Tuesday, November 30, 2010

I agree with this assessment

Recognizing I'm a majority of one, the Wikileaks story actually made me proud of our government, for acting sensibly in the area of international diplomacy. Sometimes when you look under a rock you find.....reasonableness.

Thursday, November 25, 2010

And Then There Were None*

*A movie from the Agatha Christie story

iscal drain in Spain,
Falls mainly on the brain.

Conservatives are prone to give very short shrift,
To the concept we know as the paradox of thrift.

The middle class had their day, before the revolution.
But income inequality got in their way, which spoiled their constitution.

Instead of blowing hot air the big bad wolf foreclosed on the house with a huff and a puff,
By the hair of his chinny chin chin, thereafter life for the little pig became very rough.

Without the FDIC,
A penny saved is a penny burned.

Down payment is dandy.
But leverage is quicker.

I do not like greenbacks paid to Uncle Sam.
I'm for tax reduction, Sam I Am.

Yankee Doodle went for peace and paid a lot of moan-ee.
Too bad he didn't know the Taliban leader, who turned out to be a phony.

Hi, said the multi-billionaire fat cat, I'll tell you the reason that.
The reason the country's lurched to the right, is from our stealthy funding that gave all a good fright.

There was an old lady who swallowed a horse,
And of reading the Times Op-Ed, she's had a divorce.

* * * * *

Of bad news, and giving thanks.
Today is not the day for elaborate pranks.
I'd like to wish all my readers good cheer.
By offering up lame rhymes instead of spreading more fear.

Happy Holidays.

Monday, November 22, 2010

Lessons from Walden

I spent a good chunk of yesterday listening to classical music while finishing up Walden, both furnished by my iPad. People have commented about it's weight, which can give your wrist a workout (probably one that is unintended). I found that if you can sit in a a comfortable chair with your legs propped up, then your lap makes for an ideal book holder and the "getting immersed in the reading" can take over.

The passage quoted below offers some timely advice for us all. People today would benefit from reading the chapter that is the source of this passage, Spring, as well as the Conclusion.

Tuesday, November 16, 2010

Loopholes, Progressivity, and Lines in the Sand

The first John Grisham novel I read was The Firm, a book that enthralled me. I became fascinated with the genre of page turner novels, because I read it on an airplane with a sleeping infant in my arms. That book was the enabler that allowed the entire flight to pass uninterrupted. Since travel with the kids was a real schlepp, the experience reading The Firm is one I'll always remember.

The Firm is a story of greed run amuck. In a scene intended to presage the rest of the story, Avery and Mitch fly to the Cayman Islands to meet with Avery's client, Sonny Capps. Seeming a real sleaze, Capps' goal in life appears to be shielding his massive income from taxation. He is willing to pay the law firm big bucks to shave a few percentage points off his marginal tax rate. Mitch doesn't seem to belong at the meeting. Just out of law school, he hasn't yet played with the big boys. But he is very bright, just as brash, and badly wanting to prove himself. From out of left field he pulls some very obscure bit of the tax code that will be forthcoming later in the year, something that will save Capps a bundle. Suddenly Capps tone changes. Now he is grateful. Afterward, Avery tells Mitch it was a job well done and that he deserved a little R&R as reward.

And that's the part of the story where the transactions were all legal.

The original copyright on The Firm dates from 1991. Bush 1 was President. The Democrats were still the majority party in Congress.

Most if not all of Grisham's novels follow a certain trajectory. A talented lawyer has a fall from grace, temptation getting to the better part of his nature. He gets into a stupor, not seeing a way out. Out of his desperation, with his ingenuity reignited, he finds a way toward salvation. His better self emerges anew. The law is not simply the road to perdition. It can be the path toward betterment, of self and society.

The Tea Party seems to have read only a bit of Grisham and then garbled the rest of the story. They've got the part about the fall from grace right. But their hero on the path to redemption appears to be Sonny Capps.

* * * * *

People are trying to make heads and tails of the early proposal by the Chairmen of President Obama's Debt Commission. There's been much written about it the past few days. I will offer my own opinion below, but before I do I want to make a point from the parable above.

Milton Friedman taught us "there is no free lunch," an important lesson to learn. Human nature what it is, many of us search for the free lunch nonetheless. Dire Straits wrote a song about it. ESPN has a Web site devoted to poker, and does extensive television programming of the World Series of Poker. And, as I've already relayed, there are characters in fiction like Sonny Capps. There may be no free lunch, but all of us can pass a buck.

Economists call the phenomenon rent seeking. It is socially deleterious. The effort put into it doesn't make the pie bigger. It only puts a larger share into the hungriest mouth, while the effort itself burns up socially useful resources.

We learned from the financial crisis that complexity can be the breeding ground for rent seeking, and the social destruction that results can be enormous. For the financial crisis the culprits were various derivatives, credit default swaps and the like. The U.S. tax code is likewise incredibly complex. It encourages rent seeking behavior by having people look for tax shelters or tax dodges. It would be much more straightforward to get rid of all the loopholes and therefore have lower tax rates.

In a NY Times Op-Ed today, Glenn Hubbard has a piece that I largely agree with supporting this point. On Friday in his column, Paul Krugman ripped the proposal, mainly for its lack of progressivity - the rich being the primary beneficiaries of the lower rates proposed. That got me wondering whether Krugman is right or if there are enough loopholes in the tax code where in fact the rich, and especially the super rich, have lower average tax rates than the rest of us.

On Sunday Frank Rich had an interesting column on this very theme. Rich says that share of national income now going to the top 1% of the population is 23.5%, which is bigger than the federal government. And based on the point made in The Black Swan, the skewness in distribution gets even greater as you go higher in income, meaning the top 0.1% get much more than 2.35% of the income. Rich bases much of his argument on the new book, Winner-Take-All Politics. The tax code is obviously not the only way such politics manifests. But my sense of it is that Krugman is wrong here, because the existing system is not progressive at all, when starting at very high incomes. If that is a right, a straight flat tax would be fairer than what we have now.

Republicans argue for limited government, putting their trust in "the market" to generate wealth and economic growth. But the Republican rhetoric doesn't discriminate between real wealth creation and rent seeking. In a world where the latter is fair game, who among the rich can afford not to be Sonny Capps? And when that happens doesn't it suck the lifeblood among those engaged in the former.

This seems to be where we are now. If all of society is one big Grisham story, where collectively we are nowhere near as clever as a Grisham protagonist, might we never find the way out?

Friday, November 12, 2010

On Disagreement*

Reasonable people can.
Unreasonable people do.

*With apologies to G.B. Shaw.

Wednesday, November 10, 2010

Not Just Posturing About The Deficit

It wasn't clear from this what non Social Security spending would be cut, but I liked the tone of this. The document is coming at the right time.

Tuesday, November 09, 2010

More Music My Father Played

This time it's a collection of standards from Pete Seeger.

Music My Father Played For Us

This is the Burl Ives album, The Wayfaring Stranger. We listened to it when we were kids. When my parents sold their house in New York, I took the vinyl for that and a bunch of other albums. Now those sitting somewhere in our basement. I'm very glad this is online at archive.org. I don't believe this respects copyright law. Burl Ives hasn't been dead for 70 years. But it seems right that his music should now be available this way. There can't be much of a market for it.

It is beautiful to listen to.

Friday, November 05, 2010

One, Two, Three Zing....No!

"One, two, three zing" was an expression my dad taught us. It meant everything would be done quickly and then it's over. It had it's place, but it was certainly not meant as a way of life. We seem to have made it so. In economics, we might call it HRTP (high rate of time preference). Impatience is not a virtue.

We need a rhetoric for patience, an easy slogan to signify it, and then an in depth discussion of what it means. Yesterday, I indulged my post-election blues with reading and viewing, some serendipitous, some I actively searched for, that has me with at least a framing of what this discussion should be about. Below, I will embed several of these references and give a brief discussion of them to show how they should fit into the larger conversation. Oh, on the slogan, that's simple - Invest in America. If I were a politician now, instead of moping I'd begin with a campaign where that slogan became the unifying them.

Let's begin with this interview Charlie Rose had with Felix Rohatyn about 18 months ago, mainly to promote his book, Bold Endeavors. (And here is an interview Rohatyn had with Deborah Solomon, where some of the same points come up.)

There are many interesting points in this discussion. I want to zero in on just a few of these. One is a rhetorical issue. Now in discussing government spending, there is really no distinction made between investment spending, which Rohatyn argues we need more of, and consumption spending, which may very well need to be cut. Another is a leadership issue. Really big capital investment projects - the Erie Canal, for example - require leadership and vision to enact. Apart from Rohatyn, who is outside the political sphere, there doesn't seem to be an ongoing discussion of the type of investment he is talking about. That leadership needs to emerge. All the political rhetoric now is about doing what the American people want. So a grass roots effort centered around Invest in America could pay dividends. Third, there is the question of how to finance this investment. Rohatyn has the concept of a National Infrastructure Bank, whose job it would be to match funds with worthy projects, try to eliminate or dramatically reduce pork barrel projects, how it does this I don't understand so I will read his book, and keep an ample ongoing flow of funds into this sort of investment. Bringing this issue back into a world where I know more of the detail, my Campus, there is a great temptation to defer this sort of spending in lieu of other spending that seems sexier and will produce more immediate results. So we have a huge deferred maintenance burden. I think that translates quite well on the national level. So there is a need to take these investment decisions outside the realm of the other spending that Congress appropriates. That seems to me a huge issue.

Let me turn next to this book review by Malcolm Gladwell of Steven Rattner's book about the bailout of the auto companies.

Gladwell makes an argument in defense of the GM CEO who got ousted, Rick Wagoner. In so doing, Gladwell makes several arguments some of which parallel Rohatyn. First, if you have a troubled entity, for Rohatyn that was NYC in the early 1970s, for Wagoner that was GM at the close of the 1990s, then you need to enlist all parties who are stakeholders and get them jointly to make concessions in order to help ensure viability of the entity. Wagoner apparently was able to negotiate with the UAW for wage concessions and get retirees of GM to agree to modifications on their pensions. Second you really need to improve both productivity and quality of the product. But that takes investment. It doesn't happen overnight. Gladwell argues that when the auto company CEOs came to Congress in 2008, GM had turned the corner on these issues and was really a top flight competitor at that point. Penetration in China is the main evidence he gives to prove the point. Third, balance sheets don't tell the whole story. Rohatyn talks about this too. Balance sheets give too narrow a focus of value. Financial engineers, like Rattner, focus narrowly on the balance sheet. So they may get things wrong as a result. Senator Shelby of Alabama comes off very poorly in Gladwell's piece, because he doesn't seem to understand this point at all, though to be fair to Shelby, until reading Gladwell's piece I didn't understand that GM was producing good product now and had an optimistic future if it could get the financing. I was still thinking of it as that 1990s company.

I want to talk about one more interview. This from Charlie Rose a couple of nights ago with Richard Berner of Morgan Stanley and Nobel prize winner Joseph Stiglitz. (Sorry, they didn't supply embed code for this segment.) The focus was the Fed's new policy of buying up some longer term Government debt in an effort to stimulate the economy by lowering long term interest rates. They do overlap with the other pieces somewhat on the Invest in America themes. But they have some other stuff too that is highly relevant. They cast the issue in an international context, where the Fed policy will be seen as weakening the dollar and perceived as a generally unfriendly act by export oriented nations unless it is also accompanied by substantial fiscal stimulus. So this could ignite a trade war and indeed fundamentally alter the global monetary system unless other steps are taken, steps that seem quite unlikely in the current political environment. Then there was a rather sobering discussion of the mortgage default issue that will likely remain with us for some time and act as substantial damper on economic growth over the next couple of years. I want to talk about that as I understand it.

Many people who have not made mortgage payments for a year or more are still in their homes. Those loans are in the "toxic" category. The home values are no longer anywhere near where they were in 2006 or so. There are two fundamental issues here, one that will command all our attention but I believe is not as important. The other is the key issue, but we're not talking about it very much. The first is who will take the capital loss - the banks or tax payers. I said this issue is less important but it is blocking the discussion of the other issue, which is why it remains fundamental. The more important issue is this. If the home were "correctly" valued in the current market and refinanced, should their current occupants remain in them? The answer is probably yes if they could readily make payment on the new loans and no otherwise. So the process that would be desirable is to first renegotiate the loans, offer them to current occupants to see if they agree to those terms and only foreclose when that outcome doesn't occur. But we're not getting that. Instead we're getting this backlash about the paperwork, which is not really helping because it too is blocking a sensible resolution of the issue.

Now let's be blunt here about what is actually going on with the current process. The banks are clearly trying to pass the capital losses to the tax payers. Having done so, then foreclosure and resale of the properties is income for them. But that process won't necessarily get to anything like a correct value, because the banks won't want to hold foreclosed homes on their balance sheets. Buyers of such homes will be there shopping for bargains. This issue too needs a lot more discussion. Instead we are getting venting only and no progress.

In order to get to Invest in America, I believe we'll have to relive the past - quite a bit. There will be some self-flagellation in that, so it won't be fun. But having gone through the exercise we'll start to believe that progress is possible. Now it seems only destruction will be the outcome.

Invest in America.