Damn Lies

My progressive friends, for the most part, are happy to point to graphs and tables which reveal that the reason for the huge deficits created in the last three years lies at the feet of the much hated George W. Bush, and before him, the Dark Lord, Ronald Reagan.

My conservative friends have, at their fingertips, equally compelling charts, trendlines, and datasets that lay the blame squarely on Barack Obama and his compliant side-kick, Congressional democrats, who wish to take more money out of the pockets of the earners and give it, in larger chunks, to the non-earners.

While the two sides fiddle, Rome burns.

It really doesn’t matter now who spent the money that our country doesn’t have anymore. We can blame the recession, which has reduced GDP to the point that the economy cannot pay for our future expenditures, or we can blame the tax cuts that reduced federal revenues during these perilous times. From this sofa, the situation is two sides of the same coin. That is, no matter how it is sliced, we tried to have it both ways. We wanted to drive that Cadillac without making the payments, and our buddies in Congress gave us the keys.

The only statistics that matter now are the ones that tell us that we cannot sustain this level of spending. The only question remaining is the point in time when the people we elected to give us anything we wanted finally realize that they cannot fulfill their promises. After that, the only question is whether our nation will have enough time, and the national will, to solve the problem.

Promises are going to have to be broken, either voluntarily, and in a controlled fashion, or involuntarily, with the subtlety of a dull knife. We cannot remain on this path.

Man-Made Chicanery

William Galston has put up a timely post at the New Republic website which absolutely nails the current debacle in Washington. If I may quote liberally from his post, which should be read in its entirety:

Raising the debt ceiling is a man-made crisis amenable to straightforward policy remedies. Political will is all that is lacking. Not so the economic crisis that our preoccupation with fiscal policy has temporarily obscured.

…The IMF recently conducted a comparative study of ten post-war economic recoveries seven quarters after the business cycle trough, or recession’s end. Its findings for the United States are stunning. For employment and household finances, the current recovery is the weakest since the end of World War Two. For the business and financial sectors, it’s the strongest. The banks, recipients of lavish public funds and guarantees during the meltdown, are reporting a rapid recovery from their lows in profits, loan charge-offs, and equity-to-asset ratios. Meanwhile, growth in employment, disposable personal income, personal savings and consumption, and total GDP all anguish. Needless to say, investment in structures—residential and non-residential—comes in dead last. Were it not for a strong performance in equipment, software, and exports, the current recovery would barely have a pulse. The IMF study does nothing to weaken the increasingly credible thesis that downturns induced by financial crises differ structurally from those in normal business cycles.

…At the same time that the business and financial sectors are becoming decoupled from employment and household balance sheets, gaps among different parts of our population are growing. A report just out from the Pew Research Center shows that while the median net worth of all U.S. households declined by 28 percent between 2005 and 2009, the figure was 53 percent for African Americans and 66 percent for Hispanics. And these percentages mask an even more troubling reality: The assets of black and Hispanic households have just about been wiped out.

…This painfully slow recovery is rending the fabric of American society. In turn, these growing socio-economic gaps are contributing to the rising polarization of our politics and declining trust in government—developments that will make it even more difficult to forge agreements on the policies we’ll need to get out of this deep hole. No doubt adverse trends in the global economy are making things even worse. But in the end, our economic crisis is a governance crisis. The stalemate over the debt ceiling is a symptom of this systemic fact.

Note well his words: our economic crisis is a governance crisis.

On Bonuses and Deductibles


Nobody has asked me what suggestions I might have for two of the most vexing problems of the time, but in a moment of clarity at 3:00 AM this morning I received these messages and am now compelled to report them to you, dear reader.


Obama may regard them as "fat cat bankers", but you won’t hear those words pass my lips. Having said that, there is something slightly obscene about the enormity of the bonuses being doled out by our country’s investment banks. $20 Billion for the top guys at Goldman Sachs? A federal pay czar establishing salary levels? One look at the salary discrepancy between the average federal employee and Joe the plumber in Alabama should be enough to tell us that this model can’t be good in the long term. Fox guarding the hen house, etc.

Military leadership in combat, and Infantry officers in particular, should provide the guiding principle on the bonus conundrum. Their operating principle is that they don’t eat until all the troops have been fed. Ergo, the "fat cat bankers" don’t get their bonuses until all of their employees get a bonus. And the bonus should be the same percentage for all pay levels. At most places I visited during my working life, the typical bonus on the warehouse floor was 1 week’s pay, and in really good years might have been a bump in their profit sharing plan percentage. If it’s good enough for the shop floor, shouldn’t it suffice for the executive suite? If they want to spread the $20 Billion around, spread it evenly. It’s called leadership.


Ahh, health insurance. What a goat rope. No legislative solution will ever be better than common sense, and that unfortunately is why our political leaders in Washington cannot craft any legislation that will improve our predicament. But the same principles suggested in the bonus solution inform.

For example: Assume that Goldman Sachs, or any Fortune 500 company, or a state agency, or the insurance agency on the corner all have a health plan for all of their employees. Rates for employees are based on marital status; single, married, family. Doesn’t matter how old you are, how many children you have, or how much your employer pays you…the rates are standardized based on family size. Typically, your employer pays a percentage of the actual premium, and you pay the balance.

The problem lies in the amount that different employees pay out of pocket. Most plans that I’m familiar with have an individual deductible, a family deductible, an 80/20 split of medical expenses up to some value, and co-pays for ancillary coverages like prescription drugs, office visits, etc. The receiving manager in the warehouse and the CEO have the same plan. But the receiving manager makes $24,000 annually, while the CEO makes $240,000, has a car allowance, a company credit card for entertainment, and other related perqs.

It occurs that the CEO, and maybe the CFO, the CIO, and other top executives could afford to bear a slightly heavier burden than the receiving manager. Why can’t health plans have a means test wherein employee expenses are scaled according to annual compensation? Why should an employee making 10 times more than another employee have the same out of pocket medical expenses? Sounds like a another leadership issue.

There….that didn’t take 2,000 pages plus amendments plus millions of dollars spent by lobbyists. And it sure does make sense, at least to me.




The ABC Dilemma of Health Reform


Today’s Wall Street Journal has two columns regarding the state of health care reform, here and here. The second link discusses health care ‘reforms’ in New York, and how the concepts of community rating and guaranteed issue, while noble in intent, distort the marketplace. Further distortions arise when states mandate fringe coverages that are neither necessary to a healthy life nor applicable to the majority of insureds. Add to the mix laws that prevent insurers from selling policies across state lines and it becomes clear that regulation stultifies the marketplace.

The first link is to an article so brief, and yet so profound, that one wonders why action has not been taken. That action has not been taken surely illustrates the yawning gap that separates those who wish to make their own decisions from those who wish to increase their reliance on the bounties of the government.

Since the WSJ now operates behind a pay wall, the first article is copied below. I hope Rupert doesn’t mind….




/* Style Definitions */
{mso-style-name:”Table Normal”;
mso-padding-alt:0in 5.4pt 0in 5.4pt;

The ABC Dilemma of Health Reform

There is widespread agreement with the principle that our health-care system needs to be reformed. But our representatives and our neighbors have much trouble in reaching agreement on the particulars. There have been many legislative bills offered and hundreds of amendments with no clear path to a resolution.

Health-care systems everywhere encounter cost overruns and rationing devices, like queues, in their diverse attempts to deliver products for which demand has long grown faster than other economic sectors. Why is it so difficult to find the private and public means, the combination of markets and government assistance, that enables a preferred outcome to emerge?

This question has a simple answer that plagues health care everywhere.

The health-care provider, A, is in the position of recommending to the patient, B, what B should buy from A. A third party—the insurance company or the government—is paying A for it.

This structure defines an incentive nightmare. You do not have to be an economist to realize that, when phrased in this way, nobody knows how to solve this problem. Hence the many experiments, all of which have been deemed less than satisfactory.

I don’t know whether this problem has a solution. If it does, I think it requires us to find mechanisms whereby third-party payment is made to the patient, B, who in turn pays A, supplemented with any co-payment from B for services. Hence, from the moment B seeks services from A both know who is going to be paying A for what is delivered. A and B each has need for what the other brings to the table, and this structure carries the potential for nurturing the relationship between A and B. B is empowered to become better informed about the services recommended by various A’s that he might choose among, and the A’s might find it particularly important to build good reputations with B’s.

—Mr. Smith, the 2002 Nobel Laureate in economics, is professor at Chapman University.




Two Pages In The Wall Street Journal

Two pages in today’s Wall Street Journal encapsulate, for this observer, the dilemma our politicians face as federal spending spins out of control. 

Page A4:

Jobless Rate is Key to Fate of Democrats in 2010

…But one item may prove key: the national unemployment rate, which hit a 26-year high last month at 9.8%

…President Obama and the Democrats are all the more exposed on the jobs front because they touted the $787 billion economic-stimulus bill as a way to curb job losses.


It has been noted that the real unemployment rate in this country is currently 17%. Given the horror of that statistic, and the implications of long-term unemployment that crosses all demographic lines, one would think that getting people back to work immediately would be paramount.

Another article:

Arizona Sheriff’s Powers Cut

The Obama administration is curbing the powers of an Arizona sheriff who has led one of the most contentious fights against illegal immigrants.

Under an agreement involving local enforcement of federal immigration laws, Shefirr Joe Arpaio’s deputies will no longer have the authority to arrest suspected illegal immigrants in the streets in the course of their duty.

Unlike other participating in the program, Mr. Arpaio will be restricted to determining the immigration status of inmates booked into Maricopa county jails.

…Homeland Security Secretary Janet Napolitano ordered a comprehensive review of the 287g program shortly after taking office.

So the Feds are arbitrarily defining police powers in local jurisdictions. Hhhmmmmm

Page A5

Violent Deaths Shock Chicago Into Action

…Derrion Alberts, 16 years old, was beaten to death seven blocks from his school last month. A recording of the attack was posted online and widely viewed.

…Between September, 2008, and September, 2009, 398 Chicago students were shot…

…In response to the violence, Chief Executive Officer of Chicago Public Schools…announce a safety and security strategy that will target nearly 10,000 high-school students identified as at risk of becoming shooting victims. The project will connect some of them with mentors and part-time jobs in hopes of keeping the teens off the streets. The $30 million annual cost will be paid for by federal stimulus grants.

Stimulus grants for shovel ready projects? For infrastructure? Already committed, just not spent? Sounds like there is a pool of money sitting in a secret vault in Washington where certain social goals can be funded, regardless of their stimulatory (or not) effects.

FAA Stimulus Recipients Got Low Priority Ratings

More than $270 million in stimulus grants awarded by the Federal Aviation Administration have gone to projects that scored below the agency’s own threshold for weeding-out low-priority proposals…

The FAA typically steers grants to projects scoring above 41 on a scale from 1 to 100. For stimulus grants, the FAA raised the threshold to 62.

See above. This stinks, to me, of earmarks. Yet again, our elected officials cannot resist the urge to plunder our national wealth to reward their parochial minions.

From this man’s perspective, we have not learned from the lessons of the economic collapse.

Santayana was right…



The first day of classes for the fall semester. A heavy load of business oriented classes, mostly as a requirement for my minor. The most daunting is Taxation, an upper level accounting course. The professor is a seasoned veteran of the public accounting wars who returned to the (relative) safety of academe to earn her PhD. in Accounting. Tax, she proudly proclaims, is her baby. To set the tone, she provides in the syllabus her most favorite quote:

People think taxation is a terribly mundane subject. But what makes it fascinating is that taxation, in reality, is life. If you know the position a person takes on taxes, you can tell their whole other philosophy. The tax code, once you get to know it, embodies all of the essence of life: greed, politics, power, goodness, charity. Everything is in there. That is why it is so hard to get a simplified tax code. Life just isn’t simple. – Sheldon Cohen, former IRS Commissioner

I open the book and see 29 chapters, 13 appendices, tables on inside front and back covers, a glossary that’s about 15 pages, all written in a font that requires my most powerful reading glasses.

She also points out that accountants learn, on the one hand, to maximize wealth in order to impress bankers, while simultaneously minimizing income to deter the IRS…

This ought to be good.


Who To Believe?

The Post and Courier and the Wall Street Journal have dueling headlines in today’s papers.

The Post and Courier front page lead says this:

New home sales soar in June

The Wall Street Journal story, found on page C12, starts with this headline:

Pyrrhic Victory in June Housing Data

If I took the P&C headline at face value, I might believe that, finally, the long slide in home sales is over.

If I took the WSJ headline at face value, Imight believe that, still, the long slide in home sales continues.

Who to believe?

The P&C:

The storm clouds could be starting to part over the troubled real estate market.

Realtors, builders and housing experts buzzed over an announcement Monday from U.S. Commerce Department officials that new home sales jumped a surprisingly strong 11 percent last month. That increase beat analysts’ expectations and marked the highest jump for newly built homes in nine years. (emphasis mine)

Sales for June clocked in at a seasonally adjusted annual rate of 384,000, blowing past the expectations of economists surveyed by Thomson Reuters, who were looking for 360,000.

Monday’s data came on the heels of an uplifting report last week from the National Association of Realtors that existing-home sales rose during June, the third month of growth. Sales haven’t risen for three straight months since early 2004, during the last housing boom.

Charleston’s existing-home sales have yet to reflect a year-over-year increase in 2009, but the pace of the declines has eased in recent months.

The tri-county area still has a large amount of existing properties for sale. As of Monday, nearly 9,900 homes were listed in the Charleston Trident Association of Realtors’ sales database.

The WSJ:

Many investors celebrated Monday after June’s "surge" in U.S. new-home sales. Alas, it was largely wishful thinking.

True, the Census Bureau reported sales up 11% from May. That is a big number, at first glance justifying Monday’s 4.5% leap in the Dow Jones U.S. Home Construction Total Stock Market Index. But it fails a close inspection.

First, home sales quite often jump in June, the height of the spring selling season. When trying to gauge the strength of home sales, then, it makes more sense to compare them with the same month a year ago. That comparison is less kind — sales were down 21.3% from June of 2008. (emphasis mine)

Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982, notes Richard Moody, chief economist at Forward Capital.

And the Census Bureau warns against assuming too much precision in these numbers, which are based on a sample survey. Accounting for a 13.2% margin of error — at a 90% confidence level, suggesting the actual error could be higher — new-home sales enjoyed somewhere between a 24.2% gain or a 2.2% decline from May.

New-home inventories are falling, an encouraging development. But inventories are still higher than their historical norm, and there remains an avalanche of distressed sales.

Little wonder, then, that June’s "surging" sales were driven by heavy discounting. The median new-home price — not seasonally adjusted — fell 12% in June from a year ago, to $206,200, the lowest June sales price since 2003. And it was down 5.8% month on month.

To paraphrase Pyrrhus, if sales keep soaring like this, then home builders will be utterly undone.

Two stories, two perspectives. One story is a look at data, with an understanding of statistical analysis. Call it objective, with the caveat that statistics can be manipulated to arrive at any conclusion. The other story is a compendium of anecdotal information, without an explanation of the underlying data (which discussion might reveal the facts of the data).

I’m not sure the readers of the Post and Courier are well served by their story.



For What It’s Worth

There’s something happening here.
What it is ain’t exactly clear.
There’s a man with a gun over there,
Telling me I got to beware.
I think it’s time we stop, children, what’s that sound?
Everybody look what’s going down.

There’s battle lines being drawn.
Nobody’s right if everybody’s wrong.
Young people speaking their minds,
Getting so much resistance from behind.
It’s time we stop, hey, what’s that sound?
Everybody look what’s going down.

What a field day for the heat.
A thousand people in the street,
Singing songs and carrying signs,
Mostly say, “Hooray for our side.”
It’s time we stop, hey, what’s that sound?
Everybody look what’s going down.

Paranoia strikes deep:
Into your life it will creep.
It starts when you’re always afraid.
You step out of line, the man come and take you away.

The Buffalo Springfield (1967)

From Information Arbitrage:

Another train wreck is the auto companies. Chrysler is currently staring into the abyss, soon to become part of the Fiat family. In the meantime, Chrysler’s bondholders are in a game of chicken with the US Government, which would like to portray them as "obstructionist" and "putting their interests in front of preserving the company." Well, duh. What else did the the Government expect them to do, donate their holdings to the Chrysler pension plan? The kind of coercion and stiff-arming going on here, if not amicably settled, will land the Obama Administration and recalcitrant Chrysler creditors in a pitched court battle, which could have ramifications for not just the auto industry but any sector where the Government seeks to get "enthusiastically" involved. Is restructuring under the Administration’s watch somehow more beneficial to all constituencies than under the experienced eye of the bankruptcy court? While the Administration has been pulling strings from the sidelines and tacitly engineering the bailout of the financial sector, it has steadfastly refused to force troubled institutions to face into their problems, whether through bankruptcy or radical restructurings of their businesses. The inconsistencies between the treatment of the autos and the banks is blinding, likely leading to suboptimal outcomes in both cases. Pussyfooting around with the banks. Wielding the hammer with Chrysler and GM. It just doesn’t make sense. (Emp. mine – Ed.)

Mish Shedlock has more thoughts, and provides some quotes from John Mauldin:

And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law.

If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits? (Emph. mine – Ed.)

Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all "predatory hedge funds." They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors.

Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed.

Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don’t create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive.

What is going on here? Is Obama turning the Constitution into a worthless scrap of paper and ignoring 226 years of case law?