Many of us who are older will remember the famous TV show called “To Tell The Truth”. This show challenged a number of celebrities to discover which person out of three contestants was telling the truth about an interesting profession or experience by asking a number of questions. The actual person had to tell the truth, and the impostors were permitted to fabricate their answers. Unfortunately, the healthcare debate reminds me of this famous game show and the public is supposed to find out who is telling the truth.
As the healthcare debate continues to rage on, it has become more apparent to me that President Obama is purposely avoiding many of the details of the bill he will support. He does not want a repeat of the Clinton failure on healthcare. Therefore, he has avoided presenting his own bill in order to prevent the opposition from picking it apart, which occurred during the Clinton administration. Leaving the details to Congress is reminiscent of the old adage that if you leave a committee in charge of building a horse, the final result will be a camel.
The President’s major thrust on healthcare reform is that we must contain the growth of healthcare spending or face severe economic consequences in the future. However, it seems oxymoronic to postulate that we will be able to somehow limit the growth of healthcare spending and at the same time increase the insurance rolls by millions of people who are currently uninsured and also maintain our basic framework of insurance coverage.
One of the major drawbacks of our current system is that we have removed the individual from being responsible for monitoring his or her healthcare expenses. This is provided by third parties like the government and insurance companies. Most people are not carefully scrutinizing their medical bills since someone else is directly responsible to pay these bills. In fact, Senator Tom Coburn of Oklahoma has stated that Medicare experiences about $80 billion worth of fraud a year. This represents about 20% of the annual Medicare budget. One way we could reduce fraud is to require the patient to sign off on a bill before it is sent to the government or insurance companies for payment.
In addition, since most insurance coverage is provided by corporations, many people are not directly choosing their heath insurance companies. We need to level the playing field and give the individual, not the corporation, the tax break for buying insurance. This will empower the individual to financially compete in order to choose an appropriate health plan. If the individual owns the insurance plan, it will remove a major problem associated with portability. Consumers shop for car and homeowners insurance, why couldn’t they shop for health insurance? Today, we are constantly bombarded with advertisements from auto insurance companies trying to solicit our business by maintaining that they could reduce our current rates. Therefore, what is needed is an educated consumer as Sy Syms used to state in his commercials for his Syms’ clothing stores. The internet is a good source of information that can help people evaluate health plans and determine appropriate coverage.
I am not going to be so presumptuous to try to formulate an entire healthcare plan. However, at the very least, we need an insurance plan that encourages personal responsibility and prohibits insurance companies from not insuring people that have a preexisting condition. I do not know anyone over 60 years old that does not have some preexisting health condition. In addition, I see no reason why the government cannot provide some kind of financial assistance to people who are in need other than Medicaid or Medicare to help defray the cost of health insurance. This could be based on some limits on income or financial assets. However, I do not believe that an appropriate role for the government is to provide an alternative to private insurance, which is called the “government option”. According to an October 20th editorial in the Wall Street Journal, “Uncle Sam’s” cost overruns pertaining to healthcare were dramatic. In 1965, Medicare was projected to cost $12 billion in 1990. However its actual cost that year was $90 billion. Furthermore, the Journal reported that the rate of increase in Medicare spending has exceeded the overall rate of inflation in nearly every year. Based on the Governments track record it is difficult to believe that costs will be kept under control. Therefore, under the proper structure, we need the discipline of the marketplace to keep costs down.
Another important obstacle to overcome is that each state currently imposes its own limits on the number of insurance companies that can underwrite health insurance. This is perplexing since we do not hear any complaints from the insurance industry, which leads me to believe that some of the larger companies are benefiting by limiting competition in the more populous areas. This needs to be changed to promote competition, which will ultimately lower the cost to the consumer.
One way we can promote more individual responsibility is to reward consumers for good behavior. According to the Centers for Disease Control and Prevention (CDC), a handful of diseases such as obesity, heart disease, and diabetes are responsible for a substantial amount of healthcare costs. Appropriate behavior modification can have a meaningful, positive impact on these diseases. The CEO of Safeway has demonstrated the success of rewarding good behavior in its insurance plans that have kept per capital costs basically flat during a period of four years compared to an increase of 38% for the American corporation for the same period. In fact, according to the Safeway CEO, if the nation adopted their approach to healthcare in 2005, a savings of $550 billion could have been achieved today.
Unfortunately, both the House and Senate health bills do not empower the individual or remove the restrictions that limit the number of insurance companies that can underwrite health insurance in any state. Moreover, these bills prohibit insurance companies from using any health-related factors to determine premiums. That means a life-long smoker and/or drug user will pay the same premium as someone in excellent health.
Finally, we need some tort reform to lower the costs of medical malpractice which increases the cost of insurance for doctors and may also encourage doctors to order too many unnecessary tests to protect themselves against being sued. So far, tort reform is conspicuously absent from any of the proposed bills going through Congress.
The sad commentary is that we do need changes to our current healthcare system but not the ones that are currently being proposed. Without instituting fundamental changes to reduce costs and stimulate competition, we are never going to get healthcare costs under control.
Tuesday, October 27, 2009
Saturday, August 1, 2009
Term Limits For Congress And State Legislatures - Its Time Has Come
Calvin Coolidge said the man should not become the office. Today, we have many career politicians who, if they were not corrupt when they entered office, became corrupt during their term of office. I am afraid that this corruption has become so pervasive that people are becoming desensitized to it. It seems that only the most egregious crimes committed by politicians get thoroughly investigated, like Governor Blogojevich, of Illinois. Even the Press seems to relent on pursuing politicians who violated ethical standards before a satisfactory explanation is forthcoming. A case in point is Senator Dodd of Connecticut, who is the chairman of the banking committee. Apparently, he received a very favorable interest rate on a mortgage from Country Wide, now a subsidiary of Bank of America. The Wall Street Journal ran a number of editorials about this. However, according to the Journal, the good Senator still has not provided a satisfactory explanation despite his claim that the public relations company he hired to provide the details to a limited number of the press has exonerated him of any wrong doing.
Another troubling example of an important elected official that has violated the public trust is Representative Charlie Rangel, the Chairman of the powerful House Ways and Means Committee. He failed to report income on his tax returns from property he owned, and this property was apparently financed with an interest free loan from a campaign backer who is also a politically active lawyer. In addition, he availed himself of rent controlled apartments for business purposes. Nancy Pelosi, Speaker of the House, who ran on a platform to clean up corruption in the previously Republican controlled House, was conspicuously silent about representative Rangel’s transgressions. The press seems to have given up on this story as well.
I live in New Jersey, a state that was only temporarily moved from the top spot in corruption by Chicago. The list of crimes committed by public officials is so numerous in New Jersey that it is sometimes referred to as the Soprano State, named after the book that exposed this rampant corruption. Recently, the Mayor of Hoboken, Peter Cammarano, after only 24 days in office was charged with taking bribes. That was the topper. It speaks to the unmitigated nerve of many of these politicians. This mayor’s seat was not even warm and he got caught with his hand in the proverbial cookie jar.
It was not the intent of our founding fathers to make a career out of serving the public good. We are only looking for trouble when politicians stay in office for 20 or 30 years. Unfortunately, it is very difficult to get incumbents out of office for a number of reasons. It seems that the public suffers from what I call the John Gotti syndrome. People in his neighborhood new he was a crime figure but liked him anyway since he was reputed to be responsible for keeping crime down in his community. This comparison applies to our politicians. If the majority of constituents believe that their elected officials support their pet causes and have the power to get things done, there is the tendency to look the other way when the law is stretched or broken unless there is a gross violation. Furthermore, it takes great popularity and/or money to unseat an incumbent who has been in office a long time. In addition, there seems to be a sense of powerlessness, and lack of initiative to get better informed by many in the electorate. These have to be some of the explanations for the Clinton’s or the Kennedy’s political success.
We need to ask ourselves are we getting the best people to run for office and is our current system promoting corruption and fraud? Our country is relatively young from a historical perspective. History teaches us that if a society does not encourage the best people to run for office, its success and long-term survival is at stake. At the very least, we know that term limits will eventually remove corrupt politicians hopefully before they will do too much damage. Moreover, term limits will prevent creating career politicians who are out of touch with what working people go through every day. Also, I always thought that those teachers who had a breadth of experience in the outside world made the best instructors in graduate school. Maybe term limits will encourage the right people to serve in government who will promote the public good and not just build their wealth and power. If we believe that term limits is important for the Presidency, there is no reason to believe it would not be beneficial for Congress and our state legislatures.
Another troubling example of an important elected official that has violated the public trust is Representative Charlie Rangel, the Chairman of the powerful House Ways and Means Committee. He failed to report income on his tax returns from property he owned, and this property was apparently financed with an interest free loan from a campaign backer who is also a politically active lawyer. In addition, he availed himself of rent controlled apartments for business purposes. Nancy Pelosi, Speaker of the House, who ran on a platform to clean up corruption in the previously Republican controlled House, was conspicuously silent about representative Rangel’s transgressions. The press seems to have given up on this story as well.
I live in New Jersey, a state that was only temporarily moved from the top spot in corruption by Chicago. The list of crimes committed by public officials is so numerous in New Jersey that it is sometimes referred to as the Soprano State, named after the book that exposed this rampant corruption. Recently, the Mayor of Hoboken, Peter Cammarano, after only 24 days in office was charged with taking bribes. That was the topper. It speaks to the unmitigated nerve of many of these politicians. This mayor’s seat was not even warm and he got caught with his hand in the proverbial cookie jar.
It was not the intent of our founding fathers to make a career out of serving the public good. We are only looking for trouble when politicians stay in office for 20 or 30 years. Unfortunately, it is very difficult to get incumbents out of office for a number of reasons. It seems that the public suffers from what I call the John Gotti syndrome. People in his neighborhood new he was a crime figure but liked him anyway since he was reputed to be responsible for keeping crime down in his community. This comparison applies to our politicians. If the majority of constituents believe that their elected officials support their pet causes and have the power to get things done, there is the tendency to look the other way when the law is stretched or broken unless there is a gross violation. Furthermore, it takes great popularity and/or money to unseat an incumbent who has been in office a long time. In addition, there seems to be a sense of powerlessness, and lack of initiative to get better informed by many in the electorate. These have to be some of the explanations for the Clinton’s or the Kennedy’s political success.
We need to ask ourselves are we getting the best people to run for office and is our current system promoting corruption and fraud? Our country is relatively young from a historical perspective. History teaches us that if a society does not encourage the best people to run for office, its success and long-term survival is at stake. At the very least, we know that term limits will eventually remove corrupt politicians hopefully before they will do too much damage. Moreover, term limits will prevent creating career politicians who are out of touch with what working people go through every day. Also, I always thought that those teachers who had a breadth of experience in the outside world made the best instructors in graduate school. Maybe term limits will encourage the right people to serve in government who will promote the public good and not just build their wealth and power. If we believe that term limits is important for the Presidency, there is no reason to believe it would not be beneficial for Congress and our state legislatures.
Thursday, May 21, 2009
Jack Kemp – He Represented The Best Of The Conservative Movement.
Jack Kemp espoused a very positive message. His ideas were empowering and inclusive since he believed that all people had the ability to be lifted up to improve their economic wellbeing. As a product of a middle-class background, he could identify with the concerns of the common man and had a strong conviction that economic liberty was just as important for the poor as the more affluent. In fact, it is through economic opportunity that the poor have the ability to improve their station in life.
He believed in the American dream, which he lived. As a well-known quarterback of the champion Buffalo Bills, he became an unlikely intellectual in the conservative movement. He was intimately aware of teamwork and developed a respect for people of different ethnic backgrounds. All of these positive attributes enabled him to become a Republican member of the House of Representatives in an unlikely working class district in Buffalo New York.
His economic philosophy was predicated on the belief that excessive taxation created disincentives to work and invest. He believed that government’s role was to help people help themselves. This approach is reminiscent of the adage that you can help people more by teaching them how to fish than by providing fish. His policy innovations reflected his philosophy, which included enterprise zones. These were designated areas that would be given tax advantages to attract business and stimulate economic growth. Also, he created public-housing vouchers, a concept designed to provide desirable housing for the disadvantaged. In addition, he sponsored a free-trade pact for all North America, and supported immigration; he believed these policies would make America stronger and more vibrant.
His belief in the power of the individual and his enthusiastic zeal for pro-growth measures to effectuate this power attracted the support of Ronald Reagan. Reagan embraced the Kemp-Roth tax cuts that became the foundation of the “Reagan Revolution” that according to the Wall Street Journal resulted in “the most successful domestic policy achievement of the modern era”.
Unfortunately, we do not seem to have many pro-growth polices in place today. The current administration has embraced a more Keynesian approach to massive government spending. Jack Kemp successfully repudiated the classical Keynesian policies of his day. We certainly could use more Jack Kemp pro-growth principles to improve our current economic crisis.
He believed in the American dream, which he lived. As a well-known quarterback of the champion Buffalo Bills, he became an unlikely intellectual in the conservative movement. He was intimately aware of teamwork and developed a respect for people of different ethnic backgrounds. All of these positive attributes enabled him to become a Republican member of the House of Representatives in an unlikely working class district in Buffalo New York.
His economic philosophy was predicated on the belief that excessive taxation created disincentives to work and invest. He believed that government’s role was to help people help themselves. This approach is reminiscent of the adage that you can help people more by teaching them how to fish than by providing fish. His policy innovations reflected his philosophy, which included enterprise zones. These were designated areas that would be given tax advantages to attract business and stimulate economic growth. Also, he created public-housing vouchers, a concept designed to provide desirable housing for the disadvantaged. In addition, he sponsored a free-trade pact for all North America, and supported immigration; he believed these policies would make America stronger and more vibrant.
His belief in the power of the individual and his enthusiastic zeal for pro-growth measures to effectuate this power attracted the support of Ronald Reagan. Reagan embraced the Kemp-Roth tax cuts that became the foundation of the “Reagan Revolution” that according to the Wall Street Journal resulted in “the most successful domestic policy achievement of the modern era”.
Unfortunately, we do not seem to have many pro-growth polices in place today. The current administration has embraced a more Keynesian approach to massive government spending. Jack Kemp successfully repudiated the classical Keynesian policies of his day. We certainly could use more Jack Kemp pro-growth principles to improve our current economic crisis.
Tuesday, May 5, 2009
Barack Obama Gives Hugo Chavez A “Boys In The Hood” Hand Shake. What Was That All About?
It is difficult for me to ascertain what President Obama’s was trying to accomplish during his Summit of the Americas Tour. Why would he want to give Hugo Chavez a photo op of a lifetime? There they were together, smiling and shaking hands boys-in-the-hood style. Barack even gently tapped Chavez’s shoulder, a clear sign of affection. What was that all about? I didn’t expect our President to be rude towards President Chavez; a perfunctory hand shake would have sufficed. Does Barack actually believe that Chavez should be treated like all the other democratically elected Presidents? It is difficult to believe that the last Argentine Presidential election was not rigged.
When a reporter asked President Barack about his cordial meeting with Chavez during a press conference in Trinidad and Tobago, Barack actually said that Argentina spends a fraction of a percent on military spending compared to that of the United States. What are we so concerned about? This commentary was even more astonishing than the remarkable photo op. Hugo Chavez is causing a great deal of trouble not only in that part of the world, but he has ties to Iran. Why would Barack pass up a great opportunity to at least admonish the Argentine President for his covert support of the rebel, drug cartel in Columbia. After all, President Uribe of Columbia is our true ally who has courageously fought a bitter struggle against the drug cartel in his country.
In fact, I found that Barack’s tail-between-the-legs demeanor during his European and Americas tours disconcerting. Publicly criticizing the Bush administration in a foreign country is bad form. Barack should talk about what he is going to do. Why should he have to apologize to the Europeans anyway? The Europeans blamed Bush for their lack of cooperation, maintaining he was too arrogant. They found his Texas-cowboy bravado offensive. Now that they have “Mr. Humble Pie” to deal with, what is their current excuse for not increasing combat troops in Afghanistan when Barack asked for this help? The French and the Germans have relied on our military umbrella for years. We spend hundreds of billions of dollars on defense, prosecute wars for them, like Kosovo, and this allows them to have extra funds to spend on their social programs. This is a great deal.
Unfortunately, we did not get any “Tear down this wall!” Reaganesque moments from President Barack, like when Reagan forcefully told Gorbachev to tear down the Berlin Wall. My hope was that his obsequious public posturing during these trips was very different than his behind-closed-doors demeanor. It would be nice to believe that there were some nose-to-nose discussions going on. Our so-called allies are not contributing their fair share for their own defense and the global war on terror. Oh, I am sorry, we’re not supposed to refer to this as the “global war on terror” since the administration has come up with a new euphemism, “Overseas Contingency Operation.”
Hopefully, President Obama’s more conciliatory public posture coupled with his winning personality will have the desired impact on our allies and foes. While I am not very confidant that this approach will have a positive outcome, he is our President and I am rooting for his success.
When a reporter asked President Barack about his cordial meeting with Chavez during a press conference in Trinidad and Tobago, Barack actually said that Argentina spends a fraction of a percent on military spending compared to that of the United States. What are we so concerned about? This commentary was even more astonishing than the remarkable photo op. Hugo Chavez is causing a great deal of trouble not only in that part of the world, but he has ties to Iran. Why would Barack pass up a great opportunity to at least admonish the Argentine President for his covert support of the rebel, drug cartel in Columbia. After all, President Uribe of Columbia is our true ally who has courageously fought a bitter struggle against the drug cartel in his country.
In fact, I found that Barack’s tail-between-the-legs demeanor during his European and Americas tours disconcerting. Publicly criticizing the Bush administration in a foreign country is bad form. Barack should talk about what he is going to do. Why should he have to apologize to the Europeans anyway? The Europeans blamed Bush for their lack of cooperation, maintaining he was too arrogant. They found his Texas-cowboy bravado offensive. Now that they have “Mr. Humble Pie” to deal with, what is their current excuse for not increasing combat troops in Afghanistan when Barack asked for this help? The French and the Germans have relied on our military umbrella for years. We spend hundreds of billions of dollars on defense, prosecute wars for them, like Kosovo, and this allows them to have extra funds to spend on their social programs. This is a great deal.
Unfortunately, we did not get any “Tear down this wall!” Reaganesque moments from President Barack, like when Reagan forcefully told Gorbachev to tear down the Berlin Wall. My hope was that his obsequious public posturing during these trips was very different than his behind-closed-doors demeanor. It would be nice to believe that there were some nose-to-nose discussions going on. Our so-called allies are not contributing their fair share for their own defense and the global war on terror. Oh, I am sorry, we’re not supposed to refer to this as the “global war on terror” since the administration has come up with a new euphemism, “Overseas Contingency Operation.”
Hopefully, President Obama’s more conciliatory public posture coupled with his winning personality will have the desired impact on our allies and foes. While I am not very confidant that this approach will have a positive outcome, he is our President and I am rooting for his success.
Wednesday, April 15, 2009
Blankfein Speaks Out On Executive Compensation. Better Late Than Never.
In the April 8, issue of The Wall Street Journal, Aaron Lucchetti reported on a speech given to The Council of Institutional Investors by Goldman Sach’s Chairman and Chief Executive Lloyd Blankfein. Mr. Blankfein called for major changes in how Wall Street executives get compensated. He recommended that banks and securities firms compensate senior people mostly with stock and restrict sales for at least three years. This strategy will tie the interest of these executives with the long-term interests of the firm as the stock price reflects the success of the company. In addition, executives will not be able to take advantage of any short-term moves in the stock. This should rein in excessive risk-taking. He said that Wall Street needs to do a “better job of understanding when incentives begin to work against the social good.” We should not overly compensate executives when times are good and especially during times of losses. You would think that this would be common sense. It is shocking to think that Mr. Blankfein who is in charge of one of the most successful financial companies in the world would even have to mention these principles. However, as I said, better late than never.
This is the third article I have devoted to executive compensation since I believe it is vitally important that we get this right. Our capitalistic system is predicated on incentives. People will usually do what is in their best interest. When short-term performance is emphasized, that will be the result. If there is little penalty and great rewards for taking risk, guess what, great risks will be undertaken. This is not rocket science.
I was listening to Ben Bernanke, the Chairman of the FRB give a presentation to the students at Morehouse College yesterday. One of the things he mentioned was apropos to executive compensation. He said that money should not be the motivating force behind looking for an appropriate career. Certainly, good advice for college grads entering the work force. However, I think this is also good advice for companies looking to build a good corporate culture. If compensation is the primary carrot being offered to job candidates, you’re going to get applicants that are just interested in making money. Unfortunately, this may attract unscrupulous people in their quest for wealth.
Voila, we have now covered the primary reasons for our financial mess. Our major financial institutions attracted executives, some of whom were unscrupulous, whose primary interest was making money. Furthermore, these executives were heavily compensated for taking short-term risks without commensurate penalties for poor performance that affected long-term success.
This is the third article I have devoted to executive compensation since I believe it is vitally important that we get this right. Our capitalistic system is predicated on incentives. People will usually do what is in their best interest. When short-term performance is emphasized, that will be the result. If there is little penalty and great rewards for taking risk, guess what, great risks will be undertaken. This is not rocket science.
I was listening to Ben Bernanke, the Chairman of the FRB give a presentation to the students at Morehouse College yesterday. One of the things he mentioned was apropos to executive compensation. He said that money should not be the motivating force behind looking for an appropriate career. Certainly, good advice for college grads entering the work force. However, I think this is also good advice for companies looking to build a good corporate culture. If compensation is the primary carrot being offered to job candidates, you’re going to get applicants that are just interested in making money. Unfortunately, this may attract unscrupulous people in their quest for wealth.
Voila, we have now covered the primary reasons for our financial mess. Our major financial institutions attracted executives, some of whom were unscrupulous, whose primary interest was making money. Furthermore, these executives were heavily compensated for taking short-term risks without commensurate penalties for poor performance that affected long-term success.
Sunday, March 29, 2009
Executive Compensation, Government Regulation, Oh My!
Why should the top officers of a company receive multimillion-dollar-pay packages? In many cases these top executives receive total compensation packages that are hundreds of times those of middle managers. How many of these executives make major contributions to their firms? How many Steve Jobs are there? More importantly, is it a sound management practice to establish such a skewed, two-tier compensation system? These organizations would be better served by spreading the wealth around to other deserving employees. Furthermore, providing millions of dollars in remuneration in any one year for employees can be counterproductive. These employees have automatically become independently wealthy. Companies that structure compensation packages that reward good performance over many years are providing a better incentive to maintain talented employees for longer periods of time. In addition, substantial compensation for short-term performance may create ephemeral rewards.
A classic example of how to structure remuneration properly was Goldman Sachs. It was one of the most successful partnerships. Partners had to keep the bulk of their money invested in the partnership. This led them to invest wisely for the long haul and avoid risky, alluring short-term bets. On the other hand, a case study in what not to do is Citigroup. This was an institution that attracted many talented, dedicated people due to progressive working conditions and compensation policies that were a cut above many of the other banking institutions. It was a tremendous institution until Sandy Weill literally single handedly destroyed its successful framework and corporate culture. He created a star system of so-called rainmakers that required the destruction of the compliance department and a level of compensation that the bank could not sustain without taking on more and more risk. Wall Street has created so many of these rainmakers that our financial institutions almost drowned.
Excessive pay for management and the board of directors has been building for years. Now it has reached a ridiculous level that is having a very corrupt influence on many companies. Time and time again, we have witnessed situations where the board has not performed its fiduciary duty to stockholders. Executives are receiving huge bonuses despite dismal performance, which is reflected in poor earnings and crushed stock prices.
AIG is now the poster child for poor management and the risk of improper government involvement. This company that was rescued by taxpayer dollars recently handed out 165 million dollars in bonuses. This, understandably, has created public outrage. However, in response to the public’s furor, The House of Representatives has hastily produced a confiscatory tax bill. The bill proposes to tax bonuses at a 90% rate for those individuals who make more that $250,000 at any institution who received more than five billion dollars in TARP money. This is the danger of having government involved in the day-to-day running of these financial concerns. Hopefully, this measure will not become law since it is counter productive. The whole purpose of the TARP was to stabilize the financial system by providing needed liquidity. Many of these institutions will try to get out from under punitive government control and pay back TARP money too quickly. This could undermine the purpose of providing for this liquidity in the first place. More importantly, such ex-post-facto, punitive laws are what our founding fathers warned against called “Bills of Attainder”, which undermine good principles of social compact.
As I pointed out in my commentary, “The Way the World Works”, government should act as a referee between the public and private sectors. Good government policy will permit the capitalistic system to function properly. If a company is mismanaged, we have to let it fail. This is called “creative destruction”, a term that was coined by the famous 20th century economist Joseph Schumpeter. This rejuvenates our capitalistic system by making sure capital is being used efficiently. The government’s role is not to rescue failed companies. That rewards and perpetuates failure, which is a misuse of capital. Its role should be to make sure that companies do not become so large that failure is no longer a viable option since it would put our entire financial system at risk.
A classic example of how to structure remuneration properly was Goldman Sachs. It was one of the most successful partnerships. Partners had to keep the bulk of their money invested in the partnership. This led them to invest wisely for the long haul and avoid risky, alluring short-term bets. On the other hand, a case study in what not to do is Citigroup. This was an institution that attracted many talented, dedicated people due to progressive working conditions and compensation policies that were a cut above many of the other banking institutions. It was a tremendous institution until Sandy Weill literally single handedly destroyed its successful framework and corporate culture. He created a star system of so-called rainmakers that required the destruction of the compliance department and a level of compensation that the bank could not sustain without taking on more and more risk. Wall Street has created so many of these rainmakers that our financial institutions almost drowned.
Excessive pay for management and the board of directors has been building for years. Now it has reached a ridiculous level that is having a very corrupt influence on many companies. Time and time again, we have witnessed situations where the board has not performed its fiduciary duty to stockholders. Executives are receiving huge bonuses despite dismal performance, which is reflected in poor earnings and crushed stock prices.
AIG is now the poster child for poor management and the risk of improper government involvement. This company that was rescued by taxpayer dollars recently handed out 165 million dollars in bonuses. This, understandably, has created public outrage. However, in response to the public’s furor, The House of Representatives has hastily produced a confiscatory tax bill. The bill proposes to tax bonuses at a 90% rate for those individuals who make more that $250,000 at any institution who received more than five billion dollars in TARP money. This is the danger of having government involved in the day-to-day running of these financial concerns. Hopefully, this measure will not become law since it is counter productive. The whole purpose of the TARP was to stabilize the financial system by providing needed liquidity. Many of these institutions will try to get out from under punitive government control and pay back TARP money too quickly. This could undermine the purpose of providing for this liquidity in the first place. More importantly, such ex-post-facto, punitive laws are what our founding fathers warned against called “Bills of Attainder”, which undermine good principles of social compact.
As I pointed out in my commentary, “The Way the World Works”, government should act as a referee between the public and private sectors. Good government policy will permit the capitalistic system to function properly. If a company is mismanaged, we have to let it fail. This is called “creative destruction”, a term that was coined by the famous 20th century economist Joseph Schumpeter. This rejuvenates our capitalistic system by making sure capital is being used efficiently. The government’s role is not to rescue failed companies. That rewards and perpetuates failure, which is a misuse of capital. Its role should be to make sure that companies do not become so large that failure is no longer a viable option since it would put our entire financial system at risk.
Wednesday, March 11, 2009
“The Way the World Works”
That is the title of a book written by Jude Wanninski, who is considered one of the fathers of supply-side economics. This book has a profound influence on my economic and political philosophy. One of the important tenets that Mr. Wanninski establishes is that the primary role of government is to act as a referee between the public and private sectors. Government should not place a wedge between promoting economic growth in the private sector while pursuing what it considers policies for the public good.
Confiscatory taxation can create this wedge. When tax rates reach a very high level, it discourages work on the margin. Moreover, higher taxes may not produce a dollar-for- dollar increase in tax revenues. Taxpayers will find all kind of ways to avoid taxation, legally or illegally. In fact, it has been documented that the wealthiest tax payers actually contributed a higher percentage of overall tax revenues after the Kennedy and Reagan tax cuts. Furthermore, empirical evidence demonstrates that tax rate cuts have an incentive effect that works to promote growth in a short period of time. The best evidence of this is the 1963 and 1964 Kennedy/Johnson tax cuts, the 1981, 1983 and 1986 Reagan tax cuts and, finally, the 2003 Bush tax cuts. Refer to my blog commentary, “Economics is a Dismal Science.”
Many economists point to the Clinton years as a repudiation of supply-side economics. The highest marginal income tax rate was raised from 28% to 39.6%. Nevertheless, this was one of the most productive periods of rising employment and economic growth. While President Clinton raised taxes, he also kept spending under control. Federal government deficits were reduced, thereby, creating less supply of government debt, which helped to promote lower interest rates. This was Treasury Secretary Rubin’s gambit. Just focus on the bond market in order to reduce interest rates and economic growth will follow. Another important driver of economic growth during this period was President Clinton's embracement of free trade. Thus, there were countervailing forces to compensate for the negative impact of rising taxes, therefore; overall government policy was pro growth.
Today we have the opposite problem. We have very low interest rates and an exploding deficit. President Obama’s gambit is to raise the deficit in order to stimulate economic growth in this period where the economy is contracting sharply. Unfortunately, the government is increasing spending to unprecedented levels that could be forming the wedge Jude Wanninski talks about. The current amount of deficit spending is so large, even if the economy recovers, deficits may not be effectively reduced to a manageable level in the future. The Government will not only have to cut back spending some time in the future, it will probably have to raise taxes on more than the top 3% of income earners that Obama has outlined in his ten-year budget. The reason for this is that many economists believe Obama’s yearly GDP growth projections are too optimistic.
In fairness to President Obama, he did not create our current economic problems. However, his policies have the potential to make these problems much worse.
Historically, it has been very difficult for the Government to rein in spending. The Government never seems to be able to reduce actual spending. What is reduced is the rate of growth of spending. President Reagan found this out the hard way. He made this Faustian bargain with congress that if he would raise some taxes in order to reduce the projected deficits, congress would cut back spending on a 2 to 1 margin. Congress never fulfilled its part of the bargain. Nevertheless, President Reagan substantially lowered the marginal tax rates on individuals from 70% to 28% at the end of his eight-year term in office. This created an important foundation for the economic growth we experienced in the 1980s.
Unfortunately, President Bush and President Clinton did not strike the appropriate balance between free markets and government regulation. Under President Clinton in 1999 the Glass Steagall Act was effectively repealed. This act separated commercial banking from investment banking during the depression. The idea was to prevent banks from investing in more risky activities that could compromise their financial integrity. In addition, the regulators under President Bush, along with Chairman Greenspan, permitted our financial institutions to increase leverage to imprudent levels. Moreover, there was absolutely no regulatory oversight for the credit-default- swap market. These obligations are basically insurance contracts on bond obligations. AIG was rescued by the Federal Government with billions of dollars of tax-payer’s money. This company was one of the largest insurance companies in the world. It overextending itself in this market and nearly caused a major collapse in our financial system. Currently, it is a mere shell of its prior existence.
Jude Wanniski is correct in stating that the proper role of government is to act as a referee between the public and private sectors of the economy. While it will never be perfect, government should endeavor to pursue an appropriate balance between its policies for the public good and overall economic growth.
Confiscatory taxation can create this wedge. When tax rates reach a very high level, it discourages work on the margin. Moreover, higher taxes may not produce a dollar-for- dollar increase in tax revenues. Taxpayers will find all kind of ways to avoid taxation, legally or illegally. In fact, it has been documented that the wealthiest tax payers actually contributed a higher percentage of overall tax revenues after the Kennedy and Reagan tax cuts. Furthermore, empirical evidence demonstrates that tax rate cuts have an incentive effect that works to promote growth in a short period of time. The best evidence of this is the 1963 and 1964 Kennedy/Johnson tax cuts, the 1981, 1983 and 1986 Reagan tax cuts and, finally, the 2003 Bush tax cuts. Refer to my blog commentary, “Economics is a Dismal Science.”
Many economists point to the Clinton years as a repudiation of supply-side economics. The highest marginal income tax rate was raised from 28% to 39.6%. Nevertheless, this was one of the most productive periods of rising employment and economic growth. While President Clinton raised taxes, he also kept spending under control. Federal government deficits were reduced, thereby, creating less supply of government debt, which helped to promote lower interest rates. This was Treasury Secretary Rubin’s gambit. Just focus on the bond market in order to reduce interest rates and economic growth will follow. Another important driver of economic growth during this period was President Clinton's embracement of free trade. Thus, there were countervailing forces to compensate for the negative impact of rising taxes, therefore; overall government policy was pro growth.
Today we have the opposite problem. We have very low interest rates and an exploding deficit. President Obama’s gambit is to raise the deficit in order to stimulate economic growth in this period where the economy is contracting sharply. Unfortunately, the government is increasing spending to unprecedented levels that could be forming the wedge Jude Wanninski talks about. The current amount of deficit spending is so large, even if the economy recovers, deficits may not be effectively reduced to a manageable level in the future. The Government will not only have to cut back spending some time in the future, it will probably have to raise taxes on more than the top 3% of income earners that Obama has outlined in his ten-year budget. The reason for this is that many economists believe Obama’s yearly GDP growth projections are too optimistic.
In fairness to President Obama, he did not create our current economic problems. However, his policies have the potential to make these problems much worse.
Historically, it has been very difficult for the Government to rein in spending. The Government never seems to be able to reduce actual spending. What is reduced is the rate of growth of spending. President Reagan found this out the hard way. He made this Faustian bargain with congress that if he would raise some taxes in order to reduce the projected deficits, congress would cut back spending on a 2 to 1 margin. Congress never fulfilled its part of the bargain. Nevertheless, President Reagan substantially lowered the marginal tax rates on individuals from 70% to 28% at the end of his eight-year term in office. This created an important foundation for the economic growth we experienced in the 1980s.
Unfortunately, President Bush and President Clinton did not strike the appropriate balance between free markets and government regulation. Under President Clinton in 1999 the Glass Steagall Act was effectively repealed. This act separated commercial banking from investment banking during the depression. The idea was to prevent banks from investing in more risky activities that could compromise their financial integrity. In addition, the regulators under President Bush, along with Chairman Greenspan, permitted our financial institutions to increase leverage to imprudent levels. Moreover, there was absolutely no regulatory oversight for the credit-default- swap market. These obligations are basically insurance contracts on bond obligations. AIG was rescued by the Federal Government with billions of dollars of tax-payer’s money. This company was one of the largest insurance companies in the world. It overextending itself in this market and nearly caused a major collapse in our financial system. Currently, it is a mere shell of its prior existence.
Jude Wanniski is correct in stating that the proper role of government is to act as a referee between the public and private sectors of the economy. While it will never be perfect, government should endeavor to pursue an appropriate balance between its policies for the public good and overall economic growth.
Monday, March 2, 2009
Nationalization of American Banks – Stop The Presses.
The more we hear that nationalizing banks is being contemplated by our elected officials, the more it will destabilize our financial system. Bank stocks like Citigroup and Bank of America, which were rumored to be on the short list of banks that could be nationalized, have been decimated. This kind of irresponsible commentary is having a self-fulfilling prophecy. Another bogus line of thinking is that since these banks received TARP money, the government is in effect running these institutions resulting in a de facto nationalization. While there are certain strings attached to banks receiving this money, like putting a cap on salaries and bonuses, this is a far cry from nationalization where the Government actually takes over running the entire bank. We hope the government is smart enough not to encumber Citigroup’s day-to-day activities after taking control of 36% of its common stock. If you think a lot of these banks have been run badly, wait to you see what the government will do.
Bill Seidman, who was Chairman of the FDIC and head of the Resolution Trust Corporation that took over many of the failed banks during the 1980s savings and loan crises, is advocating the same approach today. He makes nationalization sound easy. However, Citigroup and Bank of America are not small savings and loan organizations. We are talking about organizations that are a great deal larger and more complicated than the savings and loans that were rescued. Do you really think the Government can run a trading desk or a credit-default-swap operation? More importantly, how is the government going to handle the so-called toxic assets? Currently, there appears to be no active market for these securities. This is the major fallacy regarding nationalization. It would take the government a long time to get rid of these toxic assets in a prudent way, and we are assuming that the government has the capacity to get reasonable prices for these assets.
This is the crux of the problem. Many of the underlying mortgage pools that support these securitized obligations are paying off at rate which is not being adequately reflected in the current market value of these securities. If the current market prices for these securities are understated, why are we forcing the banks to use mark-to-market accounting? A better solution would be to modify the mark-to-market accounting convention that was implemented at the end of 2007. If it is going to take a while for the government to sell these toxic assets, why not give the banks an opportunity over a few years, either to sell these assets and/or amortize these losses based on an average market price during each year. Aren’t these banks in a better position to deal with these assets than the government? If the banks have more time to unload these assets, there could be less supply for sale at any given time. This, combined with the potential for higher prices due to improved market conditions, may provide the banks an opportunity to capture more favorable prices for these securities in the future.
Mark-to-market accounting is unnecessarily impairing the bank’s balance sheets by forcing banks to write down all these toxic assets every quarter based on the last market price. This is analogous to someone on your block selling a house at very distressed price because they need to raise money quickly. In effect, the value of your house has also been marked down. The banks have accumulated these assets over many years, and the accounting convention that was used for many years has changed. Since these toxic assets were not very liquid, the banks have historically used a market-model-approach to value these securities. The concern about market-model-accounting is the potential that banks may overstate the real market value of these distressed assets. Investors need to be confident that there is transparency, and that these assets are properly valued. However, due to mark-to-market accounting, coupled with the troubled state of the economy, the banks are currently dealing with target prices for these illiquid assets that are constantly moving and shrinking. Thus, bank managements continue to be in a quandary about forecasting and assessing their capital requirements, which is having a negative impact on lending. This uncertainty is causing a circuitous process as banks curtail lending, the economy is negatively affected, which in turn adversely affects lending and the price of bank stocks. This vicious cycle needs to be broken in order to stimulate economic growth.
While we should not completely eliminate mark-to-mark accounting, it needs to be modified in order to factor in illiquid market conditions. If we do not make this accounting adjustment, the cost to the Government and ultimately the taxpayers will continue to increase as more and more capital is required to make these troubled banks solvent.
Bill Seidman, who was Chairman of the FDIC and head of the Resolution Trust Corporation that took over many of the failed banks during the 1980s savings and loan crises, is advocating the same approach today. He makes nationalization sound easy. However, Citigroup and Bank of America are not small savings and loan organizations. We are talking about organizations that are a great deal larger and more complicated than the savings and loans that were rescued. Do you really think the Government can run a trading desk or a credit-default-swap operation? More importantly, how is the government going to handle the so-called toxic assets? Currently, there appears to be no active market for these securities. This is the major fallacy regarding nationalization. It would take the government a long time to get rid of these toxic assets in a prudent way, and we are assuming that the government has the capacity to get reasonable prices for these assets.
This is the crux of the problem. Many of the underlying mortgage pools that support these securitized obligations are paying off at rate which is not being adequately reflected in the current market value of these securities. If the current market prices for these securities are understated, why are we forcing the banks to use mark-to-market accounting? A better solution would be to modify the mark-to-market accounting convention that was implemented at the end of 2007. If it is going to take a while for the government to sell these toxic assets, why not give the banks an opportunity over a few years, either to sell these assets and/or amortize these losses based on an average market price during each year. Aren’t these banks in a better position to deal with these assets than the government? If the banks have more time to unload these assets, there could be less supply for sale at any given time. This, combined with the potential for higher prices due to improved market conditions, may provide the banks an opportunity to capture more favorable prices for these securities in the future.
Mark-to-market accounting is unnecessarily impairing the bank’s balance sheets by forcing banks to write down all these toxic assets every quarter based on the last market price. This is analogous to someone on your block selling a house at very distressed price because they need to raise money quickly. In effect, the value of your house has also been marked down. The banks have accumulated these assets over many years, and the accounting convention that was used for many years has changed. Since these toxic assets were not very liquid, the banks have historically used a market-model-approach to value these securities. The concern about market-model-accounting is the potential that banks may overstate the real market value of these distressed assets. Investors need to be confident that there is transparency, and that these assets are properly valued. However, due to mark-to-market accounting, coupled with the troubled state of the economy, the banks are currently dealing with target prices for these illiquid assets that are constantly moving and shrinking. Thus, bank managements continue to be in a quandary about forecasting and assessing their capital requirements, which is having a negative impact on lending. This uncertainty is causing a circuitous process as banks curtail lending, the economy is negatively affected, which in turn adversely affects lending and the price of bank stocks. This vicious cycle needs to be broken in order to stimulate economic growth.
While we should not completely eliminate mark-to-mark accounting, it needs to be modified in order to factor in illiquid market conditions. If we do not make this accounting adjustment, the cost to the Government and ultimately the taxpayers will continue to increase as more and more capital is required to make these troubled banks solvent.
Saturday, February 21, 2009
Economics – The Dismal Science
Economics is called the dismal science since the topics it normally deals with recession and inflation are not pleasant, ergo, dismal. Economics is not really a science. A scientific method cannot be applied in this field since there is no way to formulate a controlled experiment. There are many variables that cannot be measured satisfactorily in order to establish cause and effect. Often, we hear conflicting opinions from so-called experts. How do we know who is right? Who do we believe? This brings to mind the old joke. How can you tell the difference between an economist and an econometrician? An econometrician uses computers to forecast incorrectly. At the very least, economists should be referring to empirical evidence to support their conclusions. Unfortunately, either we get essays by economists without supporting documentation, or we get erroneous conclusions based on supporting documentation. In my opinion, these are the real reasons economics is the dismal science.
An illustration of an erroneous conclusion based on supporting documentation is Paul Krugman’s column “Failure to Rise” in the February 13 New York Times. He discusses President Obama’s stimulus plan and chastises the republican response by referring to it as “deep voodoo”. He states, “In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.” It is remarkable that of all the possible shortcomings that Mr. Krugman could have referred to regarding President Bush’s policies, he chose to single out his tax cuts. There is ample empirical evidence that marginal tax cuts stimulate demand. (Refer to my blog dated February 11, where I quoted Professor Robert Barro from Harvard). Mr. Krugman makes no mention of President Bush’s excessive spending or the feckless SEC during his tenure that let financial companies increase leverage from the usual 13 to 1 to 33 to 1. Mr. Krugman will not discuss the ramifications of excessive spending since he believes that Obama’s $787 billion stimulus package is too timid. That’s right. He believes that America is settling for “half measures”.
As a guide to figuring out what we should do to stimulate our economy, many economists have studied the Japanese stimulus plan that was designed to combat their economic malaise during the decade of the 1990s. Economists tend to be divided into two camps. The first group concludes that the Japanese plan did not spend money fast enough and the total amount of money was inadequate. The second group believes that the spending was poorly directed and, therefore, a colossal waste. According to an article in the February 5 New York Times by Martin Fackler “Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits. More recently, the governing Liberal Democratic Party has increased spending again to revive the economy and the party’s own flagging popularity.” This article also pointed out that Japan accumulated the largest public debt in the industrialized world which totaled about 180% of its $5.5 trillion economy during nearly two decades. Despite this massive spending, many economists concluded that Japan’s economy finally started to see improvement only when it cleaned up its debt-ridden banking system, and there was an increase in its exports to China and the United States.
Will President Obama’s stimulus plan be effective? Is this spending plan targeted correctly? Are we spending too little? Are we spending too much, thereby, leaving an enormous tax burden for future generations? Economics is a dismal science. However, based on strong empirical evidence regarding the successful tax policies of President Kennedy, President Reagan and the 2003 tax plan of President George W. Bush, President Obama should have followed their plans. Instead, his plan provides one-time tax payments that will not have the lasting impact of marginal tax rate reductions for individuals and businesses that were so beneficial in improving the stock market and economic growth in the past.
An illustration of an erroneous conclusion based on supporting documentation is Paul Krugman’s column “Failure to Rise” in the February 13 New York Times. He discusses President Obama’s stimulus plan and chastises the republican response by referring to it as “deep voodoo”. He states, “In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.” It is remarkable that of all the possible shortcomings that Mr. Krugman could have referred to regarding President Bush’s policies, he chose to single out his tax cuts. There is ample empirical evidence that marginal tax cuts stimulate demand. (Refer to my blog dated February 11, where I quoted Professor Robert Barro from Harvard). Mr. Krugman makes no mention of President Bush’s excessive spending or the feckless SEC during his tenure that let financial companies increase leverage from the usual 13 to 1 to 33 to 1. Mr. Krugman will not discuss the ramifications of excessive spending since he believes that Obama’s $787 billion stimulus package is too timid. That’s right. He believes that America is settling for “half measures”.
As a guide to figuring out what we should do to stimulate our economy, many economists have studied the Japanese stimulus plan that was designed to combat their economic malaise during the decade of the 1990s. Economists tend to be divided into two camps. The first group concludes that the Japanese plan did not spend money fast enough and the total amount of money was inadequate. The second group believes that the spending was poorly directed and, therefore, a colossal waste. According to an article in the February 5 New York Times by Martin Fackler “Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits. More recently, the governing Liberal Democratic Party has increased spending again to revive the economy and the party’s own flagging popularity.” This article also pointed out that Japan accumulated the largest public debt in the industrialized world which totaled about 180% of its $5.5 trillion economy during nearly two decades. Despite this massive spending, many economists concluded that Japan’s economy finally started to see improvement only when it cleaned up its debt-ridden banking system, and there was an increase in its exports to China and the United States.
Will President Obama’s stimulus plan be effective? Is this spending plan targeted correctly? Are we spending too little? Are we spending too much, thereby, leaving an enormous tax burden for future generations? Economics is a dismal science. However, based on strong empirical evidence regarding the successful tax policies of President Kennedy, President Reagan and the 2003 tax plan of President George W. Bush, President Obama should have followed their plans. Instead, his plan provides one-time tax payments that will not have the lasting impact of marginal tax rate reductions for individuals and businesses that were so beneficial in improving the stock market and economic growth in the past.
Sunday, February 15, 2009
Ex Chairman of the Fed, Alan Greenspan – Denial - Not a River in Egypt
Generally, I do not consider myself an armchair quarterback. It is easy to criticize in retrospect when you do not have the responsibility of making decisions. However, in the case of Alan Greenspan, I believe he is fair game since he was lauded as a God during his long tenure as Chairman of the Federal Reserve. I was watching David Faber’s interview with him during the riveting documentary on CNBC about the cause of our financial collapse entitled “House of Cards”. The title of this program for most of us could have equally been called “House of Pain”. I was struck by how smug Greenspan was when David Faber asked him if he could have done something to stop this banking crisis. He said, unapologetically, that he knew the banks were taking on a great deal of risk since he had discussed this with the various managements of these banks. He said the failure was that these bank executives assured him they would know when to stop, and obviously they didn’t. He went on to say that, basically, regulation would have been ineffective since human beings will always find a way around it; that’s part of the human condition. Furthermore, he said very confidently, he believed we would have the same conversation in the distant future, maybe 20 or so years from now.
It is fair to say that regulation is not going to prevent every indiscretion in the financial industry. He is right about human nature. However, we are not talking about just any indiscretion since this crisis will go down as one of the worst in our history. It is embarrassing to think that we, the
Friday, February 13, 2009
Wednesday, February 11, 2009
Addendum to President Obama's Press Conference
After posting my commentary about President Obama's press conference, I read the Wednesday, February 11th, Wall Street Journal and on the Op Ed page under "Notable & Quotable, Harvard economist Robert Barro was quoted in an interview by the Atlantic. This article was very timely since the professor supports my main contention that tax rate changes will boost aggregate demand. I am quoting the interview that pertains to tax policy as follows:
"Atlantic: And I take it from the Wall Street Journal piece you wrote last week...well, the piece is just specifically about measuring multipliers, but I take it that you are fairly skeptical in general that fiscal policy will boost aggregate demand.
Barro: Right. There's a big difference between tax rate changes and things that look just like throwing money at people. Tax rate changes have actual incentive effects. And we have some experience with those actually working.
Atlantic: What would you say is the best empirical evidence there?
Barro: Well, you know, it worked to expand GDP for example in '63 and'64 with the Kennedy/Johnson cuts. And the Reagan twice in '81 and '83 and then in'86. And then the Bush 2003 tax-cutting program. Those all worked in the sense of promoting economic growth in a short time frame"...
The difficulty with the economic profession is there are too many conflicting "expert" opinions. However, we should pay attention to those that are supported by strong empirical evidence.
"Atlantic: And I take it from the Wall Street Journal piece you wrote last week...well, the piece is just specifically about measuring multipliers, but I take it that you are fairly skeptical in general that fiscal policy will boost aggregate demand.
Barro: Right. There's a big difference between tax rate changes and things that look just like throwing money at people. Tax rate changes have actual incentive effects. And we have some experience with those actually working.
Atlantic: What would you say is the best empirical evidence there?
Barro: Well, you know, it worked to expand GDP for example in '63 and'64 with the Kennedy/Johnson cuts. And the Reagan twice in '81 and '83 and then in'86. And then the Bush 2003 tax-cutting program. Those all worked in the sense of promoting economic growth in a short time frame"...
The difficulty with the economic profession is there are too many conflicting "expert" opinions. However, we should pay attention to those that are supported by strong empirical evidence.
President Obama's First Press Conference - "The Agony and the Ecstasy"
It certainly was refreshing to see President Obama deliver his first official press conference. This was a commanding performance compared to President Bush's past press conferences. One of President Bush's weaknesses was his inability to effectively communicate without a prepared script. This became painfully evident at his press conferences which, unfortunately, is not a small problem. He, therefore, gave very few press conferences and relinquished an important venue to affirm to the voters that he had a firm grasp on pressing issues of the day.
President Obama deserves high marks for being articulate and demonstrating and in-depth knowledge of the topics that were discussed. There is no question that leadership requires an effective ability to communicate ideas and be persuasive. While this is important, what is equally if not more important, is the content of these ideas and their effectiveness.
Unfortunately, the President presented the American public with some poor choices. This is illustrated when he forcefully stated that, while he is open to good ideas from the Republicans, he will not listen to the same failed policies that got us into this crisis in the first place. We can infer from this important remark, based on what he has said in the past, that President Bush's tax cuts were a major contributor to these failed policies.
We all know the cliche that in order to solve a problem you have to identify the cause. Unfortunately, President Obama is putting himself in a box if he believes that President Bush's tax cuts were a major cause of the current crisis. According to Milton Friedman, permanent tax cuts are a more effective way to increase consumer spending than one-time payouts. This is predicated on his theory of permanency, which states that you can more favorably influence behavior when change is not temporary. In the past, when we reduced capital gains taxes and lowered the marginal tax rates, we had seen a commensurate improvement in the economy and the stock market. This occurred under the Kennedy administration, the Reagan administration, and the Bush administration after 2003 when his more permanent tax cuts became effective.
It was excessive government spending, in conjunction with tax cuts, and a vigorous monetary policy under Greenspan that put too much liquidity in the system. Furthermore, interest rates were kept too low for too long and provided the fuel for the housing fire that burned out of control. In addition, in his book "The Age of Turbulence" Greenspan suggests a more hands-off approach to capitalism. Thus, he provided little oversight or regulation of our financial system as leverage, risk, and complex financial derivatives dramatically increased.
President Obama deserves high marks for being articulate and demonstrating and in-depth knowledge of the topics that were discussed. There is no question that leadership requires an effective ability to communicate ideas and be persuasive. While this is important, what is equally if not more important, is the content of these ideas and their effectiveness.
Unfortunately, the President presented the American public with some poor choices. This is illustrated when he forcefully stated that, while he is open to good ideas from the Republicans, he will not listen to the same failed policies that got us into this crisis in the first place. We can infer from this important remark, based on what he has said in the past, that President Bush's tax cuts were a major contributor to these failed policies.
We all know the cliche that in order to solve a problem you have to identify the cause. Unfortunately, President Obama is putting himself in a box if he believes that President Bush's tax cuts were a major cause of the current crisis. According to Milton Friedman, permanent tax cuts are a more effective way to increase consumer spending than one-time payouts. This is predicated on his theory of permanency, which states that you can more favorably influence behavior when change is not temporary. In the past, when we reduced capital gains taxes and lowered the marginal tax rates, we had seen a commensurate improvement in the economy and the stock market. This occurred under the Kennedy administration, the Reagan administration, and the Bush administration after 2003 when his more permanent tax cuts became effective.
It was excessive government spending, in conjunction with tax cuts, and a vigorous monetary policy under Greenspan that put too much liquidity in the system. Furthermore, interest rates were kept too low for too long and provided the fuel for the housing fire that burned out of control. In addition, in his book "The Age of Turbulence" Greenspan suggests a more hands-off approach to capitalism. Thus, he provided little oversight or regulation of our financial system as leverage, risk, and complex financial derivatives dramatically increased.
Sunday, February 8, 2009
Executive compensation.
I've become deeply saddened over the years as capitalism has been driven into a huge ditch by greed and corrupt management practices. Compensation packages have been so excessive that in many cases it bears no relationship to reality. This largess has corrupted top management and the boards who are supposed to be responsible to shareholders. Furthermore, it seems that the way many compensation packages are structured are having a perverse effect. There is too much emphasis on the short term with no commensurate adjustment for what happens in the future, and there is no significant penalty for failure. The capital system works since people will usually do what is in their best interest. Managements are being compensated to take on more and more risk for short term gains since the payoffs are high, and there appears to be no appropriate penalty for current or future failures due to these risks.
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