Wednesday, March 27, 2013

“DOMA and the Supreme Court”

Sydney M. Williams

Thought of the Day
“DOMA and the Supreme Court”
March 28, 2013

There are times when the Supreme Court should decide not to decide. While I am not a lawyer, it seems to me that this is one of those times. Habits and social mores do change, but they tend to do so slowly. It takes time for people to accept that which they have long known to be forbidden. And, ultimately habits become codified into law. There has been an indisputable trend toward the acceptance of same-sex marriage. It has followed a gradually ascending path that in the past few years has accelerated. That trend is well described by Nate Silver in Wednesday’s New York Times. Nine states and the District of Columbia now have laws approving same-sex marriage. Another five states have laws that recognize domestic partnerships and civil unions. The model Mr. Silver has created suggests that in 2020 forty-four states will approve similar statutes.

Proposition 8, which banned same-sex marriages, passed in 2008 by a margin of 52.3% to 47.7%. It set aside an earlier State of California Supreme Court decision that had allowed same-sex marriages. Once the ban was enacted, the governor and attorney general decided to neither appeal nor defend it. That decision was then left to two private citizen’s groups. They tried to overturn the ban but lost their case in a federal appeals court. That, then, set the stage for the case going to the Supreme Court. “The ban,” in the words of Ted Olson, the lawyer representing the plaintiffs, “is a measure that walls off the institution of marriage.” The ban’s backers are represented by Charles Cooper who indicated concern with the effect of same-sex marriages on traditional families. Gay marriage supporters see the issue as ripe for the Supreme Court to rule in such a way that same-sex marriage would apply across the country. Doing so, however, would certainly make the Court “activist,” a term that has pejorative connotations to those like the New York Times, at least when they rule in favor of conservative causes. However, in Wednesday’s editorial they set aside any concerns about being activist, and actively encourage the Court to nullify the ban.

The trend toward acceptance of same-sex marriage, it would seem, is inevitable. A recent Washington Post poll, quoted by Eugene Robinson in Investor’s Business Daily, suggests that 60% of Americans approve of gay marriage, with 80% of adults under thirty supporting the notion. Nevertheless, thirty-one states either do not recognize civil unions or marriage between same-sex couples, or they have adopted Anti-Gay Constitutional Amendments.

But, our age demands instant gratification. Nevertheless, we should remember that changes in social behavior take time, and society is usually best served when customs are not forced to adapt too quickly. In the history of our nation, seventeen years is relatively short. It was in 1996 that Congress passed, and President Clinton signed, the Defense of Marriage Act (DOMA). At that time, only 27% of Americans supported same-sex marriage. (President Clinton, it should be noted, has since changed his opinion and now favors same-sex marriage, which is unsurprising, as he excels at the art of raising a finger to test the wind’s direction.) By 2003, according to Gallup, approval had risen to 33 percent. Nate Silver writes that then the mood shifted sharply. “Among the 12 polls conducted since 2012, all but four have shown more Americans supporting same-sex marriage than opposing it,” he writes.

Among the more thoughtful and (in my opinion) wise commentators on this difficult issue has been Georgetown law professor David Cole. In Tuesday’s New York Times he noted that, in the long term, same-sex marriage is inevitable, but then added: “Prudence counsels that marriage equality should be allowed to continue gaining support in the states, and that a federal resolution should be left for another day.” No matter how anxious one is to get this issue approved and behind us, one should not forget that our governing system is federal. The 10th Amendment states: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States, or to the people.” Forcing states to take action against the will of their citizens is not usually the most diplomatic of tactics, at least not when the same end might be achieved by waiting a short time longer. After all, the trend is in the direction of approval. We may live in a fast-paced world, but patience is still a virtue.

Moving slowly allows people to debate issues and make informed decisions, rather than being force-fed a conclusion. I remember once, years ago, asking my sister how she always seemed to get her way in marriage. She told me it was easy. She always let her husband feel that all decisions were his. In the same vein, Professor Cole wrote in the Times: “Justice Ruth Ginsberg, an unabashed defender of abortion rights, has criticized Roe [Roe versus Wade] for imprudently intervening in that debate at a time when the idea of abortion rights was already gaining ground at the state level. The Roe decision galvanized the antiabortion movement, with political impacts that still linger.”

It is understandable that beneficiaries of this issue, and especially those that are raising children, are anxious to gain legal recognition of their status. It is also understandable that same-sex partners have what seem legitimate tax and inheritance issues that need resolution. Nevertheless, the entire concept of same-sex unions is a relatively new phenomenon. It is new enough that there has been very little done, for example, in terms of studying the long term effects on the children of gay and lesbian parents. Nelson Lund, a law professor at George Mason University, noted in a Wednesday’s Wall Street Journal op-ed that “public opinion seems to be shifting in favor of change [toward same-sex marriage.]” However, he warned that there has been only one study using a large, randomized sample concerning the well-being of children raised by same-sex parents. The results of that survey were not favorable to same-sex parents. Professor Lund writes: “This research, by Mark Regnerus, a sociologist at the University of Texas, found that children raised in a household where a parent was involved in a same-sex romantic relationship were at a significant disadvantage with respect to a number of indicators of well-being – such as depression, educational attainment, and criminal behavior – compared with children of intact biological families.”

That may well be true, but for myriad reasons not every child can be raised in what we used to call ‘nuclear families.’ However, with some notable exceptions, most studies have shown that children raised with both a mother and a father are better off – they become better students, they are less likely to be involved in criminal behavior, and they have a greater likelihood of becoming productive citizens. Death, divorce, illness and separation will always deprive many children of the advantage of two parents. There is nothing that can be done about that. But if society is to push any one agenda, it should encourage that which we know does works – families consisting of a mother and father.

Few Court cases come with as much political baggage as does this one. It almost seems that the Justices will be damned no matter how they rule. Dan Balz, writing in the Washington Post, put it that the Justices were “operating in the middle of a political hurricane.” Jonathon Rauch of the Brookings Institute suggested that there were three political arguments facing the Justices. One, gay equality has come to be accepted as a civil right, and that facing that reality will help gay couples. Two, while popular support for same-sex marriage is gaining support, the country is still making up its mind, and it is premature for the Court to take the decision out of the political process. Three, can a state such as California, which has approved civil unions, gay adoption and antidiscrimination protections, legitimately withhold equality in terms of marriage, as, in fact, the ban did?

I am tempted to fall back on the satirical newspaper, the Onion, which increasingly brings a refreshing look to difficult situations. A recent article on the subject of gay marriage was entitled “Sure, Who Cares.” The authors pretended to quote Chief Justice John Roberts: “Get married, don’t get married, do whatever you want, It’s the opinion of this court that we don’t give two s***s what you do.” While I might have phrased my own opinion slightly differently, the meaning would have been the same.

It is at times like this that I long for true wisdom, wisdom that transcends political opportunism. It is, unfortunately, a commodity that seems increasingly rare. My personal preference is that the Justices listen to Professor David Cole. He concludes his piece in the New York Times: “”History suggests it would be unwise for the Supreme Court to impose a uniform solution on the nation now. Doing so would touch off huge civil resistance in the most conservative states. Prudence and law dictate the same result: cold feet at the altar.” Deciding not to decide seems a wise decision. I hope the Supreme Court reaches a similar conclusion.

Tuesday, March 26, 2013

“Lies, Damned Lies and Statistics”

Sydney M. Williams

Thought of the Day
“Lies, Damned Lies and Statistics”
March 27, 2013

I was reminded of Mark Twain’s appropriate comment (or maybe it was Disraeli’s?) when reading an article in Monday’s Wall Street Journal, entitled “Government Payrolls are Facing New Pressures.” Somewhat hyperbolically, the author Sudeep Reddy writes: “The cuts in the public sector workplace – at the federal, state and local levels – marked the deepest retrenchment in government employment of civilians since just after World War II.” Mr. Reddy noted, “At about 2.8 million civilian workers, excluding roughly 1.6 million uniformed military personnel, it [the federal workforce] occupies a smaller share of U.S. jobs {than anytime} since World War II.” To further his argument, he quoted a Brookings Institute economist Gary Burtless: “The federal government,” Mr. Burtless wrote, “is not much bigger than it was in the late Eisenhower era in terms of employment.” Continuing to embellish his position, Mr. Burtless added, “Public sector employment is really on the ropes.” Perhaps, I mused, sanity was returning to government. However, the more I read, the more it became apparent that Mr. Reddy (and Mr. Burtless) were promoting an agenda, not reporting the news.

It seemed not to matter to Mr. Reddy that the federal budget, as a percent of GDP, is at post War highs, as are our deficits, and that the only significant buyer of U.S. Treasuries, at current rates, is the Federal Reserve. Neitherdid he mention the spate of municipal bankruptcies, the most in the post-War period, and which were responsible for numerous layoffs. It was profligacy, not misfortune, that caused these bankruptcies.

In 1960, federal spending represented 17.8% of GDP; this year federal expenditures will approximate 23.8% of GDP. That same year, Eisenhower’s last as President, the budget was $92.2 billion. This year’s budget will be approximately $3.8 trillion. That represents a CAGR of 7.4% over those fifty-two years. Inflation, over that same period, has compounded at just under 4%, according to the “inflation calculator.” GDP in 1960 was roughly $519 billion. This year GDP should be about $16 trillion, suggesting a CAGR of 6.8% over those years. Put another way, while GDP has risen by a factor of 31, federal spending has risen by a factor of 41. In this world of an expanding public sector, government has been a good place to work. Incomes are high, abundant vacations, and retirement is early and easy. Average federal salaries are $76,200, while median household income in the U.S. is just over $50,000, with an annual median wage of $26,400. The median household income for a college graduate is about $68,000 – still lower than the average for government employees. The average federal employee, besides making a higher wage, enjoys a retirement package that is estimated to be 2.7X that of the average private sector worker. Unsurprisingly, seven of the richest counties in the U.S. are in metropolitan Washington.

Mr. Reddy writes of the impact from sequestration. He quotes an unnamed UBS economist who puts the number of jobs lost because of sequestration to be 100,000 annually. The Administration has elevated the idea that sequestration is damaging. White House tours have been cancelled, as have the Blue Angels’ performances. But there was no hesitation in allowing Vice President Joe Biden to spend $1 million for a night in Paris last week. Waste in government is monumental. Senator Tom Coburn has singled out excesses such as Moroccan pottery classes, the promotion of caviar production and consumption, robotic squirrels (whatever they are!), and the promotion of specialty shampoos for cats and dogs. The cancellation of any one of those programs would pay for at least four weeks of White House tours for school children. Additionally, according to Senator Coburn, in 2012 the government made available $1.3 million in “corporate welfare” to Pepsi, and they provided tax loopholes to the NFL, NHL and the PGA that amounted to $91 million. There is a lot o of waste.

Early in his article, Mr. Reddy makes the point that 97% of public sector job cuts, following the recession, were made by state and local governments. In fact, a chart which accompanies the story suggests federal payrolls are still expanding, though at a reduced rate. Mr. Reddy notes that public sector employment is down by 740,000 jobs since 2009. That sounds like a lot, until one realizes there are still 21.8 million public sector employees feeding at the government trough. The loss in jobs represents a 3.3% decline. It is not surprising that local and state governments have had to adjust to changes in fortune more quickly than Washington. Besides being able to print money, the federal government does not operate under the same fiscal restraints as do the states. Forty-nine of them are required, either by statute or Constitutional amendment, to balance their budgets every year, Vermont being the exception.

Mr. Reddy exudes concern for beat-upon government employees. He writes: “At the same time, the private sector has added 5.2 million jobs over the course of the recovery.” Perhaps they have, but I don’t know where. He must not be counting the jobs lost. According to the Bureau of Labor Statistics, the civilian workforce today is 155 million. In 2008, it was 153.6 million. The labor participation rate was 65.8% in 2008; today, at 63.5%, it is at a thirty-year low. The stated unemployment rate of 7.7% represents 12 million people looking for work, 4.8 million of whom are long-term unemployed. Additionally, there are 2.6 million marginally employed. If the latter were counted among the unemployed, the unemployment rate would be 9.8 percent. It is hard to paint the current recovery as anything more than sluggish. As Mortimer Zuckerman wrote in yesterday’s Wall Street Journal, “Despite the most stimulative fiscal policy in American history…Cumulative growth for the past 12 quarters was just 6.3%, the slowest of all 11 recessions since World War II.”

Of the 21.8 million public sector workers, 13% work in the federal sector. It is difficult to reconcile Sudeep Reddy’s pathos for government employees with what is going on in the real world. He seems to have swallowed Washington’s kool-aid.

Numbers add an air of authority to any report or presentation, but readers should view them skeptically, as most (including mine) are offered to promote a particular agenda. George Canning, a 19th Century British Prime Minister once said: “I can prove anything by statistics except the truth.” Winston Churchill was blunter: “I only believe in statistics that I doctored myself.” The better way is to look at directional changes – at trends over time.

We need to ask questions: Why has government spending outpaced inflation by 340 basis points annually for fifty years? Assuming Gary Burtless is correct, why do the same numbers of employees today, as fifty years ago, consume forty times more money than their forbearers? Why are government salaries so much higher than those in the private sector? It is answers to these and other questions that will tell us so much more than accepting at face value the statistics spewed out by pundits and reporters. The latter make authors look smart, but serve to only support predetermined opinions. Regardless, in terms of more government in our lives, what I see is discouraging.

Sunday, March 24, 2013

“Big Data”

Sydney M. Williams

Thought of the Day
“Big Data”
March 25, 2013

Big data is here. It is everywhere. It surrounds us. It was here before it became a “buzz word.” And it is expanding. Determining the quantity of information and how fast it grows is almost impossible. The authors of Big Data, Viktor Mayer-Schönberger and Kenneth Cukier, cite a study done by Martin Hilbert of the University of Southern California’s Anderson School, as being one of the more comprehensive in this regard. According to Professor Hilbert, in 2007 there were more than 300 exabytes of stored information. (An exabyte is a 1 followed by 18 zeros.) And, according to the professor, information is doubling every two years, suggesting that there are now 1.2 zettabytes of stored information.

To put that number in some sort of perspective, Messer’s Mayer-Schönberger and Cukier note that in the third century BC, Ptolemy II of Egypt purchased (or stole) a copy of every written work for his library in Alexandria. The amount of information now available is sufficient to provide all 7 billion humans with individual, and distinct, libraries, each one 340 times bigger than that of Ptolemy. While no one knows the exact size of the library in Alexandria, estimates are that it contained about 500,000 scrolls. It was burned around 50BC, allegedly (and apparently inadvertently) by Julius Caesar.

The pursuit of knowledge has been a central purpose of man since he first appeared. The telescope provides us a sense for the age of the universe (about 13.8 billion years) and the knowledge that it is still expanding. The microscope introduces us to microbiology and has allowed us to see living creatures like the hydrothermal worm, which is less than half a millimeter in size. Magnified 525 times, it is an ugly creature with sharp teeth. Big data allows us to aggregate this and other, more mundane, information, most interestingly data about the way we behave. It is what is subsequently done with that data information should concern us.

Given the proliferation of smart phones, I-Pads, Twitter accounts, YouTube and Facebook accounts, we readily know the source of the data. It is estimated that there are a billion smart phones in use, a number that is expected to reach two billion in two years. The average smart phone has 41 apps. On average, these billion users spend over two hours a day surfing and checking messages. Additionally, the authors of Big Data note that there were 400 million tweets in 2012, growing at 200% per year. Google receives more than 3 billion search queries every day “and saves them all.” Each day Google processes a volume of data a thousand times greater than all the printed data in the Library of Congress. Eight hundred million YouTube users upload a total of an hour of video every second. As of last October, Facebook claimed 1.01 billion monthly members. Users upload 10 million photographs every hour. It is impossible for people to hide from their pasts. Big brother is watching, but who is he, and is anyone watching him?

Mr. Mayer-Schönberger and Mr. Cukier write that the era of big data will challenge the way we live and interact in the world. “Society will need to shed some of its obsession with causality in exchange for simple correlations: not knowing the why but only the what.” That strikes me as slighting curiosity.

Applications for the use of all this information is limited only by man’s imagination. Government, science, medicine, finance and marketing seem obvious, but energy exploration and manufacturing are beneficiaries as well. In fact, these changes will affect virtually all existing activities. It is the predictive nature of this data that especially interest the authors. Access to these data banks will allow individuals to save money on air tickets; it will help local health officials predict flu outbreaks, and better prepare for storms like Katrina and Sandy. Insurance companies will be able to provide health and life insurance without physical exams. Cars will drive themselves and Wal-Mart will know which flavor pop-tarts to stock at the front of a store before a hurricane. (“Strawberry,” they recently answered.) Universities will have greater predictability in selecting students and will also know which courses they are likely to select, allowing them to more accurately prepare faculty assignments. David Brooks wrote of this subject recently in his New York Times column last Friday, “Forecasting Fox.” The column dealt with Philip Tetlock’s 2006 book, Expert Political Judgment, which argued that pundits and experts are terrible predictors. Far better were those who used algorithms for correlating data and applied probabilistic thinking. “Being able to look at a narrow question from many vantage points and quickly readjust the probabilities was tremendously useful.” A side benefit, as Mr. Brooks pointed out, was that this may help depolarize politics, as the best predictions were based on raw data and probability, not on preconceived political opinions.

Useful applications of this mound of data will be found in almost every aspect of lives, but the owners of this data will an enormous responsibility. And there is the major, unresolved issue of privacy. Who will monitor the collectors and owners of the data? Should the data reside in government or in private hands? Google alone has predictive ability regarding millions of people. Can they be trusted to treat it respectively, or will it be for sale? What happens if this information gets into unfriendly hands? Will the emphasis on the what cause us to lose interest in the why? Is that a good thing? Is not education largely about determining why things happen: Why is the Middle East a hot point for wars? Why was Shakespeare able to write such magnificent plays and poems? Why are you curious and I’m not, and why are your eyes brown and mine hazel? Why are some people prone to bad luck and others not? Why are both too much and too little information bad? Can we afford not to keep asking why? As a society, we must spend time considering these questions and more. It is not so much the level of information; that is a given. It is the manipulation of that data, why and by whom, that should concern us.

With government becoming increasingly pervasive, the temptation to protect our privacy is only natural. Steve Lohr, who writes for the New York Times on technology, innovation and finance, wrote on the subject of privacy in the business section of Sunday’s paper. In it, he cited a report from the World Economic Forum. The report suggested that “collected data be tagged with a software code that included an individual’s preference for how his or her data is used.” That sounds wise, but raises the question: do children, criminals, and the mentally unstable have similar rights? Mr. Lohr quotes Dr. Alex Pentland of MIT, who agrees to limitations on data collection, as long as they do not damage the “public good.” But his definition of the public good may differ from mine. Does the “nanny state” of Mayor Bloomberg suggest we are becoming increasingly subservient to an all-knowing “Big Brother?” Is not that the inevitable consequence of a government that becomes more and more pervasive? Perhaps in preparation, Mayor Bloomberg has formed an Office of Policy and Strategic Planning, a group that Alan Feuer describes in the New York Times as “a geek squad of civic-minded number crunchers.”

We live in an exciting age. I love the ability to text my grandchildren. However, the rise in connectedness increases the chances for hackers and makes all of us more vulnerable, as Chinese cyber attackers have shown. Definitions of good and bad, in a world in which relativism dominates, are in the eyes of the beholder. Most Americans would agree that if hacking into Iran’s computers would deprive that country of nuclear weapons the world would be a better place. Of course, the Iranians and Russians would disagree. If drones are used willfully to spy on political dissidents, that would appear to be a violation of our privacy rights, but not if they are used to rout terrorists. Can the line between the two be drawn firmly, or is there a grey area? The possibility to use information for good and the potential to use it for harm often reside within the same data base, the only difference being the user. Researchers at the University of California recently tested the ability to dismantle the braking system on a car. Traveling at forty miles an hour on an unused airport runway, the chase car was able to disrupt the electrical braking system of the car in front. That would be useful for the police; but it could be catastrophic, if the man behind me simply didn’t like the way I was driving.

In 1984, George Orwell expressed his fear of an omniscient, omnipresent, omnipotent government – one that could, for example, discover what an individual is thinking, without that person being aware. While we might not be at that point now, that is what the authors of Big Data certainly infer is our future, with their emphasis on predictability. We cannot and should not stop progress, but we should enter this new realm with our eyes and our minds wide open.

Nothing will (or should) impede the thirst for knowledge or the creative impulses for invention. But I fear our ability to understand and address the moral questions this technology raises. The libertarian Alex E. Jones once suggested that the answer to 1984 was 1776. That answer sounds cute, but it is reminiscent of the spirit of Thomas Jefferson who once suggested the need for a revolution every twenty years. Jefferson was speaking about how we individually view things, not about picking up arms; but his two hundred-years old words are clear as we enter this new and wondrous world. One of my fears is that we slip slowly, subtlety and surreptitiously into this pot, with politicians realizing the truth of Aldous Huxley’s words, when he wrote in Brave New World, “…most men and women will grow up to love their servitude and will never dream of revolution.”

There is no obvious answer. My preference is for decentralization, in terms of power and institutions. That looks increasingly attractive as an alternative – whether we are speaking of government, business, banks, or universities. What mustnot be lost is liberty. Liberty is a scarce and fragile commodity. Woodrow Wilson once said: "The history of liberty is a history of thelimitation of governmental power, not the increase of it." It is obvious the availability and manipulation of big data can be used for good as well as for evil. It is the risk that this data may reside in the hands of a few people, which frightens me with its potential for unintended (or intended) consequences.

Thursday, March 21, 2013

"Iraq - Ten Years on, What its Detractors Forget"

Sydney M. Williams

Thought of the Day
"Iraq - Ten Years on, What its Detractors Forget"
March 22, 2013

There is little question that the planners of the Iraqi invasion ten years ago last Tuesday did not adequately prepare for victory, or for the insurgents that persisted in harassing and killing our Iraqi Freedom forces. But, what has been lost in the persistent self-righteous condemnation of the Iraq invasion is how broad the support was at the time – including support from many who are now among the war’s most vociferous denouncers.

The concept of regime change in Iraq was clearly laid out in the Iraq Liberation Act of 1998, three years before the attack on 9/11 and four and a half years before the “pre-emptive” invasion. UN weapons inspectors had been recently expelled from the country by Saddam Hussein. The Act supported a transition to democracy, allocating $97 million to support opposition groups. It was passed by the House 360–38 and two days later received unanimous consent from the Senate. Two weeks later, on October 31, 1998, it was signed into law by President Bill Clinton.

We in the United States live somewhat separate from the rest of the world, isolated on two sides by oceans and on the north by a friendly neighbor, Canada. On the south, we are bordered by the Gulf of Mexico and Mexico. That relative seclusion has always risked us becoming isolationists and had led to a certain level of complacency at home. Of course we had been invaded in the past, but it was a long time ago. On August 24, 1814 British forces under General Robert Ross invaded and burned Washington, forcing President James Madison to scurry away, if only for the night. And on December 7, 1941 Japanese planes bombed the Pacific Fleet at Pearl Harbor. Hawaii, at the time, was a territory, not a state; nevertheless, the bombing was deemed an attack on the mainland. The terrorist bombing attack on the World Trade Center in 1993, killed six and wounded more than a thousand, but did not generate the anguish necessary for a solid, comprehensive response. But the attack eight years later on 9/11 did. Three thousand people were killed, as four planes were hijacked, three of which crashed into the World Trade Center and the Pentagon. If a suitcased-sized nuclear weapon had been placed aboard one of the planes, the damage would have been far worse.

In taking the oath of office, the President of the United States swears to preserve, protect and defend the Constitution. That also means protecting the people he has been elected to represent. The attacks on 9/11 served as a wake-up call to our vulnerability. And we also knew we were living in a world in which terrorists and nuclear weapons were proliferating. While one could not directly connect a secular terrorist like Saddam Hussein to the Islamic terrorists that killed so many, the world knew that he had used chemical weapons on his own Kurdish people, and that he had boasted of pursuing nuclear weapons.

As head of the Ba'ath Party and then as President of Iraq, it has been estimated Saddam Hussein killed between a quarter of a million and a million people over a twenty-five year period. During the 1988 Anfal campaign against the Kurds, Saddam used chemical weapons in forty villages. In March of that year, using a combination of mustard and nerve gas, his men killed 5000 men, women and children in the village of Halabja. On one September day in 1996, his Red Guard executed 700 captured Kurdish soldiers in the town of Irbil. This was not your run-of-the-mill, tin-horn dictator. This was a fiend who spewed hatred toward the West and threatened his Arab neighbors. At the end of the first Gulf War, Saddam Hussein killed thousands of Shiites who had risen against him in the marsh areas of southern Iraq. He then proceeded to bulldoze the area, diverting streams and rivers from the marshes. In doing so, he destroyed a way of life that had existed for thousands of years. His heinous behavior explains why Nancy Pelosi understandably supported the Iraq Liberation Act of 1998 when she said (courtesy of the Wall Street Journal): “Saddam Hussein has been engaged in the development of weapons of mass destruction technology, which is a threat to countries in the region and he has made a mockery of the weapons inspection process.” Thank you, Nancy.

Selective memory is a condition that appears to be a requirement to serve in national politics. On October 5, 2002 – a little more than a year after 9/11 – and after three days of debate, a Republican House of Representatives, by a vote of 296-133, passed a resolution granting war powers to President George Bush against Iraq. The Democratic-led Senate passed the same resolution 77-23 after a week’s debate. Among Democratic Senators voting for the Resolution were Senators Joseph Biden and John Kerry. Unlike the major legislation passed by President Obama in his first term, such as the Affordable Healthcare Act and Dodd-Frank, President Bush secured these votes in a bipartisan fashion.

At the time of the actual invasion five months after the authorization by Congress, Pew Research showed 72% of Americans favored the war, while 22% were against it. (Today, finding someone who admits to supporting the war is like finding anyone who owns up to voting for Nixon in 1972, never mind the fact that he won with 61% of the popular vote and 97% of the electoral vote!)

As war loomed, everyone knew that Saddam Hussein was a dictator and menace. We knew that he had practiced genocide on Iraqi Kurds and that he had used chemical weapons. There was no question in most people’s minds that either Iraq had nuclear capability or was working on it. It was the message Hussein wanted people to hear. Politicians are not the only ones with selective memories. On December 6, 2002, the New York Times editorialized: “Iraq has to get rid of its biological and chemical arms…and abandon its efforts to develop nuclear weapons.” Two months later, the same paper again editorialized: “The Security Council needs full and immediate Iraq disarmament. It needs to say so, backed by the threat of military force.” This past Wednesday, the Times sang a different tune. In a phrase that reeked of hyperbolism, their lead editorial referred to the invasion as “one of the worst strategic blunders in American foreign policy.”

As we all know, there were no nuclear weapons; chemical weapons, if any, had been moved or destroyed. It was impossible for many on the Left and the Right, both politicians and media, to admit that their own investigations had yielded answers no different from that offered by the Administration. As popular support faded, it became easy to lay blame for the failure of their investigative reporting on a deceptive Administration. Who wanted to admit fault, when blame could easily be passed onto the Bush White House?

There is much that the Bush Administration did wrong in the execution of the war, but there are things they got right, especially the Surge, decided upon by Mr. Bush and executed by General David Petraeus. The Administration was right in arguing that a liberated Iraq would no longer be a threat to its neighbors, and that establishing a democracy in the middle of the Middle East would serve as a beacon to those struggling against dictatorships in Syria and Iran. No matter how much people personally despise George Bush, the facts don’t support the notion that “Bush lied” as being the reason for our involvement. Joe Wilson, touted by the Times and others as a reliable source, was proved a liar by a bipartisan Senate report. The truth of the matter is that we were all taken by the boasts of a dictator and his history of using venal weapons. One lesson from this sad affair is that in the imperfect world of intelligence mistakes are unavoidable.

Now we are faced with another question: have we left Iraq too quickly? Have we abandoned a people before they are able to care for themselves? In spite of our relative geographic isolation, and as attractive as retreating into a cocoon may seem, we have a responsibility to the world in which we live. If Iraq can no longer count on the United States, it is not unnatural that they would turn to their eastern neighbor, Iran – a mortal enemy of America. The late Christopher Hitchens, a brilliant essayist and polemist and not known as a conservative, was an unrepentant supporter of the invasion. He had seen what Saddam had wrought on Kurds and Shiites following the first Iraq War; he considered the war appropriate if it did nothing more than rid the world of the “brutal dictator, Saddam Hussein.” In the April 2007 edition of Vanity Fair, he wrote: “However the fate of Iraq is to be decided, we cannot permit another chapter in this record of betrayal.” Given our hasty retreat, it seems that Mr. Hitchen’s fears will be realized.

Tuesday, March 19, 2013

“Cyprus – Is Nothing Sacred?”

Sydney M. Williams

Thought of the Day
“Cyprus – Is Nothing Sacred?”
March 20, 2013

From the island of Cyprus came Pygmalion and Aphrodite, symbols of love and beauty. That was long ago. Now we have an agreement by its President to concede to a request from Brussels that might have equally far-reaching consequences, but of a less pleasing nature. Last Friday, the 17 Eurozone finance ministers and the IMF demanded that a percentage of all Cypriot bank deposits be confiscated, in return for a desperately needed loan of €10 billion to the country. According to the Financial Times, this €5.8 billion “tax” was demanded by a German-led group of creditor countries. The decision was seen as a means of transferring risk and responsibility from outside creditor nations to creditors in the countries that had incurred the debt.

Recently elected President Nikos Anastasiades agreed to the deal and asked that Parliament acquiesce to its terms. That was despite the fact that expropriating 6.75% of all deposits up to €100,000 (government insured deposits) violate what has always been an inviolable principal – that insured deposits are sacrosanct. Many of those deposits represent the life savings of Cypriots. On the other hand, approximately €35 billion of the €65 billion in deposits is in uninsured accounts – amounts above €100,000. Of those accounts, a payment of 9.9% has been demanded. Making things interesting is that more than half of all uninsured deposits belong to Russian oligarchs, or, at least that is the word from the Financial Times, which on Monday suggested that this move might cost Russian depositors €2 billion. One of the concerned Russians is Vladimir Putin who allegedly is a depositor. Mr. Putin, according to the FT, thought, unsurprisingly, that such a step would be “unfair, unprofessional and dangerous.” (It’s interesting that he used the word dangerous!)

An editorial in Tuesday’s New York Times criticized the deal, but referred to the confiscation of assets as a tax, which it isn’t. They argue that the amount taken from insured accounts should be less and that taken from larger accounts should be more – that “imposing a bigger tax on deposits of more than €100,000 would not have the same ripple effect on confidence.” That may be so, but banking is one of Cyprus’ most important industries. Effectively shutting it down will not do much for the average Cypriot.

The country is considered by many as a unique situation. Cyprus is a bank haven. The country has €65 billion in bank deposits, an abnormally large number for a country with a population of 1.1 million and a GDP of about €20 billion, slightly smaller than Vermont. Their banks, moreover, have been accused of money laundering. Second, its bank’s liabilities are almost entirely composed of deposits. In any reorganization, bonds typically come before deposits. But in the case of Cypriot banks, their asset base is almost entirely off-set by deposits. Depositors are being offered equity in compensation for the confiscation, but Brussels’ demands may seal shut a number of Cyprus’ banks, rendering any equity worthless. Money will assuredly leave the island, effectively shutting down a major employer.

As a factor in the Eurozone’s GDP, Cyprus, at 0.2%, is meaningless; yet this decision is significant, as it risks creating a Tsunami of withdrawals across the region. If insured deposits are not sacrosanct, what is? Economies are built on credit and credit demands trust. Europe has enough problems. Eurozone GDP declined 0.6% in the 4th quarter of 2012. Employment has been steadily declining from the 2nd quarter of 2011. Unemployment in the area varies greatly, from 5% in Germany and Austria, to 27% in Greece and 26% in Spain.

The decision has been made not to open the banks until Thursday, giving lawmakers more time to consider how they might vote. (Incidentally, late yesterday the German finance minister warned that it is unclear if their banks will ever be able to reopen.) Regardless of the vote in Parliament, though, the die has been cast in terms of government accessing bank deposits. Monday’s New York Times quoted Stelio Platis, a banker and economic advisor to Mr. Anastasiades: “Whether Parliament approves the measure or not, the effect will be the same. As soon as banks in Cyprus reopen, people will rush to take their money out.” As well, it will be hard for depositors to have faith in banks located in other financially weaker Eurozone countries – a list that would include Greece, Italy, Spain, Portugal, Ireland and possibly France. While Switzerland is the most obvious beneficiary of the foolishness of Eurocrats, the U.S. might be as well – not because of the fiduciary responsibility exhibited by our bankers and politicians, but because the Dollar serves as the world’s reserve currency. But that could prove short-lived, as we are treading the same path trail-blazed by our European friends, in our quest for a political and financial system that is “fair” to all, in all ways.

The adoption of the Euro in 1999 merely postponed the death of a decaying welfare system for many European countries, a system which was birthed in the aftermath of World War II. Initially, before costs soared faster than revenues, it looked like Europe’s leaders had found Nirvana – a system that allowed for fewer work hours, long vacations and early retirement. It seemingly permitted all to share in the fruits of the continent’s economic success. But that began to change as expenses rose faster than revenues. Promises were made regarding health and retirement plans, but they used actuarial assumptions that had little to do with reality. Higher taxes sapped initiative. Gradually, the costs of their promises dawned. This was especially true for those countries along the Mediterranean. However, the adoption of the Euro extended this dream. Had these countries stayed with their own currencies, the discipline of the market would have forced more rational behavior. Interest costs would have risen and currencies would have declined. Access to credit would have been more difficult. And any collapse would have been more localized.

However, under protection of the Euro, countries like Greece, Italy, Cyprus, Portugal, Spain and Ireland were able to persist in their profligate and speculative ways. Germany, the beneficiary of a Euro that was priced lower than the Deutschmark, saw her exports increase. As Europe’s strongest and best managed economy, Germany played a major role in financing her more promiscuous neighbors. Now, German voters are becoming disgruntled…and Angela Merkel faces an election this year. Wanting to be seen as tough on debtors is part of her strategy. Adding to the problem, Eurocrats do not want to admit that what they wrought may not be working. Mario Draghi, president of the European Central Bank (ECB) and sounding increasingly like Cassabianca standing alone on the burning deck, vows to make good on his promise “to do whatever it takes” to protect the Euro. His words, it seem to me, resonate with those of George Orwell, when in 1946 he argued against England’s desire to continue its rule in India as a “defense of the indefensible.”

I remain of the opinion that ultimately the Euro will fail. The 17 countries that comprise the Eurozone have a population of about 330 million, with a GDP of approximately €9.5 trillion. It is a relatively small geographic area, but the differences among the myriad people are large – in language, customs, legal systems, culture and behavior. The ideal of a single unified economy, functioning with a single currency was a wish devoutly to be consummated. But, while such a union offers many advantages, it also serves as an impediment in allowing countries to extricate themselves from financial difficulties, the principal one being that a country that gets in trouble cannot devalue its way out. Austerity, whether it is imposed on government through curtailing spending, or on individuals by raising taxes will not work. If you were Greek, would you want to take instructions from Germans? Economies need more flexibility. Government should serve as a guide and governor, but not the engine. Economic growth is dependent on the invisible hand of Adam Smith and the creative destruction of Joseph Schumpeter. It is hard for that to happen, if one lives in Cyprus and every month sends a check to Germany.

Equitable outcomes are antithetical to capitalism, which is a system that relies on the rule of law and the sanctity of property law. It is a system that rewards those who excel and punishes those who fail. Its hard edges have been smoothed down by democracy. Thus it assures equality of opportunity and helps protect the poor, the sick and the elderly. As a consequence, democratic capitalism has done more to improve human welfare than any other system devised, essentially because it is dependent on democracy which assures equal opportunity and fairness under law. By its nature, it allows individuals, companies and societies to advance in an evolutionary manner. In so doing, they prevent the far bigger failures that inevitably result from government interference. But it is fragile; and the biggest risk the system faces is the one from within – destroying the system in the interest of fairness and trying to ensure equalities of outcome. Like many (or most) European nations, Cyprus lived beyond its means for too many years. Consumption exceeded savings. The current welfare system has denigrated personal responsibility and elevated dependency. It is a system that focuses on comfort today, but ignores the demands and needs of security tomorrow.

There are many who look at Cyprus as a one-off – because of the capitalization of banks and the fact that the island is a bank haven. But the problem is that what Brussels is trying to do in Cyprus is symptomatic of a bigger problem, of politicians acting with no respect for the rule of law and without regard to consequences. If the German finance minister is correct, his fellow ministers in Brussels may have opened Pandora’s Box. The concept that a state might not be able to protect insured deposits is inimical to the nature of democratic capitalism. No matter how Parliament votes, that genie is out of the bottle. Arguing that Cyprus is a special case is like a libertine telling his creditor that the check is in the mail.

Monday, March 18, 2013

“A Tale of Two Budgets”

Sydney M. Williams

Thought of the Day
“A Tale of Two Budgets”
March 18, 2013

What divides the country so sharply can be seen in the differences between the House budget and that from the Senate. It should be understood, however, that both sides have the same goals – the welfare of the nation and the people who populate it. A civil society demands that we respect our differences, while celebrating our commonalities. It is the means, not the ends that divide us. Democrats believe that the State should play a more important role than do Republicans. The latter favor individual responsibility and a stronger role for states. Democrats complain that Republicans are heartless, with no feelings for the poor, sick and elderly. Republicans claim that Democrats are foolish wastrels with no regard for costs.

Both are wrong. Individual success is common to both groups, and – Democrat or Republican – we all know what we did and who helped in reaching our personal goals. Illness knows no Party; thus we all care about healthcare. We all have parents and many of us have children, so concern about the past and the future is a universal trait. Worry about cost is not unique to Republicans. In our homes and businesses, we are all conscious of dollars expended and returns gained.

But the divide is deep. As part of his “charm offensive,” Mr. Obama visited Capital Hill last week. He made it clear that deficits were not his priority. His message: government spending is integral to spur economic growth. In an interview last week with George Stephanopoulos on ABC, the President admitted he wasn’t going to balance the budget – that wasn’t his goal. But, he sounded like a guest at the Mad Hatter’s Tea Party when he added: “We don’t have an immediate crisis in terms of debt. In fact, for the next ten years, it’s going to be in a sustainable place.”

His words seem absurd. A column in last Thursday’s Wall Street Journal by George Melloan, author of The Great Money Binge, made clear the magnitude of the debt crisis. He illustrated the obligations of taxpayers in terms of future insurance and entitlements. Fannie and Freddie, which we as taxpayers own, originated 90% of the $1.3 trillion in mortgages underwritten last year. Any defaults become ours. Student loans, which were subsumed by the government (us), in 2010, exceed $1 trillion and delinquencies are increasing. It is us, as taxpayers, who guarantee the FDIC and the Pension Benefit Guaranty Corp. Because of Dodd-Frank, we taxpayers are now implicitly guarantying all banks deemed too big to fail. (In her Sunday New York Times column, Gretchen Morgenson wrote impishly but accurately, pertaining to the huge losses incurred by J.P Morgan, that banks are not only too big to fail, “they are too big to regulate and apparently too big to manage.”) In his Journal op-ed, Mr. Melloan noted, “…the government is now insuring a large chunk of our $16 trillion economy.” And, of course, future entitlements – Medicare, Medicaid and Social Security – are our responsibility as well. No matter how calculated, debt is not sustainable.

In our politically charged environment, with politicians ducking behind meaningless words and phrases, and dividing the populace into “haves” and “have-nots,” we should never lose sight of the fact that obligations of government are not those of some anonymous, amorphous institution; they are and always will be obligations of taxpayers. A problem with the growing percentage of people who pay no federal income tax is that they have no skin in the game; therefore no self interest in rolling back expenditures. A divided nation becomes more divided.

Economic growth is the best answer. That fact is acknowledged by both those on the Left, as well as the Right. The difference is that Democrats look to government to stimulate growth, while Republicans argue that real economic growth stems from the private sector. With the public on the sidelines, it is unsurprising that an absence of conviction as to which proposals will prevail has sent consumer confidence tumbling and has kept corporate cash stashed overseas. Serving as a restraint on new corporate investments have been increased environment regulations along with new rules and regulations associated with the Affordable Care Act. Consequently, business confidence is low; that means less investment and less hiring.

Last Thursday’s New York Times provided a table comparing the dueling budgets, both of which profess to have values and priorities on their side. The Senate plan projects deficits of $5.2 trillion over the next ten years. The House plan suggests $1.2 trillion over the same time. Keep in mind, both are likely to prove optimistic on that score. Both plans assume reductions in interest expense, as both plans assume annual deficits will decline from current levels. Neither plan makes the more likely assumption that interest rates will likely rise over that ten year period, rendering any saving to be bogus. Both plans assume reductions in healthcare spending, which seem highly unlikely unless we go to some sort of a patient-centric system. Democrats cut $240 billion from defense over the ten years, which has to assume that tensions in the Middle East, North Korea or the East China Sea do not intensify. Both sides assume that $1 trillion in current spending on wars and emergency aid will not continue. Republicans garner most of their savings from repeal of Obamacare, and changes to Medicare and Medicaid. The former (Medicare) would become subject to means testing and would evolve into a voucher system. The latter (Medicaid) would become a system of block grants to the states, so that they might administer them. The Democrat plan assumes an increase in taxes derived by closing loopholes “that benefit corporations and the wealthy.” Republicans keep the tax increase of last December, but no more.

Despite what we read in the papers and see on TV and the internet, neither budget is austere in the way that you and I would define the term. Both the Republican and Democrat budgets have government growing in size relative to GDP. Personally, I believe that fact demands a great deal more debate. The Democrat’s budget, as offered by Senator Patty Murray, has government spending expanding at a 5% annual rate. The Republican budget, as proposed by Representative Paul Ryan, has government growing at 3.5 percent. GDP has grown at a little under 2% since the recovery began four years ago. If we assume GDP accelerates to 3% over the next ten years, $16.1 trillion becomes $21.6 trillion. $3.8 trillion in government expenditures in fiscal 2013 (24% of GDP) becomes $6.2 trillion in ten years under Democrats (29% of GDP) and $5.4 trillion (25% of GDP) under the Republican plan. Both proposals, in my opinion, have government growing unhealthily bigger.

Neither plan will pass as proposed. Generally speaking, plans such as these tend to underestimate future expenses and overestimate revenues. The Congressional Budget Office (CBO) that scores such proposals uses static accounting, which does not allow for changes in human behavior. In simplest terms, Democrats prefer a strong central government that provides more, increasing dependency and decreasing personal responsibility. Republicans prefer smaller, federalist-style government, with decreasing dependency while emphasizing personal responsibility.

The two big questions should be: Which plan does the most to promote economic growth? And, second, which (if either) does the most to restore our supremacy in myriad fields from education to starting a business – areas in which we have dropped in global rankings. Over the past decade we have lost competitive ground in too many categories. In the most recent PISA rankings, our high school students’ ranked 14th in reading, 17th in science and 25th in math. Our businesses are equally uncompetitive. According to the World Bank, we are 6th in terms of protecting investors and 22nd in trading across borders. We need to reverse that trend. For the past decade, economic growth in the U.S has been below normal. Congress should not impede corporate growth. It must nurture it. That will demand modernizing immigration and becoming more energy self-sufficient. There is no reason both can’t be accomplished. We should welcome immigrants, especially those who are college educated. The United States has the potential to become the world’s largest energy producer, which should lead to becoming the premier manufacturing country in the world. But that will require reducing corporate taxes, streamlining the tax code and, most importantly, easing regulatory pressures. A restoration of growth, to above 3.5% over a sustained period, will do more to minimize the fiscal mess in which we find ourselves than the adoption of either budget proposal. In my opinion, and with economic growth as the goal, the Republican plan, while still growing government too rapidly, will produce far better results than that of Ms. Murray and her Democrat colleagues in the Senate.

In his Thursday column in the Wall Street Journal, Daniel Henninger quoted the Harvard economist. Alberto Alesina. As a European, Mr. Alesina has studied the “benevolent postwar spending programs” of his native continent He found that [government] spending cuts have been associated with mild and short-lived recessions, while tax increases have been affiliated with prolonged and deep recessions. “The path back to stronger growth,” argues Mr. Alesina, “is a combination of significant, permanent cuts in public spending and relatively small tax increases, if any.” Listen up, Congress and White House!

In 2008, amidst recession and credit crisis, then Senator Obama railed against President Bush’s federal debt of $9 trillion, an amount “equal to $30,000 for every man, woman and child,” he said. In the four subsequent years, that debt has increased to $16 trillion, or $50,000 for every man, woman and child. And now he wants more. The Democrat’s budget would add another $5 trillion to the debt, meaning that a family of four would e responsible for a quarter million dollars of federal debt. That, obviously, would be in addition to any mortgage, student loans, auto loans or credit card bills they might have. The situation becomes untenable.

While I prefer less spending to more when it comes to government, both budgets appear deceptively optimistic in terms of deficit reductions. When the rate of federal spending exceeds growth in GDP, it is axiomatic that deficits, in the absence of tax increases, will increase, not shrink. And tax increases will impede economic growth, in a vicious, self-sustaining downward spiral. Real budget reform entails matching expenditures to revenues today, not in ten or twenty years. Neither proposal does that. Nevertheless, of the two options available, which path better serves the long term interests of the people? I believe the Republican’s. I don’t question the motives of either Party. But as for those on the Left, I do question their common sense.

Thursday, March 14, 2013

“Chavez – A Morality Tale”

Sydney M. Williams

Thought of the Day
“Chavez – A Morality Tale”
March 15, 2013

Abraham Lincoln once said, “You can fool some of the people all the time…” That explains, in part, the willingness of so many of the poor in Venezuela and elsewhere in South America to support a man who promised so much, yet did so little. South Americans were not alone. Many in the United States fell for the same lies. There are appealing characteristics common to men like Hugo Chavez. They are typically charismatic, with great speaking skills. They are capable of empathizing with those they are speaking. While such men harbor grandiose visions of themselves in an historical context, they in fact do not prepare for the future. Their minds are filled with their own self-importance, effectively crowding out any moral sense.

The United Nations, an organization that too often ignores the backgrounds of men like Chavez, noted that Venezuela has the lowest rate of income inequality – the smallest gap between rich and poor – in Latin America. What they did not state was that it had come at the expense of economic growth, and that growing poverty was endemic. Julia Sweig of the Council on Foreign Relations said that while Chavez gave a third of the population a sense that they mattered, “he destroyed the village in order to rebuild it, taking property, spending oil money without reinvesting, mismanaging the resources.” David Smilde a sociologist with the University of Georgia and who lives in Venezuela pointed out that the crime rate has risen, as has inflation. The Venezuelan Bolivar has fallen 87% against the Dollar since Chavez came to power in 1999. During his years in office, oil production shrunk by a quarter. Smilde adds that power and food shortages are derailing economic growth. He writes, “Chavez did improve people’s lives economically. He didn’t necessarily improve people’s economic future, because a lot of things he did aren’t sustainable.” It reminds one of politicians in the U.S. who forego the future to satisfy the present. Vote for me now and I’ll give you what you want. Let the kids pay for it in the morning.

Many Americans were taken in by this thug. “Useful idiots” was a term coined by Vladimir Lenin in the early 1920s. He used it to describe those in the West who blindly and/or naively supported Soviet Communism and the Russian Revolution of 1917. While he allegedly held such credulous people in contempt, he found them useful in spreading his message. “Useful idiots” is an expression that fits Americans like Jimmy Carter, Jesse Jackson, Sean Penn, Oliver Stone, and Michael Moore. Upon his death, they all lavished praise on the brute. In the 1920s and ‘30s many professors and intellectuals from elite universities fell in love with Lenin, Stalin and the experiment with Communism in Russia. They turned blind eyes to the gulags and the throttling of dissent. When visiting Russia, they were prevented from seeing the hunger, poverty and prisons, all of which were ubiquitous. Those from America visiting Venezuela today are just as blind as had been their forbearers three generations earlier.

Other American supporters, like former Representative Joe Kennedy, used their relationships with Chavez to make money. Kennedy imported low priced oil for purposes of providing 20 million gallons of heating oil to 200,000 needy households in 25 states. Chavez, for reasons of propaganda, was willing to sell him oil at a discount. The transactions were conducted through clever combinations of not-for-profit and for-profit companies. Demonstrating he was still a Kennedy, the former Congressman was able to extract over $1 million in annual compensation for himself and his wife.

Venezuela’s economy is oil based. When Chavez became President in 1999, oil was selling below $9 a barrel. Today it is ten times higher, closing Thursday at $93.24. In 2000, the country was the world’s 7th largest producer. Today it ranks 12th; yet it is the 2nd in terms of proved reserves with 211.2 billion barrels. As mentioned earlier, Venezuela’s annual oil production has shrunk since Chavez took office. Norway and Iran are the only other major producers whose production has shrunk over the last decade. Even Iraq is back to where they had been in 2000. The decline in production is testament to a failure to invest, and a consequence of nationalization. Mr. Chavez saw his nation’s oil riches as a cash cow, to be milked with no concern about tomorrow. Again, there is a moral for us in the tale of Chavez. That attitude of ignoring future problems is endemic to politicians who ignore the rumblings from our underfunded entitlements.

Chavez was an autocrat and a thug who may or may not have been elected democratically. Not surprisingly, Jimmy Carter thinks otherwise. Last fall he described the Venezuelan elections in typical Carterese: “As a matter of fact, of the 92 elections we’ve monitored, I would say the election process in Venezuela is the best in the world.” Following the election, Mr. Chavez confirmed Fidel Castro’s opinion of our 39th President, as a man of “honor.” In admiring the election process in Caracas, Mr. Carter stepped even deeper into the pile of manure that was already overflowing his boots when he added that in the U.S. “we have one of the worst election processes in the world.” Keep in mind, Hitler was elected democratically by a process I feel sure Mr. Carter would have sanctioned and admired. In the world of the Chavez’s there is no shortage of “useful idiots.”

It is power that people like Chavez, Castro and Hitler crave. They may speak warmly of the poor and meaningfully of the disenfranchised, but it is all for the sake of personal power. These leaders do not invest for the future. Hitler built a war machine that was unparalleled. He intended to use it to destroy Europe. He very nearly succeeded. Chavez was not as evil as Hitler, but he did nothing to help Venezuelans prepare for the future, refusing to invest in education and hospitals. Incredibly, in the desire for immediate cash he largely wasted a phenomenal natural resource.

His hatred for the United States and for what it stands was palpable. It was also what likely appealed to those great patriots like Sean Penn and Oliver Stone. Chavez’s hatred knew neither decency nor respect. President George W. Bush was a “devil;” President Obama a “clown” and “an embarrassment.” While it is too early to tell, the same attitude seemingly has inflicted his Vice President (now President), Nicolás Maduro. Mr. Maduro blames Americans for deliberately implanting cancerous tumors into Mr. Chavez. Yet despite his rants, the Administration turned the other cheek and dispatched two men to represent the United States – Congressman Gregory Meeks of New York and William Delahunt, a former Congressman from Massachusetts. Admittedly (and appropriately), they are both quacks.

In the end, all may not be lost. Lincoln concluded his statement: “…but you cannot fool all the people all the time.” It is that promise that keeps us going.

Tuesday, March 12, 2013

“Storms on the Horizon?”

Sydney M. Williams

Thought of the Day
“Storms on the Horizon?”
March 13, 2013

On Monday, the yield on the FINRA-Bloomberg index of High Yield Bonds hit 5.84% – close to the lowest yield on record, and only about fifty basis points above where the Thirty-year Treasury was selling in June of 2007. In late November 2008, the yield on that Index exceeded 25% – the highest since the Index was created. Normally, a positive move in bonds of that magnitude would be associated with a tremendous spurt in industrial and commercial activity. As we all know, that has not been the case. Instead, we are living in a strange “risk-on, risk-off” world that has as its principal source of momentum a Federal Reserve determined to keep interest rates at below normal levels. The bottom line: the Fed has done a lot for Wall Street, but not very much for Main Street.

While I have spent more than forty-five years toiling in the vineyards of Wall Street, I profess no expertise regarding bonds and very little about stocks. Years ago I learned ours can be a humbling profession. Macbeth’s three witches were far better predictors than most. Even the name Wall Street conjures images of tycoons in top hats, big cigars and fancy cars. Much of the President’s venom has been aimed at so-called “millionaires and billionaires” who populate its byways and boardrooms. This image has long been its bête noire. A hundred years ago, Ambrose Bierce incisively described Wall Street in The Devil’s Dictionary: “n, A symbol of sin for every devil to rebuke.”

Wall Street has had its share of con artists. Before Bernie Madoff, in 1940, Peter Schwed wrote a best-seller, Where are the Customer’s Yachts? The answer was obvious from the title. Just under thirty years ago, John Train’s Famous Financial Fiascos was published, which describes a dozen or so nefarious characters that have lurked along the fringes of markets for centuries. There have literally been hundreds of such books. Today, a firm called Power Trade, which I know nothing about, has a radio ad in which they highlight “Michael” who “went from a park bench to Park Avenue in a few short years” by learning to trade stocks. The ad claims he “cracked the stock market’s code” (whatever that is), “something your broker doesn’t want you to know.” When I hear ads like that I cringe and worry for our business. Caveat Emptor should be the watchword for all investors.

The Street is an easy place to mock, and there are certainly charlatans eager to separate a customer from his or her money. However, in my experience most people in the business are fair and honest. There are serious students of the market and there have been a few who have become very wealthy. At its core, Wall Street serves three critical roles. It provides the mechanism by which companies and governments can raise capital. It acts as a depository for the investment dollars of individuals and institutions. And third, it provides liquidity to buyers and sellers.

The market is persistently mystifying. Robert Shiller, the Yale economist, concluded his column in Sunday’s New York Times, “We can keep trying to understand it, but we’ll be puzzled again the next time…” He was writing about behavior, but his words apply to the way markets move. Stocks are inscrutable, which is part of their appeal. Much has been made of the fact that the S&P 500 has more than doubled in the past four years, while earnings have risen 57%. Over the same time, GDP, a more important number for Main Street, is up a mere seven percent. From my simplistic perspective there are two main reasons for that big rise in stock prices. One, stock prices in early 2009 were very depressed, having fallen just over 50% in the previous eighteen months, not surprisingly since it appeared that the world was about to end.

The second reason, however, is more pertinent to my real fears and that is the extraordinary actions taken by the Federal Reserve that first lowered Fed Fund’s rate four years ago to near zero and has kept the rate at that level. Subsequently, they have been active in purchasing Treasuries and Agencies, via multiple quantitative easing (QE) programs. The Fed’s actions have extended and accentuated what has been a thirty-year bull market in bonds. Lowering rates in the midst of the crisis was absolutely necessary. Keeping them at this level has become a matter for debate. Low interest rates are an aphrodisiac to borrowers and provide a false sense of confidence to lenders. These low rates for borrowers remind one of the doughboy song that emerged from World War I, one line of which went something like this: “How to you keep Johnnie down on the farm, once he has seen gay Paree?”

Stocks, in contrast to bonds, have been in a funk for a long time. Thirteen years ago the S&P 500 was selling at 1480, less than half a percent below where it is now. If it had simply tracked inflation, the Index today would be 1950, or 40% above where it now is. It was an expensive market in 2000, selling at 26X prospective earnings. Today, the Index is selling at 14X expected earnings. Earnings have risen 95% over the past thirteen years and dividends 87%. (The explanation as to why dividends have not done better, I believe, is due to banks having cut or eliminated them during the 2008 credit crisis.) Stocks are certainly more attractively priced than they were in 2000. But, again, predictions are tricky. It took sixteen years for stock prices to move meaningfully ahead of where they had been in 1966. And, of course, it famously took the Dow Jones a quarter century to pass the 1929 high. Regardless, investors should not be too shy. Over the past thirteen years, while stocks were essentially at a standstill, dividends increased at a compounded annual rate of 4.9 percent, while earnings have compounded at 5.3 percent.

Bonds are another matter. Over the past thirty years, but especially over the past ten to fifteen years, they have decidedly outperformed stocks. But the latter part of that bull move was due to onetime events - the QE programs. Tields are such today that no similar rally is possible; thus, with smalll but earnings and dividend increases, equities, over time, will play the tortoise to the bond's hare.

In the irritating, cutesy parlance of the day, we have been in a “risk-on/risk-off” market the last few years. (I smile when I hear commentators on CNBC soberly pronounce, with futures lower by a few points, that today looks to be a “risk-off” day.) At any rate, since the start of the year the yield on the Ten-year has risen from 1.76% to 2.02%, suggesting sellers of Treasuries are more aggressive than buyers. The opposite is true in the High-Yield market, despite 2012 having been a record year for issuance – a 38% increase over 2011. Since the start of the year, yields have declined, using the FINRA-Bloomberg High Yield Bond Index, from 6.77% to 5.84%, In other words, the price of Treasuries has fallen, while the price of high-yield bonds has risen. Bond vigilantes are on offense. Howard Marks, co-founder and chairman of Oaktree Capital Management, in a Barron’s, interview suggested we are only in the “fifth inning,” but he does caution that “rates have descended to levels that hardly compensate investors for the risks incurred.” James Grant, in his most recent “Interest Rate Observer,” noted that creative destruction may not be taking place as it should. The implication is that abnormally low rates are allowing inefficient businesses to remain open, creating the possibility that “Japanese ‘zombie’ companies” may clutter our industrial parks.

The late economist and Presidential advisor Herbert Stein once remarked: “If something cannot go on forever, it will stop.” None of us can predict when the turn will come in interest rates. We only know that it will. Fed Chairman Bernanke has suggested that he will continue to ease until unemployment gets toward 6.5%. However, markets generally, but not always, anticipate change. While no one really expected the economy to come roaring back after the credit collapse in 2008 – consumer balance sheets were way over extended – economic growth has been more anemic than most thought. The reason, in my opinion, can be traced to an absence of confidence. Two factors account for that – tax rates and regulation. Corporate taxes are too high (except for those like GE, for whom complexity works) and regulation, whether it is environmental or healthcare related, which has become too invasive, Diane Furchtgott-Roth, writing in the Wall Street Journal, recently noted: “The Senate Permanent Subcommittee on Investigations has estimated that American companies hold offshore around $1.7 trillion of earnings from foreign operations.” That represents about 11% of GDP. Not all of that money would come home, but some would, if tax rates were lowered and regulation eased.

So I sit at my desk, worried, perhaps unrealistically, about the world I see. It is not so much stocks that concern me. It is what happens when the thirty-year rally in interest rates ends. How will markets react when Mr. Bernanke has bought his last bond? Despite a gargantuan federal (and state and municipal) debt problem, there is little going on in Washington (or the affected states and cities) that provides comfort. At the same time, equity valuations, while not cheap, seem reasonable. More importantly, many companies are returning value to shareholders through increasing dividends and/or buying back shares. We are told not to worry about inflation, yet when a government becomes as deeply indebted as is ours, the incentive to pay future obligations with depreciated dollars is enticing. Thus far this year, the dollar has been reasonably strong. As to whether that reflects conviction in the U.S. or worries about the UK, Japan or Europe, I am unsure, but suspect the latter. No Western economy, other than Canada, looks particularly robust. Many have problems far bigger than that of ours. But markets look forward, not backward.

Storm is too strong a word for my fears, but having foul weather gear handy seems appropriate. Keep in mind that common sense, the rarest of commodities, is an investor’s best friend – in the stocks one buys and the prices one pays.

Sunday, March 10, 2013

“Coolidge – A Primer for Obama”

Sydney M. Williams

Thought of the Day
“Coolidge – A Primer for Obama”
March 11, 2013

“I am for economy. After that I am for more economy.” Generations of Americans have been taught that it was a frugal, laissez-faire, “Silent Cal” who served as our 30th President. “Weaned on a pickle,” was the way Alice Roosevelt Longworth once impolitely described him. Certainly Calvin Coolidge favored business, was careful with a dollar, and  was equally careful (and short) in conversation, but there was much more to the man. Amity Shlaes has corrected that perception in her tersely titled biography, Coolidge, and provided an illuminating portrait of a President who was highly popular during his five and a half years in office. He ended America’s military expeditions in Central America and brought prosperity to millions at home. While the times are very different from that long-ago age, there was much in his beliefs and conduct that are universal and timeless. Mr. Obama would be wise to read this book.

One of the more timely anecdotes in Ms. Shlaes’ biography is the point where Mr. Coolidge (who was not schooled in economics) realizes that tax cuts will expand the economy; thereby generating more revenue. Mr. Coolidge came to office determined to reduce the debt (a product of World War I), eliminate the deficit and reduce  government’s annual budget. He accomplished all three. In doing so, the economy experienced unprecedented growth.

Ms. Shlaes writes of Mr. Coolidge: “One could look at the economy as a fraction. On top was the numerator, the government. On the bottom was the general economy…Coolidge had been focusing on the numerator, the government, making it smaller relative to commerce. But you could also get the same result by concentrating on the mysterious denominator. Growth in commerce, in the end, was the goal…” Treasury Secretary Andrew Mellon believed in what he called “scientific tax cuts” – what we call supply side economics. Mr. Coolidge and Mr. Mellon noted that the lowered tax rates on the wealthy actually generated more revenues. Ms. Shlaes writes: “A greater portion of the income tax came from top earners than had at the beginning of the decade. In 1927, those earning $50,000 – a tremendous sum – would pay almost 80% of the income taxes, whereas in 1920 those top earners paid about half.” The top tax rate was brought down from 70% to 25%. Charles Johnson, quoted in Sunday’s New York Post and author of Why Coolidge Matters, noted: “But even liberals may find something to like in the Coolidge boom; the tax code became more progressive. Those making less than $5000 a year paid 15.4% of total income taxes in 1920, but only 0.4% in 1929.” Lowering tax rates and simplifying the code helps drive economic growth.

The story of the 1920s is familiar to us today – only in reverse. In place of lowering tax rates, Mr. Obama raised them. Instead of simplifying regulation, the Obama Administration has added to them. Regulations cost American business about $1.75 trillion a year – almost half the annual budget for the federal government, and almost 15% of GDP. Last year’s fiscal cliff was averted when Congress agreed to Mr. Obama’s demand that higher taxes should be levied on the rich, in the interest of “fairness.” They were, and now he wants more. During Mr. Obama’s tenure, the size of government relative to GDP has expanded, total debt is 60% higher than when he took office, deficits are deeper, more people are living in poverty and there are fewer people working.

Mr. Obama’s approach to the recession that ended four years ago has been more like that of Presidents Hoover and Roosevelt during the Depression. Both sought bigger government and raised taxes. Additionally, Mr. Hoover worsened things by signing the Smoot-Hawley Tariff, and Mr. Roosevelt did the same with a raft of new regulations. While it is impossible to re-write history, what we do know is that the policies of both men did nothing to alleviate the suffering of so many affected by the Great Depression and, in my opinion, made things worse. Unemployment peaked around 1933 at 25%, but was still 15% when we entered the War eight years later. The unlearned lesson by so many on the Left is that redistribution only shuffles the deck. It is the expansion of the deck that is wanted, and that is only possible with economic growth. And economic growth stems from the private sector.

My start at school coincided with FDR’s death and the end of World War II. At that time, Roosevelt was idolized; Hoover was reviled and Coolidge was ignored. The fact that Roosevelt’s domestic policies had done very little to staunch the Great Depression did not concern his admirers. Despite his aristocratic heritage and bearing, Mr. Roosevelt was able to identify with the common man. His fireside chats comforted people and he deservedly earned credit for his role in defeating Germany and Japan. With the aid of functionaries and abetted by a compliant press, he was elevated to a God-like status. It is an image that persists to this day and one that beckons those like our President. But those images are at odds with the facts. In an earlier book, The Forgotten Man (that should be read in conjunction with Coolidge) Amity Shlaes corrects many of those misperceptions.

We live in a far different time than the Coolidge Presidency. At that time, federal government spending, as a percent of GDP, was smaller than that of the combined forty-eight states. Today the budget of the federal government is roughly two thirds larger than that of all fifty states.. State’s rights were considered far more sacrosanct ninety years ago than today. Federally supported social safety nets did not exist. They were assumed to be the responsibility of states, local government, community organizations and well-off individuals. While the United States was the world’s largest economy by the mid 1920s, she did not have the responsibility for global security she bears today.

There are also cultural differences between then and now, some of which could and should be regained – for example, attitudes toward personal responsibility and debt. President Coolidge was accused of meanness when he stood firm on principle in refusing federal dollars for the victims of floods in Mississippi and Vermont in 1927; it cost him dearly, especially as so many of his Vermont neighbors had been terribly impacted. But how could he help those in his home state when he had not helped those in the South? He believed strongly in the principle of state’s rights, that the responsibility lay with the state, even when a disaster had national consequences. Was he wrong? Perhaps. But he was parsimonious by nature, and he was fully cognizant that government’s money belonged to the people, not the politicians. He was a steward, not a saviour. He saw himself as President, not an autocrat, and was fully aware that the word president derives from the Latin praesideo, which means to guard or protect. It was an attitude toward the Office that, unfortunately, has gone out of fashion. Today our Presidents are far more imperial in attitude and action, surrounded as they are by yes-men and women. And Mr. Obama is certainly the most imperious we have had since Nixon.

As Mr. Coolidge, Andrew Mellon and budget director Herbert Lord worked to reduce the debt incurred during World War I. They were aware of the effects cuts would have on the lives of people; for example the effect of not granting bonuses to World War I veterans. He viewed such promises as a slippery slope. One can contrast his concern with the exaggerated fears expressed by Mr. Obama as to the consequences of sequestration. Even with implementing half of the $85 billion in forced cuts, 2013’s budget will exceed 2012’s. As Senator Coburn noted in a pointed op-ed in Friday’s Wall Street Journal, there are literally thousands of programs that could be cut, without denying 5th graders a tour of the "people’s White House," or causing millions to spend an extra hour going through security at the nation’s airports. Had he been more like Mr. Coolidge, Mr. Obama would first have admitted ownership of the sequester and, second, would have explained it was the unfortunate consequence of a failure on the part of both Parties to come together, but that he, as President, would ensure that it would have as little effect as possible. Instead he has emphasized its harshness.

What threatens the United States more than anything else is not al Qaeda, or a nuclear armed Iran or North Korea. It is the enemy within. It is debt. It might even be said that the problem we face has origins in the inherent decency of Americans – to improve life for those around us, particularly the sick, elderly and impoverished; though I suspect that it also emerged from a darker sense of political opportunism. Similarly, unions risk bankrupting states and municipalities with unrealistic demands. It is these promises, written on the backs of our grandchildren, that threaten to undo us. Without significant change, we have no way of honoring past and present commitments to those in need. Social Security and Medicare and Medicaid consumed 45% of the 2012 budget. Interest expense was another 6%. Discretionary spending was a mere 17%. Given an aging population, with 10,000 baby boomers retiring every day, Social Security and Medicare will continue to expand as a percentage. Persistent deficits and normalized interest rates could easily result in interest expense doubling. We cannot walk away from our obligations, but we need to make adjustments – raising the age of retirement, means-testing, etc. And government workers, whether elected, appointed or just hired, must be made fully aware that they serve as servants to the people, and that the dollars they spend are only available because of the hard work of those in the private sector.

I don’t pretend to have answers, other than to say that the sooner we admit the creek we are up the better. There is an urge to play ostrich. My mother-in-law used to quote from an old poem by Elizabeth Allen, Rock me to Sleep: “Backward, turn backward, O time in your flight. Make me a child again, just for tonight.” Troubles often make us wish to return to the womb; unfortunately that is impossible. But what is possible is a re-reading of Coolidge and the application of the common sense solutions he advocated to the problems we face today. Mr. Obama, take heed.

Thursday, March 7, 2013

“Jobless Recovery”

Sydney M. Williams

Thought of the Day
“Jobless Recovery”
March 8, 2013

Two and a half years after the recession that ended in November 2001, the Economist bemoaned long term unemployment in the U.S., at 1.9 million people, as the “highest in ten years.” Today, four years after the end of the last recession, long term unemployment stands at 4.8 million people, or 40% of total unemployed. Richard Freeman, professor of economics at Harvard, wrote four years ago: “From the 1980s through the mid 2000s, employment has increasingly lagged GDP in economic recoveries.” Professor Freeman noted that the United States was not unique in this regard, that much of the West and Japan were experiencing jobless recoveries. It should also be noted that corporate profits have reached record levels, and this week the Dow Jones sold at new highs. Productivity gains aided the former, while the latter has a lot to do with the Fed’s policy of free money.

What’s going on with employment and what can be done about it? Professor Freeman puts much of the blame on financial institutions with their focus on proprietary trading, rather than serving the needs of individual and corporate borrowers. There is much in what he says; though I suspect it is not the whole story. Perverse incentives at banks too big to fail were, in part, responsible. A system that rewarded risk-takers for gains realized and unrealized, but that socialized losses did not function in society’s interest. Boards of directors who ignored balance sheets but celebrated income statements naturally urged the provision of capital to those departments that generated the largest profits. Their concern was not the economy; it was their banks profits. Corporate and personal loans were boring compared to the returns one could get trading derivative securities. Despite Dodd-Frank, in the months and years following the 2008 credit crisis, big banks have become even bigger. They, thus, have become more dangerous to the fragile ecology that is our financial system.

Jobless recoveries have deeper causes than banks emphasizing trading over lending. The bigger problem, I believe, has been the inability for many workers to keep up with a dynamic and changing workplace. The full ramifications of the revolution in communications, smart-phones and the internet have yet to be felt. Since the start of the Industrial Revolution, the labor force has had to adjust to changes in technology that allowed productivity to flourish, but created uncertainty for labor. The number of workers required to produce a single auto has declined significantly over the past fifty years. Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) allowed concepts to be converted to finished products with a much diminished workforce. This change has been reflected across all industries, from steel to breweries. Factory floors that once required hundreds of people can now be run by a single operator sitting at a computer console. Change continues. Today, the concept of “smart” manufacturing is transforming traditional factories from cost centers into profit centers.

For the past three decades, the problem has been accentuated by globalization, as cheap labor in Eastern Europe, the Far East and Africa usurped American jobs. All was not bad news, however; as consumers benefitted from lower prices. But nothing stays the same. Capitalism is always in flux. Plentiful and cheap domestic natural gas at home, along with rising wages in the developing world, provide the potential for a resurgence of American manufacturing, if politicians allow it.

While we are seeing the effects on labor markets today, changes wrought by technology are part of a trend that extends back decades. A few years after World War II, computers began benefitting manufacturing. Productivity improvements rewarded shareholders and corporate management, but often came at the expense of labor. For a while unions protected threatened workers, but then lost their clout as America evolved from an industrial-based economy to a service-based one. Because of a rising service sector, employment remained robust, but wages declined. Flipping hamburgers at MacDonald’s did not pay the same as working the assembly line at Ford. In part, that shift explains why nominal wages for middle income earners have been essentially flat for the last three decades.

Recently it has been the service sector that is being affected by technology. A revolution in communications and the development of the internet have greatly altered the way in which the service sector operates. With increasing numbers of people banking on-line, banks can close branches. Amazon does not require the salesforce that a Borders does. Legal, medical and tax advice are available on the internet. Planes can be flown remotely. Computer-driven algorithmic programs are replacing traders. On-line gaming will impact casinos. Electronic record keeping is negating the need for file clerks. While skeptics worry about poor or bad information, it is difficult to conceive of an industry that has not been touched by this creative destruction – a process that, no matter how individually painful, is natural to progress. When problems arise they will be addressed. We are not going backward.

None of this is new. Change of this nature has been a part of life since the start of the Industrial Revolution. Thousands of home-based producers, from bakers to milliners were made obsolete as factories opened in cities almost two hundred years ago. Railroads bankrupted canal and stage coach operators late in the first half of the 19th Century. Fifty years later, autos, trucks and airplanes began to have the same effect on railroads. In fact there are those who suggest that societal changes brought about by electricity and autos at the turn of the last century were far greater than the change we are now undergoing. In 1910, farm workers represented 40% of America’s labor force. Fifteen years later, only a third of working Americans were on farms. Today, it is under two percent. The move from hayfield to factory floor to MacDonald’s took about 175 years. The past is no guide to the future, but it does provide perspective.

Going forward, I suspect entrepreneurship will gain in importance, with the caveat that government does not impede its blossoming. Despite Yahoo’s Marissa Meyer’s recent statement, it could well be that we will move back toward a system of small, home-based businesses. Certainly, the internet and communications would allow it. Interestingly, as an aside, I was told last Friday that the fastest growing sector of the job market is the growth in farm workers! But it is from a very low level.

Capitalism, which has raised living standards for millions of people for two hundred years, is by nature disruptive. That has not changed, and it should not. But there is a tendency among well-intentioned politicians and union leaders to try to preserve the past. One of the costs of progress is the inevitability of uncertainty brought about by change. Free societies, operating within the rule of law while guaranteeing property rights, offer the best antidote to unemployment. However, today’s politicians in Washington (and other capitals) are in the business of selling comfort, taking from those that have and giving to those without – functions that once were the responsibility of states and/or the private sector. Today, to argue to the contrary makes one appear Scrooge-like.

Politicians, with an eye on the next election, are almost always reactionary. It is the rare individual in Washington who anticipates. In recent years, our politicians have offered security, creating dependency, while shunning personal responsibility. They have deemphasized private investment and encouraged consumption. When the press writes of stimulus, they think of Washington. When they speak about austerity, it is in terms of the government. Nevertheless, while government has grown bigger, the driving force in our economy is still the private sector. Big government, in my opinion, largely bears responsibility for declining rates of growth in GDP. If stimulus is needed who better to provide it than the private sector? If austerity is deemed necessary one can be assured families and businesses will tighten their belts. Government is rarely a good investor, for the simple reason they are not motivated by profit. In a Thursday Wall Street Journal op-ed, Michael Boskin quoted Larry Summers from a 2009 memo regarding an impending $527 million loan guaranty to Solyndra: “The government is a crappy venture capitalist.” They are. Government should set the rules and play umpire. The players should be the private markets.

There will always be crooked and inept business people, who make either bad decisions or ones mired in personal self-interest, rather than in the interests of their shareholders or customers. Competition is the over-riding and effective regulator in free markets; whereas government is a monopoly.

The bottom line is that the economy needs jobs, and the question is: who is best prepared to offer them, government or the private sector? In my opinion, the answer is obvious, but there are Keynesians who think otherwise. Government interference, though intentions may be honorable, tends to inhibit, not help, the natural adjustment that always (and must) takes place. Under the banner of “fairness,” government increases regulations and raises taxes. Unfortunately we live in a world where dependency has grown, making people less capable of adapting. Ironically, the characteristics necessary to survive and thrive in the world we are entering would be more familiar to our pioneering ancestors than to today’s governing and governed classes – aspiration, self reliance, hard work, adaptability, opportunism, thrift and the willingness to take a chance.

Tuesday, March 5, 2013

“Detroit – An Omen?”

Sydney M. Williams

Thought of the Day
“Detroit – An Omen?”
March 6, 2013

The headline in the New York Daily News, on August 29, 1975 read, “Ford to City: Drop Dead.” The quote became iconic, though President Ford never said such a thing, though he had nixed a federal bailout of the city. Instead, responsibility fell to the State of New York and to the people and institutions to handle the crisis themselves. Governor Carey, with Felix Rohatyn installed as chief of the Municipal Acceptance Corp., did just that. On November 18, 2008, Mitt Romney published an op-ed in the New York Times, headlined “Let Detroit Go Bankrupt.” Mr. Romney was pilloried for his comments. (The headline was chosen by the Times.) Governor Romney later said the headline should have been “How to Save Detroit,” which in fact was his message.

In December 2010, Wall Street financial analyst Meredith Whitney told “60 Minutes” that she expected 50 to 100 municipalities to file for bankruptcy in 2011. That didn’t happen and she was loudly lampooned. But there were instances of filings, and the game has not been played out. Jefferson County, Alabama filed for bankruptcy in 2011, as did Central Falls, Rhode Island. Last year, three California cities filed – San Bernardino, Mammoth Lake and Stockton. Already five cities in Michigan and three school districts are under supervision of a state-appointed emergency financial manager. Relatively low interest rates and the fact that a third of the $878 billion in the Obama Stimulus funds went to local governments temporarily staved off further defaults. If Detroit fails now it would represent the nation’s biggest municipal bankruptcy.

Four years and about $85 billion after the reorganization of the auto industry – an investment on which taxpayers are still looking at a loss of about $20 billion – the situation in the “Auto City” has grown more dire. In announcing that the city of Detroit faced a “fiscal emergency,” Governor Rick Snyder, taking the advice of a Michigan financial review committee, said he planned to send an emergency manager to repair the troubled finances of Detroit. The Governor explained that the problem in Detroit is too fundamental, too lasting and too large to be resolved by the city. The city has long been dominated by Democrats and has become increasingly African-American in terms of population. In contrast, the state of Michigan is mostly white and the Governor is a Republican; so one can expect fireworks.

City officials have ten days from last Friday to seek reconsideration from the governor before a state board appoints a manager. If the manager does get appointed, he or she would be in place for at least eighteen months and would have the powers to cut city spending, change contracts with unions, merge or eliminate city departments, sell city assets and, if all else fails, recommend bankruptcy.

The failure of America’s auto industry’s management to compete in the global economy was certainly instrumental in the collapse of Detroit, but they had lots of help. Unrealistic demands by the UAW played a crucial role, as did municipal unions whose concern for retirees optioned the future of younger employees. City managers who saw government as a panacea for the city’s ills and who made the city unattractive for business, either through regulation or taxes bear their share of responsibility. Like most desperate situations, this one had many fathers.

But it didn’t have to be this way. While most of the nation’s growth has come in the Sunbelt, there are Midwest cities that have grown over the past two decades – Indianapolis, Columbus and Pittsburg, to name just three. Fifty years ago, Detroit ranked as the fifth largest city in America, with a population of about 1.7 million. Today, the city is ranked 18th, with a population just north of 700,000. In the past decade alone, the city lost 25% of its population. More than a third of the people subsist below the poverty line; unemployment is 18.2%.The city is burdened with $14 billion in long term debt, the responsibility of a diminished and impoverished populace. As the population shrunk, the number of retired city workers grew. In a very real sense, what’s happening in Detroit is an extreme example of the consequences of a welfare state.

Yesterday’s front page article on Detroit in the New York Times was an attempt to put lipstick on what has been a failed city. General Motors, it is true, is doing better, but so would most companies if they could walk away from their creditors. Even after abrogating contract law, the stock price indicates that American taxpayers are out $20 billion on their “investment.”

Following the credit crisis and recession, there were three directions governors, mayors and council members could take their states and cities. One, they could seize the reins and promote pro-growth policies, such as making their communities more attractive to businesses by minimizing regulation and lowering taxes. Two, they could increase taxes on the expectation that higher revenues in the short term would reduce deficits and liabilities. Or, three, they could continue on the path they were on with the expectation that the sidewalk pavement would not end. Very few chose the first step. Most were unable to implement the second. Detroit (and many states and cities, especially those heavily taxed and regulated) chose the third, cruising merrily along, hoping beyond reason that the sun would come up in the morning.

Bankruptcy is not the preferred choice, but it may prove to be the necessary one. There is a Latin phrase, “extremis malis extrema remedia,” which, loosely translated, reads “desperate times call for drastic measures.” Living beyond one’s means has been endemic to Americans for years. We tend to be optimistic by nature and that optimism has proved wise as the country flourished in the post war years. As we grew rich, our concern for the less well off increased, but became institutionalized. When things turned down, for individuals and businesses, we were forced to retrench. We had no choice. But the public sector, starting at the federal level, has not had the same restrictions. While individuals and businesses curtailed borrowing and spending, government increased theirs. In part, that was a necessary and proper response to recession. But the question is one of degree. Government’s credit allowed it to keep borrowing, so that standards would not have to be reduced. But that is a rope that can only be let out so far. We have now reached a point that demands drastic measures.

A federal government that is forced to reduce its budget by a mere 2.5% has caused the President to go forth with a message to instill fear. His cabinet utter proclamations insinuating the world will end – planes will stop flying, terrorists will proliferate, teachers will be fired, the military will grind to a standstill. Much of mainstream obliges this hyperbole. Mr. Obama is correct in that any cutback in expenditures has consequences. Whenever and wherever moneys spent decline, someone suffers. That fact cannot be avoided. U.S. GDP today is only about one percent higher than it was four years ago, yet the population has grown by about two percent. That means there are less goods and services on a per person basis than there were four years ago. As a nation, we are poorer. Yet our government employees live on as they always have.

The answer to such a plight is not trying to achieve fairness. It has to be growth. The multiplier effect of moneys spent is more pronounced when it comes from the private sector rather than the public. That should be the focus. Regardless, there is no way extrication from the pit into which Detroit has fallen is possible without pain. The point is to do as little damage, while laying the foundation for future growth.

That is Detroit’s challenge – allowing a Phoenix to arise from the ashes of a city that has been mismanaged for too many years. Such miracles have happened in the past (think Pittsburgh), and could again. Other cities like Chicago should take heed before it becomes too late. Detroit does not have to be an omen of impending doom. Properly managed, Detroit could become an example that a stronger tomorrow is worth sacrifice today. God speed.