Right in San Francisco

Trump's Half Term: An Assessment

    'Tis the season for looking back and looking forward; for assessing accomplishments and opportunities unfulfilled; for thinking what was, what might have been, and what might yet be. In Trump-world this exercise is best done in two year increments - since the last election and to the next. 

The easy part: What was and what might have been. 

    - Republicans controlled the House, the Senate, and the presidency - all was possible, but never in recent history has a president faced such constant, vitriolic opposition from the opposing party, most of the media, and a significant slice of his own party. In the House, the Freedom Caucus prevented compromise; in the Senate the 60 vote threshold for most matters and the few Never Trumpers among the 51 seat Republican majority proved too liberal for the more conservative House. And that's before Robert Mueller's relentless probes to find anything to bring the president down. 

    - With that setting, Donald Trump delivered peace and prosperity, with the working class and minorities sharing the bounty for the first time in decades. 

        -- Despite the Fed returning monetary policy toward normalcy after 8 years of stimulus, the Obama era "new normal" of 2% GDP growth was bettered by 1 to 2 %, and unemployment of 4.5 % was reduced below the 4% often considered "full employment". Deregulation (deleting two old for every new regulation; freeing smaller banks from Dodd-Frank), tax cuts (benefitting 85% of payers), energy expansion (offshore; Alaska; fracking; pipelines) , and tariffs (particularly on steel and aluminum) all contributed. The results are undeniable, and they belong to Trump.   

         -- The ISIS caliphate was defeated in short order, and the promise to cut back on being the world's policeman is being fulfilled despite a messy world full of fanatics and despots. 

        --  First important steps were taken to force China to conform to World Trade Organization norms - reducing state support for favored exporters, and stopping industrial espionage - and to engage North Korea in denuclearization talks. Leaders with long term contracts in both countries will try to wait out the Americans. 

        --  The Republicans whiffed on "Repeal and Replace" of Obamacare, but the individual mandate was repealed, it was made easier for small businesses to group together to buy health insurance, and stripped down short term plans were made more available. 

        --  An early offer to Democratic Congressional leaders to trade DACA for a wall was rejected and remains an elusive goal as the Democrats prefer to stoke their voter base.   

        --  The more partisan accomplishments were also myraid: cancellation of President Obama's Iranian nuclear giveaway; withdrawal from the Paris Climate Agreement; moving our embassy to Jerusalem; appointment of two Supreme court justices and 83 lower court judges.   

And the hard part: what the next two years might hold. With Trump's high energy, unconventional style, and broad agenda in the wake of President Obama's globalist, liberal, ineffective legacy, it has been possible to make progress across a broad front. With a Democratic House (and an effective leader), it will be necessary to significantly advance a few key initiatives.   

    - Strategic confrontation of China's trade practices is broadly popular, but will take time and a coalition. When Trump withdrew from the Transpacific Partnership in January 2017, most of the other participants went ahead with a set of trade agreements which do not include China. Whether a formal participant or an interested partner, this coalition is ready-made for a more favorable realignment of East Asia trade relationships. 

    -  North Korea's nuclear program must be dismantled.  Mike Pompeo's performance review in 2020 should be heavily weighted on how well he works with South Korea and Japan to accomplish this goal.

    - We cannot go on with porous borders, millions of largely assimilated young illegal immigrants in the shadows, and a demographic which shows an aging native population in need of young workers to support Social Security, Medicare, and the general economy. Real border secutrity in exchange for DACA is so obvious that only cynical politicians can refuse to find the equation.  Unfortunately we have plenty of them. 

    -  Personality flaws aside, the biggest risk of a President Trump working with a Democratic House is the ballooning budget deficit.  With interest rates rising and current deficits coming out of Paul Ryan's House exceeding $1 trillion, one shudders to think of what Pelosi and Trump might concoct. Someone somewhere in the federal government needs to take notice. 

        One can hope that Mueller will get out of the way, and that the next two years are as productive as the last two. 

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    This week's video is a shocker -  Van Jones on CNN praising Donald Trump and Jared Kushner for their role in assembling a coalition to pass major prison reform which will greatly reduce incarceration for nonviolent offenses, and should be a big plus in the African American community.  

bill bowen - 12/28/18 

 

     

    

 

 

 

 

 

Made in China 2025

    Tariffs are only a weapon. China's "Made in China 2025" policy is the target. This week's announcement from Beijing that they will be revising the policy indicates that the weapon is hitting the target. Let's recap. 

    Chinese Premier Li Kequiang introduced the "Made in China 2025" policy in 2015 as a focused plan to move China up the value chain as a manufacturer, to increase local manufacture of critical technical components of items like cars and cell phones to 70% by 2025, and to challenge American leadership in key future technology areas:

    1) New advanced information technology and artificial intelligence (think Google and Intel);

    2) Automated machine tools & robotics (think Allen Bradley  and Epson);

   3) Aerospace and aeronautical equipment (think Boeing);

   4) Maritime equipment and high-tech shipping (think Korean or German);

   5) Modern rail transport equipment (think General Electric or European);

   6) New-energy vehicles and equipment (think Tesla);

  7) Power equipment (think General Electric and Tesla);

  8) Agricultural equipment (think John Deere or Catepillar);

  9) New materials (think 3M); and

10) Biopharma and advanced medical products (think J&J or Bristol Myers). 

    In prior Five Year Plans China had emphasized domestic innovation in targeted industries. Made in China 2025 changes the dynamic relative to foreign companies wishing to do business in China by seeking to capture and surpass global technologies.  The core reality is that the Chinese economy is comprised of state owned enterprises (often run by the military), domestic privately owned companies, and foreign owned private companies. Despite the incorporation of elements of capitalism, it remains a top-down, state-controlled economy, where nobody prospers without the approval of the Communist Party central authorities, and target industries and companies are subsidized by the government.  Despite Chinese assertions, the level of government subsidies and coercions violates the rules of the World Trade Organization which it was allowed to join in 2001.

     Until Donald Trump took on the growing behemoth with tariffs and the threat to leave the WTO, China was allowed to force companies with targeted technologies to give them up in order to participate in the Chinese market, while China stepped up a global effort to acquire technology through open source and clandestine means. Europe - with Brexit, and lesser problems afflicting France Germany, and Italy - is in no position to lead. With a century-long stigma, Japan is in no position to lead.  The TransPacific Partnership was an effort to assemble an alliance of smaller countries in the effort to reign in China, but at least for now the essential American participation is off the table.

    For clarity, global telecommunications equipment giant Huawei provides a good example. The Trump administration has asked many of our allies to buoycot their equipment because of the intelligence gathering nad potential strategic sabotage capabilities of its network. (The arrest of the company's CFO in Canada for violation of sanctions on trade with Iran is a flashpoint, but not really the driving issue.)  This week's identification of Chinese intelligence services as being behind the hack of Marriott's and several other data bases also provides a public example of Chinese government capabilities and attitudes toward the use of Information Technology to further their development goals. And then there are the 340,000 Chinese students at American colleges and universities. 

    As a very big first step in the agreement between Trump and Xi Jinping to delay the imposition of  increased tariffs, China has announced a change to the China 2025 policy to exclude smaller local companies from its mandates, and perhaps reduce the amount of "local content" required in finished products. More will be needed - doing away with joint venture requirements; a reduction in state-sponsored technical espionage; acceleration of approval of imported products without coopting the technology.

    With apologies to the farmers and oil companies, the trade problem with China will not be solved by increasing their soybean and natural gas imports.  It will require fundamental change to Chinese industrial policies and Trump has gotten their attention. China's leaders think strategically. So does Trump, even if Wall Street runs on quarterly profits. 

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    This week's bonus video covers the highlights of the acrimoneous Trump/Schumer/Pelosi meeting on funding the wall. One cynical perspective - Trump staged this televised meeting to help Pelosi with her base as she was trying to win over the Democratic caucus to again become Speaker of the House. They can count votes and do deals. 

bill bowen - 12/13/2018

     

 

Engaging China

    First, some very macro thoughts:

        - It is a good thing that some 400 million Chinese peasants have risen from poverty in the last couple of decades. There are several reasons for this progress - political stability following centuries of foreign control, civil wars, and Mao's Cultural Revolution; successful centralized planning for infrastructure and industrialization; tight internal by the Communist Party; and an outside world eager to buy cheap Chinese-manufactured goods. 

      - American global hegemony since World War II, and particularly since the collapse of the Soviet Union, is a rare phenomenon in modern history. The United States represents some four percent of the world's population and about 20% of the world's economy. Economic ascendency has allowed military, political, and cultural ascendency. China, with 19 % of the world's population, also represents about 20% of the world economy - having grown at about 10% per year for four decades. 

        - The United States' trade deficit with China of some $375 billion annually represents about half our overall trade imbalance. Primary imports from China include consumer electronics, machinery, and clothing. Primary exports include agricultural products, aircraft, and electrical machinery.  America's advantage in intellectual property is being greatly eroded by requirements for American companies doing business in China to share their technology, by the education of some 350,000 Chinese students in American universities and thousands of others employed by American companies, by hacking of American data bases, and by installing spyware in Chinese-manufactured electronics.  Republicans and Democrats have both let the problem grow. 

        - The American and Chinese economies and societies operate under fundamentally different systems.  Many core industries in China are dominated by state-owned companies (often run by the military); the Chinese government is centralized, without our checks and balances; the current president, Xi Jinping, recently had his term limits removed so that he can be "president for life"; China operates on Five Year Plans with strategic allocation of resources; dissenting opinions and minority populations are suppressed. (The desirability and long term viability of decentralized capitalist democracies versus centralized socialist dictatorships is a subject for another day.)  

        While the United States slept, China has openly advanced several initiatives designed to surpass the United States as the world's most powerful country by the middle of the century. While far ranging, the total effort is predicated upon ongoing substantial trade surpluses. 

        - The Belt and Road Initiative. Beginning in 2013, the $4 to 6 trillion dollar program to build roads, railroads, and ports supporting economic, cultural and political  connections between China, Eastern Europe, the Persian Gulf, Africa, South Asia, and Southeast Asia has been the centerpiece of Chinese foreign policy.  Underpinned by the China Investment Corporation which manages some $5 trillion of foreign exchange reserves, China shares development costs with the 60 participating countries, but is able to play a dominant role - as have the United States and Europe through the World Bank and the International Monetary Fund which were established after World War II.   

        - The "Made in China 2025" initiative which was announced in 2015 intends to surpass the United States in the key technical fields of artificial intelligence, robotics, and biotech within a decade. Elements include the education of engineers (some 350,000 studying in the United States), and national R & D spending of 2% of GDP (greater than Europe.)  

        - Traditionally a "continental" country, China has expanded its navy to the point where its ships outnumber the United States Pacific fleet. The current flashpoint is the Chinese-constructed island military base in the South China Sea between the Philippines and Vietnam, designed to extend claims to mineral rights and control of passage. The larger threat is to Japan whose economy is dependent upon an exposed supply of oil via tanker routes around Southeast Asia and up the Chinese coast.  

        - As much as the French would like for the euro to replace the American dollar as the world's reserve currency, the Chinese would like to see the yuan become the global standard. With our federal government debt surpassing $20 trillion, annual budget deficits of some $1 trillion, and trade deficits of $800 billion that is not an unreasonable goal.  

      Enter Donald Trump. Lost in all of the daily crises and breathless reporting is a strategy. First he withdrew from President Obama's Trans Pacific Partnership which would have joined together a dozen countries in a trade agreement which excluded China, believing that the United States can do better with bilateral agreements where our dominant position is maximized. (The others have gone on without the United States.) Then he negotiated a beneficial trade agreement with South Korea - finalized in September. Then he negotiated a revised NAFTA - finalized last week. Then he got President Abe to agree to open trade negotiations which will impact our $69 billion deficit with Japan. In time he will bring in the Southeast Asians who are fearful of Chinese domination and who benefit as increasing Chinese manufacturing costs drive production to lower-cost havens - Vietnam, Malaysia, the Philippines, Indonesia. 

    In the spirit of Lenin's alleged quote about capitalists selling the rope with which the communists would hang them, many "Free Trader Republicans" see China as a huge potential market rather than a fierce competitor. Trump gets it; Boeing doesn't.  The outward battle is about tariffs and trade deficits, but the implications for the world order in the 21st century are much greater. 

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    This week's bonus is the memo which sex crimes prosecutor Rachel Mitchell wrote after cross examining Dr. Blasey Ford. With hindsight, her questioning and this memo were not aimed at the media or the general public; they politely explain to Senators Murkowski, Collins, and Flake why Dr. Ford's allegations are not credible.  

bill bowen - 10/5/18

     

    

In Defense of Trade Skirmishes

     Of all the things that Donald Trump should be good at, negotiation of trade agreements is at the top of the list. This is clearly an Executive Branch function, as the world's largest market the United States posesses immense leverage, and he has lots of experience dealing with unsavory commercial partners. 

     The Issue:

          The United States has a growing unsustainable trade deficit - $810 billion in goods partially offset by a surplus of $244 billion in services in 2017. The big three problems are with China (a net deficit of $375 billion),Mexico (a net deficit of $71 billion, Japan (a net deficit of $69 billion), and Germany (a net deficit of $65 billion.) Over time we lose control of our economy if we import three to four per cent more of our Gross Domestic Product than we export. The question is not really "free trade" or "fair trade", it is "balanced trade". Apologists claim that "comparative advantage" principles make bilateral balances irrelevant, but our decisions as a country are less under our control when foreign governments, companies, and individuals own our real estate and companies, and hold our debt. We cannot significantly diminish the overall problem without addressing the largest national deficits. 

     The MAGA Trade Advocates:

          - The industries such as consumer electronics and apparell which have gone are no longer able to advocate for themselves.  A few industries, like dairy which faces closed Canadian markets, steel which has long faced unequal foreign barriers, and energy companies are openly supportive, but most do not want to be vocal, lest they offend their potential customers and draw the attention of the #Resisters.  

           - Blue collar workers are advocates for strong trade policies, but not the company owners who are looking for the lowest cost option, nor the State Department consular officials who are often more interested in helping foreign companies establish exports to the United States. 

           - The Trump team makes the case domestically and internationally, led by  Commerce Secretary Wilbur Ross, who made a fortune restructuring bankrupt manufacturng companies, Trade Representative and Washington lawyer Robert Lighthizer,  and Director of the White House Trade Council Peter Navarro, an academic outlier from the University of California, Irvine, and ardent critic of China, Germany, and NAFTA trade policies. Some ivory tower; some Washington insider; some street fighter.  

     The MAGA Trade Opponents:

           - The Wall Street Journal editors reflect the interests of capital rather than workers or any broader national good. Ditto the rest of the financial press. 

           - Walmart, which began as Sam Walton's heartland America retailer, brought scale to Asian manufacturers and became the largest champion of cheap stuff for American consumers at the expense of American workers. Ditto all of the other peddlers of cheap stuff.  

           - Export industries do not want to offend their customers - Information Technology; aircraft; vehicle components; soybeans.

           - The #Resisters and Never Trumpers from both sides of the aisle see an avenue to attack what is otherwise a successful economic performance.  

     The status:

           - The imbalance spiked in January, and has since returned to the 2017 level of about $45 billion per month. 

           - Ironically, the first major breakthrough will apparently be with Mexico where the incoming leftist president Andres Lopez Manuel Obrador, wants to take NAFTA off of the table so that he can focus on his agenda of fighting corruption and improving internal security after an election in which over 130 politicians were murdered.  Four weeks of bilateral negotiations have reached agreement on automotive wage rates in Mexico and the portion of products that must originate within North America. Canada will object to being brought in late in the discussions, but will not be asked for major concessions. Trump will be able to declare victory (even if partial) before the November 6 election - while demonstrating that he can work with leaders even when there are significant disagreements. 

           - In late July, European Commission President Jean-Claude Juncker and President Trump agreed to withhold US tariff increases on steel, aluminum, and automobiles while the EU would lower tariffs for U.S. industrial goods, provide outlets for U.S. gas and soybeans, and potentially back the US in trade rows with China.The shared goal is trade without any tariffs. A European delegation is working on details in Washington this week. The European politics have to be worked out, but it would seem that German interest in protecting the export of Mercedeses, BMWs, and Volkswagons has overcome the historic French opposition to agricultural imports. Trump also catches a break as Junker would like to avoid a trade war with the United States as he tries to negotiate Brexit terms with Theresa May.  

          - China will be more difficult - and important. Talks between dovish Treasury  Secretary Steve Mnuchin and Chinese Vice Premier Liu He broke down in May, followed by mutual 25% tariffs on $50 billion of goods. With the Trump administeration examining 10 to 25% tariffs on another $200 billion, lower lever talks have resumed this week in Washington. (The US side is led by an Undersecretary of the Treasury rather than Lighthizer, Ross, or Navarro, a clear signal that Trump is not ready to deal.)  With a greater dependence on exports, a slowing domestic economy, and a stock market down 20% on the year, Xi Jinping is under greater pressure than Trump, but he has a firm grasp on broad political power, while Trump may appear to be on the ropes. Little real progress is likely before November. 

       The trade deficit with China is a bit like North Korea's nuclear program - an unacceptable problem which has been growing for more than a decade without being confronted by American presidents - Democratic or Republican. Both problems call for bipartisan support - a commodity which is has just moved from rare to virtually impossible before the November elections.  

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  This week's bonus video is an expert legal opinion by Harmeet Dhillon, Republican National Committeewoman from California (and former chair of the San Francisco GOP), explaining that it is not a crime for a candidate to use his own resources to pay hush money, regardless of whether Mueller's team got Michael Cohen to plead guilty to that offense in exchange for leniency on other unrelated charges. 

bill bowen - 8/24/18 

 

A Socialism Primer

   Rasmusssen's polling tells us that 51% of Democrats, 26% of independents, and even 21 % of Republicans have a favorable impression of socialism. Let's assume that there is something out there beyond the desire for open borders and free stuff; something beyond a charismatic candidate from an anomylous Congressional district; something more than an antipathy for President Trump. After all, surveys of millenials frequently show greater support for socialism than for capitalism. It is worth a primer. 

    Formal definitions don't always catch what is really in people's heads, but they represent a good place to start: 

        Capitalism: An economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, voluntary wage labor, voluntary exchange of goods and services, a price system, and competitive markets. Versions include pure free market where supply and demand set prices without government, monopolies, or other interference; welfare capitalism which includes welfare services provided by the government or employers; and state capitalism where some of the economic activity is directly managed by the government, as in China.   

         Socialism: Collective or governmental ownership and administration of the means of production and distribution of goods in which there is no private property and the means of production are owned and controlled by the state. Versions include different scopes of what is owned by the state (factories; farms; small stores) and the amount of central planning. Wages are based on work performed.  

        Communism: The highest form of socialism. A society without class divisions or government, in which the production and distribution of goods would be based upon the principle “From each according to his ability, to each according to his needs.” 

    In the early stages of the 2016 presidential election, Independent Senator Bernie Sanders of Vermont brought the far left wing of the Democratic Party to life, ranting against millionaires and billionaires while promising free healthcare, free college, and free child care; he certainly had the crowd energy, and might have won the Democratic nomination had not the party machinery put a heavy thumb (in the form of super delegates and debate management) on the scales for the more mainstream Hillary Clinton.  Over his career Sanders, once a member of the Young People's Socialist League and an admirer of Socialist presidential candidate Eugene Debs, has advocated for just about every liberal cause possible, but has, in truth, not focused on government takeover of private enterprise. While frequently enjoying being called a socialist by his supporters, he has tried to identify more with welfare capitalist Scandinavia than with communist Russia - with a few forays into praise for Castro's Cuba and the Sandinistas in Nicaragua.  

    The next iteration of leftist activism is younger and less circumspect about identification as socialists. Brooklyn Congresswoman-in-waiting Alexandria Ocasio-Cortez is the current star of the Democratic Socialists of America, but she is a beneficiary of the organization  rather than its leader. Founded in 1982 as an amalgum of aging socialist and communist organizations, the DSA left the Socialist International in 2017 because it was endorsing mainstream liberal economic policies such as deregulation and free trade. The largest socialist organization in the United States in over a century, membership in the DSA has risen to 47,000 by mid-2017 - sparked largely by the Trump election - with 181 chapters and a median member age of 33 as compared to an age of 68 in 2013. 

    It is worth digesting a few pearls from the  Democratic Socialists of America web site:  

       -  We are socialists because we reject an economic order based on private profit.

        - We are socialists because we are developing a concrete strategy for achieving that vision, for building a majority movement that will make democratic socialism a reality in America. We believe that such a strategy must acknowledge the class structure of American society and that this class structure means that there is a basic conflict of interest between those sectors with enormous economic power and the vast majority of the population.

     - We believe that working people should run both the economy and society democratically to meet human needs, not to make profits for a few.

    - Like most political organization websites there is also a store selling swag - "Medicare for all" cups; "Abolish ICE" tee shirts; "Karl Marx 200th Birthday" tote bags. 

    In some regards it is good to have Ocasio-Cortez as the poster child of this race to the Left. Despite her degree from Boston University with emphasis in economics and international relations, she cannot get beyond DSA talking points, even when interviewed on sympathetic programs like the Daily Show. Unemployment is low because everyone has two jobs; last year we gave the military a $700 billion increase (actually the total military budget); she favors a two state solution for Israel and Palestine - until liberal activists get her to talk about the "massacre" in Gaza and the Israeli occupation.  A couple of generations ago an international relations degree would have implied understanding that tens of millions were killed by Stalin, Mao, and Castro for their opposition to the imposition of socialism; today one would expect students would be taking the same lessons from Venezuela: not everyone is willing to give their posessions to the state, not everyone is willing to let the state determine where they work and live, and few central government bureaucrats are willing to really give "power to the people". 

    Conservatives expect that a clarion call from the Left will fall flat as it did with candidates such as George McGovern (who carried Massachusetts and the District of Columbia against incumbent Richard Nixon in 1972). They should not be so confident. The pendulum swings - Donald Trump reflects to some extent a reaction to the globalism and smooth-talking liberalism of Barack Obama. Ocasio-Cortez will have a platform, and the mob crying "socialism" will have a voice in the Congress in 2019, potentially as an unruly part of the majority. To make it through the primaries and caucuses in 2020 the successful Democratic presidential candidate will need to sound like the Bernie Sanders version of socialism; to be elected they will need to convince the public that they believe in capitalism.  

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    This week's video is a New York Times story designed to promote the recent campaign visit of Alexandria Ocasio-Cortez and Bernie Sanders to Wichita, Kansas, as evidence that the whole country is turning left.  

bill bowen - 8/3/18

 

Trump's Dreadful Trip

    Sometimes being right on the substance and wrong on the form isn't good enough. While trying to do too much in one week, the president's proclivity for disruption and the media's proclivity for hysteria - familiar shows in domestic venues - fell flat when translated to the world stage. Some things just don't sound as good in French or Finnish as they do at a rally in Kansas City. A perspective: 

    The Bad

    1.  The United Kingdom is in the midst of an epochal struggle to redefine the nation and it's relationship with the world. Prime Minister Theresa May is trying to thread the needle, adopting a "soft Brexit" stance which retains "free trade" and shared customs procedures with Europe, a posture which has caused some 10 of her ministers to resign. The Donald found it necessary to opine that remaining part of the EU for trading purposes would make it impossible to have a trade agreement with the United States - and that her most problematic Conservative Party rival would be a good prime minister. On the merits, a "hard Brexit" would have reflected a choice to align more closely with the United States and the Anglophile world, but this advice reflected a most unwelcome intrusion into British politics at a most inopportune moment.  

    2. Trump's apparent acceptance of Vladimir Putin's perfunctory denial that Russia had meddled in the 2016 election over the American intelligence community's consensus that they had was a low light of the presidency to date. In truth, no level of Trump berating Putin in public would have satisfied the critics. The Justice Department's decision to indict 12 Russian intelligence officers three days before the meeting was intended to ensure that the issue received prominence in the Putin discussions; cries of treason from Obama's CIA director James Brennan and House Democratic Whip Steny Hoyer say much more about them than about Trump's actions; and Trump did see the need to correct the record on the following day. Back in 2016 President Obama told Putin to not meddle again; a similar admonition would have been good. 

    3. Trump's assertion that the United States leaders had acted foolishly relative to Russia in the past deserves domestic discussion, but does little to further our negotiating position with Putin. It is a good thing that Trump was not asked to put some meat on the bone by the collusion-obsessed media. For the big picture from a Russian perspective, the original post-war core NATO was expanded by President Clinton to add Poland, Hungary, and the Czech Republic; by President Bush to add Latvia, Lithuania, Estonia, Bulgaria, Rumania, Slovakia, and Slovenia; and by President Obama to add Albania, Croatia, and Montenegro. President Trump is being asked to add Bosnia/Herzogovina, Macedonia, and the former Soviet Union states of Georgia and the Ukraine.  On the substance, one might also ask about American meddling in Russian elections during the Yeltsin and Gorbachev era; President Obama's assertion that Russian ally Assad must go in Syria; or the coup in the Ukraine which overthrew an elected pro-Russian president and (coupled with potential accession to NATO) put the key Russian naval base in the Crimea at risk. When it comes to Russia, we do lack empathy and self-awareness.   

    The Good 

    1. NATO, and particularly Germany, need to be taken out behind the woodshed. Past presidents have politiely tried, but Trump is committed. Most are not making much progress toward their 2014 commitment to increase defense spending to 2% of GDP by 2024, relying instead on the United States to carry the burden of deterring the Russians while the Western alliance has extended eastward into what was once Moscow's sphere of influence. A major re-thinking is needed when Germany, stuck at 1.2%, enables their former Chancellor (Gerhardt Schroeder) to become CEO of a large Kremlin-connected Russian energy company (Rosneft), and to build a natural gas pipeline which will make Germany reliant on Russia while undercutting Ukraine, which sits astride Russia's current major pipeline to Europe.  

    2. The list of things which Trump discussed with Putin is long and appropriate - the North Korean nuclear program; the war in Syria; the need to contain Iran's ambitions in the Muslim world; a follow-up to the 2010 nuclear arms reductions agreements; Israeli security; the conflict in the Ukraine.  In the age of Resist, the Left doesn't think that Trump should be talking to Putin at all and is critical that there was not a memorandum of new groundbreaking agreements. Talking is good - and the press conference comments relative to North Korea and nuclear arms agreements offer some optimism for those so inclined, as is the offer of a second meeting in Washington.  

    3. We have an annual trade deficit in goods of $150 billion with the European Union, partially offset by a $50 billion surplus in services, driven by both tariffs and other barriers such as exclusion of genetically modified agricultural products. While the big goods imbalance is with China ($375 billion) and there are significant problems with Mexico ($70 billion ) and Japan ($70 billion), Trump was right to explain the need to restore a trade balance with the Europeans. They are allies and not "competitive foes" as Trump claimed, but they are certainly competitors. Everyone objects - major trading partners; the industries facing higher tariffs; the Resisters; the anti-Trumpers - but our global $800 billion trade deficit in goods is not sustainable. There was time when most of our markets were internal; we were rich enough to use trade deficits as a major geopolitical tool; and "free trade" did not need to be balanced. That time has passed, and Trump is willing to take the short term heat - particularly at a time when the economy is booming. 

    Bereft of other ideas, the Left has escalated its "Russia is the enemy, Trump wants to get along with Putin, Mueller will find the smoking gun" meme. From a long term geopolitical perspective Trump has it right - as did Obama, if by intent if not action. With their nucler arsenal, energy resources, broad geographic sweep, and United Nations veto power, the Russians are an important player relative to both Europe and China.  Trying to work with them - regardless of what Chuck Schumer and Rachel Maddow think - is a good thing. For that Trump deserves credit. 

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    This week's video is a short, little-reported section of the Trump-Putin press conferendce in Helsinki - in which Putin talks about $400 million which were illegally obtained in Russia and contributed to Hillary Clinton (presumably through the Clinton Foundation.) 

bill bowen - 7/20/2018

"Blue Wave" Meets "Economy, Stupid"

       Prognostications about the November House elections fall into three categories: Nancy Pelosi and the liberal media who are measuring the drapes based on the inevitable "blue wave" that will result from everybody hating the usurper, Donald Trump; professional forecasters such as Charlie Cook and Kyle Kondrick who analyze the details and - chastened by their mammoth failures in 2016 - give the probability of Democrats taking over the House  a 50-50; and those of us who are influenced by James Carville's admonition to the 1992 campaign of the first President Clinton, "It's the economy, stupid".  

    Let's deconstruct the "economy" argument. What is there in the economy that might intrude into the back of the voter's minds when they pull the curtain on the voting booth, or complete their tamper-proof mail-in ballots as we do out here on the Left Coast. And let's give the low information voters credit for making some association between the economy and the party in power.   

    First, "Results" measures - Am I better off? How are things going in the areas that directly impact my family? (Confession, this is the Republican phrasing; the Democratic phrasing would include a lot of gender and ethnic oppression stuff.)  

    1. At 3.9%, "official" unemployment is below the theoretical "full employment" level. After a decade of decline, the Work Force Participation Rate (the portion of working age residents working or actively looking for work) has stabilized at around 63% - meaning that the unemployment rate is no longer being  artifically made to look better by having people give up.  Long term unemployment claims are the lowest that they have been in 45 years. The boom is evident across all demographic categories.  

    2. Wages and salaries have been increasing at 2 to 3%, faster than in the Obama years when employers were absorbing more healthcare costs, but still below what "full employment" might call for. Inflation remains slightly lower, but gasoline prices are rising. For most workers, significantly improved income comes from longer hours rather than higher rates. 

    3. The stock market was up 23% in Trump's first year, about half of what it achieved in Obama's eight years. This year it is flat, with increased volatility. Past performance is no guarantee of future returns (or some such language), but personal account balances are up, IRAs are healthy, pension plan funding is less daunting, bank account balances are starting to show some return, and the 2008 recession is firmly in the rear view mirror. 

    4. Interest rates remain historically low, with 30 year mortgages under 5%. In the predictable future, refinancing will be severely curtailed, and housing will become relatively more expensive with higher finance costs, but that is a different election cycle. For now, people are comfortable borrowing for houses, cars, college costs, and credit card purchases. 

    5. Courtesy of our grandchildren, Congress and the president have given the average American family a tax cut in excess of $1000. The amount varies based on many factors, including whether you live in a high tax (e.g. Blue) or low tax (e.g. Red) state, but for most, withholding payments have been reduced and April 15, 2019 will be a "feel good" day for American voters. 

    6. The Conference Board's Index of Leading Economic Indicators (factory orders, interest rate spreads, jobless claims, building permits,and such) projects continued solid expansion well beyond November. 

    And some "Causal" discussion - who deserves credit? Is this all that there is? 

    1. True, economic expansion began under President Obama, but the pace was anemic by historical standards, averaging about 2%, before accelerating to 2.5% in Trump's first year. Through the Obama years the Federal Reserve held interest rates near zero, and maintained "quantitative easing" (purchase of government debt to lubricate markets.)  Rates are now up to 1.7%, and on a projected path to get to a "new normal" of about 3% within a year. Bankers are paid to divine the future economics, but there is consensus that we are enjoying  a healthy, growing economy, capable of withstanding higher interest rates.  

    2. It will take a year for the tax cuts enacted in December to fully make their way into the economy, but many voters are seeing reduced withholding from their paychecks, international corporations are repatriating money previously held overseas, and many have given a portion of their lower tax rates to employees or shareholders. Democrats (none of whom voted for the tax bill in  either house of Congress) can scream about "crumbs going to the workers", but most voters think of $1000 as more than crumbs.  

    3. Trump, Commerce Secretary Ross,  and Foreign Trade Negotiator Lighthizer are making a multidimensional high stakes effort to correct the structural $700 billion imbalance between imports and exports of goods. Half of the deficit is China, but Mexico and Germany are also problems that must be dealt with. Relative to the mid-term elections, voters understand the problem, and that action is being taken. 

    4. From January 2017, Trump has been a zealot in reducing regulations, whether from the Environmental Protection Agencvy, the Department of Labor, bank regulators, or other federal agencies, while operating under Reagan's premise that " government is not the solution to our problem; government is the problem."  In the long run this may present negative consequences, but in November 2018, the voters know that Trump (and Republicians in Congress) are all in for economic growth. 

    Democrats are starting to realize that they need to stand for something beyond opposition to President Trump, but they face a dilemna.  The energy in the party comes from the progressive left wing who want universal healthcare, free childcare, and guaranteed government jobs, while the state of the economy makes it hard for moderates to gain much traction as an alternative to Republican financial management. A tough spot, in James Carville's terms. 

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    This week's video is a brief Richter Scales ditty about being a Republican in San Francisco.   

bill bowen -  

    

    

Trump's China Play: In Search of Allies

   There is no doubt that strong measures must be taken at some point to balance our trade relationship with China. Almost half of our $800 billion annual trade deficit relates to China, and the gap is growing. Despite joining the World Trade Organization in 2001, China has not been playing by the rules, instead requiring that foreign companies doing business in China must form joint ventures with Chinese companies, demanding that they have access to American technology as part of the bargain, and being found guilty by the WTO of periodic "dumping" of products on foreign markets. 

   Donald Trump is the first president in memory to seek concrete actions in the direction of "balanced" trade", and it is a daunting task as President Xi Jinping has become the most powerful Chinese leader since Mao, and Trump faces a Democratic opposition committed to #Resist, Mueller's Russiagate, rising sexual misconduct allegations, and alienated Establishment Republicans. Whether he succeeds or not, at least he promises to frame the issue and engage the necessary American conversation. 

     In one sense, this is a rivalry between America's free market capitalism and China's state-sponsored mercantilism. One can make the case that the Chinese model has many advantages - strategic investment in industries like steel and information technology; direction of low wage and managerial labor to the locations and industries selected by the political leaders; regulations and subsidies to guide development in the favored direction; protection of strategic industries from external competition; expansion of exports through direct subsidization and currency manipulation. The United States or Europe could not do the Three Gorges Dam development of the upriver Yangtze (displacing 1.3 million people and doing extensive ecological harm); we could not align capital and the construction industries to build external transportation infrastructure on the scale of the Belt and Road Initiative (which will provide infrastructure for China-centered trade with over 50 other countries);  we could also probably not raise a third of the population from generations of poverty in two decades. Whether the Chinese can control corruption and avoid the traditional Chinese scourge of a bloated, lethargic bureaucracy remains to be seen, but at the moment they are on a roll. 

    Trump has started with modest proposals - unlike his predecessors who never started: putting tariffs on washing machines and solar panels;  asking the Chinese for a proposal on how we can reduce the trade deficit by $100 billion; instituting tariffs on steel and aluminum, then exempting Canada, Mexico, the European Union, Argentina and Brazil; and instituting some $60 billion in tariffs on Chinese goods entering the United States - an amount calculated to equal the damage done to American companies by intellectual property theft.  

    The reaction - in line with Vladimir Lenin's obseration that the capitalists would sell his communists the rope with which he would hang them: 

        - Concerns from the National Retail Federation retailers like Walmart, Target, and Best Buy that higher prices will hurt working class American families. (No comment from the thousands of retailers and small American manufacturers that Walmart put out of business.)   

        - Howls from the Chamber of Commerce (read General Motors; General Electric; Boeing; etc) that the tariffs could lead to a destructive trade war. Note that many of the larger manufacturers have formed the required joint ventures in China to gain access to a market about the size of the United States. 

        - Articles and editorials in in the mainstream business literature castigating Trump's adventurism - The Wall Street Journal; Bloomberg; the Investor Business Daily.

        - Letters from Democrats and Republicans in Congress advocating for the China lobby.   

        - Substantial stock market unease, reflected in a week of accelerating declines. 

    It will be hard to follow the actions of Trump's team - Commerce Secretary Wilbur Ross, and Trade Negotiator Robert Lighthizer - both because the subject is so extensive, and because they will be criticized by both the normal left wing media, and by the business establishment media. It is also hard to guage the global marketplace where most countries are reluctant to criticize China, but there is enough anti-China sentiment for our jilted TransPacific Partnership colleagues to have gone ahead without us in forming a trading alliance without Beijing. One can only hope that Trump has enough room to run to at least make a real start toward "balanced trade", and that he is able to cultivate allies like Chuck Schumer who seems to get it.  

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  This week's video is a brief exposure of the Facebook hypocracy where the genius of the Obama campaign's use of social media data mining became a hideous perversion when used by the Trump campaign. FWIW, the Trump campaign used the Cambridge Analytica tool in the primaries, but switched to the superior Republican Party data tools for the election. 

bill bowen - 3/23/18

The State of State

    Rex Tillerson arrived as Secretary of State in 2017 with deep experience in the oil politics of the Middle East and Russia and a successful 42 year career at Exxon Mobil. The hope was that the responsible adult would bring gravitas to the cabinet as well as understanding and personal relationships which could help in the post-Iraq, post-Syria, post-Ukraine world of American foreign policy. The generals could handle the military clean-up work; Tillerson would handle the soft side. What went wrong?

    The complexity of foreign policy is reflected in the core membership of the President's National Security Council - the Vice President, the Secretary of State, the Secretary of Defense, the the Secretary of the Treasury, and the President's Assistant for National Security, advised by the Chairman of the Joint Chiefs of Staff and the Director of National Intelligence. The three dimensions of foreign policy - diplomatic, military, and economic - are all represented; each needs a champion who has the confidence of the President and a who can draw upon an experienced and motivated staff which prepares the briefing papers and implements the decisions. This assumes competent staff down several levels, and NSC members who are aligned with the president. Both requirements proved to be missing in the case of Rex Tillerson's State Department. 

    To be fair, the fixation about Russian meddling in the 2016 election has made it very difficult to engage with what Mitt Romney had rightly called our number one national security threat. Tillerson knew Putin, at least peripherally, understood the importance of energy in Russia's economy and foreign policy, and had direct experience dealing with Russian negotiators. Before the Democrats settled on the "Russia cost Hillary the election" meme and Mueller subpoened anyone who had ever talked to a Russian, there was a chance to sort out the interests of Russia and NATO in the former Soviet republics and to agree on a plan to stabilize the Muslim nations lying to Russia's south. Tillerson could have been central, but the Trump administration was denied the opportunity, and Tillerson's resume became less relevant.      

  Tillerson, Trump, and the Senate all deserve blame for the mis-management of the State Department. Trump has had an overall problem nominating people for positions requiring Senate approval, with no nominee yet proposed for one third of the 640 such positions. State, which is facing a 30% budget reduction, is at the forefront with no nominee yet recommended for 54 positions, 61 confirmed and 28 pending before the Senate. As happened to George W Bush, but not Obama, Clinton, or HW Bush, the Senate required resubmission of nominations after the end of the year - a sign that Mitch Mcconnell is as much of a problem as is Chuck Schumer.  At State, a majority of the senior positions remain unfilled, and no ambassadors have been nominated for Saudi Arabia, Jordan, Turkey, Qatar, Yemen, or South Korea - all hot spots requiring expertise and personal contacts.  If Tillerson has been complaining about White House interference, it has not made the media. 

    On broad policy, former Exxon CEO Tillerson would have agreed with the establishment, globalist wing of the Republican party in the Make America Great Again debate about free trade and the ability of American companies to prosper amid global competition. His experienced voice will be missed in the foreign trade debates which will follow the replacement of Gary Cohn by (choke) Larry Kudlow as President Trump's chief economic advisor, and the administration turns away from multinational agreements toward individual country negotiations. Down with the influence of the embassy staffs and the Foggy Bottom experts; up with their counterparts at the Commerce Department and the office of the Trade Representative.  

    The turn from Tillerson to Mike Pompeo - US Military Academy; Harvard Law; House Intelligence Committee; CIA Director - suggests closer alignment than with Tillerson for a hawkish approach to the remaining two members of George W Bush's "Axis of Evil" - North Korea and Iran. Each has a story, but Tillerson was apparently not in the loop with Mike Pence and Ivanka on North Korea, and would have cautioned against scrapping President Obama and John Kerry's Iran nuclear agreement which does not include inspection of Iranian military sites or cover missile development. The first may be an opportunity; the second a risk. 

    Tillerson left Exxon a little better than he found it when he became CEO in 2006 - up about 25%; he won't be able to say that about the State Department, but he will have his XOM stock to cushion the blow, unlike many others who have given up good careers to join the administration and found that they cound not navigate the Senate or the top CEO.  

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      This week's bonus video is for those who couldn't get enough of the curling competition at the recent Olympics. 

  bill bowen - 3/16/2018

Trump: Challenging the Established Order

    Silicon Valley venture capitalists love companies that disrupt industries - Tesla in cars; AirBnB in hotels; Uber in local transportation; Amazon in anything. Information technology is usually a key element, but what they are really looking of is a way of transforming an industry which does not effectively meet customer needs. It is ironic that they hate the great political disrupter, President Donald Trump. Whatever his personal shortcomings and his inability to coalesce a Washington majority around his proposals, he deserves credit for challenging the established order where lesser leaders have lacked vision or feared to tread.  

    The big ones - where he has broken with Republican Party orthodoxy and found a Democratic party thus far totally unwilling to give him the handful of votes which he would need in the Senate to pass common sense legislation favored by a strong majority of Americans. 

        - Immigration. Eleven million illegal immigrants; no effective border control; a predecessor who was clear that he did not have authority to exempt categories of "undocumented immigrants" from enforcement, then did so with millions of children.  Trump had a strategy: apply pressure by terminating President Obama's illegal program with enough lead time to allow Congress to act. He had a balanced proposal which went well beyond the "heels dug in" on either side: a path to citizenship for 1.8 million; enforcement of the border (including a wall); limits on the scope of family members who come as sponsored relatives, and instead focus on immigrants who bring benefit to America; elimination of the lottery designed to allocate immigration slots to people from random countries. We wait for Congress.  

        - Gun control. After years of inaction, we have a president who is willing to take on the NRA and the "Second Amendment" wing of his party. He will eliminate "bump stocks" which make assault rifles out of semi-automatics - by executive order if necessary; he will agree to increasing the purchase age for rifles, expanding background checks, and aggressively using mental health exclusions. We wait for Congress. 

    And the third element of the trifecta which will be a signature success (or failure) of his presidency - foreign trade. The first portion of the problem has been fixed - a disadvantageous tax code which made American companies less competitive and encouraged capital to be kept offshore. As a testament to the #Resist movement, no Democratrs in the House or Senate voted for the tax code changes. On trade, the Democrats in opposition will be joined by most of the Republican establishment which believes in multilateral "free trade" agreements adjudicated by the World Trade Organization, rather than the Trump approach of direct negotiations between the United States and individual other countries. Some themes to watch: 

        - We are losing the current game, have been for decades, and neither party has effectively questioned the status quo since the 1980s when the Japanese car makers were pressured into producing cars in the United States as the price of market access. The 2017 deficit in Goods and Services of $566 billion was up 12% from 2016, and increased from 2.7% to 2.9% of GDP. (The Goods deficit was $810 billion; the Services - travel; education; trade-related; professional and management - surplus was $244 billion.)  Domestically, the winners have been more politically powerful than the losers, particularly as the Democrats have abandoned the white working middle class. 

        -  The primary target is China. China represents almost half of our deficit in goods - $375 billion in 2017. They were invited to join the World Trade Organization in 2001, but have retained their system of state-sponsored industries targeting global markets, demanding transfer of technology in exchange for permission of foreign companies to do business in China, and exclusion of foreign products through tariffs and other barriers. From their perspective the game is working - growth remains above 6%; Xi Jinping is set up as "ruler for life"; basic industries continue to grow (they make half of the world's steel) as they subsidize development in central and southwest Asia. With a detailed Trade Representative  assessment in hand, Trump has asked the Chinese government for a plan to reduce the deficit by $100 billion with the premise that if they do not make real progress, he will find a way. 

        - Trump is playing multi-dimensional chess. He starts with tariffs on steel and aluminum because they are symbolic, but also because a 1972 law and WTO regulations give the President latitude on industries related to national security. This provides leverage for renegotiation of NAFTA, which has primarily benefited Mexico. From there, the theme is that each country is different. He will eventually address the fact that Value Added Taxes - used by most developed countries, but not the United States - are unfavorable to American exports. 

        -   Trump is poor at building coalitions. With former Goldman Sachs president Gary Cohn's exit from the Council of Economic Advisors, Trump loses a strong connection to the top levels of Wall Street as well as to the "free traders" in Congress. Treasury Secretary Steve Mnuchin, Commerce Secretary Wilbur Ross, Trade Representative Robert Lighthizer, and  National Trade Council Director Peter Navarro are capable lieutenants, but a broader coalition is needed to turn policy into effective action. Likewise, there are not a lot of foreign leaders signing up to help restore balance to global trade. 

    Some of this will get done; much won't. The Democratic #Resisters and the Republican NeverTrumpers remain hopeful that the Senate's dilatory confirmation process and Mueller's meandering search for Trump malfeasance will prevail over the President's willingness to challenge the established order on the major issues  confronting the country. This writer hopes not.  

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        This week's bonus is a sample of the five-minute videos developed by Praeger U to articulate conservative positions. This discussion by Dave Rubin, "Why I Left the Left", has received some 17 million views. 

bill bowen - 3/9/18

        

Tax Reform: Three Perspectives

    Caution! This is a political blog, not investment advice. Implications - should the reader choose to accept the premise - are intended relative to the 2018 and subsequent elections, rather than DOW 30,000. There are three somewhat distinct perspectives which occasionally get mingled in political demagoguery. 

1. The Nancy Pelosi / Paul Krugman perspective: The Tax Cuts and Jobs Act  is a give away to the rich, and will be of virtually no benefit for the middle and lower classes. 

    Nobel Winning liberal icon economist Paul Krugman in December: "The economy's pretty good. In fact, it looks like we're close to full employment, although we don't know why wages aren't rising more. Trump gets essentially zero (credit)... First of all, there have been no actual policies. There hasn't really been any policy change." And, relative to the tax reform:  "Realistically we have to imagine there will be some effect, but will it be visible? Will workers see their wages increase in a way that anyone will notice over the next five years? No." 

    House Speaker Nancy Pelosi:  “It’s an all-out looting of America, a wholesale robbery of the middle class. The GOP tax scam will go down, again, as one of the worst, most scandalous acts of plutocracy in our history.”

    The sacrifice of economic analysis and linguistic hyperbole is not news for these two. What is interesting and important is that Pelosi and Chuck Schumer were able to prevent a single Democratic member of either chamber from voting for the measure. Those looking forward to wrangling over immigration and government shutdowns should take note of the extraordinary party discipline. The Left is in a full "Resist" mode, and the Democratic center dare not whisper about compromise. 

    2. The Larry Kudlow / Art Laffer perspective: It is a boon for everybody, and will pay for itself as lower tax rates multiplied by higher rates of economic activity will yield higher net tax revenue. 

    The most realistic projection is from the Congressional Budget Office  and the Joint Committee on Taxation who determined that provisions in the bill as passed would decrease gross receipts over the 2018-2027 period by $1.45 trillion, that economic activity would increase by .7%, resulting in increased taxes of about $450 billion, and that interest expense would rise by $66 billion, resulting in a net deficit of about $1.1 trillion or $110 billion per year. This is understated by some $300 billion because it assumes that individual rates will be increased in 2025 to make the numbers work. 

    Out of the box the results are better than any Republican politician could have hoped for.  Employers from AT&T, to Comcast, to Wells Fargo, to Boeing, to regional banks have announced $1000 bonuses for hundreds of thousands of workers, wage increases, increased job training, and capital spending as the top corporate rate drops from 35% to 21%. Apple, the largest of the companies holding an estimated $2.6 trillion in profits offshore, has announced plans to repatriate $252 billion, pay a $38 billion tax bill, build a third major campus in the United States, and add 20,000 workers over a period of five years.  Announcements continue weekly. 

    It is not possible to separate the causal factors for economic growth accelerating from 2% to 3% since President Trump took office - the global economy is doing universally well; deregulation is rolling through the energy, healthcare, banking, and labor sectors; and the tax reform is impacting 2018 plans for both large corporations and small businesses. Public opinion promises to shift from pre-conditioned Democratic talking points as employee paychecks start to see federal tax withholding rates drop $100 or more in February, and Clinton strategist James Carville's famous 1992 aphorism "It's the economy, stupid" clicks in.  

    3. The Bob Corker / National Review perspective: Deficits and resulting debt as a portion of GDP are on a fatal trajectory. 

    President Trump came into office following the two most profligate presidents ever - George W Bush who ran up $3.3 trillion of debt, and Barack Obama who ran up $6.7 trillion. According to the Office of Management and Budget's most benign-sounding calculations which exclude intra-government debt, the federal government is running at a 3% deficit (about $600 billion per year), and will reach about an 80% debt to GDP ratio this year - about 92% if one includes debt that the government owes itself. We will cross 100% in the 10 year projections supporting the tax reduction. 

    This is real, and there is little hope in sight. Paul Ryan and many House Republicans want to take on Social Security, Medicare, or at lease Medicaid, but Mitch McConnell has announced that there is no way to get the necessary votes in the Senate. Instead, the discussioin is about billions of more spending for a wall, hurricane and fire relief, increased payments for low wage earners with children, new nuclear capabilities, and  a general upgrade to the military. And our real estate developer president is comfortable with debt. Apologies to our grandchildren. 

    The Democrats and the media would keep the focus on the latest Trump outrage as we move into election season, tossing off an occasional reference to the first and third perspectives above. At least for the short term, the Republicans will be able to put a billion dollar marketing campaign behind Perspective 2, hoping to have an election on the economy rather than Russia or Trumps' personal failings.  

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    This week's video celebrates (?) the legalization of recreational pot in California. FWIW, Gavin Newsom the  leading gubernatorial candidate, was an early supporter and is now a leading proponent of state funded universal healthcare - which would triple the state budget. 

bill bowen - 1/19/18

 

 

Tax Reform - An Endorsement of Karl Rove's POV

    This week's blog is simply a referral to Karl Rove's article in the Wall Street Journal. There is no point in trying to say it better. It must pass; it will pass. 

 

 https://www.wsj.com/articles/two-tax-reforms-can-be-better-than-one-1510790669?mg=prod/accounts-wsj

 

 

 

  

Trump's Republican Schism

    There are social conservatives - Trump won them over by promising to appoint conservtive Supreme Court justices. There are national security conservatives - Trump won them over by promising to greatly expand the military budget, to secure the border, and to defeat "radical Islamic terrorism".  That leaves the fiscal conservatives - which will be at the center of discussion for the rest of the year, as "thinking big" runs into financial reality.

The battleground

    - The federal debt is approaching $20 trillion, about 105 % of Gross Domestic Product. This is up from $5.7 trillion at the start of George W Bush's first term and $10.6 trillion at the start of Barack Obama's first term. The states are generally constitutionally required to balance their budgets, but Washington has learned that it can increase spending and lower taxes by pushing off payment to our grandchildren.

    - The real test for fiscal conservatives is the the amount of tax revenue and spending relative to GDP. Long range they have been about 18.1% revenue and 20.7% spending, resulting in a deficit of 2.6% of GDP - which can be absorbed by a growing economy. Due largely to several years of the Republican-induced sequester, spending is currently at the 20.7% average, but revenue is at 17.6% for a deficit of 3.1%. More revenue is needed.  

    - Paul Ryan has spent a career developing proposals to move toward a balanced budget, and is willing to take on sacred cows like Social Security and Medicare.  Trump's Office of Management and Budget Director, Representative Mick Mulvaney of South Carolina, a strong deficit hawk, was a leader of the Freedom Caucus. That voice will be heard. 

    - Trump, the real estate developer, has many big ideas with the potential to blow up the budget: corporate tax cuts; individual tax cuts; a trillion dollar "public/private" infrastructure program; replacement of Obamacare; a 10 per cent ($54 billion per year) Defense Department spending increase; a new childcare entitlement; a border wall.   

    - The budget has been in something of a sequester straightjacket since 2011 when House Republicans used debt ceiling caps to force the creation of a Congressional Deficit Reduction Committee whose failure to reach any agreement triggered automatic budget reductions split evenly between defense and non-defense categories. (The anticipation had been that the risk of such a calamity would force concessions. It didn't.)

    - Generally, bills require a simple majority in the House (where the Republicans have a 239 to 193 advantage), and 60 votes to overcome a filibuster in the Senate (where they have a 52 to 48 advantage). Budget bills, however, can be passed with 51 votes under a set of arcane, but important, Reconciliation rules. Paul Ryan has general control of the House, but has to deal with the remaining 30 members of the Freedom Caucus; Mitch McConnell has to deal with a few Republican free agents (John McCain; Lindsey Graham; Susan Collins; Lisa Murkowski), while peeling off a few of the 10 Democratic senators who are running in 2018 from states carried heavily by Donald Trump. (51 is pretty safe; 60 is a heavy lift.)      

The gameplan

    Success will require cooperation among the Republicans who know that they must deliver after eight years of complaining about Obama, Pelosi, and Reid. It will also require expert timing and sequencing as well as content and salesmanship. Some predictions:

    - Repeal and replace Obamacare will come first. Secretary of Health and Human Services Tom Price is an expert on the substance of healthcare and the politics of the House. Content will include an ability to tailor coverage to the individual's needs, Health Savings Accounts, tax credits, buying insurance across state lines, a phase in period, and an expansion of Medicaid. The latter is necessary to prevent the major Democratic talking point - a significant loss of coverage. It will cost money, but it will be "repeal and replace" with a private sector solution, delivering on the Republicans' first political obligation.      

    - White House guidance to federal agencies for the budget for Fiscal Year 2018, beginning October 1, includes a $54 billion increase in defense spending, an offsetting reduction for non-defense departments, and no changes to Medicare and Social Security. Thus begins the battle with Congress and the lobbyists. Lots of oxen will be gored. The "small government" Freedom Caucus will get its pound of flesh, but Defense will drive the total up.    

    - The administration has promised tax reform to be decided upon by August - an aggressive timeline. There will likely be a revenue-increasing border adjustment tax (similar to what is imposed by countries with Value Added Taxes), reduced rates, reduced exemptions, repatriation of corporate profits held offshore, and a "revenue neutral" outcome. Rate cutters will rely on "dynamic scoring" and the "Laffer curve" - the dubious premise that reduced rates will lead to increased economic activity and greater revenue in the long run.  There will be lots of references by both sides to Ronald Reagan who reduced tax rates significantly in 1981 and 1986, but broadened the tax base, eliminating many deductions and increasing Social Security taxes.  

   Replacing Obamacare is an imperative, even if it has a cost. Increasing military spending is an imperative, even at a significant cost. It would be good to adjust Social Security and Medicare, but that can wait. Reducing the rest of governmnet is an opportunity, but not nearly enough to offset the military increase. By the time Congress gets to taxes, they will need to prioritize - and the bouquet will go to those that stimulate the economy and create jobs - not individuals. 

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    This week's video is the original exchange between Senator Al Franken and Senator Jeff Sessions. There no evidence of the underlying premise that the Trump campaign coordinated with the Russians during the presidential contest, but Sessions certainly mis-spoke. We are back to Jim Comey and the FBI to investigate the real question while Sessions recuses himself. This too shall pass. 

bill bowen- 3/3/17 

The Market Votes for Trump

    Caution: This is political reflection, not financial advice. Those seeking the latter should consult Charles Schwab, Edward Jones, or your local bartender. 

    The American stock market is up 10% since Donald Trump was elected. This despite the broad effort by the NeverTrumpers and the #Resisters to nullify the election: meaningless recounts; attempts to subvert the Electoral College; boycotts of the inauguration; screeds by Elizabeth Warren, Nancy Pelosi, and Chuck Schumer; Soros-orchestrated protests; slow-walking of cabinet appointments; talk on the left of impeachment and Californian secession; and media hysteria of an "administration in chaos". Markets are supposed to hate uncertainty, yet Trump seems to be getting a vote of confidence by those paid to predict the financial future. Let's parse that a bit. 

    An upward stock market is a heavy lift from here.

        - The current bull market began in 2009, with the S&P 500 tripling in the past eight (admittedly Obama) years. Profit margins are strong. Price to earnings ratios are stretched. Only once in history has the Dow Jones average gone this long without a 20% pullback.  

        - After eight years of giving money away, Janet Yellen's Federal Reserve is recognizing signs of inflation stirring and is poised to move interest rates back toward a "normal" 3 to 4 % over the next several years. As bond yields increase, stocks are relatively less attractive. 

    Clearly, the the consensus of the market is looking for good things from the Donald's team. They could be wrong; the Republicans may not be able to reach internal consensus on big issues; they may over-reach; the financial team of Gary Cohn (National Economic Council), Steve Mnuchin (Treasury), Mick Mulvaney (Budget), and Wilbur Ross (Commerce) may not be up to the task; there may be some unforeseen "Black Swan" event. But for the moment all seems possible on the financial front:

    - Regulations will be slashed. The presidential order that for every new regulation, two must be repealed sets a good tone. Whatever the "replace" decision, the blankets of healthcare regulation that came with Obamacare will be removed. Scott Pruitt will return the Environmental Protection Agency to a narrow agenda of ensuring clean water and air rather than the Obama administration's focus of killing carbon. Alexander Acosta's Labor Department will reverse the tsunami of boundary-pushing expensive regulations promulgated in recent years by Tom Perez - currently a candidate to lead the Democratic National Committee. 

    - Tax rates will be lowered. Paul Ryan, Steve Mnuchin, and a handful of others will provide the frame, but American companies will no longer have the highest nominal tax rates in the world, and exports will be favored over imports. Mnuchin has promised a plan by August to increase economic growth to 3% from the paltry 1 to 2% which has persisted through the Obama administration.   

    So, what could go wrong, with this big time disruptor in charge?

    - The Congressional Republican deficit hawks will run into the president who has made a fortune skating on the edge of bankruptcy in the high end real estate industry. Twenty trillion dollars of federal debt is enough; lower headline tax rates are OK if the code is simplified by eliminating deductions; defense increases need to be paid for by cuts elsewhere; repeal of Obamacare must not result in broad free healthcare. VERSUS more ships, planes, and nuclear weapons; "dynamic scoring" in which lower tax rates are thought to result in greater revenue due to an increase in economic activity; and expansion of Medicaid to those who will lose subsidized healthcare coverage. An irresistible force could meet an immovable object. 

    - The desirable objective of balancing foreign trade may slow global growth and draw retribution. We will need to brush off our history books to understand how the Smoot-Hawley tarriff bill contributed to the Great Depression. Or at least that is what the global corporation wing of the Republican party fears. 

    - We may find that having a pool of 11 million illegal immigrants living in the shadows and depressing wages for all low-skilled workers has been good for the economy - or at least for those owning the means of production. With the portion of revenue going to labor increased, that left for capital (and stockholders) will decrease. The Democrats rail against "income inequality"; Trump's immigration and foreign trade policies may actually do something about it. 

    At this point we really don't know. We have many encouraging cabinet appointments; aside from the immigration kerfuffle there has been a good start with executive orders; and there is a "Congressional Relations" reason that Reince Priebus is Chief of Staff; however, the difficult legislative work lies ahead. Nevertheless, there is a stark contrast between the Chicken Little behavior on the still shell-shocked Left and the sunny optimism of the denizens of Wall Street who are voting for Trump. 

                                                                            -----

    This week's video is a brief update on the war against ISIS in Iraq where American troops are increasingly embedded with Iraqi forces as they begin their campaign to complete the liberation of Mosul, the last major ISIS center in Iraq.

bill bowen - 2/24/17 

Trump: Right on Policy

    So much noise. To supporters, nearly every day is Christmas; to opponents, every day is another chance to resist. Sleep-ins in the Senate; riots in Berkeley; open war with the media; Soros-sponsored demonstrations; orchestrated legal challenges; endless phone calls, meetings, and pronouncements. The man may be badly flawed. The process may be chaotic and the pace unsustainable. Priorities may be unclear. The Democrats may be succeeding in delaying the formation of his team. But, the man is fearless, right on policy, and getting results. As the kids in Silicon Valley are wont to say, "Trump is a disrupter".  Consider:  

    1. Trade policy. Republicans and Democrats had both accepted the premise of a debilitating and unsustainable $730 billion per year trade deficit in goods and services - $350 billion with China; $60 billion with Mexico; $65 billion with Germany; $69 billion with Japan; $28 billion with South Korea. 

    There are advantages of the status quo: cheap stuff for American consumers produced with cheap labor; profits for American companies who import cheap stuff and operate in foreign countries; willingness of foreign governments to use the American dollar as the "global reserve currency"; conformance with "comparative advantage" economic theory in which all are best off if each country focuses on what it does best; the good feeling of globalists as hundreds of millions in China and elsewhere rise from poverty.  

        But the real result is levelling - reducing America to raise others. $730 billion is 4% of our $18 trillion Gross Domestic Product. Ample attention is given to the five million manufacturing jobs which have been lost since 2000, as thousands of factories have been closed, but the problem is even deeper. With GDP growing at 2%, each year we are selling companies, real estate, or cash to make up the difference.  

        Even without his Commerce Secretary and Treasurer, Trump has cancelled the Trans Pacific Partnership, started the renegotiation of the North American Free Trade Agreement, and convinced several manufacturers to shift production to the United States. Critics note that jobs are also lost to technology, but Trump will move mountains to accomplish what can be done.   

        2. Immigration. "America First" changes the discussion toward the Canadian model of accepting immigrants who bring needed skills or resources to Canada, and away from the US model of focusing on what is good for the immigrants. It is a difficult shift, with the Democrats long term strategy of maximizing their voter base, and only Trump had the courage to face it head on. 

        Even without his Attorney General, Trump has issued an executive order to: secure the southern border, detain individuals suspected of violating immigration laws, expedite claims of eligibility to remain, and remove those whose claims have been lawfully rejected. Ever the Marine, Homeland Security Secretary John F. Kelly told Congress "“I work for one man. His name is Donald Trump. He has told me one thing: ‘Secure the border.’”  There are details of border patrol staffing, expansion of detention facilities, expediting of legal proceedings, and specifications of a physical barrier, but the ball is rolling.

        The liberal 9th Circuit Court in San Francisco has temporarily stopped Trump's effort to halt immigration from war zones where adequate vetting is not possible - substituting it's judgement for the President's - but the defeat is temporary, to be overturned by the Supreme Court, or followed by a revised order which is better drafted. The ruling also highlights the desirability of appointing federal judges such as Neil Gorsuch who apply the constitution and the law rather than overturning politivcal decisions. There will be "extreme vetting". 

      3. Free riders. The domestic press has made much of Trump's call to eliminate or update the "obsolete" North Atlantic Treaty Organization. Of the 28 NATO countries, only the US (3.1%), Greece (2.4%), Poland (2.2%), the UK (2.1%), and Estonia (2.0%) meet the agreed military spending requirement of 2.0% of GDP, despite the threats posed to Europe by Islamic terrorists and by Russia. As part of her conversation with Trump, Angela Merkel (1.2%) has acknowledged that this must change.

    Globally, we have 150,000 of our 1,300,000 military personnel stationed overseas in a posture which hasn't changed much since 1946 - 49,000 in Japan, 38,000 in Germany, 35,000 in the Middle East, 27,000 in South Korea, 11,000 in Italy, and 10,000 in Afghanistan.  In his waning days, Barack Obama agreed to establish a permanent US military presence in Poland. Trump has called for 30 day "readiness review", as part of a broader plan to upgrade the military. Real action will await the appointment of his Director of Office of Management and Budget and his Treasury Secretary in addition to his Defense Secretary. Expect not only an increase in military spending, but also a reconfiguration for the 21st century.  

     The media pushes for detailed proposals on taxes (lower; simpler) and healthcare (repeal and replace) before Trump's Secretaries of the Treasury and Health and Human Services are approved. Thankfully he is waiting, while he deals with simple things like the Supreme Court nomination, chipping away at Dodd-Frank's financial regulations, approving pipelines, and just generally serving as Santa Clause for those who had (almost) learned to accept the premise of the last decade that America's best days were behind us.

                                                                    -----  

     This week's video is a snippet of the "Free Speech" demonstration in Berkeley against Milo Yiannopoulos before the anarchist "Black Bloc" arrived to make it really violent. Some introspection is required. 

bill bowen - 2/10/17

Assessing Trump's Cabinet - Part II (Economics)

    The election of Donald Trump was based on a promise to disrupt the multi-decade, bi-partisan direction of the American economy. The manufacturing base has been decimated; the $600 billion annual foreign trade imbalance has hollowed out the economy; the $20 trillion national debt is unsustainable. This is a complex undertaking. The Executive Branch has the lead on trade and regulatory policies, but the House has the lead on budgetary and fiscal policy. The independent Federal Reserve dominates monetary policy. This is the swamp of lobbyists and self-interest. This is where populism meets the bi-partisan corporate establishment. The administration will succeed or fail based on the performance of Trump's economic appointments. 

    Trump's team has a mix of high powered Wall Street types, successful business outsiders with conservative agendas, and an inordinate number of "advisers" with vague portfolios and ample opportunity to sow confusion.  Weaving together the conflicting threads will be a major challenge.

General Economic Direction - the top dogs. 

    - Former Goldman Sachs partner and hedge fund operator Steve Mnuchen for Treasury Secretary. (Jack Lew) The Treasury Department collects the country's taxes, pays its bills, and oversees the banking system. The Secretary is the country's Chief Financial Officer. It is one of the top three or four cabinet positions. Highly qualified. 

    - Goldman Sachs President and Chief Operating Officer Gary Cohn for Chairman of the National Economic Council. (Jeff Zients) This Chairman, part of the White House staff, coordinates positions and meetings attended by the Vice President and relevant cabinet secretaries - State; Treasury; Agriculture; Commerce; Labor; Housing and Urban Development; Transportation; Energy; Health and Human Services. Highly qualified. 

      - Congressman Mick Mulvany of South Carolina for the Office of Management and Budget. (Shaun Donovan) The OMB, the largest agency in the White House, prepares the President's budget proposal, and oversees its implementation in the executive departments. It also coordinates the administration's procurement, financial management, information, and regulatory policies. Mulvany is a founding member of the Freedom Caucus, and an extreme deficit hawk with little executive experience. His ability to reach agreements with Paul Ryan will be a key to the success of the Trump presidency. An ideological risk.

       - Son-in-law, real estate developer Jared Kirshner to be a senior adviser on trade and Israel policy. Hopefully he will not have an end-run around Mnuchen, Cohn, Mulvany and the other appointees with specific positions and responsibilities. A help if he moderates Trump's behavior; a significant problem if he has his own agenda.   

  Cabinet Positions 

    - Former surgeon, House Budget Committee Chair, and author of numerous "Repeal and Replace" bills, Tom Price to be Secretary of Health and Human Services. (Sylvia Burwell)  He will have one task - replacing Obamacare - for which he is eminently well qualified. 

    - Billionaire investor Wilbur Ross for Commerce Secretary. (Penny Pritzker) Commerce is the voice of the business community with a mission to promote job creation and economic growth. Ross made his fortune restructuring companies in Rust Belt industries, and was an early Trump supporter. Questionable.  

    - Former Texas Governor Rick Perry at Energy. (Physicist Steven Chu). He will lead the resurgence of carbon-based energy - although Texas also leads the nation in wind energy. Energy also oversees the nation's nuclear weapons laboratories. Excellent choice.

    -  Fast food industry magnate Andy Puzder at Labor. (Tom Perez) The department advocates for workers. On issues such as minimum wages and overtime pay Puzder will be a poke in the eye for the department's traditional constituency. A good lawyer/businessman, but a questionable choice. 

    - Mitch McConnell's wife, Elaine Chao, at Transportation. (Anthony Foxx) Her focus is safety and infrastructure. Qualified; popular. 

    - Surgeon and presidential candidate Dr. Ben Carson at Housing and Urban Development. (Julian Castro)  He's a smart and inspirational guy who grew up in public housing, but otherwise has no apparent qualifications. A risky choice for a low risk position. 

    - The Secretary of Agriculture, generally a non-controversial appointment, has not been named. 

Trade

     - Secretary of State Rex Tillerson will oversee the largest group of officials responsible for foreign trade, with a network of consuls around the world whose job it will be to support American companies wishing to sell abroad. The "America first" focus will be quite different with a businessman in charge instead of a traditional diplomat. 

    - Reagan administration veteran, and trade litigator Robert Lighthizer for Trade Representative. (Michael Froman) A hard line with China is anticipated. Well qualified. 

    - Trump Organization chief legal counsel Jason Greenblatt for Special Representative for International Negotiations. (new position) Hopefully he will work on specific deals under the direction of Tillerson or Lighthizer. 

    - Economist and author of "Death by China", Peter Navarro to head the new National Trade Council in the White House. (new position) Navarro advocates for a fundamentally different trade relationship with China which currently has co-opted our major corporations. This could be good; the current "free trade" rules have been much to the benefit of China and to the detriment of American workers. 

Regulation 

    - Wall Street lawyer Jay Clayton to the Securities and Exchange Commission. (Mary Jo White) Clayton will change the focus away from enforcement, much to the chagrin of Elizabeth Warren. Qualified, but probably too much an advocate for Wall Street. 

    -Oklahoma Attorney General and leading climate change skeptic Scott Pruitt  for Environmental Protection Agency. (Gina McCarthy) Dismantling Obamacare and the assault on the EPA rank as the two most direct efforts to eliminate the Obama legacy. Well qualified. 

    - Eighty-year old billionaire activist investor Carl Icahn for Special Advisor for Regulatory Reform (new position) Much of this work will be done in the first six months. 

   This is an A-list, whether one agrees with the policy direction or not. There are two risks: too many cooks with undefined roles; and the yet to be determined battle between the budget cutters and those who would cut taxes and increase military spending. There is adequate intellectual heft and proven experience to massively improve the trade balance. Lets be optimists for a while. 

                                                                    -----

  This week's video is a brief clip about illegal immigration from President Bill Clinton's 1995 State of the Union Address, back before the Democrats prioritized Hispanic voters over white middle class voters. 

 

The Obama Legacy - Part III (International)

     This is Part III (International) of a series of posts on the legacy of President Barack Obama: Part I (Economics) appeared on August 26; Part II (Obamacare) appeared on September 2; Part IV (Race Relations) will appear on September 16. Collectively, the four posts are intended to reflect what future historians will see as the salient points of his presidency.

                                                                                   -----

    The overarching international feature of the Obama presidency is the reduced standing of the United States in the world.

          - The world has always been populated by nations on the rise, trying to supplant the established powers, and since the Reagan era the United States has enjoyed the historical anomaly of been the only superpower. It is natural that Obama was faced with a rising China, a resurgent Russia, Islamic terrorists, and nascent nuclear powers in Iran and North Korea. All had been challenging the United States before Obama, and all would have presented challenges to any American president. 

        - The harshest critics would point to Barack Obama's atypical upbringing (born to a Kenyan father and expatriate mother; raised partly in Jakarta by an Indonesian step-father; tutored by a communist friend of the family in Hawaii) as depicted in his autobiography, "Dreams From My Father", and reflected by his 2009 quote at a NATO meeting in Strasbourg that "I believe in American exceptionalism, just as I suspect that the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism." At various times he has tried to walk the comment back, but it is the essence of what Michael Kinsley called a political gaffe - when a politician tells the truth. The world heard his impression of America.  

        - Obama's training and experience as a community organizer does not transfer well to the Hobbsian world of international relations. The Western Organization of Resource Councils has this to say about community organizers: Organizers listen to their members, who know the community, and let people go at their own pace while also helping them develop the self confidence to try new things. In community organizations, decision making is vested in the members. Big decisions should be made by as many members as possible. In the Libyan conflict this was aptly described by a White House adviser in the New Yorker as as "leading from behind". What may work on the South Side of Chicago does not translate to the Shores of Tripoli. 

    It is hard to find a place in the world where the United States is better respected or more influential after two terms of Barack Obama. 

        -  The administration's primary foreign policy initiative - a "pivot to Asia" - has foundered with the lack of support for the 12-nation Trans Pacific Partnership (essentially an economic alliance to limit China's influence), China's increasingly militarized claims over the South China Sea, and China's sponsorship of international financial institutions such as the Asian Infrastructure Investment Bank to rival the western World Bank. The huge decades-long trade imbalance shows few signs of abating. The protocol-conscious Chinese forget to provide a stairway for Obama to deplane when he lands for the G-20 meeting, and - not to be outdone - the president of the Philippines publicly calls Obama a "son of a whore". So much for the pivot.  

       -  In a real sense, Barack Obama and Hillary Clinton are the father and mother of ISIS - the decision to abandon Iraq; the naive encouragement of rebellion against Assad; the killing of Qaddafi. If there is an Obama Doctrine it must be some combination of give a speech, oust a despot, and hope that the locals can handle the aftermath. JayVees!!  

      - Mitt Romney was ridiculed for calling Russia our main geopolitical opponent.  Hillary Clinton started  2009 by presenting the Russian foreign minister with a "reset" button - which some since-missing State Department functionary mistakenly translated to the Russian word for "overcharged".  Proving Romney right, Putin has annexed the Crimea, supported rebels in eastern Ukraine, expanded militarily and diplomatically in Syria, sided with Iran in nuclear talks, and threatened the former Soviet republics which have moved toward the West. 

        - The list of symbolic events is long - some Obama's fault; some just bad happenstance on his watch: Edward Snowden; Bowe Bergdahl; Benghazi; abandonment of control of the Internet; ransom for prisoners in Iran; the series of snubs by the Israeli prime minister; North Korean missile firings; cyber attacks across the US government; and on and on. 

        - And perhaps most importantly in a long term horizon, the proliferation of nuclear weapons which had been curbed for some four decades accelerated with North Korea actively testing both bombs and missiles, and Iran being given an open path to develop their own. 

    The Barack Obama who was elected in 2008 had the hearts of the Global Left fluttering. After the 2009 Nobel Peace Prize Committee set the bar a bit too high, the chairman found that there were no Mulligans. American troops remained in Afghanistan; Guantanamo remained open; bin Laden was killed rather than captured; Libya was bombed; the war in Yemen escalated. But the award was not returned. And the humble president's assertion that his election would stop the rise of the oceans has come to not very much - although he is still giving speeches and making unenforceable international commitments.

    Unfortunately, the statute of limitations on blaming Bush passed a couple of years ago.  

                                                                               -----

      Given all of the hoopla about Donald Trump's racist immigration policies, it is worth a re-visit to this speech by President Bill Clinton in 1995. 

   bill bowen - 9/9/2016 

The Obama Legacy - Part I (Economics)

    The best perspective on the presidency of Barack Obama will come decades from now when the seeds that he has sown have flourished or withered, but for those of us who live in the "here and now", and for those who contemplate the implications for the 2016 presidential election, it is worth some ruminations. When Obama came into office with control of both houses of Congress in January 2009, Hope and Change had four major faces: recovery from the deep financial hole which he inherited; implementation of universal health care; ushering in an international period worthy of the Nobel Peace Prize; and cementing America's commitment to racial equality. Each deserves discussion - this week let's focus on the first.

    There is no denying that George W Bush left Barack Obama with a financial mess - the Great Recession from December 2007 to June 2009, punctuated by the housing-induced financial crash of September 2008, saw a 5.1 % drop in US GDP, and a loss of 8.7 million jobs.  The response of financial industry bail-outs, a trillion dollars of stimulus spending, and unprecedented Federal Reserve monetary policies was largely a bi-partisan effort, initially led by Republican appointees Treasury Secretary Hank Paulson and Federal Reserve Chair Ben Bernanke. The judging of Obama's contribution should really begin a year or two later. 

    By many standard measures the economy has performed reasonably well under Obama. GDP has grown each year of his presidency; 9 million jobs have been added to reduce the unemployment rate from 7.8 % to 5.0 %; the Dow which was at 7949 when Obama took office is now at 18,450; inflation has been unusually tame. But the headlines tell a misleading story: the unemployment rate went down in significant part because 94 million people were not looking for work - the highest rate in 38 years; the average GDP growth rate of 1.5% is among the worst in US history, well below the average of 3.8%; and the average household income has decreased 2.3 %. The number on disability as opposed to being counted in the unemployed has exploded. Food stamps are up 40%; home ownership is down 5.6%; households below the poverty line is up 3.5%. The trend away from higher-paying, full time industrial jobs toward lower-paying service jobs has continued while average weekly hours worked has decreased. Political populism from the left (growing income inequality) and the right (foreign trade and immigration) is rampant. 

    The longer term impact of near-zero interest rates (which have been in effect throughout Obama's two terms) is more troubling to those who think beyond the current election cycle. 

        - With the transition from company pensions to self-directed IRAs and 401(k) plans in the 70's, 80's and '90's individuals now manage their own retirement incomes and have long been encouraged to devote half or more of their discretionary financial assets to bonds as they age. With bonds paying little, the equation doesn't work for many.

        - Public employee pension plans (which still generally follow the "guaranteed payment" model) have a similar problem, except that the risk is borne by the taxpayers. According to the Actuarial Standards Board, state and local pension plans are underfunded by some $5 trillion, using an assumed rate of return of about 7.5%. And that is before Social Security and Medicare. When this blows up, taxes will shoot up, other government spending will be squeezed out, or retirees will be stiffed.

        - The third leg of this stool is the federal debt which has been doubled under Obama  - now $19.4 trillion, or 105% of GDP. At these levels the ability to respond to another crisis is greatly compromised, and when rates do return to the "normal" 3 to 5 %, other budget requirements will be forced out.

    From a "legacy perspective", it is not particularly relevant whether the president's policies caused the result, or whether he just was unable to correct problems that were foisted upon him. In the case of Barack Obama there are elements of both.  There are direct and pronounced links to policies which have done great damage to the energy and healthcare industries; the financial industry is more concentrated than it was in 2008; and no political capital has been expended to correct dysfunctional incentives in the tax code such as high corporate rates with many loopholes, incentives to locate off-shore, and special benefits for hedge fund managers. Immigrants (legal and illegal) add pressure to the job market. A major fiscal disconnect has existed between the Republican House and the Obama administration since the passage of the Stimulus plan in 2009.    

    There is a lot of meat here for Donald Trump, particularly as Hillary represents a third Obama term with strong Wall Street ties. Pundits looking back from 2030 will wonder why the voters did not revolt. 

                                                                                ----- 

   This week's video is an introduction to KellyAnne Conway, Donald Trump's new (third) campaign manager, as she jousts with CNN's Dana Bash.  

bill bowen - 8/26/16

     

Paul Ryan's Very Merry Christmas

     Before turning over the House Speakership to Paul Ryan in October, John Boehner "cleaned the barn" by  agreeing with Nancy Pelosi on a two year year budget bill which broke the restrictions of the 2011 sequester, and also passed an increase in the debt ceiling to carry us into 2017. Those were the general numbers; last week came the omnibus tax and spending bills to provide the details through September 2016.  When the Democratic leader talks of Ryan "giving away the store" in exchange for legalization of oil exports, President Obama actively lobbies for Ryan's legislation, and Politico talks of a re-energized President Obama preparing his 2016 agenda, you know that the Republicans have blown the last opportunity to attach their agenda to legislation which the President needed to sign.

    By definition, "omnibus" means just about everything - the detailed spending levels and tax levies recommended by all of the committees of Congress dealing with appropriations, after consultation with all of their lobbyists and benefactors. The combination of spending, taxes, and policy riders gave plenty to dislike, and a few things to like. 

    On the dislike side - the primary objection goes to the fiscal conservatives. There is room to argue about the performance of the economy over Obama's presidency, but there is no room to argue about the fact that our politicians (led by Obama and Pelosi, but including many Republicans) have discovered the politically successful formula of marrying huge spending with modest taxes, financed by massive federal debt to eventually be paid by our grandkids or eliminated by crippling inflation. The package of $1.1 trillion in spending and $650 billion in tax cuts puts the debt clock path toward $19 trillion after years of Tea Party-led recovery.

    Some of the winners and losers: 

    Several departments received significant increases, sometimes above what the administration proposed - the Veterans Administration (claims processing); the Office of Personnel Management (cybersecurity), the Secret Service (prominent breaches), NASA, the Army Corps of Engineers, the National Institute of Health, and the Census Bureau. 

    Others felt the wrath of conservatives - the Environmental Protection Agency (below FY2014 funding), the Internal Revenue Service, the Transportation Security Administration, the Securities Exchange Commission, and the US Postal Service.

    The tax provisions included gifts for everyone, frequently making "permanent" fixes which have previously been enacted annually - for business, improvements on research and capital investment write-offs; for families, increased child tax credits, college tax credits, and earned income tax credits; a federal deduction for state sales taxes (useful in states without income taxes); a delay in some painful Obamacare taxes; and on, and on.

    Particularly irksome to conservatives was the abandonment of "the good fight" on symbolic issues - defunding of Planned Parenthood; funds for the re-settlement of Latin American and Syrian refugees; defunding of Obamacare.     

    There are three perspectives on what happened. 

        1. The populist conservative Freedom Caucus overplayed their hand. With the House being split 247 Republicans to 188 Democrats, 29 recalcitrant Republicans are able to block the speaker - and they do. Republican speakers had been guided by the "Hastert Rule"  since the 1990's, requiring that legislation would not be brought to the floor unless it had the support of a majority of the caucus. When the majority of the caucus does not translate to a majority of the House, it has been necessary for Boehner and now Ryan to get Democratic votes. Pelosi exercises firm discipline, not giving Ryan enough votes to pass legislation unless it contains much of what she wants.  The final House vote on the omnibus bill included 166 Democrats and 150 Republicans in favor, There was no alternative supported by 218 Republicans, and 97 Republicans chose to go home to tell their constituents that they had voted "NO".   

        2. Paul Ryan is playing the long game. Not much really is going to change unless we elect a Republican president, and the chances of that are far greater if Washington is not embroiled in the "government shutdown" narrative. (Forget that it would really be the president shutting it down if faced with a budget acceptable to the conservatives. The media and the Public see it as a Republican sin.) Besides, the piecemeal tax provisions in the agreement are moot after 2016; no matter who is president, the Republican House will produce a comprehensive tax reform plan and spending which will bend back toward balanced budgets in a decade. 

        3. To borrow a phrase from Donald Trump, the inexperienced Ryan got schlonged by Pelosi.

                                                                            ----- 

     This week's bonus is from a reader in California, for those who like the philosophy of Charlie Daniels.  

www.RightinSanFrancisco.com

Paul Ryan's Decisive Speech

   Dateline: Wednesday, November 9, 2016

    Rarely has a presidential election turned so decisively on one speech, much less one by somebody other than the candidates. For posterity, I will include that speech by House Speaker Paul Ryan in its entirety:

    "Thank you Donald (or Ben, or Jeb, or Marco, or ... it didn't matter) for inviting me to join you in Columbus on this beautiful October day. The only better day this Fall will be next Saturday in Madison when my Badgers take on the Buckeyes for the Big 10 lead. Today is important; that will be historic. 

    "Since the Republican convention in July I have spent a lot of time with Donald (or Ben, or Jeb, or Marco, or ...) discussing the state of the economy and what can be done to restore growth and guarantee the future of the American Dream. I have also had many discussions with the leaders of the House. I would like to share the shape of our consensus.  

    "The Founding Fathers, in their wisdom, placed responsibility for originating legislative budgets in the House where our two year terms keep the members most responsive to the will of the people. The American people, in their wisdom, have given us Republicans a strong majority in the House, and promise to do so for years to come. I am humbled that the members of the House have elected me to be their leader.

    "Whether it is Divine Providence or sheer coincidence, most of my experience has been in the economics of the federal government. I have been Chairman of the House Budget Committee which deals with the allocation of funds between departments and all spending bills. I have also been chairman of the House Ways and Means Committee which is responsible for the tax code, Social Security, and Medicare. I have debated Obamacare and the Stimulus Plan with President Obama. I have been the party's vice-presidential nominee, spending considerable time travelling the nation with one of our great business minds, Mitt Romney. I think it is fair to say, without any false modesty, that nobody in the country knows more about the policy and politics of the federal budget, the tax code, entitlements, and the corrosive effects of deficits than I do. I have put forward specific proposals based on conservative principles in all of these areas. 

    "During the past eight years we have seen the the national debt balloon to $19 trillion dollars, the level of workforce participation decline to the lowest in a half century, the income of the average American family fall by $2000, the debt of our students reach smothering levels, and the security of our seniors' retirement put in jeopardy. Republicans have had answers, but the president has resisted any cooperation in finding solutions.

    "In this November's election, the American people have a clear choice. In 2017 and for the next four years, the Congress will bring forward legislation leading to balanced budgets, reform of the complex and counter-productive tax code, ensuring the preservation of Social Security and Medicare, and providing opportunity for economic growth for all Americans.

     "If Donald (or Ben, or Jeb, or Marco, or ...) is president, those proposals will be developed in cooperation with with the chief executive and they will be signed and effectively implemented. On the other hand, if Hillary Clinton is president, we will face another four years of threatened vetoes, gridlock, and national economic decline. 

    "Rarely has the choice been so clear. Rarely has an incoming president been so able to design, pass, and implement comprehensive and thoughtful legislation to reinvigorate the American economy. We in the House stand ready to support Donald (or Ben, or Jeb, or Marco, or ...). We urge the American voters to do likewise." 

    So began the rout. 

                                        -----

   This week's bonus is a brief video of Marco Rubio discussing the the deployment of a few special operations troops to Syria - talking about the issue, not triangulating between Obama and Trump. 

bill bowen - 11/6/15

     

       

2016: The Economy Factor

    The financial pages are full of discussion about the first half of the year - how the different stock, bond, and real estate markets are doing; whether the economy is strong enough for the Fed to move toward a more normal interest rate environment; how world events are impacting the economy.  Let's put the discussion in the context of the 2016 presidential election. 

    First, some assumptions:

        1. James Carville had a good point relative to most voters during Bill Clinton's successful effort to unseat incumbent George HW Bush in 1992, "It's the economy, stupid". People have an opinion on a lot of things, but in the voting booth they are most concerned about how financially comfortable they and their families will be.

        2. People's time horizon is fairly short, and pain leaves a longer lasting impression than pleasure. There will be a lasting impression among those who have been out of work or had insurmountable debt in 2015, but the first half of 2016 is much more important for most voters.  

        3.  The president's party gets most of the political credit or blame for the economy. Congress plays a bit part in the public's mind. 

        4. Unforeseeable events can have a substantial political impact - the financial collapse of 2008 - and a candidate's response is important, but such events are rare. 

    With those caveats, if this were July of 2016, what would be the setting for the Democrat (presumably Hillary) who would inherit the Obama economy mantle, and for the Republican (hopefully someone with a financial pedigree) who would be arguing for a more robust economy. 

    - For the "middle aged workers" - Gen X, Gen Y, and younger Baby Boomers. The statistical battle is between the Democrats who point to a gradual improvement of the official unemployment rate from 7.8 % when Barack Obama took office to 5.3 % today, and the Republicans who point to a workforce participation rate of 62.6 % - the lowest since 1977, and the fact that inflation adjusted wages have been flat throughout the Obama presidency.  For an aberrationally  high number of voters, this is not a good economy - the millions who have dropped out of the work force entirely, are involuntarily working part time, or are working at below poverty wage rates don't need economists and politicians to tell them that the economy is not working for them.  The 2016 campaign will be between ways to make the market work to create more good jobs and ways to artificially assist those who do not have the skills or the commitment to be beneficial participants. Hope versus continued dependency. 

    - For the Baby Boomers and older. Unlike earlier generations who relied primarily on company pensions, this generation has its nest egg in self-directed plans where the risk and upside belong to the employee rather than the employer. The individual retiree's attitude about the economy will depend on how much they have followed the general consensus of experts that a majority of retirees investments should be in bonds as they age. Those in the stock market have done fine with US markets more than doubling since January 2009; more conservative bond holders have been trapped by near-zero interest rates. Fortunately, inflation has also been low, preventing drastic pain.  Don't touch my social security.  

    - For the Millenials. The Obama economy has been a disappointment for the "hope and change" generation. Many with technical skills and geographic mobility are doing remarkably well; in the Bay Area the dot.com feel is back, except that this time the companies provide real services and earn real profits. However, more broadly, unemployment for those under 35 is closer to 10%, some 40% of college graduates are taking jobs which do not require a college degree, and many graduates are carrying $30,000 or more of college debt. Financially strained Boomers are retiring later; technology is eliminating many jobs; immigrants are taking many of the entry level jobs. These voters may be liberal on social issues, but they are learning hard lessons in economics which were not taught in school.

    The economy can change by a few points in a year, but these are pretty well entrenched realities - a mediocre economy which leaves the President's approval rating in the high 40's, and a two-thirds "wrong track" reading.  The Republican candidate does not need to be a policy wonk like Paul Ryan, but he (she?) needs to be someone who can easily explain why foreign trade is good for American jobs, why a restructuring of the corporate tax code would bring investment money home and incent business expansion, and why the people want and deserve  opportunities for meaningful employment more than ever-expanding welfare programs. 

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    For those confused about the Greek referendum, here's an explanation by Greek Finance Minister Varoufakis of why European governments need to respect democracy by complying with a vote by the Greek people to reject the requirement that they meet the consensus  financial requirements of the entire eurozone. It helps to understand that Varoufakis is an anti-capitalism economics professor whose expertise is game theory.   

  

bill bowen - 7/3/15

    

    

Greece: Exit Stage Left

       Long before there was a Rome, a Frankish kingdom in Paris, Anglo-Saxon rulers in England, or a Prussia, there was Greece: Aristotle and Plato; the Iliad and the Odyssey; Auschylus, Sophocles, and Euripedes; the victories over the Persians at Marathon and Priam's kingdom at Troy. How could there be a Europe without Greece? Well, everything can get stretched to its breaking point and some lessons are eternal. 

    The crisis facing Greece has two central elements:

        1. Socialist governments collapse when the ruling elites run out of other people's money.

   According to the Heritage Foundation's 2015 Index of Economic Freedom, total tax revenues amount to 33.8% of Gross Domestic Product, while government spending amounts to 58.5% and the accumulated deficit is 170% of GDP. This is what the Greek government, the European Commission, the International Monetary Fund, and the European Central Bank have been arguing about for months.

    The left wing government of Syriza was elected in January based upon impossible promises to negotiate significant forgiveness of the crushing debt, cancel planned privatization of public ports and utilities, and re-hire thousands of government workers. They have negotiated marginally less severe budget objectives from the European and American folks who loaned them the money, but have refused to reduce generous government pensions and have proposed tax increases rather than cost reductions. (Like in the US, liberals want to raise taxes; conservatives want to cut government spending.) 

    Unfortunately for the Greeks the majority of their 300 billion euro debt is owed to international institutions which are heavily influenced by the Germans whose psyche has never recovered from the hyperinflation which wiped out their middle class in the 1930's. Industrious they are; sympathetic they are not; and their government is led by Angela Merkel's conservative Christian Democrat Union whose Finance Minister, Wolfgang Schaeuble, views his Greek counterparts as Marxists and communists.  Syriza's call for war reparations from World War II appealed to the Greek masses and even had a bit of support from German leftist parties, but it did little to mollify the guy with the hammer.

      The Greeks have run out their ability to borrow from future generations and from the Germans.    

      2. The European model of a common currency with independent national fiscal policies is fatally flawed. 

   One must distinguish between  the 19 member common currency "Eurozone" which began in 2002, and the European Union which began in 1958 with the six-member Common Market and has evolved into the current 28-member European Union,  The larger organization provides for free movement of people and goods, and harmonization of regulations with European equivalents of the Food and Drug Administration, the Environmental Protection Agency, the Department of Transportation, the Department of Agriculture, the Federal Communications Commission, and a myriad of other growing bureaucracies in Brussels. The smaller "eurozone" (which does not include Britain, Poland, Hungary, and Sweden among others) began as an intermediate step toward a fully integrated continent which would eventually have a centralized government much like the United States. It is a political compromise, the most centralization that the pan-Europeans could negotiate at the time. 

    The Eurozone is overseen by the European Central Bank which has a mandate to keep inflation in check, but there is no central budgetary authority. Instead there are guidelines - budget deficits no more than 3%; debt to Gross Domestic Product ratio not above 60%; sound bond ratings. Modest violations were routinely excused in the interest of furthering integration until the 2008 financial crisis. The other major culprits - Ireland; Portugal; Spain - swallowed hard, cut spending, raised taxes, and largely got their houses in order. Greece lagged despite austerity measures which drove unemployment over 25%. The deals being discussed talk about operating budget targets - not the manageability of interest payments or debt repayment.  It is hard to see how Greece can ever meet the Eurozone requirements without significant debt forgiveness, a changed attitude about tax avoidance, and a long period of grinding austerity.  

                                           -----

    Aside from sentiment, there are good reasons to want Greece in the European Union. At the dawn of the Cold War in the 40's, there was a real chance that Greece would fall into the Russian orbit. The American and British-backed army won a three year civil war against Greek communists who were supported by Tito's Yugoslavia. Greece joined NATO, but decades of political instability and right wing governments followed. When Syriza leader Alexis Tsipris visited Vladimir Putin in Moscow in April there was at least an echo of their common communist and Orthodox Christian history. Unfortunately for Tsipris, the Russian checkbook is also depleted. 

    So, what would a Greece in the EU but out of the Common Currency look like. Some debt forgiveness would be required. The Greek drachma would depreciate substantially, reducing the buying power of the Greeks and making their exports, real estate, and services less expensive for other Europeans. There would be more jobs, but not much prosperity. The outflow of aspiring young Greeks to other European countries would accelerate. Inflation would erode the buying power of a country full of pensioners. The next few years promise to be bleak and full of political turmoil. 

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  This week's video is David Axelrod's reaction to the Supreme Court's Obamacare decision. He is a savvy guy. The Republicans will be in a much better position to fix it if they win the presidency in 2016 than they would have been with an upended system, a Democratic president, and a Republican Congress without a plan.

www.RightinSanFrancisco.com 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Long term view - golden fleece

  Mid-term view- WW II; then support for Orthodox Christians

  Current- out of Euro; out of EU

  Projections - Imp;lications for Ruissia; the Middle East; Turkey. 

Immigration: A Global View

    The second decade of the 21st century has seen a surge in controversies about immigration. There are some lessons to be learned. 

    The highlights:

    - At least 25,000 Rohingya - an impoverished and persecuted Muslim minority of about one million in Buddhist Myanmar (formerly Burma) - have fled by sea to Malaysia, Thailand, and Indonesia, with thousands dying at sea or in smuggler camps. At this point there is a stand-off between their destination countries which do not want them and Myanmar which denies them citizenship.

    - Some 3,000,000 refugees from the Syrian conflict have entered neighboring countries, and 300,000 have sought asylum in the European Union - primarily in Germany and Sweden. 

    - In 2014, some 200,000 refugees from North Africa and the Middle East crossed the Mediterranean, largely from Libya to Italy, with thousands drowning in a growing string of tragedies. The European Union's developing response is military interdiction of the smugglers in the absence of any effective Libyan government, and a contentious quota system to distribute the survivors among the 28 EU members based on the economic capacity of each country. 

    - In the UK, where net immigration runs about 300,000 in a country of 65,000,000, the rise of the United Kingdom Independence Party has forced Prime Minister Cameron to promise a difficult renegotiation of the benefits  available to the half that come from poorer EU countries and to resist the EU quota plan. Elsewhere in Europe the focus of "nativist" parties like UKIP is more toward the deluge of Muslim immigrants.

    A few comments on the macro trends:

    - Contrary to what the global warming alarmists might promulgate, these migrations have nothing to do with rising tides or famine due to changing weather patterns. In fact, over the past two decades world hunger has decreased by a third despite the addition of 1.5 billion people. The causes? Political stability in China, sub-Sahara Africa, India, and South America; containment of major diseases; and the application of technologies such as genetically modified seeds - thank you Monsanto. 

    - The downside is the arc of failed states from Pakistan, to Afghanistan, to Yemen, to Iraq, to Syria, to Somalia, to Libya. All Sunni Muslim. None showing promise of a better future.

    - In the telecommunications era every successful migrant can encourage his friends back home with stories of "the land of milk and honey", and there are reporters to cover every sinking boat or starving family - well, maybe not in central Asia or Africa.

    - The general absence of politically-motivated violence by the immigrants is striking, the al Queda and ISIS calls for jihad notwithstanding.   

    And what does it mean for us?

    -  If the situation is dire enough in Mexico and Central America no wall or border patrol will keep migrants out. 

    - The world has more sympathy for refugees from wars than it does for economic immigrants. Almost all of our immigrants are of the economic variety. 

    - The largest problems involve immigrants who come from markedly different cultures - Muslims in post-Christian Europe; the Rohingya in Buddhist Myanmar. In comparison, Hispanics in the United States are much more able to assimilate. 

    One does have to give thanks for living in the US of A, and perhaps to sing along with the Star Spangled Banner at the next ball game.  

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This week's video is a trumpet solo by a young Dutch girl backed by the orchestra of Andre Reiu. The backstory - each year on the anniversary of the liberation of Holland in World War II, there is a celebration honoring those who died in the battle, including the 8,301 Americans who have been "adopted" by Dutch families. This piece, Il Silenzio, was adapted from Taps under a commission by the Dutch government, and has been played as the closing performance since 1965.  

bill bowen - 6/5/15 

It's Still the Economy, Stupid!

    Back during the George HW Bush recession in 1992, Clinton campaign strategist James Carville coined the phrase "It's the economy, stupid" which has forever since been a major underlying consideration in any national campaign. With ISIS videos, Iranian nuclear ambitions, Benghazi, and a former Secretary of State running, the 2016 campaign promises to have a greater than usual foreign policy component, but Carville's admonition that people vote on the basis of their own economic well being can be ignored at the candidate's peril. So, lets make an honest effort to project what the campaigns will be able to say in 18 months.

    For a theme, the Democrats will claim that the economy has been good under the Obama administration, recovering from the disaster brought about by the last Republican president. Under Hillary, recalling the good years of the previous Clinton presidency, the merry-go-round will continue.  

    - There have been six consecutive years of Gross Domestic Product growth.

    - The S & P stock market index is up almost 150 % since Obama took office, driven by soaring corporate profits.

    - The unemployment rate has gone from 7.8 % at the beginning of the Obama administration to about 5.6 % today, about the historical average.

    With the Democrats (and their friendly media) touting the most popular headline numbers, absent an economic reversal, the Republicans will have a much more nuanced position to sell:

    - The credit for pulling out of the 2008 financial crisis belongs to Hank Paulson's implementation of the TARP program, Ben Bernanke's policies at the Federal Reserve, the energy revolution, and the underlying strength of the American people - not to mention increasing the national debt to over $18 trillion - above the country's annual Gross Domestic Product.   

    - Unemployment numbers are highly misleading, driven by millions of part time jobs and more millions who have dropped out of the work force. Only 44% of adults have full time jobs; calculated differently, the official BLS U-6 rate (unemployed; underemployed; dropped out) is about 11% - well above its historic average. And for those who were employed, after inflation the median weekly income was less in 2014 than in 2009.

    - The stock market numbers are only part of the story. The dark side of the Fed's low interest policies has been that bonds also pay next to nothing, providing a hard squeeze for retirees who follow the conventional wisdom of keeping their investments split about evenly between stocks and bonds.

    Federal Reserve President Janet Yellen is probably the most important decision maker for the Obama economic legacy and Hillary's 2016 campaign. She has overseen the phase out of Quantitative Easing (the buying of Treasury bills by the Federal reserve) and is poised to start raising interest rates from near-zero where they have been since the end of 2008 toward the long term average of about 6%. Much of the world is going in the opposite direction with Chinese growth slowing and Europe and Japan near recession. With a strong dollar already crimping exports and the value of foreign earnings, timing is profusely discussed in financial circles, but doesn't yet seem to have seeped into the political dialogue.

    The 2008 financial collapse which, more than anything, cost John McCain the presidency was not a glimmer in April of 2007, and there is a lot of smart money betting that the world economy will rock along about as it is at present. But somewhere in the campaign staffs being organized by Jeb Bush, Scott Walker, Marco Rubio, Ted Cruz, and Rand Paul there had better be an economist or two designing scenarios and brainstorming with the message designers to speak to the college graduates who cannot find jobs, the retirees who are trying to live without bond income, the coal miners who are being regulated into poverty by the EPA, and the Central Valley farm workers for whom the Obama economy has been a tragic failure.  The lead story cannot be about how unfairly the pie is divided; it must be about the paltry size of the pie.

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  This week's video is a 2012 speech by Ron Paul giving a full throated opposition to Iranian sanctions. For many, the first challenge for presidential candidate Rand Paul is to distance himself from the views of his father.  

bill bowen - 4/17/15

 

     

Campaign 2016: The Domestic Theme

    It is not clear where the decision is made - in David Axelrod's Chicago apartment, in the editorial room of the New York Times, in the Harvard faculty lounge, or at a George Soros-funded think tank, but it has definitely been decided. It has made its way into the State of the Union; it is undoubtedly on some liberal ListServ telling journalists what to write about; the chairman of the Federal Reserve is bemoaning it; it is in United Nations speeches; the Pope is talking about it. The problem with America is that the rich are getting richer at the expense of the middle class who are getting poorer, and we need a compassionate Democratic president to protect the middle class from the heartless Republicans.

    What we have seen thus far is the set-up. The "woe is me". The fervor intensified in 2014 with French economist Thomas Piketty's Capital in the 21st Century  which showed increasing concentration of wealth with globalization and technology; with the NPR data which show that over the past few decades the top 5% in the United States have done fine, but the 95% are under water; with the Huffington Post article about income inequality feeding a disparity of money in politics; with the editorial by Robert Reich about how much better Democratic presidents have been.

    The policy prescriptions, in the words of Elizabeth Warren, Socialist Senator Bernie Sanders of Vermont,  and the Occupy Wall Street crowd, as well as Barack Obama's political posturing during his waning presidency: higher income taxes; higher capital gains taxes; higher minimum wages; free pre-school and community college; defense of free or heavily subsidized health care. Only the welfare state can save the people.  

   That sells pretty well out here in San Francisco, the "City of Saint Francis", but it misses a big point: What is best for a great majority of Americans is a system which encourages work and job creation.

    The January 28 Wall Street Journal did a masterful job of outlining the relationship between extended unemployment benefits during the recent recession and the heightened unemployment rate. At the peak of the recession federal subsidies extended state unemployment programs to cover about two years and extended them long after the recession ended. At the end of 2013 the Republican Congress stopped the subsidy, returning the limit to 26 weeks amid Democratic howls about an economic drag, the loss of 240,000 jobs, and a renewed recession. So what happened in 2014? Job creation averaged 246,000 per month, and the official unemployment rate dropped from 6.7% to 5.6%. What's more, since benefits vary by state and regions within states, it was possible to demonstrate that those who had had the highest benefits showed the greatest improvement in job creation when the punchbowl was taken away. 

    So, beyond just seeming to be empathetic, how should Republicans talk about economic policy?  

   1. At it's simplest, Republican ideology is about what immigrants have always come here for: liberty (political; religious) and opportunity (economic; societal) with personal responsibility. When you substitute government authority for personal responsibility you diminish liberty and opportunity.

   2. The thrust of Democratic policies is redistribution and programs to lessen the suffering of the poor. Under Barack Obama we have 47 million people receiving food stamps, 10 million people receiving Social Security disability payments, and 37% of working-age adults opting out of the job market. It should not be viewed as harsh to argue that the solution to poverty is employment, supported by programs which develop 21st Century skills while encouraging potential workers to work and potential employers to employ.

   3. For the truly needy, conservatives have a demonstrably better record of demonstrating compassion. As Arthur Brooks thoroughly documented in "Who Really Cares: The Surprising Truth About Compassionate Conservatism", conservatives donate more money and time to charity than do liberals. There is a high correlation to religious conviction, but there is also a preference for personal over governmental responsibility for the needy. Conservatives do not need to apologize.

    4. The Republican Party is really the party of the middle class. Looking at the 2012 election results, Barack Obama carried voters earning less than $30,000 per year and over $100,000. He carried voters with less than a high school education or an advanced degree. Mitt Romney carried the middle in both education and in income.

    In politics, tone is often more important than substance. Republicans will have the disadvantage of a cacophony of voices - some of whom will say stupid things -  while the Democrats will most likely have only one real spokesperson. Doubtless, the media will relish Republican voices which play into the "heartless" imagery and there will be many proposals designed to place Hillary as the champion of the little people - despite her extensive connections to Wall Street and the Clinton Foundation donor network. The theme has been determined - she will make it fit.

     It will do well for Republican candidates - and individual supporters - to truly understand and keep repeating that they are the advocates of liberty, opportunity, and personal responsibility; that the best cure for poverty is a job; that conservatives demonstrate more compassion in their personal lives; and that the middle class votes Republican. The truth will make you free.

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  For those who are not familiar with "stealth" presidential candidate, pediatric neurosurgeon Ben Carson, here are the short version and the long version.

bill bowen - 1/30/15    

         

In Search of Good Jobs

           This week’s article is written by Bill McCormick, whose 40 years as an executive search company CEO give him unique insights as both a small business owner, and as an intimate service provider to thousands of large and small companies.

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       The jobs numbers we hear seem to be impressive: 370,000 added in November; 252,000 added in December; a 5.6% unemployment rate; 2.9 Million jobs added in 2014. But that is only part of the story: average household incomes are dropping; hourly wages are dropping; weekly working hours are dropping; the workforce participation rate is dropping.  What happened to the creation of the high paying middle class jobs the President campaigned on in 2008 and promised again with the $1,000,000,000 Stimulus Plan and his “green jobs” initiative?  Why are Wall Street financial analysts so happy to report these robust numbers while others, such as Rick Santelli of CNBC, question why interest rates are at zero and there is no wage inflation?

              There are several sobering factors to consider.  

       1.Baby Boomers. The retirement of the Baby Boom generation officially began in 2008, and will have a 20 year impact on the Real Estate market as they sell larger houses and move to smaller retirement homes.  (Their early purchase of the retirement homes and subsequent dumping of these houses in the financial crisis when the value of their primary residence dropped contributed significantly to the financial crisis.) The destruction of their home equity – and their IRA/401K funds - put a damper on their spending with the result that consumer spending still lags six years later, and new single family home construction is far below a decade ago.   

        The delay of Baby Boomers retirement, driven by an inability to sell their devalued houses coupled with low interest rates on bond portfolios, lessened the need for new college graduates in Fortune 1000 companies, where hiring still lags. 

       2. The Real Estate markets have always been the engine of US prosperity and the primary method of personal wealth creation for working people.  Over the last 60 years the housing industry has provided millions of middle class jobs for Americans.  Today half of those jobs are gone and the labor jobs pay less than they did in the 70’s.  The government focused on saving the housing market in the crisis, but has neglected to understand the only way to get the housing market going again would be to stimulate industry to create jobs that allow people to afford houses.  In the meantime, young Americans have chosen rental properties over risky single family home ownership.  Millions of Americans also remain trapped in under water homes unable to relocate to find better jobs.

     3. Immigration has had a major impact on job opportunities, particularly for middle class white and black males.   Thirty years of illegal immigration of nearly 30 Million low wage seeking immigrants with a strong desire to work hard and own businesses has driven down wage rates, especially in the housing and construction industries, and destroyed the jobs of many middleclass  workers. At first this was seen in the “jobs no one wanted”, but as amnesty was granted every 5 years or so the immigrants showed up in the county and city jobs as well.  Take a look at who does maintenance for your county and city today along major federal roads.  Now with an Executive Order the President has authorized an estimated 3 million more illegal immigrants to legally be hired. That will lower the wages paid and impact more middle class jobs. 

      4. The Federal Reserve policy of printing money and then regulating banks to insure that the money never leaves their balance sheets has made it impossible for most small businesses to get loans despite the low interest rates. The result is that small business owners who employ 75% of American workers resort to credit cards and selling Accounts Receivable to get money to survive. The result of these 25% interest rate loans is to depress their hiring and wages.  

       5. The pressure from Obamacare and government regulations has created a “game to avoid” by America’s larger employers. Instead of hiring full time permanent workers they hire part time, 30 hour workers and “independent contractors” who have no benefits and who can be laid off without penalty with no notice.

       6. Unable to get top line growth for the past 6 years, Americas largest and most successful Company CEO’s use their cash on balance sheets to buy back their stock creating higher Earnings per Share without real growth. At the same time they do not replace higher earning Baby Boomers and instead use new technology and lower wage employees to gain productivity.  (Take a look for yourself at the outstanding shares chart of APPLE, MICROSOFT and 3 M for example.)  The unwillingness of Congress to get the overseas cash of these giants back to the US invites them either to borrow low interest money in the US and buy back stock or to focus their expansion overseas, employing foreign workers and laying off US workers.  One of the best at it is General Electric CEO Jeff Immelt, who, ironically, headed the President’s first term job creation council.

         In the end, all of these factors have depressed the job creating engine of the US.  The focus of the White House for the past 6 years has been on the back end factors of employment - worker welfare provided by the government by openly employing anti-business strategies to “level the playing field”.   This approach will definitely get votes, but in the long term we are seeing it burden society and businesses with expenses and entitlements (still unaddressed).  This will eventually require higher penalties to businesses and, as we are seeing, they will respond to any financial penalty with a slowing of expansion of business in America, which is what really creates middle class jobs; wage and benefit suppression with contract labor; and slow to no job creation.

      In 2012 we had a chance to turn the ship with a man who knows prosperity comes from the stimulus of the business environment.  We whiffed on Romney.  Next stop: 2016. Romney or Bush or both. Let’s not whiff again. There are 11.8 million unemployed Americans and millions more under employed counting on it.

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  This week's video is John Boehner's compelling House floor speech about President Obama violating the Constitution to grant immunity for millions of illegal immigrants. Rand Paul would claim that with this president, our republic is already lost.

     

bill bowen - 1/16/15

Income Inequality - The Democrats' War on the Middle Class

    With interest rates remaining near zero and bond buying coming to an end, Federal Reserve Chair Janet Yellen recently had the time to reflect on income inequality in America, citing the increase in the portion of accumulated wealth held by the top 5 % from 54% in 1989 to 63 % in 2013.  This follows several months of adoring articles about French economist Thomas Piketty's book, Capital in the 21st Century, which feed's the Occupy movement's theme of the rich unfairly getting richer. There is room to challenge some of Yellen's  and Piketty's logic, but it is probably more valuable to accept the general premise and ask "why", and "what can be done"?

    The large dynamics are easy to understand - globalization (Western labor competing with low cost third world workers); and technology (first we automated agriculture, then the factory, now the office.)  On this, there should be little disagreement. The differences come in the solutions where there are stark ideological differences and political correctness prevents helpful discussions.

    The most telling statistic to highlight the decline of the middle class - the real cause of income inequality - is the labor force participation rate. Forget the artificial unemployment rate. Thirty-seven per cent of working age adults - 92 million people - are not working or looking for a job. There is an extensive safety net - unemployment compensation; disability payments; free healthcare; food stamps; subsidized housing - but these people are declining in economic standing. There is a lost generation that will never recover from the Great Recession, and many in the next generation who cannot get on the first rung of the ladder.    

    Economists should be able to agree that the presence of 11 million low-skilled illegal immigrants in the United States depress the labor market, with the most directly adversely affected group being the African American community. It is a tribute to the leadership of the Democratic Party that they have been able to retain 90 + % voting allegiance of African Americans (in part, but only on the margin, because of Barack Obama) and solid support of organized labor while advocating for millions who will displace them and drive down their wages. For the lower working class, this is a large factor in growing income inequality - never to be discussed by the Yellens and the Piketty's

    A second simple, politically incorrect, perspective is represented by Rick Santorum's advice to people seeking to avoid poverty - get a degree, get a job, get married before you have kids. Nuclear families are not only better for raising kids, they are immensely better for capital formation. Two incomes work a whole lot better than a single mother struggling with two or three jobs. The decline of the family - particularly in the African American community where most babies do not have a father present - is a direct cause of downward economic drift. Don't look for that in the NY Times.  

    A third easily agreed element for the Yellens and the Pikettys should be the lagging economic growth since 2008. In most recoveries, over this period the rate of GDP growth should be about 4% per year instead of the 2% that we have been experiencing. The Federal Reserve has certainly done everything that it can with monetary policy, but the legislative and executive branches have not done their part with corporate tax policy, energy policy, entitlement reform, foreign trade policy, or encouragement of lending to small businesses. The Office of Management and Budget projects that Obamacare requirements alone have cost some 2 million full time jobs. Lots of the bills sitting in Harry Reid's in box would make this better.

    From a political perspective, Republicans have recovered from an 18 point deficit in 2008 on who the voters judge best able to manage the economy to  a 10 point advantage in today's Wall Street Journal/NBC and Gallup polls. Whatever comes out of the federal government's Ministry of Truth, the people know that the middle class is suffering, and six years into the reign of Barack Obama they have decided that their real life problems will not be solved by more welfare state programs. What is needed to revive the wealth of the middle class is more jobs, provided by vibrant capitalism. It seems that the voting public gets it.

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This week's video comes from a vigilant reader in Sonoma County wondering about who created the opening for ISIS in Iraq.  Hilarious, if not so serious.

bill bowen - 10/24/14

The Great California Drought

     Before She rested on the seventh day, God created the Sierra Nevada mountains to catch a bountiful winter rain and snowfall, and a vast fertile but arid valley to the south and west. Since then California has been a story of great engineering projects to store and move water, surrounded by politics.     

 Let's set some background:

     - California's existence as a state with 38 million people and a $45 billion agricultural industry is based on the federal Central Valley Project which dates from the 1930s and moves water from the Sierras to Central Valley ranchers and farmers, the related California State Water Project  which dates from the 1950s transporting water from the Sierras down the western side of the Central Valley mostly serving some 23 million residents, and the Colorado River Aqueduct which was built by the state in the 1930s to deliver water originating in the Rocky Mountains to Los Angeles, San Diego, and other southern California cities. The first two also generate a significant portion of California's electric power.  

    - Each year a high pressure ridge parks itself off of the coast of California. Usually it break down, letting several winter storms through, but this year it has remained in place, pushing the storms to the north where they miss the California reservoirs and do not deliver the snowpack in the Sierras which feeds the system throughout the year. The current ridge, four miles high and 2000 miles long, has been parked in place since December of 2012. The last such occurence led to the drought of 1976-1977.

    - Three years into this accelerating drought, with reservoir levels at less than 40%, some are thinking of worst case scenarios in which agriculture, which consumes 80% of California's water, will be shut down along with severe limitations on residential use and constraints on river flows which will decimate salmon and delta smelt populations. Costly and energy intensive desalination plants may be in vogue.  

   And the politics:

    - Water politics divides the state north-south, but more significantly it divides between the coastal city dwellers/environmentalists and the inland farmers. Coastal folks are largely Democrat; inland folks, like rural people everywhere else in the country, tend to be Republican.  Since all politics is local, the drought will probably not significantly impact state-wide elections, but it will put Central Valley Democrats at risk in Congressional and state legislative elections. In jeopardy are the Democrats' two-thirds majorities in the state Assembly and Senate (needed to pass tax measures), and a few House seats.

    - The first salvo, a House Republican bill to override federal limits on pumping to the Central Valley from the San Juaquin-Sacramento River Delta was quickly met by a Democratic Senate bill designed to increase flexibility in regional water management decisions and support recycling efforts. The divided Congress now waits.  

    - The state Democrats are doing what they can without giving the farmers any more water. Governor Brown declared a state of emergency in January, cutting off water to thousands of farmers and a few central valley communities; this week the governor and Democratic legislative leaders (no Republicans invited) announced a package of $687 million in aid (available from past unused appropriations), largely for water conservation and clean drinking water projects and aid for farmers.    

    - At the behest of local Democrats, President Obama this week bestowed $170 million on drought-stricken California ranchers and food banks and opined how this was all due to global warming. While that appealed to the enviro-industrial complex, the reality is that many global warming models predict that California should be getting wetter. No chance goes unmet to appeal to folks like San Francisco's Tom Steyer who will donate some $100 million to Democrat "climate change" loyalists.   

    Meanwhile, Governor Brown has some difficult terrain to traverse if he is to make any lasting progress. His stalled $24 billion proposal to divert more Sierra water to the south by tunnelling under the Sacramento-San Joaquin River Delta predictably has supporters in the south and opponents in the north. The companion concept of expanding reservoirs at Los Vaqueros, San Luis, and other locations makes eminent sense - except to the powerful Sierra Club which opposes inundating pristine natural settings and would like to drain the Hetch Hechy reservoir in Yosemite Park which supplies San Francisco.

    To the true believers, it's not just about the fish and the oranges - there are too many people.

                                                      -----   

    In this week's video Secretarey of State John Kerry explains to the Indonesians that climate change is as large a threat as pandemics, terrorism, and nuclear proliferation. One wonders what the Iranian mullahs think of that.

bill bowen - 2/21/14 

 

 

 

The Morality of Obama's Wagon

     Dinesh D'Souza, conservative intellectual and producer of 2016: Obama's America, recently commented on the inverted morality of praising those who are "sitting in the wagon" and demonizing those who are "pulling the wagon". (See this video starting at minute 4:00.)  D'Souz's premise has three parts:

    1. There are an increasing number of people sitting in the wagon.

    - The simplest statistic is the civilian labor force participation rate which has fallen 2.9% (about 7 million workers) since Obama took office to its lowest level since 1978, leaving 154.9 million employed or looking for work and 91.8 million retired, in school, home with the kids, or just dropped out. Some of the decline is a function of the aging of the Baby Boomers, but the number and quality of jobs created in the recovery since 2009 have been unusually weak.

    - Viewed differently, the Bureau of Labor Statistics survey of employers shows that the economy has added some 7.8 million jobs since the trough in February 2010, but that we are still about 860,000 short of the January 2008 peak. At the current rate of adding 100,000 to 200,000 jobs per month we should be back to 2008 levels around mid-year. In the meantime, the population has grown by 13 million.

    2. Obama's policies encourage people to sit in the wagon.

    - Obamacare is the big motivator. While most people think it bad that the Congressional Budget Office projects that 2.5 million people will be pushed out of the work force by the incentives in Obamacare, Jay Carney calls it a good thing that so many people will no longer be "trapped in a job".  

    - The Republicans have received much criticism for eliminating extended unemployment benefits four years after the recession officially ended. Some two years ago the Obama administration allowed the states to eliminate the Gingrich/Clinton requirement that people had to be actively seeking work or be in a training program to qualify.  

    - The Food Stamp program has nearly doubled to 47 million recipients under Obama, with a relaxation of eligibility rules and an increase in the amount available. The recent Farm Bill agreement to trim the number by about 1% brought a firestorm from the Left.

    - Social Security disability recipients have increased by 3.1 million to 8.9 million in the last decade; most will never return to work.

    3. The president's rhetoric and policies demonize those pulling the wagon.

    - Obama's "You didn't build that; somebody else made that happen" quote was a frank statement of his view that an individual's success is not the result of one's intelligence and hard work - the inference being that the successful should be taxed more to provide the benefits of their success to the less fortunate.

    - The "1%" campaign of the Left drives a broad political agenda - more tax increases; demonization of Republicans as the party of Wall Street; Republicans as enemies of the middle class. While the middle class actually tends to vote Republican, Mitt Romney's "47% comments" were instrumental in his election loss.  

    - Obama's tax policies have been targeted at the "wagon pullers": the 10 year $3 trillion in tax increases have been largely accomplished by raising top marginal rates, capping deductions, and increasing estate taxes as well as the many taxes included in Obamacare.

    The old cynical wisdom is that the Republicans are the party of the rich, the Democrats are the party of the poor, and both try to increase their voting base. With the median family income dropping $2400 (inflation adjusted; including government payouts) on Obama's watch, he is succeeding both in getting more people into the wagon and in increasing the number of potential Democratic voters.

    How much better it would be if we focused on the morality of creating good jobs.

                                                    ----

    This week's video is an interview with Kevin Faulconer who won a run-off election to be mayor of San Diego on Tuesday, beating a Latino opponent in a majority Democrat city, thus becoming a rising star in California Republican politics.

bill bowen - 2/14/2014

  

Inequality: The Obama Legacy

    The State of the Union speech really had two messages:

     1. We are faced with three years of a lame duck. President Obama will not try to work with Congress and has no illusions of accomplishing much that is significant. He has not rethought Obamacare, the NSA, tax policy, energy policy, or anything else that is holding back the economy. We can probably live with that domestically; unfortunately, President Putin, Xi Jinping, and Supreme Leader Ali Khamenei of Iran also understand his powerlessness.

    2. The theme of income inequality will dominate President Obama's rhetoric, in a virtuous feedback loop with the media and the Left. The political challenge for conservatives is to preserve and enhance those institutions which make America the world's greatest "land of opportunity" while balancing personal responsibility and a "social safety net." There is much practical experience on our side.

     Some thoughts:

        1. Unemployment is the primary problem.  The poverty rate among those with full time work is 3%; for those without it is 33%. The predominant emphasis needs to be on increasing full time employment. Many of President Obama's policy positions - on energy, on taxes, on Obamacare, on the minimum wage - work against job creation.

        2. Progress has been made since Lyndon Johnson started the "War on Poverty" 50 years ago. The official poverty rate has been reduced from 19% to 15%. (Other measures show more improvement.)  For seniors, Social Security and Medicare have helped reduce it from 35% to 9%.  Opportunity has been spread more broadly with better access to education at k-12 and college levels. Racial and gender discrimination has been reduced. However, in the aggregate the ability to climb the economic ladder has remained about the same over decades. It is still hard to get off of the bottom rung and the top rung is not very crowded.

        3. The largest correlation with poverty is single parent families. When the "War on Poverty" began some 93% of babies were born into two parent families; now it is about 60%. The poverty rate for single parent families is about 37%; for two parent families it is about 7%.  Rick Santorum had it right with his advice to get an education, get a job, and get married before having kids. A leader with Obama's following could do a lot of good if he preached a bit of tough love. Good policy; bad politics; won't happen.

      4. It is a blinding flash of the (politically unspeakable) obvious that the presence of 11 million low-skilled illegal immigrants exerts a substantial downward pressure on the economic well-being of lower and lower-middle class Americans. Given enough time the growth of the economy will absorb most of the impact, but it is a significant part of the reason that the poor are where they are and the unconstrained influx must be stopped.

    5. If the public is to support a government safety net, it must contain only a minimal amount of corruption. President Obama's decision in 2012 to amend, by executive order, the work requirement of President Clinton's 1996 Welfare Reform Act went badly in the wrong direction. Ditto the loosened requirements that have seen food stamps hover around 47 million recipients - about twice the level of a decade ago. Ditto the honor system for Obamacare subsidies.   

    6. For the young American, it is not enough to get a college degree. Stories abound about the 15% of US cab drivers that have a college degree and the reality that about half of recent college graduates are not employed in jobs requiring a degree. The simple answer? Not only does more education still correlate highly with lower unemployment and higher wages, but prospects are vastly better for healthcare workers, teachers, and natural resource professionals than for artists and humanities majors. Opportunity is not only for IT workers.

    Outside of Washington - and particularly at the individual level - the inequality problem is manageable. Would that politicians were rewarded for doing what really helps rather than for soaring speeches which are calculated to divide.

                                                  -----

This week's video demonstrates the contrast between the receptions given by rank and file military to President Bush and President Obama. People risking their lives like to believe that their leaders are in it to win.

bill bowen - 1/31/14 

In Praise of the Republican House

    Polls are confusing when they are intended to form opinion rather than to reflect it. Take the favorability ratings of Congress - 9% according to Gallup, the lowest since polling began in 1974. Outlets like CBS , The Hill, and the Huffington Post like to use this number to make President Obama's 40% approval ratings look good, and to attach blame to the Republican House and its Tea Party members. The number is right, but the interpretation is way off base.

    First, a small parsing of the data:

        -  Congress includes Harry Reid's Senate as well as John Boehner's House. Polls don't usually distinguish.

       - Approval as of November was 9% among Republicans, 8% among Independents and 10% among Democrats. Republicans and Independents had actually gone down since Republicans caved on the October shutdown. While the media celebrates compromise, a lot of Republicans and Independents clearly favor taking a hard line on spending.

    Second, a few procedural reminders:

        - When Republicans took over the House in 2010 they banned earmarks and, despite some quarreling, they retained that provision in the current House. Whatever else the merits may be, this has reduced the ability of leadership to reward members for loyal behavior, and placed greater emphasis on satisfying their constituents.

        - Republicans also have six year term limits for committee chairs - with a few notable waivers such as Paul Ryan on the Budget Committee. While the increased turnover eliminates independent feifdoms, it also has the effect of promoting chairs that reflect the views of the Speaker. More influence within the leadership offsets less with the members.

        - Since the 90s, Republicans have generally followed the Hastert Rule, no Republican Speaker should bring a bill to the floor which does not have the support of a majority of the Republican caucus. Democrat votes may still be needed if the majority of the caucus does not make up a majority of the House, but it does prevent a Democratic Bill which would pass with a few Republican votes. This is critical to maintain relevance for a party which does not hold the Senate or the Presidency. (Boehner's one major exception was the tax act of 2012 which kept most of the "Bush tax cuts", but did raise upper income rates over the opposition of most Republicans.)

    A few comments on what has been accomplished:

        - Comprehensive alternatives have been offered to Democratic programs - Paul Ryan's "Roadmap for America's Future", and the Congressional Republican Study Committee's comprehensive alternative to Obamacare - to name a couple.

        - A combination of the Budget Control Act of 2011 (which cut projected 10 year spending by $1.2 trillion and averted a default and a shutdown) and sequestration in March of 2013 (which cut an additional $1.2 trillion in 10 year spending) have been contentious and - in the latter case - ham-handed, but they, the tax increases of 2012, and a gradually improving economy have reduced the deficit from $1.4 trillion in FY 2009 to $680 billion in FY 2013 - about 4.1% of GDP. The recent Ryan-Murray two year budget deal backs off a bit, but doesn't change the direction.

        -  Some items which were originally passed with sunset provisions have been allowed to lapse: the reduction in Social Security taxes in 2013, and the extension of unemployment compensation in 2014.

    And some conjecture on what is to come:

         -  The two year budget deal did not solve the debt ceiling which will again be breached in about March. Republicans will have little leverage here, but might just extend it to the Fall to ensure that the subject of financial responsibility which favors Republicans is in the public mind when we elect the next Senate.

        - Paul Ryan will apparently defer any run for President to bring his conservative intellect to the chairmanship of the House Ways and Means Committee which would have lead responsibility on tax reform, Medicare, and Social Security. At 43 he can wait.

        - And in the most important poll of Congressional approval - the one held every other November - sages such as Charile Cook and Stu Rothenberg are talking of an historic Democratic collapse and "all but erasing any chances that the party can win back the House next year" following the Obamacare fiasco.

    Facing a Democrat Senate and a liberal Democrat president John Boehner, Paul Ryan, and their associates haven't done bad at all - at least on the financial stuff.   

                                                     -----

    This week's video discusses Vladimir Putin's latest one-upping of Obama - a $15 billion loan and natural gas deal to keep Ukraine in the Russian orbit instead of moving toward the European Union. Earlier this year he gave NSA traitor Edward Snowden sanctuary in Russia and brokered a deal in Syria to keep the US out and Assad in power. Maybe Barack will do better in 2014.

bill bowen - 12/20/2013 

    

    

     

   

 

   

Defunding Obamacare: Two Strategies and No Plan

    The debate du jour within the Republican Party is not about philosophy or objectives, it is about the best strategy for defunding Obamacare. One group thinks it must be done now, before it gets ingrained in our national welfare state; the other thinks it more realistic to marshall the political resources to roll it back in 2014 or 2016. Neither adequately addresses what comes next. Some observations:

    For the "do it now" advocates (House Republicans; Ted Cruz):

        -  A majority of the public believe that the new law will make the healthcare system worse, but that number is volatile. Liberals complain about a few ads encouraging people not to sign up, but future months will see a billion dollar advertisement campaign from the administration, insurance companies and other advocates.

        -  We are at the peak moment of dysfunction. Thirty six states have decided to let the feds run their exchanges. Several large insurance companies have decided not to participate. Polling shows that most young people will choose not to buy insurance despite the mandate. Computer glitches abound.  Clerks managing subsidies will have access to previously private health records and income tax returns - and for 2014 will accept applicants claims of income without any verification. Much of this will be worked out in a year or two, if not in months.

        - Even if Republicans hold the House and win the Senate in 2014, President Obama will veto any rollback. A trifecta in 2016 is far from inevitable. The surest approach is to attach a defund mandate to a bill that the Senate and the President must pass and sign - a continuing budget resolution or a debt limit increase.

        - Election losses following the 1995 government shutdown are a myth - Newt Gingrich's  Republicans held the House and gained Senate seats in 1996. It is the president who refuses to negotiate on the budget, the debt limit, or Obamacare. It is the president who grossly misrepresented the impact of Obamacare on the middle class in terms of taxes, change of doctors, and change of insurance carriers.     

    For the "marshall the resources" advocates (The Republican establishment):

        -  Don't worry about the law succeeding. Tens of billions in new taxes will hit the public as they prepare 2013 and 2014 tax returns. Unions and the public understand that the employer mandates are destroying the 40 hour work week and full time jobs in the service sector. Doctors are dropping Medicare while Obamacare is trying to add 30 million patients. Insurance companies will be offering inferior provider networks at mostly higher rates, higher deductibles and higher co-pays. Corporations are requiring hundreds of thousands of employees to purchase their own insurance. The individual mandate and required coverage for contraception and morning after pills remain strongly unpopular.

        -  Rarely does a political party face a president whose "signature accomplishment" is so unpopular and so difficult to implement. There is a golden opportunity to force Democrats in red states to take votes that will be vastly unpopular - particularly Mark Begich of Alaska, Mark Pryor of Arkansas, Mary Landrieu of Louisiana, and Kay Hagan of North Carolina who face reelection in 2014. Ted Cruz has helped to shine the spotlight. A pickup of 5 is needed for control.  

    Most analysts, and even firebrands such as Rand Paul, believe that the Republicans will eventually give in rather than risk giving up a winning political hand for 2014.

    But this is only the prelude. Beyond "defunding Obamacare", the Republicans need a plan of their own. Elements could include tort reform, selling insurance across state lines, perhaps a base government-funded catastrophic insurance, perhaps enhanced Health Savings Accounts, something to enhance access for people with preexisting conditions, perhaps the popular requirement that kids could remain dependents until age 26. The absence of a Republican alternative creates two problems:

    1. In the ongoing debate it is hard to beat something with nothing.

    2. More importantly, as Obamacare becomes increasingly unpopular the Democrats have a Plan B - "single payer", perhaps in the form of Medicare for everybody, with current support from folks such as Harry Reid, unions, and other advocates for a government run national healthcare system.

    In 2016 a Democratic candidate promising to simplify the system and get rid of insurance companies will have an attractive message. Republicans had best get their plan put forth while the Democrats are still concentrating on the Obamacare monstrosity.

                                                     -----

   This week's video shows President Bush at Yankee Stadium for the World Series in New York after 9/11. Exceptional.

    And for those who have 10 minutes to better understand Ted Cruz, here is Cruz' father discussing Cuba and his son's upbringing.   

bill bowen - 9/27/13       

Two Paramount Financial Truths

    The next few months - with the October 1 start of the FY14 budget and the projected $17 trillion debt limit breach by early November - will look like Crazy Season in Washington. With both sides in full political posture mode, two obvious paramount factors risk being obscured.

   1. Obamacare will not be repealed.

    The House has tried this 40 times; a dozen conservative Senators have stated their opinion; Republicans lacking in zeal are likely to face primary opponents. To some extent this is seen as the last hurrah with exchanges going into effect on January 1, but the election of Mitt Romney was the last real hope for preventing the carnage. It wouldn't matter if the Republicans shut down the government, the Senate will not pass a repeal and President Obama would certainly veto any major changes.

    Contrary to the "inevitable march of socialist progress" view, that need not be the end of the story. A plurality of voters oppose Obamacare today. Over the next six months there will be increased insurance rates, chaotic state and federal run exchanges, chaotic data hubs to verify eligibility for subsidies, more patients with fewer doctors, more layoffs of 40 hour workers, refusal of young workers to buy insurance, and the imposition of tax penalties for high end employer-sponsored plans. Even the unions and congressional staffers are seeing the light.

    But you can't beat something with nothing. Republican success requires winning the Senate and  presidency, then instituting Plan B. In fact, campaigning on Plan B should be wildly popular if it keeps near universal coverage with minimum base level benefits, encouragement of individuals and companies to buy supplement plans as they choose, no prohibition on pre-existing conditions, an increase in nurse practitioners, ability to buy insurance across state lines, no mandated birth control and morning after pills, and a few other similar provisions.   

   2. Obama's Democrats have locked in the inflated spending levels from 2009-2010 when they controlled the House as well as the Senate and the Presidency.

    Obama and Paul Krugman will continue to obscure the central fact that prior to 2008 federal government spending was under 20% of Gross Domestic Product; throughout the Obama presidency it has remained in the 23 - 24% level. The 2011 Sequester simply held the line.  Paul Ryan's 2014 proposal would put us on a path toward a balanced budget in a decade and move back toward traditioinal federal spending levels; President Obama's would increase spending, taxes, and deficits.   

    In his latest round of speeches, Obama has bragged about reducing the deficit due to his prudent management, and adding millions of jobs. The reality is that the reduction to a deficit of $750 billion in 2013 is the result of hundreds of billions in tax increases and the sequestration which he proposed, then fought tooth and nail. His latest laundry list of new spending proposals - universal pre-school; more "infrastructure"; more "clean energy" subsidies and R&D - will not get past the House, but the status quo does not represent progress and deserves a fight.  

    As backdrop, Obama has moved on from blaming Bush for his financial failures to blaming the Republican House. The ongoing real 15% unemployment, the decline in wages, the anemic 1-2% GDP growth, the explosion of food stamps, the poverty of retirees living on bond income - none of it the result of his war on carbon-based energy, his antipathy toward small business ("you didn't build it"), his tax increases, his National Labor Relations Board decisions, his financial regulations, or any of his other aspect of his Left-wing agenda.   

    Fortunately the American voters get it, continuing to trust Republicans more on the economy, jobs, and taxes.  John Boehner gets it. Reince Priebus gets it.  Hopefully, they will be able to keep Republican focus on 2014 and 2016 when there is a potential to truly eliminate Obamacare, move toward a balanced budget, and reverse the spate of executive orders from the increasingly imperial president. That outcome is the Republicans' to lose.

                                                                        -----

    This week's video is the view of conservative icon  Charles Krauthammer on the tactics for defeating Obamacare.  

bill bowen - 8/8/2013  

 

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.

                                                        -----

    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.

                                                ----- 

   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.

                                               -----

    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.

                                                   -----

   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.    

                                                   ----- 

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.   

                                            -----

    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."   

                                                    -----

    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.  

                                                    -----

    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.     

                                                -----

    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.

                                                -----

   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