Saturday, September 28, 2013

Getting To Blink Or Blame

I continue to try to understand what the Republicans are trying to accomplish when it comes to Obamacare.

They clearly think it is bad law.  It will be detrimental to our health care system and bad for our economy and our country.  For every positive aspect in the law there are hundreds of negatives.  It has "train wreck" written all over it.

However, the Republicans appear to have been burned so many times by the promise and allure of government programs that the Democrats sell to the public (of course, someone else always pays the bill), they don't really believe it.  The only thing they really believe is that this law will create more government, more dependency and more Democrats in the future.

If they are correct, we have reached a sad state of affairs.  I prefer to believe that the majority of people in this country still have some common sense.  My advice to the Republicans is to fashion their strategy over the next few days to more common sense arguments.

Negotiations are won by playing up your advantages and taking advantage of the other side's weakness.  It is fairly simple.  However, you need to really understand what these advantages and disadvantages are.

Let's look at the state of play in the Continuing Resolution negotiations.

The federal government does not have a budget for the new fiscal year that begins on Tuesday, October 1.  It needs Congress to pass, and the President to sign, a continuing resolution to fund the government by that time or there will be a government shutdown.

Although all essential functions of government will continue, there will be enough disruption of government services, that is assumed that the public will not be happy.  Parks will close, passports will be delayed and the good people of the will lose their patience with the ineptitude of those in Washington, D.C.

Who is to blame if this occurs?

That is the first question to ask and answer when assessing advantages and disadvantages.

It really comes down to who appears to have been more reasonable to the public in their negotiating position before negotiations broke down.

As it has stood up until now, the Republicans look more unreasonable in asking for the defunding of Obamacare.  It simply looks to common sense folks that the Republicans are poor losers.  They lost in 2008 when healthcare reform was an issue in the election, they lost in the Supreme Court and they lost again in the 2012 election.  They put themselves in a terrible negotiating position by pressing the defund strategy.

I had written previously that this was flawed strategy and suggested a stronger and more defensible strategy in "There Is A Better Way To Defund Obamacare."  My argument was that the Republicans should merely ask that Obamacare be funded to the exact level that it was supposed to be when the law was passed.  After all, this is a budget negotiation, what is more reasonable than asking that the law live within its original budget projection?  This would mean that $27 billion would need to be cut from Obamacare's costs for 2014.  It also happens to be almost the exact projected costs of the individual subsidies in the law.  Without those subsidies, Obamacare cannot create any dependency.

If Obama did not want to agree, he was once again a budget buster.  If the government shut down, he was the one that caused it by being unreasonable.  After all, the Republicans only asked him live within the original cost projections of his law.

Of course, that opportunity was missed.  What can the Republicans do now?

Their most important priority is putting President Obama at a disadvantage.

That will not be accomplished by asking for an overall delay of Obamacare for one year.  My opinion is that this actually plays into Obama's hands.  Obama might actually welcome this deal in that it appears that Obamacare is faced with innumerable implementation problems.  By taking the deal, Obama makes himself look magnanimous while also buying an additional year to insure that the technology and other implementation issues can be fixed.  When it does go live a year from now, it will all look like much ado about nothing right before the 2014 elections.

Why would the Republicans want to give Obama another year to figure this out?

A better strategy is to look at Obama's weaknesses and take advantage of those in the negotiations.

First, Obamacare is certain to have a number of implementation and technology issues.  The large number of waivers and extensions (in contravention of the clear letter of the law) is clear evidence of that.  Republicans should be pushing for the overall law to take effect as scheduled to see this play out.

If Obamacare gets off to a rough start with the public due to chaos and confusion with the health exchanges this could signal deep problems for the program going forward. It is hard to recover from poor first impressions, especially if media attention picks up on it. A compliant Obama-friendly media is not likely to be eager to play up any problems. However, they may not be able to avoid it. If they jump on the bandwagon if things go poorly it will be difficult to turn around the public's perception of the program.

Second, instead of a one-year delay in the entire law the Republicans should only be asking only for a one-year delay in the individual mandate.  This is entirely justified in that Obama has already provided a one-year delay in the employer mandate.  Asking for a one-year delay of the entire law is not much different that trying to defund.  It looks like sour grapes to most people. However, asking for a one-year delay in the individual mandate is a simple question of fairness and equity.  It is a common sense request that would be hard for Obama to defend himself against.  You gave it to employers why not to individuals?  That is not fair!

Of course, he knows that without the individual mandate the entire Obamacare structure will fall apart.  Those with expensive health conditions will enroll.  The young and healthy will have no incentive to do so.  This will mean that health insurance rates for next year will skyrocket.  And those rates will be in the news right before the 2014 mid-term elections.  This is exactly what the Republicans need to occur to build the constituency to repeal the law.

An additional argument for the delay of the individual mandate is that when he ran against Hillary Clinton in the 2008 primaries Obama argued against the individual mandate that Clinton had as part of her health care plan.  It is time to remind the American public of this again.  Why is he so insistent on it now when he was against it then?  They should also be reminded that in 2006 he was against an increase in the debt ceiling limit.  Do you see a pattern here?

Third, the Republicans should insist that the subsidies that are being provided to Congress and their staffs to offset the cost of healthcare insurance in the exchanges should be prohibited.  Of course, this is actually the way the law is written but the Obama administration has simply ignored the law and ruled that Congress will receive a subsidy to pay 72% of the cost regardless of income.  

This is an extraordinary weakness for Obama in that he is providing benefits to those in D.C. that are simply not available to the average American.  It doesn't get much better than this in a common sense position that the American people will understand.  Of course, to do that they are also voting against their own self-interest.  They will be taking money out of their own pockets and from their staffs.  However, they were not elected to represent themselves, they were elected to represent us.  It is time to show us they do.

In summary...

Forget about any one-year delay of Obamacare in return for the passage of the Continuing Resolution.  

The Republicans should merely ask for a one-year delay in the individual mandate and that Congress and the White House participate in Obamacare in identical fashion as everyone else.

If they do this, the Republicans will be talking common sense.  The Republicans are on the high ground with this strategy.  Obama will be on defense.

If the government shuts down who is the public going to blame?

My bet is the guy who gave a one year delay to businesses but would not do so for individuals and the guy who wanted to give a special break to his Washington friends that he was not willing to give to the average American.

If I am a Republican and I use this strategy, I would then sit back and let Obama make his choice.  Does he really want to defend the indefensible?

The way I look at it, anything that happens from that point forward means I win.  Obama blinks or ends up with a lot of blame.  The government is starved of funds or Obamacare is starved of oxygen it needs to survive. I can live with either result.  Can Obama and the Democrats say the same?

Tuesday, September 24, 2013

Safe Haven

I watched the movie, Safe Haven, over the weekend.  Based on the book by Nicholas Sparks, the movie stars Josh Duhamel and Julianne Hough, in a tale about a young woman with a mysterious past who starts a new life in a small coastal town in North Carolina and becomes attracted to a young widower with two small children.  He helps her confront her past and find comfort in the "safe haven" of his love and in her life in the small town.

The "safe haven" for most savers and investors over the last 30 years has been the money market fund. The money market fund is an open-ended mutual fund that invests in short-term debt securities, short-term t-bills and commercial paper.  MMF's were not designed to provide a large yield but were usually attractive compared to bank CD's and savings accounts as they provided a higher yield than a savings account and more liquidity as compared to a CD.

To provide some perspective, there is over $2.5 trillion invested today in MMF's.  This is more than the sum of checkable and demand deposits at commercial banks ($2.3 trillion per Federal Reserve).

MMF's are also designed, unlike most other financial instruments, to provide a stable value of $1 per share so that the fund owner will not worry about the loss of capital.  This feature has also made MMF's a popular capital preservation vehicle for investors.

However, unlike deposits in banks with FDIC backing, MMF's have no deposit or fund guarantee.  If the underlying investments in the mutual fund go bad, it is possible to "break the buck" meaning that you do not get the $1 back that you invested originally.  This has only happened a handful of times since the inception of MMF's but it could have been a serious problem in the financial crisis of 2008 if the U.S. Department of Treasury had not stepped in after the Lehman Brothers bankruptcy to "guarantee" the $1 net asset value in participating MMF's.

MMF's position as the "safe haven" for investors may change in the future as the SEC has proposed that institutional MMF's might need to move to a floating or variable net asset value.  This would end the traditional $1 stable NAV for these funds.  Alternatively, MMF's could continue to operate with the $1NAV but they would need to place restrictions on the fund to control for heavy redemptions and potential "runs on the fund".

These new rules would be designed to reduce the systemic risk in MMF's for investors and the financial system. You can read all about these proposals and the potential effects on 401(k) plans in this article by PIMCO.

A major point in the article is what is reflected in this chart showing nominal (actual) and real (after inflation) of MMF's since 2003.  It shows just how damaging the low interest rate environment has been to savers.  The reality is that MMF's may be perceived to be a "safe haven" but they have quietly been eroding the real wealth of savers by about 2% per year over the last decade.

Credit: Franklin Templeton 

Compare these rates to the yields on MMF's from 1992-2004 where nominal rates were more typically in the 3-6% range.

Compare the difference to the saver between a 4% yield and a 0.02% yield.  $100,000 in a money market mutual fund provides $4,000 of yearly income to the saver.  At .02%, it provides $20!  A $2,000 real return becomes a loss of $2,000 after taking account of inflation.

Based on the estimated $2.5 trillion invested in MMF's right now, the loss of interest income for savers in the aggregate amounts to around $100 billion this year alone.  If you take all of the interest income on savings-bank savings, CD's and bonds, you are talking about $400 million or more. That is a lot of money being taken out of the pockets of savers.

To put that in perspective, the FICA payroll tax holiday that was in place a year or so ago carried a cost of $120 billion per year.  That was supposedly done to put more money in people's pockets.  However, at the same time, we were taking 3 times that much from savers.  Could that be a reason the economy is stuck in neutral?

Can you imagine what the reaction would be if a $400 billion annual tax increase was proposed on savers at the beginning of this recession?  There would have been rioting in the streets.  In fact, that is what happened in Cyprus earlier this year.

However, this is exactly what has occurred in this country with nary a peep.

I wrote about the adverse effects of the Fed's policies over two years ago in "Robbing Savers To Pay Goldman, Chase and Citi et al" and nothing much has changed.  However, you can also include the federal government as another major beneficiary of the low interest rate policy.

Quite simply, we have reached the point where a return to normal interest rates would be nearly fatal to our federal budget and most of the other G-7 countries.  In fact, a 1% increase in interest rates means an additional $1.4 trillion in costs for these countries.

This is what I wrote in February, 2011.

The policymakers are so driven to prime the pump in an attempt to save Wall Street and the banks who made the bad loans and investments they have purposely forced savers to get almost nothing for their efforts.  Why?  Quite simply they want to make it so unattractive to save that these savers will finally give up and take a flyer on the stock market or buy a new house.  At a minimum, they would like them to go to the bank and pull the money out and spend it on something!  
Of course, the savers they are targeting are your grandparents or your parents or some other responsible soul who played by the rules their whole life.  They saved liked they should to build a nest egg for retirement or their child's college eduation.  
Now the Fed policymakers come along and they want to "smoke them out of the foxhole" by fixing it so they get no interest on their savings.  If they can't get them to trade their savings for stocks or some other investment they have a second approach lined up.  INFLATION!  What do people do when they see their money being eaten up by inflation?  They quickly decide they would rather spend it on something today rather than get a lot less than something tomorrow  

Beware the "safe haven" of money market funds and other low yielding investments that are resulting from the Fed's policies.

Watch Josh Duhamel and Julianne Hough instead.  $1.20 at Red Box (before tax, of course).  $6,000 in a money market for a year will pay for it.

Sunday, September 22, 2013

The Old Man Who Could See

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” ---Ernest Hemingway

I came across this quote from Ernest Hemingway last week.  It seems especially appropriate considering what is going on in Washington, D.C. of late.

Ben Bernanke says the Federal Reserve will not taper its money printing anytime soon.  The sad truth is that we seem to be as incapable of kicking the QE habit we have developed as a crack addict has in getting off cocaine.

Axel Merk of Merk Investments provides some perspective on just how far the Federal Reserve has gone to try to create "temporary prosperity".

Below is a chart depicting relative growth of central bank balance sheets since August 2008. This growth is often referred to as the amount of money that’s been printed, even if no actual banknotes are issued. When money is “printed” to buy, say $1 billion in Treasuries, the Fed credits the account of, say, Goldman Sachs, with said $1 billion. In return, the Fed’s balance sheet now carries the Treasuries on the asset side, growing by $1 billion, and the $1 billion credit to Goldman on the liability side. In total, the Fed balance sheet now stands at over $3 trillion. On the chart below, tapering refers to the rate at which the growth of the Fed’s balance sheet will level off, i.e. when the black line moves horizontally, rather than upward:

Contrast that with the European Central Bank (ECB) that’s actually mopping up liquidity. It’s not that the ECB is so hawkish, but their printing press is wired differently: instead of buying some seemingly random amount every month, the ECB’s balance sheet is demand driven. That is, when banks request liquidity (cash), the ECB provides it in return for qualifying collateral.

Should it come as a surprise that the euro is the best performing currency year-to-date? Last year, by the way, with all the trouble in the Eurozone, the euro also outperformed the U.S. dollar. That’s how well the cleanest of the dirty shirts has been performing. It seems to me that the seemingly clean shirt has been trading on unrealistic expectations that it might outshine the rest of the laundry.
There are indeed a lot of dirty shirts around the world.  Consider these observations from Egon von Greyerz of Matterhorn Asset Management on the mountain of debt that has built up around the world.  When you look at the mounting interest costs on that debt you begin to see why the Federal Reserve and other central banks are doing every thing they can to put the lid on interest rates.  You also see why inflation is ultimately the last refuge of political and economic opportunists.  It literally is the only way out.  Ultimately, if the public stands silent, government debts will be paid with currency worth cents on the dollar.

“The G-7 are the top industrialized countries in the world:  The U.S., the U.K., France, Italy, Canada, Germany and Japan.  Since neither China and Russia are included, you can question the validity of this group, especially since most of the G-7 countries are bankrupt.
Nevertheless, the G-7 represents around 50% of world GDP, which totals $30 trillion.  But these countries have a total debt of $140 trillion, which is a remarkable 440% of their GDP.  If you look back to 1998, the total debt of the G-7 was $70 trillion and their GDP was $30 trillion.  So, Eric, debt has doubled between 1998 and 2012, from $70 trillion to $140 trillion, and GDP has only gone up by $10 trillion.  What this means is that it takes $70 trillion of additional debt to produce $10 trillion of additional GDP.  
So the world’s so-called richest nations need $7 of debt to produce $1 of GDP.  The world is bankrupt, and all of the economic figures that are being published are just a mirage of a castle built on a foundation of worthless paper money.  The world can, of course, never pay back the debt with real money, and the world can’t even pay the interest with real money.
Every 1% increase in the interest rate means an additional cost for the G-7 of a staggering $1.4 trillion.  That is absolutely massive.  $1.4 trillion is only slightly less than the entire GDP of Canada.  If interest rates increase by 10%, then we are looking at an increase in interest expense for the G-7 nations which equals the entire GDP of the United States. 

Of course, at the same time, we also have a President talking about deploying U.S. military forces in a war effort in Syria that is undefined and ill-conceived.  It looks like nothing more than a refuge to cover for Barack Obama's ill-considered remarks, missteps and foreign policy failures.

I read The Old Man and the Sea in the 7th grade.  I didn't really realize at the time how well Hemingway could really see.  I thought he was just a good writer.  I now understand that he was much more talented than I thought.

Thursday, September 19, 2013

Writing History Painfully

I often wonder how history will remember the Presidency of Barack Obama.  Will it be seen as the grand beginning to a new era of progressivism?  Will it be recorded as the beginning of the end of the United States as a world power?  I don't feel comfortable with either conclusion.

My best guess right now is that future generations will just wonder how the American people could have let themselves be bamboozled by someone who when, viewed in the fullness of time, was not much different than a 19th century snake oil salesman.  Articulate and personable with a nice smile who  was great on the stump.  However, in the end, that was all there was.

I know it sounds harsh but I can't escape this nagging feeling that history is going to judge Barack Obama in a very unfavorable light.  The world has been Obama's oyster almost his entire life.  Things came easily.  Private school in Hawaii.  Occidental. Columbia.  Harvard Law. Law Review Editor. Community organizer. Constitutional Law professor. State Senator. U.S Senator. President.  Nobel Peace Prize. He had a lot of help along the way.  He seemingly got pushed to the front of the line at crucial times in his life.  People wanted to help the nice young man and he took full advantage every step of they way.

However, it appears to me that Barack Obama's luck has run out.  He's finding that out every day.  American's foreign policy is in disarray.  Although many thought it was impossible, respect for America is lower than it was under George W. Bush.  The economy is still lackluster.  Our fiscal house is in horrible shape and we seem to be in eternal gridlock in Washington. At the same time, Obama appears incapable of leading, building consensus or doing anything to unite the country.

Daniel Henninger of The Wall Street Journal describes the Obama modus operandi as: "I think, therefore you do."

We should admit the obvious: Barack Obama is the most anti-political president the United States has had in the post-war era. Truman, Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter (even), Reagan, Bush, Clinton, Bush. All practiced politics inside the tensions between Congress and the presidency that were designed into the system by the Founding Fathers. Not Barack Obama. He told us he was different. He is.
Mr. Obama doesn't do Washington's politics. Disappointed acolytes say it is because he is "passive." That underestimates him. For Mr. Obama, the affairs of state are wholly a function of whatever is inside his mind. 
Some things remain in his mind, like the economic benefits of public infrastructure spending, which appeared one more time in Monday's post-Navy Yard speech on the lessons of the financial crisis and Congress's obligations to agree with him. Some things enter his mind and then depart, like red lines in the Syrian sand.
From where he sits, it is the job of the political world outside to adjust and conform to the course of the president's mental orbit. Those who won't adjust are dealt with by the president himself. They are attacked publicly until they are too weak politically to oppose what is on his mind.
There is no better example of this than the President's speech to the Business Roundtable yesterday where he stated,

"Raising the debt limit, which has been done over a hundred times, does not increase our debt."

Excuse me? Did he really say that? This was not one of Obama's famous gaffes either. He read it straight off the teleprompter.

Here is a chart of increases in the debt limit and in the federal debt since President Obama took office. You can make your own determination of that statement.
Granted, raising the debt limit does not increase our spending obligations. But it certainly leads to increases in our debt as the chart shows . That fact is inescapable. However, the President did not say that. The President also conveniently ignores the fact that the only reason the Republicans want to negotiate with the debt ceiling is to attempt to reduce the rate of increases in spending and the resulting federal debt from our deficit spending. If the President showed any willingness to negotiate on normal terms it would not be necessary.

What is really remarkable is what Barack Obama said in 2006 when the Bush administration asked Congress for a debt ceiling limit increase. These are verbatim excerpts from his speech on the Senate Floor on March 16, 2006 when he stated he would not support an increase in the debt limit.
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion.  (Note: the current debt limit ceiling is $16.7 trillion which is almost $8 trillion more than in 2006)

And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.

Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities. Instead, interest payments are a significant tax on all Americans—a debt tax that Washington doesn’t want to talk about. If Washington were serious about honest tax relief in this country, we would see an effort to reduce our national debt by returning to responsible fiscal policies.

Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘‘the buck stops here.’’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

I therefore intend to oppose the effort to increase America’s debt limit.

Over the years I have learned that things that don't make sense can continue for much longer than you ever thought possible.  The reason is that human beings often make decisions and come to conclusions based more on the reflexive parts of their brain than the reflective parts.  However, over the long term, you can't defy gravity.  Bubbles burst, false heroes fail and what appeared to be gravitas is revealed to be nothing more than glibness.

Politics is a tough business.  It is difficult to know who your real friends are.  It is also ultimately a game of survival.  For most politicians it is largely about maintaining power as well as positioning for the next step up the ladder.  You help those who can help you.  You distance yourselves quickly from anyone who cannot help your cause or could harm your own survival.

People can also turn quickly on someone.  Especially if they believe they have been duped or misled.

Barack Obama is in a different place right now than he has ever been in his lifetime.  The finely polished veneer is cracking and we still don't fully know what is really underneath.  My guess is that we will find out a lot more about the real man Barack Obama is over the next few years.  Will we start to see more Democrat defections on key Obama initiatives?  Will his approval ratings continue to fall with voters?

The real danger for Obama is that once cracks start to surface they tend to spread.  He has had a lot of cover up to now from both his party and the press.  How will he deal with it if that starts to slip?

There is much history yet to be written with Barack Obama.  Salesman or Statesman? Pretender or President?  Liability or Leader?

George Washington once said, "Truth will ultimately prevail where there is pains taken to bring it to life."

The last five years have been painful enough.  How much more pain is it going to take to get these answers?

Too Young To Die

The shooting at the Washington, D.C. Navy Yard was horrific.  We may never know the complete  motives of the gunman.  It seems evident that he was deeply disturbed and mentally ill.

In all, 12 people were killed and eight were wounded.

What I found interesting was that there was not one person killed that was under the age of 46.  Most were in their 50's. The average age of the victims was 56.  I could find no information on the ages of those wounded.

This seems very unusual.  You would normally think there would be a variety of ages in a workforce including young, middle-age and older.  You would also think the victim's ages would have been similarly distributed.

Is this due to the advanced age of the federal government work force that I recently wrote about?

Is it because the shooter targeted the older workers and ignored those younger?

Did those younger run faster?

Is it just a coincidence?

Unanswered questions.

My prayers go out to the families of the victims.  They all died too young.

Tuesday, September 17, 2013

Constitution Day

Today is the 226th anniversary of the signing of the U.S. Constitution.  The Constitutional Convention had convened on May 14, 1787 and work was finished and the delegates signed the Constitution on September 17.

The Constitution was then sent to the 13 states for ratification.  Nine were required for the Constitution to fully "unite" the states.  That did not occur until June 21, 1788 when New Hampshire became the ninth state to ratify the document.

In the interim, the Federalist Papers were written to explain the theories, rationale and reasoning of our Founders.  Alexander Hamilton devised the idea to write and publish this series of papers in an effort to enlist support for ratification in the states and to answer the many criticisms that were lobbied against the Constitution.  This was particularly the case when it came to defending the need for a federal government at all.  Oh, how times have changed!

Hamilton enlisted James Madison and John Jay to join him in writing the series of essays.  Hamilton ended up writing 51 of the 85 articles.  John Jay fell ill and ended up writing only five papers.  This left the remainder to Madison who is know today as the "Father of the Constitution".  By the way, Madison was just 36 years old and Hamilton was 32 when they were writing the Federalist Papers.

What is truly amazing in reading the Federalist Papers is how well our Founders understood human nature and the efforts they took to provide safeguards in the Constitution against human fallibilities and foibles.

I have written about the Federalist Papers before and it being Constitution Day I thought I would once again highlight what is perhaps my favorite blog post since I started writing BeeLine.

If you have any doubt about the brilliance of our Founding Fathers and of the Constitution they drafted read on about "Improper and Wicked Projects" in the Federalist Papers.  What were Improper and Wicked Projects?

This is their list.  I kid you not.

A rage for paper money 

A rage for the abolition of debts 

A rage for an equal division of property

A little eerie?  Read it all and send it on to others.  The answers to our problems are already in existence.  It was written down 226 years ago today.   We just need the good sense to return to these founding principles.

Improper and Wicked Projects (originally posted August 22, 2011)

Power, politics, greed, bias, conflicts of interest, oppression.  There is nothing going on today that our Founders did not anticipate.

Due to the intelligence and insights of our Founding Fathers they wrote a document that considered all of the above and more in writing the U.S. Constitution.  They knew that instability, injustice and confusion within the institution of government had caused many to fail.  They were determined to build a governmental structure that could endure for the ages.

Federalist Paper #10 was written (by James Madison) to describe "How the Union Will Act as a Safeguard Against Domestic Division and Rebellion". The Founders understood that opposing political factions were the greatest potential threat to any government and that in many governments the only redress was violence.  They wanted to insure that factions could not wield power that would be dangerous to either the rights of other citizens or the common good.  What did they see as the most common and tangible source of faction?  The conflict between rich and poor. Here are the exact words from #10.

The most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. 
Where did they see the most danger for a majority to trample on the rights of a minority?  Taxation.

The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets. 
They understood that those that governed us had to be a cut above to balance and mediate these conflicting interests and put the public interest above any special interests.  However, they also knew that this was naive. The Common Argument modern translation puts it this way.

Enlightened statesmen will not always be in power, and even if such mediation could happen, it would rarely take place with long-term interests in mind, since the immediate "here and now" interests of the party in power would most likely win the day at the expense of the rights of the other party, or the good of the whole.
Our Founding Fathers were one smart group.

They also knew that there was little they could do to prevent factions from occurring.  That could only be done by limiting liberties or insuring every citizen has the same opinions, feelings and the same interests. Neither was acceptable to the Founders.  They had no interest in preventing the causes, which is what Communist and Totalitarian governments do.  They focused on controlling the effects of factions.  Thus, they constructed a republican governmental framework with an ultimate goal of securing both the public good and private rights against the dangers of an oppressive majority faction.  Everything in the Constitution was built on this foundational principle. 

They built a government which derived all of its power directly or indirectly from the People, administered by representatives who hold their offices at the pleasure of the People, for a limited period of time, or during good behavior.  Using different time periods for holding office, including the separation of powers between the three branches of the federal government and limiting the power of the federal government relative to the states were all important foundational principles to achieve their overarching goal of facilitating majority rule but protecting minority rights.

Perhaps most applicable to today is what Federalist #10 says in the second to last paragraph.  It explains why they set up the republican form of government we have and not a democracy or parliamentarian system. It literally stopped me in my tracks when I read it.  I re-read it several times in The Original Argument and then went to the actual Federalist Papers to read it exactly as it was written.  There could not be a better example to show how far we have deviated from the path the Founders established and why they set up safeguards in the Constitution to protect the People.  It reads as follows with the bold emphasis being mine:

The influence of factious leaders may kindle a flame within their particular States, but will be unable to spread a general conflagration through the other States. A religious sect may degenerate into a political faction in a part of the Confederacy; but the variety of sects dispersed over the entire face of it must secure the national councils against any danger from that source. A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it; in the same proportion as such a malady is more likely to taint a particular county or district, than an entire State.
How much more relevant can you be to what we have seen in recent years in this country, most particularly in the Obama Administration?  The Founders found all of these to be "improper or wicked projects"by dangerous factions.  These were the types of government abuses they were trying to prevent. 

  • a rage of paper money (what is the Federal Reserve doing?)
  • an abolition of debt (what was done to the secured creditors in the GM and Chrysler bankruptcies or with the bailout of Wall Street?)
  • for an equal division of property (Redistribution of income and wealth through a focus on taxing the rich)
Isn't it interesting that each of these "improper or wicked projects" is also at the core of what has motivated the Tea Party?  Terrorists?  I think not.  These are the sons and daughters of the Founding Fathers united against the very factious leaders our forefathers warned us about.  

Sunday, September 15, 2013

By The Numbers

A few interesting numbers that I came across this past week.

3 out of every 4 jobs of the nearly 1 million hires this years are part-time positions per Reuters.  You don't think Obamacare has anything to do with this, do you?

6.6% of the private sector workforce is in a union. 35.9% of the public sector is unionized.  In 1973 private sector union membership was about 25% while public sector membership was 23%.  Declining union membership has forced the AFL-CIO to now offer membership to anyone.  It does not matter if they do not have a union affiliation.  They simply need the money. Lee Saunders, president of the American Federation of State, County and Municipal Employees (AFSCME) supported the change and stated, "The freedom to choose to be part of this movement must be a freedom available to every worker".  That has to be one of the funniest statements I have heard this year as AFSCME opposes "Right to Work" laws that give workers the freedom to not join a union.  AFSCME also does not want public sector union workers to have the choice to stay out of a union.

10  The number of Nobel prizes won by the entire Muslim world. By contrast, graduates of Trinity College,Cambridge in the U.K. has produced 32 Nobel laureates by itself. In fact, the Muslim total drops to 4 compared to 31 for Trinity if you do not consider the Nobel Peace Prize. As another reference point, Harvard graduates have won 67 Nobel Prizes.

14% The percent of Americans who believe the United States is more respected in the world today than it was five years ago. 48% believe the U.S is less respected. I thought President Obama was going to fix the negative view of us around the world caused by President Bush?

40% Approval rating for President Obama in recent Fox News Poll. This ties the lowest positive approval in his Presidency (with December, 2010). His disapproval is now 54%, the highest since he took office.

48% The percent of births of babies in the United States that were paid by Medicaid last year. We are challenged by falling birth rates and the poor are having this many babies? This does not bode well for the future.

57%   The percent of houses purchased so far in 2013 in all cash transactions according to Goldman Sachs. In 2005, only 19% of home purchases were in cash. This clearly shows that Wall Street is buying Main Street. What happens when this money is no longer fueling the housing market and interest rates begin to rise?

262,000  The number of Federal government workers who are age 60 or over. In 2000, it was only 94,000. This looks like a great opportunity to reduce the federal government payroll through natural attrition. That is what a private sector business would do if it was running deficits every year. Does anyone think like that in Washington, DC.?

Wednesday, September 11, 2013

How Many States Are In Our Future? 57, 54, 49?

We all know that there is a lot of political division and unrest across the country.  A lot of this seems to stem from a fundamental difference in the outlook and values of those who live in urban settings and cities as opposed to rural areas and towns.

For the last 30 years, those of like minds have increasingly decided to live closer together.  It really is a case of birds of a feather flocking together.

You can readily see the effects of this political polarization by looking at the results of Presidential elections since 1976 as Bill Bishop and Robert Cushing did in their 2008 book, The Big Sort.  Consider the differences in voting between 1976 and 2000 as pointed out by Jonathan Last in his book, What To Expect When No One's Expecting.

In 1976, only 26.8% of the counties in America went for either Jimmy Carter of Gerald Ford by a margin of 20 points or more.
In the razor thin race between George W. Bush and Al Gore in 2000 it was not even remotely close in nearly half of U.S counties (45.3%) as either Bush or Gore won by more than 20 points.  
In 2004 the '"landslide counties" increased to 48.3% of the total. 

Last observes that this "sorting' is not an accident.  People are more mobile today than in years past and they increasingly move to find areas where people have similar lifestyles, attitudes, values and political views.  That is why Arlington County, Virginia has become overwhelmingly Democrat (Obama 69%, Romney 29% in 2012) and Collin County, Texas is overboard for Republicans (Romney 65%, Obama 34%).  Arlington is populated by a bunch of young, single, liberal Yuppies.  The northern suburbs of Dallas are filled with married couples with families who go to church and like July 4th fireworks displays.

These demographic changes are a big reason that there is so much polarization in our politics today in Congress.  Districts are likely to be solidly Democrat or Republican because there is not a lot of diversity of thinking in most locales compared to 35 years ago.  Politicians that walk down the middle of the road today get run over by the electorate because of the Big Sort.

This polarization is also showing up in state politics.  For example, twice in the last month I have seen stories about groups that want to form a new state because they are dissatisfied with the representation they are getting in their current state.

The first example is in Northern Colorado.  Voters in several rural Colorado counties will be asked in the November elections whether they want to form a new state tentatively named "Northern Colorado".

The Siskiyou County Board of Supervisors in far Northern California have the same idea.  They want their county to join other Northern California and Southern Oregon counties in the establishment of a new state called Jefferson.

Establishing a new state by seceding from an old state is permitted under the U.S. Constitution.  Article IV, Section 3 requires that the proposal must first be approved by the existing state(s) legislature.  It then must also be approved by Congress.

A state breakup is not without precedent. Maine used to be part of Massachusetts.  It did not become a state until 1820. West Virginia used to be part of Virginia.  It became a separate state in 1863.

However, the fact that you need both the consent of both the state legislature (who would be giving up land and power) and Congress makes any such effort a long shot.

One of the more interesting historical factoids on this subject involves the state of Texas.  It seems to have special privileges not provided to the other 49 states.  When Texas was being wooed to join the union in 1845 (it was then an independent country), Congress wrote into the resolution granting it statehood that Texas could later slice itself up into two, three, four or even five distinct states without the subsequent approval of Congress.  Texas would only need to have its state legislature agree to the split.  This clearly was done due to the sheer size of Texas compared to other states at the time.

I always have wanted to write a political thriller based on this little known historical footnote where Texas used this power to effectively add eight senators to represent its people in Washington to change the balance of power on a major issue (for example, oil and gas) that was critical to the state.  Oh, to find all the time I need to do everything I want to!

There are some that have even gone to the trouble to propose borders and names for what The Five States of Texas might look like.  The picture below is from a site called "Fivethirtyeight" which also projected what the county by county face off between Obama and McCain in 2008 would have looked like in the five states of Texas.


Our Founding Fathers also thought that it was possible that two or more states might also be formed by the junction of two or more states, or parts of states at some point in the future.  This has not occurred yet but might it be a possibility if a state found itself in dire financial straits or in bankruptcy?  Could we eventually see state mergers much like corporate takeovers or mergers?  It is allowable in the Constitution.  How about a future in which we have Chicago,Wisconsin or Detroit, Indiana?

The Wall Street Journal had an interesting story several years ago on some of the history of "Altered States" that provides more background about past efforts to establish new states.  It also provided this map of some of the proposed states that never quite made it.  The states of Lincoln (Western Washington and Eastern Idaho), Acadia (Northern Maine) and Chesapeake (Eastern Shore of Maryland) are just a few examples.

You can go to an interactive map to get details on the background and history of each of these proposed states.

When President Obama was running for office in 2008 he made one of his famous "off Teleprompter" remarks and referred to the fact that he had visited 57 states during the campaign.

All of this shows that he may actually be proven right one day.  At some point we may very well see success from one or more of these state secession efforts.  Its been done in the past.  There is no reason that it might not occur again. I never ignore history.  It may never repeat, but it does rhyme.

Monday, September 9, 2013

Participate or Perish

The headline unemployment rate has dropped to 7.3%.  There should be cheering in the streets as is the lowest it has been in almost 4-1/2 years.

However, a closer look at the numbers is cause for real concern.

I have written before that I am more focused on the labor participation rate than the unemployment rate as a gauge on our economy. The unemployment rate calculation has become too subjective. It only counts those as unemployed if they are actually looking for work. It does not count those who become discouraged and have simply quit looking. It does not count the young slacker who has dropped out of school and is living in his parent's basement playing video games. It does not count the older worker who got laid off at age 59 and "retires" because of no decent job prospects.

In the end, every American is a mouth to feed, clothe and shelter. If there are fewer people pulling the wagon and more people in the wagon, we have a fundamental problem. The money gets spread around in thinner and thinner increments. That is just basic economics.

The labor participation rate in August slumped to a 35-year low of 63.2% last month. The last time we had a lower percentage of working age Americans employed was in August, 1978. Of course, in 1978 there were many fewer women working outside the home.

Here is a chart from Zero Hedge that shows the rise and fall of the labor participation rate since 1978.

More sobering is this chart (also from Zero Hedge) that shows the number of people not in the labor force.  That number is now a record 90.5 million Americans!

Let's put that in perspective.

There were 144.2 million Americans that were employed in August.  This is 1.9 million fewer than were working in the pre-recession high over five years ago.

There were 11.3 million that were unemployed in addition to the 90.5 million that are not considered in the labor force.

Therefore, of those of working age, 101.6 million Americans are not working and 144.2 million are employed.  That means that for every 10 people that are employed, there are 7 Americans of working age that are not working.

Keep in mind that these numbers also do not take into account children and the elderly that are not of working age.  The estimated population of the United States is approximately 316 million. Considered from this perspective, every worker, on average, is supporting about 1.2 other Americans.  The wagon is indeed getting heavy.

This number makes the worker to social security ratio look like nothing.  Right now every worker is only supporting about .36 Social Security beneficiaries.

Another interesting piece of data I found in the BLS data is the labor participation rate between those foreign born and native born.  Those foreign born actually have a higher labor force participation rate (66.9) than those native born (62.8).

In fact, 78.5% of foreign born men are working compared to only 68.9% of native born men.  On the other hand, 55.7% of foreign born women are working compared to 57.5% of native born women.

What about the labor participation rate based on race?  63.4% of whites are employed, 60.8% of blacks and 66.3% of Hispanics.

The labor participation rate based on educational attainment is also telling.  Only 45.4% of those with less than a high school diploma are working.  This rises to 59.0% for high school graduates, 67.3% for those with some college and 75.4% for those with a college degree or higher.

What do I make of all this?  We need more people working.  There simply are not enough people pulling the wagon to meet the expectations and obligations that were established in past years.  We really need to get more labor participation or we will see many dreams perish.  There is simply too much on too few to keep the wagon rolling.

The roads of the Welfare State are always paved with good intentions.

Unfortunately, those good intentions often lead us on a road to ruin.  That appears to be the path we are on right now.

Where and when does it end if we do not see the labor force participation rate start to increase?