What Happened and What Will the Future Bring?

The question relates to the midterm elections and the answer comes via the oblique route of my 50th high school reunion. In the summer I was invited to the reunion but unfortunately I would not be able to attend.

My "old" classmate, Eileen, who did a yeoman's job organizing the reunion was disappointed (as was I), but told me that our grade advisor from those by-gone years, Mr. Brickner would be there. I was delighted to hear his name again and to learn he was well. She said she would be meeting with him to finalize plans and she was still having difficulty addressing him as "Roger" rather than Mr. Brickner. I know what she meant. Our class had tremendous respect for Roger Brickner. And, for me, he was not only my advisor, but an important mentor (probably unknown to him). My first three years in high school were mostly wasted opportunities, but when I had Mr. Brickner for Honor Economics, all that changed. I wrote to Eileen that “he is one of the few teachers I so clearly remember as being encouraging of my dormant academic abilities and I would love to be able to be in touch with him to thank him.”

Ellen passed on the information and one day I received a phone call. It was Mr. Brickner, animated and enthusiastic, exactly as I remembered him from fifty years ago. I had the opportunity to personally thank him for being such a supportive teacher and asked him whether he still wore his trademark bow tie (no). We exchanged email addresses.

Suddenly I began to receive broadcast emails from him about the, then, upcoming midterm elections, detailed analyses covering the house, senate, and gubernatorial races, state by state, projecting winners and the reasons why. I was stunned by the scope of his knowledge and asked whether he worked professionally in this area after teaching. He wrote back, "My interest in politics is an enthusiastic avocation. I began to predict presidential elections as a teenager and since I thought Dewey would win in 1948 I have been lucky to pick every winner since that time. The key is understanding where the American people are each fall of a presidential year." Now I understood why he was the champion of mock political conventions in our high school. I participated in the one for 1960 and as I recall placed Margaret Chase Smith, the Senator from Maine, in nomination for the Presidency, which put me way ahead of the times (imagine, a woman President!).

His predictions were remarkably accurate, nailing almost all the races, and reading his forecasts was a better use of time than watching the network "calls" of the election. As the projections of all the major networks -- ABC, CBS, CNN, FOX, and NBC -- rely on the same exit poll information gathered by National Election Pool (NEP), their calls and analysis can be dully redundant. It was a breath of fresh air to read Roger's coverage and projections, all well before the exit polls gathered by NEP were distributed to the networks. After the election he sent a daily email dissecting the house, senate, and gubernatorial results. On November 9 he did an omnibus summary, musing about the possibilities for 2012, which I publish in its entirety as a valuable guest entry:

WHAT HAPPENED AND WHAT WILL THE FUTURE BRING?

Dear Friends:

First and foremost, the election just concluded (with still a few undecided races) WAS truly a remarkable one. It tore down past records. The Republicans now have more state legislators than they have had since 1928. They have seized control of the House to a greater extent than they have had since 1946. Hardly a record, they added six seats in the Senate, remaining behind by a 53-47 margin. In number of governors they are very close to their all time highs of the 1970's and 1980's.

What caused this surge to the Republicans? The public never accepted the assurances of the President and the Congressional leaders that the Medical Care measure was in their interests. They were appalled by the dealings in congress and the twisting of arms. Standard behavior in Congress, but not appreciated by the public. But if the Medical Care bill hurt, it was the inability of the Administration to lower significantly unemployment. There also was the feeling that nothing was being done to limit the power and the machinations of Wall Street and Big Business. Not spoken about in the campaign I believe it was an underlying factor. It not only united the left with the populist tea party right, but it activated the latter while depressing the former.

The president himself was a substantial factor. Not that he did not achieve Congressional measures he fought for, but that he seemed not to be able to communicate to the public easily. He was viewed as being "an educated elitist" who was not comfortable with ordinary people. A bit like Adlai Stevenson.

Losses in key areas were devastating. He lost 21% of the over 65 voters, who voted in a greater proportion than in 2008. On the other end the under 30's held in their support BUT far fewer got out to vote. White men, white women, less educated all shifted strongly to the Republicans. Blacks remained loyal to the Dems. Their proportion of the vote dropped however.

The tea party played a role in the 2010 election... it helped both the Republicans and the Democrats and it hurt both as well.. It is a dynamic loosely knit group of individuals motivated by a desire to change the way government has been going of late. It is quite the populist movement, hardly a sophisticated bloc of traditional activists tightly organized. It has had the effect of bringing out voters. It has encouraged participation of voters, particularly in Republican primaries, challenging both Conservative and Moderate party standards. In three cases it achieved the nomination of tea party types in areas where the general electorate not inclined to support them. They undoubtedly caused the Repubs. Senate seats in Delaware, Colorado and Nevada. Had the standard candidates run in these states the Senate would be 50-50. If Lieberman ( I-CT) or very conservative Ben Nelson ( D-NE) had switched to vote to organize for the Republicans it would be a different story. Tea party has surely hurt the Repubs. in these three states. The Dems. can see this as a ray of hope for them. However, the Republicans undoubtedly were invigorated by the support of many in the tea party. Perhaps now that they have a half dozen tea party Senators and perhaps 40-50 House members they will understand the process of politics more than their exuberant backers. Indeed, I see this Repub. bloc as I did the Blue Dog Dems in the last Congress. Many of the Blue Dogs lost as readers of these letters expected. Many of the tea party winners come from these Blue Dog CDs.

The tea party may become involved in the populist cause of punishing the greed on Wall Street and be joined by the left wing pseudo socialists in the President's party. Perhaps this unlikely coalition will be an interesting development of tea party influence. Keep watch for this.

As the lame duck Congress meets later this month, I shall return to the issues and the wisdom of how much a lame duck Congress should attempt especially after a watershed election.

What is in this election to help us understand the 2012 election? History tells us that presidents bounce back after major defeats in Congress after their first two years... TRUMAN, EISENHOWER, REAGAN, CLINTON. All were two term presidents (Truman less only 80+ days). Does this apply to Obama?? History says it may well. But, just to play the game of IF THE PRESIDENTIAL ELECTION WERE HELD TODAY WOULD YOU VOTE FOR OBAMA OR FOR ROMNEY? My guess is that would be an extremely close election with perhaps 1% separating the two. Electoral vote? Obama 271, Romney 267. that would see Obama losing four major states VA, NC, FL, OH. It would be a nail biting election. BUT the election is NOT now, it is in NOV 2012.

A POSSIBILITY for 2012 is for third party(s) may become significant. It would really shake things up. A centrist party a la Bloomberg or a frustrated Tea Party on the right could mess up anyone getting a majority of the electoral votes. If that happened then the House votes by delegation for one of the top 3 candidates popular vote. If that were to happen in 2012, the Repubs. would make the decision for they are in control of 33 state delegations and only 26 votes are needed. So given that reality, it would seem a Tea party third party is the more likely. A centrist party would have to win a majority of the votes for it to win, and if it ran and did not, the Repubs. would again be able to vote themselves in. THIS IS ALL CONSTITUTIONAL OK??

Time to take a break, Roger

Veterans Day Thoughts

On this Veterans Day I take a moment to remember my father who fought in WW II. He was a Signal Corps photographer, and although that doesn't sound very dangerous, he had his share of close calls, fears, and uncertainties. He did things he never imagined he'd be asked to do or see, such as having to film a German concentration camp as soon as it was liberated witnessing first-hand those demonic atrocities. Or having to go up in gliders to silently land near enemy lines, and, generally, having to be away from his wife (Penny) and young son (me). He rarely talked about those war years, preferring to just put that part of his life into a compartment, locking it and throwing away the key.

My father had some notoriety, appearing on the pages of Stars and Stripes, the venerable newspaper of the armed forces that has been published since the Civil War. My father was filming at enemy lines overlooking the Rhine River, under a German sign reading "Photography Forbidden."

Now that he is long gone I regret not trying to talk to him more about the experience. I have some of his letters that he wrote to my mother and my Uncle and below I quote one of my favorite passages as it is so revealing. Towards the end of the War he wanted to get home so badly. Who could blame him? I'm sure all Veterans, current and past share those feelings.

Here are my father’s hopes and thoughts on Aug. 12, 1945, in a letter to his brother, Phil, from Wiesbaden, Germany:

“As you no doubt already know, I informed my sweetheart [Penny] some very discouraging news – that is being stuck here as [part of the] occupational [force]. On the heels of that letter came the wonderful news that Japan is asking for surrender. As this wasn’t definite as yet, I can’t say that finally war is ended, but I’m sure it’s only a matter of a day or two.

The Atomic bombings, and Russia’s entry into the conflict just overwhelmed the Japanese, especially the Atom smasher, a deadly and destructive thing, which has great future development for the betterment of mankind, but what I fear is some nation to use it for a complete destruction of civilization. I hope that this fear never will materialize.

What I began to say concerning the news [staying here as part of the occupational force], which I hated to tell Penny, is this – the sudden ending of all hostilities can possibly bring me and hundreds of other guys back to homes sooner than is predicted. I’m sure that those who are the law makers at home aren’t going to leave us in these foreign lands against our will – especially as there are millions of other Joes who have never left the good old USA and faced a future of sudden death.

I fought for freedom, freedom for all peoples. Now that we have won victory over the oppressors, haven’t I the right to enjoy that freedom? The Army is composed of civilians. Is it not the democratic way that we all share the fruits of victory, especially those who fought for it and were fortunate enough to be sparred a hideous death?"

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A Taxing Question

How rich is too rich? Actually, I published a book by that title almost twenty years ago and some of its ideas are as relevant today as it was then (How Rich Is Too Rich; Income and Wealth in America by Herbert Inhaber and Sidney Carroll: Praeger, 1992). Two points from that book stuck with me. First, there is the very descriptive opening chapter of looking at income distribution as an imaginary "sixty minute grand parade," tax payers being the marchers, grouped by their height which would be representative of their incomes, the first marchers having the lowest income and the last the highest, with "height" determined by the "average" taxable income being equal to the "average" height of an individual American. The "parade" in effect is an X/Y graph, the Y axis being the income (height), and the X axis being the minutes of the "parade." The first few minutes one sees no marchers even though we can hear some noise. These are people with negative height, those who report the loss of money in that taxable year. It isn't until about ten minutes into the parade that we see marchers between 10 and 24 inches in height and it isn't until 36 minutes we see the so called "average height" taxpayer march by. With about only 20 minutes left, heights begin to rise dramatically. With the last five minutes giants appear, people whose heads are so high we can hardly make out their faces without binoculars. The marchers in the very last minute of the parade are so tall we can only see their feet. These are people of accumulated, sometimes inherited, wealth and in the last few seconds the marchers are the size of sky scrapers. In effect, the parade shows a slowly rising gradient until the far right of the curve when it begins a parabolic rise and then shoots straight up off the graph.

While the numbers might have changed over the last twenty years, the concept has not. Probably, if anything, the "parade" has become even more dramatic, more parabolic, with a steeper rise at the end. And, those at the end of the parade pay now less as a percentage of their income to the government than at any time before.

To listen to the Tea Partiers, a roll back of taxes of the very wealthiest to pre-Bush rates, is an evil, evil thing. Just think of the trickle-down effect that would be lost to the little folk who stand in line for the crumbs falling from the tables of the fabulously wealthy. It is ironic that these dire warnings of the effects of a tax increase on the wealthy are carried into battle on banners hoisted by "Joe the Plumbers" -- it shows the power of the conservative media and the most virulent impact of the Internet. It just makes no sense that the people near the middle of the parade should become pawns for the people at the very end.

Actually, I think the converse is true: it is an evil thing for people who have benefitted from being able to accumulate wealth in the greatest of all capitalist democracies, not to give back more for that opportunity. The argument goes that asking these people to pay more will remove the incentive for them to work, and maybe if we're talking about 70 percent of one's income that might be true. But in 2000, people reporting AGIs of more than $1 million paid 28% of their income as taxes vs. 23% five years later. In 2005 there were 304,000 households reporting income of more than $1 million, more than a trillion dollars of income or $3.375 million per household. And mind you of those, there are a few at the very end of the "parade" with incomes that have so many zeros they would be hard to read. The latter are sports stars, entertainers, and, of course, very, very successful entrepreneurs. Are they going to work "less hard" by paying an additional five percent overall? That five percent would mean another $50 billion going to the US Treasury, at least a beginning to address the ongoing deficit. And, of course, if you look at the $250,00 level as the cut off as suggested by President Obama, there is much more to be gleaned, but given the midterm elections, that level is probably going to be raised if it is not eliminated altogether.

The alternatives that are occasionally pushed by the Tea crowd, such as a flat tax, is, in effect, a regressive tax, with the lower income people having to pay the same taxes on necessities as the wealthy, which just further splits the great economic divide in this country. A national sales tax does the same thing and as we are now so dependent on consumer spending, that could be the death knell for the economy. No, a progressive tax structure has been this country's basis for supporting it's national programs and we have been able to grow in spite of these supposed "disincentives" of higher taxes at a higher bracket.

No doubt the current tax structure is hopelessly and needlessly complicated and THAT is where the discussion should also be focused. There are so many loopholes, that a revised graduated tax structure would not have much teeth without addressing those as well. And then there is the issue of capital gains and dividends. We certainly want to encourage taxpayers to reinvest in our equity markets.

The other point I never forgot from that book was its commentary on the estate tax, arguing against the estate tax altogether, provided there was an alternative system of "estate dispersion." Rather than taxing one's estate at death, it suggested a tax-free dispersement up to a certain level per recipient (rather than per estate). For argument's sake, call that $1 million per recipient. Amounts exceeding that would begin to be taxed on some kind of graduated basis. Those would be life time totals, so if an individual receives money from different inheritances, they would be accumulated and taxed on that scale. "No longer would the estate tax system generate an American royalty -- those freed from the need ever to be economically productive. This alternative system would generate for all the incentive that most of us have in the outcome of our own economic lives. No longer would a large part of our national wealth be beyond responsive use."

Now, the incredibly wealthy could give a million dollars each to a thousand different people, all tax free (if those recipients also received no other inheritances in their lifetimes). The point is that those thousand people would put that capital to work, rather than vesting a billion dollars in one's immediate family who might decide to simply live off the income and pass it on to the next generation, and the next. Or he/she could still leave more to the immediate family, but it would be subject to taxation, perhaps substantial taxation on a graduated basis.

"Wealth great enough to entitle one to membership in the elite comes from two sources -- enormous earnings or inheritance. Prudent public policy should allow those, who, through individual ingenuity, talent, or luck, gain a fortune to use and enjoy it for life...but if these individuals have the power to transmit immense wealth to others after death...they can write the rules controlling this wealth, possibly many generations into the future. This breaks the chain of personal effort that is tightly bound, for most of us, to personal reward. Economic resources, controlled by rules set up by the dead, are denied to those who might well be more productive."

If the Republicans and Tea Partiers interpret their gains to mean they now have carte blanche to keep the Bush tax cuts for the highest wealth tier -- people who would not be hurt by some roll back to pre-Bush tax levels -- the result will only increase the deficit further. There would seem to be no upside to such an action; in effect it is a spending initiative something they claim to condemn. Failure to make tax reforms that lead to a more graduated income tax and closing loopholes, and not having a sensible inheritance tax also just further drives a stake between the haves and the have-nots.

On a related subject, the so called "wealth effect" the Federal Reserve is trying to engineer with its QE2, is still another factor favoring the haves. This is convincingly analyzed by my fellow blogger over at Fund My Mutual Fund in his posting Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses. It is well worth reading.

A tranquil reprive from QE2 and the upcoming taxation battle in Congress

The Widow Maker

There is a fine line writing this blog, expressing my views on a number of subjects, but sometimes struggling about how much personal information I am willing to reveal, and this entry is one of those, somewhat crossing the line to recount a recent health issue as a "public service" piece.

I remember when Forbes' Wealthiest 400 List was first published, noting that among the foremost "professions" that led to wealth was "inheritance." I made a mental note to make that my college major in my next lifetime. Being born into such a family such as DuPont or Rockefeller made succeeding generations instant lottery winners!

Here's the connection to the topic at hand: The reverse lottery is being born into a family that has a history of coronary heart disease. Eating a reasonably healthy diet and exercising might delay or mitigate the effects of being dealt poor genetic cards, but last week I found that no matter what I do, I am going to battle this disease for the rest of my life. That is the depressing part of the problem. I have always approached life with the thought I can do something about affecting the outcome. Well, I have no direct control over the progression of coronary heart disease; both my parents suffered from it, in one form or another.

Now other people have been dealt much worse hands on matters of health and cancer has to be among the most cruel and frightening. Coronary heart disease, however, is stealth like and a bigger killer. It develops over years and years. No doubt I compounded my genetic problem as a young adult, smoking by my late teens into my early 30's. My parents both smoked and the rooms of our home sometimes looked like they were in a fog. Also as I kid I ate foods like Wonder Bread ("builds strong bodies 8 ways!") and drank massive amounts of whole milk (which I did into my college years). Meat was also a staple "health" food, and Coca-Cola at 5 cents a bottle was consumed like water.

Over the past summer I noticed that I was having difficulty climbing steep hills during my morning power walks, with a noticeable tightness in my chest. So until we returned home to Florida, I just avoided hills. That was stupid. I should have seen someone immediately, but I didn't think much of it and I was fine otherwise. Once I returned, my Doctor did not like anything I reported, and he said let's skip the usual stress test and go directly to a radial catheterization. Going through the wrist is a newer technique, with faster recovery for the patient. So I went into our local hospital which has an excellent catheterization unit on Monday last week, made a mental note of the time I was wheeled into the cath lab and found myself in recovery less than a half hour later. I then knew there was something wrong. Even if they did merely a balloon angioplasty it would have taken longer than that.

When the Doctor showed up in recovery, he explained I had a 99% blockage in the "Widow Maker" an apt name for the left anterior descending artery which usually gives little warning of being blocked and most who have a heart attack because of that particular blockage die then and there. This blockage could not be addressed with drugs and most interventionist cardiologists would simply refer me to surgery for bypass surgery, an invasive procedure, painful, and with some real risks.

He suggested another option, inserting two drug eluding "kissing" stents where the arteries form a "V." He said it would be tricky, but given my age it might be a better option than a bypass we might have to do all over again in ten years. One bypass per lifetime is enough.

So the next day I was prepped early for a femoral procedure and at 8.00 am was back in the cath lab saying hello to the same technicians and nurses again (we're on a first name basis). I didn't get out until after 10.00 so I knew it was a complicated procedure, but awaited the word from my Doctor about how it went. He explained I received three new drug eluding stents, two in the left anterior descending artery and a kissing one in the diagonal. That makes six total stents in my system and I am now known as a catheterization lab "frequent flyer."

It's been quite an experience. As I said, not half as bad as many people have to go through with their health issues, but bad enough. The message: listen to your body and know your family history.

I am hopeful that I can continue to successfully manage this, but that hope is sort of dependent on being reasonably tethered to my cardiologist and cath lab. In that regard, Dr. Paul Teirstein of Scripps Clinic wrote a reassuring editorial, "Drug-Eluting Stent Restenosis. An Uncommon Yet Pervasive Problem", published online June 21, 2010 in Circulation. His advice for physicians:

Do not underestimate the emotional impact of repeated procedures on patients, particularly the “frequent flyers” who have experienced multiple visits to the catheterization laboratory. These patients often describe significant frustration and fear. They feel a loss of control, mostly due to an inability to plan their lives and predict when a restenosis will occur. It is helpful to reassure these patients by emphasizing they do not have an incurable, lethal disease.... Patients can be told if they stay in close contact with their cardiologist, the risk of death and infarction is low.... It may sound obvious to the physician, but most of our patients are seeking this kind of reassurance.... I also emphasize that recurrences are unlikely to go on forever. Finally, it is worth communicating that they are not the only patient to encounter this problem, and ultimately, patients with restenosis who seek treatment usually have good outcomes.

Take Tea and See

The electorate has spoken and so has the Federal Reserve. The Party of No will now be in a position to speak words of more than that one syllable.

Meanwhile, Mr. Bernanke's monetary gift to the markets of quantitative easing is propelling them to new highs, especially assets benefitting from a weak dollar. Like sheep investors are being herded into a pen of commodities, export-focused stocks, and corporate bonds, anything but prosaic government bonds and CDs. QE2 is to stem deflationary forces and to stimulate the economy but the Fed is entering uncharted waters with its actions and will it create jobs? Beware of Federal Reserve economists bearing gifts to stimulate inflation and then be careful of getting more than what we wish for. The markets might party while Bernanke plays out QE2, and maybe even QE3, but what is the end game and don't markets ultimately discount what IT perceives as the end? I refer again to John Hussman's important observations on the subject

As to the election, the results were no surprise. I remember being "amused" by the rhetoric heard immediately after Obama's victory into his first few months in office, the Dow dropping almost two thousand points in that short period of time as being "evidence" of his "dangerous" economic agenda. It was immaterial that the markets had already been in a swoon for a year before by even a greater percentage. As the Dow recovered, up more than four thousand points since the "Obama low" not a peep about his policies being responsible.

Of course, neither the decline shortly after his taking power, or the Dow turnaround have much to do with his policies. The Federal Reserve can take responsibility for markets on steroids. A year ago I said "I still think the President could have devoted more of his first year to policies addressing what I called a 'new economic morality.' But Main Street seems to have been sacrificed at the altar of Wall Street and we are angry. Who truly believes the economic crisis is solved rather than being merely postponed?" That anger has spilled over into the midterm elections and, now, we will have the help of the Party of No -- and, who knows, perhaps they will have something positive to say and do. Time to take some tea and see?



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Telling It the Way It Is

You have to admire Bill Gross, the eponymous bond king who runs PIMCO's portfolio. His latest monthly Investment Outlook in part takes on the silly season of the midterm elections and its outrageous campaign tactics. The election nearly neatly coincides with Halloween and the ghoulish nightmare of the endless direct mailings and automated phone calls insult the intelligence of the American voter. The negativity is overwhelming. Being on the National Do Not Call list is irrelevant as apparently the people who make the laws can easily bend them for their own benefit so night after night negative recorded messages besiege our land line. If you do not answer, the recording ends up on your answering machine -- some of them can last minutes. When we're home, call recognition winnows most so we can easily answer and hang up almost simultaneously.

The mailbox is stuffed with dire warnings, black and white photos of the opponent which makes he/she look like a ghost and then a nice colorful photo of whomever the mailing supports. Fill in any politician's name you want "[Blank] Is Sucking the Life Out of the Economy." Or another one we received today: "[Blank] Has a Secret She Doesn't Want You to Know." Some are sent by a major party while others are sponsored by "organizations" that sound mighty impressive but are totally unknown such as "Citizens for Lower Taxes and a Stronger Economy, Inc." Hey, I want a stronger economy and lower taxes -- I should be for what they're for!

But I say elect Spiderman!

Just imagine a political system with campaigning that relies totally on televised public debates and published position papers (on the Web, in newspapers) but NO PAID ADVERTISEMENTS or CALLS. Imagine saving all those wasted resources and putting them to better use, especially in these dire economic times.

I'm sick of it and so is Bill Gross. As I said, you have to admire his stance, a risk he takes as he is not a politician, but represents a major financial institution. He's also a damn good writer. Good riddance to the midterm elections. When will we ever learn? The link to Gross' article is above, but I conclude by quoting part of his statement on the subject. It's just too good to be buried in the link.

Each party’s campaign tactics remind me of airport terminals pre-9/11 when solicitors only yards apart would compete for the attention and dollars of travelers. “Save the Whales,” one would demand, while the other would pose as its evil twin – “Eat Whale Blubber,” the makeshift sign would read. It didn’t matter which slogan grabbed you, the end of the day’s results always produced a pot of money for them and the whales were neither saved nor eaten. American politics resemble an airline terminal with a huckster’s bowl waiting to be filled every two years.

And the paramount problem is not that we contribute so willingly or even so cluelessly, but that there are only two bowls to choose from. Thomas Friedman, the respected author of The World Is Flat, and a weekly New York Times Op-Ed author, recently suggested “ripping open this two-party duopoly and having it challenged by a serious third party” unencumbered by special interest megabucks. “We basically have two bankrupt parties, bankrupting the country,” was the explicit sentiment of his article, and I couldn’t agree more – whales or no whales. Was it relevant in 2004 that John Kerry was or was not an admirable “swift boat” commander? Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal? Shame on them and of course, shame on us. We’re getting what we deserve. Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.

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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