Monday, December 31, 2012

“Death of the GOP?”

Sydney M. Williams

Thought of the Day
“Death of the GOP?”
December 31, 2012

It was Mark Twain who wrote thirteen years before his death in 1910: “The report of my death was an exaggeration.” Similarly, there have been a slew of premature obituaries written for the Republican Party, following their defeat for the White House in November. The latest appeared in last Thursday’s Financial Times. The editorial repeated conventional thinking: “Republicans look like the 1950s – their most loyal voting block is over 65.” Usually they are described as white and male, as well as being over 65. The FT went on: “Today’s Republican Party is a bit like a headless body striking out blindly against change.” The last is a non sequitor, in that it is change that Republicans want. They see Benghazi as a cover-up; the lack of drilling on Federal lands as a deterrent to economic growth, as well as regulations that have become ridiculous in their impediments to growth. They look upon Obamacare as another expensive and unfunded entitlement, and they see an Administration with claims toward openness, yet mired in secrecy. They recognize that the path Washington is on leads inexorably toward a welfare state like Greece. They want to change direction.

It is true that Republicans are disjointed. Tea Party members in Congress performed hara-kari in denying John Boehner a vote on Plan B a few days ago. The race for a Republican nominee seemed to have been more a race to the bottom than a dash to the top, with some of the sorriest contenders I have ever seen. Republicans, contrary to what they showed the country in the nominating process, have a deep bench. A list of attractive, modern younger Republicans would include Mitch Daniels, Nikki Haley, Jeb Bush, Scott Walker, Rick Snyder, John Kasich, Paul Ryan, John Thune, Jen Brewer, Marco Rubio and Chris Christie. When forecasting the death of the Republican Party, keep in mind that in victory, Mr. Obama became the first person in recent memory to win re-election by garnering fewer votes than he did during his initial run. And Republicans kept control of the House, while picking up an additional Governorship, giving them thirty. That doesn’t sound like a Party that is ready for the funeral pyre.

The truth of the matter is that politics (and political parties) are evolutionary; a natural process that smug Democrats proclaim is beyond the understanding of provincial Republicans. Precipitate mourners make much of the fact that in the last seven Presidential elections only one Republican received more than 50% of the popular vote – George W. Bush in 2004. They conveniently forget the role of third party candidates and the overwhelming advantage Democrats have in terms of registration. They ignore a mainstream media that yodels for the Left no matter their policies, and the role of universities in creating a homogenous cadre of graduates. As Victor Davis Hanson recently wrote in “An Anatomy of a Most Peculiar Institution,” “there is no diversity of thought on the vast majority of university campuses.” The cost of an education has risen at double the rate of healthcare, and it is producing students who are instructed in what to believe, not taught to think independently.

Both Parties have extremists in their midst. Among Republicans, they are represented by the 25 or so truculent House members. In the Democratic Party, however, the extremist sits in the White House, immune from critics within his own Party. The Left tends to be an overly sensitive bunch that places political correctness above moral rigor. Their fear of being labeled racists has given Mr. Obama a green light in terms of fiscal irresponsibility. He has created a spending spree that threatens our economy and the dollar. For four years, Mr. Obama has incurred trillion dollar deficits. The last time Mr. Obama submitted a budget was in 2011. It was voted down in the Senate 97-0.

Mr. Obama’s approach to the “fiscal cliff” has been cavalier, divisive and redistributionist. In demanding higher tax rates for “millionaires and billionaires,” he ignored the far fairer policies of streamlining the tax code, limiting deductions and credits. And he offered no cuts in spending, other than including existing defense cuts commensurate with winding down the wars in Iraq and Afghanistan, and suggesting any further cuts were subjects for future negotiations. The cliff we approach tomorrow is only a precursor of far higher ones to come. Without an economy that can grow at better than 3% on a sustainable basis, deficits will only worsen. The Federal Reserve, in keeping interest rates abnormally low, has masked the true costs of Mr. Obama’s wastrel policies. In a period of unusually low interest rates, most borrowers would be extending maturities, trying to lock-in low rates for as long as possible. The U.S. has been shortening maturities so that interest expense can be kept as low as possible. Rates will change. They will go up. No one can predict when, but when they do our annual deficits will become far worse. It is a game being played by politicians concerned with the present; it is our future that is at risk.

The bell will certainly be tolling, but I am not sure it is for the Republican Party. For years, many Republican politicians in Washington have neglected their roles as fiduciaries. It has not just been Democrats who have brought us to this place. Unless we address not only the current deficits, but the far more serious ones surrounding entitlements, we risk a sharp decline in the dollar and an equally sharp spike in interest rates. It seems more likely that the bell is tolling for a way of life that demands low tax taxes and generous government services. Honesty will have to become part of the political conversation. Personal freedom may already have disappeared. Debts are obligations of all of us. Redistribution may give the country a few years, but it will not ensure its long survivability. It is a problem from which we will not be able to hide much longer. The one official in Washington who has tried to address it has been Representative Paul Ryan. He has been dismissed by mainstream media and largely ignored by his own Party. If the GOP is in its death throes, the coroner will likely rule suicide.

My hope is that my pessimism overstates the case – that a way will be found which will deny the country a financial day of reckoning that seems to me so inevitable. Markets are anticipatory mechanisms. The great bull market ended in the last year of the Clinton Administration. Since then markets have risen and fallen. Today the S&P 500 is below where it was in March 2000. But markets will also, at some point, anticipate positive change. The future is never clear, and one can be influenced by one’s political biases. That is very possible in my case. Regardless, it is my devout hope that 2013 proves to be individually healthy and collectively peaceful.

Happy New Year!

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Thursday, December 27, 2012

“The Repugnance of Leftist Racism”

Sydney M. Williams

Thought of the Day
“The Repugnance of Leftist Racism”
December 27, 2012

“I think one of the most threatening places to be in politics is a black Republican.” So stated Tim Scott, newly appointed Senator from South Carolina in a recent Wall Street Journal interview with Stephen Moore. What lends so much meaning to Representative Scott’s words was a mean-spirited op-ed by Adolph Reed of the University of Pennsylvania in the December 19th issue of the New York Times. Professor Reed writes that “modern black Republicans have been more tokens than signs of progress.”

Politics is a blood sport, and nowhere is this so true as when Leftist’s become condescending because independent minded black conservatives violate their concept of the stereotypical African-American – a man or woman who eschews individual responsibility for dependency on government. It is an insult to the independence (and independent thinking) of millions of African-Americans, many of whom believe in certain aspects of conservativism. It is also an insult to the precepts of conservativism, which celebrate, among other factors, aspiration, personal responsibility, the rule of law and the concept that freedom and property are closely linked.

Professor Adolph Reed concludes his op-ed with these incredulous (and demeaning to blacks) sentences: “Republicans will not gain significant black support unless they take policy positions that advance black interests. No number of Tim Scotts – or other cynical tokens – will change that.” The presumption Professor Reed is making is that blacks are incapable of adapting a political philosophy that transgresses the desires of special interest groups. In such declarations, the Left’s attitude would have found common ground in the colonialism of the 19th Century. It is an insult to men and women like Tim Scott, Colin Powell, Condoleezza Rice, Clarence Thomas and millions of others.

A problem of politics, but especially among those on the Left, is to compartmentalize their constituents. They do so because it is easier and more productive to address communities rather than individuals. It accounts for the Left’s obsession with race, whether it is Blacks, Asians or Hispanics. Mr. Obama’s election was supposed to lead to a post-racial world. It hasn’t. The Left has become more strident (and, in fact repugnant, to the extent that Professor Reed’s op-ed reflects Leftist thinking.) It is a supercilious attitude that finds it impossible to imagine an intelligent minority finding comfort in the polices of conservativism. It is repugnant.

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Friday, December 21, 2012

“Size of Government – The Real Debate”

Sydney M. Williams

Thought of the Day
“Size of Government – The Real Debate”
December 21, 2012

Winter came early to Washington, as “Plan B” failed in the House. Stubborn Republicans, along with equally obtuse Democrats refused to grant tax increases even on those earning a million dollars. While Mr. Obama will celebrate the disjointedness of Republicans, the victory will prove pyrrhic, as this almost assuredly means a dive off the “cliff” in ten days. While Republican “Tea Partiers” may return to their districts claiming they held tight to their principle of no tax increase, more importantly it means sentiment has swung even further toward wastrel Democrats. The era of big spending will persist. One aftereffect of the horrible tragedy in Newtown had been to bind the nation. Unfortunately, it proved as ephemeral as the lifespan of a Drone Ant. Earlier, the President and Mr. Boehner had moved out of their respective trenches, and appeared separated by a no-man’s land of $600,000. The President wanted taxes raised on those making more than $250,000. Mr. Boehner countered with $1,000,000. Instead of dismissing the counter, the President came back with $400,000. Any hopes for a Christmas truce came screeching to a halt last evening.

Editorials are as strident as ever, as are politicians like Senator Harry Reid whose idea of compromise is a willingness to share the Senate dining room (though not the same table) with the opposition. Intransigent Congressional Republicans have made certain that Mr. Obama will gain further support. For Republicans, it was suicide by idiocy. It’s too early to know if the bell has tolled for Republicans, but their cause suffered a severe loss. An editorial in Wednesday’s New York Times noted “that if Mr. Obama were a more combative negotiator (I wonder how Mr. Boehner feels about that allegation?) he would not have gone for the chained index. It reinforces the incorrect notion that the big budget problem is overly generous benefits.” Really! I guess $60 trillion in unfunded liabilities doesn’t mean much to the “Grey Lady.” On the same day, an editorial in the Wall Street Journal opined about the President’s latest proposal: “This isn’t reform, it’s another tax increase disguised as reform.”

While there is a gaping annual budget gap of over a trillion dollars (and has been for the past four years), the real issue is what do we really want government to be. Neither side wants to be overly overt about their goals. The trend has been toward big government, which is where we are headed. Conservatives are concerned they will appear, aloof, cold and indifferent. The Left understands Socialism is alien to the American experience. So we drift, inexorably, down the stream toward a welfare state, seduced by the gifts government grants. Serious debate, as to the ultimate destination and consequences, is missing.

In the camp preferring big government are some odd bedfellows: unions and their members, especially those in the public sector; big business whose revenues are tied to government contracts and fledgling industries dependent on government subsidies; large banks whose assets are protected under the “too big to fail” rule; ivory-towered academics, wealthy coastal elites and members of the press, all of whom toil under the assumption that the burdens of the downtrodden can only be adequately addressed by a superior, educated governing class; and those that are dependent on government for their every-day needs.

Those that want to limit the size of government generally fall into two classes: those that put a very high value on individual freedom and rights, and those that are concerned about the cost of government and how to pay for it. Would, for example, society achieve better returns if more money were left in the hands of taxpayers? This group includes most small businesses, many of whom file tax returns as individuals, thus subject to higher tax rates than their larger, corporate cousins.

Mr. Obama recognizes that to be too explicit as to the direction he is driving the country would alienate some of his support. Most Americans would prefer not to be France; nevertheless, left alone, that is the direction in which we are traveling. Likewise, Republicans don’t want to seen as the party of Scrooge and the Grinch. Being parsimonious, especially in this season, is not the way to attract voters. Unfortunately we have become reactionary as a society, focusing on immediate problems, like the fiscal cliff. We do not spend enough time considering the repercussions of the road we are traveling.

If I had one wish for the year ahead it would be that the people would think seriously of the consequences of policy decisions taken today on future generations. What is it we want from government? Are we all willing to finance it? Are we willing to concede that for every dollar we send to Washington means one less that can be invested in new jobs and new ideas? Has liberty lost its preciousness? Do we really want to exchange personal responsibility for group dependency? These are the questions we must ponder, as 2012 becomes 2013.

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Tuesday, December 18, 2012

“Killings in Newtown”

Sydney M. Williams

Thought of the Day
“Killings in Newtown”
December 18, 2012

The death of a child is the saddest event anyone can endure. A violent, senseless death of a child is even more difficult. When multiplied by twenty it is beyond comprehension. The town, the state and the nation mourns the killings in Newtown, and asks why?

The search for answers will go on for months, perhaps years, but I suspect there is no satisfactory explanation for a crime of such wantonness and brutality. In the past dozen or so years we have witnessed other crazed individuals randomly killing innocents: Columbine High School in 1999; Virginia Tech in 2007; and at the Century movie theater in Aurora, Colorado in July of this year. There have been others, in at least nine states over the past twenty years. In this instance, there were several examples of extraordinary courage by the principal and some of the teachers. While we mourn all those who died, we should celebrate the heroics of those who gave their lives that others might live.

Again, the question rises through the mists of grief – why? At a memorial service for the victims and their families Monday night, President Obama said: “I have come to offer the love and prayers of a nation.” He then added: “These tragedies must end. And to end them we must change.” He was not specific in what changes he would wrought, other than to imply gun control laws must be tightened. In a remarkably sensible op-ed in Monday’s Wall Street Journal, Robert Leider of the University of Pennsylvania School of Law offered some perspective and advice. He noted that the common denominator in most of these mass killings has been the presence of significant mental health problems. Federal firearm gun control laws explicitly “prohibit the purchase of a firearm by anyone who has been adjudicated mentally defective or who has been admitted to a mental health institution.” But states need to update their records, so that that knowledge is available to anyone in the United States. Professor Leider suggests laws be expanded, so that authorities can remove firearms from anyone who subsequently became mentally disabled. But, more importantly, he concluded that the stalemate between the gun and anti-gun lobby can be broken only “if both sides exit their trenches.” That’s always good advice when negotiating.

But what happens in the case like Nancy Lanza who is burdened with a child with Asperger’s syndrome? Naturally, she loves her child, wants to protect him and wants to give him everything he needs. Common sense would suggest that parents with such children would protect their children from guns, by not exposing them to such potentially deadly weapons. Unfortunately, when love is involved common sense does not always prevail. There are no simple answers, but the search will go on. It has to.

Other than an old Kentucky, muzzle-loading squirrel gun (which probably could not be fired) there are no guns in my household. Apart from once going skeet shooting when I was a teenager, I have only fired a rifle when I was in the Army in 1962-63. I don’t use guns and don’t want them in my house, but I have no objection to hunters and others who legally own guns. I understand perfectly that it is not the gun that does the killing; it is the individual who pulls the trigger. However, why does any citizen need an assault rifle? Why does anyone need a magazine that holds more than ten shells? Those are questions on which we should all be able to agree. Making it more difficult to acquire weapons makes the most sense.

The problem reaches far beyond gun control and the study of mental health; it goes deep into the very nub of our culture. Violence is all around us, in movies, video games, TV, the internet and, perhaps most deadly, in rap singers who are celebrated and applauded by the press, despite their pounding out messages of hate and violence. What, for example, possessed Mr. Obama to invite the South Korean rap singer, Psy, to the White House? His song, “Gangham Style” is anti-American and includes the words, “let’s kill them all slowly and painfully.” Words have meanings and children in their vulnerable years – preteens and teens – listen to what is being said and they note that the songsters are hailed by those in positions of responsibility.

It has always been fascinating to me to look back on the movies and literature of the 1930s and 1940s, at a time when times were very tough, both because of the Depression and then the War. People craved escapism, not reality shows. The good guys wore white hats, while the bad guys wore black. Differentiating good from evil was easier. In the real world, the news was bleak enough. Perhaps (in our supposedly more sophisticated state) we are no longer expected to enjoy simple pleasures. Suffering for the moment from a slightly degenerated disc and an exposed sciatica nerve, I prefer to read humorists like Wodehouse, or mysteries by Rex Stout, Agatha Christie or Old Lyme’s David Handler, rather than some new fiction on the New York Times best seller list. I don’t need to read about another dysfunctional family living in Fairfield County. Reality is all around us. Being able to escape for an hour or so is a distraction and a pleasure.

I don’t pretend to have any answers, but I strongly feel that a culture that embraces multi-culturalism, while ignoring moral certitude is one that does not allow our youth to grow up understanding right from wrong. Connecticut’s Governor Malloy was right in referring to what happened in Newtown as evil. It was. But evil is balanced with good. Evil should be punished and good rewarded. Understanding the difference is what parents and teachers must provide the young they love and instruct. There is no question that a lot of the decisions we must make every day fall into a gray area, but our ability to deal with those options is enhanced when we are unafraid to admit that evil exists – as that scene of horror in Newtown last Friday so vividly told us – and the presence of honor, as the noble acts of the teachers so importantly portrayed.

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Monday, December 17, 2012

“Euphemistically Speaking”

Sydney M. Williams

Thought of the Day
“Euphemistically Speaking”
December 17, 2012

There is an impulse among all of us to find more pleasant ways of relaying unpleasant truths. It is most common in the case of death. We prefer to say one has “passed on,” rather than saying the person has died. “Passed on” leaves open the possibility that he or she may be on the other side of the wall. “Dead” implies gone forever. Blind people are “visually challenged.” Even the word “handicapped,” which was once a euphemism itself, is today considered offensive to the uncompromising ears of the “politically challenged” – itself a euphemistic term for the Left. Words don’t change. It is only people’s interpretation that does. For example “retarded” was once a euphemism for “slow,” but no self-respecting Upper Westside matron would today utter such a blasphemy. Handicapped has morphed into disabled. The word “idiot” is banned by all the right people, despite it serving as a title for one of Dostoyevsky’s masterpieces. An idiot can be seen as a euphemism for a member of Congress. And a morally challenged person is still immoral.

The unabridged Random House dictionary defines euphemism as the “substitution of a mild, indirect or vague expression for a word or expression thought to be offensive, harsh or blunt.” The first edition of Webster’s Dictionary defines the same word less euphemistically, as “a word or expression that substitutes for another, which may be offensive to delicate ears.” The use of “delicate ears” in such a sentence would likely be considered politically incorrect today. The Rehabilitation Act Amendment of 1992 replaced one and two syllable word-phrases; i.e. the term “deaf people” has become “people with hearing impairments.”

Political correctness – principally the province of the Left – accounts for many such words and phrases. Politicians claim to use them so as not to offend their myriad constituents, as though truth is the wrong medicine to provide those on whom they depend for office. Consider the fast approaching “fiscal cliff.” Should we go over it, it is widely claimed (in this instance truthfully) that taxes will rise for all. However, the Obama Administration, desirous of granting tax cuts, couches extending the Bush Tax rates for the 98% as a “tax cut,” when in fact it is not. Any tax system that has been in place for ten years and more is not considered temporary by taxpayers, no matter what the law may state. Reverting to the Clinton-era tax rates, for the “two Percent,” is deemed “fair,” though it would be a tax increase.

Even worse, as we all remember, was the refusal of the Obama White House to acknowledge terrorism. Terrorist attacks, like those on 9/11, were described by Janet Napolitano, newly installed Secretary of Homeland Security, as “man-caused disasters.” Instead of a War on Terror, our troops are engaging in “countering violent extremism.” The Administration wanted to distance itself from its predecessor; yet, they risked increasing danger, as people came to underestimate the will of the enemy. And why call Adam Lanza a “shooter,” when in fact he was a killer? A lot of people shoot. A small minority are crazed killers. On Saturday someone on CBS referred to him as a man with “retained anger” – psychologist-speak for insanity. If we weren’t afraid to refer to people such as Mr. Lanza as a lunatic, it might be easier to get such people off the streets.

This Christmas season provides one of our most obnoxious euphemisms – the Holiday Tree. It was in Boston, in 2005, when the word “Holiday tree” was first substituted for “Christmas tree.” Christmas is a Christian holiday, and it is one that most Americans celebrate, regardless of faith. They do so because of the inclusiveness of Christianity, especially at Christmas time, and because of the pervasiveness of the holiday in a commercial sense.. And the tree has become a non-denominational symbol of the joy of Christmas. Ben Stein once wrote, “Christmas is about something huge. You can be saved if you simply make a contract to believe in God and (some add) if you act right.. It has nothing to do with how you were born or into what tribe.” Christian symbols at Christmas times, such as crèches and crosses, are discouraged in our multi-cultural society, sucked out by the politically correct among us. These people have converted what was once the celebration of the birth of Jesus into a commercial holiday in which same-store sales comparisons have become of greater importance than the miracle of Jesus’ birth. The best thing about Christmas is that it manifests the generosity of the human spirit. It causes us to believe in ourselves, our friends and neighbors. There is no need to turn it into a political whipping post, euphemistically or otherwise.

In general, I have always favored good old Anglo Saxon words and terms, where there is no question as to a word’s meaning. However, if one can look beyond a few preposterous euphemisms, others can be fun: A fat person is “built for comfort, not speed;” “shooting blanks” for sterility; “making whoopee” for having sex, and “turning up one’s toes” for having died. Others, like “ethnic cleansing,” instead of racial genocide, hide the horrors of their true meaning.

Of course there are times when euphemisms are appropriate. Sir Galahad Threepwood, younger brother of Lord Emsworth and one of P.G. Wodehouse’s most likeable characters, has many names for attractive young females, generally fiancée’s of his younger friends. In A Pelican at Blandings, Gally (as Sir Galahad is widely known) is walking the grounds of Blandings Castle (his ancestral home) with his godson, John Halliday. While the plot is too complicated to easily summarize, just know that Halliday’s fiancée Linda Gilpin has broken their engagement. Gally refers to Ms. Gilpin as a “popsy.” “I wish you wouldn’t…,” interjects young Halliday. Gally interrupts: “I am a plain spoken man. I call a popsy a popsy.”

Is any of this important? Kenneth Jerrigan, blind from birth and the long time leader of the National Federation of the Blind, believed passionately in justice for the blind, and he thought it was. He believed in the importance and accuracy of words. In 1993, five years before his death, he wrote: “As civilizations decline, they become increasingly concerned with form over substance, particularly with respect to language.” “Shell-shock” became “combat fatigue” during World War II. It is now known as Post-Traumatic Stress Disorder,” with its own acronym – PTSD. The problem with an emphasis on form is that it detracts from the real problem. But it does provide work for another layer of bureaucrats, as manuals must be revised. And, as in the case of the nut in Newtown, CT demonstrated, it may make us less wary of those with mental problems.

I would urge people to use simpler, Anglo-Saxon words and terms. We shut doors; we do not close them. The area beneath our house is a cellar, not a basement. Why do builders insist on putting dens into homes? Dens are for wolves, or for an argot of thieves, euphemistically speaking.

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Friday, December 14, 2012

“Too Big to Jail”

Sydney M. Williams

Thought of the Day
“Too Big to Jail”
December 14, 2012

It is not often that I find myself in agreement with the editorial page of the New York Times, but I did on Wednesday. The Times criticized the $1.92 billion settlement agreed to by HSBC as “a dark day for the rule of law.” No bank executives, according to the LA Times, were charged. While $1.92 billion sounds like a lot, it is about 0.07% of the banks $2.6 trillion in assets. All banks stretch the limits and meaning of regulation. HSBC, the world’s third largest bank, and one that has been frequently warned, has simply been the most egregious. Without the rule of law, civil society devolves into either totalitarianism or anarchy.

The problem is not just the fact that no one at HSBC was jailed for criminal activities that make Jessie James, Willie Sutton and Bernie Madoff look like amateurs; it is that there seems to be collusion between the bad guys (the big banks) and government. The government imposes fines, which appear steep but are manageable, payable to the agencies charged with monitoring their behavior. It is symbiotic, crony capitalism. Banks simply look at fines as a regular cost of doing business. Agencies view them as a source of revenues. It is the public, the bank’s customers and shareholders who bear the cost. Society’s moral fiber becomes weakened.

What HSBC did was knowingly launder money for drug cartels in Mexico and Colombia, and provide banking services for countries known to harbor terrorists and for exporting terrorism. Both are in contradiction with stated American policy, but more importantly, both violate common rules of humanity. Mexican drug lords are not known for their niceties. According to the current issue of the Economist, 60,000 Mexicans, including 60 mayors, have been killed in the past six years. Bloomberg reports that the cartels used cash boxes precisely the dimensions of “tellers’ windows in HSBC’s Mexican branches.” Colombian narcotics dealers sell drugs in the U.S and then send the funds to Mexican banks to be converted into Colombian pesos. Additionally, the bank has provided banking services for countries like Cuba, Iran, Libya and Sudan. Stuart Gulliver, CEO of HSBC, in paying the fine and accepting responsibility, said “We are profoundly sorry” for what his bank did. Really?

American officials said that they were fearful of imposing punishment so severe that a bank could be destroyed in the process. Fed officials have little concern about smaller banks and the hedge fund industry, which they persist in trying to topple. But big banks remain in a class by themselves. Senator Carl Levin (D-MI) praised the settlement saying that it sends a “powerful wake-up call to multinational banks about the consequences of disregarding their anti-money-laundering obligations.” I suspect the real message is get big enough and you won’t have to worry. It seems beyond credibility that executives who so blatantly violated federal laws should be allowed to go free. While HSBC stock, at $51.68, remains below its all-time high price of $99.52 set in October 2007, it is up 36% year-to-date – not too shabby.

Despite the reluctance of the federal government to prosecute executives of very large banks who have violated more laws than Willie Sutton, we are living, according to the New York Times, in “the era of the star prosecutor in white-collar crime.” The paper noted that Preet Bharara, U. S. Attorney for Manhattan, was on the cover of Time magazine and got a shout-out from Bruce Springsteen during a recent concert, because of his decision to go after hedge funds for “insider trading.”

Certainly trading on inside information is wrong and deserves punishment, but in a world in which information flows like the Mississippi it is difficult to determine what is right and what is wrong. The real reason the Bharara’s of the world go after hedge fund managers is because of the widely spread notoriety of their incomes, which, admittedly, seem excessive at a time of persistent high unemployment. However, their incomes are paid by sophisticated investors. Nevertheless, even if their crimes prove true, their actions pale in comparison to the practices of banks like HSBC. The bank laundered $881 million from drug cartels like Sinaloa in Mexico and Norte del Valle in Colombia. Thousands of deaths have resulted from these cartels and millions of Americans have suffered the consequences of their products. The same bank violated sanctions imposed against regimes by our government. The sanctions were meant to contain terrorist activity. Are not these crimes far more damaging to our society than those highly publicized investigations into the possibility that some hedge funds traded on information that may or may not have been received legitimately?

What message about our society does all this send to our children and to all those who strive to play by the rules? You can escape punishment if you become an executive at a bank “too big to fail and jail,” As a prosecutor, you get shout-outs from rock stars if you indict a well known hedge fund manager, even if he is innocent. If, as a hedge fund manager, you achieve enormous financial success you are automatically deemed a piranha to society, and thus a target for an over-eager prosecutor looking to add another notch to his holster. Firms too small to defend themselves are deemed small enough to fail and jail. It is a rotten message, but unfortunately one that captures the spirit of the downward spiral of our culture.

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Wednesday, December 12, 2012

“Right to Work versus Requirement to Join”

Sydney M. Williams

Thought of the Day
“Right to Work versus Requirement to Join”
December 12, 2012

There are times when a single event appears to overwhelm a secular trend. The event was the re-election of President Obama; the trend toward fiscal responsibility is both gradual and erratic, and is manifested in Michigan’s decision yesterday to become a right-to-work state.

I write “gradual,” because the trend toward responsibility has begun at the local and state levels, and I note “erratic” because states periodically take two or three steps backward, as California did on November 6, when it voted for Proposition 30, a $6 billion tax hike. With a top income tax rate of 13.3% and a 7.5% sales tax, California ranks among the most taxed states in the union, giving credibility to the notion that the state’s greatest export is its population.

Nevertheless, with states like Indiana, Virginia, Wisconsin, North Carolina and now Michigan imposing limits on profligate unions, there is a growing understanding that reining in public sector union power is necessary for fiscal salvation. Michigan’s adaptation of right-to-work laws has been the 24th state to do so. The significance of the Michigan decision is that it becomes the first state among the top five, in terms of union employees as a percent of their workforce, to adopt such rules. The decision and the signature by Governor Rick Snyder should not have been a surprise, despite the thousands of people bussed in to picket the Legislature. Polls going back more than two years support the notion of right-to-work. A Labor Day poll, conducted by the Grand Rapids Press in 2010, showed 51% supporting such rules with 27% opposed.

Indiana became the 23rd state last February, the first in over ten years to adopt what seem to be commonsensical rules. It was notable, as it was the first state in the industrial Midwest to adopt right-to-work rules. Under right-to-work rules, union membership is not required for most state jobs – police and firemen are often exceptions – and current members can turn in their union cards with no adverse consequences. Dues are no longer deducted from state checks, depriving unions of what had been an unfair advantage. Rights to collectively bargain and to organize are not affected by these rules; though the ability to do so may be impeded; for the dollar amount of dues collected will likely decline, as workers decide to opt out of unions. President Obama said on Monday that the issues have nothing to “with economics. They have everything to do with politics.” He’s wrong and he is right. Public sector unions have been more responsible than any other entity for the fiscal mess in which our states and communities now find themselves. The vote in Michigan is the first toward restoring fiscal sanity. On the other hand, the vote is very political, as unions provided the President with his single largest means of financial support.

When President Obama visited Michigan to defend the unions that helped elect him, he posited his remarks on a false assumption: “What we shouldn’t be doing is try to take away your rights to bargain for better wages or better working conditions.” The right to collectively bargain persists, but what states and cities must do is rein in the ruinous entitlement spending that risks bankrupting the nation. Typical of the attitude of too many, Detroit City Council member JoAnn Watson, last week deplored the attitude of the people, the legislature and the governor of her state when she resurrected the image of Mayor Coleman Young going off to Washington in 1977. He went to the city and “came home with some bacon. That’s what you do.” There was no sense of President Kennedy’s imploring the people to ask “…not what your country can do for you, but what you can do for your country?” In the past decade, Detroit lost 25% of its population, which should be no surprise given stewards such as Ms. Watson watching the purse strings. Instead of bacon, the Detroit City Council should be feeding on humble pie.

In September 2011, Chairman of the Joint Chiefs of Staff Admiral Mike Mullen, in response to a question, explained that debt was the largest national security issue we faced and that we have “every responsibility to reduce that threat.” What was true in 2011 is truer today. Yet our representatives in Washington fiddle while the country burns. While union demands do not account for all of the mismanagement of the people’s money, they certainly comprise a significant part. It may not be possible to assign cause and effect, but empirical evidence provided by the Bureau of Labor Statistics (BLS) shows that employment in the 22 states with right-to-work laws, over the past decade, grew 8.2%, while employment in those states where workers are forced to join unions declined 0.5%. According to “State Budget Solutions,” the level of per-capita state debt, in 2011, in right-to-work states was about half that of the per-capita debt in the other twenty-eight states – $9,456 versus $16,486.

The evidence is overwhelming that it is spending, not revenues, that is the principal culprit behind both federal and state deficits. I say “principal” because revenues are lower than they should be, but that has less to do with tax rates than deductions, credits and expenditures, all of which effectively lower tax receipts, and are a special benefit to the wealthiest among us. Tax reform needs to be addressed, but the most important issue is for states (and the federal government) to address the addiction to spending. Michigan, at least, is moving in the right direction, but it will need to do a great deal more. States with the heaviest unionized workforces – New York (24%), Alaska (22%), Hawaii (21.5%), Washington (18.9%), Michigan (17.5%), Rhode Island (17.4%), California (17.1%), Oregon (17.1%), Connecticut (16.8%) and Illinois (16.2%) – are among those with the worst financials. In fact, Huffington Post, in October 2011, ranked five of those states – Connecticut, Hawaii, California, Rhode Island and Oregon – as among those having the dubious honor of being in the top ten in terms of state debt per-capita.

The sad thing is that this condemnation of unions belies the greater good they did earlier in the past century. Unions reduced workweeks to manageable hours; they were responsible for child labor laws, and they allowed employees to enter the middleclass. But, they overstepped their bounds and leaders became greedy. They helped precipitate bankruptcies in the private sector. But it has been their role in the public sector that risks the greatest damage . In fact, the cause of the damage they have wrecked can be traced back to Executive Order 10988 signed by President Kennedy in 1962 (and, notably, endorsed by politicians from both parties), which allowed public sector unions to bargain collectively. That was the catalyst that allowed government workers’ unions to blossom. Today their membership exceeds that of their private sector compatriots.

A city or a state that is reduced to surviving on handouts from the federal government has assumed the status of a Third World nation. Reining in overly aggressive unions is but one step toward fiscal responsibility. Allowing a worker the choice to join, or not join, a union seems like it should be part of the American experience. And such actions slow the momentum toward possible state default. It’s a positive step toward fiscal responsibility.

[1] See Thought’s of the Day, “Unions – For Better, For Worse,” dated November 27, 2012, and “Chicago Teacher’s Strike – Emanuel’s Waterloo.

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Tuesday, December 11, 2012

“Where Have All Our Heroes Gone?”

Sydney M. Williams

Thought of the Day
“Where Have All Our Heroes Gone?”
December 11, 2012

In the midst of the Vietnam War, in 1970, Bill Anderson composed the song, “Where have all our heroes gone?” It is a question that is still being asked. During my growing-up years – the post War into the mid 1950s – there was an abundance of heroes. World War II provided innumerable ones, most of whom never considered themselves heroes. I recall a mechanic who worked in the Ford garage in Peterborough. He was a quiet, unassuming man. My father told me he had been a tail gunner on bombers flying missions out of England over Germany. He was not alone. My father won a Bronze Star for “meritorious service” with the 10th Mountain Division in Italy. Yankee stars like Joe DiMaggio and Mickey Mantle were players I admired, but knew I could never emulate. On the other hand, as a skier, I tried to imitate Toni Sailor and Stein Ericson, but of course could not. However, my Stein Ericson skis, with their long thongs still attached, still hang in my garage. Churchill and Eisenhower were military/political heroes. As a young boy Lincoln represented honesty; Huckleberry Finn, faithfulness, and Davy Crockett, courage. They were all heroes of mine, as were Frank and Joe Hardy, in the eponymous series by Franklin W. Dixon.

We now live in another world at a different time, but the question is still worth asking: Do we still have heroes? And, as important, what is a hero? Scott Allison and George Goethals, writing recently in their 2010 book, Heroes: What They Do & Why We Need Them, describe a hero as one who is “supremely moral, supremely competent, or both.” Importantly, they note: “heroism is in the eye of the beholder.” Different people have different values and personal preferences, though all heroes have characteristics in common. Ray Cotton of Probe Ministries writes that we need “heroes that last, who walk on earth, and yet have something within them that carries beyond the frustrations and failures of everyday life.” In their book, Allison and Goethals, after polling a number of people, cite eight characteristics, some of which are common to most heroes: smart, strong, resilient, selfless, caring, charismatic, reliable and inspiring. I would add honor and moral courage. Actual heroes vary enormously, at least according to a sampling of my seven oldest grandchildren, more of which later.

The absence of heroes, or at least heroic action, has been in the press recently, as the shoving of Ki-Suck Han onto the subway tracks twenty-two seconds before the arrival of an in-bound train, contrasted with a similar incident in 2007, when Wesley Autrey became a hero for saving a man in a similar situation, with a comparable number of seconds before a train entered the station. The death of Mr. Han also reminded us of the killing of Kitty Genovese in 1964, when a number of people ignored her screams for help, and did nothing to prevent her being stabbed to death. While there is little doubt in my mind that I would not have been brave enough to save the unfortunate Mr. Han, the question arises, has society conditioned us to passivity in such instances? In the foreword to the 2006 book, Home Grown Heroes: How to Raise Courageous Kids by Tim Kimmel, Brigadier General and Congressional Medal of Honor winner, Joe Foss, writes: “America needs a new generation of heroes…people ruled by a conscience that doesn’t take the Ten Commandments lightly, who have a fundamental reverence for their Creator, and a respect for the people and things He has created.” Society should encourage honor, honesty, morality, civility, compassion and respect.

Amplifying on the theme that heroes have been relegated to a distant past, Christine Ockrent writing a little more than a year ago in the New York Times, complained, “…alas, heroes are nowhere to be found these days.” She noted that in mythological Greece it was tragedy that produced heroes. And, while tragedy continues in abundant supply, she fears heroes have slipped their moorings.

However, conversations with seven of my grandchildren, ages eight through twelve, suggests young people still find those they admire. Their heroes ranged from Taylor Swift and Jorge Posada to Katniss Everdeen (of the Hunger Games) and Manti Te’o, the Notre Dame linebacker who came in second in the Heisman Trophy voting. All of them included their parents and most, thoughtfully, mentioned their grandparents. The granddaughter who mentioned Mr. Te’o had recently been with her family to South Bend to watch Manti play. But what especially impressed her was his sensitivity expressed in a letter he had written to a young cancer patient. One granddaughter spoke of all veterinarians, and then added Perseus of Greek mythology who was noted for having slain the Medusa. I was very pleasantly surprised when one grandson added Jackie Robinson, a hero of my generation. Fictional characters mentioned, apart from Katniss and Perseus, were Olivia Bean (the trivia queen), Harry Potter, Percy Jackson and his sidekick, Nico di Angelo. Other figures from the world of athletics included Lionel Massi, Devin Hester, Jesus Montero and Robinson Cano.

Notably missing were figures from politics, the military and Hollywood. The President may desire to “transform America” and the Right may claim to be adhering to the principles laid down in the Constitution. Among political figures, my grandchildren are more impressed with giants from the past – Washington, Jefferson and Lincoln – than those who stalk today’s stage. War, fortunately, has not been a factor in their young lives, so the absence of war heroes is understandable; though a couple of my grandsons have been fascinated about reading of their great-grandfather and the 10th Mountain Division. The grandson who named Harry Potter and Katniss Everdeen has read all the Potter books and Suzanne Collins’ The Hunger Games. It was not Hollywood that caught his attention.

There is an inclination in our culture to promote the antihero. As Allison and Goethals explain, some of the characteristics common to heroes are also present in villains, such as smart and resilient. But the latter tend to be violent, greedy, immoral, egotistical and vengeful. Frank Miniter, writing in National Review, suggests that an anti-hero is one who is unable to distinguish right from wrong – good from evil. He contrasts heroes from the stories of Jack London and Louis L’Amour to characters like Harry Callahan, Jason Bourne and Rambo. Most of us live our lives in a grey zone, accepting minor infractions of law and morality, as a price worth paying for living in a multi-cultural world. Adhering to hard and fast moral judgments is virtually impossible in real life. Nevertheless, that is no excuse for dismissing the importance of moral tales, nor should it diminish our honoring heroic actions. As Mr. Miniter writes, “We again need films about the men and women we want to be. We need stories that might even wake up and inspire…”

The concept of heroes may seem dated and out of sync with today’s cynical world, but I don’t believe that is true. Children want and need heroes and they are abundant. Most heroes are ordinary people doing extraordinary things, like Mr. Autry in 2007 or Mr. Te’o bravely writing to the young patient cancer patient, as his girlfriend was dying of the same dreaded disease. Mayor Cory Booker of Newark displayed extraordinary heroism when, over the objections of his security detail, he recently rescued a woman from the second floor of a burning house. An April 23rd, 1978 newspaper headline reads “Tot, Senior Saved in Fire.” It is the story of how Neil Crespi rushed into a burning house to save the two who otherwise would have died.

A multicultural world that is more focused on relativism and fearful of alienating other cultures can blur the line between right and wrong. Such moral relativism ignores a basic sense of civility (and civility is aligned with morality.) In doing so, we forget the reasons why principles like the Ten Commandments exist. It is not to create a “holier than thou” citizenry; that such rules exist. It is so society can function smoothly. Saying ‘please’ and ‘thank you’ take little effort, but their effect is enormous. Stories of heroes help distinguish good from evil. Tales of heroism allow the author to speak not of how the world is, but of how it might be.

Bill Anderson and Ms. Ockrent are wrong; heroes have not gone. They are all around us. We should read more about them. We should honor and respect the moral code they reflect.

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Tuesday, December 4, 2012

“The Fiscal Cliff – Time to Jump?”

Sydney M. Williams

Thought of the Day
“The Fiscal Cliff – Time to Jump?”
December 4, 2012

“Laws are like sausages. It’s better not to see them being made.” So spoke Otto von Bismarck, at least allegedly. Whether it was disgust at the ingredients or concern about the consequences, the Administration and Congress were unable over the past year and three months to agree on a Bill that would address unsustainable deficits. Republicans prefer cuts in spending. Democrats want to raise taxes, especially on the “rich.” Like Kipling’s admonition regarding the East and the West, that “never the twain shall meet,” Republicans’ and Democrats’ mulish behavior has caused this impasse.

Political correctness has consigned smoke-filled rooms to the dust-bins of history. They were once used effectively to negotiate differences with the goal of producing a “sausage” fit for human consumption. Instead, we now have a President who has been doing what he does best, ‘telepromptering’ harangues to the Party faithful, using the power of the pulpit to pressure his opponents. His emissary, Treasury Secretary Timothy Geithner, spent Sunday on the talk shows hammering home the point that the “rich” must pay more. His opponent, John Boehner, made the opposing arguments on the same talk shows, speaking of the need to cut spending and the importance of addressing entitlements. Instead of attempting to work out their differences, both men spent the day animating their bases, further dividing the already too-wide chasm that splits the two Parties. They are forcing us to watch the making of a sausage that may never make it to the table.

The reason we are facing the cliff is because of some pail-kicking over the past two years. In December 2010, during the lame duck session, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. That Act extended the Bush tax cuts for two years, patched the exemptions to the Alternative Minimum Tax (AMT) and authorized a one-year reduction in the Social Security employee payroll tax (FICA). The latter was extended for the balance of 2012 by the Middle Class Tax Relief and Job Creation Act of 2012.

On August 2, 2011, Congress passed the Budget Control Act of 2011, as part of the agreement to resolve the debt-ceiling crisis. That act included a provision for a Joint Select Committee on Deficit Reduction, known as the “super committee.” The Committee was charged with producing legislation by late November that would decrease the deficit over ten years by $1.2 trillion. (Keep in mind, we are running trillion dollar-plus deficits every year.) If the Committee failed to do so – and they did fail – then the act directed automatic across-the-board cuts (known as “sequestrations”), split evenly between defense and domestic programs beginning January 2, 2013.

Well, the “super committee” proved to be not so super, and there has been no further extension of the Bush tax cuts; so we are faced with the “cliff.” I am beginning to think that a dive over is the only way of getting the attention of not just Congress and the Administration, but of the people. The people are as much to blame for this sad state of affairs as those in Washington; for we are the ones who elected these officials. As Pogo said, “We have met the enemy and he is us.” Some wag once said that Americans love a welfare society as much as Europeans, but just don’t want to pay for it.

That may be true. Consider some numbers. Our federal debt is $16.3 trillion, on a GDP base of about $15.5 trillion. The annual deficit this year will be about $1.1 trillion, which is about 25% of the annual federal budget. We are spending too much, but we are also taking in too little. The problem fiscal conservatives have is that the patient (government) is still on the sauce. In other words, if given the money there is no assuredness that his spending addiction has been cured.

According to the CBO, which uses static accounting suggesting their estimates are optimistic, increasing taxes only on the top two percent of earners (Mr. Obama’s proposal) would raise $110 billion. If we let the Bush tax cuts expire on all income brackets and do not index the AMT for inflation, we would raise an additional $550 billion, again assuming no ill effects for having raised taxes. That is still not enough money to cover current deficits, to say nothing of reducing our long term debt, or addressing the looming costs of the welfare state. If people truly want to live the life of “Julia,” they are going to have to get used to much higher taxes – the most likely being a VAT, or sales tax.

Politicians tell us that no one wants to go over the cliff, because no one wants to take the blame for what could become a nasty recession. Consensus seems to suggest that Republicans would become the goat. However, Keith Hennessey of Stanford, in yesterday’s Wall Street Journal, points out that Mr. Obama can ill afford another recession, as he begins his second term. Frankly, I don’t care who takes blame. The issues we face and the type of society we want are too critical to worry about who takes responsibility for a dive off the cliff. If such an act would focus the attention of those in Washington, the media and the people, it may be justifiable.

There are three courses available to Americans, in terms of their relationship with government. The first, favored by Mr. Obama, leads to an increasingly paternalistic welfare state, which means that government will represent an ever-increasing percent of GDP. To pay for that, income taxes will have to rise, and a wealth tax and VAT will have to be deployed. If that is what people want, so be it, but Obama & Co. must be honest as to its cost. Such a route increases dependency and substitutes government handouts for personal generosity. The second, preferred by Boehner & Co., leads to a smaller central government, one charged with responsibilities for defense, infrastructure, education and the welfare for the elderly, poor and incapacitated that we have become used to over the past forty years. But it is a society that celebrates individual initiative and promotes personal responsibility, which means rewarding the successful, but not compensating the losers. It promotes a society the antithesis of that encountered by my grade school-age grandchildren, which rewards all children equally, regardless of effort and ability.

The second path may seem harsher, but the country was built on the backs of individuals who risked their lives and fortunes, reaping rewards when they came and suffering losses when they did not. We have never had a “planned” economy, and those countries that attempted to do so universally failed. Why start now?

Unions, working collaboratively with elected officials, have pressured state and local governments to provide compensation packages that risk bankrupting our states. A recent report by the U.S. Congress Joint Economic Committee has estimated that the debt of state-run retirement systems to be $3.5 trillion. One quarter of the 2009 $787 billion stimulus went to states and local government. The funds were not used to implement reforms, but to continue their spendthrift ways. With that as a precedent, there is good reason to suspect that the obligations granted union workers by states will, at some point, become that of federal income taxpayers.

There is a third path of course, which is the one we have been on, slipping innocuously and without fanfare down the road toward a European-style welfare state. It is the one most politicians prefer – even as they refuse to call it by name – as it doesn’t demand confronting difficult questions. A compromised settlement, between now and year-end, is the one most everyone (including the stock market) prefers, but it would only defer, not resolve, the far more difficult choice that will eventually have to be made – what do we want from government.

Continuation on this path, which is the most likely, will not resolve the debt and deficit problems. It is one that leads to dollar debasement and reduced confidence, at home and abroad. But, since the grade is gradual, the path is familiar. Like a frog tossed into tepid water, we are lulled into compliance. As the water heats up, the frog is seduced by its growing warmth. It is only when the water begins to boil that the frog begins to realize his fate. While going off the cliff in a month will create some immediate pain, it would be far less traumatic than jumping off a far higher diving board into a shallower pool, which would be the inevitable consequence of ignoring tomorrow’s problem today.

………………………………………………………………………

Tomorrow morning my wife and I are jumping ship for a few days in Florida, where the biggest problems one faces are when to play tennis and what to have for lunch. I will return to my desk a week from today.

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Monday, December 3, 2012

“US Births – Positives Outweigh the Negatives”

Sydney M. Williams
Thought of the Day
“US Births – Positives Outweigh the Negatives”

December 3, 2012

In the long term, as John Maynard Keynes once wrote, we are dead. But it is also true that over the long term economic growth depends upon on an expanding population. Historically, the United States has been unique among developed countries in the West in maintaining birthrates in excess of what’s needed to prevent the population from declining. An abundance of births have provided the fundamentals needed for long term economic growth.

However, that may be changing. According to a recent Pew Research survey, birthrates in the U.S. have reached their lowest levels since at least 1920. The numbers indicate a birthrate of 63.2 per thousand women of childbearing age (15-44). In 1990, the number was 71 per thousand. The peak year for births in the U.S. was 1957 when the comparable number was 122.7. The National Center for Health Statistics shows that the U.S., in 2010, had a TFR of 1.89, which is below the replacement rate and the lowest since the 1970s. In 2011, the TFR in the U.S. was below that of France and the UK.

In accordance with declining birthrates, the population of the United States is aging, with a median age in 2011 of 36.8, compared to 32.9 in 1990. That increase in age is manifested in the decline in the number of workers per retiree. In 1965, 81 million workers paid for the benefits of 20 million people – a ratio of 4:1. Today that ratio stands at 2.8:1. If current trends persist, that ratio is expected to drop to 2:1 in 2035, with 186 million workers expected to pay for 91 million retirees.

This trend has obvious negative implications for Medicare and Social Security. It is what has been driving politicians like Paul Ryan to address the needs of these programs before they financially collapse. Taken to extremes, very low birth rates cause declining economic growth. Ted Fishman, who wrote of the expected rise of the next superpower in China, Inc, writes in Shock of Gray: “A low birthrate could be a recipe for mass poverty and isolation.”

Given economic conditions, even after three and a half years of “recovery,” it is unsurprising that birthrates in the U.S. have declined. A chart depicting birthrates over the past century show similar declines in times of economic duress, especially during the 1930s and 1970s. What is surprising, and what provides a reason for cautious optimism, was the far more dramatic drop in births among teenagers, immigrants, along with an increase in births among college-educated, older mothers.

According to the same PEW study, birthrates for women aged 15-19 fell to 34.3 per 1000 in 2010, the lowest level ever recorded, and it fell across all race lines. The study also showed that the number of immigrant women giving birth fell 14% between 2007 and 2010, while Mexican women (the nation’s largest immigrant group) saw births drop 23 percent. At 87.8 births per 1000, foreign born women still give birth to more children than their native born counterparts. In 2010, immigrant women gave birth to 23% of the nation’s babies, while making up 17% of the country’s female population. Nevertheless, the trend suggests that poorer, less educated women are adapting to changing circumstances, be they economic, or lifestyle choices.

Confirming the fact that women are delaying raising families, birthrates among women in the age category 30-34 (97.5 per 1000) exceeded those of women in the 20-24 (96 per 1000) age group for the first time. Writing last January, before the release of the Pew study, Samuel Sturgeon, director of research at Demographic Intelligence , noted a rise in birthrates among college educated and older women, especially among those who can afford to be stay-at-home mothers. I found that interesting, as it supports the anecdotal evidence from observing my own children and their friends living in suburbs outside New York.

The principal reason these positive trends have developed has been a virtual universal adoption of birth control. Sandra Fluke’s argument not withstanding, the cost of birth control is not beyond the means of most people. Additionally, there has been a greater willingness among married men to undergo vasectomies and for women to undergo tubal ligations, allowing better child planning for young families. The greater availability of abortion clinics has also allowed pregnant women a socially acceptable means of not giving birth to unwanted babies.

Looking forward, the United Nations, CIA and World Bank all forecast TFRs for more than 190 countries. All three are suggesting that the TFR for the U.S. will rise above 2.0 in 2012, though still below the self-sustaining level of 2.1.

Other than the absolute decline in birthrates (which a more robust economic recovery might reverse,) and the fact that unwed mothers continue to give birth at alarming rates, it is hard not to react positively to the PEW report. Birthrates among the immigrant poor are declining, as are birthrates among teenagers across all racial lines. Not unlike pre-industrial England, it is the educated and wealthier that are having more children. No one can predict how long the trend might last, and no one can forecast the consequences, but I find it hard not to be encouraged.

There was a theory advanced, which I don’t accept and that has largely been discredited, that one reason the Industrial Revolution began in England was due to the fact that wealthier (and presumably better educated families) had more surviving children than the poor. The facts, which seem empirically logical, were confirmed in a recent study conducted by Gregory Clark of the University of California at Davis and Neil Cummings of City University New York. The report is titled “Beckerian Family and the English Demographic Revolution of 1800.” They found that between 1250 and 1800 the rich produced more surviving children than the poor. Between 1800 and 1875, they could find no association between wealth and fertility, but that after 1875 wealth became negatively associated with fertility.

The findings are not surprising in that in pre-industrialized England, the wealthy were able to provide better food and keep their homes in a warmer in winter and cleaner all the time. The Industrial Revolution did begin in England and did ultimately bring better conditions for the poor. By the end of the 19th Century infant deaths and child-birthing deaths had begun to decline, while artificial means of birth control were essentially non-existent. The consequence was an explosion in births among the poor. It seems safe to assume that the major cause for the recent secular decline in births, among teenagers and the poor, is a consequence of education and the easy and inexpensive availability of birth control devices. The economy has added a cyclical element to the mix, but that is likely to reverse as conditions improve.

It remains to be seen if the gradual decline in TFRs point to a permanent population decline in the U.S. I suspect the answer is no. However, in much of the developed world the numbers would seem irreversible. Mainland China’s TFR is 1.55. In Europe, Spain, Switzerland, Germany, Austria, Italy, Hungary, Greece, Slovakia, the Czech Republic, and Lithuania all have TFR’s below 1.5. Japan’s is 1.39 and South Korea’s is 1.23. These countries will have tough economic times ahead unless they can reverse these population trends. France is an example, though, of a country that has reversed course; however, it has been Muslim immigrants that have been driving their increase in births, a condition which portends a different problem.

Nevertheless, in the U.S., it is hard not to be encouraged by the fact that babies are increasingly arriving because they are wanted, not a consequence of a mistake.

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Friday, November 30, 2012

“Who is Grover Norquist, Part II? ”

Sydney M. Williams

Thought of the Day
“Who is Grover Norquist, Part II? ”
November 30, 2012

“Politics is the art of the possible.” The quote is attributed to Otto von Bismarck, a man not known for warm and fuzzy relations with political opponents. First as a Prussian general and later as Germany’s first Chancellor, he dominated European affairs for much of the second half of the 19th Century. He provoked wars that made Prussia dominant over France and Austria, and lined up smaller German states to unify the German Empire in 1871. Bismarck was a formidable figure who understood the necessity of interpersonal relations, even with those with whom he disagreed. Like Presidents Lincoln, Roosevelt, Johnson and Reagan, he learned to accomplish his agenda without abandoning his principles.

Washington today is awash with leaders with principles, but who are unable to negotiate in a bipartisan manner. The President negotiates by giving telepromptered speeches to friendly audiences, knowing they will be shown by mainstream TV stations at prime time. He then relies on Tweets and e-mails to get his message back to recalcitrant Congressional Republicans. Grover Norquist has become an expert at persuading individual Congressmen and women behind closed doors of the imperativeness of not raising taxes. Mr. Obama should borrow some of Grover’s methods – negotiate in private – while Grover should learn from the President how to better ingratiate himself with the press.

But who is this Peck’s bad boy that everyone knows by his first name. He was born in 1956 and grew up in Weston, MA. He graduated from his local high school and then received his BA and MBA at Harvard. In contrast to the standard caricature of conservative Republicans, Grover married Samah Alrayyes, a Palestinian Muslim who grew up in Kuwait and who now has her own consulting firm. They have two small daughters. Following graduate school, he moved to Washington and in 1985 President Reagan asked him to form the Americans for Tax Reform. The mission of the firm is to oppose tax increases as a matter of principal. He has been unusually successful. Even after the recent election, 218 House Republicans have signed the “Pledge,” as have 39 Senators.

Grover is almost always described as a gregarious optimist, one who views the glass as half full. He is seen as intelligent, commonsensical and persuasive. And, he is adamantly opposed to higher taxes; he authored the infamous no-new-taxes pledge twenty-seven years ago that most Republicans have since signed, along with three Democrats.

Mainstream media and the Democratic Party despise Grover Norquist. He has made a career of illuminating the wastrel ways of government and his pledges threaten the lifestyle of those we send to Washington. He is portrayed as a Rasputin hypnotizing dupable Republicans. The great irony is that he has the voice of reason on his side – that it is spending which is the principal culprit that has the country in trouble, not tax rates that are too low.

Spending, as a percent of GDP, has soared from the 20% where it had been for the past four decades to 25% under Mr. Obama. Is it sustainable? Only if we are willing to pay for it. And who knows what the economic costs will be? Certainly the U.S. will lose some of its dynamism and it seems probable that longer term growth will come to resemble Europe.

Since the dollar acts as the world’s reserve currency, no one knows how long the game can be played. Washington has operated for four years with trillion dollar-plus deficits, yet the trains are running, stores are still open, Thanksgiving came and went and my television and i-Phone still work. Our debt and deficit positions are worse than much of Mediterranean Europe and, while unemployment and under employment are far too high, schools and towns continue to function. Nevertheless, this will end, and probably not nicely. The Federal Reserve has been complicit in keeping the price of debt at extraordinarily low levels for four years. This ostrich approach to a pending financial Tsunami has worked for two decades. Might it last two more? Who’s to say? But for anyone who believes that there will be no day of reckoning is, as R. Emmett Tyrrell so diplomatically put it, an ignoramus.

It is true that revenues over the past four years have been low (16% in 2011), as measured as a percent of GDP. That can be attributed to abnormally low economic growth, but it may also be a function of an increasingly complex tax code filled with credits, deductions and exemptions that is a boon to lawyers, accountants and their wealthy individual and corporate clients; but the code is a bane to the rest of us. To get revenues to match current government spending would require an annual increase in taxes of $1 trillion, which would surely send the economy reeling into a severe recession, if not depression. The problem is spending, and all the talk of the “rich” not paying their “fair share” and efforts to trivialize Mr. Norquist are red herrings designed to divert attention from a government that keeps expanding. It has been for these reasons that Grover has been portrayed as a malevolent Svengali who has a stranglehold over Republicans. Democrats see the problem as being one of too little revenue, not one of excess spending. Both sides express some truths and a lot of untruths; though, again, the real problem is spending. When cuts are offered, they are not real “cuts.” All federal spending is assumed to grow at some predetermined rate. So when they discuss “cuts” they are speaking of cuts in the rate of growth, not what we homeowners and taxpayers mean when we speak of cuts.

To hear the talking heads on TV and their “expert” guests, one would conclude that if only the Republicans agreed to raise taxes on the “wealthy,” everything would be hunky-dory. As one Congressman pointed out, such increased income would cover eight days of operating the government. We have problems – spending and future obligations that a welfare state produces – that the President avoids like the Plague and which I suspect neither Harry Reid nor Nancy Pelosi even realize exist. I single them out because they are such extreme examples of idiocy, adamancy and partisanship that wallow in Washington. Republicans don’t fare much better. Does Mitch McConnell really understand the speed with which we are running out of gas? The one politician who has been on the forefront of attempting to address entitlements, and the $60 to $80 trillion unfunded obligations those programs entail, has been Paul Ryan, and he was muzzled on the campaign trail last fall.

Sometimes one must settle for half a loaf, and that is Grover Norquist’s biggest problem. Adamancy is fine for an advocate (which he is), but doesn’t work as well as compromise and flexibility, something Bismarck and Lincoln instinctively understood. (Lincoln knew where he wanted to go, but was flexible as to which route to take.) Grover favors reform, but only if it is accompanied by tax cuts, so that the net is no increase in revenues. I do have a problem with that. In my opinion, the goal should be growing the economy more rapidly. Tax reform should spurt economic growth. Properly done, the economy would speed up and revenues would increase. That should be the desired outcome. History tells us that a lower, flatter and broader tax provide the best inducements for growth. But keep in mind that Grover’s indomitable opinions are equally matched by a President noted for contumacious views toward those who disagree with him. Following Harry Reid’s announcement last week – “I am not going to be a part of having Social Security as part of these talks relating to this deficit” – the White House concurred with Mr. Reid. Mules pulling in opposite directions don’t get much work done.

But make no mistake. The problem facing the country, as we march blindly toward the cliff, is not Grover’s obstinacy, or even his presumed Svengali-like control over credulous Republicans. The problem is too much spending and a dogmatic refusal on the part of the President and his cohorts in Congress to acknowledge that past and current promises – be they Social Security, Medicare or Obamacare – cannot be paid for, unless we dramatically recalibrate our government. No one knows how long is the road down which we are kicking the pail. It could go on for four more years, or perhaps twenty. Faster economic recovery will mask the problem for a few years, but it will not postpone the eventual day of reckoning. Grover Norquist’s approach is obviously distasteful to some and unhelpful in its pigheadedness, but at least he illuminates the problem. In the end, it is the Republicans who signed the pledge, not Grover Norquist, who look foolishly recalcitrant.

What would be best for the country would be to extend for a few months the current tax system and to postpone sequestration, giving both sides time to work out real tax and entitlement reform. After all, politics should be the art of the possible. In current day Washington, that is probably a phantom hope. I am not sure Grover Norquist is a help in that regard, but neither do I believe are the President and the Congressional leadership.

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Wednesday, November 28, 2012

“What Do We Want To Be?”

Sydney M. Williams

Thought of the Day
“What Do We Want To Be?”
November 28, 2012

I was struck by the eloquent but sober tone of a recent essay written by a 28-year-old Brit (now living in the U.S.), Charles C.W. Cooke, in National Review. It’s entitled, “Why I Despair” and dated November 10, 2012. What concerns him is his take on the meaning of the re-election of Barack Obama. The vote, in his opinion, marks the final repudiation of classical liberalism and the rise of the welfare state. Mr. Cooke emigrated to this country because of the freedom it offered. But he is now concerned. He quotes Thomas Jefferson who in 1788 wrote, “The natural progress of things is for liberty to yield, and government to gain.”

There is reason for concern. Twice in these epistles I wrote of the video “Julia’s World,” which was displayed on the President’s website. I saw it as a chilling vision of a future that reflected the fears that George Orwell saw in Soviet Russia and wrote about in 1984. I was mistaken in thinking it would frighten others, as it had me. Apparently there were those who saw those images as providing comfort, unaware, I am sure, of the personal costs they will ultimately incur. Those who think otherwise should re-read Stephen Vincent Benet’s The Devil and Daniel Webster. Jabez Stone was able to enlist Mr. Webster to extricate him from the terms of the contract of having sold his soul to the devil. Most of us would be on our own, and so would Mr. Stone today.

I agree with Jefferson’s sentiments that that is the natural progress of civilization, and certainly it has been true for the United States for most of the past eighty years. However, I also recall the clarion call that heralded the election of Ronald Reagan in 1980. He ran and won on the principle that government was not the answer to all our problems. Remember his observation: “What are the nine most terrifying words in the English language? I’m from the government and I’m here to help.” At the time, America was on its heels. The economy was meandering aimlessly. Confidence was low. Inflation was rampant. Stocks were selling at the same level as fifteen years earlier. The Iranian government had been holding 52 Americans hostage for 367 days at the time of the election. Government’s answers to problems are too often chimeras – it provides the verbiage people want to hear, but without an explanation of the costs, either in dollars or in freedom. People’s response is that was a different time, another age. We have changed, but in the grand sweep of history thirty-two years is but a moment. We attach too much importance to ourselves, if we believe our time is our country’s crucible.

Now, in the wake of Mr. Obama’s re-election and as we confront the fiscal cliff, it is a good time to debate what it is we want from government. I suspect Congress is incapable of such a meaningful discussion. Their time horizons are far too short – generally no further than the next election. So the debate will have to be conducted in the media, in fact as it has been. From my perspective it is unfortunate that so much of today’s mainstream press is aligned with the Left, but that is reality. It becomes incumbent on those who worry about the long slide toward paternalism, to persist in warning of its ramifications – the most important of which are the loss of personal freedom and the fact that more government means higher taxes. While most of us can live with higher tax rates, it is the loss of freedom that is of greater concern.

In regards to the latter, David Brooks’ column in yesterday’s New York Times is worth reading. It is entitled “How People Change.” He writes of an English father who let his children grow up unsupervised and to whom he finally sent a long e-mail admonishing their life-styles – their jobs and their spouses. A daughter released the e-mail and it went viral. As a consequence, Mr. Crews has become a folk hero of sorts to British parents. I agree with Mr. Brooks that the honor is unwarranted, but nevertheless there is a lesson in acting irresponsibly. There is risk in adhering to a moral relativism that does not permit moral standards. When government provides its citizens cradle-to-grave care, there is a concomitant loss of personal responsibility. Mr. Cooke quotes the British historian, A.J.P. Taylor who wrote in August 1914, that “a sensible Englishman could pass through life and hardly notice the existence of the state beyond the post office and the policeman.”

This is not a suggestion that we should return to a frontier mentality, but we must recognize that individuals should take responsibility for both their actions and inactions. They reap the benefits and suffer the losses. It is the only way that children, and a nation’s citizens, learn maturity.

The subject of taxes is more specific and less philosophical. Government expenditures are expected to be $3.8 trillion in 2012, roughly 24.7% of GDP. Receipts are expected to be about $2.7 trillion, leaving a deficit of $1.1 trillion, or 7.7% of GDP. The deficits, we know are unsustainable. Either spending must come down, or receipts must rise. We cannot remain as we are. But that should prompt reflection on what we want from government. Keep in mind, before 2009 federal spending was generally capped at about 20% of GDP. Federal government spending had been around 15% before Lyndon Johnson’s Great Society programs of the 1960s.

Our population is estimated to be 315 million today. The breakdown is roughly as follows: 85 million people between the ages of 0 to 20; 105 million between 20 and 45; 85 million between 45 and 70, and 40 million over 70. We can assume that, on balance, the cost of government is borne by the 190 million Americans who are of working age – between 20 and 65. That suggests roughly a tax of $19,000 per person in that age category to pay for the $3.8 trillion in spending in this year. (Joint filings brought down the actual number of returns filed, in 2011, to approximately 110 million.) The numbers are estimates, and I recognize that, but they provide a sense of the situation.

In general, one can assume that roughly 60% of the population works to support the other 40%. I believe most people are fine with that. The debate should be over the level of service we choose to provide and the distribution of the costs of providing those services. The first is the more important and my feelings are well known on the subject, and I recognize its sensitivity. As for the second, most of us agree with the concept of a progressive tax, and I would suggest that everyone should have to pay something, no matter how little. It sends a terrible message when people benefit from services provided, including social welfare, education and defense, yet have no skin in the game. It is my opinion that the Tax Code should be simplified, broadened and lowered.

The President ran for re-election on the basis that the rich weren’t paying their fair share. He explained neither “fair” nor “share.” In 2009 10% of the working population paid 70% of all federal income taxes while earning 43% of all income. (Incidentally, that is a ratio that rose during the Bush years. In Clinton’s last year, the top 10% paid 65% of all taxes.) The top 1% earned 17% of all income while paying 37% of all federal income taxes. The bottom 50% earned 13% of all income and paid just 2% of all taxes. It is hard to argue honestly that the rich are not paying their fair share. One might argue that the rich earn too much and the poor too little, but that leads to the slippery slope of redistribution policies, likely the President’s real goal.

A symbolic gesture, such as that recommended by Warren Buffett in which a minimum tax be levied on those earnings more than $1 million, makes good press but does nothing to find an answer to today’s deficit. According to a study by Congress’ Joint Commission on Taxation, a Buffett-style 30% tax on all those earning more than $1 million would generate just $5 billion – less than 5% of today’s deficit. Nor does it advance the debate we should be having – what size of government do we want? Whenever one hears Warren Buffett chime in about raising tax rates, keep in mind he loves complexity in the Tax Code. Simplifying the Code, capping deductions and exemptions would capture more money from Mr. Buffett than raising the statutory rate.

This is a complex issue that entails far more wisdom than I am capable of imparting. But it is an issue with which we must deal; it should be conducted in public forums, in small and large meetings, in schools and universities, in blogs and in the op-ed pages of today’s newspapers. Such discussions are healthy and invigorating. Our history is not being written; we are living it. We are not at a significant turning point, much as we would like to believe we are. The country is fairly evenly divided on these issues. In their wisdom, the people sent a populist President to Washington, but they sent men and women of quite a different stripe to the state capitals in thirty of our fifty states. In a country as dynamic as ours, nothing is decided in a single election. Presidents don’t get mandates. They get an opportunity and a pulpit from which to preach their own version of democracy. Some do a good job; others do not. But nothing ever stays the same.

It is not in my nature to feel the despair toward which some of my conclusions might lead, or which Mr. Cooke expressed so eloquently. Yet I feel great empathy with his piece in the National Review. When I find my spirits begin to lag, I pick up a novel from another Englishman, P.G. Wodehouse, and from the first page a smile begins to crease my face. The opening line in Luck of the Bodkins (1935) is a perfect example: “Into the face of the young man who sat on the terrace of the Hotel Magnifique at Cannes there had crept a look of furtive shame, the shifty, hangdog look which announces an Englishman is about to talk French.” When I watch Harry Reid march to the microphones, a line from The Code of the Woosters (1938) comes to mind: “I could see that, if not actually disgruntled, he was far from gruntled.”

Escapism can only help maintain one’s sanity; it will not solve our problems. But, can anyone read those words without recognizing the universality of their appeal? And, while Mr. Wodehouse was born British, he chose to make his home in America – for the same reason Mr. Cooke came here and for the same reason millions of people from all over the world still clamor to come to America. It is a unique place. Let’s not change that.

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Tuesday, November 27, 2012

“Unions – For Better, For Worse”

Sydney M. Williams

Thought of the Day
“Unions – For Better, For Worse”
November 27, 2012

The fire in the garment factory in Bangladesh on November 24th that took 134 lives is reminiscent of the Triangle Shirtwaist Factory fire in New York City that occurred on March 25, 1911 that claimed 146 lives. In both cases, the factories were located in crowded, squalid areas. Poorly paid young women, working in cramped quarters with few safeguards, were the principal victims. In the case of the Triangle Shirtwaist tragedy, doors were locked – the reason being, or so management alleged, to prevent pilferage and unauthorized breaks. In Bangladesh, fire officials said people were killed because “there were not enough exits.” As the editor of a socialist paper wrote in the aftermath of the New York fire, “The deaths resulted because capital begrudged the price of another fire escape.”

The fire in Bangladesh cries out for the need of labor and safety reform in that country, just as the fire 100 years earlier did in New York. In the wake of the Triangle fire, union leaders from the International Ladies Garment Workers Union (ILGWU) allied themselves with reformers such as Al Smith, Robert Wagner and Frances Perkins to push for comprehensive safety and workers’ compensation laws. It took a long time for reforms to be fully implemented and for workers to be paid fairly, but ultimately (and because of the pressure unions brought to bear) they were.

Most people most of the time operate in their own self-interest. It makes no difference whether one is speaking of capitalists, labor leaders or politicians. Capital is fluid and chases returns wherever it can find them. Government tries, through monetary controls and tariffs, to keep capital closer to home, but the fact is it migrates to where returns are the highest, not necessarily what is in the best interest of the country. In like vein, union leaders have a personal interest in growing their membership base, increasing dues and, thus, their power.

Reforms always take longer than we would like. Sometimes the pendulum swings to excess; efforts to better working conditions and increase wages at some point become counter-productive. As well, the interests of union leaders can be at odds with those they purport to represent, as employees at Hostess Brands are discovering when their demands forced the elimination of all jobs. Union demands over the past few decades have bankrupted many businesses, forcing jobs overseas. Such actions explain, in part, the sixty-year decline of private sector union membership. Losses in the private sector, however, are being offset by gains in the public sector.

Countering the exploitation of labor by capital in the first half of the Twentieth Century demonstrated the good side of labor. But the relatively recent intractability of their demands in the public sector have created enormous fiscal problems for states and have helped make too many public elementary and high schools uncompetitive in international testing. In the private sector, labor and capital seek equilibrium. Both have powerful incentives to protect their easily-defined interests.

In the public sector, however, there is not the same natural alignment of interests. Labor, obviously, wants as generous a package as possible, but the representatives for the counter-side are not so obvious. In state governments, management and capital are two distinct parties. Management is the elected officials. Capital is taxpayers. Government employees work for the taxpayers and citizens of their respective state. Their income, pensions and benefits are paid for via tax receipts. Elected officials have often had their campaigns sponsored by the largesse of the same unions who may be demanding greater benefits for their members. But it is the taxpayer who has the obligation to pay the benefits negotiated by elected officials. It is one reason why Franklin Roosevelt did not favor the unionization of public sector workers. He considered the possibility of public sector unions going on strike as “unthinkable and intolerable.” In like vein, former president of the AFL-CIO, George Meany, stated: “It is impossible to bargain collectively with the government.”

Unfunded state pension plans and post-employment benefit obligations totaled $3.49 trillion at the end of last year. To put that liability in perspective, fiscal 2012 aggregate state spending budgets, according to the National Governors Association, will be $667 billion this year with revenues of $659 billion. It is beyond the ability of the most profligate states to honor their promises. According to the findings of the Joint Economic Committee, the state pension plans of twenty states are more than 60% unfunded, with the two worst, Illinois and Connecticut, unfunded by more than 70 percent. No state is even close to being adequately funded. North Carolina is in the best shape, with their plan 37.1% unfunded, according to the same study.

Because of the unreasonable demands unions have requested, and that elected officials have granted, the American people will be faced with the difficult choice of either a federal bailout of states’ pension and health plans, or letting prior promises go unfulfilled. The first will require an unprecedented increase in federal taxes (along with a concomitant slowdown in the economy such tax increases would cause); the second would be reflected in the difficulty of affected states to access credit markets. Neither choice is desirable.

The other area in which unions have acted against the broad interest of the American people is in education. The National Education Association (NEA) and the American Federation of Teachers (AFT) have a combined membership of 4.5 million. With dues averaging about $500, unions collect about $2.25 billion, enough money to give them enormous political clout. While one might argue the merits that unionization has brought to teachers, the real-life consequence has been declining standards for millions of American children. Seniority is given precedence over merit. Bad teachers are not fired; they are kept on in “rubber rooms.” Additionally, unions have fought competition stemming from Charter Schools and voucher programs, despite the obvious public clamor for such alternatives. Ironically, those that are most damaged by the intransigence of teachers’ unions are the urban poor. Suburban schools tend to perform better, but still not well enough in the global environment. And the wealthy have private school alternatives.

Every three years the Program for International Student Assessment (PISA) publishes its survey of student achievement. The results for the 2009 PISA survey were published in December 2010. They indicate the distance our students must travel in order to be globally competitive. In reading, the U.S. ranked 17th, in science 23rd and in mathematics 31st. In reading the United States ranked just below Poland and just above Lichtenstein; in science we were between Hungary and Norway, and in math betwixt Luxembourg and Ireland. Asian nations and Finland dominated the top five in all three categories. We may have the best universities in the world, but too many of our public high schools are failing to keep pace. It is the greatest challenge our nation faces.

Over the years, unions have played a critical role in improving working conditions and raising the standard of living for millions of workers. They did so especially in the first half of the Twentieth Century in the U.S. The conditions that created the horror in Bangladesh demonstrate the need for worker-support groups in that country. Unions should be applauded for representing the cause of workers at a time when they needed it. But they should also be chastised for advocating programs that are destructive to state budgets and deleterious to public school students. Their greed led directly to the bankruptcy of businesses in the auto, steel and now in the baking industry. More important, in the public sector, they have set us up for a financial Armageddon that lies ahead, and they risk graduating a generation of students unqualified to meet the demands of the Twenty-first Century.

In short, the success of public sector unions, at the expense of the people, is but another step toward the Potemkin village that Washington is rapidly becoming.

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Monday, November 26, 2012

“Now it’s the FHA – Will We Ever Learn?”

Sydney M. Williams

Thought of the Day
“Now it’s the FHA – Will We Ever Learn?”
November 26, 2012

Since entering conservatorship in September 2008, $188 billion in taxpayer funds have been used to prop up Fannie Mae and Freddie Mac. Granted, the two companies have repaid $45 billion in dividends to the Treasury, but most of the funds used to pay those dividends were borrowed from the Treasury. It was simply a matter of taking a roll of bills from one’s left pocket and placing it in the right – a slight-of-hand unavailable to most taxpayers. In sharp contrast to a shell game, it is the dealer who plays the fool.

Ten days ago, the U.S. Department of Housing and Urban Development (HUD) released its annual report to Congress on the financial condition of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund. The independent study found that, even as housing continued to recover, the capital reserve ratio of the MMI Fund, which is used to support FHA’s single family mortgage insurance programs, fell below zero to a negative 1.44% – or a negative economic value of $16.3 billion. The HUD report also includes “additional actions designed to contribute billions of dollars in added value to the MMI fund over the next several years.” Among those are hiking mortgage insurance premiums, selling off delinquent loans, and pressuring five major banks to contribute another $500 million into the capital reserve fund. Taxpayers and banks are being asked to pay for the FHA’s actuarial losses.

The FHA is the largest insurer of mortgages in the world, providing lenders protection against losses incurred in the case of default. It currently insures about 4.8 million homes and 13,000 multi-family units, with a value just under $700 billion. The Agency was established in 1934, becoming part of HUD in 1965. Its mission is to insure mortgages for low-income and first-time buyers. According to the HUD website, the “FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing” – a dubious statement, in light of its just-released annual report. Unlike conventional loans that adhere to strict underwriting standards, FHA-insured loans require very little cash down, generally about 3.5%, and are made to those with credit scores as low as 580. (The Federal Reserve determines that borrowers with credit scores below 640 are subprime.) Forty percent of newer FHA-backed loans are subprime and 17% are now delinquent.

During the housing boom that peaked in late 2006, the FHA generally sat out the party. Lenders were willing to make conventional “no-doc” or “low-doc” loans to subprime borrowers. They were easy to qualify for and less expensive. Private insurers flocked to the party. But once credit tightened in 2008, FHA’s star began to ascend. The Associated Press reported in late 2009 that the number of mortgages insured in September 2008 (96,000) was three times what they had been a year earlier. A Bloomberg report of last May stated that in 2010, the Agency insured 1.1 million single family loans, versus 261,165 in 2007. Today, the FHA is insuring about 6000 loans a day (multi-family as well as single family), four times the amount in 2006.

In April, lenders initiated foreclosures on 36,400 FHA-insured mortgages, twice the number of a year earlier. Diane Swonk, chief economist at Mesirow Financial in Chicago, noted that in September 2011, 638,000 FHA mortgages were in their second default – 12% of mortgages then insured.

There are times when it becomes necessary for government to act quickly and decisively, as they did in the fall of 2008 when the credit crisis threatened to take down the financial system. But the mission of government should always be to exit the field as soon as practically possible, to reduce their direct involvement in what is better performed by the private sector. In reality (and unfortunately) that goes against the grain of politicians who do not like to be the bearer of bad news. It is in the nature of these folks to keep on giving, ergo the promise of homes for all by President’s Clinton and Bush; a chicken in every pot and a car in every garage, as Herbert Hoover promised in 1928; flood insurance for those who live along coastal plains; extraordinarily low interest rates for indebted consumers and government, and low mortgage insurance for subprime homeowners. Like Little Orphan Annie, we are promised that the sun will come up tomorrow.

Newton’s Third Law states that for every action there is an equal and opposite reaction. Likewise, it is in the nature of man to constantly be in motion. Storytellers write of the yin and the yang, and of feast or famine, of the pull of evil and the push toward good. In an interview in this past weekend’s Barron’s, Carmen Reinhart spoke of human nature as it applies to economics throughout history: “You go through history and, in good times, the tendency is to, liberalize. Then a crisis happens, and you retrench. But the retrenchment lasts only as long as your memory does and memory is not that great.” Especially for policy makers, she adds. The cause of the credit crisis was an excess of optimism as it applied to asset prices, be they homes, commodities or stocks and bonds. Prices ran up on the eons-old greater fool theory. We are now in the digestive phase.

Home values, stocks and the economy collapsed, as consumers slowed their spending. The Fed offset the decline in asset values and the rise in our national debt by greatly reducing the cost of money and cheapening the dollar. The federal government, not wanting to be seen as ignoring the crisis, put in place more regulations, created an entirely new entitlement system, (the Affordable Care Act), increased transfer payments, cut the payroll tax, and implemented dozens of new taxes to help pay for Obamacare. The consequence has been a rally in stocks, positive but mediocre GDP growth, continued high unemployment – all covered in a blanket of uncertainty.

Over the past decade and a half, Congress and regulators looked the other way when Fannie Mae and Freddie Mac used excess leverage to create high-risk portfolios. Managements of the two agencies, in conjunction with Congress, proved a vivid manifestation of crony capitalism. Congress promised homes for all, with little regard for the ability to repay loans. Managements at FNM and FRE were paid outrageous salaries, while the Agencies became huge political donors to their backers in Congress. Their de facto bankruptcies have costs taxpayers billions of dollars.

We have witnessed the same financial ineptitude in other government-sponsored programs, ranging from Sallie Mae to Solyndra. According to Friday’s Wall Street Journal, 38% of all college graduates with student loans are either delinquent or have defaulted. Taxpayers have pumped and lost billions of dollars into alternative energy companies like Solyndra, sometimes permitting politically-connected investors to come out ahead of taxpayers when the businesses defaulted. General Motors reported profits, but that was after a restructuring that cost thousands of non-union workers their jobs and reneging on obligations to bond holders. The U.S. Post Office lost $15.9 billion last year and predicted “more red ink for fiscal 2013.” (Keep in mind that about 70% of mail delivered is junk or unwanted catalogues, and that the balance represents bills and solicitations.) Bloated bureaucracies and crony capitalism have conspired to render government’s ability to efficiently manage businesses essentially nonexistent.

The Federal Housing Administration was supposed to be an exception. According to the HUD website, the FHA, as mentioned earlier, is the only government agency that operates entirely (theoretically) from its self-generated income and “costs the taxpayers nothing.” Given the extraordinary increase in their business, private insurers sensibly vacated the market, amid a vetting process that does not conform to traditional underwriting practices. It seems highly probable that the taxpayer will once again become the backstop.

Will we ever learn? Individually we might, but collectively, and in regards to our government, the answer, sadly, seems to be no – that history is doomed to keep repeating itself, and that our government appears fated to become even more pervasive.

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