Thursday, August 25, 2011

Stirred, not shaken

A 5.8 earthquake hit the East Coast this week. Buildings were evacuated, companies shut down and there was wall-to-wall television coverage. Most Californians don’t get worked up over smaller quakes. Last year a friend was visiting and during lunch by the ocean a 5.3 shaker hit and she was the only one who noticed. No tsunami fears here as there were in Times Square. I suppose if a snowstorm hit LA then we’d have wall-to-wall coverage and people would be marveling at the event while our East Coast brethren would be curious as to what the big deal was. The upside to the shaker? The Stock Market ended the day up 322 points.

The Dow Jones Industrial Average is an average of 30 company stock prices on a given day. The companies are all large, multinational corporations in a range of business sectors.  The focus on the daily iteration of whether it’s up or down is a pedestrian way of reporting complex business news. Dow Jones has over 130,000 indexes. There’s also many other stock markets to track. The Dow is an important indicator to part of the economy, but they are not the whole story.

The financial crisis of 2008 resulted in lots of damage to the economy. The Dow and other stock markets nearly halved in value, tens of millions lost jobs, the credit markets froze and consumer spending reverted to necessity based purchases. Housing woes included the essential nationalization of the mortgage industry, record foreclosures and a virtual collapse of new construction. The American banking, insurance and automotive industries received over $1 trillion in government guarantees and bailouts.

The Dow Jones hit its historic high on October 9, 2007 at 14,164.53. By March 9, 2009 it had lost 53.78% of its value and closed at 6,547.05. The Dow rose to over 12,000 by February 2011. By August 2011 the roller coaster dropped the average to under 10,000 with daily swings of 400 points in each direction becoming the norm.

That the Dow increased 45% from its low in 2 short years is the important statistic. Conventional thinking is that a strong stock market reflects a strong economy. This is where the economic recovery of the past few years is fundamentally different than any other in American history. A resurgence in investments is not reflective of the day-to-day economy.

Everybody’s playing it safe. In 2008 companies relied on credit to operate their businesses. When the credit markets froze and businesses lost their ability to borrow to fund operations – something had to change. Today companies are holding on to a record amount of cash – nearly $2 trillion.  President Obama has implored these companies to use the cash to hire people and reduce the nearly 20% who are unemployed or underemployed. This reasonable request ignores the fact that the cash hoarding is a protection against an unreliable credit market. The stock market may have restored, but confidence hasn’t.

What corporate America is doing is mirrored in the personal savings rate of Americans. By the end of Quarter 1 2008 the savings rate hit an all time low of 1.5%. Americans were living beyond their means, spending virtually everything that came in and carrying lots of debt. Today the rate has increased to 4.6% . From a structural financial point of view – this is good news. For an economy that for 30 yeas has relied on consumer spending for growth – this is not so good news.

Confidence is ethereal. To make it concrete requires political leadership. While politicians cannot impact the economy as directly as they wish they could or claim they can, they do establish the climate where confidence is measured.

In 2008 the government opted to bail out banks that were “too big to fail.” The merit of President Bush’s actions is a whole other blog – the point here is that there wasn’t a consistent metric to determine who was saved and who wasn’t. As a result the government's actions bred fear and destroyed confidence. Why was CitiBank saved but not Bear Stearns? If the State was going to nationalize the banks, it should have done all of them consistently. There would have been a legitimate constitutional and economic philosophy debate – but there wouldn’t have been this reality show to find out who was in and who was out.  Even today it's unclear the result.

Today’s economic indicators remain all over the map with few metrics showing promise. Politicians bicker and policies change. Just over a year ago the Dodd-Frank Financial Reform Act was signed into law. Today virtually none of the Act has been implemented. It’s the see-saw that is hurting the economy, not a particular policy – since no policy has had the chance to be unequivocably implemented for at least 6 years.

My hope for 2012 is that there is a landslide. Maybe that's what it will take for one policy to actually be implemented and seen through to completion.  Then we can measure its effectiveness. That would stir things up much more than the constant shaking that happens now.

Thursday, August 18, 2011

Party time!

I’m not a party guy. I like people well enough – just not necessarily in large numbers. There’s the occasional birthday event and of course the requisite holiday things that are fine so long as I know everybody in advance. My ex was the party one. The house would be filled nearly weekly with dozens of people. Early in the relationship there was a confusion about my return from the Cannes Film Festival. After nearly 20-hours of travel I stumbled home to find dozens of people I’d never seen before hanging out. I went to the bedroom, kicked a few people out, closed the blinds and promptly crashed. Our ying-yang approach to socializing was one of the things that actually worked about our relationship.

Social organizing has changed in the past few years. Want to have a group over? Send a tweet and within hours the place will be rockin’. Having a more traditional event? Set it up on Facebook or eVite a group over. It’s easier and easier to gather people quickly.

The various demonstrations and protests in the Middle East in early 2011 have been credited to Twitter and Facebook and other Social Media sites. The services allow people to quickly and easily disseminate short bursts of information to their network of friends. So it’s the modern equivalent of those 1970’s Fabrerge commercials – where you tell two friends, and they tell two friends, and so on and so on and so on. U.S. politicians use the same sites to generate interest in their events. Not sure if there’s an event for something you’re interest in? Check out

When Syria, Iran or Libya shuts down the internet and effectively eliminates the population’s ability to connect via Social Media, freedom loving westerners are outraged. China’s largest search engine Baidu closed its version of Twitter this week  leaving the country with virtually no social media outlets since Twitter, Google and Facebook are already banned. In London, after a week of riots, U.K. Prime Minister David Cameron suggested that Blackberry Messenger be shut down after it was learned that most of the rioters were organized using the anonymous service.  It’s not surprising that the U.K. would overreach. London has tens of thousands of cameras at a cost in excess of $350 million that are supposed to reduce crime. Instead most of the videos go unwatched and 80% of the crimes go unsolved.

Censorship – whether it’s banning a book or limiting communication opportunities – rankles American sensibilities. Well, it used to anyway.

Each year the American Library Association publishes a list of books that have been banned. Yes, books are regularly banned in the United States.

Philadelphia claims to be the home of liberty. Last week the Mayor has ordered anybody under 18 to be off the streets by 9pm. Any child who doesn’t comply? The parent pays a $500 fine. Shocking and infuriating as that is – the same law has been on the books in Los Angeles since 1998 and dozens of other cities across the US.

In San Francisco this week officials went one step further: Bay Area Rapid Transit officials shut down cell phone service to several stations that were reported to be targeted by protesters.

The First Amendment allows for freedom of speech and religion. It also guarantees freedom of assembly. How helpful is it to practice free speech and freedom of religion on your own? Not so much. It’s much more effective with others – so logically the Founders provided that opportunity by prohibiting “interfering with the right to peaceably assemble.”

A civil society must have rules, regulations and laws that prevent anarchy. That structure has been in place for generations. It’s clear, however, that those rules are becoming more and more excessive to the point where government now legislates behavior instead of facilitating order.

The Constitution is the framework that outlines the relationships of the Federal Government with the States and the people. The Bill of Rights does not grant citizens rights; instead it sets limitations on what the Federal government can do. Together they form the bedrock of American society.

When we as a nation decry the tactics of another country because it offends our sense and illusion of freedom, it’s particularly mortifying to find identical examples in our own backyard. Legislation and actions that limit social media, prevent people from freely gathering to voice opinions and punishes other people for somebody else’s actions are all incremental steps that puts the kibosh on the party known as American Democracy.

Thursday, August 11, 2011

Social Security turns 76

August 14, 1935 The Social Security Act was signed into law as part of President Roosevelt’s New Deal. It was highly controversial as the country came out of the first Great Depression with parts of the New Deal being struck down by the Supreme Court. Roosevelt then changed the composition of the court in a bid to change their decision. (Sometimes we forget the ‘good old days’ of gentlemen politicians.)

The opposition was passionate, vociferous and ultimately not impactful. The New Deal fundamentally changed the U.S. and quite probably the world.  Legislation prior the New Deal kept the role of government limited. Roosevelt and the Democrats changed the role of government to provide services, funding and care for the elderly, sick and infirm. This rhetorical and philosophical difference in the size and scope of the state must be continuously debated. However, the reality is that Social Security is the #1 most popular government program in existence and it isn’t going anywhere.

Looking at the merit of the Act isn’t helpful, but looking at how the program is doing is. At 76, is Social Security showing its age? Politicians on the left and the right of the political spectrum have been hyperventilating that the program is broke and it is bankrupting the country. Per Gallup, 93% of Americans think that a crisis in Social Security is going to happen within 20 years. Not really.

Ida May Fuller - first Social Security Recipient
Those people who got the first checks in the late 1930’s never contributed to the program, but only took funds out. Over time that changed and workers and their employers would contribute to the fund and then draw benefits at the time of retirement. The idea was that the government had some costs to the early beneficiaries, but after that the program became self-sustaining. In fact, it’s called the Trust Fund. President Reagan popularized the term “lock box.” The great illusion is the idea that money withheld from paychecks are being set aside to be distributed via benefits upon retirement.

Per SSA, from 1937 to 2009 $13.8 trillion has been collected. $11.3 trillion has been paid out. Using grammar-school math, then, the Trust Fund has $2.5 trillion in excess cash. Problem solved?

Remember all that noise about the $14+ trillion deficit? $2.5 trillion of that is money that the government borrowed from the Trust Fund.

Think of it this way: you put away $20 a week towards a vacation. After a few years quite a nice sum would have  accumulated. Then the roof leaks and you have to borrow from the vacation fund to fix it. That’s sort of what’s happened – except the government didn’t raid the jar for a leaky roof, but rather to pay day-to-day expenses (groceries).

There is much discussion about how to “fix” Social Security. Various actuarial analyses show that in 2036 the program will be expending more money than it brings in.  This is because the number of beneficiaries in 25 years will outnumber the number of contributors. The surpluses from prior years will not earn enough interest to offset the difference, so either more contributions will be needed or benefits may need to be curbed. This inevitability is due to population changes. The program was conceived of with a fundamental expectation that there would always be more workers contributing than there would be workers retiring. It is this flawed assumption that must be corrected.

It is unfair to change the rules midstream. When people refer to the program as an entitlement – they’re right. People are entitled to the funds because they have paid into it and the quid-pro-quo was they’d get back certain benefits. Yes, there will be a problem in 25 years – let’s adjust for that generation and not punish this one that played by the rules.

  • Change the retirement age. When originally conceived, the Act was not intended to be a way of life. A relatively easy solution is to incrementally increase the retirement age so as not to pull the rug out from people in their 60’s, but so that those of us in our 40’s know we’re going to have to work into our 70’s. With the population change we’ll have to do so anyway --- there won’t be enough workers to replace those retiring.
  • Lift the caps. Have a percentage of every dollar earned be contributed. This is an additional burden on high income contributors, no question. This is much more attractive than means testing the benefits after somebody stops earning and immediately shores up the financial strength of the program that impacts 2% of the population.
  • Payroll tax should stay in place. President Obama and Congress have reduced the contribution rates as a way to stimulate the economy. It’s too small for people to notice in their paychecks. Spending hasn’t increased as hoped for. Companies are not using the savings to hire people. Starving the Trust Fund of needed dollars today is not a solution for tomorrow’s issues.

These three options would extend the life of the fund until after today's kids would need it. Social Security may not be this Libertarian's philosophical ideal way of taking care of people – but it also is not Government Spending gone awry. It should not be part of the general budget.  It’s an insurance plan. As long as it’s there let’s not mess with it. Using restricted dollars for discretionary spending has always been a bad idea. We’ve done that to the tune of $2.5 trillion so far. Washington should budget day-to-day expenses with day-to-day income.  The best birthday present:  Leave the Trust Fund secure!


Thursday, August 4, 2011

Walking the Walk

This week is the 66th anniversary of America dropping the atomic bomb on Hiroshima. It’s the 37th anniversary of President Nixon’s resignation. It’s also been about six months since the “Arab Spring” and three months since the assassination of Osama bin Laden. The U.S. came close to not paying its bills this week.  These seemingly diverse remembrances are intertwined. They are incident that are at odds with the narrative of American character.

At 8:15am on August 6 1945 “Little Boy” bomb was dropped on the Japanese city. Japanese officials determined that 69% of Hiroshima's buildings were destroyed and another 6–7% damaged. Approx. 30% of the population of Hiroshima was killed immediately. Over 90% of the doctors and 93% of the nurses were killed or injured. By 1950 estimates are that 200,000 people had died in Hiroshima from the effects of the bombing.  Three days later, America dropped a nuclear bomb on Nagasaki and Japan surrendered the War.

The use of atomic weapons was politically popular and is still considered necessary by many historians and war experts. It was demmed a great show of strength and military might. A member of the U.S. Strategic Bombing Survey documented the results of the bombings. The film crew's work resulted in a three-hour documentary that included images from hospitals showing the human effects of the bomb; it showed burned out buildings and cars, and rows of skulls and bones on the ground. It was classified "top secret." 90,000 ft. of footage filmed in 1945 has not been fully aired.

President Richard Nixon became the only President to surrender the Office of the Presidency. He did so at noon on August 9, 1974, two years after the arrest of five men for breaking and entering into the Democratic National Committee headquarters at the Watergate complex. Journalists and the FBI were able to connect the break-in to the President's reelection campaign. There were tapes to prove the President had knowledge. Facing near-certain impeachment in the House of Representatives and a strong possibility of a conviction in the Senate, Nixon resigned.

The American political system has never been the same. How Presidential campaigns are funded changed. Watergate was a driving factor in amending the Freedom of Information Act in 1974, as well as laws requiring new financial disclosures by key government officials, such as the Ethics in Government Act. The Watergate scandal left such an impression on the national and international consciousness that many scandals since then have been labeled with the suffix "-gate".

In February/March 2011 nearly a dozen countries in the Middle East experienced various forms of civil uprisings in an attempt to change the oppressive regimes that were in place. Jeffersonian-style democracy has not emerged as hoped for by U.S. politicians. 
  • Egyptian protesters attempted to congregate in Tahir Square this week and were forced out.  The military leadership that has helped rule the country for most of the past century is still in place. 
  • Nearly 2,00 people have died in Syria this year in conflicts. CNN reported that the violence continues: “bodies lay stuffed and tangled like garbage in the back of a pickup. Men lifted the bodies one by one and hurled from them from a bridge into a river below.”
  • Libya continues to try to oust Mummar Gadhafi with NATO forces leading the fight.  President Obama refused to obtain Congressional authorization for American military participation.

Three months ago Osama bin Laden was assassinated. The New Yorker this week has a comprehensive essay that leaves no doubt that there was only one mission all along: kill the target.

America lost its moral authority in 1945. Americans lost faith in political leadership and began to distrust government institutions in 1974. Confidence in Constitutional relevance is at risk when the President engages troops in military conflict and refuses to obtain Congressional authorization. The President’s choice to kill an enemy of the United States (instead of determining guilt and exacting punishment through a judicial process) undermines the entire concept of the Rule of Law.  The Rule of Law is the bedrock principal that distinguished the United States from any other nation on the planet.   The U.S. has never not paid its debts.  This week the message from Washington was that many political leaders were OK for the U.S. not to meet its financial obligations. 

America is more than a country. It’s an idea. It’s an aspiration that the world looks to. As the 2012 Presidential campaign kicks into high(er) gear (just 480 Shopping Days Left!) the mantra of America being the best will bang loudly in a misguided attempt at patriotism. Were it still so.

The self-inflicted wounds to the character of the country can be remedied. It requires humility, remorse and leaders with integrity to redeem and restore our greatness and so that we can live by the values we expouse. I love this country. I love what we stand for and believe in who we can be as a People. That’s talking the talk. It pains me that we’ve fallen so short of who we claim to be. When will be be #1 in walking the walk.