Show Us The Figures, Rick

By now Rick Perry's opinion piece in today's Wall Street Journal is making some waves. In many ways I agree with you, Rick, particularly about simplifying the tax code. But that does not mean a simple graduated tax structure has to be thrown out (in favor of the regressive flat tax) and it does not mean one has to entirely do away with capital gains taxation (usually the realm of the wealthy, so that, too, is another regressive move) or does it mean that a carefully thought out, and fair, inheritance tax shouldn't be retained (concentration of wealth doesn't enhance the American dream, it erodes it). And I'm all for responsibly addressing the twin Swords of Damocles that loom in our future, Medicare and Social Security. I'm even for a balanced budget, but not via Constitutional Amendment (imagine having to raise $$ in a crisis with congressional bickering stalling the process, not to mention transitional issues).

So while I agree with many of the feel-good measures, Rick, how does your op-ed piece constitute a "plan?" Show us the figures, Rick -- how many jobs evolve from massive tax cuts and would those jobs materialize anyhow with the next business cycle? Where is the evidence? Or, is this merely an ideological belief?

And that is my problem in accepting your "plan" as a serious one. Furthermore, Rick, you were not the first Republican candidate with a flat tax agenda. Cain beat you to the Texas punch and Gingrich now says he's for an optional flat tax rate of 15%, which beats yours by five percent. By your own logic, that ought to create even more jobs! And Romney now says he's always been for a flat tax. Sounds like a game of Texas Hold 'em. Are all you Republican candidates in? -- place your bets.

There is a pioneering book of social psychology you should read, Rick: Gustave Le Bon's The Crowd; A Study of the Popular Mind. Hard to believe it was written in 1895 as your true-believer words "tax cut" could have been used by Le Bon as an example. Think of them in the context of a passage I underlined as a student: "The power of words is bound up with the images they evoke, and is quite independent of their real significance. Words whose sense is the most ill-defined are sometimes those that possess the most influence...Yet it is certain that a truly magical power is attached to those short syllables" [e.g. tax cut] "as they contained the solution to all problems. They synthesize the most diverse unconscious aspirations and the hope of their realization. Reason and arguments are incapable of combating certain words and formulas. They are uttered with solemnity...and as soon as they have been pronounced an expression of respect is visible on every countenance, and all heads bowed. By many they are considered as natural forces, as supernatural powers. They evoke grandiose and vague images in men's minds, but this very vagueness that wraps them in obscurity augments their mysterious power."

"Tax cut" is the holy grail for supply-siders -- a "mysterious power" indeed when it comes to resulting in more jobs. As Le Bon further says, those unexamined words "become vain sounds, whose principal utility is to relieve the person who employs them of the obligation of thinking." And, that seems to be the new "democracy" of the so-called "debates." As the late preeminent science fiction writer Isaac Asimov said in Newsweek (21 January 1980): “There is a cult of ignorance in the United States, and there always has been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that 'my ignorance is just as good as your knowledge.'” (Hat tip, The Big Picture)

Natty Bumppo Economics

The recently completed $38 billion battle of brinksmanship over next year's federal budget is going to look like child's play in comparison to the upcoming showdown over the need to increase the debt ceiling. So, so much more is at stake, including the dollar's status as a reserve currency. And yet, our congressional "leaders" have declared a recess until sometime in early May, only a couple of weeks before the Treasury hits the debt ceiling. No doubt the recent move in gold and dollar weakness reflect an increasing anxiety that the United States Government could actually default. S&P has put the US on credit watch. Without Congressional action we will simply greatly increase the cost of inevitably having to borrow anyhow when Armageddon comes knocking at our fiscal door, and who will want to lend to a deadbeat government? Why would our politicians even play such a game? Is it a form of political conspiracy to bring the government to its knees?

Agreed, carrying unsustainable debt is a sure death knell as well. But debt on the balance sheet comes not only from making poor judgments and being profligate, it also comes from failing to raise revenue. Both sides of the income statement --- expenses AND revenue ---need to be examined by our absentee representatives.

It is wishful thinking, particularly as the economy has been on life support through the Federal Reserve since the 2008 financial crisis, that we can grow enough to offset the tax cuts that have been implemented since the Clinton years. US taxpayers with the highest adjusted gross income have watched their federal tax rates fall from about 30 percent in 1995 to 17 percent by 2007. No argument that we need to simplify the tax code, but tax revenues need to be higher, simple as that. We need to revisit those Clinton rates again, a graduated tax rate without the loopholes. Close as many doors as possible to the underground economy. Eviscerate tax avoidance strategies.

We also need to shore up Social Security by increasing the wage limits for SS taxes -- or how about a similar "donut hole" we give to seniors for their drug needs, taxing wages for social security to a certain limit, then no tax until another higher limit is reached, and then resume taxing for social security revenue. On the expense side of the income statement, means testing will have to be instituted and the retirement age slowly moved back.

The ideas put forth for privatizing Medicare will slowly kill the program, so desperately needed by the middle class. Cost containment measures have to take first priority. A voucher program is smoke and mirrors. Can you imagine the average senior having to make such decisions with insurance companies pulling the strings?

And Medicare being entirely turned over to the States, many of which can hardly make their own budgets balance? Disaster for the poor.

These are huge issues and I don't mean to simplify any of them, but defaulting on our debt is NOT the first step in resolving any of these problems. It will be our last.

The amazing thing about this "movement"-- if it is fair to call it that -- is some of the people who would be hurt the most just say "bring it on, let the government fail." Perhaps this notion harkens back to the idealized Natty Bumppo from James Fenimore Cooper's Leatherstocking Tales. But this is not a mythical tale of American rugged individualism and "one shot, one kill." It is about cooperation and compromise. We need our representatives to do the hard, serious work they were hired to do without all the political posturing and partisanship, and without the brinksmanship of the twelfth hour.

Cheery Tidings from the Social Security Administration

For the second year in a row, this happy news from the SSA, received in the mail yesterday: "Your Social Security benefits are protected against inflation. By law, they increase when there is a rise in the cost of living. The government measure changes in the cost of living through the Department of Labor's Consumer Price Index (CPI). The CPI has not risen since the last cost-of-living adjustment was determined in 2008. As a result, your benefits will not increase in 2011."

What a country, retirees are protected from the ravages of inflation, and, better news, yet, there is no inflation! Hooray! There is certainly no inflation in interest rates from CDs, that's well documented. Thank you, The Federal Reserve!

Of course the SSA's Cola adjustments are made through the most bizarre calculation. Sounds like a lot of sleight of hand, but here is an explanation.

It is interesting to review how the CPI gets measured and how such measurements might distort what inflation seniors really face. According to Bureau of Labor Statistics Consumer Price Index the prices of certain items have actually declined over the last year, specifically Window Drapes (8.00%), Peanut Butter (5.10%), Bedroom Furniture (5.00%), Dishes (4.40%), and Sports Equipment (4.00%). But, with the notable exception of Peanut Butter which many seniors may have resorted to consuming, these items are probably not frequently among their purchases. On the other hand, let's look at some of the offsetting increases: Funerals +2.20%, Dental Services +2.80%, Nursing Homes +3.50%, Physicians Services +3.50%, Prescription Drugs +3.90% and Hospital Services +9.30%

No inflation for seniors? Ha. Also, for a quick peek into the future, let's review the past: According to the Bureau of Labor Statistics, the purchasing power of a 1984 dollar is now $.458 while a 1967 dollar is only $ .153.

No doubt entitlement programs need to be looked at along with taxes to get our fiscal house under control, but inflating away the dollar and playing shell games with Social Security is what happens when Congress cannot agree on anything and political posturing is all our representatives seem to be able to do. We've become a sound bite democracy.

Meanwhile, on another, but related topic, the essay du jour is Bill Gross' latest, with his conclusion saying it all: "The United States in short, needs to make things not paper, but that is not likely unless we see a policy revolution in Washington DC. In the meantime, our unemployed will continue to fill out forms and stand in line. We’re living here in Allentown."

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Long-Term Thinking

This entry is a redirect to the site of the John Hussman, an academic economist turned mutual fund manager, who takes a long-term perspective and invests accordingly. He has been a frequent critic of the overall bailout strategy arguing that until we clear out bad loans, requiring those who made them to take losses, we are doing nothing more than applying band-aids to wounds that need major suturing.

It is amazing to watch the markets since late 2007 as governments around the world have gone into hock, writing blank checks to the financial sector. This has reengaged investors, driving up markets, and leaving risk-adverse investors with the option of getting no return or being forced into riskier investments. It is as if governments are introducing the same problem as a solution. We all get a sense that there will be serious long-term consequences and perhaps recent developments in Europe are indicative. In the U.S. we have time bombs of Fannie, Freddie, deteriorating state and municipal government finances, Medicare and, now, the economic consequences of an ecological disaster in the Gulf, which will linger for generations. How much longer can difficult, lasting solutions be deferred?

Meanwhile, investors can always follow Dilbert’s Scott Adams’ investment “advice” bearing in mind that in humor there is much truth, although he does carry the disclaimer “not to make investment decisions based on the wisdom of cartoonists.”

Here are some key points Hussman makes in his latest piece:

* The fundamental problem is that we have not, as a global economy, accepted the word "restructuring" into our dialogue. Instead, we have allowed our policy makers to borrow and print extraordinarily large band-aids to temporarily cover an open wound that will not heal until we close the gap. That gap is the difference between the face value of debt securities and the actual cash flows available to service them. The way to close the gap is to restructure the debt. This will require those who made the bad loans to accept the associated losses. By failing to do that, we have failed to address the essential problem faced by the world, which is that we have created more debt than we are able to service.

* When our policy makers insist on defending reckless lenders with public resources, we have to recognize that this is not free money. When the government issues a paper liability for real value, that real value gets directed to the recipient at the expense of countless other activities. Even seemingly costless interventions can be redistributions of wealth. For example, the strategy of dropping short-term interest rates to nearly zero as a way of increasing the interest spread earned by banks has the direct effect of impoverishing savers, very often elderly people who rely on lower risk investments for capital preservation.

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Bombshell

“We are out of money.”

This is the “news” we’ve feared, although expected, but not so soon: the admission that the US economic system (not necessarily the stock market which lives in its own fantasy land before it adjusts to reality) is insolvent. President Obama, responding to a question about the cost of health care in an interview on C-SPAN yesterday, said, “Well, we are out of money now.”

Just a couple of weeks ago I noted, “One gets the feeling that the Obama administration has little choice but to let this kind of bad news out slowly, hoping the market and the psyche of the country can absorb it without disrupting the tenuous nature of the recovery, particularly in the credit and stock markets. Until REAL unemployment recedes deficits will inevitably grow beyond forecasts.”

Obama’s admission seems to be a continuation of the letting-the-news-out-slowly “strategy” the consequences of which are staggering, not only for holders of US Treasuries, but just about every world currency because of the symbiotic relationships between the lending economies and the consuming economies. For sometime I’ve been concerned about this, particularly because of the mathematical confluence of rising healthcare costs and rising unemployment. “Are T-Bills “risk free,” especially as the US seems to be on a course to guarantee every debt and every major corporate shortfall, not to mention the twin time bombs of Social Security and Medicare/Medicaid as the baby boomers retire and unemployment rises? Now there is a Black Swan.” So, today’s headline “Fix is hard for Medicare, Social Security finances” does not come as a surprise, but it is disturbing that we have so long delayed the inevitability of facing up to this hydra headed conundrum. “If we cannot even acknowledge these economic truths, there can be no national plan to deal with the dire consequences.”

Maybe President Obama’s statement was more of a Freudian slip, but it is now out there, to be “pondered" by the markets, and, hopefully, to be finally faced up to by Congress.
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Black Swan Reveries

As a change of pace – away from my normal interest in literature and biography -- I read Nassim Taleb’s The Black Swan; The Impact of the Highly Improbable. He basically argues that experience and therefore planning counts for little. We are all governed by extraordinary effects of unanticipated extraordinary events and not by planning the minutia from the observed experience of the past. Essentially, our planning tools, the normal statistical methods we use are only effective in “Mediocristan" a world in which extremes are limited, such as the normal height of human beings, and therefore a random selection of that particular universe is anticipatable and measurable. He contrasts Mediocristan with "Extremistan" the world in which chaotic extremes reign and therefore a random sampling will not be representative. Hence, it is fruitless to plan for such extremes. So much for free will.

We are left with a world we can plan for “inside the box” but the true impact to that world occurs outside the box.

It’s sort of an in your face, edgy presentation by Taleb, very cynical in some respects. I empathize with the latter because of years of corporate planning. With the development of, first, VisiCalc, then Lotus 123, and now Excel, this kind of planning has been taken to such an extreme that the process itself probably keeps half of corporate America employed. It always amused me; I used to call it the battle of the spreadsheets – central corporate vs. the operating companies.

Part of that “planning” involves associating or connecting past events and “making sense” out of them. He calls that “naïve empiricism,” a “natural tendency to look for instances that confirm our story or our vision of the world….Alas, with tools, and fools, anything can be easy to find. You take past instances that corroborate your theories and treat them as evidence.” Even more profound is his observation: “We humans are the victims of an asymmetry in the perception of random events. We attribute our successes to our skills, and our failures to external events outside our control, namely to randomness. We feel responsible for the good stuff, but not for the bad. This causes us to think that we are better than others at whatever we do for a living.” Decades of corporate life leave me saying Amen to that.

But, isn’t the existence of the worlds of Mediocristan vs. Extremistan self-evident? Obviously, we can only think within the box when dealing with processes such as sales forecasting, budgeting, etc., basing them on the past statistics from Mediocristan. And a “black swan event” is going to have a profound impact on the world of Mediocristan. We mere humans do not have much control over an asteroid hitting our planet. Taleb’s problem with the foregoing is that we think we do.

Besides being a mathematician and philosopher, Taleb is a hedge fund manager. I was therefore interested in how he translates his philosophy to investment. Essentially, he takes the position that 85% of one’s portfolio should be allocated to “risk free investments,” specifically US Treasury Bills and the remaining 15% into very high risk investments that could have an exponential payoff in a Black Swan event from the world of Extremistan. So after a very convincing and sometimes disturbing philosophical argument the author seems to fall victim to the very blindness he decries. Are T-Bills “risk free,” especially as the US seems to be on a course to guarantee every debt and every major corporate shortfall, not to mention the twin time bombs of Social Security and Medicare/Medicaid as the baby boomers retire and unemployment rises? Now there is a Black Swan.