Sunday, September 26, 2010

We ARE smart people! Yes! Yes! We ARE!!

Then why are our best minds failing us?   Why is the economy in the toilet and there is not good sign of recovery anytime soon?

I just think our economists have it wrong.  This is from a guy who may become an economist one day.  My thought is that our recession is not in a normal business cycle recession which says that manufacturers build up inventories until demand fails off, at which point manufacturing pulls back until inventories fall back to normal levels and consumption increases.   Keynesian expansion was made for this type of downturn. 

This is an accountant’s view of the problem.  This is a balance sheet recession.  There was not an over supply of inventories in September 2009.  Instead we devalued our assets over night, and we had a leverage problem.  When banks have fewer assets on their balance sheets to leverage against our loans, they have less to loan, and business contracts.  When we have less equity in our houses and our neighbors are moving out of theirs, we become more conservative, pay off our own individual debt, and restrict our buying.  So, if the Government stimulates the economy, we won’t respond as normal.  The Federal Reserve can flood the banks with cash and the cash will just sit there, especially after the banks raises the criteria for borrowing.  

The entire balance sheet of the country has been devalued, when our country borrows for the stimulus, we accelerate sovereign debt problems. 

What this adds up to is that there are no easy fixes to the recession.  Knee jerk reactions won’t work.  We may be in this thing for a long period of time.

Michael Hirsh says that our best minds are no longer becoming economists.  They are AWOL and have become financial engineers.   Ugh!

Incompetence is a Political Risk

One of the gifts that President Bush gave President Obama is that he made incompetence a political risk.  Simply because President Obama avoids terms like “strategery” and “lock box” does not put him in a position where he can avoid looking incompetent.

To solve a problem, President Obama likes to get the best minds in the country in one room and select the policy that represents a consensus.  He does not necessarily know the subject matter at hand, but if everyone else in the room agrees, it must be right.  Right?  Wrong!  A President must know the subject matter enough to recognize bad alternatives and get them out of the room.  If he doesn’t do it, know one will.  Those smart people are afraid of speaking truth to power and will not speak up.  The result will be bad policy.

If, as the previous post suggests, that some basic college level education would help, especially in economics, then the President would have known that short term tax cuts have limited usefulness.  Even his predecessor had a tax rebate in his final year and it benefited the economy for only two quarters.  We all should have learned from that.  He would have also known that fiscal stimulus projects of two to three years in length severely dilute the impact needed today to reduce unemployment.  Even people on the street would have told him that incentives for home and car purchases merely move demand up in time, but don’t really create additional demand, which explains why home and car sales are down now that those rebates are over. 

A basic course in project management would have helped the President in the gulf oil spill.  It would have told him to identify all his potential solutions on day one of the crisis, and crash, or expedite, them all.  Instead, he took them one at a time, including the berm designed to protect the wetlands.  I am quite sure that some of the President’s competition in 2012 will point out lots of ways for him to have shortened the 80 days it took him to stop the leak.  

I have spent my life around some of the most brilliant and overeducated minds in a host of industries and some of them could not lead you to a restroom.   Yes, they could after studying the matter, but many of them are so consumed with their own thoughts that they fail to notice where the restrooms are when the walk through the building.  They are often arrogant and self-absorbed to the point that they fail to listen and understand the self-interests of those who are affected by the policies they create.  Now that I possibly alienated some of my friends, I lay myself open for the same criticism.

There is a political risk brewing for the President in health care.  There is a case that is moving up to the Supreme Court that seeks to declare the new health care law unconstitutional on two grounds, namely that it violates the commerce and taxation clauses of the Constitution.  The health care law has a provision in it that says if the Court voids any part of the law, the entire law will be voided.  This is unusual, and if voided, as some predict, it will bring questions of to why the President took more than a year to put our country through the national exercise of adopting this law during a severe economic recession, and the law was not even competently constructed?

Now I have to find a restroom.


I turn on the TV and I turn to Fox and I get one interpretation of public policy.   I turn on MSNBC and I get a different view.  I turn on CNN and I am not sure what I get.  But common to all three of these news outlets is that none of them really concentrate on educating the audience as to the basics of how things work.   To the reader of this blog, the following may seem tedious, but work with me here, please.  This is an educational piece that explains one of the key themes of this blog.  Or, you can skip this and move on to the next post.

During the Enron crisis, the stock market was crashing and President Bush stabilized it by making it a criminal offense to put forward financial statements that misrepresented the financial condition of a public company.  Instead, the press concentrated on the Sarbanes-Oxley bill.  But if one reads the first few chapters of a basic text in financial management, one will learn that information risk is a major factor that has to be controlled in order to stabilize market values and lower interest rates.  History has proven Bush right in that instance and the Sarbanes-Oxley bill has proven to be excessive.  The press could have educated the public on something important, but they focused on the wrong thing.  We, as a public, could have learned something important.

During a debate on Social Security, one Democratic Representative, said that a bankrupt Social Security Fund was okay.  It would pay out 40% of its commitments.  The press did not jump on this and they should have.  Just the mere thought of a 40% payout is offensive, but another education opportunity was lost.  A basic first year text in accounting would explain that bankruptcy is the inability of a company to pay current obligations with current cash.  Again, a major opportunity to educate all of us was lost. 

During the debate on General Motors and Chrysler, no one in the press talked about public versus private goods.  Many of our freedoms and responsibilities as an electorate are present in a discussion on this subject.  The freedom to own property is embedded in this right.  A basic text in economics discusses this.  Again, the press was silent on this subject, and the Government went ahead without an educated electorate to help with the decision.  

During the debate on fiscal stimulus, the press failed to educate on the efficiencies of tax cuts versus direct government programs.  Guess what?  A basic text in economics addresses this.

During the debate on banks and TARP, the press failed to educate on monetary policy.  Again, a basic text in economics discusses this.

I heard people recommend that when writing for the general public, it is best to write to a 10th grade level of education.  I also heard that we should peg our writing at the 8th grade level.  We spend so much on education and this is the result?  I am advocating that we raise it to a first year college level of education.  After all, 85% of our fellow citizens have completed high school.  This is just a little higher.  If low expectation is the standard of our press, then no good policy will be the result.  Every smooth politician will think that he or she can sell us anything.

I really don’t care that Fox is conservative and MSNBC is liberal.  I care that they educate and enable us, the electorate, to competently engage in public discussion.  We need some economic education.  Good policies are the result of an educated electorate.

A Numbers Game?

Valerie Jarrett was on “The View” recently defending the stimulus plan on the basis that it helped keep 3 million jobs.  If you visit, the Administration’s official website on the stimulus, it says that the stimulus funded 749,779 jobs during the first 15 months of the program.  Last week, the Controller’s Office of Los Angeles reported that $111 million dollars of stimulus funds were used to create 55 new jobs. 

If we project from the City of Los Angeles experience, maybe only 270,000 jobs have been created to date?  If this even begins to approach the truth, where did all the money go?

According to the, Robert Inman, an economics professor at the University of Pennsylvania, theorized that state governments have been using the money to promote their own selfish agendas and are not using the funds in the best interest of the country.   

Thursday, September 23, 2010

GM, TARP, and China

My wife and I proudly own only GM cars.  All told, we have owned eight GM cars, as well as a few Fords, in our combined lifetimes.  To me, it was a patriotic thing to buy an American car and create more American jobs.

So, it pains me to present the following, all of which have been sourced from mainstream financial and auto industry publications.
  • The government owns 60.8% of GM. 
  • GM is planning to sell a portion of the government’s share in an IPO right after the elections.
  • GM needs an estimated $133.78 per share for the government to re-coup its $49.5 B investment.
  • Financial press has speculated for months that GM and the government will lose money on the initial sale of shares in the upcoming IPO.  In fact, the latest speculation is that the IPO will yield only $10 B when the initial target was $16 B.
  • The new GM CEO has said that it will take years for the American taxpayer to realize a payback.

But wait, there’s more.
  • SAIC, a Chinese auto company intends to buy GM shares in the upcoming IPO.
  • China has signaled its intent to force US and other automakers operating in China to share its technology.  Rep. Dingell, a Michigan Democrat, has voiced his strong objections.  This means that the new battery technology behind the Volt will be at risk.
  • GM recently sponsored a film in China promoting the Chinese Communist Party.
  • GM has recently begun giving money to various candidates for the upcoming election, mostly incumbents from both parties.
Just a few more facts. Most Apple, HP, or Dell computers are made in China when the technology was invented here.  China is at the top of the FBI’s list of nations sponsoring industrial espionage? 

My boss’ favorite saying is ‘you can’t make this stuff up.’

I have been visiting the AutoTrader website recently and found myself looking at BMW coupes, 3-series, automatic with paddle shifters, and a sunroof.  White with a tan interior would be nice.

Monday, September 20, 2010

When is a Stimulus Like a Boat?

In an earlier post I reported Christine Romer predicted that the stimulus package would add 1.6% GDP to the economy.  So, let’s have some fun with her prediction. 

When the stimulus bill was passed, the economy was $14,050 B and it has grown to $14,575 B over a year and a half, a difference of $525 B.  Now in the same period of time the Federal Government has spent $512 B of the $787 B in the stimulus bill.  So, what can we conclude?  The stimulus caused the economy to expand by $13 B beyond the stimulus itself?  At 3%, that only covers the first year’s interest on the money borrowed for the stimulus. 

Let’s keep Christine’s Romer’s 1.6% expansion in mind.  We should have grown by $225B more than the stimulus.  But not all of our growth can be attributed to the stimulus.  Let’s assume that half of the $525B is the product of our individual private labor and companies.  Also, we must give some credit to Ben Bernecke and the Federal Reserve’s expansionary money supply policies.  Then we are getting about a 50% return on the dollar from the stimulus. 

Annualized we are growing at something like 2% per year when we should be getting 5-6% in the initial phase coming out of a recession.  We shouldn’t be threatened with slipping back into a second recession.  In Keynesian terms, the multiplier effect of the stimulus is between .5 and 1 when it should be between 2 and 3.

President Obama wants to add $50B for transportation improvements, and he does not want to call it a stimulus.

When I thought about this post, I thought of some very clever things to say, but now that I laid out this information, I think I’ll stop writing.

Republican Tax Cuts

Politicians and their economic policy analysts can engineer the economy. They are not always successful, but they attempt to engineer it.  The Republicans generally do it through tax cuts to stimulate consumption.  Democrats tend to emphasize government purchases.  Any entry-level college text in macroeconomics will say that the GDP is a combination of consumption, government purchases, investments, and expenditures by foreigners. 

Tax cuts have the advantage of working quickly and effectively.  The Bush tax cuts were very successful in stimulating consumption with an average 6.5% per year increase in GDP from 2002 to 2008.  Give people money to consume and they consume.  Unfortunately, a lot of what they consume is foreign.    In 2006, when the Federal Budget deficit was $247 B, the trade deficit was $235 B, and China bought $200 B in US Treasuries alone to finance our deficit.  Where did China get the money?   From us.  So, here are the connections.  The US Government cuts tax rates for people to spend, and they spend a lot of it on foreign goods that transfer wealth to foreign countries that buy up our debt.  This wealth then becomes a basis for them to build up their industries and eventually begin to buy our industries and our wealth creation capabilities.  A case in point is Ford selling Volvo to a Chinese car company. 

As Mr. Spock would say, “This is not logical.”  And I did not even begin to get into structural unemployment.

Next post - equal bashing for the Democrats. 

Keynes Said What?

I recently began the study of economics and I know enough to be dangerous.  But for further discussion, here are some basic points about John Maynard Keyes.

One, he says that government can correct a recession by expanding government. This expansion is financed through debt.

Two, the impact of government expansion can be calculated by estimating its “multiplier effect”.  This is difficult to estimate.  In simple terms, when you or I spend a dollar we actually give it to a business owner who spends that same dollar on something like employees, goods, rents, and other things needed to run the business.  And the person who gets my dollar from the business owner does the same thing, and this goes on and on.  The ‘multiplier effect’ is intended to estimate the growth effect of passing this dollar along the economic chain of the Gross Domestic Product.  It is not unusual for texts to talk about multipliers between 2 and 3.5 of governmental purchases on the overall economy.

Three, governments are supposed to repay their debts during good economic times.  Ooops!

Goodbye Christine Romer, for Now

Christine Romer resigned last month from the Obama administration and went back to UC Berkeley to teach.   Dr. Romer was President Obama’s first Chair of the Council of Economic Advisors.  In her tenure, she co-authored a paper with Jared Bernstein, Vice-President Biden’s chief economic advisor, in which they predicted that the effects of the recent stimulus package would contribute a 1.6% growth rate to the expansion of the economy.  Further, the growth rate would be stable for the next several years.  Combined with the economy’s own natural cyclical capabilities to grow we should have a GDP growth rate much higher than the current 1.6%.  Growth doesn’t all come from stimulus.

In a paper by Cogan, Cwik, Taylor, and Weiland titled “New Keynesian versus Old Keynesian Government Spending Multipliers”, Romer’s and Bernstein’s conclusions are challenged with predictions that the stimulus package would contribute only .8% growth to the economy in 2010, .5% in 2011, .3% in 2012, and .2% in 2013.  To me, it was unusual in how it directly and strongly challenged the Rome-Bernstein conclusions.

Dr. Romer has one thing for which I give her credit and that is the good sense to choose this time to quit.  It should be clear that she did not create the stimulus legislation.  That was Congress.  She did estimate its effects. She has been replaced by Austan Goolsbie, an economist who was, at least one time in his life, a stand-up comedian.

The Unemployment of Youth

On August 27 the August 27 Kansas City Star reported that this year’s youth employment rate was 48%, the lowest since 1948.

I live in Southern California and some of my relatives are an hour away in San Diego.  Instead of driving the coast, I sometimes take the train and do some studying, this time it was math.  I sat across a young man of no more than 20 years, who was traveling with his girl friend to see her parents.  He was adorned with a collection of tattoos, and came with an obsessive desire to talk.  He wanted to know what I did, what my wife did, and my education.  He was in search of a job.  He explained how since he was 16 he had been on his own working at a series of jobs, including programming.  He was also educated and a few credits shy of a bachelor’s degree in science. 

I put my books down and began talking about networking and the process of building a career.  I also tried to steer the conversation towards opening a business.  Surely this guy with his gift for striking up conversations, his intelligence, and his quickness would end up a multi-millionaire within five years.  But, it was not to be on this trip.  He wanted a job.

The reason why this encounter has stuck with me is that I got the impression that if we do not come out of this recession soon and offer our young people some hope, then more is at stake than our economy.  I don’t know what was true or false about what he said, but a fear grew in me that we, in our collection of institutions and relationships charged with developing our youth, have not instilled in them the values of liberty and self-reliance that built this country.  Our greatest threat to our country’s future may be what we failed to pass on to our youth.  The report in the Star reinforced my fear.

Saying Anything Should Be Based on Something

Every good argument is based on three things, namely principals, reasoning, and evidence.  Before this blog begins, some space should be devoted as to why I believe what I believe.

Most of us are deductive in our reasoning.  Sometimes we are inductive.  Acknowledging that there is a number of what philosophers call ‘logical systems’ that provides a basis for learning and reasoning, for this blog simple deductive and inductive reasoning will be adequate.  So I spent some time trying to identify the major principles upon which I will be basing most of my arguments.  Here is my list as of today.

1.   There is a moral good. Regents University holds a Ronald Reagan Symposium annually and in February 2010, Hadley Akres was invited to speak.  I invite everyone to find the symposium in the C-Span archives and listen to the whole program.  Akres argues that there is a natural law that defines the moral good and that it is discoverable through reason, by asking questions to discover our moral principles and applying them consistently in our lives.  Some say God gives these principles to us.  Others say that they are formed by and embedded in society, and are stable enough over generations to form the basis for society and government.  One thing is clear.  They should not change in the short term.  History’s best example of a democracy that abandoned its long-term moral good over night is the first French revolution as it used tyranny to purged its society.

2.     The rule of law.  Because society pursues a moral good, government can seek to apply it by maintaining the rule of law.  Justice can now have meaning in its application. 

3.     The Declaration of Independence gives the Union purpose.  I once saw a debate between Alan Keyes and Alan Dershowitz in which Dershowitz proclaimed that the Declaration of Independence is mere metaphor.  I don’t care if Dershowitz is the Felix Frankfurter Professor of Law at Harvard, the Declaration of Independence has meaning, and if I could change anything about our legal structure, it would be to weave the term “life, liberty, and the pursuit of happiness” into that structure.

4.     The Constitution gives our political system process.  If the Declaration of Independence gives us purpose, the Constitution gives us process.  The Constitution is a work of genius in balancing power (thank you Ben Franklin).  The best way to curtail a force is to counter it with another force.  However, it is clear that the Constitution is not the purpose of our union.

5.     Reason is a good thing.  It is an undervalued thing.  It can lead to faith. Reason and faith can and should be used together.  Father Jenkins, the President of Notre Dame University said the following when introducing President Obama to the 2009 graduating class.  “Genuine faith does not inhibit the use of reason; it purifies it of pride and distorting self-interest. As it does so, Pope Benedict has said, “human reason is emboldened to pursue its noble purpose of serving mankind, giving expression to our deepest common aspirations and extending … public debate.””  Father Jenkins postulated that reason can lead to faith, and with faith we can reason.  Faith and reason are not separable, especially in public debate.

6.     We are a nation of faith.  Though we vigorously separate church and state in the conduct of our governmental business, the people of this nation believe in God.  We are a nation of faith, and faith-based arguments can and should be used to persuade one another to do right things.

7.     Self-interest is a good thing, economically, politically, and personally. Adam Smith proclaimed self-interest a good thing in describing the organization of our societies economically. And yes, self-interest is present in our bureaucracies.  In fact, we cannot get rid of it.  It is part of our nature in running organizations, both public and private.  More importantly, things work better when we use self-interst as a basic organizing principle.  For me, to legislate against self-interest is delusional.  To politicize it is demagoguery.  Therefore, let’s use it well, but in doing so; let’s realize that self-interest does have its limits.  When it leads to excessive power, the best way to counter it with an opposing power.  And again, our Constitution is an excellent example of three branches of power, each limiting the others.

8.     Limits and balance.  All things have limits, even governments.  We should not overreach.  None of our creations should overreach.  We all have boundaries.  To exceed them leads to self-destruction. 

9.     Keeping promises.  When I was in grade school and we came to studying poetry in English, one poem by Robert Frost stood out called “Stopping by Woods on a Snowing Evening”.  It describes someone who is traveling in the evening, perhaps delivering goods with a horse and buggy, and who stops to admire the beauty of the woods and enjoy the light snow falling to the ground. “The woods are lovely, dark and deep, 
But I have promises to keep, 
And miles to go before I sleep, 
And miles to go before I sleep.”  I believe this is a good principle upon which to base national public policy.

10.  Being an ‘other person’ person.  The reader can probably guess that I am a Christian, and I need to relate that an extremely important point in my Christian walk is when I realized that I was saved for a purpose.  It is not just salvation, but how we  act out our salvation.  That means imitating Christ, who really lived for others.  Every situation in the Gospels describes how he understood his audience and purposed every interaction to build up the people that he was with.  Though I am discussing a Christian point of view, similar points can be made within the context of other faiths.  One of my most memorable and touching experiences was several days after 9-11 when a fellow employee, who was Muslim,  shared his faith with me and I shared mine with him.  I could see how the horror of 9-11 affected him.  He talked about the mercy and compassion of his faith, and how he could not fathom how an act such as 9-11 could come to be. 

There is tension when to give to others and when to give to oneself.  We must take care of ourselves in order to be a meaningful giver to others. There is a tension between self-interest and fulfilling the call of our faiths.   Sometimes this tension is present in our public policy discussions, and those of us who have an active faith should be challenging each other in faith in the midst of public debate.  And no, I am not leading up to a right to life discussion. 

Sunday, September 19, 2010

What This Blog is About

 ‘Only Slightly to the Right’ is a blog dedicated to the idea that the current policy options facing the United States on most any topic do not impress the center majority of the country, which in itself can be characterized as right of center.  As I discuss issues with friends, the result is repeatedly the same that on topics facing the economy, foreign relations, and social issues, neither the position of the Republican or Democratic parties represent us.  It is time for someone to say this.  Neither party is listening to the center of the electorate.  It seems as if the middle is being yanked to either the extreme right or left, and it is time to say ‘H--- no! We won’t go!’

The first purpose of this blog is to examine various issues from both the right and the left and point out where they do not make sense, and by ‘make sense’,  I mean that both policy options are ‘illogical’ from a Spock point of view.  There are many times in the course of watching our public debates that I want to take representatives of both sides, bang their heads together, and shout as loudly as I can in their ears “GET REAL!!”

The second purpose of this blog is to ‘work things out.’  I don’t have all the answers.  In fact, I hardly have any answers.  Regardless, I think I know a bad answer when I hear it.

That leaves one question.  Who am I?  I am a guy who has had a number of jobs in both the private and public sectors, most in finance, planning, and management.  My educational background includes studies in public administration, public policy, finance and accounting, computer systems, mathematics, and recently, economics.  I grew up as a conservative Republican who loved Nixon up until he broke my heart.  I have also liked some Democrats such as John Kennedy and Birch Baye.  This is my first attempt ever at trying to be public with my opinion.  I would prefer spending my time taking classes, learning new things, enjoying close relationships, and looking forward.  But if more of us from the old middle would be more vocal, perhaps our politics will change.

This blog will be updated with a new post at least once a week through the 2010 elections.  After that I will re-evaluate. The opinions are mine and mine alone, and don’t reflect a survey or other instrument that attempts to assess the middle of the political spectrum.  The first post is a longer than most.  It lays out some principles upon which I based my opinions.  The second post is a simple statement on what I believe is the most important priority in the current recession.  The third post continues the economic discussion with some comments on the current Chair of the Council of Economic Advisors.  The fourth post starts a series to take on some of the economic positions of the two parties.