Saturday, February 28, 2009

The Rhetoric Trap

The problem is our rhetoric. Our politicians constantly tell us that our workers are the smartest, most innovative, most creative, and hardest-working in the world. It follows, then, that we deserve the most comfortable lifestyle, ensured by entitlement programs that have expanded beyond reason (and beyond our ability to pay for them). We are told by advertisers that every American deserves the good life ("You deserve the very best” or "You owe it yourself..."). American exceptionalism has been proclaimed for so long and so emphatically that we have come to believe it. If other countries are starting to creep up on us economically, it must be because they cheat, manipulating their currencies, subsidizing their industries, and free-loading off our world-wide defense forces.

There’s an ounce of truth in all this. The American brand of free-market capitalism has proved itself superior to centralized planning, and for the past century we have achieved amazing things. But the jingoism is wearing thin these days. After all, we can’t very well bash China while we’re borrowing more a billion dollars a day from them, can we? If we’re so much smarter than they are, shouldn’t they be borrowing from us?

The rhetoric trap brings me to President Obama and his national budget. I don’t quite know what to make of it or of the bellicose rhetoric that accompanied its unveiling. If the President really believes that we can mend our broken economy by redistributing wealth, that’s one thing. But if his budget is based not on pragmatism but on political theater, that’s another.

It is easy to characterize the big Wall Street bonuses and the private jets and the parties at Las Vegas as excesses. And it’s not fair, as Warren Buffett says, for a top executive to be taxed at the same rate as his secretary. But then, Lenin and others have attacked capitalism on fairness grounds, too. Capitalism is arguably unfair. Life is unfair. You can’t win a logic contest judged on fairness. So if you hold the reins of power, you try to find a system that works for most people, and screw the fairness or unfairness.

My faith in Barack Obama has been based on my belief that he is, ultimately, a pragmatist. Indeed he has said as much, repeatedly using the term “what works” as a mantra. But now I fear that he is giving in to other principles. The “buy America” provision in pending legislation is suspect under “what works” thinking, as any Wal-Mart shopper can tell you.

The promise to arrange the tax code so that “the affluent” are defined as those making more than $250,000 is equally spurious. In a different era, I remember House Speaker Tip O’Neill being asked where he drew the dividing line between haves and have-nots. “$50,000 a year,” he answered. Later, the Alternative Minimum Tax was packaged and sold as a means of catching the idle rich. Alas, neither Tip O’Neill’s dividing line nor the AMT was indexed for inflation, and President Obama has not mentioned a word about indexing his proposed tax plan. Given the outlook for the dollar, it is quite possible that most members of the middle class will soon be earning $250,000 a year – and be taxed accordingly. That’s how governments from time immemorial have solved their financial problems.

John McCain and Barack Obama, in the presidential campaign, both championed “straight talk,” while both were giving us, not straight talk, but political talk. No wonder folks are so cynical. And I am afraid President Obama has not lost the appetite for political talk. He is acting and talking as if his victory was a mandate for a lurch to the left, when in fact it was simply a repudiation of George Bush and the Republicans. There’s a difference.

So let’s please have an end to the political talk, Mister President, and the beginning of some real straight talk. Something like this:

My fellow Americans. Globalism is neither bad nor good, but it is a fact, and we must accept that. Americans are good workers, but so are the Chinese and the Indians and the Japanese and the Brazilians. We are smart, but so are they. We can’t build fences around the United States, and we can no longer dictate how other people live. Once we start believing that we are entitled to more just because we are Americans, we are in for a hard time, because the other 95 percent of the world’s population won’t accept that.

And we cannot succeed by attacking each other. Just as we have fought battles against discrimination on the basis of race and creed, we must be careful not to hate people because they have more money or a bigger house or a newer car. Any economic system produces winners, and our job is to see that we have more winners, not fewer. The more winners we have, the fewer losers there will be.

I wish I could promise you all a satisfying career and a comfortable retirement, based simply on the fact that you were born in this country. I can’t. No President can, although many have tried. In the final analysis, you must rely on your own skills and enterprise and work ethic, fortified by the love and compassion of your family and friends. Your country can create a helpful environment, but you must do the heavy lifting.

Thursday, February 19, 2009

Thoughts on Stimulating the Economy

Democracy will cease to exist when you take away from those who are willing to work and give to those who would not.
Thomas Jefferson



Abraham Lincoln serves as an inspiration for our new president, as he does for millions of people who credit him with saving the Republic and freeing the slaves. Lincoln was indeed a great man, who left enough of a paper trail to document his greatness. But our founding fathers – Washington, Franklin, Adams, Jefferson, Hamilton – were arguably even greater, for it was they who created a republic worth saving.

Rick Santelli, a CNBC regular at the Chicago trading pit, takes a straw poll on the justice of bailing out people who added a new bathroom in a house they couldn’t afford in the first place. In the pit, the response is unanimously negative. The chorus of raspberries reflects a growing sentiment among people who play by the rules that they should not be forced to rescue those who knowingly took on more debt than their income could handle.

Those who think it is right to bail out borrowers who are over their heads say that the borrowers were victimized by villainous banks, that they didn’t fully understand adjustable-rate mortgages, that they were simply chasing the American dream, home ownership.

They have a point. Many if not most mortgagees didn’t understand the terms they agree to. Their parents never told them, as mine did, that you shouldn’t pay more than a week's wages for a month's rent. More’s the pity, they never learned that in school, either, because you never learn even rudimentary economics in school.

We are a nation of economic illiterates. What’s worse, most of our Congressional representatives, judging by their televised comments during recent hearings, don’t know a thing about derivatives, CDOs, LIBOR, option spreads, ETFs, etc. So, instead of asking intelligent questions of the witnesses, they rail against private jets, golden parachutes, and bonuses. There’s nothing like righteous indignation to show the folks back home how tough you are on the fat cats.

If you’ve been reading these blogs for a while, you know that I have been a stock-market bear for the last two years. Alas, today I am just as bearish as ever. There is no bottom in sight, despite the cheer-leading from the CNBC die-hards. Their arguments are all based on history: Recessions and bear markets last x months on average, the stock market always turns up six months before the economy turns, if you wait until you see the economy pick up you’ll miss out on the opportunity of a lifetime, blah, blah, blah.

Much as I appreciate history, in this case it is of no value. In previous recessions we were not in hock to China. In previous recessions we were not being impoverished by runaway entitlements. In previous recessions we had a world-class manufacturing base. In previous recessions we weren’t fighting an expensive war that had no end in sight.

President Obama, who deserves more support than he is getting these days, will soon start getting blamed, unjustly, for the spreading misery. He began his presidency with the nation in a sharp red-blue divide, and whatever he does to address the economic collapse is sure to enrage either the reds or the blues. Enraging the left is probably a safer course, because he has a deep reservoir of support there, but that would go against his instincts.

What should he do? Despite the popular shibboleth that “Main Street is more important than Wall Street,” the stock market is our best barometer of the national confidence in the economy. Consumer confidence has been destroyed, and as the consumer goes, so goes 70 percent of our economy. And the consumer is now seeing his or her 401-K and the dream of a comfortable retirement go down the drain with the stock market.
Like it or not, Main Street cannot recover unless Wall Street recovers.

Here’s an idea: Declare a moratorium on capital-gains taxes. Maybe a year, maybe two. There aren’t any gains anyway, so it won’t cost the Treasury much unless the stock market takes off. And if it does take off, it will be because risk capital has begun flowing again, and the risks have started paying off. As it is, the risk capital is all in Treasury bonds and mattresses, and that doesn’t help.

Cutting the capital-gains tax rate to zero, even for one year, would be controversial, but it would in keeping with Obama’s stated appetite for thinking outside the box. As for Congress, he could charm the Democrats, and the Republicans wouldn’t dare complain.

While the stock market would be a primary target of such a move, the elimination of capital-gains taxes might also invigorate the real estate market.

There’s a risk that the moratorium would ignite the stock market for a short-term rally with no economic follow-through. But I think the risk-taking current runs deep in this country, and that, once the flow is restarted, the economy would heal itself.

It won’t happen. For this president, eliminating the capital gains tax would be, not just outside the box, but outside the galaxy. Thus the economy and the stock market will continue south. I remain a bear.

Tuesday, February 10, 2009

The Obama Presidency - Chapter Two

Dice are rolling, the knives are out
Would be presidents are all around
I don’t say they mean harm, but they’d each give an arm
To see us six feet under ground.
- from “Evita” lyric by Tim Rice

So it must seem to President Obama this week. The nightly television talk, especially that carried by cable, is filled with carping. The editorial pages of the Wall Street Journal, which are given over to Karl Rove, John Bolton, and the neocons in exile, tell us daily how badly the new President is screwing up on foreign policy, on the financial rescue programs, and on just about everything on his plate. And the man has been in office barely a month! It doesn’t seem fair.

All right, some criticism is justified, especially on errant cabinet appointments. But that’s not the loudest beef. What really ticks off the hard right is his promise to talk with Iran, his determination to close Gitmo, and his obvious preference for diplomacy over confrontation. Real men choose confrontation, the hawks seem to be saying. Pie-in-the-sky Obama just doesn’t get it.

The most dangerous situation facing us is what’s brewing in Pakistan. As someone said, Afghanistan is irrelevant; the real game is in Pakistan, a big country, a poor country, and a country filled with weapons, including the nuclear kind. As is so often the case these days, we get along (barely) with the leaders but the people don’t like us. What should the President do about Pakistan? The neocons would say “get tough.” The doves would say, “pull out.” Neither approach makes sense. It’s not that simple. The problem calls for patient, thoughtful diplomacy. Above all, it calls for working the global room, schmoozing with China, Russia, and other Asian neighbors. Obama seems to recognize this, and the critics should at least give him credit for his recent overtures to Russia, whose help would be invaluable in Asia. But they won’t, because some of them are still fighting the cold war.

The polls suggest that the natterers are having little effect on public opinion, as Obama’s honeymoon continues. Of course, the kind of decisions he will have to make soon, especially on the financial front, are sure to cost a lot of people a lot of money, and that will take points off his approval rating. Will the public blame the President, or will it blame the forces that created the problem? Reason says the latter, but I am not so sure. A wild card in all this is Congress, which seems intent on pulling Obama to the left, a chancy move in a country that is still somewhat to the right of center politically.

This week the President took the gloves off, so to speak, in addressing the Republican opposition to his financial bailout, reminding them pointedly that it was the Democrats, after all, who won the election. Fine; there is nothing wrong with showing a little spine in politics. But one hopes he will be equally tough on the Congressional Democrats who try to yank him off the reservation, because it seems to me that they will turn out to be his real problem in Washington. The Republicans, for all their bluster, are, like Afghanistan, irrelevant. If you want to know where the dice are rolling and the knives are out, look in the direction of Nancy Pelosi and Harry Reid.

Friday, February 06, 2009

Einstein's Dreams

Have you ever wondered about the nature of time? Of course you have. I have. We all have, including Einstein, who wondered about time a great deal and finally came to grips with it in 1905, when he published four remarkable treatises, including one setting out his theory of relativity.

The possibility of time travel has excited fiction-writers for many years, and even though I have seen The Time Machine often, I never tire of watching Weena and her simple-minded Eloi friends escape the Morlocks. Countless other time-travel tales engage us, even though we know the basic premise is impossible.

Or is it?

Last night I read a little book called Einstein’s Dreams. It was written in 1993 by an MIT professor named Alan Lightman, and it is one of those books you can’t put down. The subject matter is the hook, but the fact that Lightman is a world-class writer is the grabber.

The book, which runs a mere 179 pages, explores the possibilities attached to various theories about the nature of time, some well known, some not so. Maybe time is a repetitive phenomenon. Maybe time does not exist outside our perception. Maybe, since time is related to mass, it passes more slowly the farther you are from the earth’s core. Maybe there are two kinds of time: mechanical time and body time. Maybe, because time passes more slowly for people in motion, those who travel at high speed gain time.

The book is organized as a series of vignettes, dated throughout 1905 and separated by “interludes” in which Einstein chats with his friend Besso in Berne. But Einstein’s fantasies of various time-altered “worlds” are the attraction here, along with the metaphysical points they make. Take this picture of a world in which everyone travels at high velocity to gain time:

"A man or a woman suddenly thrust into this world would have to dodge houses and buildings. For all is in motion. Houses and apartments, mounted on wheels, go careening through Bahnhofplatz and race through the narrows of Marktgasse, their occupants shouting from second-floor windows. The post office doesn’t remain on Postgasse, but flies through the city on rails, like a train. ….Everywhere the air whines and roars with the sound of motors and locomotion. When a person comes out of his front door at sunrise, he hits the ground running, catches up with his office building, hurries up and down flights of stairs, works at a desk propelled in circles, gallops home at the end of the day…..No one is still.”

The book was widely praised when it was first published, but it took me a while to discover the small volume, which has been sitting in my library, unnoticed, for at least 10 years. What made me decide to pick it up last night? Why did Einstein have his “annus mirabilis” the same year my mother was born, the year her father died? Why did I choose to quote the paragraph above, only noting afterward that it was dated May 29, my birthday?

Tonight, still in my own private time warp, I read the short story “Germelshausen,” by Friedrich Gerst├Ącker, which takes place in a small German village that comes to life for one day every hundred years. I remember reading it in German when I was in high school, but then I knew it as “Das Geheimnisvollen Dorf” (the full-of-mystery village). It’s a lovely tale, used as the basis for Brigadoon. And further proof that, no matter how surely we are prisoners of mechanical time, the idea of breaking free of those chains is endlessly fascinating.