Tale of Two Economists

In an ironic twist, an economist turned entrepreneur writes a rigidly academic critique, The Recklessness of Quantitative Easing, and an academic pens an anecdotal piece of writing on a different but related subject, I Can Afford Higher Taxes. But They’ll Make Me Work Less.

Recklessness by John Hussman, whom I’ve quoted before in this blog as I consider him to be one of the clearer thinkers about the uncharted territory we call today’s economy, argues that the Federal Reserve’s announced intention to pursue a second round of QE is to drive “interest rates to negative levels in hopes of stimulating loan demand and discouraging saving” and to “increase the supply of lendable reserves in the banking system.” But will this increase output and employment?

Hussman thinks not as “interest rates are already low enough that variations in their level are not the primary drivers of loan demand.” There is simply a lack of confidence – both for the consumer and businesses -- that they will have the income in the future to pay off loans. So low or even negative interest rates is not a barrier and “removing a barrier allows you to move forward only if that particular barrier is the one that is holding you back (the economic term being "constrained optimization" as he explains.)

“Instead, businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?”

The effect of all the talk about QE2 has been to propel gold to new highs and to further erode the value of the US dollar as the Fed dramatically expands its balance sheet. “But once the Fed has quadrupled or quintupled the U.S. monetary base from its level of three years ago, how will it reverse its position?” Hussman’s answer is that many years down the road it will be forced to sell off the instruments it is buying, driving interest rates much higher as foreign buyers might be absent from such auctions, and undermining whatever recovery might have begun of its own accord, just further accentuating the boom bust cycle.

He has constructive suggestions, fiscal responses that might include “extending unemployment benefits, ensuring multi-year predictability of tax policy, expanding productive forms of spending such as public infrastructure, supporting public research activity through mechanisms such as the National Institute of Health, increasing administrative efforts to restructure debt through writedowns and debt-equity swaps, abandoning policies that protect reckless lenders from taking losses, and expanding incentives and tax credits for private capital investment, research and development.” Of course many of these require the cooperation of Congress and watching the mud slinging of the mid term elections, one has to wonder.

But Hussman’s article is must reading it its entirety, especially if you are an individual investor and wondering how to position a portfolio in this strange new economic world. The net effect of the Fed’s actions, besides the obvious nearly zero return on any CD you might buy, is to “force” the investor to move into riskier assets commodities in particular and equities as well. One could also “play” the decline of the dollar by investing overseas or in US multinational companies, which derive a majority of their income abroad. But to what extent QE2 is already baked into the prices of these riskier assets is anyone’s guess. There is also the possibility of a more protracted deflationary period than anyone can imagine right now, with the ongoing real estate crisis and high unemployment having a continuing impact. There seems to be a heavy reliance on the Fed’s future actions leading to an idyllic outcome. I think Hussman would disagree.

One of his suggestions as noted is “ensuring multi-year predictability of tax policy” which leads me to the other economist, Professor Mankiw who is professor of economics at Harvard and was an adviser to President George W. Bush, whose administration has to share some if not a majority of the responsibility of our present economic morass.

Professor Mankiw op-ed piece in the October 9th New York Times, through a convoluted and highly subjective mathematical exercise, argues the proposed tax increase on the 2% wealthiest Americans – some attempt at least to close the budget abyss -- will lead to such people not working much, including, alas, movie and rock stars and even novelists! Outraged, and disappointed that I might not see another Harrison Ford movie, or see my first Lady Gaga “concert” or that Jonathan Franzen will put down his pen, denying us his next novel in protest, I immediately shot off a letter to the editor of the NY Times business section, in which Mankiw’s article appeared. Some very good letters were published in response, but not mine. The nice thing about a blog is I can publish my own rejections! So here is what I wrote:

While it is hard to argue with Professor Mankiw’s math (“I Can Afford Higher Taxes. But They’ll Make Me Work Less”) of what his incremental income might become thirty years in the future in a halcyon tax-free world, his conclusion that movie stars, novelists, rock stars, and surgeons might work less if taxes are increased is based more on his own anecdotal view of working. By his own admission: “I don’t aspire for much more than a typical upper-middle-class lifestyle,” and that’s fine, but don’t blame the tax code for declining his next free lance opportunity. If he should climb down from his Ivy tower and look at the real world with real unemployment around 15%, people trying to work to simply support their families and hold onto their homes rather than handing down wealth to succeeding generations, he might have a little more empathy for a progressive tax code that did not seem to destroy incentives during the Clinton years, the last years in which our country actually had a surplus. And even Warren Buffett and Bill Gates see the fairness in having some sort of an inheritance tax.

Maybe the Times found it too preachy or politically oriented. Perhaps I should have concentrated on the nature of work itself. Remember Hussman’s comment about constrained optimization, that removing a particular barrier only has a beneficial impact if indeed it was that particular barrier holding you back? If Mankiw is entitled to personalize his argument, so can I. I worked as hard when in a higher incremental tax bracket as I did when they were lowered. Why? I loved work, simple as that. And, that is what is missing not only from Mankiw’s formula but how our society looks at work and values workers.

I remember my first visit on business to Japan in the 1970’s, the taxi cab drivers waiting at the hotel for a fare, their cabs gleaming as between fares they would polish and clean their cars. The refuse collector doing his job well was as highly valued by society as a company executive. Japan today, of course, suffers some of the same maladies as ours, with a twenty-year head start on the phenomenon of deflation, so perhaps that has taken its toll on their workers. Somehow, as a society, we need to value all workers and restore work as something to be embraced.

Of course we don’t always have an idyllic choice of the work we do in our lifetimes, but we do have a choice of doing it well or not and by choosing the former, we open a path to finding it meaningful. I’m sorry Prof. Mankiw chooses whether he will write an article or accept an invitation for a speech merely based on what his incremental income bracket might be, although I think most people would envy that he actually has a choice.

I like what the great short story writer, Raymond Carver, wrote thinking about a friend who admitted he wrote something just to make a deadline and make a buck, knowing he could have written something better if he took the time. “If writing can’t be made as good as it is within us to make it, then why do it? In the end, the satisfaction of having done our best, and the proof of that labor, is the one thing we can take into the grave. I wanted to say to my friend, for heaven’s sake go do something else. There have to be easier and maybe more honest ways to try and earn a living. Or else just do it to the best of your abilities, your talents, and then don’t justify or make excuses. Don’t complain, don’t explain."

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Cruise to Canada and New England

Although we lived in the northeast all of our adult lives before moving to Florida, and still spend the summers there on our boat, we had never taken our own boat north of Nantucket, so this summer we planned a trip to the Canadian Maritimes, but on a cruise ship, leaving the driving to someone else. And although we had navigated New York harbor on our own boat, there is nothing like leaving New York on a 93,000 ton vessel, where you pass Lady Liberty at eye level and

the entire panorama of New York slowly unwinds as you leave the pier at 55th Street and 12th Avenue and make your way towards and under the Verrazano Bridge, barely clearing the bridge in such a vessel. Passing Ellis Island stirred stories in my memory of my ancestors who were processed there, arriving from Cologne, Germany before the Civil War and afterwards building a photography business on the Bowery in lower Manhattan.

Having departed NY in the late afternoon, we emerged into the open waters of the Atlantic on way to the first port of our itinerary, Halifax NS. Our departure coincided with the arrival of Hurricane Igor in the Atlantic and although we were no closer at any time than about 1,000 miles, the storm stirred up the seas, resulting in considerable swelling. But for old salts such as ourselves, the 8 to 10 foot seas were very tolerable, particularly in such a large stabilized vessel. I felt sorry for the passengers who were wearing their wristbands and their patches behind their ears to ward off mal de mare, real or imagined. One could easily recognize such people from a slight glaze of fear in their eyes.

This first leg to Halifax took a full day and night from NY and we entered the harbor early in the morning, a special moment for me as several years ago I edited a book, New York to Boston; Travels in the 1840’s, which included selections from Charles Dickens’ American Notes (1842). Halifax was Dickens’ first stop after transiting the Atlantic Ocean on one of the early steamers -- and in January no less. One can understand his relief at arriving in Halifax, writing the following about his Atlantic journey: “Imagine the wind howling, the sea roaring, the rain beating: all in furious array against her. Picture the sky both dark and wild, and the clouds, in fearful sympathy with the waves, making another ocean in the air. Add to all this, the clattering on deck and down below; the tread of hurried feet; the loud hoarse shouts of seamen; the gurgling in and out of water through the scuppers; with, every now and then, the striking of a heavy sea upon the planks above, with the deep, dead, heavy sound of thunder heard within a vault.”

His ship went aground entering the Halifax Harbor and after being reassured that there was no danger of the ship sinking, or rolling over as the tide was on the rise, Dickens went to bed at 3:00 AM. Upon awakening the next morning, he wrote: “When I had left it over-night, it was dark, foggy, and damp, and there were bleak hills all round us. Now, we were gliding down a smooth, broad stream …the sun shining as on a brilliant April day in England; the land stretched out on either side, streaked with light patches of snow; white wooden houses; people at their doors; telegraphs working; flags hoisted; wharfs appearing; ships; quays crowded with people; distant noises; shouts; men and boys running down steep places towards the pier: all more bright and gay and fresh to our unused eyes than words can paint them.” They finally got off the ship for the first time in fifteen days, Dickens describing Halifax as follows: “I carried away with me a most pleasant impression of the town and its inhabitants, and have preserved it to this hour… The town is built on the side of a hill, the highest point being commanded by a strong fortress, not yet quite finished. Several streets of good breadth and appearance extend from its summit to the water-side, and are intersected by cross streets running parallel with the river…. The day was uncommonly fine; the air bracing and healthful; the whole aspect of the town cheerful, thriving, and industrious.”

I include Dickens description as remarkably it mirrors our own impression of Halifax, and I could not help thinking of his visit while there. Of course, things are more modern now, and the fort he referred to as being unfinished, The Citadel, was completed in 1856, fourteen years after Dickens’ visit.

It was a clear chilly day with nary a cloud in the sky when we were there, the wind having whipped around from the north after the passage of Hurricane Igor far to the east. We walked the extensive hills of Halifax. In some ways, it reminded us of a small Vancouver, with many ethnic groups, Halifax’s Pier 21 having served as the “gateway to Canada” as did Ellis Island in NY.

Our departure followed Dickens into the Bay of Fundy, but his ship went directly to Boston whereas we were on our way to Saint John, New Brunswick, on the north shore of the Bay of Fundy and at the mouth of the St. John River. The Bay of Fundy has always fascinated me because of its extreme tidal changes, an unthinkable fifty-five feet along with the strong currents that accompany such change. As a boater, I wondered how one would navigate and tie off to fixed docks for such a change (answer: time activity to avoid low tide or just sit on the bottom waiting for the tide to rise). Intent on seeing as much as we could of this phenomenon and the caves gored by tidal action, we wanted to travel parts of the Bay of Fundy trail and therefore we booked a private guide to be driven to all the highlights.

This turned out to be a fascinating part of the trip, not because of the scenery per se, which was not as memorable as we had hoped (we were there at the wrong tide, closer to high than low) but because of our driver, a woman in her early forties, and her unusual and remarkable life story.

She was born to a French-Canadian father and a mother who is part native Indian and actually was raised on a Reservation. In fact, her Uncle is currently a chief of one of the Micmac tribal villages. Our guide has twelve half brothers and sisters, all fathered by different men! Her mother had problems, too personal to go into detail here. But remarkably, our driver raised many of her half siblings from her early pre-teen years, and her own two sons and a daughter as well, completely on her own. Through much personal sacrifice and hard work, they have become upstanding citizens and she is currently a very proud homeowner and successful in her business, and is reconciled with her parents who rent a room in her house!

So while we toured and she explained the various sites, we were equally fascinated by this larger than life person, and her perspective on living in St. John, a beautiful part of the world.

From St. John the ship moved on to Bar Harbor, Maine, my friend Emily’s favorite place. Although our son went to Bates College in Lewiston, and we used to visit him there, regretfully we never found our way to Bar Harbor, a town that reminded us a little of Nantucket. Emily’s “go to destination” in town is Sherman’s Bookstore where she advised Ann to buy, Contentment Cove, a novel written by Miriam Colwell, which although she actually wrote in the 1950’s was published only four years ago. Ann loved the book, finishing it during the rest of the cruise (I was reading Jonathan Franzen’s Freedom)

Acadia National Park, with its striking views of the Porcupine Islands and much of Maine’s extensive coastline was a special treat. Before the fire of 1947, Bar Harbor had large, Newport-like “cottages” but most of these were consumed in the fireball that was fed from the Acadia woods by a dry strong wind. Today Bar Harbor’s 4,000 resident population grows ten times that in the summer. One can see why.

From Bar Harbor we cruised overnight to Boston, where we eagerly anticipated seeing our son, Chris. We decided to meet at The Institute of Contemporary Art where we were treated to highly interesting and imaginative work of Charles LeDray, an exhibition entitled workworkworkworkwork, “consisting of handmade sculptures in stitched fabric, carved bone, and wheel-thrown clay.” These are all “smaller-than-life formal suits, embroidered patches, ties, and hats, as well as scaled-down chests of drawers, doors, thousands of unique, thimble-sized vessels, and even complex models of the solar system.” The gestalt was to make the viewer’s life feel tiny in the continuum of time and space. This exhibit will tour, so be on the lookout! Afterwards, we had a wonderful lunch overlooking the Boston Harbor. The sun set over Boston as we departed.

The last port was one we had once visited on our own boat, many years before, Newport, RI. Here is one of the most beautiful, venerable NE seafaring towns, with its “cottages” for the rich and famous. Newport always has a breeze blowing and I remember having to back our boat down a corridor at the old Treadway Inn, currently another hotel, its docks now rearranged for mega vessels, with a crosswind that made the boat almost unmanageable. I think I made a mental note to avoid Newport thereafter, at least on our own boat. Nonetheless, I love the architecture in Newport.

Returning to New York early the next morning was dramatic as we caught the dawn and then the sunrise. The Williamsburg Bank tower in Brooklyn as well as the Brooklyn and Manhattan bridges marked my return to an area I had spent a good part of my early adult life.

It was strange to see these landmarks from the perspective of the ship, four decades later, almost as if I am now a stowaway from another land.

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Freedom

I will not attempt to formally “review” Jonathan Franzen’s Freedom as it justifiably has been thoroughly reviewed and highly praised since publication. But having recently read it, here is my opinion. It is a tour de force of our times covering the entire canvas of American culture, politics, and the forces that now shape our personal relationships and our society. It is stunningly and ingeniously written, with a fresh originality, a postmodern view of who we are and how we got here. In so doing, Franzen excoriates the worst aspects of American culture.

It is a story about the enmeshment of relationships, the extent to which we create our own hell (or heaven) having been dealt the hand of the families we are born into. Do we assume the roles of our parents or rebel against them? To what extent do we really have free will or become victims of abuse and misbehavior inflicted by prior generations? It is about competition and power, survival of the fittest, fathers vs. sons, almost echoing the Darwinian themes of Dreiser. It is about the conflict of personal freedoms and the need to protect the environment and control population growth. Will “the American bourgeoisie…voluntarily accept increasing restrictions on its personal freedoms”?

It is also a novel about a unique development in American life, new generations not having it better than previous ones, perhaps the consequence of having too many choices. As Franzen writes about the main character, Patty, “she was struck…by how much better off and more successful her parents were than any of their children, herself included.” Her mother cursed her husband’s genes “for her kids’ weirdness and ineffectuality.” At times the characters are “bludgeoned by depression,” another leitmotif of the novel and certainly characteristic of our Prozac plagued times.

I couldn’t help but think of Updike’s Rabbit novels, written about every ten years, capturing the Zeitgeist of each decade, and Franzen, now, encapsulating the state of the first decade of the millennium. There is also the eerie coincidence of Patty being a basketball star in her youth, like Rabbit Angstrom. In many respects, there is a decidedly Updikian feel to the novel.

The novel is a shot across the bow of a society that values the culture of American Idol and the worst aspects of capitalism more than the environment and intelligent political choices. At one point Patty’s son, Joey, wishes “there were some different world he could belong to, some simpler world in which a good life could be had at nobody else’s expense,” summing up the modern conundrum.

While it is a novel of social commentary, it is also a page-turner with memorable characters, ranking with the best in American literature. The writer who shared similar concerns in the early 20th century, Sinclair Lewis, said America is “the most contradictory, the most depressing, the most stirring, of any land in the world today.” I think Franzen would agree.
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The More Things Change....

Welcome to the twilight zone. When I read stories such as Microsoft possibly borrowing to increase its dividend and stock buybacks, I see it as just another sign of the American economic system gone wild. There was once a day when companies borrowed money to finance expansion for the production of goods. Now we borrow to pay shareholders or make titanic bonuses to executives. Or we finance our deficit by borrowing from China to keep the American consumer, AKA Hamster on a Wheel, buying at the local official distributor of goods made in China (and other emerging countries), Wal-Mart. But even with interest rates at all time lows, we cannot create borrowing demand in housing, or small business so unemployment remains intolerably high.

In the past I’ve written about many of the pieces of the economic conundrum we’ve created for ourselves, the problem of job creation, the local government crisis, the underfunded pension guarantees, entitlements, banking bailouts, the inflation/deflation tug of war, and in general our consumption oriented society. In fact, while everyone feels a little better as we have thrown so much $$ at the economy to keep it afloat, repair some damage to everyone’s 401Ks, the really major challenges lie ahead, and in one of the more divisive political environments as the midterm elections loom. The more things change, the more they stay the same…. Alphonse Karr
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Slouching Towards Nostalgia

When I first began this blog, I really did not know where it would take me. I should have maintained an index as entries have floated like a dandelion in the winds of our time. They are idiosyncratic reactions to the macro and micro moments of my life, but true to my “mission statement” it has been focused on my primary interests, publishing, music, reading and writing, economics and business, photography, and boating. The presidential election occupied a fair amount of angst, not to mention the ongoing Great Recession, the disaster in the Gulf, and “circus occasions” such as the Madoff affair which led to a number of entries.

John Updike’s death was a great sadness to me, the passing of America’s greatest contemporary writer, but luckily, it appears that the baton has now been placed in the capable hands of Jonathan Franzen who has followed up his promising Corrections with Freedom, which has even been acclaimed as the latest “Great American novel.” I got my hands on one of the first copies from my friends at Amazon (a printed copy that is not a Kindle, which I continue to resist). I am so looking forward to reading it, that I am delaying the pleasure until we take a trip in a couple of weeks. Interestingly, taking a page from Updike’s Rabbit series, Franzen has neatly spaced his two novels a decade apart, giving us an opportunity to kaleidoscopically view the differences in our times. So Franzen, I am hoping, will be a worthy successor to a writer I have loved to read for the past fifty years, although he will never be as prolific as Updike, who could move gracefully in many genres, from the novel, to the essay, to the short story, to poetry.

While writing this blog over the past few years, I also “discovered” Raymond Carver, not that I had not read him before, but I immersed myself in his short stories with the publication of the Library of America’s complete collection and Carol Sklenicka's excellent biography, Raymond Carver: A Writer's Life. Many of his stories, such as Gazebo, continue to resonate in my consciousness, so perfectly constructed and moving. Carver always wanted to write a novel, but he was the master of the short story and was wise never to leave that field, including writing some very good poetry. Perhaps Franzen will follow suit, recognizing his territory as the novel, and one absolutely brilliant novel each decade would be more than enough by any standards.

I also renewed my passion for the theatre during this time, especially the productions of Dramaworks in West Palm Beach, and am looking forward to my preview seats for the forthcoming season so I can comment on the productions before traditional media intrudes.

But I started this blog with several entries of a personal nature, about my family and childhood, the good, the bad and the ugly and I see that several of my last entries hark back to more nostalgic feelings than was my original intent. This is a far cry from providing a ‘first hand” account of “our” times, and although family and reflecting on my life will always be a part of what makes me write, I’m taking a vacation from that for a while.

However, I can’t resist the temptation to recount one very recent personal experience, occurring on the night of Labor Day. We had taken our boat to our mooring off Crow Island which we have visited now for some thirty years. There we met friends, thinking we would stay for the day and return to our marina before sunset. Instead, we were easily persuaded to stay the night, enjoy a pot luck supper, including fresh dug steamed clams, and although my instincts told me that an exceptionally high tide might make it uncomfortable, I relied on the NOAA forecast of “relatively light winds” for assurance that we would not excessively rock at high tide as we slept. By dark the winds increased to some 20 knots pushing the water of the Long Island Sound over the bar that protects the anchorage. The End Result: all night we rocked, rolled, banged, bow and spring lines loudly snapping and tugging, things thrown off counters, to the point of virtually no sleep. By morning, with the tide subsiding and the wind backing down, we were greeted by this sunrise, a small consolation to a night from hell.
And a few minutes later…..
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Batter Up!

It is a moment one almost likens to tales of the unbelievable, news about one's 50th high school reunion. When I graduated from Richmond Hill High School in 1960, it would have been the class of 1910’s turn; it would never happen to us. Now in 2010, it is our turn, my generation no longer on deck, but in the batter’s box, approaching a full count. Baseball metaphors were in my thoughts as I held the invitation to my 50th HS reunion from one of my old classmates.

I had attended the 20th reunion and generally was not recognized or probably more aptly, not remembered. The surreal aspect of that gathering was it took place at the school itself, its hallways, classrooms, and the cafeteria where the reunion was celebrated, all seeming to be diminutive, as if we had either grown into giants or the rooms had shrunk. Recognizable was the old route to the high school, partially along Jamaica Avenue which connected my two childhood homes.

Richmond Hill was a working class community of mostly families of German, Italian and Irish heritage. A recent Wall Street Journal article described the evolutionary changes to what used to be called 'Berlin' in the 1800s. Although still a working class community of immigrants, it is now primarily populated by families from India and Guyana. So the baton of opportunity in the New World has been passed on to a new generation of immigrants.

Gone are the landmarks of my youth, in particular, Jahn’s where we spent our teenage after school time or the next door RKO Keith’s where as kids we were drawn to the Saturday matinees and the Triangle Hofbrau diagonally across the street, the restaurant where our family sometimes celebrated special occasions. My father, mother, uncle and aunts had all attended the same high school. Now they are all gone and most of the people I went to school with have migrated east to Long Island or west to New Jersey. Probably no one remains in the old neighborhood.

Our 8th grade graduation photo (I’m second from the right in the first row) shows us on the cusp of entering that high school, with our future selves lying before us. Now we look back and wonder how that deceptively eternal future suddenly became the past, the world of today not even imaginable then.

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Low Tide

I mean this literally and figuratively, an astronomical low as evidenced by the photo below of the Norwalk River.

And a walk down Westport’s Main Street, my first in many years, revealing that most of the local shops are gone, the Remarkable Bookstore and Klein’s now a figment of my memory and, in their place, trendy shops one would encounter in an upscale mall. In fact, think of downtown Westport, CT as now being mostly an outdoor mall with only Acorn Pharmacy, Westport Pizzeria, the Liquor Locker, and Oscar's the vestiges of the New England town I once knew.