Wednesday, November 30, 2011

"Europe - The Emperor's New Clothes"

Sydney M. Williams

Thought of the Day
“Europe – The Emperor’s New Clothes”
November 30, 2011

“Europe should leave the European Union.” So concluded Private Eye, the British satirical weekly, as reported in Monday’s New York Times. Or, put another way, in looking at Europe (or the United States Congress, for that matter) one could paraphrase Oscar Wilde: It is the hypocritical in defense of the irresponsible. The Euro cannot work without a common fiscal authority, which will require greater political union. Greece will have to default, yet the banks are not willing to write the loans down. Perhaps the December 9th European Summit will see progress in that regard, but we have been down the road toward hope before. Europe’s leaders are finding it difficult to admit what others can see. Boldness is needed. Timidity is being offered.

The concept of unified Europe makes sense. After all, the combined economies of the 27 states that comprise the European Union represent the world’s largest economy. The 17 nations that use the Euro represent the world’s second largest economy, a little less than the U.S and about 70% of the EU’s economy. What happens in Europe does impact the global economy. On Monday, the Organization for Economic and Co-operation Development (OECD) lowered their expectation for world growth from 4.6% in May to 3.4%, with most of the decline attributed to Europe (0.2% from 2.0%) and the U.S. where the forecast is now for 2.0% versus 3.1% in May.

The dilemma confronting the peoples of Europe is not unlike the situation in this country when, following the Declaration of Independence, the thirteen founding states were loosely organized under the Articles of Confederation. The Articles were drafted in 1776-7, ratified in 1781 and then replaced in 1789 with the Constitution. The Articles proved impractical as they did not provide for a centralized federal taxing authority, nor did they allow for a strong executive or a national judicial system. The states were suspicious of one another, especially between the commercial/trading north and the agrarian south. But, they had in common a legal system based on English common law, and a common language and heritage. While more than fifty languages were spoken in Pennsylvania in 1781, most of the people, at that time, could trace their roots to the British Isles. In spite of forging a centralized fiscal and political system, it wasn’t until 1863, in the midst of the Civil War, that a unified currency emerged. Two years later, in 1865, state bank notes were finally taxed out of existence.

The world today is far more complex and interrelated than it was two hundred years ago. Derivative instruments have permitted more precise hedging strategies that have diminished risk on the one hand, but those hedges have been offset by the increase use of leverage, with German banks allegedly levered 40:1. Additionally and perhaps more important, the differences between individual European states overwhelm their common needs. Their heritages reach back, in the case of the Mediterranean nations, more than two thousand years. The legal systems of the individual countries are different. For example, how will German courts adjudicate Greek bonds issued under Greek law, but held in German banks? While English has become the common language of business in Europe, it is not native to the 17 Euro Zone members.

In the end, the determination as to the future of the Euro must be tied to the outlook for economic growth. How best can their economies grow? For example, the Euro has benefited the Germans in providing them a currency that is cheaper than the Deutsch Mark would have been, while the Greeks are saddled with the same currency, but one that is more expensive than the Drachma would have been. German exports over the past decade have grown from just over one quarter of their GDP to just under fifty percent.

The possibility of a breakup of the Euro, and its implications, are being given serious consideration. On Monday, with one eye (or perhaps both eyes?) on next year’s election, President Obama met with European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso. Speaking of the debt situation in Europe, he said, “This is of huge importance to our economy.” “If Europe is contracting or if Europe is having difficulties, then it is much more difficult for us to create jobs at home.” Let’s hope that does not mean he will encourage the IMF to step up their loan guarantees to Europe, for that would be tantamount to the U.S. bailing out Europe. Yesterday, the Wall Street Journal reported that the U.K. Financial Services Authority “advised banks to make contingency plans.” Germany’s credit is considered impeccable, thus their inability to sell a full complement of 10-Year Bonds last week suggests the market is becoming wary of currency risk. Since early June, the Euro has declined 9% versus the Dollar.

European banks have used low-cost borrowings from the European Central Bank (ECB) to buy Sovereigns, which were considered risk-free, so were levered. As reality is beginning to sink in that Greek bonds are perhaps worth twenty-five to thirty-five cents on the dollar (and Italian, Spanish and Portuguese bonds are worth less than par), the banks want the ECB to buy the bonds back, something their charter would disallow. The ECB may try to circumvent its charter by lending to the IMF, but that road, as mentioned above, has risky implications for the U.S. It would have to print money, an anathema to Germany whose long memory has never forgotten the inflation of the post World War I Weimar Republic. If they don’t do so, banks will have to take the hit of writing down their Sovereign assets – a catch 22 situation.

It seems inevitable that the Euro is doomed. Niall Ferguson, professor of history at Harvard has long been a Euro skeptic, suggesting more than a year ago that it could not survive. The fear is that its collapse would create chaos. Currency unions have broken up before, “but,” as the Journal reported yesterday, “none with such complex inter-linkages both between countries and between governments and banks.” John Hussman, of Hussman funds, in a recent note, proposed that individual countries could issue bonds in Euros, but that are convertible into their legacy currencies. If they solve their problems, no conversion would be necessary. On the other hand, should they exit the system, it could be done without jeopardizing the system. When the United States went to a single currency, states and banks continued to issue their respective currencies for two years.

My guess is that the Euro cannot survive without a central political and fiscal structure, neither of which seems likely given the myriad cultures, languages and legal systems. Perhaps the summit meeting in Brussels on December 9th, at which the proposed European Monetary Fund will be highlighted, will provide promise. But, absent a politician with the courage and charisma of a Thatcher or a Reagan, it seems to me a mountain too high.

Why no one can forecast what would happen should the Euro Zone break up, my guess is that if it were done with advanced warning and with dual systems operating for a period of time it would be less painful than the Cassandra’s are predicting. It would require a bold leader with a clear agenda for growth. Man is capable of far more than people think. The men and women of the “Greatest Generation” were no different from people today. They lived during a time when great feats were required, and they responded with great bravery and determination; as people have always done throughout history. Those same characteristics, I am sure, are true of people today. Markets look through disruptions, when they sense that difficult decisions have been made in the long term interests of investors. Markets, though, are nervous and would likely react to any announcement of a breakup, but the transition may be less difficult, in my opinion.

With the introduction of the Euro a dozen years ago, the Germans rationalized their economy, while the Mediterranean nations largely saw the Euro as a vehicle that lowered their costs of borrowing, allowing them to continue living beyond their means. Today, the Greeks are bankrupt, and Europe has not yet admitted that fact. The situation cannot be resolved easily, but it increasingly seems likely that any answer is going to include some sort of a breakup of the Euro.

Tuesday, November 29, 2011

"Obamacare - It is not too Late to Reverse Course"

Sydney M. Williams

Thought of the Day
“Obamacare – It is not too Late to Reverse Course”
November 29, 2011

“We have to pass the healthcare bill so that you can find what is in it.” No matter how long Nancy Pelosi lives, she will never say anything that so marvelously combines sanctimony, idiocy and a lie. It is sanctimonious that Ms. Pelosi thinks of us as children and government as a benign parent. The statement was idiotic, in that she was obviously planning to vote for something she did not understand, let alone the rest of us. And it was a lie, because a year and a half after its passage we still do not know all of the Bill’s features. And, of course, the full costs of the Act are not scheduled to become effective until 2013, conveniently after next year’s Presidential election.

Last week, conservative radio host Mark Levin took a call from a man who stated he was a neurosurgeon and had attended a meeting in Washington to review the new healthcare plan, as it applies for advanced neurosurgical care for patients over 70. The caller referred to a document allegedly issued by the Department for Human and Health Services. Assuming the call was true, it was chilling, especially for one of my age. According to the caller, if one arrived at an emergency room with a brain trauma and was on government supported healthcare, the individual would get “comfort care”, in accordance to the determination of an ethics panel or committee. Like something out of George Orwell, patients were referred to as “units.

End of life care consumes the bulk of spending for the typical Medicare recipients (or patients in any other plan, for that matter.) In fact, on average, about forty percent of one’s lifetime spending on healthcare is done in the last month of one’s life. While it may sound callous, most of that spending does little other than to buy a few more weeks. In the last couple of decades, hospices have been providing palliative care to an increasing number of patients. The purpose is not to cure the patient, but to make him or her comfortable. Perhaps the hardest thing about living is knowing that at some point we die. And, while no one can foretell how they might feel when the moment arrives, I certainly hope that I recognize that money spent prolonging my life by a factor of a few weeks would be better spent on my grandchildren. Nevertheless, decisions should be made on the basis of condition, not age, and are better made by the patient and his or her family rather than by some bureaucrat. And, the patient should always be considered a person, not a unit.

Whether that caller was legitimate or not, mystery continues to enshroud the 2,733 page bill. Kansas Republican Tim Huelskamp wrote two months ago in the Washington Examiner that the level of shock from each new discovery in the plan “never seems to recede.”

The Bill has important components – for example, extending healthcare coverage to millions who are denied coverage because of “pre-existing conditions” and to adult children who are unemployed and living at home – but it is based on a lie: that it would reduce overall healthcare costs. We Americans may be rubes, but we are not stupid. We recognize an entitlement when we see one. Anybody with an ounce of common sense knows that existing programs like Social Security, Medicare and Medicaid are bankrupt, or will soon be. Obamacare simply speeds the process. We know the numbers and we know that when additional services are provided, costs go up. Also, as everyone knows, the effect of Obamacare will be to divert money from private insurers toward Medicaid. The ultimate goal, as was made clear, is a single payer – the federal government. As Mitch Daniels writes in Keeping the Republic, “Obamacare reflects in crystalline form the worldview of our Benevolent Betters. It assumes that Americans are too dim-witted and too intimated to make their own decisions, even (or, perhaps they would say, especially) in this most personal of life’s realms.”

The federal budget today comprises about 25% of GDP, about one quarter of which is Medicare and Medicaid. The healthcare industry was 17.6% of GDP in 2009 and has continued to grow at double the rate of GDP. In 2009, the year before the Affordable Health Care Bill was passed and according to the California HealthCare Foundation, overall health spending grew at 4%, the smallest annual increase on record. However, and tellingly, Medicare spending grew by 7.9% and Medicaid by 9.0%, while spending by private insurers increased by 1.3%. The numbers suggest what most of us instinctively know – government is not the most prudent steward of our money.

The future of Obamacare is inextricably tied to the 2012 election. If the Democrats retain the White House and regain the House, socialized medicine will be the result, and the costs, as P.J. O’Rourke has pointed, out will skyrocket . Nobody knows how the election will fare; hopefully cooler heads will prevail and this Bill can be extinguished. Nevertheless, people have become frighteningly immured to the concept of an all pervasive government involvement with healthcare. Last week, I e-mailed a parody entitled Americans with no Abilities Act (AWNAA.) The piece of satire, brilliantly written, was sent to me by a doctor friend. The Act, according to this parody, is designed to provide protection to the estimated 50% of the population who “do not possess the competence and drive necessary to carve out a meaningful role for themselves in society.” The Act would create “25 million ‘middleman’ positions with important sounding titles, but little responsibility, thus providing an illusory sense of purpose and performance.” At least a dozen people e-mailed me back, asking if this was for real!

The election of 2000 had driven a wedge between the Parties. Democrats claimed they had been robbed of the White House. The 2008 Democratic nomination was expected to go to Hillary Clinton, but then Barack Obama came out of nowhere, winning the Iowa caucus, losing New Hampshire by less than three percentage points, and smoking Ms. Clinton in South Carolina 55.4% to 26.5%. People saw an attractive, well-spoken African-American who said he would bring us together. He spoke of “change” and “hope”; each of us heard what we wanted to hear. Once nominated, the mainstream press, which historically has played the role of the skeptic, lobbied blindly on his behalf. Mentioned, but left unexplored were his relationships with extremists such as Saul Alinsky, author of Rules for Radicals, and the Reverend Jeremiah Wright whose sermons were at times filled with diatribes against the United States. People wanted Mr. Obama to be something he was not – a centrist.

In my opinion, we Americans struck a Faustian deal when we chose Barack Obama to become President. The country, in 2008, was ready for a change. People were fed up with wars in Iraq and Afghanistan, and sick of Americans dying. The rest of the world seemed to view the U.S. with alarm, claiming we had acted unilaterally, which we had. Divisiveness rent the populace. At home, the economy was in collapse, led by the housing industry, the source of most people’s wealth; the uncontrolled use of leverage and derivatives, fueled by a desire of politicians to provide homes to those without means, had almost brought the financial industry to its knees. Wall Street was increasingly a casino, with a focus on short term profits. Anybody, in the minds of many, would be better than Bush.

But things did not improve. Mr. Obama used his honeymoon period to expand the reach of government. Soon after being sworn in, he signed an $860 billion stimulus package that was used primarily to retain unionized government employees. The American auto industry was bailed out, cavalierly (and perhaps illegally) ignoring the rights of bond holders, while saving union jobs. Banks were saved, but “too big to fail” became institutionalized. AIG was essentially nationalized. Fannie Mae and Freddie Mac, principal causes of the collapse, were left intact, as were the politicians who aided and abetted in their growth and reach. A Cap-and-Trade Bill proved even too much for Democrats and was fortunately defeated. Our nation’s debt grew expeditiously, with little to show for it, in terms of economic growth. Crony capitalism persisted, only in different forms; it now combined big business, big government and big unions. Left out were small businessmen and women, the engines of employment and the foundation of our democracy. Divisiveness in Washington and the country has grown worse.

Nowhere is this desire for statism better manifested than in Obamacare. The Bill passed without a single Republican vote. The Bill ignores the role of choice for consumers and excludes competition among insurance companies – a system that helps provide members of Congress with a far better plan than that which they have foisted on the public . It leaves intact the current tort system, a boon to trial lawyers and a bane to providers of health services, including doctors, labs and hospitals. It boldly assumes that government is more efficient than the market place.

There are no easy answers. The fact that Congress’ own deficit commission turned up empty-handed (and the third such commission in the last year to do so, or to be ignored) suggests that the consequences of overspending have not yet been fully felt – that more pain will have to be suffered, before answers are found. The Federal Reserve has abetted this masquerade by keeping interest rates unnaturally low. The true costs of our much larger government have not yet been felt, but that will change. Rates will rise before deficits decline. If Obamacare is not rescinded, the impact on all our lives will be less growth and a decline in our standard of living. Keep in mind, government spending is unconnected to productivity improvements. There is time to change, but the opportunity for doing so is slipping away.

Monday, November 28, 2011

"The Market - Where Art Thou Headed?"

Sydney M. Williams

Thought of the Day
“The Market – Where Art Thou Headed?”
November 28, 2011

On Saturday, the Wall Street Journal noted that last week the Dow Jones posted its worst Thanksgiving week in the seventy years since Thanksgiving became a federal holiday on December 26, 1941. For the week, the S&P 500 was down 4.7% and is now down 7.9% year-to-date, a pretty poor showing for a third year in a Presidential cycle, typically the best year. But perhaps we should be thankful: The UK is down 13.6%; Australia, down 18.6%; Japan, down 19%; Canada, down 19.5%; Hong Kong, down 20.7%; Germany, down 24.2%; France, down 26%; Taiwan, down 26.3%; Russia, down 27.4%; China Small Cap, down 34.5%, and India, down 37.3%. Almost $10 trillion in global equities have evaporated so far this year.

U.S. investors are concerned; the decline has taken place despite the efforts of business leaders to rationalize their companies during a period of tough economic conditions. The decline has more to do with policy issues, than with bad fundamentals. It has been a failure of governments to recognize that spending on social programs may make good politics today, but at an unbearable cost to be borne by future generations. Prime Minister Margaret Thatcher saw the problem clearly when she condemned the path toward socialism Britain was on in the late 1970s: “The problem with socialism is that pretty soon you run out of other people’s money.” Today, our country has run out of our money.” Mrs. Thatcher was far from the first to recognize the problem of Socialism. Friedrich A. Hayek, in his book The Road to Serfdom published in 1944, warned of the unpleasant consequences of Socialism. He was, of course, referring to Germany and the Soviet Union. In November 1949, in response to a “pie-for-everybody” speech by President Truman in St. Paul, Minnesota, an unknown politician penned an “Ode to the Welfare State”. A foolish father is speaking to his sensible son. Two stanzas that resonate today:

“Don’t worry, bub, there’s not a hitch
In this here noble plan –
He simply soaks the filthy rich
And helps the common man

But, father, won’t there come a time
When they run out of cash,
And we have left them not a dime
When things will go to smash?”

The peculiar situation in today’s equity markets is that they have been riven by negative macro events (the Euro debt crisis and a failure in the U.S. to address our growing entitlements) and positive micro reports (positive corporate earnings and cash flow, along with substantial amounts of cash on corporate balance sheets and in investor’s portfolios.) Even the U.S. domestic economy is not in terrible shape. When a woman feels the need to pepper-spray her competitors as happened on Black Friday at a Wal-Mart in California, it is a strong indication that demand exceeds supply!

The macro challenges are obviously winning, and they are being helped by the manner in which stocks are increasingly traded. High frequency algorithmic trading programs have been capturing more of daily trading volume – an estimated 70% today. That factor, along with the continued growth and use of ETFs, indicates that the prices of individual stocks reflect less a company’s specific fundamentals and are more of an echo of market or industry psychology. A high frequency trader does not care about the underlying business of the stock he or she is trading. The security serves only as a vehicle, allowing him to make a penny or less on the direction it is trading. While an ETF investor has made an industry selection, he does not differentiate between good companies and bad ones. The wheel is spun and speculators put down their chips.

While the very cheapness of stocks, especially relative to alternatives such as Treasuries and Investment Grade Corporates, should bode well for stocks on a trading basis, a sustained rally depends on a fundamental change in policy. In the U.S., it will likely take a sense that a growth strategy – involving deficit reduction and tax reform – is more than just talk, that it will be legislated. “Going green” when we have excess gas reserves makes little sense. High paying jobs are out there, if environmental lobbyists would just lighten up. In Europe, it will take a public acknowledgement that the social welfare state cannot exist in its current form. Debt and demographics are forces too powerful to overcome. In neither continent is there enough money to do what our political leaders would like done. Both continents should adopt, as Mitch Daniels has written and spoken, “Change that Believes in You.”

It is easy for populist presidents to demonize Wall Street (and certainly many who labor in its vineyards are far from paragons of virtue.) The very name ‘Wall Street’ conjures up images of fat white men – the one percent – wearing suspenders, smoking cigars, ignorant and uncaring of the poverty that surrounds them – the ninety-nine percent. Demonizing Wall Streeters as “millionaires and billionaires” brings applause, the principal aphrodisiac to a politician. But there is risk in such blanket condemnation. First, Wall Street is well aware that, for example, entitlement reform will have to have a means test as a central tenet. Reasonably well off aging baby boomers collecting Social Security and Medicare have not helped income inequality. Second, our system thrives on capitalism. It is the source of all private sector job growth. (Public sector employees, it should never be forgotten, are funded by the private sector.) Roughly half the households in this country have some exposure to equities. What happens on Wall Street does affect Main Street.

The great irony is that as government has taken a bad situation and made it worse, the private sector has forged ahead. Fear of increased regulation and unknowns as to future tax rules have restrained corporate expansion plans, so they have run their businesses to produce and husband cash. Greater confidence in political leadership will encourage business leaders to start spending.

Forty-four years on Wall Street has not provided me the ability to predict markets. I recognize we have been down seven days in a row and that the market is now selling below both its fifty-day and two hundred-day moving averages. That probably suggests we are ready for a rally. (In fact, overseas’ markets and U.S. futures suggest a strong rally today.) Nevertheless, I suspect that the fuel is there for a sustained market rally. What is missing is the ignition – a spark. Washington, Berlin, Paris, Rome, Athens, are you listening?

Wednesday, November 23, 2011

"Thankful for Being an American"

Sydney M. Williams

Thought of the Day
“Thankful for Being an American”
November 23, 2011

At a time when our country is in political disarray, with a looming debt crisis and an obdurate stalemate in Washington and with many states approaching bankruptcy, I remain thankful to be an American. We make no secret of our problems; if anything they become exaggerated because of our inherent freedoms that allow us to protest and openly express disapproval. Nevertheless, times are tough. Markets have gone nowhere for ten years. Income inequality, while down from its peak in 2000, remains too high. Too many people are without jobs, while those in Washington who have jobs are feathering their nests, while forsaking the needs of the people. But we could be living in Greece, Syria or China. We are fortunate to be here.

The headlines from Tuesday’s financial press tell the story: New York Times, “Credit Risks in Europe Push Stocks Downward; Wall Street Journal, “B of A Warned to get Stronger”; Financial Times, “Gridlock Fears as US Deficit Talks Fail”; Bloomberg, “Supercommittee Failure Poses Threat to U.S. Recovery”; CNN Money, “Economy Barely Growing.” It’s like being constantly whacked on the head by a two-by-four, and it happens every day.

We have been told that we are in decline – that the American century has been consigned to the dustbins of history. The President has spoken of the “post-American world”, that America is exceptional only in the sense that all nations are exceptional and that are relations with other nations must be “re-set.” Books, like Rob Gifford’s China Road; Fareed Zakaria’s The Post American World, Ian Morris’s Why the West Rules – For Now, Niall Ferguson’s The Decline of the West and Mark Leonard’s Why Europe Will Run the 21st Century have been published in the last few years, becoming best sellers, and all raising self-doubt among our citizens.

The trend continues. A few days ago, an article entitled “John Steinbeck’s Bitter Fruit” by Melvyn Bragg appeared in The Guardian. Mr. Bragg is a British producer for BBC who was recently asked to make a film about Steinbeck for the BBC. He re-read Grapes of Wrath (as I did in early 2009) and concluded: “As in the 1930s, there is a powerful feeling that the promised land promises nothing, not even hope.” Growing up in rural New Hampshire, as I did in the late 1940s and early 1950s, I can assure anyone that rural poverty today does not come close to the rural poverty of sixty-five years ago, and that was seven or eight years after the Depression. The sense of hopelessness Steinbeck so vividly portrayed is radically different from what we have today.

Yan Xuetong, a professor of political science and dean of the Institute of Modern International Relations at Tsinghua University wrote a piece for the New York Times on Sunday. The article was entitled, “How China Can defeat America.” Professor Yan argues that the way to people’s hearts is through “humane authority” which “begins by creating a desirable model at home.” He concludes that “the country that displays more humane authority will win.” Given what we now know of Chinese leaders and their relationship with their people that – despite my and others criticism of Washington – should be a lead-pipe cinch win for the U.S.

Victor Davis Hanson, a columnist for the “National Review”, points out in a recent article, “What America Does Best”, that none of this declinism is new. He cites examples ranging from the adoration of the Soviets in the late 1920s and early 1930s to the current love/fear relationship we have with China.

I will add some observations of my own. Lincoln Steffens, the journalist and social activist after a visit to the Soviet Union, said to Bernard Baruch: “I have seen the future and it works.” How wrong he was! Tens of thousands of Americans, following glowing reports from reporters like John Reed and Walter Duranty, traveled to Russia in the early 1930s convinced it represented the future, freedom and opportunity. Their story was hauntingly told by Tim Tzouliadis in his book The Forsaken. Most died in the gulags, their fate ignored by the Roosevelt Administration. In 1938, Joseph Kennedy, was named the United States’ ambassador to the Court of St. James. He infamously fraternized with Nazis, and was far from alone when he looked upon Hitler as a “welcome solution” to problems then confronting the world.

I was in high school when the Soviet Union launched Sputnik on October 4, 1957. Concern was that we were losing the space race. And, since the Soviets had nuclear weapons, the prospect of a Soviet vehicle laden with an Atomic bomb circling the earth brought palpable fear. Thirty years later, as the Soviet Union was collapsing, Japan became the new worry. Their economic success seemed miraculous. By the late 1980s this island nation, with half of our population, purchased U.S. real estate from Rockefeller Center to Pebble Beach. In 1987 their markets began collapsing. Today, the Nikkei 225 is 63% below where it was twenty years ago.

America is exceptional; individually we are not, but as a nation we have been and are today. The proof is in our 222-year history and the way we continue to conduct ourselves. As Mr. Hanson notes, who besides the United States defends small countries like Israel and Taiwan? What other country has incorporated every known culture, gender and race into positions of power in government and in business? Where do students from all over the world come when they choose the best universities? What country is as open to self-criticism as are we? The rhetoric can be deafening and it can be seen as paranoia about decline, but in fact it reflects strength; it says that we are confident and unafraid to disclose and discuss our weaknesses.

Much of the world criticized the decision ten years ago to chase down the leaders of Al Qaeda, who had wrought such damage on our nation on 9/11. Yet the price we paid was not simply to avenge an horrific attack, but was a selfless action that served to protect innocents in dozens of countries. We did not ask for thanks, and we received more criticism than appreciation. But we know that millions around the world are thankful that our nation was willing to pay the price of the 6,290 killed, so that some measure of peace could be achieved.

Problems exist. Our debt is overwhelming us. Too many in Washington and in state capitals remain in denial as to the origin and the depth of our problems. Can we do better? Of course we can. We should always strive toward perfection. Our democracy is founded on principles of free markets and creative juices run rampant through our veins, as the successes of companies from Google to Whole Foods are testament. Our population, unlike most of the developed world, continues to expand. President Obama’s statism is an anomaly in a center-right country. Americans are neither lazy nor spoiled. They have been lied to. They have been led to believe that the wealthiest Americans, who today are paying the largest share of taxes in the nation’s history, can be counted on to supply a never-ending cornucopia of benefits to millions who pay nothing. A return to confident and positive economic growth depends on returning power to the individual and it relies on an individual sense of responsibility. That is not rocket science; and it will happen.

Victor Davis Hanson writes: “America alone values individual and limited government under the rule of law.” While doubts exist today, I believe the observation is true. Lee Greenwood’s words ring as true today, as they did when they were written 26 years ago:

“And I’m proud to be an American
Where at least I know I’m free.”

It is reason enough to be proud, and to be thankful to be an American, as you sit down for thanksgiving turkey, on this unique American holiday.

Happy Thanksgiving!

Tuesday, November 22, 2011

"Who is Grover Norquist?"

Sydney M. Williams
Thought of the Day
“Who is Grover Norquist?”

November 22, 2011

The twelve members of Congress who constituted the Deficit Committee have failed. The stock market, on Monday, certainly voted with its feet, fleeing equities as though the New York Stock Exchange were infested with Scarlet Fever. (An estimated trillion dollars has exited mutual funds in the past two years.) While blame for the failure of the Deficit Committee has at least twelve fathers, the man who has borne the brunt of the assault is Grover Norquist. Mr. Norquist is the founder of a tax payer advocacy group, Americans for Tax Reform. The fact that he was the subject of a CBS 60 Minute interview with correspondent Steve Kroft only added fuel to the fire. Mr. Kroft, a sanctimonious and partial interviewer, suggested that Mr. Norquist’s organization has some of the characteristics of a “protection racquet.” Grover Norquist steadfastly indicated no interest in compromise.

Norquist could be characterized as an “enfant terrible.” Whether one agrees with him or not, he has been candid and has said things many people find offensive. Nevertheless, in his early years he was prodigy-like. In 1985, at the age of 29, with two degrees from Harvard, and at the request of President Reagan, he founded Americans for Tax Reform. A year later the Tax Reform Act of 1986, the first major tax reform since 1954, was passed. Effectively, the Act eliminated many deductions and lowered the maximum effective tax rate from 50% to 28%. The effectiveness of the change could be seen in the fact that in 1985 federal tax receipts, as a percent of GDP, were 17.7%; in 1987 they were 18.4%. GDP during those two years rose from $4.218 Trillion to $4.736 trillion. Lower nominal tax rates produced higher revenues, vindicating Arthur Laffer’s curve.

In the years since, Mr. Norquist has become a highly influential lobbyist in Washington, characterized by some – perhaps hyperbolic – as the most important person in Washington. What he did do was to get 279 members of Congress to sign a Taxpayer Protection Pledge. The pledge is made to the taxpayers of the district of the Congressman and has two items: a pledge not to raise the marginal tax rate for individuals and/or businesses and, second, to oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by reducing tax rates. Its obvious purpose is to shrink government, which is a good idea in my opinion, but can be obstructionist in its adamancy, unhelpful in my opinion. The best comment I have heard regarding that, or any pledge was uttered by the hapless Jon Huntsman, the most sensible of the Republican candidates. At one of the debates, when the subject of the Pledge came up, Mr. Huntsman said, “The only pledge I would sign is a pledge not to sign a pledge!”

Nevertheless, it is easy to understand the frustration of fiscal conservatives that has driven them to make such pledges. Special interest groups have been feeding Democrats for years. Public sector unions owe their jobs, high salaries, unusually good benefit packages and a lack of accountability and responsibility to the symbiotic relationship they have with the Democratic Party. Those pledges and commitments to union members risk bankrupting our federal government, as they have been doing to our state and local governments. Since the early 1970s, federal government expenditures have been running between 18.5% and 20.5% of GDP. Receipts have generally been about one hundred basis points lower. In 2009, outlays increased to 25.0%, while receipts dropped to 14.9%. This year receipts are expected to fall further to 14.4%, and outlays will rise to 25.3%. Spending has gotten out of hand, but tax revenues are too low. Democrats have a responsibility to reduce spending, but Republicans must find means of increasing receipts. A pledge which essentially precludes tax reform only further ossifies an intractable problem.

What Congress must first determine is the vision of government the people want: what size government should we have relative to GDP? What role should government play in our lives? How intrusive should it be? Keep in mind that currently combined federal and state spending is roughly equivalent to 40% of GDP. Since government is solely dependent on the private sector it seems pretty shortsighted on the part of Democrats to insist that current spending habits cannot be changed. If current trends persist, one of my great-grandchildren (or perhaps one of yours) may become the sole private sector worker supporting a cast of two or three hundred million government workers. That is obviously an embellishment, but it is the logical destination of the direction we are traveling.

Mr. Norquist has put on notice those Congressmen and women who, in moments of conciliatory weakness, deemed to violate their pledge. As he said in his interview with Mr. Kroft, Grover Norquist “innocently” noted that he would only make the taxpayers, in the district of the feckless Congressman, aware of the breaking of a promise. However, when Congressmen of either Party remain obtusely obstinate, it results in Americans choosing homicide over political suicide.

The second item Congress must address (and related to the first) is: How best to generate economic growth? Again, Congress is split. Democrats argue that government should drive growth, ergo a focus on stimulative spending. Republicans understand that the private sector is both faster and more efficient, thus their focus on tax reform and reductions in federal spending.

My sympathies lie with Republicans in this regard, but stalemate helps no one. Bismarck, a man not noted for his cozy relations with his political enemies, once remarked: “Politics is the art of the possible.” Richard Brookhiser, in his biography, James Madison, writes about Madison, as the Constitution was being debated: “He lost arguments and changed his mind. That is because the Constitution was produced by politics as well as theory.”

Washington has become a theater of the absurd and Grover Norquist is a principal player. But for 60 Minutes to imply he is the most powerful man in Washington only adds to the absurdity. That city has become filled with people more focused on re-election than on doing right by the American people. The President speaks in high moral tones, but his adamancy equals anything put forward by the Republican camp. Earlier this fall, he said he would veto anything that cut his new healthcare plan and insisted on $1 trillion in tax increases. During the final, climatic days before the cutoff, he skipped town. Can anyone imagine Lyndon Johnson not being part of the scrum?

Democrats in Washington have turned a deaf ear toward the logic of arithmetic. There is not enough money to do what they have promised. They have created a generation of dependencies, in which half the people pay no federal income taxes and in which about 70% receive more from government than they pay in. Democrats have always had the easier argument. It is more pleasant to give than to take, and to place blame on the “rich”. It has provided them the moral high ground, even as they know the gifts they have promised are ephemeral. Republicans are left to clean up after their prodigal brothers – to take away what is unaffordable.

The problem in Washington, the refusal to own up to the road to Socialism we are traveling, and the stalemate it has produced is reminiscent of the Dead Horse Theory. The wisdom of the Dakota Indians, passed on from one generation to the next, says: “When you discover that you are riding a dead horse, the best strategy is to dismount.” Congress has tried everything from appointing a committee to study the horse, to re-classifying the dead horse as living-impaired. What they have not done is to acknowledge the problem for what it is – living beyond our means.

Grover Norquist grew up in middle class suburbs outside of Boston. Despite his notoriety and his success, he continues to live simply. While I don’t believe Mr. Norquist is evil, as Steve Kroft implied, his intransigent inflexibility does not serve the interests of fiscal conservatives, who share his belief in smaller government, but who recognize that a refusal to negotiate means nothing gets accomplished. The art of the possible in today’s political environment requires enlisting the support of independents. The President, with his flirtations with Socialism, is vulnerable. Republicans, with a center-right candidate, can move the country forward with far greater momentum than can an obstructionist like Grover Norquist.

Monday, November 21, 2011

Video Games and Education

Sydney M. Williams

Thought of the Day
“Video Games and Education”
November 21, 2011

We have an analyst, Bill Lennan, who covers the electronic interactive entertainment space and I have a son, Edward Williams, who does as well for another firm. I have avoided speaking to either of them about this piece, so as not to embroil them in this debate, nor to embarrass them into being seen as colluding in any conclusions I have drawn.

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The purpose of education is to teach young people to learn, to think, to reason and to communicate. The process begins with social interaction and to encourage the innate sense of curiosity children possess. Addressing a child’s curiosity begins the process of learning – asking questions, reading, solving math problems, exploring scientific experiments, and studying history, geography and civics. The result is a base of knowledge allowing one to have informed opinions, to consider alternatives and to reach conclusions. Above all else, learning should be fun. An educated person is one who deliberates, reasons out answers and then communicates what he or she has learned. Additionally, it allows the process to begin anew. Education is innate to our being; techniques have improved over time, but the essence is unchanged.

The imperatives to a successful learning process are first, parents who encourage the process; second, an able, empathetic, enthusiastic and creative teacher; and, third, a student willing and anxious to learn. There is nothing more important in a young person’s life than getting a good education. Whatever interferes will be a detriment to their future success and happiness. There are varied forces competing for a student’s time and attention, among which are video games. It is not fiat that brings an eager and attentive student to class; it is the attractions of the classroom and a desire to learn.

There have always been distractions to learning. Video games are but the latest. The industry is relatively new, with games like Pac-Man and Donkey Kong having been developed for home computers toward the end of the 1970s. Today, the industry is larger than either the movie industry or the music industry. It is global, with worldwide sales around $60 billion. Game Developer Research puts U.S. employment in the industry at about 45,000, with an average salary of $80,000. Drew Davidson, director of the entertainment technology center at Carnegie Mellon University, said in a NPR interview a year ago January, “I’d say game industries are sort of coming out of their adolescence.” In other words, it would be fair to say that the industry is still young and growing rapidly; games are played in about 65% of U.S. households and the industry is a significant contributor to GDP. According to the Entertainment Software Association (ESA), 46 million children between the ages of 5 and 17 have played video games. Based on 2010 census numbers, that represents an approximate 70% penetration ratio. Like them or not, video games are likely to be around for a while.

The question on the table, however, is: do video games do more harm than good? Opinions vary, depending upon who is speaking or writing. Like most controversial issues, there are people on both sides. There are a growing number of people who have self-interest in the perpetuation of the industry. On the other hand, most studies raise legitimate concerns.

According to the Entertainment Software Association (ESA), 300 American colleges, universities and technical schools offer programs and courses in video game and design. A survey released by the Scottish Centre for Games and Learning showed that brain-training games such as Dr. Kawashima’s Brain Age have a positive impact on behavior and on learning when played in school. Dr. James Paul Gee of the University of Wisconsin recently concluded that video games intermix instruction and demonstration more effectively than “memorize and regurgitate” methods generally used.

The Supreme Court, in a 7-2 decision last June that has relevance to this discussion, struck down a California law that banned the sale of violent games to children. The opinion was based on their interpretation of the First Amendment. Justice Scalia, writing for the majority pointed out that depictions of violence have never been subject to government regulation, pointing out that “Grimm’s Fairy tales are very grim indeed.” Justice Scalia added, in response to Justice Alito, “Disgust is not a valid basis for restricting expression.” Justice Stephen Breyer, who with Justice Clarence Thomas dissented, based his opinion on studies that have shown violent games were positively associated with aggressive behavior.

Douglas Gentile, an associate professor of psychology at Iowa State University who has had his research largely typecast on the “bad” side in terms of violent video games and in terms of addiction, has concluded that there are some benefits of the games. He writes of five dimensions on which video games can affect players simultaneously – amount of play, content, game context, structure of the game, and the mechanics of game play. There are games whose structure motivates teamwork and provide a sense of mastery; there are those that require the player to consider alternatives and their consequences, and others which require motor skills. “Nonetheless,” he concludes tellingly, “every hour playing games is one not spent doing homework.”

The Journal of the American Medical Association (JAMA) in July 2007 reported on a study conducted on 1,491 10-19 year-olds during the school year 2002-2003. The youngsters reported on how they divided their time: playing video games; times spent with family and friends; doing homework, and involved in sports. Thirty-six percent played video games, 80% of whom were boys. The adolescents who played video games spent 30% less time reading and 34% less time doing home work. Another study, conducted by two psychologists from Denison University and reported in “Psychological Science”, found similar results. Families that had no video games, but did have boys between the ages of 6 and 9, were recruited for the study. Half the families were given a video machine and three age-appropriate games. The others were promised a system at the end of the four month experiment. The boys with the video games spent considerably less time in after school activities and scored “significantly” lower reading and writing scores.

The biggest problem, though, is the one of addiction. Much like substance abuse, video games are designed to be addictive; they are designed to generate excitement, anticipation, and accomplishment, all of which compels the player to continue. Studies have not concluded whether gaming addiction is a “diagnosable disorder”, but common sense suggests that youngsters who are easily bored or feel like outcasts in social situations are most at risk. Dr. Kimberly Young, author of Caught in the Net: How to Recognize the Signs of Internet Addiction – and a Winning Strategy for Recovery says that, yes, gaming can be a true addiction: “It’s an impulse control disorder, an addiction in the same sense as compulsive gambling.” Smith & Jones Addiction Consultants has created a treatment center in Amsterdam. Keith Bakker, director of the firm, created the program the more they looked at the problem, “the more we saw gaming was taking over the lives of kids.”

Like most things in life, moderation is key. There are those in the industry who will argue the merits of gaming and how it is helpful in terms of motor skills or, in some on-line games, of partnering. There are apologists who will point out that many games teach the ability to consider alternatives, to take action and then to suffer or benefit from the consequences. But one of the benefits (and joys) of reading is that it demands an imagination. Before Daniel Radcliffe became the face of Harry Potter, his image was unique in the imagination of each reader. Once the movie was made, we began to see Harry and all of his Hogwarts friends according to the imagination of the director, Chris Columbus. While the movies have generally been pretty spectacular, something has been lost. The same is true of video games.

A good education develops the mind. We question; we imagine; we debate, we argue as we learn. We explore worlds we never knew. As exhilarating as is the process of learning, it can also be intense; so demands release. Video games, like sports, can serve as that release. But they cannot substitute for learning. To the extent they dominate one’s life, the loser is the child. In moderation they are okay, but they risk doing harm. But the industry is not going away. Parents and teachers cannot ban games, nor should they; they should not so much argue the negatives of gaming, as to promote the joys and excitement of learning – that books open doors, that the relationship between numbers is fascinating and that discovery through scientific experimentation can be awesome. While learning, in my opinion, is its own reward, it has become critical in our globally competitive world. And, as important as anything, education puts us on the road toward understanding the value of personal responsibility.

Thursday, November 17, 2011

"Insider Trading in Congress"

Sydney M. Williams

Thought of the Day
“Insider Trading in Congress”
November 17, 2011

It is the hypocrisy that is so offensive. From its earliest days there has been collusion between speculators and politicians – call it cronyism, if you will. As a land surveyor, George Washington (of whom I am a big fan) acquired thousands of acres along the upper Potomac River. In 1785 after the Revolution and before he became President, he was named president of the Potomac Company. The company was formed to make the Potomac more navigable, to build canals around a number waterfalls, with the intent that the river could compete with the Mississippi (controlled by the Spanish) and the St. Lawrence (controlled by the French) for the profitable interior trade. Ultimately the company failed.

CBS’s 60 Minutes ran a segment last Sunday in which they interviewed Peter Schweizer, author of Throw Them All Out. The book’s title refers to the conclusion Mr. Schweizer reached after researching the “insider trading” being done by members of Congress. The term insider trading is in quotations because members of Congress are exempt from the rules that apply to the public regarding trading securities. In fact, Peter Schweizer referred to those entering Congress as engaging in “a venture opportunity.” “There are,” he said, “all sorts of forms of honest graft that congressmen engage in that allow them to become very, very wealthy.” The rules are based on the fact that lawmakers have no corporate responsibilities, conveniently overlooking their responsibility for writing legislation and regulations that govern these same industries and businesses.

Almost as off-putting as the sanctimonious comments made by members of Congress when pontificating about the baddies on Wall Street, was yesterday’s equally specious comment by Senator Kirsten Gillibrand (D-NY), in the wake of the 60 Minutes exposé: “The American people deserve the right to know their lawmakers’ only interest is what’s best for the country, not their own financial interests.” That statement is in sharp contrast to what she and her husband were engaged in three years earlier. In 2008, according to a May 3rd 2010 article in the Wall Street Journal, her husband, Jonathon Gillibrand, made more than 250 transactions in his E*Trade account – most of them put options, many of which were on housing stocks – while she was serving in the House. In an April 22 2010 news release on White House financial regulatory proposals, Senator Gillibrand, dripping with false piety, praised the effort to “rein in excessive risk and leverage in the pursuit of short-term profits.” Her words echoed the old saying, “Now that I’ve got mine, you can’t get yours.”

Ms. Gillibrand has plenty of company from both Parties in this ethical lapse. In September 2008, Representative Spencer Bacchus of Alabama, the then ranking Republican member on the House Financial Services Committee and now its chairman, bought put options on the market the day after a briefing with then Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke who warned of a possible global financial meltdown – a meeting so sensitive that cell phones and blackberries were confiscated. In another instance, Mr. Schweizer, in his book Throw Them All Out, writes that Dennis Hastert (R-IL) was worth a few hundred thousand dollars when he became Speaker of the House in 1999. He left the job eight years later “with a reported net worth of up to $11 million.” Nancy Pelosi, the dissembling, self-righteous former Speaker of the House, with her husband was given the right to buy 5000 shares of Visa on its IPO at $44.00 just as legislation effecting credit cards was making its way through the House. Two days later the stock, now public, was trading at $64.00 – a nice $100,000 profit! CBS correspondent Steve Kroft questioned her on the possibility of a conflict of interest; Ms. Pelosi’s response reflected her scrambled mind: “…it doesn’t…it only has appearance if you decide that you’re going to have…elaborate on a false premise. But it…it…it’s not true and that’s that.” Keep in mind, this woman, as Speaker of the House, was second in line to become President!

As the country and the world was teetering on collapse in 2008 too many in Congress were using privileged information to line their own pockets. Their activity brings to mind the notorious Albert Wiggin. When President of the Chase National Bank of New York in 1929 he shorted shares in his own bank while having the bank buy shares. The trade netted him $4 million and, since he did the trade in a Canadian shell company, he was able to avoid any tax liability. What he did was perfectly legal at the time, but that did not make it morally acceptable.

There are problems our country faces that dwarf the nefarious activities of a few greedy members. Holman Jenkins’ point is well taken when in yesterday’s Wall Street Journal column, he wrote, “After all, the real scandal isn’t what they do with their own money, but what they do with ours.” Mr. Jenkins’ position is understandable. He writes about Senator John Kerry, accused of trading in and out of healthcare stocks during the debate over Medicare in 2003, “Mr. Kerry doesn’t need to stoop to making money. He married it. His wife is worth an estimated $1 billion.”

While I agree with Mr. Jenkins that the real problem is what they do with our money, the mixture of power and money is potentially dangerous. President Eisenhower, in his farewell address, warned of the military-industrial complex. In his book, Mr. Schweizer quotes Benjamin Franklin who warned of the corruptive confluence of the mixture of money and power: “There are two passions which have a powerful influence in the affairs of men. They are ambition and avarice; the love of power and the love of money.” Separate the passions create dynamic growth; co-joined they risk malfeasance.

The other problem is that Mr. Jenkins dismisses too easily the lack of a moral compass such activity reflects. The trading of securities in which Congressional members have been engaged may fall within legal boundaries, but they fail commonsensical ethical standards. As leaders of the country, Congressional members have a responsibility to uphold basic moral standards. They have failed. Mr. Schweizer is right. Throw out what he calls the Permanent Political Class, and prevent them from taking jobs as lobbyists for at least five years.

Wednesday, November 16, 2011

"Republican Dissonance"

Sydney M. Williams

Thought of the Day
“Republican Dissonance”
November 16, 2011

The fact that Republican candidates for their Party’s nomination often disagree is a privilege of democracy and a benefit to constituents. The fact that Republicans are unified in their desire to beat the incumbent a year from now should benefit all of us.

Recently there were disagreements regarding China and the allegation of currency manipulation, with former Utah Governor and Ambassador to China Jon Huntsman, alone suggesting that condemning our largest creditor is impolitic at best and fiscally stupid at worse. During tough economic times there is a tendency to circle the wagons. But doing so slows commerce for everyone. Xenophobia is a condition not uncommon during periods of high unemployment and slow economic growth. It is easy to lay the blame for our woes on some distant foreigner. But one of the lessons of the past three decades is the globalization of finance, manufacturing and labor. The United States is still the world’s second largest manufacturer and its third largest exporter. The Chinese Yuan has appreciated 30 percent over the past five years, roughly a 5.4% annual compounded rate. Markets are working. Currency controls or custom duties tend to do more harm than good. The road to protectionism is a slippery slope; as tempting as it might seem, it should be avoided at all costs.

At Saturday’s debate, disagreements about waterboarding surfaced. The New York Times, in their usual sanctimonious bid for the moral high ground, was shocked, shocked that so few had learned their lesson “from the moral calamities of the administration of George W. Bush.” Jon Huntsman and Ron Paul deplored the practice. Mitt Romney remained silent. The others endorsed the practice. But, whether waterboarding meets the definition of torture remains a subject of debate. It certainly would not be a pleasant experience. However, the Times has decided waterboarding is torture, but not everyone agrees. Congress could revise relevant statutes to specifically classify waterboarding as a form of torture. They have not yet done so. And the Supreme Court can interpret existing anti-torture laws in such a manner to include waterboarding. People who are quick to condemn the practice should understand the difference between waterboarding and real torture American soldiers and others have had to experience. Pick up a copy of Mario Vargas Llosa’s book, The Feast of the Goat. It describes the methods used by aides to President Rafael Trujillo in the Dominican Republic in the late 1950s. Or read Unbroken, Laura Hillenbrand’s story of Louis Zamperini who was captured and tortured by the Japanese during World War II. Books such as these explain real torture. To compare waterboarding, which our own soldiers experienced before subjecting captured enemies to the treatment, is like comparing a Sunday’s drive in the country to a lap around the Daytona 500 Speedway.

Inconsistencies among Republicans are not limited to those running for office. Last July, as Senator Tom Coburn was introducing his $9 trillion deficit reduction plan, which would have ended tax breaks for historic preservation, Ohio House Republican, Michael Turner was introducing the Historic Homeownership Revitalization Act, which would have provided up to a $60,000 tax credit willing to rehabilitate certified historic structures. We are in this pickle because our heart was bigger than our brain. We promised what we could not deliver. There is not the money to do all the things we would all like to do. Choices have to be made. While the Super Committee is putzing around looking for budget cuts that would amount to less than five percent of the budget, the hole we are digging keeps getting bigger. Theirs is the third committee to meet on the subject in the past twelve months and so far the results have been zilch, nada, nothing. God help us if interest rates start to rise, which they will at some point, for creditors will demand a higher return for the risks they are taking in owning our paper. How can a Republican like Mike Turner keep spending our money at times like these?

Most Republicans want smaller government. Most, including me, want lower taxes, as a means to spur economic growth, which will increase tax revenues. Many people, Republicans and Democrats, seem to have forgotten the dictates of the Laffer curve, which argues that lower taxes increase revenues to government, while higher taxes shrink the tax take. Is it possible that Democrats and Republicans are on the wrong sides of this debate? I don’t think so, but it is curious.

Immigration is another issue that reflects dissension. With the exception of Jon Huntsman and Ron Paul, most of the Republican candidates, at a debate a month or so ago, agreed that a wall should be built along the Mexican border. Notably, Texas Governor Rick Perry, the only one who would be immediately affected, disagreed, stating what to me seemed obvious that a wall represents the antithesis of what America means. (Ron Paul, parsing his words as only he can, added that a wall can keep one in, as well as keeping others out!)

This dissonance among Republicans extends to me. We are, after all, a country of individuals. Very few thinking people hue strictly to a Party line. “Consistency,” as Oscar Wilde once said, “is the last refuge of the unimaginative.” Many of my Democratic and “liberal” friends have segregated me into a box reserved for a Wall Street-centric, who is indifferent to the needs of the environment, with a Cro-Magnon type mind and who exhibits a callous disregard for the poor.

While it is generally a waste of time trying to defend myself, I do disagree with many Republicans on a host of social issues. They are too public in their emphasis on religion. People should be free to exercise their beliefs, while respecting those who disagree. Republicans should emphasize the fact that their tax policies will raise revenues, and stop focusing solely on the act of lowering rates. Our country was built on immigration. We should encourage immigration, at the one end offering citizenship to all who complete their college education here and at the other end to anyone willing to work. Those who choose to come to these shores have already demonstrated grit. I get very uncomfortable when candidates for President talk as though they would always do what the commanders in the field suggest, seemingly oblivious that the President is the Commander in Chief of the armed forces, a factor a number of Lincoln’s generals learned to their regret, as did General Macarthur when he deliberately disobeyed President Truman in April, 1951. Listening to generals is one thing; doing their bidding is another.

What keeps me in the Republican camp is the emphasis on individual freedom, the importance of private property, a belief in private enterprise and free markets, and skepticism regarding the omniscience of government.

But dissonance within parties is healthy, as is civil disobedience in our society.

Tuesday, November 15, 2011

"Europe Agonistes"

Sydney M. Williams

Thought of the Day
“Europe Agonistes”
November 15, 2011

The usual explanation for the struggle in Europe is that it was based on a common monetary system put in place without fiscal or political authorities or considerations. The fate of the Euro seems predetermined, absent addressing those other two factors. But at its essence, and the lesson for the United States (which does have political, fiscal and monetary authority), it is a struggle about the survivability of the massive social welfare states that grew from the ashes of a war-torn Europe sixty-six years ago.

According to J.P. Morgan strategist, Ken Landon, government spending, as a percentage of GDP, among the seventeen countries that constitute the Euro Zone is around 50%. With fully half of all economic activity passing through government, the financing needs of those states are enormous. Corporate and income taxes are levied, as one would expect. But, to pay for the benefits these countries have so generously ladled out, all of these countries use some version of a value added tax (VAT) – a euphemism for a sales tax. The VAT in those seventeen countries ranges from 15% in Cyprus and Luxembourg to 23% in Finland, Greece and Portugal. The VAT in most countries falls between 19% and 21%. Any sales tax, by whatever name one chooses to call it, is regressive, and it is rare, as we all know from our state sales taxes, for such a tax, once instituted, to be lowered or eliminated.

In 1945 Europe was devastated. Excluding the Soviet Union, more than twenty million Europeans were killed. Buildings, roads and bridges were destroyed. It is no surprise, after the two world wars, that Europeans would forego military arms and concentrate on building socialist states. For the three decades following the War, demographics worked – a large workforce supported a small number of retirees. An idyllic world was achieved – short work days, enough money to live comfortably, and early and easy retirement. No one bothered to compute the costs as demographics shifted and obligations mounted. Today, 20 percent of Italy’s population is over 65, and Italian women have on average 1.2 children. Italy’s population is both aging and shrinking.

Can Europe be saved without enormous dislocations? Analysts and commentators with far more expertise than I have published myriad articles on the Euro Zone, reflecting virtually all views on its potential success or failure. Their lack of consensus suggests nobody knows. Nevertheless, my read is that most people continue to be too optimistic as to the Euro’s survivability.

In his weekly market comment, John Hussman of the Hussman Funds notes that leverage ratios for most European banks exceed 40-to-1. Whether that is accurate or not, the price of many southern European country bonds suggest that a 50% write down, for example, of Greek debt has been inadequate. Ditto for Italian bonds. Italy’s government debt amounts to about $2.5 trillion (120% of GDP and the 3rd highest in the world), most of which is held in Italy. Have Italian banks sufficiently marked to market their country bond holdings? With three of the largest Italian financial institutions (Generali Group, Intesa Sanpaolo Bank and UniCredit Group) holding combined assets greater than the GDP of Italy, the question is not just academic.

But markets, as we all know, are discounting mechanisms. Markets and economies do not always move hand-in-hand. Over the past ten years, since shortly after the advent of the Euro, the Euro Stoxx 50 has declined 40%. Granted, prices ten years ago were elevated because of the tech/internet bubble, but even so, some discounting has to have been going on. The Index is down 22% over the past twelve months. Whenever you hear a market or economic seer speak of a lost decade to come, ask them about the lost decade we have left behind.

There are lessons in Europe’s “Appointment in Samarra” for the United States, lessons whose clarion calls we appear to be ignoring. For the forty years ending 2008, U.S. federal government spending, as a percent of GDP ranged from 18.2% in 2001 to 23.5% in 1983, when defense spending accelerated; outlays, over that time, averaged 20.5%. Receipts during those years ranged from 14.9% in 2010 to 20.6% in 2000 and averaged 18%. (For those who keep track of data like this, in 2007, four years after the Bush tax cuts of 2003, tax receipts rose to 18.5% of GDP from 16.2%. During those four years GDP rose cumulatively 14 percent, so tax revenues increased about 28%. Spending during those four years grew in line with GDP growth.) What concerns fiscal conservatives is that spending over the past three years implies a far bigger role for government going forward.

While we await the recommendations of the Super Committee on deficit reduction – the third such committee in the past year – questions come to mind: Congress needs to ask: How big do we want government to be? What do we want it to provide? If more entitlements, like the Affordable Care Act, are wanted, then a lot more revenues will have to be found. Questions need to be asked regarding the scoring of proposed legislation by the Congressional Budget Office (CBO). The CBO uses static accounting; in other words they assume that any proposed legislation will have no affect on people’s behavior. While allowing for behavioral changes could foster the fudging of results, both parties could express their version of any expected consequences. Additionally, the art of behavioral economics has greatly improved over the past several years.

In the past decade, the study of behavioral economics has gone from the margins of academia to the mainstream. In 2002, the psychologist Daniel Kahneman won the Nobel Prize in Economics. Economic professors, Richard Thaler and Cass Sunstein (who worked with Peter Orzag in the White House) authored the best seller Nudge in 2008. There are those, like Peter Orzag who practice a form of activist behavioral economics – economists who push people toward outcomes they have predetermined are in their or the country’s best interest. But there are also those like Malcolm Gladwell (Blink, in 2011) and Steven Levitt (Freakonomics, in 2005 and Super Freakonomics, in 2009) who simply demonstrate how people react to changing conditions, or different stimuli. Regardless, the time has come for the CBO to provide at least two scores regarding pending legislation – the current static response, and another based on probable changes in behavior. Pretending that changing the tax code or removing a regulatory barrier will have no consequences is absurd. We may not be able to accurately forecast what the effects will be, but Physics 101 teaches us that for every action there is an equal and opposite reaction.

Europe’s latest response has been to replace democratically elected leaders in Greece and Italy with “technocrats” appointed by the Presidents of the respective countries. (Presidents’ duties in Italy and Greece are largely ceremonial and are elected by the country’s parliaments.) Lucas Papademos, a central banker, has been asked to lead Greece, while Mario Monti, a former European Commissioner, will do the same in Italy. Their jobs are to restore confidence and implement austerity measures. However, there remain a number of unanswered questions. Will Italians, Greeks, Spaniards, Portuguese and even the French willingly give up their way of life? Would austerity measures simply make a tough economic environment worse? Can the authorities in these states address the culture of tax avoidance? Will banks address their balance sheet needs? How long will the people willingly accept a government that was not freely elected? Will riots in the street require a police-style response?

Europe’s struggles will continue. And, unfortunately for us, what happens in Europe will not stay in Europe.

Monday, November 14, 2011

"A Service Economy - What About Serving America?"


Sydney M. Williams
Thought of the Day
“A Service Economy - What About Serving America?”
November 14, 2011

We live in a country in which services dominate the economy. According to the CIA Fact Book, 76.6% of 2010 U.S. GDP was represented by services; yet we live in a society in which the concept of service is increasingly alien.

The sectors of the service economy that seem the most customer friendly are those where there is no interaction with people. Reading a review in the New York Times on Friday of Peter Englund’s new book, The Beauty and the Sorrow, I logged onto Amazon, bought the book knowing that it will be at my home on Monday. In contrast, on Saturday I had to have blood work done in preparation for a doctor’s appointment next Friday. I called Yale New Haven’s Guilford number. After waiting ten minutes, curiosity overcame frustration. So I put my phone on speaker, read the papers, ran some errands – having to explain to people what I was doing, as music was coming from my pocket – and only hung up when I needed the phone for other calls, disconnecting after one hour fifty-one minutes and thirty-eight seconds on hold. There is no excuse for such poor service; unfortunately it is all too common, as anyone knows who has had to deal with the myriad numbers one must press on one’s phone, in response to a mechanical voice, while trying to reach a real person.

Far worse was the experience of a few hundred people at Hartford’s Bradley Airport a couple of weeks ago. In the midst of that October 29th freak storm that dumped twenty inches of snow on Hartford, the FAA, in their wisdom, diverted twenty-eight flights to Bradley Airport. Passengers on four of those flights, including an American Airlines flight from Paris, were forced to remain on the tarmac for seven hours. With babies screaming, whatever liquor on board already consumed, and with backed up toilets, they would have had to take me off in a straight jacket! Don’t airports still have rolling staircases? They do have emergency chutes. Wouldn’t you have rather have been shepherded across the airport, through the snow, than be confined to your 36 cubic feet of space for seven hours? Is that service?

I detect the heavy hand of inflexible government regulation, designed to protect us, but instead fated, at times, to place us in deplorable conditions.

Websites, as good as they may be, are no substitute to a human voice. Government is the worst violator of all. Hours spent on hold, or in lines at departments of motor vehicles or at social security offices, provide a preview as to what seeking answers to questions about healthcare will be like, if Obamacare is not expunged.

There are, of course, businesses within the service sector where personal attention is key and where attention to detail is critical to the success of the enterprise. High-end hotels and restaurants, which depend on repeat visits, are noted for making customers welcome and comfortable. There is, as a result, a direct link between the manner in which one is treated and the amount of compensation to the one providing the service.

However, the problem is societal. It is revelatory of our culture and can be seen in the lack of respect that too many people have for one another. The concept of service, of doing something for others, of paying back society is common among many who have done far better financially than they ever expected. It is a habit that should be taught at an early age.

One way would be to reinstate the draft, if not in the form we once had, at least in a fashion that requires every able bodied young person to perform some service for their country, either in the military or in some form of a domestic version of the Peace Corps. Unemployment is high, especially among the young. This would address that issue. Skills and training would be taught, helping young people as they enter the workforce. It could be seen as a form of stimulus, but its most important lesson would for the young to learn selflessness. It would give people a sense of the satisfaction that service to one’s nation provides. It would help them understand that nothing is free, especially freedom. And, it would give the youth of America a sense of responsibility.

We have had freedom in this country for so long that it is taken for granted. The history of the United States’ founding is subsumed by classes on “relevant”, politically correct subjects like women’s rights, or the experience of minorities in America, or the misdeeds of a small number of soldiers in places like Abu Ghraib Prison in Iraq. This is not to dismiss the importance of those subjects. They should be studied. However, it is a question of priorities. The National Assessment of Educational Process, in a June 2011 study, found that nearly half of Americans were unable to identify the three branches of Government, suggesting that the basic lessons of civics and history have been ignored, either through laziness on the part of teachers or, more likely, because of a warped sense of priorities in the educational system.

A month or two ago the left attempted to adopt the Occupiers of Wall Street to their cause. The President said the “Occupiers” express “the frustration that the American people feel.” However, increasingly people see a “rampant creepiness”, as Peggy Noonan recently put it, when they watch the physical destruction of private property, the openly blatant use of drugs, clashes with the police, a disregard for basic standards of cleanliness, and the destruction of the businesses of many small merchants. Would not these occupiers have been better off having first provided some service to the country that has allowed them to protest?

Much has been written and spoken about our divided nation. Less than one percent of young people today serve in the armed forces. We have created what we call a voluntary army, but in fact it is a professional army. Many of the few soldiers we have in uniform have had to serve multiple tours in Iraq and Afghanistan. That never used to happen. A professional army is not healthy for a democracy. Just as I believe in citizen legislators, I also feel we should have a citizen army. Every year, around Veteran’s Day, the Old Lyme Country Club hosts a singing group from the nearby Coast Guard Academy. The program ends with the singing of the United States Armed Forces Medley, a four minute song comprised of words and music from the theme songs of the five branches of the military. Anybody who has served, in whatever capacity, is asked to stand during the few moments the words representing their branch are being sung. Not surprisingly, most of those who stand are old. At 70, I am one of the youngest. It is sad to think that this tradition may disappear.

The concept of service needs to be re-learned. Competition is the way in which the private sector learns the rewards of service. But as more of our economy comes under the auspices of government – a monopoly by definition – that concept risks disappearing. Bringing back the draft may serve to make more of our youth knowledgeable and respectful for the nation in which we live and, at the same time instill in them the importance of serving their country. We will all be better served.

Friday, November 11, 2011

"Term Limits - Another Look"

Sydney M. Williams
Thought of the Day
“Term Limits – Another Look”
November 11, 2011

(Not being a Poe or an O’Henry and to avoid any surprise, I am a strong proponent for term limits.)

Under the Articles of Confederation, which were ratified in 1781 and lasted until 1789, according to Richard Brookhiser, in his new book James Madison, term limits were in place for members of that Congress. No member could serve more than three years out of six. When the Constitution was adopted in 1789, establishing the three branches of our current government, term limits were not mentioned. George Washington established the principle of a President serving no more than two terms. Most, but not all, of those in Congress considered themselves citizen politicians, serving in Washington, before returning home.

The standard for the President set by George Washington lasted for one hundred and forty-four years, until Franklin Roosevelt ran and won a third term in 1940. Eleven years later, in 1951, Congress ratified the 22nd Amendment, which held that no person could be elected more than twice and could serve no more than ten years as President. The subject of term limits for Congress has been frequently discussed and debated. Given the very low Congressional approval ratings, the issue has become a hot button once again.

The principal arguments against term limits are several. First, they would seemingly violate the principle of free choice, including the opportunity to vote for a serving member of Congress, if that person had reached their term. Second, term limits would kick out the good with bad. Third, every job has a learning curve and experience and contacts are valuable. Fourth, a congressman in their last term in office may choose to act willfully. And fifth, term limits would not necessarily resolve the rancor so prevalent in today’s Washington.

As for the first argument, the fact that about 85% of incumbents are re-elected, suggests voters are already denied adequate choices. The second argument presupposes there is a dearth of good people. That seems unlikely, as each Congressman represents approximately 900,000 people, among whom there must be a few good women and men willing to join (as Mark Twain would say) the criminal class, commonly known as Congress. As for the third point, there is little doubt that experience and contacts are of value, as most Congressmen have discovered to their financial advantage, while trolling from their respective offices. That doesn’t make the blessing of experience or contacts necessarily desirable. The fourth argument makes the assumption that those in Congress must have morals lower than even I imagine. Perhaps that it is true and it wouldn’t surprise me, but that is no reason to stay with the old when one can go with the new. As for the fifth, it is impossible to know if the level of dissonance would persist or desist. But with approval numbers in the teens, there would seem to be limited downside.

It is true that the Speaker of the House is third in line to be President, but given some of our recent Speakers that lends little comfort to the existing system. The idea of a President Pelosi would be enough to make my hair curl, if that weren’t its natural condition. Besides which, in 222 years there has been only one Speaker who became President – Gerald Ford.

The arguments in favor of term limits are more convincing, in my opinion. The current system has fostered a class of political operatives who have become distanced from the people they supposedly represent. The gerrymandering of districts virtually assures their re-election. The combining of lobbyists’ money and legislative power has been used for years to serve the special needs of members of Congress, at the expense of the people. Term limits would introduce new blood and fresh competition. It would send Senators and Representatives home to live in the real world. Their subsequent influence would be lessened, as many of the people they once knew would be gone as well. Corruption would not be eliminated, but it would not likely increase. While term limits might serve to increase the power of the staff and bureaucracy, it is more likely there would be less wasteful spending. Smaller government and lower taxes should result. The universe of people having served in Congress would expand, benefitting the rest of us and the country.

Much of the current clamor for term limits is due to the way our system has devolved. Sour milk, not the cream, has risen to the top of the bucket. Perhaps it is the time in which we live. Perhaps it is inevitable, but I have heard nothing to suggest not imposing term limits would be a good thing, other than for those members of Congress who would be forced to find real jobs.

……………………………………………………………………

On Wednesday evening I listened to a debate between MIT and Smith College on the subject of term limits. The subject, resolved: “This House would impose term limits for the Senate and the House.” Speaking in proposition was MIT; speaking in opposition was Smith College. In my limited (and long ago) experience in debate, I always found it easier and more fun to argue in opposition, and perhaps that is why I found Smith College out-debating their MIT rivals. Nevertheless, it was disappointing that the engineers did not argue more convincingly, for I am sure they had the correct side. Regardless, term limits should be imposed.

Thursday, November 10, 2011

"A Doozy of a Market"

Sydney M. Williams

Thought of the Day
“A Doozy of a Market”
November 10, 2011

By August 8th the S&P 500 had fallen 18% from its April 29th interim high of 1363.61. About the same time daily volatility, which for twelve months had been docile, began accelerating. A 3.7% decline in the market, as we saw yesterday, is an eye opener. While it is not the biggest decline we have seen or are likely to see, it is, nevertheless, like getting sucker-punched and disquiets the mind as well as the stomach.

The reasons, not surprisingly, were attributed to Europe and the dance we have been witnessing between the parsimonious north and the profligate south, and now especially the fun loving Italians. Italy is a country, as the wags put it, that is too big to fail and too big to save; thereby creating a conundrum for which the wisdom of a Solomon is needed. And no Solomon can be found. Of course intransigence is a condition not limited to Europe. One has only to look at the stonewalling in Washington.

The real problem for both Europe and the United States is a refusal to admit the real cause of the credit collapse. In any crisis, a scapegoat must be found. Politicians and most of the press, in both places, have found one in bankers. They are a convenient target. There are not that many of them. Some of them make unseemly amounts of money. Arrogance is not an unknown characteristic, as when Lloyd Blankfein suggested Goldman was only doing “God’s work.” When the system needed savings, bankers were among the chief beneficiaries. But, importantly, they serve as a diversion to politicians who have avoided the mirror while looking for culprits. More than anything it was a culture they helped create, one with no accountability, that created the chaos.

The cause was societal. Government was (and is) as responsible as any segment of our society in fostering this environment of irresponsibility. People were urged to take on debt. And they did. Politicians and union leaders made promises on which they could never deliver. People, unquestioning, accepted those pledges. It was (and is) a Walter Mitty world.

The situation in Europe should serve as a cautionary tale for the United States, that the road to Socialism is paved with unintended consequences, and at the end of the day common sense must prevail. When the money is gone; it’s gone. But unfortunately, that lesson has not been learned. Voters in Ohio on Tuesday overturned Republican Governor John Kasich’s efforts to place limits on public employee unions’ collective bargaining rights. Perhaps taking their cue from Ohio, yesterday Democrats on the Super Committee walked out on discussions, claiming that Republican offers of $500 billion in revenue increases over ten years was unacceptable, as it results from lowering rates and eliminating deductions. Part of the problem derives from the fact that all assumptions are based on static accounting, which does not factor any behavioral effects of new rules. But part of the problem is simply a version of class warfare, a condition encouraged by the President in his rabble-rousing populist speeches, as he chases around the country campaigning for a second term. Both Democrats and Republicans should be looking to do those things that would enhance economic growth, period. Demonizing the wealthy may make good press, but it does not address the real problem of spending and unrealistic promises.

In my opinion, it is these macro factors that have been weighing on stock prices. The western world is gradually shifting from a never-never world built on dreams to a more realistic one based on facts and the competition emerging from the East and other emerging countries. The change is not easy and some people will suffer. For every two steps forward there is at least one step backward. But investors should always keep in mind the discounting nature of markets. When we pick up a paper and read of problems in Ohio or Greece, or when we hear that Italy had to pay 6.07% for one-year notes, we are not the first to read or hear that news.

Ronald O’Hanley of Fidelity spoke yesterday in Boston. He pointed out that since the beginning of 2008 $1.2 trillion in cumulative outflows have departed U.S. equity mutual funds, a considerable sum even for a market that is valued at $15 trillion. Mr. O’Hanley pointed out that the reasons had to do with de-risking and diversification. Volatility, ten plus years of mediocre returns and the fact that 10,000 people in the United States are reaching retirement age every day – and will continue to do so until the last baby boomer reaches 65 in 2029 – only aggravate the situation. But, again none of this news is new.

Markets almost always deny simple analysis. The last time the market experienced the type of volatility we are seeing today was in the September 2008-April 2009 period, a time during which the S&P500 declined from 1166.36 to 872.81. Of course, the S&P in September 2008 was already down 25% from its October 2007 high. People who bought stocks during that time have generally done well.

Corporations are laden with cash. According to the Federal Reserve, non-financial corporations have more than $2 trillion on their balance sheets at the end of June. As Mr. O’Hanley put it, “While there is a bull market in corporate earnings, there’s a bear market in stock multiples.” I am not so sure I would go that far, but stocks generally seem fairly valued, which suggests that stock pickers should be able to find values. But, for any sustained rally, daily volatility will likely diminish.

It is worth reviewing a study done by Birinyi Associates in 2007, entitled “The Good, the Bad and the Beautiful,” a piece I wrote about three years ago. The report looked at three different investing scenarios over a forty-year period: 1) Buy and hold; 2) without the five worst days of each year and 3) without the five best days of each year. The results are telling. Under a buy and hold strategy, one dollar invested in February 1966 became $16.58 by May 2007. Avoiding the five worst days, the dollar became $2,520.94, while missing the five best days, the dollar over those forty years became $0.11. One can conclude that market timing works, but one had better be very good at it. For the rest of us, we should recognize that over time stocks have done well and that attempts to time the market is generally unprofitable.

So, my sense is that we are in a market in which company fundamentals are improving, but a political system that has yet to come to grips with the real causes of the crisis. There are many companies that pay attractive dividends, in some cases yielding more than their bonds, and in more cases yielding more than the Ten-year Treasury. To use a non sequitor, I remain cautiously optimistic. Any full fledged bull market will have to wait, in my opinion, until we have greater clarification on the political front and that the culture that created the 2008 crisis has dissipated. On the other hand, it would be a mistake, in my opinion, not to have some exposure to stocks.

Wednesday, November 9, 2011

"College Costs - How High Will They Rise?"

Sydney M. Williams

Thought of the Day
“College Costs – How High Will They Rise?”
November 9, 2011

I recall a board meeting, in the mid 1980s, of the day school in Connecticut my daughter attended. The subject of tuition increases was on the table. By the mid ‘80s, economic conditions had improved and the opportunity to make up for the difficult 1970s seemed timely. As to how high we should raise tuitions, the suggestion was made: until they meet resistance. Let the market be your guide. Tuition at the school has risen from $1400 for the first grade in 1974-75 to $30,000 this year, an 8.6 percent compounded annual increase, close to triple the rate of inflation. No one on the board at the time realized how far and by how much rates would rise.

What has been true for schools has been true at colleges and universities. Costs have persistently outpaced inflation and average incomes. Gordon Wadsworth, author of The College Trap wrote recently that over the past 25 years, while overall inflation rose 115.06 percent, tuition increased 498.31 percent. The numbers tell an ominous story. According to CNNMoney.com, in a report last week, the average one year cost for a private four-year college is $42,224. IRS data suggests that less than three percent of tax returns filed in 2009 were based on adjusted gross incomes of more than $200,000. Fewer than 12 percent of students pay the full freight. The 88 percent who do get assistance in the form of scholarships, grants, or federal tax benefits receive on average $15,530 according to the College Board. That means that the average student must come up with $26,694. A June 2009 study found that only 5 percent of workers make more than $100,000, suggesting that a private college education, without incurring debt, is available to a very small percent of the population – a situation that will only amplify the gap between rich and poor.

Two William & Mary professors, David Feldman and Robert Archibald have attempted to answer the question as to why tuition costs have been rising so fast. The primary reason they found is that labor is their largest cost and, in the classroom, labor is thus far resistant to productivity improvement. They point out that in 1960, students paid about the same for tuition and fees as they did for room and board. Today, tuition and fees cost between two and four times room and board. The trend has been exacerbated by the very fact that those with college and advanced degrees have out-earned those without. They seem pessimistic as to a solution.

However, market forces appear to be at work. In an article in yesterday’s Wall Street Journal, entitled “Is an Ivy League Diploma Worth It?”, a young student who turned down Cornell for an honors program at Queens College is quoted. The young man aspires to be a doctor and felt that he would rather spend his family’s scarce resources on medical school than undergraduate college. Very maturely, he says, “I have to grow up. I have to incorporate what I want with what I can have.” Feldman and Archibald do suggest that the nation’s “flagship” public universities, where tuition remains relatively low, will attract more elite students. That is the thrust of the Journal article.

But colleges, in persisting to raise tuition in difficult economic times, are running counter to the trend of consumers toward reducing debt and, more importantly, are encouraging a widening of the gap between the haves and the have-nots. But, most meaningful, they are encouraging the President to lighten the load of student loans by off-loading them on the American taxpayer. As of June 2010, student loans, at $830 billion, exceeded credit card debt for the first time. Default rates have been rising and have now reached 8.8%, while default rates on credit cards have been declining and are now below that of student loans. For example, as of February according to Bloomberg, credit card default rates at Bank of America were 8.84%; American Express, 3.8%; Chase, 6.21%; Discover, 5.79%, and Capital One, 5.91%.

In a recent speech at the University of Colorado’s Denver campus, President Obama proposed that he would accelerate an income-based repayment option to forgive more student debt and limit monthly repayments. Borrowers, according to an editorial in yesterday’s Wall Street Journal, will not have to pay more than 10% of their discretionary income each year. “Discretionary income” is defined as the difference between the borrower’s adjusted gross income and 150% of the poverty line. As of 2011, the poverty line is $22,350 for a family of four. So that if one’s adjusted gross income is $75,000, the former student’s repayment would be no more than $4,148, regardless of interest rates. Because money is not free, any shortfall will be made up by taxpayers.

But it gets worse. If the money is not repaid in twenty years, whatever debt remains will be forgiven. If the student has chosen to become a “public servant” (read: government or nonprofit employee) the debt will be forgiven in ten years. In other words, the President is pushing the country toward one more entitlement. Additionally, with the President making it easier for students to pay down, and even renege on student loans, there is less pressure for colleges to lower tuitions.

Is college worth the high price? Yes, assuming one can afford it. But are the costs harmful for society? They are, because tuition costs serve to drive a wedge further separating rich and poor. Could colleges do something about it? Of course. Endowments have risen substantially over the past thirty years. The money has been used for a variety of purposes, but has not been used to make college more affordable. There is no easy solution, but the President’s response is exactly wrong. It will accentuate the trend of Americans toward the very factors that helped create the credit crisis – a combination of too much debt and a moral lassitude toward individual accountability. The President, while seemingly compassionate, encourages a sense of entitlement and discourages personal responsibility. And nothing he has done will halt the rising cost of college.