Congress Can’t Get Out of Its Own Way

So the ladies and gentlemen of congress want to sit in judgement of Toyota.  Someone should.  At one time it should have been them.  But since they have got themselves into the auto business, they are no longer suitable.  Judgement requires a disinterested party.  They no longer are one.

Of course I would never accuse the Solons in Washington of anything but the highest of motives.  (Just look at Charlie Rangel.)  But at the same time, I can’t help but suspect that they have a keen interest in the profits of their new auto acquisitions, enough to taint the proceedings going on with all due pomp in Washington.  When a judge draws a case and realizes that he or she has an interest in one of the involved parties, that official, if he or she is at all ethical, reuses himself or herself.  The opposing attorneys ask the jurors if they have  an interest in the case, and if one does, excuses that juror with no objection from any involved.  So now the men and women of congress, having given themselves an interest in the success of General Motors and Chrysler, have no business judging their own competition, Toyota.  Their interests, however nobel at base, are questionable.

Against such a background, it is comical to watch these clowns pose as if there were no question that they could have anything other than the public interest at heart.    Ultimately, however, matters are not so funny.  The cruel joke is on the American people, who have had to buy General Motors and Chrysler for congress, and in doing so, have lost an impartial guardian of the public good.  Now there is no one who can look out for the public welfare.  Congress, of course, is so sensitive to ethics, that it has not even noticed.

Obama’s Sudden Tolerance of Huge Wall Street Bonuses: Who is Buying Whom?

Especially after the last year or so, it was strange indeed to read how President Obama does not “begrudge” JP Morgan Chase CEO Jamie Dimon and Goldman Sachs CEO Lloyd Blankfein their huge bonuses.  Not too long ago, he regularly described such payouts as, an “outrage” and “shameful,” as the “height of irresponsibility” and as a “violation of our fundamental values.”  Now he thinks $16.1 million to Mr. Dimon and $9.0 million to Mr.  Blankfein are just fine, similar, the president seems to believe, to the payouts often given professional athletes.  (What could be more innocent!)  It is stranger still that even as the president spoke, Deputy White House Communications Director Jen Psaki posted an official White House blog, hewing to the old, critical administration line.  Why all the contradiction?

One explanation is the usual political double talk.  To be on both sides of the same issue, politicians, since before there even was an America, would say one thing in one place and then say another in a different venue or say one thing themselves and then have one of their minions say the opposite.  Then they could draw on whichever public statement is convenient.  If called on the contradiction, they can hide behind the old debating trick perfected by Bill Clinton of accusing their questioner of seeing a difference without a distinction (or maybe it is the other way around.)  Either way, the politician dodges the accusation.

An alternative, darker explanation, is that the president is talking less to the public and more to Dimon and Blankfein.  After all, both these men are well known as big political donors, as are the firms that they control.  A big part of the bonuses they have received over the years has flowed liberally to political candidates, including Mr. Obama.  It could be payback for that support that the president suddenly wants to protect these men from the criticisms leveled at others.  It could also be that the president fears that these two and others like them, especially after the abuse of the past year, will do something else with their money, maybe even send it to Haitian relief or to fight cancer.  Either way, it sure looks like a special favor for supporters, past, present, and, hopefully, future.

Certainly that is the appearance when tallying political contributions with those who have and those who have not felt the heavy hand of government.   The public record shows that in the election year 2008 Mr. Dimon made political contributions in the impressive amount of  $109,700.  Not to be outdone, Mr. Blankfein gave $431,000.  By contrast, Richard Fuld, CEO of Lehman brothers, who the authorities allowed to go bankrupt, gave only $41,200, and Bill Coyne, CEO of Bear Stearns, who the authorities forced to sell out at a bargain price to  Mr. Dimon’s JP Morgan Chase, gave a mere $6,681.

Even this great cynic balks at suspecting such corruption of this or any president, but the hypothesis is worth airing at least, certainly under this, the most transparent of administrations ever.

Something More Fundamental About Massachusetts and the Tea Parties

The remarkable election in Massachusetts and the broader tea party movement have, as do all major political shifts, many roots.  People worry over the surge in government spending.  They object to the provisions of the health care reform legislation and the atypically corrupt way that the Democratic leadership tried to shove it through congress, and still might.  They worry over budget deficits and what they might do to the economy.  They fret whether all these actions will unleash a wealth destroying inflation.  But there is something more fundamental at work here, too, less concerned with legislative or economic specifics or with party.  People have at last tired of being told by Washington and the academic establishments on which it relies that they have betters who know what they need better than they do.  They are, quite simply, fed up with the anti-democratic, elitist, condescending, arrogant, insulting approach to governing that has prevailed through both Republican and Democratic administrations but that has become stark in the Obama White House and the Pelosi-Reid congress.

The people of Massachusetts  must have felt great passion to do what they did this past January.  Many voted as they never have before, nor their parents, nor their grandparents.  Such action takes great conviction.  For years they seemed to behave like sheep, supporting the Kennedy-Harvard nexus, accepting the notion that Teddy and the professors knew better, except that Kennedy, for all his many excesses and faults, could convincingly appear as if he were listening, enough to soften an othewise smug sense of superiority and entitlement.  But with Teddy’s passing, this old sleight of hand ceased to work.  Coakley’s inept campaign only drove the point home harder.  Democratic Party leadership expected them to fall into line as before and take what they were given.  But even if the Democrats had put up someone with more political acumen than Coakey, which in retrospect would not have been difficult, it probably would not have changed the result.  Massachusetts voters still had before them the stark picture of overpowering arrogance in the White House and in congress.  They said, “no.”

It is this horrible arrogance that formed the base of the reaction in the Bay State and that forms the base of the tea party movement that seems destined to play such a large role in the 2010 mid-term elections.  It goes beyond party.  It is about respect.   All the insults hurled by Pelosi, Reid, Obama, and their minions have only reinforced people’s conviction that this leadership has no regard for the opinions of others, especially the people.  William Buckley famously said that he would rather be ruled by the first 100 names in the Boston telephone directory than the faculty at Harvard, or words to that effect.  It was not contempt for Harvard that led him to make such a statement.  Rather, it was Harvard’s contempt for the rest of us.  The people of Massachusetts saw that contempt in today’s political leadership.  The people in the tea party movement see it, too.

There Are Too Few Greedy “Fat Cats” Among Corporate Shareholders

Corporate abuse, particularly management’s outrageous compensation packages, would all stop, if the owners of these firms, the shareholders, asserted their greedy personal interests.  Why do corporations pay lavish compensation packages to incompetents and allow rivers of cash to flow away from dividends or reinvestment opportunities that might enable longer-term growth?  Why do boards of directors — the shareholders’ agents in management —  rubber stamp such activities?  The problem, at least in part, is that most shares and the voting proxies that come with them are controlled by institutional functionaries with little or no interest in corporate governance.  Boards and shareholders rubber stamp management initiatives that aim less at enriching the firm than at enriching those involved.  If more shareholders had a direct interest in the long-term success of the firm, they would force boards and managements to behave differently.

Some 40 years ago, Wall Street fret over what it called the “institutionalization” of investment management.  The growing prominence of pension funds and mutual funds had at last outweighed the influence of individuals in the stock and bond markets, and many wondered what it would mean to have large pools of money managed by a relatively small number of professionals instead of a relatively large number of individuals.  Most of the  commentary of the day worried that trading activity would accelerate.  It did.  It worried that group think would create investment fads and dangerously extend trends.  It has.  But in all that active conversation, few thought about the effect on corporate governance.  Now that effect is clear, too.

Because the professionals who manage these large pools of money seldom hold shares for long, they have little interest in corporate governance.  They have a distaste for corporate politics anyway, and even if they wanted to participate, the business interests of their firms or institutions would hold them in check.  Neither do these professional mangers have the resources to consider all the issues before corporate boards and vote the proxies accordingly.  To be sure, some public pension funds do get involved in corporate governance, but usually over the issues of interest to the politicians who control them and not over the long-term health of the company in which they own shares.  They push more on green initiatives than on compensation packages.  Even the unions, which through their pensions own wide swaths of corporate America, ignore their power as shareholders.  (They seem to prefer direct political power to reach ends that they might achieve more effectively and certainly more cheaply through voting their shares.)

While these disinterested professionals control more and more shares, boards and managements face less and less discipline.  When individuals had more power, rich and greedy “fat cats” had a passionate interest in the long-term success of the firms in which they held shares.  They balked at huge pay packages for incompetents, voted their shares accordingly, and called attention to such goings on at annual shareholder meetings.  Now the professionals at institutions do not even bother to attend such meetings.  Neither do they vote much against management, providing a green light for the abuse about which everyone complains.

The Great Health Care Insurance Givaway

Behind all the pages, baffles, recriminations, and special carve outs, the health care legislation we have before us stands as a huge giveaway to America’s insurance industry.  The president and his minions in congress have given a group of “fat cats,” in the president’s wonderfully childish and hypocritical phase, more on which to dine.

• The bill would insist that all Americans buy health insurance, that is, give these companies business.  Since most of those who have forgone insurance to date are young and healthy, these new customers would offer the most lucrative sort of business.  Of course, the new law would also forbid the insurers from discriminating against those with pre-existing conditions, but since these people would constitute only a small part of the new customer base, it would be a small price for the companies to pay for the business.
• For those who cannot afford the price of their now required premium, the law would offer a subsidy from the public purse, that is the taxpayer would transfer funds to the insurers.
• The legislation would force an excise tax on luxury, so-called “Cadillac” plans, unless, of course, you are a member of some politically well-connected union, but that charge should hardly upset the insurers, since it would raise monies to pay for the otherwise lucrative new customers.
• For all the talk of historic, this bill takes care to continue the protection insurers have from competition from across state lines.

In the meantime, the new law would siphon funds from Medicare, a plan closer to socialized medicine, in order to better equip the authorities to subsidize all these new health insurance customers.  If this works, the next thing Obama will do is help Detroit by requiring all Americans to buy a Chevy and then subsidize any who cannot afford the purchase with a special excise on successful car makers.

Politization as Regulation

The House of Representatives has passed Barney Frank’s financial regulation bill.   Among its provisions, it would create a new agency to protect people from financial practices that are already illegal.  It would also establish a means to dismantle large, failing financial firms, which some of us thought was the role of a bankruptcy proceeding.  But more than simply adding redundancy to the rules, Rep. Frank’s legislation would give regulators tremendous discretion and latitude, an arbitrary power that, if it does not protect Americans from the financial chaos that befell them in late 2008 – early 2009, would certainly politicize financial institutions and the financial sector of the economy.  To give us a taste of such a world, Rep. Frank recently suggested to financial executives that they fire the lobbyists who opposed his legislation.  It is the kind of Christmas present Washington increasing wants to power to give.  At least he refrained from President Obama’s sophisticated habit of name calling.

Need for Change Again in Washington

The coming year will demand two major changes in Washington: 1) The Federal Reserve will need to absorb excess reserves from the banking system or risk igniting inflation. 2) The White House will need to slow the tide of deficit spending or risk undermining the dollar’s role as the world’s reserve currency.

The Federal Reserve (Fed) knows that past liquidity injections require a response. Though done to relieve the strains of the financial crisis, the excess of money and reserves in the banking system, unless removed, just about guarantees inflation — too much money chasing too few goods. And the rise in such inflationary pressure has been dramatic. During the past year, bank reserves have increased by an astounding 225 percent, the monetary base — bank reserves plus currency in circulation — has jumped by 77 percent, and the primary, M1 measure of money supply has increased by 13.5 percent. All these expansions are far beyond the economy’s longer-term fundamental needs, which at most would require money growth of 6-7 percent a year. Little wonder, then, in the face of this inflationary prospect, that the price of gold has skyrocketed by some 30 percent since the most intense fears about the economy began to ebb last July.

Though many of the programs that the Fed put in place to alleviate the financial crisis have begun to shrink naturally as financial healing relieved the need for such assistance, ultimately the needed remedial action will demand a rise in short-term interest rates. Since such rates today are inordinately low, the economy, especially as the recovery gains momentum, will cope will with moderate rate hikes, but the political pressure on Fed chairman Bernanke to delay the needed move will nonetheless build as  the 2010 election approaches. If he and the Fed yield to that pressure, then inflation concerns will build, gold prices will continue to rise, and the dollar will continue to lose value on foreign exchange markets. If the Fed resists such pressure and steps up to its responsibilities, it can forestall such painful outcomes.

Demands for a change in White House budget policy are no less important.  The budget outlook presently is far from encouraging. Fiscal 2009, which ended this past September, had a deficit of $1.4 trillion, more than three times the $459 billion deficit of the previous year. At 10 percent of the gross domestic product (GDP), last year’s flow of red ink was almost twice the size of Ronald Reagan’s worst relative deficits and unprecedented since World War II. Official White House estimates for the current fiscal year show only a slight improvement to a deficit of $1.3 trillion. At 8.5 percent of that year’s estimated GDP, the situation would be the most severe since 1945, except, of course, for last year.

Weighing even heavier than this immediate situation are projections of continued large deficits for 2011 and beyond. According to White House estimates, these remain large despite expectations of continued economic recovery. Even out in 2013, the White House looks for deficits of over $500 billion, still substantial at over 3 percent of projected GDP. What is more, these rather depressing expectations emerge even amid unrealistically optimistic expectations for economic growth. More plausible growth figures would constrain revenues expectations and generate still larger deficit estimates.

Even more problematic are the uncertainties engendered by the administration’s heavy legislative calendar. Two issues in particular feature large, health care reform and the cap-and-trade environmental bill. Neither is included in the administration’s already large deficit estimates. The second of these pieces of legislation would actually tend to narrow the deficit because it amounts to a huge tax on production. But there is reason to worry over its economic effects anyway, as it would raise costs throughout the economy and hamstring growth accordingly. The health care picture is more ambiguous. The Congressional Budget Office (CBO) has characterized both bills before congress as deficit narrowing, despite the huge costs involved, under the dubious assumption that business will pay out any health care savings in wages and in so doing raise incomes and income tax receipts. Though plausible, such a view nonetheless leaves much room for skepticism.

What the economy needs in this situation is first an end to the huge legislative uncertainly and second a believable plan to contain the deficits and the flow of debt. That plan must include specifics. So far, various elements in the government have expressed determination to establish prudent budgetary control, but has offered more than the vaguest of statements along the lines of bending the government’s “cost curve,” what ever that could mean. If Washington wants to move the economy forward, it will have to give confidence that it has a definite plan. Further, that plan will have to address deficits with something more than just tax hikes, which will have their own adverse economic consequences. They will have to address spending, particularly entitlements spending, which already constitutes more than half of all federal outlays, far larger than defense spending.

At the moment, citizens have the luxury of time. The economic recovery is just beginning and these needs can wait for some months yet. But as 2010 matures and the recovery gains momentum, further gains will demand these policy changes. The authorities at the Fed and the White House do not have to do everything right, but they will have to make some change in these directions or the longer-term prospects for the economy, inflation, and the dollar will darken.

The Government Shows How It Would Cut Health Care Quality

As if by clockwork, the government has confirmed the health care analysis I posted on this blog only just last Monday, November 16.  There, I insisted that the system would have to sacrifice quality to contain costs.  And then just a few days later, the government told American women to relieve the burden on the system of mammograms and other breast cancer prevention efforts.  Though the American Medical Association has called for an annual mammogram after 40, the government panel now says women can wait until 60 and then do a mammogram only every other year.  I have no idea which is correct, but in the face of the AMA and past practice, one would think that the panel should at least justify itself with some references to research.  It, however, has not done that.  It has not offered any explanation at all.  Without any medical reference, it is only natural that we look at other motivations for the guidelines, and they seem to appear in cost containment.  Cutting out 10 years of exams and then half those following certainly will keep costs down, while there is not reference to the medical ramifications.  This juxtaposition of what we can know and what we cannot know certainly raises suspicions about how the government will proceed going forward.  It also gives a taste of the imperial style they are likely to adopt, that Washington always adopts.

A Time to End All Subsidies

A recent editorial in the Christian Science Monitor, “Time to End Home Subsidies,” gets it half right.  It rightly criticizes Washington for continuing housing subsidies.  It points up how such policies in the past have misallocated resources and have led to boom-bust cycles, of which the most recent is one of the harshest.  It also correctly warns that if the subsidies continue, so will this destructive and painful pattern.  But then it goes on to urge a different emphasis on Washington, a subsidy for export industries.  That would be a mistake.  The Monitor would simply substitute one destructive distortion with another.

It is not that exports are bad.  On the contrary, they help with economic growth and job creation.  But then, neither is home ownership bad.  It shelters people and creates a sense of community.  The problem lies in Washington subsidies themselves, whatever the chosen beneficiary.  Washington’s money always brings excess and overbuilding that then begs a painful economic correction.  The editorial actually, if inadvertently, points to the evidence of such folly by drawing a parallel to Japan.  The government in Tokyo has spent decades subsidizing exports at the expense of consumption and home building, and though the effort helped Japan grow at first, it has in large part been responsible for that economy’s inflexibilities and its sub-par growth of the last 20 years.

Like anything else in life, economic prosperity depends on balance and an ability to adjust to new information.  When the government push’s subsidies, it runs on rules and policies that are out of date before they are even e-mailed to the functionaries who administer them.  There is no flexibility, no adjustment.  Government cannot help but go too far, a fact to which the housing disaster speaks loudly.  It would happen with exports, too, if government were to get involved.  Better that Washington simply get out of the subsidy business altogether.

Health Care Fog

Watching the health care “debate” reminds me how much Washington loves complexity.  Like a varied landscape, it offers so many places to hide.  No one, of course, can or should dispute the complexity of today’s health-care issues, but even so, there are certain basic benchmarks against which to assess the otherwise bewildering and contradictory statements of senators, congress people, and the president.  I offer them here, not as a solution to the nation’s health care problems, but rather to help people judge the blue smoke and mirrors in each particular piece political rhetoric.

Three basic considerations stand on the cost side with two more on the  financing side:

1. The more people the system covers, all else equal, the more expensive it will be.
2. The greater the quality of care, the greater the cost.
3. The greater the efficiency of delivery, the more the scheme can give to more people at a given cost.
4. The more people the system taps for payment, whether premiums or taxes, the more money it will have.
5. The larger the assessment on each person, the more money, all else equal, the system will have.

Matters may seem simple and obvious stated this way, but these points are easily lost in the fog of Washington’s rhetoric. Testing a speaker’s comments against them can tell how much confusion there is, whether he has confused himself or is trying to confuse his listeners.

Take, for example, President Obama’s commentary on the subject.  He has said that the proposed reforms will give more people better quality health care at lower cost than today.  If you can do that, there is, of course, no need to look at the financing side of the equation, and he seldom, if ever, mentions it.  But since covering more people and improving quality both tend to increase expenses, he places a heavy burden indeed on efficiency.  Since further, he has refused to move an inch on tort reform, leaving that huge burden on efficiency and consequently costs, the president has given himself little more with which to improve efficiency than the dubious claim to rid the system of waste and fraud.  Washington has so harped on “waste and fraud” in every area for so long and to so little effect that the claim here takes on the character of a bad joke, like the aging coach’s hackneyed half-time speech that bores all and inspires none.  There is always hope, I suppose, of an audacious nature of otherwise, but it  is difficult to hang onto when Medicare, the primary government-run health care system in this country, has more waste and fraud than private insurance and when the president seems reluctant to give specific examples of how he would improve efficiency beyond equally dubious generalities about computerization.

Whether Obama is kidding himself or trying to fool the public, it seems clear that his scheme will touch on the other four basic points in different ways than he says or implies.  Either fewer people will get covered with poorer quality care than he says or more people will have to pay higher premiums/taxes.  There are hints of where these additional touches will occur in this huge piece of legislation currently floating in congress.

On the financing side, for instance, the legislation is not quite so quiet as our otherwise talkative president:

1. More people will pay, since the bill mandates that all will have to buy insurance.
2. Since the legislation disallows cut-rate policies that, for instance, cover only catastrophic events, it insists that on average people will have to pay more.
3. By taxing existing insurance that otherwise meets the requirements of this legislation, it also increases the average per-person cost of health care coverage.

While increasing the take for health care, questions on the quality of care remain open, but, even here, there are indications.  The bill, for instance, includes a panel that would decide what kind of care the system would offer, to whom, and when, indicating that some quality, at least for some, would bow to cost considerations.  This is a far cry, of course, from Sarah Palin’s “death panels.”   More likely, the system would outsource such difficult decisions along the lines already pioneered by the Commonwealth of Massachusetts for its statewide system.  That state’s health-care commission recently voted unanimously to end fee-for-service payments to doctors in favor of per-patient payments, an approach it calls, “capitation.”  By paying each doctor by the patient instead of according to what  he or she does for that patient, this new Massachusetts approach gives a strong incentive for doctors to do as little as possible for their patients, along the lines of the much-despised HMOs, and in the process effectively outsources the hard decisions about cutting the quality of care.

There is a need to reform America’s health care system.  That fact does not mean, however, that anything else is better than what the country has now.  Neither does it mean that reform can repeal the laws of economics, accounting, or that it can change human nature.