Thursday, June 28, 2012

“The Euro – A Failed Experiment”

Sydney M. Williams

Thought of the Day
“The Euro – A Failed Experiment”
June 28, 2012

The summit that began this morning in Brussels for the 27 members of the European Union is the 19th since the Greek crisis began two and a half years ago. While the meeting is for the entire EU, the focus will be on the 17 nations that comprise the Eurozone, especially Germany who holds all the aces, and on Italy, Spain, Greece and Cyprus who have real problems. The dictionary has as its second definition of summit as the “highest attainable level of achievement.” Having a “summit” every couple of months would seem to trivialize the term. In any case, previous summits have done little to alleviate the crisis. The typical summit lasts 36 hours of posturing and haggling, and concludes with a communiqué promising little more than a willingness to continue to work together, with plans for the next summit. More than anything, the content of these summits seems to consist of what my mother-in-law used to call “air pudding with wind sauce.” The one thing we should get but won’t is an acknowledgement that the experiment with a single currency has failed. In the land of nod, hope springs eternal.

In a game of musical chairs, banks in Italy and Spain are buying their respective sovereign debt, while governments are committing funds to rescue failing banks. Italian banks, as of April, owned €294.9 billion in Italian government debt, up 44% in five months. Spanish banks owned €167.3 billion in Spanish Sovereigns in April debt versus €70.3 billion in November, up more than 100%. Last month, the Spanish government committed €19 billion to rescue Bankia, which suggests that Spanish bank’s ownership of sovereign debt is likely to increase again. We are left in a vicious cycle, with default fears eroding the value of sovereign bonds placing greater pressure on banks’ balance sheets, causing governments to borrow to salvage failing banks. At some point the music stops and there won’t be enough chairs to go around. While the Council claims to have a “Grand Plan,” I wouldn’t bet my last dollar on that as an outcome.

There are many lessons from Europe for the U.S., in terms of the ineluctability of our operating deficits on our economic growth, on the damage that “too big to fail” banks can cause, and on governments and unions that promise what can never be delivered. With the U.S. in the weakest economic recovery in its history, the President is in no position to offer financial advice to the Germans who are struggling to deal with their profligate neighbors. As German’s Chancellor, Angela Merkel recently replied to Mr. Obama, according to the New York Times, “Look, Mr. President, I have some problems that I need to respond to that don’t correspond with your need to be reelected.”

The genesis of Europe’s problems goes back to the simple fact that a currency was created before political or fiscal union. It allowed profligate nations like Greece to borrow at lower rates than would otherwise have been the case, with no responsible adult to rein them in. In fact in 2001, with the help of Goldman Sachs, Greece was only able to meet the conditions of Euro membership by demonstrating the “directionality” of their public debt, which was far above the standard of 60% of GDP requested by the Eurozone. (Greek debt currently is about 170% of GDP.) A swap was entered into which removed €2.8 billion in public debt, allowing them to join the Euro. While the swap was perfectly legal, and Goldman claims that Eurostat, the European accounting agency, was informed by e-mail, the fact of the matter is that for all intents the swap remained secret. Even so, the swap has since ballooned to €5.7 billion (demonstrating that being on the other side of a Goldman trade is not always a good idea), an amount that represents a drop in the bucket of Greece’s total public debt, estimated at €356 billion.

The markets momentarily breathed a sigh of relief when Greece’s New Democracy Party (a center-right party) won a plurality, but far from a majority, on June 17. (They won 29.6% of the vote.) Antonis Samaras, the party’s leader was supposed to be the “responsible” choice, as he had vowed to keep Greece in the Euro. But if one took the combined votes of the radical-left Syriza (27%), the socialist Pasok (12.3%) and the Communist Party (4.5%) they add to 43.8%. Throw in the center-left Democratic Left (6.2%) and 50% of the voters preferred left-of-center leadership. It still seems to me that the most likely outcome is for Greece to exit the Euro. Such an event is bound to be disruptive, but it should also provide the beginning of recovery and reform.

Yesterday, London’s Telegraph printed a copy of the invitation from European Council president, Herman Van Rompuy to today’s summit. A former Prime Minister of Belgium, Mr. Van Rompuy is the first full time president of the Council. He wrote of four things they hope to accomplish: endorsing country-specific recommendations to guide policies and budgets; adopting the “Compact for growth and jobs;” launching the final phase of a new Multiannual Financial Framework (MFF) mobilized in support of growth and jobs, and setting our Economic and Monetary Union (EMU) on a new path. I am sure all these issues are critical and deserve attention, but the real problem has been that issuing a common currency without centralized legislative and fiscal authority is akin to putting the cart before the horse. It hasn’t worked. Somebody needs to do a mea culpa.

The cultural differences between the nations can perhaps be overcome, but it won’t be easy. Cultures within individual nations go back a thousand years and more. A recent and simple manifestation of the difference can be seen in France’s intent to roll back retirement age to 60, while Germany is considering extending it to 67. Commentators like to compare the crisis in Europe to that facing Alexander Hamilton at the end of the Revolutionary War when war debt of individual states was assumed by the central government. Some states had financed the war effort concurrent with the war. Others had not. Nevertheless, it is an unfair comparison. In the case of the newly created United States, the debt was incurred fighting a common enemy. In the case of Europe, much of the debt of the Mediterranean countries was to support an unsustainable life style (Greece and Italy,) or to speculate in housing and real estate (Spain and Ireland.)

The most important questions for Europe (as they are for the U.S.) are how to rein in debt and deficit spending, and, at the same time, reignite growth. Can it be done in Europe while maintaining a single currency? Can it be done without? To those that argue that a single currency is crucial to growth, how does one explain growth in Euroland before the advent of the Euro? Additionally, European nations must come to grips with the fact that the socialism of the post war years does not work. Demographics do not allow it. It was the conclusion reached by Margaret Thatcher thirty-three years ago and which gave birth to a renaissance in Britain. Unemployment of 12%, when she became Prime Minister, was 6.9% when she left twelve years later. While deficits are today’s problem, inflation was the problem in 1979. It was reduced by Mrs. Thatcher from 21% to 4%. Net migration from Britain became net immigration. Unlike the more temperate moves of current European leaders, Margaret Thatcher and her counterpart in the U.S., Ronald Reagan, opted for revolutionary action. Bold action is required in Europe; not more meetings whose principal purpose appears to be to schedule the next meeting. The answer may necessitate the dissolution of the Euro.

To use Greece as an example – its stock market is valued at about 10% of GDP. (In contrast, the U.S. equity markets are valued at about 125% of our GDP.) The Dalmatian Coast is one of the most beautiful areas in the world. People are hesitant about investing in the country because of uncertainty created by the crisis. A reintroduction of the Drachma would certainly cause some temporary dislocations, but would that be worse than the uncertainty caused by the pride of staying with a currency that may not be in the country’s best interest? Is hubris overwhelming common sense? Is it not possible that Greek assets would look far more attractive if the buyer did not have to worry about the currency? Alternatively a TARP-like plan allowing the ECB or the European Financial Stability Facility (EFSF) to take equity positions in the country’s banks may work; but as long as there is uncertainty about the fate of the currency, investors will stay away, and investments are the oil that lubricates the machinery of commerce.

Greece is a small country whose economy represents about 2.4% of the Eurozone’s GDP. But what is true for Greece is also true for Italy, Spain, Portugal and Ireland. Italy and Spain, combined, constitute roughly 26% of the area’s GDP, smaller than the 42% represented by German and France, but still significant. Another question European officials must consider is – has the Euro been acting as an accelerant or a governor on the respective states’ economies? It is hard to see it as an accelerant. A cheaper currency is necessary for the Mediterranean nations to reinvigorate their economies. Germany is the one country that has benefitted, as the Deutschmark would be priced more expensively. The rest have been hamstrung. More than anything, well intentioned European officials have created an aura of uncertainty and doubt – the opposite of what is needed to permit economic growth, and the emergence from despair and disillusion.

European leaders, in their desire to maintain the currency they fought so hard for and for so long, speak of its demise in dystopian terms. I am not so sure, but of this I feel certain – more of the same may promise hope, but nothing more. Let the Euro go. Defense of the indefensible is no defense.

Wednesday, June 27, 2012

“Education – The Fixable Problem”

Sydney M. Williams

Thought of the Day
“Education – The Fixable Problem”
June 27, 2012

Problems around the world abound. There are days when the best solution seems to be to turn off the TV, cancel the newspapers, get back in bed and pull the covers over one’s head. North Korea is unstable. China’s navy is beginning to challenge our dominance of the western Pacific. Iran persists in its quest for nukes. The Russian reset needs to be reset again. The situation in Europe keeps getting worse, with uncertainty regarding the Euro causing investors to freeze. Italy is expected to approve a decree to help banks boost capital through the sale of bonds to the government, when a few months earlier the Italian government had demanded banks buy their government-issued bonds. It was the price decline of those bonds that has led banks to their current precarious position. It is, as a friend Alan Rivoir writes, a Monty Python moment. France has decided to face the financial crisis by raising taxes and reducing the retirement age! The United States is faced with a deleveraging consumer and a government whose debt and deficits make Italy and Spain appear models of fiscal prudence.

Children are lucky. They can always revert to a land of fantasy. We can’t.

One can be overwhelmed by the magnitude of the problems. However, each day we must rise; there are things we can do and that are being done. Low natural gas prices have made manufacturing in the U.S. far more competitive. Productivity has risen. Low interest rates allow consumers and businesses to access credit markets inexpensively. Technology has radically changed the way and the ease with which we communicate. The internet means that ideas can leap national borders and time zones.

However, with that cloud of despondency threatening the developed world and with technology changing our lives at warp speeds, one aspect of our lives here in the U.S. lies mired in the morass of the past, and is fixable – public sector unions, and especially those that serve the teachers responsible for our children and grandchildren. Despite their intractable attitudes, signs of change are in the wind. According to a recent study conducted on behalf of Harvard’s Program on Education Policy and Governance and the journal “Educational Next”, the numbers of Americans with positive views toward teacher’s unions slid from 29% in 2011 to 22% in 2012. More tellingly, among teachers a positive view of unions fell from 58% in 2011 to 43% this year. Early this month, voters in Wisconsin decided to back Governor Scott Walker who had taken on public sector unions, including the powerful American Federation of Teachers (AFT) and the National Education Association (NEA.) So, perhaps the power of unions is beginning to wane.

These battles are never easy. Like the mythical Hydra who grew two heads when one had been lopped off, teacher’s unions refuse to bow to the good of the people. In a column in yesterday’s Wall Street Journal, William McGurn wrote of unionized teachers in Idaho battling reform, which would limit collective bargaining rights, introduce merit pay and eliminate the practice of protecting bad teachers who have seniority, while firing newly hired teachers no matter how good they may be. Union goons have resorted to physical violence and vandalized the pickup truck of Tom Luna, Idaho’s elected superintendant of public schools. Like the Hydra, which Hercules did eventually slay, unions in Idaho, like unions elsewhere, will ultimately be forced to accept financial reality. But victory will be neither easy nor quick. But, again, it appears the pendulum is starting to correct.

The Council on Foreign Relations recently sponsored a task force on education reform in the U.S. and national security. It is led by Joel Klein, former head of New York City public schools and Condoleezza Rice, former Secretary of State. “Educational failure puts the United States’ future economic prosperity, global position and physical safety at risk,” warns the task force. “The country will not be able to keep pace – much less lead – globally unless it moves to fix the problems it has allowed to fester for too long.”

Their findings are disheartening; they demonstrate the depth of the problem and the urgency to fix it, but unfortunately say nothing overtly about the role of unions, perhaps because Randi Weingarten, president of the AFT, is a member of the Task Force. Despite the U.S. spending more on K-12 public education (on a per pupil basis) than any other developed country, we lag badly according to the measurement services of the Program for International Student Assessment (PISA) which measures 15-year-olds in reading, math and science: In the last year studied, 2009, the U.S. ranked 14th in reading, 25th in math and 17th in science. More than 25% of students fail to graduate from high school in four years; for African-American and Hispanic students the number is approaching 40%. The College Board reports that among college-bound seniors only 43% meet college-ready standards. For those of us who live in wealthier suburbs with decent public schools, we can only imagine how bad things are for those students consigned to poorer urban and rural schools.

Everybody agrees that one of the greatest needs of our country is a better educated youth, able to compete in a rapidly changing, global environment. We also all recognize that public schools, in general, have inadequately addressed these concerns and have, in fact, failed their charges – our children – condemning too many of them to lives of desperate destitution. Where we differ is in the solutions we offer.

Alan Blinder, professor of economics and public affairs at Princeton, in an op-ed, in Tuesday’s Wall Street Journal, acknowledges the problem, but does nothing to propose a solution, other than to suggest that “on average, charter schools perform neither better nor worse than public schools.” Thanks for the helpful comment, Professor Blinder.

Nevertheless, answers are obvious, though perhaps difficult to implement. Parents must become more involved, demanding better teachers and greater accountability. Political correctness cannot be permitted to deny a child the opportunity for success because one deems it impolitic not to offer courses in the child’s native language. English must be standard in all our schools. Secondary languages should be encouraged, but not at the expense of English. Superintendants and principals need to be able to fire underperforming teachers regardless of tenure. Teachers who are found guilty of sexual relations with students should be summarily fired with no access to union support, deprived of all benefits and turned over to the police. Schools should trim their bloated non-teaching staff, so that good teachers can be paid more. Much on this subject can be learned from Dr. Richard Soghoian’s excellent recent book, Mind the Gap. (The book should be compulsory reading for the student body, faculty, president and trustees of the University of Virginia.) Competition is always good. Monopolies breed inefficiencies. That is as true for schools as it was for ‘Ma Bell,’ regardless of Professor Blinder’s findings. How else would you explain the laughter of joy and the tears of sorrow in “Waiting for Superman?” When Mitt Romney, two months ago, said that students should be put ahead of unions – a statement with which most would agree – he was, unsurprisingly, denounced by the NEA, but also by such mental heavyweights as Matt Damon. He received no support from President Obama.

The answers to the problems that plague us, from Europe’s experiment with an unaffordable political system to the unrest in the Middle East and our sluggish economy at home, require a change to our expectations of instant gratification. And we cannot be afraid to try something new. The market is not looking for a final answer; it is looking for signs that we understand the nature of the problem and that we have the courage and conviction to fix it. We are an attention-deficit disordered society that lives along a continuum and which must recognize that there are no immediate answers, only gossamer threads that gradually can be woven to yield a solution. The most important place to start is with our schools.

Tuesday, June 26, 2012

“Pelosi – Romney’s [not so] Secret Weapon”

Sydney M. Williams

Thought of the Day
“Pelosi – Romney’s [not so] Secret Weapon”
June 26, 2012

“The gift that keeps on giving.” Thus was described California’s erstwhile Representative, Nancy Pelosi on Chris Wallace’s Fox News Sunday program this past weekend. Ms. Pelosi represents California’s 8th Congressional District, a seat that has been in Democrat’s hands since 1949, so is safe, even for one as incompetent as the present occupant. It seems that every time she opens her mouth Democrats (who don’t care) and the English language (which does) suffer another embarrassment. She has become the Mrs. Malaprop of the United States Congress and, as such, provides an advantage to the more controlled and better-spoken Mr. Romney.

Recently Ms. Pelosi has adopted the notion, now widespread among defensive Democrats, that any contempt charges brought against Attorney General Eric Holder are motivated 1) by racism and 2) as supportive of “voter suppression” laws, a reference to laws that a number of states have passed requiring voter ID cards as a means of countering the proliferating problem of voter fraud. Since a license is needed to drive a car, and an ID is required to buy a beer, board a plane or to enter the hallowed halls of Congress, it doesn’t seem such an inconvenience to require something similar, so that one can exercise the greatest privilege of being a citizen – the right to vote.

Specifically, she said: “They’re going after Eric Holder because he’s supporting measures to overturn voter suppression initiatives in the states…This is no accident, it is no coincidence. It is a plan on the part of Republicans.” That Mr. Holder may be withholding documents never occurred to her. She added, apropos of who knows what and sounding like the mad Red Queen, that she could have arrested Karl Rove, former senior advisor and deputy chief of staff to President Bush. “I could have arrested Karl Rove on any given day. I’m not kidding. There’s a prison here in the Capitol…If we had spotted him in the Capitol, we could have arrested him.” When asked on what grounds she could have him arrested, she confusedly said: “Oh, any number. But there were some specific ones for his being in contempt of Congress. But we didn’t.” Mr. Rove must have felt relieved.

This is the same woman who in 2005, in her role as Speaker of the House (the third most powerful office in the land!) and after promising to lead the most open and bipartisan Congress in history, responded to a reporter’s question: “Why should we put a plan out? Our plan is to stop him. He must be stopped.” She was referring to, of course, President Bush. And she is a moderate according to people in her District!

At some point this week – expectations are that it will be Thursday – the Supreme Court will render its opinion regarding the Affordable Care Act (ACA.) No one, other than the Justices and some of those who clerk for them, knows what their decision will be. On both sides, lawyers acknowledge the complexity of the legal questions. Not so the heterophemistic Ms. Pelosi. When the bill was being debated, the then Speaker was asked, by some audacious member of the opposing party: where is it written in the Constitution that Congress has the power to enact a health insurance mandate? Her answer sparkled with intelligence, wit and clarity: “Are you serious? Are you serious?” Yes, Ms. Pelosi, the questioner was serious. To the people of the United States she showed less certitude, while still displaying her notorious ignorance: “But we have to pass this bill [ACA] to see what’s in it.”

As the bill neared passage – a tough call despite Democratic majorities in both Houses – Nancy Pelosi appeared gloating and magnanimous as she told the assembled masses: “I’m confident…I’m hopeful that we’ll have a [healthcare] bill as a Christmas present for the American people.” Thanks, Nancy. We got what we deserved for sending you to Washington.

Mrs. Pelosi, as Speaker of the House and against the wishes of the Bush White House, visited President Bashar al-Assad in Damascus. She returned bearing word of his desire for peace. Like Neville Chamberlain in 1938, she reported back in 2007: “We were very pleased with the assurances we received from the president that he was ready to resume the peace process.” One wonders how the families of the estimated 10,000 citizens of Syria that Mr. al-Assad has murdered in the past couple of years must feel.

In December 2010, Nancy Pelosi rebuked Representative Charlie Rangel after he had been formally censured by the House – the first such censure in thirty years. She had promised, upon becoming Speaker, to “drain the [Washington] swamp.” Now, after Mr. Rangel survived a primary bid for a 22nd term, Ms. Pelosi hailed him as a “champion” of the working people. The “swamp” that is Washington just became deeper and darker.

Some of her gaffes are priceless and funny – if they weren’t being uttered by a person in such a powerful position. Ms. Pelosi is estimated to be worth somewhere between $35 million and $50 million; so it is perhaps unsurprising that she once said: “This initiative is funded by the high end – we call it Astroturf. It’s not really a grassroots movement.” Or another, “Unemployment benefits are creating jobs faster than practically any other program.” Or this, in reference to a bill she jammed through a Democratic Congress without one Republican vote: “A bill can be bipartisan without bipartisan votes.”

Nancy Pelosi is far from alone in the ignorance she displays or in the contempt she shows for the intelligence of the American people – perhaps deservedly as we are the people who elected her. Her inability to speak in a straightforward fashion is a mark of her profession. After all, obfuscation is a necessary part of a politician’s curriculum vitae.

This past April, in a delusionary moment, Congress passed a bill creating a commemorative coin honoring the author of Tom Sawyer and Huckleberry Finn. As is well known, Mark Twain held Congress in low regard. Besides the novels on which his fame rests, Mark Twain was also the author of such one-liners as: “Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.” “Fleas can be taught anything that a Congressman can.” “There is no distinctly native American criminal class except Congress.” Are you listening, Ms. Pelosi? And finally, “All Congresses and Parliaments have a kindly feeling for idiots, and a compassion for them, on account of personal experience and heredity.” As one wag put it, “Full range loonies can pick pockets and get re-elected.”

Samuel Clemens died in 1910, thirty years before Nancy Pelosi was born, but he must chuckle every time the lady approaches a microphone, knowing that another arrow will be available to his quiver of humor. His disdain for politicians proves as relevant today as it was more than a hundred year ago. For Mitt Romney Ms. Pelosi’s verbal gymnastics provide a weapon of her and her Party’s self-destruction. If it walks like a duck and quacks like a duck, it must be a duck.

Monday, June 25, 2012

“Specter of Smoot-Hawley?”

Sydney M. Williams

Thought of the Day
“Specter of Smoot-Hawley?”
June 25, 2012

Hard times arouse instincts for self preservation. That is as true for countries as it is for individuals. On Saturday, the New York Times reported, in a news item I have not seen elsewhere, that the World Trade Organization (WTO) said that, since October 2012, 124 new restrictive trade measures had been added by the twenty largest economies, affecting about one percent of world trade.

Earlier this year the WTO lowered their prediction for the growth of global trade to 3.7%, below the 5.0% level during 2011 and sharply below the pace in 2010 of 13.8%. (For comparison purposes, growth in global trade has averaged 6 percent since 1990.) These numbers are significant in that global trade of $18.2 trillion in 2011 represented 27.6% of global GDP. Pascal Lamy, the World Trade Organization’s director general, said in April, “The WTO has so far deterred economic nationalism.” But he did caution that with slower growth comes the risk that politicians might look inward and seek to make a scapegoat of trade, causing damage to the global economy.

Mr. Lamy’s fears are not far-fetched. For example, when the 407-page American Recovery and Investment Act of 2009 (the stimulus bill) was passed three years ago, it included a “Buy America” provision, which was later softened, but not removed. It is not unnatural for countries undergoing economic weakness (or, in the case of the U.S., abnormally slow recovery) to protect jobs at home, without regard to the negative longer-term consequences of their actions.

Europe’s financial plight has already slowed their economies to near-recession levels. Japan, last week, reported their first trade deficit with the European Union since the Finance Ministry began tracking data in 1979. Indicators in China suggest a moderation in their growth rates, while growth in the U.S. can best be described as anemic.

Trade is a difficult subject and the process of negotiating agreements moves like molasses. On paper, the concept seems obvious, but implementation is difficult. The inability of the WTO to complete the Doha Development Round of globally reducing trade barriers is an example. The Doha Round began in Doha, Qatar in November 2001 and after almost eleven years there is still no resolution. In a report to the WTO General Council a month ago, Mr. Lamy advocated “small steps” and rethinking those parts “where greater differences remained.” The Trans-Pacific Partnership will conduct its 13th round of negotiations in San Diego next month. In the U.S., it took three years for the President to agree to the free trade agreements with Panama, Colombia and South Korea negotiated by President Bush – and the agreement with Panama has yet to be implemented.

Trade is generally less important to mature economies than to developing ones (Germany and Japan being notable exceptions), but still critical. Trade comprises about 13% of our GDP, while it constitutes about 24% of the GDP for the BRIC nations. Nevertheless, as U.S. consumers gradually delever, increased trade will be important in terms of making up some of the shortfall – unless (God forbid) one expects government to continue to consume an ever increasing share of GDP.

Trade is a key part of a healthy global economy, but it is also important as it counters natural tendencies toward nationalism, often a consequence of tough economic times. All policy makers are mindful of avoiding the errors of 1930s protectionism, but the risk is that legislators become blind to incremental, tit-for-tat reactions. The Times quotes Michael Froman, assistant to the President for international economic affairs: “The record is actually rather good. The fact that major countries have taken actions that only affects such a small amount of trade in this environment – I think that’s quite positive.” But, like Carl Sandburg’s fog that surreptitiously “comes on little cat feet”, the trend, as the Times notes, does not look good. The reporter writes of Global Trade Alert, an independent trade organization: “It bumped up its estimate of the number of protectionist measures enacted in 2010 and 2011 by 36%, and warned that countries had many more coming.”

Despite its obvious benefits, free trade does have detractors. Special interests and unions being the biggest factors, with the former concerned about the effect of competitive pressures and the latter desirous of protecting jobs. Both have money to spend. Both want to preserve the status quo, despite being cognizant of the ever-changing nature that technology and productivity bring to business and labor. Change does not derive from hope; change is the child of necessity and the instrument of growth.

I am not predicting a return to Smoot-Hawley and its resultant isolationism in the U.S. and nationalism in Europe and Japan, but neither am I sanguine that protectionism will disappear without a whimper. Nationalism appeals to both the worst and the best of our emotional instincts. Patriotism is fine, but unfettered nationalism can cause fear, scapegoating, bigotry, and xenophobia. It pays to be vigilant.

Friday, June 22, 2012

“Confidence and Markets”

Sydney M. Williams

Thought of the Day
“Confidence and Markets”
June 22, 2012

In 2008, Warren Buffett and John Bogle warned investors to expect modest equity returns going forward. Around the same time, Bill Gross, chief investment officer of PIMCO, wrote of a new normal – slow economic growth, persistent high unemployment and gradual deleveraging. In such an environment one could only expect modest investment returns. Nevertheless, most pension funds, public and private, continue to use actuarial returns of seven to eight percent.

In 1997, the great bull market had three years to run, yet the compounded return to the S&P 500 over the past fifteen years has been a modest 2.9%, with, roughly, another 175 basis points of dividend yield, producing annual returns of less than 5%, in line with Mr. Buffett’s and Mr. Bogle’s “modest returns.” James Paulsen, chief investment strategist at Wells Capital Management and who is considered by some to be a “perma-bull”, in a recent Fortune interview, was quoted: “We look back at the dotcom era as a ridiculous mania of optimism. I would argue that the past few years we’ve been living through a mania of pessimism.”

Pension funds that model seven or eight percent annual returns when 30-Year Treasury Bonds are yielding under 2.8%, and when stocks have been providing total returns of less than 5%, are being self-deceptive. Such decisions (and promises) are also dangerous to our national financial health, as we witness the problems states’ have with tax funded employee retirement accounts. Nevertheless, the ability to forecast markets is a fool’s game. The best anyone can do is study the past and make certain assumptions about the future. We do know that over long periods of time markets tend to track earnings. We also know that markets have years during which price appreciation exceed profit returns, and that they also have equally long time periods in which price returns are less than earnings growth. A reversion to the norm is how market gurus refer to such action, though most people (like me) are incapable of defining “norm.” Historical multiples are difficult benchmarks, as future growth prospects vary, along with interest rates and productivity.

Certainly, the 1980s and ‘90s were a time when the appreciation of stocks far surpassed the growth in earnings, and the reverse has been true since March of 2000. One question: has this period of correction created real value? A second question: Does the relative low volatility we are now experiencing, both in terms of the VIX and in daily volatility (although yesterday showed some real volatility!), suggest complacency on the part of investors? Have the macro challenges facing Europe today along with our own debt and deficit problems, combined with the rapidly approaching financial cliff been factored in? A third concern asks: What are prospects for growth? These questions and more have challenged America’s natural optimism, and they raise the question as to how confidence will be raised and how long it will take.

The first question is almost impossible to answer, other than to say, in wise guy fashion, that stocks are less expensive than they were in 2000, yet not as cheap as they were in 1982. However, macro conditions are very different. In 1982, the interest rates on Thirty-Year Treasury bonds reached 15% and inflation was running in double digits. We entered a bull market in bonds that is still underway. In 2000, expectations were so bullish that internet stocks were priced on the basis of “eyeballs.” It was a “silly season” with many stocks trading at several multiples of revenues, as there were no earnings. Today, investors are far more sober. And there can no longer be an extended bull market in bonds that helps drive equity prices, unless we believe that interest rates can go below zero. Unfortunately there is no crystal ball and there is no historical precedence.

The second question is something I worry about, but I also know I have plenty of company. In Berkshire Hathaway’s 2008 annual report, Warren Buffet wrote: “When investing, pessimism is your friend, euphoria the enemy.” With the mounting problems in the euro zone, a slow down in China, burgeoning balance sheets on global banks “too big to fail,” ballooning federal deficits and debt at home, persistent high unemployment and sluggish economic growth, euphoria is certainly not our problem; but are we pessimistic enough? It’s hard to tell; though we are assuredly leaning in that direction.

The third question, in some respects, is the most interesting. It is made so because of the fact that we are in an election year, and the choices we are offered are stark in their contrasts. On the one hand, the President offers more of the same – an emphasis on the public sector to drive economic growth, with higher taxes and more public projects. On the other, Mr. Romney proposes to let the private economy take the lead, with a lessening of regulation and tax reform that should encourage investment in both capital and labor, which ultimately would provide more cash to federal coffers, thereby helping both debt and deficits.

This rising tide of pessimism threatens to sweep us away. Politicians are held in very low esteem. Surveys show increasing numbers of people do not expect to be able to live as well as their parents, the notable exception being immigrants who still view this country as a land of opportunity. The Administration appears to have a vendetta against capitalism, yet they smilingly wallow in the dollars we send them. Everyone is concerned about consumption, while no one seems concerned about a lack savings and investments. The Federal Reserve has kept interest rates at exceptionally low levels for more than three years, damaging savers and the elderly, while purportedly driving consumption and asset prices. Does the Fed truly believe people cannot see through their scheme? Investment is what drives capitalism, allowing economies to grow. On January 1st the tax rate on dividends will rise from 15% to 42.5%, for those in the highest tax brackets. Is that any way to encourage investment, or to raise confidence on the part of investors? At hearings on Wednesday regarding the definition of high frequency trading, Duncan Niederhauer, chief executive of NYSE Euronext, speaking of the stock exchange, stated: “The public has never been more disconnected and has never had less confidence in the underlying mechanism.”

When I look at the market, it seems to me, to use a restaurant analogy that the ingredients are in the kitchen, the wait staff is ready, and there are customers in the dining room. The problem is the chef.

Wednesday, June 20, 2012

"Who Should We Be?"

Sydney M. Williams

Thought of the Day
“Who Should We Be?”
June 20, 2012

(The title of this piece is a bastardization of the late historian Samuel P. Huntington’s book “Who Are We?: The Challenges to America’s Identity.”)

No one will argue that everything America has done has always been right, either for itself or the rest of the world. But, neither can anyone deny that any country, while at the height of its power, has fought more for principle and less for material gain, nor sacrificed so much for others. While self preservation was a consideration, American soldiers who died in the Argonne forest in 1918, in the Italian Apennines in 1944, in the Korean Peninsula in 1952, along the Ho Chi Ming Trail in Vietnam in 1967, or more recently in Iraq and Afghanistan did not give their lives for material gain. They did so that others may enjoy the fruits of liberty, which is ours. In an imperfect world and despite our admitted periodic failings, America has generally been a force for good.

What is striking today is the contrast between the vision of America seen by President Obama and that of President George W. Bush. Following the attacks on 9/11, President Bush assumed a robust foreign policy described by John Lewis Gaddis, in Surprise, Security and the American Experience: “American leaders have evolved a strategy of forestalling future challenges by enlarging American interests.” The principal elements of that strategy were: preemption, unilateralism and hegemony. In his second inaugural speech, Mr. Bush said, “We will persistently clarify the choice before every ruler and every nation: The moral choice between oppression, which is always wrong, and freedom, which is eternally right.”

President Obama began his Administration by adopting a more nuanced and conciliatory tone in Cairo in June 2009, seeking in his words, “a new beginning between the United States and Muslims around the world.” He spoke of Iraq, as being a “war of choice” and added, “I have unequivocally prohibited the use of torture by the United States, and I have ordered the prison at Guantanamo Bay closed by early next year.” The upshot was that America was not to be in the forefront of global policy decisions, but to be one among many. The pendulum swung quite quickly from an arc that embraced primacy and confidence to one that embraced diffidence and caused uncertainty.

Subsequently, the “Green” revolution in Iran went unanswered, and the “Arab Spring” has become a winter of discontent. The threat of nationalism rifts through a dissonant Europe. The Russia re-set button opened the wrong doors. At least the Guantanamo Bay prison remains open. While three captured terrorists underwent water boarding during the early Bush years, the Obama Administration has chosen to kill dozens of al Qaeda leaders (along with dozens more civilians) with the theoretically surgically precision of Drones. In doing so, they have avoided the complication of worrying what to do with prisoners, but also denying our security forces the ability to gain intelligence. But Obama’s hardening position on terrorism may reflect a realization that the world is more dangerous than he envisioned when he was only a candidate. (Terrorists actions are no longer referred to as “man-caused disasters.”

E.J. Dionne, Jr. recently wrote a piece for Democracy, A Journal of Ideas, entitled “Why History Matters to Liberalism.” He makes a point with which I agree, “From the beginning of our republic…Americans have been torn by a deep but productive tension between our love of individualism and our ongoing quest for community.” It is a beautiful metaphor that captures our philosophical, but not implacable, divide. His article deals with the search for equilibrium – a quest without end, in my opinion as it should be. He loses me later in the article, as he pushes his Leftist agenda and makes assumptions with which I disagree. He writes: “Conservatives are, by nature and conviction, more comfortable with the very idea of tradition.” While the statement is true as it applies to behavior and a moral sense, it totally ignores the thesis of creative destruction which drives capitalism, or that business people, of necessity, must focus on the future, not the past. He argues that the word “progressive” is the exclusive purview of the Left, despite the progressive nature of free markets. He ignores the fact that unions, which once fought for the future, now defend the present; in general, they have failed to adapt to the times. Left and Right are not so easily defined.

Yesterday’s Wall Street Journal’s lead editorial, “A Leaderless World,” described what they see as “A world without U.S leadership…” The Bush Doctrine that presented America as a “hyperpower” has morphed into a rudderless ship now at risk of foundering on the shoals that are Syria, Iran, Russia, Egypt, Europe and South Asia. The editorial is correct, in my opinion, in that the consequences of a slow-growth entitlement society mean a nation with less economic growth and reduced global influence. Definitionally, an expansion of entitlements means an emphasis on consumption rather than investment, the driver of growth. The Journal’s editorial concludes on a sobering note worth pondering: “Without that American leadership, the increasing signs of world disorder will be portents of much worse to come.” However, any prediction should carry a warning label, as the view through the windshield is never as clear as the one in the rearview mirror.

Should the Journal’s views prove prescient and current trends are allowed to persist, the consequence must be reduced military spending. But can we afford that? Certainly, Europe is incapable of defending itself. Perhaps we can rely on the kindness of those who play by different rules – the Chinese, Russians, Iranians, Syrians and North Koreans. But that seems a stretch? Pease Air Force Base in New Hampshire where I grew up was home to a unit of the Strategic Air Command. Their motto was “Peace through Strength.” While the Command was disestablished in 1992 following the collapse of the Soviet Union, its motto is as true today as it was years ago.

Both Alexander Hamilton and Thomas Jefferson, while differing in means, saw America as an empire, “an empire for liberty,” in Jefferson’s words. Two hundred years ago the word “empire” did not carry the negative connotation it does today. It referred more to a sphere of influence. America’s predominance remains as important to the world as ever. Who should we be? In my opinion, we who live here are extremely lucky, and we have an obligation to maintain the torch of liberty as a signal to the oppressed everywhere that our example can be emulated. That does not mean that we should enforce our form of government on others, but we cannot ignore struggles for freedom. The Cold War was a period of continuous brinkmanship, maintaining a standoff between two giant powers – the U.S. and the USSR – representing very different visions of the future. That time led to the school of “realism” in foreign relations, recognizing that the avoidance of Armageddon should be the number one priority. Today we live in a very different time. Wars are more likely to be local, but nuclear weapons remain in unstable hands. We must be wary and diligent, while maintaining our responsibilities and our moral sense.

Tuesday, June 19, 2012

“Cronyism – Alive and Well in Washington”

Sydney M. Williams
Thought of the Day
“Cronyism – Alive and Well in Washington”


June 19, 2012

Despite pledging to send special interests to the woodshed, President Obama has practiced his own form of crony capitalism, laying out taxpayer funds on businesses that have helped him politically – green energy (Solyndra) being of particular note, but also, notably, General Electric. His support of union members, at the expense of bondholders in the auto industry in 2009, was another example, as were his recess appointments of three people to the National Labor Relations Board this past January. Nevertheless, if Republicans want to gain the high ground in ethical politics, they, too, must exchange favoritism of the few for the interests of the majority; thus far in this Congress their success is mixed.

An insightful editorial on this subject appeared in yesterday’s Wall Street Journal, which praised Senator Jin DeMint (R-SC) and chastised Senator Marco Rubio (R-FL.)

In the first instance the Senate, by a vote of 78-20, reauthorized the Export-Import Bank, a bill whose passage was never in question because of its backing from the White House, the Chamber of Commerce and business groups. The Export-Import Bank is the official export credit agency for the United States. It was established in 1934 to help businesses fund exports, thereby (theoretically) creating or preserving jobs, while (supposedly) leveling playing fields. Supporters argue that the bank provides these functions at no cost to taxpayers; in fact, they claim, it earns a profit. However, the non-partisan Congressional Budget Office has cautioned that under Fair-Value Accounting rules the bank actually loses money – about $200 million a year. The Administration has argued that the bank helps small businesses, but, interestingly, of the $32.7 billion in loans in 2011, 41.6% went to two companies – Boeing and General Electric, with Boeing receiving $12.4 billion. According to Economic Policies for the 21st Century, the borrowers receive a subsidy of about 1% of the amount borrowed. In other words, Boeing benefitted by approximately $120 million. Was taxpayer largesse of that amount necessary for a company that last year reported $5.34 billion in net income, or were those loans examples of crony capitalism?

A cynic might argue that the outcome of the Senate vote was a foregone conclusion, implying Senator DeMint was able to make political hay by voting against it. But that doesn’t seem to have been the case – he led the opposition and, keep in mind, Boeing has a major, new plant in South Carolina, (as does GE.) In a speech to 400 Chamber of Commerce members, Mr. DeMint said he voted against the reauthorization because “we’ve created a culture in Washington that has almost every major business in the country with its nose in the trough.” It’s hard to disagree with that statement.

On the other hand, Senator Rubio caved to the sugar lobby, and especially to Florida’s Fanjul family, the country’s largest sugar producers. Sugar has enjoyed price supports for years that effectively limit lower priced sugar from other countries. An amendment to the farm bill, sponsored by Senator Jeanne Shaheen (D-NH), and a reform bill proposed by Senator Pat Toomey (R-PA) would have eliminated or reduced price supports for U.S. grown beet and cane sugar. Shaheen’s amendment failed, and the Senate voted 50 to 46 to table Senator Toomey’s bill. Senator Rubio joined 15 Republicans and 34 Democrats in killing reform. Sugar is used by virtually everybody, though Mayor Bloomberg is doing what he can to curtail its usage in New York City. By artificially inflating its price, the bill provides support of about $2 billion a year to 5000 sugar farmers, according to a 2000 study by the General Accounting Office. It acts as a regressive tax on the rest of us 306,995,000 Americans.

Promising to be like Jesus who drove the money lenders from the temple, candidate Obama promised to drive special interests from Washington. In 2008, candidate Barack Obama said, “Were going to have to change the culture in Washington, so that lobbyists and special interests aren’t driving the process.” While registered lobbyists have been banned from official invitation lists to the White House, the New York Times reported on April 14th of this year that large donors “often took lobbyists with them, while others performed essentially the same function on their visits.” What I find especially offensive about this Administration is the sanctimonious tone of their remarks and the disingenuousness of their actions. Unsurprisingly, Mr. Obama has not driven special interests from Washington, and certainly their influence on Congress is as strong as ever. One could argue that the President has probably set a record as the single worst investor since Jimmy Carter – taking our money and throwing it at battery and solar companies, like Solyndra.

Money will never be removed from politics. Every attempt to reform campaigns has proved a failure. Money and politics will always mix. It is naïve to believe otherwise. The Administration had hoped that Citizens United would curtail or limit corporate contributions to campaigns; though they had no interest in eliminating contributions by labor unions or Hollywood studios. Whatever, the Supreme Court decided otherwise. We are left with the best disinfectant being sunshine – that, and term limits, which would render Congressional men and women less valuable to business people, bankers and unions. Contributors to specific campaigns are obligated to disclose their names, and limited in what they can contribute. Contributors to PACs have no such limits, and can remain secret. Their names should be made public. Republicans have recently argued against such disclosure rules; they are concerned that they would be harassed. They do have reason for concern, as Mr. Obama, like one of his less-than-worthy predecessors, has created an “enemies” list, and has used it to intimidate and harass opponents. But the reality is that if the name of every contributor were made public, any attempt to intimidate would also be in the public domain. It is a price worth paying, in my opinion, for a badly needed cleansing.

Crony capitalism is one of the few issues on which there is bipartisan unity. Both Parties lament its existence. Neither Party is immune from its effects, and both Parties partake of its goodies. It will not disappear, despite promises made by aspiring politicians. The more complicated the rules governing such behavior, the greater the possibility of discovering loopholes. Complex regulations inspire a competitive streak in lawyers who see them as a challenge, not something to limit their creativity. Again, sunshine and good investigative journalism are the best antidotes.

As the Wall Street Journal editorial concludes: “If Republicans want the political credibility to reform middle-class entitlements, they had better be prepared to eliminate corporate welfare too.” While it is too much to hope that cronyism be eliminated, at least it should be controlled. That’s Mr. Romney’s opportunity. It sure doesn’t appear that Mr. Obama has made much of a dent.

Monday, June 18, 2012

“The Dream Act by Proclamation”


Sydney M. Williams
Thought of the Day
“The Dream Act by Proclamation”
June 18, 2012

A year ago, in a speech to a Hispanic civil rights group, President Obama bemoaned the fact he had to deal with a Congress – perhaps momentarily forgetting which country he was presiding over, when he added: “Believe me, the idea of doing things on my own is very tempting. I promise you.” Nevertheless, the use of executive orders goes way back. Thomas Jefferson’s Louisiana Purchase was made by executive order, as was Abraham Lincoln’s Emancipation Proclamation. Harry Truman used an executive order to integrate the military in 1948. If an executive order is not challenged by Congress within 30 days, it becomes law.

Friday’s order to ease the rules governing young illegal immigrants was President Obama’s 129th executive order. Despite their unilateral nature, such orders are not uncommon. In eight years, George W. Bush issued 291 such orders, while President Bill Clinton issued 363 during his two terms. However, Mr. Obama, a master of ducking responsibility and spreading the blame, blindsided Republican Senator Marco Rubio who had been working on a similar plan. A spokesperson for Mr. Rubio’s office, Alex Conant, on Friday said, “We first heard about it this morning. They [the White House] didn’t ask for any input despite all the work we’ve done on the issue.” In fact, in April, according to an article in Investor’s Business Daily, the White House had “privately urged immigration groups not to back Rubio’s plan but to instead wait for the election.” The problem, the White House maintained, was that Rubio’s plan did not offer a path to citizenship. But, then neither does Mr. Obama’s.

In announcing his plan, the calculating and cynical Mr. Obama, who has deported more illegal immigrants than any other president, said: “This is not amnesty. This is not immunity. This is not a path to citizenship. It is not a permanent fix.” So much for his criticism of Senator Rubio’s plan. Mr. Obama must have worried that nasty Republicans might get credit for helping solve what has become an intractable dilemma – what to do with millions of illegal immigrants residing in this country.

The timing of the President’s action raises questions about his intent, and the fact he did it without consulting Congress raises more questions. The New York Times wrote of his timing: “In many ways, the President’s move was a clear play for a crucial voting bloc in states that will decide whether he gets another term.” The failure to consult Congress, especially when Senator Rubio was working on legislation that would accomplish the same goals, shows a man who puts his bid for reelection ahead of the interests of the country. Certainly, it was a putdown of the bipartisanship he claims to want. In his weekly radio address, recorded on the same day as the executive order, Mr. Obama deplored his inability to work with Republicans in Congress. That failure, this action only confirms, is largely self-inflicted.

Nevertheless, despite my criticism of the means the President employed, I support the notion of granting those who came here as children the right to live, work and study in this country. The parameters laid out by the President are fair: illegal immigrants under the age of 16 who are now under the age of 30, and who have lived here five years with no criminal record should have a right to stay, in my opinion. In fact, the sentiments offered in the President’s speech very closely matched those of the despised President Bush six years earlier: “…yet we must remember that the vast majority of illegal immigrants are decent people who work hard, support their families, practice their faith and lead responsible lives.”

Despite the xenophobia of a few in the Republican Party, many Republicans have long favored a realistic and humane approach to illegal immigration. Again, President Bush in 2006: “It is neither wise nor realistic to round up millions of people, many with deep roots in the United States, and send them across the border.” In signing the Immigration and Reform Act of 1986, President Reagan essentially provided amnesty for an estimated 2.7 million illegal aliens. On May 12, 2006, President George W. Bush, in a speech promoting comprehensive immigration reform, added: “We are a nation of laws, and we must enforce our laws. We’re also a nation of immigrants, and we must uphold that tradition, which has strengthened our nation in so many ways.”

Immigration is a touchy subject. Like entitlement reform, it has become another “third rail” of American politics. It is a subject that needs to be debated intelligently and without evoking emotional responses. While the President’s cause, in my opinion was righteous, making a unilateral decision, the way he did, was a blatantly cynical political move. It was designed to help him with Latino voters in several swing states and to make Republicans appear as prejudiced and reactionary. It was particularly insulting to Senator Marco Rubio, a prominent Latino Republican who had been working on a similar plan in Congress.

The history of our leaders toward immigrants has not always been a proud one. We should never forget President Roosevelt’s refusal to grant thousands of Jewish immigrants’ permission to come to this country as Hitler’s armies were sending millions of Jews to death camps. We are a nation of laws, laws we must uphold, but we are also a nation of immigrants, a heritage of which we should be proud. Like a magnet, we attract those who value freedom and the opportunity to achieve individual success. I find it hard to believe that most Americans support the deporting of an estimated eleven to twelve million illegal immigrants, many of whom came here as children. Enforcing existing laws, expelling those with criminal or terrorist intent, while finding a path to citizenship for the rest, should be a priority of government.

Immigration is an issue on which I differ from many of my peers. In my opinion our immigration laws are too constrained, one of the best examples being laws that send young men and women home upon graduation from an American college or university. We obviously must screen for criminals and terrorists, but today’s technology should make that task easier. We are a large and an energetic nation, made more vital because of the diversity of our people. Immigrants are a key reason. Among Western nations, ours is the only one that continues to enjoy population growth – a condition ultimately necessary for long term economic growth.

Romney’s reaction to the President’s executive order should be weighed carefully, because of the real possibility of unintended consequences. In my opinion, he should agree with the President’s goal, but not the manner in which he accomplished it. At a time of rising nationalism in Europe, fanning the fires of xenophobia at home serves no good purpose.

Friday, June 15, 2012

“Political Balderdash in the New Yorker”

Sydney M. Williams

Thought of the Day
“Political Balderdash in the New Yorker”
June 15, 2012

Rip Van Winkle slept through the American Revolution, according to the wonderful tale written by Washington Irving in 1819. Ryan Lizza, a political reporter whose article “The Second Term” appears in the June 18th issue of the New Yorker, must have slept through the last three and a half years of President Obama’s Presidency. It is a long article based on a hope that nobody was paying attention during the last few years, and helps spread the illusion that his hero will still be able to evoke the change he so desperately seeks.

The New Yorker was once a great magazine, founded by Harold Ross in 1925. Mr. Ross had an eye for talent. E.B. White, in my opinion the best essayist the country has ever produced, was an early hire, as were Wolcott Gibbs, Edmund Wilson and Katherine S. White (E.B. White’s wife.) The magazine employed cartoonists like Peter Arno and Charles Addams, and published stories by John Cheever, James Thurber, John O’Hara and J.D. Salinger. Sadly, it has become a politically correct, ideological organ for the Left. Even the cartoons have lost their bite.

Ryan Lizza’s article typifies the magazine today. Here is a sampling of his not very incisive and often inaccurate observations. It reminds me of another politician who once spoke of putting lipstick on a pig:

          “But a President who has won reёlection can also feel less tied to his political base and more free to shift toward the political center.” Really! And what’s with the German umlaut?

          “Notwithstanding Boehner’s antics, there is a possibility that a second term could begin with major deficit reduction and serious reform of taxes and entitlements.” If it’s so easy, why wait ‘til now?

          “Over in the Senate, there is a hint that the ice could thaw if Obama wins.” Yeah! When Hell freezes over!

          “If President Obama can indeed guide the parties toward an agreement that puts the federal government on a sustainable fiscal path, it would be a substantial achievement and would vindicate his early promise as a bipartisan leader.” It would indeed be a substantial achievement, but if you believe if we give Mr. Obama the keys to the car again that this time he will drive safely, I have bridge to sell you. Fool me once, shame on you; fool me twice, shame on me.

          “Much of the talk of bold contrasts is a strategic necessity. Obama wants the voters to cast their ballots based on the platforms of the two candidates, not on the record of the first term.” No s**t, Sherlock!

Mr. Lizza quotes his idol:

          “My hope, when I came into office, was that we could have Republicans and Democrats coming together because the nation was facing extraordinary challenges. It turns out that wasn’t their approach – to put it mildly.” None of the fault, of course, lies with the President who decided that healthcare reform, card check and green energy were more important than economic recovery!

Mr. Lizza begins his piece by writing of Mr. Obama’s ambitious goals for a second term. The fact that he has “ambitious goals” for the second term should scare any sensible person away. Does Mr. Lizza not think the Affordable Care Act, throwing our money at losing businesses like solar panel companies and $100,000 electric-powered cars and card check were not ambitious?

He writes: “The President has said that the most important policy he could address in his second term is climate change, one of the few issues that he thinks could fundamentally improve the world decades from now.” Hello! Climate change! Decades from now! What about the fact that there are 23 million Americans unemployed and under employed today? What about the global economy that needs growth now?

It’s curious that Mr. Obama has chosen his second term to focus on climate change because he told his Denver audience, in accepting the Democratic nomination in 2008 (in a less than democratic venue and using decidedly sanctimonious language) that his victory marked “the moment when the rise of the oceans began to slow and our planet began to heal.” In stating that he needs a second term, is Mr. Obama suggesting that “the moment” did not arrive? Does he think the Gods were just waiting for his reelection?

But, if that acceptance speech didn’t scare the “bejeezus” out of you, Mr. Lizza’s article will, if his 10,000 word essay doesn’t first bore you to death.

Wednesday, June 13, 2012

“The Pendulum of Politics”

Sydney M. Williams

Thought of the Day
“The Pendulum of Politics”
June 13, 2012

Should Mitt Romney win the White House in November, he will have a massive job restoring order to a dysfunctional government and confidence to a disheartened nation. In fact, Mr. Romney will have to be transformative – not to be a transcendentalist, as Mr. Obama promised to be in 2008, for Mr. Romney is only human. But he must change the fiscal direction of the country and attempt to unify millions of people with myriad opinions.

Looking back fifty or sixty years, people my age often yearn for what seems, with the distance of time, to have been a calmer and more cohesive 1950s. Time has a way of rounding the sharper edges of history. We forget that the ‘50s were a period in which segregation was rampant and most graduates of Wellesley and Smith College could find jobs only as secretaries. Intolerance and prejudice were so common that frequently they were not recognized as such.

Beneath the surface, though, the earth was beginning to tremble. The end of the decade brought with it the Civil Rights movement, which in turn brought needed change to a nation grown too comfortable in its biases. Three television networks – all spewing the same editorial content – replaced innumerable newspapers, as people’s primary news source. As a result, and despite protest marches, a false sense of serenity evolved. Even the anti-war protests of the late ‘60s and early ‘70s did not divide the nation to the extent it is divided today, again in part due to the limited sources of news and the non-confrontational opinions they expressed.

That began to change with the advent of cable television and talk radio, which allowed dissidents to more easily express themselves. Today, the internet allows anyone to express any opinion he or she chooses. As a result, despite the noise level and a perceived lack of quality we are better informed than ever before. Traditional sources of information, like newspapers, magazines and network telelvision, in order to remain relevant, have had to become as biased as their more recent competitors, talk radio and cable news. The New York Times still carries the message “All the News That’s Fit to Print” on its banner, but in reality it is nothing more than an organ for leftist politics. One can say the same thing about the Wall Street Journal and Investor’s Business Daily, on the right. The only difference being that they don’t pretend to be something they are not. Network television has become increasingly apologists for the Left, as have CNN and MSNBC, while Fox News provides the same service for the Right. If one chooses, one can be very well informed. On the other hand, such biased reporting can also serve to solidify the biases of the less curious.

For most of our history, political dissonance has been fanned by the press, initially by pamphleteers and later by myriad newspapers representing every conceivable opinion, and printed in hundreds of languages. The placidity of the 1950s was never the norm. It was a rare interlude made possible by early television and the decline of daily papers.

Earlier, World War I had changed the world from one built on social strata to one of far greater equality and democracy. The end of the war brought with it a period of difficult adjustment – hyperinflation in Germany, the rise of dictators in Spain, Italy and Germany, a period of wanton spending in the U.S. that became known as the “Roaring ‘20s.” A stock market crash and ensuing global Depression brought that period to an end in 1929. Following the angst of the Great Depression and a devastating World War, people were ready for a time of calm and the 1950s, fortuitously, provided it. As mentioned above, many people of my generation think of that time as the norm. It wasn’t. It only represented a small segment in the arc of the political pendulum.

We are now in another time of great turmoil. Our financial system came close to collapse in the fall of 2008. While it has become unpopular to say so, the system was saved by the extraordinary efforts of three men – Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and NY Fed President Timothy Geithner. Those three, along with a handful of bankers, prevented what could have been a catastrophe, not just for the U.S., but for the world. All three have been criticized for doing too much, or doing too little. But the fact is the credit crisis was largely resolved by the end of 2008. The problem has been the subsequent failure of economic policy. Nobody, American, European or Asian has shown leadership in galvanizing global markets with the goal of improving world economies. Instead, the cause of this first meltdown four years ago – at its essence, too much debt – has been allowed to continue to expand, until today we sit perilously close to where we sat four years ago, and Europe close to where it was eighty years ago.

David Brooks’ column yesterday in the New York Times speaks to the waning respect of people for institutions and leaders. He writes that it is due to a rising cynicism and that people “like to pretend that they are better than everything else around them.” Personally, I am unsure as to which came first, poor leaders or poor followers. Mr. Brooks concludes that to “have good leaders you have to have good followers – able to recognize just authority, admire it and emulate it.” I am not so certain. Leadership, in my opinion, means taking a position and adhering to it, but above all it means having moral principles. One of Mr. Obama’s problems is that he campaigned as a uniter – remember the “purple” states, no more red and blue? – that he would mend a nation divided by an unpopular war; but instead he has governed as a divider, and seems devoid of moral principle. His signature piece of legislation was a healthcare bill that was passed without one Republican vote. A risk to the world is that into this leadership void might arrive an unprincipled, charismatic, populist, power-hungry leader to seize control.

No matter what side of the political aisle one sits, there is a general agreement that government has become dysfunctional. I suspect that the problem is not so much reflective of stridently different opinions, as it has to do with politicians who are too closely aligned with special interest groups, what we usually call crony capitalism. We can wish that money and politics will no longer mix, but we cannot legislate or regulate their separation. Campaign finance reform has been an abysmal failure because it fails to account for human behavior. The only thing we could legislatively change to reduce the overt influence of money in politics would be to impose term limits, thereby diminishing the relative importance of legislators to special interests.

Regardless, the pendulum that is politics will continue to swing, from left to right and from right to left. But, as stated earlier, it is unlikely that politically we will ever again revert to what we remember as the calmness of the ‘50s and early ‘60s when the bulk of our news was determined by three anchormen, all of whom were politically cast from the same mold.

In many respects Mitt Romney faces the reverse problem of Mr. Obama who promised unity. To secure the nomination Mr. Romney had to cater to some extreme elements within the Republican Party, especially, in my opinion, regarding immigration and other social issues. However, given his past history, his tenure at the helm of Bain Capital and as Governor of Massachusetts, I strongly suspect he is more principled than his opponent, and his beliefs more moderate and more inclusive. Primary races tend to bring out the worst in candidates. The general election will provide a better platform to judge both men. In attempts to win primaries, candidates tend to campaign from the fringes, and then tack toward the center for the general election. Gravity, if nothing else, will ultimately pull the political pendulum back toward the center.

Tuesday, June 12, 2012

“A False Dawn in Madrid?”

Sydney M. Williams

Thought of the Day
“A False Dawn in Madrid?”
June 12, 2012

Will a €100 billion injection into its banks solve Spain’s bank’s problems? Perhaps. It’s a large amount of money, representing almost 10% of Spain’s annual GDP, and would cover about 60% of bank real estate loans that are considered at risk. It may lower the fever, but the patient will still be very sick. Structural problems remain.

The issues are two-fold. First, Europe faces a credit crisis, potentially hastened with what could be an uncontrollable run on bank deposits. It is not unlike the one we faced in September 2008, when the Federal Reserve had to step in to guarantee all deposits on amounts of $250,000 or less and money market funds. Second, the socialist nature of Europe’s economy makes reform, which definitionally will involve austerity, painful. It will only be entered into under duress. Europe, no matter what politicians claim, cannot solve its problems painlessly. The best answer would be some form of regulatory and tax reform that would lead to faster economic growth, dismayingly an unlikely prospect in my opinion.

A sobering op-ed on the subject was written by the odd combination of Nouriel Roubini and Niall Ferguson, and appeared in last weekend’s edition of the Financial Times. Their point was that, absent an FDIC-like guaranty, there could be a run on the banks; the risk to Europe would be a recession (depression) with devastating consequences. As they point out, the European Union was initially created to avoid the nationalism that led to the Second World War. The risk Europe faces today is one of repeating those disastrous mistakes of 80 years ago. They conclude their piece: “It is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.”

Keeping in mind that Greeks have withdrawn more than €700 million in bank deposits in the past month, the intractable nature of the problem suggests, on the one hand, an immediate risk of the withdrawal of smaller, insured deposits from “Club Med” banks, and, on the other hand, the need for meaningful and necessary reforms among most of the Euro zone countries. Germans fear that if they endorse the concept of debt mutualisation, necessary structural reforms will only be delayed, and perhaps never implemented. The wags have it that on Angela Merkel’s last visit to Greece, when the customs people asked, “Occupation?” she responded, “No. I’m just here for a meeting.”

Both options – austerity or more loans to the profligate – are repulsive to the opposing side. Loans without restrictions are unacceptable to the Germans, while austerity alone will almost certainly create economic chaos. There are no attractive options, only ones that may be less bad.

Fear serves only to make the problem worse. Martin Wolf, writing last week in the Financial Times, and bringing to mind FDR’s famous admonition that “we have nothing to fear, but fear itself,” noted, “In a panic, fear has its own power.” The 1930s have recently been referenced by observers of the European scene. In 1931, the Viennese bank Credit-Anstalt failed, leading Europe into a financial panic that infested other parts of the world. Two years later, Adolph Hitler was elected Chancellor of Germany.

I am certainly no expert when it comes to the European credit and debt crisis, but what I find mind-numbing has been the lack of anticipation. This is not a run-away train that crashed suddenly into a railroad crossing. This has been an accident happening in slow motion, as though a 45rpm record were playing on a 33rpm turntable. Four years ago Iceland’s economy crashed, as did Ireland’s. Greece’s economy, as measured by GDP, first fell in 2008 and its rate of decline has been accelerating since. There has been plenty of time for banks to have begun writing down loans. It would appear that none did; they were governed by the philosophy of “hear no evil, see no evil, speak no evil” – a case of foolish, Panglossian optimism. Similarly, there was time for governments to take action. Again, most did not. Attempts at reform in Greece led to street riots. Entitlements, apparently, are not up for debate. And now France has decided to lower the age of retirement from a too-young 62 to an even younger 60! How bad do things have to get before the people accept the facts on the ground?

The funds to save Spanish banks are expected to come from the European Stability Mechanism (ESM,) the expected successor to the European Financial Stability Facility (EFSF), a fund to which all eurozone members (and the IMF, which means the U.S.) will contribute. Ironically, as Vince Farrell pointed out yesterday, that means, for example, Italy must borrow money at 6.15% and lend it to the ESM at 3% – not a formula that makes a lot of sense for a cash-strapped nation.

It is likely foolish on my part, but I hope that Europe’s leaders are preparing for the exodus of Greece from the eurozone, if not the dissolution of the entire enterprise. It may not be their desire, but to not prepare for the worst would be a dereliction of their duty. I fear, though, they are blinded by hope and unwilling to admit they were wrong in creating a currency before they built an infrastructure to support it. The biggest risk facing Europe is a rise of nationalism that could lead to a leadership vacuum into which might fall a new charismatic dictator that could arrive from either the Right or the Left. Prejudice and racial hatred lurk near the surface in many parts of Europe – the targets generally being Jews and Muslims. It is tinder that could easily be lit, because when hard times get worse, as they likely will, blame will fall somewhere and it usually descends on those that are considered the most alien.

Victor Davis Hanson wrote yesterday that the current meltdown in Europe is “a morality tale of those nations and regions that sought to stay fiscally responsible …and those that did not…The truth is that one workable paradigm reflects human nature, of spending what you make and the other does not.” Perhaps Europe will extricate from the mess they have made without undue imbalance, but that bet is a long shot. The acceptance of responsibility for what has been wrought is a mark of maturity and common sense. Thus far, leaders whether in Brussels, Athens, Madrid or Washington have not yet reached that conclusion. It is we, not them, who stand to suffer. As much as I would like to believe that €100 billion loan at 3% will do the trick, count me as being from Missouri.

While in the U.S. there seems to be a growing realization at the grass roots level that the entitlement state no longer works (the Wisconsin recall election being the latest example,) most of Europe, from my limited knowledge, does not seem to have reached that point. That does not portend well.

Monday, June 11, 2012

“Science and Ethics”

Sydney M. Williams

Thought of the Day
“Science and Ethics”
June 11, 2012

There is increasing evidence that advances in science are outpacing man’s ability to ethically adapt.

Like all of nature’s specimens, we are less than perfect. Perhaps it is because of our minds, which allow us to love, think and reason, also help us hate, plot and connive. The country who brought us Goethe, Gutenberg and Mozart also gave us Adolph Hitler. Every carnivore’s instinct is to kill, but it is so they might eat. Man kills more for sport, or in battle. David Brooks addressed this moral vacuum in his last Friday’s New York Times column entitled, “The Moral Diet.” Unlike generations past, Mr. Brooks notes that most of us believe in our essential goodness, despite the fact that most of us lie and cheat in small ways. In past generations, we would have been told we were “depraved sinners” in want of redemption. Both characterizations seem extreme. Mr. Brooks suggests that the next time we are faced with temptation we should neither aim for goodness nor consider ourselves depraved sinners, but we “should shoot for rectitude,” to try to be morally correct in our behavior – a noble goal, in my opinion.

America for some time has been slip-sliding away from many of the moral foundations upon which earlier generations had built their lives. Political correctness precludes us from adhering to a universal code of right and wrong. Any reading of the Founders, their stories, letters and papers provides a sense of their moral code, a code on which this country was founded. In classrooms, up until the early part of the 20th Century, a student’s day often started with a lesson in ethics. In my day, we often started with the Lord’s Prayer and the Pledge of Allegiance. The Ten Commandments and the Golden Rule were regular parts of our lives. The idea of a principal nixing the singing of “God Bless the USA,” as happened last week at Coney Island’s PS 90, because, as she put it, “we don’t want to offend other cultures,” would have been unheard of. While there have always been knaves among elected officials (and among the populace as a whole), can you imagine one of the signers of the Declaration of Independence falsely claiming Native American heritage? And, when confronted with her lie, not stepping down in disgrace?

It is not that morality has disappeared, but it seems often absent and hidden from view. We have taken some of these basic truths and re-forged them to comply with the politically correct version of the world in which we live. Greta Hawkins, principal of PS 90 typifies this trend. She claimed that Lee Greenwood’s ballad, also known as “Proud to be an American,” was not “age appropriate,” but that Justin Bieber’s “Baby” was. People like her create moral boundaries that are porous and reflect a loss of a positive sense of our common heritage as Americans.

We come from myriad places, which is reflected in the uniqueness of America. We have provided ourselves a government that increasingly assumes responsibility for more and more aspects of our lives, thereby creating a burgeoning sense of dependency and a shrinking sense of self-worth. Self worth is a derivative of self reliance and personal independence. As those characteristics disappear, so does self worth. Morality, as a consequence, is no longer innate, but becomes what the state says it should be, or what misguided educators like Ms. Hawkins claim it is.

Scientific advancements are coming at breakneck speeds. Most of them are designed to improve our lives. We travel faster; food has become cheaper and more plentiful. We communicate more easily with one another, and we know much more about our environment and treat it far better than we did in bygone days. We have far more leisure time. Medicines and healthcare generally have allowed us to live longer and more comfortably. The consequences of these advancements are ones we must deal with daily – the social aspects of electronic networking and the addictive nature of video games.

These thoughts came to mind as I read a fascinating article in last Thursday’s New York Times by Andrew Pollack. The front page article dealt with doctors at the University of Washington who were able to map the entire genome of a fetus using only a blood sample from the mother and a saliva sample from the father. The samples were taken 18.5 weeks into the pregnancy, or a little more than four months; however the doctors expressed confidence that such tests should be available in the first trimester. For some time it has been possible to determine the DNA sequence of a fetus through tests involving the placental tissue, but those procedures are invasive and risk inducing a miscarriage; thus they are generally only done when there is a strong reason to believe that something may be wrong with the unborn child. Using blood and saliva samples from the parents, on the other hand, would, as Mr. Pollack writes, easily “allow thousands of genetic diseases to be detected prenatally.”

Besides the costs which are high – $20,000 to $50,000 – there remains an unknown element: full fetal genome sequencing, according to Mr. Pollack’s article, would turn up numerous mutations from which one could not be assured of the probability of a disease or condition. Thus it is possible that the termination of a pregnancy may have proved needless. Regardless, the approach will likely lead to more terminated pregnancies because of the presence of some genetic likelihood of disease.

Abortion has already divided the nation. Increasing the frequency will not solve the riddle of the sanctity of life; though the information garnered from a complete genome may make the lives of parents less stressful, or perhaps not. As Marcy Darnovsky, associate executive director of the Center for Genetics Society, a public interest group in Berkley, notes “The tests will spur questions on who deserves to be born.” Gina Kolata, in the magazine section of Sunday’s New York Times, wrote an article, “How Do You Live Knowing You Might Have an Alzheimer’s Gene?” Knowing does not make life easier. Her subject concludes: “We’re just hanging in there. Life can be cruel.” Of course, advances in medical research will at some point produce drugs that may negate the reason for the abortion in the first place. The questions posed are complex and solutions even more so.

Perhaps most important, is the possibility that this approach, once it becomes common (which it probably will) will lead to positive selection, eugenics, if you will – a search for athleticism, intelligence, height, hair color, etc. – decisions that raise far more serious ethical questions, which I doubt most of us are able to handle. It reminds one of Hitler’s desire to create a master race. With the tools available, will we, or will some other country, attempt to do so?

Science will, as it should, keep moving forward. But it is also necessary that at the same time we, as a nation, become fundamentally more moral and ethical. In my opinion, we should start by requiring that schools teach the classics and philosophy. While the focus of higher education increasingly is on courses that prepare us to make a living, we should not slight those that make us better people. There is no reason why ethics should not be taught in elementary school and continued through high school. After all, the Ten Commandments and the Golden Rule are based on pretty simple precepts, which are comprised of universal rules for civility. The Bible, Shakespeare, Dickens and Tolstoi should be required reading in high schools, as protagonists in these books encounter virtually every emotion and experience known to mankind. Bringing back the military draft would allow young people to better understand the concept of service and selfless responsibility. It would also do away with the practice of a professional army, which is inimical to a free and democratic people.

The questions and the situations we will face in the future, because of advances in science, will become increasingly complex. As a people, we must become better able to deal with the moral consequences those advances bring. Educators like Ms. Hawkins are proof that we are not there yet.

Friday, June 8, 2012

“Wisconsin Recall and the Stock Market”

Sydney M. Williams

Thought of the Day
“Wisconsin Recall and the Stock Market”
June 8, 2012

The news media attributed Wednesday’s surge in stock prices to rumors of money being thrown at Spanish banks and to the possibility of QE3 - odd explanations in my opinion, as such actions confirm that current fiscal and monetary policies are not working. I wonder if something more fundamental is going on. Wisconsin, in my opinion, may provide a clue.

William Buckley once alleged that he would rather be governed by the first 400 people in the Boston phone directory than the Harvard faculty. In essence, that is what happened in Wisconsin. Mr. Buckley distrusted supercilious elitists, especially when they appeared masked as altruists. (We’re from the government and we’re here to help.) He did, however, trust the people to collectively do what is right. In Wisconsin, I believe, they did. Governor Walker’s victory was impressive. Consider this: Tom Barrett received 158,482 more votes in 2012 than he did in 2010 when he lost to Scott Walker. Mr. Walker received 205,509 more votes than he did in 2010. And think of this: Mr. Walker, accused of being the anti-union guy, received 38% of all household union votes, better than his showing in 2010. Kevin Kennedy, Executive Director for the Government Accountability Board (State of Wisconsin) said that the turnout was the highest in the state’s history for a gubernatorial election.

The New York Times credits the Walker victory to the millions of dollars spent by the Republican Committee and conservative PACs. In a bit of twisted logic, the lead editorial in Thursday’s Times claimed that Mr. Walker did not take on the unions to “save the state money” (which in fact he has done) but to “break the unions by ‘demonizing’ their bosses.” Whether he “demonized” them I don’t pretend to know, but he did show them to be the charlatans they are. Had they continued to have their way, they would have bankrupted cities and towns across the state. The Times, incredibly and audaciously, stated that Mr. Walker’s goal was to end the ability of the bosses “even to collect dues.” Keep in mind, prior to Governor Walker’s rescission of the practice, union dues were collected automatically and preemptively by the state. Workers had no choice. Even if one chose not to be a union member, each employee had to pay dues amounting to several hundred dollars a year. Forcing workers to pay union dues, regardless of their individual preference, is part of Leftist theology.

The left feels they are entitled to the votes of the working class and minorities. They feel that way because over the decades they have redistributed wealth downwards, seemingly unconscious of the demeaning and patronizing aspect of so doing. In contrast, classical liberalism, common to fiscal conservatives, believes in the upward mobility of people based upon talent, aspiration and hard work.

Redistribution relies on a progressive tax code, which we have had for almost 100 years. All conservatives support some form of a progressive tax code. But redistribution does subtract from a nation’s wealth, and that is a price we are all willing to pay – up to a point. And it is a game that has a terminus. At some point the money runs out. That was the sad truth facing voters in Wisconsin, as well as in San Diego and San Jose where votes favoring public union pension reform won by 66% and 70% respectively. Mr. Walker’s victory was not, Mr. Sulzberger, a function of money – though that helped – it was indicative of the common sense of the voters (Mr. Buckley’s 400) who realized they were on a path to oblivion if they did not alter direction.

The Left has been shackled by a belief that only they are the true guardians of students, the poor, the elderly, immigrants and minorities. They believe in their perceived superior abilities. They believe that those on the Right are tools of big business and the rich. What balderdash! The wealthiest counties in this country have voted Democratic for decades. Their influence is seen along America’s east and west coasts. Mr. Obama outspent his Republican rivals in 2008, and received far more money from Wall Street than did John McCain. Barack Obama regularly returns to New York and Hollywood chumming for dollars. His visit this coming week will be his 41st of this season. How many fund raising trips to New York did President Bush make? Not many. How many has Mr. Romney made? Fewer than Mr. Obama.

The Right appeals to the aspirational, while the Left encourages dependency. The Right believes in the ‘Self”: that responsibility and self-reliance are critical to an individual’s self-worth and success. Jonathon Haidt, a professor of psychology at New York University’s Stern School of Business wrote recently in The Guardian that “the Left has a tendency to place caring for the weak, sick and vulnerable above all other moral concerns.” Professor Haidt identified a total of six moral concepts: care/harm, fairness/cheating, liberty/oppression, loyalty/betrayal, authority/subversive and sanctity/degradation.” There are others that perhaps could have been included: respect/disrespect and, simply, right/wrong. But Professor Haidt failed to note that at times the desire to “care” has unintended and unfortunate consequences, as we learned from the housing policies of President Clinton and the willingness of Congressmen like Chris Dodd and Barney Frank to provide mortgage financing (and now student loans?) to those with little ability to repay. When one sends millions of people into personal bankruptcy, it makes little difference that one’s intentions were honorable, when the results were devastating.

The lesson from Wisconsin is important – that the era of endless spending on programs we can ill afford is coming to an end. They are neither fair to the majority nor to those they purport to help. It is a lesson, however, that has yet to be learned in many state capitals, including Sacramento, despite the clear message from San Jose and San Diego. It certainly has not been learned by those in Washington. Nevertheless, in my opinion, the die has been cast. The process began eight years ago when Mitch Daniels was elected governor of Indiana. He was the first in an expanding group of reformers. In my opinion, we are on the road to recovery. It may take a few more years and there will be setbacks. Cronyism, union leaders and other special interest groups will fight hard to retain their grip on power. But I believe we have made the turn (or are in the process.) And that, at least in part, was the message from the market when it rallied Wednesday, up almost 2.5% on good volume.

Wednesday, June 6, 2012

“Wisconsin Recall”

Sydney M. Williams

Thought of the Day
“Wisconsin Recall”
June 6, 2012

While Washington remains dysfunctional, an increasing number of state governments are addressing the root causes of the debt and deficit crises, the growing influence and costs of public sector unions, and the benefits proffered state employees, the costs of which exceed the ability of the people to pay. They are acting just in time. Unfunded liabilities for unionized state employee health and pension plans are estimated to be between $2 trillion and $3 trillion. The estimated discounted value for a typical unionized state employee’s retirement benefits is about $4 million, according to Wayne Allyn Root, Chairman of the Libertarian National Congressional Committee – an amount far in excess than is available to the average worker.

The 2010 midterm elections represented a backlash against government spending that had got out of hand; it was a victory that placed the general interests of taxpayers above special interest. This provides credence, at least to me, that we will in time address our problems. When all the votes were counted in November of that year, seventeen new Republican governors took office against seven Democrats. Of those Republicans, six scored victories in traditionally Democratic states – Florida, Maine, Michigan, Oklahoma, Pennsylvania and Wisconsin. Of the new Democratic governors, only one, John Hickenlooper in Colorado, took a seat in a state whose registration favors Republicans. Wisconsin’s vote yesterday solidified the reform movement. Governor Walker, becoming the nation’s only governor to survive a recall election, won by nine percentage points – a margin larger than his victory in 2010.

(Separately, two of California’s largest cities, San Diego and San Jose, passed pension reform packages yesterday.)

Even earlier, governors in Indiana, New Jersey, Virginia and Louisiana had begun the tough process of bringing fiscal order to overly indebted states. On the other hand, following the same old path, California and Illinois look to be at greater risk than ever – opting for a dosage of the ‘hair of the dog” that had done them in. The promising of benefits that society can ill afford is neither fair to those to whom we promise help, nor to the taxpayers who must pay. Alexis de Tocqueville, upon visiting America 175 years ago observed, “A democracy can only exist until the voters discover they can vote themselves largesse from the public treasury.” Over 100 years ago, George Bernard Shaw wrote, “A government that robs Peter to pay Paul can always depend on the support of Paul.”

Yesterday’s recall election in Wisconsin was a referendum on what is one of the greatest threats to democracies – the ascendancy of cronyism and special interests over the general interests of the people. It is a warning that dates back to Alexis de Tocqueville. In Wisconsin, it has manifested itself in the growing power of public sector unions and the devastating damage they have inflicted on taxpayers. In the main, union leaders were upset with Governor Walker for two decisions: One, he rescinded the right to collectively bargain for pension and healthcare benefits for state union employees, except police and firemen. Because unions spend enormous amounts electing candidates favorable to their cause, union leaders effectively sit on both sides of the bargaining table. The result has been very attractive, but unaffordable, health and retirement packages for union workers. Politicians are supposed to represent taxpayers – all taxpayers – but some politicians owe their office to the person with whom they are bargaining. The second decision was Mr. Walker’s ending of the state’s practice of automatically deducting union dues. Interestingly, but not surprisingly, when dues became voluntary union membership fell from 62,818 in March 2011 to 28,745 in February 2012, costing union leaders about $17 million – dollars that can no longer be spent buying elections, but instead will be saved or spent by the workers.

David Brooks wrote on Tuesday that he is “not a fan of the way Scott Walker went about reducing debt.” But he acknowledged that Governor Walker “did turn a $3.6 billion deficit into a $150 million surplus” with, he adds, “the help of a tax collection surge.” He neglected to point out that that is what happens when the proper fiscal policies are implemented. It is why supply-side fiscal policies do work.

Once again pollsters were surprised. Wisconsin’s election was expected to be close. It wasn’t. Many on the left will tend to trivialize Wisconsin’s election results, claiming it was due to inordinate amounts of out-of-state money. It is true that a lot of money was spent, much of which came from other states, but the turnout was one of the greatest ever in Wisconsin, or anywhere. In Madison, one of the nation’s most liberal cities, voter turnout exceeded 70%.

Special interests and crony capitalism have dominated our politics for a long time. It is a disease that infects both the right and the left. It is good to see that the nation’s voters, when presented with issues such as those faced by the electorate in Wisconsin, decide in favor of common sense. We can only hope that Washington will learn from the lesson that has rung out from the Badger State.

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Elections have become increasingly expensive, which seems odd given an economy that continues to struggle. Participants from both sides of the aisle bewail the discrepancies in income and wealth between rich and poor, yet continue to provide an inexhaustible flow of money flows to what Thomas Sowell has called the greatest con artists of all time – politicians. It has been estimated that $63.5 million was spent on the Wisconsin recall election. Closer to home, on Monday evening I got caught in Manhattan’s traffic snarl as the President came to the big Apple for his 38th, 39th and 40th fundraisers in New York since becoming President – 26 more gatherings than did President Clinton in 1996. In the three meetings he raised an estimated $3.6 million. As I was sitting in traffic, I wondered why should I, as a New York City taxpayer, help pay for his fund-raising trips to New York? Should not the city assess his campaign for the cost of extra police and security, for the lost revenues at shops, taxis and restaurants inconvenienced by his appearance? My guess is that this trip cost taxpayers more than he raised.

What is true of Mr. Obama is also true for Mr. Romney. Should not cities that have to hire extra police or pay overtime and whose local businesses are disrupted be compensated by the campaigns? There is no question that when the President travels on matters of State, we taxpayers should pick up the tab, but campaigns are a different matter. If nothing else, such rules would likely greatly reduce the amount of money in politics.