Thursday, April 29, 2010

Sarah Palin for President?

Sarah Palin enjoys a great deal of popularity in many Republican and Tea Party circles. She is less popular in large cities in blue states on both coasts. She is especially unpopular in high-brow intellectual circles, where she is regarded as an intellectual and political lightweight.

Few conservatives inhabit the social science halls of Ivy League universities, small liberal arts colleges, and leading state universities. Even fewer of these support Sarah Palin for president.

The Hoover Institution at Stanford, widely regarded as “conservative” in its leanings (although its fellows gave more to Obama’s campaign in 2008 than to McCain’s) is the only major “conservative” think tank that is an integral part of a leading university. Hoover fellows have Stanford ID cards which identify them simply as Faculty/Staff; the IDs do not specify department, school, or institute affiliation.

Several of my colleagues, normally conservative in outlook and Republican in party affiliation, told me they voted for Obama because they could not bear the idea of Sarah Palin being a heartbeat away from the presidency. They stated that they would not vote Republican if she was the Republican choice for president or vice-president in 2012, no matter who the Democrats select as their candidate. The nomination of Sarah Palin in 2012 would likely bring the historical voting pattern of Hoover fellows, split evenly for Democrats and Republicans, in line with the Stanford faculty, which routinely votes around 80 percent Democrat in presidential elections.

Wednesday, April 28, 2010

Goldman, Greece, Lincoln, and China

The list of villains in the financial crisis of 2007-09 is long and well-known. It includes ninja (no income, no job, no assets) home buyers, unscrupulous mortgage brokers, lax government regulators, easy-money Federal Reserve Board, greedy investment bankers, irresponsible politicians, deficient economic and finance theories, and so on.

Imagine that a building is on fire. Forget, for the moment, who set or what caused the fire. The proper course of action is to put out the fire before it spreads to other buildings. What Goldman Sachs did was to pour gasoline, not water, on the blaze. That everyone else did it is no excuse. That no law explicitly forbade it is no excuse. Say what you want about grandstanding Torquemadas and Madame Defarges on the dais, what GS did and its putative explanations during Senator Levin’s Star Chamber proceeding was embarrassing.

The chickens, along with the hawks, vultures, wild turkeys, and eagles, have come home to roost on Greece and the viability of the euro experiment. Greek financial statistics have been a house of marked cards. Strikes and demonstrations reveal a population oblivious to its own misbehavior, unwilling to take the necessary belt-tightening medicine. The collapse of the Greek bond market threatens Portugal and Spain. The integrity of the eurozone and viability of the European Union are in grave danger. “You want the truth? Europeans can’t handle the truth.” The fat years are about to be replaced by lean years, regardless of any financial package extended to Greece.

Abraham Lincoln got it right. “You can fool some of the people some all the time, and all of the people some of the time, but you cannot fool all of the people all of time.” Replace “people” with “investors.”

The Greek crisis, which has driven down the value of the euro against the dollar, puts China’s plans to diversify its foreign currency reserves temporarily on hold. China’s long term solution lies in making the yuan (Chinese dollar) a trading and reserve currency. Until that day arrives, China will be known by a new acronym FBC: China can make everything faster, better, and cheaper. By 2020, perhaps sooner, I anticipate hearing a Chinese Mark Haines begin the morning financial show with the words “Live from the financial capital of the world in Shanghai.”

Tuesday, April 27, 2010

Goldman Sachs No Longer Glitters, Part II

On Tuesday, April 27, 2010, Senator Carl Levin will convene a hearing of the Senate Permanent Subcommittee on Investigations into Goldman’s shorting of mortgage-backed securities. The panelists, those in the dock, include CEO Lloyd Blankfein, director of structured products group trading Fabrice Tourre, CFO David Vinar, and Chief Risk Officer Craig Broderick. Media reports on Monday, April 26, portray Blankfein as defiant and confident.

Blankfein and his GS colleagues are mistaken if they believe that logic and evidence can carry the day in their attempt to prove the firm did nothing wrong or illegal. Protestations of innocence were of little use during the Spanish Inquisition. Many Spaniards fell victim to the wrack. Their innocence was proven if they did not recant their heresy under torture, but the price of proof was often death.

When looking at Senator Levin, Blankfein would do well to visualize Tom├ís de Torquemada, who served for fifteen years as Grand Inquisitor of Spain, in the chairman’s seat. Although the Senate cannot inflict physical torture, it can dish out considerable mental torture.
Wednesday's stories will likely include photos of Blankfein squirming in his seat and other unflattering images.  Snippets taken from Senators' statements and questions will portray GS as a casino in which the house (GS) wins at the expense of the American people.

Monday, April 26, 2010

All That Glitters is not Goldman Sachs

A corollary of Euripides states, “Those whom the gods would destroy they first make greedy.”

The gold leaf has come off the doorknobs at Goldman Sachs. The Securities and Exchange Commission recently filed a civil fraud charge against GS. The SEC claimed that GS failed to disclose vital information to buyers of a synthetic CDO created for, and with the involvement of its client, John Paulsen. The case has led to a vocal exchange in the media and blogosphere. Defenders of Wall Street say the SEC has a weak case at best. Those of the SEC say that GS is guilty and, even if GS were to be acquitted in a jury trial, behaved unethically.

The best comment I’ve read so far, with which I largely agree, is “10 Things You Don’t Know (or were misinformed) About the GS Case,” posted by Barry Ritholtz on April 23, 2010. He has offered to bet anyone $1,000 that GS will lose in court or settle, with the winnings to go to the charity of the winner’s choice.

Universities are all about truth, ethics, and justice. During apartheid, students and faculty demonstrated against investments in South Africa. Ditto for other important social causes. I have yet to read of a student and/or faculty demonstration demanding that universities divest themselves from GS. Perhaps one reason is that most universities do not disclose individual holdings in their endowments. I wonder how many, if any, graduate schools of business will return gifts to GS if the firm is found guilty, especially that the newest courses found in GSB curricula are about ethics (and the environment).

Sunday, April 25, 2010

Beware of Greeks Bearing Bonds

In his address to the nation from the tiny Aegean island of Kastellorizo, just off the coast of Turkey and home to a mere 500 persons, Prime Minister George Papandreou announced that Greece would ask the European Union and most likely also the International Monetary Fund for a temporary financing package of about $60 billion, enough for Greece to pay its bills for a year.

I’ve been to Greece a half-dozen times since 1967. It’s a tourist paradise. The Greeks party late into the night, enjoy late morning coffee and breakfast, and seemingly have lots of leisure time to sit around and play with beads. The wealthy keep their money offshore and tax evasion is a national sport.

But Greece is no longer a residential paradise. Having lied about economic statistics for years and having lived well beyond their means, Greeks are in for a nasty reduction in pay, benefits, consumption, and public services, the price of wanton profligacy.

In what must rank among the year’s top ten examples of chutzpah, Papandreou blamed “market speculators” for the dramatic rise to 10 percent interest on two-year bonds, an unsustainable level.

One German critic advised Greeks to get up early and begin work at 8:00 AM. China is concerned about Greek debt and its potential effect on the value of the euros it holds among its central bank foreign reserves. As Greece goes, do Portugal, Spain, and Italy follow later? Will putting a band aid on a deep financial cancer forestall national default? Watching some militant Greeks demonstrate and break windows in the central square of Athens is not an encouraging sign. Hardly good advertising for summer tourism either.

Saturday, April 24, 2010

Reflections on the Second British Political Debate

American-style mud-slinging has arrived in Britain. Gordon Brown (Labor), David Cameron (Conservative), and Nick Clegg (Liberal Democrat) have taken to calling each other liars—a strong word in Anglo-American politics—and fear mongers. This is a marked change from the mild-mannered first debate, when the three candidates were feeling their way around an unfamiliar format.

The principal subject of the second debate was to be international issues. The overriding themes remained fairness, climate change, and economic recovery. On military strategy, Clegg’s opposition to the invasion of Iraq and spending £100 billion on a new generation of nuclear submarines distinguished him from the other two, who were largely in agreement. All three stated their support for the brave armed forces and promised to commit them only in service of the national interest.

Clegg committed what I regard as the one gaffe. He charged that the Conservative Party in the European Parliament was aligned with other center-right parties that included anti-Semites, climate change deniers, and homophobes—guilt by association. This charge was below the belt, and it will be interesting to see if it costs him points with the British electorate.

A softer association with Europe distinguished Cameron, who opposes the transfer of power from Westminster to Brussels without a public referendum, from Brown and Clegg, who can be classified as europhiles.

All three promised more support for the elderly and maintaining other social services, while promising to reduce the deficit. None was persuasive. This was doubletalk at its best.

Several of the questions left something to be desired. What did the candidates think about a possible visit by the Pope? What did each candidate do in his life to reduce his personal carbon footprint? All three stressed rail over air travel and the benefit of home insulation.

The strategies were similar to the first debate. Clegg blamed Labor and Conservative for the economic and political mess. Cameron blamed Labor. Brown warned that Clegg was irresponsible on security and Cameron’s reduction in spending would wreck the recovery.

On style, Clegg was less impressive in the second debate. Both Cameron and Brown appeared more confident. As of this posting, puts the probability of a Conservative victory at 72 percent. My sense is that some of the steam will go out of Clegg’s campaign over the next week, and that he will need a blockbuster performance in the third and final debate on April 29 to recover the high ground.

Friday, April 23, 2010

Arizona’s Legislature Pushes Immigration Policy to the Forefront

On April 20, 2010, Arizona’s legislature approved an immigration bill that makes it a state crime to be in Arizona without documents. As of this posting the governor has not yet signed it into law. J.D. Hayworth, opposing John McCain in a tough Republican senatorial primary, strongly supports it. McCain, a member of the “Gang of Fourteen” in the Senate, half Democrats and half Republicans which proposed comprehensive immigration reform several years ago, recently asked President Obama to send troops to help control the border, following the murder of an Arizona rancher.

The Mexican government, naturally, denounced the proposed law, charging the Arizona legislature with “racial profiling.” More to the point, opponents of the measure might sue in federal court on the grounds that immigration policy is a matter for the federal, not state, government. Pressed by Arizona, the Obama administration may feel compelled to deal with immigration reform sooner than it had planned.

I propose a simple thought experiment to evaluate the motives of those for and against comprehensive immigration reform. Suppose the vast majority of illegal immigrants were Asians, largely from China, rather than Hispanics from Mexico, Central America, and South America. Would Republicans and/or Democrats advocate comprehensive reform that includes a path to citizenship? If not, why not?

Thursday, April 22, 2010

Does Obama Deserve Credit for the Economic Recovery?

Scores of books, articles, and blogs, and those in press and under contract, have tried to explain the financial and economic crises of 2007-09. Important factors include unqualified home buyers, complicit lenders, policies promoting home ownership, overly loose monetary policy, lax government regulation, development of incomprehensible financial instruments, irresponsible investment houses, and others.

The same holds for recovery. What accounts for the rapid rise in stock prices since the low of March 9, 2010, the improvement in employment conditions, and return to economic growth? Posited factors include stabilizing the financial system, normal operation of the business cycle, accommodative monetary policy, tax cuts and stimulus spending, improving consumer confidence, and others.

Politicians, academics, the media, and the blogosphere are engage in a great debate to justify the policies they support to prevent another meltdown and improve current economic conditions. Left and right disagree on the role of the stimulus, how fast to tighten monetary policy, the need for additional financial regulation, and so on.

In November voters will cast their judgment on President Obama first two years in office in the mid-term elections. Democrats will find it hard, even if true, to blame Bush and Republicans for the financial crisis. If unemployment remains high, Democrats will be blamed and likely suffer large losses. If hundreds of thousands of new jobs are created every month between now and November, Democrats will lose fewer seats than forecast.

If the economy improves, Obama will get the credit. His achievements will include having passed a stimulus package that Democrats will claim prevented a second depression, restoring confidence in consumer and financial markets, enacting health reform to cover millions of uninsured, strengthened financial regulation (which appears increasingly likely) to prevent future meltdowns, withdrawing 50,000 troops from Iraq, and escalating the war against the Taliban. One thing is clear. Whether by hook or by crook, whether for good or for bad (where you stand depends on where you sit), Obama has delivered on several of his key campaign promises. This stands in contrast with many of his predecessors who, once installed in the White House, forgot their constituents.

Wednesday, April 21, 2010

Earth Day 2010

I think that I shall never see
A poem as lovely as a tree

These famous opening lines by Joyce Kilmer (1886-1918) are perfect to mark earth day, first begin on April 22, 1970. That was long ago.

When Japanese tourists began globe trotting in the 1970s, they viewed the sights through the lense of their camera. They never actually saw the sight they went to see.

The same has beset earth day. Walking around Stanford’s campus, one of the most beautiful in the world, witnesses droves of students, faculty, and staff looking at the screens of their iphones, blackberries, and cell phones to make sure they haven’t missed an “important message.” The only moment they see or appreciate any bit of nature is when the screen of their portable device puts up a picture of a tree as an advertising come on for earth day. Portable phones have turned too many into 1970s-style Japanese tourists.

Tuesday, April 20, 2010

Do Goldman Sachs and Wall Street Require Tougher Regulation?

Time will tell if Goldman Sachs is guilty of financial misconduct as charged by the Securities and Exchange Commission. But it is timely to weigh in on the firm’s conduct as an example of what can go wrong on Wall Street, and whether new legislation is required to prevent asset-backed securities and other derivatives from putting the financial system at risk.

In the wake of the 1997 Asian currency crisis, I was asked by some investor friends to meet with three hedge fund managers in Florida and New York in December 1997 to evaluate their trading strategies. These funds only allowed redemptions at the end of each quarter. Although they beat market indices every year since 1994, the investors were concerned about financial contagion spreading from Asia. They wanted to decide whether to adjust their positions before the doors closed on redemptions for another three months.

I met with the managers of the funds and the mathematicians who designed their trading strategies. At one I was given a fifty-page paper replete with mathematics explicating its winning trading strategy. I concluded in five minutes that the mathematician was from outer space and that the manager had hit a winning streak amplified by twelve-to-one leverage. I told my friends that I wouldn’t invest a penny with that fund. They closed their positions at the end of 1997. To conclude this particular story, the fund declined 16.2% in April 1998, 8.4% in May 1998, and 19.2% in June 1998. It reduced its positions from over $5 billion to just over $400 million. The other two funds were similar in their operations, of which one was later charged by the Internal Revenue Service for failing to report income and pay taxes.

What accounted for the losses? They resulted primarily from “unusual market conditions that affected the Fund’s mortgage pass-through securities and related hedging instruments and losses in liquidating positions.” The problem was falling bond yields that dropped home mortgage rates to their lowest levels in five years, below treasury bonds, which pummeled investors in leveraged mortgage-backed securities as home owners refinanced at lower rates and prepaid loans.

Imagine that! Mortgage-backed securities were at the root of hedge fund failures in 1998. No charges or allegations of fraud were leveled by the SEC. Nor were the risks understated in the funds’ prospectus. The operations of these funds never posed any risk to the financial system until Long Term Capital Management came along with its massive, highly-leveraged bets. Still, numerous high net worth individuals were attracted to funds promising high returns based on mathematical trading and hedging strategies.

Monday, April 19, 2010

Were Universities Complicit in the Financial Crisis?

University seals, logos, coats of arms, and policies rest on such principles as truth, freedom, honor code, transparency, and ethics. Do their investments in the financial crisis of 2007-09 conform with those ideals?

A flood of books, articles, statements, and comments on the causes and consequences of the financial crisis fills bookstores, the media (television, radio, print), the blogosphere, oficial testimony, and academic conferences. The culprits include federal and state regulatory agencies, the Federal Reserve Board, unqualified home buyers, mortgage brokers, wall street financiers, and professors of economics and finance who laid the intellectual foundation with theories based on rational man, the efficient market hypothesis, self-regulating markets, value at risk models, monetary policy, and so forth (although few professors have yet to say “mea culpa”). To-date, little attention has been given to the investment behavior of managers of university endowments.

The Ivies (including Stanford) outperformed the general market over the past 10-20 years by a considerable amount, building up large endowments. These funds enabled rapid expansion of facilities and faculty, and generous aid for students. Books and articles were written about the “Yale model,” largely copied by Harvard, Dartmouth, Princeton, Stanford, and others. The investment strategy paid off until 2007, until it backfired with a vengeance in 2008-09. Endowment returns plunged billions of dollars, forcing cancellation of building projects, staff layoffs, faculty buyouts, and the need to sell bonds to raise cash for operating budgets or contingencies.

Harvard University Financial Report 2009 is 48 pages long. It sets out investment returns for the 1, 5, 10, and 20 years. Its fiscal 2009 performance was dreadful, taking severe losses in private equity, special situation funds, interest rate exchange agreements, and real assets (property, commodities, etc.). Investment assets are divided into three levels of pricing: (1) active markets, (2) inactive markets but assets can be priced directly or indirectly, and (3) prices based on inputs that are unobservable. (The latter rests on what managers of private equity and commodity funds tell the university, not on the university management company’s independent evaluation.) Of the total value of investment assets on July 1, 2008, nearly two-thirds was in level 3, calling into question the real as opposed to overstated value of the endowment.

The 2009 report from the Stanford Management Company that is available to the public on its website is exactly four page long, of which three pages consist of comparisons with benchmarks. Long-term policy targets include 35 percent real estate, private equity, and natural resources. The one year comparison (fiscal year 2009 vs. 2008) against benchmarks reveals massive losses in natural resources, real estate, and special situations.

Here’s the question for Harvard, Stanford, and other similarly managed university endowments: where are the details? Were any funds placed with Lehman Brothers, Goldman Sachs, and other miscreants? Did the endowments hold mortgage backed securities, other asset backed securities, credit default swaps, collateralized debt obligations, synthetic collateralized default obligations, and other obscure derivatives that were doomed to collapse? Were the trustees and other university officials responsible for overseeing the investment companies aggressive in asking tough questions or did they just go along with their reports, assuming good times would continue without interruption? Universities enforce a strict honor code among students, send out annual memos to faculty about proper use and misuse of licensed materials, and warn about plagiarism, among others. However, stakeholders of donors, faculty, and staff are not accorded symmetric treatment on the specifics of endowment managers.

Every year, TIAA/CREF, Vanguard, Merrill Lynch, and other firms that manage retirement funds distribute annual reports itemizing assets in their funds, along with purchases and sales of securities. These reports are required under government regulations. Shouldn’t university portfolios be subject to similar disclosure?

President Obama is seeking financial reform legislation that strengthens existing regulations and add new regulations to reduce the risk of a future meltdown of financial markets. If enacted, which seems increasingly likely, university endowment managers may no longer be able to place risky bets that bring outsized returns. The new investment landscape may require universities to accept less ambitious targets for expansion and program development. Perhaps universities can save several million dollars by replacing expensive management companies with index funds.

Saturday, April 17, 2010

Whither the House of Lords?

Nick Clegg’s performance on behalf of his Liberal Democrats in Britain’s first televised national election debate on April 16, 2010, may have sounded the death knell of the House of Lords. Barring dramatic changes in public opinion before the May 6 election, the new Parliament is likely to be “hung,” with no party having a majority of seats in the Commons.

It’s hard to see common ground for a LibDem-Conservative coalition, especially with the Conservatives pledging only to transform the Lords into a “largely” elected body. Most likely is a LibDem-Labor coalition. In that event, Brown may retain his premiership, but will have accept key LibDem demands. Among them is electoral reform that will require an outright majority of votes cast in each constituency, not just a plurality, to win a seat in the Commons.

The bigger change will replace the House of Lords as a body of hereditary and life peerages with a smaller fully-elected body. Lords might get to retain their titles but will have to win an election to sit in the new chamber. Grants of new lordships by the queen would no longer carry political rights.

What to name the new body? Most likely Senate or Upper House as in former British colonies and current Commonwealth countries with bicameral parliaments.

Some lords may choose to stand for election to the new body. Most will likely fade away into history. The Lords may be on the verge of extinction, a casualty of popular democracy, bringing an old era of British politics to an end.

Friday, April 16, 2010

Reflections on the First Televised British Political Debate

As Americans rushed to submit their tax returns before midnight on April 15, and political activists held Tea Party rallies around the country, the leaders of the three largest British parties—Gordon Brown of Labor, David Cameron of the Conservatives, and Nick Clegg of the Liberal Democrats—debated each other for ninety minutes on a range of domestic issues: the deficit, health care, education, crime, and budgetary support for the military. Each stressed that his party would build a more fair Britain. It was a scene straight out of Snow White and the Seven Dwarfs: “Mirror, mirror, on the wall. Who’s the fairest of them all?”

I hope the League of Women Voters was watching. The event was a real debate run by a superb moderator. Audience members, not journalists with their own agendas, asked the questions. The audience did not interrupt with applause. It put American presidential debates to shame.

Some general impressions of the three leaders. Brown recited laundry lists of Labor achievements during its thirteen years in power, rejecting each attempt to blame it for any current problems. Cameron spoke in generalities of a better Britain, blaming Labor at every opportunity. The two men largely took after each other, trying to minimize the credibility of Clegg’s Liberal Democrats to prevent a hung Parliament in which Clegg held the deciding votes between Labor and Conservative if neither won an outright majority. Clegg talked in big picture terms. He told the British people that a vote for the LibDems was not wasted. Only his party could make a clean start of fixing the Britain that had been misgoverned by alternating Labor and Conservative Parliaments. He promised a straight talking, open, honest government. A post-debate snap poll revealed that 62 percent of viewers declared Clegg the winner; a Guardian poll on Friday gave Clegg 51 percent. Brown and Cameron equally split the remaining percentages.

In my opinion, Cameron committed the only real gaffe. He insisted that the U.K. needed to maintain its independent deterrent as it was impossible to know what’s going to happen in Iran and China (perhaps he meant North Korea?). What do you suppose the Chinese made of that remark? Was Britain preparing for a possible nuclear attack on China?

The U.K.’s fiscal deficit was the biggest bone of contention. The deficit is estimated at £160-70 billion this fiscal year. This sum is about 12 percent of government spending of £700 billion, or 6 percent of GDP of £1.4 trillion. Brown declared that spending could not be cut this year; a reduction of £6 billion in spending would cost 40,000 jobs and risk the recovery. Cameron replied that spending had to be cut by £6 billion to prevent a one percentage point rise in National Insurance contributions that would kill jobs. For Brown, government spending is the source of jobs. For Cameron, tax cuts and private business are the solution. Clegg said that he had spelled out £15 billion in spending cuts, which included the cancellation of Britain’s Triton nuclear submarine program. He appeared the most serious of the three in cutting the deficit.

Cutting £6 billion from spending to prevent a tax increase that would kill jobs, or keeping the ₤6 billion in the budget to insure the recovery by preventing the loss of jobs, must strike any serious thinking person as absurd. £6 billion is 0.8 percent of total government spending, and a minuscule 0.4 percent of GDP. Can a fraction of a percent be the difference between recession and recovery? If so, the British public will face “shock and awe” in spending cuts and tax increases in the next few years as the government is forced to cut its deficit by some £100 billion. On this magnitude, all were silent.

Thursday, April 15, 2010

President Obama Bows to China’s President Hu at the Nuclear Security Summit

Critics of President Obama, conservative pundits and intellectuals, decry his bowing to third world oligarches and dictators. They say it shows weakness, not strength, encouraging such leaders as Iran’s Ahmadinejad to disregard U.S. warnings about Iran’s nuclear program.

Perhaps Obama believes he is being courteous, thereby rectifying eight years of perceived Bush swagger in dealing with foreign leaders that he thinks has alienated our allies and deeply offended those with whom we have to negotiate.

Culture influences the interpretation of pictures. Among Chinese, bowing to the supreme Chinese leader is redolent of China’s imperial past when foreign dignitaries kowtowed (bowed nine times) to the emperor when appearing in court. Kowtowing was seen as a sign of deference, great respect, and submission to the emperor’s place at the center of the world.

Millions of Chinese saw the leader of the U.S. show great deference to the leader of China. This may or may not have been President Obama’s objective, but that was how it was perceived in China. More so since President Hu made no firm commitment to imposing meaningful sanctions on Iran and revaluing China’s currency.

Wednesday, April 14, 2010

U.S. Aid to Israel: Much Ado About Less and Less

Critics of U.S. foreign policy cite foreign aid to Israel as a source of Arab discontent. The critics of aid to Israel include Europeans, virtually every Arab regime, and secular, left-leaning Jewish Americans, among others. They argue that aid props up Israeli hard-liners who oppose progress toward a two-state solution for Israel and the Palestinians.

On its face, the criticism seems plausible. On the facts, it is not.

Aid to Israel is a small part of the U.S. aid budget. Aid to Egypt and Jordan along with civilian aid to Iraq and Afghanistan exceeds aid to Israel. However, few argue that this aid props up Arab hard-liners who obstruct peace.

Aid to Israel has varied between $2-4 billion over the past three decades. In the four years 1980, 1990, 2000, and 2009 taken as examples, aid was $2.12 billion, $3.03 billion, $4.13 billion, and $2.55 billion respectively. In the same four years, the size of Israel’s economy, expressed in U.S. dollars at purchasing power parity, was $21.78 billion, $69.10 billion, $159.31 billion, and $201.32 billion.

As a percentage of Israel’s economy, U.S. foreign aid amounted to 9.7 percent, 4.4 percent, 2.6 percent, and 1.3 percent respectively for the four selected years. U.S. aid is symbolic of America’s commitment to Israel, but provides limited resources that “enable” Israel to frustrate peace between Israel and the Palestinians. Perhaps the problem is aid to regimes that prop up hard-line Arab critics of Israel, thus preventing Arab countries from granting official recognition to Israel.

Monday, April 12, 2010

Alan Greenspan’s Thoughts Circa 1980

In 1980 the Hoover Institution published its longest and most influential policy book, The United States in the 1980s, whose contributors included many members and advisors of the Reagan administration. I edited the fourteen domestic issues papers, which included a paper that can be read on Google books by Alan Greenspan entitled “Economic Policy.”

The context of his paper, the high and rising inflation of President Carter’s years, led Greenspan to warn of the risk inflation posed to investment and the efficiency of the economy. Reducing high-risk premiums, which were “blind-siding” the market system, should be the primary focus of Western economic policy. This, in turn, required a significant and credible reduction in the rate of inflation.

The policy question was how to lower inflation and contain it. He stated that the Federal Reserve Board alone would find it difficult to take the heat to reduce and contain inflation. It was also necessary to curb the growth in federal spending and deficits to restore balance to the financial system. Curbing spending and deficits necessitated reining in the growing number of fiscal constituencies that clamored for ever-more government programs.

The most effective constraint in his view was a constitutional amendment to restrain expenditure and tie it to a balanced budget requirement. Recognizing the political difficulty of achieving an amendment, second best was requiring 60 percent super majorities for Congress to pass money bills. Although a super majority provision could be readily overturned by simple majority passage of another law, he believed that the politics of appearing spendthrift could keep a super majority provision in place for some time.

Fed Chairman Paul Volcker succeeded in lowering inflation in the early 1980s, which threw the economy into recession. Its subsequent recovery and steady expansion over the next several decades in a non-inflationary environment suggests that presidential and Fed chairman will were the crucial ingredients. But Greenspan was prescient in warning that government spending and deficits would grow without some effective constraint. Sadly, no effective constraint exists.

Sunday, April 11, 2010

Learn from China

It is widely believed that America exports technology to China and imports, in return, low-tech assembled electronic goods, toys, clothing, and other consumer products. This belief, the conventional wisdom, rests on a widely-held view among Americans that Chinese in China are not creative, that they learn by rote with little emphasis on speaking out, that the society rests on a high degree of consensus and stifles individuality, and so on.

For those who have spent decades observing China’s remarkable economic transformation, conventional wisdom is dated. China’s government has just signed a cooperation agreement with the State of California High-Speed Rail Authority to provide engineering expertise and high-tech parts for the construction of high-speed rail (perhaps providing some of the financing). China is well ahead of the United States in building high-speed trains. China is planning thousands of miles of new high-speed rail construction in the next five years. It should be noted that China’s high-speed trains are faster than Japan’s bullet trains and France’s TGV.

As a general rule, China can make things better, faster, and cheaper. This rule is spreading throughout all sectors of economic activity, including high technology, and is poised to encompass biotechnology in the not-too-distant future.

(Hat Trip: Dean Baker)

Saturday, April 10, 2010

Vote Conservative: Save the Queen

The three major parties contesting the May 6, 2010, national election in the United Kingdom pledge to end, or significantly reduce, aristocratic privilege embodied in the House of Lords. The Liberal Democrats want fairness, first and foremost. Labour is equally committed to fairness, with the Conservatives not far behind. Still, the Tories state their intention to maintain some aspect of non-elected membership, however small, in the Lords.

There is no written constitution in the United Kingdom. Parliament, specifically the House of Commons, is supreme. Over the centuries it has whittled away royal power. Legislation has transformed the Lords from a hereditary body to one chiefly of life peerages. The next reform of the Lords will likely entail an end to hereditary privilege and a gradual phasing out of life peerage as elected members replace lordships. As this unfolds, the British monarch will lose the power to approve lordships. Titles would become honorary, lacking political position.

The biggest problem facing the United Kingdom is its massive fiscal deficit. Avoiding a Greek-like crisis requires freezing or reducing public spending, and imposing new and higher taxes. The “fairness” doctrine will require the royals to make a larger contribution to the running of the country: higher taxes, reduced grants from Parliament (Civil List), even perhaps privatizion of royal palaces.

The monarch has three official residences: Buckingham Palace in London, Windsor Castle outside London, and the Palace of Hollyroodhouse in Edinburgh. Wealthy Russian oligarches, oil-rich Arab potentates, and successful hedge fund managers would pay huge sums to buy a royal palace. A condition of private ownership could require historic preservation and opening to visitors for a minimum number of days a year.

The royal family owns several private residences, Sandringham House (20,000 acres) in England and Balmoral Castle (65,000 acres) in Scotland, along with residences for other members of the royal family. The government could provide an office in Parliament for the Queen to grant her royal assent to legislation and carry out other royal business.

Based on the manifestos of the three parties, the Conservatives appear most committed to maintaining the royal tradition. I recommend voting Tory.

Friday, April 9, 2010

Vote Conservative: Save What’s Left of the British Constitution

On May 6, 2010, voters in the United Kingdom will go to the polls to select a new House of Commons, from which the executive branch will be formed. The polls and betting sites ( predict a Conservative Party victory, but the Tories (another term for Conservatives) have seen their lead shrink in the past few months. Prime Minister Gordon Brown still believes that Labour can win a fourth term, while Nick Clegg’s Liberal Democrats hope to make their best showing in decades.

I’ve browsed the web sites of all three, reading their platforms and election manifestos. They are the equivalent of Brahms’ variations on a Theme of Haydn. Each promises to stop climate change, build a sustainable green economy, maintain and improve the National Health Service, reduce crime, cut class sizes, improve public transportation, retain the 50 percent top tax rate, rebuild the military, repair the public finances, and so on. The choices seem to be Labour, Labour-lite (Tories), and Labour-strong (LibDems).

I’m urging U.K. voters to vote Tory to preserve what remains of Britain’s constitution. Labour wants to hold a referendum on political reform that (1) would move to what is called the Alternate Vote system, which would eliminate safe constituencies and produce a more representative House of Commons, and (2) complete reform of the House of Lords, eliminating hereditary and life peerages in favor of elected Lords. The LibDems want the same reforms as Labour, but also the right of a certain number of constituents to recall (“sack”) members who have misbehaved by being able to force a by-election. David Cameron’s Tories state that they will “work to build a consensus for a mainly elected second chamber to replace the House of Lords.”

England is the birthplace of modern parliamentary democracy. During the centuries a series of political reforms have removed from the Crown virtually all its political powers, replaced most hereditary Lords with life peerages, and expanded the franchise for MPs from one in twelve adults in 1832 to universal suffrage. Creating a fully-elected Lords would transform Parliament into an American-style, two-body Congress, with the difference that the prime minister would still be chosen from the Commons, not by a separate vote.

If it ain’t broke, don’t fix it! Unelected Lords often do a better job reviewing legislation than MPs, who must pander to the voters to win reelection. Cameron has not specified the definition of “mainly elected,” except that it must mean some non-elected feature. Some tradition is better, although not by much, than no tradition.

Thursday, April 8, 2010

“Nagging Housework,” Part II

Yesterday’s post reported the research of Londa Schiebinger that women academics and professionals did twice the housework of men, ten hours vs. five a week, which put women scientists’ career advancement at a disadvantage.

Having given further thought to this problem, I have several suggestions to remedy this inequity, especially for women scientists who must put in long hours in laboratories to keep up with men, which can save the extra five hours, maybe more, they spend on nagging housework.

Eat and drink on paper or plastic plates, cups, bowls, and use plastic silverware. These can be discarded instead of washed, dried, and kept on shelves.

Have all laundry and dry cleaning picked up and delivered by a commercial firm.

Shop on-line for clothing and other apparel.

Shop at big box stores (e.g., Costco) once a week. Stock up on frozen prepared foods that only require a microwave to heat up. Buy fresh fruit and vegetables cut up for eating or heating. These purchases will help to minimize preparation time. Or, eat out five nights a week.

Live in an apartment, condo, town house, or home on a small lot to minimize gardening and other maintenance.

Older cars require more care. Lease, rather than buy, a car to minimize maintenance. Renew the lease on a new car every three years.

For those with teen-age children, require household chores in exchange for cash allowances, special clothing purchases, i-phones, etc.

Read journal articles on the treadmill. Multi-tasking, a specialty of women, will kill two birds with one stone.

Have a simple hairdo that requires less maintenance.

The above should save at least, but probably more than, five hours a week. It’s just a matter of more efficient allocation of time. Moreover, women scientists who follow this regimen will serve as excellent role models and mentors of younger scientific women.

Wednesday, April 7, 2010

April 7, 2010, “No Housework Day” at Stanford

Stanford University has declared April 7, 2010, “No Housework Day.” The Michelle R. Clayman Institute for Gender Research is hosting a panel discussion on “nagging housework” eating into job productivity, interfering with women’s career advancement, and reducing America’s global competitiveness in science.

Professor Londa Schiebinger, director of the institute, has studied the issue of housework. Despite women’s progress in recent decades, she found that women scientists do twice as much housework at their male counterparts: ten hours a week for women and five for men. The ratio applies to women in much of the academic and professional worlds.

Schiebinger proposes that employers provide benefits to support housework to all employees, both men and women, which would augment benefits for health care, day care, housing, and college tuition. Noting that Swedish firms provide housework benefits, Schiebinger suggests that this additional benefit would create better paid jobs for professional house cleaners, in turn reducing illegal immigration. Swedish firms also assist with gardening and cooking.

Schiebinger has left several questions unanswered. Would the benefit be a tax-free fringe? Does it make economic sense to provide the benefit to moderate-income secretarial and grounds maintenance staff? Is the benefit to be doubly provided for married couples? Would the budgets of employers require reductions of other benefits or lower increases in salaries? Would stay-at-home spouses be reimbursed for “nagging housework?”

In her essay that appeared in the Economist Debates, Schiebinger did not address the issue of taxation, especially of professional couples. On January 1, 2011, the current 35 percent top rate of tax will rise to 39.6 percent on couples earning more than $250,000. When effective in 2013, the Medicare tax will add another 0.9 percent to the top rate, and the 3.8 percent total Medicare levy will apply to capital income. A back of the envelope calculation suggests that Londa and her professional husband will pay an additional $15,000 or more in federal income taxes. At the average of ten hours a week of housework, $15,000 is sufficient to pay $30 per hour for household help for a year, which translates into $60,000 a year for house cleaners, no mean income. Perhaps the benefit should be means tested to exclude those earning more than $250,000, which would improve the distribution of income. If the U.S. needs more productive women scientists to compete with China, perhaps Schiebinger should oppose Obama’s tax-rate increases, which penalizes the efforts of female partnered scientists.

As for me, I’m scheduled for several hours of housework while TBW (the beautiful wife) takes the day off.

Tuesday, April 6, 2010

Searching for the Holy Grail of Social Justice

Many scholars, politicians, and pundits worry that large concentrations of income and wealth in the hands of a few in Western market democracies can lead to social and political instability. They contend that redistribution of income from the wealthy few to the less well-off many, thereby achieving a more “equitable” distribution of income, increases “social justice.” Improving the financial condition of the lower half of the income spectrum increases its access to health care, education, housing, and other goods and services. In particular, the high-tax, big-spending “social market economies” of Europe, especially the Nordic countries, are touted as ideal models.

During the past fifty years, I’ve visited Denmark, Finland, Sweden, and Norway numerous times. I’ve spoken with academics, business leaders, politicians, bureaucrats, and persons in the street. Residents of each country regard their political economy—the scope and size of government spending, taxation, and regulation—as the most just in the region.

I found no consensus on the “optimal level” of social justice among the four. Over the decades, opinion has changed in each country on the appropriate size of government that maximizes social justice. Sometimes the level of spending and taxes were too low, sometimes too high, sometimes just right, but the just right level never stayed intact for any length of time.

Turning to America, politicians who push for higher taxes on couples earning over $250,000 a year to fund more health insurance, prolong the solvency of Medicare and Social Security, and finance new programs of public investment often speak of achieving greater social justice. I, for one, would be more comfortable if someone, anyone, would define with absolute clarity and provide a standard of measurement that enables us to recognize social justice when it has been achieved. And, to insure we can keep it once we get it.

Monday, April 5, 2010

Definition of a Politician

Sir Henry Wotton (1568-1649) is known for his definition of a diplomat: “An ambassador is an honest man sent to lie abroad for the good of his own country.”

Rabushka’s definition of a politician: “A politician is an honest, or dishonest, person who is paid to lie to his (or her) own country.”

Nowhere is this more clear than newspaper reports of September 18-19, 2006, of a leaked tape that contained blunt remarks of Hungary’s prime minister, Ferenc Gyurcsany, speaking to a meeting of his Socialist Members of Parliament a few weeks after they won the election:

A melange of comments from the tape regarding his party’s statements on Hungary’s economy:

“Our party lied to the public....Evidently, we lied throughout the last year-and-a-half, two years. It was totally clear that what we are saying is not true....We lied in the morning, we lied in the evening....the lies were those politicians told citizens, who now believed they could have happiness as a gift....We have to stop the deluge of lies which have covered the country for many years.”

Perhaps Ferenc Gyurcsany is the most honest politician in the world?!

Sunday, April 4, 2010

Taxes of a Thousand Cuts

An interesting itemized list of taxes (not tax deductions):

Taxes upon every article which enters the mouth or covers the back or is placed under the foot. Taxes upon everything which it is pleasant to see, hear, feel, smell, or taste. Taxes upon warmth, light, and locomotion. Taxes on everything on earth or under the earth, on everything that comes from abroad or is grown at home. Taxes on the raw material, taxes on every fresh value that is added to it by the industry of man. Taxes on the sauce which pampers man’s appetite, and the drug which restores him to health; on the ermine which decorates the judge, and the rope which hangs the criminal; on the poor man’s salt and the rich man’s spice; on the brass nails of the coffin, and the ribbons of the bride; at bed or board, couchant or levant, we must pay. The schoolboy whips his taxed top; the beardless youth manages his taxed horse, with a taxed bridle, on a taxed road; and the dying Englishmen, pouring his medicine, which has paid 7 per cent., into a spoon that has paid 15 percent., flings himself back upon his chintz bed, which has paid 22 per cent., and expires in the arm of an apothecary who has paid a license of a hundred pounds for the privilege of putting him to death. His whole property is then immediately taxed from 2 to 10 per cent. Besides the probate, large fees are demanded for burying him in the chancel. His virtues are handed down to posterity on taxed marble, and he will be gathered to his fathers to be taxed no more.

Gordon Brown’s Britain? Obama’s future America?

This passage is taken from an essay of Sydney Smith, published in the Edinburgh Review in 1820, five years after the conclusion of the Napoleonic Wars.

Saturday, April 3, 2010

Some Thoughts on Inequality

Academic interest in feminist studies has grown at an exponential rate, from a handful of centers and university departments to more than a thousand over the past fifty years. Academic presses routinely publish books on feminist and gender studies.

A new field of study is developing around the theme of inequality and its relationship to minorities, poverty, school dropouts, family instability, and so forth. Inequality centers and research programs have been established at Stanford, Northwestern, Columbia, Princeton, Cornell, Wisconsin, Iowa, Yale, and Brookings, to name a few. The stated purpose of many of these centers is to design policies that reduce inequality on the view that greater equality in the distribution of income and wealth will improve living standards of lower income households and the workings of democracy.

How many of the scholars in these centers take vacations to see inequality? We routinely receive brochures in the mail promoting cruises, flight and hotel packages, and travel destinations to help us plan our summer holiday. Most destinations are in Europe, in Scandinavia, Eastern Europe, Russia, the Southern Mediterranean, Western Europe, and the British Isles.

The stops in each itinerary include the great cities and ports of Europe, with a choice of tours that focus on the basic foursome: monuments, museums, churches, and castles. In the course of lecturing on cruise ships during the past decade, my wife and I have taken many tours. Guides rarely if ever show us examples of inequality, for instance, workers’ housing blocks or welfare centers. The only workers’ sights I’ve ever observed were from the windows in taxi rides from airports in Belgrade, Zagreb, Vienna, Prague, and others en route to historical city centers.  Guides talk about kings and queens, architectural wonders, great art, colossal churches, country homes, nobles’ attire, and so forth. During our tour of St. Petersburg we learned about Czarist Russia, and then skipped the entire Communist period to the “new Russia.” Ditto in Gdansk.

Tours of Asia and Latin America are similar in focus. The chief attractions are colonial or dynastic buildings, monuments, churches, fortifications, etc. I have yet to visit a peasants’ museum (if there are any).

The sights of Europe (including most museum collections) are the result of concentrations of wealth that enabled the commissioning of paintings, buildings, and monuments. Had the history of Europe been socialist-style equality throughout the three past millennia, and of Asia for four millennia, there would be little of interest to see in our travels.

Friday, April 2, 2010

Confucius for Americans

Confucius is my favorite philosopher. Although his analects (sayings) are 2,500 years old, their truths may be more relevant than ever.

The Chinese Communist Party discouraged the study of Confucius and other classics during their rise to power and the years of Mao Zedong and his followers (1921-78). Since Deng Xiaoping put China on a path of opening up and modernization in 1978, Confucius is back in vogue. China has established hundreds of Confucian institutes around the world.

Confucius commented far and wide on politics, interpersonal relations, correct modes of behavior, and the importance of learning, among others. Like Aristotle, he described the good versions and the perversions of behavior in all of these areas. Confucius proposed a four-class system of social organization, with scholars at the top. Accordingly, education was his central focus, but he worried about its misapplication.

In illustrating his fear, Confucius says “Rarely do I meet a man who studies for three years without thinking of a [lucrative] post in government.” This has its counterpart in the United States. Rabushka says, “Rarely do I meet a man who works for three years in Washington, D.C. [in elected or appointed office] without thinking of a lucrative book deal, highly-paid speeches, and a fat post in a lobbying firm.” The concept of “public service” takes on a different meaning in the Confucian framework.

Thursday, April 1, 2010

Ending Snake Oil Salesmen

To get a driver’s license, we have to pass written and driving tests. To buy life insurance, we have to pass a medical exam. To be admitted to most colleges and universities, we have to earn reasonably good scores on the SAT or ACT entrance exam. To practice law we have to pass the BAR exam. Ditto for medicine, electrician, plumber, contractor, engineering, land surveying, real estate, social work, insurance, counselors, and so on.

In the last two years, several dozen books and numerous articles have been published trying to identify the causes of the financial and economic crisis of 2007-09. Most authors agree that an important cause was the subprime mortgage crisis; many individuals signed up for mortgages they did not understand. Most agree that another cause was the proliferation of complex financial instruments, such as asset backed securities (ABS), mortgage backed securities (MBS), collateralized debt obligations (CDO), synthetic CDOs, that many investors did not understand. Most agree that government agencies bore some responsibility for failing to regulate financial institutions undertaking excessive risk. And so on.

I propose, then, a regime of extending testing to specific financial decisions. To prevent another subprime housing crisis, home buyers applying for a loan must first pass an exam in which the applicant demonstrates knowledge of fixed interest rates, variable interest rates, principal payments, no-principal loans, prepayment penalties, property taxes, escrow, points, closing costs, insurance, monthly-payment-to-income ratio, and so forth. Passing an exam will reduce the ability of overly aggressive salesmen and lenders to confuse, deceive, or mislead buyers.

Ditto for investors. Anyone opening a brokerage account must first pass an exam demonstrating knowledge of different kinds of securities, margin, government guarantees, risk, rates of return, and so on.

The old adage of caveat emptor was replaced long ago by consumer protection, which clearly fell short in the areas of home buying and investing. Consumers would be better protected and make better choices if they commanded some level of understanding and proficiency in financial affairs instead of relying on the recommendations of salesmen whose incentive is to close the deal, however sound.