Over the cliff and through the woods,
To a grand recession we go.
Congress knows the way to waste its last day,
raising taxes and adding woe.
Over the cliff and through the woods,
To a grand recession we go.
The Fed is on deck, printing money like heck,
Investors are losing dough.
Over the cliff and through the woods,
To a grand recession we go.
The Dems go their way to make the rich pay,
Republicans say no no.
Over the cliff and through the woods,
To a grand recession we go.
Where the deficit shrinks, while the jobless drink,
Eating cake is for the po'.
Happy New Year.
Sunday, December 30, 2012
Wednesday, December 19, 2012
The Fiscal Cliff Negotiations: Just Who Is Barack Obama?
Recent negotiations over the fiscal cliff, which seem to be faltering after initial signs of progress, raise a persistent question about Barack Obama: has he any political principles? After campaigning this fall to protect the poor and middle class, he agreed in fiscal cliff negotiations to changes to the income tax structure and Social Security that are more damaging to the poor and middle class than the prosperous segments of American society. By accepting Republican demands for the Social Security inflation adjustment to be the Chained Consumer Price Index, Obama has effectively reduced inflation protection for Social Security recipients, military retirees and federal civilian retirees, the vast majority of whom are low or middle income. At the same time, because the same inflation adjustment would be made to income tax brackets, the brackets would rise more slowly during inflationary times. That would effectively result in heavier taxation across the board, a seemingly regressive result. Additionally, Obama agreed to raise the threshold for higher tax brackets from his original position of $250,000 to $400,000. To be cynical, this might be viewed as a gift to the upper middle class professionals who often are his supporters and contributors. And to be more cynical, it can be observed that many lower income folks, especially older whites heavily reliant on Social Security and/or military pensions, tend to be Republican more often than Democrat. Perhaps the President sees little to lose in imposing austerity on them.
One wonders if Obama, after four years of dealing with the Great Recession, understands even the basic structure of the U.S. economy. Our economy is 70% consumption. Money in the hands of the poor and middle class gets spent. They don't have enough to save hardly a penny. This spending stimulates the economy. Money in the hands of the upper middle and upper classes is frequently saved, allowing the rich to get richer relative to other income categories. By raising taxes on the poor and middle class while cutting benefits to Social Security recipients, and military and federal civilian retirees, the President is reducing consumption and its stimulative impact on the economy, while exacerbating the inequality in wealth distribution. What policy sense does this make?
During his first term, Obama demonstrated time and time again at critical junctures that he is a clever politician and dealmaker much more than a leader. He craftily co-opted his most serious Democratic rival, Hillary Clinton, by making her secretary of state. And he kept the liberal wing of the Democratic Party at bay by putting one of their number, Joe Biden, in the Vice President's residence. But he has few loyal constituencies. His one signal achievement, the Affordable Care Act, may transform life in America. But transformational legislation doesn't necessarily bestow greatness on a President. Lyndon Johnson's Great Society programs transformed America far more than anything Barack Obama has done or will do. Indeed, the Voting Rights Act of 1965 enfranchised black and other disadvantaged Americans, paving the way for Obama to win the White House. But Johnson has been denied the mantel of greatness. While this is due in large part to his foreign policy catastrophe in Vietnam, it's also because Johnson, like Obama, was a consummate politician without any large loyal constituencies. There's no one running around singing Johnson's praises. Obama will always be remembered as the first nonwhite President, and there's a measure of greatness in that. But John Kennedy was America's first non-Protestant President, and in 1960 that was an achievement not far from Obama's achievement in 2008. Kennedy is remembered today for his charisma and charm. But he doesn't rank among the great Presidents. And, because Obama seems to value a deal more than principles or loyalty to constituents, neither will he.
One wonders if Obama, after four years of dealing with the Great Recession, understands even the basic structure of the U.S. economy. Our economy is 70% consumption. Money in the hands of the poor and middle class gets spent. They don't have enough to save hardly a penny. This spending stimulates the economy. Money in the hands of the upper middle and upper classes is frequently saved, allowing the rich to get richer relative to other income categories. By raising taxes on the poor and middle class while cutting benefits to Social Security recipients, and military and federal civilian retirees, the President is reducing consumption and its stimulative impact on the economy, while exacerbating the inequality in wealth distribution. What policy sense does this make?
During his first term, Obama demonstrated time and time again at critical junctures that he is a clever politician and dealmaker much more than a leader. He craftily co-opted his most serious Democratic rival, Hillary Clinton, by making her secretary of state. And he kept the liberal wing of the Democratic Party at bay by putting one of their number, Joe Biden, in the Vice President's residence. But he has few loyal constituencies. His one signal achievement, the Affordable Care Act, may transform life in America. But transformational legislation doesn't necessarily bestow greatness on a President. Lyndon Johnson's Great Society programs transformed America far more than anything Barack Obama has done or will do. Indeed, the Voting Rights Act of 1965 enfranchised black and other disadvantaged Americans, paving the way for Obama to win the White House. But Johnson has been denied the mantel of greatness. While this is due in large part to his foreign policy catastrophe in Vietnam, it's also because Johnson, like Obama, was a consummate politician without any large loyal constituencies. There's no one running around singing Johnson's praises. Obama will always be remembered as the first nonwhite President, and there's a measure of greatness in that. But John Kennedy was America's first non-Protestant President, and in 1960 that was an achievement not far from Obama's achievement in 2008. Kennedy is remembered today for his charisma and charm. But he doesn't rank among the great Presidents. And, because Obama seems to value a deal more than principles or loyalty to constituents, neither will he.
Wednesday, December 12, 2012
How Will the Fed Deal With Speculation on the Fed?
The Federal Reserve's historic announcement today of specific benchmarks for changes in monetary policy--no positive short term interest rates permitted until unemployment is 6.5% or lower, or inflation exceeds 2.5%--got a resounding shrug from the stock market, which closed flat. Or maybe it wasn't a shrug, but puzzlement. This policy takes the Fed into uncharted territory, and the truth is no one really knows what will happen next.
One thing that's certain, though, is financial speculators just got another trading opportunity. With the Fed specifying benchmarks, speculators can concentrate bets on which way economic statistics will go. For example, if you think unemployment will drop quickly, short sell the long end of the Treasury securities market. Or buy a derivatives contract over the counter to quietly do the same thing without the regulators having much idea of what you're up to.
Because of the Fed's unquestioned ability to move the financial markets, these benchmark bets may be very large. Indeed, as the Fed's balance sheet balloons even more above its current $3 trillion level in its relentless prosecution of QE ad infinitum, its potential impact on the financial markets will billow proportionately. Speculators may pile on the risk in the hope of getting even more bang for the leveraged buck.
With prospects for "real" investments like stocks and bonds murky and guarded, hedge funds and other money managers may be tempted to make benchmark bets instead of living with the disappointing returns available from the real world. After all, they need to beat the averages in order to attract investors, and benchmark betting could offer a lucrative way to do that (if you guess right). The financial contracts for making such a bet are manifold, so the quantity of betting may be unlimited. Since much of this betting could take place in the over-the-counter derivatives markets, central banks and other regulators might not have a good idea how much gambling is going on. The specter of systemic risk could lurk.
If benchmark betting becomes a popular play, the Fed might be confronted with the problem of collateral damage to the financial system and economy if economic statistics move in unexpected ways. If important players in the financial markets suffer a lot of collateral damage from speculative wounds, the Fed might have to deviate from its expected course of action (such as by not raising interest rates or working down its balance sheet even though unemployment drops below the 6.5% benchmark). In such an instance, the very policy that the Fed is attempting to implement could be undermined.
But there is no practical way for the Fed to prevent benchmark betting. Even if it can control the risks taken by the largest money center banks (and that's no certainty by a long shot--witness J.P. Morgan's London Whale debacle), it can't control the risks that myriad hedge funds and other investment vehicles, many of which would be in other countries, might take. If a lot of these speculators are leaning right when the economic statistics move left, the Fed and other central banks might have a highly problematic problem.
The idea behind the Fed's announcement of benchmarks is to make monetary policy more transparent and understandable. That's nice theory. But the abundance of wise guy speculators in the financial markets can muck up (that's the polite phraseology) the works.
One thing that's certain, though, is financial speculators just got another trading opportunity. With the Fed specifying benchmarks, speculators can concentrate bets on which way economic statistics will go. For example, if you think unemployment will drop quickly, short sell the long end of the Treasury securities market. Or buy a derivatives contract over the counter to quietly do the same thing without the regulators having much idea of what you're up to.
Because of the Fed's unquestioned ability to move the financial markets, these benchmark bets may be very large. Indeed, as the Fed's balance sheet balloons even more above its current $3 trillion level in its relentless prosecution of QE ad infinitum, its potential impact on the financial markets will billow proportionately. Speculators may pile on the risk in the hope of getting even more bang for the leveraged buck.
With prospects for "real" investments like stocks and bonds murky and guarded, hedge funds and other money managers may be tempted to make benchmark bets instead of living with the disappointing returns available from the real world. After all, they need to beat the averages in order to attract investors, and benchmark betting could offer a lucrative way to do that (if you guess right). The financial contracts for making such a bet are manifold, so the quantity of betting may be unlimited. Since much of this betting could take place in the over-the-counter derivatives markets, central banks and other regulators might not have a good idea how much gambling is going on. The specter of systemic risk could lurk.
If benchmark betting becomes a popular play, the Fed might be confronted with the problem of collateral damage to the financial system and economy if economic statistics move in unexpected ways. If important players in the financial markets suffer a lot of collateral damage from speculative wounds, the Fed might have to deviate from its expected course of action (such as by not raising interest rates or working down its balance sheet even though unemployment drops below the 6.5% benchmark). In such an instance, the very policy that the Fed is attempting to implement could be undermined.
But there is no practical way for the Fed to prevent benchmark betting. Even if it can control the risks taken by the largest money center banks (and that's no certainty by a long shot--witness J.P. Morgan's London Whale debacle), it can't control the risks that myriad hedge funds and other investment vehicles, many of which would be in other countries, might take. If a lot of these speculators are leaning right when the economic statistics move left, the Fed and other central banks might have a highly problematic problem.
The idea behind the Fed's announcement of benchmarks is to make monetary policy more transparent and understandable. That's nice theory. But the abundance of wise guy speculators in the financial markets can muck up (that's the polite phraseology) the works.
Friday, December 7, 2012
Will Stocks Drop Over the Cliff?
The stock market has been eerily calm in spite of all the sturm und drang over the fiscal cliff. After a brief sell-off following President Obama's re-election, the Dow Jones Industrial Average has treaded water right around the 13,000 mark. Evidently, the market believes the anonymously leaked assurances from both the Republican and Democratic sides that a deal on the fiscal cliff will be reached. And, rationally speaking, that should happen. So maybe the market is justified in its equanimity.
But is it? Looking back at the most recent comparable instance of fiscal dysfunction, the 2011 debt ceiling scrum, we find that "resolution" of the political problem was followed by a drop in the market.
The debt ceiling fight simmered until June and July 2011, when all hell broke loose and records were set for political dysfunction in Washington. Only at the last minute, on August 2, 2011, was a deal to lift the debt ceiling finalized and approved by Congress. The Dow, which floated around in the 12,000s during July, fell below 11,000 within a week. One might have thought that resolution of the debt ceiling battle would produce a market rally. But, no, just the reverse happened.
The debt ceiling fight revealed the depths of America's political dysfunction. Standard & Poor's cut America's credit rating on August 5, 2011. The future looked, if anything, more uncertain than before the debt ceiling crisis. The resolution to the debt ceiling problem was to kick the can down the road, and defer confronting the government's tax and spending issues until after the November 2012 elections. Stalling and delaying isn't the kind of thing to inspire investors. The market's frothiness before the deal and its drop after the deal seemed like a classic case of buy on the rumor and sell on the news.
Well, that may be where we are headed today. There are plenty of nice sounding rumors being floated by politicians who have plenty of incentive to shade the truth. Reality is that whatever compromise the Republicans and Democrats reach on the fiscal cliff will surely be ugly. The pie is too small to be apportioned in a way that will make many, if any, happy. With the "resolution" to the fiscal cliff likely to make most of the nation grumpy, stocks aren't likely to be exuberant. Whatever you do, don't bet on politics to produce investment gains.
But is it? Looking back at the most recent comparable instance of fiscal dysfunction, the 2011 debt ceiling scrum, we find that "resolution" of the political problem was followed by a drop in the market.
The debt ceiling fight simmered until June and July 2011, when all hell broke loose and records were set for political dysfunction in Washington. Only at the last minute, on August 2, 2011, was a deal to lift the debt ceiling finalized and approved by Congress. The Dow, which floated around in the 12,000s during July, fell below 11,000 within a week. One might have thought that resolution of the debt ceiling battle would produce a market rally. But, no, just the reverse happened.
The debt ceiling fight revealed the depths of America's political dysfunction. Standard & Poor's cut America's credit rating on August 5, 2011. The future looked, if anything, more uncertain than before the debt ceiling crisis. The resolution to the debt ceiling problem was to kick the can down the road, and defer confronting the government's tax and spending issues until after the November 2012 elections. Stalling and delaying isn't the kind of thing to inspire investors. The market's frothiness before the deal and its drop after the deal seemed like a classic case of buy on the rumor and sell on the news.
Well, that may be where we are headed today. There are plenty of nice sounding rumors being floated by politicians who have plenty of incentive to shade the truth. Reality is that whatever compromise the Republicans and Democrats reach on the fiscal cliff will surely be ugly. The pie is too small to be apportioned in a way that will make many, if any, happy. With the "resolution" to the fiscal cliff likely to make most of the nation grumpy, stocks aren't likely to be exuberant. Whatever you do, don't bet on politics to produce investment gains.
Wednesday, November 28, 2012
Political Risks of the Fiscal Cliff
Who faces the greatest political risks from the fiscal cliff? It ain't the Democrats. They could do nothing, and watch the pre-Bush tax rates go back into effect in 2013. While this would have a near term negative impact on consumer spending, it would lower the federal deficit. That would promote long term economic growth. The President would take some heat for the economic slowdown, but the Democrats would have four years to recover before facing the 2016 Presidential election. By then, the economy might well be improving.
If there is a deal on the fiscal cliff, it would probably include some cuts to Medicare and Medicaid, and perhaps to Social Security (although the latter is less likely, since Social Security is actually much less of a fiscal problem and more visible to the voting public). The Democrats would blame these cuts on Republican insistence (of which there is plenty). Meanwhile, the Democrats would take credit for whatever tax increases or enhancements or whatever else would be part of the deal, which probably would fall more heavily on the rich than the 99%.
The Republican insistence on no tax rate increases allows President Obama to replay his winning electoral strategy of advocating tax increases for the rich. Republicans believe too much in their own P.R., that all taxes increases are invariably bad and that spending cuts would somehow be made to prevent taxes from increasing. A majority of the electorate thinks otherwise, and the Republicans conceded these voters (let's call them the 51%) to President Obama.
The baseline problem with the Bush tax cuts is that they reduce federal revenues to the point where Social Security and Medicare--the two most sacred bovines of American politics--are imperiled. It's one thing to attack federal funding of bridges leading to nowhere. It's another to take away bread and butter from the elderly. Republicans have managed to put themselves in a corner where they seek to protect low taxes for the wealthy while trying to squeeze pensioners having modest incomes. They ultimately can't protect the wealthy from a tax increase--the Democrats can do nothing and those increases will take effect at midnight, Jan. 1, 2013. But the Republicans can manage to look like Scrooge during the Christmas season as they advocate cuts for moderate income retirees. Politically, it won't be the Democrats who tumble over the fiscal cliff.
If there is a deal on the fiscal cliff, it would probably include some cuts to Medicare and Medicaid, and perhaps to Social Security (although the latter is less likely, since Social Security is actually much less of a fiscal problem and more visible to the voting public). The Democrats would blame these cuts on Republican insistence (of which there is plenty). Meanwhile, the Democrats would take credit for whatever tax increases or enhancements or whatever else would be part of the deal, which probably would fall more heavily on the rich than the 99%.
The Republican insistence on no tax rate increases allows President Obama to replay his winning electoral strategy of advocating tax increases for the rich. Republicans believe too much in their own P.R., that all taxes increases are invariably bad and that spending cuts would somehow be made to prevent taxes from increasing. A majority of the electorate thinks otherwise, and the Republicans conceded these voters (let's call them the 51%) to President Obama.
The baseline problem with the Bush tax cuts is that they reduce federal revenues to the point where Social Security and Medicare--the two most sacred bovines of American politics--are imperiled. It's one thing to attack federal funding of bridges leading to nowhere. It's another to take away bread and butter from the elderly. Republicans have managed to put themselves in a corner where they seek to protect low taxes for the wealthy while trying to squeeze pensioners having modest incomes. They ultimately can't protect the wealthy from a tax increase--the Democrats can do nothing and those increases will take effect at midnight, Jan. 1, 2013. But the Republicans can manage to look like Scrooge during the Christmas season as they advocate cuts for moderate income retirees. Politically, it won't be the Democrats who tumble over the fiscal cliff.
Sunday, November 18, 2012
Why Insurance Products Can Make Lousy Investments
If you're considering an insurance product that includes an investment feature, consider the following two examples of why you might want to say no.
Mass Mutual. On Nov. 15, 2012, the SEC sued Massachusetts Mutual Life Insurance Company in an administrative proceeding (an agency process somewhat like a court case, although conducted within the SEC instead of in a court). Mass Mutual settled without admitting or denying the SEC's charges. The essential accusation the agency leveled against Mass Mutual was that it didn't adequately explain to customers how withdrawals from variable annuities under certain circumstances could drain their accounts of value. (See the SEC's press release at http://www.sec.gov/news/press/2012/2012-230.htm.)
Variable annuities involve the customer making periodic payments for a number of years and directing how the money is invested in a tax sheltered annuity. Eventually, the invested amounts can be used to purchase an income stream from the insurance company. The investments may do well or poorly. To ameliorate the potential for poor investment returns, Mass Mutual offered an optional rider that, for an additional premium, gave customers a GMIB, or Guaranteed Minimum Income Benefit. The GMIB guaranteed a minimum value that customers could use eventually to purchase an income stream, regardless of how poorly their investments did.
The GMIB could increase by 5% or 6%, depending on the rider. Mass Mutual capped the level of the GMIB (through a somewhat complex formula). Once the cap was reached, the GMIB wouldn't increase. Mass Mutual also allowed customers to make withdrawals from their annuities before they converted the investment value into an income stream. If they made a withdrawal before the GMIB reached its cap, the withdrawal would reduce the GMIB value (and the value of the invested assets as well), but wouldn't prevent the GMIB from continuing to increase. However, after the GMIB reached its cap, withdrawals would decrease the GMIB and it wouldn't increase the next year. Thus, making withdrawals after the GMIB reached its cap could permanently shrink the GMIB--under some potential circumstances, to zero. According to the SEC, Mass Mutual didn't clearly explain how the GMIB, which might be thought by customers to be a guaranteed minimum value, wasn't guaranteed if the customer made withdrawals after it reached its cap.
Got it? Pretty simple, right? To be sure, after it was nabbed by the SEC, Mass Mutual did the right thing and eliminated the cap on the GMIB. But if you furrowed your brow over the details of this annuity (and we've just summarized them--read the SEC's press release and order cited above for a gorier rendition), you should think twice--and then three times--and then four times--and then five, six, seven and many more times before investing in a variable annuity.
Universal Life. The other example is in today's Wall Street Journal (Nov. 17-18, 2012, P. B9), which reports that low interest rates may require universal life insurance policy holders to pay higher premiums or face the cancellation of their policies. Universal life is a form of permanent life insurance that allows customers to have life insurance coverage for long periods of time (i.e., longer than the perhaps 20 years allowed in term life coverage), often with flexibility in the amounts of the premiums paid. Universal life also has an investment feature, and customers can use money from the investment account to help cover the cost of their life insurance. As customers age, the cost of life insurance coverage naturally increases. But today's low interest rate environment has been detrimental to investment returns, including those of universal life policies. Many universal life customers are facing the need to pay increased premiums, or see a reduction of their life insurance coverage or even the cancellation of their policies. Large numbers of universal life policies were sold years ago, before the Federal Reserve declared war on positive interest rates. So the current low rate environment and its consequences for universal life policies probably come as a surprise to many customers.
Insurance products like variable annuities and permanent life insurance can sometimes put customers into the middle of the complexities of the financial markets. You're subject to many of the same risks as professional investors and traders. But you probably don't have the same level of knowledge, experience, and information as they do. Sophisticated insurance products can be labyrinthine mazes of risk shifting, and it's possible to run into the Minotaur. Traditional insurance, which consists of the pooling of risks, can offer sensible protections. But stick to policies that are easy to understand, because then you'll know what you're getting into. Term life and fixed annuities can be useful for many people. Super dooper, turbo-charged complex insurance products that also invest your savings, pick up your dry cleaning and get the oil changed in your car are to be viewed cautiously, and then skeptically.
Mass Mutual. On Nov. 15, 2012, the SEC sued Massachusetts Mutual Life Insurance Company in an administrative proceeding (an agency process somewhat like a court case, although conducted within the SEC instead of in a court). Mass Mutual settled without admitting or denying the SEC's charges. The essential accusation the agency leveled against Mass Mutual was that it didn't adequately explain to customers how withdrawals from variable annuities under certain circumstances could drain their accounts of value. (See the SEC's press release at http://www.sec.gov/news/press/2012/2012-230.htm.)
Variable annuities involve the customer making periodic payments for a number of years and directing how the money is invested in a tax sheltered annuity. Eventually, the invested amounts can be used to purchase an income stream from the insurance company. The investments may do well or poorly. To ameliorate the potential for poor investment returns, Mass Mutual offered an optional rider that, for an additional premium, gave customers a GMIB, or Guaranteed Minimum Income Benefit. The GMIB guaranteed a minimum value that customers could use eventually to purchase an income stream, regardless of how poorly their investments did.
The GMIB could increase by 5% or 6%, depending on the rider. Mass Mutual capped the level of the GMIB (through a somewhat complex formula). Once the cap was reached, the GMIB wouldn't increase. Mass Mutual also allowed customers to make withdrawals from their annuities before they converted the investment value into an income stream. If they made a withdrawal before the GMIB reached its cap, the withdrawal would reduce the GMIB value (and the value of the invested assets as well), but wouldn't prevent the GMIB from continuing to increase. However, after the GMIB reached its cap, withdrawals would decrease the GMIB and it wouldn't increase the next year. Thus, making withdrawals after the GMIB reached its cap could permanently shrink the GMIB--under some potential circumstances, to zero. According to the SEC, Mass Mutual didn't clearly explain how the GMIB, which might be thought by customers to be a guaranteed minimum value, wasn't guaranteed if the customer made withdrawals after it reached its cap.
Got it? Pretty simple, right? To be sure, after it was nabbed by the SEC, Mass Mutual did the right thing and eliminated the cap on the GMIB. But if you furrowed your brow over the details of this annuity (and we've just summarized them--read the SEC's press release and order cited above for a gorier rendition), you should think twice--and then three times--and then four times--and then five, six, seven and many more times before investing in a variable annuity.
Universal Life. The other example is in today's Wall Street Journal (Nov. 17-18, 2012, P. B9), which reports that low interest rates may require universal life insurance policy holders to pay higher premiums or face the cancellation of their policies. Universal life is a form of permanent life insurance that allows customers to have life insurance coverage for long periods of time (i.e., longer than the perhaps 20 years allowed in term life coverage), often with flexibility in the amounts of the premiums paid. Universal life also has an investment feature, and customers can use money from the investment account to help cover the cost of their life insurance. As customers age, the cost of life insurance coverage naturally increases. But today's low interest rate environment has been detrimental to investment returns, including those of universal life policies. Many universal life customers are facing the need to pay increased premiums, or see a reduction of their life insurance coverage or even the cancellation of their policies. Large numbers of universal life policies were sold years ago, before the Federal Reserve declared war on positive interest rates. So the current low rate environment and its consequences for universal life policies probably come as a surprise to many customers.
Insurance products like variable annuities and permanent life insurance can sometimes put customers into the middle of the complexities of the financial markets. You're subject to many of the same risks as professional investors and traders. But you probably don't have the same level of knowledge, experience, and information as they do. Sophisticated insurance products can be labyrinthine mazes of risk shifting, and it's possible to run into the Minotaur. Traditional insurance, which consists of the pooling of risks, can offer sensible protections. But stick to policies that are easy to understand, because then you'll know what you're getting into. Term life and fixed annuities can be useful for many people. Super dooper, turbo-charged complex insurance products that also invest your savings, pick up your dry cleaning and get the oil changed in your car are to be viewed cautiously, and then skeptically.
Sunday, November 11, 2012
The Republican Redistricting Nightmare
The Republican Party is all tangled up in a pickle of its own making: redistricting. And this pickle doesn't taste very good.
Redistricting is the re-drawing of the borders of Congressional districts. It often happens after a decennial census, when the results show significant population change. In most states, redistricting is done by state legislatures, sometimes subject to the approval of the governor. The potential for political shenanigans is obvious, and the federal courts have presided over many cases alleging gerrymandering. But stacking the deck in your favor isn't always unconstitutional, depending on how you do it, and there are many districts resembling Rorschach tests for ghouls that are legally tilted in favor of one party or the other.
The Republicans have been very successful at redistricting. In recent decades, they have used political successes at the state level to string together districts that look like they were inspired by Jackson Pollock but vote reliably Republican. They got what they wished for.
Then came the Tea Party. A problem with democracy is the little people can't always be kept in line. They can sometimes be unruly and demanding. When riled up enough, they may even assert control. The doyens of the Republican Party found this out the hard way in 2009 and 2010, when malcontents of many kinds coalesced into the Tea Party movement. Although Tea Partiers counted some Independents and even a few lapsed Democrats within their ranks, the movement as a whole gravitated toward the Republican Party and pushed it ideologically rightward. To make things worse, the erstwhile 2008 Republican Vice Presidential nominee, Sarah Palin, went rogue on the party's leadership and helped many radical right Tea Partiers win primary elections in 2010 over mainstream Republicans. Thus, in 2010, a number of Tea Party and other seriously right wing candidates won elections in reliably Republican districts.
Now, the Republican leadership is stuck with these Tea Party legislators. Perched in districts well-drawn to protect incumbency, these birds ain't going nowhere. They'll keep the Republican agenda firmly anchored to starboard, even though the route to an electoral majority veers to port. The Republican chieftains can't sponsor centrist candidates or advance a more moderate iteration of the vision thing without alienating their base, now ensconced in Republican cocoons.
Political segregation prevents the Republican Party from evolving. For those that are creationists, this is probably okay. But others in the GOP may realize that they've been too clever by half, and that they helped to make the Democratic strategy of political integration a winner.
Redistricting is the re-drawing of the borders of Congressional districts. It often happens after a decennial census, when the results show significant population change. In most states, redistricting is done by state legislatures, sometimes subject to the approval of the governor. The potential for political shenanigans is obvious, and the federal courts have presided over many cases alleging gerrymandering. But stacking the deck in your favor isn't always unconstitutional, depending on how you do it, and there are many districts resembling Rorschach tests for ghouls that are legally tilted in favor of one party or the other.
The Republicans have been very successful at redistricting. In recent decades, they have used political successes at the state level to string together districts that look like they were inspired by Jackson Pollock but vote reliably Republican. They got what they wished for.
Then came the Tea Party. A problem with democracy is the little people can't always be kept in line. They can sometimes be unruly and demanding. When riled up enough, they may even assert control. The doyens of the Republican Party found this out the hard way in 2009 and 2010, when malcontents of many kinds coalesced into the Tea Party movement. Although Tea Partiers counted some Independents and even a few lapsed Democrats within their ranks, the movement as a whole gravitated toward the Republican Party and pushed it ideologically rightward. To make things worse, the erstwhile 2008 Republican Vice Presidential nominee, Sarah Palin, went rogue on the party's leadership and helped many radical right Tea Partiers win primary elections in 2010 over mainstream Republicans. Thus, in 2010, a number of Tea Party and other seriously right wing candidates won elections in reliably Republican districts.
Now, the Republican leadership is stuck with these Tea Party legislators. Perched in districts well-drawn to protect incumbency, these birds ain't going nowhere. They'll keep the Republican agenda firmly anchored to starboard, even though the route to an electoral majority veers to port. The Republican chieftains can't sponsor centrist candidates or advance a more moderate iteration of the vision thing without alienating their base, now ensconced in Republican cocoons.
Political segregation prevents the Republican Party from evolving. For those that are creationists, this is probably okay. But others in the GOP may realize that they've been too clever by half, and that they helped to make the Democratic strategy of political integration a winner.
Wednesday, November 7, 2012
All That Noise, All Those Robocalls, and Nothing Changed
We had the elections, and nothing changed. Barack Obama was re-elected President. The Democrats kept control of the Senate. The Republicans kept control of the House. After all the accusations, attack ads, junk mail, robocalls, soaring campaign rhetoric, and lies, we can look forward to . . . more gridlock.
This election was the comeuppance of all the money bag men who nonymously or anonymously tried to buy their way into political power. Hiding behind secretive nonprofits, monied interests barraged users of every type of media with relentless harangues and unending fear mongering. While Democratic war chests were very large, Republican funding was Brobdingnagian. But all that spending, and counter-spending, produced very little change.
That's a great result. It shows that the American voter isn't a dumbo who can be cynically manipulated by unnamed puppet masters with zillions to spend behind the scenes to instill subliminal fears. Politicians and political parties must, however difficult it may be, offer something that is in the public interest. They need to demonstrate that they have something positive to say and do. The political process remains a means for societal concerns to be debated and resolved. The rich may not get richer. The poor may not get poorer.
Many problems lay ahead. The fiscal cliff approaches anon. The economy remains in first gear, and unemployment levels feel like the real bad hangover that comes from drinking the worm as well as the tequila. The federal deficit must be dealt with. As difficult as these problems may seem, the defeat of the monied interests is a sign of hope--hope that politicians may try doing something constructive for a change, rather than cater to those that offer to hand over the biggest checks.
This election was the comeuppance of all the money bag men who nonymously or anonymously tried to buy their way into political power. Hiding behind secretive nonprofits, monied interests barraged users of every type of media with relentless harangues and unending fear mongering. While Democratic war chests were very large, Republican funding was Brobdingnagian. But all that spending, and counter-spending, produced very little change.
That's a great result. It shows that the American voter isn't a dumbo who can be cynically manipulated by unnamed puppet masters with zillions to spend behind the scenes to instill subliminal fears. Politicians and political parties must, however difficult it may be, offer something that is in the public interest. They need to demonstrate that they have something positive to say and do. The political process remains a means for societal concerns to be debated and resolved. The rich may not get richer. The poor may not get poorer.
Many problems lay ahead. The fiscal cliff approaches anon. The economy remains in first gear, and unemployment levels feel like the real bad hangover that comes from drinking the worm as well as the tequila. The federal deficit must be dealt with. As difficult as these problems may seem, the defeat of the monied interests is a sign of hope--hope that politicians may try doing something constructive for a change, rather than cater to those that offer to hand over the biggest checks.
Tuesday, October 30, 2012
The Great Anxiety
The Great Recession has morphed into the Great Anxiety. Economic growth is tepid, enough so that it inspires little confidence. Unemployment, still high, is falling, but so slowly that consumers' animal spirits remain tame. Individual investors, confronted by three year highs in the stock market, celebrate by fleeing. The members of Congress devote their energies to calling each other finks, rat finks, double rat finks, and triple rat finks, while the nation veers toward a fiscal vortex. Both candidates for the Presidency, although individually quite intelligent and accomplished, swap lies about how the other is lying and inspire little more than resigned sighs from their supporters. The Federal Reserve is operating the only show in town, and its program consists of printing money, printing money while riding a bicycle sitting backwards, printing money while juggling eight balls and printing money while doing double somersaults on a trapeze. But the Fed can't do much to resolve the problems in Europe, which is now sliding into recession even as the sovereign debt crisis gets kicked farther down the road.
If the Federal Reserve Board is correct in believing that public confidence is crucial to economic growth, then we are a long way from healthy, sustainable growth. By all current indications, whichever candidate for President wins won't inspire much confidence. Congress appears likely to remain divided between a Republican House and a Democratic Senate. Gridlock isn't that big a problem when the economy is strong. But it is deadly when the economy is moribund. For better or for worse, a somnolent economy needs a decisive government, and we probably won't have one. Can kicking isn't a sound federal economic policy. Both Japan, and more recently, the European Union, have vigorously kicked the can numerous times. The problem, though, is that business people and consumers all know that the can is still there, and can bite them in the butt big time. So they don't make big commitments; they don't go exuberant. Can kicking virtually guarantees stagnation. Yet can kicking has been the order of the day in Washington.
In a time when lukewarm coffee is all that you can hope for, invest cautiously. It's not a bad idea to hold some risk assets. But limit your exposure, and avoid the riskiest. Hold a good dollop of stable assets, and don't stretch for yield. One important way to give your net worth a boost is to save more. Remember that the thriftiest squirrels have the best chance of surviving winter--and the coming winter could be cold indeed.
If the Federal Reserve Board is correct in believing that public confidence is crucial to economic growth, then we are a long way from healthy, sustainable growth. By all current indications, whichever candidate for President wins won't inspire much confidence. Congress appears likely to remain divided between a Republican House and a Democratic Senate. Gridlock isn't that big a problem when the economy is strong. But it is deadly when the economy is moribund. For better or for worse, a somnolent economy needs a decisive government, and we probably won't have one. Can kicking isn't a sound federal economic policy. Both Japan, and more recently, the European Union, have vigorously kicked the can numerous times. The problem, though, is that business people and consumers all know that the can is still there, and can bite them in the butt big time. So they don't make big commitments; they don't go exuberant. Can kicking virtually guarantees stagnation. Yet can kicking has been the order of the day in Washington.
In a time when lukewarm coffee is all that you can hope for, invest cautiously. It's not a bad idea to hold some risk assets. But limit your exposure, and avoid the riskiest. Hold a good dollop of stable assets, and don't stretch for yield. One important way to give your net worth a boost is to save more. Remember that the thriftiest squirrels have the best chance of surviving winter--and the coming winter could be cold indeed.
Sunday, October 21, 2012
Manufacturing Matters
In the end, Steve Jobs got his revenge. Once marginalized by Microsoft and its monopoly on PC operating systems, and then kicked out of Apple, the company he founded, Jobs was recalled to Apple as it was sliding into a death spiral. He proceeded to rebuild his brain child into the most successful business corporation today. Apple is the leader of its market segment--that segment being the mobile world. It manufactures visually attractive and highly efficacious mobile devices. Okay, they had a problem with maps. But Apple has overcome its previous belly flops, and it will surely overcome this one. Its high prices may keep it out of the reach of some consumers. But those that can afford its products tend to be the well-off who are highly sought by advertisers.
By contrast, Google and Facebook are now looking at the abyss. They haven't figured out mobile, at a time when mobile products are the fastest growing consumer high tech segment. Both Google and Facebook rely heavily on advertising, but mobile screens are too small for the kinds of ads that have proven successful on PCs and traditional laptops. There isn't yet a mobile-specific advertising strategy that really works. As the world becomes more mobile, Google and Facebook face the potential for a Yahoo-style decline, unless they solve the advertising problem or find alternative revenue sources. Solving the advertising problem requires gathering more and more detailed information about individuals using their products. But that could bring them into greater conflict with governmental protections for privacy. This is a particular issue in Europe, and a growing issue in America. These privacy protections will ultimately limit the extent to which Google and Facebook can facilitate the targeting of ads. One interesting notion is perhaps Yahoo, with its banner ad business (which doesn't rely on detailed personal information), will eventually prove the tortoise in its race against Google and Facebook.
In part, Google and Facebook confront the problem of all successful high tech companies. No matter how well you're doing, the next big thing is coming and you'd better be prepared for it or others will out-innovate you and leave you in the dust. IBM didn't anticipate the PC, and it lost its standing as the predominant computer company. Microsoft didn't anticipate the ubiquity and importance of the Internet, and it's in a slow fade. RIM didn't anticipate how consumers would flock to the smart phone, and it's barely staying alive on its corporate customer base.
But failure to anticipate the next big thing isn't the only dynamic. Part of the dynamic is that Apple manufactured the next big thing. By creating products that elevated the mobile experience by quantum leaps, Apple made consumers want mobile products. By manufacturing and selling these products, Apple derives a very large part of its revenues from selling hardware and software packaged together. It doesn't give consumers stuff for free and hope that it can slip in a few ads here and there. It makes and sells stuff for cash money.
Making and selling stuff has, for millenia, been the heart of economic activity. The evolution of the industrialized world revolved around elevating the manufacturing process to a grand scale, so that vast quantities of stuff could be made efficiently and sold at prices a lot of people could afford. Steve Jobs' relentless commitment to manufacturing--and thus control over product design and quality--placed Apple at the core of the industrial process. By manufacturing high quality and innovative stuff, Apple avoided the commoditization of PCs (which bedeviled Dell, Hewlett Packard and other companies) and elevated itself to the top of the high tech world.
This isn't a sales pitch for you to run out and invest in Apple. Its stock, on a tear earlier this year, has been falling back recently. Its maps debacle hurt, and its future--always uncertain because it's in the most volatile of industries, high tech--has been made more unpredictable by the death of Steve Jobs. The point here is that Apple's business strategy of manufacturing made it strong, and is a sound idea for American economic policy. America increasingly doesn't manufacture. But you can't build a strong national economy on management consulting, investment banking, hedge funds, law practice, health care, restaurants, and services like hair salons, pet walking, personal shopping, and the secondary and tertiary retailing in websites like eBay. The foundation of a strong economy is manufacturing. Look at Germany. Look at China. America was once the manufacturing giant of the industrialized world. While it can't return to that status, it can look for ways to encourage manufacturing. We all know Apple manufactures a lot of components in China. But well under half of its revenue dollars are spent in China. Much more is allocated to spending in America, for things like retailing, distribution, employee payroll and so on. Successful manufacturing companies make their home countries strong.
Most of the debate today over fiscal policy revolves around the amounts of federal spending and federal taxation. But fiscal policy isn't just a matter of accounting. The nation benefits by spending and taxing wisely. Keeping Social Security, Medicare and Medicaid in the black will be easier if we have a robust manufacturing sector. The pie is much easier to divide if it's bigger.
By contrast, Google and Facebook are now looking at the abyss. They haven't figured out mobile, at a time when mobile products are the fastest growing consumer high tech segment. Both Google and Facebook rely heavily on advertising, but mobile screens are too small for the kinds of ads that have proven successful on PCs and traditional laptops. There isn't yet a mobile-specific advertising strategy that really works. As the world becomes more mobile, Google and Facebook face the potential for a Yahoo-style decline, unless they solve the advertising problem or find alternative revenue sources. Solving the advertising problem requires gathering more and more detailed information about individuals using their products. But that could bring them into greater conflict with governmental protections for privacy. This is a particular issue in Europe, and a growing issue in America. These privacy protections will ultimately limit the extent to which Google and Facebook can facilitate the targeting of ads. One interesting notion is perhaps Yahoo, with its banner ad business (which doesn't rely on detailed personal information), will eventually prove the tortoise in its race against Google and Facebook.
In part, Google and Facebook confront the problem of all successful high tech companies. No matter how well you're doing, the next big thing is coming and you'd better be prepared for it or others will out-innovate you and leave you in the dust. IBM didn't anticipate the PC, and it lost its standing as the predominant computer company. Microsoft didn't anticipate the ubiquity and importance of the Internet, and it's in a slow fade. RIM didn't anticipate how consumers would flock to the smart phone, and it's barely staying alive on its corporate customer base.
But failure to anticipate the next big thing isn't the only dynamic. Part of the dynamic is that Apple manufactured the next big thing. By creating products that elevated the mobile experience by quantum leaps, Apple made consumers want mobile products. By manufacturing and selling these products, Apple derives a very large part of its revenues from selling hardware and software packaged together. It doesn't give consumers stuff for free and hope that it can slip in a few ads here and there. It makes and sells stuff for cash money.
Making and selling stuff has, for millenia, been the heart of economic activity. The evolution of the industrialized world revolved around elevating the manufacturing process to a grand scale, so that vast quantities of stuff could be made efficiently and sold at prices a lot of people could afford. Steve Jobs' relentless commitment to manufacturing--and thus control over product design and quality--placed Apple at the core of the industrial process. By manufacturing high quality and innovative stuff, Apple avoided the commoditization of PCs (which bedeviled Dell, Hewlett Packard and other companies) and elevated itself to the top of the high tech world.
This isn't a sales pitch for you to run out and invest in Apple. Its stock, on a tear earlier this year, has been falling back recently. Its maps debacle hurt, and its future--always uncertain because it's in the most volatile of industries, high tech--has been made more unpredictable by the death of Steve Jobs. The point here is that Apple's business strategy of manufacturing made it strong, and is a sound idea for American economic policy. America increasingly doesn't manufacture. But you can't build a strong national economy on management consulting, investment banking, hedge funds, law practice, health care, restaurants, and services like hair salons, pet walking, personal shopping, and the secondary and tertiary retailing in websites like eBay. The foundation of a strong economy is manufacturing. Look at Germany. Look at China. America was once the manufacturing giant of the industrialized world. While it can't return to that status, it can look for ways to encourage manufacturing. We all know Apple manufactures a lot of components in China. But well under half of its revenue dollars are spent in China. Much more is allocated to spending in America, for things like retailing, distribution, employee payroll and so on. Successful manufacturing companies make their home countries strong.
Most of the debate today over fiscal policy revolves around the amounts of federal spending and federal taxation. But fiscal policy isn't just a matter of accounting. The nation benefits by spending and taxing wisely. Keeping Social Security, Medicare and Medicaid in the black will be easier if we have a robust manufacturing sector. The pie is much easier to divide if it's bigger.
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