Loewe's and Religious Discrimination

There has been a minor kerfluffle regarding the giant home improvement retailer Loewe’s this past week.

There is a show called “All American Muslims” on TV. This show, centered on the large Muslim community in Dearborn, Michigan (also home to Ford Motor Company’s headquarters), is designed to show American Muslims assimilating into American culture. Something along the lines of “See, we’re not all terrorists. We’re just like everyone else. We just don’t serve bratwurst at our backyard barbeques. Or beer.” I have to admit I’ve never watched the program, but apparently Loewe’s was a major advertiser.

So Loewe’s was contacted by a Christian interest group called FFA. These guys felt that “All American Muslims” was actually Islamic propaganda, softening us up for the stealth jihad agenda of imposing Sharia law on the United States. FFA began organizing a boycott of Loewe’s.

In response to their threats, Loewe’s decided to pull their ads from the program. This decision got them in hot water with a bunch of other people. Crying out “Religious discrimination” a number of other commentators are calling for a boycott of Loewe’s.

Of course, Loewe’s did not pull their ads because of religious discrimination. If they were concerned about Islam, they never would have run the ads on the show in the first place. Loewe’s in neither pro Islam or pro Christianity. What Loewe’s is in favor of is DIY home improvement.

What Loewe’s is opposed to is the same thing every giant corporation is opposed to: getting their brand identity tied up into controversy. A little buzz about the show that gets people to tune in and be exposed to your advertising: good. A little buzz about your running your ads on that show: bad.

So now Loewe’s is trapped in a classic no win scenario. Continue to run the ads, and risk angering the hard Christian right. Pull the ads, and risk angering the ACLU types and the not insignificant Muslim-American community.

I don’t feel sorry for Loewe’s, though. Nor do I have a lot of sympathy for the FFA, the Muslim-American community, or the ACLU types. My sympathy is reserved for the low level media buyer who decided to place the ads on “All American Muslims” in the first place. Because that poor schlemiel is the guy who placed a multibillion dollar retailer right in the middle of a no win scenario. And somebody is going to have to pay for that mistake.

It’s a dreary, sad thing, losing your job in the middle of the holiday season.

Illegal Immigration: Forever Guilty?

I recently read a story in the news about a Mexican woman who had been deported after living in the US for 21 years. Both her children were US citizens, and she had left them behind. The immigration laws had effectively broken up her family.

Obviously the woman was cherry picked to put current immigration law in the worst possible light. But it does make you think about the nature of the crime she had committed.

Most crimes are crimes of commission, as in committing a felony. You steal an old lady’s purse. You assault someone. You burn down a house. Other crimes are crimes of omission. For example, if you fail to file a tax return, you have broken the law.

Illegal immigration, on the other hand, is neither a crime of commission or of omission. The reason we deport illegal aliens is not because they have entered the country, but because they are in the country. The crime is being here. Illegal immigration is an ontological crime. The only other ontological crime I can think of is DUI. Even if you are driving under the speed limit and obeying all posted traffic signs, if you get stopped by the cops and blow a high level, it is off to the pokey you go.

With DUI though, eventually you sober up. You never stop being an illegal immigrant. Even if you hold down a job for decades, pay taxes, and own property. There is something about that situation that offends my sense of fair play.

Any talk of amnesty for illegal immigrants is a hot button issue, sure to start a fight. But maybe we shouldn’t be using the word “amnesty.” Maybe we should be talking about a statue of limitations instead.

And Then There Were None

AMR, the parent company of American Airlines, filed for Chapter 11 bankruptcy reorganization yesterday. I’m pretty sure AA was the last major air carrier to do so, having been proceeded in bankruptcy court by Continental, USAir, United, Northwest, and Delta, along with lots of smaller airlines.

Interestingly, AMR still had billions of dollars left in the bank. Looking into the future, the management of the company felt that they were better served by filing now, rather than waiting another couple of years and filing for reorganization after running out of cash. This was a preemptive strike.

Although the shareholders got wiped out, they didn’t lose much, since the stock price is down about 90% in the last year. Management’s stock options are worthless, but they’ll be issued a bunch of new shares when the company emerges from the bankruptcy process. Passengers are okay, since the company has already announced they will continue to honor prepaid tickets and frequent flyer miles. The big loser in this process is going to be the employees.

When a company goes through Chapter 11 reorganization, contracts, particularly union contracts, can be renegotiated. And by renegotiated, I mean that the company can dump the pension plan, drop healthcare for retirees, and cut wages and benefits unilaterally, shoving the changes down their unions’ collective throats. We know that the company can do this, because that is pretty much what every other airline has done in bankruptcy.

After all their major competitors went through bankruptcy, American Airlines was stuck in the unenviable position as the airline with the highest costs. And since prices in a market are determined by the producer with the lowest costs, that explains why American lost money in 15 of the last 16 quarters.

American has been trying to wring concessions from their unions to avoid the step they took yesterday, but without much success. You cannot really blame the unions for being intransigent. Having to accept permanent downward mobility is a bitter pill to swallow. Now the concessions they would not agree to will be imposed on them, and maybe more to boot. After all, management will want to emerge from bankruptcy court as the new low cost provider.

Meanwhile, low cost carriers Jet Blue and Southwest continue to expand and prosper.

Penn State: What would you do?

I've been following the unfolding mess at Penn State for the last couple of weeks. For anyone who hasn't watched the news, a grad jury investigation has handed down indictments after investigations that went on for months. A retired defensive coach, who was still active on the Penn State campus, was charged with 40 counts (40!) of child molestation, over a period going back at least 12 years. Also indicted were the school's athletic director and the VP for Finance and Administration, charged with lying to the grand jury about an incident that occurred in 2002.

In the second act of the drama, Penn State's legendary football coach, Joe Paterno, as well as the university president, were both fired. The trustees felt they had not done enough to push the investigation of the retired coach, Jerry Sandusky. In 2002 they were given specific and credible allegations that Sandusky had been caught having sex with a minor on campus. They called him in and told Sandusky that he was not to bring any more children onto the campus. That was it. No police investigation, no attempt to identify the minor.

The third act of the drama has just begun. Lawyers have been parachuting into Pennsylvania, ringing doorbells in the search for more victims. The taxpayers of Pennsylvania are going to be on the hook for a big settlement by the time this is all through.

One of the more inexplicable aspects of the story was that not once, but twice, individuals walked in on a middle aged man clearly having sex with a young boy. In both cases, they did nothing to intervene, but merely turned around and walked out.

In watercooler conversations about this situation, the conventional wisdom is "I would have done something. I would have gone in there and torn that guy off the kid." I'm guessing that most of us would do no such thing. Why do we think we would behave in a more heroically active fashion than the 28 year old grad student who walked in on Sandusky and his victim in 2002.

History is full of examples of people not taking an active stand on behalf of their morals. In 1964 Kitty Genovese was knifed to death on a public street. At least a dozen people heard her cries for help, and no one intervened. In the sixties, sociologist Stanley Milgram conducted a series of studies where subjects administered what they thought were serious electrical shocks to others, solely because a man in a lab coat told them to. Recently, in China, a small child was struck by a car on a busy street. A number of people passed by in vehicles and on foot without stopping to help.

We all like to think we would act to help others, step in to right a wrong, even if there was some risk to ourselves. Sadly, the evidence indicates otherwise.

Another Inspirational Story from Occupy Wall Street

Really, you can't make this stuff up.

This is the lead of an article in The Nation, about an artist participating in the Occupy Wall Street protest in New York:

A few years ago, Joe Therrien, a graduate of the NYC Teaching Fellows
program, was working as a full-time drama teacher at a public elementary school
in New York City. Frustrated by huge class sizes, sparse resources and a
disorganized bureaucracy, he set off to the University of Connecticut to get an
MFA in his passion—puppetry. Three years and $35,000 in student loans later, he
emerged with degree in hand, and because puppeteers aren’t exactly in high
demand, he went looking for work at his old school.

One scarsely knows where to begin. What kind of elementary school has full time drama teachers? What exactly do they do? Put on the school pagent? I think this was the plot of an episode of Modern Family last year.

Apparently UConn offers a Master's program in puppetry. Who knew? Maybe the program was endowed by Jim Henson: the Kermit the Frog chair in puppetry studies, with the Miss Piggy fellowship available to selected students.

"puppeteers aren't exactly in high demand" Nah, really? Ya think?

But here's the $64 question: What kind of person borrows $35 grand to get an advanced degree in puppetry? I can understand having a passion for puppets. People have passions for all kinds of things. It's part of what makes the world such a varied and interesting place. I can even understand the impulse to try and make a living at it. The idea of making your avocation your vocation is deeply appealing.

But this guy quit a full time job in order to invest three years and $35,000 of somebody else's money in a pursuit so ludicris that it reads like the punchline to a joke. And now he is protesting because "the system" is unfair. It's guys like Joe who give the Occupy movement the high standing it currently enjoys among the employed.

The Christmas Economic Stimulus

Keynesian economists argue that when the economy is not providing enough jobs, the problem is a lack of demand. If more consumers were clamoring for additional goods and services, businesses would hire workers to provide them. If borrowers are tapped out, either overloaded with debt or saving more because of uncertainty, they cannot increase spending.

Governments, however, can usually continue borrowing even if individuals cannot. When the economy is in recession, the government can run a deficit, and spend the money to pump up demand. Once demand is higher, businesses will hire more workers. With more money in their pockets, workers will spend more, creating even more demand. Once the consumer demand recovers, government can then drop the deficit spending, as aggregate demand will have recovered. Keynes likened it to priming a pump.

This is the economic theory behind the various government stimulus packages that we have seen in the last few years. President Obama’s job program proposal was another along these same lines. It did not get off the ground, due both to partisan politics and a legitimate concern that the Federal government is already carrying too much debt.

It occurs to me, however, that the private sector is about to undergo a burst of increased demand. It’s called the Christmas selling season.

Goods are moving from the warehouses onto store shelves in anticipation of Black Friday. Retailers are hiring additional staff to handle the expected surge in buyers. And the increase in demand is not just limited to presents. At my employer, we are already making deposits for the caterer and DJ at our annual Christmas party. Folks are booking airline flights as they plan their holiday travel.

Viewed as a temporary increase in demand, the holiday season fulfills the same function of a government stimulus package. But we all know what happens after the first of the year. Seasonal workers get laid off. The inevitable credit card bills arrive, causing December’s free spending consumers to retrench in January. Economic activity drops back down again as people tighten their belts.

So when the private sector does a stimulus package, the effects are short term in nature. I wonder why we think it will be longer lasting when the government does it?

Occupy Wall Street Continued

The Occupy Wall Street movement has more legs than I originally gave them credit for. The protests have spread to an increasing number of cities, including a number of international sites. There are clearly a lot of people out there who both feel disenfranchised from the current economic system, and have too much time on their hands.

But I still don’t see any evidence of a coherent program of policy demands coming out of the protests. The op-ed writer Tina Depuy has put out a column that claims there is a demand: economic justice. In fact, she repeats the term “economic justice” five or six times in the course of the column. To me, trying to figure out what “economic justice” means is like looking at a Rorshach blot test. You can read anything into it that you want to see.

If you have $100,000 in student loans, maybe economic justice is having the debt written off by the bank. But if you are a stockholder in a bank, why should you write off those loans? Wouldn’t that make you poorer? What if you are a pension fund that has invested in student loans? Don’t you need the students to repay their loans so you can continue making payments to retirees who are depending on those checks? Writing off the debts of 20 somethings and sticking it to 70 somethings doesn’t seem very just to me.

How about the money paid to Wall Street bankers? You could consider it economically unjust that they are making such huge bonuses. But is bankers are going to have their incomes cut, shouldn’t we look at other highly paid individuals, like movie stars and athletes? Take the Yankee player A-Rod, for example. His salary alone is more than the total payroll of half the teams in Major League Baseball, yet the Yankees got eliminated early this year. Paying somebody that much for losing doesn’t seem very just to me.

Then there is joblessness. People need jobs! Of course, the last time I checked, the military was still recruiting. But the folks of OWS probably don’t want those jobs. They want the jobs they want.

Now, if you want to reinstate the Glass-Steagall Act, I could see how that could be a useful policy to advocate for. But I would bet that not one in a thousand of the OWS protestors world-wide could tell you what the original Glass-Steagall Act did, so somehow I doubt that is driving the train.

The problem with fuzzy concepts like “economic justice” is that they mean something different to almost everyone, which is like saying that they mean nothing at all.

Occupy Wall Street vs. Tea Party

Much comparison has been made between the Occupy Wall Street protestors and the tea party movement. The commentary is that even as the tea partiers are a grassroots movement espousing a varied, but generally conservative agenda, so the OWS crew is the left wing equivalent. The laundry list of desired policies from the Occupiers runs the gamut, from calls to intensively regulate the capital markets, to a push for some sort of government jobs program that will put large numbers of the unemployed back to work.

But I see far more structural and philosophical distinctions than similarities between the tea party and OWS, even taking their policy differences into account.

The tea party protests were geographically far flung, and were most effective by working within the democratic system. At literally hundreds of town hall meetings, all across the country, citizens came forward to meet with their elected representatives and express displeasure over government’s increasing reach. The same groups that showed up to protest went on to push for candidates who believed in limited government, and helped get a number elected.

The Occupy Wall Street protests are (so far) an exclusively urban phenomena, and do not seem to be spreading beyond a handful of cities. New York, Washington, Boston, Seattle and Chicago are the one’s I have heard of. No Occupy San Diego, or Occupy Indianapolis has made the news yet.

Also, while both Occupiers and tea partiers are activated by a sense that the government is no longer working for their interests, on the tea party side the theme is generally for a smaller government, and particularly an opposition to tax increases. Of course, many tea partiers are drawing plenty of government benefits already. A more nuanced statement of their position would be that the government is just big enough. Any benefit cuts should come out of programs they don’t use. The real desire is to oppose tax increases.

In a hyper-partisan political environment, saying no to taxes seems to be a strategy that is winning.

The Occupiers want a bigger government, or at least a government that is just enough bigger to give them something. Taken collectively, there would be quite a smorgasbord of increased spending to make all of them happy. To pay for their increased benefits, they want somebody else to foot the bill.

When the Federal government is already running a 40% deficit, expansion doesn’t seem like a good idea, even if you do get to soak the rich to help.

So you’ve got one movement that is geographically diverse, is focused on a primary objective, and is meeting the lawmakers in their districts. You’ve got another movement that is geographically restricted, wants lawmakers to come to them, and has a laundry list of demands.

Advantage, tea party.

Occupy Wall Street?

I confess I am absolutely mystified by the Occupy Wall Street protests. There doesn’t seem to be any coherent theme or agenda behind the protestors.

Are they advocating specific regulation in the financial industry? I certainly can’t tell that from the news coverage. Are they attempting to disrupt operations on Wall Street? If so, the organizers flunked out of protestor camp, because it is business as usual.

Now the labor unions are getting involved. Several unions have announced plans to join the Occupy Wall Street protests. The unions appear to be supporting the idea that union members should be getting higher wages and better benefits. What this has to do with credit default swaps and collateralized debt obligations is anybody’s guess.

The most recent stunt was for some of the protestors to wear zombie makeup and pretend to be zombie corporate workers. I’m just not sure what that is supposed to symbolize.

Lots of questions, and not very many answers. I know why the protestors are getting on the news every day. Protests make for great television visuals. But if you cannot articulate what you stand for, don’t be surprised when you don’t get what you want.

Unless you want to be an extra for the TV show The Living Dead. Because the protestors are getting great training for that.

How Do You Lose $2 Billion, Part II

News has continued to trickle out regarding the UBS rogue trader in London who lost $2 billion of the bank’s money. But not much news. It has dropped completely off the top stories on my Google news feed. There is plenty of speculation out there, however.

One piece of the story that has been out from the beginning is that the trader in question worked at the “Delta 1 trading desk” in UBS’s London office. This is a standard department in all of the big global investment banks. What these trading desks do is engage in trades for securities that are supposed to move up and down in lockstep. A change (or delta) in one stock of 1%, should be matched by a 1% change in other stocks. Of course, with any actively traded security, the correlation is never perfect, which opens up opportunities to make money.

The Delta 1 desk is supposed to engage in arbitrage, not speculation. Speculation involves swinging for the fences. Bigger risks, but correspondingly bigger rewards. Arbitrage, on the other hand, is about engaging in risk-free transactions that still provide a positive return.

Let’s say you are speculating on the price of wheat. Based on your analysis of global weather patterns, you think the harvest will be bad, and wheat prices will be higher a year from now. You can go into the futures markets and contract to buy (a long position) 10,000 bushels of wheat a year from now, with a price of $1.60 per bushel. A year from now, if you are right, the spot price of wheat goes up to $1.90 per bushel. But your contract says you can buy at $1.60. Your contract is now worth 1.90-1.60, 30 cents a bushel. But there is no guarantee. If the price of wheat actually falls, you can lose money. That’s speculation.

Now change the situation. Imagine that someone will sell you 10,000 bushels of wheat today for $1.50 per bushel. They’ll store it for a year for $200. Your cost of capital to buy the wheat is 5%. You buy the wheat, and then you go into the futures market and contract to sell (a short position) the wheat a year from now at the same $1.60 per bushel. Your costs for wheat, storage, and interest are $15000+200+750, for a total of $15950. A year from now you deliver your wheat and collect $16000. You make a small profit of $50. But by buying and selling simultaneously, you have eliminated any risk. The weather can be good, bad, or indifferent. You are insulated from movements in the spot price. That’s arbitrage.

What Delta 1 traders are supposed to be doing is arbitrage. The net total of your buy positions and the net total of your sell positions are always supposed to be close together. That way your bets are hedged. You can’t make much money on any individual trade, but if something unexpected happens, you won’t lose a lot of money either.

What UBS’s rogue trader was doing was faking one half of the equation. He was placing large speculative bets, and then falsifying the paperwork on the offsetting hedges. Eventually, someone noticed that things weren’t lining up properly, and he was caught.

But $2.3 billion is a lot of misalignment.

UBS Loses $2 Billion: Part I

The financial world was rocked by a scandal last week. UBS, the giant Swiss bank, announced losses of over $2 billion in unauthorized trades. The losses were generated by one trader in their London office.

The obvious reaction is "Two billion dollars! How does one guy lose two billion dollars?"

We don't know yet, and the details will only trickle out over the next few weeks. Already this weekend, UBS has revealed that the trades that generated the losses occurred over a period of about three months, and that the total losses came to about $2.3 billion.

"Two point three billion dollars! How does one guy lose two point three billion dollars?"

We have now seen enough of these "rogue trader" cases to make a few predictions about the story that will emerge as the investigation continues.

1. It started out much smaller. These guys don't start out placing $2 billion bets in the giant global casino known as our modern capital markets. Far more likely is that he screwed up some trades, maybe from something as mundane as a keystroke error. "Sell a million euros at the preset price. At most I'll lose a million. Holy crap, how did that extra zero get in there!" You lose a big enough chunk of money, and you will get fired. So now the thought process runs "I can't tell my boss about losing $10 million; I'll get fired. And my swanky bachelor pad costs $10 grand a month in rent. I have to earn that money back."

2. Risk controls were defeated. In the giant global casino known as our modern capital markets, the senior management of the investment banks is aware that it might not be the best idea to hand company credit cards with no limit out to a bunch of testosterone fueled 25-30 year olds who are amped up on Red Bull. So instead, they give them cards with credit limits. Essentially, every bank has systems in place to measure how much the bank could potentially lose from each trader's positions. In every case of a "rogue trader" those systems have been circumvented. Part of the problem here is that the big money is made by trading, and coming up with newer, ever more exotic financials instruments. The small money is made by working in risk management. The best and the brightest aren't clamoring to work in the field.

3. The problem got much bigger quickly. Once you've lost a bunch of money, decided to try and make it back, and figured out how to make bigger and bigger trades without senior management catching on, you start doubling down on your trading positions. Trading positions are what ordinary people would call betting, but we don't work in the giant global casino known as our modern capital markets. Let's say you start by losing $10 million. You place another $10 million bet to get it back. Once you lose that, now you've got to make $20 million back. The losses can grow geometrically at this point. If you double down and lose it all every time, it only takes 8 trades to get to the level of losses experienced by UBS.

The rest of this story will eventually emerge. When it does, I'm going to try and put the details into plain English.

Unemployment: We're On Our Own

The President is scheduled to make a major address on jobs and job creation this evening. He is going to unveil his plan for reducing the unemployment rate below the 9% level where it seems to be stuck. I plan to be doing something else during the speech, maintaining my near unbroken, bipartisan record of skipping presidential addresses.

President Obama will probably propose a bold new program of infrastructure rebuilding. This will be combined with tax credits for companies that hire new employees and maybe a request for money to retrain displaced workers. This will be combined with lines like “let’s get this country moving again.”

The problem is that almost none of what he proposes is going to work. Tax credits have been tried before, and failed miserably, during the Carter administration. A $500 credit, or even a $1000 credit, simply is not enough incentive to convince employers to add on employees they don’t need. Conversely, if you do need to hire someone, you are going to do it whether tax credits are available or not.

Retraining sounds like a good idea, but community colleges are set up to produce entry level employees with no experience. Taking a couple of classes for six months to a year will not lead to a new career.

As for a massive Federal jobs program, that is going to run into fiscal realities. The government is spending 40% more than it is taking in tax revenue. A bipartisan super committee of Congressmen and Senators is currently doing the planning for a major round of spending cuts.

Besides, what does an infrastructure rebuilding program really consist of? A bunch of work crews filling potholes and painting bridges. Does anybody really think that an unemployed office worker who’s a hundred pounds overweight is going to take a job on a road crew? Those positions would probably be filled by illegal immigrants with fake social security numbers.

Nope, a big jobs program is an idea that would be dead on arrival. All that’s left is a bunch of high sounding phrases about how the government is no going to abandon the people who need help in this crisis.

Now, it is easy for me to be blasé about the unemployment rate. After all, I still have a job. But it seems to me that the best thing the President can do about jobs in this country is tell the truth: we’re on our own. It is not the Federal government’s responsibility to provide jobs. Even if it was, deficit spending has reached its limit and beyond.

Anybody who is waiting for the Feds to ride in like the cavalry and create a bunch of jobs is going to be sorely disappointed. The first step to solving a problem is to admit that the problem exists. Everybody agrees that high unemployment is a problem. But the second step towards solving a problem is taking ownership of the problem. As long as we think it is the President’s, or Congress’s, or the Federal government problem to solve unemployment, people will not take whatever necessary steps to reinvent themselves and find work.

You see, it is up to us, to get this country moving again.

The Wisconsin Recall Elections

The results are in from Wisconsin's recall elections. Of the six state senate seats contested, four of them remain in the hands of the Republicans who won them in the 2010 regular election. This is considered a victory for the Republicans, who retain control of the state senate.

The concerted effort to undo the results of the last election was sparked last spring. The newly Republican legislature joined forces with the Republican governor to roll back benefits and limit union rights on benefit negotiations for state employees, including teachers. These moves sparked a firestorm or criticism, including massive demonstrations from union members.

The remaining Democratic members of the state senate actually left the state in an attempt to prevent the legislation from passing by denying a quorum. People are criticizing the tea party conservatives in the US House for not negotiating, but at least they stayed in town. Deserting your post to prevent the majority from passing legislation is bad enough. But then some chucklehead had the bright idea "hey, let's try and undo the results of the election."

It's important to remember the difference between a pure democracy, which we don't have at the state and Federal levels, and a representative democracy, which is our form of government. In a pure democracy, the populace votes directly the issues of the day. Think of a ballot referendum as an example.

In a representative system, we pick representatives for a set period of time. After their term is up, we get to decide if we want to keep them, or throw the rascals out and bring in a fresh set of rascals. If you're in the party that is on the outs, you organize, you fund raise, and you get ready for the next election. But you wait your turn.

The recall effort was the worst kind of cynical politics. The senators selected were not guilty of malfeasance. With one exception, they were not involved in scandal, and had won their elections fair and square. They were guilty of voting for the party platform they had campaigned for, and of having won by narrow margins in their districts.

The voters of Wisconsin wisely rejected this attempt at an end run around the electoral process. In a little over a year, the Democrats will get another, more legitimate chance to swing the pendulum back in their direction.

The Debt Ceiling: The Aftermath

Proving that when the chips are down, our elected representatives can craft a deal that nobody likes, the debt ceiling was successfully raised before the government ran out of cash. So, unless you’re working for the FAA, let the good times roll.

I have been stunned by the outpouring of scorn that has been heaped upon tea party Republican freshman in the House of Representatives. One op-ed piece in the New York Times actually compared them to terrorists. They have been called irresponsible for creating a crisis in Washington. How dare they threaten the full faith and credit of the US? The insolent nerve, to demand spending cuts and refuse to increase taxes! Didn’t they understand how bad a default would be? If government spending had forced to be reduced by 40% overnight, that would have been like running into a brick wall!

The attitude of the tea partiers seems to have been that it was better to run into the brick wall with $14 trillion in debt than wait ten years and run into the brick wall with $28 trillion in debt. And by run into the brick wall I mean have the Chinese government impose austerity plans on us in exchange for continued access to credit, ala the IMF and Greece. Created crisis? Certainly. Crisis that needed to be created? Maybe.

Looking at the deal that finally got done, I’m not entirely sure that it would not have been better to hit the wall now. At least that would have forced some tough choices. As it is, the deal that got signed does nothing to address entitlements and transfer payments. And the increase in the debt limit pushes the issue down the road two years, until after the next election. In two years we are going to go through all of this all over again. Only next time, the national debt will be $17 trillion, not $14.3 trillion.

So after all the Sturm and Drang, what we ended up with is pretty much business as usual. So much for hope and change.

Debt Ceiling Talks: The Scale of the Problem

We are less than a week away from hitting the debt ceiling, and there does not appear to be a bargain in sight. If both Houses of Congress and the White House do not get their act together, the US government will be limited in spending only what it receives in tax revenue. The result will be an immediate 40% cut in Federal spending.

I don’t think there has been enough said about that 40%. Congress has authorized spending for almost twice as much as they take in. Twice as much. The idea that we are going to close that gap, either by shutting down the national parks, NPR, and the State Department, as the right wishes, or by making the people in the top 10% of incomes pay another 4% of their income in taxes, as the left envisions, is ludicrous.

To close the gap on the revenue side would require the government to increase taxes by 67%. Since the top 5% of income earners pay 59% of total income tax, if you wanted to close the gap solely from that group, their taxes would have to double to about a 80% marginal rate. We would be telling people “if household income exceeds $200,000, 80 cents out of every extra dollar you earn is going to be taken away. If we did that, who would be left to contribute to politician’s reelection campaigns?

On the expense side of the equation, you would have to make huge cuts in the defense budget, along with eliminating all other discretionary spending to close the gap. No Federal prisons. No air travel, because no air traffic controllers. No repairs to the Interstate system. Nada.

Or, you could stop paying Medicare. Medicare accounts for about 40% of current Federal spending. Interestingly, most of the commentators I have been reading have assumed that Medicare spending would be a priority in the event the debt ceiling is reached, right after interest payments on the debt. But that topic is the subject of another post.

Another interesting thing about the current crisis is that it is completely made up. Created out of whole cloth. The debt ceiling has been raised 78 times in the last 50 years. It is simply a matter of Congress giving the Treasury Department permission to go out and dig the hole a little deeper. Congress could come back from lunch this afternoon and raise the debt ceiling on a voice vote. It is, as they say, merely a stroke of the pen.

The Republicans started the crisis going by declaring that the debt limit wasn’t going to go any higher until a deal was reached on spending cuts. Big spending cuts. The President then doubled down by threatening to veto any increase in the debt ceiling that didn’t include a “Grand Bargain” on spending cuts and revenue increases. The revenue increases to start right away, the spending cuts to take place sometime in the future. Preferably after the next election, when he is settling into his second term. Both sides think they can win the political game by being intransigent, and here we are.

At this point, there is not enough time left to put together major legislation on either spending cuts or revenue increases. This means that the most likely scenario is that at the eleventh hour both sides will toss in the towel and agree to increase the debt ceiling enough to get through the rest of this year, and part of next.

That only takes a stroke of the pen.

The Debt Ceiling: What happens if we hit?

We’re getting closer to our self imposed limit on the national credit card. The current debt limit is around $14 trillion. According to pronouncements from the Treasury, the government is spending money so fast that we are going to hit that limit on August 2, about two weeks away. As things stand now, neither side of the negotiations on the budget is giving way.

Once we lose the ability to continue tacking on more debt to the debt we already have, the US will default on its debt for the first time in the history of the country. The financial Apocalypse will have arrived.

Sort of. Because many people in this country have hit their individual debt limits. It’s called getting your credit card refused, or being denied for refinancing. But for a lot of those individuals, maybe most of them, being unable to dig the hole deeper doesn’t in and of itself require a default.

After all, it’s not as if the government is not still taking in tax revenues. My employer will continue tax withholding. Self employed individuals will continue making quarterly estimated tax payments. There isn’t going to be a complete shutdown of the Federal government. What there will be is a partial shutdown of the Federal government and Federal transfer payments.

One thing for sure is that the top priority for the money coming in is to continue making interest payments on existing government bonds. After all, if you stop making interest payments, the lenders won’t be too keen on loaning you more money after the debt ceiling problem is straightened out. Actually, the government will continue to sell bonds even without an increase in the debt ceiling. The money taken in from those bond sales will be used to pay off older bonds that are coming due. So first demand on the revenue will be to the bondholders.

Now, if you are making interest payments and paying off maturing bonds, I’m not even sure you can call it a default at all.

On the other hand, the Federal government is currently spending 40% more than it is taking in. Hitting the debt ceiling may not cause a default, but the immediate cuts required would entail huge disruptions to the economy. Either way, I’m not anxious to try it.

Migrant Labor as Skilled Labor

The inestimable Megan McArdle has a post on her blog over at The Atlantic where she argues that the work performed by illegal migrant workers requires more skill than we Anglos normally give credit for. Specifically, she writes about her experience at a pick-your-own raspberry farm. She noticed that a lot of the fruit was either missed or wasted, combined that with the aches and pains she felt for days afterward, and voila, picking fruit takes more skill than you realize.

Ordinarily I see Megan's point in everything she writes, and I agree with almost all of it. In this case, however, I believe the pain in her hamstrings has influenced her judgment. By her own admission, purple raspberries are an obscure, not widely grown fruit, which is more difficult to harvest than other varieties. That's probably why so few farmers grow them.

Even so, she lists only five rules for picking the fruit:

1. Get low to the ground.

2. Look under the leaves.

3. Go around to the back side of the bush.

4. A GO condition for the color--it must be purpler than some value of red, or it will be unripe.

5. A NOGO condition for gloss--the fruit cannot be too matte, or dull colored, because that means it is overripe and will mold.

By working with a skilled trainer, a sufficiently motivated trainee could learn these distinctions within about 500 iterations of the task. "That one is too dull. That one is too red. You forgot to look under all the leaves." That is a single basket of fruit. By sufficiently motivated I mean that is you cannot learn to get all of the acceptable fruit, and only the acceptable fruit off a bush, within a couple of hours, we fire you and you go back to unemployment. Once these quality control tasks are learned, the remainder of the job consists of physical conditioning and coming up to standard speed.

One week, or at most two, would be sufficient to master this job. Maybe a couple more weeks for other crops. This means the first farmer to hire an inexperienced picker suffers the losses during the learning curve, but the other farmers in the picking season will benefit thereby.

In my factory, it takes about a month to get signed off at the entry level machine operator position. With the current level of unemployment in our area, we are having no problem filling positions at a starting rate of $8/hour.

All labor is honorable, and some jobs are a lot tougher than others, but picking fruit is still unskilled labor.

Bristol Palin: Fortune's Child

I may have to revise my opinion of Bristol Palin.

My initial impression of Sarah Palin’s oldest daughter was that she is a thirty watt bulb. There’s a spark, but it is pretty dim. After all, she let herself get knocked up by Levi Johnston, who by all appearances and public statements is a pretty reprehensible character. After having her baby, she didn’t seem to be in any hurry to get back to school and continue her education past high school. I figured Bristol for a loser, another unwed mother who is supported by her parents.

But the events of the last year have made me reconsider.

First, there was the US magazine cover story, where she and Levi announced they were back together and getting engaged. Okay, the engagement lasted about three weeks, right up until Levi Johnston realized she meant it when she told him there would be no premarital sex. The public humiliation did nothing to enhance Bristol’s reputation as a sharp operator. But her share of the fee paid by US magazine for the scoop was $125,000. Not bad for a day’s work.

Meanwhile, she was the national spokesperson for an organization devoted to preventing teen pregnancy. According to USA Today, her salary for that gig was $209,000 per year. That is enough to put her compensation into the top 10% of households in the US.

Then there was “Dancing with the Stars.” Now, she was certainly not the worst dancer that season, but I watched some episodes of the show, and she was nowhere near the best. But her mother’s fan base kept her in the running, right up until the final three couples. As I understand the compensation structure of the show, you get $10,000 for the first episode, $20,000 for the second, and so on. The payout escalates the longer you survive the elimination. By my estimate, by making it to finals, Bristol grossed about $2 million that season.

Now she has written her memoir. The sum total of her life experience to date has been: getting pregnant by Levi Johnston, backstage observer on a failed political campaign, and a stint on DWTS. And she got a book deal out of it. Can you spell P U B L I S H E R’ S A D V A N C E?

At this point the lifetime earnings of this 21 year old are somewhere north of mine, and I’ve been working as a college educated professional for 30 years. You can’t argue with success, and this girl has had a ton of it in the last three years. So like I said, I’m going to have to revise my opinion of her talents upward significantly.

But damn, who’s her agent?

The Greek Crisis

The Greek capitol of Athens has been rocked by massive protests and civil unrest this week. The issue that has enraged the populace is the consideration by the Greek Parliament of a new round of tax raises and spending cuts. These “austerity measures” are the conditions placed on Greece by the IMF and the European Community Bank, in exchange for a second cash infusion that will allow the Greek government to continue to make payments on its existing debt.

At this point it looks like the politicians are going to vote in the austerity package in the face of overwhelming popular opposition, which is unusual in a democracy. Por qua? Well, the answer to that question is the politicians (or their senior advisors) can do basic math, and know what will happen is they turn down the IMF conditions. The protestors, on the other hand, are rioting for the privilege of continuing to live beyond their means, which they think is a right.

The protestors want the Greek government to cancel its debt, stiffing the mostly French and German investors who loaned the money. The dilemma the politicians face is that Greece’s current account deficit is just over 10%. For every euro the government takes in taxes, they are currently spending 1.1 euros. The austerity measures are designed to get that deficit down around a target of 3%. The IMF doesn’t require Greece to balance the budget. They just want the budget to be less unbalanced then it is right now.

If the Greek government defaults, the well founded concern is that they will be cut off from the international lending markets. Who is going to lend money to the guys who don’t pay it back? Without access to credit, there is an immediate, crisis-driven budget balancing, which means even more austerity than currently proposed.

Greece, although the cradle of Western civilization, is a small country with little industry and few natural resources. In today’s world, that is a recipe for being poor. Joining the Euro zone allowed Greece, for a few years, to live like they were richer than they really were. Facing the readjustment back to being poor is the root cause of the civil unrest currently wracking the country. But you can’t wish away the math by rioting in the streets.

Austerity? We don't need no stinking austerity!

Paul Krugman has put out an op-ed piece in the New York Times accusing governments on both sides of the Atlantic of not doing enough to provide jobs for the unemployed. He believes that governments are sacrificing the welfare of their citizens because they are giving undue influence to the owners of capital. The interests of bondholders are being protected at the expense of ordinary people. He doesn’t quite use the phrase “sinister cabal of international financiers,” but he comes close.

I know the guy has a Nobel Prize in Economics and I don’t, but really, I think he’s overstating his case. Krugman argues that as long as the unemployment rate is high, governments need to do more deficit spending, even if printing money to pay the bondholders kicks off a higher inflation rate. And if a few governments have to default on their loans, well, that’s a small price to pay. Sure, the bankers will take losses, but look how much good they’ve done!

Maybe the politicians are reluctant to dig the financial hole deeper because they remember their grandmother’s telling them to always spend a little less than they earn. Maybe the politicians don’t want to saddle their children with huge debt payments. You know, principled arguments against taking on too much debt. Aw, who am I kidding, these are politicians I’m talking about. They probably are listening to the bankers.

Still, there is nothing sinister about not wanting to lose money. I’m not an international financier, but I’m not wild about losing money on bad investments. Let’s picture a conversation between an International Financier and a Liberal Politician:

LP: I know we’re borrowing 40% of every dollar we spend, but I’m thinking we need to increase our spending.
IF: If you continue to increase your debt, there’s a good chance you won’t be able to pay back the money you’re borrowing. If I don’t think I’m going to be paid back, I’m not going to loan you any more money.
LP: But you have to keep loaning me money. Even after this crisis is past, we’re still going to be spending more than we take in taxes.
IF: You’re very telegenic, and you’ve got charisma coming out your ears, but I don’t think you heard me. If I don’t think I’m going to be paid back, I’m going to stop loaning you money.
LP: But people need jobs!
IF: Not my problem. My problem is getting paid back with interest. If I loan you too much money, you won’t be able to pay it all back.
LP: You will get paid back! I own a printing press, and I can just print off more money. Problem solved.
IF: *sigh* If you print more money, than you set off inflation. If you have 8% inflation, and my bonds are drawing 4% interest, that is a negative 4% return. I don’t loan people money in order to lose it.
LP: So you’re telling me that if I increase our deficit spending, you’re going to cut me off.
IF: In a nutshell, yes.
LP: Well, I guess I can’t increase the amount of deficit spending then, even though I want to.

There is no great conspiracy here. Just a lot of people pointing out that even great nations have to eventually pay back the money they borrow, and that it is a bad idea to dig that hole deeper then you can climb out of.

It doesn’t really take a Nobel Prize to figure that out.

Libya: Mission Creep

As part of the “Arab Spring,” the Libyan uprising against the government of Moammar Gadhafi was supposed to be over in only a few weeks, especially after NATO forces used airpower to enforce a no fly zone over the country. It is now almost summer, and there are very few signs of the regime folding its tents and going away. Instead, it now begins to look like NATO is supporting one side in what is shaping up as a civil war between the western and eastern halves of the country.

Of course, NATO’s military involvement has been about much more than just grounding the Libyan air force, right from the get go. Under the guise of a humanitarian mission, NATO aircraft (mostly from France and Britain) have been striking at Gadhafi’s military whenever targets present themselves. However, the fighter aircraft deployed are not the most effective weapon to use for close air support of the rebellion’s ground forces. It is hard to hit scattered artillery pieces when you are moving 500 miles an hour at a height of 2000 feet, even with precision guided munitions. So this week France announced that a force of attack helicopters would be sent to Libya to support the rebellion.

But it would only be twelve choppers. That’s not much of an investment, is it?

Well, not so fast. The twelve helicopters and their crews represent NATO’s fist. But it takes a lot of muscle to drive that fist. First of all, they have to be refueled after every mission, so you need fuel handlers and fuel storage. Second, when the choppers break, you’ve got to fix them, so you need a complement of aircraft mechanics and avionics technicians at the air base. On hot missions you fire off weapons, so you need ordinance personnel to store ammo and reload the guns. And because you need to house and feed all these guys, military units almost always carry their own logistical capability with them when they deploy.

Bottom line, when the politicians talk about sending twelve helicopters, they are really talking about sending a whole unit, a squadron. This means that the French will have about 250 of their airmen involved in the conflict. Once they are on the ground, they become legitimate military targets for Gadhafi’s forces. How much do you want to bet that as soon as the squadron commander sees the half trained militia providing security for his unit, he’ll start lobbying for more troops to protect his air base?

NATO is escalating its forces in Libya. From a US perspective, the only good thing about the situation is that the Obama administration has pushed this mess off onto the Europeans. Because once you start escalation, each incremental step gets easier and easier. And we still have our hands full in Iraq and Afghanistan.

High Gas Prices: Who's to Blame?

I spent over $65 filling up the gas tank of my car the other day. Six months ago that would have cost me less than $50. Gasoline prices have shot up over the past year, and are well over $4.00 a gallon in many parts of the country.

The rapid rise in prices is putting a squeeze on many household budgets. Inevitably, people tend to hate on the big oil companies, blaming them for the increase in energy costs. And those companies are reporting high profits. Rather than blaming the oil companies for high prices, however, we need to look deeper to understand what is driving the costs of a barrel of oil upward. After all, when oil prices drop, so do gasoline prices. Not always as fast a drop as when they go up in lockstep with cost increases, but if oil prices were to fall substantially, gas prices would eventually follow.

The first of the forces pushing upwards on the cost of oil is the Federal Reserve’s program of Quantitative Easing. In order to try and stimulate the economy, the Fed has been printing money and putting it in circulation. $600 billion on this round, and this is QE II. The theory is that flooding the economy with money will jumpstart spending, because people will have more cash to spend.

Another term for quantitative easing is devaluing the currency, but that would be politically incorrect to say, so no one in Washington is using that term. Devaluation does help expand exports, so in that sense it does stimulate the economy. But it also makes imports more expensive. As the dollar becomes worth less, because there are more of them around, commodities that trade on global markets, like oil or gold or cotton, go up in dollar terms. Printing money is a big chunk of why gas prices ascended to the stratosphere in the last six months or so. But it’s not the whole story.

The other piece of the puzzle to higher gas prices is financial speculation. There is a very active market in oil and gas futures. These are contracts where you can lock in a price for future deliveries of oil at a specified price. If you don’t need to take delivery of the oil, you can resell the contract and pocket a gain or loss, depending on what direction oil prices have moved since the original contract was purchased.

There are bona fide purchasers of oil futures, companies like airlines and large trucking companies. These guys like the stability of knowing what their fuel costs are going to be six months down the road. There are also speculators trading in contracts for profit. They never intend to take delivery of the oil, but merely to resell the contract. Traders perform an important market function. They provide the liquidity that makes the market function.

But when speculative trading outweighs bona fide purchases, then the market is driven by speculation, and not the underlying fundamentals of supply and demand for the actual commodity being traded. Fueled by borrowed money, Wall Street hedge funds are now buying and selling more oil contracts then bona fide oil users.

We are seeing straightforward momentum investing driving oil prices these days. Rising oil prices make futures contracts more valuable. Other investors see the profits, and leap into the market as well, driving the price higher. The higher prices make the new contracts profitable, pulling more money into the market. The result is a price spiral that continues as long as money pours into the market, and with borrowed funds, money can pour in for a long time.

The villains at the gas pump are not the oil companies. It is a combination of government debasing the coinage, and Wall Street speculation that is pushing up prices at the pump.

In the face of large impersonal forces beyond my control, I’m not shaking my fist and cursing at the oil companies, or even at the hedge funds running the game. I’m trading in my gas hog for a small car that gets better milage.

Raising Taxes on Oil Companies

All the signs of spring are here. The grass has started growing again, the birds are singing, and the sap has started rising in Washington.

As a response to high gasoline prices, legislation has been proposed to increase taxes on the five largest oil companies. It is being billed as the removal of tax breaks, which strikes me as terribly disingenuous. If you are raising revenue, that is a tax increase.

The news reports I have read are short on details about what specific subsidies are being changed or lifted. Apparently some of the provisions under review have been part of the tax code since the 1920’s.

The biggest piece of the puzzle, however, is undoing a change to the tax code that was made in 2005. This change lowered the maximum income tax rate from 35% to 32% for companies in certain manufacturing industries. The proposed legislation raises the income tax rate for these five companies from the current 32% to 35%. This tax increase provides $18 billion of the total $21 billion increased tax revenue of the whole package.

First off, when the government changes your tax rate from 32% to 35%, that’s not eliminating a subsidy, that is a tax increase. The next point of contention I have with this is why single out the oil and gas industry? Why not increase taxes on the car companies, or paper products manufacturers? And then there is the question of what makes these five companies so special? That proviso has Supreme Court challenge written all over it.

The most amazing thing about this proposed legislation, however, is that it will do nothing to reduce gas prices. High gas prices are what made these companies a target in the first place.

So let’s take a concern of the citizenry, use that as an excuse to raise taxes by scapegoating the largest players in an industry. Ignore the reality that what you propose is probably unconstitutional. Sell it by claiming you are eliminating subsidies, instead of calling it an increase. And finally, the actions you propose will do nothing to address the original concern of the citizens. That’s our Congress for you!

There are times when I despair for the future of the republic.

Osama Bin Laden Sleeps with the Fishes

Well, it took ten years, but justice finally caught up with Osama Bin Laden. Chalk one up for the good guys.

I’m intrigued by what appears to be unseemly haste in disposing of the carcass. I understand the desire to appear responsive to the Islamic world’s sensibilities, but it was less than twelve hours after the news broke that the first deniers and conspiracy theorists began making pronouncements that the whole incident had been faked. I would have dumped the body in a freezer until an independent authority could verify the identification process. Then weight the corpse and deep six it.

For me, the revelation that Bin Laden wasn’t hiding out in a cave is the most fascinating and disturbing part of the whole story. Abbottabad is only forty miles outside of Islamabad, the capital of Pakistan. One of the interesting wrinkles is that the entire operation was a massive violation of Pakistani territorial sovereignty. This was not a drone missile strike in the tribal areas along the border with Afghanistan, where the central government’s control is honored more in the breach than the observance. We flew multiple helicopters deep inside Pakistan for a smash and grab operation. I would like to see more reporting on the Pakistan reaction to our unilateral military action inside their borders.

The big news is that it really calls our Afghanistan strategy into question. We invaded Afghanistan nine years ago for two purposes: bring Bin Laden to justice, and prevent al Qaeda from using the country as a staging ground for terrorist attacks on the US. It now turns out that for the last few years, all of our efforts in Afghanistan seem to have been wasted in advancing those goals. Bin Laden wasn’t in Afghanistan to find, and the locus of terrorist planning has shifted to other countries, such as Yemen.

We are involved in a hugely expensive exercise in state building in Afghanistan, working at the end of extremely long supply lines, and after nine years we have little to show for our efforts to build up Afghan institutions. If we stopped propping up the Karzai government with both money and troops, I have little doubt it would collapse like a house of cards. We may be accomplishing small incremental gains in nation building over there, but from what I read, there is nothing like self sustaining development occurring in Afghanistan.

We have achieved our war aims in Afghanistan. It is time to declare victory and go home.

Not working, and not looking for work

Whenever I read anything about the unemployment rate in this country, it usually includes the caveat that the official statistics for unemployment only include people who are looking for a job. There follows a comment to the effect that the true unemployment rate is actually higher, because people who have gotten discouraged and quit looking for a job are not counted.

I can never quite figure out how that works. If you've "gotten discouraged" and "quit looking for a job," the implication is that you have no income, and you are not actively seeking income. The implication of the articles I read is that there are a lot of these people.

What do they eat?

I wake up hungry every morning. Furthermore, approximately six hours after my last meal, I can predict that I will be hungry again. As far as I can tell, we are all in the same boat.

Now, there may be some hunter-gatherers living out in the bush in Alaska who provide all their subsistence from foraging, but the rest of are getting our calories in the form of groceries from the supermarket. That takes money.

I'm also addicted to electricity. When I turn that switch, I for sure want the lights to come on. Okay, maybe I can get by without the lights, but by God that TV better come on. Now the discouraged people without jobs might be able to get off the electrical grid. All it takes is adopting the lifestyle of a medieval peasant. But I can't think of any way that somebody can beat their own metabolism.

And yet we are supposed to believe that large numbers of people are dropping out of the labor force. I just wonder how they make that work.

The Shores of Tripoli

Remember the Powell Doctrine? This was the set of principles to guide the use of military force, developed by General Colin Powell out of his experience in Viet Nam. There were basically three tenets to the doctrine; actually more like three tests to be met before using military force.
1. Can the mission be accomplished with military force? Don’t look for political solutions to be imposed by soldiers.
2. Are we going in with overwhelming force? Once the shooting starts, you better have enough guns to finish the job.
3. Is there a defined exit strategy? Once you have committed to the use of force, how are you going to extricate your troops? Democracies make poor occupying powers.

The first Gulf War was a classic application of this doctrine. We kicked the Iraqis out of Kuwait, and then we went home. The countervailing examples are Iraq and Afghanistan, of course. Nine years later we are still trying to build stable democratic societies so we can get out.

To show that we never seem to learn from our mistakes, consider the military involvement in Libya. Part of the mission seems clear enough, and militarily feasible: our war aim is to end the regime of Moammar Gadhafi. But who do we want to end up in charge over there? Our policy is a little vague on that score, since we don’t seem to be able to identify exactly who the rebels are.

As an aside, in a classic bit of Orwellian Newspeak, our military intervention has been labeled “a humanitarian mission.” Sure, because nothing says you are overflowing with the milk of human kindness like firing off 160 cruise missiles.

Although the NATO forces have complete air supremacy, the Gadhafi regime has not obliged us by folding up their tents and moving into exile. We control the skies, but the regime is reextending its hold on the ground. So we’re in a shooting war, but we haven’t committed the forces required to win.

Finally, what is our exit strategy? Since we don’t have any ground forces committed, we could just end the mission and send the planes and ships home. But after shooting at Gadhafi, what do we do then? If we leave him still in charge, doesn’t that make the humanitarian problem worse? After all, now that the rebels have announced themselves, I don’t think he’ll be satisfied with a live and let live policy.

The time to think about these issues is before you commit military force. Instead, our policy was based on optimistically assuming that the regime would quietly surrender, or go into exile, or some undefined happy outcome. Happy for us, that is. Not so great for Gadhafi or his family.

From where I’m sitting, the situation in Libya looks like a fiasco unfolding in slow motion.

Government Shutdown Averted!

I didn't look at the news much this weekend. As I matter of fact, I pretty much ignored outside events from Thursday afternoon until Sunday night. So I jumped directly from headlines about an imminent government shutdown to headlines that the crisis had been temporarily averted. The Republicans and Democrats had come up with a compromise to keep the Federal government running, at least on a short term basis. My thought was "Crisis? What crisis?" In my average day, I don't interact with the Federal government. It could have been shut down over the weekend, and I would not even have noticed. It makes me wonder: how long could I have gone without the Federal government in operation before it impinged on my life? One way to answer that question is to hope that it would be a good long time before I noticed the lack. In the week of brinkmanship leading up to the final compromise, the media was full of stories about how bad it would be if the shutdown happened. In the television coverage I saw, the unanimous position was that a shutdown would be a Very Bad Thing. But when you really examine the stories, they mostly boil down to this: the National Parks would have to close down for the duration. Oh, the humanity! I went to Yosemite National Park last summer. It was terrific. Not going back this year, though. I don't want to argue that we don't need a central government, and we need to fund the operations of that government. But in determining the level of that funding, there is some instructional value in realizing that it would take awhile to miss it if it was gone.

Japan's Nuclear Nightmare

It takes a lot to overshadow a natural disaster that kills 10,000 people in a First World country like Japan. The specter of a nuclear reactor melting down, with a corresponding massive release of radiation will do it, however. The prospect of five nukes blowing up will really focus your attention.

At this point it is impossible to say just how bad the situation at the Japanese nuclear power plant will end up being. The best guess is that it will be somewhere between the US experience at Three Mile Island (small radiation release, no public harm documented), and the Russian experience in Chernobyl (massive radiation release, thousands of deaths attributable to the accident).

Clearly, the contingency planning on the part of Tokyo Electric was fatally flawed. It looks like their earthquake preparation actually worked as intended. At the first tremor, the reactors shut themselves down. The problems seemed to have a root cause in the tsunami that accompanied the earthquake.

Once a reactor of the type in question is shut down, it still needs circulation of cooling water for days afterward to carry away the residual heat of the nuclear reaction. The circulation is done by big, electrically powered pumps. But when the reactor shuts down, it stops generating power for the all important pumps. The design solution is to install diesel powered backup generators on-site. These generators automatically kick in when the reactor shuts down. In the case of the Fukushima Daiichi plant, these diesel generators were located in a low lying area. They, and the switches that route the electricity, were flooded out by the big wave.

In the aftermath of this crisis, we will face a fork in the road with regard to the peaceful use of atomic energy. One path is to decide that nuclear power is too dangerous to use, that the risks are not worth the rewards. People who follow this path will say “See, we listened to the experts, and they were wrong. They promised us it was completely safe, and now there has been a radiation release. We have to shut down all the nuclear power plants right now.”

This appears to be the position of the German government. This week they shut down seven reactors, and plans are afoot to close another ten. Since nuclear power provides about 25% of Germany’s electricity, that will leave a large gap to fill. The Germans are acting as is there is an imminent failure risk, in spite of the fact that Germany is tectonically stable, and has never been known to suffer from tidal waves.

The other path is to learn from this situation, and apply those lessons going forward. There is an old saying that experience is what you get when things go wrong. Plenty has gone wrong at the Fukushima Daiichi power station. But we can learn from the mistakes, whether they be mistakes of planning or of execution.

In light of concerns with global warming and oil depletion, due to the uncertainty of wind and the inability to store solar energy for nighttime use, nuclear power is one of our best bets for a secure, reliable energy future. We can close the systemic gaps revealed by the current Japanese disaster, and strengthen the safety systems going forward. But we have to have the will to face the problems, instead of turning our backs to the technology.

We have Democratic and Republican parties. We have Green parties and Tea parties. I’d like to see a Let’s Keep the Lights On party.

Strategize This!

Embedded into our notion of what “character” means is the concept of consistency. When we talk about a person’s character, to some extent we mean predictability. Your character shapes your response to a changing situation. By knowing someone’s character, we can have confidence in how that individual will react to circumstances. If we speak of someone as brave, we would be surprised if they ran from danger. If we speak of someone as cowardly, the surprise would be if that person stood up to danger.

I bring this up because the Obama administration is behaving out of character with regard to the recent rise in gas prices. The President has made statements indicating that he is considering opening up the Strategic Petroleum Reserve and selling oil to bring down gasoline prices.

These comments make me think that the administration is having a hard time with the concept of a “strategic” reserve. Strategy implies a long term orientation. In the case of the Strategic Petroleum Reserve, it was established to ensure a US based source of oil in the event of a major supply disruption, like the OPEC oil embargo.

There is no evidence of any supply interruption occurring in today’s situation. There are no shortages of gasoline being reported. Instead, smoothly working market mechanisms have driven up oil pricing in response to the Federal government printing money (the Fed’s quantitative easing II), and geopolitical instability, particularly the civil war in Libya.

I like low gas prices as much as the next guy. But when gas prices go up, I tend to try and find ways to drive less. When pump prices cracked past $3.25 per gallon, we cancelled that tractor pull set up for next week. This is normal market behavior. When the price of a commodity increases, buyers begin to use less of that commodity. Long Sunday drives: bad; long Sunday crossword puzzles: good.

The reason I find the Obama administration’s reaction to high gas prices inconsistent is because they want us to use less gasoline. Internal combustion engines are a major source of greenhouse gas emissions. If you’re opposed to the prospect of global warming, you should celebrate increases in gas prices. Every nickel rise in gasoline prices moves another thousand hybrid vehicles off showroom floors. Pumping oil out of the Reserve to lower gas prices works directly against that situation. So you can see why it appears out of character for this administration.

Unless the true character of the administration is to pander to the voters in every possible way. The President’s statements are perfectly in character with that end.

Politicians on the Lam

Wisconsin’s Democratic state senators are still missing in action. They fled the state a couple of weeks ago to deny a quorum, preventing the incoming Republican majority from passing legislation that would eliminate the right of state employees to bargain for fringe benefits. Since a large chunk of the union dues paid in the state flow directly into Democratic campaign coffers, The Democrats’ desperation to defend their power base, as well as the Republicans’ determination to reduce union power are both understandable.

When the Dems first bolted across the border to Illinois, I appreciated the free entertainment. I enjoy a good piece of political theater as much as the next man, and it was good of our fellow countrymen in the great white north to provide a terrific piece of grandstanding. It reminded me of professional wrestling. The same histrionics. The same larger than life conflicts. And ultimately, the same preordained conclusion. After all, the Republicans had the votes.

By going on the lam, the Democratic senators focused a lot of media attention on the issue. They also bought time to try and swing public support to their side. All well and good, and for the first few days, entertainment value aside, I thought the desertion a legitimate delaying tactic.

That changed when the Democrats realized they could stay away indefinitely, and began issuing demands for their return. They would return to the state capitol, but only if the offending legislation was removed from consideration. That is not only profoundly undemocratic, but it sets a dangerous precedent as well.

Representative democracy is primarily a matter of majority rule. If you get 50% plus one vote on an issue, the gavel comes down, and it is the law. 100% of the citizens must comply. There are two types of exceptions to the rule of the majority. First are rights that are built into the state or Federal constitution. These rights, such as freedom of speech and religion, are unalterable by a majority, no matter how large. A minority of one gets to practice his right of free speech, no matter how repellent that speech is, and 100% of the citizens must allow that. An independent judiciary acts as the safeguard of those rights.

You can also have preset procedural rules requiring a greater than 50% plus one majority for certain purposes. Three quarters of the states have to ratify an amendment to the US constitution. In the US Senate, 60% of the Senators must agree to stop debate before a measure can be voted on. California has a rule that two thirds of the legislature has to approve a tax increase before it can take effect. The key to these procedural safeguards against change are that they must be put in place before they take effect.

What the Wisconsin Democrats are doing is demanding a power be ceded to them, the power to block legislation they don’t like, even though they are in the minority. Regardless of your stand on their objections to the law in question, this tactic is a power grab, plain and simple. It goes beyond partisanship into a tribal level of identity politics.

It also provides a dangerous precedent. Until recently, Wisconsin was a majority Democrat state, with the Republicans in the minority. If, during the Republicans time of ascendency, this refusal to participate actually bears fruit for the Democrats, they will find the taste of that fruit bitter indeed, and sure to prove indigestible.

After all, what is sauce for the goose is sauce for the gander. Should the current Democratic tactics work, then the Republicans will surely adopt them when next the political pendulum swings to the other party.

We will have moved from principled disagreement and potential compromise to the political equivalent of hostage taking.

Better Living Through Tax Credits

Middle class and upper middle class people are always astonished when I tell them that the battle to redistribute income is over, and they lost decades ago. The Federal government does a massive amount of income redistribution, and has for a long time. Nobody is even talking about limiting this.

I’m referring to the Earned Income Credit, and the Additional Child Tax Credit, which are two of the big tools the government uses to hand out money to the lower class. Consider a single mother with two children, making $19350 a year as a nurse’s aide. Assume she pays $1935 in withholding a year.

First, her standard deduction as Head of Household, combined with three personal exemptions, reduces her taxable income to $0. Most people don’t have a problem with this. If you don’t make much money, we’ll give you a pass on paying income tax. After all, everyone else gets those same opportunities to avoid taxes, based on their household scenario. So this woman will get a full refund of the money withheld from her paychecks, $1935.

But we’re not anywhere close to done. She has two kids, which is a tax advantaged situation. If she had owed taxes, she would have been eligible for the Child Tax Credit, a nonrefundable credit of $1000 per child. Since she doesn’t owe taxes, instead she qualifies for the Additional Child Tax Credit, a refundable credit of $1000 per child. This boosts her refund by $2000. Her refund check is now up to $3935.

Now let’s look at the Earned Income Credit. The amount of the credit varies with the number of children (up to three) and the amount of earned income. As income goes up, so does the credit, until it reaches a plateau. As income continues to go up, the credit begins to phase out. In our example, with earned income of $19350 and two children, the amount of EIC will be $4427.

As the piece de resistance, let’s not forget to add in her Making Work Pay Credit. This $400 credit is part of the Obama stimulus package, and will not be part of the tax code next year. It is essentially a refund of the Social Security taxes you pay on the first $6000 of earned income.

Let’s add it all together:
Withholding $1935
Add’l Child Tax Credit $2000
Earned Income Credit $4427
Making Work Pay $ 400
Total Refund $8762

In our example, our hypothetical tax filer got $6427 from the government, in addition to $2335 returned to her from paycheck withholding. That’s a wage increase of 33%. Where does that 33% increase in pay come from? Why, it comes from the taxes that higher income taxpayers put into the system. Or even from the taxes that lower income taxpayers without minor children pay into the system. Or from the taxes that married couples that both work pay.

But however you slice it, the government is taking money away from some individuals, and handing it over to other individuals, without asking anything in return. That is the income redistribution that is at the heart of socialism.

Adventures in Taxland

True conversation with a tax client:
“How come I’m not getting as big a refund? Last year I got almost $6000, and you’re telling me that this year I only get $1000.”

“Well, sir, last year you claimed your daughter and granddaughter as dependents. The child entitled you to the Additional Child Tax Credit and the Earned Income Credit on your wife’s earnings. That made the difference.”

“Why can’t I claim my daughter and granddaughter this year?”

“Your wife told me that they moved out after living with you for only five months last year. They have to live with you at least half the year to claim them as dependents.”

“I’m just going to make a call to my daughter, and then we’re going to get that changed. She’ll tell you she lived with us all year long.”

“Sir, I’m not going to change this return. Before you got here your wife gave me this information, and you can’t unring a bell. If I knowingly falsify a tax return, I could lose my license.”

“Then I’m just going to get my return done somewhere else.”

Here is where we deviate from what actually happened. What I would have liked to have said:
“Sir, sit your ass back down. I have your social security number, and your wife’s social security number. I also have the 800 number the IRS uses to report tax fraud. Unlike you, I actually pay taxes, and I’m offended by your attempt to defraud the system. Now, we’re going to file your tax return as it stands, and you’re going to sit there and sign it.”

Of course, blackmailing your clients probably isn’t a good business model in the long run. What I actually said:
“It’s your prerogative to get your taxes done anywhere you want. Here is your wife’s W-2 form.”

You can’t always get what you want.

Egypt

Watching the events unfold in Egypt over the last couple of weeks puts me in mind of the old saying that the written Chinese character is the same for both “crisis” and “opportunity.” This peaceful revolution, fueled by massive discontent at all levels of Egyptian society, has swept away the Mubarek administration. Whether this is the start of true regime change, or merely a shuffling of faces at the top remains to be seen.

It was interesting to watch the waffling and sail trimming of the Obama administration as events unfolded. If you don’t have any influence on a situation, and you don’t have a clue as to how it is going to turn out, it is probably best if you keep your mouth shut about things, for fear of inserting your own foot. Aside from philosophical support for democracy in general, and the basic human right of peaceable assembly in particular, US policy should have been that this was an internal Egyptian matter, end of comment.

Much of the discontent with the Mubarek regime was driven by economic issues, both of the middle class and of the poor. By some estimates, half of the recent college graduates in the country are unemployed. Among the poor, the desperation and despair are even sharper.

Egypt does not produce enough food to feed its 79 million people. As a food importer, the country has been buffeted rises in commodity prices over the last year. In America, when wheat prices double, a family’s grocery bill goes up five or six dollars a week. In Egypt, when wheat prices double, people who were spending 50% of their income on food are now spending 100% of their income on food. When a large percentage of your population goes to sleep hungry at night, that is a recipe for political instability.

My take on things is that the mandate of the new government will be to create huge numbers of new jobs, while simultaneously lifting incomes and guaranteeing subsidence for the bottom 30% of the populace. And, oh yeah, you’ve got to do this fast, before the euphoria wears off and things turn ugly again.

Sometimes the crisis outweighs the opportunity.

Cut and Run

Jane Harmon has just announced that she will be resigning from the US House of Representatives to take over as the head of the Woodrow Wilson Center, a Washington think tank specializing in international relations. Harmon is a nine term Democrat holding the seat for California’s 36th District, a swath of coastal Los Angeles.

Excuse me, but didn’t she just get reelected, like, three months ago? What happened? Did she get to Congress after the last election, realize that the Democrats weren’t in charge of the House anymore, and immediately put her resume on the street?

Hers was apparently a pretty safe district, but she didn’t run unopposed, which meant that she probably spent at least a million bucks on her reelection campaign. That’s a lot of money. Other people’s money. I doubt her conversation with major donors included a line about her needing their cash, because she needed a paycheck while she was searching for a better gig. How about the campaign staff? Not the professionals, but the volunteers. “I need you to give up your time to support me, at least until I hear back from the search committee.” And don’t even get me started about perpetrating a fraud on the voters, who now get to foot the bill for a special election to replace her.

I don’t know all the ins and outs of her situation, but it’s hard not to be contemptuous of someone who runs for office, and then bails out upon receipt of a better offer. Of course, in all fairness, I feel pretty much the same way about Sarah Palin.

Bundling versus Unbundling

I ran into a terrific example of the concept of economic bundling last week.

Every year I go on a ski trip, arranged by a ski club. When I started going on club trips (a long, loong time ago), the process was remarkably simple. You wrote the club a big check, and you were told when to show up at the airport. Once there, the trip leader handed you an airline ticket. You deposited a massive amount of gear at the gate (skiers travel with more equipment than your average Himalayan expedition), and got on the plane.

When the plane landed, you got on a bus that took you to the resort. After check in, you got your lift ticket for the week. Invariably, several dinners were included in the price of the trip, so you would get together with other members of the club and swap lies about how adventurous you had been.

The dominant feature of the pricing was that it was all inclusive. That is, you paid one fee, and everything was included. Put another way, all of the various services had been put together in one bundle by the club.

This year's trip provides quite a contrast with those earlier experiences.

First, I had to make my own airline reservation, separate from the payment for the club trip. I also had to pay an additional fee to cover the bus transfer from the airport to the resort. Several years ago, the lift ticket had been broken off from the rest of the trip package. You select the number of days you want to ski, and pay for those apart from the main trip fee.

When I bought my airline tickets, I thought I had a pretty good deal. That illusion stood until I got to the airport with all my luggage, and had to pay baggage fees, which were equal to 30% of the original ticket cost. Since the airlines no longer serve food on the flights, we bought something at the airport to eat on the plane. The trip price also included only one final dinner at the end of the week. There were other group activities planned, but they were pay as you go.
All of the discrete pieces of the original trip package had been separated, or unbundled, from each other.

The advantage of unbundled prices is the additional freedom and flexibility it offers the individual. When prices are bundled, you pay for everything, whether you use it or not. You don't like airline food? Tough, you still have to pay for it. Renting your equipment to ski? You don't get to use all of the baggage allowance built in to the ticket price. You like to rent a car and drive yourself to the resort? The other people who are riding the bus appreciate your subsidizing their ride. So unbundled prices give you a chance to save some money.

Bundling prices offer a couple of advantages, however. First of all, it is less complex, both for the buyer and the seller, and complexity costs money. If you use bundled prices, you only have to pay one time, and there is only one revenue collection point for the seller. In the context of my ski vacation example, bundling has another, even larger benefit. By grouping together a number of individuals, the club was able to get discounts by buying in bulk. A batch of wholesale purchases bundled together are going to be cheaper than the same set of purchases made at the retail level.

For my trip this year, I had more options, but the sum of my individual choices cost me more than what the old group price would have been. For once, I can actually put a price on freedom.

Tax Tales

If you ever want to know how loose the average American’s connection to the concept of honesty is, you just have to do taxes for a while. Most folks will say anything to get a bigger refund. What’s even more amazing is that they expect the person preparing their taxes to collude with them. Some examples:

“Off the record, I did air conditioning repair work last year. But I had to buy my tools all over again, because somebody stole them, so I didn’t hardly make enough money to talk about. We don’t have to report that, right?”
That would be a Schedule C business, and the excess of revenue over expenses has to be reported as income. And yes, you do have to report it, especially when you have just told the tax preparer that you have a side business.

Or another:

“I was separated from my husband in 2008 and 2009, so I filed as Head of Household. But my husband I got back together a few months ago.”
So you were married on December 31. You and your husband will have to file as Married, either Jointly or Separately. If you choose Married Filing Separately (MFS), you will lose the Earned Income Credit, along with most of the refund you got last year.
“We only got back together a few months ago, and he doesn’t want to file with me. Can’t we just forget I mentioned him?”
You can’t unring a bell. You can’t change your story after learning the tax consequences. The good news is that you get the share the joys of connubial bliss again.

Or this one, taken over the phone:

“I get $8000 a year in disability payments. Someone else claimed me on their tax return. How much of his refund belongs to me?”
If he provided more than 50% of your support, he can claim you as a dependent, in which case his refund belongs to him. If he did not provide half your support, and you knew he was going to claim you as a dependent, you have both committed tax fraud. What did you say your name was?
“*click*”

Martin Luther King Day

Watching the news this morning, there was a story about school districts that are not taking off Martin Luther King Day as a holiday this year. Because of unusually heavy snowfall's this year, these school districts are using MLK Day to makeup for snow days they have had to take.

Outraged over the lack of reverence shown to the memory of Dr. King and the civil rights struggle, it was reported that there were calls for parents to pull their children out of school for the day. These calls for a boycott were led by...wait for it...Al Sharpton and Jesse Jackson. There's a shock for you.

Somehow, I don't think that the legacy Dr. King wanted to leave was that it is okay to skip school. Much of the civil rights struggle was about gaining access to education. You know, the whole Brown v. Board of Education thing.

The Reverends Al and Jesse could have campaigned for special class sessions on civil rights on MLK Day for schools that were in session. Instead, they argued for a boycott of education. Maybe it is just me, but the priorities seem a little screwed up.

Hit the Ground Running

I read an article on the Motley Fool website the other day that referred to the “Red Queen” economy. In Alice in Wonderland, the Red Queen is the one who says you have to run as fast as you can just to stay in place. If you want to get anywhere, you have to run faster than that.

In the Motley Fool article, the phrase “Red Queen economy” was used to describe deleveraging in the face of falling asset values. Normally, deleveraging, or paying down debt, increases your net worth, because you still own your assets, there is just less of a claim on them by the bank. If asset values are falling, however, you can pay down debt and still go under water, with your equity less than the remaining debt. You have to run as hard as you can just to stay in place.

I thought it was such a good metaphor that I’m going to try and use it in the area of work skills. When I started my career, back before globalization had taken hold, and at the start of the information technology revolution, it was possible to learn one set of skills, and use those skills for an entire career, oftentimes at the same company.

Early in my career, I met a man who was a draftsman. In his fifties, he had spent his entire adult life making drawings on a drafting board. When times were slow, he was laid off. When business picked up, he went back to his drafting board.

He had done basically the same job for the last thirty years. In the 20+ years since then, he would have had to reinvent his skill set twice to stay employed. First, he would have had to master computer aided drafting. A few years later, mastery of three dimensional modeling software. That's two reinventions of the job, for a field that had been the same for the previous fifty years.

In today’s economy, whole industries are created and wiped out in near record time. To stay ahead of this wave of creative destruction, you have to be upgrading your skills all the time. This requires a couple of judgment calls on the part of the skill seeker. First, you have to place a bet on what skills are going to be in demand. Second, you have to acquire those skills.

Formal education can only get you so far. You also need to find ways to sharpen and deepen new skills acquired in the classroom. To keep yourself employable, a necessary step is to pick up some experience, as well as education.

In the meantime, you have to continue performing in your current position. Run as fast as you can just to stay in place.

Like the survivors in the movie Zombieland, there are rules for surviving the Great Recession. Rule number 1: Cardio.