Tuesday, March 29, 2011

"Cronyism in Washington Leads to GE Paying no Taxes"

Sydney M. Williams

Thought of the Day
“Cronyism in Washington Leads to GE Paying no Taxes”
March 29, 2011

At the Internal Revenue Service, General Electric must be to business what Warren Buffett is to the individual; both generate enormous profits, yet neither pays much, if anything in taxes.

An article by David Kocieniewski in last Thursday’s New York Times highlighted the fact that in 2010 GE generated $14.2 billion in profits of which $5.1 billion came from the U.S. Instead of owing taxes, the company claimed a $3.2 billion tax credit. (The reason had to do with tax loss carry-forwards at GE Capital. Mr. Kocieniewski report is not strictly accurate, as GE does pay payroll taxes on 150,000 U.S. based employees, as well as state and sales taxes.) Nevertheless, the column generated a lot of interest. The next day, after receiving 975 comments on their website, the Times issued a terse statement: “Comments no longer being accepted.

Public companies like GE are owned by shareholders; management and the board of directors have a responsibility, within the confines of the law, to run the business in the interests of their owners, and that includes adhering to a tax policy that takes full advantage of what the tax code allows. GE is not at fault in this instance; the problem lies in the system.

First, it should be understood that federal revenues collected from corporate taxes, in the past year, comprise about 6% of overall tax collections; so, as outrageous as this situation is, it is relatively small beer. Nevertheless, while as a reporter, Mr. Kocieniewski was omissive and somewhat inaccurate, as an editorialist he provided a valuable service in highlighting an untenable situation. In 1986, as part of the Tax Reform Act of 1986, the statutory corporate tax rate was cut from 46% to 34%, while closing billions of dollars in loopholes. The overall effect was to raise the effective rate to 26.5%, according to a study by Robert McIntyre and T.D Coo Nguyen in Multinational Monitor. That decline in the statutory rate (and unsurprising to anyone who understands the Laffer curve) resulted in an increase in corporate taxes. Throughout the 1990s and the 2000s, Congress, bowing to increasing lobbying pressure from corporations like G.E., began adding deductions, exemptions and credits to the tax code. As a result, the effective tax rate on corporate taxes declined, as did those taxes as a percent of total receipts, even as the nominal rate was increased from 34% to 35%. The effective rate has declined to less than half the statutory rate.

In his January 25th State of the Union message, President Obama proposed reducing the corporate tax rate, while eliminating a number of loopholes (à la President Reagan in 1986.) A February White Paper from the American Enterprise Institute notes that a number of congressional committees are working on an overhaul, including House Ways and Means chairman, David Camp (R-MI) and Senator Max Baucus (D-MT), of the Senate Finance Committee. Perhaps this injustice will get resolved. I hope so.

Today, the thirty-one members of the OECD have an average statutory corporate tax rate of 25.5% (the U.S., at 35%, has the second highest rate behind only Japan.) Corporate taxes in those OECD countries contribute about 2.75% of GDP. In the U.S., with our higher statutory rates (and, more importantly, higher effective rates) corporate taxes generate about 2.25% of GDP – another argument demonstrating that lower marginal tax rates generate more revenues.

General Electric, unsurprisingly, given that they employ 975 people in their tax department, took issue with the Times story, pointing out that if one excludes the impact of its losses in GE Capital that the effective tax rate is 21%. That is beside the point, as GE Capital is an integral part of GE. And, while GE decided not to form a bank holding company in 2008-2009, they certainly benefitted by taxpayers bailing out the banking system. There is, at the same time, a delicious irony in Mr. Obama appointing GE CEO, Jeffrey Immelt to head the President’s Council on Jobs and Competitiveness. It may work, but it smacks of hiring the fox to guard the hen house, somewhat akin to FDR’s hiring of Joseph Kennedy, a man who had made a fortune buying and selling businesses in the 1920s using information that today would be considered dubious, to become the SEC’s first chairman in 1933.

The situation that allows a GE to legally avoid taxes can largely be attributed to the increased complexity of the tax code. Those businesses (and individuals) who can afford the most competent accountants and lawyers and the best lobbyists are the beneficiaries of this convoluted system. One should expect corporations to explore every avenue to legally reduce their tax obligations. Their responsibilities to their shareholders take precedence over any benign feelings they may have toward government. In his farewell address, in January 1961, President Eisenhower warned against what he saw was a looming military industrial complex: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military complex.” One has only to substitute “financial corporations” (GE still derives about 20% of its income from GE Capital) for “military complex” and the same warning should hold. It was this cronyism between Congress and a consortium of large American corporations – banks too big to fail, Fannie Mae and Freddie Mac and large conglomerates like GE – that brought our financial system to its knees three years ago. Letting the status quo stand, as the Dodd-Frank Bill largely does in terms of banks too big to fail, presents a continuing risk with no upside.

The tax code should be simplified. Nominal rates should be lowered and loopholes eliminated or drastically reduced. And term limits should be imposed on Congress to limit their susceptibility to “unwarranted influence.”

Monday, March 28, 2011

"America - The Melting Pot"

Sydney M. Williams

Thought of the Day
“America – The Melting Pot”
March 28, 2011

As far back as 1782, the concept of American exceptionalism was widely understood. In his Letters from an American Farmer, John Hector St. John de Crevècouer wrote, “Who is this American man? He leaves behind his ancient prejudices and manners, receives new ones from the mode of life he has embraced (and) the government he obeys…Here individuals are melted into a new race of men…” In 1845, Ralph Waldo Emerson referred to America as the Utopian product of a culturally and racially mixed “smelting pot.” Frederick Jackson Turner, the American historian and author of The Significance of the Frontier in American History, wrote in 1893 that the frontier functioned as a crucible where immigrants were Americanized. Henry James, in The American Scene (1905), noted the same phenomena in New York City: The City is a “fusion, as of elements in solution in a vast hot pot.” In 1908, Israel Zangwill wrote a play, The Melting Pot, in which he stated: “America is God’s Crucible, the great Melting Pot where the races of Europe are melting and reforming.” It is this unique combination – a diverse population living in a country, large in area and rich in resources, under a Constitution of 4400 words that were agreed to by a small, mostly homogenous group of wise men, representing differing political, social and philosophical views – that has made us the luckiest people on earth.

The release of the 2010 Census last weeks is proof that America continues as a beacon, a “city on a hill,” for people from all over the world. More than half the nation’s population growth in the past decade (about 15 million of a 27 million person increase) was a result of immigration, both legal and illegal. I worry that the press and the government’s desire to demonstrate diversity overwhelms the importance of the concept of the crucible. The report from the government reflecting the number of Hispanics, Asians, Native Americans, Africans, non-Hispanic Caucasians, etc. is reminiscent of the elite American university that looks upon such statistics as proof they are truly diversified. The consequence is the absence of a well-rounded individual, but a diversified class of entering freshman. The American Anthropological Association, in commenting on the 2010 Census section on “race”, stated: “Eventually, however, these classifications must be transcended and replaced by more non-racist and accurate ways of representing the diversity of the U.S. population.”

Diversity is important and it makes all of us better, but the real story is the continuing integration of people in producing that unique and exceptional characteristic that becomes the American man and woman. During the past ten years, among American children, the multiracial population increased almost 50% to 4.2 million (out of 63 million children under the age of 14) making it the fastest growing youth segment in America. My paternal grandmother, born in 1875 was a pragmatic woman who spent six years studying at M.I.T. Once, during the early days of the Civil Rights movement in the mid 1950s, she told me that the answer to the race problem would come when everybody would be the same color. That day may be coming sooner than even she expected.

Politicians and businesses that target specific groups have been at the forefront of an attempt to compartmentalize our nation’s people. Schools that cater to immigrants by teaching in languages other than English do a disservice to their students. Politicians who segregate Hispanic, Asian or African-American voting blocks discourage the natural tendencies to integrate that de Crevècouer wrote of two hundred and thirty years ago.

A failure on the part of the immigrant to assimilate does him and his new country a disservice. On the other hand, England, which incorporated Islamic law two years ago, allowing Shiria courts to rule on Muslim civil cases, is a terrible precedent and, in my opinion, a form of Apartheid that will serve to segregate Muslims within their adopted country. A country is unified in three basic ways – language, customs and laws. A common language is imperative for basic communication and in permitting each individual an equal opportunity. Customs are fluid. Naturally, immigrants do influence customs, but the change is normally glacial and virtually unnoticeable. Laws are integral to a civil society and all people – rich and poor, native born or foreign bred, no matter race or heritage – must be subject to the same laws. A Shiria court is an encroachment of religion into politics and makes distinctions between people – a precedent that will come back to bite.

America has not been free from xenophobia. Many, if not most, immigrants throughout our history, no matter their heritage, religion or race, have been victims of discrimination and venality. Such attitudes unfortunately persist today. However, in a generation or two, most groups have assimilated into American life. The history of our success has been that while pride in one’s heritage is natural and positive, pride of being American should take precedence.

The single biggest problem facing the U.S. today is debt. For better or for worse, the country has embarked on a mission of providing entitlements for our citizens, guaranteeing the debts of banks, building up beachfronts, becoming the insurer of last resort and the cleaning up of disasters – man-made and natural – both here and abroad. For example, every time we launch a Tomahawk missile into Libya it costs a million dollars. And, in the first day we launched over a hundred. The country has done all this through borrowing, not taxation. Sating today’s desires, not focusing on growth for tomorrow, has been driving government. We are coming close to a point, as Mark Whitehouse writes in this morning’s Wall Street Journal, where we “won’t be able to bear the cost of another disaster.” On the other hand, most immigrants are young, willing and able to work. That is why they come here, for the opportunity. They do not add to the problem; they are part of the solution.

The Census tells us a lot about our country, not only about immigration and race, but as to which regions are growing most rapidly, the attractiveness of certain cities and the demographics of age. Virtually alone among western nations, the U.S. continues to grow, both naturally and through immigration; it is that melting pot concept that persists in attracting people from all over the world and which adds to the exceptionalism of America. It must be encouraged.

Friday, March 25, 2011

"Japan - Beyond the Personal Tragedy, a Blow to the Economy"

Sydney M. Williams

Thought of the Day
“Japan – Beyond the Personal Tragedy, a Blow to the Economy”
March 25, 2011

Aside from the devastating personal disaster the Japanese experienced on that Friday afternoon two weeks ago, their nation faces a rebuilding which is estimated to cost, according to the World Bank, between $122 billion and $235 billion. Since the full magnitude of the damage has not yet been determined, it is likely the final costs will exceed the high estimate. Indeed, other estimates have the costs exceeding $300 billion.

Japan, with a $5.1 trillion economy, represents about 8.5% of global GDP. Their public debt is roughly equal to 200% of GDP, the highest ratio among developed nations. A year ago, Finance Minister Yoshihiko Noda offered a plan to pay down debt. That will not happen, at least not in the foreseeable future. Assuming the high end of the World Bank’s estimates, reconstruction will cost about five percent of GDP. The IMF had estimated Japan’s economy to grow 3% this year. Preliminary estimates have reduced that growth by 1%. Bond issuance for purposes of relief and rebuilding will rise, and tax revenues will fall. The deficit will worsen.

The greater Tokyo area, according to Stratfor, is receiving about 33 gigawatts of generating capacity versus normal peak demand needs of 45 gigawatts, suggesting that the greater Tokyo area is looking at prolonged rotating blackouts for the next couple of months. Japan generates about 30% of their electric power from nuclear. A former trade negotiator tapped by the government to deal with the Fukushima nuclear crisis, Kiichi Hidehiko, said that Japan has set a goal of increasing the amount of electricity generated by nuclear to 40% by 2020. Japan has no alternative. They have no native natural resources; they are dependent on the Middle East for oil, Australia for coal and gas from places like Papua New Guinea. Nevertheless, brakes on existing facilities are likely to be applied. Industrial production will be in retreat, at least for a few months.

Fear of radiation has scared both Japanese citizens and foreign workers. Japanese officials have said that all people living within 12 miles of the Fukushima Daiichi plant should be evacuated, and that anyone within 18 miles of the site should stay indoors. U.S. citizens living within 50 miles of the site have been evacuated. Water, milk, spinach and other food products have been singled out as exceeding some government radiation standards. In terms of water, on Tuesday the Japanese government said it had detected 210 becquerels per kilogram of iodine-131 in one sample. A sample from a second site gathered the same day showed 32 becquerels; on Wednesday, though, the sample dropped to zero. The government limit for infants is 100 becquerels per kilogram. However, the broad limit for all others is 300, far more stringent than the international level of 3000 becquerels per kilogram. Iodine-131 has a half-life of roughly a week, suggesting levels would fade if new radioactive material is not added. It does not seem to me, at this point, to be a high risk problem.

On Wednesday, the government reported that radiation levels in downtown Tokyo on Wednesday stood at 0.146 microsieverts an hour, versus the normal level of 0.035. To put that number in perspective, a typical chest X-ray exposes a patient to 100 microsieverts. In New York City, the normal rate is 0.11 microsieverts per hour. A typical airliner flying at 37,000 feet exposes the passengers to about 5.5 microsieverts per hour. Again, I am no expert, but from what I have read the risks of radiation don’t appear to pose a serious long term threat.

The problem for Japan will be recovering from a devastating natural disaster that, as of Thursday evening, has taken (killed or missing) 27,352 lives, and destroyed several towns and villages. Two towns that disappeared – Minamisanriku and Kesennuma – were bustling seaports, each with several thousand inhabitants. Today, both lie beneath a sea of mud. Sendai, a city of a million, was hit by a thirty-foot Tsunami. The northeast part of Japan is home to a number of manufacturing plants, whose destruction or simply temporary loss of power will impact auto and technology companies (among others) in the U.S. and other countries. Out of fourteen million autos produced in Japan in 2010, nine million were shipped overseas. Nine of Sony’s twenty-five plants in Japan have been idled temporarily or partially suspended production.

On the other hand, Japan has one of the highest household savings rate in the world. Their savings, estimated at over $17 trillion (or about $130,000 per person) dwarfs on a per capita basis that of the United States – about $60 trillion, or a little less than $20,000 per capita.

What’s past is prelude, as Shakespeare wrote, and Japan has a history of recovering from disaster faster than most expect. The city of Tokyo was flattened in the 1923 Kanto earthquake and 140,000 died. The city was rebuilt, only to be destroyed twenty-two years later. Again, it was rebuilt and within twenty-three years Japan had become the world’s second largest economy. They are a resilient people and should not be underestimated in the determination and speed with which they will rebuild.

But the longer term problem for Japan is its declining and aging population – and that may render comparisons with the past mute. Over the past one hundred years Japan’s population has risen 150%. Over the past ten years it rose 0.2%. Nobody expects Japan’s population to double again. Of the 128 million Japanese, 29.4 million are over 65. (And more than 44 thousand are over 100.) Those facts will impact savings and trade balances. Japan is the world’s largest creditor nation with net external assets of about $1.7 trillion, according to a Reuters report dated March 17, 2011. However, their aging population is forcing a drawing down of their savings. In January 2010, Kiichi Tokuoka of the IMF suggested that by 2015-2020 public debt will exceed household gross financial assets. Overseas buyers of Japanese debt will likely demand higher interest rates and risks putting their credit ratings at risk.

In the shorter term, though, Japan has the wherewithal to pay for reconstruction, but there seems little question that domestic GDP will be impacted. The effect on global GDP, however, while having a negative bias should not be too meaningful. It is the longer term that bears watching.

Thursday, March 24, 2011

"George Osborne - A Supply-sider amid a Kettle of Keynesians"

Sydney M. Williams

Thought of the Day
“George Osborne – A Supply-sider amid a Kettle of Keynesians”
March 24, 2011

George Osborne, 39 and Chancellor of Britain’s Exchequer, and a member, according to the Financial Times, of the “braying upper class Bullingdon Club” at Oxford, has become the poster boy of fiscal hawks around the world. In less than a dozen years, Mr. Osborne rose from head of the political section of the Conservative Research Department to the second most important job in the British Cabinet. Last year, when he assumed the job, he was the youngest Chancellor in at least a century.

The Chancellor of the Exchequer is controversial. He is rich, looks it and has been caricatured, according to the FT, as a “sneering aristocrat.” He is not loved by the public, but hopes to be respected. One conservative observer said he is “like a submarine, surfacing to make strategic interventions then disappearing.” He is, according to the FT, obsessed with Tony Blair whom he refers to as “the master” and counts Blair’s A Journey among his favorite books. U.S. Secretary of the Treasury, Timothy Geithner, who comes from the opposite end of the political spectrum, recently said he was “very impressed” at Osborne’s start in the job.

Yesterday George Osborne presented the upcoming budget to Parliament. England, like most western economies, has been experiencing anemic economic growth. The Chancellor had imposed austerity measures in October when he announced £113 billion in spending cuts and tax increases spread over five years. Growth forecasts for the current fiscal year were recently revised down to 1.7% from the 2.1% estimated in November, following a 0.6% decline in fourth quarter GDP. At the same time, England is facing rising inflation. In February, the rate rose to 4.4% and Mervyn King, Governor of the Bank of England, predicted on Tuesday that the rate would rise to 5%. An increase in commodity prices – most notably oil, which is priced in dollars – coupled with a decline in the Pound, combined with Osborne’s VAT hike have created a scare. Slow economic growth and high inflation are reminiscent of the stagflation that infested the U.S. in the second half of the 1970s and the first couple of years of the 1980s.

In response, Mr. Osborne presented his Budget, a budget focusing on growth. The Budget sets four goals:
    • The most competitive tax system in the G-20;
    • To be the best place in Europe to start, finance and grow a business;
    • To be a more balanced economy, by encouraging exports and investments;
    • And have a more educated workforce that is the most flexible in Europe.

To achieve those goals, the following are some of the Budget’s provisions:
    • An immediate reduction in the corporate tax rate from 28% to 26%, with continuing annual reductions     of 1% for the next three years. To ensure this is not a net tax cut for banks, the bank levy rate will be raised.
    • Removing 100 pages from the tax code, including abolishing 43 tax reliefs as a means of simplifying the code.
    • Introduced a Fair Fuel Stabilizer that will raise the levy on oil and gas production from 20% to 32%.
    • The default indexation assumption for direct taxes will move to CPI and indirect taxes will be moved to the same basis when the fiscal situation allows.
    • ₤350 million worth of specific regulations will go
    • Existing regulation will be scrutinized by the public.
    • Funding 21 new Enterprise Zones, beginning in the areas with the greatest needs.

These are just a few of the initiatives the Chancellor mentioned. In his speech to Parliament, Mr. Osborne said, “In an age when businesses and capital and people can increasingly move anywhere, high tax rates can do real damage. That’s true for high corporate taxes. It’s true for high personal tax rates too. They crush enterprise, undermine aspiration and often undermine tax revenues as people avoid them.” Time will tell as to whether the Budget will be successful. When President Reagan cut taxes in 1981 to encourage economic growth, and Fed Chairman Paul Volcker raised the Fed Funds rate to defeat inflation, which was insidiously debasing the Dollar, the first effect was to induce a sharp but short recession. However, a year later the economy took off on what would be, other than a three quarter decline in 1991 and a two quarter drop in 2001, a twenty-six year period of economic growth. During that period interest rates declined 1000 basis points and the stock market rose twelve fold. The consequences of fiscal and monetary policy decisions, good or bad, are never seen immediately. But people do respond to incentives.

Supply-side economics, with their lower marginal tax rates and reduced regulation, incorporate ideas voiced thirty five years ago by Robert Mundell, a Nobel economist at Columbia and Arthur Laffer in response to Keynesians who had encouraged Nixon to go off the gold standard in 1972. The roots of supply-side economics, however, trace back to Adam Smith, David Hume, Alexander Hamilton and others. Essentially they pit those who favor smaller government against those who prefer a more intrusive government.

Again we are living in a world dominated by those who would expand the size of government and increase regulation. Certainly that is the path on which the U.S. has embarked. David Stockman, in an interview in the April issue of Reason, makes the perfectly valid point that “If we are not willing to actually shrink government spending, then we should pay full freight now…” While the statement, on its own, makes sense, the problem is that most of us do not trust government to use the increased taxes to fund existing programs or pay down debt. Congress’ habit of spending is difficult to break under any circumstances; history has shown they do not have the will to do so voluntarily.

Britain has chosen a different road. The next few years will tell the tale as to whether the alternative road – the austerity measures and growth incentives of George Osborne – will lead Britain away from her high deficits and feeble growth. I suspect they will.

Wednesday, March 23, 2011

"War by Committee - Will it Work?"

Sydney M. Williams

Thought of the Day
“War by Committee – Will it Work?”
March 23, 2011

Waging war by committee may satisfy the desires of those who disapproved the unilateralism of George W. Bush, but it may lose more in efficiency than it gains in principle. An article on the front page of yesterday’s Financial Times made the bickering among the European partners seem like the nattering of school girls. A western official said: “There are major tensions between the US-UK and the French.” Anders Fogh Rasmussen, secretary-general of the North Atlantic Council, blasted the French for impeding NATO by kicking off the operation without notifying its partners, and he disparaged the Germans for lack of participation. In the country with bases closest to Libya, Franco Frattini, Italian foreign minister, was reported to have said, “Italy will begin reflecting on the uses of its bases for the Libya operation if there is a multiplication of command centres.” The use of “reflecting” is as disconcerting as is the idiocy of “multiple command centres.” Will the left hand know what the right is doing? Will it care?

The stated mission in Libya is clear, in a somewhat fuzzy way. United Nations Security Resolution 1973 states that the mission is “to protect civilians and civilian populated areas under threat of attack.” However, in recent weeks Barack Obama, Nicholas Sarkozy and David Cameron – the main players in the coalition – have all said they want to see Muammar Gadhafi removed from power. What’s a general to do?

U.S. domestic support for a war in Libya lasting more than a few weeks is essentially nonexistent and is unlikely to broaden as time goes by. The President, while seeking and receiving UN backing for Operation Odyssey Dawn, did not ask for Congressional approval. Members from both parties have voiced concerns. It is possible, of course, that a missile or bomb might find Mr. Gadhafi in his Bab al-Azizia Compound, but given the UN’s publically stated mission statement, it is far more likely that the gentleman has surrounded himself with women and children. If he were killed, the incident would be celebrated by the world; we all wish it happens, but the odds don’t favor it. Like Saddam Hussein in 1991, it is probable that Mr. Gadhafi will live to fight another day.

The Middle East has always been a conundrum. It still is. The Arab League’s endorsement of a no-fly zone was one reason Mr. Obama reversed himself and decided that the U.S. should join the coalition. But now, according to the Investigative Project on Terrorism (IPT), the Arab League has apparently contradicted its earlier stand and today condemns the West’s broad bombing campaign, and Turkey, compounding the problem, has blocked NATO’s mission in Libya.

President Obama, in his desire to be the anti-Bush, has largely abandoned his predecessor’s Freedom Agenda, which had argued that all people, regardless of race or culture, seek freedom and democracy. Demonstrations in Tunisia, Egypt, Yemen, and Bahrain are suggestive that Mr. Bush was right. Mr. Bush has been much maligned for Iraq, yet Iraq is one of the few Middle Eastern countries whose citizens have not needed to demonstrate for freedom, even though their democracy is young and fragile. An irony, not lost on protestors in the Middle East, and as explained by Fouad Ajami in today’s Wall Street Journal, is that the liberal Mr. Obama who spoke so eloquently about a new relationship with the Muslim world in Cairo two years ago, has proved to be less a friend of democracy-seekers in the Middle East than the conservative Mr. Bush.

Colonel Gadhafi has proved himself a coward when faced with a determined opposition. He did so in late 2003, following the invasion of Iraq, when he abandoned his program of developing weapons of mass destruction. He immediately called for a cease-fire when the U.S. agreed to impose a no-fly zone. Had the U.S. and the West shown more determination earlier and had we recognized the rebels at once, fewer casualties would likely have ensued. Finally, a month into the rebellion, as Gadhafi’s troops were laying siege to Benghazi, with promises to kill the rebels hiding in closets and under beds, President Obama was forced to join the cause on humanitarian grounds.

Whether the committee forged to wage war on Mr. Gadhafi succeeds remains to be seen. The handover to NATO, or some collection of European powers, should take place in the next few days. In a sense, it is a test of an Obama Policy that subsumes, but hopefully will not dilute, our might to international bodies. Mr. Obama wants America to be seen as a partner, not a leader, a bully or an instigator. If successful, the policy will gain traction, but the risk is that committees cannot wage wars, and we lose respect and our identity of exceptionalism.

In the meantime, Iran appears to be licking its chops as it surveys the chaos throughout the Arab world. A crisis, Mr. Ahmadinejad might have said, is a terrible thing to waste. Iran is the most destructive force in the Middle East. They should stay in our sights. Our interests in Saudi Arabia’s oil means defending that regime, if necessary. It will be interesting to see if the Obama Policy, with its war by committee, has the fortitude to stand up to far more serious problems that surely lie ahead.

Tuesday, March 22, 2011

"Mother Nature can be a Mother"

Sydney M. Williams

Thought of the Day
“Mother Nature can be a Mother”
March 22, 2011

The recent 9.0 earthquake in Japan and the ensuing Tsunami are reminders that Mother Nature is far more powerful than anything man has ever devised. They also should serve as clarion calls to increase our preparedness to extreme natural (as well as man-made) disasters, however remote their possibility may seem.

For centuries, man has harnessed the power of rivers and wind and used the heat of the sun for his own purposes. Man has adapted to his environment, living among ice floes in the frigid arctic and on arid desserts with temperatures’ reaching one hundred degrees Fahrenheit. However, the relationship between man and nature has never been that of master and servant. A 1960 earthquake in Chile measured 9.5 on the Richter scale, generated the equivalent of 178 billion tons of TNT, enough to power the energy needs of the United States for 740 years. A flood in China, in 1931, took an estimated four million lives. The volcanic eruption of Mount Tambora on Sumbawa Island in Indonesia, in 1815, has been estimated to have been fifty-two thousand times more powerful than the bomb that devastated Hiroshima on August 6, 1945. Additionally, cyclones, wildfires, hurricanes, typhoons and mudslides have demonstrated man’s subservience to the powers of nature.

Hundreds of years ago and in primitive societies today, natural disasters were attributed to gods who had grown angry with man’s state. In China, such tragedies portended the end of a dynasty. Earthquakes in Japan were attributed to the stirrings of giant catfish. In Mark Twain’s A Connecticut Yankee in King Arthur’s Court, the American who had been transported to Sixth Century England predicted the upcoming solar eclipse, thus winning adulation from the credulous populous. The fact that we capitalize “Mother Nature” is a clue to our respect for the unknown mysteries of the natural world. Even today there are those who see signs in nature’s ugly surprises. Ian Burma, in the weekend’s Wall Street Journal, wrote that Glenn Beck’s reaction was “zany,” after he suggested that Japan’s disaster was “a message from God to follow the Ten Commandments.”

Tom Friedman, in his Sunday column in the New York Times, suggests we are taunting Mother Nature. He bemoans the fact we have no energy policy and no climate policy, and then suggests, somewhat oddly and out of context, that we have no long-term plan to deal with an “unsustainable deficit.” I agree that we have no plans for the deficit, but deficits and natural disasters are subjects of very different pedigrees. The deficit is man made; so man alone can fix it, and the obligations we have incurred have nothing to do with the weather. Neither rain nor sun will improve or harm our financial situation. Only a strict diet of budget cuts and tax reform will save us from sinking into a cesspool of fiscal folly. Mother Nature, in contrast, is something over which we have limited control. We can build dams and erect buildings that are earthquake and hurricane resistant, but we are incapable of diverting a Tsunami, cyclone or typhoon from wrecking immense damage. Earth plates separating and then coming together in a powerful crash, as they did in Japan on March 11, have nothing to do with the U.S. drilling for oil on the ANWR or Chinese coal plants spewing toxic fumes. We can do little, other than continue to study the earth and perhaps learn to anticipate such tragedies and so prepare people. There is no one to taunt.

Most of the time man and nature live in a harmonious, symbiotic relationship. Our food, clothing, shelter and fuel are derived from the earth and from nature. Anthropologists’ remark on primitive tribes today living in a harmonious relationship with nature in remote jungles along the Amazon or in parts of New Guinea, and, in the interest of their science, would like to preserve the timeless nature of their way of life. However, I doubt they would want to trade places. Most people aspire to a future that materially enriches their lives, and that means using the resources nature provides. As societies grow wealthier they can afford to give back and help reconstitute the planet. It is an evolutionary process. (Interestingly, the Connecticut River, at whose mouth I live, is far cleaner today than it was 150 years ago.)

Cassandras have long predicted we are destroying the planet. The most recent examples are the shrill cries from those like Al Gore and Michael Moore, more promotional than realistic, who claim that man is solely responsible for global warming, just as their forbearers claimed a generation ago, through the Club of Rome, that man was responsible for the earth’s cooling. Societies, like species and like the earth we live on, are constantly evolving. There is no question that man impacts nature, often in harmful ways. Poorer countries create more pollution, as food, warmth and shelter take precedence over natural preservation. But we also realize that, as man becomes wealthier he aspires to live in as pristine an environment as possible. And we know that nature is bigger than man; to assume that he alone affects the earth is to assign too much importance to man and to misunderstand the very nature of nature.

Memories are too often short. Millions of people continue to build their homes on top of known fault lines and along seashores that have witnessed horrific hurricanes, as those who live in New Orleans can well attest. Man is also incredibly resistant. In 1923 an earthquake destroyed most of Tokyo. It was rebuilt only to be demolished by incendiary bombing in 1945. It has been rebuilt more magnificently than ever.

Perhaps we will find ways of predicting such tragic events as happened in Japan, so be able to provide timely warnings to those at risk. But, unfortunately we will never live in a world devoid of natural disasters, for Mother Nature can indeed be a mother.

Monday, March 21, 2011

"Fannie and Freddie Investigations - Let the Chips Fall Where They May"

Sydney M. Williams

Thought of the Day
“Fannie and Freddie Investigations – Let the Chips Fall Where They May”
March 21, 2011

An article in the weekend edition of the Wall Street Journal, “Fannie and Freddie Probe Faces a Snag,” caught my attention.

A number of executives at the two GSE’s, including both companies former CEOs, Daniel Mudd of Fannie Mae and Richard Syron of Freddie Mac, have been served Wells Notices. (A Wells Notice indicates that the SEC staff is preparing to recommend civil charges against the person served, and provides that individual the opportunity to persuade regulators against such action.) The charges refer to the possibility (I would argue probability) that they (the management) failed to disclose the growing exposure to riskier mortgages between 2006 and 2007. The “snag” refers to the allegation by the defendants that any and all disclosures were reviewed by the firm’s regulator, the Federal Housing Finance Agency (FHFA.) The SEC must now prove that not only did the two agencies mislead investors, but they misled the agencies overseeing them, a difficult thing to prove in that David Felt, the former deputy general counsel of the FHFA said his agency had reviewed the disclosure issues and concluded, in January 2010, that they did not have sufficient evidence against any individuals.

The problem stems from the complicit and explicit role Congress played in perpetrating the collapse of the housing and mortgage markets. A principal culprit was the unintended consequence of the Community Reinvestment Act (CRA.)

The CRA is a federal law designed to encourage commercial and savings banks to help meet the needs of borrowers from all segments of their communities, including low income neighborhoods. The Act was passed in 1977. A number of changes were made to the Act in 1989 and throughout the 1990s. Attempts to rein in its influence failed in 2005. As Robert Rubin stated in 1995, the principal purpose of the Act was “to deal with the problems of the inner city and distressed rural communities.” In 1999, with the enactment of the Gramm-Leach-Bliley Bill that repealed the Glass-Steagall Act, any bank holding company wishing to be designated a financial holding institution would have to comply with the guidelines of the CRA. On signing Gramm Leach, President Clinton said, “that, as we expand the powers of the banks, we will expand the reach of the Community Reinvestment Act.” This Act abetted the proliferation of subprime mortgages.

In 2007, as the slide in the housing and mortgage markets were well underway, Federal Reserve Chairman Ben Bernanke suggested increasing the presence of Fannie and Freddie in the affordable housing market to help banks fulfill their CRA obligations by providing them with more opportunities to securitize CRA-related loans.

The point is that Congress, five administrations and myriad regulatory agencies aided and abetted the environment that led to speculation in housing, by encouraging those to buy houses who had limited ability to repay the loans and who were dependent on continuing rising prices. The relationship Congress had with the two GSEs, Fannie and Freddie, was truly symbiotic – the larger they became, the greater their donations to their benefactors in Washington. The victims were not only lower income home buyers, who had been sold a false promise – an Eldorado of ever rising prices, and taxpayers who had to step in to pick up the pieces, but investors who were lied to by managements operating behind the shield of regulators.

This is not to absolve banks for deceptive practices, nor mortgage brokers or real estate agents whose desire to book a transaction took priority over prudence. It is not to excuse consumers who came to expect annual increases in their home values as a reason to tap the improved value for ephemeral consumer items. There are very few people or groups who do not share some blame. But regulators and our elected officials in Washington were as guilty as anyone – and yet have been the least scrutinized and the least blamed.

Will investigations into misconduct at Fannie and Freddie grind to a halt because of the “snag” that any indictment might shed light on the role of regulators, which, in turn, could lead back to Congress? I hope not. A failure to persist will be a disservice to our system of democratic capitalism. Those who work hard, save and invest have been largely ignored, yet they are integral to our future well being. Increasingly, the demand by borrowers exceeds the ability of Americans who invest; so we have had to go offshore to find buyers of our bonds and assets. As risks to our system have become more apparent, we have, in the last several months, now become dependent on the Federal Reserve to purchase Treasuries – a form of debauching the currency. If they had not done so, interest rates would be considerably higher, negatively impacting our deficit, but at least providing a more realistic return to the elderly and the prudent, and a better reflector of embedded risks.

Capitalism, by definition, relies on adequate sources of capital. Very little that Congress or Washington has done over the past few years has appealed to that maxim. Congress is very good at spending money, especially on entitlements – Obamacare being the most recent and most egregious example – but they having shown little interest in increasing savings, despite the growing numbers who are approaching retirement age. Economic growth does not operate in a vacuum. It relies on investors and risk takers.

The investigations into Fannie and Freddie should continue; the chips should be allowed to fall where they may.

Friday, March 18, 2011

"It is Still the Economy"

Sydney M. Williams

Thought of the Day
“It is Still the Economy”
March 18, 2011

“It’s the economy, stupid” was a sign hung in Bill Clinton’s headquarters to keep the staff on message during the 1992 Presidential campaign. Even though the economic recovery was already well underway, as it is today, the message should be re-hung, as next year’s campaign gets underway. The 1991 recession had been very mild; nevertheless the recovery, which began in the fourth quarter of 1991, was stronger than that of today. A strong economic expansion, despite the depth of the 2008-2009 recession, remains more of wishful thinking than a realistic expectation.

The country is in its seventh quarter of recovery, according to the National Bureau of Economic Research (NBER). The average of the six positive quarters reported thus far has been 2.9%. No two time periods are the same, but to put that number in context, the average of the first six quarters of recovery in 1983-84 was 5.7% and the average in 1975-76 was 4.1%. This recession was worse than those two, in terms of GDP decline; so theoretically should have experienced a sharper rebound.

The biggest problem has been employment. About 1.4 million people enter the labor force every year, indicating we must add about a hundred and twenty thousand to the payrolls every month just to keep unemployment level. (The estimated workforce in 2000 was 143 million; today it is about 158 million.) While the total number of employed persons is about the same today as it was in 2008, the unemployment rate has risen from 6% to 9%. In February 192,000 were added to the payrolls, a good number, but since the payroll number turned positive, in March 2010, we have added a monthly average of 106,000, not enough to offset the natural increase of people entering the workforce. Productivity gains, however, have allowed GDP to increase by about $300 billion, indicating that fewer people are producing more goods and services, a good thing for the economy, if not employment.

There have been several recommendations to improving employment over the long term, most focusing on education, but thus far little has been done to solve the immediate problem. The number of high school graduates going to college has been trending higher, approaching 70%, yet, according to Edward Gordon author of Winning the Global Talent Showdown, there are about three million jobs requiring technical skills, that have gone unfilled because of a lack of qualified applicants. The majority of those jobs are in science, technology and engineering, the qualifications for which could be provided, according to Mr. Gordon, by two-year colleges, or through apprenticeships. David Roberts, CEO of Carlisle Companies, told CNBC last August that he cannot find enough qualified workers who are willing to live in small towns in places like North Dakota (a state with an unemployment rate of about 3.5%.)

Taxpayer–supported programs like food stamps and extensions of unemployment benefits have become, as David Rosenberg described somewhat crudely but accurately, the modern equivalent of yesterday’s soup kitchen. The line between providing the necessary support for needy families and giving support that disincentives the desire to seek work is difficult, and perhaps impossible, to define. Compassion is integral to America; yet one cannot help thinking that, as a society, we have become spoiled. College has become an excuse, in too many instances, for four years of partying, while learning little that is practical. The concept of becoming a welder, a plumber or an electrician appears beneath one’s dignity. And moving to the farm fields of Indiana or the windswept plains of North Dakota, states far more business friendly than New York, New Jersey, California or Connecticut, is seen by too many as too great a sacrifice.

But there are lessons that Washington and many of the coastal states could learn from their Midwest cousins – a more attractive tax environments for one and a friendlier regulatory environment for another.

An interview in yesterday’s Wall Street Journal with Representative David Camp, Republican chairman of the House Ways & Means Committee provided little that was positive, in my opinion. Like so many in Washington, he speaks of simplified and lower tax rates for both corporations and individuals, but also like so many he provided no specifics. While he said that America needs a tax code that promotes job creation and reduces complexity – a fact with which no sane person would disagree – he begged off when asked which deductions he would eliminate. Warren Buffett once famously said, when arguing for higher tax rates, that his actual tax rate was lower than that of his secretary. A flat tax would fix that inequality more easily than raising nominal rates, but leaving myriad deductions in place. One can bet that should Mr. Buffett’s tax bracket be raised, his accountant would simply sharpen his pencil, turn up the lights and find a favorable path through the maze that benefitted his benefactor – and likely get a raise for doing so.

There is little question in my mind that overregulation, combined with a tax code whose complexity benefits only lawyers and accountants, acts as an inhibitor on the hiring plans of businesses. An emphasis on community colleges, which provide needed and practical skills, should become a policy initiative. (In fairness, President Obama has talked about such programs.) But changing the mindset of the country toward an emphasis on the pride of production and a sense of self-reliance, away from self gratification and dependency on government is difficult to achieve. When almost 50% of the working population pay no income tax (apart from payroll taxes), it means they have no skin in the game. Government, to these people, is seen as a benevolent provider, not as an entity to which one should contribute. That is an unhealthy situation.

The anemic recovery we are experiencing is not helped by world events. Rising commodity prices are having an impact, as the consumer is still 65% or more of our economy and, while the Federal Reserve may not consider food and energy crucial to the measurement of inflation, I can report that those who live in small town America do. The events in the Middle East may not cause oil prices to rise, but they sure won’t create lower prices. The earthquake, Tsunami and the explosions at the nuclear facilities will create demand as the country rebuilds, but lower production from Japan is unlikely to improve the global economy.

It is, as politicians will learn, still the economy.

Thursday, March 17, 2011

"There Must Be a Middle Way"

Sydney M. Williams

Thought of the Day
“There Must Be a Middle Way”
March 17, 2011

While the destruction of the Fukushima nuclear reactors have dominated the headlines (and the stock market,) and while our heartfelt sympathies go out to the thousands of victims and their families, the violent protests in a fragile Middle East are likely to have a more meaningful impact on our wealth and our lives.

Like bullies around the world, Muammar Gadhafi responds to toughness. In December 2003, the Libyan leader agreed to suspend his quest for weapons of mass destruction. He had seen what American forces had done to Saddam Hussein earlier in the year and decided to shunt aside bravado in favor of discretion. He shut down his chemical and nuclear weapons facilities and invited UN inspectors to witness what he was doing. Fast forward eight years, and whatever leverage the rebels in Libya had appears to have been lost in the mixed messages emanating from the American Administration. In contrast with President Theodore Roosevelt who said he would speak softly and carry a big stick, President Obama has talked tough (“we’re tightening the noose”), but is carrying a wiffle bat. In Egypt, the January 25 Revolution Youth Coalition refused to meet with American Secretary of State during her recent visit. Their declaration stated that “the U.S. Administration took Egypt’s revolution lightly and supported the old regime while Egyptian blood was being spilled.” Actions have consequences, but so do inactions.

In his bid to seek favor with other nations, the President has focused on being the anti-Bush. Anne-Marie Slaughter, a former State Department official, wrote in an op-ed in Sunday’s New York Times that “when we were asked to support their cause with more than words, we blinked. Americans in turn will read of Mr. Obama’s June 2009 speech in Cairo, with its lofty promises to stand for universal human rights, and cringe.” In doing nothing (today heading off to Brazil for five days,) he appears weak, but more importantly he seems to have lost his moral compass, as it applies to the U.S. and its history of standing firm behind human rights. There is no question that the U.S. must operate in its own self interest, which often means dealing with unsavory characters. But the U.S. has always stood for freedom and democracy, and those who have fought for those rights have always known they had a friend in America. In 2009, the President declined to publically support the Iranian Green Movement. Perhaps it would not have made a difference, but it would have sent a message.

Defense Secretary Robert Gates laid out (to my mind) a compelling argument against implementing a no-fly zone over Iraq, as it would require the destruction of Libya’s Air Force and anti-aircraft installations; such activity, in his opinion, would have established a state of war. However, specific and tough actions could have been taken. A meeting between the main rebel group, the National Council of Libya, and the American Secretary of State could have been arranged, which would have demonstrated our commitment to their cause. We could have sent the Enterprise into the Mediterranean from the Red Sea. Our air force could have conducted war games out of Aviano, a NATO Air Base in southern Italy and about fifteen minutes by air from Libya. We could have provided weapons, transportation and medical supplies to the rebel forces. As it was, we dithered, the rebels lost their impetus and Gadhafi’s troops regained the offensive. With Gadhafi’s troops outside Benghazi, affecting the outcome now will be far more difficult.

As the Wall Street Journal’s lead editorial made clear yesterday, the real fears of Arab leaders include a resurgent Turkey and a nuclear-empowered Iran. Memories are long in this part of the world. The Ottoman Empire finally disappeared in the aftermath of World War II. At its height, the Ottoman Empire stretched from the eastern gates of Austria, encompassing the entire eastern Mediterranean and west to Algeria along Africa’s northern coast. The Persian Empire disappeared centuries before the Turks, but it was only in 1979 when the last heir to the Peacock Throne was finally tossed out of Persia, a country reborn as Iran. Looking like a giant lobster, their empire stretched from India to the Balkans on the north and to Egypt on the south. With their history of being subject to the conquering arms of their neighbors, Arabs have largely looked upon America as a (relatively) benign presence.

America cannot fight every war. There is a limit to our resources and, as I wrote on Monday quoting George Friedman of Stratfor and Richard Haass of the Council on Foreign Relations there are parts of the Middle East far more critical to our interests than Libya, but that is no excuse for giving the appearance of letting those who fight for freedom dangle in the breeze. A middle ground could have been found; it would have had us flexing our muscles and meeting with the revolutionaries, perhaps preventing what looks to becoming a failed revolution.

Carl Gershman, President of the National Endowment for Democracy, wrote a fascinating article, “The Fourth Wave,” in the March 14 issue of The New Republic. He writes that over the past five years the number of countries registering declines in political rights has exceeded those registering gains by 77 to 57. However, he adds that “the events in the Middle East offer powerful and, I would argue, conclusive evidence supporting the idea that democracy is a universal value.” All of the evidence explaining the democracy deficit in the Arab world is “now being refuted by millions of Arab citizens ready to risk their lives for freedom…”

The protests occurring in Bahrain and Saudi Arabia are not just about democracy, they also reflect an ages-old dissension between Sunnis and Shiites. It is a complex situation fraught with risk, but one underscored by a desire for freedom. The stance America takes, more than resolutions from a dysfunctional UN or expressions of support from an enfeebled NATO, is more important to our partners and friends in the Middle East. As democratic protests persist in Saudi Arabia, Yemen and Bahrain, the President cannot afford to stand aloof above the fray. Mr. Obama is the President of the sole superpower in the world. In his first year in office, he made 411 TV appearances. In the past two weeks he has been notably absent. He is not a delegate to some world body. He has a responsibility to lead, to be strong; he must provide hope for all who yearn for freedom and democracy while not losing sight of our country’s self-interests. Between war and passivity, there must be a middle way.

Wednesday, March 16, 2011

"You Can Run, But You Can't Hide"

Sydney M. Williams

Thought of the Day
“You Can Run, But You Can’t Hide”
March 16, 2011

The tragedy in Japan and Gadhafi’s escapades in Libya have had the effect of removing the problems of deficits from the front pages of newspapers and from the evening news. But the problem persists. February, with only twenty-eight days, won the dubious crown as the month showing the biggest federal deficit. For years, politicians have hidden behind words of their own deceit. With the advent of YouTube, bloggers, tweeters, etc. that is no longer possible. They have to take ownership of what they say and what they do. Ironically, the internet, while providing more information at faster speeds then ever before, also allows the public to read or listen to complete speeches. No longer do we have to rely on sound-bites or news editors snipping out those items that fit their preconceived idea as to what is important. It is what gives me confidence, during this period of ever-rising deficits, that politicians will be forced to confront the deficit problem.

Traditional news sources – newspapers and network TV (and now cable news) – have been losing audiences for more than two decades. Reuters recently reported the results of a survey conducted by Pew Research, which indicated that in 2010 online ad revenues exceeded that of print for the first time – $25.8 billion versus $22.8 billion. That trend will only worsen for print. The Newspaper Association of America reported that, on average, 39.6% of Americans over the age of 18 read at least one daily paper. However, the breakdown by age category is significant. Only 24.1% of 18-34 year olds pick up a paper versus 55.1% of those over the age of 55.

The trends in television news show similar patterns. Audiences for networks’ news have been declining for twenty-five years. And, now cable news is showing similar declines. In 2010, CNN, MSNBC and Fox News all lost viewers. Nevertheless, another Pew Research study showed no decline in terms of the public’s knowledge of current affairs.

We owe that fact to the internet, which has been the big winner in garnering viewers – a medium dominated by bloggers. According to Web Site Performance Monitor, a firm that monitors websites and internet traffic, there are about two billion online users of the internet, sending or receiving 247 billion e-mails every day. (It is estimated that about 80% of this traffic is spam.) Approximately 126 million bloggers seek to reach those users. Facebook has at least 350 million users, of whom 50% log in every day. Dick Costello, COO of Twitter, claimed last June that his company was getting 190 million visitors every month, of whom 65 million tweeted at least once a month. YouTube serves up one billion videos every day.

Consumers have been quicker to adapt to this changing world than have been traditional media and politicians. In time, this changing dynamic should have a salubrious effect on the way politicians perform and reach out to their constituents. They will not be able to hide. What they say can be used against them, or in their favor. For example, yesterday, in the aftermath of the passage of the umpteenth fiscal continuing resolution, Nancy Pelosi, who once urged Congress to pass the healthcare bill so that the people can discover what’s in it, in an attempt to clarify her opposition to budget cuts, said “It’s not about the money; it’s about the morality of what we’re doing.” President Obama’s indecisiveness on Libya has been seen by millions. On the other hand, Mr. Obama’s magnanimous and healing speech in Tucson after the massacre that killed nine and badly wounded Representative Gabrielle Gifford has been seen in full by 796,218 people on YouTube and read by thousands more.

This trend in media will either make politicians far more circumspect, or make them more honest. Time will tell.

The search for an honest politician has been compared to Diogenes’ search for an honest man, a search that has been underway for years. Simon Cameron, a onetime Senator from Pennsylvania and Abraham Lincoln’s first Secretary of War once said: “An honest politician is one who, when he is bought, stays bought.” He must have been speaking from personal experience, for he was fired by Lincoln for corruption after less than a year. Nevertheless, he was re-elected to the Senate, only resigning when he was assured that his son would succeed him. Last year, the Adam Smith Institute in London scrapped its annual Honest Politician of the Year Award, because no qualified candidates could be found. Next year the Institute is planning to give its award to the most Corrupt Politician of the Year. “This should give us many more candidates,” said Institute director Dr. Eamonn Butler, “Indeed, I can think of 646 already.” (There are 650 elected members in England’s House of Commons.)

It is far too early to know the full ramifications of the democratization of the news, but letting the sun shine into the dark recesses of Congress has to ultimately be positive for voters. Democracies depend on a well informed public. The biggest problem facing our nation is the one of deficits and it is comforting to see what has happened in Indiana, is happening in Ohio and Wisconsin and now what Democrat Martin O’Malley is attempting to do in Maryland. H.L. Mencken once said: “An honest politician is regarded as sort of a marvel, like a calf with five legs…” The internet, with myriad bloggers representing every conceivable political position poses a possibility of turning some of these rogues into honest people. They may run, but they won’t be able to hide.

Tuesday, March 15, 2011

"Nothing is Ever Completely Safe"

Sydney M. Williams

Thought of the Day
“Nothing is Ever Completely Safe”
March 15, 2011

Listening to and reading the news, it is almost impossible to discern facts from myriad opinions being tossed out, as they apply to the catastrophe at Japan’s nuclear facilities at Fukushima. The press, for obvious reason, has an incentive to sensationalize the events, while governments have an incentive to underplay bad news. As a result, investors are left stumbling in the dark, both figuratively and literally (in Japan.)

A piece I read yesterday by Dr. Josef Oehmen, a professor of mechanical engineering at M.I.T. and an expert on nuclear technology detailed the events dispassionately. He calmed my fears, minimizing concerns regarding the spread of radiation and suggesting the biggest problem will be a prolonged power shortage. However, since he wrote the piece (on Saturday) two additional plants in Okuma (there are a total of six) exploded and a third is on fire. However, comparisons to Chernobyl seem unwarranted in that, as I understand it, the facility in Russia did not have the containment systems of those in Fukushima. Nevertheless, the vacuum of reliable information is disconcerting.

Twenty percent of all electricity in the United States is generated by 104 nuclear power plants located in 31 states. There are three new plants under construction and twenty—seven in the planning stage. Most operating nuclear plants in the U.S. are Generation II reactors (similar to those in Fukushima,) in which the cooling water is circulated by electric pumps – and it was the shut down of electric power to the plants that failed in Japan causing the problems. Generation III reactors, as explained by William Tucker, author of “Terrestrial Energy: How Nuclear Power Will Lead the Green Revolution and End America’s Energy Odyssey”, in yesterday’s Wall Street Journal, use what is called a “passive” cooling system where the water circulates by natural convection with no pumping required. One would assume that existing nuclear plants will be upgraded to the new cooling systems.

It seems obvious that Senator Joseph Lieberman is correct when he says that the United States will “quietly put the brakes on,” as regards future plants. The administration and the opposition appeared in unison, in suggesting that nuclear will remain a part of our longer-term energy plans. I would guess that they are right, though one should expect coal and natural gas will benefit over the near term.

There is little question that the economic impact on Japan will be meaningful. The Kobe earthquake (6.8 on the Richter scale) was estimated to have cost Japan about one percent of its GDP. The cost of rebuilding amounted to about two and a half percent of their GDP. The current situation will be more costly and have a bigger impact. The Richter scale is logarithmic, suggesting that this one was stronger than Kobe by a factor of more than a hundred. Today, Japan’s GDP is slightly over $5 trillion. Approximately 30% of Japan’s power generation comes from nuclear. With a number of plants shut down, or being upgraded, one can assume that power shortages will be in effect for some time. That will affect industry. According to Bloomberg, for example, about 25% of the world’s technology products are produced in Japan and they manufacture about 15% of U.S. auto component parts. From what I can tell, radiation issuing from these plants, dissipates over time and should not represent a severe problem to the people in Tokyo, a city of 13 million 130 miles to the south. But I am no expert and accurate information is impossible to access. The problem, though, will be economic.

In today’s Wall Street Journal, George Melloan quotes Frederic Bastiat He was a nineteenth century economist who taught the parable of “the broken window,” which holds that GDP growth that comes from reconstruction brings no net gain in society’s wealth. “Destruction is not profitable,” he wrote. And rebuilding Japan will take time, as they well know.

Fifty percent of our electricity generation comes from coal, twenty percent nuclear, eighteen percent from natural gas, seven percent from hydro and five percent from “other.” All carry risks. Last April an accident at Massey Energy’s Upper Big Branch mine in West Virginia killed 29 of the 31 workers in the mine. Later that month the explosion of BP’s Deepwater Horizon Well killed 11, inundated coastal waters and marshes with oil and stopped all drilling for almost a year. Japan’s misfortune is our fortune, in that the lessons learned will be applied to our nuclear program.

Government and industry have a self interest in minimizing accidents (and over time they have done a good job,) but there is no way to eliminate all risks from our lives, a condition well known to portfolio managers.

Monday, March 14, 2011

Sydney. M. Williams                                                                                          March 14, 2011
Notes from Old Lyme
“The Return of the Bluebird”

“And Spring arose on the garden fair,
Like the spirit of love felt everywhere.
And each flower and herb on Earth’s dark breast
Rose from the dream of its wintry nest.”
“The Sensitive Plant”   1820
                                                                                          Percy Bysshe Shelley (1792-1822)

Saturday morning, like most people in the world, I awoke to the devastating news of an explosion at one of Japan’s largest nuclear power plants, the Fukushima Daiichi facility in Okuma. The blowup was a consequence of the fifth largest recorded earthquake in history and the subsequent Tsunami that swept 23 foot high waves six miles inland. Cracks in the casing of the cement structure allowed radiated plumes to escape, potentially making this the worst nuclear power plant disaster since Chernobyl in 1986. (A no-go zone of 20 miles continues to surround Chernobyl twenty-five years after the accident.)

When not speaking of the devastation in Japan, reporters turned to the news of a 5:00AM bus accident on I-95 in the Bronx. A tour bus, returning to New York’s Chinatown from Connecticut’s Mohegan Sun Casino, overturned near the Bronx killing fifteen and leaving five severely injured.

Trying to digest the meaning and attempting to understand the randomness of these horrific events and the role chance plays in our lives, I began my morning exercises, standing on my Bosu warming up and looking out toward the marshes and the Connecticut River. Amazingly, the first thing I noticed was that our bluebird family had returned, a harbinger of spring. Later that morning, working in our flower garden, I noticed that the season’s first flowers – Snowdrops – had pushed their way through the warming, but still cold, soil. Ten thousand or more people may have died in Japan’s earthquake and the ensuing Tsunami, and fifteen died in the Bronx, allegedly a consequence of human error. Lives have been snuffed out, but life endures.

Man’s capacity to overcome disaster has been shown time and again. The ability to do so does not diminish the awful nature of the act, but it is how the species survives. In 1888, in Twilight of the Idols, Friedrich Nietzsche wrote, “What does not kill me makes me stronger.” Japan, in 1945, was destroyed. With a population of seventy-one million in 1940, the country lost an estimated three million people – four percent of their population. Cities were bombed. Industry was destroyed, along with railroads, cargo ships and port facilities. Yet twenty-three years later, in 1968, Japan had become the world’s second largest economy. In 1995, the Kobe earthquake killed more than six thousand people. In the aftermath of that quake, according to Peter Tasker writing in the Financial Times, more than a million Japanese, demonstrating man’s humanity to man, volunteered their services.

In February 1945, on top of Mt. Belvedere in Italy’s Apennine Mountains and after a bloody fight attacking entrenched German mountain troops my father wrote to my mother, not of the casualties or of the explosions of land mines, but of the buds of new flowers poking their way through the blood-drenched snow. The war in Europe still had two and a half months to go and thousands more would die, yet, amidst all that death, budding flowers, those perennial symbols of renewal, were making their presence known. Death and destruction resulting from natural or man-made causes are, unfortunately, an inevitable aspect to our lives; but, so too are hardy flowers, budding trees and the returns of songbirds to our New England gardens heralding the renewal that this season brings. And, so too, are the fortitude and determination of mankind.

Knowing no one on the fated bus driving down from the Mohegan Sun early Saturday morning and having no relationship to the ten thousand Japanese killed the same day, it is easy for me to look through those calamities to the morning that will surely come. But we have all experienced tragedy and we know that the passage of time, while never fully healing the wounds, makes them bearable. That bluebird, sitting atop his red birdhouse last Saturday morning, was a sign that days of renewal lie ahead.

"Libya - Revolution, or Civil War"

Sydney M. Williams

Thought of the Day
“Libya – Revolution, or Civil War?”
March 14, 2011

When violent protests within nations succeed, they become revolutions; when they fail, they are known as civil wars. In our two hundred and thirty-six years, we have experienced both – the American Revolution, when the protestors (with necessary aid from the French) successfully beat back the British, and the American Civil War, when southern secessionists failed in their attempt to establish a confederacy. During the American Civil War, the British, while sympathetic to the southern cause, as their mills were dependent on American cotton, did not intervene.

Violent protests have broken out across North Africa and in parts of the Middle East. Libya has become the most recent focus, with their thuggish dictator, Muammar Gadhafi, once on the ropes, but now looking to maintain power. As with all of these outbreaks, the question becomes, are they bids for democracy, or do they incorporate a cynical manipulation of events by Islamic extremists to create chaos, thereby allowing an opening for conservative Muslim clerics or groups like Al Qaeda to assume control? The assumption, perhaps fairly, is that it is the former.

The United States, like England in 1861, must decide what its role should be. As the world’s only super power and as a beacon for those who strive for freedom and democracy, the United States bears a unique responsibility. Nevertheless, the country must act in a way that serves its best interests – economic and political. Sometimes that means dealing with those we neither like nor trust, and that includes many Middle East leaders, because of the oil under their deserts or because of their strategic locations. In the case of Libya, while the instinct is to help those seekingr democracies, this country is neither politically strategic nor economically critical to the U.S.

Interestingly, even the Arab League, whose members consist of Syria, Yemen and Saudi Arabia, has called for an implementation of a “No-Fly” zone. France, which has far greater economic ties to Libya than does the United States, has already recognized the rebel factions. The arguments for intervention are based largely on humanitarian needs, a legitimate reason, for democracies are not only upholders of human rights, they are less likely to cause international strife than dictatorships. In the U.S., as Ross Douthat writes in this morning’s New York Times, “…it’s striking how quickly the coalition that backed the Iraq invasion has reassembled itself to urge President Obama to use military force against Libya’s Muammar el-Qaddafi.” If Libya’s Gadhafi succeeds, as looks increasingly likely, the consequences for the rebels will be severe. Their leaders will not likely be granted the magnanimous treatment provided Jefferson Davis and Robert E. Lee by President Andrew Johnson in 1865.

Nevertheless, as George Friedman, of Stratfor, mentioned on Friday, “The world’s focus should be on the Persian Gulf, not Libya.” Secretary of Defense Robert Gates has warned that the implementation of a “No-Fly” zone would require the destruction of Libyan military aircraft on the ground and fracturing their airstrips – an act of war. And, as much as the Europeans (who have a greater economic stake in Libya than does the U.S.) would like us to proceed with such action, actual combat missions would essentially be carried out by Americans, not Europeans. Intervention, no matter the high-minded reasons, does not always work. Arms we provided insurgents in Afghanistan in 1989, who were fighting the Soviets, ended up being used by the Taliban, who harbored Al Qaeda and ended up being used against us. Mr. Douthat concludes that military intervention requires that the threat to our national interest must be compelling and that the case for war airtight. “With Libya,” he writes, “the case has not yet been made.” Richard Haass, president of the Council on Foreign Relations, argues against a military intervention, agreeing with George Friedman and Ross Douthat. Mr. Haass writes: “Libya is far from the most important country in the Middle East – both in terms of political influence and its impact on the oil market.” America’s policy makers would be wiser to focus on maintaining stability in Saudi Arabia and fomenting dissension in Iran.

America does not have the resources to fight every war. However, there are things we can do – impose trade barriers, freeze assets, politically isolate regimes, such as that of Gadhafi, and provide clear moral support. It is the lack of decisiveness that is hurting the Obama administration in this instance. Comments from the President that he is “organizing a series of conversations,” or “slowly tightening the noose,” serve to make our country appear weak and indecisive. In his desire to be the “anti-Bush,” the President, in seeking world approval for every external move, sends a message of vacillating on the concept of American exceptionalism. In contrast, Australian Prime Minister Julia Gillard, speaking to a joint session of Congress last week, was clear and laudatory of Americans. She spoke of her parents’ generation being inspired by the landings at Normandy and of hers with the landing on the moon, thinking “Americans can do anything.” She added that she still believes that to be true.

It is a message that President Obama should take pride in iterating. Our country is far from perfect and is certainly not a paragon of virtue, but relative to the way most of the world lives, these shores continue to be the ones most people aspire to. That does not mean we have to militarily support every uprising. We cannot. We must act in our self interests, but there should be no question as to where we stand when it comes to speaking out for the morality of human rights.

Friday, March 11, 2011

"Representative Peter King's Hearings - Will They Backfire?"

Sydney M. Williams

Thought of the Day
“Representative Peter King’s Hearings – Will They Backfire?”
March 11, 2011

Congressional hearings often have a result contrary to what was intended. Representative Peter King’s hearings risk falling into that category. While political correctness has delegated many Americans to the nether regions of denial, the facts indicate that radical Islam is a danger. The proof is in the attacks: the killing of 3000 people on 9/11 by thirteen suicide Al Qaeda terrorists; Richard Reid, the “shoe bomber” who was prevented from igniting plastic explosives in his show while enroute on an American Airlines flight from Paris to Miami; Major Nidal Hasan’s, a disciple of American-born and Yemen-based cleric Anwar al-Awlaki, murder of thirteen soldiers at Ft. Hood, Texas; Umar Farouk who, carrying explosives in his underwear, tried to blow up a Northwest Airlines jet over Detroit; and, most recently, Faisal Shahzad’s failed attempt to blow up a car in New York’s Times Square.

Despite all of these terrorists having one thing in common – they are all radicalized Islamists – Eric Holder, the country’s Attorney General, could not get himself to mention that fact when questioned at hearings of the House Judiciary Committee last May. Janet Napolitano, at confirmation hearings in March 2009, would not use the term terrorism, preferring instead the euphemistic “man caused disasters.”

It should come as no surprise, given that as a background, that politicians far more direct and perhaps less “political” than those in Mr. Obama’s administration, like Representative Peter King, should call for Congressional hearings to consider the question as to the role played by Islamic extremists in radicalizing an individual into becoming a mujahid. In a thoughtful piece in yesterday’s Washington Post, Ruth Marcus concludes that even with Mr. King’s blustery and somewhat crude ways, the questions he raises are “appropriate…and important.”

Nevertheless, and despite my sympathy for the intent of the hearings, my disdain for political correctness and my preference for profiling, I worry that the hearings may backfire. The Muslim community, a necessary ally if we are ever to defeat radicalized Islamism, may view themselves and their Mosques as victims and targets. We cannot afford that. The risk is that Congressman King will use too broad a brush and indict all Muslims, or, at least, that is the way the press may portray the hearings and findings. Ms. Marcus mentions that in a letter to King on Monday more than fifty progressive groups “slammed him for singling out a particular community for examination.” That’s not correct. He singled out a small segment of a “particular community,” a group that has been responsible for thousands of deaths in our country and other failed attempts. Ideally, the inquiry should be conducted by Muslims, but that is not to be the case.

As a country, we do a better job of assimilating immigrants into our society than any other country. Most people who live in the U.S., whether Asian or African by heritage, or Muslim or Hindu by faith, consider themselves Americans. That has been true for over two hundred years. Unfortunately, a number of liberals, in endorsing multiculturalism, have effectively slowed the process toward assimilation, as they appear to value diversity over unity.

The hearings opened Thursday at 9:45AM. One hundred people had already lined up at 7:00AM Opposition to an advanced copy of his opening statement, from one news report, ranged from “measured and thoughtful” to “paroxysms of rage.” The Huffington Post, unsurprisingly, huffs that the hearings exemplify “bigotry” and are “unfairly targeting American Muslims.” It will be impossible, it seems to me, to rationally discuss the seriousness of this issue in so charged an environment. My reluctance to not endorse the hearings has nothing to do with the charges or questions raised by Mr. King, for I agree with Ms. Marcus that they are important. But I fear the event will turn into a circus, serving no one and clouding the real purpose of the hearings. I worry that the consequences will be far different from what Representative King envisioned.

Thursday, March 10, 2011

"Monetization of Debt Today - Inflation Tomorrow"

Sydney M. Williams
Thought of the Day
“Monetization of Debt Today – Inflation Tomorrow”

March 10, 2011

Everybody is concerned about the size of the federal debt and its relationship to GDP, as well they should. (Yesterday, Moody’s downgraded Spain’s debt. Their government debt to GDP is 60%. Ours is 96%.) Yet the reluctance by Congress to cut programs is paralyzing Washington. Leadership is needed and it is missing. Only the President has the pulpit, not only to preach the need for fiscal restraint and reform, but to propose real cuts. Instead, we heard him yesterday, in the wake of two scandal-forced resignations, defend the continuing funding of those indispensable institutions, NPR and public broadcasting.

Polls reflect the quandary in which the people find themselves. While the polls suggest people view the deficits as significant problems, they also do not want programs cut or taxes raised, especially when they affect them personally. Despite all the talk and all the press, neither Congress nor the President has elevated the problem of the deficits to a level of exigency they belong. There is also the probability that a recovering economy, and the increased tax receipts that will follow, will diminish the critical urgency of state and federal deficits. Kicking the can down the road to beyond 2012 just may work. But a temporary alleviation of the problem will leave the damaged structure in place. Even Keynes, father of deficit spending during recessions, believed surpluses should be generated during boom times. Boom times for Washington, in this regard, are always around the next corner. Procrastination is the politician’s friend.

Members of President Obama’s deficit commission, whose advice has thus far been ignored by he who appointed them, have become increasingly vocal in their warnings of the path we are treading. Even Alice Rivlin, the first director of the Congressional Budget Office, a senior fellow of the Brookings Institute and a member of the deficit commission, recently said, “…our creditors will begin to worry that we’re not creditworthy, they will demand a higher price, and interest rates will go up.”

Structural deficits that appear permanent in nature, with a Congress and an administration loathe to make the tough decisions necessary to kick the spending habit, have already limited our options and risk impeding the recovery before it recovers to historical levels. Richard Fisher, President of the Dallas Fed, and representing the other side of the political spectrum from Alice Rivlin, in a speech on Monday, pointed out that “…liquidity tanks are full, if not brimming over. The Fed has done its job.” Business must now be incentivized to commit that liquidity and create jobs in America. That is a job for Congress, not the Federal Reserve. Mr. Fisher had been quoted earlier comparing Congress to Lindsay Lohan, “a beautiful creation…but waylaid by addiction…and by a proclivity to shoplifting.” Term limits, anyone?

Much is made in the press by the idea that we have, like Jabez Stone, sold our soul to the devil, in this case sold our debt to foreign entities. China, for example and according to Reuters, owned $1.16 trillion of U.S. Treasuries – about a third of all U.S. Treasuries owned by foreign holders at the end of December. Over the past twelve months the yield on the 10-Year has risen four basis points, suggesting the price is essentially flat. During the same time, the Yuan has risen about 3.8% versus the Dollar, suggesting a nominal loss, after interest income, for the Chinese over the past year – an untenable situation over any extended period. An expectation of a 6% rise in the Yuan this year only makes ownership of low-paying U.S. Treasuries more unattractive for the Chinese. As Ms. Rivlin recently said, buyers will demand higher returns.

However, the bigger problem, in my opinion, is that the Federal Reserve has become the single biggest buyer of U.S. Treasuries over the past year, adding about a trillion dollars to their balance sheet in the past year. In the last half of 2010, the Fed represented about half the buying of treasuries. This is no more than a monetization of debt. Having one governmental department print money and another buy it does not represent market-determining pricing. Wage pressure may be absent in our economy, but the monetization of debt inevitably leads to inflation. Food, cotton and mineral prices are up substantially in the past year. The Fed appears in denial, but if it walks like a duck and quacks like a duck, it is probably be a duck.

Additionally, the larger the Fed becomes, as an owner of Treasuries, the tougher will be the unwinding of their positions. Mr. Bernanke may prove a magician, but I suspect that is a low probability bet.

The Federal Reserve, in lowering rates at the end of 2008 and helping to provide liquidity to the financial system in 2008 and early 2009, helped stave off what could have been a dramatically worse problem. We owe them thanks for the role they played in helping to save the capital markets. Quantitative easing has helped the still-ailing housing market by keeping mortgage rates low. But part of what got us in trouble was a proliferation of too-low interest rates for too long, which encouraged leverage within households and financial organizations. The risk now is that the government is simply encouraging the markets to repeat the mistakes of the past.

The Fed, as Mr. Fisher said, has done its job. Now it is the time for Congress and the President to act on fiscal policy. If they don’t, if they duck their responsibility until 2013, and simply pass the job temporarily onto the monetary authorities, the result will be inflation, higher interest rate costs and a devalued currency.

Wednesday, March 9, 2011

"'Happiness' - China's New Policy?"

Sydney M. Williams

Thought of the Day
“’Happiness’ – China’s New Policy?”
March 9, 2011

In 1988, Bobby McFerrin recorded the song, “Don’t Worry, Be Happy.” The song became McFerrin’s biggest hit and changed his life. It also became the official campaign song for George H. W. Bush’s presidential bid that year. It now appears to be a theme for China’s 12th five-year plan.

In January, the Communist Party branch in Guangdong Province specified “Happy Guangdong” as one of its goals for the five year period, 2011-2015. The proposal won enthusiastic approval from Beijing and the media. So, when China opened its annual “two sessions” meetings last week, with the Chinese people’s Political Consultative Conference and the National People’s Congress – China’s political advisory board and national legislature – it was unsurprising that promoting “happiness” was at the top of the list of priorities.

The ‘happiness’ that Chinese leaders expect to bestow on their 1.3 billion subjects does not have the same meaning as Thomas Jefferson’s definition when he wrote in the Declaration of Independence that all men “are endowed by their Creator with certain unalienable Rights, that among those are Life, Liberty and the Pursuit of Happiness…” While there is debate as to exactly what Jefferson meant, it is generally accepted that his “happiness” stems from the Lockean concept embedded in the natural right of man to be intellectually free.

The Chinese, with Nobel Peace Prize winner Liu Xiaobo safely locked away under home arrest, take a more pragmatic approach towards happiness. To them, happiness is the containment of people in a contented environment, dispelling all notions of protesting the State. It is expected that proposals will include items like:
     • Improving living conditions.
     • Raising the minimum threshold for taxable income by 50% to $450.00 per month.
     • Reducing Inflation.
     • Expanding government-sponsored affordable housing.
     • Reducing the work week to four and a half days.
     • Placing warning labels on cigarettes.

The goal of making happiness a central goal of government policy is not a new concept. In 1972, Bhutan’s King Jigme Wangchuck, with the assistance of Nobel economist Joseph Stiglitz of Columbia, coined the term Gross National Happiness (GNH) to “emphasize the holistic values of economic development policies.” (Cynically, I suspect the concept was a diversionary tactic.) French President Nicholas Sarkozy, in 2009, suggested that happiness, long holidays and a sense of well being should be embraced by the world in a national accounting overhaul. Last year, the U.K., in response by a report from Professor Stiglitz and another Nobel economist, Aamartya Sen of Harvard, plan to implement what they deem the most important elements of the Stiglitz/Sen report: systematically measuring subjective wellbeing and using the data to inform policy choices. Angel Gurria, Secretary-General of the 32-member OECD (Organization for Economic Cooperation and Development,) recently warned, “economic resources are not all that matters in people’s lives.”

All that may be true, but try telling that to a Chinese farmer earning $125.00 a year. Aspiration is what motivates people – aspiring to be successful in their jobs and their incomes, to be free in their ability to assemble and express themselves. Success in those endeavors will bring happiness.

China deserves enormous credit for the growth their economy has enjoyed over the past 40 years; millions of their people have benefitted magnificently. It is estimated that approximately 400 million people have been catapulted out of desperate poverty into the ranks of the middle class. And, along the way, a small number of Chinese have become very rich. GDP growth, though, has shown a remarkable Madoff-like consistency of eight to ten percent a year. The modernization of cities like Shanghai and Beijing, the only two that I have visited, make ours appear shabby in contrast. But, it is also estimated that close to a third of the population lives in unimaginable poverty. The CIA Fact Book notes that almost 60 million people live on less than $125.00 a year, what some men in New York will pay for a haircut. Twenty-two years ago, an estimated 3000 students were killed in Tiananmen Square, according to the Globe & Mail. One should also not overlook that Mao Zedong, the founder and first leader of the current Communist Party of China, and still revered in the country, allegedly caused the deaths of between 40 and 70 million people – making Hitler and Stalin appear pikers in comparison. The legacy from which leadership in China descends is not one consistent with our notion of “happiness.”

Ultimately wealth spread broadly among a widening middle class in China will create a citizenry aspiring for individual freedoms and for the right to elect their own leaders. It is a transition China has yet to make. Perhaps they will do so peacefully, without disruption. The world certainly hopes so. But it will take a man or a woman of unusual courage, humility and foresight to be willing to relinquish personal power, so that power to the people will become a reality. The Communist Party’s perception of happiness, as welcome as it might be today, will not serve to satisfy the true aspirations of the people tomorrow.

Tuesday, March 8, 2011

"Immigration - Let Them In"

Sydney M. Williams

Thought of the Day
“Immigration – Let Them In”
March 8, 2011

For a nation of immigrants, surprisingly the United States has periodically undergone severe bouts of xenophobia: The Know Nothings was a political party formed in the mid 1840s, in response to the large-scale arrival of a large number of Catholics. The Chinese Exclusion Act of 1882, an eponymously named law that was the only piece of U.S. legislation to name a specific group. In 1893, a group of nativist Americans formed the Immigration Restriction League to pressure Congress to sharply curtail immigration. The National Origins Act of 1924 not only restricted the number of immigrants into the U.S., but assigned quotas based on national origins – giving preference to those from northern and western Europe.

A consequence of that law was to limit the number of Jewish refugees fleeing Nazi Germany. Between 1938 and 1939 more than 300,000 German Jews sought U.S. visas; about 85,000 were admitted. In an infamous result of that Act, the S.S. St. Louis, carrying 900 Jewish refugees from Europe, was denied entry into the United States, condemning the passengers to almost certain death in Hitler’s death camps, as they were returned to Antwerp in June 1939. Belgium fell to the Nazis the following May. The conscience of Americans did allow refugees to emigrate from Hungary, after their failed 1956 revolution, and from Cuba, following Castro’s takeover. The National Origins Act remained in place until 1965 when the Hart-Celler Act finally removed many of its restrictions, stimulating immigration from Asia, the Middle East and Africa.

Once again, there are rising voices in the United States claiming an immigration crisis. It is principally a result of an estimated twelve million Mexicans who have crossed the border illegally. There are others who cite the attack on 9/11 and their fear of Islamic terrorism. That may be a cause, but I am not convinced it is a major reason. In 2005, the largest number of Muslims immigrated to the U.S. in the previous twenty years, suggesting that the War on Islamic Terrorism being waged by the United States is not seen by the global Muslim community as a war against Muslims, despite fears to the contrary from the editors of the New York Times. Even so, the number of Muslims admitted to citizenship in 2005 was 40,000 – not a number that threatens to overwhelm a population north of 300 million.

In the 2010 gubernatorial races, twenty candidates for governor from both parties endorsed an Arizona-style law, in states ranging from Georgia to Massachusetts to Illinois to Michigan. It has been the failure of the federal government to act on immigration reform that is the genesis of these legislative actions. In 2005, President Bush introduced legislation that would strengthen borders, issue guest worker permits, and provide a path to citizenship for illegal immigrants. President Obama proposed a virtually identical bill. None of these Comprehensive Immigration Reform Bills have made it through Congress.

Borders cannot be wide open. The United States needs to improve its ability to validate immigrants, checking their backgrounds for criminal behavior or terrorists associations. Today’s technology should make such a task easier. The history of the United States is one of assimilating many people from very diverse backgrounds. As long ago as the American Revolution, Noah Webster noted that fifty languages were spoken in the state of Pennsylvania.

Immigration reform is a policy need whose time has come. An obvious place to start is to offer citizenship (or at least a path toward that goal) to all foreign college and university graduates, subject to a detailed background check. But we also need to consider those millions of people who come here to perform the type of work many Americans believe is beneath their dignity – mowing lawns and housekeeping. We need these people to become part of our fabric, contributing positively to our economy.

The United States is faced with an estimated 12 million illegal immigrants. Deporting them (assuming one could find them) would be an impossible task, not to mention distasteful for many of us. On the other hand, granting them immediate citizenship would be unfair to those who emigrate legally and then must wait about eight years to become a citizen. But a middle ground should be possible. Beginning in 1942 and until 1964, a guest worker program (the Bracero Program) permitted the hiring of thousands of mostly Mexican workers. While some have called the Bracero Program an indentured servitude program, illegal immigration fell by 90%. A guest worker program, like the one envisioned in Utah makes sense.

Immigrants have been good for our economy and good for our country. Mississippi Governor Haley Barbour, following the devastation of Katrina, warned the press not to ignore the contributions made by immigrants in the recovery. Many of them were presumably illegal; however he added, “I don’t know where we would have been without them.” The Michigan League for Human Services recently released a report indicating that a third of all high-tech start-ups in the state were begun by immigrants. The Utah Compact, a statement of principles on immigration reform compiled by the state attorney general states: “Utah is best served by a free-market philosophy that maximizes individual freedom and opportunity.”

Those periods of restriction, whatever the motivation, did not mark our finest hour. In 2008, Jason Riley, a member of the editorial board of the Wall Street Journal, wrote Let Them In (the title of which I borrowed for this essay,) a case for open borders. He writes, “No self-respecting free-market adherent would ever dream of supporting laws that interrupt the free movement of goods and services across borders. But when it comes to laws that hamper the free movement of workers who produce these goods and services, too many conservatives abandon their classical liberal principles.” A free-market capitalist cannot disagree.