Prepare Ye Thy Republican Bashing

In this blog I have spent a number of posts going after the Stimulus, and by association, the Democrats who crafted it and sold it, particularly President Obama.  In each, I promised to balance the scales and bash some Republicans.  Oh, yes, I did agree with Joel Klein on his opinion of Christine O’Donnell, but I really haven’t balanced the scales.  Well, it’s almost time to pay-up.

Before I do, can we spend some time together and discuss some terms that I want to use in next post’s bashing?   (Yes, this is the paragraph where I attempt to persuade you to read on in spite of the fact that the bashing will be in the next post.  I promise you it will be worth the effort.  The terms are on public finance.   Work with me here.  You will be a hit at parties discussing terms many of your friends don’t know.)   Seriously, part of my purpose in this blog is to help educate, which makes this post as important as one that goes after any particular politician or party.

Let’s start with taxes.  Let’s define progressive, regressive, and flat taxes.  Basically, a progressive tax is one that taxes people who have low income with a small tax rate, or even no tax.  As income rises, the rate of taxation increases as well.  Our income taxes at the Federal and state levels are examples of progressive taxes.   Regressive taxes are just the reverse.  As income shrinks, the rate of tax increases.  Social security is an example of a regressive tax.  A person making $100,000 pays 7.65% in Social Security and Medicare taxes.  This rate applies up to a $106,800 ceiling after which there is no tax.  That means a person making $200,000 pays about 4% overall for the same tax.  A flat tax is a simple tax rate that applies to everyone regardless of income.  A sales tax is a good example of a flat tax.

Some related tax terms are transfer taxes and tax incidence.  A transfer tax has two definitions.  One is a real estate document tax, which is not my purpose here.  Another is consistent with my purpose and it is a general term for a type of tax designed to transfer funds from one class of people to another.  I submit that Social Security taxes have become transfer taxes, but I will elaborate on this in the next post. 

Tax incidence is a term for which class of income bears the tax burden of government.  Many opponents of increasing individual income tax rates argue that people in the high rates pay most of the tax, and that increasing tax rates also increase their tax burden.  This is a tax incidence argument.  Wikepedia has a good discussion on tax incidence.

So much for tax terms.  Now let’s discuss funds.  Most of us have a checking account and a savings account.  Funds are a little bit like this.  Sometimes government sets up a fund to collect funds and put them in their own account.  We call this a fund, except that the fund is associated with laws that say the money can only be used for a designated purpose.  The moneys are then isolated in the funds and reserved.  All interest payments on balances are also returned to the funds.

Okay, one last concept that I find a little tough to summarize, but let’s see what I can I do with it.    It is about investments and annuities.  When we setup a savings account and designate a specific sum to be deducted from our payroll check to be deposited in the account, we notice that over time, the savings earns interest, and the interest earns interest.  This interest compounding effect works in our favor.  It means having more funds on which to retire at 65.  When approaching retirement, we may approach a bank or financial advisor to set up an annuity, which is somewhat like a reverse mortgage.  The bank will arrange for a series of payments from the fund taking into account interest earnings on the remaining balances of principal.  The first payment has more interest that the second payment.  Principal in the first payment is less than the second.  This downtrend in interest and uptrend in principal will continue with each successive payment until the principal runs out.  The Social Security fund works like this.

One final term.  “Gnashing” (pronounced nashing, unless one prefers the Monty Python pronunciation of gah-nashing) is defined as grinding one’s teeth.  It is often used to describe scenes where people are freaking out in mass at some ugly thing.  It is also found in Biblical passages, sometimes associated with beheadings or killings or some such thing.

Now, we are ready for the Republican bashing.  I can see some of them now ….. fearful.  Their teeth are clenched and a few are trembling.  Imagine dark music in the background.  Will it be a gnashing of a bashing? 

Read the next post on “Slightly Right of Center”.  (Dark music swells.)

 

 

Barbara Billingsley

Barbara Billingsley Died last week.  She was 95.  To me, she made a contribution.

She was known for her role of Beaver’s mom in “Leave It to Beaver”.  She was the archetype of the perfect ‘mom’.  She, Jane Wyatt of ‘Fathers Knows Best’, and Harriet Nelson of ‘The Nelsons’ represented this 50’s image.  To sons and daughters of my generation, she was the mom we wanted to have, and to our mothers who had to put up with us, she was the impossible standard.  It was great entertainment for its time.   It was like tapioca pudding, a favorite desert of the 50’s.

She was also known for a very small role on “Airplane”.  She played a passenger who volunteers to help the airline stewardess to communicate with two passengers who only spoke ‘jive’.   Imagine a perfect mom with the 50’s image breaking the mold and reaching across to others of a different culture, helping the situation, and encouraging us to not just laugh but also to reach across ourselves.

The world changes, and we keep up.

Of course, I still like tapioca pudding.

Democracy, Reason, and Listening

In the previous post, I noted how a politician on the right was deemed by the a journalist on the left as ignorant of the issues, and I noted how a leader on the left appears, in my opinion, to be ignoring relevant facts in revisiting policy on the major issue of our time.   I concluded with the question of whether our politics has evolved to a situation where we must choose politicians based on the facts they consider relevant, and those that they ignore in their reasoning process.

Reason requires the same set of facts.  For me to reason based on these facts and you to reason on those facts is similar to me dismissing you and you dismissing me.  Neither of us likes to be depersonalized.

People may weigh some facts over others in the reasoning process.  Why a particular fact is not important and others are is part of the debate.  The other person deserves to know.  If we all commit to reason, fairly and legitimately, then we can survive as a democracy.

In order to discuss the same set of facts, we must listen for them – to each other for them.  So, for that period of time we should stop talking and listen.  Second, we must acknowledge what we heard.

For those who are ignorant of the issues, education is the answer.

For those who insist on building policy without acknowledging the facts advocated by the other side, then that is what elections are all about.   The public will decide which set of facts will prevail.

I was concerned when I wrote the previous post, but I was depressed when I heard this week of a Republican Congressional candidate in Texas who said that violent revolution was not off the table.  I hope he looses.  I hope he doesn’t get a vote, even his own.

President Obama and Christine O’Donnell

What do two politicians who are so diametrically different have in common? They both have significant intellectual blind spots. 

The New York Times reported that President Obama said that there is no such thing as shovel ready projects in a recent interview in the New York Times.  Shovel ready projects were one of three major pieces of the stimulus package that the Congress passed early in 2009.   The other two are limited term tax cuts, which fail to be effective about two quarters after they expire, and payments to states to maintain existing government workers, which is not stimulus. 

Of the three parts of the stimulus, the one that had some potential to stimulate was the shovel ready projects part.  Had it been known at the time the stimulus package was being considered that there are no shovel ready projects, then we as a nation would have looked for other ways to work ourselves out of the recession. The skeptical observer would cite something called a ‘time lag’ as the period between the point in time when a economic policy is adopted and the time it’s effects are felt.  Skeptics predicted that the time lag would be years to feel the effects of the stimulus because they doubted that there were shovel ready projects.  Now, we learn that the skeptics were right.

The statement invited a chorus of criticism.  Some commentators said he lied.   Others, like Derek Thompson of the Atlantic Monthly, said he is intellectually dishonest.  I come down close to the latter, though with a nuance, because intellectual dishonesty can be seen as someone not being honest with himself.  It is not a criticism of character, but rather one of a person’s ability to reason, especially in the area of self-evaluation.  Sometimes we lie to ourselves.  I don’t believe that Obama knew that his policy choice was ineffective and misrepresented the situation, but that leaves the situation where he may not have the good sense to question the major assumptions on which his policies are built.  It makes him look incompetent, or worse.   Had he doubted the realism of a shovel ready project in February 2009, his administration could have drafted something that could have worked.

Andrew Sullivan, a liberal blogger, likes the fact that the President is smart and brings his intellectual honesty to the task of policy making.  Why did Obama fail at it when it comes to the economy?  From the Times interview Obama still believes he made the right choice and that those un-shovel ready projects will ultimately work us out of our bad economic times.  The current state of the economy is sufficient evidence that his approach on the economy is wrong, and his apparent desire is to continue along a discredited path. 

The President went to Massachusetts to campaign for its Governor and proclaimed that Republicans stood by while he tried to fix the economy insisting that he was doing it wrong.  If events have proven the President wrong and his opponents right then why not reexamine the policy and set a new course consistent with good policy making?  We are paying the price for the President trying to prove that his approach to fixing the economy actually works in spite of the evidence.

Joel Klein wrote a column in Time about Delaware Senate candidate Christine O’Donnell and questioned why we, the public, seem fascinated with candidates like her, who are ignorant of the issues.  When asked, she could not name a single Supreme Court case with which she disagreed.  We like “Mr. Smith Goes to Washington”.  We, the public, like candidates who are like us.   But why must these candidates be ignorant of the issues?   Good point.  I agree.

Ignoring the facts should also be avoided.  To persist on a policy approach that is intellectually bankrupt when people are hurting may or may not be intellectually dishonest, but it is grossly inadequate.  Change is required.

What do these two politicians have in common?  They have major intellectual blind spots.  They cannot see what others see.

So, are we left with a choice between politicians who ignore certain relevant facts versus others who ignore different but relevant facts?   

More On TARP, GM, and the Stimulus

Here are a some updates on a few of my favorite topics. 

The White House has announced recent studies indicating that TARP will cost less than anticipated, specifically, no more than $50 billion, and perhaps zero when all the repayments are in.  Even if it turns out that TARP costs $50 billion after the final accounting, I still think TARP was worth it considering the personal havoc it avoided.  Yes, it was flawed and, yes, it was not executed as planned, but it protected us from a very ugly downside.  Banks are very different from normal businesses.  They have our money.  They play with our money.  We need to remember that.

On another matter, the White House announced that taxpayer losses from the auto bailouts are estimated at $17 billion.  In fact, because the new GM has not yet reached its goal of 19% market share, some speculate that the IPO may not happen, which will leave the American taxpayer holding the bag for a while longer.  Car companies are different from banks.  They don’t have our money, or at least they are not supposed to.

Finally, President Obama told the New York Times this week that there is no such thing as a shovel ready project, a major component of the stimulus package.  Well, this has opened a Pandora’s box of criticism.  The next post will examine the mess that the President has unleashed. 

(Tease?   That’s what my wife said.  She wanted some meat on this last subject, somewhat like the old Wendy’s commercial, “Where’s the beef?”  Well, it’s coming.  I actually started writing the stimulus part of this post and it just grew and grew and grew.  I read a little and wrote a little and suddenly it was bigger and being bigger it deserved its own post.  Okay?.........Remember when Walter Mondale tried to use the Wendy’s beef line in a joke during his 1984 debate with President Reagan?   Didn’t go anywhere then either….)

“What’s the News Across The Nation?”

“We have got the Information!”  Well, this is a little homage to Laugh-In, my generation’s SNL Weekend Update.

In the past week we have heard that House Speaker Nancy Pelosi announced that unemployment and food stamps increase job creation.  The problem is that these payments are known as transfer payments and are not counted in the calculation of our national GDP.  Her statement got an almost universally negative reaction.  Normally, this type of statement would go unnoticed, but it came from a person in power who was a major player in the creation of the stimulus package. 

Richard Blumenthal, the Democratic nominee for the U.S. Senate from Connecticut took almost two minutes in a debate to explain how a job is made, and the reviews are practically unanimous that he got the answer wrong. 

Now even though these two news items are about Democrats, the Republicans have nothing to brag about either.  I am planning a few choice bashings of their “misunderstandings” in future posts.  There will be balance.

The point is the same one I made in a previous post.  Politicians who are making economic policy in this country seem not to have a sufficient knowledge of economics to pass an introductory course in the subject.  Quiz them in finance, same result.  And we wonder why we are in the mess we are in.

My second reaction to Richard Blumenthal’s inability to explain how a job is created is that it is obvious to me that he was never unemployed.  He appears never to have gone through the experience, and had he done so, he probably would have found himself in a church or a community center that sponsored support groups for people looking for work.  The first group lecture is why a job is made.  The explanation is that employers create so much demand for products and services that they create jobs to do work that they cannot do themselves.  I know, because I have heard the lecture. 

How can he feel the pain of people who ARE out of work when he was born economically secure?  I mean how can he really identify with people who have had to stand in line to file for unemployment?  It is an intensively leveling experience.  I met a senior defense engineer and a construction worker in the same line.  There were men and women, people in suits and people in jeans, and people of all races and ages and backgrounds.  The pride of a job flows out of you in the line no matter who you are. 

They were great laughs, Dan and Dick, …… George too.  

What if David Stockman is Right?

Okay, the David Stockman interview mentioned in the previous post wasn’t pretty.  It depressed me.

I can’t believe I am writing this.  I need to entice readers into looking at what he says.  Yes, he says very important things.  Yes, there are warnings that should be taken seriously.  But wow!   Talk about speaking loudly and carrying a toothpick.

Here are just a few of his observations.

Over the past 40 years, we have had only 2 years in which we had a surplus.  That is 38 years of adding to the National debt.

If we elect a Republican Congress, we will have 2 years of gridlock with a split White House and Congress.  Nothing will get done, including deficit reduction.  Once we can be in a position to reduce the debt, perhaps as early as 2012, we will have added an additional $16 trillion in total debt with state and local debt added in.  That will surpass the nation’s GDP.

After 40 years of deficit spending, we no longer have the balance sheet to support the budget cuts that Republicans want to extend.  There is a 10% gap between revenue and expenditures in the National budget, and Republicans are “faking it” when it comes to budget cuts, and that means raising taxes.  When there is no will to cut spending, then raising taxes must be used to balance the budget.

The recovery is over.   The news flash is that we had a short recovery and we are now in a new normal of slow 1% to 2% growth with 9%, perhaps 10%, unemployment for years.  (See, I told you he was depressing.)

This is a bad environment to work on the deficit problem but we can’t wait.  We must start now.   We have excessive debt at all levels, and we must de-lever at all levels, including our personal individual debt.

He was asked about going back on the gold standard.  Before the Nixon Presidency, the dollar was tied to gold before Nixon let it float.  Stockman did not advocate returning to it, though he did advocate getting positive in our current accounts internationally.  Hmmmm….sounds like a future post on this subject.

I had to turn it off.

But if David Stockman is right, what should we be thinking about?  First, we have a long way to go to get into a growth economy.  Second, deficit reduction will be tough.  Third, we are so over leveraged with debt that we can no longer stimulate the economy through debt.

Stimulus programs don’t work, but tax cuts may not work either?  Well then, what will?

David Stockman is Coming! David Stockman is Coming!

I saw David Stockman being interviewed the other day.  Well, like the rest of us, he has aged.

For those who don’t remember, Stockman was a Congressman when President Reagan tagged him to be his first Director of the Office of Management and Budget.  Stockman was impressive.  He knew the Federal Budget inside and out.  He would identify budget cuts better than any OMB Director before or since.  His influence in the Reagan Administration fell in December 1981 when an article was published in the Atlantic Monthly in which he was quoted as saying "Kemp-Roth [Reagan's 1981 tax cut] was always a Trojan horse to bring down the top rate.... It's kind of hard to sell 'trickle down.' So the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."

Yes, we owe the term “trickle-down economics” to David Stockman.  But what does this really mean?  Is there a rational approach that allocates resources efficiently?   Not in the sense that Stockman was implying.   I am not aware of a government centralized resource allocation mechanism that works.   Government is not designed around a win-win approach based on individuals advocating their self-interest economically.  By the way, the top tax rate when Reagan took office was 70%.

Regardless of which tax theory one advocates and as a future post will suggest, the first question is to determine what’s fair.

TARP and the Church Lady

Will I harp on TARP again?  Well, I will….one last time…….at least for now.  But this time, let’s have some fun with it.  Imagine the Church Lady from Saturday Night Live.  What would she say about TARP?

First, let’s imagine that the Church Lady has a $200,000 house with an $180,000 mortgage right before the fall of 2008.  This means that she has $20,000 in equity.  She has no credit card debt (I mean, would anyone think that the Church Lady would have credit cards?), and she has $50,000 in savings.   So, her total assets are $250,000 from the house and the savings account.  Weighed against a liability of $180,000 for the mortgage, her personal net fortune is $70,000. 

Most readers will probably recognize the basic accounting relationship of assets equal’s liabilities and equities here.  This is the basic balance sheet formula.

Imagine also that during the crisis, the Church Lady’s neighbor had an identical house with a higher mortgage.  Both houses went down in value by $50,000, except that her neighbor defaulted on her mortgage, and the bank had to write off the mortgage as well as those of many others.  Well, the balance sheet of the bank went from a positive equity position to a negative equity position.  It had more liabilities than assets.   

Though the Church Lady has lost $50,000 in net equity, she continues to support the house.  The bank, however, is not as fortunate.  The government through the Federal Reserve Board has set a minimum reserve level, which the bank can no longer meet.  The bank goes bankrupt.  It can no longer give loans to people who want houses or businesses that employ people who buy houses.  Other banks raise loan requirements because they have bad loans on their books and they cannot afford acquiring any more.

The government passes a law called the Toxic Assets Relief Program in which the government will buy the banks’ bad loans.  The bad assets go away in exchange for cash, and miraculously, the banks balance sheet is healthy.  The banks can lend money again. 

The Treasury changes its mind.  It buys stock in the banks.  The balance sheets are better, but not as healthy and credit is still difficult to come by. 

What would the Church Lady say?  Well, first, she would say that the Congressmen and Senators who voted for the original program were lied to.  She would note that despite the lying, the Treasury department did make money on the bank investments.  She also noted that despite the change in plans, banks closures did slow and that gradually, people began to get the credit they deserved.  The devastating losses decelerated, and the bottom was within reach.  This was TARP. 

To answer the question, I personally believe the Church Lady would have refrained from ranting at the program and the Congressmen and Senators who voted for it.  Something had to be done.  The destructive cascade had to stop.  Their motives were in the right place.    Execution?  Well…  We all can improve that.

However, she would note one particularly bad government bailout.  Oh, how would she say it?  Maybe something like “Who, after being bought by the Federal government, sold the government assets, assets purchased with taxpayer money, at a loss to corporate investors, some from China who demanded it to share its technological advancements?  Who could it be?  Who could it?  Could it be …… General Motors?”

Okay…I bashed GM again.  I couldn’t resist.

TARP! The Sequel?

The period from late 2008 through 2009 was frightening.  In the previous post I talked about small investment firms that went bankrupt due to the fall of Lehman.  But genuine fear ran through me when a relative’s business went under in early 2009, again, as an after effect of the failure of the investment banks from the previous fall.

Let’s call this relative Jane, who is an MBA with a great track record.  She wanted to develop a small restaurant idea into a business.  She developed a business plan, searched for the right location, developed a theme, leased space, retained an architect, paid attention to every detail from food to drink to ambience, AND the result was spectacular.  Every time my wife and I visited we were awed at the accomplishment. 

So Jane got up early every day and got home late every night.  She always looked tired, as well as proud, deservingly proud. 

And then one day we got an email saying that Jane was closing her restaurant.  She could no longer get credit.  The standards had changed.  The effects of the investment crisis cascaded down again.

How many times would this story have repeated itself across this country without TARP?

So, You Want to Vote Out Politicians Who Voted for TARP?

I observed some interesting behaviors in the investment industry following the collapse of Lehman Brothers in September 2008.  There are many small investment firms that went out of business as a result of the fall.

Investment firms often leverage funds. Downside risk can be mitigated by a series of investments that go up as others go down and vice-versa. When Lehman Brothers went bankrupt they denied these firms a source of funds for leveraging.  As Lehman went under, calls against all of its investments funds drew down the values of their funds to fire sale levels.  Hence, a number for firms went under through no fault of their own.

Imagine working all of your life in a small investment firm.  You put all of your capital in the firm.  You work long hours.  You don’t make the megabucks of the big firms.  You make enough like everybody else, and whatever good fortune you get goes back in your firm.  And suddenly, it is all gone.  Your life’s work gone over night.  And it was not your fault.

Had TARP or something like it been in place when Lehman went under then the cascade would have been prevented and many of these small firms could have been saved.

The conclusion is that TARP was intended to provide a firewall around some of the innocent investors who did nothing wrong.  These are the people who responsibly managed the retirements of lots of small investors whose retirements are now either gone or severely impaired.  The impact could have been disastrous for so many.

For the Tea Party to advocate that voting for TARP was a wrong idea – well – find someone who was washed out by the Lehman collapse and make your case.   Remember that real people got hurt.  Now imagine that the situation of many of these small firms is replicated to the large firms because TARP was not available, and think about how many jobs, jobs like yours and mine, are really dependent on the success of these larger firms who received TARP.  Now think about risk and whose job you are willing to risk by not voting for TARP. 

To me, TARP was a necessary evil.  The recession would have become a depression without it.  I don’t blame a politician who held his or her nose while voting for it.

The Smartest Guy in the Room

Wait!  There is one explanation to the deeply critical question raised in a previous blog of how could those smart people have failed us?

They can’t forecast!  They can’t forecast the economy!

At least that is what Nassim Nicholas Taleb says.  He is one of those financial engineers that could have been an economist.  He is not just a financial engineer, but he is a teacher of financial engineers at New York University.  So, he is the smartest guy in the room, at least today.

He says that the investment crisis could have been forecasted.  He also says that the Obama stimulus made things worse, and that the proper course of action would have been to pay down debt. 

So, we have administration officials saying that as many as 3 million jobs were helped from the stimulus.  While there is great difficulty finding supporting data to their claims, there is at least one leading financial engineer who says the stimulus hurt the recovery.

Though this dialogue could have been forecasted, there is an ongoing issue here that has been a recurring theme in my blog.  There are those who believe in Keynesian economics that more government spending yields greater overall consumption, and those who take more of a balance sheet view that excessive levels of debt may restrict increased consumption.   We will revisit this tension in future posts.