Thursday, February 28, 2013

“It Can’t Happen Here”

Sydney M. Williams

Thought of the Day
“It Can’t Happen Here”
March 1, 2013

The title of this piece does not refer to sequester whose start we celebrate today. It is the title of a 1935 novel by Sinclair Lewis. The book was written at a time when Fascism was rising in Europe and concerned itself with the possibility that the United States could also fall victim. As we know, that did not happen. But that does not mean we are forever safe.

Today, Europe is dealing with the unfortunate consequences of its post-war experiment with the welfare state. This time, in my opinion, we are more vulnerable for at least two reasons. First, the trend toward a welfare state is subtle and seductive, slowly drawing people in, providing the state more control, often under the banner of fairness. Second, mainstream media is alert to authoritarianism from the right, but is, in fact, complicit when it comes from the left.

Capitalism has served the western world well over the past two centuries. Standards of living have risen for all and the abject poverty that exists in non-capitalist societies is non-existent. The best example is the contrast between North and South Korea. In 1953, both were devastated by war. Six decades later, South Korea is almost twenty times wealthier. However, as Jerry Z. Muller, a professor of history at the Catholic University of America, writes in the current issue of Foreign Affairs, it is true that capitalism does create a rise in inequality. Those who are more aspirational, who have greater abilities are able to succeed where others do not. As nations become wealthier there is an increased concern for the welfare of the “have-nots.” They are provided with expanded entitlements. The unfortunate consequence is to make them increasingly dependent. That dependency helps perpetuate and deepen what becomes a vicious cycle.

Professor Muller’s conclusion is that some way must be found between the Charybdis of privilege and the Scylla of resentment. He writes, “…the right should accept that a reasonably generous welfare state is here to stay, and for eminently sensible reasons…The left, in turn, needs to come to grips with the fact that aggressive attempts to eliminate inequality may be both too futile and to expensive.” While I agree that compassion is an admirable trait, I would add that aggressive attempts to foster fairness and equality will destroy the very spirit of capitalism, which is the fountain of our nation’s wealth.

During World War II, Winston Churchill humorously described capitalism: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of misery.” His ironic observation has relevance to today’s debate, as it reflects the mindset of socialism.

Nevertheless, a balance should be found. Unfortunately, human nature has a tendency to push pendulums too far in both directions. Whether as a nation or as individuals, we start out as poor. And, if fortune smiles and if aspiration is present; if talent exists and there is a willingness to work hard, we may gradually becoming wealthy. As nations become rich, all boats are lifted. But as time goes on, those that get left behind become insecure and resentful. Government steps in as saviour, to care for the wellbeing of the sick, the elderly and the indigent. Inevitably that trend leads to dependency and an increased emphasis on redistribution. All of us accept some level of redistribution. Keep in mind, a progressive tax code, which most of us support, is redistributive by definition. At some point, though, redistributive policies become counterproductive. The question swirling around Washington and in the editorial offices of the nation’s press is, have we reached the point where disincentives to produce have negatively impacted our economy? That certainly seems to be the case in Europe.

The expense of the welfare state is exceeding the Eurozone’s ability to prosper. Eurozone GDP declined 0.5% in 2012 for the third year out of four and with the fourth quarter down 0.9%. Unemployment is close to 27% in Spain and Greece. Italy’s elections last week showed a country in desperate turmoil. France recently announced it would miss its deficit reduction targets because of diminishing growth prospects. The prognosis for Europe is not sanguine. And their present is our future.

While the European political class believes that the Euro crisis hit its high point last summer, Bernard Connelly, in an interview in last weekend’s Wall Street Journal, said, “But from the perspective of real live people the situation is just getting worse and worse.”

Prophets are rarely recognized in their time and the interview with Mr. Connelly was an eye-opener. In the Book of Matthew, Jesus is quoted, “Only in his hometown and in his own house is a prophet without honor.” Seventeen years ago, Bernard Connolly was running the European Commission’s Monetary Affairs Committee responsible for introducing the Euro. He had doubts, and expressed them in a book, The Rotten Heart of Europe. It was a prophetic prediction, but a politically incorrect step. Despite the correctness of his forecast, it cost him his job and his pension. He became a private economist, and in 2003 described the U.S. economy as a debt-driven Ponzi scheme. At the time, Federal Reserve Chairman had cut the Fed Funds rate to 1%. Mr. Connelly, according to Brian Carney of the Journal who interviewed him, said that in 2003 he predicted interest rates would have to fall even further in the next cycle to keep the scheme going – another prophecy that has materialized.

Mr. Connelly argues that the cause of the crisis was a massive bubble created by monetary policy, tied to the introduction of the Euro. Undisciplined states like Greece, Ireland and Spain suddenly saw their cost of money decline. As a consequence “money was flowing into these countries out of all proportion to the opportunities available.” Could one not argue that with Fed Funds now at virtually zero for four years the same situation has been created in the U.S.? Commodities have risen; stocks and bonds have experienced bull markets, but the economy is languishing in the U.S., and is in decline in Europe. It is true that housing has retreated from the brink, but it has not been strong enough to improve labor markets. While the federal government has increased its borrowings by about $6 trillion, it has resulted in less than half a trillion in additional GDP. And there are still three million fewer people employed than there were in 2009.

Europe’s future has obviously not yet been written. But the question must be asked: How long will Germany be willing to fund the welfare of their more reprobate neighbors? If France is added to the list of those dependent on Germany, how long will Berlin persist in supporting them? German reunification, according to Mr. Connelly, has cost the former West Germans about 5% of GDP a year. That cost was bearable because they were reuniting their country. But there is no sense of a European demos.

I would suggest that the real genesis of Europe’s problems is a blind belief in the sustainability of a welfare state, despite the growing pressures it brings to the productive elements of society. Europe is aging and, in general, is not replacing its population, placing additional pressure on the young and those still working. Additionally, its character is changing, as the dominant growth element within its population is the still rising birthrates among Muslims. That inevitably will lead to more change. The success of the Golden Dawn party (a neo-Nazi party) in Greece’s last election should serve as a shot across the bow for the continent and for America.

The parable of Snow White should not be lost on Europe’s leaders or ours. What seems beautiful and perfect may be nothing more than our own imagination and reflection, warped by the contours of a faulty mirror. The concept of solving society’s ills through redistribution may be based on good intentions, but it is the unintended consequences that should concern us. Writing in Thursday’s Investor Business Daily, Ralph R. Reiland quotes a directive issued by the State Council of the People’s Republic of China: “Narrowing the income gap is essential for ensuring social justice and social harmony. We need to raise income levels of the poor and adjust taxes on the exceedingly wealthy.” Those words have a striking resemblance to those of our President, and that should worry us all. For, while China is becoming an economic powerhouse, it has no rule of law; it does not honor property rights, and its history of human rights is abysmal.

When schools do not require English to be the language of instruction , we place immigrant children at a disadvantage in their subsequent life as productive adults. When our government creates dependency, we subject those that have become dependent to a life of servitude. For more than three centuries, America has been fortunate. The earliest settlers found an abundance of resources and an insufficiency of natives. Our Founding Fathers were uniquely honorable, just and intelligent. Capitalism and free enterprise flourished. Immigrants flocked to our shores, bringing talent and a willingness to work hard. We became over time the richest, most powerful nation on earth. But what has happened in recent years? We are rapidly losing ground. According to the World Bank, we rank 6th in protecting investors, 13th in staring a business; 17th in dealing with construction permits and in education; 19th in getting electricity; 22nd in cross-border trading, and 25th in registering property. High taxes and excessive regulation have made the United States one of the more difficult nations in which to operate a business. Our public elementary schools are not educating students for a globally competitive world. While we graduate more college students, too many leave uneducated and unprepared. And we are breeding dependency, while depleting personal responsibility. In doing so, we are losing our moral compass.

This should not be happening. There is a roadmap, which is Europe. Those who believe that what is happening over there may not be our fate are naive. This time it could happen here.

Tuesday, February 26, 2013

“Guns – One Last Time”

Sydney M. Williams

Thought of the Day
“Guns – One Last Time”
February 27, 2013

If you are sick of reading the tripe that passes for criticism and/or support for gun control legislation, read no further. However, in my opinion and despite my ambivalent feelings on the whole issue, as well as my promise to leave the issue alone, there is more to be said.

Those who favor gun control recognize a political opportunity; though they know it will raise the ire of gun supporters, of whom there are more than there are opponents. Nevertheless, it seems to me that anyone who owns a couple of assault rifles and who feels his Second Amendment rights are being threatened is smoking something. In writing the Constitution, those in Philadelphia that summer of 1787 could not conceive what weapons would be developed in two hundred years, or the multiple cartridges that accompany them. At that time gun barrels had not been rifled. With no standing army in 1787, the concept of a “well regulated Militia” was deemed necessary for the “security of a free state.” It was determined, therefore, that the “right of the people to bear arms shall not be infringed.” So ends the Second Amendment.

But today we live in a different time. While we do have a standing army, states have abrogated much of their authority to the central government, in contravention to the concept of a republic. Many of those who met in Philadelphia that long ago summer were skeptical of a strong central government. They had recently fought and defeated the greatest power on earth for taxing without representation. So, while the need for a militia, in the sense understood by those men who met that summer, is no longer necessary, they were concerned about the risk of authoritarianism. And, it is my guess that today they would be concerned with the decline of federalism and the increased power that has accrued to the executive branch. That shift would be considered reason enough to support the right to bear arms. Why, they would ask, does the Department of Homeland Security (DHS) feel the need to purchase 1.6 billion rounds of ammunition over the next five years? To put that number in perspective, during the height of active battle operations in Iraq, U.S. soldiers used 5.5 million rounds per month. They would have been bothered by the fact that last year the Social Security Administration posted a notice that it was buying 174,000 hollow point bullets. While we think of Social Security recipients as being nice elderly people (like me), there are those who cheat. The agency employs 295 agents who investigate fraud and other crimes. But do they need almost 600 rounds per agent – and hollow point bullets, at that?

The explanation for the purchase by the DHS is that they want the ammunition for law enforcement training centers they operate, for example the ones in Glynco, Georgia and Artesia, New Mexico. According to reports, 750 million rounds would be used for training over the next five years. In 2012, 70,000 agents and officers fired 15 million rounds at those training facilities. Over five years, that would account for about 75 million bullets. Why do they need an additional 675 million rounds? The balance of the 1.6 billion rounds of ammo (850 million rounds) would be assigned to Immigration and Customs Enforcement (ICE). ICE employs between 15,000 and 20,000 people. That means immigration officials have enough ammunition to provision 42,000 rounds per employee. Why? Like Pogo, the Founders would likely have concluded, “We have found the enemy and it is us.”

Even before Newtown, gun advocates were nervous about the intentions of the Administration. Five years ago in Pennsylvania, Mr. Obama patronizingly described such rural citizens as “clinging to guns and religion.” A study funded by the DHS (and leaked last year) found that Americans who are “suspicious of centralized federal authority” and “reverent of individual liberty” were described as “extreme right-wing” terrorists. I am certainly skeptical of a strong central government and am “reverent” of individual liberty, but I know of no one who sees me as an extreme right-wing terrorist. Further, I would suggest that any American who is not skeptical of centralized government is lacking knowledge of history and an understanding of human nature.

As I have written before, I am not a gun guy, but I am a believer in our rights as individuals; the rule of law, not men; the importance of the separation and balance between the three branches of government, and I am instinctively untrusting of any government entity attempting to garner control and power. That has been the direction we have been headed for the past eight decades and we are now moving at an increasing rate. It suggests more dependency, and less personal responsibility and personal freedom.

Sadly, gun violence is higher in the U.S. than in most other western nations. The good thing is that the murder rate in the U.S., according to the Department of Justice, is about half of what it was in 1980. Nevertheless, gang related violence has quadrupled over that same time. Despite the recent hoopla, there does not appear to be a discernable trend in terms of mass murders in the United States. Grant Duwe, a criminologist with the Minnesota Department of Corrections and who has written on mass murders in America, provided the following estimates for mass murders (more than four people) by decade: 1980s – 32; 1990s – 42; 2000s – 26.

While mass murders garner publicity and allow politicians to moralize against guns, most gun-related killings take place in inner cities, especially among minorities and the poor. In most cases, they are unreported by the Press. Mass murders, such as the one in Newtown, are horrific, especially when they involve young children, are widely reported. However, they are almost impossible to predict and thus difficult to prevent. Time and money would be better spent on the far greater incidence of killings in our inner cities. Those are more predictable and therefore more preventable. When President Obama went to Chicago to promote his gun violence initiatives, he spoke to the core of the problem: “There is no more important ingredient for success, nothing that would be more important for us reducing violence than strong, stable families, which means we should do more to promote marriage and encourage fatherhood.” Amen.

Unfortunately such talk flies in the face of the Leftist agenda that sees government as a necessary component in the solution to every problem. Disappointingly, the President didn’t stop with the above comments. He went on about “Promise Zones” that have been around for years, yet have done very little to stop violence. And how could Hollywood endorse a suggestion as conventional as marriage between a man and a woman? Homicides in Chicago in 2012 were equal to nineteen and a half Newtowns, yet received none of the press. Those of us who live on the coasts, and who are white and affluent could identify with the families in Newtown, whereas we cannot with the killings in the poverty stricken areas like inner-city Chicago. But neither can the Press nor politicians. Most of the latter were gang related and most involved minorities from broken families racked with poverty. According to the Department of Justice, 93% of African-American murders are intraracial. Those killings are a world apart from where most of us live. Understandably, we are drawn to that with which we identify.

We must also keep in mind that bans on assault rifles in Connecticut did not deter Adam Lanza from carrying one that awful day in Newtown. Nor should we ignore the fact that Chicago has some of the toughest gun laws in the nation, yet had more killings in 2012 than any other city.

All of this talk has brought out the absurd as well as the sensible. Vice President Joe Biden suggested he would arm his wife with a shotgun, with which she should fire out the window and into the air if she hears a disturbance. His comments were was not only ridiculous, they were dangerous. I cannot imagine giving my wife similar instructions, an opinion I share, I am sure, with most Americans. What I hope the country does is take heed of those words the President spoke about in Chicago this week – the stability of families, the role of fathers, and the importance of marriage. That is by far the best way to reduce violence. And it doesn’t involve government, but it does require leadership.

Sunday, February 24, 2013

“Simpson-Bowles 2.0”

Sydney M. Williams

Thought of the Day
“Simpson-Bowles 2.0”
February 25, 2013

“Situation Hopeless…But not Serious” was the title of a 1965 film starring Alec Guinness. It is the story of two American World War II pilots who are forced to bail out over Nazi Germany. They are taken in by a German (Alec Guinness) who enjoys their company so much he doesn’t tell them when the war is over. After seven years they finally escape into a peaceful West Germany. The recent decision by Alan Simpson and Erskine Bowles to revitalize their debt and deficit reduction plan just seems hopeless. None of our elected officials on either side of the aisle (with the possible exception of Paul Ryan, Tom Coburn and perhaps a few others) have any inclination toward addressing what is a mushrooming problem – our debt and deficits. A condescending and irreverent Greg Sargent, in a recent column in the Washington Post, suggested that Mr. Simpson and Mr. Bowles seem “like a pair of aging crooners.”

The new Simpson-Bowles plan is similar to the first in that it relies on reduced spending and increased taxes. It differs in that there is a greater emphasis on spending cuts than on tax increases, and that has the Left up in arms, despite the fact that taxes were raised unilaterally at the start of the year. Mainstream media has become apoplectic. As Derek Thompson, writing in the Atlantic put it: “This plan all but gives up on the idea that balancing the budget requires a roughly equal mix of tax hikes and revenue cuts.” Kevin Drum, writing for “Mother Jones” makes the same point more colorfully: “I guess they figure that conservative sacred cows are a little more sacred than liberal ones.” Similar comments were posted by those writing for the New York Times and the Washington Post.

The problem, in my opinion, is far more fundamental. There is a growing sense among millions of Americans that money spent by government is free – that it has no cost. I hear anecdotal evidence of such beliefs all the time, as I am sure you do. Why don’t they fix these potholes? Why do we not have street lights all along 95? Where are the cops when we need them? Try telling any senior that his Social Security is to be halved. As the country moves toward 50% of the wage-earning population not paying federal income taxes, this attitude will only increase. The automatic withholding of payroll taxes, implemented during World War II, proved a painless, surreptitious seduction of American taxpayers. It has had devastating consequences. Should all taxpayers actually have to write checks to the government every quarter, the size of government would likely be far smaller. Voters today are willing to raise taxes on the rich, because 98% of them would be unaffected, but the idea of raising middle income taxes has been met with resistance, because too many taxpayers would be affected.

The idea that government-spent money is free is not confined to the taxpaying public. It is an attitude, unfortunately, endemic to those who work for government. And that attitude is not exclusive to one Party; though former Indiana Governor Mitch Daniels made a point of reminding state workers that they were servants to taxpayers. Nevertheless, Republicans are generally every much as guilty as Democrats. When was the last time you saw a member of Congress in a suit from Sears? While salaries of Congressional members are relatively modest, non-taxable expense accounts are multiples of their income. Their haughty attitude was captured recently, as Nancy Pelosi refused to consider a pay cut for the House: “It would be beneath our dignity.”

The principal problem in Washington is spending on entitlements. And, sadly (and realistically) there is little that can be done to change it. Those of us who have had children know the love and affection we get when we give them something they want, and we also know the tears and the resentment we get when we take something away that they like. Politicians are smart enough to know that that aspect of human nature extends to adults. Despite the ultimate consequences, Democrats for decades have taken advantage of that knowledge, placing Republicans in the role of having to play Starbuck to the Democrat’s Ahab.

Peggy Noonan, in the weekend edition of the Wall Street Journal, has a far simpler explanation for Mr. Obama’s emphasis on taxes over spending cuts. “He wants the rich to pay more and those he judges to be in need to receive more. End of story. Debt and deficits don’t interest him, except to the extent he must give them lip service.” In my opinion, Mr. Obama, despite his poll numbers and the adoration he gets from mainstream media and Democratic Congressional leaders, is an outlier. He is uniquely protected by the veneer that criticism of his policies would be seen as personally racist. In my opinion, and despite the polls, he doesn’t represent mainstream thinking.

Many Democrats are concerned about the direction we are heading. They have to be. A recent Wall Street Journal op-ed, quoted by Leeds on Finance last week noted: “Orange County beach lifeguards are retiring at age 51 with a $108,000 pension plus healthcare benefits.” Politics has become a world of make-believe. “If wishes were horses, beggars would ride,” is an old English proverb. In Washington everyone now dines on ‘Wish Stew.’ Promise them anything, seems to be the accepted slogan, but they fail to add that the costs will be born by our children and grandchildren. Ken Langone was blunt last week: pursuing the President’s vision “is eating the grandchildren’s breakfast, lunch and dinner right now. And the grandchildren haven’t been born yet.”

The creed of ancient Epicureans was “eat, drink and be merry, for tomorrow we die.” That creed has been assumed by too many of those we send to Washington. We send them not only to pass laws and protect our lives and property, but as fiduciaries of our tax dollars. How many in Congress have the slightest concept of the duties of a fiduciary?

Our representatives in Washington pontificate piously and pompously about fiscal matters, but they do very little. A cynic might ask, do they truly want to suffer the torment of resolving the problem – the resolution of which might cost them their jobs? For decades, they have been able to kick the can down the road. Who’s to say that that road is now ending? With one eye on their own retirement and another on polls, they try to measure how long the game can be played: what are my re-election chances and how close am I to retirement? They have immunized themselves from what surely will be the unaffordable aspects of the Affordable Care Act and have ensured that their own retirement pensions are secure. I am sure there are many in Congress who do care, but unfortunately there are obviously far more who do not.

Nevertheless, unless brakes are applied soon to this run-away spending, there will be an unpleasant rendezvous with a brick wall. It is that fear that prompts decent people like Alan Simpson and Erskine Bowles to act as they did. Both men have been successful. Both are patriots; Simpson served with the U.S. Army and Bowles with the U.S. Coast Guard. Both men have served in politics: Simpson as a U.S. Senator and Bowles as Chief of Staff for President Clinton. Both could easily have retired in peace and comfort. Neither needs the notoriety their plans have brought them. While it is unlikely that anything comes from their efforts, trivializing their efforts is marginalizing two men who have chosen to address a problem that others, who are responsible, have chosen to ignore.

Thursday, February 21, 2013

“Politics by Propaganda and Polls”

Sydney M. Williams

Thought of the Day
“Politics by Propaganda and Polls”
February 22, 2013

Less we forget, on this day in 1732 George Washington was born. Growing up, February was a wonderful month for school age children who loved winter, as I did in New Hampshire. We celebrated not only the 22nd, but also the 12th, Abraham Lincoln’s birthday, which often meant two midweek February holidays! The Uniform Monday Holiday Act of 1971 changed all that. Instead of honoring giants from our history, we combined Andrew Johnson and Chester Arthur with Washington and Lincoln. Political expediency and convenience trumped the individual commemoration of great leaders.

All Presidents use polls. Or at least they have in earnest since 1936 when George Gallup conducted his first national poll. The very first presidential poll was conducted in 1824. The results showed Andrew Jackson defeating John Quincy Adams. Jackson did go on to win the popular vote and a plurality of the electoral vote. But because a majority of the electoral vote was needed, the election was determined by the House of Representatives, which decided in favor of Adams. Jackson did go on to win the Presidency in 1828 and served two terms. Prior to Jackson, two terms had been the norm (the exception being the two Adams’), but subsequently no President was elected for a second term until Lincoln in 1864.

Modern polling which uses random sampling, as opposed to the straw polls of the earlier era, was first conducted by George Gallup in 1936. An interesting footnote is that that year also saw the failure of straw votes. The Liberty Digest Poll sent out ten million questionnaires. Two million responded. The conclusion was that Alf Landon would defeat Franklin Roosevelt. When FDR won the Presidency with 63% of the popular vote and 46 of 48 states, the inherent weakness of straw polls became apparent. The Liberty group had used auto registrations and phone books for addresses. At that time, in the midst of the Depression, only the wealthy had either a car or a phone, skewing the results.

But Presidents have increasingly been using polls to conduct policy which, in my opinion, is wrong. It becomes even worse when they propagandize the electorate with the assistance of a compliant press. We supposedly elect our political leaders because of the platforms on which they run or on the promises they make. We also elect them because we have determined that they have both the wisdom and character to make good decisions. We put our faith in them to do what is right. We should not see this as a popularity contest. No more should a President conduct the nation’s business with one eye on the immediate popularity of what he or she may be doing.

A manifestation of our times can be seen in a story in Monday’s business section of the New York Times: “Obama Faces Risk in Pipeline Decision.” The “risk” has nothing to do with deciding what is in the best interest of the American people; the risk to which they refer is the political one facing the President – union workers who favor the Keystone XL pipeline, or environmentalists who do not. Is the Times fearful for Mr. Obama because of the consequences his decision will have on his or his Party’s future? Mr. Obama is a second term President who, unless he has plans on abolishing the twenty-second Amendment, will no longer be a candidate for President. At this stage in his career, his focus should be on the good of the country and its people, not on what would be preferable to him or his Party. And what could be better for the economy and the country today than the creation of jobs, the production of cheap energy and the elimination of a reliance on dictatorial regimes?

There was a time when Presidents made hard decisions, which were based on their determination as to what was right for the country, not what was right for them or their party to retain political power. Abraham Lincoln famously gathered a cabinet of men who disagreed with one another. While Mr. Lincoln was our first Republican President, the cabinet included Democrats and Whigs. While Mr. Lincoln had strong feelings, particularly on maintaining the union and the evil of slavery, he was interested in working out, through debate and discussion, the proper course the country should take. To Lincoln, the means were of less importance than the ends.

Even George W. Bush, a much maligned President, was unafraid of having strong people in his cabinet – think Dick Cheney and Donald Rumsfeld. Whether one agrees or disagrees with their policies they were independent men who were unafraid to confront Mr. Bush. In his first term, Mr. Obama showed backbone, selecting Hilary Clinton for State and keeping Robert Gates in Defense. But Mr. Gates resigned in 2011 and Ms. Clinton, who initially seemed forged from the granite of my home state of New Hampshire, fell in lock-step with Mr. Obama in perpetuating a cover-up regarding Benghazi.

And now, for his second term, Mr. Obama has chosen a cabinet that hews unquestioningly to his policies. He is not looking for a debate or a challenge from within his own Party, or from anyone with an independent view. He reserves his energy for golf, propagandizing and for fights with Republicans. Mr. Obama realizes that only the recapture of the House will ensure that Julia’s world can be achieved – a place where dependency rises and responsibility devolves to government. To effect this change, he harangues his opponents and unabashedly uses props to support his cause. He has learned well the lesson from Nazi propaganda minister, Joseph Goebbels: “Repeat a lie often enough and it becomes truth.” He did so about Mitt Romney. He has done so about Benghazi. And now he is doing so about sequester.

As a people, we are vulnerable. Most people get their news in sound bites from network TV, cable, or from the internet in less-than-a-minute YouTube videos. Very few have the patience to read newspapers or long magazine articles. And how many of us read history once we have left college? Complicated issues require comprehensive study. The fact that so many people have neither the desire nor the time suits the playbook of Mr. Obama and his team.

This past Sunday the New York Times magazine had a long (and somewhat patronizing and silly) article entitled, “Can the Republicans be Saved from Obsolescence.” According to the author, Robert Draper, Republicans are doomed because they have not learned how to reduce their message to the 140 characters required for Tweeting. For twenty years – 1932 to 1952 – Democrats dominated the national scene. Yet over the next forty years, Republicans won seven Presidential elections to the Democrats three. By the end of the 1980s, Democrats appeared to be on the ropes. Yet they have since won four of the last six Presidential elections. As the old saying goes, ‘nothing stays the same.’

Nevertheless, with a loss in personal responsibility and with a concomitant increase in dependency, and with schools failing to teach our youth the fundamentals of our republic – the reasons for revolution, the promise of liberty, the rule of law, an understanding of property rights – it becomes possible that, over time, our democracy could give way to tyranny. That may sound extreme, but all previous empires have collapsed.

Propaganda by slogans characterized both Nazis and Communists, as they do all dictatorships. It is a tool of all who would wrest control. Think of Saul Alinsky – a community organizer who, though dead, served as one of the President’s mentors – “Pick a target, freeze it, personalize it and polarize it.” The “wealthy” have served as Mr. Obama’s target. In every speech, he freezes them, personalizes them and, now, has certainly polarized the nation.

Keeping a Democracy is hard. It requires an educated electorate who understand the consequences of giving up individual rights and the responsibility that comes with them to the state because of the dependency that state offers. Yet, I stay optimistic. Over the years, one could demonstrate that while the American people have proven to be gullible for short periods, over time they revert to sanity. William Buckley once famously said that he would rather be governed by the first 400 names in the Boston telephone directory than the Harvard faculty.

Nevertheless, I do worry. Our young people are entering the workforce with little knowledge of their country, its origins, history and its laws. Increasingly, people get their news from sound bites and tweets. It is from these ephemeral sources that opinions are formed, and those opinions form the basis of polls. Polls can be managed. What makes the scenario most dangerous is that the mainstream press has refused to do their job as the fourth estate – they have become lap dogs instead of watch dogs. Fortunately, cable TV news, talk radio and internet bloggers are providing a counterbalance. But again, like mainstream media, they also use abbreviated comments, as an attention-deficit-deprived nation no longer has the wherewithal to study complex issues. It is ironic (and deliberate in my opinion) that at a time when tweets have replaced dialogue and our news is provided in ten-second increments, the laws Congress is passing are increasingly long and complex. Keep in mind, complexity, whether in regulation or in the tax code, is friend to lawyers and government, but is enemy to liberty.

And, governing by polls is wrong; manipulating them, whether overtly or covertly, is far worse.

Tuesday, February 19, 2013

“America in Decline?”

Sydney M. Williams

Thought of the Day
“America in Decline?”
February 20, 2013

Niall Ferguson subtitles his most recent book The Great Degeneration, “How Institutions Decay and Economies Die.” It is a short treatise on the way in which well-intentioned political leaders can cause the failure of that which they have been charged with preserving. On the last page, Mr. Ferguson quotes from Mr. Obama’s “You Did Not Build This” speech. He writes, “It is not that the implied interdependence of the private sector and the economy is wrong. It is the overstatement of the case that is disquieting, as if it took government to build every small business or, indeed, to ‘create the middle class.’”

America, if it is failing, is not doing so because it is too poor. It is doing so because it became too rich. And, in being rich, it has become too complacent. It is not failing because it does not care about its people. It is doing so because when the state assumes too much responsibility for the welfare of its citizens, it causes dependency and destroys self-reliance and aspiration

The United States has been lucky in many regards. Geographically we are bound by two oceans. We have friendly neighbors to the north and south. We have an abundance of natural resources, virtually unparalleled. Our population is diverse, as the country has been occupied by immigrants since its discovery. Our government was founded by an exceptional group of wise men who wrote a Constitution based on English common law, which respected property rights and which emphasized our God-given rights. As a nation, we grew rich and our people selfless. Americans have done more to help those in other parts of the world than any other nation in history, including the giving of their lives.

But, in our wealth and our caring we have become complacent, expecting the economic growth that has carried this nation to persist, but apparently forgetting the basic principals of thrift, hard work, the rule of law and self-reliance that helped forge success over two centuries. Most discouragingly, we have grown increasingly dependent on government, rather than on ourselves, our neighbors and local groups and institutions.

History is replete with nations and empires that have sputtered out – from the Inca and Aztec Empires to the Greek and Roman, to China and the sun-setting of the British Empire in the past century. The challenges facing a mature and wealthy nation are many, especially when that country is essential to peace in the world. Japan and Germany, the world’s third and fourth largest economies, have had the benefit of the U.S. providing for their defense for the past sixty-eight years, allowing them to spend money in more productive ways. For five hundred years, today’s second largest economy (China) wallowed in the backwaters, as their society did not provide a legal system that would protect property rights, or the economic incentives necessary for growth. There are many sober and substantive commentators who see the U.S., and in fact much of the West, failing in a world grown globally more competitive. Instead, they look upon statism as a new and favored path to economic success. That certainly seems to be the trend. The question is, has it become too late for us to reverse course? In the meantime, there are developments that should raise cautionary flags.

For one, our high school students rank poorly when compared to their foreign counterparts. The Programme for International Student Assessment (PISA) ranks fifteen-year olds in mathematics, science and reading across thirty-three countries. For 2009, the last year available, the United States ranked 18th in math. It was 13th in science and 7th in reading. Why are we not one or two?

For another, experts ranging from the Harvard Business School to the World Economic Forum to the Heritage Foundation have quantified a growing loss of business competitiveness in the United States. The problems include excessive and expensive regulation, a complex tax code, the inefficiency of the legal framework and corruption tied to cronyism between government, big unions and big business. Again, according to surveys conducted by those organizations and the IMF, the U.S. compares poorly and declining.

Abraham Lincoln, in his “Gettysburg Address” called ours a government of the people, by the people, for the people. That seems no longer to be true. America was always divided into three distinct groups – the wealthy, the middle class and the poor, but we were fluid, with people, over generations, moving up and down the scale. Sadly, over the past couple of decades it has become easy to move down, but increasingly difficult to move upward. And we now have a new class, a “government class.” Government jobs are seen as sinecures. Too often we see sons and daughters “inheriting” Congressional seats. Nancy Pelosi, when asked last Thursday if she would be willing, given our sizable debt, to take a pay cut, responded “it would diminish the dignity of lawmakers.” This daughter of a political family who is wealthy in her own right to make such an offensive statement when unemployment remains high and millions of people have had to take pay cuts is supercilious and shows contempt for the electorate. Our system of government was founded on the precept of the rule of law. It is becoming one of a rule by lawyers – lawyers who in earlier generations facilitated government, but who since have become parasites living off government.

But it is debt which is the biggest challenge facing the United States, and it is a general lack of preparedness for retirement that is facing most middle class people. The Federal Reserve has been able, thus far, to mask the onerous expense of our debt by keeping interest rates low. But in so doing they tripled the size of their balance sheet; that cannot go on forever. At some point our creditors will demand higher rates in return for the increasing risk they assume. Higher interest rates on expanding debt will exacerbate both deficits and debt. Keep in mind as well that inflation is friend to the debtor. Apart from default the biggest risk to creditors is inflation. Retirement is another looming problem, which will divert scarce resources from more productive uses. State pension plans are underfunded by about $3.5 trillion. Medicare and Social Security are on paths to bankruptcy. The Center for Retirement Research, using Federal Reserve Data, estimates that 53% of Americans thirty and older are on a track that will leave them unprepared for retirement. That percentage is up from 38% in 2001 and 30% in 1989.

It is generally assumed today that younger baby-boomers will be the first generation to live less well in retirement than their parents. That should send a signal that all is not well in middle class America and, despite words to the contrary, nothing the President has proposed will make it better. We need economic growth, and to get it the government must step out of the way and unleash capital markets, entrepreneurship and free markets. Economic liberty and property rights are no longer accorded the same importance or respect as civil rights. This is not to belittle the importance of civil rights, but without property rights the latter become meaningless, as their absence implies a stronger central government – and less personal freedom.

President Obama talks glibly and feelingly about the middle class, but his policies have not served their needs. Mobility between classes is more difficult than ever. Education serves the wealthy well, but too-powerful unions have harmed the lower and middle classes. There are fewer people working today than four years ago, while the numbers of people on food stamps and disability have increased. The nation’s tax code encourages consumption and discourages investment. Regulation has made it more difficult than ever for small businesses to start and to grow. Obamacare has raised costs for these same businesses. Cronyism between Washington, big business and unions provide a disincentive to small business. An expanding “government class” further distances leaders from the people. And the piling on of debt, while satisfying those in need of instant gratification, worsens the prospects for our children and grandchildren.

None of these concerns suggest the path toward decline or decay is irreversible. In my opinion, they could all be corrected reasonably quickly with the right policy changes – a balanced budget, deregulation, a simplified tax code and term limits for those in Congress, providing us once again a government of the people, by the people, for the people – a people more self-reliant and less dependent. Unfortunately that doesn’t seem likely with this Administration.

Monday, February 18, 2013

“Sequester”

Sydney M. Williams

Thought of the Day
“Sequester”
February 19, 2013

Sequester: legal: To remove (property) temporarily from the possession of the owner;
seize and hold, as the property and income of a debtor, until legal claims are satisfied.
                                                                                                                 The Random House Dictionary
                                                                                                                 Second Edition, unabridged

The seemingly inevitability of sequester is in direct contrast for its raison d’ĂȘtre. It was passed and signed into law with expectations that it never would go into effect. The possibility that it will is a manifestation of failed leadership in the White House and Congress. The idea of sequester for political purposes was first conceived in 1985 with the passage of the Balanced Budget and Emergency Control Act of 1985. The Budget Control Act of 2011 specifically required Congress to ready a plan that would reduce the annual deficit by $1.2 trillion over ten years beginning in fiscal 2012. Failure to do so would trigger automatic budget cuts starting with the 2013 budget. The Office of Management and Budget was provided authority to carry out sequester. Now we are fast approaching an event no one thought would happen.

Sequester was approved by Mr. Obama as a quid pro quo. It was seen as a way of forcing Congress to implement $1.2 trillion in reductions to the deficit over ten years, in exchange for an increase in the debt ceiling. A super committee was formed to come up with proposals. They gathered with great fanfare and collapsed ignominiously a few months later. Their failure triggered sequestration. A $2.1 trillion increase in the debt ceiling (the quid) was approved by Congress in 2011. Now fiscally conservative Congressional members are demanding the quo (sequester.) The “fiscal cliff” agreement last December did nothing more than postpone the inevitable for two months. The Budget Control Act of 2011, which created this monstrosity, was passed with rare bipartisan majorities in both the House and the Senate. It was signed into law by President Obama. With the March 1st deadline, and with a new debt ceiling fast approaching, the necessity of acting is imminent; otherwise another debt downgrade is possible for U.S. securities.

According to the Bipartisan Policy Center, of the $1.2 trillion required by sequester, $216 billion will come from assumed interest savings. For the balance ($984 billion,) cuts would be evenly divided between each of the remaining nine sequester years, or $109 billion per year. Annual cuts would be evenly divided between the non-exempt portions of defense and non-exempt, non-defense spending. Money’s spent on wars are exempt, as is most mandatory spending, including Social Security, retirement programs, veteran’s benefits, Medicaid, CHIP, food stamps, unemployment insurance, etc. Keep in mind, the annual budget for 2013 is expected to be $3.8 trillion, of which defense would be 24%, or about $950 billion. In other words, Defense, which would be hit harder than most other departments would lose approximately six percent of their 2012 revenues – a number that, while perhaps undesirable, should be manageable.

The battle over sequestration is what makes Washington so frustrating for citizens, yet what provides so much material to comedians and commentators. A majority of Democrats in the Senate voted for Sequestration, as did a majority of Republicans in the House. This was one bill that truly received bipartisan support. It did so in large measure, I assume, because a year and a half is a lifetime in the nation’s capital. It should also be remembered sequestration received the full endorsement of the President. In fact, on November 21, 2011, when it became obvious that the super committee had failed, Forbes quoted Mr. Obama: “I will veto any effort to get rid of these automatic spending cuts,” adding, “the only way to get rid of these cuts is for Congress to come together and work a deal.” Now that sequestration seems inevitable, responsibility is being passed around Washington like a hot potato, with everyone denying paternity.

Popular legislation has multiple fathers, but when a law goes sour it becomes an orphan. Less than a year after his fervid boast, Mr. Obama was singing a different tune. Last October, in response to criticism from Mitt Romney that American security is at risk if defense cuts are triggered by sequester, he said: “First of all, sequester is not something I proposed, it’s something that Congress proposed. It will not happen.” In his State of the Union, the President claims that sequester was a bad idea and cited a litany of programs that would be cut, most of which are exempt from the law’s provisions. In his book, The Price of Politics, Bob Woodward claims differently. It was the White House, Mr. Woodward alleges, that first suggested the concept of some kind of triggered spending cuts as part of a compromise to get more borrowing capacity. Honor has little meaning to too many politicians cavorting around Washington on our dime. Despite the omnipresence of YouTube, persistent denial still serves as a politician’s best friend.

Republicans are equally guilty. They accepted sequestration as the price for granting more borrowing power to the profligate Mr. Obama. Following passage of the legislation in 2011, John Boehner was quoted as saying he got 98% of what he wanted.

What once seemed a harmless nudge to wrest reason from an unreasonable Congress is now being touted as everyone’s worst nightmare. Mr. Obama has had his cabinet in attack mode. The President has made it clear that such cuts will harm the poor, the elderly and of course the middle class, his current favorite constituency. They won’t, however, as mandated programs are largely exempt. Our new Secretary of State, John Kerry, on Friday, said, “These cuts would severely impair our efforts to enhance the security of U.S. government facilities overseas and ensure the safety of the thousands of U.S. diplomats serving the American people abroad.” (It was the failure to deploy assets – not their absence – that resulted in the tragedies in Benghazi.) Defense Secretary Leon Panetta has said that sequester would be “shameful” and would “hollow out the force and inflict severe damage to our national defense.” The headline in Friday’s The Day, (New London, Connecticut’s daily paper and which serves as my local paper) reads: “Napolitano: Looming Cuts Imperil Coast Guard.” The Secretary for Homeland Security spoke of how sequestration would disrupt her department and the nation’s security. Where were these people a year and a half ago? One of them, John Kerry as Massachusetts’ senior Senator, voted in favor of sequester.

When you listen to the blather and lies of these bloviating politicians, keep in mind that cuts of this magnitude for the most part represent cuts in the rate of growth, not in actual spending. Unlike most household budgets, government ones have built-in growth assumptions. It is true that some departments will be hurt, but as John Makin wrote in last Thursday’s Wall Street Journal, “Fear mongering aside, the sequester is more paring knife than meat axe.” Tax increases on the highest earning Americans, which were not part of the Budget Control Act of 2011, were put into effect on January 1st alleviating some fiscal pressure. It is not as though government will starve.

A $109 billion annual reduction in spending out of a proposed $3.8 trillion budget for fiscal 2013 represents a 2.9% cut. Sequestration would not have been most of our preferred venue, but if it focuses attention on our rapidly increasing debt it will have served its purpose.

Thursday, February 14, 2013

“State of the Union”

Sydney M. Williams

Thought of the Day
“State of the Union”
February 14, 2013

Like Pavlov’s dogs, we have become conditioned to instant gratification. While explanations for such behavior may be shrouded in the mists of human psychology, government has certainly played a role. Despite four years of trillion dollar deficits and total federal debt exceeding 100% of GDP, Tuesday’s State of the Union was simply another confirmation of the importance Mr. Obama sees of government in our lives. The President asked $50 billion for infrastructure projects, universal public preschool for all four-year olds, higher minimum wages, and keeping the promises we have made to seniors and the infirm. He called for a carbon tax to limit emissions and an emphasis on renewables, despite our nation being rich in hydrocarbons. Like all politicians, Mr. Obama was long on promises and short on costs.

Also, like all politicians, Mr. Obama played fast and loose with facts. He said that we added six million jobs in the past four years, but neglected to point out that roughly 5 million people have been added to the workforce and, more importantly, that there are 3.2 million fewer people working today than when he took office. He failed to mention that more people have been added to disability roles than have received jobs since he took office, or that the number of people on food stamps has increased 50%. He said that the deficit has already been cut by $2.5 trillion, more than halfway toward a $4 trillion target, a mirage-like number, as our deficits have exceeded $1 trillion in each of the past four years and federal debt is fifty percent larger than it was four years ago. He did ask three important questions: How do we attract more jobs? How do we educate workers for those jobs? How do we ensure that those working will be paid a fair wage?

But the President’s responses suggest more government. He didn’t mention oppressive regulation or that the Affordable Care Act has rendered offering healthcare to workers unaffordable to many small businesses. He did not acknowledge that the government has refused to allow fracking on federal lands, or that the EPA has prevented the building of the Keystone XL pipeline. While he did talk of tax reform, it was only in the context of generating more revenues to government, not to provide more incentives for employers. There was no mention of the streamlining effects competition brings to the private sector. Mr. Obama urged Congress to raise the minimum wage from $7.25 an hour to $9.00, as it would allow millions to emerge from poverty. He pointed out that the minimum wage pays annually about $15,000 a year – an amount no family can live on. He neglected to point out that $9.00 an hour would only pay $18,720 annually – roughly what the U.S. Census deems to be the poverty level for a family of four. As Marco Rubio said, in the Republican’s response, such a number is unconscionably low. The answer, as Senator Rubio said, is faster economic growth, not saddling employers with a higher minimum wage, which history has shown almost always increases unemployment. Steve Malanga, of the Manhattan Institute, put it more eloquently: “The real key to raising wages is not boosting the minimum wage, but eliminating the disincentives to hiring.”

Our tax system needs reform. It penalizes savers and rewards consumption. The President speaks eloquently of “shared sacrifice” and “investments” in the future, but his reality is something far different. By shared sacrifice, he is speaking of redistribution and by investment, he means spending on entitlements and benefits for consumption today.

A characterization of our age is that we live under the sign Carpe Diem (seize the day,) the words David Brooks entitled his op-ed in Tuesday’s New York Times. Mr. Brooks’ concern is that when we focus too much on the present, we give up the future. The principal exception, it seems to me, are immigrants – those who come here because of the promise of opportunity that America has long offered. Naturally there are a few who come for the handouts, but they are a distinct minority. Mr. Brooks quotes from one of my favorite novels, Giants in the Earth by O.E. Rolvaag. He describes Per Hansa, a Norwegian immigrant, describing his Minnesota land to a visitor. He speaks of his beautiful home and the surrounding barns and out-buildings. Mr. Brooks writes: “The visitor confesses he cannot see them. That’s because they haven’t been built yet…but they already exist as reality in his mind.” The President is right to call for immigration reform – protecting our borders while making it easier for immigrants to live and work here. I was pleased that he mentioned that learning English should be a prerequisite for citizenship.

In his latest (and sobering) book, The Great Degeneration, Niall Ferguson concerns himself with what Adam Smith called ‘the stationary state.’ By that he meant formerly wealthy nations that had ceased to grow. Professor Ferguson notes that it is very hard to achieve higher growth under a heavy debt burden. He quotes from Reinhart and Rogoff’s “Debt Overhangs: Past and Present.” “The debt burden lowers growth only when it rises above the 90% of GDP threshold.” Today our total federal debt exceeds 100% of GDP, but supporters of Mr. Obama will point to the much higher level of debt following World War II, a period that was followed by strong economic growth. However, that period coincided with an extraordinary pent-up demand resulting from sixteen years of depression and war. Borrowing from our grandchildren to pay for entitlements for people my age places an undue burden on future generations. Professor Ferguson writes: “I want to suggest that the biggest challenge facing mature democracies is how to restore the social contract between generations.

Mr. Obama, I am sure, cares about the welfare of the people and especially, as he repeatedly says, those who represent the middle class. But his means of redress seem at odds with what will do them the most good. Noting that the speech came on the 154th birthday of Abraham Lincoln, Kevin Brady and Lewis Lehrman, in an op-ed in Wednesday’s Wall Street Journal, wrote: “The underlying theme of Lincoln’s economic initiatives was that by providing ordinary people with incentives to use their own skills and labor, the entire nation would prosper.” The key word is ‘incentives” – very different from Mr. Obama’s emphasis on entitlements and redistribution.

Sounding more like a huckster at a campaign rally, rather than a President delivering a State of the Union, Mr. Obama called out half a dozen times: “Let’s get it done!” He is an eloquent spokesman, but his policies call for more, not less, government. He has a habit of taking credit for the favorable consequences of programs he did not support, like oil and gas production, and of placing blame on his political opponents for any failures. He demonstrates none of the strength of character of a Harry Truman, with the buck stopping with him. His view toward Washington is precisely the opposite of what Ronald Reagan told the American people when the late President said, “the nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’” Keep in mind that Mr. Reagan’s Presidency ushered in the longest lasting period of economic growth in the post-war period. Will we be able to say the same for Mr. Obama?

The state of the Union is still strong, but less so than before. It is being weakened by crippling debt. It remains under attack by Islamic terrorists that we cannot wish away. It is being challenged by a rising China and a resurgent Russia. Financially, the process of decay has been underway for decades. The fault does not lie solely with Mr. Obama, but he has done little to strengthen the fundamentals of the nation or the resolve of its people.

Tuesday, February 12, 2013

“Governing by Intimidation?”

Sydney M. Williams

Thought of the Day
“Governing by Intimidation?”
February 12, 2013

On August 6, 2011, Standard & Poor’s downgraded U.S. debt from AAA to AA+, the first such downgrade in our nation’s history. Neither Moody’s nor Fitch followed suit. Last week the Justice Department filed a $5 billion lawsuit against S&P for alleged fraud related to the mortgage/credit crisis of 2008. Thirteen state attorney generals also filed suits against S&P and their parent, McGraw Hill. No suit was filed against Moody’s, nor was one filed against Fitch, despite the competitive nature and similarities of the rating business. All rating agencies must be sanctioned by the SEC.

A lower rating means higher costs for the issuers; thus the perverse incentive is to be liberal in the ratings. The ratings of instruments such as residential mortgage-backed securities (RMBSs) and collateralized debt obligations (CDOs.) tend to be similar, especially as it is the issuer who pays the rating agency. If one rating firm was found wanting, why weren’t the other two? Perhaps the answer lies in the fact that both Moody’s and Fitch kept AAA ratings on U.S. debt, while S&P did not?

Rating agencies are highly profitable. In an interesting article detailing the difficulty of breaking into that favored clique, Gretchen Morgenson’s column in Sunday’s New York Times, told the hapless story of a small firm, R&R Consulting, with what appear to be highly respected credit analysts. As of yet, they have been unable to break into the favored ranks. Their approach has been to work with investors, as opposed to issuers, but the principals of R&R realize that rating issues is more profitable. Because of the need to be approved by the SSEC, rating agencies are in effect government endorsed businesses, limiting competition and certainly not helping investors. It is another example, in my opinion, of crony capitalism.

After any crisis, there is the inevitable search for cause – for someone or some organization on which blame can be placed. There is no lack of suspects for 2008 credit crisis that almost brought the financial system to its knees. We were all culpable – government, banks, mortgage lenders, real estate agents, consumers and rating agencies. Bubbles are never the consequence of a few outliers; they exist because we were all complicit.

Government had long been interested in widening homeownership. Presidents and Congress promoted the entire subprime mortgage market, extending home ownership who could ill afford the obligation. As government sponsored enterprises, Fannie Mae and Freddie Mac have been examples of crony capitalism from the start. They have helped fund the campaign chests of politicians like Chris Dodd and Barney Frank, while they took undue risks that, while markets were working in their favor, paid off handsomely. Their executives made millions, which they willingly shared with their political backers. When markets declined, though, leverage worked against them and the house of cards tumbled. Banks created derivative products that allowed them to use exceptional levels of leverage, endangering depositors, all in the search for profit. Mortgage lenders, in many cases complying with government regulations, made “no-doc” loans, requiring little or no down payment. Real Estate brokers, hiding behind their slogan of caveat emptor, were motivated solely by transaction volumes. Consumers saw home prices rising endlessly, convincing themselves that values would never retreat. And rating agencies, competing for the opportunity to rate debt of issuers, were lax in terms of fiscal prudence.

Rating agencies have long operated in a strange milieu, with a clear conflict of interest. They are paid by the issuers whose paper they rate, not by investors whose capital is at risk. Banks, in many cases, were both issuers and investors. As Floyd Norris wrote in Friday’s New York Times, “in some cases, the banks that S&P is supposed to have defrauded are the very same banks that put together the securitizations.”

Caveat Emptor, a saying long associated with realtors, can be justifiably applied to issuers who first hired a rating agency and then, on the basis of the rating, sold paper to institutional buyers. As I wrote back on May 3, 2010, “Rating Agencies – Do We Need Them?”, “their demise would be filled by creative, entrepreneurial firms specializing in credit research, and whose clients would be investors, not issuers.” In a sense, it would seem that is what R&R Consulting is hoping to achieve.

Despite my questions regarding the integrity of the ratings issued by those like S&P and Moody’s, I find it curious that the Justice Department has decided to sue the one rating agency that downgraded the government’s own debt. One would have suspected that if one were guilty, all would be. Perhaps Mr. Holder is simply playing a game of tit for tat? Perhaps the DOJ is saying to the agencies, don’t tread on me?

Friday, February 8, 2013

“Wherefore Art Thou, Drones?”

Sydney M. Williams

Thought of the Day
“Wherefore Art Thou, Drones?”
February 8, 2013

Wars have infamously produced new killing technologies. The Civil War produced the Gatling gun, the forerunner to the modern machine gun. The tank emerged from World War I, the war that saw the last cavalry charge. The nuclear bomb came out of World War II, and to this day instills fears when placed in the wrong hands. And from the War on Terror has come the drone, a riskless and seemingly sanitized instrument of death. The longer civilization extends, the more efficient we become at killing one another.

The War Powers Resolution of 1973 was an attempt by Congress to limit the power of the President to take military action without Congressional approval, yet was ignored by President Reagan in 1981 when he sent troops to El Salvador and by President Clinton in 1999, with the bombing campaign over Kosovo. On September 14, 2001, Congress acknowledged that the President had broad powers to take action in response to the terrorists attack three days earlier. Included in the preamble are the words: “The President may deploy military forces preemptively against terrorist organizations or the states that harbor them, whether or not they can be linked to the specific terrorist incidents of September 11.” In testimony yesterday, John Brennan, Mr. Obama’s candidate for CIA Director, said that the 2001 Congressional Authorization for use of military force “does not contain a geographical limitation.”

The Congressional hearings for John Brennan, President Obama’s candidate for CIA Director, along with the reporting by NBC News of an unsigned and undated Justice Department “white paper,” have raised concerns about the increased use of drones to kill our enemies, as well as the secrecy surrounding the program. As yesterday’s lead editorial in the Wall Street Journal put it, “President Obama has been lucky in many ways. But no more so than not having a Senator Obama to assail his use of Presidential war powers.”

The debate is over the use of a weapon, which has largely been kept secret and yet one that has killed between 3000 and 4500 people (including “well over 200 children”, according to Mary Ellen O’Connell, a professor of law at the University of Notre Dame, writing in Thursday’s New York Times.) Presidents have long used war as an excuse to curtail civil liberties. During the Civil War, the writ of Habeas Corpus was suspended by Lincoln, allowing the Administration to detain indefinitely anyone they considered to be a risk. World War I saw the creation of the Censorship Board in 1917, along with the passage of the Sedition Act and the Alien Act in 1918. Seventy thousand Japanese-Americans, almost all from the West Coast, were interned in camps during World War II.

John Lewis Gaddis, a Yale historian and author of Surprise, Security and the American Experience, described America’s policy in the fight against terrorism: unilateralism, preemption and hegemony. It was the policy of the Bush Administration and has been kept largely intact by the Obama Administration. Drones were first used in 2002, but their usage ramped up over the past four years. Lev Grossman, writing for Time, notes that the Pentagon has 7500 drones in its fleet, up from 50 a decade ago. “More than a third of the aircraft in the Air Force’s fleet are now unmanned,” he wrote. The U.S. military reported carrying out 447 drone attacks in Afghanistan in the first eleven months of 2012. On Inauguration Day, a drone attack was carried out in Yemen. Enemies (and civilians) have been killed in three countries: Afghanistan, Pakistan and Yemen. Among those killed was the American citizen, Anwar al-Awlaki, a terrorist living in Yemen. He was killed, along with his 16-year old son, in October 2011. Robert Gibbs, then White House press secretary commented somewhat callously, on the death of the boy: “He should have had a more responsible father.” If we could only choose our parents!

There are an estimated forty countries attempting to get drones, so the precedent set by the United States will have worldwide ramifications. We must consider the consequences of sending drones to kill an alleged terrorist into a country that may be an ally. What would be our reaction, for example, should Canada or Mexico send a drone into the U.S. to kill a terrorist threatening them, especially when there is always some collateral damage? It is no wonder that the New York Times quoted retired General Stanley McChrystal as warning that drone strikes are so resented abroad that their overuse could jeopardize America’s broader objectives.

In his piece “Drone Home” for Time, Lev Grossman wrote, “Having transformed war, drones are getting ready to transform peace.” There will be myriad legitimate users – border control, police departments, weather forecasters, farmers, conservationists, Hollywood, cartographers, hobbyists, builders and parents to track children. But there will also be criminals who will be able to use them for surveillance. They will become ubiquitous, allowing neighbor to spy upon neighbor and spouse to watch over wandering mates. Who will store the data they collect? Who will own it? Will it be for sale?

As an instrument for killing, drones challenge conventional morality. Deaths are antiseptic to the perpetrator, as he or she has no need to be in the vicinity; they can only see what has been done through the lens of a camera. There is a remoteness and a safety to their methods that allows the killing of one’s enemies to be done without emotion and probably more easily. The confidential Justice Department ‘white paper” states that the decision to kill can be made by an “informed, high-level” official of the government. How many people does that description encompass? Are our Twentieth Century moral codes capable of adjusting to this new technology that may be evolving faster than our ability to comprehend and cope?

When Juliet calls out, “O Romeo, Romeo! wherefore art thou, Romeo?”, she is not asking where Romeo is. She is upset that the young man she loves carries the name of Montague, a family inimical to her own. Why, she wants to know, should she have fallen in love with one that will only be hers in death? The same question might be asked about drones. What is it about nature that allows our intellectual growth to exceed our ability to understand the ethical and moral consequences of what we have created? Why is it that, as civilization advances, we continually create weapons that make us less civilized? An increased use of drones, whether for target killings abroad or surveillance at home, means that we will all have to put more trust in our government. Are we willing to do that? Is this not a slippery slope down which we are sliding toward “big brother?” Can we trust those in Washington to make such life and death decisions? And, why wasn’t a drone deployed to take out terrorists that September 11th night in Benghazi?

Drones, it seems to me, have created more questions than answers. Nevertheless, they are surely here to stay.

Wednesday, February 6, 2013

“The Sun Also Rises”

Sydney M. Williams

Thought of the Day
“The Sun Also Rises”
February 6, 2013

Following an election, which Mr. Obama took as a mandate, despite his receiving fewer votes than he did in 2008, consumer confidence fell in December, based on concerns about the “fiscal cliff.” In spite of the “fiscal cliff” being avoided, at least temporarily, confidence plummeted even further in January. Now the concern is the economy and individual financial expectations.

Nevertheless, the stock market has had its best start since 1989. The S&P 500 is now selling close to its peak in October 2007 and just below where it was in March 2000. Interest rates are set so low, that there is little cost to money, which helps asset prices, but which provide little upside for bond investors. On Monday Laszlo Birinyi, who was one of the first strategists to recognize the bull market almost four years ago, reaffirmed his expectation that the market has another one to two years to run. In Washington, amidst all the tumult over debt, deficits and guns, it would seem that at least immigration reform may be forthcoming. The debate, as L. Gordon Crovitz wrote in yesterday’s Wall Street Journal, “has turned to opportunities, not the burdens.” And immigration reform has significant consequences, almost all of which are positive for the economy. Roger Altman has an article in the current issue of Foreign Affairs, “The Fall and Rise of the West,” in which he identifies five reasons to be bullish on the United States. Does all this suggest calm seas and smooth sailing?

We tend to extrapolate our most recent experiences. It is the rare individual who can look through the haze and see the future with clarity. Most of us are mere mortals, but an understanding of human behavior is perhaps more important than a knowledge of economics when making forecasts. Like Pavlov’s dogs, we are biologically engineered to behave in certain ways, one of which is to consistently fight last year’s battles. For the past thirteen years we have battled terrorism. The housing market, the source of most people’s wealth, began to collapse seven years ago. Federal Reserve numbers show that household net worth fell 39% between 2007 and 2010. Median family income declined 8% over the same period. The S&P 500 is almost exactly where it was in 2000. The world’s financial system came close to collapsing in 2008 and, since then, Wall Street has fared better than Main Street. Is it any wonder that, in spite of 125% rise in stocks since their bottom four years ago, investors and consumers remain skittish?

Problems abound. The world is a dangerous place, but troubled seas can be deceptively calm and raging storms give little hint of placidity to come. The VIX is selling at multi-year lows, yet terrorism persists and political/economic instability is a common theme around the world. Our debt and deficits are real. Unfunded entitlements will force needed changes. Interest rate policy at the Federal Reserve may have saved a worse economic collapse four and a half years ago, but it has punished savers and the elderly. Crony capitalism persists between titans in the industrial and financial sectors and elected and appointed officials in government. Banks too big to fail have become even larger and, thus, more dangerous. The spread between the rich and the poor remains too high, even though it peaked in the waning days of the Clinton Administration. The middle class has been squeezed and there are fewer people working than five years ago. Poverty remains too high, especially among minorities. There has been a growing dependency on government, which only adds to the problem, both ours and theirs. Unfortunately for too many, dependency is seen as a permanent solution. Our students are failing. They compare poorly to their peers in several other countries. A study done by the National Center for Public Policy and Higher Education found that 50% of college students could not understand a typical newspaper’s editorials. We live in a society that celebrates relativism and abhors conventional moral standards, yet everyone agrees, for example, that children born to unmarried women start life at a disadvantage. And we know they represent 40% of all births in the U.S. today. Even candidate Barack Obama, in 2008, noted that such babies were five times more likely to live in poverty and nine times more likely to drop out of school. Yet the persistence of such births has increased over the past four years.

But acknowledging that such problems exist is a necessary first step toward finding a solution. Once identified, they can be addressed. And that process, I submit, has begun.

We know the world is dangerous, but that has always been the case. Nothing is static in foreign relations; not diplomacy, alliances, trade pacts, weapons, military strength or borders. Technology and real-politics are forcing change. Drones will not only be used as killing machines, they will change the way in which intelligence is gathered and monitored; and potentially will be used for surveillance on American citizens. In a front page article on Monday, the New York Times discussed a secret legal review which concluded that President Obama has the power to order a pre-emptive cyber strike “if the United States detects credible evidence of a major digital attack looming from abroad.” Whether one agrees with the decision or not, the announcement demonstrates the changing nature of international conflict and prompts ethical questions, as of yet unanswered.

Ultimately, the answer to the debt and deficit problems will be found in neither austerity nor tax increases; the answer will be found in an economy that expands closer to three percent than two percent. That will not prevent foolish legislators from acting foolishly, but it should provide a reprieve, perhaps temporary. The International Energy Agency estimates that the U.S. will surpass Saudi Arabia as the world’s largest oil producer by 2017. In 2012, the output of oil and other hydrocarbons rose by 7%, the largest single-year increase since 1951. It is certainly possible that government will do their utmost to retard development, by limiting access to federal lands, but, in any event, the process will persist. Cheaper sources of natural gas and petroleum will provide enormous benefits to America’s manufacturing base, which have already benefitted from improved efficiencies, a result of the recent recession and mediocre recovery. Exports should expand as a percent our national GDP. The housing glut and subsequent bust have provided an opportunity for the construction industry to renew growth, at least in line with family formations.

Pro-growth economic policies would accelerate the trend. A lowered and simplified tax code, expansion of free trade, the elimination of burdensome regulation, an immigration policy that favors the talented and well educated; an expanded guest worker program would also help fuel the recovery. While most of these changes seem unlikely under the current Administration, the foundation for increased growth exists.

Nothing in life, however, is assured. At some point the Federal Reserve will have to lift its foot from the accelerator and place it firmly on the brake. Will they be able to do so without going into a skid? Probably not. Technology has advanced at a pace faster than our ability to absorb the natural growth in our workforce, and it has strained our ability to understand the effect of technological advancement on our moral standards. Nevertheless, things are changing. The financial successes of states ranging from Wisconsin to Indiana to Texas are attracting wider attention. The number of charter schools is increasing, providing alternatives to the poor and oppressed, especially in our inner cities. The gasping, grasping sounds emanating from teacher’s unions indicate they are aware that their future is less secure. But it is our children and their teachers, not the unions, which should be our concern.

I am far from happy with current trends at the national level. The course the Administration has chosen, in my opinion, is distinctly the wrong one. Redistribution and collectivism will do nothing to revive the animal spirits necessary for robust economic growth. Congress has abused our trust for years and appears uninterested in addressing the serious financial concerns we all face. But many local and state governments are confronting the consequences of previous administrations’ profligate ways. They are taking on unions and improving their local economies. Susan Combs, the state comptroller of Texas, has recently proposed the radical step of returning to taxpayers the state’s surplus. A first step toward long term reform is the public acknowledgement that the funds with which any government operates belongs to the taxpayers, a position Mitch Daniels repeatedly emphasized during his eight years as Governor of Indiana. Government employees serve at our pleasure. Nationally, we have moved a long way from that understanding. It is refreshing when governors, mayors and comptrollers remind us that they are servants of the people, rather than us being subjects of the state.

Of course, if more Republican governors follow the sorry example of Ohio’s John Kasich, and a half dozen others, and succumb to the temptation of ephemeral federal Medicaid funds, then all bets will be off. Mr. Kasich may win this year’s budget battle, but he surely will lose the war.

Despite my concerns, it is the examples of Ms. Combs and Mr. Daniels that provides me hope that the sun will come out.

Tuesday, February 5, 2013

“More Gun Foolishness”

Sydney M. Williams

Thought of the Day
“More Gun Foolishness”
February 5, 2013

Tragedies almost always beget dubious responses. For the sake of looking busy and important, following the shootings in Connecticut, politicians have criss-crossed the country demanding gun reform. By that they mean limiting or reducing sales of automatic weapons and clips that hold more than a set number of cartridges. But they don’t want to look like spoilers of the Second Amendment, so they weasel around the subject in an unappealing manner. A collateral consequence was the silly photograph of the President allegedly firing a shotgun at clay pigeons, but, given the stance in which he was aiming at head level, more likely at Republican interlopers.

In terms of murder rates per thousand people there is little correlation between states with strict gun laws and those that are more liberal. Three states, including New Jersey, have implemented a one-gun-a-month policy, a policy endorsed in yesterday’s New York Times. The policy states that buyers, unless receiving an exemption from the superintendent of New Jersey’s state police, can only buy one hand gun per month. Of course, that also means that over a ten-year period anyone could purchase 120 weapons, enough to outfit a small army. Left unanswered, of course is the question: how many weapons does a criminal or a madman need? Again, there seems to be little relationship between murder rates and one-gun-a-month policy. In fact, all three states with such laws rank among the top half in murder rates. The other two states are Maryland, which ranked 4th in murder rates in 2011, and California that clocked in at 19th. (New Jersey comes in 24th, and is one of the few states not to have seen a decline in murder rates over the past fourteen years.)

The one-gun-a-month policy supposedly prevents an accumulation of weapons for re-sale to undesirable people; though it is far more likely that anyone wishing to buy anything on that scale is more interested in collecting than in killing. On its face, the law seems silly. Would not a national registration make more sense? Crimes and mass killings are the venue of the criminals and the insane, and that is where government’s focus should be. An op-ed in today’s Wall Street Journal should be required reading by every member of Congress. The author is Dr. E. Fuller Torrey, founder of the Treatment Advocacy Center. In the piece, Dr. Torrey discusses the failed initiative instituted fifty years ago, which closed mental state hospitals and substituted community mental-health centers. Most of those discharged never entered the community centers. Half of those discharged, those without family support, have done poorly. Dr. Torrey quotes from a study done by his center that notes that the untreated mentally ill are responsible for 10% of all homicides and a higher percentage of mass killings.

Nevertheless, the New York Times felt an obligation to enter the fray on the side of New Jersey, regardless as to the shallowness of their argument. Their ability to write ridiculous editorials is unsurpassed. Unfortunately, they have become so commonplace that they rarely necessitate mention, other than as a source of humor. The editorial yesterday on New Jersey’s one-gun-a-month policy brought new meaning to the word absurd.

The focus of authorities should be on keeping weapons out of the hands of criminals and the mentally ill. That means demanding just punishment for criminals and openness and honesty as to mental behavior, perhaps returning the obligation for their care to the states. It may mean violating some people’s sense of privacy and dealing with uncomfortable truths, but it is the greater good that should be considered. Neither the press nor authorities should ever forget that a rifle or a pistol is an inanimate object that left alone is harmless. It only becomes a lethal weapon when in the hands of one who is predisposed to do harm.

Monday, February 4, 2013

“Kim Jong-un – A Tinderbox”

Sydney M. Williams

Thought of the Day
“Kim Jong-un – A Tinderbox”
February 4, 2013

Despite allegations by President Obama that Hilary Clinton ranks among the greatest Secretaries of State the country has known, it is difficult to see any part of the world as being safer today than it was four years ago. The Obama Administration began with hope and a promise – to change the way in which the world perceives us. Mr. Obama and his new Secretary of State were going to “re-set” the relationship with Russia and improve our dealings with China, as part of Mr. Obama’s “pivot” to the Pacific. In a speech at Cairo University in early June 2009, Mr. Obama spoke of a new era of respect between Muslims and the West. Terrorist attacks were referred to, euphemistically, as “man-caused” disasters. The prison at Guantanamo would be closed and torture would be forever prohibited. Iraq was the “bad” war; Afghanistan, the “good” war. Everything Bush related would be reversed and serve as a source of blame.

Four years later, with a resurgent Putin, relations with Russia have soured. China has launched its first aircraft carrier, and increased its presence in the region. Tensions between China and its neighbors have tightened. Despite the laudable act of killing Osama bin Laden, Islamic extremists, including al Qaeda, are active across 4500 miles, stretching from Morocco to the Pakistani-Afghanistan border. The ‘Arab Spring,’ which was ushered in two years ago with great fanfare and expectations, has denied liberalization to the people. The principal beneficiary has been the Muslim Brotherhood, an organization that promotes Islamic states and Sharia laws. American embassies have been attacked throughout the region, with an ambassador killed (in Libya) for the first time since Jimmy Carter was President. While our homeland has been secure from attack, U.S. assets in other parts of the world have been destroyed. Instead of “torture,” the Obama Administration has utilized ‘antiseptic’ Drones that have killed terrorists, but also innocent civilians, including American citizens. Theoretically, they have done so with less collateral damage and by more “hygienic” means. It may be significant that on her last day as Secretary of State, a Leftist terrorist group stormed our embassy in Turkey (an ally of the U.S. and a fellow member of NATO) killing a guard.

The world remains a dangerous place. With all the attention being paid to Islamic terrorism in the Middle East and Africa, Kim Jong-un and North Korea should not be forgotten. Fortunately we have “The Onion” to remind us, if not as to how dangerous he and his country might be, as to what fools they appear. A few weeks ago, a facetious article announced that the “baby dictator” was the “sexiest man in 2012.” According to CNN, China’s “People’s Daily Online” took the story seriously, as apparently did some in North Korea, including, I am sure, Mr. Kim. An article in the same satirical paper this past week announced that North Korea retaliated against South Korea’s launch of a civilian rocket with the announcement that Mr. Kim had “moon-walked”, the first man to do so since Eugene Cernan climbed aboard his lunar module on December 13, 1972. The British tabloid, “The Sun,” showed a recent photo of the “Supreme Leader” sitting on a bed in a new, modern hospital, cigarette in hand while declaring that he wanted to ensure that the new building was “thoroughly sterilized and dust-free.” Stupidity is not limited to the U.S. Congress.

However, the humor masks the reality of the evil that is North Korea and her leaders. It is remarkable how little attention has been paid to the deteriorating situation in Pyongyang. In 2010, President Obama reaffirmed the ill-advised decision by George W. Bush to remove North Korea from the State Department’s list of state sponsored terrorism in 2008, which Mr. Bush had done on the premise that they had begun to dismantle their nuclear complex at Yongbyon. Mr. Obama’s reaffirmation of that position in 2010 was made despite the country’s conducting its second nuclear weapon’s test in early 2009. North Korea is now warning that it plans another nuclear test, the third since 2006.

This third test is considered more worrisome because it would be a highly-enriched uranium explosion, versus the first two tests, which used plutonium devices. While the manufacture of a plutonium bomb is difficult to hide, the centrifuges that produce enriched uranium can be operated in much smaller, more difficult to find places, like tunnels or caves. Also, North Korea, according to “India Today,” has large deposits of uranium, while plutonium must be imported. In an article dated January 31, “Russia Today” claimed that the North Korean leader issued a series of orders to conclude preparations for a new nuclear test. Additionally, they reported a source as claiming that Mr. Kim declared, “The country will be under martial law from midnight January 29th and all frontline and central units should be ready for war.” I suspect that most North Koreans already consider themselves under martial law, so not much in their lives will change.

The Far East has the makings of a tinder box and Kim Jong-un could serve as a catalyst. China and Japan have been arguing over the Senkaku Islands, a topic I wrote about on September 24th last year (“Rising Risk in the East China Sea.”) China has generally been quick to excuse the extremism of North Korean leaders and their system of government which has impoverished their people. So it was refreshing to note, as The Economist did in its current issue, that China had signed on to United Nations Security Council Resolution 2087, tightening sanctions on North Korea to punish it for a rocket launch in December, and its aggression toward South Korea. In the scheme of things, South Korea is a relatively young democracy. Should North Korea attack her, as she has threatened to do, and stage her next nuclear test, as she has vowed, it would place the United States and China in difficult positions. China has insisted that its main interest in the region is stability, as is ours, that and keeping sea-lanes open.

Persons without stakes in the status quo are always more dangerous than those with an investment. It is what makes terrorist groups like al Qaeda so frightening. The world can blow up and what do they care. They have nothing to lose and much to gain. North Korea is in somewhat the same situation. It is a rogue nation run by a dictatorship, which largely operates outside the community of nations. While they have developed nuclear weapons, their people are impoverished and live without hope. It is a combustible situation.

China, I am sure, wants stability, but I am equally certain their leaders also desire increased influence in the region. The question becomes: at what price stability? Will China be willing to sacrifice Kim Jong-un? Japan and South Korea have generally taken their political and economic systems from the West, principally the United States. However, as China flexes her muscle, we are likely to see a major shift in geo-political alignments in that part of the world. If North Korea is not part of China’s solution does she become a loose cannon? If tensions increase, and China sides with North Korea, the United States would certainly come to the assistance of South Korea, but our influence and military might is not what it once was. And the possibility of sequestration on our defense spending would cause us to become even more enfeebled.

China may prefer a waiting game, and perhaps that makes the most sense. In 19th Century America, it was often the case that family fortunes were lost by the third generation – “shirtsleeves to shirtsleeves in three generations” was an old saying. We have no way of knowing whether Kim Jong-un, the son of Kim Jong-iI (1941-2011) and the grandson of Kim II-sung (1912-1994), has the discipline and brains of his father and grandfather, or the loyalty of his subjects, but I would doubt it. It is far more likely that reason and intelligence are missing. And among the most dangerous of tyrants are those that are stupid. Security in the region will largely depend on the role China chooses to play, but also on a continued robust American presence.