Monday, March 30, 2009

The President's Remarks on the Auto Industry

The President's remarks on the auto industry were amazing (even without the annotations included below). There represent an arrogance of hope that is should provoke outrage. What are the new standards from which he operates? What particular expertise has he demonstrated in improving any business? Why should the CEO of GM go and not the head of the UAW who is at least as culpable as the CEO in getting GM to where it is today? Bush was criticized (in part correctly) because his strategy in Iraq had "no exit strategy" - what is the exit strategy here? How should we judge whether the President is acting in the national interest or by fiat? Here is his speech with some annotations -

One of the challenges we have confronted from the beginning of this administration is what to do about the state of our struggling auto industry.Is the Auto industry so critical to our future that the government is obligated to do something? In recent months, my auto task force has been reviewing requests by General Motors and Chrysler for additional government assistance as well as plans developed by each of these companies to restructure, modernize, and make themselves more competitive. Our evaluation is now complete. But before I lay out what needs to be done going forward, I want to say a few words about where we are, and what led us to this point.

It will come as a surprise to no one that some of the Americans who have suffered most during this recession have been those in the auto industry and those working for companies that support it. Over the past year, our auto industry has shed over 400,000 jobs, not only at the plants that produce cars but at the businesses that produce the parts that go into them, and the dealers that sell and repair them. More than one in 10 Michigan residents is out of work -- the most of any state. And towns and cities across the great Midwest have watched unemployment climb higher than it's been in decades. Is the unemployment in the Midwest only related to declines in the auto industry - the numbers say no/ The Big 3 share of the total US market went from 70% in 1998 to 53% in 2008. That is a long term problem. At the same time the percentage share in the economy of manufacturing continues to fall. Our economy is changing - does the President propose to try to hold on to share?

The pain being felt in places that rely on our auto industry is not the fault of our workers, who labor tirelessly and desperately want to see their companies succeed. Although most estimates suggest that the legacy costs caused by prior labor agreements increases the costs of American vehicles by a lot. And it is not the fault of all the families and communities that supported manufacturing plants throughout the generations. Rather, it is a failure of leadership -- from Washington to Detroit -- that led our auto companies to this point. Washington has leadership for the auto industry?

Year after year, decade after decade, we have seen problems papered-over and tough choices kicked down the road, even as foreign competitors outpaced us. Well, we have reached the end of that road. And we, as a nation, cannot afford to shirk responsibility any longer.We can't afford my deficits either. Now is the time to confront our problems head-on and do what's necessary to solve them.

We cannot, we must not, and we will not let our auto industry simply vanish. This industry is, like no other, an emblem of the American spirit; a once and future symbol of America's success. It is what helped build the middle class and sustained it throughout the 20th century. It is a source of deep pride for the generations of American workers whose hard work and imagination led to some of the finest cars the world has ever known. It is a pillar of our economy that has held up the dreams of millions of our people. But we also cannot continue to excuse poor decisions. And we cannot make the survival of our auto industry dependent on an unending flow of tax dollars. These companies -- and this industry -- must ultimately stand on their own, not as wards of the state. But with my involvement in the industry, and my demands that the CEO of GM resign, I want to make sure that the companies remain wards.

That is why the federal government provided General Motors and Chrysler with emergency loans to prevent their sudden collapse at the end of last year -- only on the condition that they would develop plans to restructure. In keeping with that agreement, each company has submitted a plan to restructure. But after careful analysis, we have determined that neither goes far enough to warrant the substantial new investments that these companies are requesting. And so today, I am announcing that my administration will offer GM and Chrysler a limited period of time to work with creditors, unions, and other stakeholders to fundamentally restructure in a way that would justify an investment of additional tax dollars; a period during which they must produce plans that would give the American people confidence in their long-term prospects for success. Admittedly I have no experience in any industrial work. The federal government, when it runs things, like the postal service and Amtrak, has not done a good job.

What we are asking is difficult. It will require hard choices by companies. It will require unions and workers who have already made painful concessions to make even more. It will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts. Only then can we ask American taxpayers who have already put up so much of their hard-earned money to once more invest in a revitalized auto industry. But I am confident that if we are each willing to do our part, then this restructuring, as painful as it will be in the short-term, will mark not an end, but a new beginning for a great American industry; an auto industry that is once more out-competing the world; a 21st century auto industry that is creating new jobs, unleashing new prosperity, and manufacturing the fuel-efficient cars and trucks that will carry us toward an energy independent future. I am absolutely committed to working with Congress and the auto companies to meet one goal: the United States of America will lead the world in building the next generation of clean cars.

No one can deny that our auto industry has made meaningful progress in recent years.Although with the help of government regulations and generous labor burdens they have been impeded from competing with their more nimble competitors. Some of the cars made by American workers are now outperforming the best cars made abroad. In 2008, the North American Car of the Year was a GM. This year, Buick tied for first place as the most reliable car in the world.That is one of the major reasons why I think it is critical to get the CEO of GM to resign. And our companies are investing in breakthrough technologies that hold the promise of new vehicles that will help America end its addiction to foreign oil.

But our auto industry is not moving in the right direction fast enough to succeed. So let me discuss what measures need to be taken by each of the auto companies requesting taxpayer assistance, starting with General Motors. While GM has made a good faith effort to restructure over the past several months, the plan they have put forward is, in its current form, not strong enough. However, after broad consultations with a range of industry experts and financial advisors, I'm confident that GM can rise again, provided that it undergoes a fundamental restructuring. As an initial step, GM is announcing today that Rick Wagoner is stepping aside as Chairman and CEO. This is not meant as a condemnation of Mr. Wagoner, who has devoted his life to this company; rather, it's a recognition that it will take a new vision and new direction to create the GM of the future.We don't want them to get Car of the Year again. In this context, my administration will offer General Motors adequate working capital over the next 60 days. During this time, my team will be working closely with GM to produce a better business plan. They must ask themselves: have they consolidated enough unprofitable brands? Have they cleaned up their balance sheets or are they still saddled with so much debt that they can't make future investments? And above all, have they created a credible model for how to not only survive, but succeed in this competitive global market? Let me be clear: the United States government has no interest or intention of running GM. What we are interested in is giving GM an opportunity to finally make those much-needed changes that will let them emerge from this crisis a stronger and more competitive company.

The situation at Chrysler is more challenging. It is with deep reluctance but also a clear-eyed recognition of the facts that we have determined, after a careful review, that Chrysler needs a partner to remain viable. Recently, Chrysler reached out and found what could be a potential partner -- the international car company Fiat, where the current management team has executed an impressive turnaround. Fiat is prepared to transfer its cutting-edge technology to Chrysler and, after working closely with my team, has committed to building new fuel-efficient cars and engines here in America. We have also secured an agreement that will ensure that Chrysler repays taxpayers for any new investments that are made before Fiat is allowed to take a majority ownership stake in Chrysler. The oddity of the assumptions here are awesome.

Still, such a deal would require an additional investment of tax dollars, and there are a number of hurdles that must be overcome to make it work. I am committed to doing all I can to see if a deal can be struck in a way that upholds the interests of American taxpayers.So I am trying to build the deficit to record levels and to keep those levels for many years in the future. That is why we will give Chrysler and Fiat 30 days to overcome these hurdles and reach a final agreement -- and we will provide Chrysler with adequate capital to continue operating during that time. If they are able to come to a sound agreement that protects American taxpayers, we will consider lending up to $6 billion to help their plan succeed.Gee, one wonders what kind of deal can be negotiated with such a time limit in place. But if they and their stakeholders are unable to reach such an agreement, and in the absence of any other viable partnership, we will not be able to justify investing additional tax dollar to keep Chrysler in business.

While Chrysler and GM are very different companies with very different paths forward, both need a fresh start to implement the restructuring plans they develop. That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger. So if it is good idea in the future - why not now? Now, I know that when people even hear the word "bankruptcy" it can be a bit unsettling, so let me explain what I mean. What I am talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet and onto a path to success; a tool that we can use, even as workers are staying on the job building cars that are being sold. What I am not talking about is a process where a company is broken up, sold off, and no longer exists. And what I am not talking about is having a company stuck in court for years, unable to get out.

It is my hope that the steps I am announcing today will go a long way toward answering many of the questions people may have about the future of GM and Chrysler. But just in case there are still nagging doubts, let me say it as plainly as I can -- if you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired, just like always. Your warrantee will be safe. In fact, it will be safer than it's ever been. Because starting today, the United States government will stand behind your warrantee. Actually Mr. President, it is Warranty. But are there other ways to implement such a plan without putting the taxpayers on the hook?

But we must also recognize that the difficulties facing this industry are due in no small part to the weakness in our economy. Therefore, to support demand for auto sales during this period, I'm directing my team to take several steps. First, we will ensure that Recovery Act funds to purchase government cars go out as quickly as possible and work through the budget process to accelerate other federal fleet purchases as well. Second, we will accelerate our efforts through the Treasury Department's Consumer and Business Lending Initiative. And we are working intensively with the auto finance companies to increase the flow of credit to both consumers and dealers. Third, the IRS is today launching a campaign to alert consumers of a new tax benefit for auto purchases made between Feb. 16 and the end of this year -- if you buy a car anytime this year, you may be able to deduct the cost of any sales and excise taxes. This provision could save families hundreds of dollars and lead to as many as 100,000 new car sales. The other tax provisions I am proposing will diminish those benefits for many taxpayers. Even the proposed benefit requires a choice - if you choose to take the deduction for income taxes, you can't get both.

Finally, several members of Congress have proposed an even more ambitious incentive program to increase car sales while modernizing our auto fleet. Such fleet modernization programs, which provide a generous credit to consumers who turn in old, less fuel efficient cars and purchase cleaner cars have been successful in boosting auto sales in a number of European countries. I want to work with Congress to identify parts of the Recovery Act that could be trimmed to fund such a program, and make it retroactive starting today. The changes that will be proposed won't reduce the deficit but will allow us to rearrange the deck chairs.

Let there be no doubt, it will take an unprecedented effort on all our parts -- from the halls of Congress to the boardroom, from the union hall to the factory floor -- to see the auto industry through these difficult times. But I want every American to know that the path I am laying out today is our best chance to make sure the cars of the future are built where they've always been built -- in Detroit and across the Midwest; to make America's auto industry in the 21st century what it was in the 20th century -- unsurpassed around the world. This path has been chosen after consulting with other governments that are facing this crisis. We have worked closely with the government of Canada on GM and Chrysler, as both companies have extensive operations there. The Canadian government has indicated its support for our approach and will be announcing their specific commitments later today. The Canadian government's record on manufacturing autos is as good as the US government's.

While the steps I am talking about will have an impact on all Americans, some of our fellow citizens will be affected more than any others. I have not mentioned Cap and Trade - of course that will slow down the recovery of the auto industry. And so I'd like to speak directly to all those men and women who work in the auto industry or live in the countless communities that depend on it. Many of you have been going through tough times for longer than you'd care to remember. And I will not pretend the tough times are over. I cannot promise you there isn't more pain to come.The deficits I am proposing in my budget will offer pain for generations to come, even if the auto industry recovers - even more if it does not. But what I can promise you is this -- I will fight for you. You are the reason I am here today. I got my start fighting for working families in the shadows of a shuttered steel plant and I wake up every single day asking myself what I can do to give you and working people all across this country a fair shot at the American dream. Actually I mean the European Socialist's dream.

When a community is struck by a natural disaster, the nation responds to put it back on its feet. While the storm that's hit our auto towns is not a tornado or a hurricane, the damage is clear, and we must respond. That is why today, I am designating a new Director of Recovery for Auto Communities and Workers to cut through red tape and ensure that the full resources of our federal government are leveraged to assist the workers, communities, and regions that rely on our auto industry. Edward Montgomery, a former Deputy Labor Secretary,I wanted to call him Commisar but I thought that might not work at this point. has agreed to serve in this role. Together with Labor Secretary Solis (Whose perfect record with organized labor and zero experience in any economic activity or even any private sector industry) and my Auto Task Force, Ed will help provide support to auto workers and their families, (actually all that support is coming from borrowed money, borrowed from you and your children and grandchildren) and open up opportunity in manufacturing communities. Michigan, Ohio, Indiana, and every other state that relies on the auto industry will have a strong advocate in Ed. He will direct a comprehensive effort that will help lift up the hardest hit areas by using the unprecedented levels of funding available in our Recovery Act and throughout our government to create new manufacturing jobs and new businesses where they are needed most -- in your communities. And he will also lead an effort to identify new initiatives we may need to help support your communities going forward.

These efforts, as essential as they are, will not make everything better overnight. There are jobs that cannot be saved. Except for those government jobs we keep creating. There are plants that will not reopen. And there is little I can say that can subdue the anger or ease the frustration of all whose livelihoods hang in the balance because of failures that weren't theirs.

But there is something I want everyone to remember. Remember that it is precisely in times like these -- in moments of trial, and moments of hardship -- that Americans rediscover the ingenuity and resilience that makes us who we are. That made the auto industry what it once was.Except even in FDRs time we did not have the kind of massive interventions in the industry that we propose now. That sent those first mass-produced cars rolling off assembly lines. That built an arsenal of democracy that propelled America to victory in the Second World War. And that powered our economic prowess in the first American century.

Because I know that if we can tap into that same ingenuity and resilience right now; if we can carry one another through this difficult time and do what must be done; then we will look back and say that this was the moment when America's auto industry shed its old ways, marched into the future, and remade itself, once more, into an engine of opportunity and prosperity, not only in Detroit, and not only in our Midwest, but all across America.

Propositions 1D and 1E

A few years ago we passed to initiatives which increased tax rates on cigarettes and high income tax payers to fund programs for education programs for young children and mental health. Ideally these kinds of set asides would be abolished. Taxes should not be dedicated in the way that these were. What is the relationship between tobacco usage or high income taxpayers and the intended use. First Five has been especially prone to misuse. Almost from its start, the money collected seemed to be a personal plaything of its original sponsor.

That notwithstanding, diverting money from the sources to more general purposes is a pretty good idea. The voters support this one mildly, especially when compared to 1C. These two should pass, I will vote for them.


We saw Duplicity over the weekend - the Julia Roberts/Clive Owen caper movie about industrial spying. The movie has more twists and turns than a winding road but it is thoroughly enjoyable. The four main characters work well together. Be prepared for a couple of surprises and also you will need to pay attention - even at the end. The movie is loads of fun.

Sunday, March 29, 2009

May 19 Election - Proposition 1F

There are six items on the May 19 ballot. The PPIC poll last week offered no good news for the political leadership in the state. The only proposition that is winning is 1F - would prevent pay raises for elected officials if they don't get the budget done by the deadlines in the constitution. That one has 81% of the voters supporting it. The response on that measure suggests that people are grumpy. Over the next couple of days I will offer some comments on the remaining five measures.

1F is a silly idea on its face. But based on the experience of the last few years, I will vote with the vast majority and vote YES.

The PPIC poll had some other interesting developments. For example, it said only 11% of the voters had confidence in the legislature. That is about a third of the level gained by the Governor. 48% of the respondents said they did not like their own Assemblyman or Senator. That is in contrast to the 55% who support their individual member of the House.

Odd in the Extreme

On Sunday night we got the word that GMs CEO had been forced out as a condition to get more federal bailout. From my perspective it is an disturbing development. Chrysler to get their booty were advised they need to merge or form some form of alliance with Fiat. (How apt a name.) There should be little confidence that this new round of dollars will help the companies grow stronger.

The President, who has no experience in the auto industry said there had been “a lot of mismanagement of the auto industry over the past several years,” and declared that more government help would be contingent on the companies’ “willingness to make some pretty drastic changes.” I wonder how he could make that judgment.

In its story the New York Times made a slight error - "Like Mr. Wagoner, Mr. Henderson is a graduate of the Harvard Business School and a lifer at G.M. He started in the finance division in 1884 and later spent nine years in executive positions in South America, Asia and Europe. The Detroit-born son of a G.M. sales manager, Mr. Henderson, 50, became chief financial officer in 2006 and was named president and chief operating officer a year ago."

One wonders about this on many levels. First, with a government that is out of control financially, what kind of expertise have its leaders demonstrated in working through the complexities of a business like the auto industry? Second, although there are some financial experts on the Administration's auto task force, there is very little, if any expertise in the auto industry. Is this primarily a set of questions that investment bankers could solve - or would it be better to get someone with some actual working knowledge of the industry? Third, don't we already have a mechanism for solving these kinds of restructurings - called bankruptcy?

Time on Quantitative Easing

Time has an interesting picture essay on the dangers of printing money. My concern for the Administration's proposals on stimulating the economy is that they are probably past reasonable efforts to help in solving the slowdown (to the extent that the government can help here - and there is considerable evidence that their efforts will not help).

I carried in my wallet for a long time a 100,000 peso note from Mexico which was issued prior to the mid-1990s devaluation. When I got it in Oaxaca, the note was just about to be pulled and was worth the equivalent of 100 pesos - the Mexican government had been forced to drop three zeros from their currency. There were lots of disruptions in the economy at the time including a group called the naked bandits. This was a group in Mexico City that would enter into banks completely naked and rob it. They would shout the government has taken everything else we have.

Rahm Emmauel says it is a bad thing to waste a crisis. That may be true but it is probably a worse thing to misuse one.

Friday, March 27, 2009

Apples to Apples

Microsoft is continuing to try to respond to the "I'm a Mac, Your a PC" ads that came out of Chait Day for Apple. After the Jerry and Bill ads - which most viewers thought were bizarre - this is their second buy in their $100 million campaign. The young lady in the ad seems intent on getting a 17" laptop. From my perspective that seems odd. Ultimately, the first thing I would ask is why 17" - the tradeoffs for getting that size machine are huge - especially in weight. As Walt Mossberg has pointed out frequently in his WSJ technology column - if you want a really large screen unit a desktop machine will pack more power for the price.

The crux of the question here is a real comparison. Admittedly the Apple ads left some things out too. Each one concentrated on a weakness that was understood in the marketplace about Windows based computers. The two characters became icons. This ad seems to concentrate on one of two themes. A) Price or B) Cool.

The price argument is absurd. For under $1000 in a WIndows based laptop you get an inferior processor and video chip. Most people who use a 17" laptop want blazing speed. When you look at the two choices for under $1000 on a site like Best Buy - you find that either Dell or HP supply the unit. The Dell gets pretty lousy customer ratings. The HP gets better. But when you shop feature to feature Apples are very comparable in price. The Apples are consistently rated very high in consumer ratings.

The cool argument is even more off. "I'm not just cool enough to be a Mac person." seems especially odd. It assumes that people will not do the real comparisons and have a very clear idea of why they want a computer. That may be true for some buyers but many want a mix of features and when one goes to the next level the quick comparison just might not make the sale.

Monday, March 23, 2009

Some intriguing thoughts on income disparity

Don Boudreaux did an interesting post on income inequality. In the last two decades there has been an apparent shift in income distribution. The rich seem to be getting richer. But two editorial letters to the WSJ raise questions. In the 1980s two trends began to happen - first, more women went into the professional workforce. Based on marriage statistics those "yuppies" as they were quaintly called then, were more likely to marry each other. At the same time statistics on out of wedlock births began to rise. When you count income statistics based on household income - it would be expected that the apparent divergence would begin to grow.

In a column last week Dan Henninger of the WSJ looked at the President's proposed budget (which is called a New Era of Responsibility) that relies on some calculations by two French economists who make the assumption about income inequalities growing.
Henninger makes the point that this "New Era of Responsibility" should probably be based on some facts and that the "evidence" offered about changes in the economy may not be accurate. A couple of years ago, Elizabeth Warren and Amelia Warren Tyagi did a very provocative book on these challenges. The Two Income Trap looked at the changes wrought by changing work patterns. Many families in the book spend a lot of their income on costs that they might not have born had they stuck to traditional patterns. Neither Warren and her co-author would argue that it would be good to go back to limiting roles for women. But their excellent book raises issues that should be considered. (Warren by the way has some role in the new Administration.)

Ultimately, the point of all of this is to be very careful about the facts. If the perception about income inequality is wrong and we begin to impose significant new taxes on couples who work very hard for their two incomes, we could create some very negative and perverse incentives.

Return on Investment

California, according to a report released by CQ press, ranks 37th in Crime Statistics (that means we are near the top in crimes not near the bottom) compared to New York, New Jersey and Massachusetts (who rank much better). Yet we are close to the top in expenditures for incarceration. In the last five years we have doubled the expenses per capita for costs per inmate. By a conservative estimate we now spend $60,000 per inmate to house our criminals. From my perspective that does not sound like a very good investment - except in the well being of prison guards.

Sunday, March 22, 2009

The Great Buck Howard

When he was young we knew Colin Hanks, he grew up in Sacramento. His dad came to school plays where both of our kids went. I admired his dad because, when you got to talk to him he seemed to be a regular guy. Colin dated my daughter when she was in high school. When Colin was in high school and made a high school type error his dad took his car away. I admired that.

But his acting career to date has been less than spectacular. In the couple of movies I have seen him in - he was a bit wooden. We enjoyed Orange County but his performance was a lot like the character he was playing. But today we saw him in The Great Buck Howard where he plays opposite John Malcovich. He has come of age as an actor. The movie is about a kid who is forced to go to law school by his dad and then chooses to drop out and be a personal assistant to an aging mentalist who plays out of the way bergs. It is a fun story with some very interesting characters. For the first time on the screen Colin seems to be into his role - without pretensions. His dad, Tom, has a couple of cameos in the movie and their interaction is wonderful, not at all forced.

I wonder why this movie did not get a bigger roll out. It is an engaging story with interesting characters. I would recommend it, highly.

Comments on A Big Steaming Pile of Hypocrisy

One of my readers commented on my post on Keith Olbermann. There are two points here. First, is the media treating the Obama plans with the same level of scrutiny that they treated the Bush plans with? From my perspective I think they are not. Bush was roundly criticized for allowing the deficit to grow to 5% of GDP. Obama, has allowed it to more than double that rate - even accounting for the decline in the economy.

At the end of Bush's term the economy had been in recession, according to the National Bureau of Economic Research (the official arbiter of such things) for about a year. He allowed the deficit to grow to 5% of GDP. Olbermann was highly critical of that development. Over the last decade federal revenues as a percentage of GDP have fluctuated at levels between 18% and 20% of GDP, as a result of the recession which Obama inherited that level has dropped to 15% of GDP. But even with that, according to the Congressional Budget Office, the deficit balloons to 13% of GDP - that is twice the level under Bush and Olbermann and other Bush critics are silent on the change. In my book that is hypocrisy.

The second question is the more important. Are the Obama policies going to be helpful in abating the effects of the recession? In this case there are two issues here. Will the cure help? And I am skeptical that it will. Second, will the cure induce significant inflation? I believe there is a considerable risk that the significant increase in borrowing, under both Bush and Obama will have huge long term negative effects on the economy including the possibility for significant inflation similar to the kinds we had in the middle 1970s under President Carter. As Robert Samuelson pointed out in his recent book The Great Inflation and Its Aftermath the policy levers that were used in the early 1980s may not be as available or effective in this cycle. Note: there is considerable debate about whether the inflationary cycle that I worry about will come about. But I believe the current administration (and the last one) has paid inadequate attention to the issue.

Saturday, March 21, 2009

A big steaming pile of hypocrisy

Keith Olbermann made a semi-career on MSNBC criticizing the last administration for its deficits. The Bush presidency did not do a good job of controlling federal spending. At the end of the Bush administration Olbermann had lots of criticism about Bush's profligacy with spending to create a deficit that amounted to 5% of the GDP. In the last several months federal receipts have dropped from their historic levels of 18-20% to 15%. But according to the Congressional Budget Office the first Obama Administration budget is 13% of GDP, even by allowing for the decline in revenues, that is some kind of record. If Olbermann were not a hypocrite he might raise a question about those levels. When do you expect him to do that? Will it before or after hell freezes over?

Is Major Bowes working for the President?

The news this week in a Congressional Budget Office Analysis) that the deficit would reach $1.8 trillion was interesting enough (at 13% of GDP that is TWICE as large as any deficit since the end of WWII). The spread is what should concern us. The dip in the economy has dropped revenues to less than 16% of GDP. But expenditures will be more than 28%. For the last decade revenues have run at a rate of about 18-20% of GDP and our deficit has run a couple of points above that. The Obama people also believe that it would be good for the country, even after the economy recovers, to increase the federal share of our output to about 23% of GDP. One of the other worries about these kinds of projections, is based on prior CBO analyses the estimates contained in the book tend to be a bit more optimistic on revenues and tend to underestimate expenditures than the reality comes out to be.

If the numbers don't bother you then the picture of the cover should. Perhaps these people are not amateurs. If that is true the conclusions are even more scary.

Thursday, March 19, 2009

Lesser Known Parts of the Stimulus Package....

In the last few days there has been a lot of outrage about the bonuses paid at AIG. Part of the grumpiness has been related to the notion that it is a bit odd to offer executives who have either had a hand in driving a company down to the dumps. We now hear that two other welfare queens of the financial mess (who are currently asking for another sixty billion between them) are planning to pay their executives some pretty large bonuses.

"It was critical to retain their most important asset -- their employees -- who are being asked to play a vital role in the nation's economic recovery. As the previous senior management teams left, it would have been catastrophic to lose the next layers down and other highly experienced employees." That is what the guy who was responsible for playing out this dough said - sounds a lot like the people at AIG doesn't it? But these bonuses are going to executives at Fannie Mae and Freddie Mac. Fannie's EVP is getting $611,000 now and then another $429,000 next February on the base of a salary that is $676,000. The company's CFO is getting a total of $1.1 million on a base salary of $385,000 for the same period.

What is interesting is that you don't hear the jackals on the Hill (Dodd and Frank) yammering about that money. Not a peep out of Brad Sherman. Although the proportions are smaller the concept of giving bonuses here is about as appropriate.

Wednesday, March 18, 2009

Computing power - first notions and now

Today, I began to set up a new Mac Pro. (looks like the computer on the right) My new Pro has 6 gigabytes of memory and 2 Terabytes of hard disk space. It could build out much bigger. In the middle 1970s I began to work with computers - I had a simple terminal that allowed me to do email with a slow modem. (I think it may have been 50 baud or 50 characters per second). But it was truly amazing. We were in the middle of a very tough fight on a bill that would have given one institution the opportunity to help students and faculty using the usury laws. We had a determined opponent named Lou Papan who hated the institution, Stanford, and wanted to exercise his unique brand of power in the process. But the bill was complex. It was a great idea but hard to explain.

In the middle of the fight, we had a meeting with a couple of legislators and I needed to get back to the University Counsel and the VP public affairs about what I had learned and more importantly to show them the language that had been proposed which would allow us to negate Papan's opposition. I suppose we could have done all that via fax. But I was blown away by the ability to send all that information on something called Email. I was so amazed that for several years I kept the print out of the messages during that exchange - all printed on a primitive dot matrix printer (thumpety, thumpety, thump).

A few years later, I bought my first computer, an Osborne (the picture on the left). At about the same time I was on the Stanford campus and had a discussion with the director of the Stanford Computer Center. She told me that the total storage space in the network was 2 terabytes - the exact same size as the storage space on the Pro. All I can say is wow!

An interesting analogy

I had lunch today with John Vasconcellos,a retired member of the California Legislature. John has spent a good deal of his career thinking about higher education and is in the process of working on a couple of very interesting projects including ones to bring greater attention to higher education as a public good and a serious attempt to significantly improve opportunities for Latino students to be successful at the university level. One of the things that has intrigued me about him for more than four decades is that he combines a constant set of values with an exploratory ethic to think about new ways of thinking.

John is someone who thinks creatively about a lot of issues. Today, he came up with what I thought was a great line. We were talking about a number of trends in society where the old way of doing things does not seem to work. There are amazing parallels between the problems of trying to form a budget in the state and bailing out the financial industry, for example. John suggested that in this time of transition that we need to provide "hospice care for the old system, while simultaneously providing a mid-wife's role for the one developing."

Monday, March 16, 2009

Keep on Truckin'

For the last several years Mexican truckers have been frustrated by American truckers. Mexican long haul truckers are pretty high tech. When you see them on the roads in Mexico they are equipped with safety and computer equipment that you would never see on American trucks. But the unions in the US have been able to stop NAFTA from being implemented. The Bush Administration equivocated. The Obama administration, after a furious effort by US truckers, allowed a pilot program allowing Mexican truckers over the border to lapse.

Now the Mexicans have said "basta ya!" They imposed some new tariffs on American made products - those tariffs may cost American producers something north of $2.4 billion. The Mexicans had had enough. Free trade, as adopted by NAFTA, should go both ways, but evidently American political interests want to protect unions from alleged competition. Now more than 90 types of US products will be facing tariffs when they are exported to Mexico. Mexico is our third largest trading partner. So all of us will be paying for the narrow interests of a few truckers who don't want to compete.

One would hope that the idiots in Congress will at last admit the real benefits that NAFTA has offered America. But that may be asking for way too much. The xenophobic union thugs don't want to admit that Mexican truckers are well qualified.

A demonstration of Public Choice Theory

About 30 years ago a group of then young economists including Anthony Downs, Thomas Borcherding and Anne Krueger began a line of theory on the economics of bureaucracies. One of their key principles was that as opposed to firms, bureaucracies, in times of economic decline would cut services first and they might be expected in hard times to actually increase their staffing. Public Choice Theory has both a normative and positivist base and a lot of its critics pooh-poohed the notion.

The Sacramento Bee, in a story this morning, found that in this time of monster budget problems for California, that state employment actually went up by about 1% over the last year. That is in spite of the request by the Governor that positions be frozen and that some open positions simply not be filled. The Governor's spokesman, Aaron McLear, commented "The fact that we've been able to maintain the overall size of state government while demand on state services has increased, demonstrates that the governor has been able to make cuts where we can." That sure is not the way a business enterprise would operate.

The Public Choice Theory argues that traditional firms cut their service last and their workforce first in downturns and that because of the incentives in bureaucracies, they cut service first and employees last.

AIG and the Bonuses

The justification over the weekend that AIG was obligated to pay bonuses because of a contract is nuts. AIG is bankrupt. The American taxpayers have kept it afloat. Bonus agreements are subordinated creditors. They get paid way down the list. The current leadership at AIG should understand that, if nothing else.

Paradoxical Heroes

Today is James Madison's birthday. Among our founders he is an enigma. He was the author, for the most part, of the Constitution. Wrote stunningly in the Federalist about the scope and role of government. Yet, he was only a middling president. He grew up as a scrawny kid, complained constantly about various conditions, yet for his times lived a very long life. He is often, among the founders, forgotten. He was arguably Princeton's first graduate student under the tutelage of Scottish Enlightenment philosopher John Witherspoon. Before the Constitutional Convention, he went to the grandest library in the US at the time (in Jefferson's home) and did a six month stint studying the great works on government.

His life, in my mind, was divided into two chapters. The first as a young political intellectual who was the guiding force behind our Constitutional system. The second half of his life was after he was president, where he became a senior statesman. He wrote extensively on a variety of subjects.

When my daughter was thinking about college, we looked at William and Mary and so I drug her to Montpelier, which was his home. Most of the estate is preserved, although when we were there, because the DuPont family had donated the estate to the National Trust, one room preserved the exploits of the woman who donated the property. As we were coming out on the bus, my daughter slyly said "Gee dad, I know how much you like Madison, and even better I now have a better understanding of President DuPont."

But among the founders there are some major gaps in the coverage of his life and times. Washington, Adams, Jefferson have all had major biographies in many genres but Madison deserves some more coverage.

The Five Villains of the Current Financial Crisis

Last night we were invited to small gathering by a friend to hear from a retired Chief Executive of a major US financial institution. Our friend thought it would be interesting to hear from this guy with long experience in the financial industry. He argued that the current crisis was precipitated by five villains - two members of congress and three organizations.

He first described the Community Reinvestment Act. Surprisingly to me he thought the intent of the Act was pretty noble. The idea, when the Act was first adopted, was to reduce the possibility for lenders to "red-line" areas - exclude lending in an area. He described lending practices by some lenders before the CRA as "reprehensible." But he also expressed skepticism about the underlying assumption by at least some who supported the Act that everyone should be able to own a home.

His first two villains were Senator Christopher Dodd and Congressman Barney Frank - who have served as either the ranking member or chair of the financial institutions committee in the Senate and the House. He described their absolute defense of increasing the leverage of the two agencies dealing with housing finance. His next two villains were the two Government Sponsored Enterprises - Fannie Mae and Freddie Mac that Dodd and Frank defended. His description is a perfect example of what some political scientists call an "iron triangle" where elected officials and industry and bureaucrats work in common purpose. The organizational structure of Fannie and Freddie put them as neither fish nor fowl in the financial world. Their congressional protectors were perfectly willing to allow them to continuously expand their leverage well beyond what a private financial institution could. The ultimate result was predicted well before it happened by a number of observers including the Bush administration - privatizing gain and socializing risk. As leverage for the two institutions increased the executives of Fannie and Freddie made huge bonuses. The politicians got the credit for expanding housing opportunities and the taxpayers were stuck with paying the bill for this largesse. The final villains were the ratings agencies. He argued that the incentives for the ratings agencies were all wrong. Ratings agencies, much like the role of bond attorneys, were supposed to be working for future investors, but in this crisis they figured out that the fees they received were actually from the debt issuers who wanted favorable ratings to sell their securities. Much of what he argued was not surprising - from my perspective, while he suggested at the beginning that there was plenty of blame beyond the five villains, I think he captured the most important five.

He also had comments about FASB 157 or "mark to market." FASB 157 requires financial institutions to establish a current "market value" for assets held on the balance sheet. He suggested that in many cases there may not be a market for the asset and in others the valuation is not based on current value. Thus, when a lender offers a mortgage to a borrower, the expectation is that the value of the mortgage will be realized over the term of the mortgage. While there should be a reliable underlying ratio to value, there can be times during the period of the mortgage where that value will fluctuate. The problem with 157 is that by requiring current valuations, when markets fluctuate financial institutions see significant hits to their capital. Financial institutions are required to maintain a ratio of hard assets to lending which might be 1:10. When an asset gets marked down the financial institution has less to loan. The essence of his argument was that transparency here was more apparent than real and that a competent financial executive should have some level of professional judgment about valuation of assets.

Jon Stewart is to NEWS as Jim Cramer is to FINANCIAL INFORMATION

There was a lot of twitterpation last week about the supposed dust up between Jon Stewart and Jim Cramer. Stewart, of Comedy Central had Cramer of CNBC on his show to beat him up for his lapses in journalistic standards. In essence, Stewart was accusing Cramer of being what in polite society was once called a financial tout.

Investing is serious business. Anyone who would take advice from someone like Cramer is a fool. But one could also make the same comment about Stewart's brand of reporting. Stewart is legendary for his humorous slant on the news, but many people take his "news stories" as being close to accurate. In fact, much of what Stewart does is as biased and slanted in the same way that he accused Cramer of offering.

Sunday, March 15, 2009

The Tea Party Movement

On the conservative blogs there has been a lot of chatter about scattered protests of the Obama fiscal and tax plans. The movement is called the Tea Party. (After the revolutionary period.) Several blogs have shown pictures of the events. I am not sure whether the movement actually has legs. I am pretty sure that a good deal of the "stimulus" package is likely to burden us with a lot of debt we do not need. But I thought this picture was pretty funny.

Thursday, March 12, 2009

Washington and Lewis Carroll

The Hill, which is a major news source on Capitol Hill quotes Michigan congressman Bart Stupak as saying “We’ve got to see an uptick by August or the Democratic majority is in jeopardy.” Indeed, with the Howard Fineman article in Newsweek and a number of other rumbles the President has had a fairly rough month. But when I read representative Stupak's comments I thought a lot about the rabbit in Alice in Wonderland, at least Disney's version of it. At one point the rabbit sings "I run and then I hop, hop, hop,I wish that I could fly,There's danger if I dare to stop,And here's the reason why,You see, I'm overdue, I'm in a rabbit stew,
Can't even say "Goodbye", "Hello" ,I'm late, I'm late, I'm late."

But even though I think a lot of the Administration's policies will come to naught (of even less), I think it is a bit too early to believe as representative Stupak seems to. There are a couple of reasons for that. #1 - The economy may recover, in spite of the Administration's spending plans. I am quite concerned about the level and direction of the stimulus policies that have been enacted thus far and a planned. In the long term they are likely to actually dampen economic growth. The WSJ economist panel gives the Administration an F on their economic efforts so far, and from my perspective that is about right - too much spending of borrowed money. But long-term is not 2010. #2 - Michigan may be a special case. Michigan has labored under special circumstances for some time. The combined weight of the brilliance of the auto industry as a base and the current socialist ingenue as Governor (Jennifer Granholm) would help to produce an almost 12% unemployment rate almost anywhere. Stupak's district is in an area that is outside the economic mainstream, the Upper Peninsula of Michigan, so he may be either a leading indicator or an outlier. #3 - The Republicans could screw it up. Based on the performance of the Administration so far, I would give them a B+ for lofty rhetoric and a C- for execution. It is pretty clear that the GOP has not lived up to either standard. An essential rule of politics (probably not true either at the end of Carter or Bush II's years) is that in politics you always have to run against someone. Let's see which side gets their game together. I am far from a cheerleader for this administration, but I think it is a bit early to throw in the towel.

Wednesday, March 11, 2009

A plea for NetEtiquette

I have a pet peeve. Instead of using a great service like Time Bridge, many of the groups I work with use emails to set meeting times. Time Bridge is a nifty service - you set a meeting date, notify your colleagues of possible times and the system reconciles the schedules. I am not sure why some in those crowds believe it is necessary to hit the REPLY ALL button when advising the correspondent of their availability. It clogs up my email. When I get those kinds of insensitive replies, I have the notion, which I have not yet acted on, to sign their email addresses up for 100 spam accounts. After all if they can bore me with their extreme inability to make a particular meeting why should they not also hear from the private solicitor in Africa who wants to transfer $20 million to them? Sounds like a good tradeoff to me.

Bloviating versus Thoughtful Commentary

Tonight in rapid succession NPR had Robert Reich, the once always available pundit with lots of words but little to say and Fred Smith - the genuine American innovator who started Federal Express. I wonder why anyone ever listens to Reich; I was a captive in a car. He gives a bad name to the word glib. His commentary tonight was that if we only went back to the era of the 1950s when a third of private workers were in unions, the economy would be humming along soon. Indeed, if we went back to the 1950s more people would die of cancer too.

The time for industrial unions may have been in the decades that Reich would like to recreate, but our economy is different today. He argues that if we just extended unions to the service sector that we would be in better shape. That is just plain silly. Many service industries have consistently rejected attempts to organize them. Reich and his crowd say it is intimidation by the "bosses", in reality times are different and many workers understood what I did when I was first working. My first job was as a dishwasher. I found a job at a fast food place that was unionized and thought wow my wage will increase from $1 an hour to $1.25. At the end of the summer the net cost of joining the union cost me 27¢ per hour. In my senior year in high school I tried a union gig for a bluegrass band I was working in. While their scale was higher than I was being paid it had two defects - a representation fee and a "drumstick man" who was some out of work musician who went out on our gig and collected a fifth of our pay for picking up our drumsticks (we were a bluegrass band so that was a bit odd). Unions have done some good for some workers but they have also clogged up the wheels of commerce. Going back to a third of the workforce in unions is not a solution. If the efficacy of unions were really true then the wages of public workers would be coming up and the public economy would be more efficient. Neither is true.

Then the program presented Fred Smith. He discussed FedEx's current situation. Business for them is down. He made some thoughtful comments about the Stimulus package just adopted (it could have been shaped better into more productive investments and less blatant spending) but he thinks we might be coming out of this downturn in the summer. He looked at the downturn from a number of views including that the spike in gas prices led to some decline in the mortgage market (with some homeowners choosing between mortgage and gas payments). That is not all of it, but it could have been a precipitating event.

Reich is at Berkeley now after stints at a number of universities, at least one of which where he was denied tenure. I wonder why he is sought out for his opinions. On the other hand Smith was worth listening to - I would have liked to hear more.

Tuesday, March 10, 2009

Looking at Numbers

In these troubled times there is a lot of data out on the net. I came across this when a co-worker brought it in with a Morningstar logo on it. The chart here, which is exactly the same as the one I saw with the Morningstar logo is from Lincoln Financial Group. The chart purports to give you an understanding of the relationship between downturns and the subsequent recoveries. Yet the first chart is arguably wrong. It is hard to think about any competent economist could believe that the Great Depression lasted only 34 months. Likewise, with an average rate of unemployment during the 1930s of about 17% (things were not counted in the same way then as now). The 1930s were not a continuous period of decline, either in the general economy or in the stock market. But it is odd to suggest that the decline described here was followed by a period of 151 months of continuous growth in the market or in the economy. There are many possible conclusions as to why the people who drafted this chart chose to portray the data in this way, but none of them are especially satisfying.

One thing is pretty clear from all those market declines since 1929 The recoveries from 1929 at 12 months, after they began have a median recovery of 44.3% (based on the total return for the S&P 500 index) - that is pretty spectacular! (That is from the National Bureau of Economic Research data and so it is pretty good.)

Emory Tax Professor's Nonsense

On March 8, Emory Tax Law professor Dorothy Brown wrote in the New York Times -

There are effectively two tax systems in America: one for the very rich and one for the rest of us. Income from stock dividends and capital gains, which makes up a disproportionate amount of the earnings of the very rich, is taxed at 15 percent. But the bulk of what the rest of us earn — wages and interest from savings accounts — is taxed at up to 35 percent. Though President Obama’s recent tax proposals are progressive and comprehensive, his reforms don’t do nearly enough to address this significant disparity.

She goes on to suggest that an ideal tax on capital would be the same as ordinary income although she also shows a recognition that many taxpayers pay a bulk of their taxes through the Social Security tax (which after all is at half the rate of capital gains). She also suggests that capital losses, which are currently capped at $3000 be raised to $15,000 - why only $15,000? Most other losses are a function of income (there is a percentage exclusion based on income). Obviously, the current code is a mess.

Professor Brown goes on to argue that the taxation of capital gains is one of "fundamental fairness". Evidently Professor Brown did not bother to deal much with economics. The differential rate on capital gains is there to promote capital investments. The current code makes no recognition of the long term nature of capital investments, save for the capital gains rate. Thus, if I invest in an asset costing $100 and its nominal value increases by 50% over the time of my holding it, even if the value is diminished by inflation by 50%, I still pay as if the asset had appreciated. That is a pretty crude measure. Professor Brown's definition of "fundamental fairness" is pretty narrow, as she does not seem to worry about the capital gains exclusion for housing. (Where the rate is effectively ZERO.)

There are lots of ways to improve the tax code in this area. But changes based only on the principle of "fundamental fairness" should not be the only policy view in making the tax code. If we want to promote more savings and investment, then we should lower the rate even more, as we have with capital gains on housing. Or we might index the rate, to more closely reflect the long term nature of investments. Or we might lower all tax rates on investments including interest. But raising the rate, to work with a narrow definition of "fairness" is short-sighted.

Monday, March 09, 2009

A strange sort of thanksgiving

This morning, I sold the remaining part of my aunt's portfolio. She died at 92 in September. I have been the executor for both my aunts. Part of the reason I think I was chosen was because I think my two aunts thought I would be respectful of their independence.

For the last couple of years my older aunt lived in a nursing home. She lost her ability to move around and for a good part of the last year she was alive rarely if ever ventured from her bed and her room. But between her investments, a small pension check and her Social Security check, she was able to cover those costs. As I was selling the porfolio off today I wondered whether the amount we were now realizing would have produced enough cash flow to assure that she did not have to worry about bills. I am thankful I never had to confront her with that problem.

One other footnote to this story. Like many stock portfolios this one has taken a significant dump. She had a portfolio that had some very good companies - most of whom were chosen for their dividends. But one bright light is the existing capital gains rules. With the decline we have several items in the portfolio that are well below their basis in September - for those willing to invest in the market in these times, there is significant potential for capital appreciation without tax cost. That is almost like a freebee.

Thursday, March 05, 2009

Is the Decline in the Stock Market a "Black Swan?"

Nassim Nicholas Taleb wrote a very challenging book called The Black Swan which tried to explain those big events in life that are unexpected. Taleb argues that three things create Black Swans - they need to be an outlier from prior experience, it has an extreme impact, and finally after the fact we try create explanations of the event that bring the event into greater predictability.

So the question is - are the financial meltdowns that we have had in the last several months a Black Swan? A student of mine asked me that in October and I immediately responded that I thought the answer to be no. I saw him a week or so ago and he asked me the same question again. It got me to think.

In the last decade we have had two events that might qualify as Black Swans - the tech bubble and this drop. The more I have thought about it the less I am inclined to describe either event as a Black Swan - although there are certainly more feathers in this episode than in the tech bubble.

Robert Schiller (who with a colleague developed the Schiller Case Index of home prices) wrote a book a couple of years ago called Irrational Exuberance that tried to explain how we get ourselves into speculative bubbles. He argued at the time that there were a number of disturbing trends in the financial markets that suggested that we were relying too much on unsustainable valuations. He points out in his most recent book on the Subprime situation that the financial services industry has grown from 2% of GDP to 7% since 1950. He also points out that the increasing integration of markets has produced both positive (for example, more capital available) and negative (for example,more volatility) effects.

It is hard for anyone to argue that they were able to pinpoint the decline - to predict it. Yet, in both of these financial disasters there were plenty of writers who were raising questions about valuations and the new models which everyone was seemingly accepting. In the tech bubble the models were based on the odd assumption that a company needed no money or business plan to succeed. In this meltdown the models were based in part on new ways to combine capital and some very sloppy valuations, including the way we qualified people for mortgages. One could make a very good argument that with those understandings that at least some did not find our current problems as a Black Swan.

Why is the President Engaging in Happy Talk?

This poll taken from the Volkh Conspiracy gives a good idea about the President's commitment to talking up stocks. There is plenty of evidence that we've either reached or are about to reach what market watchers call "capitulation" - which means we are close to the bottom of the market. But the market still seems bound and determined to shudder under even slightly bad news.

It is unclear whether talk from the Oval Office can move markets. Clearly, beginning in my memory with the JFK episode with the steel companies, Presidents can have an effect on the negative side. But as Rober Schiller pointed out in his book on Subprime issues (I will review it soon - short review is that it is well done) part of a president's economic task is to help build confidence.

While there are many things I am not comfortable with about the President's budget proposals, I think his effort to boost our spirits is appropriate. I hope it works.


In the early days of the web we heard a lot about democratization. The web was supposed to allow enterprising people to compete with the big guys by cutting out the middle people. This morning I heard about two enterprising groups who took that notion to heart.

#1 At one point then Governor Wilson said, to celebrate the diversity of California's population "The typical California lunch is a couple of fish tacos with a side of Kimchee." It turns out all that talk was true. Mark Manguera, the founder of Kogi and his wife Caroline and their partners Roy Choi and Alice Shin started with the idea of a taco truck (ubiquitous in LA) that would serve tacos with a Korean flair. They added images to Flickr and added themselves to Twitter and off they went. Can't wait to get to LA and find them. From what the reviews say, the food is excellent. When will Kogi move to Sacramento?

#2 - A Salt Lake entrepreneur has created a service called House Tending to allow foreclosed homes to have a tenant who will keep the place up. The tenants pay a small monthly rental but the homeowner or the bank pays nothing. The people in the house agree to do things like lawns to make sure the place looks lived in.

Both ideas show the creative spirit of the American people is not gone at all.

Wednesday, March 04, 2009

Sophistry Passing as Scholarship

The Center on Budget and Policy Priorities wrote a "research" piece on the Administration's proposal to cap charitable deductions at the 28% bracket. The Center is a left wing "think" tank/advocacy organization formed in 1981. A good part of their original motivation was to oppose the proposals of the Reagan administration.

The president's proposal is likely to generate a lot of opposition. Since the income tax was first authorized there has been a charitable deduction in the code. It is unique among tax provisions in that it is the only provision which provides no personal benefit to the person claiming it, besides the slight reduction in tax liability. Once you make a charitable deduction you lose control of the assets you donate. But the Center makes at least three specious arguments in favor of the proposal.

The Administration’s proposal would cap the subsidy at 28 cents on the dollar for those with incomes over $250,000 —
the same rate at which those expenses could be deducted during the Reagan years, when the top tax rates were lower. As a result, the incentive to incur those expenses would be the same as under President Reagan.

This is a silly argument. Tax rates were lower in the Reagan era but the code was also less complicated. The mere complication of figuring different deductions at different rates will provide a disincentive to give to charities.

The proposal would affect only the 1.2 percent of tax filing units that are in the top two income tax brackets. Tax Policy Center data indicate that these taxpayers account for only 18 percent of the charitable contributions that are reported as itemized deductions. Thus, only about 11 percent of total charitable giving would be affected. A recent paper on the elasticity of giving suggests that a 1% change in net price of giving (i.e. raising or lowering rates) would change giving by $9 billion. That certainly is not pocket change.

The numbers here are phony. They are calculated on the number of donations not the amounts. While there will be some mitigation from the President's proposal to not change the estate tax provisions, ultimately the taxpayers most likely to be affected are also the donors who give the most. While there is not a direct correlation between the incentives offered in the tax code and the amount of giving (as once argued by economists like Charles Clotfelter) increasing the net cost of giving for the highest income taxpayers is more likely to reduce the total amount of giving.

The Obama Administration’s health reform proposal aims to provide health coverage to most or all of the 45 million Americans who are now uninsured. Currently, people without health insurance receive some free care from hospital emergency rooms, neighborhood health clinics, and other charitable organizations. Health reform will greatly reduce the burden on non-profit organizations to provide free health care, thereby offsetting to a significant extent the overall drop in contributions.

Only a small percentage of the total number of charitable organizations in the country are health charities and even a smaller percentage are hospitals. It is unclear whether the Obama proposals will reduce costs. But the proposals on the charitable contributions will likely reduce donations for ALL charities.

The Center did itself no favors by rushing out this baloney.

Putting the Stimulus in Perspective

Getting an understanding of the scope of the cumulative actions by the government in response to the current economic problems we face is tough. We are just beginning to use the term Trillion. Pillar Pacific Capital Management configured some data that I found very helpful. They took some major governmental interventions in the economy and then normed them to current dollars (made all the numbers comparable). I then put the numbers into a more visual form. To give you a perspective, in current dollars the Hoover Dam cost us a mere $782 million in current dollar terms. The Panama Canal cost $7.9 billion. The first Gulf War cost $98 billion. The chart presents the numbers for things in excess of $115 billion.

There is no comment about the relative efficacy of any of these policies, this is just an attempt to get an idea of scale.

Tuesday, March 03, 2009

The Esteem of Public Officials

The first Field Poll on the six measures adopted by the legislature to solve the budget crisis in California is revealing in several dimensions. First, voters seem to understand that the state will, at least temporarily need revenues. Prop 1A which adds revenues but also creates a new type of spending cap has support of 57% of the voters. Support for that drops when voters figure out that the measure extends the tax raisers. Measures that might affect kids have a tougher time - so Prop 1B and 1D have the respective support of 53% and 54% of the voters. California has an odd situation in relation to our schools. We've gone from one of the highest spending states to well below the median. Prop 98 was sold to the voters as protecting schools and clearly it has not. While I suspect most voters would, if they understood the complexities of Proposition 98, support a modification, voters are not as supportive of that change. Again, even though the First Five (Prop 1D) money has been frittered away, because it was dedicated to children, it receives only tepid support. Proposition C, which would sell the lottery, has only 47% support. I suspect that comes from voter recognition that the proposed sale might not be as lucrative as our public officials expect it would be. Finally, Prop 1E which would divert the money used for community mental health, through a dedicated tax, receives 57% support. By the way, in the same poll 55% of the voters are skeptical of the budget solution. I suspect that comes from two sources - the length of time that it took to adopt it and the complexity of the deal. But based on the numbers for the propositions - even though they are skeptical - they support the measures required to adopt the budget. Contrary to the argument that some elected officials have about voters, that they are self-interested narrow minded twits, the response to the six measures seems pretty thoughtful.

But then comes the kicker. The most vigorously supported measure among the six pack of measures would cut public official's pay if they dithered with setting a budget. If elected officials thought they were held in any esteem, the 77% support for that measure should wake them to reality.

Monday, March 02, 2009

Responding to the League of Women Voters

The League of Women Voters sent me a fund raising appeal with a survey that I was asked to fill out. The Survey has eight questions on it. To be helpful to readers who did not receive this appeal I present the questions and suggested answers below. They introduce this as wanting to know what my opinions are - it may be tough but you may want to know which the most important question on which they want a response.

#1 - Do you believe that special interests have gained too much power over elected officials in our democracy?
Dear Women Voters just what are the "special interests?" Does the League employ lobbyists? Or are some special interests more equal than others?

#2 - Do you believe that quality affordable healthcare should be available to all US citizens?
I wonder whether they have tried to define the terms "quality" and "affordable." And why are they limiting it to US citizens?

#3 - Do you believe partisan redistricting determines the result of too many Congressional elections before any votes are cast?
Of course, this is the give away question in the survey.

#4 - Should the League continue advancing legislation that will gear us toward energy independence?
I'm not really sure what "energy independence" is. Has the League ever read any David Ricardo and encountered the notion of comparative advantage? Should we also be seeking "independence" from all imports? Are some imports more equal than others?

#5 - Are you concerned about protecting individuals' basic Constitutional rights from increased government surveillance and wiretapping?
Did the League oppose the increased role of government surveillance in agencies like the Transportation Security Administration? Or are they just concerned about the policies of the last administration?

#6 - Do you believe that it is important in today's world for the United States to cooperate with the United Nations and other countries to develop international solutions to world problems?
Does the League believe in US sovereignty?

#7 - Do you believe that all citizens have a role to play in shaping our democracy by being informed and active participants in government?
Does the League believe that all citizens (again I wonder why they limit these questions to citizens) should be informed participants in markets?

#8 - Are you ready to support the League of Women Voters in its efforts to defend democratic principles and individual liberties, and increase civic participation in our democracy?
This must be the one they want a response for - the others are just too ambiguous.

The Marriage of Figaro

The Sacramento Opera presented as its second opera - The Marriage of Figaro. It was excellent, a wonderful ensemble of voices. Figaro is part of three opera set (the others being Rosenkavelier - which was one of my mother's favorite operas and the Barber of Seville) that deal with the character Figaro. This one has a number of twists and double entendres, in the style of traditional opera buffa. It concerns the impending marriage of Figaro to Susanna and the interventions of the Count and his wife and a bunch of other zany characters - but like with most of Mozart - the music comes first. The cast has a couple of very strong voices including the Countess (Emily Pulley) and Figaro(Bojan Knezevich) but as one of my seat mates commented yesterday, the whole cast had a great mix of voice and dramatic talent which made the performance even more enjoyable.

I recently saw Amadeus, the Milos Foreman movie, and one of the key lines in the movie is Mozart trying to explain the opera. Mozart builds duets into trios, into quartets and then beyond. The music is elegant and fun at the same time.

There is one more performance of this run for Sacramento, on Tuesday night, and it would be well worth it to get tickets. The Sacramento Opera is great resource for the city and the region.

Sunday, March 01, 2009

Kindle 2 and the Luddites in the Authors Guild

One of the new features in the Kindle 2 is a text to speech feature so you can have your book read to you. This feature is not one I would have used much. If I want an Audiobook than I would go to and buy it - with a great read. The Kindle feature uses text recognition which IMHO can be a bit wooden. (In fact a lot wooden.) But the Author's Guild thought this would cut into their take on audiobooks. What nonsense - if anything it might actually improve sales. But that is the way of Luddites.

Amazon rushed out an opt in feature where authors can allow their books to be converted in the text to speech feature. I will be interested to see how many authors opt in - anyone who is smart should.