This excerpt comes from the blog News from 1930 which gives us a day-to-day account of what was being reported in 1930 before the worst of the Great Depression hit.

“The unemployment situation in New York is critical. Unless it is speedily met, we face a winter of hunger and distress for families whose bread-earners are without work and without funds. The great majority of family men now unemployed are asking not for charity, but for a job. In the richest city of the world, where the vast majority are at work, it is unthinkable that anyone should be permitted to starve. The Emergency Employment Committee is composed of New York business and professional men, formed at the request of experienced welfare organizations of the city. It is raising funds which will be used by these organizations to give temporary work to heads of families and to relieve distress caused by unemployment without regard to race, creed, or color.” Followed by endorsement from Pres. Hoover and appeal for funds.

Sen. Smoot denies tariff is retarding business recovery, says it has saved thousands of jobs and helped maintain wages and preserve farm purchasing power; points out only one country has increased its tariff since US adopted revisions; says question now is whether tariff is high enough, not whether it is too high.

I find the parallels to present day frightening to say the least. Let’s hope for some serious divergence.

Related posts:

• Black humor on Wall Street circa 1930
• Unemployment: U-6 data versus the Great Depression
• Food insecurity: alternative measure of economic distress skyrockets
• “That’s what happens when a town full of broke people gets a whiff of free money”
• When is the next panic?

The US Department of Agriculture highlights how the United States in the last decade, despite increased aggregate wealth, slid back significantly in terms of food insecurity as measure of poverty. With everyone now focused on the unemployment situation, it bears noting that even before the downturn in the economy there had been a large surge in food insecurity nationwide.

The Guardian says:

Food insecurity – defined by the USDA as when "food intake … was reduced and their eating patterns were disrupted at times during the year because the household lacked money and other resources for food" – afflicted 14.6% of Americans in 2008. ie, some 50 million people were too poor to guarantee being able to put food on the table.

The table below, also from the Guardian, shows where food insecurity is highest. While much of the distress is concentrated in the South, there are plenty of states in the Southwest and West as well. Maine has the highest food insecurity in the Northeast.

My interpretation of the data goes to income inequality. I see this as evidence that the last decade of growth in the U.S. has not been beneficial for poorer Americans. However, I would go further in saying that the downturn in the U.S. and rising unemployment, bankruptcy and foreclosure in the middle class has made plain that the middle class has also been left behind. While distress amongst poorer Americans is plain from these numbers, the diminished position in the middle class was masked by a surge in debt. This was made plain only as a result of a drop in asset prices.

At present, U.S. policy makers are trying to make this problem go away by reflating an asset bubble, but continued high unemployment is the elephant in the room which higher asset prices can not make disappear.

As for the poor, a related Guardian article gets to the heart of things:

The report said 6.7 million people were defined as having "very low food security" because they regularly lacked sufficient to eat. Among them, 96% reported that the food they bought did not last until they had money to buy more. Nearly all said they could not afford to eat balanced meals. Although few reported that this was a permanent situation throughout the year, 88% said it had occurred in three or more months.

Nearly half reported losing weight because they did not have enough money to buy food.

The number of children living in households where there were shortages of food at times rose by nearly one-third to 17 million. The report says that most parents who did not get enough to eat ensured their offspring received sufficient food but that more than 1 million children still suffered outright hunger.

The worst affected states are in the south with Mississippi having the largest proportion of its population enduring shortages of food followed by Texas and Arkansas. More than half of those affected are minorities, principally black people and Hispanics.

Millions more Americans do not go hungry only because they are so poor they receive government food stamps or rely on handouts from food banks such as Feeding America. In some states, such as West Virginia, one in six of the population is on food stamps.

This is certainly the stuff of depressions more than V-shaped recoveries. The first Guardian article has links to the data for downloading.

Source

Hungry America: food insecurity, state by state – Guardian

Record numbers go hungry in the US – Guardian

Related posts:

• News from 17 November 1930: “we face a winter of hunger and distress”
• If you can’t afford food, steal it: lessons from Japan
• “That’s what happens when a town full of broke people gets a whiff of free money”
• Massive U.S. job loss of 598,000 in January
• 467,000 jobs lost in the U.S. in June 2009

That’s how my friend Jeff described the most recent flap over a banker allegedly using religion to defend the industry.

If you haven’t caught it, Goldman Sachs CEO Lloyd Blankfein was quoted in the Sunday London Times as saying “we have a social purpose,” in referring to the banking industry. What caught everyone’s eye was the headline: “I’m doing ‘God’s work’. Meet Mr Goldman Sachs,” something sure to inflame already raw feelings against bankers worldwide. And this comes after John Varley (the CEO of the soon-to-be-considered-vampire-squid of Britain when it shows record profits) invoked religion in talking of banking – in an inappropriate defence of British banks at church.

Quite frankly, Blankfein’s comments are not what I would consider good PR for the banking industry or Goldmans in light of the recent flap over Goldmans’ Lord Griffiths’ inflammatory comments on how Britons must:

tolerate the inequality as a way to achieve greater prosperity for all.

Remember, this is the same company pejoratively labelled Government Sachs and a vampire squid.

But, what did Lloyd Blankfein actually say? Here’s the quote from the Times.

Luckily for him and his firm, he’s a damn good salesman. He starts with a little humility. He understands that "people are pissed off, mad, and bent out of shape" at bankers’ actions. Goldman played its part in the meltdown that almost destroyed the global financial system. It, like most other banks, lent too much money, made its first quarterly loss for more than a decade last year and ended up taking bail-out cash from Washington. "I know I could slit my wrists and people would cheer," he says. But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."

Do you see anything in this quote about God’s work? I clicked on this article expecting to see something outrageous of the Lord Griffiths variety. I don’t. So, why is the headline pointing to these statements as ‘God’s Work?’ I think the headline is reckless and misleading. Its sole purpose is to inflame anti-Goldman sentiment. The language of the article is construed to cast Blankfein and Goldman in a negative light. This is not what I consider the best of journalism in the least.

So, let’s look at the actual merits of what was said.

• “people are pissed off, mad, and bent out of shape” – I’m glad you realize this. But paying record bonuses doesn’t sound like you understand the gravity of the situation or how pissed off people are.
• “I know I could slit my wrists and people would cheer” – exactly. So you should be as meek as a mouse right now.
• “We’re very important" – poor choice of words, my friend. See the previous statement.
• "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." – YES! That’s the bloody point here. I see this as an accurate statement of the social purpose of investment banking.
• "We have a social purpose." – In fact, you do.

Later, in the same article comes the money quote:

An impish grin spreads across Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker "doing God’s work"

This looks to be a very damning quote, doesn’t it? Three little words. What was the context here? I’d like to see this quote contextualized like the paragraph I deconstructed above.

So, how do I see this issue?  Investment banking does indeed have a social purpose. In fact, it is the one stated quite well by none other than Lloyd Blankfein. Whether bankers are fulfilling this purpose and how much they should earn for doing so are wholly different questions (see Bookstaber’s question “Why do bankers make so much money?”). But, trying to turn this statement into a polemic against banking is despicable.

As for Blankfein’s other statements, it does not seem from what has been written that he is demonstrating the necessary contrition or humility in this particular situation which is going to cast him in a favourable light. Those three words could make him infamous. Perhaps he thought he could speak on the record in his own voice and explain away the bailout followed by the record profits and bonuses. If so, he’s deluding himself – and this piece of biased journalism and the dozens of pieces in multiple languages sheepishly picking up on the ‘God’s work’ part show why.

May the Lloyd be with you. And also with you.

Sample sources

Goldman-Sachs-Chef: "Banken verrichten Gottes Werk" – Spiegel (Germany)

Banker mit Gottes Segen – tagesanzeiger (Switzerland)

Goldman Sachs boss says banks do "God’s work" – Reuters

Topman Goldman: banken doen werk van God – NRC Handelsblad (Netherlands)

Goldman Sachs boss: ‘bankers do God’s work’ – Telegraph

Related posts:

• Goldman’s need to change
• Quote of the day: Investment Bank Leverage
• Bloomberg is coming down hard on Goldman
• Banks: are mergers in the offing?
• Goldman loses $2.1 in the third quarter

In the months since I began this website, I have had some fairly harsh things to say about economic policy in the U.S., the U.K. and elsewhere. I have consistently condemned what I think is a captured government promoting an unstable financial system and a bloated financial sector. But, I have made a conscious effort to not use the word ‘bankster’ because I find it unfair and dehumanizing.  Other bloggers may disagree, but allow me to tell you why I have made the choice I have.

I look more to government and its regulators as the problem than the banks. As an example, my post “Forget about Goldman” is about why it is government at fault when Goldman Sachs gets preferential treatment.  I make much the same point in my post, “Why is Goldman allowed to game the system?”

Wall Street, indeed the financial services industry globally, employees hundreds of thousands of people. These people do not magically transform into ‘banksters’ looking to steal grandma’s pension when they start working on the Street or the City. They are no different than you or I.

The problem is government. Our policy makers are the ones who allowed easy money and lax regulation to become the status quo. They are also the ones who gain power through the political patronage of special interests as we have seen not only in banking, but in healthcare and oil and gas.  Government has created a lawless environment in which far too many individuals have committed fraud and far too few have been prosecuted. But the vast majority of people in the financial services industry are hard-working honest individuals who do not deserve to be labeled banksters.

Take the recent Washington Mutual expose that I linked to in an earlier post. There was a telling few lines involving a veteran WaMu employee that goes to the heart of the problem. It says regarding a predatory loan product at WaMu:

The White House is pushing for a new consumer regulatory agency to end these sorts of abuses, but the banking lobby and even federal banking regulators are opposed. Banks say more regulation would kill innovation.

"I hated that loan," said Mary Kay Morse, a 20-year veteran at WaMu whose job was to persuade independent brokers to make option ARM loans. "It’s just not a good loan. It wasn’t good for the borrower."

That loan affected her opinion of WaMu.

"I always felt like I worked for a really honest industry that cared for the borrowers they dealt with," she said. The corporate culture changed to: "We just want to do the most we can to make money for the bank."

How could she have changed anything when the whole force of the system was working against her instincts? Should she have quit her job, left the industry, or blown the whistle? And to the degree she participated in getting these option ARMs out to consumers, is she complicit in the whole web of deceit?

To me, these are important questions which go to the concept of “collective guilt,” where people go along to get along while crimes are being committed in their midst. What got me to thinking about this issue was a BBC Documentary podcast called “Assignment – Protecting Britain’s Children” which I listened to this morning. The issue was social services in Britain and their complicity in the horrible death of an infant called Baby P at the hands of his parents in Britain. The incident caused shock and outrage, much of which was directed at Britain’s social workers, who were seen as complicit in the death.

Some social workers felt ashamed of who they were. Others left the field. Many more felt besieged by the public as a whole. I listened to all of this thinking of the parallels to the banking industry, which was crystallized for me when I read the Washington Mutual article. I see both episodes as related to some sort of collective guilt.

I have a problem with assigning this collective guilt to so-called ‘banksters.’ Yes, we should want regulators to do their jobs and prosecute people for fraud. We have not seen any prosecutions I know about from the alleged predatory lending at Washington Mutual or Countrywide Financial. This is yet another example of the permissive and destructive regulatory environment which created this mess.

But, we should stop well short of making blanket accusations of blame. The notion that there is collective guilt here is something we need to examine and address. I, for one, do not support it. I see captured and weak government as the problem.

Blame the government for setting up a rigged and corrupt system without adequate checks and balances. Vilify regulators for encouraging fraudulent practices that ripped off and bankrupted ordinary Americans and led to a fantastic crisis. Reserve your enmity for a system which encourages greed and naked self-interest at the expense of the broader economy and financial stability. And demand action.

Don’t hate the player, hate the game.

Related posts:

• On so-called bureaucrats in Washington and the morality of capitalism
• Consolidation through merger over bankruptcy
• WaMu: Mr. Smith goes to Washington and turns predatory
• WaMu on the brink of disaster: has agreement with regulators
• Anecdotes on reckless lending at WaMu from the Seattle Times

The title of this post is somewhat misleading – designed to be provocative to get you to read what I have to say. Indeed, I am going to defend Goldman Sach’s right to pay what it likes to its employees. But, I am also going to defend your right to be outraged and to look for redress.

Socialism?

Let’s start this off with another provocative statement which encapsulates my thinking on the issue:

The teabaggers who showed up in the summer at Town Hall meetings to shout down politicians and scream ‘socialism’ at anyone who would listen because Barack Obama was going to pull the plug on granny need to redirect their anger. By socialism I take it they mean central planning in a capitalist society. If they want to see socialism in action, look no further than banking.

Yes, that’s how I want to lead into this issue.

Let’s state the obvious: banking is a legally sanctioned cartel. In the US, the federal government by law has nominal control over the entire monetary and lending apparatus- both the printing press and interest rates – via the Treasury and the Federal Reserve respectively. The state and federal government also control who gets to be a bank by accepting and rejecting applications for bank charters and seizing banks which fail to meet their obligations as safe and sound lending institutions.

Let’s call this what it is: socialism.  One can argue whether this is the right way to run a banking system. But let’s put that (ideological) argument aside and focus on the specific issue of bonuses within that system – and whether the government’s controlling them is ‘socialism’ and whether we should accept that control.

Should the government Get to dictate who gets how much in the financial sector?

Goldman’s bonuses?

When Goldman Sachs reported record profits for the third quarter of this year, they also told us they were setting aside a record amount of money to pay bonuses.  Goldman’s record bonuses were not the only signs of champagne and caviar on Wall Street: JPMorgan Chase reported preparations for huge payouts as well. Even Citi and Bank of America are poised to pay billions. Over in the UK, the same is also true in the City of London, one reason London residential property prices are rising. Bankers are poised to make tens of billions.

Meanwhile, in the real world, the unemployment rate is still rising, we are seeing record numbers of foreclosures, and households are struggling with unprecedented levels of debt. And much of this has to do with the the inability or unwillingness to lend by those same bankers, many of whom are making millions individually. Clearly, there is something wrong with this picture.

The Obama Administration, which helped orchestrate a bailout of the banking system as the first priority when it came into office, has been asleep at the wheel quite frankly. It should have been patently obvious to them that bailing out the bankers while allowing them to pay themselves billions in the middle of a depression was going to create a backlash, ruin their credibility as agents of change and sow the seeds of a Democratic Party nightmare in 2010.

Obama has wasted political capital bailing out the financial sector. This is why people were yelling socialism at town meetings when Obama wanted to pass healthcare reform – something you should see as misdirected anger which the health insurance lobby is all too willing to exploit. What’s funny is that the bailouts are not just killing Obama’s street cred; they are also poisoning the chalice on Wall Street. Big bank CEOs – to a name – spited the man by not showing up at his big financial reform speech. And bankers are not ‘happy’ with Obama for having received their bailouts as political contributions are down.

At least they are beginning to realize their mistake. They are now admitting publicly that even Goldman Sachs would not exist except for the largesse of government. Witness these comments from Larry Summers as reported by Paul Krugman on Monday.

There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.

But, what are you going to do about it?  Are you going to try to cap bonuses?  How about a windfall tax as has been proposed in Britain. This is where I say “keep your hands off Goldman’s bonuses.”

Capping pay

Is capping pay a legitimate way to run an industry?  Paul Krugman thinks so:

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that.

All I can think is that this was another example of something we’ve seen before: Mr. Obama’s visceral reluctance to engage in anything that resembles populist rhetoric. And that’s something he needs to get over.

It’s not just that taking a populist stance on bankers’ pay is good politics — although it is: the administration has suffered more than it seems to realize from the perception that it’s giving taxpayers’ hard-earned money away to Wall Street, and it should welcome the chance to portray the G.O.P. as the party of obscene bonuses.

Equally important, in this case populism is good economics.

No, it’s bad economics.

Here’s an idea:

You, down the street, packing and hauling those boxes –everyone else in the city is making $27,000 for packing and hauling. You’re making $43,000. I don’t care if your company is more profitable — that’s too much. We’ll leave you a little upside but not THAT MUCH upside. Your pay is officially capped at $37,000.

Is that what you want?

You say:

Edward, it’s different with bankers. They’re just greedy. They don’t need the money for basic necessities like food, rent and utilities.

Neither do Madonna, Will Smith, or Tiger Woods. Should we cap their pay too?

You say:

Well, no. They earned the money. The bankers are greedy. Greed is not good. It is excess and it needs to be stopped. it’s just not fair.

Now, you are on to something.

The issue is the bailouts

The problem here is fairness.  What you have here is a case where bankers have received huge wads of taxpayers’ money to save them to perform their central roles in supporting economic growth as lenders and depositary institutions.

The populist take: The banks took the bailout money and, instead of lending, they went out, leveraged up, and put their casino money in proprietary trading, mergers and acquisition and broker dealer activities. Then they paid themselves record – not just large, but record – bonuses with our money.  It is theft, plain and simple.

I hope I have the sentiment about right.  I share those sentiments. 

The question again is: what should we do about it? The position that government can just arbitrarily reach into some private enterprise’s internal affairs and make individual decisions on its behalf is indefensible. That is not how capitalism should work and I am not buying into that argument.

What should have been done when Obama came to office in the first place is bankrupt organizations should have been seized and broken up, sold, recapitalized or liquidated. That is what was discussed in February as nationalization, but what I call pre-privatization. If insolvent big banks had been seized during the panic, all contractual obligations would have been rendered null and void. There would have been no $100 million payout for Andrew Hall, no billions in bonuses, nothing.  The slate would be wiped clean and the government as temporary owner (and a bankruptcy judge) could briefly decide who gets what before the assets were disposed of. And of course, all of the other problems like overcapacity, lower lending to protect weak capital bases, excessive risk taking would have disappeared as well.

But, that never happened because the Obama Administration and Congress are captured. Rahm Emanuel is famously rumored to have said ‘never waste a crisis.’ Well, guess what? Your administration just wasted a crisis. As for capture, call it kleptocracy. Call it corporate communism. Call it crony capitalism. Call it whatever you want – that ship has sailed. We never took over the banks. We never demanded a say on pay in exchange for government backstops. We gave the banks everything they wanted with no strings attached. Oh, there was the stress tests. But the stress tests were a sham right from the word go. Irrespective, the government has no legal authority to reach inside Goldman Sachs and start dictating pay any more than it has authority to do the same at your company.

What the government has the power to do is four things:

1. Break up the big banks
2. Start regulating the banking industry properly.
3. Prosecute fraud and criminality in banking.
4. Set up a proper too-big-to-fail resolution process to seize bankrupt large financial institutions.

What can you do?

1. Stay informed.
2. Speak out.
3. Show politicians you want real change.

Financial Reform Poll Memo

Related posts:

• Goldman loses $2.1 in the third quarter
• Goldman partners get margin calls
• Forget about Goldman
• Goldman and Morgan Stanley are now banks
• Obama and health care: Wasting political capital

The following is a re-print of the latest monthly newsletter from Niels Jensen of Absolute Return Partners, published with the express permission of the author. Visit www.arpllp.com to learn more about Absolute Return Partners.  You can reach the firm  by email at info@arpllp.com.

The Absolute Return Letter

October 2009

A Country for Old Men and a Bit of Samba

The Man Card “Excuse me Sir, can I see your Man Card?” The stone-faced look of the security guard at Dallas Fort Worth Airport gave nothing away and, after two days of celebrating John Mauldin’s 60^th, my brain was probably operating somewhat below full capacity. “I need to see your Man Card Sir”. Couldn’t he just go away, I thought to myself, not really sure how to deal with the situation. Suddenly his face cracked wide open and in the broadest possible Texas drawl he said: “With those pink socks on Sir, I need to make sure you are a man”. Welcome to Dallas!

The highlight of the weekend was a two hour roundtable discussion on Saturday afternoon where John had asked 15 of his friends and business associates to share with the group what their fears and hopes were for the next 15-20 years. I duly noted that the issues on the minds of our American friends are not at all dissimilar to what we worry about in Europe – our children’s welfare, unemployment, immigration, racism, the impact of technology and the aging of our society to mention but a few.

This month’s letter is about demographics and is the second in our series about major trends defining the future of the world we live in. Last month I wrote about the energy outlook, and I had an unusually high number of emails commenting on the letter. Many of them made the point that the world is in better shape than I seem to think, even if oil supplies are dwindling, as natural gas reserves are ample. We just need to switch source. Whilst I don’t disagree that natural gas seems the way forward, one should not underestimate the task ahead of us. About 2/3 of all oil is used for transportation purposes and it is an enormous task to reduce our oil dependency. It will take many, many years and cost gigantic sums of money.

It is the banks, Stupid! Back to this month’s topic – in the financial press, there has been no shortage of attempts to apportion blame for the credit crisis. Disregarding the more obvious finger-pointing (it is the banks, stupid!), there seems to be a growing acknowledgement that large imbalances in the global economy are to blame for the current mess.

Put differently, a large number of countries – mainly Anglo-Saxon in origin but also the majority of our Eastern European friends – became credit junkies and spent beyond their means, year-in year-out. Conversely countries with large current account surpluses (e.g. China, Japan and Germany) were only too happy to deliver the drug to the intoxicated.

It is therefore too simplistic to suggest that only the deficit countries are to blame. The suppliers of credit must accept that they carry no small part of the responsibility, just like the drug dealers do when supplying junkies. In the past, I have been critical of Ms. Merkel of Germany when she stated publicly that Germany should continue to do what Germany does best, and that is to export goods of high quality. The obvious point here is that if Germany pursues such a strategy, the world will be no more balanced ten years from now than it is today, and a crisis similar to the one we have just been through could happen again.

It should therefore be obvious that not only should the deficit nations become more disciplined (i.e. save more and spend less), but the large surplus nations should actually put measures in place to ensure that their citizens save less and spend more. In practice, however, that is easier said than done. Demographic forces have a much bigger say on spending and savings patterns than generally acknowledged.

The Life Cycle Hypothesis My story begins with Franco Modigliani. In 1985 he was awarded the Nobel Memorial Prize in Economic Sciences for his life cycle hypothesis which (somewhat simplified) states that spending and savings patterns are predictable and largely a function of demographics. When you are in your 20s and 30s, savings are low as much of your income is spent on establishing a family, buying and furnishing your home, putting the children through education, etc. Then comes a phase, from your early to mid 40s until just before you reach retirement age, where your savings grow significantly. The outgoings are smaller during this phase of your life as the kids have left home, and you focus on accumulating wealth to pay for your retirement. Eventually, when you retire, your savings rate turns negative as you begin to live on your life savings¹.

Empirical evidence has since shown that this is generally true both for the individual and for society at large. Obviously, you don’t win the Nobel Prize for pointing out something that can hardly be classified as original thinking, but Modigliani’s claim to fame was to demonstrate the effect this pattern has on the general economy as the population ages. Let me introduce you to a chart constructed by fellow Dane Claus Vistesen who is an economist and active blogger. He has made a solid attempt to graphically illustrate the consequences of Modigliani’s work (chart 1).

Chart 1:   Age’s Effect on the Current Account

Source: http://clausvistesen.squarespace.com

The blue line represents the current account – it is in surplus when above the red line and in deficit when below. As you can see, when a country’s population is relatively young, the country should (all other things being equal) run a current account deficit. As the population grows older, and the savings rate rises for the reasons described above, the deficit turns into a surplus until such time that the elderly begin to dominate the young at which point the surplus turns into a deficit yet again.

Our export dependency Why is all this important? Well, take another look at chart 1, but focus on the purple line instead, which represents the country’s export dependency. Translated into plain English, Modigliani’s work implies that a country with an ageing population must grow its exports aggressively in order not to build up an unsustainably large current account deficit. Unfortunately, as you can see from the shape of the curve, it is not a linear function. The problem gets progressively worse as the population ages.

Now, with most OECD countries fast approaching the danger zone where an uncomfortably large part of the population consists of old-age pensioners, how do we get out of this pickle? We can’t all export our way out of the problem. Somebody needs to buy our products. I will get back to answering this question later, but let’s take a quick look at the so-called dependency ratio first. If the ratio is, say, 30, it means that there are 30 people at the age of 65 or older for every 100 people between the age of 15 and 64 (which defines the working population).

Obviously, the higher the dependency ratio, the fewer working people there are to pay for the elderly. At some point the cost of supporting the elderly will reach a level which spells economic disaster, and some of the more exposed countries may quite simply be forced to abandon their welfare standards to cope. More about this later – let’s get some data points on the table. In chart 2 below, I have tried to keep things relatively simple. I have assumed, for example, that the fertility rate will remain unchanged going forward. This may or may not be a reasonable assumption. Only time can tell.

Chart 2:   Old Age Dependency Ratios for Selected Countries

Source: http://data.un.org/

A walk in the park The first thing that struck me when I produced this chart was how relatively benign the US outlook is. I read an awful lot of US centric macro economic research (my wife thinks too much!) and, more often than not, there is a reference to the bleak future for America given the fact that baby boomers in large numbers will be retiring over the next two decades. However, when you compare the US numbers (a dependency ratio of 19 today growing to 34 by 2050) to most other developed nations, the US demographic challenge suddenly looks like a walk in the park.

No other country is aging as quickly as Japan. Saddled with a large number of old age pensioners already (the dependency ratio is currently 35), the ratio will grow to an astonishing 76 over the next four decades. The Japanese economy has struggled to drag itself out of a slow growth environment for the past twenty years (give or take). The problems in Japan are well publicised and are often blamed on failed policy measures. I just wonder how big a role demographics have actually played in all of this and whether the Japanese mire is a sign of things to come for the rest of us?

Europe is toasted The outlook for Europe doesn’t make for pretty reading either. In fact, you can argue that we are worse off than Japan given our lower savings, and it raises some serious questions about the sustainability of our entire welfare model. The IMF has calculated that the cost of age-related spending in the average advanced G20 country will cause public debt-to-GDP to grow to over 400%, with Spain and Greece reaching over 600% unless the existing welfare model is cut back (see the April 2009 Absolute Return Letter here). For comparison, Japan has the highest public debt-to-GDP ratio today at about 225%.

As our business partner, John Mauldin, always reminds us, what cannot happen, will not. We may have to prohibit the use of condoms (not advisable for other reasons), import more labour from countries with higher birth rates (immensely unpopular) or simply reduce old-age benefits. The latter carries its own set of challenges as the political influence of the elderly is on the rise, and it won’t exactly become any easier over the next 20 years to pass draconian legislation to reduce old-age benefits. Frankly, I have no idea how we will find a way out of this pickle. But find a way we will.

BRICs versus PIGS As far as emerging economies are concerned, the outlook is considerably brighter (note the big difference between the BRICs and the PIGS in chart 2) but perhaps not as straightforward as you may think. Most investors seem to buy into the idea that, over the next few decades, emerging markets will offer better investment opportunities than more mature markets, as their economies are likely to grow much faster, and you don’t yet pay for the faster growth through higher P/E ratios. Whilst we wrestle with depressing issues such as how to pay for the credit crisis and how not to bankrupt ourselves as we age, emerging economies should benefit from a growing labour force. In fact, as you can see from chart 3, in the next few years less developed countries, which tend to have very young populations, will actually outgrow more developed countries in terms of the size of the working population relative to the total population (which is good for economic growth).

Chart 3:   Working-Age Population as % of Total Population

Source: http://data.un.org/

The growing number of workers should, according to Modigliani, be followed by stronger economic growth and rising savings. If these savings can be invested into new productivity enhancing investments, emerging economies should enjoy much higher living standards in the years to come. You may raise a hand here and say “STOP – didn’t you just argue that countries with young populations should run current account deficits and hence low savings rates?”  It is indeed correct that ‘young’ countries should, according to Modigliani’s hypothesis, not be able to generate savings rates at the magnitude we have seen coming out of South East Asia in recent years.

Cheating is omnipresent But Modigliani didn’t take cheating into account. Virtually every country in Asia has artificially depressed its currency in recent years in order to export itself to prosperity. This cannot, and will not, go on forever. As living standards rise in these countries, and domestic demand fuels economic growth, expect their currencies to appreciate against the old world currencies.

At the same time, one should not ignore the fact that not all emerging economies have young populations. I have included the four BRIC countries in chart 2 in order to make this point clear. As you can see, by the middle of the century, China and Russia will actually both have a higher dependency ratio than the United Kingdom, whereas Brazil and in particular India should continue to benefit from relatively young populations.

In a recent research paper², BCA Research analysed a number of emerging economies and found that, broadly speaking, they can be divided into 3 categories – those where the working population is peaking just about now, those that will peak in the next 7-10 years and finally those where the peak is still 15-20 years away (chart 4).

Chart 4:   Demographic Profile of Emerging Economies

Source: BCA Research

It is clear from BCA Research’s work that some countries are in much better shape demographically than others. Most interestingly, China, which everybody (well, almost everybody) raves and rants about, does not look particularly attractive. Obviously you cannot judge the investment appeal based only on demographics, but if you add to that China’s fragile banking system and a construction boom which has left most new buildings half empty and led the Chinese authorities to block local access to hedge fund manager Hugh Hendry’s website, because he had the audacity to point out the insanity of many of the construction projects in China, then the Chinese investment story loses some of its glamour.

Too much of a good thing A great growth story like China will always attract plenty of capital but, in the case of China, you can actually argue that too much capital has been attracted. As I was taught at university, economic growth loses its momentum if capital spending outgrows labour because of the diminishing return on capital. BCA has illustrated this graphically (chart 5), and it is obvious that China is attracting too much capital for its own good. You want to invest where capital is scarce, not plentiful.

Chart 5:   Capital-to-Labour

Source: BCA Research

You are therefore likely to earn a higher return on investment by investing elsewhere in the universe of emerging economies. One such country is Brazil which does not attract nearly the amount of capital that China does. I have been keeping an eye on Brazil for some time now as I am intrigued about their fledgling oil industry, and the more I learn about this country, the more excited I get. The story has not gotten any worse in recent days after the International Olympic Committee’s decision to award the 2016 summer games to Rio de Janeiro. But that is an entirely different story which I may write more about another day.

Going back to the question I raised earlier, how do we get out of this pickle? As already stated, we cannot all become exporters as we grow older and domestic demand begins to fade. The only way out, if we want to maintain economic growth, is for the younger and more dynamic emerging economies to become net importers. This will require a sea change in policy, and attitude, in those countries. Most importantly, it will require the exchange rate cheating to stop once and for all. There is no alternative, unless you are prepared to accept negative GDP growth year-in year-out. And that is no fun.

Niels C. Jensen

© 2002-2009 Absolute Return Partners LLP. All rights reserved.

See other posts I have published referencing or presenting Niels’ analysis.

• The emerging markets crisis – Nov 2008
• Do BRICs (and Germans) Eat PIGS? – Feb 2009
• Europe on the ropes – Mar 2009
• The Fake Recovery - Apr 2009
• Green Shoots or Smoking Weed? – May 2009
• Make Sure You Get This One Right – Jul 2009
• The Hamster on the Wheel – Sep 2009

Related posts:

• Chart of the day: household debt vs. savings
• Chart of the day: Savings Rate
• Low savings, high debt and interest rate policy
• Savings in America hit 5%, up from nil last year
• Jim O’Neill on the Global Economy

Jesse of Jesse’s Café Américain posted on the important subject of deregulation in his last post, “Why the Austrian, Keynesian, Marxist, Monetarist, and Neo-Liberal Economists Are All Wrong.” In it, he opined that it is entirely wrong-headed to assume everything will be alright if we just let free markets work their magic. I want to take his thoughts one step further because I think there is a misperception about what the free market entails and why the deregulation movement went astray.

Kleptocracy defined

First, a framework.

Last March, I posted an article called “A populist interpretation of the latest Boom-Bust cycle” in which I used Jared’ Diamond’s viewpoint of stratified societies as Kleptocracies as a lens through which to understand the secular trends which have characterized the last generation of western economic history.

To review, Diamond won a Pulitzer Prize in 1998 for his book Guns, Germ and Steel, which is a narrative of how Eurasian societies as a whole have dominated others throughout the last 10,000-odd years.  One of his basic premises is that Eurasian societies are stratified, and hence less egalitarian, allowing individuals to specialize. The hierarchy and specialization have combined to give these societies advantages that less stratified (and less resource-rich) societies do not have.

The corollary of this – and where I want to concentrate – is that advanced societies are not egalitarian. Some will de facto have more, and others will have less.  Moreover, as Diamond asserts, this lack of equality becomes, in essence, a kleptocracy i.e. a reverse Robin Hood organization where the elites enrich themselves at the expense of the others.

This has been the reality in all advanced societies based on agriculture, manufacturing and services for the last 10,000-odd years. This social structure has been net beneficial to the societies employing it in comparison to more simple societies – a case of a rising tide lifting all boats. So, on some level, kleptocracy is nothing about which to get irate.

The problem is that not all kleptocracies are created equal. At some point, the ruling class overreaches in a way that subtracts from rather than adds to the overall prosperity of the society. Cries of “throw the bums out” are heard, an uprising ensues and a new elite is installed who themselves turn to the same methods of kleptocracy to ensure their own power.

I suggest you read my ‘populist’ post or Diamond’s book in full for more on this.  His book is quite enlightening.

Where free market ideology fits in

Obviously, if some always have more power and wealth than others, there is never a situation in which the economic playing field is level. Moreover, it is axiomatic that those with the means and access will always have greater influence over government than those without. So, in a very real sense, the socioeconomic elite of any advanced, stratified society will always  have disproportionate control of the economic and political system.

Now, I happen to be a Libertarian-minded individual, so I have nothing against the free markets or the concept of small government and deregulation.  Freer markets and smaller government are my preferred ideal. However, I am a realist. I understand that markets are never truly free and government fulfills a necessary function.

So, when you hear someone talking about getting government out of the way and allowing the free markets to work, you should be thinking about the influence and control this would naturally engender.

Think crony capitalism

In fact, I would argue that the deregulation and free market capitalism that these individuals refer to is really crony capitalism in disguise. I will explain.

When I think of deregulation, I think of two related but distinct concepts.  The one is the actual de-regulation, which is the permission of economic actors to compete in markets previously unavailable to them by order of legislation or de facto government intervention and coercion.  The other is regulatory oversight, which is the maintenance of specific rules of engagement under threat of penalty on economic actors by government. De-regulation and regulatory oversight are related concepts but they are not the same.

I am a proponent of deregulation – a major reason I don’t see the re-imposition of the Glass-Steagall Act as the solution to what ails us.  When you look across industries that have been deregulated, from energy to transportation to finance, invariably competition has increased and prices have come down, benefitting consumers. That is what deregulation is supposed to do.

On the other hand, whenever you have witnessed lax regulatory oversight after deregulation, it has always been an unmitigated disaster (examples include finance in Sweden, the US and the UK, air travel in the US, energy markets in the US). De-regulation and lax oversight make for a particularly potent cocktail. It’s like allowing your twenty-year old and his friends to drink beer at home under your supervision, but then telling him he can raid the liquor cabinet when you go away for a week-long vacation.  What do you think is going to happen?

But, if you mix a lack of oversight with deregulation knowing that the political and economic playing field is not even, you are inviting corruption aka crony capitalism. Why do you think the Washington Post was trying to sell access to politicians on health care reform? Why was Lloyd Blankfein the only CEO in the room when AIG’s fate was being decided? Why did the Obama Administration make a secret deal with the pharmaceutical lobby on health care? You might answer that these examples show isolated cases of crony capitalism in an age of special interests. I would argue that you are just seeing the kleptocracy pendulum swing too far. This type of cozy relationship between government and industry has always existed. This is the reason a codified and robust structure for regulatory oversight exists – to prevent this type of thing from tilting the playing field too far.

So, if you want to boil this post down into a sound bite, think: deregulation good, but regulatory oversight necessary. Without the necessary check on the power of special interests that adequate regulatory oversight provides, deregulation is simply another word for crony capitalism.

Related posts:

• A populist interpretation of the latest Boom-Bust cycle
• Greenspan: financial crisis ‘will happen again’
• Crony capitalism: Bush policies on oil and in Iraq
• Greed is not good
• More on greed, regulation, Lehman and the financial industry

Many economic prognosticators believe Chinese consumption growth is key to a global economic recovery.  The US consumer, who had been the buyer of first and last resort during the bubble years, is tapped out and indebted.  The new engine of global growth must come from elsewhere.

On Friday, BBC Radio 4 released a broadcast called “Selling Cheese to the Chinese” recounting how Europeans and North Americans are aggressively hawking their culinary wares to the burgeoning Chinese middle class. For young twenty-somethings who have lost an appreciation for their own culinary history due to its suppression during Mao’s Cultural Revolution, western products have a certain appeal.

For those seeking status, there are even French wine and cheese parties designed to ‘educate’ about European culinary delights.  Some can even spend a month’s salary drinking single-malt Scotch in bars.  Welcome to the wonderful world of conspicuous consumption in China.  Is this the new source of global growth?  Western companies and entrepreneurs sure hope so because they are falling all over themselves trying to break into the Chinese market.  Personally, I am sceptical. This report tells the tale.

Have a listen below.

Source

Documentaries Podcasts – BBC World News

Related posts:

• China’s savings habit
• Conspicuous Consumption
• Folks trade down and shift to house parties to get a buzz
• The China gold announcement is not that significant
• Stephen Roach sees a W-shaped recovery for China

This was a front-page story at the Wall Street Journal today.  It should bring home the problem with lack of benefits in America. Also see Mark Thoma’s post yesterday on health care called "The Hottest Places in Hell are Reserved for Those Who, in Times of Moral Crisis, Maintain a Neutrality".

A link to the WSJ print story is at the bottom.

Source

Slump Spreads to Health Care as Michigan Loses Auto Jobs – WSJ

Related posts:

• The purpose of health care reform
• Christina Romer: The Economic Case for Health Care Reform
• Obama and health care: Wasting political capital
• Healthcare in America and eating our young
• WaPo cancels paid White House-Congress-lobbyist hook up

Credit is still tight despite the low Libor rates and other signs that market stress has died down. Case and point is an item I ran across on the Norwegian site E24. Apparently, Amsterdam is losing revenue as its prostitutes in the red light district cannot get credit.  Here is my translation of the story:

The City Council in Amsterdam is turning its attention to a pressing problem. One of the city’s key industries is struggling to obtain credit and banking. And it will now take elected officials to clear things up, reports Reuters.

The city’s red light district is known for women which lure customers through tiny windows with even tinier clothing. But despite the activities being completely legal, many banks do not want these women as customers.

The City Council will put an end to this. As part of a facelift for the De Wallen neighborhood, which also includes the red light district, the City Council has been asked to help bordello owners and employees to make banking connections more accessible.

Over the course of two months, a solution will be put in place that can help the industry. But the City Council will not establish or sponsor a separate sex bank, as reported by a local newspaper.

It’s a somewhat amusing little story, but the overall point is clear.  Credit is still restrictive the world over and that means deleveraging is still continuing apace.

Bankkrise for prostituerte – E24

Related posts:

• Bank of Canada blames Geithner for financial mess
• CIT: $3 Billion Credit Facility and Recap Plan
• Bloomberg wins Freedom of Information lawsuit against Fed
• Bloomberg News vs. Fed: Judgment against Fed attached
• Bloomberg News is still after the Fed for more disclosure

In America tomorrow is July 4th, which is a big celebration.  For a lot of people it means fireworks.  But, fireworks are actually pretty dangerous.  So before you go out and buy those illegal M-80s, you need to watch this video.  Do not try this at home (you know I’m talking to you David).

Otherwise, have fun!

Related posts:

• A conversation about Prop. 8 with David Boies on Charlie Rose
• A conversation about the growing fiscal deficit on Charlie Rose

Just when you thought things couldn’t get any more questionable in Washington, then along comes this (hat tip Tom).

Washington Post publisher Katharine Weymouth said today she was canceling plans for an exclusive "salon" at her home where for as much as $250,000, the Post offered lobbyists and association executives off-the-record access to "those powerful few" — Obama administration officials, members of Congress, and even the paper’s own reporters and editors.

This is not a joke, it was a serious plan whereby the Washington Post was set and ready to use its publisher’s home to bring together lobbyists on the one side and White House and congressional people on the other.  Boy, I wish I had that kind of access.  But, then again, I would have to pay a lot of money.  On second thought, maybe it’s not a good deal.  But, hey, if you are a health care lobbyist (the type of lobbyist this event was designed for), then you’ve got the dosh.  Why not?  Apparently, not every lobbyist felt that way.

The astonishing offer was detailed in a flier circulated Wednesday to a health care lobbyist, who provided it to a reporter because the lobbyist said he felt it was a conflict for the paper to charge for access to, as the flier says, its “health care reporting and editorial staff."

To sum up, the Washington Post, which last nearly $20 million in the first quarter, has made bringing people together another proposed revenue source.  In this case, it was to bring together lobbyists and government and was to be paid by the lobbyists for doing so.  When some invited lobbyists felt this was a conflict of interest, Politico was able to get its hands on an invite.  As a result, the Post cancelled the event.

Oh, and by the way, if you think that U.S. health care reform proposals are not heavily influenced by lobbyists, you might want to read the full account below.

Source

Washington Post cancels lobbyist event amid uproar – Politico

Update 940AM: Below are some additional sources with reports of damage control by the Washington Post.

Washington Post Flap: How They Played It – Karen Tumulty, Swampland
Pay-for-Chat Plan Falls Flat at Washington Post – NY Times
Post Co. Cancels Corporate Dinners – Washington Post

Related posts:

• Doubling down at AIG
• Congress passes the bailout bill
• Obama leads McCain by 2 points
• Congress does need to act on the Economic Patriot Act
• Question of the day: Would we go to war for Georgia?

As Americans ponder the health care reform initiatives now coming from Congress and the Obama Administration, I want to say a few words about what the subject means to me.

America is often touted as the richest country in the world.  It is certainly a rich nation with an advanced economy.  As such, certain basic services and protections should be taken for granted. What is the point of being a rich nation if basic needs are not met?

From the beginning, national defense was a clear service and protection offered to all residents. Eventually, these protections and services expanded to include education and the right to vote for all adult citizens. After the calamity that was the Great Depression, we also realized that a less porous social safety net was necessary. Unemployment insurance came into being.

Now, in the 21st century, more than 230 years after our first Independence Day, isn’t it time that access to insured basic preventive and emergency health care get added to this list?

I am not saying that all American residents must have comprehensive coverage.  What I am saying is this: it is utterly deplorable that the richest nation in the world could allow millions of its own citizens and residents not to have insurance against basic health care needs. You must question the value system of a nation which allows many of its residents to be bankrupted in order to get healthy.

Let’s be honest, when costly services like education and health care are provided for through a common pot and everyone pays the same amount, some people are going to get a better deal than others.  But, so what?  That is the reality.

So, when you are thinking about health care reform and how to get it,  you should be asking yourself why we need reform at all.  To me, it has little to do with cost, little to do with who administers it, and little to do with who profits from it. Those are technical issues – vitally important to cracking this nut but not the core issue of health care insurance.

The core of this debate has to do with basic values: Which rights and protections do Americans believe should be available to all residents of an advanced economy in the 21st century?  In my view, health care insurance is one of them.

Related posts:

• Christina Romer: The Economic Case for Health Care Reform
• Yes, we’re bitter!
• Obama and health care: Wasting political capital
• Personal story on devastating loss of health care benefits
• What real comprehensive healthcare reform looks like

I happened upon an article about shops being closed in France that highlighted a larger issue about cultural attitudes in the U.S. and Europe regarding work, leisure and material wealth.  I would like to share some thoughts with you on these issues because I think they are significant in regards to savings, debt and other issues at the heart of the recent economic bubble and meltdown.

Shops closed? How 19th century.

First, the blurb on French shops posted by Jay Newton-Small on Time Magazine’s political blog Swampland.

Michelle Obama has unwittingly caused a national French debate over working on Sundays. It seems the First Lady wanted to take Sasha and Malia shopping while there: the problem was virtually every store in Paris is closed on Sundays. There is a ban in France, a Catholic country, on working the day God rested. Embarrassed, Prime Minister Nicolas Sarkozy personally called a few stores and asked them to open especially for the Obama ladies. Sarkozy has since introduced a law, expected to be voted on in the National Assembly on July 6, to allow shops in touristy areas to remain open on Sundays. In an article entitled, "If You Have to Work Sundays, It’s Michelle Obama’s Fault," Sarkozy, roughly translated, argues: "Is it normal that when Mrs. Obama wants to visit French stores with her daughters on a Sunday, I have to make a call to have them opened? Everyone in President Obama’s entourage was present, great. Who then had to explain to them why we are the only country where, even in Paris, everything is closed on Sunday?" A spokesman for the Communist Party responded saying Sarkozy "crossed the line" by invoking Michelle Obama. Vivre le shopping!

In America, shops are open every day, often well into the night when most people are at home with their families.  This is especially true in America’s big cities, especially in the northeast and west.  Clearly, Michelle Obama has been living that lifestyle and was unconscious of how different it can be in Europe or even in other parts of the U.S.  It is admirable that the First Lady spends so much time with her children. However, in this case, every hour extra she gets to go shopping with her daughter is one hour less that the people working in those shops have with their own children.

So, why the cultural divide here?  Religion is certainly part of it in the Midwestern and Southern America and in France – hence the allusion to France’s being a Catholic country.  But, Germans also frown upon opening shops on Sunday as well and they are not all Catholics, though many are.  I would say much of the difference has to do with culture.

Europe equals leisure while America equals wealth

A few years ago, three economists (including a brilliant former classmate of mine, Bruce Sacerdote) produced a paper called “Work and Leisure in the U.S. and Europe: Why so Different?” Below is the abstract. (emphasis added)

Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe. Another popular view is that these differences are explained by long-standing European "culture", but Europeans worked more than Americans as late as the 1960s. In this paper, we argue that European labor market regulations, advocated by unions in declining European industries who argued "work less, work all" explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations.

Translation: Europeans worked more than Americans just four decades ago, but now work less. Thus, they are taking more of the benefits of increased wealth since that time in the form of leisure over material gain than do Americans.  In a nutshell, Americans are more materialistic than Europeans.

Now, you can argue why Americans work more.  The economists make the case for unions as the driving force behind this dichotomy.  That’s an argument for another day.  My focus here is on the fact that cultural differences have developed such that Americans prefer to work many more hours in order to accumulate wealth than do Europeans.

For example, productivity levels in the United States and Western Europe are not that far apart.  The 2008 OECD Factbook as the following quote:

In 2006, GDP per capita in OECD countries ranged from over USD 39 000 in Ireland, Luxembourg, Norway and the United States to less than USD 17 000 in Mexico, Poland and Turkey. On average, income levels were about 70% of that of the United States, Norway is a notable exception with its GDP per capita 14% above that of the United States.

Relative to the United States, most OECD countries had higher levels of GDP per hour worked than GDP per capita because their levels of labour utilisation were substantially lower than in the United States. This owes to disparities in working hours but also, in several countries, to high unemployment and low participation of the working-age population in the labour market.

Europe is just as productive as the U.S. But, clearly Europeans are choosing to work less than Americans.  Think store closings on Sunday in Paris.

The asset-based economic model

The result of America’s drive to work more has been an asset-based economy driven by debt. In America, and similarly in other Anglo-Saxon countries like the U.K., debt and savings are viewed in many parts quite differently than they are in places like Germany.  In the Anglo-Saxon model, people talk about things like efficient markets and wealth accumulation with almost religious fervour. Work is certainly prized as means of accumulating wealth. But, so too are debt and asset accumulation.

That leads to a greater reliance on markets and debt.  Look at any measures of aggregate national debt to GDP and you will see the U.S. and the U.K. at enormous levels over 300%.  The same is true in terms of market capitalisation levels.  The U.S. and the U.K. are much higher in terms of publicly listed companies as a percentage of GDP than, say, Germany.

German politicians disparage this as the Anglo-Saxon economic model – and since it is an election year in Germany, we are bound to hear more of this than usual. I call this the asset-based economic model.  The goal is to accumulate as much wealth as one possibly can by buying as many assets as one can, through income (hard work) and debt (mortgaging future income).

I find all of this a bit like a rat in his cage chasing a hunk of cheese.  After all, there are only so many hours in the week to divide between family, leisure, work and sleep.  And, there is only so much you can borrow against future income. At some point, lenders figure out they have lent more than you can possibly earn and pay back.

And that’s the message here and now, isn’t it? We have seen a massive credit bubble which has taken debt levels to unimaginable proportions – all in the quest for more material wealth.  My guess is that the pendulum, having swung too far in the one direction, is headed back the other way.  While risky debt-financed binges seemed the road to riches in the asset based economy, the conservative new normal will be savings.

My hope is that this new normal not only ushers in a world where high debt and low savings are frowned upon.  I also hope we see a re-allocation of time and energy away from work and wealth accumulation and toward other more important things like family and leisure.

Related posts:

• Barack Obama ushers in a new era in America
• The U.S. is exporting unemployment with ‘Buy America’
• Remittances to Eastern Europe to slow dramatically
• Twenty wealthiest towns in America
• Europe is in for a rude awakening

I was catching up with some of my reading when I happened across a quote from 1930 twice, which led me to write this post on how poor the Obama reform agenda really is. And I want ask you: is Obama Change you can believe in?

The first post by Paul Krugman, “Green shoots, 1930” was used to question whether we are actually moving toward recovery at all. Krugman goes on to use the Eichengreen-O’Rourke graphs on how 2009 is tracking 1930, which I was first in the blogosphere to highlight. (See my post here. Strange how things catch on because I wrote this post on June 14th and the Eichengreen-O’Rourke graph update was from June 4th, with the original being April).

The Krugman post also quotes a story highlighted by a blog I will now follow called “News from 1930” in which a banker from 1930 was waiting for imminent recovery.  Obviously, that recovery did not come until 1933. Then that same story came up again in a post from FT Alphaville, fittingly entitled “News from 1930.”  SO I decided to look at this blog an see what it had to offer.  It is quite good, so I suggest you have a look as well.

The interesting bit for me was seeing the news from June 24th 1930.

Senator Glass is heading a subcommittee considering extensive changes to banking regulations. Among the changes considered are restricting speculative loans by banks to brokers and stock exchange members, removing the Secretary of the Treasury as a member of the Federal Reserve Board because of undue influence, making it easier for banks to expand nationwide, etc. Anticipated the committee will have meetings all of next year’s session and submit recommendations December 1931.

Now, if you recall, the Glass-Steagall Act which resulted from the work started by this subcommittee did not get enacted until 1933, three years later.  So why is Barack Obama trying to get his inadequate banking reform agenda signed, sealed and delivered by the end of the year?

I have certainly been willing to give the President the benefit of the doubt.  But, I cannot help but wonder whether he is using the same sort of ‘speed is crucial’ tactics that Paulson used in order to pass the TARP so that we get a watered-down, bank friendly reform bill.  After the worst banking crisis in three-quarters of a century, one might think that more comprehensive reform was forthcoming – especially from a politician who touted himself as “change you can believe in.”  But clearly, this is not the case because Geithner and Summers are not looking for reform.  The inadequacy of the reform agenda is a feature, not a bug.

Take a look at what Bloomberg’s Caroline Baum has to say.

The Obama administration’s architects went back to the drawing board and last week produced a blueprint for regulating financial institutions. One controversial aspect of the plan is the creation of a systemic risk regulator, the Federal Reserve, with the power to oversee any financial firm, not just a bank holding company, “whose combination of size, leverage and interconnectedness could pose a threat to financial stability if it failed.”

In other words, the same folks who missed, or did nothing to prevent, the worst crisis since the Great Depression will definitely, absolutely, positively be able to anticipate the next one. Uh-huh.

Are you connecting the dots?  Obama’s Administration is completely captured.  Geithner and Summers were on the job when the regulatory lapses occurred.  It doesn’t take a rocket scientist to figure out that they are not going to give us truly robust reform.

But, what is more troubling is how in bed the Obama administration is with the bank lobby.  Even before the reforms were presented, bank lobbyists were in the White House watering this thing down.  It kind of reminds me of Tim Geithner allowing banks to negotiate their stress test results. So why was Obama consulting the very people who caused the problem in the fist place?  Crony Capitalism.

Take a look at a quote from this missive in the Wall Street Journal today about regulation in the ‘free markets’ era.

It was not merely structural problems that led certain regulators to nap through the crisis. The people who filled regulatory jobs in the past administration were asleep at the switch because they were supposed to be. It was as though they had been hired for their extraordinary powers of drowsiness.

The reason for that is simple: There are powerful institutions that don’t like being regulated. Regulation sometimes cuts into their profits and interferes with their business. So they have used the political process to sabotage, redirect, defund, undo or hijack the regulatory state since the regulatory state was first invented.

Thomas Frank, who wrote that piece says that even in the 1880s when the Interstate Commerce Commission was set up to regulate railroads, we had the same desire to lobby against regulation.  Who wants to have restrictions imposed on them?  No one.

So here we are in 2009 with the change-you-can-believe-in Administration allowing lobbyists to negotiate their capital requirements and to shape regulatory policy.  And lest we forget, most Americans want a public option or single payer health care plan. Yet, Obama is caving here again.  Why?  Paul Krugman makes it seem like its because Obama wants to negotiate and compromise. But is that what’s really going on?  After all, Tom Daschle, the original Health and Human Services nominee was a lobbyist for the healthcare people.  And the HHS Secretary Sebelius used to be a trial lawyer lobbyist.

I’d like to hear from you.  Are you getting the faint whiff of crony capitalism? What do you think – is this a case of ‘negotiate and compromise’ or ‘crony capitalism’?

Here’s my poll:

Related posts:

• Rosner: Financial Stability Act “single worst not-yet passed piece of legislation”
• Obama caves to pressure on consumer financial protection
• Obama’s finance reform speech fizzles; big banks set to reinflate bubble
• Presidential debates crucial in test of economic leadership
• Geithner and Summers consolidate power

The video below comes via FORA.tv (FORA stands for Feed Your Inner Genius).  It is of Christina Romer making the case for Obama’s health care plan at the Commonwealth Club.  This video runs over one hour, and so, should give you a fairly comprehensive view of the economic case Obama is now making for health care reform.

Note that she says that three-quarters of the rise in health care costs has nothing to do with demographics. And that the number of uninsured is rising. “Doing nothing is not an option.”

See the link below for the report on which this speech is based.  The synopsis pulled from that report is below.

• We estimate that slowing the annual growth rate of health care costs by 1.5 percentage points would increase real gross domestic product (GDP), relative to the no-reform baseline, by over 2 percent in 2020 and nearly 8 percent in 2030.
• For a typical family of four, this implies that income in 2020 would be approximately $2,600 higher than it would have been without reform (in 2009 dollars), and that in 2030 it would be almost $10,000 higher. Under more conservative estimates of the reduction in the growth rate of health care costs, the income gains are smaller, but still substantial.
• Slowing the growth rate of health care costs will prevent disastrous increases in the Federal budget deficit.
• Slowing cost growth would lower the unemployment rate consistent with steady inflation by approximately one-quarter of a percentage point for a number of years. The beneficial impact on employment in the short and medium run (relative to the no-reform baseline) is estimated to be approximately 500,000 each year that the effect is felt.
• Expanding health insurance coverage to the uninsured would increase net economic well-being by roughly $100 billion a year, which is roughly two-thirds of a percent of GDP.
• Reform would likely increase labor supply, remove unnecessary barriers to job mobility, and help to “level the playing field” between large and small businesses.

Related articles
The Economic Case for Health Care Reform – CEA website

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Yesterday, I argued that the United States faced a policy dilemma in avoiding debt deflationary forces while maintaining fiscal prudence.  The reality is that President Obama faces political constraints in Washington right now in regards to budget deficits.  He is not likely to get another stimulus package through the Congress unless he can credibly demonstrate a longer-term deficit reduction outlook.  In my view, this necessarily means changes to Social Security and/or Medicare.

Last June and July, I presented five charts from Ross Perot’s website perotcharts.com which demonstrate the future budgetary problem:

• Chart of the day: US Federal government spending
• Chart of the day: US federal spending and receipts
• Chart of the day: projected US government deficit
• Chart of the day: US national debt
• Chart of the day: US Federal Deficit

Fiscal Year 2007: before the bubble burst

What becomes apparent if you look at these charts is that the United States faces a very large fiscal problem under present tax and spend scenarios given likely future growth outcomes.  In plain English: there is a gigantic hole in the U.S. Government’s balance sheet under normal GAAP accounting.  Let’s look at the balance sheet for 2007 because John Williams at ShadowStats.com has already done the analysis and this was a budget that was created before the housing bust was apparent.

On December 17th, The U.S. Treasury released the annual Financial Statements of the United States Government for fiscal year 2007 (year-ended September 30th), prepared using generally accepted accounting principles (GAAP), audited by the General Accountability Office (GAO) and signed off on by Treasury Secretary Paulson.

The statements still show that the federal government’s fiscal woes continue to careen wildly out of control. Based on my estimate of the 2007 GAAP-based deficit exceeding $4.0 trillion (see discussion below), the term "out of control" is not used loosely. If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis.

The number $4 trillion is the number you would see if the U.S. Government reported its accounts as businesses do on an accrual basis using Generally Accepted Accounting Principles (GAAP). GAAP accounting means that all promises i.e. future pension and healthcare spending must be accounted for on today’s financial statement.  If we did not do accounts on an accrual basis, then many companies would go bankrupt when the unaccounted for future liabilities not addressed on their balance sheet came due.  In the case of General Motors, future liabilities for pensions and healthcare are a large part of their financial problem.

The U.S. government reports its accounts on a cash basis.  That means it matches the cash that comes in the door against bills it must pay in that current year.  This is how small businesses run their accounts.  Under this methodology, the accounting looks very different.  Here is how George W. Bush summed up his 2007 budget deficit (Fiscal Year 2007 Overview).

For 2007, the Budget forecasts a decline in the deficit to 2.6 percent of GDP, or $354 billion. By 2009, the deficit is projected to be cut by more than half from its projected peak to just 1.4 percent of GDP, which is well below the 40-year historical average deficit.

As last year’s dramatic increase in receipts demonstrates, the most important factor in reducing the deficit is a strong economy.

His last words are well-placed because we know that the course of events was quite a bit different than was predicted in this budget.  In sum, there is a large hole in the government’s accounts that an order of magnitude larger when you use GAAP.  This was true even before the housing bubble and makes plain that the U.S. government’s budgetary problems are structural. (Also see Wikipedia’s entry on the 2007 Budget. It gives a good overview)

Honing in on the problem: Medicare and Social Security

The problem, of course, is Medicare and Social Security.  Looking again at 2007 and the composition of spending (Chart of the day: US federal spending and receipts), one can see that 40 percent of the budget went to spending on Medicare/Medicaid and Social Security.  This percentage will rise inexorably as the Baby Boom generation retires starting in 2011.  If you look at the government’s own accounts (PDF), they tell the story.  Notice the over $40 trillion in unfunded liabilities associated with Medicare/Medicaid and Social Security

How this fits in to today’s debate

These unfunded liabilities fit into today’s policy debate in that reducing Social Security and Medicare benefits would not only eliminate structural budgetary problems, it would also allow Obama to demonstrate fiscal prudence – even while the present deficit balloons.  I guarantee you that Summers, Geithner, Orszag and Romer are on to this and that this is a debate of huge importance inside the Administration.  I anticipate we will see a Social Security/Medicare change under Obama.  The question is how would this change be achieved.  There are four possible ways:

1. Raise Taxes.  To satisfy liberals, who have become more and more worried about Obama, one could see the Administration allowing Congress to eliminate the payroll tax exemption on some of the income earned above $100,000.  If you listened to Joe Biden on Meet the Press on Sunday, it was clear that the President is going to make pragmatic decisions on budget issues and will not veto bills unless their totality is  “wrong for America.”  Translation: he would not necessarily add in a payroll tax increase himself, but he would sign a bill that has one if he could tout this as a tax increase for the rich and stress the fact that the middle class would see no rise in the income tax.
2. Reduce Benefits. Another way to reduce entitlement liabilities is to reduce the net benefits. Obviously raising tax on benefits for those earning a specific threshold outside income would be the taxation way of achieving net benefit reduction.  Again, this would be touted as a tax on the rich.  Cutting benefits outright is a non-starter and political suicide. On Meet the Press, Biden was unwilling to dismiss the potential that the President would sign a Universal Health Care bill that taxed health care benefits.  I think this is a crucial statement regarding  both UHC and entitlement programs.
3. Reduce Coverage. Because medical care has advanced hugely over the last decades, we are now able to keep patients alive (and often healthy) who would have died years ago.  As a result, medical costs have skyrocketed.  The simple fact is that using all available medical science to treat patients costs a lot of money.  This makes attractive the potential cut of Medicare coverage i.e. reducing which procedures and care will be paid for.  I expect, this is another option that is going to be explored.
4. Delay Benefits.  This is my preferred option. The average lifespan of Americans has increased tremendously particularly since Social Security was enacted.  As a result, retirees today receive many more benefits than they did in the 1940s. (“The 2000 U.S. census revealed that the number of Americans over 65 years old has more than doubled since 1950 and increased from 31.1 million to 34.91 million from 1990 to 2000, largely because of continuing advances in medical science and nutrition.” – MSN Encarta Encyclopedia).  These demographics are killing the U.S. and they are going to get worse.  Given relatively low fecundity rates among young American women, they will get worse still. Therefore, the U.S. government is going to have to raise the age at which Americans are eligible for Social Security.

In sum, while I prefer a delay of benefits, all of these ways of reducing entitlement benefits are going to be researched and suggested.  The Obama Administration does seem willing to address these issues, potentially as a quid pro quo for another round of stimulus.

An alternative view

I would be remiss if I didn’t present you with links to the other side of this argument.  This is handled capably by Dean Baker of the Center for Economic and Policy Research, one of the few economists to have spotted the housing bubble early (see his 2002 article here).  In April, he penned a piece at Andrew Cockburn’s site counterpunch.org called “Hands off Social Security.”  I suggest you read this for an alternative view.  In addition, I would also recommend his book with CEPR colleague Mark Weisbrot “Social Security: The Phony Crisis.” 

One reason Baker is so vehement in his arguments is that he knows ideologues are orchestrating a battle against social security in order to deprive you of your retirement benefits.  Remember the 2004 Bush plan to privatize Social Security?  What lies underneath this is a desire to give the financial services industry even greater power by allowing it to control the funds for Social Security. So, be forewarned.

In the end, while I have great respect for Baker – and agree with many of his arguments, I disagree with his conclusions (summarized here in his opposition to the film I.O.U.S.A.).  Social Security and Medicare must be changed.

Conclusion

In the end, if you are looking for ways to increase stimulus to prevent a double dip or debt deflation while remaining fiscally prudent, a cut to entitlement programs is going to be necessary.  As I see it, you can’t have your cake and eat it too.

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This case is going to the Supreme Court of the United States.  It will be a landmark ruling when the issue is decided. Take a look at what David Boies has to say about the issue.

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I say no, he needs to get all of this out in the open and behind us.  But the Conservative Wall Street Journal’s Jerry Seib makes a compelling argument that he should, using Jerry Ford’s pardon of Richard Nixon as a reason.  Take a look.  And if you’re interested in Watergate, the recent film Frost/Nixon is a brilliant look into aspects of that time in the U.S. political scene.

Obama is shifting his stance on waterboarding as the furore grows about this issue. Take a look. There’s a special appearance by Waterboarder-in-chief Dick Cheney, defending himself. Pretty nauseating, actually.

This last video goes to the internal debate regarding releasing the classified waterboarding memos. Many at the CIA are up in arms about it. Personally, I support the CIA as a very necessary organization, one that works hand-in-hand with the State Department. However, they do not get a free pass.

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The following is a translation of an article by Dr. Artur P. Schmidt, a well-known economist and economic journalist in Switzerland. Schmidt is also a keynote-speaker, who speaks regularly about new media, technology, future trends and knowledge creation.

Recently, he warned that Switzerland faces potential bankruptcy if it does not act to stem losses by its banks and in Swiss Francs in Eastern Europe.

Now he turns to the United States. While I do not agree with everything he writes (I see Glass-Steagall as less important than lack of regulatory oversight), the general tone and overall analysis is spot on regarding interest rates, bailouts and savings. He also has some interesting words to say about how the inflationary policy in Washington is making other nations pay for debts incurred in America.

I should warn you that this analysis at the end of this missive is ‘leftist’ in tone — quite a bit more than what you have seen me write. However, given the huge disparity in income that has built up over the last 35 years in the United States, Schmidt’s analysis does have merit. For my take on similar issues of wealth distribution, see my post, “A populist interpretation of the latest Boom-Bust cycle.”

The real culprits

The U.S. president’s speech on the State of the Nation on Tuesday, February 24th, 2009 was brilliant. He understands how to commemorate big performances with his rhetoric and to captivate his audience. However, with all his magic, one must conclude that, when it comes to economic issues, the long-term thinking he has spoken of goes missing. Even if the current economic program provides short to medium term stimulus, it solves none of the problems in the global crisis. It is too easy to identify Wall Street alone as the culprit of the current crisis. The main responsibility rests with the Federal Reserve, which for more than 13 years allowed the money supply to grow faster than the growth of gross domestic product (GDP). The central bank acted with gross negligence in lowering interest rates ever deeper in order to solve crises and created one bubble after another. The U.S. Congress, which allowed Fannie Mae and Freddy Mac unregulated guarantees and state monopolies, contributed significantly to the fact that the entire U.S. economy was transformed into a giant Ponzi scheme. Obviously, it is not acceptable that bankers exploited this system radically for their benefit, but the culprits of the crisis were sitting in central banks and governments of this world.

Clinton’s big mistake

One of the disastrous decisions was made by Bill Clinton and Al Gore, when, in 1999, they repealed the Glass Steagall Act, which provided for a separation between investment banks and commercial banks. This made possible the immense leverage in financial products in recent years and, thus, the bubble in U.S. housing markets. In order to remain competitive internationally, investment banks took ever greater risks, which ultimately led to their complete collapse in the autumn of 2008. The fact that Obama has not checked Federal Reserve Chairman Bernanke’s ever-widening money printing machinations now will prove a fatal mistake, as, ultimately, the entire American middle class will be expropriated by this inflationary policy. Obama fails to recognize that previous policy has not improved the credit crunch. Had he, he would not agree to bank bailouts, but rather make that money directly available to companies. Only through such an credit airlift can the real economy be prevented from collapsing. If there is enough credit for the economy, interest rates could also be increased, because if the U.S. is lacking something, then it is a higher savings rate. This cannot be realised through low interest rates and gifting taxpayers’ money to banks, because the wrong incentives and signals are being set.

Exogenous downturn factors

While it may make sense from an economic point of view to reduce the current budget deficit of 10% of GDP to 3% by 2013. However, such a policy does not work in recession, but only in a periods of a booming economy. In America, the economy is not booming, but debt creation is. And through an inflation policy, this will be partly funded by the rest of the world. If Bernanke has his way, one will soon buy up even government bonds, in order to keep interest rates low. But wait: Why then is the yield on the 10-year and 30-year government bonds currently climbing significantly? Shouldn’t the market tolerate Bernanke’s milk maid’s bill? Obama would be wise to recognize that the two main forces which will accelerate the economic downturn in the U.S. are exogenous factors:

1. First, demographic factors clearly show that the departure of the baby boomer generation from the working world will lead to a clear weakening of U.S. growth economy in the next two decade. and,
2. Second, foreign investors will be increasingly less prepared to lend to the U.S. at low interest rates if Helicopter Bernanke is allowed to act further.

Erhard Legacy: Real wages must rise again!

But where can the money come from then for the restructuring which is needed in America? It can only come from those who for decades have robbed it from the lower and middle classes, namely the American upper class. If a country’s income disparity has become so large as it has in the United States, economic leverage must be applied for it to be reduced again. Even the Great Depression of the 30s had its starting point in an incredible shift of wealth to a few. Recent surveys reveal that some 300,000 Americans together earn as much income as that obtained by 150 million Americans in the lower income stratum. Per person, breadwinners in the top group earned 440 times the salary of an average person in the lower income class. As a result, these figures have almost doubled since the year 1980. It certainly has nothing to do with socialism, if one recovers the money stolen from the middle class from the so-called elites through higher taxes. The alleged economic hostility of such a measure can be immediately refuted as it is the accumulation of capital in ever fewer hands which first made the global economic crisis possible. If Obama wants to prove successful in fighting perhaps the greatest economic depression in history, then he must start here. The key to the success of his economic policies will be rising real wages in lower income groups and the middle class. Meanwhile, in the U.S. only every other job has a salary, which is sufficient to maintain a family budget. The result is a double or triple jobs often with significant social consequences for single mothers, fathers and their children. There was no place in neo-liberalism for Ludwig Erhard’s reminder that the needs of a social market economy, only to be met if “real wages increase.”

Reversing wealth disparity

If Obama is to be measured later by whether his economic policy was successful, then he must reverse wealth disparity and force the 10% of the U.S. population which controls two-thirds of the assets into solidarity through higher taxes. Had Roosevelt set out on this in the 30s, the New Deal would have been much more successful. Obama now has the chance to show the world that America has not only finally overcome segregation with his presidency, but also the income division, which has led to one of the most unjust economies the world has ever seen. It is a disgrace for the U.S. that at least 1 / 5 of the population, i.e., approximately 60 million Americans live below the poverty line, while the rich celebrated uproarious parties for decades. Ever since Milton Friedman, the “Solidarity Economy” doctrine became valued with top managers without paying enough mind to solidarity, equality and justice. “Yes we can” means that Obama breaks through this doctrine and recognizes the true causes of the current crisis, not just treats its symptoms.

Related sources
Ludwig Erhard – Wikipedia

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Barack Obama has won the U.S. presidential election in convincing fashion. While I am clearly not a liberal nor a Democrat, I am pleased with the election’s outcome. It signals a new beginning – a new era in American politics and in American society that is much needed.

A generation ago, in 1980, it was much the same. Americans looked back on the recent past and saw shame and defeat. We had seen a collapse in the value of the U.S. dollar, an end to the Gold standard, very high inflation, an end to energy independence. We witnessed the shameful resignation of the US. President, an ignominious retreat from Vietnam, the beginning of government deficit spending, the collapse of many an American city, and a humiliating hostage crisis in Iran. The 1970s were a lost decade.

The United States had been the most powerful country in the world at the end of World War II. Europe was in shambles, Asia was prostrate after a decade of fighting, and Latin America and Africa were not large economic factors. The United States had unrivaled power economically, politically, and militarily. Yet, in thirty years it all seemed lost.

America wanted change. Into this void stepped Ronald Reagan and his supply-side revolution of deregulation, limited government and lower taxes. Over the next quarter century, America was guided by a market-based, laissez-faire philosophy which proved spectacularly beneficial to many. Our stock market went from 800 to over 14,000. Our bond markets sky rocketed as interest rates decreased from well over 15% to as low as 1%. And the overall health of many cities improved if you witness places like Washington, DC, Baltimore or New York. For many, this was golden era.

However, underneath the apparent successes of the market-based approach lay a burgeoning debt burden and macroeconomic disequilibria which have proved the Achilles heel of this golden era. Policy makers failed to recognize the very real threat of human nature’s tendency to go to excess in their support of laissez-faire reforms. A market-based approach must be accompanied by oversight, regulation and vigilance in order to succeed.

I have been particularly critical of the monetary stewardship of Alan Greenspan and the latter day laissez-faire policies we followed despite these looming problems. Last month, I wrote:

The United States had been living beyond its means for a very long time before the credit crisis finally hit. The truth of the matter is that U.S. monetary and fiscal policy rewarded risk-taking and leverage at the expense of prudence and saving.

The goal of government it seemed was to avoid the pain of recession and keep the economy growing at all times. Every time the U.S. economy would hit a stumbling block, the Federal Reserve would lower interest rates and flood the economy with money. Market participants learned to trust in the Greenspan Put — an understanding that they would be bailed out by Fed policy at the first signs of trouble.

This irresponsible monetary stewardship seemed to work wonders as GDP in the U.S. continued to rise year after year. Yet, large macro imbalances increased steadily year after year. Foremost among critics of U.S. monetary and fiscal policy was Stephen Roach, Morgan Stanley’s former Chief Economist and now head of Morgan Stanley Asia. He has been warning since the bust of the Tech Bubble that “global re-balancing” needed to occur, whereby the overextended U.S. consumer passed the reigns as motor of the global economy to consumers in China, India or Japan and Europe (see article).

Below are a number of charts that I have compiled which should make abundantly clear what the disequilibria were and how large they had become. Presently, this re-balancing is being forced upon us by a deep recession. It is unfortunate we could not have had the foresight to avoid the worst of things by taking corrective action earlier, particularly after the tech bubble in 2001.

History books will look on this period of U.S. history as one dominated by hubris, where fiscal and monetary policy were particularly reckless, leading the United States into a long period of decline.
-Charts of the day: U.S. macro disequilibria

So, here we are in the year 2008, having just elected a bi-racial man named Barack Hussein Obama with roots in Kenya, Kansas and Hawaii to be the next President. Quite frankly, it is a bit of a leap of faith for America. But, I am encouraged to see Americans take that leap. I am encouraged because it suggests that America is a nation that is now still more hopeful than fearful. And that is a very important distinction as we face some very daunting tasks ahead.

Let’s see where this journey takes us.

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Race has a way of inserting itself into almost everything in America. I have always found this troubling. In this particular Presidential election, it should be the economy here, the economy there, the economy everywhere. Yet, we also find the issue of race a factor where it should not be.

Witness Patrick Buchanan. Now, I have a certain amount of respect Patrick Buchanan, the former U.S. Republican Presidential candidate (after all, his website is on my blogroll). I came of age watching him debate Morton Kondracke and Eleanor Clift on “The McLaughlin Group” weekly in the early 1980s. His controversial ideas on foreign policy are top-notch. However, when it comes to domestic politics, he often veers off into the jingoist and downright racist side of things.

Such is the case again regarding Colin Powell’s endorsement of Barack Obama for President. Buchanan makes a connection between Obama and Powell that many seem to have made silently, but have been afraid to voice out loud in a politically correct America — they are both Black.

Was race a factor in the decision of Colin Powell to repudiate his party’s nominee and friend of 25 years, Sen. John McCain, two weeks before Election Day, and to endorse Barack Obama?

Gen. Powell does not deny it, contending only that race was not the only or decisive factor. “If I had only that fact in mind,” he told Tom Brokaw, “I could have done this six, eight, ten months ago.”

Yet, in hailing Barack as a “transformational figure” whose election would “electrify our country … (and) the world,” Powell seems to testify to the centrality of Barack’s ethnicity to his decision.

For what else is there about this freshman senator, who has no significant legislative accomplishment, to transform our politics and to electrify the world, other than the fact that he would be the nation’s first African-American president?

Powell’s endorsement follows that of another African-American icon, Congressman John Lewis of Selma Bridge fame, who switched allegiance from Hillary to Barack, while Clinton still had a fighting chance to win.

When Lewis deserted her in February, he, too, claimed a Road-to-Damascus experience, to have seen a transformational figure:

“Something’s happening in America, something some of us did not see coming … Barack Obama has tapped into something that is extraordinary. … It’s a movement. It’s a spiritual event.”

Lewis’ desertion, however, was not unrelated to a primary challenge in his Atlanta district and angry constituent demands to know why he was not backing the first black with a real chance at winning the White House.

Powell was under no such pressure. Hence, what he did, and why, are subjects of media and political speculation.

Understandably, Powell is being hailed by the Obama media as a profile in courage. Equally understandably, his endorsement of Obama is said by Republicans to smack of ingratitude, opportunism, and even vindictiveness toward a party to which he owes his fame and career.

Here was a man who was rendered extraordinary honors by three Republican presidents. Reagan raised him from Army colonel to national security adviser, the first African-American in the post. George H. W. Bush named him chairman of the Joint Chiefs, over hundreds of more senior officers. George W. Bush made him the first African-American secretary of state.

While he may have gotten well with the capital elite with this decision, Powell has wounded his party’s nominee at a point of maximum vulnerability, a friend who supported him on the war, and agreed with Powell on the need for a larger invasion force. And Powell has embraced a liberal Democrat who owes his nomination to his fierce opposition to the war Powell sold the nation, a war Obama calls the worst blunder in U.S. history and a manifestation of a lack of judgment by those, like Colin Powell, who launched it.

Joe Biden, who voted to authorize the war, now calls his vote a mistake. Yet, Powell endorses him, too, while repudiating a McCain-Palin ticket that continues to defend his war.

And the scatter-gun attack Powell launched on the GOP ticket — hitting McCain for fumbling the financial crisis, choosing Sarah Palin, pressing Barack’s association with William Ayers, and not defending Obama’s Christianity — suggests a man with scores to settle with the party of George W. Bush.

Yet, what kind of Republican can Powell be when he professes deep concern that McCain might choose Supreme Court justices like John Roberts and Sam Alito? Every Republican in the Senate voted for Roberts. All but one voted for Alito.

Does Colin Powell have a problem with Antonin Scalia? Is the general a Ruth Bader Ginsberg Republican?

There is speculation Powell feels badly used by the neocons who cherry-picked and hyped the intelligence about weapons of mass destruction he presented at the U.N., and that he harbors a distrust of the neocons now reassembling around McCain.

If so, he surely has a case, and should have made it.

But in the last analysis, one comes back to the forbidden issue of ethnicity. For example, would Powell have endorsed Hillary, had she won the nomination? After all, her views on Iraq — having supported the war and never apologized — are even closer to Powell’s than Obama’s.

The issue cannot be avoided.

After all, we are in a year where Obama defeated the wife of “our first black president,” Bill Clinton, 90-10 in the black wards of Philly, and African-Americans, in one poll, are going 94-1 for Barack. And a Republican ticket that is hammering Barack on his ties to William Ayers fears to bring up his far closer ties to the Afro-racist anti-American Rev. Jeremiah Wright.

Organizing a fundraiser last year for New Mexico Gov. Bill Richardson, an Hispanic Democrat, Lionel Sosa of San Antonio, a political strategist for Reagan, Bush I, and Bush II, said, “Blood runs thicker than politics.”

Mr. Sosa is perhaps more candid about his motives than folks in D.C.

-Tribal Politics

The thought process here goes: Powell is Black. Obama is Black. Powell is a Republican. Obama is a Democrat. Therefore, Powell supports Obama only because they are both black. So, vote Republican because we care about issues, not race.

Hmmm. What about Chuck Hagel and Chris Buckley? Aren’t they also Republicans for Obama? In truth, I find this whole line of thinking quite sinister. It reminds me of a comment made by Australian Tennis Player Lleyton Hewitt in a match against American James Blake, who is half-black.

In a five set match with James Blake at the 2001 U.S. Open, Hewitt complained to umpire Andres Egli and asked for a black linesman to be moved after being called for two foot-faults in the third set. “Look at him,” Hewitt said, gesturing at the linesman. He approached the chair umpire and, pointing first to the offending linesman and then to Blake, said,”Look at him and you tell me what the similarity is.”
-Wikipedia

It is this type of thinking that leads to comments like this one here responding to Buchanan’s blog post:

friscokid said:

Powell is an intelligent and capable bureaucrat, but that’s all he is. He was used by the Republican Party to put a visible black face high up in the government, but he’s really just a spineless person (kind of like Joe Biden, come to think of it). Why else would he have allowed himself to be used by people
who, as is apparent now, he didn’t even like and who’s ideas he didn’t support.

Powell’s allegience to Obama is probably indicative of what we can expect from most black appointees in an Obama administration: if there is any friction or disagreement between a white person and a black person, we can count on black bureaucrats to side with blacks every time. Tribalism, which is what we’ve been taught is wrong, and which was waning, will have a sudden resurgence, in my opinion. The concept of payback for past injustices will also certainly be a factor in the intensity of the tribalism that we can expect to see.

Barack Obama is just one man. Even if you think he’s fair, his appointees are going to be running our daily lives. I don’t think most people are going to like what they do.

-Tribal Politics, comments section

Hello? It’s the economy, Stupid. But, apparently, this is how many frame issues in their mind. In an election as important as any in some 75 years, it would be nice to see the issue of race handled with greater dignity and less suspicion.

Plus ça change, plus c’est la même chose.

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I just read a post on the blog Duck’s Pond about how the crisis in health care in the U.S. will lead to some sticky problems for baby boomers. It’s an interesting take because it’s not the straightforward social-security-is-going-bust-so-baby-boomers-are-screwed argument.

It says more that a lack of health care in the growing Hispanic population in the U.S. means that when push comes to shove down the line, Hispanics won’t be able to shoulder the burden of their own health care costs and retired baby boomers’ costs too.

It’s definitely something to noodle on.

Why are Americans behaving like they’re part of a “Wild Kingdom” (Discovery Channel) episode and devouring their young? Are we in a state of “psychological stress?” At least that’s one of the explanation that experts give to explain why animals in the wild chomp down their newbies. I know this sounds kind of gory and just generally whack, but a couple of eye popping studies have just come out which have made me reflect on how this country is treating (or cannibalizing) its next generation.

Consider the newly released survey, conducted by the Pew Hispanic Center and the Robert Wood Johnson Foundation that paints a dismal picture of health care among Hispanics in the United States.

According to the study, an estimated 25 percent of Hispanics in the United States don’t have a regular health care provider to treat their medical needs.

The post goes on to ask this provocative question:

So riddle me this? If (as according to the Pew study), Hispanics are more than twice as likely to lack a regular health care provider. And if in 30 years they will they will be the proverbial shoulder on which the U.S. elderly population stands (or by then slumps). How can we expect Hispanics to be healthy enough themselves to carry out the enormous burden of caring for an aging baby boomer population? The short answer: we can’t. Already burdened by a Social Security system that will have failed, a deficit that will have to be repaid and just the sheer math of fewer taxpaying folks trying to support a vastly larger elderly population – the task could prove impossible.
-Duck’s Pond

Check out the site for the full post. It’s definitely food for thought.

Source
Eating our Young, Duck’s Pond

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This comes from Larry Wright of the Detroit News via the Moderate Voice

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