Leverage?

Some members of the chatterati may have taken Archimedes a bit too literally: “Give me a place to stand and with a lever I will move the whole world.”  Often too much emphasis is placed on the fulcrum and not quite enough on the part about the ancient mathematician needing a place to stand.  The word of the week sounds like “leverage” in Washington, D.C. Who has it? Who doesn’t? And, so what? The So What part isn’t all that interesting.

Although the pundit class is thoroughly fascinated at the moment with how much leverage the President and the Republicans may each possess after the self inflicted Fiscal Cliff fiasco, most of their comments can be categorized as post game “analysis” of the variety which is more commonly associated with post game “analysis” of a sporting event.  It’s never quite enough to declare one team or another victorious based on the scoreboard numbers — “we” have to “know” why one team won and the other lost.  In reality, we really don’t.

So, in the parlance of political reporters emulating the post game questions of their sports writer colleagues — can the President win the next game? A game of Debt Ceiling already scheduled by the Republicans and given official status by the post game analysts.

It depends on where you stand.

There are two major elements of the federal debt that deserve serious scrutiny.  First, during the Bush Administration’s policy of credit card conservatism we racked up two wars (off the budget and supported by supplemental appropriations), a major addition to the Medicare program (Medicare Part D, also unpaid for) and one major Recession.  All were guaranteed to increase the national debt.  The first two increased spending and the latter cut into the tax base.

Secondly, we do need to reduce the national debt, but how we do it is important.  This is one of those occasions which calls for a scalpel, not a meat axe.

It is also important to stand on firm ground.

A few facts are in order.  The first part of standing on terra firma before attempting to leverage anything is to dismiss some media mythology about trends in the national budget deficits.  The following chart should provide an illustration of the inaccuracy of the Now That A Democrat Is In The White House The Deficit Is Out Of Control Myth:

The chart illustrates what happens when two wars, one major Medicare addition, and a nasty Recession contribute to national spending. It also shows the effect of Obama Administration policies mentioned earlier, a point at which we should note that the Bush Administration toted up about $5.1 trillion in expenses, while as of last June the Obama Administration’s policies resulted in about $983 billion in spending.

In short, if we are really serious about deficit reduction then we need to eschew the policies that got us into this mess in the first instance, i.e. unnecessary tax cuts, and two very expensive wars.

OK, so if we don’t get involved in more military operations, we resist the myth that tax cuts somehow cause economic growth (which they never have), and we regulate our financial markets more effectively in order to mitigate the excessive enthusiasm of traders who created the last great mess, then where do we cut?

It’s time for another reality check.

Here’s where the money goes:

Since Social Security is a self-funding program, which as President Reagan famously cautioned in 1984 doesn’t add to the federal deficit (video), we can take that 20% out of the equation right now.  Anyone who is truly serious about the single issue of Social Security solvency should be clamoring to increase the cap on earnings liable to the payroll tax, currently set at a measly $110,000. We also need to remove the mandatory spending from the discussion because what we cut will have to be from discretionary spending.

The FY 2013 budget calls for spending $666.2 billion by the Department of Defense.  Another $80.6 billion is allocated to the Department of Health and Human Services (Medicare, Medicaid), and the Department of Education (Pell Grants, Title I, student loan guarantees, etc.) is scheduled to spend or entail $67.7 billion while the 4th largest chunk of the budget goes to the Veterans Administration which has $60.4 billion in scheduled spending.

In short, we’ve budgeted for $1,510 billion in discretionary spending in FY 2013.  The Department of Defense is on track to receive 44.12% of ALL the discretionary spending in the national budget.   Yet calls to cut military spending brings on the wailing of voices, the gnashing of teeth, and the rending of garments about “making us less safe” in an uncertain world.  In spite of all the wailing, gnashing, and rending — that one single department consumes 44.12% of the entire pot of discretionary spending is something we ought to be discussing.

Medicare is another matter.  IF we are truly serious about deficit reduction then we need to have more than the simplistic discourse already in evidence.  There is a false choice being presented, as though the only options are to privatize the Medicare program (give Granny a coupon and let her go out and find her own insurance) or to create a Single Payer national health care system.  While I wouldn’t be sorry to see a Single Payer system, this is an argument for another day.  The point is that there are options between these two proposals.

The central focus point should be that nothing which doesn’t have a bearing on health care cost containment is going to make much difference in the spending levels.   Privatization doesn’t address the cost containment issue, and a single payer system without cost containment elements is merely a recipe for increased expenses.

Now that the campaign season is over we can dismiss the Republican rhetoric about “Obama cut $716 out of Medicare,” and consign to the dust bin the notion that the Affordable Care Act somehow impinges on Medicare benefits.  Business Week explains:

From 2010 to 2019, Obamacare trims payments to providers by $196 billion. They agreed to take a cut because they will get so many new patients, thanks to the individual mandate. Another $210 billion will be generated by raising Medicare taxes on the wealthy (that’s households earning more than $250,000). Another $145 billion comes from phasing out overpayments to Medicare Advantage. About 25 percent of seniors use the program—in which private plans compete for Medicare dollars—instead of traditional fee-for-service Medicare. Under Obamacare, the government has to keep Medicare Advantage costs in line with those of traditional Medicare. More savings come from streamlining administrative costs.

Thus, if we trim payments to providers, phase out over-payments for profitable private health care policies, and put some reins on administrative costs we’ll find about $716 billion in savings for the Medicare program.  Other cost savings may also be the result of more efficient record keeping, especially in the pharmaceutical segment.  Anyone who’s dealt with the medical issues of an elderly parent knows of multiple prescriptions written from several physicians who may or may not consult with one another.  The result can be as minimal as two (or three) prescriptions for the same medication at different dosages; or, as detrimental as two prescription medications which should not be taken together.

However, the bottom line is still the bottom line — unless and until we are ready to discuss health care cost containment we’ll be immersed in the rhetoric of low bludgeon and high dudgeon without much result.

When we discuss funding for the Department of Education it’s important to note that the FY 2013 discretionary requests yield an official number, $69.8 billion — if we include Pell Grants.  Pell Grants constitute about $22.8 billion of the total, a decrease from $23.8 billion in the FY 2011 budget.  Without the Pell Grants the total discretionary spending in the FY 2013 budget is $47 billion.   There are two constituencies with major stakes in arguing about these funds.

Parents.  Unless one is amenable to the elitist argument that kids should have access to only the level of education their parents can afford (which makes social mobility a moot point) parents are going to need assistance paying for their children’s education.  Whether we like it or no, education is a labor intensive business.  We can trim educational spending by continuing what the Obama Administration has started — saving approximately $61 billion by cutting the banks out of their role as middlemen in the student loan program [NYT]– but it really doesn’t do to cut efforts to educate our young people.  It also doesn’t make economic sense since a college degree is worth money in the marketplace.

Local school districts.  Cash strapped and semi-starved local school districts rely on funds for Special Education programs, Title I services, School Lunch programs, to make up budget shortfalls.  While the level of federal involvement at the local level isn’t all that much it does cover expenses local districts would be hard pressed to meet were the monies cut.

Hostage Taking

How we fund, or de-fund, these major activities depends on who is being held hostage and by whom.   Did the President allow the Republicans to gain “leverage” by taking the tax rates off the table in the next Congressionally manufactured debt ceiling debacle. Or, are we going to change hostages?

Will the Republican stance be that all other programs must be cut in order to spare the 44.12% consumed by the Department of Defense?

Will the GOP position be that Medicare must be privatized in order to practice “sound fiscal responsibility?”

Will the GOP position be that Social Security must be “reformed” (read cut) in the interest of “fiscal accountability and deficit reduction” even though it adds not a nickel to the federal debt?

Will the Administration simply say — You manufactured this debt ceiling “crisis” live with it?  Remembering that if the national credit rating is downgraded this will likely mean that the cost of borrowing (yields paid to those who invest in Treasuries) will go up, exacerbating the problem rather than addressing it.

Will the point be made to the American people that while the credit card analogy is handy, the United States of America doesn’t have creditors it has investors.  Our federal government accesses funds by issuing bonds.   And WE own most of those bonds.

Here’s the little chart again:

42.2% of the money “borrowed” by the U.S. government is an asset for U.S. individuals and financial institutions.   Today’s yield curve doesn’t indicate a government which is having to pay all that much to get people and institutions to invest in it:

Even 30 year bonds are paying only 3.0% interest.

The amount of leverage always depends on where one stands and places the fulcrum.

Fiscal Cliff or Stairway to Heaven?

As the Nevada Progressive points out, the looming “fiscal cliff” is a meaningful moment for the Republicans in the U.S. Congress.   The somewhat sordid history of this “cliff” which in actuality could be more like a slight slope is summarized as:

“The United States fiscal cliff refers to the effect of a series of recent laws which, if unchanged, will result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013.  These laws include tax increases due to the expiration of the so-called Bush tax cuts and across-the-board spending cuts under the Budget Control Act of 2011.” [link]

At this point, even the well informed may need a reminder that the term ‘fiscal cliff’ was coined by Federal Reserve Chairman Ben Bernanke, who was concerned that the impact of the failure of the Super Committee to reach an agreement would depress the economy:

“For the record, although the explanation wasn’t reported or repeated as much as the catchphrase itself, Bernanke actually said the fiscal cliff was about the large spending cuts and tax increases already scheduled to occur being far too big for the current U.S. economy to handle at one time. “I hope that Congress will look at [the spending cuts and revenue increases] and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date,” he told the committee.

In other words, “fiscal cliff” means the big deficit reductions that have been both inadvertently and intentionally scheduled to go into effect at the turn of the year are the absolutely wrong fiscal policy at that time and that the economy will be damaged if they are not changed.” [OF.org]  (emphasis added)

For those likely to hit the panic button — some programs are exempted from the budget cuts: Social Security, federal pensions, and veteran’s benefits.  Social Security is properly called an entitlement program, because the beneficiaries have paid into it, and it is supported by payroll taxes and its own trust funds.  No one, repeat NO ONE, has “spent” money earmarked for the Social Security Trust Funds.  [SSA]

For those likely to run screaming into the sage brush about THE DEFICIT, we should note that reductions in military operations in Afghanistan will reduce that beast, and we should remember that the Affordable Care Act also has some deficit reduction benefits.  Cherry-picking selective think tank and editorial board musings notwithstanding, the  “CBO and JCT estimate that enacting both pieces of legislation—H.R. 3590 and the reconciliation proposal—would produce a net reduction in federal deficits of $143 billion over the 2010–2019 period as result of changes in direct spending and revenues.” [WH.gov]

The central question about the ‘fiscal cliff’ is whether or not  it becomes a stairway to heaven for the American middle class.  It’s a cliff if the Republican controlled Congress obstructs the negotiation process such that ALL tax breaks enacted during the Bush Administration expire — including those for those earning less than $250,000 annually.  It’s a stairway to heaven, if the Congress can agree to allow the tax breaks for millionaires and billionaires to expire, and retain the tax breaks for middle class families.

It’s a cliff if the Congress demands that automatic economic stabilizers like unemployment insurance support, nutrition programs, and other means by which we prevent highly volatile economic swings are cut in order to prevent the upper 1% of American income earners from having to pay any increased taxation.  It’s a stairway if the economic stabilizers can be themselves stabilized, perhaps even if in slightly reduced forms.

It’s a cliff if the tax breaks for 97% of American small businesses are lost in the interest of sparing the top 0.01% of American income earners any tax increases.  It’s a stairway if tax breaks for 97% of American small business owners are maintained, and the deficit is reduced by encouraging economic growth, and by taxing the top 1% more fairly.

The newly re-elected President had some words about this choice:

“President Obama said he refuses to accept any approach that isn’t balanced. “I’m not going to ask students and seniors and the middle class to pay down the entire deficit,” while higher earners get tax cuts, he said.

The President said he will ask Congress to pass a bill that will continue the tax cuts for the middle class, which he says will eliminate much of the uncertainty in the nation. After that point, he said, he and Congressional leaders can work on a compromise for the remaining tax cuts.” [CSPAN]

The President’s own words, on video (not yet embeddable) from CSPAN.

 

Simple Economics Made Complex: Capitalism vs. Financialism

The 2012 election at almost every level will be determined by turn out, and predicated on economics — micro and macro.  The problem for most voters is that we’re talking about two economies.  The economy of the financialists and the economy of the capitalists.  So far, the capitalists are winning.  Barely.

A capitalist believes that our economy works best when consumers have a choice of products from a variety of manufacturers or providers.  The economy expands as the demand for goods and services increases and providers seek to accommodate consumer needs.  A capitalist believes that capital should move from areas of surplus to areas of shortage, for small business lines of credit, for home loans, for student loans, for consumer credit, for business expansion, for commerce and marketing needs.

A financialist believes that the economy serves to accumulate wealth such that we create financial products and services which can be securitized and manipulated to create more wealth.   The financialists have been doing very well, thank you very much.  Not sure, then consider this chart:

That’s right, 93% of the increases in American income (wealth) in 2010 went to the top 1% of income owners in the U.S.  And the stock market has been doing quite well since 2009:

Of course, it’s not just stocks in which we find increased trading.  Other financial products, derivatives included, have been doing a thriving trade.

The traffic in derivatives hasn’t slowed much either.

So, while those whose income comes from the financial sector have been doing quite well, those in the “real” economy — the capitalist economy have been in something of a bind.

Note, Governor Romney’s complaint that the current economy means “stagnating” wages for middle class Americans he’s omitting a crucial bit of information:  When economic policies favor the accumulation of wealth in the coffers of the o.01%, it shouldn’t be the least bit surprising that middle class Americans aren’t seeing the increases in their bank accounts.

In short, the Financialists (and their presidential candidate Governor Mitt Romney) having secured a deregulated financial sector which rewards them disproportionately, are loathe to adopt any policy which might require them to pay more in taxes or to comply with any regulations on the financial product manipulation which constitutes their wealth accumulation strategy.

It’s up to the Capitalists in the 2012 election to secure a level playing field, or at least a more level field, one in which INVESTMENT is rewarded before SPECULATION.   One in which the economic reality of supply and demand means the supply and demand in REAL markets — not in esoteric “markets” for artificially concocted risk management products.

Let’s hope the Capitalists win.

Nevada Political Notes

Nevada Political News:  “Organizations step up final push to get Hispanics to the polls,” Las Vegas Sun.  Plans are still on for President Obama to speak in North Las Vegas (info here) if recovery activities after Sandy permit. The race for the middle in Nevada Senate District 5; Kirk may call himself a pragmatist — if so, then why the attack on collective bargaining, which brings to mind the antics of the GOP in Wisconsin and Ohio?  Woodhouse (D) is the actual moderate in this race.

It should be remembered in Nevada District 4 that the Republican in the race has touched the third rail of Nevada politics — advocating that the Silver State become the nation’s nuclear trash dump.

Governor Sandoval may be talking nationally, but his money’s on legislative races. [RGJ] *Note that one of Sandoval’s favorites is ALEC supporter Greg Brower (R-Reno).   Senator (by appointment only) Dean Heller has received the endorsement of noted advocate of scrambling up church and state, and of pushing the  USCOCB’s version of women’s health — Rick Santorum.

Nationally, 538 shows President Obama up by 3.2% in statewide polling.  The same source reports Senator Dean Heller leading Democratic challenger Shelley Berkley by 3.6 to 4.4 depending on the measurement used.

The astroturf follies are alive and well in Nevada, and it’s not just down south.  Northern Nevada voters have been getting pro-Heller fliers in the mail from Safari International, the gun lobby, the Idaho Republican Central Committee, and Karl Rove’s Crossroads Super PAC, along with robo-calls from “Jack” and “Sandy” to get out the vote for the Republicans.  Since the fliers and calls are broadcast generally a person could wonder what happened to that carefully targeted GOP “Voter Vault” advertizing effort of recent memory — but why bother when there’s plenty of PAC money flooding the process?

Line of the Week: “Reid repeatedly said he has “nothing personal” against Romney, but nonetheless delivered a harsh political attack. “He’s multiple choice on everything,” Reid said. “He doesn’t stand for anything. He’s the plastic man of American politics.”   Yes, the “Plastic Man” of American Politics.  Yes, “plastic” in the sense of be capable of being molded or modeled, and “plastic” in the sense of being synthetic or processed materials that are mostly thermoplastic or thermosetting polymers of high molecular weight. AKA artificial.

The Sin City Siren is decked out for Halloween, complete with Creature Features which describe the Jekyll and Hyde (plastic) capacities of one Willard Mitt Romney.

Read the labels!  About all a person needs to know about the trade and economic policies of the Romney and the Obama campaigns is illustrated by Vegas Jessie who helpfully posts pictures of the labels on campaign gear. Guess whose is made in China?  Blue Lyon posts the GOP “Rape Advisory Chart,” along with some very compelling reasons why this election matters.

There’s another good graphic from On My Blotter concerning why a middle class tax cut is a sound economic idea.

Wynn Joins the P.I.T.Y Party

Poor Steve Wynn — the Nevada gambling mogul isn’t getting the respect he deserves! To hear him tell it:

“I’ll be damned if I want him (President Obama) to lecture me about small business and jobs,” he told Ralston. “I’m a job creator. Guys like me are job creators and we don’t like having a bull’s-eye put on our backs.”

“I can’t stand the idea of being demagogued, that is being put down, by a president who hasn’t created any jobs and doesn’t even understand how the economy works,” he added.”  [LVSun]

Stephen Colbert had some well chosen words for this attitude, and offered a solution — the formation of the Protecting Industry Titans and Yachtsmen, or the P.I.T.Y. Party.  Evidently, Mr. Wynn is seeking membership.

The moguls like Wynn  certainly are getting touchy these days.   Mr. Wynn is sounding ever so much like hedge fund manager Leon Cooperman, from Freeland’s article, and Colbert’s satire:

Cooperman argued that Obama has needlessly antagonized the rich by making comments that are hostile to economic success. The prose, rife with compound metaphors and righteous indignation, is a good reflection of Cooperman’s table talk. “The divisive, polarizing tone of your rhetoric is cleaving a widening gulf, at this point as much visceral as philosophical, between the downtrodden and those best positioned to help them,” Cooperman wrote. “It is a gulf that is at once counterproductive and freighted with dangerous historical precedents.”  [New Yorker]

Excuse me for a moment — as a member of the 53% who did pay federal income tax in 2011, but whose vehicles must do without their own elevators, I have to ask: When did getting your itty-bitty feelings hurt preclude you from making sound business decisions in your own interest?

First, what happened in the recent recovery which might have exacerbated the sense that the 0.1% were raking in far more than might be expected for any small element in the overall economy?

Chrystia Freeland captured the trends in two paragraphs back in 2011:

“Before the recession, it was relatively easy to ignore this concentration of wealth among an elite few. The wondrous inventions of the modern economy—Google, Amazon, the iPhone—broadly improved the lives of middle-class consumers, even as they made a tiny subset of entrepreneurs hugely wealthy. And the less-wondrous inventions—particularly the explosion of subprime credit—helped mask the rise of income inequality for many of those whose earnings were stagnant.

But the financial crisis and its long, dismal aftermath have changed all that. A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble.”  [Atlantic]

BUT, don’t mention any of this or they’ll get their feelings hurt?

Note that both Cooperman and Wynn perceive themselves as members of the focus group formulated Job Creators category.  If one remains hermetically sealed in one’s “rarefied economic bubble,” then this might be understandable.

Thus within the confined realm of their “narrowly self-interested motives,” excluding the needs of any around them, Wynn and Cooperman are free to indulge in the level of self pity necessary to excuse their opposition to paying a mite more in taxes to support the interests of any others. Or, that other 99%.

Secondly, “it’s all about me,” isn’t necessarily a good philosophical foundation for business practices.  Note the arrogance of Wynn’s articulation, “Guys like me are job creators and we don’t like having a bull’s-eye put on our backs.”    Mr. Wynn should know better.  What happened to his business in the wake of the Housing Bubble collapse?

Visitor volume, reported as 54,267,549 for Nevada in 2008 dropped to 49,731,901 in 2009.  It dropped to 49,684,782 in 2010 as the Recession deepened.  [NVRA]  Airport travel, convention attendance, visitor volume, all those statistics Nevadans watch carefully were down.  People de-leveraging from household debt, and especially those who lost jobs, don’t answer Nevada’s siren songs.  Those people are included in a group commonly called CUSTOMERS.

If too many customers are too financially strapped to play with our fancy lights and whistles money grabbing machines or to play at our flashy green tables then Mr. Wynn’s operations decline — back to the bad old days of the Bingo Parlor in Maryland?

Who doesn’t understand how the economy works?

If those who consider themselves the Elite excavate their own custom designed bunkers in which only their economic needs really count, and bombard the political system with their avaricious ideology, then it won’t be too long until the customers they require to sustain their operations evaporate.

Income inequality trends were in place prior to the Recession, as illustrated by this graphic from the Congressional Budget Office:

Income increased by 275% for those in the highest quintile, by 65% for the next highest group, by just under 40% for the next 60% of the income earners, and 18% for those in the bottom quintile. [CBO]

Notice that since 1982 the percentage of wealth accumulating to the top 1% of American income earners has increased, and increased rather dramatically since 2002.

Now it’s time to ask the obvious question:  If wealth accumulation trends continue, and it appears that they have during the recovery period –

“In 2010, average real income per family grew by 2.3% (Table 1) but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover. National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly.”  [Saez pdf] (emphasis added)

– then how do the ultra-rich intend to keep their businesses profitable?  Especially in Mr. Wynn’s case, the casinos being essentially entertainment retailing?

One of the time honored ways to determine if a business is in trouble is to see if it is gaining a larger share in a declining market.   Obviously, if a declining number of people have the financial capacity to spend their discretionary income on entertainment, then this doesn’t bode well for entertainment establishments.   Pursuing economic and taxation policies which precipitate further contraction in wealth accumulation among a majority of the population isn’t conducive to creating an expanding market for anyone’s products.  The President appears to have grasp this point, Mr. Wynn and Mr. Adelson perhaps not so much.

Job Creators

Moguls do not create jobs.  Moguls, and other businesses owners, hire people.   If they have a lick of sense they do not hire anyone they don’t need.  Another time honored rule of personnel management says:  If you don’t need Cousin Harry don’t hire him.  Nothing will drive any business into the ground faster than an inflated payroll — especially when it threatens to morph into the  family tree.

For the umpteenth millionth time — staffing levels should only be increased when the current employees cannot make or provide the goods and services demanded by the customers, with an acceptable level of customer service.

Demand is what creates jobs.  For all the self-congratulatory posturing of the economic elite, if no one is buying the vehicles, purchasing the furniture, or spending a night with the slot machines — there will be less demand and with less demand comes the natural restrictions on hiring.  The old Supply Side Hoax was never more than an artificial justification for greed.  It certainly isn’t the way to keep an economy growing.  The President understands this, some of the touchy moguls not so much.

Perhaps someone would like to procure one of Mr. Colbert’s Million Dollar Certificates, suitable for framing, telling Mr. Wynn that at least one person likes him?

Graphs, Charts in The Fact Based Universe

There must be an alternate universe somewhere in which the following trends do not apply.  However, these are what they are.  The unemployment rate is down.  It’s interesting that while the unemployment rate was at least 8% the Republicans had no problem whatsoever vouching for the accuracy of the BLS reports, but once the number fell below their threshold for advertising purposes, then the numbers were questionable?  The main point isn’t the specific percentage of unemployed but the trend — which certainly looks better than when the deregulation fueled Recession was in full bloom.

It’s also interesting to note that there must be some other rationale for Gloom and Doom from the Wall Street crowd, because the stock market indices have been going up during the Obama Administration.

If an index of 500 stocks isn’t enough, why not take a look at an index of 5000?  Here’s the Wilshire 5000 total market index.  If new regulations on banks and their derivative trading is so deleterious to our financial health, then why these rather robust numbers?

Retail sales and food service numbers are looking better too, and the banks are doing well also.

Retail sales, food service, banks doing well. The stock market is back to trending upward, and the unemployment figures aren’t climbing up as they were during the Recession — So, are we better off than we were four years ago?  And, why did the Romney Campaign stop asking that question?

Reboots, Revisions, and Reality

President Obama addressed a rally in Las Vegas yesterday [LVSun] including the stump speech line: “In fairness, my opponent’s got a plan, too,” Obama said. “They think that somehow you can lower our deficits by spending another $5 trillion on tax cuts for the wealthy. No matter how many times they try to reboot their campaign and try to explain it, they can’t.”  It’s tempting to conjecture that the Romney campaign has rebooted more often than Microsoft has issued new versions of its operating systems.

One problem is simply that Trickle Down, or Supply Side, Economics is a hoax.  [DB] [Krugman] [Stewart] There’s no way to reboot, re-wrap, re-state, or re-launch an economic program predicated upon a fundamentally flawed economic proposition.  One with its origins in the 1970s:

A group of thinkers, including the economists Arthur Laffer and Robert Mundell and the journalist Jude Wanniski, became convinced that lower taxes and deregulation were the answer. If you lowered taxes, the thinking went, people would take the extra money and invest it in new enterprises, getting the economy started again. [The New Yorker]

Nor did the initial proponents envision the misuse of the theoretical framework they propounded as a foil for reducing government services to its population:

Laffer, whose inspired napkin scrawl was most responsible for popularizing supply side, warned its followers not to look to the theory as an all-encompassing outlook—economic or ethical. “A problem I have with people who follow us,” he told Brooks, “is that they don’t recognize the theory’s shortcomings. They go too far. I don’t think you cut Social Security or unemployment insurance in a down economy. To do that is—well, immoral.” [The New Yorker]

Since the notion that tax cuts and deregulation work to increase revenue is a proposition thoroughly debunked [EPI]; and, since tax cuts and deregulation aren’t effective in creating a stable economy, witness the Housing Bubble collapse in 2007-2008; and since no causal relationship can be demonstrated between tax cuts and employment.  [Bernstein] Then the only straw left in the stack is to decry the Deficit and Debt in order to justify a program predicated on lowering taxes for the wealthy.   It’s both a last straw and a thin reed.

Little wonder vice-presidential candidate Rep. Paul Ryan (R-WI) didn’t want to stand on it when he told Fox News he didn’t have time to explain their tax plan. [TP]  A person could spend a goodly part of the next millennium to attempt an explication of in the inexplicable and still not get the job done. “Revenue neutral” only works when its acknowledged that the money has to come from somewhere.  If taxes are lowered on corporations, wealth management executives, and wealthy individuals then the other side of the equation has to be addressed in the form of higher taxes on everyone else, draconian cuts to public services, or both.   This shouldn’t take much time to explain — any 8th grader in a pre-Algebra class can tell you both sides of an equation must have the same value.

A second problem is that de-regulation, especially in the financial sector, is an invitation to economic instability.  We tried that.  Combining high speed electronic trading with flawed risk management models with the securitization of assets with the creation of synthetic derivative instruments along with third party bets on asset based securities and those derivatives … created the financialist’s flash crashes and the Wall Street Casino.   A volatile financial market is a financialist’s dream — full of opportunities to make big bucks in the margins; it is a Main Street nightmare.

Even the tepid provisions of the Dodd-Frank Act, seeking to re-regulate the derivatives markets, to monitor the liquidity and solvency of the major banks, to require banks to development ‘living wills’ in the case of serious trouble, to impose rational orderly liquidation of banks if they fail — are too much for the confirmed financialists.  The question becomes how generously will financialist Governor Willard Mitt Romney embrace them.

In May 2012, Governor Romney pledged to repeal the Dodd Frank Act, but offered no specifics. [Boston.com] He was still hewing to that position as of May 26, 2012. [TDB] By August 17, 2012 Governor Romney was calling for “transparency and common sense regulations,” while his running mate was publicly supporting a reversion to the Glass-Steagall Act which prohibited banks from indulging in propriety trading. [Politico]  As of September 6, 2012 Bloomberg news reported:

“Mitt Romney has pledged to repeal the Dodd-Frank act. That’s not really going to happen—and that’s just fine with Wall Street. Instead, President Romney would likely try to give the financial industry something it wants more: a diluted financial reform law that would relax restrictions on some of its most profitable—and riskiest—investments but maintain enough government oversight to give the banks cover.”

Somehow, the idea that our government should be primarily concerned with “giving the banks cover,” doesn’t seem to be a particularly good campaign talking point while speaking to middle America.  The Etch-A-Sketch could move into over-drive?

Meanwhile back in the real American economy — the growth of which  President Obama would like to sustain –

Shows steady growth in the last year in the Real Gross Domestic Product

An economy with some good news for Main Street — retail sales and food service are trending into positive territory –

Shows continued improvement in private sector employment:

President Obama may be campaigning in Nevada’s largest urban area, but the economic message is right out of the First Rule of Ranch Management — If it ain’t broke, don’t fix it.

The Mortgage Modification Morass

President Obama, currently in southern Nevada — one of the unfortunate centers of the foreclosure problems in the wake of the Housing Bubble Collapse — would like to promote more mortgage modification to assist homeowners who are having difficulty paying their mortgages.  [LVSun]

Unfortunately the same problem that got us into this mess (securitization) is precisely the source of the problem getting out of it (securitization).

Why, for example, would any financial firm ever opt to promote foreclosures if there were any possibility the homeowners could be assisted to fulfill their mortgage obligations with a little modifications?

Well, if the firm is a mortgage servicing company then there are at least four reasons (shown in the graphic above) which make it more profitable for the foreclosure process to continue, than for a mortgage modification to be negotiated.  [Credit Write Downs] [AllmandLaw]

“Obama focused his address on the need for Congress to approve his housing market plan to assist “responsible homeowners” that he presented in February. The plan would allow those homeowners a chance at a lower rate, saving them about $3,000 a year.” [LVSun] (link added)

Or, a bit more specifically:

“Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac (i.e. GSE-insured loans) will have access to streamlined refinancing through the GSEs. Borrowers with standard non-GSE loans will have access to refinancing through a new program run through the FHA. For responsible borrowers, there will be no more barriers and no more excuses.” [WH]

There’s another fly in this ointment.   While the President’s proposal is certainly better than the present position of the Congress in which Doing Nothing seems always preferable to doing anything,  the plan really doesn’t go far enough.  Congressional Republicans have been enthusiastic about opposing what little has been done (HAMP) on the grounds that the underfunded and limited program hasn’t been effective — as underfunded and limited programs often are in the face of massive problems.  A short list of problem creators:

The Foot Draggers: Those who (a)  invested heavily in mortgaged based securities during the Housing Bubble, especially in the upper tranches, have little incentive to support mortgage modification if any hope remains that they’ll get their share IF they hold out.  The MBS market, recently viewed though it was some small fuzzy brown thing walking on a dinner plate, is now “coming back.” [ChiTrib] (b) There is also the MERC Mess.  Investment companies, finding the efforts of local county recorders entirely too slow to satisfy the bankers’ voracious appetite for more mortgages more swiftly, created their own electronic recording system only to see it collapse in a heap of unresolved paper work which leaves homeowners wondering who owns what.  (c) Mortgage service companies who want to protect their margins. “We find that loss mitigation is costly for servicers, in large part because servicers currently lack adequate staff and technology; unfortunately, servicers have few financial incentives to expand capacity.” [ClFed]

The Inch Worms:  The foreclosure problem is a national issue, as illustrated by Realty Trac’s map shown below:

Click on the map to go to Realty Trac for more information.  About 93% of those facing foreclosure are single family homeowners [FDIC pdf] — not the “flippers” so often blamed in some conservative blogs.  Secondly, most of the mortgages in really serious trouble are those notorious adjustable rate monsters with reset rates designed to make homeowners refinance (thus stuffing the mortgage finance industry with new revenue) rather than pay off the existing mortgage.

Any plan which allows the mortgage sector to renegotiate loan by loan day by day inch by inch is insufficient to solve the problems.  Banks or other mortgage holders need to be required to deal with categories of mortgages not individual mortgage holders.   No doubt the bankers assault on this idea on Capitol Hill would be roughly analogous to the D-Day landings in Normandy.

The Principals:  Bankers and the financial sector recoil in horror at any proposal calling for them to take any cuts in the principal of a mortgage.  This is a bit hard to stomach since these were the same little Wall Street Wizards who paid zilch attention to the types of mortgages being sold to unsuspecting, and quite often unsophisticated borrowers, all in the interest of creating fodder for their CDOs and Synthetic CDOs… There are some real estate markets, and Nevada may well be one of them, in which the foreclosure problem will not be significantly mitigated until some banks take a cram down.

Calendar Watchers:  Forbearance is a lovely word.  The White House proposal addresses this as follows:

 ”Move by Major Servicers to Use 12-Month Forbearance as Default Approach: Key servicers have also followed the Administration’s lead in extending forbearance for the unemployed to a year. Wells Fargo and Bank of America, two of the nation’s largest lenders, have begun to offer this longer period to customers whose loans they hold on their own books, recognizing that it is not just helpful for these struggling families, but it makes good economic sense for their lenders as well.”  [WH]

12 MONTHS?  And, notice that the Lady Bountiful Forbearance demonstrated by Wells Fargo and Bank of America is on loans which they hold on their own books.   First, why only 12 months? Why not just get rid of the resets on those nefarious ARM mortgages and turn them into good old fashioned fixed rate mortgages?  Or, why not allow 24 months or 36 months for ‘forbearance?’

And…not to bring up another sticky point… What about those mortgages which are on someone’s books somewhere that isn’t a bank?  Unless, of course, the argument is that if BoA and Wells-Fargo can do it, why then can’t some mortgage servicer?  At which point we revert to the dis-incentives for servicers to modify much of anything.

Perhaps the best that can be said of the President’s proposal is that it does try to do something, and it does answer the Grover Norquist mailer sent to Nevada households saying that the President “promised” to solve the foreclosure crisis — which no, he didn’t.  And, in the face of extraordinary opposition from bankers, mortgage servicers, bondholders, shareholders, investment houses, and the attendant army of lobbyists thereof, it might be the best option political practicable at the moment.  It’s certainly better than Governor Romney’s suggestion that we simply let things “bottom out.”

There’s one more trap coming from the financialists — any good news concerning the housing market becomes fodder for the argument that we really don’t need to do anything because “the market is coming back.”   Tell that to the underwater, out of luck, and nearly out of time, homeowners in one of those states shown in deep red on the RealtyTrac map.

Chalkboard Talk: Obama – Romney and Medicare

Sources and References:  An Economic Sense, “Romney’s and Ryan’s Confusion on Basic Accounting: Medicare Costs,” August 16, 2012.   The Hill, “Gibbs: Ryan should thank Obama for strengthening Medicare,” August 19, 2012.  Christian Science Monitor, “Romney says Obama robbed Medicare,” August 16, 2012.  New York Times, “Patients would pay more if Romney restores Medicare savings,” August 21, 2012.  Washington Post, “Van Hollen: The Romney Ryan Plan Medicare Plan would have immediate cost increases for Seniors,” August 18, 2012.  Kaiser Health News, “CBO: Seniors Would Pay Much More For Medicare Under Ryan Plan,” April 5, 2011.   Washington Post, “Paul Ryan’s budget keeps Obama’s Medicare cuts – full stop,” August 14, 2012.

The Vague Factor: “

On “60 Minutes,” Romney said: “I don’t want any change to Medicare for current seniors or for those that are nearing retirement. So the plan stays exactly the same.”

Still, it’s unclear if that means a guarantee of no future cuts for those remaining in traditional Medicare, or if Romney is merely saying that the overall design of the program will stay the same.”

Good question, especially since Governor Romney has managed to turn vague political rhetoric into a form of modern performance art.

The Right Response

Nevada Senator Harry Reid (D) issued this statement in regard to the attacks on American consulate personnel in Libya:

I was deeply disturbed and saddened to learn of the deaths of Ambassador Chris Stevens and three other American personnel in an attack on the U.S. Consulate in Libya. I join President Obama in condemning these senseless acts of violence. And my thoughts are with the families of those who were killed in this horrific attack.
It is too often forgotten that American diplomats risk their lives on a daily basis. Our diplomatic corps is filled with admirable and dedicated public servants. And the four Americans who lost their lives yesterday exemplified the courage and sacrifice that happens every day at diplomatic posts across the globe.

I have traveled to many of America’s embassies abroad, and I have always been impressed by and grateful for the leadership and commitment of America’s ambassadors and State Department personnel. Ambassador Stevens was a career Foreign Service officer and a former Peace Corps volunteer, who spent his life giving of his time and his talents to promote democracy and American values. I support President Obama’s directive to increase security at our diplomatic posts around the world, and to provide whatever resources necessary to keep our personnel in Libya safe. And I will continue to the monitor the situation as we learn more about these terrible events.

This is what diplomacy sounds like.   This is also what someone sounds like who has been reading the foreign policy and intelligence briefings.  Here’s why:

1. Condemnation is a strong word in the diplomatic world.  It is not used lightly.  To condemn an action is to place it beyond the realm of negotiation.  However, it must be use carefully so as to allow the party creating the injury to respond in diplomatic terms without necessarily having to resort to military action.

The Administration and State Department achieved that.  The proof is in the response of the Libyan government – what we would want to hear is precisely what the Libyan government conveyed: “President Magariaf of Libya expressed his condemnation and condolences and pledged his government’s full cooperation.”  [TDS]

The Libyan President responds with an equal measure of outrage, offers his condolences on behalf of his nation, and most importantly offers his nation’s “full cooperation.”   The modifier is also significant.  “Full” is also a meaningful word. The Libyan President could have stopped with the condolences — with all the implications that might have inferred — but he didn’t, he went that last step and offered all the services his new government can muster to resolve the issues peacefully.

The public isn’t privy to the policy and intelligence briefings concerning the new Libyan government but we can reasonably surmise they are not far from the public assessment offered by the U.S. State Department:

“Libya faces the challenges of building democratic institutions, protecting the universal rights of all Libyans, promoting accountable and honest government, rebuilding its economy, and establishing security throughout the country. The United States has a strategic interest in a stable and prosperous Libya, and is supporting Libya’s democratic transition in cooperation with the UN and other international partners.”

Note that the democratic institutions are not yet fully functional, the economy is not yet fully stabilized, and “establishing security throughout the country” is  still a work in progress.   This leads to the second reason why briefings and intelligence analysis and cool heads matter.

#2.  Attacks on American and American interests are no longer primarily a function of state actors.  They may not even be the result of client state activities such as we witnessed during the Cold War.  The term asymmetrical threat is a polite euphemism for “Who Knows Who’s Going To Do What, Much Less When?”   Senator Reid is correct — it take some courage to take a diplomatic posting these days because an incident which outrages some group in one country  could result in an attack on an American embassy anywhere.  For example, in May 1986 “The Japanese Red Army fired on the Japanese, Canadian, and U.S. embassies. The Red Army’s goals included overthrowing the Japanese government and starting a world revolution.” [IBT]  A splinter group from Al Qaeda was responsible for the September 13, 2001 attack on the U.S. Embassy in Paris, France. [IBT]

Because the attacks are “asymmetrical,” because they are not state sponsored, and because they aren’t even organizationally rational, it becomes all the more important to be as fully briefed as possible with the understanding that those briefing are as informative as the host government is cooperative.

#3.   Here’s what happens when the time isn’t taken to assess a diplomatic situation carefully before speaking:

Romney: “I’m outraged by the attacks on American diplomatic missions in Libya and Egypt and by the death of an American consulate worker in Benghazi,” Romney said. “It’s disgraceful that the Obama Administration’s first response was not to condemn attacks on our diplomatic missions, but to sympathize with those who waged the attacks.” [WaPo]

The first, and obvious problem, is that the statement came out before Ambassador Stevens death was confirmed and the family was notified.  But, there are diplomatic issues as well.

Yes, indeed, the attacks were outrageous, but notice that the Romney statement fails to differentiate between official State Department statements and a release by the Cairo Embassy well in advance of the protests which sought to explain that the motion picture so offensive to some Muslims was not indicative of American attitudes toward members of the Islamic faith.  A point raised by President George Bush after the September 11, 2001 attacks and maintained by his successor.  Both the Bush and Obama Departments of State repeatedly sought to sustain cooperation with Middle Eastern, African, and Asian nations by emphasizing that the American government  dislikes terrorists but does not vilify all Muslims.   The previous point should be repeated: Those briefing are as informative as the host government is cooperative.

The second is that there is no message.   Senator Reid points out that the U.S. will be stepping up mission security, and that “we” will be monitoring the situation.  That “we” could infer a wide variety of agencies.   Secretary Clinton said:

“But we must be clear-eyed, even in our grief. This was an attack by a small and savage group – not the people or Government of Libya. Everywhere Chris and his team went in Libya, in a country scarred by war and tyranny, they were hailed as friends and partners. And when the attack came yesterday, Libyans stood and fought to defend our post. Some were wounded. Libyans carried Chris’ body to the hospital, and they helped rescue and lead other Americans to safety. And last night, when I spoke with the President of Libya, he strongly condemned the violence and pledged every effort to protect our people and pursue those responsible.”

The friendship between our countries, borne out of shared struggle, will not be another casualty of this attack. A free and stable Libya is still in America’s interest and security, and we will not turn our back on that, nor will we rest until those responsible for these attacks are found and brought to justice. We are working closely with the Libyan authorities to move swiftly and surely. We are also working with partners around the world to safeguard other American embassies, consulates, and citizens.”  [emphasis added]

Secretary Clinton affirms the relationship with Libya, thanks them for their cooperation, and announces there will be further discussions of embassy security with other host nations.   Messages sent.   Unfortunately, the only initial message from Governor Romney is that he is angry and doesn’t think the President is doing a good job.  It doesn’t take diplomatic credentials to figure that out, but it also doesn’t give our friends and enemies any hints about how he might address similar issues in subsequent talks with them.

There was a message in the President’s remarks: “We’re working with the government of Libya to secure our diplomats,” he said. “I’ve also directed my Administration to increase our security at diplomatic posts around the world. And make no mistake, we will work with the Libyan government to bring to justice the killers who attacked our people.” (emphasis added)  The collaborative nature of the activities is on notice.  The United States has received the assurance of the Libyan government that it will “fully” cooperate, and will act in concert with the Libyan government to secure what we want — bringing the perpetrators of the attack to justice.

And, while the U.S. works with the Libyan government Americans may learn that there are 22 shabiyats or districts in Libya, and four significant political parties.  However, the most important word is “with” — we will not act on them, or independently of them, but WITH them — sending the message that we accept them as a full partner and equal on the world’s diplomatic stage.  The right responses help  send the right messages.