May, 2010 legislation to support these governments. With troops in Iraq and Afghanistan, participation in NATO's Libyan operations, and drones operating in Pakistan, Somalia, and Yemen it would seem to be time for a discussion of priorities and the need to involve Congress and the public in the process of going to war.

bill bowen - 10/21/2011 

The Youth Vote

    I recently met a Janis Joplin-like young woman at an oversold Republican dinner in San Francisco. She had lost track of the time and hadn't dried her hair; she held court about school, her friends, conformity, and the economy; she loved Ron Paul. So, I got to thinking:

    I'm in the group which believes that the Arab Spring is mostly about jobs. At least in Cairo, if you are not connected to the military-dominated establishment, there is no meaningful work. Education is widespread, but many with solid college degrees seek menial jobs. Youth unemployment is 25 %. The anger is not about Israel or religious impurity, it is about the inability of the law-abiding masses to find meaningful employment even if they do everything right.

    American unemployment is nominally 9.1%. For those who would like to work it is really about 16%. For kids it is 18 %. For African American kids it is 31 %. Salvation in Cairo is a government job. We are shedding government jobs at the local, state, and federal levels. So, which party's philosophy is most likely to grow the economy to create meaningful jobs over the next ten to twenty years?  The one dominated by the environmentalists and the unions or the one dominated by small business?

    Somebody eventually has to pay the bill. A baby born today inherits $46,000 of debt. At the end of a second Obama administration it would be at least another $20,000.Sure we have made promises to seniors and everybody should have some minimal health care, but what about young parents? What happens when the interest on the debt consumes everything? And which party really wants to get this under control?

    And what is the relationship between the individual and the government described by Thomas Paine's "Common Sense" and enshrined in our Constitution?  Which party would tell us that we must buy their insurance, build our factories in states run by their supporters, and endure thousands of pages of new regulations on health care, investments, the environment, and everything else. It is a complex world, but the philosophical difference between the parties about individual liberty is stark.

    For those who like data, even some liberal pollsters are showing a switch, with Obama's 2008 advantage of 30% being cut in half, and young white voters actually favoring a generic Republican.

    My young Janis Joplin is all about fairness and opportunity. We need to better spread the benefits of prosperity before we look like Cairo. Tax policy matters. Wall Street governance matters. Education policy matters a lot. But before we spread prosperity, we need to create it. And it can't all go to the government employees. That is the difference between the parties which is obvious even to today's refugee from Haight-Ashbury.  Vietnam brought a generational political shift; President Obama may be bringing another.

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   If you enjoy seeing an intellectual conservative destroy a pompous political liberal, you'll enjoy this video of Milton Friedman's discussion with Phil Donahue.

bill bowen - 9/9/11

    

Death and ...

We'll skip over the death thing and go directly to taxes, a subject that allows at least a bit more optimism.

First, a few general comments:

- Our federal trillion dollar deficits come from recent increases in spending from about 20% of GDP to 24%, coupled with a decrease in revenue from an historic 19% to about 15%. Some of the revenue decrease comes from an anemic economy, but some comes from the "Bush tax cuts" which were extended by Barack Obama as part of the 2011 budget agreement in February. The increases, well ... try just about everything.

- Within the Republican psyche there is a desire to "starve the beast" as well as a belief in the indefinite extension of the "Laffer Curve" which posits that reduced rates result in increased economic activity which actually produces more net revenue. At some point the latter is true - arguably demonstrated by President Reagan - but not indefinitely.

- Grover Norquist's "Americans for Tax Reform" pledge has been signed by 236 of 242 Republican House members and 41 of 47 Republican Senate members as well as 2 House Democrats and Democratic Senator Ben Nelson of Nebraska. The pledge is to oppose any increase in marginal tax rates and any reduction in deductions not offset by equal reductions in rates. It has been signed by Rick Perry, Michele Bachmann, Mitt Romney and the other major Republican presidential candidates. President George HW Bush paid the price in for violating his 1988 "read my lips" pledge not to increase taxes if elected - and politicians remember.

But, there are a few glimmers of hope for either a Clintonesque redefinition of what "is is" or a courageous grand bargain.

- In the Senate 30 Republicans - led by Tom Coburn of Oklahoma - were willing to eliminate the subsidy for ethanol - effectively a tax increase - but the bill failed.

- A few Representatives have rescinded their commitmentto Norquist's pledge.

- During the deficit increase negotiations John Boehner was apparently willing to offer up to $800 billion in tax increases over a 10 year period in exchange for major spending decreases and significant entitlement reform. The deal fell apart when Obama tried to up the ante to $1.2 trillion.

So, a couple of settings for the stage:

- Paul Ryan's 2012 budget proposal included a "revenue neutral" major restructure of the tax code, eliminating many deductions in the individual and corporate schedules in exchange for lower rates. Among the major puts and takes it would not be possible to attach specific increases to reductions with the overall impact being subject to assumptions about future economic activity. Ryan would change the game.

- The Republican appointees to the new Congressional Deficit Reduction Panel include Republican Dave Camp whose House Ways and Means Committee has jurisdiction over taxation, Social Security, and Medicare; Fred Upton whose Energy and Commerce Committee has jusisdiction over Medicaid and parts of Medicare; Rob Portman who was W's budget director; and John Kyle of Texas who is retiring. Boehner and McConnell appointed members with conservative credentials and thorough knowledge of budgetary and tax matters. (The Dems appointed Patty Murray, the chair of the Democratic Senatorial Campaign Committee and John Kerry among others.) Both sides agreed on a Republican aide and chief tax counsel to the Senate Finance Committee to be the staff lead.

And a few more things in the optimism column:

- There are several easy targets upon which most can agree - hedge fund managers income being taxed at capital gains rates; ethanol subsidies; corporate jet tax breaks (created as part of Obama's Stimulus Plan).

- Republicans would probably agree to big changes to energy tax credits - which go to solar, wind, and electric vehicles as well as oil and gas companies.

- The penalties for non-agreement by the new joint committee - gutting of the military; reduced Medicare payment rates without any real reform - provide a big incentive for a "grand bargain" if the parties demonstrate an interest in governing instead of building up campaign talking points.

It will take two to dance. If the Democrats bring serious entitlement reform to the dance floor, and the Republicans bring comprehensive tax reform, the Republicans may have enough conservative "cred" to do what Boehner was considering before President Obama moved the goal posts. One statesman on each side would get a proposal to the Congress for an up or down vote (no amendments.)

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This week's video goes back to the "death" theme - the demise of "green energy" darling, Solyndra along with 1100 jobs and a half billion stimulus dollars. This is right down the street in Freemont, California, from Nummi, the last significant auto manufactuiring plant in California which closed in 2010. "Just bad luck".

bill bowen - 9/2/11

The Emperor's (Jobs) Speech

While we all eagerly await President Obama's return from Martha's Vineyard with a new jobs agenda, we can muse about whether he will walk through Door A or Door B.

Door A: Governing. What would seem to be needed is a long term plan with a short term component, agreeable to both parties.

The framework could be based on Simpson-Bowles, perhaps enhanced by elements of Paul Ryan's FY 2012 budget and the recent debt ceiling debate "grand bargain". That would include restructure of the corporate and individual tax codes; steps to restructure Social Security, Medicare, and Medicaid; and a general tightening of federal spending to get Debt to GDP into the 60 to 70% range.  This is the work of the bipartisan Deficit Reduction Commission, but a strong and specific presidential plan would go a long way.

Given a long term framework, there are some things that could be done in the short term.  Regulatory relief would seem an easy place to start - eliminating new dust standards for farmers; letting Boeing and other decide where to locate their facilities; getting on with expansion of our energy resources.  He might unlock the free trade agreements which have been negotiated and available from Day 1 - but face union opposition. As part of a total package the Republicans might well agree to a deficit-increasing continuation of unemployment benefits, the partial payroll (Social Security) tax holiday, and more subsidies for mortgage holders.

Door B: Campaigning. Continue the mode of blaming Bush, the Tea Party, and "bad luck".

     Much of the media still seems willing to place the blame for the debt limit impasse on the Tea Party's insistence on not raising taxes rather than the Democrats unwillingness to address entitlements. Ryan's proposal to reform Medicare remains a good demagogue item which would be lost for 2012 if Obama made any similar concrete proposal. Taxing "the rich" to make them pay their "fair share" is always a good applause line, particularly if you can get Warren Buffet to deliver it - even though such an increase would have a negative impact on job creation and he agreed to the current rates as part of the "continuing budget resolution" debate for FY 2011.

     Part of the problem for Obama is that it is probably too late for any impact on the economy prior to the 2012 election unless it is a matter of passing out money for specific short term job creation - and the Republicans won't allow that for ideological and political reasons.  With the Congressional Budget Office projecting unemployment well above 8% through 2012 he will be aiming at the optics of an improving situation to get above his current Carter-esque approval rating. And, of course, if it is somebody else's fault - maybe the Big Guy who's sending earthquakes and hurricanes.

     But the larger part of his problem is that he doesn't have a clue. Most of his economic advisors are gone; he still doesn't have any business people in his inner circle; and he leans in public on people likeJeff Immelt of GE which pays no taxes (due largely to "clean energy" credits for wind turbines) and apparently intends to move its medical devices headquarters from Wisconsin to China.  Small business - forget it.

    A prediction: Obama will will stay with Door B; Mitt Romney will offer a Door A option.  Game on.  

 

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      In place of a video, this week's "bonus" is an excellent Stratfor article about Libya's future challenges.  Absent from the discussion of internal divisions and external forces - Egypt; Europeans; China - is any mention of the United States.

bill bowen - 8/26/11

Deficits: Lessons (re-) Learned

From even the worst disasters we can learn lessons. Here are a few:

1. Successful negotiations require an understanding/acceptance of your opponent's bottom line, clarity about your own minimum objectives, a search for common ground between those boundaries, and an ability to deliver on your commitments.

- To the end the President did not accept the Republicans' "no tax" requirement. Boehner eventually understood that the Democrats were split, having three requirements - the Left insisted on no change to entitlement programs; some like Bernie Sanders insisted on the virtue of taxing the rich; and Obama primarily wanted to get past the next election with no problems.

- When President Obama was close to an agreement with Speaker Boehner on the big deal he could not deliver his Party - in part because he had excluded them; in part because he persuades by public speeches, not by private negotiation. Conversely, it is not clear that Boehner could have delivered on his tentative acceptance of $800 billion in "revenue increases" even if Obama had not "moved the goal post".

- An important rule of negotiation is the "Principle of Least Interest" - the party most willing to walk away has the most leverage. For principle rather than tactics, the Tea Party Republicans provided great leverage. They won on the "no new taxes" and "cuts exceeding limit increases" principles, even if the math is fuzzy. The direction of the national discussion has been shifted.

- In business it is rare for negotiators to highlight their opponent's shortcomings - your own stature is enhanced if the opponent is enhanced. Both President Obama and Majority Leader Cantor became personal while denigrating the other's supporters and motivations.

2. Politics is the art of the possible. Republicans will not accept tax increases; Democrats will not accept meaningful entitlement reforms. Without either (and with honest accounting) it is not possible to cut spending enough to get through 2012. We will muddle through the next election - quite likely with a rating downgrade and higher interest rates even before inflation takes off.

3. The real issue is a disagreement about the size of government. In the last decade we have increased from an historic 19-20% of GDP to 24-25%. Part of that was President Bush's agreements with Teddy Kennedy to increase federal education spending (No Child Left Behind) and a Medicare prescription drug benefit as well as the wars in Iraq and Afghanistan. The Democrats have brought a quantum increase from there with a disdain for any budgets. There is no middle ground.

4. Big changes take a couple of election cycles. The Pelosi-Reid-Obama tide had huge electoral successes in 2006 and 2008 and with that they could just barely muscle through their top priority - Obamacare. With 23 Democrats and 10 Republicans up for election in the Senate in 2012, it is likely that the Republicans' 2010 wave will be followed by a takeover of the Senate next year. With 9% unemployment it is likely that they will also take the presidency, allowing a rollback toward the 20% spending level.

5. It is easy to get distracted. As important as the deficit is long term, today's economic and political problem is jobs. With increased deficit spending off the table (tax cuts; another stimulus) there are few actionable employment ideas in Washington and no Democratic relenting on regulation - EPA; NLRB; financial sector; Obamacare. Recovery, if there is to be one before 2013, will be up to the private sector.

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This week's video is a concise but impactful explanation of the growing cost of interest on our national debt.

Please visit my new web site at www.BillBowenAuthor.com

Financial Malaise

    The cognoscenti have determined that a jobless rate below 7.2% is the key to Obama's reelection. If only he can somehow get the jobs machine going ... at least for a few months next summer. But the problem is a lot bigger than that.

    1. The worker problem. Sure, jobs is a big issue with the Congressional Budget Office predicting a headline unemployment rate of 8.2% next year - a half percent above when Obama took office.  Obama may be able to goose it a bit by extending employer Social Security tax holidays and finding some more 'shovel ready projects"; but employers will become increasingly interested in holding back until a hoped for better day in 2013. (I am in the perhaps minority who believe that as the election approaches small business owners will really, really, really want Obama to lose.) The big factors are long term anyway - globalization; back office automation; the housing industry depression (see below.) And, if he is going to court the Hispanic vote, he may have to explain to the 13.6 million mainstream unemployed why the presence of 12 million illegals isn't a big contributor to their unemployment and compressed wages.

   2. The homeowner problem. For better or worse the major asset of many middle class Americans is the old homestead. With Barney Frank leading a large bipartisan parade, we increased home ownership from the traditional two-thirds of the public to almost 70% and home prices increased much faster than inflation or rental rates. Well, numbers revert to the mean and most experts believe that prices will continue to fall and new construction will remain constrained for several years.  Due to low downpayment standards and falling prices, about  a quarter of owners are under water. There will be another round of blaming the banks - and perhaps another effort at "loan modifications" -  but there is no way that homeowners will be in a good mood in 2012.

   3. The retiree problem. This could be the biggest political problem if properly explained by the Republicans.

        -  By now everybody (except Harry Reid) understands that Social Security and Medicare are unsustainable.  If the Democrats won't allow an honest discussion of the issue issue until after some distant election, they will be the party of the status quo. The Republican candidate just needs to be empathetic and promise a plan to save the basic benefits.

        -  More important is the second component of Jimmy Carter's "misery index" - inflation.  The Left may be able to convince people not to worry about what trillion dollar deficits will do to their grand kids, but if Republicans show retirees on fixed incomes the impact of a 10% inflation rate there will be a lot of support for those who want to attack the budget deficit now.  For those who have missed it, the latest Consumer Price Index reading was 3.6% (about twice the Fed's target), and inflation on imported goods (partly because of the unstated "weak dollar" policy) has been much higher.

        -  Perhaps most importantly, this discussion is as much about uncertainty as about facts. Few retirees have a solid understanding of their resources and future requirements; fewer have adequate resources to comfortably survive what debt-driven inflation will bring if deficits are not brought under control.  For these people a 65% "wrong track" polling number reflects real anxiety.

    All of which explains why James Carville's statement was "It's the economy, stupid", and not just "It's jobs, stupid."  As it stands, Obama projects to do well except for those who want jobs, those who have houses, and those who are retired and living on fixed incomes.  For the rest, the "stay the course" message may resonate.

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   This week's video and the accompanying article by mainstream scientists are about recent evidence anticipating a prolonged decrease in sunspot activity beyond the normal 11 year cycle.  Such a "Maunder Minimum" is associated with an absence of sunspots between 1645 and 1715 and a concurrent "Little Ice Age". Oops.

bill bowen - 6/17/11

Boeing: A Jobs Case Study

    For those who wonder if the Obama administration's policies really affect job creation, the decision of the National Labor Relations Board to try to block Boeing from installing a production line at their factory in South Carolina to produce their 787 Dreamliner should answer the question. The facts are straightforward:

    1. Boeing bought the factory  in North Charleston - which made Dreamliner components - from Vought Aircraft in July 2009. The local workers voted to decertify the International Association of Machinists union in September. In November Boeing announced expansion to assemble about one third of the Dreamliners with 4000 additional  employees. (Boeing will still be hiring to produce two thirds of the Dreamliners in Seattle.) Production begins in mid-2011 with deliveries in early 2012. Labor costs will be lower and, more importantly, the impact of a potential strike in Seattle will be diminished.  

  2. The commercial aircraft industry is a cornerstone of American manufacturing and exports. Boeing employs 159,000 people in 60 countries in high paying aircraft and aerospace jobs. They have "bet the ranch" on a new generation of aircraft, the 787 Dreamliner, which is currently in flight testing with almost 700 orders from over 50 global customers after three years of technical delays. Boeing's aircraft manufacturing is concentrated in the Seattle area where aggressive unions have frequently called extended disruptive strikes.

    3. The global commercial aircraft industry is dominated by Boeing and European conglomerate EADS  with a few smaller competitors. China has identified aviation as a priority for their national industrial strategy - the Aviation Industry Corporation of China (AVIC) will be a formidable competitor in a few years.

    4. If America had an industrial strategy it would focus on those industries which have a high technological content and in which we are globally competitive - such as telecommunications, computers, pharmaceuticals, automotive, energy, and aerospace.  Policies would encourage keeping these jobs in the United States.

    5. The Obama administration has been a disappointment to the labor unions - despite the fact that Andy Stern of the Service Employees International Union and Richard Trumka of the AFL-CIO have enjoyed ready access to the president. In 2009 and 2010 when the Democrats controlled the House and Senate Obama did not deliver "card check" which would have eliminated secret ballots for union organizing votes (placing all of their efforts behind Obamacare instead), and many feel that the administration has not been visible enough in public employee pension debates. As the 2012 election cycle begins, a chit is being called.

       6. Most broadly, this is the latest chapter in the battle between organized labor and the 22 "right to work" states where employees cannot be forced to join a union as a condition of employment. It is a replay of the auto industry in the 70s when foreign manufacturers agreed to limit imports and placed their US manufacturing in the South. In general, these states have lower unemployment and lower wages. Over recent decades it is these states where manufacturing jobs have been created.

    7. In this specific case the charge is that Boeing is illegally retaliating for past legal strikes in Washington state. Boeing's claim is that it is a forward-looking strategic move to disperse their manufacturing - and that they are concurrently increasing jobs in Washington. The NLRB, stuffed with Obama appointees, agrees with the union.

    8. While it is highly likely that Boeing will prevail, South Carolina's concern is that less well financed employers will be deterred from establishing production there. That is the objective. Whether America remains the world's largest manufacturing country with high skill, high paying jobs is apparently not the administration's concern.  

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    So, last week I heard an MSNBC commentator talking about how the Paul Ryan budget has been getting the same hostile reception at Town Hall meetings that Obamacare did. Here's an example in Ryan's swing district in Wisconsin.

bill bowen - 5/6/11 

Economic Politics

    There is a thought that the only economic number that matters for President Obama's reelection is the headline unemployment rate as of November 6, 2012. Unfortunately, reality is a bit more complex.

    I am among the group that believes that a "Budget Grand Bargain" is needed if the country is to avoid effective bankruptcy. Paul Ryan offered his half - Medicare reform; Medicaid reform; discretionary budget cuts; some military spending cuts; cleansing the tax code of loopholes - hoping that President Obama would respond with Social Security reform, more military cuts, and some increased taxes. Unfortunately Obama chose to use Ryan's opening offer as a foil for his 2012 presidential campaign. Standard and Poor's responded with a warning that they might downgrade US debt from its AAA status. (A downgrade from AAA would prevent many pension plans and mutual funds from holding Treasuries.) Oy vey.

    Polls show that the American public is confused and schizophrenic. They (we) want balanced budgets, and a cap on the authorized debt limit, but oppose changes to Social Security or Medicare, higher taxes on themselves, and many discretionary spending reductions.  Obama offers "shared sacrifice" by increasing taxes on the top 2 % with half of the public paying no federal income tax at all, unidentified cuts to Medicare costs, unidentified cuts to military spending, and a trillion dollar reduction in debt service costs. The cynical political bet is that voters will care much more about short term jobs than long term debt, that the "blame Bush" argument has legs, and that he can demagogue the "rich bankers" in public while taking their donations and protecting their profits and bonuses in private.

    Even if you can fool 51% of the people often enough, there are several reasons why this "continue to march" approach will likely not work:

    1. The game will change.  The Fed's program of buying $600 billion of treasury bills to keep interest rates low will end in June and is unlikely to be extended. Extended unemployment benefits will expire well before the election.

    2. Central banks in Europe and Asia are increasing their interest rates to control inflation. As the fed keeps our rate near zero in a futile effort to support housing, the value of the dollar has declined an average of about 10% in the past year and the decline is accelerating. The result - exporters of commodities such as oil which are priced in dollars have increased their prices to maintain revenues. Jimmy Carter got us to 13% inflation by a similar route.

    3. Housing will not be robust. We artificially increased the portion of home ownership from its long term 65% to a high of 69% and it will take years to work off the excess. Foreclosures will continue; the "refinancing ATM" is history.

    4. Even in the best of times,the twin forces of globalization and technology are helping millions of people around the world, but the American middle class is being hollowed out.   With no business experience or perspective in the administration, Obama has nothing to say or do about the central problem. (This is Romney's wheelhouse.)

    With a billion dollar war chest, no international or domestic accomplishments to point to other than passing the unpopular Obamacare, and nothing to say about creating real jobs, it is no surprise that Team Obama is taking the low road of class warfare.

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    This week's video is an amusing MSNBC/Huffington Post explanation that Obama's low ratings are a result of being dragged down by the Republican Congress' low ratings.

bill bowen - 4/29/11  

2012: Setting the Baseline

    With the realistic 2012 presidential candidates - Obama, Romney, Pawlenty - launching their campaigns amid little chance of major bipartisan budget compromise, it is useful to understand the metrics that will determine success before they get too twisted by the candidates and the media. Where are we now, really; and where will we likely be in the fall of 2012.

1. Current prosperity.  

    -  Jobs. Headline unemployment is 8.8% - a point above what Obama said we would face without his stimulus plan and 3.4 % above when he took office. The full number is more like 16%. Both are trending down a bit - the recession officially ended 18 months ago - but are unlikely to be anywhere near the normal 4 to 5% considered "full employment. Average hourly pay is also down. Extended unemployment benefits - now up to 99 weeks - will expire in January 2012. 

    -  Inflation. The "core" CPI rate has started to creep up to a still benign 1.1 % in February; with food and energy it is 2.1%. With unemployment high, labor costs are not a problem and housing prices continue to fall, but commodity costs (oil etc.) are rising fast, and import prices are rising due to a weak dollar.  For those with short memories, Jimmy Carter got us to 13% in 1980.  

    The campaign thread: we didn't know how bad Bush left things. Reality: most of the other G-20 countries are doing better than our 3% growth rate and are taking stronger steps to reduce deficits and control inflation.    

2. Future prosperity.

    -  The public understands that the current $14.2 trillion dollar debt is a big problem for our kids and grand-kids and will presumably punish any candidate that doesn't have a realistic plan to control it. The arc hasn't changed yet and the amount will probably be $16 trillion before the election - with the current deficit of 10.8% of GDP the greatest in the developed economies.

    -  The Fed's program ( click here for a humorous explanation of Quantitative Easing II) of buying almost all of the new government debt to finance deficits will end in June. The largest private purchaser of bonds, Bill Gross' PIMCO, has stopped buying Treasuries and has started shorting them.  Look for a big rise in rates from today's 3.6% for 10 year treasuries with a huge negative impact on borrowing costs as Treasury looks for somebody to buy a net increase of $30 billion per week.

    The campaign thread: we didn't know how bad Bush left things. Reality: President Obama has increased the debt from $9.2 to $14.2 trillion in 2 plus years.

3. National security.

    -  Wars. We currently have 47,000 troops in Iraq, and 98,000 in Afghanistan. Pentagon officials have been hedging on commitments to be out of Iraq by year's end and to start withdrawing from Afghanistan by July 1.  A muddled "kinetic military activity" continues in Libya.

    -  Proliferation. North Korea has been quietly starving as the transition to Kim Jong-un proceeds. Iran's joining of the nuclear club has been slowed by the Stuxnet computer worm which has apparently set back the Iranian nuclear program by a couple of years. Pakistan remains a risk with the US relationship badly deteriorating. The best that anybody can hope for is no news.

    -  Terrorism. Osama bin Laden remains hunkered down while the "Arab Awakening" contains risks of new Al Queda refuges in Yemen, Libya, and elsewhere. The best that anybody can hope for is no news.

    The campaign thread: we didn't know how bad Bush left things. Reality: the Obama policies look more and more like Bush's - lock up terrorists and promote democracy; there is no plan for the Arab world.

     Things will definitely change between now and next November, but history won't - except in the speeches of the politicians and their media supporters.

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This week's video is for those unclear about President Obama's perspective on increasing the debt limit - at least when he was a senator and George Bush was president. He now regrets the vote - without mention of the rhetoric.

bill bowen - 4/15/11

Paul Ryan's Leadership Lesson

     Paul Ryan has presented a vision of a fiscally sound America with the federal government consuming the historic 20% of Gross Domestic Product.  Barack Obama has presented a vision of an America where federal spending continues at his accelerated 25% of GDP and accumulated debt exceeds that of the weakest countries in Europe.  This is the beginning of a long negotiation - the Democrats will add increased taxes and mount a vigorous defense of Obamacare; the president will be challenged to add Social Security reform to the mix.

    Ryan has been preparing for this moment for a long time: he was the minority leader on the budget committee when Nancy Pelosi ran the House; he presented a "Roadmap for America"; he served on Obama's Budget Deficit Commission; he developed the controversial Medicare/Medicaid  portion of his budget proposal in conjunction with prominent Democrats including Alice Rivlin who was President Clinton's budget director.  He knows his numbers, believes in his policies, and presents them with passion and charm knowing that he will be vilified and distorted by Democrats and the media.

    Contrast that with Obama's demonstrated leadership failures just this week.

    1. He sent out Eric Holder to announce retreat on his "firm, principled commitment" to close Guantanamo and prevent trial of terrorists by military commissions. This had been the subject of much campaign rhetoric, but not much administrative or political effort by Obama at several opportunities over two years.

    2. Al Jazeera has attributed Obama's "ambiguous and half hearted" efforts in Libya to his aversion to anything resembling George Bush's push for democracy in the Middle East or Bill Clinton's ignoring the slaughter of 800,000 Tutsis in Rwanda.  Meanwhile Obama called for the removal of President Saleh in Yemen with no idea what that would do to the home of Al Queda in the Arabian Peninsula.  Saudi Arabia has made known its discomfort with Obama's tepid support. Most Americans do not know what our policy is or who we are protecting in Libya.

    3. Rep Louis Guiterrez (D - Ill) began a 20 city tour to protest Obama's abandonment of his immigration promises from the 2008 campaign.  Unable to appease the Hispanics who want comprehensive reform and organized labor which wants protection from a wave of low cost competition, he has given speeches but done nothing.

    4. Obama sycophant Ezra Klein of the Washington Post has criticized his messiah for "whiffing" on his 2012 budget and the State of the Union, allowing Ryan to set the budget conversation on his own.

    5.  After posturing about the need for everybody to do whatever it takes to get a 2011 budget agreement, Obama went off to political meetings in Philadelphia and New York - the Democratic calculation apparently being that the Republicans will suffer more from a government shut down.

    With Obama moving on to his reelection campaign and Ryan able to focus on the country's economic future, it is ironic that Ryan's success may actually be Obama's salvation. 

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    This week's video(s): a parody of the president's first reelection commercial which received more hits than the blah, blah, blah  real thing.  

bill bowen - 4/8/11

Fiscal Responsibility: Adult Behavior

    For the next few years elections will be won or lost on the issue of fiscal responsibility. Everybody was scared by the collapse of 2008, understands that trillion dollar deficits are unsustainable, realizes that Social Security/Medicare/Medicaid must be scaled back (the sooner the better), and that the fat years must be followed by some lean years.  If President Obama remains AWOL and the Republicans don't let the Democrats divert attention to "birthers", gay marriage, or "union busting", the day is theirs. Short term noise may be disappointing, but the tide should turn by mid-year.

    -  Round One. In a demonstration of extreme juvenile mismanagement Speaker Pelosi made no effort at a budget for the 2011 fiscal year which began in October, instead passing a "Continuing Resolution" effective through March 4, to keep spending at 2010 levels (24% above 2008)  Unlike Pelosi, Speaker Boehner has allowed bi-partisan debate and amendment in committee and on the House floor to arrive at $61 billion in cuts for the current year and has offered an extension in exchange for small pro-rata cuts. Reid, hoping for a shut down that he can blame on the Republicans, offers nothing.  In round one he may have the stronger hand.

    -  Round Two. In April or May the federal debt limit of $14.3 trillion will be reached and presumably raised.  Polls show that a large majority of the public opposes raising the debt limit - a sign of how deep the public's discomfort is rather than belief in a realistic option to be worked out in a month.  (At a similar point in 2006 Senator Obama famously said "The fact that we are here to debate raising our debt limit is a sign of leadership failure. ... America has a debt problem and a failure of leadership.")  Now the spector being trumpeted by Bernanke and Geithner is default on our debt with a disastrous impact on our future borrowing power. Expect a series of small raises designed to keep the pressure on, perhaps with some current spending concessions.  

    -  Round Three. In April the House Republicans will unveil their 2012 budget proposal. While the first two opening shots offer the Republicans leverage and the likelihood of some progress, they do not reflect the comprehensive blueprint that the 2012 budget will. Unlike President Obama's proposal it will include entitlement reform. It may include broad tax code reform. It will presumably include an alternative to Obamacare. It will serve as a foil for the ideas of a bipartisan group of Senators (Democrats Conrad, Durbin, and Warner; Republicans Chambliss, Coburn, and Crapo) who wish to draw on the ideas of the Deficit Reduction Commission which Obama formed with much fanfare then ignored. With or without Senate Majority Leader Reid, Democratic votes will be available.

    With President Obama projecting a $1.65 trillion deficit and no entitlement reform in his 2012 budget proposal, and with nothing from Reid, the issue of the day has been handed to the Republicans. "Just say no" may be an effective legislative tactic but it will not solve the nation's financial problems or get public support.  To this point the Tea Party has shown it to be serious (killing a big defense contract in Boehner's district), Boehner has shown himself to be reasonable (offering negotiation and modest cuts for extensions), and Budget Chair Paul Ryan is the perfect spokesman to lead an adult conversation. This is a marathon, not a sprint.  

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    If there were any question about Obama relation with the public employee unions - other than the twice -a week White House visits from their leaders -here's a frightening video from 2008.

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    And a special bonus: Nicholas Kristof's NYT op-ed on Libya. There are things that we should be doing while the result hangs in the balance - offer sanctuary to naval and air forces who refuse to attack their own people, declare a "no fly zone" (as we did to Hussein in Iraq) to prevent Gaddafi from attacking opposing elements, freeze the foreign assets of his family. Our international stature declines daily as we do nothing.

bill bowen - 2/24/11 

Chinese Relations: Scruting the Inscrutable ChiComs

    Discussions about President Hu Jintao's recent visit to the United States have been remarkably shallow, given the importance of the relationship between the two countries and the availability of information. Perhaps it is a European bias in our East Coast media or our current sense of national financial angst that prevents a meaningful discussion. (It did give Obama an "investment" theme for his State of the Union address.)  I will provide a perspective on this most important relationship nurtured out here on the West Coast.

    The Chinese leadership - not a single dictator; a Politburo of a couple dozen members - must feel quite good about themselves. With the past decade's annual 9% GDP growth they have lifted 300 million people out of poverty and passed Japan as the world's second largest economy. They have had no wars. They were little affected by the 2008 global financial meltdown. They enjoy the traditional "Mandate of Heaven".

    The century before this had not been so harmonious for the Middle Kingdom: the Boxer Rebellion; Sun Yat Sen's overthrow of the Qing Dynasty in 1912; World War I; Mao's Revolution; World War II; the Korean War; the Great Leap Forward; and a few million casualties from other internal and external conflicts. Today's leaders grew up in these latter days. They like peaceful, prosperous order.

    China's self-image has been helped by the shaking of the Western economic system, but they do have their problems. They have lost their family-based social security system as hundreds of millions have migrated for jobs and government policy has required a single child; thus a high personal savings rate. Lack of confidence in the currency and the stock market has driven a real estate bubble. Highway construction has not kept up with 12 million auto sales per year. Pollution abounds. Despite a population four times the US, their GDP is still only about one third of ours - one tenth in per capita terms.  

    So what do we need from them?

        1. Support for a soft landing while we get our financial house in order. That means reasonable currency and export policies and continued purchases of our debt.  In exchange they'd like to see a plan. (So would I.)

        2.  Peace in East Asia. Mostly this means corralling North Korea. A low profile in neighborhood disputes would be a bonus. (Their recent test of a "stealth" aircraft matches where we were 30 years ago.  Our military budget is six times theirs.)

        3. A market for our agricultural and tech stuff. We are still the world's largest manufacturer and have a comparative advantage in computers, telecom, pharma, aircraft, and a number of other industries.

    And what do they need from us?

        1. A continued market for their lower end stuff. They still have a couple hundred million more folks in the interior to get off of the farm and become consumers and they need jobs to soak up internal migration.  And as their labor costs increase, global manufacturing of textiles, shoes, and plastic junk moves to Bengladesh and Vietnam. But WalMart still becons.  

        2. No meddling in their internal affairs.  Democracy activist  Liu Xiaobo and Tibet independence leader The Dalai Lama do have more Nobel Peace Prize "cred" than Barack Obama, but there is understandable resentment that the West would focus on a developing democracy rather than more worthy honorees in Russia, Pakistan, Africa, or Latin America.

        3. Respect. This was the gift of Obama to the Chinese, as "parity" was trumpeted in the Chinese press.  The reciprocal gift?

    It is ironic that we have been lurching toward an enlarged central government which intervenes extensively in the economy while the Chinese success is driven largely by an adoption of capitalism. (Their favorite presidents are probably Nixon who opened relations and George W who allowed a massive trade imbalance.) We will inevitably compete with the Chinese for natural resources and we need to stand up for our friends in the neighborhood, but the Chinese have never had global military ambitions. They do not export religious zealots. And they don't insist that the rest of the world adopt a One Child Policy, outlaw the burning of coal, or speak Mandarin. We could do a lot worse for a partner with whom to share global leadership in the new century.

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    This week's video is Paul Ryan's ten minute response to President Obama's State of the Union address.  Obama has apparently made the political calculation to ignore the recommendations of his Deficit Reduction Commission, put on a sunny face, and defer to the leadership of Ryan and the Republicans on all matters financial.  While that may be good cynical politics, the experience of Chris Cristie suggests that the American people are at the point where they will reward adult supervision. Let's hope.

bill bowen - 1/28/11  

Job One : Jobs

    With everybody writing about House and Senate procedures, President Obama's wonderful 50% approval rating, and Sarah Palin's intentions I'd like to focus on the much mentioned but little understood subject of what can be done about jobs. Lets take three time frames.

    1. The Crisis. With the 2008 financial crisis we went from an historic nominal 5% unemployment rate to about 10% where we remain today. Government intervention did prevent much higher numbers: the automobile industry would have been much worse; the stimulus plan did allow state and local governments to avoid layoffs; the extension of unemployment insurance did help consumer spending. Each had their faults, but they did help employment. That was then.

    2. The Economic Cycle. We now have had about a year and a half of modest GDP growth, the stock market has recovered from its post-Lehman Brothers collapse lows, and corporate profits and cash holdings are strong. But some things make recovery more difficult than usual: banks received a "near death" experience and are cautious; states and public employee pensions are broke; housing will not recover until we work off the excess inventory built over the last decade; and the weaklings of the Eurozone were exposed. Business people think in the future and like certainty before they commit capital or hire. The Democrats have provided no budget, no appropriations bills, no plan for individual or corporate tax rates, no plan for Medicare, no plan for Social Security, and no plan for eliminating trillion dollar deficits. Instead we have environmental regulations, costly health care mandates, financial regulations, and a lot of rhetoric about punishing Wall Street and "the rich". Over the next few months the new Republican House will do everything that it can to correct these problems. Their success is key to Obama's reelection.

    3. The Undiscussed Long Term Structural Problem. Technology took the United States from a country with 75% farmers in 1870 to one where 2% of our people can produce more than we consume. Since 1980 manufacturing employment has decreased by seven million (37%) while manufactured output has increased by 75% and we are still the world's largest manufacturing nation. Over the last few decades the information revolution has followed the manufacturing revolution, eliminating swaths of jobs. So with the companies and the majority of the people doing just fine, the question of great moral and political consequence is "what do we do with the workers that we don't need?"  

    The primary answer: shrink the work force.

        -  Some of this will happen as Baby Boomers retire and are replaced with a less populous generation. Politically neutral.

        -  Some will happen if we keep young people in school longer - a side benefit of their getting the skills that they will need. Politically popular.

        -  Some will happen if people retire earlier. Unfortunately the financials of the Social Security system and the individual damage of the 2008 financial meltdown push in the opposite direction. Politically difficult.

        -  Revert toward one income families. In 1900 20% of women were in the work force; now it is about 75%. The numerical impact of women entering the work force over the past half century has largely played out, but some reversal would be helpful (for either spouse.) Politically incorrect and difficult.

        -  Reduce the number of hours that people work per year: where 40 hours per week at 50 weeks per year would be 2000 hours, the US has stayed steady since 1980 at about 1800 while the Europeans have dropped from parity with us to 1400 to 1700. Politically possible.   

        -  Control immigration. Extended unemployment benefits mute the movement, but willingness of American workers to take jobs as cab drivers, field hands, factory workers, dish washers, and gardeners would get us back to historic unemployment rates. Politically difficult, but a looming factor.

     Rather than class warfare about punishing the rich, the national debate should be about how to make the economics work for people who are working less.  

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    For those who think that the labor movement would be part of the answer for workers and jobs, this interview with Richard Trumka, the president of the AFL-CIO, shows a very different priority.

    And for those seeking a bit more humor, this video arrived as we were struggling with a new Kindle and a new laptop. Happy New Year.

bill bowen - 1/7/11

Obama's 2011 Opportunity

    By this time next year we will know whether the Republicans have been able to pull Barrack Obama's chestnuts out of the fire.

    For the record we should note that when the Republicans take control of the House in another week the Democrats have no budget for the current fiscal year, no appropriation bills, no plan to reduce the trillion dollar budget deficit, no chief presidential financial advisor, and nobody with business experience in the president's inner circle.  To be fair, we do have modest 2 to 3% economic growth - low for this point in an economic cycle and well below the world's developing economies, but stable growth none-the-less. To be more critical, the financial system stabilization program (TARP) was passed by George Bush and Hank Paulson while the Obama Stimulus Plan has been of much more questionable value and unemployment is stuck at a number that would virtually guarantee a Republican president in 2013. Obama must know that he needs help.

    But there is a happy convergence in 2011: propelled by the Tea Party movement and before we get into the contention of a presidential election year the Republicans come ready to take the heat for a general roll back in spending to 2008 levels, an apparent willingness to take on entitlements, and in Paul Ryan a lead spokesman who actually has the draft of a plan for financial stability.  Amid the howling of the Paul Krugman's and the Huffington Post there is a chance - I believe a real chance - that Obama understands that financial medicine is badly needed, that the Left will never prescribe it, that he can get a fair share of the credit for having appointed the Debt Reduction Commission, and that he will be able to work with the House leadership.

    The biggest obstacle remains Health Care Reform II where a bit of kabuki is required. The Republicans are compelled to attempt repeal which will be defeated in the Senate or vetoed by Obama. For his legacy Obama must retain the expanded scope of coverage in a system where the cost of insurance coverage is split between employers (for most) and the government (for the poor and older voters.) The risk of the Supreme Court eventually declaring the enrollment mandate unconstitutional and the continuing escalating costs of coverage (what, we can't cover 30 million more people and reduce the total cost?) provide an incentive to compromise and Obama would probably like a way out of the cost containment deals that he made with the hospitals, doctors, nurses, drug companies, trial lawyers, insurance companies, and equipment manufacturers. A few people in a closed room without lobbyists could probably figure out how both sides can win.

    So, 2011 can be the Year of the Grand Deal.  It certainly doesn't escape notice that Newt Gingrich's Contract With America in 1994 brought financial discipline after Bill Clinton's first two years, that the Republicans overreached, and that Clinton would be broadly acclaimed for his economic management - even if the Republican House forced it upon him and he benefited from Al Gore's invention of the Internet.

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   In the spirit of filling a void in knowing about important politicians, this week's video is a 2008 commercial for Congressman Mike Pence of Indiana who is running for president as a doctrinaire social, fiscal, and national defense conservative. He is in the "all others" category in terms of polling, but sets the standard for the Right.     

bill bowen - 12/31/10

The Year of the Child

    As I get older I fear sounding like Ebeneezer Scrooge - particularly at this time of year - but a number of recent events have made me look askance at the behavior of the children (with an apology to those under 20.)

    WikiLeaks. A definitive article by George Friedman in STRATFOR on the three rounds of disclosures points out that none have provided "new news" for those who have been paying attention, that the first two on the wars in Afghanistan and Iraq put some of those who have helped us at risk, and that the State Department cables reveal no duplicity or illegality.  One striking point ignored by the site's founder, the naive anarchists on the Berkeley City Council, and the Russian call for a Nobel Peace Prize is that conflicts between countries can be solved by armed conflicts or by diplomacy, and diplomacy requires frank discussions and exploration of alternatives with confidence that such conversations will be handled discreetly. The press focuses on the gossip and the anti-Americans have a brief high, but American diplomacy is the real casualty.

    The end of the party. Not to be confused with the $858 billion bill to extend tax rates, prolong unemployment insurance, and reduce Social Security tax rates (plus some help for ethanol and other stuff), on December 14 the Senate Democrats sprung a 1,924 page $1.1 trillion "omnibus spending bill" for 2011 (with over 6500 earmarks) which must be approved by December 18 to avert a government shutdown. (Concurrence with the House's proposition to punt to the new Congress had been expected.) Congress has been operating on "continuing resolutions" (spend at current levels) since the fiscal year began on October 1 rather than go through the messy hearings and trade-offs of doing a real budget and passing targeted appropriation bills. This last suck at the punch bowl may be defeated in the Senate or House, but many lame duck members are deaf and it may actually pass. (Update: After publication Senate Majority Leader Reid, recognizing unified Republican opposition, withdrew the bill while citing the legitimacy of earmarks and the independence of the Senate from the White House.)  Circle January 3 on your calendar for when the adults arrive.

    Playing with trains. Out here in California we are thankful to Secretary of Transportation Ray Lahood (and the newly elected governors of Ohio and Wisconsin who rejected the gift) for the recent $3.5 billion of Stimulus funds to lay track (without electrification or trains) between two small towns in the Central Valley. This is a bit hard to explain to folks east of the Sierras, but in 2008 we passed an initiative for a $40 to 50 billion high speed rail network, with a first $10 billion to pay for the consultants, lobbyists, designers, and prototype folks with the expectation that the feds (you) would pay for the rest. Meanwhile we are stalled on a $13 billion project to supply water for one fifth of our population, the farmers in the Central Valley, and the delta smelt ... oh, and we are broke. I have visions of the grandkids some day going to visit this quaint "short line" partially covered by sand dunes.  

    But that's not the way that Bob Cratchit would see it. Next week I'll try to find something in the spirit of the original Tiny Tim.    

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     Actually, regular reader Herb McClannan has submitted this video which strikingly shows the health and wealth progress of mankind over the past couple of centuries. Spectacular. Perhaps we just need a long enough perspective and a good statistician.

bill bowen - 12/17/2010

Why Repeal Obamacare: One Perspective

    With John Boehner touting "Repeal and Replace" of health-care legislation to be a top priority of the next Congress and President Obama holding a veto, it may be useful to think about how great the surgery needs to be. I've asked frequent commenter Bill McCormick for his thoughts from a small business perspective.

    First, what does McCormick know about small business? He has some academic credentials - a Harvard Business School graduate program for small business owners - but, more importantly he has a 40 year history of starting successful small businesses from management recruiting and business travel agencies to innovative Hallmark shops, to off site electronic data storage. His "top 25" management recruiting firm in particular gives him insight into the thinking of a broad range of businesses large and small.  

    Some of his thoughts:

        1. The political system caters to the large corporations. That is where money for political campaigns is more easily raised, lobbyists are employed, and large blocks of voters can be found.  And the companies like General Electric, Bank of America, and Boeing are politically agnostic - whoever will address their needs. Small business owners on the other hand have not been of much interest to the Democrats.   

      2. With large scale, low skill manufacturing migrating overseas, we are left with an economy in which 75% of our 107 million workforce is employed in businesses averaging 10 or so employees - flower shops, builders, computer services, landscaping, and professional practices. Some do make stuff. This is a turbulent environment where most businesses last just a few years with many of the successful ones being acquired by larger firms. In the section of the economy served by small businesses Return on Investment is often too low, complexity is too great, customer interaction is too demanding, and change is too rapid for large corporations. But this is where job creation must happen.

        3. The 2010 health-care reform did not change the basic premise of employers bearing the cost of insuring most of the populace and did not do much of anything to reduce the costs in the system. Government funding pays for some of the expanded coverage, but popular mandates like "preexisting conditions" and covering children to age 26 fall back on to the insurance companies and to the people paying their bill. McCormick's company rates had an average annual increase of 9% for Bush's last three years and 25% for Obama's first three. It is a sample of one, but representative.

        4. Many of the features of the current system and Obamacare are particularly burdensome to small businesses: small insured pools which cause single large claims to cause rate spikes (A. allow large pools across state lines); disproportionate effects of a catastrophic illness or disability (A. let the government handle truly catastrophic illnesses); provisions which prevent older workers from relying primarily on Medicare (A. allow workers over 65 to use Medicare with a company-paid supplement); higher risk that the small business insurer will go out of business, leaving the insurer on the hook (A. see larger pools above); and burdensome federal reporting (A. as a start, get rid of the Obamacare requirement for reporting all company payments over $600.) More broadly, get beyond insurance and go after the real cost reductions - tort reform; competitive pricing for pharmaceuticals and equipment; nurse practitioners; neighborhood clinics.   

         5. Many of the answers are simple if the administration were to listen to small business owners. Instead, if one were cynical, one might think that the intent was to drive small business owners to eliminate their coverage (incurring a modest fine) with the result that the majority of American workers would obtain expensive individual policies and create a demand for the government to take over the health insurance industry.

    There are other things that would greatly invigorate small businesses - expand Small Business Administration-type loans for proven small businesses and promising start-ups; prevent higher interest rates or lower lines of credit for business borrowers who are current on payments; provide certainty on taxes; avoid union bias in government contracting - but eliminating the disincentive to hiring caused by the health-care legislation would go a long way toward getting the economy going.  Correcting Obamacare is a legitimate top priority.

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    This week's video is an interview with Joe Lieberman about the WikiLeaks fiasco. (I had thought about an article on this subject, but am just too bummed out.)

bill bowen - 12/3/10

California's Parallel Universe

    A friend recently asked what San Francisco's bond rating getting downgraded had to do with Sharon Angle and Christine O'Donnell's losses in the last election. I will try to connect the dots.

    We're broke. The American public knows it. They turned over at least 63 House seats, 6 Senate seats,  a dozen governorships, 20 chambers of state legislatures, and untold mayors and dog catchers to Tea Party-led Republicans. Sometimes an election turns on a scandal, a major personality, an international crisis, or social issues. Not this time - the public rejected the liberal policies of the Democrats. Among the candidates propelled by the tide were some with great promise - Marco Rubio and Nikki Haley for example - and some that would not have achieved much attention or success in a normal year - Angle and O'Donnell among them. For the defeated Democrats it is much more comforting to talk about the few than the many.

    Out here in California the same factors exist. We've got among the highest unemployment rates, housing foreclosure rates, structural state budget deficits, unfunded public employee pension liabilities, and an evaporating tax base. But the political establishment and the voters have a different set of priorities. While the rest of the country is looking for adult supervision and jobs, Californians continue to oppose oil drilling and nuclear power, and instead reaffirmed the country's most stringent environmental regulations knowing that they will drive up utility costs and further reduce manufacturing and the tax base. And they turned the governorship from Republican to Democrat while keeping the Democrats'  large federal and state legislative majorities and almost all state offices.

    It really is the voters, not some diabolical plot of the media or corrupt politicians. Its not even that the Republicans didn't have decent candidates or enough money to spend. If there is no money for schools, water projects or roads, at least we are doing our part for global warming. The icing on the fiscal irresponsibility cake was in San Francisco where a proposition to put modest brakes on public employee pensions was easily defeated by the city's unions and their liberal allies. Two weeks later bond-rater Fitch provided a negative review, citing the City's "persistent and large budget deficits" and "post-employment benefits liabilities". Fitch may not have as much effect as the voters in Ohio, but they recognize that we are on the road to ruin.

    So what can change the game in California other than bankruptcy or an unlikely federal bailout?  I note with some interest that 37% fo the students at the University of California are now Asian and that a majorityof students in the statewide k-12 school system are now Hispanic. Their parents came here for economic opportunity and want their kids to have good educations. They are not environmental zealots and do not use the political establishment's pro-choice litmus test. I don't know how the political restructuring will come about, but it is my hope that the emerging majority will eventually demand government policies which support a prosperous economy.  Whether the Republicans can align with them or whether they will eventually change the Democratic Party remains to be seen.

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    This week's video explaining the Federal Reserve's "Quantitative Easing II" monetary policy is a bit long, but then the subject is complex. And the video is hilarious.

 bill bowen - 11/26/10

    And one final plug for The Target, as discussed on WGN in Chicago.

Obama's Global Hearing Deficit

    If President Obama's domestic electoral "shellacking" wasn't enough to convince him that his financial policies need to change radically, his reception at the G-20 meeting in Seoul should have sealed the deal.

    The Europeans - particularly Britain, Germany, and France - were adamant that fiscal discipline needed to take priority over financial policies designed to goose the US economy. In fact, Germany's position as a minimum practitioner of stimulus measures over the past two years has resulted in a stronger recovery than most other nations - a point which Chancellor Merkel was eager to make.

    China (who has been carrying the global recovery over the past year - successfully "decoupling" in the language of 2008) goes a step further, pointing out (along with Obama's new friend, India) that the issuer of the global reserve currency has a responsibility to the world financial system, not just to its own domestic considerations. Efforts to get the Chinese to upwardly value the yuan are certainly not helped by the Fed's efforts to devalue the dollar.

    A bit more broadly, Obama's international weakness is striking. Yes, he gave a great speech in India and had a feelgood moment in Indonesia, but in the past week he was rebuffed in efforts to establish targets for national trade balances,  and failed in efforts to renegotiate a highly visible free trade agreement with South Korea which Bush had signed in 2007.  (Note: as the former head of purchasing for two Fortune 500 companies, I recognize that there is a time to walk away from a contract. But competence requires that you don't set it up to look like such a failure - and this was overall a good deal despite the UAW's objections.) And an editorial  by Simon Tisdall in today's left-leaning British Guardian reflects that unresolved issues with Europe "encourage the feeling that Obama cares little for Europe'sinterests and even less for its opinions. In short, he is not listening."

    The big point is that the voters have told Obama and the international community has told Obamathat he has to get his financial house in order.  With the Fiscal Responsibility Commission he has an opportunity. Lets hope that he has the strength (not yet shown in either direction on almost any issue) to stand up Nancy Pelosi, the AFL-CIO, Krugman and the others on the Left who have offered a knee-jerk "no way" reactionto the initial salvo from Bowles and Simpson.

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     This week's video is a byplay between the two most important figures in the financial conflict - Paul Ryan the new Chairman of the House Budget Committee and Tim Geithner, Obama's Secretary of the Treasury. I'm betting on Ryan.

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   And here's the interview for The Target that I did this week onRick Kogan's show on WGN radio in Chicago.

bill bowen - 11/19/10

The Obama Economic Plan

   The most significant speech coming out of Washington this month was not Glenn Beck's rally, one of President Obama's political rants, or John Boenher's suggestion that we cut spending back to 2008 levels and freeze taxes. It was outgoing Chairman of the President's Council of Economic Advisors Christina Romer's "valedictory" at the National Press Club. Her main points:

     1. She had no idea how bad the economic collapse would be (thus Obama's famous 8% unemployment limit);

    2. She still doesn't understand exactly why it was so bad;

    3. The response to the collapse was inadequate;

    4. She doesn't have much of an idea about how to fix things.

   When Budget Director Peter Orszag resigned in July and later took issue with with Obama's tax policies, it suggested disagreement about details of the administration's plan. Romer makes it clear that - like Congress having no 2011 budget -THERE IS NO PLAN.

   To the layman, it seems as if a big piece of our financial problem is failure to distinguish between shorter term cyclical problems and longer term structural problems. All of the "sound and fury" coming out of the Democrats for the past two years (aside from health care) has dealt with the cyclical problem - often making the structural problem worse. If Washington listened a bit to The Public, they would realize that The Public understands and wants long term solutions.

    So, the cyclical problem: overbuilding in housing; excessive personal debt; irresponsible financial industry mismanagement; lax regulation. A few trillion dollars later we have deferred some of inevitable pain in housing, saved some banks and car companies, extended the dole for the unemployed, and funded every public works project that could be earmarked. Twenty or thirty years ago we could have afforded that and moved on - but there are bigger structural problems afoot in 2010 and THERE IS NO PLAN.

And a few thoughts on the long term problem:

-- We were living on debt for a couple of decades, consuming more than we produced as a society - we will not return to those levels of perceived wealth. Until we recognize that everybody isn't entitled to a McMansion, a place at the lake, and world travel, we cannot start to rebuild our foundation.

   --  The productivity of the information technology revolution has hit in full force - much as the automation of agriculture and manufacturing did in the past. (We are still the world's largest manufacturer and third largest agricultural producer despite low manpower requirements.) The question for government is what to do about the workers that we do not need. Some logical answers - keep people in school longer; retire earlier; limit immigration of unskilled workers; shorten the work week; move back toward single wage earner families; increase services.

    --  A balance of payments imbalance of 5 % of GDP is crazy. Fixing this - by establishing "ranges of appropriate balance" with our major trading partners - would help to fix the employment problem. The world knows that the balance of the past decade (not only with China) is not sustainable; our politicians favor short term gratification.

 Paul Krugman's bizarre attack on Paul Ryan's "Roadmap for America's Future" is reflective of not only an ideological disagreement with its provisions, but also of a desire to avoid any clarity with The Public about where we are going. Many bought the "Hope and Change" schtick once; this time a more adult America needs a leader willing to discuss a plan.

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   This week's video is an intriguing presentation on the status of social media. At least you read a blog.

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 And a reminder about my new nuclear terrorism thriller, The Target, available in paperback or Kindle formats at Amazon.com and by order from most book stores. Thanks to the readers and friends who are helping organize an October 16 to 24 bookstore/library/media tour in Illinois and Wisconsin - the home of many of The Target's characters.   

The New Republican Congress

Despite Tom DeLay's admonition against overconfidence, I will go with the polls showing a "generic" Republican preference of about 5%, and offer some conjecture about a Republican 2011 House of Representatives. (See the electoral map.)

We've been here before and screwed it up. Lesser lights were the worst offenders: Congressman Duke Cunningham - guilty of taking millions in bribes; lobbyist Jack Abramoff - guilty of defrauding Indian tribe clients and official corruption along with a dozen other White House and congressional aides; Rep Mark Foley - guilty of soliciting a young male page.  While not convicted of crimes, a considerable stink hung over leaders Newt Gingrich (reprimanded in 1997 and fined by the House for ethics violations), Tom Delay (charged in 2005 with violating state campaign finance laws and money laundering), and Dennis Hastert (shady real estate deals.)  Those looking for reasons why Democrats outnumber Republicans 4 to 3 while voters self-identify as conservative over liberal 2:1 should start with the Republican House's decade of corruption. 

This time it is high unemployment and generation-punishing budget deficits that are giving Republicans a chance, and they will be the focus of the 112th Congress.

-- John Boehner, was a junior reformer in the 90's, helped write the Contract with America in 1994, and became minority leader in 2006, following Tom DeLay's resignation. Under his leadership (and with Nancy Pelosi seeking no Republican input), he has been able to hold his caucus to a virtual 100% voting record. He promises to be a solid majority leader.

-- Paul Ryan of Road Map fame will presumably be the Chair of the House Budget Committee.  Wisdom and courage will be required.

--  Ryan is also on the Bowles/Simpson Deficit Reduction Commission which will report in December on recommendations to close the $1.4 trillion dollar budget deficit, giving the administration and the Congress a beginning point for negotiations. Democrat Bowles has indicated that he favors 3/4 spending cuts and 1/4 tax increases, rolling back the recent expansion of government spending from 21 to 24 % of GDP.  Options such as a Value Added Tax will probably not get the 14 of 18 votes necessary for recommendation, but they will receive attention none-the-less.

--  Fortunately, the new Congress should be encouraged by several recent examples of new leaders receiving early credit for slashing spending - Governor Chris Cristie in New Jersey; Governor Bob McDonnell in Virginia; Prime Minister David Cameron in the United Kingdom. Look for the House's "power of the purse" to run into the Community Organizer in Chief's desire to spread the wealth. Obama is smart enough to know - even after the resignations of Budget Director Peter Orszag and chief economic adviser Christine Romer - that wealth has to be created before it can be redistributed.

-- In the short run, voters favor job creation over deficit reduction, suggesting a series of Republican proposals to help the creators of jobs - extension of the Bush tax cuts; a shift of focus on health care from extension of coverage to cost reduction (repeal is not possible with Obama's veto); movement toward real energy independence; a challenge to regulatory expansion; and most importantly, a plan to return to budget sanity.   

--  One concern of the White House will be Darrell Issa, the Republicans' biggest investigator of the administration's alleged abuses, as chair of House Oversight and Government Reform Committee - with subpoena power. Move over Henry Waxman.

-- Finally, it will be interesting to see what happens to the Blue Dog Democrats - or what is left of them - once they are out from under the thumb of Ms Pelosi. With a liberal Democratic president and a Tea Party-energized Republican House, they will remain in "no man's land".

This all assumes that the Republicans' campaign message remains on track, not getting distracted by popular, but less important, issues such as immigration, Muslim mosques, and the corruption of Charlie Rangel. I believe that the Republican leaders get it.

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This week's video is a largely unreported welcome of returning soldiers by President George W. Bush at Dallas/Fort Worth. Whatever his other shortcomings, this is his element.

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And, a plug for my nuclear terrorism novel, The Target, available in paperback and Kindle at Amazon and by request at most book stores.

Entrepreneurs: Hunkering Down

   One way to think about why there is anemic jobs creation while the economy has started to grow and company earnings are good is to look at the entrepreneurial class, as opposed to the large international corporations who have recovered from the Great Recession, and the "working class" who are accustomed to taking what The System gives them, or doesn't.    

The "entrepreneurial class" manages people, real estate, farms, small businesses, and investment portfolios. They figure out the rules, assess risk and reward, and make decisions about how to deploy their resources. They trust their judgment and believe that their decisions have a significant affect on outcomes. With Pelosi declaring that the Democrats needed to pass the health care bill to find out what was in it, and Chris Dodd admitting that we won't know the result of the financial regulation bill for years, those who must figure it out are screwed.

- For the shop owner or restaurateur, how long will customer demand be down; how should they deal with health care - their employees' and their own; will the bank pull the line of credit; what if the landlord goes under; which taxes will go up, and how much; how about undocumented workers?

-  For the farmer, will financial reform affect their ability to hedge crop and fuel prices; should he buy a new tractor; will the bank advance funds for the next planting season; what about his seasonal labor?

- For the small banker, how much will capitalization requirements increase; how much will FDIC fees increase; how will definitions and disclosure regulations change; will consumer credit become unprofitable; how will his borrowers be affected by changes in energy policy; when will the commercial real estate market turn? 

-  For the investor or retiree, what rate of inflation should he assume; what will capital gains, dividend, and estate tax rates be; what will happen to Medicare and Social Security; can he afford to contribute to college funds for kids and grandkids?

The natural response to waves of undefined change for the millions of people who make the decisions that drive the economy is to hunker down. For the disconnected politicians, it is to consider the job done when the 2000 page bill is passed. Let the bureaucrats write the implementing regulations, and move on to find the next apple cart to overturn - energy; immigration; whatever. Small wonder when the Obama administration has the smallest number of people with private sector experience (except lawyers) of any in the last century. This is why nobody is hiring in Obama's America.  

It is no surprise that countries are doing fine where the business managers know the rules - China; India; Brazil; Canada; Germany; Turkey. We will eventually recover, but not until much of the Obama/Pelosi/Reid legislation has been modified, the regulations have been litigated, and the managers know where they stand. Fortunately, we are an adaptive nation, blessed with leadership in technology and higher education in a century that will be dominated by technology and knowledge. Unfortunately, it will take years to undo the damage and let the entrepreneurs make informed decisions.  

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We don't normally endorse commercial products, but this You Tube submission by reader Themis Michos calls for an exception.

bill bowen - 7/23/10

America's Funk

For the first 225 years as a country we could do pretty much anything that we wanted. For the last decade we haven't been able to do much of anything. The liberal intelligentsia blames it on Bush and Obama's timidity; less than a third of the country thinks that we are on the "right track"; the political mood is "a pox on both their houses." What's up?

Well, it has become obvious that "Yes We Can" was a vacuous campaign slogan, particularly for somebody who had never done anything of note, and had never had the personnel and budget responsibilities of a governor or business owner. It is now obvious that he can't:

1. Provide the clarity that the private sector needs in order to get the economy and hiring going again - a long, muddled health care debate that turns the system upside down; a shorter, inconclusive energy debate that threatens huge costs to producers; a long financial regulation debate which does not deal with rating agencies, Fannie Mae/Freddie Mac, and (to a large extent) "too big to fail"; the impending (to be adjusted?) end of President Bush's tax cuts.  What he, Nancy, and Harry have delivered is a $787 billion omnibus stimulus grab bag that many economists would say has done little to stimulate the private sector.

 2. Exercise any financial constraint - compromising away any cost containment provisions in the health care legislation; proposing budgets that project unsustainable deficits for a decade; telling the G20 that he wants another round of spending before the party is over; watching our prime lender, China, call for the end of the dollar's reign as the world's reserve currency.

3. Provide for security - Iran and North Korea; the Mexican border; an objective-less Afghan War; meaningful interrogation of terrorists.  

4. Fix the gushing metaphor in the Gulf - or at least provide skimmers to gather up what cannot be prevented.

So, where can optimists who believe in America's "exceptionalism" look for hope?

1. The first Tuesday in November. It looks increasingly possible that Nancy Pelosi will be out of a job, and that the Democrats will have a narrow majority in the Senate. Hopefully, the Tea Party fiscal conservatives will have enough influence to prevent the Republicans from returning to their pattern of the last decade.

 2. The world's greatest economic engine. We are the unquestioned technology leader in a century which will be dominated by technology. Contrary to conventional wisdom, we are still the leader in manufacturing output, and the patent office granted twice as many patents in 2008 as in 1990. We have the world's most productive agriculture and the best universities. We sit on enough energy if we can get our act together. Ongoing productivity of 3% leads to profitable companies, structural unemployment of some 10%, and a social problem, but that is under our control if we choose. 

3. The political system is self-correcting - perhaps our greatest strength. Many states and communities are starting to require that public employees retirement ages, pensions, and health care contributions look more like the rest of us. Here in California we have taken redistricting away from the legislators and mandated open primaries to help centrist candidates. Now, if we can just do what the Canadians did in the 90's (see last week's posting), and demand that the politicians produce balanced budgets.

Many Democrats who prayed that President Bush would fail now criticize Republicans for wanting the same for President Obama. On many policies this is reasonable - suing Arizona; trying terrorists in civilian courts; spending to oblivion - but in the larger sense we should be hoping that, despite much evidence to the contrary,  he has learned something about management.

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And this week's You Tube - the Obama administration's plan to fix the "undocumented worker" problem in Arizona.

bill bowen - 7/2/10

Learning From Canada, eh

With the world leaders gathering for the G20 meeting in Toronto to debate more stimulus (Obama) versus fiscal prudence (everybody else), there are lots of articles about why our neighbors to the north avoided much of the 2008-2009 carnage. Well, by chance I was recently part of a political tour to Ottawa and Quebec, and have some answers.

The easy answer is that the Canadian banking system is more highly regulated, and that the government started from a position of strength, having run federal surpluses since the late 90s. I'll dig a bit deeper.

1. At a fundamental level, the Canadian constitution's founding principles of "Peace, Order, and Good Government" are pretty boring compared to our "Life, Liberty, and the Pursuit of Happiness."  But the critical commitment to good government is real. When the International Monetary Fund censured Canada in 1993, Prime Minister Jean Chretien's Liberal Party responded not with tax increases, but with major spending cuts - slashing the government bureaucracy and cutting healthcare, among other things - and were rewarded with more than a decade in power. Our Republicans and Democrats both  prefer the "pursuit of happiness".  

2. Banking is more conservative, with banks actually holding the mortgages that they initiate and maintaining higher capitalization rates. There is no Fannie Mae/Freddie Mac being driven by a Barney Frank to enable mortgages for the unwashed masses - with an unlimited line of credit leading to a cost of $160 billion and accelerating. Rather than a global bank tax, the Canadians would call for spreading "best practices."

3. The central bank has a single inflation-fighting mandate (updated every five years)  - currently, keep inflation rates at about 2%. Poor Mister Bernanke must try to balance conflicting dual mandates of price stability and (the more political) full employment, while overseeing banking regulation as well - a task handled by others in Ottawa. So, to muddle things more, the Congress is now adding a consumer protection agency to the Fed's portfolio.

  4. While taxes and government spending are somewhat higher than in the U.S., much is paid for through provincial and federal "Goods and Sales" taxes which - unlike Europe's "Value Added" taxes are clearly itemized on the bills that the consumer pays. In addition to being visible, everybody pays - unlike the U.S. where the bottom half of income earners can demand more services to be paid for by "the rich".  

With Obama's Budget Director, Peter Orszag, resigning in July, Pelosi announcing that there will be no legally-required  budget resolution for 2011 (not wanting to highlight trillion dollar deficits before the election), and Obama continuing to be out of step with the rest of the world in advocating continued huge deficits, it is not surprising that the financial regulations making their way through Congress look more like the work of lobbyists than the "good government" folks. But November is coming, and perhaps the victors will have the wisdom to look north for some answers.  

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For those who believe in metaphors, this week's You Tube is of General Petreus' recent testimony before the Senate Armed Forces Committee - and that was before his key subordinate's Rolling Stone interview became public. If Obama didn't have the oil spill to distract us, the collapse of support for the Afghan War would be big news. (For what it's worth, I believe that civilian control of the military is a cornerstone of American democracy, and am amazed by General McChrystal's behavior.)

bill bowen - 6/25/10

Those Corporations

One of the major differences between the Tea Party folks and the establishment Republican Party is the perspective on corporations. Having been a corporate guy most of my career (VP Pabst Brewing Company and Kraft Foods), I find myself increasingly in the Tea Party camp, thinking that common sense and fiscal imperatives need to trump the corporate lobbyists.  (Perhaps I have been soured by the Supreme Court's recent decision that Unions and Corporations are people, and that limiting their political contributions would be unconstitutional.) 

For the past couple of years I have tried to distinguish between the evil bankers and real corporations that produce and sell stuff that people need - or at least want. Well, BP produces and sells stuff. From my experience, I can say with some certitude that the average leader at BP does not include the people and marine creatures of the Gulf among their real stakeholders - stockholders, yes; senior management, yes; employees, yes; customers, probably; suppliers, perhaps; pelicans, nah. Decisions about safety precautions normally consider the employees, but it should not be at all unexpected that the risk to the environment would fall way below the profit motive - perhaps explained in some strategy presentation as a high cost multiplied by a very low probability.  Even then, the calculation would be in terms of the PR costs, the lawsuit costs, and the legislative penalty costs. Effective regulations are necessary.

Back to the evil bankers for a minute, the Swiss legislature's tentative decision this week to allow bankers at UBS to divulge the names of American clients who avoid billions in taxes by hiding their money there raises the question - why do we let such companies do business in our very attractive market? One thing that the Obama administration started to do right a year ago - and which has since languished - was a crackdown on corporate and individual tax cheats. Maybe the Swiss legislature and the Deficit Reduction Commission will add some steam.

More broadly, the advisory and understaffed commission tasked with getting the country out of our deep financial pit needs to take a look at corporate taxes. Yes, we have the second highest corporate tax rate among the developed countries - it is just that the lobbyists have managed it that companies like ExxonMobil, Chevron, General Electric, and Bank of America pay next to nothing here. Some practical economists (Paul Ryan?) need to look at incentives to boost exports and R&D spending, but the rest of the goodies from subsidies for large farmers to oil depletion allowances need to go. 

Ironically, the political combination necessary to get regulations and corporate taxes in line is probably the Tea Party folks aligned with many folks from the Democratic Party.  That is not a comfortable alliance, but if the common sense fiscal conservatives can align with the Democrats on eliminating tax dodges and with the Republicans on spending, we may have a chance. 

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This week's video is a cute Song by Ray Stevens on immigration.

bill bowen - 6/18/10

The Greek Canary

What is perhaps most amazing is that it has taken over two years of global financial stress to cause Europe's disconnect between monetary policy (the common euro) and fiscal policy (national budgets) to come to light - questioning the viability of European economic union and providing a warning to America, if we will listen.

From Greece's perspective:

-  An economic shambles. Debt at 125 of GDP; a 12.4 % budget deficit; at least 30% tax cheats; phony government financial reporting; huge government unions; little going on in the private sector; because of the euro, unable to debase the currency to pay off debt or lower the cost of exports. With a long history of post-war communist and socialist governments, the outcome is fit for a Greek play, tragic flaws and all.   

- The 1992 Maastricht Treaty which established the euro-zone theoretically requires countries to hold deficits to 3% of GDP and accumulated debt to no more than 60% of GDP. (All participants have exemptions, but Greece is the worst.) Despite riot-inducing budget cuts, a draconian plan to increase the retirement age to 63, tax increases to include a 40% rate, and a temporary ability to borrow at European interest rates, most economists have a hard time seeing how Greece can grow out of its abyss.  

From Europe's perspective:

-  While Greece is but 2.5% of the euro-zone, the national debt of $375 billion greatly exceeds any prior International Monetary Fund bailout. There is every reason to fear contagion to include at least Spain, Portugal, and Ireland - and to the German, Swiss, and French banks which hold much of the debt. While Germany has caved in to the creation of a $640 billion fund and the IMF is putting up $320 billion, the Germans see this as a stop gap, worth perhaps three years.

-  More broadly, the common currency reflects the half-century dream of France and others for a united Europe - militarily, foreign policy, monetarily - capable of balancing the United States. Germany bought in due to European fears at the time of the integration of East and West Germany in 1990, and has prospered with their fiscal conservatism and productivity. But, the alliance is strained - Germans do not want a politicized European central bank buying Greek debt, and Angela Merkel's party is already paying a political price for bailing out the "too big to fail" Greeks. Many think that the solution is temporary.

  From America's perspective:  

- In the short term, the Greek impact is mostly one of financial markets, with a falling euro, concern about a stalled European financial recovery as countries move from stimulus to debt repayment, reduced demand for US exports, and reduced earnings from European divisions of US companies. The pressure that President Obama put on Merkel to go along with the bail out fund and the American contribution of some $50 billion to the IMF effort have received little attention.

- In the long run, it should be noted that the US budget deficit is 12.4% with no plan to get it into the 3% range, that the accumulated US debt is passing the European 60 % maximum, and that the credit default swaps markets are flashing a warning that California is now in the top 10 of likely governmental defaults (despite it being illegal.)  

 So, a daring prediction: efforts will shift to minimizing the damage from evicting the Greeks (and perhaps some other Club Med countries) from the euro zone - perhaps sooner than later. Global markets beware.  

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This week's video is one example of establishment-anointed Connecticut Democratic senatorial candidate Richard Blumenthal's false claim that he served in Vietnam when he, in fact, obtained 5 deferrals before joining a safe reserve unit. In an age of anti-establishment political rage, he will apparently face Republican Linda McMahon(CEO of World Wrestling Entertainment) in November - whose investigators found the story missed by the Hartford Courant, the New York Times, and all other media outlets over a period of years. Bring it on.

And my continuing endorsement of Tom Campbell for Senate in the June 8 California  Republican primary - the proven fiscal conservative.  

bill bowen - 5/21/10

Next week: Rand Paul  

Sounding Retreat

  The premise:  The military and political decline of empires often follows an economic decline as self-serving corruption eats at the center and rulers favor butter over guns. Chinese dynasties; Rome; Barney Frank and Charlie Rangel.   

The question: Faced with unsustainable deficits and a limited ability to raise taxes, what will be the response of Barry Obama-Soetoro - son of a disillusioned American ex-patriot mother and a politically displaced polygamist Kenyan father; step-son of a middle class Indonesian army geologist; student of Jeremiah Wright and Bill Ayers; patron of Van Jones and Eric Holder?

The setting: The U S of A has had an unprecedented run -with 5 % of the world's population enjoying 30 % of the economy; with the dollar being the global reserve currency buttressed by the International Monetary Fund, the World Bank, and the World Trade Organization; with pliant military and political alliances spanning Europe, south-central Asia, Southeast Asia, and Latin America; with a defense budget equal to 41% of the world's military spending; with the United Nations in New York and the greatest international universities spread across the land; with McDonalds, Hollywood, and Madonna raising global cultural standards. Ah, those were the days.

The upheaval: So what happens when Obama's trillion dollar deficits make us give up the deal: the hundred Army, Air Force, Marine, and Navy bases spread around the globe; the naval bases in the Indian Ocean which protect the flow of oil to Japan and Australia; the bases in South Korea and Japan which guarantee our friends against Kim Jong il's North Korea and Hu Jintao's China; the 80,000 troops in Europe for some forgotten reason. Oh, and things like the billion dollar bribe to Egypt to leave Israel alone.

The path forward: So, where does the pied piper (whose $3.83 trillion 2011 budget has a deficit of $1.27 trillion and "discretionary security" spending of $782 billion) want to take us if he ever gets serious on the spending side?

- An age with many fewer nuclear weapons - despite a big increase in the 2011 budget.  Probably a good idea. Probably will save some money in the long run.  

-  An age with less new military hardware - the $140 million per F-22 fighter jet; perhaps a carrier battle group or two; the moon exploration program. Secretary of Defense Gates should be able to wield a surgical knife. Will decrease some exports and spin-off civilian applications of the technologies. Bad for some of my stocks.

-  An age with a lesser commitment to our long time friends - England; Israel; Japan. Definitely a bad idea, but Hillary doesn't seem to have much of a policy voice. Nature won't like the vacuums.

-  An age with less global largess under the State Department's $56 billion umbrella: help for the globe's poor, hungry, sick, climate-challenged, and politically needy.

- An age of diminished expectations - for our kids and grandkids; for the kids growing up in Iran's neighborhood; for the Europeans who have long since forgotten how to protect themselves; for the 100 United Nations members who so much enjoy voting against us in the Security Council - and should start studying Chinese.  A very bad idea indeed.

Sometime after the election we will get the recommendations of Obama's commission on fiscal responsibility. One assumes that it will be at least 2000 pages long and that nobody in Congress will read it. But you can also assume that it will protect the expanding health care entitlements, contain enough taxes (probably VAT) to provide the butter, and enough military and foreign policy cuts to sound retreat for the empire. Barry's mother would be proud.

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This week's video is an ad being run by the Republican Governor's Association, Remember November. Much better than what the Republican National Committee is doing.

bill bowen - 4/30/10 

An urgent favorite: Tom Campbell who is running in a June 8 primary to face Barbara Boxer in November. Harvard Law; U of Chicago PhD in economics; 5 term congressman from Silicon Valley; twice named the most frugal member of Congress by the National Taxpayers Union Foundation; a fountain of fiscally conservative/socially moderate ideas.

Obama's Wall Street

So why has President Obama called Senate Minority Leader Mitch McConnell's opposition to Chris Dodd's financial reform bill "cynical and deceptive" - other than, of course, Obama's abiding passion for post-partisan civility in Washington. Given that Goldman Sachs was the second largest contributor to Obama's campaign (sandwiched between the University of California and Harvard) and that a large majority of Wall Street money has gone to Democrats in recent years, it is good to look beyond the politics of demonizing Republicans and see what is really going on with financial reform.

 Lets briefly review the elements of financial reform and see what the Democrats are trying to deliver. I'll be simplistic, and let you click on the reference to the level of your appetite.

1. Too big to fail. The administration and Congress have backed away from any effort to break up the large banks  - for example by re-instituting the Glass-Steagall Act (rescinded in 1999 under President Clinton) which separated commercial banks (which serve individuals and Main Street) from the investment banks (which deal with public offerings, acquisitions, derivatives, and the like.)  The closest remaining effort is a discussion - not in the bill - to prohibit the banks from trading on their own accounts - and a feeble objective of preventing the big ten banks, which have grown in twenty years from 24 % of the industry to 58 %, from getting much larger. With big contributions to both parties, Wall Street has won their biggest fight.

2. Future bail outs. The most argued portion of the bill is a $50 billion fund to be derived from industry levies and to be used to wind down big banks that are going under - much like the FDIC does with small banks. All want larger reserve requirements. Opponents (virtually all Republicans, but also including Democrats like Representative Paul Kanjorski of Pennsylvania and Senator Edward Kaufman of Delaware) fear any fund would be too small (AIG absorbed $185 billion), that its presence would make the banks seem safer and thus give them a competitive advantage, and that decisions about who to help would be made by the government instead of the market. Proponents want any shock absorber not paid for by the taxpayers. People of good will can disagree.

3. Regulation of derivatives. Most agree that Collateralized Debt Obligations, Mortgage-Backed Securities, Credit Default Swaps, and the like should be traded on an exchange for visibility and regulated. Obama's threat to veto the legislation if this provision isn't included was pure political theater - and it is in a parallel bill in the Agriculture Committee.  

4. Rating Agencies. Reform - perhaps by compensating them with a fee on bond or derivative sales to be paid by the buyer rather than by fees on the sellers - would get at one of the central points of the meltdown. Nada.

5. Consumer protection. Creation of a central agency to oversee credit cards, mortgages, and various loans adds some bureaucracy, but centralization may improve advocacy and diminish abuse. Popular and included.

6. Fannie/Freddie. Republicans would like to rein in Fannie Mae and Freddie Mac who now hold $6.3 trillion of debt reflecting (along with Sallie Mae) government control of 90% of the residential mortgages in the United States. Not on Barney Frank's watch.

7. Preventing corruption. Some recent examples show two types:

-  Bernie Madoff, Allen Stanford, and Raj Rajaratnam demonstrate that the SEC has been indifferent, incompetent, or worse. Heads should roll - and at least a few private industry ones are, even as the public watchdogs send their resumes to Wall Street.

-  The more subtle double dealing where one Wall Street genius creates a pile of crap, sells it to a crony who buys a Credit Default Swap to bet on its collapse, and pays the middle men million dollar commissions to make it happen before they get out of Dodge. This is the current Goldman Sachs kerfuffle, with a more egregious example being the Magnetar scam of 2006-2007. (The attached Magnetar discussion is lengthy, but totally revealing.)

Give Obama and company an A for politics and misdirection, but a D for substance. Without downsizing the banks, new evasions will need to be invented for new constraints; enforcement will remain spotty (but politically timely); the big banks will grow and prosper; clever ethically-challenged bankers will be buying their places in the Hamptons; and the campaign contributions will continue to roll in. For skeptics, make a note to look at OpenSecrets.com before the 2012 election.

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Sometimes the only thing that you can do is laugh. If you are up to it, watch this hilarious video about the Magnetar trade.

For those who want to see Representative Paul Ryan's view on all things financial (of whom I am one), here is a 7 minute video.  

bill bowen - 4/23/10 

The Second Shoe - VAT

When smart, informed people do things that make no sense on the surface, it is usually because there is another strategic step that has not yet been unveiled. Thus, when President Obama presented a 2011 budget projecting trillion dollar annual shortfalls for the next decade, it did not seem possible that he really was accepting public debt to the level of Greece. Enter the recent burbling by Paul Volker (to conservatives, the most credible administration financial adviser) about a Value Added Tax.

It has seemed that Obama was in a box: promises not to raise taxes on people making under $250,000 per year (broken, but not yet shattered); corporate tax rates among the highest in the industrial world; heavy political support among the 47% of households paying no federal income taxes; already factored-in heavy tax increases on "the rich" with the expiration of the Bush tax cuts at the end of the year; and all available revenue gimmicks used to support the new trillion dollar health care entitlement.

Having exerted all of his political resources to raise federal government spending from 19.4 % of GDP in 2008 to 25.1 % in 2011, Obama has three choices: reverse course and drastically reduce spending (military; farm subsidies; education; whatever); increase marginal tax rates on individuals to the 85% level while throwing out the tax work of all of those corporate lobbyists; or change the game.  

Enter the European-style Value Added Tax - a levy on sale prices minus component purchase prices at each step of manufacture - worth a hundred billion dollars for each per cent. (Europe ranges from 6 to 25%.) The VAT has several advantages - it is unseen by the consumer; it discourages consumption and encourages saving; it can be excluded from exports; it is an unknown to the public - and thus is easier to sell. The disadvantage is, of course, that a big tax increase is a big tax increase - and this will be an overlay, not a replacement.

So, the politics of it. With the Republicans gaining substantial numbers of seats (and potential control) in the House and Senate, who could possibly favor such a massive, economy crippling tax increase? Well, some answers:

1. People who are happy to see the federal government's share of the GDP grow to 25 or 30% (plus 10 to 15% state and local).

2. People who are unwilling to mortgage their grandchildren's future by running trillion dollar deficits and do not believe that enough spending can be cut.

3. The top tier tax payers who do not want all of the burden to fall on them.

4. Corporations who do not want all of the burden to fall on them. 

5. Advocates of a "flat tax" who want to move from a complex personal tax system to something simpler.

Count me among those who don't believe that Paul Volker just goes around talking off of the cuff, that Obama has another year of "change you can believe in" planned after the November elections and before his reelection campaign begins, and that Republicans will be happy to let Democrats take the heat for tax increases which are necessary to prevent financial Armageddon. Besides, it is a lot more fun for the politicians to argue about how to restructure the tax code (with some reductions here and there) than how to cut Medicare and Defense.  

I am reminded of a lesson from an old Purchasing course - the Principle of Least Interest. In any negotiation, the person least worried about the discussion collapsing has the most power. Who cares the least about trillion dollar deficits? So, those who care the most have a choice in the 2010 elections - either elect a lot of Congressmen and Senators who will roll back the huge growth of government, or be prepared for the new "painless" tax which will add 10% to the cost of all goods and services that you purchase. Unsustainable deficits are unsustainable.

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You know something is going on when liberal media "personalities" like Donny Deutsch start making racist comments about Florida Republican Senate candidate Marco Rubio. After all, isn't it is the Republicans who are racist - ground breakers Senator Ed Brooke, Secretary of State Colin Powell, National Security Adviser Condi Rice, Republican Party Chair Michael Steele, Attorney General Alberto Gonzales, Senator Mel Martinez, Supreme Court Justice Clarence Thomas and a whole bunch of others notwithstanding. Maybe Cubans are fair game if they don't know their place. 

bill bowen - 4/16/10  

Health Care: A View From England

Well, the sun came up on the day after the great liberal health care victory and, at least over here in London where I am visiting, the birds are singing. The newspapers mix in a few columns about the vote numbers and the extension of coverage to 32 million uninsured (they don't seem to understand reconciliation and deeming) alongside the story about the most recent bombing in Pakistan and Angela Merkel's latest pronouncement on bailing out Greece.  Will the bill add cost, make companies less competitive, raise taxes on individuals, force people into inferior coverage, and reduce individual choice - of course. Will it be a major factor in the demise of America as a world power? Some reflections:

By chance, the United Kingdom is having a major election in May, and the ruling Labour party has published a new budget this week. So there are many snippets of information available about the state of things in this country which is probably closer to the United States than is any other European country - a reliable ally in Iraq and Afghanistan; the source of much of the philosophy in our Constitution; and a partner in what French President Sarkozy derisively calls "Anglo-Saxon capitalism".  

Some current factoids to show us how far we have to fall:

- The UK recently passed 50% of the Gross Domestic Product being in the public sector, as compared to 40% when Labour took over in 1997. We are about 41%.  

- The National Health Service is not only a universal public insurer, but it also runs the hospitals and employs the doctors.

- Some 3500 Sure Start centers for three and four year old children provide government child care and pre-school education.

- Most of the marvelous museums are free.

- Off hours bus transportation for Old Age Pensioners (above 60) is free. 

And, making the point that the masses will never be satiated, proposals in the Labour Party's manifesto for the May election:

-  A new network of publicly-owned People's Banks located in Post Offices to break the monopoly of the private system - and funnel deposits to local pork-barrel projects.  (Japan has been struggling for over a decade to privatize a similar system.) 

-  A $2 billion pound, government run venture capital fund to start small "green" businesses that are not of interest to the private sector.

-  A large increase in the $8.70 minimum wage.

-  Free school meals for all.

-  A reduction of the voting age to 16.

- Creation of a new force of public employees providing home health care.

- etc. etc. etc.

- And, oh yes, higher health care taxes, especially on the rich.  

I have long wondered where the money comes from, with the decline of manufacturing, mining, and agriculture. (Specifically, there is a 50% income tax, a Value Added Tax, and a local Council Tax, but the question is broader.) Perhaps it is cheaper to live in the buildings built by the Tudors and drive tiny cars; perhaps the upper class has well invested the spoils of the lost empire; perhaps the current leaders of the Commonwealth do their banking in London. But it is encouraging that  even at this point in the drift to socialism, things can work. In contrast, it is clear that - even with ObamaCare - the US has by far the most vibrant economy in the developed world, and we shouldn't get too despondent.    

So, my advice to my fellow Republicans: The American people are optimists; they look forward; and they have a short attention span. On the health care debate, turn the page. A focus on Repeal will lose elections, but that does not mean that this is the end. A 2010 congressional campaign season built around the Health Care Fiscal Responsibility and Fairness Act of 2011 would sweep the field. Lets get working on that. 

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Joe Biden is always good for a You Tube. Here we have an Israeli snub of the vice president, as US influence in the area approaches a low ebb.  

bill bowen - 3/26/10

  

Paul Ryan's Answers

    Harry Cat - a thoughtful, left-of-center reader from Maine - has asked for an opinion on the proposals by Paul Ryan, the ranking Republican on the House Budget Committee, for fixing the massive federal deficits. The boyish, geekish Wisconsinite gained national attention at the February health care summit by showing that the Republicans have plenty of ideas to reduce costs and that the Democrats' "budget neutral" claim for their proposed coverage expansion is a fraud. But, Ryan's "Roadmap for America's Future", delivered in late January as a counter to Obama's budget, covers the whole waterfront - using figures from the Congressional Budget Office, the conservative Heritage Foundation, and the liberal Brookings Institution to document the implications of current and projected unsustainable spending. He talks eloquently of a tipping point toward a culture of dependency and decline, and lays out a set of specific, quantified recommendations. 

    On Health care - use specific tax code and Medicare changes to move to a system where the individual (rather than the employer or government) has an account to contract for services as they see fit. (To me, this is the essence of the health care solution - an informed consumer making choices that he helps pay for.)

    On Social Security - establish partial personal investment accounts for people under 55; gradually extend the retirement age until 70. (Agree on the latter; some reservations about the first.)

    On tax policy - radically simplify the personal tax code with two levels and few deductions; eliminate the Alternative Minimum Tax, capital gains tax, and dividend taxes; change businesses to a "value added" form of taxation. (Agree, except that I would keep the capital gains and dividends taxes.)  

    On job training - consolidate government programs. (No opinion.)

    On the budget process - add meaningful focus on large entitlement programs; create a binding cap on total spending as a per cent of GDP; require a three-fifths House and Senate vote to increase taxes. (Agree that we need to build a national consensus on limits, and they are the only saving grace in California. However, acceptance is unlikely.) 

    This is "hope and change" with the specifics. Some (the job training section) seems like platitudes, some (binding budget constraints) is politically not possible, and Ryan avoids talk of realistic tax increases (such as extending the Social Security tax to all income). But he does add an intellectual, quantified, credible voice for restraint of government spending and growth to complement the populist man-on-the-street wisdom of the Tea Party crowd. And for Republican candidates looking for ideas to run on, he offers a banquet. 

    In a wide-open Republican party, Ryan is a breath of fresh air - kind of a Mitt Romney without the baggage (Massachusetts health care; tough venture capital background; Mormon religion). At 41 he lacks experience, and will undoubtedly be the target of a legion of private investigators - but some form of his ideas will be prominent in the country's efforts to recover from the Obama hangover.  

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    This week's video is a short clip of Congressman Ryan asking Secretary of the Treasury Tim Geithner why the president's budget includes unending trillion dollar deficits and punts the problem to a powerless Fiscal Commission. 

bill bowen - 3/19/2010  

    

Jobs: Some Predictions

Aside from showing America sinking beneath a mountain of debt, President Obama's 2011 budget assumes an unemployment rate of 10% in 2010 - about twice the Bush eight-year average - improving at about 1% per year thereafter. Thus his new promise of a laser-like focus on jobs - oops, that is when he is not flogging health care, cheer-leading the Democratic party, or hosting a Super Bowl party. While we all know that the jobs deficit is Bush's fault, a closer look shows four causal factors.

1. The unusually deep cyclical recession - now statistically ended.   Economists would advise that the stock market (with a 60% gain since March 2009) is a leading indicator, and that jobs can be expected to lag.  Current data (with the cross-currents common at an inflection point) show the economy getting less bad, but  projections of a tepid 3-4% GDP growth in 2010 would barely create the 150,000 jobs per month needed just to break even. There may be another "jobs bill", but if the $787 billion Stimulus bill couldn't do it, don't expect much.  Expect a slow slog with the Fed's mortgage support ending in April, remaining state budget and commercial real estate problems, many Bush tax cuts expiring at the end of the year, and the beginning of Fed rate hikes.    

2. The delivered productivity promise of Information Technology. In a couple of centuries we transitioned from 90% agricultural jobs to under 5%. Those 85% moved largely to industrial jobs which we then automated. (About 10 % of jobs are now in manufacturing.)  For decades we've been putting many of our best minds and lots of money into stuff that would let one office worker do the work of 10. Well, it worked. Ongoing 3% productivity (half of the recent rate) implies a need to replace three million jobs per year.

3. The rise of China as a manufacturing powerhouse. As we move toward the malaise of socialism, the Chinese have moved rapidly toward the dynamism of capitalism. The world isn't really a zero-sum game, and we can benefit from having somebody else carry part of the load, but we have been quite naive in letting the Asians have our technology and our markets. Perhaps the Tea Party contingent will make WalMart go back to Sam Walton's "Buy American" roots, and the coastal elites will give up their brake-challenged Priuses. At a minimum, we cannot afford to continue to solve all of the world's problems.

4. Government policies aimed at those who create jobs.

- When allowed to follow its instincts, this administration has sought large government participation in numerous industries, increased environmental restrictions, increased business taxes, sought massive costs for subsidized public health care, increased the minimum wage, tried to make unionization easier, and run up massive inflationary deficits while stalling available free trade agreements and ignoring opportunities to foster lending to small businesses. No speech will overcome the reality of that.

- And when we need strong management, we get a president and Congress who cannot figure out how to do anything - not only on budgets and jobs, but pick a subject - financial regulatory reform, health care reform, closing Guantanamo, reining in Iran, deciding on an Afghanistan strategy, picking a family dog.   

So, where is the optimism?

-  Most of us - particularly at higher income levels - have jobs or retirement savings. Company earnings are good. The Asian economies remain strong. The world is not collapsing. That's good for the managerial class, but doesn't help the lower-middle working class.  

   - The growing gap between the "Have's" and the "Have-not's" is in part a result of massive immigration from Latin America. While it is not a direct correlation, the number of immigrants in the last decade is not far from the number of unemployed. There is opportunity here to strike a better balance. 

-  Our political system of checks and balances and regular elections lets us correct - even when we make big mistakes. All polls show an increasingly unpopular president and Congress - not because of gridlock, but because of their agenda. Much of this agenda will eventually be reversed, but the potentially irreversible big things to worry about are the huge deficits being created and the potential of more health care entitlements. 

   -  The country has been in deep holes before - the Civil War; World War I and II; the Great Depression - and emerged to new greatness. We do have a great constitution which actually works, a population that has traditionally rewarded individual responsibility and initiative, and the resources in transportation, housing, communications, education, banking, agriculture, and manufacturing to remain the world's greatest nation.

And, if nothing else, we are a nation of optimists.    

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For those who watched the Super Bowl instead of the ads, this is my favorite. We do have garbage police in San Francisco.  

bill bowen - 2/19/10

The Truth Deficit

There is good reason that the Soviet Union's newspaper was called Pravda (Truth), that George Orwell's 1984 had a Ministry of Truth, and that military academies have honor codes. Leadership requires that followers trust the leaders. Barack Obama beware.

When Obama was first discovered by the main stream media and the masses, he was given a pass. Tony Rezko was just a guy next door with whom he did a small real estate deal; for twenty years he didn't pay much attention to his "crazy uncle", the Reverend Wright; the bomb-throwing Bill Ayers was "just a guy in the neighborhood". His personal history - without transcripts, a birth certificate, or sources of support - should be taken as he wrote it. OK for round one - he was a charming guy with a charming story.

Phase II can be forgiven as political rhetoric. Of course nobody thinks that we can actually provide health care for 30 million people without anybody paying for it; of course you couldn't really expect him to eliminate lobbyists, earmarks, and back room deals; of course the stimulus plan couldn't really have been expected to get the economy going; of course we'll be fiscally responsible once we spend our way out of Bush's recession.  We can fix the problems once we get the big bills through.

Then came Congressman Joe Wilson and Justice Sam Alito with the message that the emperor has no clothes.  When Wilson cried out "you lie!" during an address to Congress, he was improper and factually wrong. He reacted to Obama's claim that health care coverage would not be extended to illegal immigrants. That is not in the House and Senate bills - a gap left to be fixed by immigration reform.

But when Supreme Court Justice Alito mouthed "not true" during the State of the Union, it is Obama who was improper and factually wrong. Obama must have known that he was on the edge of propriety in criticizing a Supreme Court decision in this forum, and that the "free speech" decision did not apply to foreign corporations as Obama claimed. It was a good applause line and he has a base to energize, but he did knowingly lie.  

But one's reputation for honesty is a precious commodity - particularly in a large country where most people do not know the president personally -  and Obama has lost it. A recent Rasmussen poll shows that a strong majority of voters do not believe Obama's claims that he has cut taxes for 95% of Americans, that he has started the economy growing, and that he has put 2,000,000 people to work. And he is asking these people to ignore the Congressional Budget Office and believe that his financial plans will somehow lead to fiscal stability. Fool me once, shame on you - fool me twice, shame on me. While the speech gave a bump to Obama's approval with his base, the "strongly disapprove" among independents moved from 42% to 50%.

Another resource squandered.

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This week's You Tube is an interview with Douglas Elmendorf, the geekish and honest Director of the Congressional Budget Office, discussing the 2010 federal budget projections for the next decade. The key question (at minute 2:00) from the Bloomberg reporters - is there any plan to do anything to fix it? Nope. 

Next week we'll try to make some sense out of the prospect for a jobs recovery - short term and long term. I'm trying hard to conjure up some optimism.

If you have any comments or suggestions, please make them directly on the blog or send an e-mail to bbowen7@comcast.net. I send a weekly reminder to a list of readers, and would be glad to add others to the distribution. Just let me know.  (No tweets at this point.)

bill bowen - 2/5/10 

The State of the Speech

It is interesting how many of the critiques of President Obama's State of the Union speech were written before he gave it - "Obama Pivots to Jobs"; "Obama Bids for Rebound"; "Message to Democrats: Stay the Course". I'll try to be objective, and use the test of whether the speech reflected a change of direction or added impetus to any major initiatives. And, it is important to recognize that a speech is just a speech unless it results in specific legislative proposals or executive orders.

First the credits:

-  In discussing energy, Obama seemed to advocate offshore drilling for oil and a significant expansion of nuclear power (a la McCain.) In promoting exports, he seemed to advocate for passage of the long-delayed free trade agreements with South Korea, Columbia, and Panama (a la McCain.) He claims a desire for bipartisanship, and has agreed to participate in House Republican Conference later this week. He sought Republican ideas on health care - and can find them at Gop.gov.

-  And he gave credit to George W. Bush (well, he didn't exactly phrase it that way) for the plan to successfully phase down American military presence in Iraq, and the TARP's rescue of the financial system.

- On the economy, he advocated using $30 billion of remaining TARP money for loans to small businesses through community banks. Better late than never.

-  While some would disagree, I would put the rescinding of "Don't Ask; Don't Tell" in this "credits" category. (To me, President Truman's 1948 executive order integrating the military provides encouragement.)

Then the debits:

-  Obama obviously doesn't get it on fiscal responsibility. A "spending freeze" on discretionary spending - to begin next year on budget items which have increased 70% in a decade and does not include "stimulus money" - satisfies nobody. And a toothless "bipartisan fiscal commission" to recommend spending and tax changes after the next election provides political cover for the Democrats who control everything budgetary. He couldn't even resist new spending programs - college loan foregiveness and subsidies for elder care.

-  He clearly understands the need to do something on jobs, but has no idea what. He included much of the Chamber of Commerce's wish list on tax cuts (ala McCain) - rejected a year ago in favor of the pork-laden Stimulus Bill, and this will do some good, but not soon enough to save his Democratic Congress.

- And national security really is a blank. False claims of moral leadership (abandonment of Iran's opposition movement), progress on control of nuclear weapons (except Iran and North Korea), and a comprehensive (unsigned and stalled) treaty with Russia should be challenged. And the silence about criminal trials for terrorists was deafening.

And the pivot?:

-  Health care. We still need Congress to pass comprehensive reform, now that we are so close. C'mon Harry.

-  Cap and Trade. Still a priority. Ignore the "deniers".  

-  Financial regulation reform. Maybe Tim Geithner will get out ahead of this if he survives.

-  And "Good government". There was acknowledgment of the people's disgust with Harry Reid's health care deals (with or without C-Span), credit for starting to rein in earmarks (ala McCain; well, there have been just a few thousand), a false "lobbyist-free" claim, and an inappropriate criticism of the Supreme Court decision on free speech by corporations and unions - with a clearly wrong and inflamatory claim that it applied to foreign corporations.  

   And finally, on style:

-  The pundits still refer to his great oratory - despite his finger wagging and 96 references to "I".  Over-exposure for sure.

-  And most irritating was the requirement to spend an hour watching Joe Biden and Nancy Pelosi in the background, particularly as she jumped to her feet to applaud at the mention of earmarks.

So, did it change any significant directions or add impetus?  It might edge his approval ratings back toward 50% for a few weeks, but otherwise I doubt it.

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This week's You tube is a hilarious riff by John Stewart about the Scott Brown election, the event which showed that the emperor had no clothes. And for those questioning the Daily Show's general bias, here's a year-old interview with Stewart's 10 (all male) writers expressing their love for Obama.

bill bowen - 1/29/10