Friday, September 28, 2012

“In Government, We Do Not Trust”

Sydney M. Williams

Thought of the Day
“In Government, We Do Not Trust”
September 28, 2012

Polarization has characterized the electorate for some time. President George W. Bush alienated Democrats, while President Obama has done an equally good job of turning off Republicans. But what both men have done, with considerable help from Congress and other officials in Washington (elected and appointed,) is to raise the level of distrust of all those in government. In a Pew Research survey conducted a year ago, just 19% of respondents said that government can be trusted “always or most of the time” – a record low. Over the past fifty years, that number has typically hovered between 25% and 45%. In the 1950s and early 1960s, those trusting government was closer to 75%. A sense that our leaders in Washington were lying to us during the Vietnam War began the decline. It stabilized in the 1980s and 1990s, but has accelerated over the past ten years.

On Monday, David Brooks had one of his regularly informative columns in the New York Times, this one entitled “The Conservative Mind.” In it he discussed two different mentalities of the conservative movement – economic conservatism and traditional conservatism. He writes that the former is alive and well, while the latter has “gone into eclipse.” President Reagan, Mr. Brooks states, embodied both aspects, but no one has since. He writes: “Economic conservatives have the money and the institutions. They have taken control.” He claims that there are few on the conservative side who would be willing to raise taxes on the affluent to help the needy.

It could be that traditional conservatism is hibernating, but it may be that it is only struggling to stay alive. Mr. Brooks uses Russell Kirk’s “Ten Conservative Principles” to point out that traditional conservatives did not see society as a battleground between the private sector and government. He writes that conservatives believed that people should lead disciplined, orderly lives, but doubted that individuals had the ability to do this alone. He suggested that today’s Republicans simply repeat formulas; for example, ‘government support equals dependency.’ He suggested that Republicans have very little to say to Hispanic voters “who often come from cultures that place high values on communal solidarity.” I am not sure whether Senator Marco Rubio and Governor Susana Martinez, both of whom spoke at the Republican Convention, would agree.

The problem, I suspect, is different. It is not so much that Republicans have lost their balance, as it is that government has betrayed the principles of our founders. Relativism has replaced a sense of moral certitude and, politically, decentralization has given way to centralization. The first of Russell Kirk’s principles reads that “conservatives believe there exists an enduring moral order…[that] human nature is a constant and moral truths are permanent.” In today’s world, those words seem dated. Obscenity, for example, is treated with tolerance and humor when it is used by the Left and directed at conservatives. On the other hand, can you imagine the outrage of Democrats if actor Samuel L. Jackson had made a video taking aim at Mt. Obama comparable to the foul one he produced targeting Mr. Romney?

Russell Kirk believed in the importance of community, but he opposed what he termed “involuntary collectivism.” “In a genuine community,” Mr. Kirk wrote, “the decisions most directly affecting the lives of citizens are made locally and voluntarily…But when these functions pass by default or usurpation to centralized authority, then community is in serious danger.” Kirk warned against utopian promises of egalitarianism; he called for restraints on power, and wrote: “The conservative does not put his trust in mere benevolence.” He did, though, believe in the concept of progression, but through prudent reform.

It is not, in my opinion, that Republicans have abandoned their traditional conservative roots; it is Washington, in its power-grab across many Administrations, that has let down the people. It was the perfidy of government which was largely behind the formation of the Tea Party and, to a lesser extent, Occupy Wall Street.

A year ago, a New York Times/CBS News poll found that 89% of Americans distrust government to do the right thing and that 84% disapprove of Congress. In the article, reporters Jeff Zeleny and Megan Thee-Brenan wrote: “A remarkable sense of pessimism and skepticism was apparent in question after question in the survey…”

Judicial Watch, an allegedly non-partisan organization but one with conservative roots, puts together a list each year of the ten most corrupt individuals in Washington. They stress the need for transparency, integrity and accountability on the part of government. In the past, they have sued both the Clinton and Bush Administrations for alleged violations. A second group, CREW (Citizens for responsibility and Ethics in Washington), a more left-leaning group, also compiles a list of ten each year that they have determined to be most corrupt. For 2011 three House members had the dubious distinction of making both lists: Laura Richardson (D-CA), David Rivera (R-FL) and Don Young (R-AK). Maxine Waters (D-CA) would have made both lists, but because of the chaos surrounding her investigation, CREW opted not to include her this year. (The House Ethics Committee has since cleared her of steering TARP funds to the bank in which her husband is a major shareholder. But her exoneration confirms rather than denies a persistent sense of crony capitalism that exists between government and the financial world. She was a key member of the House Financial Services Committee and her husband’s bank did receive their requested funds.)

Anecdotal evidence of corruption is everywhere. When Secretary of Health and Human Services Kathleen Sebelius made a speech at an official function in North Carolina last February, in which she explicitly campaigned for the Lieutenant Governor and the President, there was little question that she had violated the Hatch Act. Punishment for such infringements is typically termination. In her case, her remarks were attributed by the President to “an inadvertent error.” Similarly, Attorney General Eric Holder has been exonerated from any responsibility in the Fast and Furious case, despite being held in contempt by Congress and regardless of memos suggesting he knew more about the F & F case than he alleged.

You cannot fool all the people all the time, said Abraham Lincoln. However, the Administration continues to try, as they did regarding the attacks in Benghazi. For days following the attack that killed four Americans, the Administration insisted that the fault lay with a video. Yesterday, we learned that in fact the Administration knew within 24 hours of the event that Al Qaeda-affiliated terrorists were involved. Yet, they persisted in their story. Outright liars like Elizabeth Warren, who claims to be Cherokee, have become common and are too often given a pass by a media more interested in pursuing their own agenda than in determining the truth. It is little wonder that the electorate has grown cynical and distrust more prevalent.

Increasingly, the people have become isolated from their leaders, leaders who are arrogant, supercilious, and who reflect a sense of entitlement. Voters appear to be necessary nuisances to be tolerated and infantilized. The proliferation of “czars” in Washington is symptomatic of this change. They are unaccountable to voters and inaccessible to most Americans. All Presidents have appointed policy advisors, now termed “czars.” President Bush appointed 32 during his two terms. According to Judicial Watch, President Obama had named 45 as of a year ago. These appointments do not have to be confirmed by the Senate, as do Cabinet Members; they are responsible only to the President. Similarly, safe seats in Congress abound. About 75% of the 435 House seats have remained in the same Party for the past ten years. While the average term in the House and Senate did modestly decline at the start of the 112th Congress versus the 111th, term limits would ameliorate the tendency toward cronyism that seems endemic to those serving in Washington.

Newly-elected reformers seemingly become enticed too easily by the power and opportunities that Washington offers, and too quickly lose their connection to the electorate. I suspect that it has much to do with lobbyists tossing money around like confetti at a wedding. When Mr. Obama went to Washington, he promised to heave lobbyists overboard. Instead, and unlike Jesus’ success with the money lenders, they have found the White House open for business as usual. At a time of relativism and general moral decline, it is perhaps too much to ask that a penurious public servant be immune to the siren call from K Street. Nevertheless, we expect our elected representatives to serve the public interest, not their own. Unfortunately, most don’t.

It is unfair and untrue to write, as David Brooks implies, that today’s conservatives lack compassion. For one thing, their level of giving, even when one excludes donations to religious organizations, exceeds that of their compatriots on the left. Additionally, the top 10% of all income earners now pay 70% of all federal taxes. Their concern is not a lack of interest in the needy; it is that they see their money going to Washington to satiate inflated bureaucracies that function with little restraint, and that rules and regulations are increasingly being imposed which serve to limit their ability to feed the beast that is government. It is the misuse of our money that concerns all of us.

Russell Kirk’s fifth principle is that conservatives recognize that variety is natural to the human condition. By that he meant that the only true form of equality in society is “equality at the Last Judgment and equality before a just court of law.” Attempts to impose an egalitarian society are an anathema. “Economic leveling,” he wrote, “is not economic progress.” In fact it is instead, as Friedrich Hayek noted, “A Road to Serfdom.”

Somehow, sometime, government is going to have to re-earn the trust of the people. I am not sure how or by whom, but I feel confident it can be done. But blaming conservatives for a problem brought on by proponents of big government does not help. As a society we must keep the promise a community offers, but we cannot do so while subverting the principles of individual freedom. Success in government welfare programs, such as food stamps or unemployment insurance, should be measured not by how many people we add to the programs, but by how many we are able to successfully remove. Conservatives want and need government, not only to help care for those incapable of doing so themselves, but also for defense, protection, teachers, roads, bridges and myriad projects that are better performed by a community than an individual. Federal government spending, however as a percent of GDP, has surged in the last four years from 20% to 24%. As government consumes an increasing share of the economy, the effect will be to retard economic growth. If we want living standards for everyone to continue to rise, as they did in the 1980s and ‘90s, we must provide the private sector more latitude and remove the omniscience of government.

Government has become its own worst enemy, accumulating power and creating bureaucracies whose sole purposes are to expand. It needs honest and caring guardians, not supercilious elites who know better than us as to what is in our best interests. It is little wonder that it is government that we do not trust.

Tuesday, September 25, 2012

“Government and Economic Growth”

Sydney M. Williams

Thought of the Day
“Government and Economic Growth”
September 25, 2012

Government is addicted to growth. Unfortunately it is addicted to the growth of its own bureaucracies, not the economy. It is the rare bureaucrat who desires to make his or her department smaller. There are a few examples. Demobilization always follows the conclusion of wars. In Germany, the Treuhandanstalt, which was established in 1990 (and for which my oldest son worked for a year and a half) to privatize East German industry, was that rare bureaucracy that was set up to last for a specific period of time. In 1990, it was the largest industrial firm in the world with 8500 businesses employing 4 million people. Five years later, its job accomplished; it did not exist. As Indiana Governor Mitch Daniels said in his response to the President’s State of the Union message last January, “…government is meant to serve the people rather than supervise them…” Every manager – public and private – has a desire to grow his department. But the government bureaucrat who does so too often inhibits the private sector, by imposing unnecessary rules and regulations.

A sense of waste is embedded in almost all governmental bodies. When I was a new Army recruit fifty years ago, I recall being ordered to rake leaves, but to rake them one leaf at a time.

Unlike a business that must depend on rising sales to enjoy the benefits of growth, the government worker relies on an ever-rising stream of tax revenues, or an increase in the level of debt to achieve the same objective. Government does not produce anything, apart from paper work. It is responsible for passing legislation and then administering rules and regulation; it protects our lives and property and defends us when we need defending; it has responsibility to teach our youth and to ensure laws are upheld. It prosecutes miscreants, and transfers wealth where and when it deems to do so necessary. And it does all this while being paid through the tax dollars we pay. It is a service industry with too little understanding of the concept of service.

For most of the past four decades, the federal government spent about one out of every five dollars in the entire economy. For the last four years it has been spending one out of four. An expanding government crowds out a struggling private sector. When the economy expands, so do tax revenues. But, when it shrinks or grows at a subpar level, tax receipts decline. When spending keeps on chugging along, as it is now in lean economic times, that means debt is expanding.

Recessions cause the traditional balance between the public and private sectors to be altered, at least temporarily. A lack of tax revenues causes debt to increase, but the goal should be to get the private sector re-energized as quickly as possible, not to permanently put in place government programs that cannot be easily disassembled. The Federal Reserve plays a key role in aiding an ailing economy, but encouraging business investment and consumer spending should be the motivating reasons – not making it easier for government to expand their reach, which is what this Fed has done.

With tax revenues at historically low levels, the response of the Administration has been to raise “fees” on everybody, increase taxes on the “rich,” and to increase borrowings to pay for expanded welfare programs. Cutting spending and reducing the size of government is considered an unacceptable form of austerity. Low interest rates have allowed government to expand without the penalty of paying for what has been reckless fiscal behavior. With a complaisant Federal Reserve, while having the world’s reserve currency, the consequences of the arithmetic have not yet been fully felt in the U.S. But that will not last. There will be a price to pay.

John Taylor, professor of economics at Stanford, recently noted that last year the Fed bought 77% of all new federal debt issuance. Their actions have kept interest rates at abnormally low levels. For example, last year federal debt amounted to 98.7% of GDP, and interest rates were 3.0% of GDP. In contrast, in 1989 debt was 53.6% of GDP, while interest expense was 4.4% of GDP. Another way of looking at the same numbers is to measure federal debt per capita and as a percent of per capita income. Using those measures, debt per capita as a percent of per capita income in 1989 was 85%. In 2011 it was 183% . If price controls on interest rates were lifted, interest costs would exceed what we now pay for defense. MSNBC, not a noted advocate for fiscal prudence, noted last year that interest costs on the federal budget in 2018 will exceed what we now pay for Medicare. Today, according to their report, interest costs are one half of Medicare expenses.

The Fed can keep the music going for a while, but at some point it stops. Senator Schumer (D-NY) recently stated, in an unacknowledged indictment of himself and Congress, that “the Fed is the only game in town.” Richard Fisher, President of the Dallas Federal Reserve Bank, at a speech last week at the Harvard Club said he would have answered Mr. Schumer (who is also his college classmate): “No, Senator, your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum (loosely translated as ‘Don’t let the bastards wear you down.’) Sacrifice your political ambition for the good of the nation…For unless you do, all the monetary policy accommodation the Federal Reserve can muster will be for naught.” I would add to the list of those guilty our President who has done very little, if anything, to jumpstart the process of reigniting the economy. Mr. Fisher’s speech can be accessed by going to www.dallasfed.com, and then looking for speeches by Mr. Fisher.

In the same speech, Mr. Fisher referenced a recent Duke University survey of 887 chief financial officers. Only 14.5% cited credit markets/interest rates among their top three concerns. In contrast, 43% listed consumer demand and 41% mentioned federal government policies. Third on the list were price pressures from competitors, and fourth was global financial instability. Eighty-four percent of the respondents said they would not change investment plans if interest rates dropped two percent.

As I noted in a piece last week, “The Fed Does What Washington Dares Not,” liquidity is not the problem. Banks have excess reserves of $1.5 trillion. Corporations have something like $2 trillion in cash on their balance sheets. As of last week, money market mutual funds held $2.578 trillion. Cash is not the problem. Confidence is. Mary Anastasia O’Grady had an op-ed in yesterday’s Wall Street Journal, in which she reviewed the miracle of commonsensical politics that saved Canada eighteen years ago. It is a story worth recapping. Paul Martin, who had been elected finance minister in 1993 in Jean Chrétien’s Liberal Party, faced a federal debt-to-GDP ratio of 80 percent. Interest costs were consuming about one third of the government’s revenues. Mr. Martin cut spending by ten percent over two budgets. Nothing was spared. In the 1997 election, the Liberal Party increased its majority in Parliament. Two tax cuts were implemented, in 1997 and 2000, including the largest cuts – both corporate and personal – in the history of the country. Again, in the next election, they won. The problem in Canada had been building for years. Over a two-month period in 1994, interest rates on Three-month Canadian Treasuries rose from 3.85% to 5.82%, providing a preview of what can happen in Treasury land. Federal spending, which was 15% of GDP in 1965, had risen to 23% by 1993. (Today, we are at 24 percent.) Canada turned the corner. Growth reignited. Taking the difficult steps to fix the problem did not hurt the Liberal Party in the subsequent elections. Of all developed countries, Canada weathered the recent economic downturn better than most. Countries can be turned around, but it takes bold ideas, determination and a willingness to be straight with the electorate.

More than anything, Mr. Obama should be using the power of his pulpit to restore confidence; and that means explaining the magnitude of the problem and that the best way to restore growth is to simplify both the tax code and regulation, as a means to encouraging businesses to invest.

A consequence of an expanding government – one that has increased rules, regulations – has been a decline of the United States in the Economic Freedom Index compiled by the Fraser Institute in British Columbia. Gene Epstein reported the results in last weekend’s Barron’s. On a scale of 1 to 10, the U.S. scored a 7.7, placing it 19 and behind such countries like Canada, Chile, Denmark, Finland and the U.K. In 1995, the U.S. was 2, and in 2000 it ranked 8.

Growth can only come from the private sector. Government needs to provide for those who for whatever reason cannot do so themselves, but bureaucracies getting big for the sake of getting big are not the answer. They encourage a lack of responsibility on the part of people, and complacency and arrogance on the part of government employees. Parkinson’s Law, which states that work will expand to fill the time available for its completion, is applicable to government, but not to private businesses that must produce a profit in order to survive and grow. As Mr. Daniels said in his response last January: “We do not accept that ours will ever be a nation of haves and have nots; we must always be a nation of haves and soon to haves.”

The philosophical difference is important. One says trust in government; the other says trust in one’s self and free markets. One breeds dependency; the other responsibility and self respect, and helps fulfill the aspiration of millions. One grows government; the other grows the economy.

Monday, September 24, 2012

“Rising Risk in the East China Sea”

Sydney M. Williams

Thought of the Day
“Rising Risk in the East China Sea”
September 24, 2012

The assassination of the Austrian Archduke Franz Ferdinand by Serbian terrorist Gavrilo Princip on June 28, 1914 in Sarajevo was the match that ignited the conflagration known as World War I. The War decimated a continent, killed an estimated 16 million, and the terms of its peace led directly to World War II, twenty-one years later. But the assassination was only the match; the tinder had been laid over the decade leading to 1914.

Writing in the Financial Times, Ambrose Evans-Pritchard, International Business Editor of the paper, writes of the 1911 Agadir crisis, when the Kaiser sent a warship to Morocco to prevent French annexation. The purpose, he suggests, was to test France’s entente with the British. It was one of a series of seemingly small instances that led up to the fatal shooting in Bosnia three years later.

It is far too early to suggest that the dispute between China and Japan augurs a similar devastation; though it is probably fair to say that the bickering is one means of testing the security treaty obligating the United States to come to the defense of Japan in case of attack. On September 18, Defense Secretary Leon Panetta informed Chinese National Defense Minister Liang Guanglie that the Senkaku Islands (Diaoyu Islands, as they are known in China) would be considered a part of Japan for purposes of the treaty. Nevertheless, Washington has also maintained its stance that it would not take sides in the territorial dispute over the islands – a position it has held for several decades.

The feud over the islands has resonated across China and Japan, putting at risk $340 billion worth of trade between the two nations. Thousands of Chinese attacked Japanese-owned shops and factories in China. The Japanese Embassy in Beijing was the recipient of paint bombs. An estimated 800 Japanese demonstrators in Tokyo, organized by the nationalist group Ganbare Nippon (go for it, Japan,) marched on the Chinese Embassy.

The islands in dispute by themselves have little, if any, economic value, but they lie in fishing waters of the East China Sea, which are critical in terms of defending shipping lines in the area. They are also potentially home to mineral rights. They lie about 100 miles northeast of Taiwan. They have been under Japanese dominance since the end of World War II. Recently the Japanese government purchased three of the five islands from their private owners. War over those islands seems remote. After the devastation of World War II, most Japanese show little interest in a nationalist call to arms. However, the weekend’s Financial Times reported that a poll conducted by the Nikkei newspaper last month indicated that “48% of the respondents thought Japan should react firmly to Chinese moves on the Senkaku.”

Memories last long in the region, and December 13 will mark the 75th anniversary of one of the most notorious atrocities of all time – the Rape of Nanking. While estimates vary as to how many were killed at that time, it is generally conceded that about 200,000 died, many of them women and children. To put the number in perspective, the population of Nanking, the former capital of the Republic of China, was about 600,000. Manchuria was invaded in1931 by the Japanese, and China’s pleas to the U.S. and the League of Nations, at the time, went unanswered.

Ironically, the very presence of the U.S. in Asian waters has served to allow the region to expand economically, with China the single largest beneficiary. Yet, according to Andrew Nathan and Andrew Scobell, writing in the September-October edition of Foreign Affairs, China sees the United States as a less than benevolent guardian of the region. They note that the American military is deployed around their periphery and that they “maintain a wide network of defense relations with China’s neighbors.” Additionally, they point out that Chinese analysts see their country “as heir to an agrarian, eastern strategic tradition that is pacifist, defense-minded, non-expansionist and ethical.” In contrast, they perceive the U.S. has being “militaristic, offense-minded, expansionist and selfish.” The authors suggest that calls for human rights and democracy in China are simply subtle ways of weakening the power of China’s leaders.

Regardless of how the Chinese may view themselves, relations with other neighbors in the South China Sea, such as South Korea, the Philippines and Vietnam have proved edgy over resource-rich waters. The Economist, back in April ran a special edition, “The Dragon’s New Teeth.” The authors quoted an editorial in the Chinese state-run Global Times: “If these countries don’t want to change their ways with China, they will need to prepare for the sound of cannons.” That is not what I would call a policy of pacifism, non-expansionist and ethical.

On June 21st, China’s State Council approved the establishment of a new prefecture, which it named Sansha with headquarters on Woody Island in the Paracel Islands. This is a group of islands over which Vietnam claims sovereignty. The next day China’s Central Ministry announced it would deploy a garrison of soldiers to guard the islands. And now, according to Virginia Democratic Senator James Webb writing in the Wall Street Journal a month ago, “China has begun offering oil exploration rights in locations recognized by the international community as within Vietnam’s exclusive economic zone.” There have been similar differences with the Philippines, for example, with China preempting mineral rights in the Scarborough shoals.

It is far too early to suggest that China will resort to military action. According to most sources, they are not yet ready. They do have the largest standing army in the world (ten times that of Japan.) But their number of aircraft is roughly 30% of ours, while their navy, in terms of total number of ships, is about 40% of ours. Our defense budget is four times that of China’s, but theirs is growing, while ours will likely be shrinking, at least as a percent of GDP. The Chinese, for example, have only one aircraft carrier, the ‘Varyag’ which is a retrofitted Ukrainian carrier. However, the first Chinese built carrier is expected to be christened in 2015. The U.S., in comparison, has five carriers. The addition of more Chinese-built carriers, though, as the article in the Economist makes clear, “would be an unmistakable declaration of an ambition eventually to project power far from home.”

In terms of territorial disputes, the United States has taken the position that it will not interfere, even though defense treaties might imply otherwise. Senator Webb worries about this historic policy of taking no sides. It has, he writes, “emboldened China.” “Washington has by default become an enabler of China’s more aggressive acts.”

It would be nice to believe that people of all countries, no matter their differences, could live peacefully. But, unfortunately, that is not the lesson from history, and it is not the message of the current day. Man has never shown an ability to live peacefully. Contentions are driven by culture, religion, geography and economics. The best means for the U.S. to help keep the peace is to stay strong. Senator Webb, in the same article cited earlier, wrote: “History teaches that when unilateral acts of aggression go unanswered, the bad news never gets better.” As mentioned above, it was China’s call for help in the 1930s that went unanswered. Better than most, they understand the consequences of the failure of the international community to respond. And the memories of a December 13th tragedy seventy-five years ago are unlikely to disappear unacknowledged.

In terms of trade, in my opinion, we do ourselves harm when we raise the subject of currency manipulation and when talk turns to recriminations and trade wars. First, the United States has been guilty as any country recently in terms of manipulating its currency and second, the erection of trade barriers serves no one. Trade wars encourage an unhealthy increase in nationalism, one of the causes of both World Wars. In the early 1930s, they deepened and prolonged the Depression.

President Obama was right to “pivot” towards Asia. The region is combustible. Lines are being drawn. Last November, at a Moscow meeting with Wen Jiabao, Vladimir Putin slammed “arrogant world powers.” This past June he met in Beijing with China’s incoming President Xi Jinping, Mr. Putin emphasized the two countries military alliances, pointing to last April’s joint naval training exercises. At the same time, the United States has been trying to strengthen its ties with India, which is a work-in-progress. India has been a leader in the non-aligned movement, with an official policy of being “strategically autonomous.” Nevertheless, disputes along China’s western borders and rising tensions with Pakistan may cause India to seek a partner. Raising the stakes for the rest of the world, India, Pakistan, China, Russia and the U.S. are all nuclear powers.

Despite wars in Korea and Vietnam, the Asian region has been relatively peaceful for the past sixty-seven years – in part because of the presence of the United States Navy. It is not a surprise that with China’s growing prosperity she would want to increase her sphere of influence. By itself, that is not necessarily bad, but it means that the dynamics in the region are changing. A big difference between Asia in the second decade of the 21st Century and Europe in the second decade of the 20th Century has been the hegemony of the United States, which has helped preserve the peace. It appears that those relationships are now changing. The best chance for peace, though, is to keep our military strong.

The Middle East, with the Iraq-Iran dispute in the forefront, may be the most immediate concern, but we cannot afford to be too casual as to what is happening in the East China Sea, with China and Japan disputing a few islands populated mostly with goats. Minor, seemingly unimportant disputes can have meaningful consequences, as diplomats discovered in Europe a century ago.

Friday, September 21, 2012

“Who Is Mitt Romney?”

Sydney M. Williams

Thought of the Day
“Who Is Mitt Romney?”
September 21, 2012

First a caveat: As will be of no surprise to anyone, I prefer Mitt Romney to Barack Obama. While I have a prejudice about giving money to any politician – I feel about gifts to politicians as P.J. O’Rourke once said about voting for them, “It only encourages the bastards” – I was persuaded by a friend to give $1000.00 to Mr. Romney’s primary campaign last spring. Thus far, the only return on my investment has been a series of unwanted e-mails and unsolicited phone calls. I have never met Mr. Romney; so my opinions expressed below are based on what I know of his history, his family, friends and financial advisors, people like Glenn Hubbard of Columbia and John Taylor of Stanford, and of course what he has accomplished.

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The Obama campaign, with a great deal of help from a partisan press, is trying to portray Mitt Romney as an aristocratic, callous multi-millionaire businessman who is out of touch with middleclass Americans. Mr. Romney appears, at times, to be intent on encouraging that image.

The latest flap concerns a surreptitious recording taken at a fundraiser last May and then posted on YouTube. In the recording, Mr. Romney refers to Obama voters who are “dependent on government” and that “47% of workers paid no federal income tax.” It took four months for the Obama campaign to go public with the video, presumably because David Axelrod determined that the publicity effect would be greater a few weeks before election, rather than during the primary season.

Now it appears that the tapes may have been incomplete or, worse, edited. Breitbart News reported on Wednesday that David Corn of Mother Jones (the company that provided the tape) admitted that “two or three critical minutes may be missing or have been edited out.” As to whether the tapes accurately portray Mr. Romney’s predilections or not, the video snippet was accepted, with no questions asked, by mainstream media. As Dorothy Rabinowitz put it in an op-ed (“The Fourth Estate, Still Thrilling to the Spirit of ‘08”) in Wednesday’s Wall Street Journal, “the sanctimony of the virtuous knows no political bounds.”

A big part of the problem of attempting to understand a man like Mitt Romney is because our primary system requires a candidate to appeal to myriad fringe elements. The problem is compounded by the fact that technology has ensured that there is no such thing as speaking privately to a group no matter how small. It makes no difference where a candidate is; regardless of how they look, or what is said, the event is videoed and recorded, either overtly or covertly. Campaigns use flattering sound bites. On the other hand, if the candidate says something that could be used against them, rest assured it will be.

The electorate is better served to look at Mr. Romney’s record as a student, husband, father and businessman. They should consider his time as president of the Salt Lake Organizing Committee for the 2002 Winter Olympics and as Governor of Massachusetts, rather than listening to sound bites that almost always are cut and edited for effect.

The head of the school attended by his five sons gave a speech in the mid 1990s to parents. In it he deplored the state of our politics and suggested that men like Mr. Romney, then head of Bain Capital, should consider public office. I have no idea if that headmaster today supports Mr. Romney, but I believe he perceived at the time a quality in Mr. Romney that many in public life do not have, and that is a sense of honor. Mr. Romney’s compassion can be seen in the affection of his family for him (and he for them) and in the story of his once suspending all activities at Bain in order to conduct a search for the missing daughter of a colleague. There is little question about his competency, as seen by his success at Bain and at saving the 2002 Winter Olympics from financial collapse. As Governor, he proved his ability to work with a Democratic legislature, reduce a projected $3 billion deficit, and, yes, help shape and sign a Massachusetts healthcare plan.

The role of the Fourth Estate has historically been to present all sides of an issue or individual, so as to provide the reader or the viewer the data to make an informed judgment. As we all know, instead they have become advocates and, in some cases, participants. Opinions should be reserved for the editorial pages. David Brooks, unique among columnists for generally writing intelligently and dispassionately, did himself a disservice on Monday, in my opinion. His sense of balance seemed to be off-kilter in his column, “Thurston Howell Romney.” First, Mr. Romney bears no resemblance to the scatter-brained and pompous Mr. Howell of “Gilligan’s Island.”. Mr. Brooks, in his column, is far too quick to draw conclusions. He suggests that Mr. Romney’s “inelegant” (as Mr. Romney termed them) remarks – ones that now appear to have been partially taken out of context – say unflattering things about the candidate. Mr. Brooks claims “he really doesn’t know much about the country he inhabits” that he “doesn’t know much about the culture of America” and that he “knows nothing about ambition and motivation.” The allegations fall somewhere between spurious and ridiculous.

Mr. Brooks invokes another charge. He suggests that Mr. Romney has lost any sense of the social contract, quoting a Pew Research Center survey that showed that 62% of Republicans in 1987 believed that government has a responsibility to help those who cannot help themselves. Mr. Romney’s signing of healthcare legislation in Massachusetts indicates a compassionate side and that he cares. Mr. Brooks fails to focus on the enormous differences between the financial health of our economy twenty-five years ago and today. Most Americans, including most Republicans, expect government to help those unable to help themselves. Certainly I feel that way. But the problem is not what we would like to do; it has become what we can afford to do. In 1987, federal debt was 51% of GDP; today it is over 100%. I enjoy David Brooks’ columns and will continue to read them, but this one was beneath his standards.

Like all candidates in a country with many differences, Mr. Romney is trying to win an election to govern 315 million Americans. It is why we need to look at what he has done, not sound bites taken out of context. It is why the same principles should apply to Mr. Obama and the mentors who have influenced him – ones that he has tried to run from (think Jeremiah Wright,) something Mr. Romney does not do. While the mainstream media will search under every rock looking for some damaging association or comment of Mr. Romney, they provide a pass to the President. In so doing, they leave to us the responsibility of determining which is the better candidate.

George Will, in a recent column “Feeling Our Infantilism,” quotes a Washington Post/ABC News poll that asked: Which candidate would you rather have home to dinner? We don’t elect Presidents on the basis of friendship, or at least I hope we don’t. Speeches before cameras stacked with screaming partisans only fuel the narcissism of a candidate. We have too much of that. Mr. Obama’s appearance on the fawning David Letterman’s show did nothing to advance people’s knowledge of the evasive President. In fact, at a time of crises at home and around the world, the President’s appearance was discomfiting. As Mr. Will suggests, the electorate is old enough to be treated as adults. The question should be, in regard to the economy: “Is this the best we can do?” The answer has to be no; we can do better.

Who is Mitt Romney? I realize I have not answered the question. But we know certain things. His history is not shadowy like Mr. Obama’s. He did not write his own autobiography before he was thirty, as did Mr. Obama, so as to control the search into his background. Mr. Romney is not only a capable entrepreneur, he is a talented administrator. As governor, he showed he could work across the aisle. He has successfully tackled big problems, but most important, in my mind, he has combined decency and compassion with competency, in both his personal life and in his professional careers.

………………………………………………….

My bias is based on not only on my sense of each candidate’s character, but on the fact that the crisis we face, the one of our debt and our deficit, is the greatest in my memory. Federal debt, at over $16 trillion, exceeds 100% of GDP for the first time since World War II. Our annual deficits, which, collectively, have amounted to $5 trillion in the past four years, are expected to exceed $1 trillion in each of the next four years. At that rate, the expansion in deficits will be three times the projected growth in GDP. In short, we are facing a potential financial crisis of enormous dimensions.

Globally, we face the possibility of horrific collisions between a nuclear armed Iran and a vulnerable Israel, and increasing tensions between China and Japan over the Senkaku Islands, (populated for the most part with goats). Our ability to help will be constrained unless we very soon address the tidal wave of debt that is approaching. If we do nothing, it will be monetized, sending inflation soaring.

The problem of getting our own house in order first is somewhat analogous to the advice given air passengers about to depart: when and if the oxygen masks descend, put yours on before placing one on your child.

Mr. Obama has shown no interest or resolve in seriously addressing this issue. In fact, of the four candidates running for President and Vice President only Paul Ryan has been willing to speak out regularly on the subject. The President, the Vice President, along with the mainstream media, have done their utmost to demonize and marginalize him. Perhaps Mr. Romney will also be unable to resolve this issue, but the risks of staying with Mr. Obama, on the current course, are far too great. The election is not about who might be the most compassionate; it is about who has the most common sense.

Wednesday, September 19, 2012

“Lessons Not Learned from 2008”

Sydney M. Williams

Thought of the Day
“Lessons Not Learned from 2008”
September 19, 2012

Just over four years ago, the world as we knew it looked like it was coming to an end. And perhaps it did. On September 6, 2008 the Director of the Federal Housing Finance Agency (FHFA) announced he was placing Fannie Mae and Freddie Mac into conservatorship. On Sunday evening, September 14, Lehman elected to file for bankruptcy. Earlier that afternoon, the sale of Merrill Lynch to Bank of America was announced.

Volatility, as measured by the DJIA moving more than 1.5%, had been relatively high all year, but spiked in September with 11 of 22 trading days being in excess of that number. It would peak in October. Indicative of the confusion existent in the market at that time, over the five trading days beginning September 15, the DJIA lost 953.84 points and gained 920.29 points, but losing only 0.3% for the week. As the severity of the crisis began to sink in, markets continued to lose ground until they finally bottomed six months later on March 9, 2009. In the interim, the S&P 500 lost 46% from the Friday before the Lehman collapse, and it wasn’t until December 21, 2010 that the S&P 500 topped where the market had been on that Friday.

Four years ago (September 16, 2008), I commented in a TOTD on the “sense of helplessness” that one felt, and that what was happening was “not only beyond our control but beyond our understanding.” The next day, I noted that the bankruptcies of Lehman and Washington Mutual, the last minute acquisition of Merrill by Bank of America, the governments’ injection of $80 billion into AIG, and the conservatorships of Fannie Mae and Freddie Mac seemed like “a series of controlled explosions.” On the 18th, I wrote: “Economic growth around the world is bound to slow and is likely to be sub-par for the next few years.” For everyone who lived through those few weeks it was frightening – more so than October 19, 1987, because that event was over so quickly.

Despite the fear that those events created, I worry that we may not have learned the lessons we should. Following the collapse of the Internet-Tech bubble in 2000 and the terrorist attack on 9/11, the Federal Reserve had kept interest rates exceptionally low until early 2005, despite a recovery that began in late 2001. Even though the stock market collapse of 2000-2003 wiped out almost $6 trillion, the more important asset for most people was their home. And homeownership was increasing and so were prices. Amendments to the Community Reinvestment Act which were signed into law in 1995 imposed penalties on banks that discriminated against certain borrowers, some of whom did not have the financial wherewithal to qualify for conventional mortgages. Banks, in other words, were forced to make loans that a fiduciary would have nixed. Additionally, the Bush Administration had made a policy decision to increase home ownership. The consequence was a spurt in home prices and an increase in unconventional mortgages, both of which contributed to the ultimate collapse.

We are now more than three years into a recovery, albeit one so feeble as to have kept unemployment at uncomfortably high levels. Nevertheless, the Fed has persisted with continuing low interest rates. From an economic perspective, low rates may have stemmed the bloodletting in the housing market, but they haven’t done much for the rest of the economy. Their most notable effect has been on asset prices. Stocks, bonds and commodities have all risen – doubled or better since the end of December, 2008. Household income, though, is down, and unemployment is up. Seniors and those living on fixed income have seen their income decimated. The yield on 90-Day Treasuries on December 31, 2007 was 3.17%; a year later it was 0.11%, where it remains today. Savers have been sacrificed in favor of borrowers, even though it was leverage that fueled the speculation that created the crisis. The bottom line is that the wealthy have done well, while the middle class has not.

At the moment of panic, which began that Sunday, September 14th with the bankruptcy of Lehman, the focus of the Fed and Treasury was to ensure that the banking system remained intact. The domino effect of collapsing banks was a scary thought. TARP funds were used to shore-up banks, purchase troubled assets and in fact, inject equity capital into banks. Investment banks like Goldman and Morgan Stanley were converted into commercial banks, so as to be able to access the Fed’s Discount Window. In October 2008 the Federal Reserve began paying banks interest on reserves. Historically, according to Bruce Bartlett writing recently in the New York Times, the Fed never paid interest on reserves. Since December 2008, the rate paid to banks on reserves has been 0.25%, providing banks a riskless rate of return, initially as a means of encouraging them to strengthen their balance sheets. Today, according to the Fed, banks are sitting on $1.5 trillion in excess returns, which means that we as taxpayers are paying banks $22.5 billion a year for doing nothing. Does it make sense to continue the practice four years after the event?

Yet with all the talk of banks too big to fail and the need to separate commercial banking from investment banking, the effect of government policy has been to make them even larger. The four largest banks – Bank of America, Citigroup, JP Morgan Chase and Wells Fargo – in 2000 held 22% of all banking assets. By 2009, that number had risen to 39%. Today those four banks represent 55% of $13.247 trillion in U.S. banking assets, with the balance ($5,941 trillion) spread among 8095 banks. If we thought 2008 was frightening, that period would be a walk in the park compared to a similar incident today.

The automobile companies in 2008, because of their overleveraged and undermanaged finance arms (along with union demands and an unprofitable dealer network,) faced bankruptcy. Chrysler and General Motors accepted funds. Chrysler was later sold to Fiat, but we taxpayers still own a slug of General Motors and are underwater on our investment. Among the conditions demanded by government was a settlement that favored union members over non-union members and, critically in terms of bankruptcy law, bond holders were subordinated to union obligations. The consequences of that decision have yet to be felt. Cronyism between big banks, big corporations, big unions and government has increased, not lessened, since the autumn of 2008.

Wall Street was regulated going into the credit crisis of 2008. The problem was a failure of regulators to regulate. A two-way street exists between Wall Street banks, law firms and regulators easing the adoption of rules favorable to banks, and likely permitting regulators to blink when necessary. The Volcker Amendment, which would essentially restrict banks trading for their own account, appears to be losing supporters. As banks have grown in size, so have their lobbying budgets and efforts. The simplest and most effective way of regulating them would be, as I have written before, to limit their ability to leverage – the larger they become, the less leverage they should be able to deploy. Making a few bankers rich is far less important than ensuring the safety of the system for the rest of us.

While Congress was generous in spreading the blame, they, naturally assumed none for themselves. It is what happens when the investigators, the judge and the perpetrator all happen to be the same person. In my opinion, when the final chapter of this period is written Congress will be seen as culpable as any party.

On the positive side of the ledger, to the extent there is one, it is the individual and small business person who have been chastened by events, as they are the ones who suffered the most. But because of their caution and the uncertainty we all face, they are spending less and hiring less. Both Senator Chris Dodd and Representative Barney Frank took advantage of age and tenure to slip away. Good riddance, in my opinion, even if they leave unpunished.

But, in general, I don’t believe we learned very much. Not one banker, nor corporate manager, nor Congressman who aided and abetted a scheme that almost brought our financial system to ruin is in jail. Regulation and taxes are more arcane than they were earlier. The Fed persists in cheapening our currency. Banks continue to get bigger, their very size more threatening than ever. There is much we have not learned.

Tuesday, September 18, 2012

“Be Careful For What You Wish”

Thought of the Day
Sydney M. Williams
“Be Careful For What You Wish”

September 18, 2012

There are those who claim that anti-Islamic depictions, like Salmon Rushdie’s Satanic Verses published in 1988, or the unflattering cartoons that appeared in the Danish newspaper “Jyllands-Posten” in 2005 are “hate speech,” and therefore should be banned. That suggests a dangerous precedent, for while they may be distasteful and crude, they are also examples of free speech. And so is the video that has created so much commotion. As such they must be defended by those who believe in freedom of expression. In my opinion Google has been right in denying the Obama Administration’s request that they take down the American-produced anti-Islamic video that has been cited by some as inciting violence. In fact, an unfortunate consequence of the Administration’s making so much of the video has been to increase its popularity. It is a fourteen-minute trailer to a full-length, American-produced film that according to Wikipedia was shown once to a theater audience of ten people and then uploaded to YouTube in July. It is, apparently, insulting to the Prophet Muhammad. But bad taste and insults, however, have never been an excuse to censure the right of free expression. If they were, politicians would be unable to advertise and campaign.

It is this threat to a basic freedom that should concern us, as Americans, more than whom or what was responsible for the attacks on our embassies and consulates in the Middle East. A country that grants its citizens the right of free speech must necessarily be morally strong. Obviously, the right of free speech does not protect the idiot who cries “Fire!” in a crowded theater. But the state, as the defender of free speech must be able to withstand the objections of those who are offended by what has been spoken, written or produced. It must agree that some of what is said or written is tasteless and offensive. It must have the moral certitude to defend the rights of those with whom they disagree. Such rights are elemental to the existence of a free society. And, just as we have the right to speak and write freely, so do we have the right not to listen, view or read.

In my opinion, the reason the Administration decided that the warped and tasteless video would become the motivating factor for the attacks on the Embassy in Cairo and the killing of the American Ambassador at the Consulate in Benghazi had less to do with Muslim sensitivities and more to do with diverting attention from what may have been a failure to take proper precautions leading up to the eleventh anniversary of the attacks on 9/11. It was certainly easier than accepting responsibility. And, in campaign season, one can never let an opportunity be wasted.

Once the decision was made, it was endorsed wholeheartedly. Last Thursday, Secretary of State Hilary Clinton, at a press conference in Washington tried to quell Muslim anger: “Let me state very clearly, and I hope it is obvious, the United States government had nothing to do with this video.” It is unlikely that anyone believed that such a poorly made video would be the product of the U.S. government. But that she did not feel an obligation to also defend the right of a citizen to do so is troubling. On Friday, as our embassies were still being mobbed by radicals, as had begun on the anniversary of 9/11, White House spokesman Jay Carney held a press briefing: “The unrest we’ve seen around the region has been in reaction to a video that many Muslim’s find offensive. It is not a response to 9/11.” He did, though, later add, “As I said yesterday, it can be difficult to see in some countries why the U.S. can’t simply eliminate this expression…but as you know…it’s one of our fundamental principles.” Others, including the Chairman of the Joint Chiefs of Staff General Martin Dempsey apparently disagree, as he continued efforts to have Google muzzle the offensive video.

On Sunday, the Administration dispatched U.S. UN Ambassador Susan Rice to the talk shows to pass on the same message: “Based on the best information we have to date…it [the attack] began spontaneously in Benghazi as a reaction to what had transpired some hours earlier in Cairo, where, of course, as you know, there was a violent protest outside of our embassy sparked by this hateful video.” Keep in mind, this was the eleventh anniversary and the video was downloaded to YouTube two months earlier. In contrast to Ms. Rice’s comments, Mohamed Yusuf al-Magariaf, president of Libya’s General National Congress, said on the same CBS “Face the Nation” show: “The way these perpetrators acted and moved, and their choosing the specific date for this so-called demonstration, this leaves us with no doubt that this was preplanned, predetermined.”

The fact that the attack came on 9/11, and that the perpetrators carried rocket propelled grenades and mortars suggests this was not a spontaneous uprising by disenchanted protestors having seen a video they did not like. This had been planned and was well funded. The photograph taken five days ago of Ambassador Chris Stevens being dragged through a street of Benghazi, allegedly being taken to the hospital, is equally disturbing.

The passing of the blame onto a video that had been made two months earlier is nothing more than a red herring. It is designed to divert attention from the fact that Mr. Obama, like his predecessors, has been unable to solve the riddle that is the Middle East. But, worse, it suggests a bending of the principles of our Constitution. When we disrespect our own laws, how can we expect to earn respect from other nations?

Every President that I can remember believed he would be able to solve the Rubik’s Cube that is the Middle East. None have succeeded. Perhaps there is no solution. The people of the Middle East – Arabs, Jews, Coptic Christians, Persians, Kurds, Turks and others – have lived there for thousands of years. Yet the boundaries that delineate their countries were drawn by the British in the aftermath of the First World War, less than 100 years ago. Oil, which was discovered in the Arabian Peninsula in the 1920s, made the region of commercial interest to all western powers, but especially to the United States. Upon the termination of the British Mandate for Palestine, the State of Israel rose in 1948. The day after they were recognized by President Harry Truman as an independent country they were invaded by Arab neighbors in support of displaced Palestinians. The region has not known peace in the ensuing sixty-four years.

At 95, Bernard Lewis is generally considered the greatest authority in the U.S. on Islamism. He is noted for having always held a balanced, but ultimately optimistic view toward Muslim society and culture. However, his warning in a 1990 essay in the “Atlantic” is how he is best known today: “But Islam, like other religions, has also known periods when it inspired in some followers a mood of hatred and violence. It is our misfortune that part, though by no means all or even most, of the Muslim world is now going through such a period, and that much, though again not all, of that hatred is directed against us.” More recently, according to an article that appeared recently in the “Tablet,” an on-line magazine of Jewish news, ideas and culture, Professor Lewis’s life-long affection and respect may being tempered, as a darker picture than he envisioned is emerging from Morocco to Afghanistan.

Mr. Obama is only the latest in a long series of Presidents with the goal of solving this riddle. But he is a man who brings more hubris to the party than most, a man who spent part of his childhood among Muslims and who was awarded the Nobel Peace Prize, not for what he had done, but for the peace he was expected to bring. Such testimonials, however, may have provided him with more arrogance than understanding. It remains to be seen what he can do. But running from America’s basic rights of freedom, and passing blame, is not the right way to start.

The twin mandates of the United States have been to support the democratic State of Israel and to ensure the regular flow of oil, principally from Saudi Arabia. Those goals, obviously, are often in conflict. It has meant that we, a democratic nation, have had to support dictatorial regimes. When revolutions have arisen, as they did in Egypt in 1952 when King Farouk was overthrown, or in 1979 when the Shah of Iran was deposed, it has taken skillful negotiations to maintain some semblance of order. Dictatorial regimes have generally been replaced by other dictatorial regimes. That has continued to be true, including last year’s Arab Spring.

Despite our obvious failings to bring peace to the Middle East, we must keep in mind that in all of history there has never been another country that has been a force for so much good as the United States, nor one that has done so much to welcome and assimilate others, including Muslims, into our culture, which has expanded as it has accepted them. There is no need to apologize about who we are and the principles we represent. As we have discovered, we cannot dictate events in the Middle East, but we can and should remain true to the principles of our own nation – defending the rights of our citizens, showing the world that we cannot be cowed into stooping to their level. At all times, though, we must remain ever vigilant and be careful for what we wish.

Monday, September 17, 2012

“The Fed Does What Washington Dares Not”

Sydney M. Williams

Thought of the Day
“The Fed Does What Washington Dares Not”
September 17, 2012

To avoid being seen as partisan, the Federal Reserve traditionally has taken no decisive action in the last several weeks of a Presidential election. Mr. Bernanke tossed custom aside when, on Thursday, he pushed through what the Financial Times termed “a stunningly aggressive set of measures.” The Fed said they will be purchasing $40 billion of mortgage securities a month. The plan is open-ended, with the focus on jobs rather than controlling inflation. The reason that the Fed has had to go on the offense is because the President and Congress have failed in their responsibility to enact a pro-growth fiscal policy.

Even the New York Times acknowledges that the new stimulus “reflects the disappointing condition of the American economy.” Later in the article, and in keeping with their bias, they quote the master of blunt partisanship, Senator Chuck Schumer: “The Fed is fulfilling its obligation to take action to address unemployment. Now Congressional Republicans need to fulfill theirs.” There was no mention that during 2009 & 2010 Democrats controlled both Houses of Congress and the White House – yet did nothing for the economy. There was no mention that the President’s 2012 budget, back in May, was defeated 414 – 0 in the Republican dominated House and failed in the Democratic controlled Senate 99 – 0. Does Mr. Schumer think the electorate stupid? What has the President done to aid a flailing economy? And, while fiscal matters are the domain of Congress not the President, is it not the responsibility of the executive to propose legislation? Isn’t the President supposed to lead? While Mr. Obama is quick to pass on blame onto others, he is equally agile at accepting credit when it comes his way, as we saw with the killing of Osama bin Laden.

These questions are critical, for they show an absence of leadership and a failure to assume responsibility. (Mr. Truman’s sign, “The Buck Stops Here,” must have been removed.) We have an economy that has seen average incomes decline over four years and a net job loss over the same time. The federal deficit now exceeds $16 trillion. Unemployment consistently has been above 8% for forty-two months, the longest stretch since the Great Depression. U.S. employment, as a percent of the population, at 45% is the lowest in thirty years. Median household income, according to the U.S. Census, has fallen for four years in a row. The President and his surrogates brag about the number of jobs created since he has been President, but he doesn’t say anything about the number of jobs lost, nor does he explain that 1.5 million people enter the workforce each year, so must be absorbed. The stated unemployment is as low as it is because millions of people have given up the search for jobs. That is why workforce participation rates are more important in understanding what a desperately poor job this President has done in terms of employment and the economy. And, it explains why the Fed has been the only game in town.

The New York Times on Saturday suggested that the fault lies with Republicans for failing to support stimulative programs, hiring teachers, rebuilding schools and otherwise creating jobs. The Times apparently doesn’t understand that it is only the private sector, through the taxes they pay, that can build schools and provide for additional teachers. With no sense of irony, an editorial in the same paper suggested that one of the benefits of low interest rates is that they encourage stock investments – and “from there [to] consumer spending.” That’s a form of trickle down economics that not even Republicans could recommend.

There is only one way out of the maze in which we find ourselves, and that is more rapid economic growth, which is difficult given some of the secular changes to our economy, but which only the private sector can provide. Government can provide a safety net, but it is not an engine for growth. The Federal Reserve has attempted to encourage growth, but they cannot do it alone. QE1, which began on November 25, 2008, was necessary in my opinion to stave off what could have been a cataclysmic credit collapse. It worked. By the time Mr. Obama took the oath of President, the effects were being felt. The TED spread, for example, had declined 300 basis points. The benefits of QE2 and Operation Twist are less clear cut. One can argue that they helped the housing market, but they also caused asset prices, like food and energy and financial assets, to increase, which helped the wealthy at the expense of the poor. Of course, they also had the negative consequence of greatly reducing the income of seniors living on fixed income securities and annuities.

The decision by the Fed to go with QE3 is likely to generate more speculation in commodity prices and may help housing by keeping mortgage rates low, but it will do little to encourage banks to increase lending and, of course, does nothing to prevent the fiscal cliff facing us at the end of this calendar year. Businesses, faced with uncertainty, are unlikely to increase hiring. Additionally, the Fed’s decision increases the difficulties of an eventual unwind. Over the past four years, the Fed’s balance sheet has increased three-fold, from $800 billion to about $2.5 trillion. With freshly printed dollars the Fed has been buying Treasuries and mortgage securities, with most of the interest they receive being rebated back to the Treasury. The effect is two fold. First, the annual deficit is understated because it does not include most of the interest costs on bonds bought by the Fed, and second, interests rates are lower than they would have been had markets been acting freely, as the Fed has been the single largest buyer of Treasuries. With QE3, that trend will persist. Price fixing, whether it is on cabbages, gold or interest rates has never been a panacea.

Mr. Bernanke is counting on two things happening – one, that the economy picks up strongly with little or no inflation, and second that his eventual unwinding of the portfolio will not cause interest rates to spike so rapidly that they kill the recovery he hopes to engineer. It is a risky strategy, and one taken solely because the Administration and Congress have ignored their responsibility. If it does not work, expect the Dollar to depreciate substantially and inflation to become a major concern. In any event, the Dollar will likely continue to weaken and food and energy inflation will probably continue to rise.

We do not have a liquidity problem. Banks have excess reserves estimated to be $1.5 trillion. Corporations have approximately $2 trillion on their balance sheets. What we have is an absence of confidence. Ideally, at a time of unusually low interest rates, borrowers try to extend maturities. A handful of companies have sold 100-year bonds. In April, the University of Pennsylvania sold $300 million of 100-year bonds with a yield of 4.7%. The UK has been toying with same idea. But the U.S. cannot do so, because the Fed, in its commitment to keep long rates low, has been buying almost all the Treasury’s thirty-year issuance, along with mortgage securities. There are no other buyers at current yields. In fact, the Fed has been funding the Obama Administration’s spending which has proved so ineffectual in terms of economic results. We have backed ourselves into a very risky position.

The only way out of this maze is through dramatically reforming fiscal policy, so that it encourages investment, and convinces businesses that government is there to help, not hinder, growth. Government can provide guidance and act as a referee. It is when they act as a participant that they do harm. The first steps should be to streamline regulation, simplify the tax code, encourage more free trade agreements and return government programs to zero-based budgeting.

The tax code should be simplified and flattened. The President should propose, and Congress should implement on a graduated basis, eliminating all significant deductions and credits. The federal income tax should be broadened, so that every worker pays some amount, no matter how small. Such action would lessen dependency by causing every working American to have a stake in his or her government. Higher tax revenues will be a consequence of the simplification. Higher tax rates alone will not, as history has shown time and again, yield higher revenues.

Regulation has become too big a constraint on entrepreneurs. It has discouraged start-ups and hiring. For example, instead of thousands of pages of bank regulation, it would be far simpler to simply to require banks to reduce leverage based on asset size (including off balance sheet items.) The bigger the bank, the less leverage they should be able to deploy. The “too big to fail” risk has risen exponentially in the last four years. We could not afford another 2008, yet the prospect of such an event lingers. Voters, politicians and regulators should understand that, in a competitive environment, complexity is a friend of the wealthy individual and the large corporation. Simplicity is friend to the small and less wealthy.

Trade should be encouraged. Debasing the Dollar, as the Fed’s actions will ultimately do, raises the risk of a return to the “beggar thy neighbor” policies of the Depression. Both Mr. Romney and Mr. Obama’s attacks on China do not help. To the extent they provoke a trade war with China, they put at risk thousand of U.S. workers who are employed either on the design phase of many Chinese manufactured products, or in their distribution. Additionally, a reduction in Chinese imports will cause an unnecessary rise in consumer prices for millions of Americans.

Virtually all budgeting in Washington (and in State Capitals) today assumes that the “baseline” is automatically approved, and it is only the increase that is subject to being cut or increased. The practice, in my opinion, is highly deceptive. A return to zero-based budgeting should be required of all government departments.

While the likelihood of events unfolding as I would like them is slim to nil, any directional shift toward these ends would be welcome. The effect would be to raise the level of confidence. The biggest hurdle for the economy is that neither consumers nor business trust the future. Providing a sense that government is on the side of economic growth, and that simplified rules and regulation will have some level of permanence, will allow businesses to invest, not only in infrastructure but in people. And it would provide individuals the confidence to invest for the future. The Fed cannot accomplish this alone, as recent history suggests. Investor’s should not be fooled by rising financial markets as a forecast of economic events. Markets are simply responding to the Fed’s encouraging the purchase of riskier assets. Success will be seen in employment and economic numbers. Thus far those numbers portend a bleak future. An expanding economy will produce the revenues politicians are seeking. But it is only the private sector that can lead us out of the darkness.

Friday, September 14, 2012

“Israel, Iran and the Bomb”

Sydney M. Williams

Thought of the Day
“Israel, Iran and the Bomb”
September 14, 2012

The relationship, which was never warm and fuzzy, has become frostier between President Obama and Prime Minister Benjamin Netanyahu, as Iran’s centrifuges keep spinning. In any case, it would be unlikely that a conservative Israeli Prime Minister and a left-wing U.S. President would form a close friendship. Nevertheless, the U.S. is one of Israel’s best friends on a diminishing roster of friends, and the country is the sole democracy in the Middle East, a region that appears to be falling under the spell of the Muslim Brotherhood. Rhetoric between the U.S. and Israel recently heightened, with Mr. Netanyahu desirous of “red lines”, and Secretary of State Hilary Clinton saying that the U.S. was “not setting deadlines.”

When world leaders convene in New York next week for the annual opening of the United Nation’s General Assembly, it appears that the two leaders will not meet privately, despite a request from Mr. Netanyahu. Whether this is a “snub” by Mr. Obama, as some suggest, or, as others conjecture, a carefully orchestrated political move to avoid what could be an embarrassing meeting, no one really knows. Perhaps it is because Mr. Obama felt it more important to attend a $40,000 a plate fund raiser, which he will be doing at Jay-Z’s club in New York on Tuesday evening.

What we do know is that Israel is a country one eighth the size of Florida in which 7.7 million people reside. And we know it is being threatened by a much larger enemy that is developing nuclear weapons. When one looks at a map of the Middle East, other than Lebanon, Israel is the smallest nation in the region. Nevertheless, it includes over 40% of the world’s Jewish population. Iran, 1100 miles to the East, and separated by Jordan, Saudi Arabia and Iraq, has a population ten times that of Israel. Its leader Mahmoud Ahmadinejad has vowed to wipe Israel off the face of the earth. The country’s Supreme Leader, Ayatollah Ali Khamenei has vowed to confront and defeat the “cancerous tumor that is Israel.” In a world that sometimes seems mad, these men stand out. Israel is under daily threat from terrorists. In 2011, they killed 23 Israelis and wounded 92. Is it any surprise that Israelis may be concerned for their lives should Iran develop the bomb? Why does so much of the world seem so blasé regarding the situation? With what we know of the nature of Iran’s leaders, why, for example, does Reuters, in a news item earlier this week, refer to Iran’s “suspected” pursuit of nuclear weapons? If it walks like a duck and quacks like a duck, you can be pretty sure it is a duck.

The situation reminds me of the well known, and relevant, quote uttered more than two hundred years ago by Edmund Burke: “All that is necessary for the triumph of evil is that good men do nothing.” The policy of the United States, in the post-War years has been to support Israel, while trying to maintain a level of stability in a notoriously unstable region. Certainly oil has been a motivating factor, but so has been the tinderbox nature of the region. The thousand-year old conflict between the two branches of Islam, Sunni and Shiite, when not in open conflict, is always at risk of igniting.

This week’s violence against the United States within four Muslim nations, theoretically made more liberal by the Arab Spring, only serves to highlight the risks inherent with the Obama policy of coddling our enemies while alienating our friends. The fact that the terrorists struck on the eleventh anniversary of 9/11 was surely no coincidence. The focus of the media, however, was on the (perhaps) impolitic words of Mitt Romney, in response to the siege of the embassy in Cairo. With the subsequent killings in Libya, there is no question but that we should mourn the dead and side with the President when, sounding just like his predecessor whom he openly despises, he vowed: “Make no mistake, justice will be done.” However, contrary to those like the New York Times, who would like to use the episode to solidify support for the President’s re-election bid, this is the right time to debate the President’s foreign policy.

The United States has risen to become the most powerful nation on earth. Certainly, we can all agree it has not always conducted itself in a morally exemplary fashion. Yet, on balance it has been a force for good, and millions of people around the world are better off for our existence. We should never gloat, nor flex our muscles unreasonably. We should stand for the principles of freedom. While apologies are appropriate for specific violations of moral behavior, there should never be an apology for an American who says something with which we might disagree, but which is his perfect right. The fourteen-minute YouTube clip “Muhammad Movie Trailer,” which has been out for two months, may be in bad taste and provocative, but the rights of the man who made it need to be protected. No American should ever apologize for the right of people to have their say. Consider what the human condition of men and women would be like today had Hitler succeeded, or had Communism prevailed?

Today, in the Middle East, the civilized world is faced with a dilemma far exceeding what is happening in Egypt, Libya, Tunisia or Yemen, and that is the prospect of a theocratic Islamic nation – one that harbors, condones and promotes terrorism – coming into possession of atomic weapons. It is a nation, as I wrote above, that has threatened to eradicate the state of Israel. The leaders of Iran have never made any secret of their hatred for the United States or Israel, yet Mr. Obama chose to ignore the pleas of Iranian citizens when, in their “Green Revolution,” they rose up against the dictatorial regime of the Ayatollah and Mr. Ahmadinejad, during the summer of 2009. During the Arab Spring of early 2011, Mr. Obama deliberately avoided trying to affect change, instead deciding, in his own words, to “lead from behind.”

In 1946, the Strategic Air Command (SAC) was created. Until being disestablished in 1992, it acted as a deterrent to the Soviet Union. When I was growing up, one of their bases was located in Newington, New Hampshire – Pease Air Force Base. The sign outside their gate may have seemed ironic, but it proved true and it worked – “Peace is our Profession.” Democracies have armies, not to invade neighbors or create colonies to exploit; they have them to preserve peace – peace through strength. As every schoolboy knows, signs of weakness invite disrespect and provoke attacks.

Sanctions against Iran never worked during the Bush Administration and they are not working now. There have been too many exceptions allowed, and as Ms. Clinton said, the U.S. will draw no lines in the sand. The Obama policy is the reverse of President Theodore Roosevelt’s, which was to walk softly, but carry a big stick. There is foretelling wisdom in a sentence that appeared in yesterday’s lead editorial of the Wall Street Journal: “A nation that appears so reluctant to stand by its friends won’t be respected or feared by its enemies.”

Sitting in front of a computer in Old Lyme, Connecticut provides no insight as to what course of action we should take regarding Iran, but to do nothing, to not stand up for our beliefs, to not be empathetic to the real fears of Israel, could lead to untold horrors. Writing of another frightening time, the historian, Ian Kershaw noted, “The path to Auschwitz was paved with indifference.”

Squabbling over words from Mr. Romney detracts from debating what seems to me to have been the overwhelming tragedy of Mr. Obama’s foreign policy in the Middle East – an inability to acknowledge that evil exists, that terrorism is real and not “man caused disasters,” and that toughness and compassion are not incompatible. We owe it to ourselves, to those who came before us and to our children and grandchildren to be ever vigilant for evil, which may seem foreign to a nation such as ours, but which unfortunately is a constant presence.

Wednesday, September 12, 2012

“Chicago Teacher’s Strike – Emanuel’s Waterloo?”

Sydney M. Williams

Thought of the Day
“Chicago Teacher’s Strike – Emanuel’s Waterloo?”
September 12, 2012

The bitterness emanating from the Chicago teacher’s strike was as predictable as it is unsettling. State and municipal unions have become symbolic of government overreach and, in fact, the focal point of fiscal irresponsibility; so leaders are fighting for their survival, with little regard for the affected students, nor even for their hard working, most effective members.

Private sector union membership has been declining since peaking in the mid 1950s, when about 35% of all workers were union members. For 2011, the comparable number is 6.9%, according to the U.S. Bureau of Labor Statistics (BLS.) Public sector unions, which did not exist in the 1950s, represented 37% of government employees in 2011. The BLS notes that total union membership in 2011 was 11.8% of all wage and salary workers, with 14.9 million workers – a 70-year low, according to the New York Times. In contrast, in 1983, there were 17.7 million union members, representing 20.1% of the workforce. Tellingly, according to the BLS, union membership was highest among workers 55 to 64 years old (15.7 %) and lowest among those aged 16 to 24 (4.4%.) With states like Indiana, Michigan, New Jersey, Ohio, Wisconsin and others implementing reforms that do away with mandatory membership requirements for municipal workers, public-sector union membership roles continue to decline. That is positive for the citizens of those states, as public employees reorient their allegiance to taxpayers – their real employers – versus union leaders who have usurped that responsibility.

For most of our country’s history, unions had no role with public employees. Calvin Coolidge, as governor of Massachusetts, rode his breaking of the Boston police strike in 1919 to the Vice Presidency, and then to the White House upon the death President Harding in 1923. President Franklin Roosevelt, a friend of labor, said in 1937, “The process of collective bargaining, as usually understood, cannot be transplanted to the public sector.” Even George Meany, the first president of the AFL-CIO, believed it was “impossible to bargain collectively with the government.” The sense was, according to Daniel DiSalvo, a professor of political science writing two years ago in National Affairs, that “democracy would be compromised when elected officials begin sharing with union leaders the power to determine government employees’ wages, benefits and working conditions.”

The enactment of civil-service laws in the late 1940s converted many government jobs from patronage appointments to lifetime jobs, or at best made them non-political. (In the early 1940s, for example and according to Mr. DiSalvo, the average tenure for a cop or garbage collector in New York was five years.) During the 1950s, the “baby boom” created increased demand for government services, especially teachers. At the same time, the labor movement was becoming more and more important to Democratic coffers. For the 22 years ending in 2010, twelve of the twenty largest political contributors were unions. Almost all of their money went to Democratic candidates. So, when private sector union membership roles began declining in the late 1950s, newly elected President Kennedy was open to the idea of allowing public sector employees to organize, and in January 1962, with the signing of Executive Order 10988, he granted them the right to collectively bargain. That act triggered a wave of unionization, a movement that initially enjoyed bi-partisan support. However, in time it became a movement that enhanced the growing symbiotic relationship between unions and Democrats.

The dye had been cast. Union leaders demanded more and more in terms of salaries and benefits. Politicians’, eager to satisfy this growing bloc of votes, ignored the math of what they were promising. By the late 1960s, equities had been rising for more than thirty years. Interest rates were rising nominally. In those early post-War years there were more than six workers for every retired person; positive equity returns, while modestly rising interest rates implied that a discount rate of eight or nine percent seemed reasonable. No one worried about the consequences of the promises that were being made. Future obligations did not seem especially onerous.

At the same time, though, many in the private sector saw the handwriting on the wall. The weight of union demands was pressuring their businesses. Those that did not heed the warning, like Chrysler in 1980 and Bethlehem Steel’s in 2003, had to file either pre-packaged bankruptcy proceedings or were forced into outright bankruptcy. One consequence was a gradual shift from defined benefit retirement plans toward defined contribution plans, initially for non-union employees. Employees had to assume some of the costs of healthcare and other benefit plans. With a responsibility to shareholders, as well as to employees, management realized the route they had been on would lead to failure. Persistent demand by union members led to a reduction in their numbers. As markets became more volatile and interest rates began a thirty year decline, the cost of future obligations for retirement and health plans rose. At the same time, foreign competition put additional demands on productivity. Many industries and businesses, as a consequence, failed. The result was a dramatic decline in private sector union membership, as noted above.

At the same time, public sector unions were increasing their roles. They have been long time contributors to the Democratic Party. In exchange for campaign donations, politicians assured union members of their continued support. Left out, were taxpayers who had to fund the promises made by political leaders to municipal and state union employees. Between 1989 and 2012, The American Federation of State, County and Municipal Employees (AFSCME) contributed $61.4 million, with none of it going to Republicans. During those same years, the National Education Association (NEA) donated $44 million, with 5% going to Republicans. And, over that same time frame, the American Federation of Teachers (AFT) gifted $34.7 million to political parties, again with none going to Republicans.

The recall election in Wisconsin in June of this year was a sea tide moment, with Governor Scott Walker fending off a bid to unseat him, despite very aggressive spending – $21 million by some accounts – by union leaders. According to the BLS, there are about 7.6 million public sector union members in the U.S. With average annual dues around $500, that amounts to approximately $3.8 billion. The most important use of those funds is keeping their members happily employed and growing the base. That means campaign contributions. The relationship between union leaders and Democratic bosses has served both parties well for six decades. But, time is drawing nigh. Through the end of July there have been nine municipal bankruptcies this year alone, and two major California cites – San Diego and Sacramento – recently voted overwhelmingly for public-pension reform.

Now we have President Obama’s former chief of staff and current Chicago Mayor Rahm Emanuel confronted with a disruptive strike by teachers in Mr. Obama’s home city. The average teacher in Chicago, according to the Wall Street Journal makes $71,000 a year, plus annual benefits estimated to be worth an additional $15,000. (The New York Times puts the average salary at $76,000.) Meanwhile, the median household income in Chicago – the taxpayers who pay the teacher’s salaries – is $47,000 – thirty percent less. For their money, Chicago’s taxpayers are getting a graduation rate of about 55%, one of the worst in the United States, with only six out of every one hundred public high school freshman receiving four-year college degrees. (Among African-American and Hispanic boys, the number is three out of a hundred.) When Mr. Emanuel assumed office, the Chicago Public Schools were facing a $700 million deficit. In three years, expectations are that the Chicago School System will be $3 billion in the red. S&P and Moody’s recently downgraded Chicago Public School’s debt, despite the City having the highest property tax allowed by law.

The problem confronting Chicago voters is a system that has gotten out of control. It is broke. The strike by 26,000 teachers has meant that 350,000 students are not being educated. It is disrupting the lives of working families. When the income disparity between teachers and residents of Chicago is as great as it is, one cannot feel sorry for them. When teachers refuse to submit themselves to the same type of standards as the rest of us, it is difficult to have sympathy for them. When 50,000 lucky Chicago students attending charter schools are unaffected by the strike, will it come as a surprise that the demand for more charter schools by inner-city parents will be forthcoming?

If government chooses to play a positive role for the future of our nation, in a globally competitive world, there is no more important place to begin than in education, especially at the elementary school level. Parents, especially those of disadvantaged and minority students, understand that that their children need tools, not handouts, if they are going to successfully compete against youngsters from Asia, South America, Europe and Africa. They instinctively understand that competition breeds excellence – they see it in sports. What is true for a basketball or baseball team is equally true for young scholars. Parents understand this, even if union leaders do not. If Mayor Emanuel lets Chicago’s students be devoured by the greedy leaders of Chicago’s teacher’s unions, then he has met his Waterloo.

Tuesday, September 11, 2012

“A Brave New World”

Sydney M. Williams

Thought of the Day
“A Brave New World”
September 11, 2012

Last Wednesday’s Wall Street Journal carried an article: “Step Into The Office-Less Company.” Three weeks ago, the New York Times printed something similar, “Sleepwalk to Work.” A little over twenty years ago, Charles Handy wrote a book, The Age of Unreason, in which he foresaw the disappearance of life-long jobs. Last week I received a request from a “virtual” firm looking for analysts. A recent Stanford analysis of a Chinese call-center company found that home-based employees were more productive than those that were office-based. They handled more calls per minute; they took fewer sick days, and they were less likely to seek employment elsewhere. With a growing number of virtual and home-based businesses, the job market is changing around us and will have implications for most every aspect of our lives.

This past weekend at a nephew’s wedding in Easthampton I spoke to a niece and niece-in-law, both of whom have home-based businesses. My niece in Vermont: www.mooglevermont.com, while my niece-n-law: www.melindabaxter.com. They join my son and daughter-in-law: www.lyceumassociates.com and www.beatrizwilliams.com. It is, indeed, a new world.

The credit crisis of 2007-2008 and its accompanying recession had the devastating effect of producing the worst job situation in decades. There are five million fewer workers than there were in 2007, according to Mortimer Zuckerman writing in the weekend edition of the Wall Street Journal. He also notes that despite the population having increased 31 million people since 2000, fewer Americans are at work than a dozen years ago. The answer for many has been a proliferation of people starting their own businesses.

There will continue to be factory floors and rooms filled with people trading securities; there will always be schools, restaurants, resorts and hotels. (However, increasingly colleges are offering degrees that one can earn via internet-based courses.) We will always have hospitals, shopping malls and prisons. Cars will have to be serviced by men and women working in real auto dealerships. However, the advent of computers and the internet and pressure from overseas competition, is changing the workplace. Increasingly, people are performing jobs that can be performed from home at home. Games, architecture, software and medical products can be designed, if not produced, on home-based computers.

In Old Lyme, Connecticut where I live, there are, according to the State of Connecticut, 400 home businesses. Old Lyme is a village of 7500 people, in about 3000 households – suggesting that about 13% of all homes include a home business. The State of Connecticut derives the number of home businesses based on the levying of an annual $250.00 business entity tax. Of course, there are assuredly others who operate from their homes without bothering to register. While I was unable to get the number of home businesses a decade ago, I have been told that the annual growth in home-based businesses is in double digits.

According to Rachel Emma Silverman, who wrote the Journal article, 2.5% of the workforce in 2010 considered home its primary place of work. (Those numbers differ substantially from what I know of Old Lyme, but perhaps the difference is in the words “primary place of work.”) The numbers, which come from census-data analysis, indicate a 66% increase from 2005. Catherine Saint Louis, who wrote the piece in the Times, admits that nobody knows how many New Yorkers are running a business from home, “but it’s a lot.” Astonishingly to me, Ms. Saint Louis notes that in 2008, 65.2% of all businesses in New York City had fewer than five workers, up from 63.9% in 2000.

That fact may, in part, explain why, according to a Rasmussen Poll quoted by Charles Koch in Monday’s Wall Street Journal, 68% of voters said they believe “big government and big business work together against the rest of us.”

Writers, musicians and artists have long worked from home – or, at least, a principal part of their creative time is spent at home. My parents were both sculptors and later on had a small home-based business where they produced toy rubber animals; so I grew up in such a household. For many years insurance and real estate agents, with odd hours including weekends, have had home offices. On Wall Street today, many analysts spend at least part of the time working from home. (This TOTD was started at my home in Old Lyme.)

The California-based company discussed in the Journal’s article has 123 employees working in 26 countries, 94 cities, including 28 U.S. cities. The company hosts servers for the blogging platform, Wordpress.com. Because the employees work in many time zones and their work requires a certain amount of collaboration, they often work asynchronously, reminding me somewhat of the way the “book” at Salomon Brothers was passed from trading desk to trading desk – following the sun – from Tokyo to London to New York, and then back to Tokyo. Ms. Silverman quotes the CEO of a design-review software company ProofHQ: “Managing ‘distributed’ teams requires 25% more effort than a face-to-face team because managers must pay close attention to whether workers are motivated and fully understand tasks and processes.” However, he adds the expenses for the virtual company are about 50% less than for one having fixed real estate costs.

The proliferation of video games, with many students devoting hours each week to being alone on a computer, is creating a cadre of young people who have substituted traditional networking to virtual social networking, making it more likely they will adapt to the rigors of working from home. Instant messaging, chat rooms, social network sites and skyping allow employees to stay connected, or to at least feel that they are.

Nobody fully understands the consequences of this shift away from traditional offices. My niece in Vermont spoke of the quality of living. Her husband, a derivatives trader, has his Bloomberg set up in the barn out back, and speaks to his London Clients in the early morning hours, freeing him to spend more time with his family.. (She tells me that home-based businesses in Vermont are often referred to by the acronym BOB – with offices set up in the ‘barn out back.’) Both young women mentioned the personal pleasure they derived from interacting with people over the internet and how bantering back and forth in real time made them feel connected. They both also said that their personal lives had changed for the better.

In colonial days, most businesses were home based, whether it was the blacksmith, the doctor, the baker or cabinet maker. The industrial revolution saw the rise of factories, and then Henry Ford created the assembly line – improving efficiency, but increasing the monotony of the job. Factory automation has reduced the need for many assembly line workers, but necessitating the need for engineers, computer programmers and industrial designers. Computers have meant that some of that work can be performed offsite. In a sense, it is a returning to our roots.

We are, in my opinion, in the early innings of a revolution that will have dramatic consequences on the way our lives will be lived. Social interaction may decline; family time may increase. Self motivation will rise in importance, as well as the ability to compartmentalize one’s time. The firm looking for analysts stressed the candidate “must be able to work independently and be comfortable working from home.” But because of the interconnectivity allowed by the internet, the individual must also have the “ability to work in a collaborative, team-oriented environment.” Small businesses will continue to be the employer of most Americans. Unfortunately, since they cannot be compartmentalized for political purposes, they collectively have less political clout than their big brothers. Nevertheless, they need from government two essentials – simplified and easily comprehensible regulation and a simplified tax code that encourages innovation and hiring, and does not require an army of expensive lawyers and accountants.

Futuristic novels, like H.G. Wells’ The Time Machine, Aldous Huxley’s Brave New World, and George Orwell’s Animal Farm, principally concerned themselves with the communal world of sameness and conformity, along with good versus evil. Perhaps their predictions will prove wrong not in the absence of evil, but in the prophecy of the Eloi or the Morlocks Wells suggests we might become. In contrast to the hopes and expectations of the Left, perhaps man is driven by individuality, independence and self reliance. Man is almost infinitely adaptable, and that is a good thing. In his book, The Time Machine, Wells writes: “There is no intelligence where there is no change and no need of change.” The desire for personal freedom is what causes us to worry about the effects of cronyism – the partnering of big business, big unions and big government – and encourages us to embrace the myriad opportunities that changes in technology and communications have provided us.

While all of the virtual companies of which I have read consciously bring together all their employees at least once a year, we should applaud the initiative and creative spirit that has shown that people will do for themselves what others cannot. While government promotes a culture of dependency, many individuals are discovering their own solutions. Who will be better prepared to face an uncertain future – he who succumbs to the siren call of a government that fosters dependency, or she who becomes self-reliant?