Friday, November 30, 2012

“Who is Grover Norquist, Part II? ”

Sydney M. Williams

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, November 28, 2012

“What Do We Want To Be?”

Sydney M. Williams

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, November 27, 2012

“Unions – For Better, For Worse”

Sydney M. Williams

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, November 26, 2012

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

Sydney M. Williams

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, November 21, 2012

“Europe and Muslim Assimilation?”

Sydney M. Williams

Thought of the Day
“Europe and Muslim Assimilation?”
November 21, 2012
Anthropologists estimate that 60,000 years ago small bands of early humans made their way out of Africa along the Arabian coastline; and then, over the millennia, dispersed north and east. To the extent that these scientists are correct, that small group of early humans are the ancestors of us all – Muslim, Christian, Jew, Hindu, Buddhist, etc.

That all humans have a common ancestry is indisputable. A simple exercise in compounding proves the point. Each one of us has two parents, four grandparents, eight great-grandparents, ad infinitum to the beginning of time. If we assume three generations per century, we only must go back to the time of the signing of the Magna Carta to recognize that each of us descends from over a billion people. Since there are seven billion people on the planet today, and estimates are that the world population was 265 million in 1000 AD, the math tells us – we are all related.

Relatively high Muslim birthrates, in conjunction with rising Islamic extremism, have given birth (the pun was unintentional) to fears of a developing “Eurabia.” The concerns, in terms of population growth, may be overblown, if we are to believe the results of a Pew Forum on the future of global Muslim population and a paper from the Hoover Institute at Stanford.

Muslims comprise about 23% of the world’s population, or roughly 1.6 billion people. That would compare to about 2.3 billion Christians, or approximately 32% of the total population. Hinduism is the only other religious group whose membership tops a billion. The population of the 27 countries in the European Union is just over 500 million. Of those, 44.1 million were Muslim, according to the Pew study. That was up from 29.6 million in 1990. Projections are that the number will increase to 58 million in 2030, a 32% increase. Europe, during those same twenty years, should see its total population increase by about 135 million, or 27%.

Total fertility rates (TFRs) and immigration statistics are what demographers use to estimate future populations. The TFR number represents the number of children a woman is expected to have over her lifetime. A number of 2.1 is considered necessary for a population to sustain itself. Birth rates globally have been declining. The TFR for the world is currently estimated at 2.5, versus 4.3 in 1970. While birth rates continue to decline, death rates, which had also been declining, have leveled off. Ironically, but not surprisingly, the highest TFRs are in the undeveloped world with countries like Niger, Mali and Somalia at the top of the list. Hong Kong, Macau and Singapore are at the very bottom, suggesting the beginnings of population declines.

The fear that Muslim births will dwarf European ones appears to be overstated, if one can believe the data. Among the twenty-five European countries for which data is available, the average TFR for Muslims during 2005-2010 was 2.2. For non-Muslims, the TFR was 1.5. Projections are that the TFR for non-Muslims, between 2025-2030, will be 1.6, and for Muslims, 2.0. Thus, as a percent of the total population, Muslims are expected to grow from 4.5% today to 7.1% in 2030.

Nicholas Eberstadt and Apoorva Shah of the Hoover Institute at Stanford came to a similar conclusion in June of this year, in a piece they wrote entitled, “Fertility Decline in the Muslim World.” They begin their report by noting conventional wisdom suggests Muslim societies are resistant to embarking upon the path of demographic and familial change that has transformed population profiles in Europe and, in fact, around the developed world. Muslim-majority countries had a TFR for 2010 of 2.95, well above the average for European countries, and above the average for Muslims living in principally non-Muslim nations. However, that number, according to their study was lower by 2.6 births from where it had been between 1975-1980. The conclusion: Muslim births are also slowing.

Nevertheless, Islamophobia persists. While I pretend no expertise, I would suggest that its modern roots have two obvious origins and one not so apparent. The 9/11 attack on the United States that killed 3000 and a host of suicide bombings have created concern among all civilized people. Secondly, the evolution of many Muslim states away from secularism toward Sharia, or Islamic law worries tolerant Westerners. And third (and sometimes confused with the latter,) I believe that moral relativists have worsened the problem. As in most societies, there are bad as well as good people. Just as there are those who deserve sainthood, there are others who are evil and deserve punishment. But, it is the inability of some of our noblest institutions (universities, the UN, etc) to accept the notion of objective, universal moral standards common to all cultures. And it is difficult to consider a common moral sense without invoking God…and we, in the non-Islamic world, live largely secular lives, in which religion is often considered opium for the masses, not a philosophy deserving of intellectual debate.

Most everyone agrees that men like Osama bin Laden and Adolph Hitler had no redeeming qualities. Whether we believe in a Creator or not, it is commonly accepted by conventional standards that they were bad people. So could one not say the same thing about Mahmoud Ahmadinejad? His country is fast approaching nuclear capability, and he has sworn to wipe Israel off the map of the earth. Yet, when Lee Bollinger, president of Columbia University invites him to his campus, or when he is invited to address the UN, he receives the imprimatur of the establishment. When our leaders don’t recognize evil for what it is, and are reluctant to call it out, it makes skeptical those who actually confront it.

Islamophobia has become acknowledged as a form of intolerance. It was recognized as such at the Stockholm International Forum on Combating Intolerance. Yet, Sharia is not similarly recognized, despite its intolerance for what we in the West would call its violation of the basic rights of women. Hatred of any kind is rarely the answer, but neither is tolerance of the intolerant. Not all phobias are the same and sometimes hatred is necessary in order to combat what we know to be wrong. Would not most people agree that Hitler’s SS troops were deserving of hatred? The attacks by Islamic extremists on the United States on 9/11 and on thousands of people in other locations were evil. But is it not also evil to stone a woman to death for adultery, or to deny her daughter an education solely on the basis of her sex? If we all believe those acts were evil, then evil must exist; so, tautologically, we come full circle to a belief in an objective, universal moral sense. If Europe’s leaders did not seem so afraid of hurting the feelings of Islamic extremists; if they did not appear fearful of expressing their beliefs in moral terms, then Islamophobia might disappear.

Ultimately, the best resolution to a problem of this nature is assimilation, and over generations it is what will occur, as it has in the past. However, at this time, with Sharia Law in the ascendancy, it may be that the differences are just irreconcilable.

The Mullahs in many Muslim countries are leading their people backward toward a new dark age. Keep in mind, this was a religion that introduced mathematics and libraries to much of the Mediterranean world a thousand years ago. Now they are depriving half their youth a basic education. The biggest mistake Europe could make would be to accommodate those who shun modernism in the name of Allah. While Europe will have to live with what seems a modestly growing Muslim population, their political leaders must reject any adoption of, or accommodation with, Sharia Law. It is far too estranged from Western mores. To let one segment of your population live under such radically different moral rules is to invite both segregation and dissension, both capable of rendering civilization. Should a country such as France, noted for its long association with democracy, abandon its principles and values, it will inevitably partner with oppression.

It is important that we all re-think the notion of universal moral standards, ones that are common to us all and respectful of each person. At this time of Thanksgiving, while we give thanks to so many for so much, it is a hope of mine devoutly to be realized. I wish you the very best on this best of all Holidays!

Happy Thanksgiving!

Tuesday, November 20, 2012

“’Happy Planet Index’ – Are These Guys for Real?”




Sydney M. Williams
Thought of the Day
“’Happy Planet Index’ – Are These Guys for Real?”
April 3, 2012



While silliness is not the exclusive purview of governments, a lot of our tax dollars go to projects that would astound the Founders and which defy common sense…and I suspect would surprise most clear-thinking individuals here in the good old U.S.A., as well as sensible people in other parts of the world.



As a manifestation that too many people have too much time on their hands, the New Economics Foundation in July 2006 introduced the Happy Planet Index (HPI) as a measurement to challenge such well-established indices of countries’ development, such as GDP.



Under that index countries are ranked according to an average of a subjective measurement of life satisfaction, life expectancy at birth and ecological footprint per capita. The absurdity of their efforts can be seen in the rankings, which had, as of 2009, Costa Rica, the Dominican Republic and Jamaica heading the list of “happiest” countries. The people of Cuba (ranked number 7) might be surprised to learn that they are far happier than those in the country so many of their compatriots have died trying to reach, the United States (ranked number 114). Haiti (number 42) is being visited with an outbreak of Cholera; yet their people are deemed happier than those in Germany (51), Switzerland (52), Sweden (53) or the UK (74).



The hypocrisy, of course, lies in the belief that government can affect and measure happiness – a belief that belies the findings of Arthur Brooks who in 2008 published a survey and analysis of U.S. happiness: Gross National Happiness: Why Happiness Matters – And How We Can Get More of It. His findings were (and are) controversial, but to me seem commonsensical. Religious people of all beliefs are much happier than secularists. Couples with children are happier than those without. Balancing personal freedom with societal order brings happiness. Conservatives were twice as likely to call themselves “very happy” than liberals. Mr. Brooks writes that having a “meaning” to one’s life, what Aristotle called eudaimonia, is critical to happiness.



Not wanting to be on the bottom of any list, no matter how ludicrous, the U.S. Department of Health and Human Services has convened a panel of experts to try to define reliable measures of “subjective well-being,” a measure of happiness, an effort welcomed by our dear leader, President Obama. The study will consume millions of our tax dollars. Meanwhile, much of the infrastructure of our highways and bridges are rusting. Veterans are returning from wars in Iraq and Afghanistan to face indifference at home and benefit cuts from a not-very-thankful government. And unemployment remains above eight percent. But government knows what’s best for us; so the hell with the consequences, we are going to be happy no matter how much it hurts or what it costs!



The concept of quantifying happiness goes back to 1972 when King Jigme Singye Wangchuck of Bhutan pledged to measure his country’s progress not in GDP, but in “gross national happiness”. The idea was to commit to a leadership that could be trusted, that would respect one’s cultural heritage, to avoid being swallowed up by the “menacing forces” of globalization and to not grow the economy at the expense of the people.



The scorecard? Forty years on the authoritarian government of Bhutan “ethnically cleansed” those of their countrymen not considered pure – mostly those of Nepalese origin. The country ranks 111th in terms of “freedom”, between Tanzania and Vanuatu, in the category “Mostly Unfree”, and number 76, between Brazil and Montenegro, in terms of GDP per capita. Nevertheless, Bhutan shows up number 17 on the HPI, ahead of 126 other countries, including every western country. Apparently a dictatorial regime and killing one’s countrymen in the name of ethnic purity enhances happiness!



Moving from the sublime to the ridiculous, yesterday the Bhutanese Prime Minister H.E. Jigmi Y. Thinley convened a summit at the UN, entitled “Wellbeing and Happiness: Defining a New Economic Paradigm.” “In short,” as Lisa Napoli naively wrote in last weekend’s Forbes, “there’s more to life than amassing money. And the future of the planet depends on changing the way we think.” High sounding words, but one can rest assured that, while the skies of Bhutan’s mountainous skies may be blue and their rivers run cold and clear, the leaders of Bhutan have amassed riches, but the masses live in poverty.



The President of Costa Rica, Laura Chinchilla, will deliver the keynote address at the UN, as her country is “heralded as happy” for abolishing its military and maintaining its environment, and is ranked number one on the Happy Planet Index. However, Costa Rica, for those keeping track, is ranked at 44, in terms of freedom, between Macedonia and Colombia, and in terms of world GDP per capita, Costa Rica is number 76 between Brazil and Montenegro.



With images of smiling, healthy Bhutanese faces on the eastern slopes of the Himalayas, or laughing Costa Ricans dancing through Rain Forests, it is surprising that Americans are not clamoring to emigrate. Instead, why are Bhutanese, Costa Ricans, Cubans and Haitians trying to come here? Might it have something to do with freedom, opportunity and the prospect for happiness?



Our Declaration of Independence states that the people are endowed by their Creator with certain unalienable rights, one of which is the pursuit of happiness. According to that document, it is the “Creator”, not government that grants these rights “Unalienable” is defined as something that is incapable of being repudiated or transferred, which means they are not government’s responsibility. People have long debated the exact meaning of happiness as used in the Declaration and, to the best of my knowledge, nobody has come up with an answer that satisfies all parties. Its origins date back to Aristotle and John Locke who, in a 1690 essay entitled “Concerning Human Industry”, wrote, “The necessity of pursuing happiness is the foundation of liberty.”



The best definition I know suggests that the pursuit of happiness is the right to pursue any lawful business or vocation, in any manner, that does not violate the equal rights of others. At its essence, it describes the right of people to be free.



Despite the inability of students and philosophers to quantitatively define happiness, Health and Human Services Secretary Kathleen Sibelius and the UN have concluded they will be able to apply analytics to measure what surely is a qualitative state of mind. They are not alone. British Prime Minister, David Cameron, who should know better, has embraced the idea of assessing happiness through surveys, with such incisive questions as, “Overall, how happy did you feel yesterday?” French President Nicholas Sarkozy, in 2008, launched a commission which opined that the “time is right for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.” Once “measured”, policies will be implemented according to government’s definition of happiness – and an element of individual freedom will be lost.



Certainly, it is true that happiness does not stem from materialism alone. The most important element is a moral component. If one adds value to one’s family, co-workers and friends – if one makes them happy – one is likely to be a happy person. In truth happiness is indefinable. It means different things to different people, but people who are happy know it, just as those who are unhappy also know it. For Mrs. Bennett, happiness was getting her five daughters married. “Happiness,” wrote Maxim Gorky, “always looks small while you hold it in your hands, but let it go, and you learn at once how big and precious it is.”



If government feels that happiness is worth quantifying and measuring, it suggests they have plans to make us all happy. But government cannot impose or mandate happiness. It can, though, provide the conditions that let happiness thrive. That means a society that recognizes that all citizens are created equal, a society that functions under the rule of law, that safeguards its people and that offers equality of opportunity and one that keeps its people free – to succeed or fail. “Men,” George Orwell wrote, “can only be happy when they do not assume that the object of life is happiness.” A Happy Planet Index is a distraction, and a government that believes they can foster happiness is a dangerous one.



………………………………………………………………..



I will be away the balance of the week, spending some happy time with three grandchildren.







































Monness, Crespi, Hardt & Co., Inc.


767 Third Avenue

New York, NY 10017



Sydney M. Williams



Thought of the Day

“’Happy Planet Index’ – Are These Guys for Real?”

April 3, 2012



While silliness is not the exclusive purview of governments, a lot of our tax dollars go to projects that would astound the Founders and which defy common sense…and I suspect would surprise most clear-thinking individuals here in the good old U.S.A., as well as sensible people in other parts of the world.



As a manifestation that too many people have too much time on their hands, the New Economics Foundation in July 2006 introduced the Happy Planet Index (HPI) as a measurement to challenge such well-established indices of countries’ development, such as GDP.



Under that index countries are ranked according to an average of a subjective measurement of life satisfaction, life expectancy at birth and ecological footprint per capita. The absurdity of their efforts can be seen in the rankings, which had, as of 2009, Costa Rica, the Dominican Republic and Jamaica heading the list of “happiest” countries. The people of Cuba (ranked number 7) might be surprised to learn that they are far happier than those in the country so many of their compatriots have died trying to reach, the United States (ranked number 114). Haiti (number 42) is being visited with an outbreak of Cholera; yet their people are deemed happier than those in Germany (51), Switzerland (52), Sweden (53) or the UK (74).



The hypocrisy, of course, lies in the belief that government can affect and measure happiness – a belief that belies the findings of Arthur Brooks who in 2008 published a survey and analysis of U.S. happiness: Gross National Happiness: Why Happiness Matters – And How We Can Get More of It. His findings were (and are) controversial, but to me seem commonsensical. Religious people of all beliefs are much happier than secularists. Couples with children are happier than those without. Balancing personal freedom with societal order brings happiness. Conservatives were twice as likely to call themselves “very happy” than liberals. Mr. Brooks writes that having a “meaning” to one’s life, what Aristotle called eudaimonia, is critical to happiness.



Not wanting to be on the bottom of any list, no matter how ludicrous, the U.S. Department of Health and Human Services has convened a panel of experts to try to define reliable measures of “subjective well-being,” a measure of happiness, an effort welcomed by our dear leader, President Obama. The study will consume millions of our tax dollars. Meanwhile, much of the infrastructure of our highways and bridges are rusting. Veterans are returning from wars in Iraq and Afghanistan to face indifference at home and benefit cuts from a not-very-thankful government. And unemployment remains above eight percent. But government knows what’s best for us; so the hell with the consequences, we are going to be happy no matter how much it hurts or what it costs!



The concept of quantifying happiness goes back to 1972 when King Jigme Singye Wangchuck of Bhutan pledged to measure his country’s progress not in GDP, but in “gross national happiness”. The idea was to commit to a leadership that could be trusted, that would respect one’s cultural heritage, to avoid being swallowed up by the “menacing forces” of globalization and to not grow the economy at the expense of the people.



The scorecard? Forty years on the authoritarian government of Bhutan “ethnically cleansed” those of their countrymen not considered pure – mostly those of Nepalese origin. The country ranks 111th in terms of “freedom”, between Tanzania and Vanuatu, in the category “Mostly Unfree”, and number 76, between Brazil and Montenegro, in terms of GDP per capita. Nevertheless, Bhutan shows up number 17 on the HPI, ahead of 126 other countries, including every western country. Apparently a dictatorial regime and killing one’s countrymen in the name of ethnic purity enhances happiness!



Moving from the sublime to the ridiculous, yesterday the Bhutanese Prime Minister H.E. Jigmi Y. Thinley convened a summit at the UN, entitled “Wellbeing and Happiness: Defining a New Economic Paradigm.” “In short,” as Lisa Napoli naively wrote in last weekend’s Forbes, “there’s more to life than amassing money. And the future of the planet depends on changing the way we think.” High sounding words, but one can rest assured that, while the skies of Bhutan’s mountainous skies may be blue and their rivers run cold and clear, the leaders of Bhutan have amassed riches, but the masses live in poverty.



The President of Costa Rica, Laura Chinchilla, will deliver the keynote address at the UN, as her country is “heralded as happy” for abolishing its military and maintaining its environment, and is ranked number one on the Happy Planet Index. However, Costa Rica, for those keeping track, is ranked at 44, in terms of freedom, between Macedonia and Colombia, and in terms of world GDP per capita, Costa Rica is number 76 between Brazil and Montenegro.



With images of smiling, healthy Bhutanese faces on the eastern slopes of the Himalayas, or laughing Costa Ricans dancing through Rain Forests, it is surprising that Americans are not clamoring to emigrate. Instead, why are Bhutanese, Costa Ricans, Cubans and Haitians trying to come here? Might it have something to do with freedom, opportunity and the prospect for happiness?



Our Declaration of Independence states that the people are endowed by their Creator with certain unalienable rights, one of which is the pursuit of happiness. According to that document, it is the “Creator”, not government that grants these rights “Unalienable” is defined as something that is incapable of being repudiated or transferred, which means they are not government’s responsibility. People have long debated the exact meaning of happiness as used in the Declaration and, to the best of my knowledge, nobody has come up with an answer that satisfies all parties. Its origins date back to Aristotle and John Locke who, in a 1690 essay entitled “Concerning Human Industry”, wrote, “The necessity of pursuing happiness is the foundation of liberty.”



The best definition I know suggests that the pursuit of happiness is the right to pursue any lawful business or vocation, in any manner, that does not violate the equal rights of others. At its essence, it describes the right of people to be free.



Despite the inability of students and philosophers to quantitatively define happiness, Health and Human Services Secretary Kathleen Sibelius and the UN have concluded they will be able to apply analytics to measure what surely is a qualitative state of mind. They are not alone. British Prime Minister, David Cameron, who should know better, has embraced the idea of assessing happiness through surveys, with such incisive questions as, “Overall, how happy did you feel yesterday?” French President Nicholas Sarkozy, in 2008, launched a commission which opined that the “time is right for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.” Once “measured”, policies will be implemented according to government’s definition of happiness – and an element of individual freedom will be lost.



Certainly, it is true that happiness does not stem from materialism alone. The most important element is a moral component. If one adds value to one’s family, co-workers and friends – if one makes them happy – one is likely to be a happy person. In truth happiness is indefinable. It means different things to different people, but people who are happy know it, just as those who are unhappy also know it. For Mrs. Bennett, happiness was getting her five daughters married. “Happiness,” wrote Maxim Gorky, “always looks small while you hold it in your hands, but let it go, and you learn at once how big and precious it is.”



If government feels that happiness is worth quantifying and measuring, it suggests they have plans to make us all happy. But government cannot impose or mandate happiness. It can, though, provide the conditions that let happiness thrive. That means a society that recognizes that all citizens are created equal, a society that functions under the rule of law, that safeguards its people and that offers equality of opportunity and one that keeps its people free – to succeed or fail. “Men,” George Orwell wrote, “can only be happy when they do not assume that the object of life is happiness.” A Happy Planet Index is a distraction, and a government that believes they can foster happiness is a dangerous one.



………………………………………………………………..



I will be away the balance of the week, spending some happy time with three grandchildren.




























Monness, Crespi, Hardt & Co., Inc.


767 Third Avenue

New York, NY 10017



Sydney M. Williams



Thought of the Day

“’Happy Planet Index’ – Are These Guys for Real?”

April 3, 2012



While silliness is not the exclusive purview of governments, a lot of our tax dollars go to projects that would astound the Founders and which defy common sense…and I suspect would surprise most clear-thinking individuals here in the good old U.S.A., as well as sensible people in other parts of the world.



As a manifestation that too many people have too much time on their hands, the New Economics Foundation in July 2006 introduced the Happy Planet Index (HPI) as a measurement to challenge such well-established indices of countries’ development, such as GDP.



Under that index countries are ranked according to an average of a subjective measurement of life satisfaction, life expectancy at birth and ecological footprint per capita. The absurdity of their efforts can be seen in the rankings, which had, as of 2009, Costa Rica, the Dominican Republic and Jamaica heading the list of “happiest” countries. The people of Cuba (ranked number 7) might be surprised to learn that they are far happier than those in the country so many of their compatriots have died trying to reach, the United States (ranked number 114). Haiti (number 42) is being visited with an outbreak of Cholera; yet their people are deemed happier than those in Germany (51), Switzerland (52), Sweden (53) or the UK (74).



The hypocrisy, of course, lies in the belief that government can affect and measure happiness – a belief that belies the findings of Arthur Brooks who in 2008 published a survey and analysis of U.S. happiness: Gross National Happiness: Why Happiness Matters – And How We Can Get More of It. His findings were (and are) controversial, but to me seem commonsensical. Religious people of all beliefs are much happier than secularists. Couples with children are happier than those without. Balancing personal freedom with societal order brings happiness. Conservatives were twice as likely to call themselves “very happy” than liberals. Mr. Brooks writes that having a “meaning” to one’s life, what Aristotle called eudaimonia, is critical to happiness.



Not wanting to be on the bottom of any list, no matter how ludicrous, the U.S. Department of Health and Human Services has convened a panel of experts to try to define reliable measures of “subjective well-being,” a measure of happiness, an effort welcomed by our dear leader, President Obama. The study will consume millions of our tax dollars. Meanwhile, much of the infrastructure of our highways and bridges are rusting. Veterans are returning from wars in Iraq and Afghanistan to face indifference at home and benefit cuts from a not-very-thankful government. And unemployment remains above eight percent. But government knows what’s best for us; so the hell with the consequences, we are going to be happy no matter how much it hurts or what it costs!



The concept of quantifying happiness goes back to 1972 when King Jigme Singye Wangchuck of Bhutan pledged to measure his country’s progress not in GDP, but in “gross national happiness”. The idea was to commit to a leadership that could be trusted, that would respect one’s cultural heritage, to avoid being swallowed up by the “menacing forces” of globalization and to not grow the economy at the expense of the people.



The scorecard? Forty years on the authoritarian government of Bhutan “ethnically cleansed” those of their countrymen not considered pure – mostly those of Nepalese origin. The country ranks 111th in terms of “freedom”, between Tanzania and Vanuatu, in the category “Mostly Unfree”, and number 76, between Brazil and Montenegro, in terms of GDP per capita. Nevertheless, Bhutan shows up number 17 on the HPI, ahead of 126 other countries, including every western country. Apparently a dictatorial regime and killing one’s countrymen in the name of ethnic purity enhances happiness!



Moving from the sublime to the ridiculous, yesterday the Bhutanese Prime Minister H.E. Jigmi Y. Thinley convened a summit at the UN, entitled “Wellbeing and Happiness: Defining a New Economic Paradigm.” “In short,” as Lisa Napoli naively wrote in last weekend’s Forbes, “there’s more to life than amassing money. And the future of the planet depends on changing the way we think.” High sounding words, but one can rest assured that, while the skies of Bhutan’s mountainous skies may be blue and their rivers run cold and clear, the leaders of Bhutan have amassed riches, but the masses live in poverty.



The President of Costa Rica, Laura Chinchilla, will deliver the keynote address at the UN, as her country is “heralded as happy” for abolishing its military and maintaining its environment, and is ranked number one on the Happy Planet Index. However, Costa Rica, for those keeping track, is ranked at 44, in terms of freedom, between Macedonia and Colombia, and in terms of world GDP per capita, Costa Rica is number 76 between Brazil and Montenegro.



With images of smiling, healthy Bhutanese faces on the eastern slopes of the Himalayas, or laughing Costa Ricans dancing through Rain Forests, it is surprising that Americans are not clamoring to emigrate. Instead, why are Bhutanese, Costa Ricans, Cubans and Haitians trying to come here? Might it have something to do with freedom, opportunity and the prospect for happiness?



Our Declaration of Independence states that the people are endowed by their Creator with certain unalienable rights, one of which is the pursuit of happiness. According to that document, it is the “Creator”, not government that grants these rights “Unalienable” is defined as something that is incapable of being repudiated or transferred, which means they are not government’s responsibility. People have long debated the exact meaning of happiness as used in the Declaration and, to the best of my knowledge, nobody has come up with an answer that satisfies all parties. Its origins date back to Aristotle and John Locke who, in a 1690 essay entitled “Concerning Human Industry”, wrote, “The necessity of pursuing happiness is the foundation of liberty.”



The best definition I know suggests that the pursuit of happiness is the right to pursue any lawful business or vocation, in any manner, that does not violate the equal rights of others. At its essence, it describes the right of people to be free.



Despite the inability of students and philosophers to quantitatively define happiness, Health and Human Services Secretary Kathleen Sibelius and the UN have concluded they will be able to apply analytics to measure what surely is a qualitative state of mind. They are not alone. British Prime Minister, David Cameron, who should know better, has embraced the idea of assessing happiness through surveys, with such incisive questions as, “Overall, how happy did you feel yesterday?” French President Nicholas Sarkozy, in 2008, launched a commission which opined that the “time is right for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.” Once “measured”, policies will be implemented according to government’s definition of happiness – and an element of individual freedom will be lost.



Certainly, it is true that happiness does not stem from materialism alone. The most important element is a moral component. If one adds value to one’s family, co-workers and friends – if one makes them happy – one is likely to be a happy person. In truth happiness is indefinable. It means different things to different people, but people who are happy know it, just as those who are unhappy also know it. For Mrs. Bennett, happiness was getting her five daughters married. “Happiness,” wrote Maxim Gorky, “always looks small while you hold it in your hands, but let it go, and you learn at once how big and precious it is.”



If government feels that happiness is worth quantifying and measuring, it suggests they have plans to make us all happy. But government cannot impose or mandate happiness. It can, though, provide the conditions that let happiness thrive. That means a society that recognizes that all citizens are created equal, a society that functions under the rule of law, that safeguards its people and that offers equality of opportunity and one that keeps its people free – to succeed or fail. “Men,” George Orwell wrote, “can only be happy when they do not assume that the object of life is happiness.” A Happy Planet Index is a distraction, and a government that believes they can foster happiness is a dangerous one.



………………………………………………………………..



I will be away the balance of the week, spending some happy time with three grandchildren.


















































“From Fat Cats to Mangy Mutts”

Sydney M. Williams

Thought of the Day
“From Fat Cats to Mangy Mutts”
November 20, 2012

Are Wall Street’s glory days but a distant memory? Are we living through the new normal of finance? Michael Moore, writing in businessweek.com, predicts that 20% of financial service employees around the world won’t get year-end bonuses for fiscal 2012. It is expected that more than 200,000 global financial services jobs will be cut over the course of 2011-2012. The real number is probably higher than that, as the estimate comes from a survey that only measures the very largest global banks. In contrast, according to Bloomberg, 174,000 jobs were lost in 2009. As it pertains to the U.S., the Center for Economics and Business Research (CEBR,) a UK-based consulting firm, estimates that in four years Hong Kong will become the global center for financial employment, surpassing both New York and London. The world is changing.

Markets and the world of finance is very different from when I joined Merrill Lynch four and a half decades ago. The media constantly reminds us that we are all subject to Attention Deficit Disorder, in all aspects of our lives including investment horizons. It is no longer your grandfather’s market. In the mid 1960s, the average holding period was eight years. Today, it is five days. In one generation, we have morphed from investors to traders. High frequency trading, ETFs, and the dominance of tax-deferred retirement programs have all played a role. The first two have had the consequence of treating stocks as commodities, rather than individual companies comprised of employees, customers and communities. Retirement funds have no current tax consequences. Holding periods, therefore, are irrelevant. Corporate investor relations departments have abetted the trend, focusing on next quarter’s performance rather than strategies that may be implemented over a period of years. Institutional investors, not to be left out, demand an unrealistic level of precision from corporate managers.

From everything I read, Washington plans to use tax reform as a means of neutering investors. Returns on investments – dividends and capital gains – are expected to be taxed at ordinary income rates. Spending is what Washington does best. In a speech last week at Stanford, Dallas Federal Reserve Chairman Richard Fisher quoted “the venerable Sam Cohen – a living encyclopedia of U.S. budgetary history.” It was 1971 and federal outlays for the first time exceeded $200 billion. George Schultz was the Director of the Office of Management and Budget. Mr. Schultz asked Mr. Cohen if there was really any difference between the spending habits of Republicans and Democrats. Cohen’s reply: “Sir, there is only one difference. Democrats enjoy it more.” That has become our biggest problem. Government spends; yet, economic growth is dependent on private investment. To the extent Washington wants to increase revenues, shouldn’t they encourage investments? That simple truism seems to have escaped the wizards in Washington, as they scramble for revenue in a depleting economy.

The President campaigned for re-election on a platform of raising taxes on “millionaires and billionaires,” not unlike Franklin Roosevelt’s re-election campaign in 1936 when he campaigned against “economic royalists,” while proposing (and getting) an undistributed-profits tax. Like today, businesses in the late 1930s were hoarding cash, as confidence in the Administration’s economic policies had ebbed. Mr. Roosevelt decided that if companies wouldn’t invest their cash, it would be taxed. Seventy-five years ago that rhetoric and higher taxes had the consequence of increasing unemployment and lengthening the Depression. It didn’t work then and it won’t work today. The end of the Depression only came with the build up in industrial activity, as the U.S. became the armory for the Allies in their battle with the Nazis. We had all better hope that the situation in the next couple of years will not require anything as dramatic and as destructive as World War II.

Economies are self-correcting. Government may ease the crisis, but the problem is that they arrive late to the party and try to rein in something that is already abating, usually with unfortunate and unforeseen consequences. Markets have no politics and are not partisan. Wall Street is (and always has been) a self-correcting mechanism. When President Roosevelt was inaugurated the people of the country were angry and frustrated, as well they should have been. On Inauguration Day, March 4, 1933, the DJIA were near their lows – 53.84. Nine years later, off of the worst stock market crash in the exchange’s history, the Index was 105.99, a compounded return of 7.8% – not a great return given how far the averages had fallen in the prior three and a half years. Unemployment in early 1933 was close to 25%. Five years later, unemployment was still 19%. It was the War, not the New Deal, which brought the Country out of the Depression.

Once again, it is not just Wall Street that is paying the price for over expansion in the 1990s and 2000s. Total employment is lower today than it was four years ago. GDP is up 7% since bottoming in June 2009, indicating a dismal compounded return of 2.6%. GDP has grown by $1.2 trillion, while federal debt has expanded by $6 trillion. Wall Street has been affected as well. The S&P 500 is 15% below where it was in October 2007 and 9% below where it traded in March 2000. Citigroup is selling 93% below where it was in June 2007 and 91% below where it was in March 2000, when the market first broke. Twenty years ago, the price of Citigroup was 14% above where it is today. JP Morgan’s stock price is the same as it was fourteen years ago, and 32% below where it was before the crisis began. The last dozen years have been punishing to the 100 million Americans who own stocks in their retirement plans.

Restitution is gradually being realized, irrespective of what happens in Washington. The spread between CEO compensation and average income remains substantially above where it was before options as compensation were first granted in the early 1980s (about 50 times.) But at 231 times it has declined from 411 times in early 2000, at the peak of the dot com bubble. The direction is likely to continue lower.

Dodd-Frank has put a damper on the cowboy capitalism that began in the 1980s, flourished in the ‘90s, was knocked to the canvas in March 2000, and which was finally KO’d in the fall of 2008. The seeds of destruction were sown, in part, during the “irrational exuberance” of the 1990s, and, as importantly, by the decision of the federal government to extend homeownership to those with little ability or inclination to pay. Risk without consequences always brings unhappy endings. Wall Street began down that path years ago when partnerships were converted to public vehicles. In that instance, risk accrued to shareholders, while employees reaped the rewards. Around the same time, banks began using derivative instruments, theoretically to reduce risk, but in reality to enlarge it. Derivatives provided position traders a false sense of confidence, encouraging them to leverage further already extended balance sheets. An unintended consequence of Dodd-Frank is that it has immunized the largest banks against current and future errors. The result is big banks becoming even bigger. And technology has allowed them to operate with fewer people; ergo the 200,000 + layoffs.

There will always be Fat Cats on Wall Street, just as there will always be cronyism in Washington, but the clowder of Fat Cats has shrunk. Maureen Farrell at CNNMoneyInvest recently wrote a piece, “Why Wall Street Hates Obama.” She is mistaken. Wall Street strongly endorsed Mr. Obama four years ago. This time they did not. Wall Street, like most, operates in its self-interest. It doesn’t hate. It rationalizes. People have emotions. Institutions do not.

While I do not mourn the passing of many Wall Street Fat Cats – those like Jon Corzine who used the system for his own advantage – I only hope that bright, aspirant and hard working young men and women will not be deterred from chasing and realizing their dreams. Their success helps all of us. We should never forget that democratic capitalism and the individual freedom that accompanies it have lifted all Americans – some higher than others – to increasingly higher standards of living. In his speech at Stanford, Richard Fisher reminded us of the pitfalls stemming from a too-intrusive government, the failure that comes from too much debt and an inability to reconcile our differences: “In the minds of many, our government’s fiscal malfeasance threatens the world’s respect for America as the beacon of democracy.”

The use of “mangy mutts” in the title is perhaps an exaggeration, but it was alliterative; and it reminded me of all the dogs of my childhood. (They weren’t mangy, but they were mutts.)

Monday, November 19, 2012

“Technology’s Latest Frontier – Education”

Sydney M. Williams

Thought of the Day
“Technology’s Latest Frontier – Education”
November 19, 2012

Technology has long been identified with certain locations, and often with specific universities: Route 128, outside of Boston, in the 1960s and ‘70s; Silicon Valley, outside of Palo Alto, for the past three decades. The former was associated with MIT and Harvard; the latter with Stanford and Berkley. The technically gifted entrepreneurs, who have changed our lives in so many ways, were nurtured by some of America’s great universities. Yet the schools that nurtured those technological geniuses continue to function pretty much as they did in my father’s day.

In fact, Alex Tabarrok, an economist at George Mason, director of research at Independent Institute (a think tank in California) and participant at TED (Technology, Entertainment, Design,) notes, in a piece posted last week, “Why Online Education Works,” that instruction at Oxford today is little changed from when the University was founded in 1096. In partial explanation, Professor Tabarrok writes: “Productivity in education has lagged productivity in other sectors of the economy, because teaching is so labor intensive.”

That may be changing. A week ago, I cited the fact that last spring a single on-line electrical engineering class at MIT attracted 155,000 students, more than ten times the entire student body. Clay Shirky, a writer and professor on the effects of internet technology on society, recently noted that an online course at Stanford – Introduction to Artificial Intelligence (AI) – attracted 160,000 potential students, of whom 23,000 completed it. One of the two professors teaching the course, Sebastian Thrun, said of it: “Peter [Norvig] and I taught more students AI, than all AI professors in the world combined.” Incidentally, Stanford has a total on-campus enrollment of less than 20,000.

Myriad challenges face college administrators, some of them perhaps more intractable than online education. Last week I attended a lecture by Richard Sander and Stuart Taylor, authors of a recent book, Mismatch. The book deals with a subject that no one wants to discuss: how affirmative action has hurt the very students it was designed to help. The authors are not calling for an end to affirmative action, but for more transparency on the part of universities who accept these students. Their findings conclude that too many minorities are accepted into programs for which they are not prepared; with some students finding themselves at the bottom of their classes, which can have the effect of damaging their self-esteem. Letting accepted students know how others have done who entered the college with similar GPAs and SAT scores may allow the student to better determine if this is the college he or she should attend. A loss of confidence, in such situations, often leads to self-segregation; thereby worsening a problem affirmative action was designed to counter. Mr. Sander and Mr. Taylor, moreover, hold out little hope that their recommendation of transparency will be adopted. Like so many recalcitrant problems, there are no easy answers.

In the weekend edition of the Wall Street Journal, in an interview, Greg Lukianoff, a young lawyer and president of Foundation for Individual Rights in Education, spoke of the lack of free speech on today’s campuses. Administrators and professors claim to support diversity, but not when dissenters are deemed politically incorrect. A book I wrote of last week, Sex and Man at Yale by Nathan Harden, deals with the confused response from universities when the rights of students in academic pursuits conflicts with gender treatment and behavior. The example he uses is “Sex Week at Yale,” during which purveyors of sex products are invited to speak at the university. They have the tacit approval of the college, despite the fact that so much of which is shown and discussed is demeaning to women. Mr. Harden writes: “Pluralism may allow for a maximum sense of academic freedom; but, on the other hand, Yale lacks the cohesive moral framework religion once provided.”

College is not solely about education. Some see a diploma as simply a means to an end – a license permitting a better job. Others look upon college as an opportunity to break family binds, to create their own persona. For many, if not most, it is four years that stand between family dependence and personal responsibility. It is a time to grow from childhood into adulthood. The cocoon that is university life usually provides life-long friendships – not something most would willingly forego – but it is not the real world. Fifty years ago, the draft provided an alternative for young men, as a place they could spend two or three years after high school, as they readied themselves for work or university. In a sense, modern university life has deferred the maturing process. Technology may be changing that.

The cost of a four-year college education is also forcing change. A good, private college will cost about a quarter of a million dollars over the four years. That is almost six times the average annual income ($44,259) for a 2012 college graduate who was able to find a job. Unfortunately, in 2012, about half of all graduates were unable to find fulltime work.

On-line learning is not a substitute for the whole college experience. Football games, coffee shops, fraternity parties, hooking up, and one-on-one meetings with professors are all part of college life. However, the current model is not leverageable in an increasingly expensive environment. If the optimum number of students in a class was fifteen 100 years ago, it still is. That is not the sole explanation as to why tuition costs have risen at roughly double the rate of inflation for the past three decades, but it is one cause. Ballooning armies of administrators, supported by unions, are another.

The United States still has the best universities in the world, but other countries are gaining ground. In US News’ world’s ranking of universities for 2012, eleven of the top twenty-five universities are located outside the U.S. Consequently, foreign students still flock to the U.S. in record numbers. About 3.5% of the 21.6 million students enrolled in American universities in 2012 are from outside the U.S., a 6% increase from 2011. (Of course, at more elite universities, the percentage of foreign students is far higher. For example, foreign students at Harvard and Columbia comprise 20% of their respective student enrollments.) As a means of competing for the global student, many American universities now have campuses across the world.

Professor Tabarrok compares online courses to the movies, and traditional teaching (what he calls offline courses) to plays. Plays are performed in real time. Mistakes cannot be corrected. Movies, in contrast, are prepared in advance and can be shown simultaneously, or at the viewer’s discretion in the venue of his or her choosing. Like newspapers, colleges must learn to survive in a digital world. Last week, I wrote of Khan Academy, which has become the world’s largest university, claiming 10 million students around the globe. Before this year’s rise in massive open online courses (MOOCs,) 2.75 million students in the U.S. took online courses. Those 2.75 million people represented about 12% of students at degree-granting American universities. For example, Coursera, a start-up online education company that has enrolled 1.35 million students in its free online courses since it began last April, is, according to a report in the New York Times, more than doubling its partner universities to thirty-three. Brown, Columbia and Wesleyan will be joining Princeton, Stanford and the University of Pennsylvania.

Education in the developing world is increasing at an impressive rate. Over the next fifteen years, India expects to see the number of students rise from 12 million to 30 million – an event that would require a thousand new universities. In the past fourteen years, China’s student body has grown six fold to 6 million today. Professor Tabarrok asks, rhetorically, will they implement the Oxford model of 1096, or will it be the new online model?

Two factors (and I am sure there are more than two) are creating an increasingly competitive environment for our young. First, the pervasiveness of technology has allowed for the wider use of on-line teaching, where the world’s best teachers can give lectures that can be delivered anywhere in the world, at the convenience of the student. That is going to help the aspiring student who is either too distant or too poor to attend a traditional university. Second, the emergence of developing nations has increased the pool of potential students, creating competition for college placements and for jobs in the global market place.

Traditional universities will persist. Real college experience, as I noted above, is almost always a positive one. Life-long friendships are formed. Physical universities provide sanctuaries for serious research and debate. However, they may become even more elitist, in the sense that one consequence will be relatively fewer on-campus students. Like other traditional businesses and institutions, the digital revolution, along with rising demand and prohibitive costs, are forcing change. And, like all changes, the transition period will create anguish and stress. Joseph Schumpeter’s theory of creative destruction is as applicable in academia as it is in business.

Friday, November 16, 2012

“The Fiscal Cliff – A Compromise?”

Sydney M. Williams

Thought of the Day
“The Fiscal Cliff – A Compromise?”
November 16, 2012

The President will meet this morning with Congressional leaders to discuss the nation’s head-long dash toward a date that will cause tax rates to rise and sequestration for government programs, primarily Defense. In preparation, on Tuesday the President met with union leaders and heads of other “progressive” groups, and on Wednesday he met with business leaders. We know who will show up from Congress this morning. The question is which Mr. Obama will appear, the conciliator or the ideologue?

As he starts out on his second term, Mr. Obama has sent mixed messages. When with union leaders, he appears intractable, in terms of his stance on the “wealthy” having to pay higher rates. When he is with business leaders, he sounds more conciliatory.

The President does not appear to be in a conciliatory mood. Wednesday, at his bi-annual news conference, he remarked that John McCain and Lindsay Graham were out of line regarding their comments as to the suitability of UN Ambassador Susan Rice to be Secretary of State; he had the gall to blame Republicans for picking on her for going on five Sunday TV talk shows five days after the attack on the Consulate in Benghazi during which she relayed the Administration’s lie as to what caused the attack in Benghazi on September 11th. Within twenty-four hours of the attack, if not sooner, the Administration had been told the attack was pre-planned by al Qaeda and their affiliates. The Administration knew the cause was not a video, yet they persisted in claiming it was. It was Mr. Obama who threw Ms. Rice under the bus by having her mislead the American people, not Mr. McCain or Mr. Graham. He also threw Secretary of State Hillary Clinton and DCI David Petraeus under the same Chicago bus for telling the same tale. This is not a man with whom negotiations will be easy. He wants his way, and his conceit says he deserves it.

However much the President likes to think of himself as the voice of the nation, he is the president of a republic, not an irreproachable monarch. He won re-election, but he gathered only 50% of the vote, less than he did in 2008. He must know that the opposition is not defunct. Republicans control 30 of the 50 governorships, including seven of the ten most populous states. They control 27 state legislatures and 28 state senates. In a USA Today poll out yesterday, optimism in the country has fallen in every category today versus 2008, except one – the likelihood of bringing troops home from Afghanistan.

As everyone knows the sticking point is the President’s demand that the tax rate on those making more than $250,000 ($200,000 for singles) must go up. The Republican’s response is that those income levels include a large number of small businesses that file as individuals, which will likely cause lay-offs. One alternative is the one proposed by the Simpson-Bowles Commission (and by Governor Romney) of limiting total deductions – charitable, mortgages, state and local taxes – for high earners to some fixed amount; for example $30,000. There are those like Robert Rubin who oppose such recommendations, which is unsurprising. Such a decision would make it harder for him, and people like him, to hide income. He prefers higher tax-rates, because they don’t interfere in his ability to continue to avoid taxes. A higher tax bracket is Mr. Rubin’s briar patch, as it is for Warren Buffett and others like them.

The President has raised the ante. In the summer of 2011, in a grand bargain, he and Mr. Boehner agreed on revenue increases of $800 billion over ten years. After a deal had been struck and agreed upon, Mr. Obama changed his mind and asked for $1.2 trillion. Mr. Boehner refused. At that point, the concept of the “fiscal cliff” was introduced, as a means of forcing action. Now the President has asked for $1.6 trillion in additional tax revenue over the next decade. In Wednesday’s TOTD, I showed how $2.0 trillion over ten years could be achieved by limiting deductions, but it appears the President is determined to make a political point of raising taxes on the “wealthy” regardless of the consequence and no matter how little will actually be collected. It is a case of ideology superseding common sense.

The fiscal cliff, according to conventional wisdom, poses little risk for the President. He is in his last term. He has, as he whispered to then Russian President Dmitri Medvedev last March, “more flexibility” now that the election is over. Should we slip over the edge and into the abyss, the effect would likely be a recession. Everybody’s taxes would rise, which could be blamed on Congressional Republicans. Defense spending would be cut, which would be okay with Mr. Obama. Entitlements would not be touched, so the spending spree would continue. With Republican’s suited out in a dunce cap, Mr. Obama would practice what he does best – passing the blame. But that may not be the consequence. The President, after all, is the man in charge.

The silly posturing going on by both sides understates the seriousness of the problem and defers an even more serious question that needs to be asked. The problems are ones of debt and deficits. The inflation adjusted fiscal deficit in 2008 was $488 billion. Last year, it was $1.32 trillion. It has been in excess of a trillion dollars since 2009. In 2012, it is expected to be reported at $1.1 trillion, moving in the right direction, but still way too excessive. Another recession would cause revenues to decline further and the deficit to widen. In 2008, total federal debt –excluding obligations to Social Security, Medicare, Medicaid and now Obamacare – was $10 trillion. Today it is $16.3 trillion. That means $50,000 worth of debt for every man, woman and child, an amount equal to the annual income for the average American worker. When future entitlement obligations are factored in, debt numbers roughly quadruple. Welcome to America!

Anyone who doesn’t think we have a problem is living on another planet. One who doesn’t think we have a debt crisis is the President’s buddy, AFL-CIO President Richard Trumka. He and his pal, Mary Kay Henry, President of Services Employees International Union, held 100 rallies last week pressuring Congress on holding off on any entitlement cuts. They walked out of last Tuesday’s meeting with the President feeling the “rich” would pay more and being assured that entitlements would not be touched. Thus they told the President that they “had his back.” These are the fiscally irresponsible leaders who have helped bankrupt businesses, states and cities. They are now vowing to do the same to the federal government. Left untethered, they will.

The more serious question that needs to be asked is what kind of government do we want. Following Lyndon Johnson’s great society, federal spending, as a percent of GDP, began rising toward the 20% level. In the 1950s and early 1960s, it had been closer to 15%. It remained at the 20% level through George W. Bush’s second term. President Obama has taken that number up closer to 25%. If that is what the American people want, it means that taxes on everyone will have to go up, not just the wealthy. The President has persistently vilified the wealthy, claiming they don’t pay their fair share. The fact is that, in 2011, the top 10% of America’s workers earned 48% of the nation’s personal income and paid 70% of all federal taxes, the highest percentage ever. If the people of America want a paternalistic welfare state, such as the one depicted in “Julia’s World”, which can be seen on the White House’s website, everybody’s taxes will have to go up substantially, first to pay for the new programs and second to offset the decline in GDP growth that would inevitably ensue.

I don’t get the sense that the Administration (or Congress) is fully aware of the explosive nature of the powder keg with which they are dealing. The best way to resolve the problem is through economic growth, which would lift tax revenues while reducing unemployment and poverty. That is indeed possible, but it means unleashing the animal spirits of the private sector – limiting regulation and reducing taxes, exactly the opposite of what this President wants to do. The fiscal cliff should be avoided if possible, but if the consequence of avoidance is simply to push out the tough decisions that must be made, then facing reality today may be better than confronting a bigger problem tomorrow.

If we were to nosedive off the cliff, markets would weaken sharply, as would the dollar. International disillusionment with the United States could cause interest rates to rise. But it is possible that such a crisis might be a wake-up call to finally address the fiscal issues that have been avoided by Republicans and made worse by Democrats for too long. If markets sensed that we were serious about addressing the problem, they would recover; so any shortfall might prove temporary. If, on the other hand, they saw the leap off the cliff as a means for the President to pressure Congress to come around to his plan of continuing the process of wealth transfer, high unemployment and slow economic growth, then, as Betty Davis once said, we had better “buckle our seat belts; it’s going to be a bumpy ride.”