On my mind.

The Debt Ceiling Debate - The Real Issue

2011-07-31T15:49:00.000-07:00

Ken Langone, one of the former founders of Home Depot, was a recent guest host of the CNBC program Squawk Box. His insightful commentary on this debate crystallized my views on this controversy. I loved his reference to the movie “Moonstruck”. There is a scene in this movie that reminds him of what is going on in Washington today. The grandfather enters the kitchen, which usually is the center of an Italian household. He is in the midst of a confrontation between the various generations of family members about their romantic interests and suddenly leaves shaking his head saying, “I am so confused”. Confusion is what most of us are confronted with today in listening to this debate. When I discuss this with my liberal friends, they blame the Republicans and the Tea Party for their recalcitrance. On the other hand, my conservative friends blame President Obama and the liberal left. The truth of the matter is there is enough blame to go around.

The Tea Party in my view is a movement that evolved as many people started to feel disenfranchised with the politics in Washington. Tea Party members have been concerned with run-away spending in Washington and the socialist path that our country is headed with no detour in sight. Today, this situation has become more acute. We are reaching a major inflection point where the government needs to take appropriate action to get the debt under control or our economy faces ruinous circumstances in the near future. As Mr. Langone mentioned, you don’t have to be a financial expert to realize that if the federal government is spending $.40 on every dollar spent just to service the debt, we have a problem. Furthermore, he states that since our interest rates are at historically low levels, a rise of several percentage points in short-term interest rates will add to the federal debt by $300 to $400 billion a year. He goes on to say that even the average American household is aware that you cannot continue to borrow money and spend more than your means and not ultimately face serious consequences.

I believe the Tea Party has done this country a service by bringing the spending and debt issue to the forefront of American politics. However, what the Tea Party is losing sight of is that the Republicans are not in control of the government today. They only control one-half of the congress, and the Democrats control the other half and the presidency. More importantly, we are running out of time to pass the debt limit and legislation that deals with our long-term-debt problem. It is unthinkable that we are now confronted with a possible downgrade of our AAA+ debt rating and a potential default. We are at a critical juncture, and both parties have no viable choice but to compromise in order to get passed this critical threshold. The conservative republicans cannot expect to win this battle today. This battle should be fought to secure the next presidential election and a majority in the Senate. Unfortunately, if there is no compromise, I believe the conservatives will get the lion’s share of the blame and be labeled as obstructionists. Moreover, if this were to occur, the public backlash could jeopardize their chances to win elections next year.

What is President Obama’s role in this mess? I agree with Mr. Langone. Obama is not acting presidential. He has become a divisive force in this country by promoting class warfare. This is the real issue facing the long-term health of this country. He campaigned to win the presidency on a platform of bringing change to Washington. He promised to rise above petty politics, bring more civility to the political discourse and unite this country. Instead, he has become petulant and boorish at times by promoting partisan politics. He certainly has not demonstrated good negotiating skills during this debt debate. He panders to the press for political gain by demonizing the other side, and he continually positions himself as the only adult in the room during these negotiations. We do not know what is going on behind closed doors. Nevertheless, if the other side is acting badly as he maintains, it is his role as president to rise above petty politics, and negotiate in good faith to find a solution. Instead, he is using this critical time in our history not to solve this problem but begin his campaign for re-election.

We also know by the sequence of the following events that the president was not fully engaged early on to deal with the budget impasse. During the past two years, the democratically controlled Senate has not passed a budget. He did not get behind last year’s recommendation of his nonpartisan, Simpson-Bowles commission, to deal with the debt problem. If the president was serious about dealing with this issue, the recommendations of his commission were a perfect platform to begin negotiations with Congress in order to find a solution. Finally, he introduced a budget in April that was such a sham it was soundly defeated in the Senate 97 to 0. After all of this transpired, does he get personally involved? No. Instead, he sends Vice President Biden to do his biding with Congress. This was doomed from the start since the president was not sitting at the table during these negotiations. Even Maureen Dowd, in a recent column in the New York Times, chastised the president for not being more in sync with the electorate on profligate spending. The example she used was his signing of the 2009 Pelosi budget that was loaded with earmarks. This was another violation of his campaign promise to be vigilant on wasteful spending.

Admittedly, President Obama was dealt a lousy hand by former President Bush. President Bush got the ball rolling with-out-of- control spending and having a major financial collapse on his watch. However, when it comes to spending, this president is Bush on steroids. The last time government spending was this high compared to the GDP was during World War II. So far, the economy is not responding adequately to this largesse. Employment has rarely budged, and GDP growth is anemic.

What is the president’s rejoinder to all this? He blames the rich for not paying their fair share of taxes. When 47% of the population is not paying federal taxes, and the top 1% is paying approximately 40% of the taxes, how much more can we tax the wealthy? Factually, even if we taxed the wealthy (annual income of $250,000 and higher according to Obama) 100%, it would not come close to solving the budget gap. Many of the rich, including Mr. Langone, have contributed a significant amount of money to charity. Therefore, Mr. Langone reprimanded the president for using “glittering generalities” to demean the wealthy. Furthermore, the wealthy are the job creators in this country. I have never worked for a poor person. Sadly, President Obama’s strategy is to incite class warfare in order to get re-elected. This is a very dangerous road to follow with a steep cliff at the end. It is the real issue behind this debate.

A Letter to President Obama.

2011-01-19T17:29:00.000-08:00

Your memorial speech at the University of Arizona regarding the horrific shootings that occurred in Tucson was eloquent. We needed to hear about those people whose lives were lost and the heroism of those who survived this senseless tragedy. Your message of healing and dedicating ourselves to becoming a better country to honor the memory of those that were killed and of those who courageously tried to help them was extraordinary. Moreover, this time you made no apology for America as you had done in the past; particularly, in your Summit of the Americas Tour. Peggy Noonan, in her Wall Street Journal opinion column, crystallized your message beautifully stating: “We are not a nation of victims; we are a nation in which people work together doing brave things and achieving great outcomes.” You said, “Heroism is here, in the hearts of so many of our fellow citizens, all around us, just waiting to be summoned — as it was on Saturday morning.” Not only was this statement “worthy of a president” as Peggy Noonan mentioned, your entire speech was presidential worthy.

While I believed your words were heartfelt, I could not help thinking about Maya Angelou who said, during a recent Oprah Winfrey interview, “If you teach, you have to live your teaching”. This is what leadership is all about. It is not enough just to be articulate. You have to be believable which is established through consistent actions. In other words, you have to walk the walk. Rex Ryan, the Jets coach, has become controversial these days because of his oratory. Nevertheless, one of the Jet’s players said he is effective because his actions reflect his stated beliefs.

I am hopeful that in the second half of your term your actions will reflect your stated beliefs. You rose to office on a tsunami of oratory that change was coming to Washington. It was not going to be politics as usual. Unfortunately, right up to this memorial service, it has been politics as usual. Your rhetoric, political tactics and sometimes strident commentary has made you a divisive force in this country. For example, you repeated the mantra that Republicans were the “party of no” and had not offered any constructive suggestions for your healthcare initiative. When some of the republicans challenged this statement at the healthcare summit, you had to repudiate your assertion. Nevertheless, the political damage was already done since your retraction was not widely disseminated by the press.

Moreover, the passage of your healthcare initiative was an ugly display of politics with backroom deals and a major violation of your campaign promise not to use the nuclear option, also known as reconciliation. This is an extreme measure rarely used in passing legislation that circumvents the 60-vote majority in the Senate that would be needed to overcome a filibuster. You were quoted many times as saying if you were elected President you would make sure there was more than a simple majority supporting any significant piece of legislation before it would get your approval.

When the Arizona law on immigration was passed, you grossly misrepresented that law by saying that now any family in Arizona could be stopped even while buying ice cream and asked for identification. This law is very specific. The police have to establish probable cause that a law had been violated before asking anyone about their immigration status. In addition, you tried to gain further political curry with Hispanics when you said, before the mid-term elections at a political rally, that the Republican Party was the “enemy”.

Finally, on your last appearance on the View, you were asked why there is so much pessimism regarding politics today. Your response was that politicians are doing too much campaigning and money raising. Yet you knew you had a full week of fund raising scheduled after this show. Did you think that we only listen to what you say and do not pay attention to what you do?

Do all of the above comments and tactics reflect “a more civil and honest public discourse…” that you evoked in your speech to “help us face up to the challenges of our nation …” and make the victims proud? Regrettably, these are just a few of a litany of disingenuous comments you have made that were not worthy of a president. I believe this country desperately wants a leader who says what he means and does what he says. We need a statesman, not another politician. We can only hope that this speech will represent a major turning point for you and this country. “We should do everything we can to make sure that our democracy lives up to our children’s expectations.”

The Pinocchio President – Change We Can Believe In?

2010-06-13T16:58:00.000-07:00

President Barack Obama’s main campaign theme was that he would bring change to Washington, “change we could believe in”. However, there is a huge chasm between his soaring rhetoric and his actions. Unfortunately, the statesman that many people hoped for is just another politician, and not a very good one at that. Instead of trying to bring this country together, he has become a divisive force.

When Nancy Pelosi served up the omnibus spending bill that was loaded with earmarks, he signed it. It was President Obama’s first bill signed into law which violated a campaign promise to be more vigilant against wasteful spending. This was an ominous sign of what else was to come.

The President’s health care initiative is an egregious violation of many of the core principals he espoused during his campaign. This became clearly evidenced from the outset when he turned over his health care initiative to Nancy Pelosi to craft legislation in the House. Subsequently, the Senate followed with its own bill. There appeared to be very little Republican input, and the attitude from the Democrats reflected “we have the super majority take it or leave it”.

The Republicans are not blameless, as there is always partisan politics. Republican Senator De Mint of South Carolina said that not passing the health care bill would be tantamount to President Obama’s “Waterloo”. Nevertheless, it appeared that the President made a very disingenuous effort to be nonpartisan. How do you expect to get the opposition party on board when the bills have already been hammered out? Furthermore, we witnessed some of the worst kind of backroom political deals to gain passage in the Senate.

Due to the unpopularity of the President’s health care initiative, there was a major public backlash which was reflected in significant democratic losses in Virginia, New Jersey and Massachusetts. It appeared that in order to gain public support for his heath care proposals, the President finally decided to bring the leadership of both parties together in an open forum televised by C Span. This was political theater that turned out badly for the President since no compromise resulted. Peggy Noonan characterized his behavior during this forum as “boorish”. After this charade the President pushed for the completion of the Senate bill by using reconciliation, and it finally passed. This resulted in the passage of a major bill with a 51 vote majority in the Senate.

Countless times during the Presidential campaign, President Obama stated that he would bring transparency back to politics. One way to accomplish this was to have the public view the crafting of major bills on C Span. Furthermore, he would reach across the isle to illicit the cooperation of the Republicans in order to shape major bills. He also stated that if he were President he would never use the nuclear option for major bills or what is known as reconciliation. He was quoted on film that it is necessary to achieve a significant majority when passing legislation that would have a major impact on this country.

When the President first started to frame the debate on health care, he stated that the primary reason for health care reform was to rein in the costs of this very significant part of our economy. The President’s major thrust on healthcare reform is to 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 simultaneously increase the insurance rolls by 32 million. This bill is about access, not cost cutting. It is just another entitlement program at a time we can least afford.

While the Congressional Budget Office concluded that the Senate Bill would pay for itself, its analysis is based on some heroic assumptions. First, the Cadillac health care plans will be taxed in 2018. This was a capitulation to the unions. Why should we believe that somehow things are going to be different in 2018? Second, the bill calls for taking $500 million from the already bankrupt Medicare Insurance program. Furthermore, there is a major accounting gimmick as revenues for this bill will begin several years before the bill goes into effect. All these factors give the appearance that this bill will pay for itself.

The cornerstone of this bill is to create a federal agency to review and regulate health insurance premiums which is supposed to rein in costs. How does holding down premiums solve the problem of cost increases by doctors and hospitals? Moreover, state regulators are concerned about solvency. Rate setting without financial oversight is a prescription for trouble. It is a very complex analysis to determine what a reasonable premium should be in relation to benefits. This is much more suited for a market place where increased competition will help reduce costs.

The President clearly believes the end justifies the means in his zeal to do something historic. While this health care legislation institutes some positive changes, such as prohibiting insurance companies from turning people down with preexisting conditions, it comes at a huge cost. The President missed a great opportunity to incorporate the kind of change to make healthcare better and more affordable. Warren Buffet said in a CNBC interview that we should scrap the Senate Bill because it does not address the problem of costs. (Refer to my blog on healthcare.)

It is very troubling to think that this historic presidency is being squandered. This President generated great expectations based on his oratorical skills. However, his philosophy and approach of redistributing the wealth based on fairness is missing the mark. This country is a meritocracy and was not built on equality of result. Nevertheless, we should try to help those who are truly in need. One way we can accomplish this is to improve the equality of opportunity. It is also important not to enable those people we are trying to help. If we provide welfare, we need to encourage a work ethic to pursue education and/or jobs. In most cases, giving people money without incenting them to provide for themselves is a prescription for disaster.

The Democrats always refer to the widening gap between the rich and the poor. However, they fail to mention that our society has tremendous mobility between these groups according to government statistics. In fact, the Treasury Department in 2007 released the results of its study examining income mobility of individuals over a ten year period (1996 through 2005). The study found that over half of the taxpayers moved to a different income quintile. Approximately half of the participants who were in the bottom income quintile moved up to a higher group. Moreover, for those in the very top group in 1996 only 25% remained in this group at the end of 2005. This study revealed that we do not have a caste system in this county and that there is meaningful opportunity for advancement.

The Government should be focusing less on income redistribution and more on economic growth. Increasing the economic pie will provide better opportunities for wealth creation. When 10% of the population is paying over 70% in taxes, we will not achieve more prosperous economic growth by taxing this subset more. These are the people who invest capital and create jobs. When was the last time you worked for a poor person?

Not only has President Obama healthcare initiative tarnished his credibility, his handling of the latest Gulf oil disaster is now bringing into question his competency. Process, promises, and results all matter. That’s how you build trust, integrity and leadership. This is the kind of change we can believe in.

President Obama - “We need to do a better job of connecting the dots.” Huh!

2010-01-14T17:44:00.000-08:00

This is what President Obama said regarding the failed attempt by a 23-year-old Nigerian man to blowup an airplane bound to Detroit on Christmas day. It is only due to the incompetence of this 23 year old that a major catastrophe was avoided. There were 279 passengers and 11 crew members on board that plane. The more we learn about this potential tragedy the more it becomes evident that a number of people screwed up big time.

This boy’s father went to the US embassy in Nigeria to express major concern that his son might become a terrorist. According to the NY Times, his cousin said the father received a text message from his son that “he had found a new religion, the real Islam” and he was never coming home again. What other dots do we need? This is not a dot. It is a major bull’s-eye. Based on this information alone, this young Nigerian’s name should have been added to the top of the no-fly list?

The story even gets better since this 23 year old from Nigeria named Umar Farouk Abdulmutallab bought a one-way ticket for cash and checked no luggage and yet was able to board this Northwest plane in Amsterdam without incident. Moreover, how did he get an American Visa? It is absurd that we are not profiling people like this. I am sure in the future it will not be as blatantly obvious, but so far, young, male Muslims are the ones we have to be concerned about.

Anecdotally, I was searched at the airport in Minneapolis about a week after the Christmas bombing attempt. The TSA security agent was apologetic, and my response was that he should do a good job. After all, isn’t it in our best interest to endure a little inconvenience as long as the TSA is trying to keep us safe? If I were a Muslim, I would be happy that all Muslims were profiled in order to keep any radicals off my plane. Unfortunately, the cliché that the good suffer for the bad comes into play.

While we cannot completely safeguard against all human errors, this incident reveals a number of misadventures that could have easily been avoided. Not to mention that it took approximately two weeks before President Obama strongly spoke out about this security breach and reassure the American people that it will be thoroughly investigated. In addition, to make matters worse, Mr. Abdulmutallab is going to be tried in a civilian court with a plea of not guilty. He is not a US citizen and was caught red handed when he set himself on fire. It seems evident that President Obama, for what ever reason, prefers to try these cases in civilian courts whenever he can. The logic escapes me considering he sanctions the use of predator drones internationally to blow up would-be terrorists without a trial.

I hope the President continues to show outrage and determination to help prevent future attacks. Before this incident, he gave the impression we were not engaged in an all-out war with Jihadist extremists and all that was required domestically was police action. In the past, this White House refused to mention the word war to describe our approach to this conflict. The “War on Terror”, which was a descriptor used by the Bush administration, has now been replaced with a new euphemism called “Overseas Contingency Operation”.

It appears that only recently President Obama used the word war when he mentioned we are at war with al Qaeda. Hopefully, this is a sign that he will begin to rethink those policies that are making us less safe. For instance, civilian trials for terrorists make no sense since we are giving up the opportunity to extract important information that can save lives. There is no better example than all the useful information we extracted from Khalid Sheikh Mohammed, the mastermind behind 9/11. It is beyond my comprehension that we will try him in civilian court in New York near the World Trade Center site. This will be a field day for Jihadist propaganda as our government and the CIA will be put on trial. Prosecuting a war does not permit us the luxury to follow all the legalities that are required in a civilian court room like reading someone their Miranda rights. In addition, Eric Holder, the US Attorney General, is going ahead with an investigation of the CIA during President Bush’s tenure. Some of these agents could be prosecuted for following what they were lead to believe was legal action, which may turn out to be illegal. How do we expect our agents to perform in this kind of environment? Furthermore, according to a recent Investment Business Daily op-ed, a new government report found that one-in-five released prisoners from Guantanamo have returned to the battlefield. In fact, the President recently stated that for now no more prisoners would be sent back to Yemen. It was reported that a number of them were the masterminds behind the attempt to blow up the aircraft over Detroit. Yet, we are still going through with the closing of Guantanamo.

More importantly, the President needs to speak out more consistently and forcefully against Jihadist extremists that have perverted a major religion to justify their wanton disregard for human life. Thomas Friedman agrees with this line of thinking since he has written some terrific pieces in the New York Times during the past couple of weeks which articulated the importance of eliciting the support of Muslims to rail against these acts of terrorism. Unfortunately, the governments and the people of these Muslim countries have been conspicuously silent, and in some cases not only have given tacit approval but financial support to these Jihadists. He states that unless we foster a change in this complicit behavior …. “no laws or walls we put up will ever be sufficient to protect us unless the Arab and Muslim societies from whence these suicide bombers emerge erect political, religious and moral restraints as well – starting by shaming suicide bombers and naming their actions “murder,” not “martyrdom.”

Obama’s Gambit on Healthcare – Will The Real Healthcare Bill Please Stand Up

2009-10-27T07:59:00.000-07:00

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.

Term Limits For Congress And State Legislatures - Its Time Has Come

2009-08-01T08:57:00.000-07:00

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.

Jack Kemp – He Represented The Best Of The Conservative Movement.

2009-05-21T15:46:00.000-07:00

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.

Barack Obama Gives Hugo Chavez A “Boys In The Hood” Hand Shake. What Was That All About?

2009-05-05T12:52:00.000-07:00

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.

Blankfein Speaks Out On Executive Compensation. Better Late Than Never.

2009-04-15T08:18:00.000-07:00

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.

Executive Compensation, Government Regulation, Oh My!

2009-03-29T16:21:00.000-07:00

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.

“The Way the World Works”

2009-03-11T06:44:00.000-07:00

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.

Nationalization of American Banks – Stop The Presses.

2009-03-02T09:58:00.000-08:00

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.

Economics – The Dismal Science

2009-02-21T09:59:00.000-08:00

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.

Ex Chairman of the Fed, Alan Greenspan – Denial - Not a River in Egypt

2009-02-15T08:11:00.000-08:00

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 United States, not Mexico, Latin America, or Russia, were responsible for creating this worldwide financial mess. This crisis did not happen abruptly, without any warning. All we have to do is review what happened in 1998 when Long-Term Capital almost collapsed the financial system. If a hedge fund just the size of Long-Term Capital could have brought down our financial system as a result of too much leverage, that should have been a warning shot across Greenspan’s ship’s bow.

Addendum to President Obama's Press Conference

2009-02-11T17:29:00.000-08:00

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.

President Obama's First Press Conference - "The Agony and the Ecstasy"

2009-02-11T08:23:00.000-08:00

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.

Executive compensation.

2009-02-08T17:39:00.000-08:00

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.