Friday, September 2, 2011

Confucius Analect of the Week, September 2, 2011

Forget the "Luck of the Irish."  Here at Stanford it is "LUCK of the Cardinal."

Go Stanford.  Rose Bowl or Bust!

Tuesday, August 30, 2011

Die Luft Der Verschiedenheit Weht

On August 18, 2011, President Obama issued an executive order “Establishing a Coordinated Government-Wide Initiative to Promote Diversity and Inclusion in the Federal Workforce.”  The order will augment the many numerous existing federal programs on diversity and inclusion.

A committee consisting of the director of the Office of Personnel Management, deputy director of the Office of Management and Budget, the president’s Management Council, and the chair of the Equal Employment Opportunity Commission shall establish a strategic plan and oversee its implementation.

Under the order, federal agencies retain the right to also establish an independent Diversity and Inclusion Office.  It should be remembered that the Dodd-Frank financial regulation law authorizes the creation of 28 Diversity and Inclusion offices in federal financial regulatory agencies and the financial institutions they regulate.

[The title of this post is a play on Stanford’s motto, “Die Luft Der Freiheit Weht,” “The Wind of Freedom Blows,” replacing “Freedom” with Diversity.”]

Monday, August 29, 2011

No Wonder Spain is in Trouble

To reassure Germany and other investors that Spain will not need a bailout, the ruling Socialists and opposition Popular Party agreed on August 26, 2011, to enact a balanced budget amendment to the Spanish constitution.

The lower house of Parliament will vote on the measure on September 2 with the amendment to receive final approval in July 2012.

This will reassure foreign holders of Spanish bonds, yes?  No!

The amendment will not take effect until 2020.  This gives new meaning to kicking the can down the road.  Moreover, the measure can be suspended by Parliament if there is a natural disaster or economic recession.

Huh?  On these provisions, you cannot fool any of the people any of the time, with perhaps the exception of Spanish government officials fooling themselves.

Saturday, August 27, 2011

August 2011

Does August 2011 feel a bit like the end-of-summer days of August 1914.

Friday, August 26, 2011

Confucius Analect of the Week, August 26, 2011


"No one calls Wei-sheng Kuo upright!  When someone asked for vinegar he sought it from a neighbor and gave it to him [the someone]."  (James R. Ware, Chapter 5, Verse 24)

Look on the bright side.  Wei-sheng Kuo ASKED a neighbor.  Today politicians TAKE from a neighbor to give to another (to buy votes).  Who can call tax-and-transfer politicians upright?

P.S.  Confucius was on vacation last week, trying to catch a glimpse of the goings-on in Martha's Vineyard.

Thursday, August 25, 2011

Minorities Clash — Paradise Lost

One would think that the election of a black president would improve relations between the minorities in the U.S.

Sadly, this is not the case between native American Indians and African-American descendants of former Indian slave owners.

When the Cherokees, the second largest Indian tribe, were forcibly moved to Oklahoma from their homeland to what became Oklahoma in 1838, some brought with them their African-American slaves.  After the Civil War, the Cherokee nation voted these “Freedmen” to membership in the tribe .

Now, more than 140 years later, the “Freedmen” have been evicted from tribal membership The Cherokee nation Supreme Court, the highest court in the sovereign Cherokee nation, has ruled that a 2007 tribal decision to detribalize them was proper.

The losses of the denationalized Freedmen entails losing free health care, educational concessions, and other benefits.  Black members of Congress are charging Cherokees with racism and apartheid.

Time will tell if the U.S. Supreme Court steps in to reverse the ruling.

Still think that the Shia, Sunni, and Kurdish peoples will live happily in a unified, democratic, stable Iraq?  Pashtuns and non-Pashtuns in Afghanistan?


Tuesday, August 23, 2011

Chinese Economics With Midwest Characteristics

Brookings Institution scholar Cheng Li has written an historical account of Chinese think tanks.  In recent years, China has turned its attention increasingly in the direction of domestic economic policy and international economic issues.

A recently established think tank is the China Center for Economic Research (CEER) at Peking University, China’s premier university.  As of 2005 (Cheng Li’s data), CEER had 24 scholars, all holding Ph.D. degrees from foreign universities.  (See Table 5)

One held a degree from Stanford.  None held a degree from the East Coast Ivies of Harvard, Yale, Princeton, and M.I.T.  Two held degrees from Chicago.  CEER was to be modeled in line with the traditional Chicago school.

Half held degrees from Midwestern universities, the heartland of red states.  (The same was true for the foreign trained economists in Korea and Taiwan that spearheaded reform in those lands.)  Midwestern doctoral programs tend to deal more with real world issues than with the finer points of mathematical models that have little real-world applicability.

China’s economic policy is generally regarded as pragmatic.  Its foreign trained economists have been educated to see things in the same way.

Could we swap some of their think tank economists for ours?

Monday, August 22, 2011

The American People Want Leadership

So said all the television talking heads, journalists, pollsters, and political consultants.

Just to let them know, Hu Jintao and Wen Jiabao are both available starting next year.  And they don't take vacations during economic crises.


Sunday, August 14, 2011

Politicians Uttering Platitudes

We need more aggregate demand---We have to cut spending.

We need to protect Social Security---We can't cut defense.

We need a balanced approach to deficit reduction---No new taxes.


Saturday, August 13, 2011

Understanding British Street Riots

Read Chapter 9, "Rioting Mainly for Fun and Profit," in Harvard's Edward Banfield, The Unheavenly City Revisited.

Friday, August 12, 2011

Confucius Analect of the Week, August 12, 2011

Somebody remarked.  “Jan Yung may be Man-at-his best but he lacks eloquence.”

“Of what use is eloquence?  He who engages in fluency of words to control men often finds himself hated by them.  I don’t know whether Jan Yung is Man-at-his-best, but of what good would be eloquence to him?”  (James R. Ware, Chapter V, Verse 5)

Confucius describes the class of smooth (slick, sleazy) political talkers, who conflate eloquence with good judgement and competence in government.

Thursday, August 11, 2011

NO YOU CAN'T

President Obama wants tax incentives for small businesses to encourage them to expand and hire.  Yet he wants to increase tax rates on those very same enterprises.  Is it small wonder that they are reluctant to expand and hire?

Mr. President: NO YOU CAN’T!

(HT:  I concur with Barry Eisler's characterization of Obama's statement on August 8)

Wednesday, August 10, 2011

Mirror, Mirror on the Wall. Who is the Fairest Credit Rating of them All?

Not the United States, which Standard & Poor's has downgraded from AAA to AA+ with a negative watch.

More than a dozen countries still enjoy an S & P AAA rating.  As of June 2011, these include Norway, Switzerland, Sweden, Denmark, Finland, Luxembourg, Canada, Netherlands, Hong Kong, Singapore, Australia, United Kingdom, Austria, Germany, and France.

Most interesting is China’s rapid rise through the ranks, from BBB in February 1992, to BBB+ in June 1997, A- in July 2001, A in July 2006, A+ in July 2008, to AA-, its current rating.

One more slip down for the U.S. and one more upgrade for China, and the two are even.  Whoduvthunkit?

Tuesday, August 9, 2011

Why Are So Many Economic Reports Unexpected?

It has become routine to say that economic reports on jobs, growth, inflation, consumer confidence, factory orders, home sales and prices, and other measures are “unexpected.”

How can this be?  Private and public economic forecasters have been trained in the nation’s finest universities and business schools.

Does anyone really expect that ten-year projections of deficit reduction have any credibility at all?  Does it matter if the long-term forecasts are put out by Democrats, Republicans, “independent agencies,” or White House staff?

Monday, August 8, 2011

Macroeconomics Final Exam Question


Draw up a list of factors that affect economic growth and contraction.  (Minimum of 20, maximum of 30)  Rank in order of importance.  Justify using examples and citations of demonstrative research.

On the basis of your answer, write a memo (not exceeding 1,000 words) to the president of the United States advising him of the best course of action to improve the economy. 

Friday, August 5, 2011

Confucius Analect of the Day, August 5, 2011

"Continuous readaptation to suit the whims of others undermines Excellence."  (James R. Ware, Chapter XVII, Verse 11)

Small wonder that politicians rarely achieve Excellence!

Thursday, August 4, 2011

Uncertainty is not Crashing the Stock Market

No, indeed!  Rather, it's the certainty that the United States is governed by buffoons in both parties whose actions will likely make things worse in the coming year(s).

Friday, July 29, 2011

Confucius Analect of the Day, July 29, 2011

“If a man does not give thought to problems which are still distant, he will be worried by them when they come nearer.”  (James R. Ware, Chapter XV, Verse12)

Congress and the White House (except President Clinton) disregarding the consequences of spending, deficits, and debt.

Tuesday, July 26, 2011

Would China Please Crash Already!

For the past several years, every day brings new warnings of the coming China crash.  The pessimists include business and finance analysts, journalists, expat professors and visiting economic experts, world economic institutions, and Western China specialists.  The pessimists steadily grow in numbers.  Only a handful dare deny the coming crash, exposing themselves to exclusion and ridicule.

The pessimists’ reasons for the coming crash include property bubble, inflation, overvalued currency, dependence on exports, widening rich-poor gap, urban-rural gap, rote learning in schools, counterfeiting, ill-defined rule of law and property rights, faulty social policies, one-party dictatorship, religious repression, and others.

China’s refusal to crash is harming the self-esteem of the China pessimists.  This must stop! 

Monday, July 25, 2011

Thomas Jefferson Opposed Public Debt



"I wish it were possible to obtain a single amendment to our Constitution.  I would be willing to depend on that alone for the reduction of the administration of our government to the general principles of the constitution:  I mean an additional article taking from the Federal Government the power of borrowing."

Friday, July 22, 2011

Confucius Analect of the Week, July 22, 2011

"Great Man is dignified but not proud,  Petty Man is proud but not dignified."  (James R. Ware, Chapter XIII, Verse 26)

Fill in the names of your proud, but not dignified, local, state, and federal politicians.

Thursday, July 21, 2011

Lying to Congress is a Crime

Why is lying to Congress a crime when Members of Congress lying to American citizens is just politics? 

Wednesday, July 20, 2011

Spending Limit–Balanced Budget Amendment

A spending limit-balanced budget amendment is not an impossible pipe dream.

The Basic Law (mini-constitution) of the Hong Kong Special Administrative Region (HKSAR) and that of Macao provides for a spending limit balanced budget.  The text appears in Chapter V, Article 107.

“The Hong Kong Special Administrative Region shall follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits, and keep the budget commensurate with the growth rate of its gross domestic product.”

Article 108 requires that the HKSAR shall enact tax legislation “taking the low tax policy previously pursued in Hong Kong as reference,...” 

The proprietor of Thoughtful Ideas wrote several articles on the Spending Limit–Balanced Budget Amendment three decades ago.  These include:

Chapter 4,”Tax and Spending Limits,” The United States in the 1980s.  1980

In this essay, TI proposed an amendment to balance the federal budget and limit federal spending similar in spirit to the current House Republican "cut, cap, and balance" plan.

“A Compelling Case for a Constitutional Amendment to Balance the Budget and Limit Taxes 1982

Including a flat tax in the amendment would greatly enhance the proposal.  Call it a spending limit-flat tax-balanced budget amendment.

Tuesday, July 19, 2011

Let’s Raise the Debt Limit...

So we can dig ourselves deeper in debt
So we can continue to fight Hillary’s war in Libya
So we can stay in Iraq and Afghanistan
So we can borrow more money from China (and deter them from selling U.S. debt)

With a higher debt limit we can maintain China’s confidence in U.S. debt while...

We complain about China’s cyberspace attacks on America
We complain about China’s military buildup
We complain about China’s record on human rights
We complain about Chinese counterfeiting of U.S. products
We complain about China’s overvalued currency and other unfair practices
We complain about China having leverage over U.S. policy because it holds so much U.S. debt

Can you understand the logic of this arrangement?

Monday, July 18, 2011

Oil Prices Fail to Cooperate With President Obama’s Political Objective

On June 23, 2010, President Obama announced that the U.S. government planned to release 30 million barrels of oil from the Strategic Petroleum Reserve, about 5% 0f the total.  The move was intended to offset the loss of global supply from Libya.

On the announcement, the price of oil futures dropped $4.02 a barrel to $91.30 by 1:45 PM EDT.  On July 15, the price exceeded $97 a barrel.  The benefit to American consumers was short-lived.  Obama will get no political credit for this ostensibly political move.

Friday, July 15, 2011

Confucius Analect of the Week, July 15, 2011

“This is certainly the limit!  I have yet to meet a man who, on observing his own faults, blamed himself!”  (James R. Ware, Chapter V, Verse 27)

Do you suppose Confucius foresaw American and European politicians, their economic advisers, and government-appointed regulators trying to escape blame for their roles in the financial crisis of 2007-09, the Great Recession, and risks of sovereign default?

Wednesday, July 13, 2011

Academic Accreditation is Flawed

Academic accreditation in tertiary education amounts to the industry setting its own standards and then judging producers of higher education against those standards.  Perhaps this is appropriate when universities hire graduates of other universities as new faculty.

This model–the industry judging itself–is a poor way to determine the value of higher education.  Graduates, many saddled with large debts, in the humanities, the soft social sciences (excluding economics), education, and law face increasing difficulty finding good-paying jobs.  The educational standards universities set for themselves, by which they are in turn judged, too often fail to meet the requirements of potential employers.

Why not replace academic accrediting agencies with new accreditation bodies of consumers of higher education, namely, councils of potential employers?  Market-based accreditation would provide students, tuition-paying parents, and taxpayers supporting public institutions with real-cost benefit analysis of the value of degrees awarded by tertiary institutions.

Monday, July 11, 2011

New Young Thinking Ousts Old Old Thinking

On July 9, 2011, The Washington Post published an article by Laura Keeley entitled “Boston venture capitalists don’t want to let another big one get away.”

It’s about Boston VCs having turned down Mark Zuckerberg’s request for funds.  Off he went to Palo Alto, got funding, and built Facebook, estimated to be worth about $80 billion.  Boston VCs accounted for 11% of U.S. venture capital investments in 2010, down from 15% in 2003.  In contrast, Silicon Valley’s share has risen from 34% to 39% over the same period.

Why did they miss Facebook?  It’s about age, a generational issue.  The average angel investor in Boston is about 55 years old.  In California the average is 32.  Said MIT lecturer Howard Anderson, “To understand things like Facebook, you have to be 19 to 24 years old.  If you’re 56, you don’t quite get it.”

This is how traditional print publishing and media missed the digital (and self-publishing) revolution.  It’s why traditional universities will gradually lose out to much, much cheaper digital learning.  It’s how young Obama used the internet to defeat Hillary Clinton’s old-time political strategy.    And on and on and on.

Saturday, July 9, 2011

Confucius Analect of the Week, July 9, 2011

The Master wanted Ch’i-tiao K’ai to take office, but he replied, “I do not yet command sufficient confidence for that.”  And the Master was pleased.  (James R. Ware, Chapter V, Verse 6)

Wouldn’t it be nice to see a bit more humility among our political candidates?  Perhaps some experience other than a couple of uneventful years in political office and mouthing political shibboleths?

Friday, July 8, 2011

End or Cap the Mortgage Interest Deduction

Republicans should applaud eliminating or capping the mortgage interest deduction.

Why?

Expensive homes bought by upper-income households, who get the largest benefit of the mortgage interest deduction, are largely in Democrat blue states, such as California, New York, and Connecticut.  Lower- and middle-income households in Republican red states typically take the standard deduction instead of itemizing.

Tuesday, July 5, 2011

Can Bernanke Learn from Japan and Greenspan?

On May 27, 2000, a Member of the Policy Board, Bank of Japan, Eiko Shinotsuka, spoke on the subject “Japan’s Economy and the Role of the Bank of Japan.”  His main focus was the lost decade of the 1990s.

In his view, two factors were critical: (1) the bursting of the land and stock market bubbles, and (2) a structural problem.

Euphoria and loss of self-control, coupled with the Bank of Japan providing easy money for a long time, resulted in unfounded bullish expectations.  Capital invested in assets at the peak was devalued when the bubble burst (luxury resort hotels on remote islands).  The resulting fall in asset prices impaired the asset quality of both borrowers and lenders.

The structural problem was a decline in the average productivity of capital.  Wage growth exceeded labor productivity growth during the bubble, squeezing profits.  The structural problem exacerbated the impact of the bursting of the bubble.

Going forward, his recommendation was that the Bank of Japan needs to pay attention to rising asset prices, to be prepared to conduct pre-emptive monetary policy to prevent another bubble, and increase its awareness of this risk scenario.  Easy money for too long is playing with fire.

Will Bernanke learn from Japan and Greenspan?

Friday, July 1, 2011

Confucius Analect of the Week, July 1, 2011

“Extravagance leads to disobedience; parsimony leads to miserliness.  Of the two I prefer miserliness.”  (James R. Ware, Chapter VII, Verse 36)

Do you suppose Confucius was trying to warn us about the  European and American debt crises?  

Thursday, June 30, 2011

Training American Diplomats for Service in the Middle East State Department Bureau and Countries in the Region

Many Americans who join the diplomatic service do so out of a sense of doing good for the world, eliminating poverty and disease, and promoting human rights and democracy.

The Middle East is the perfect place in which to try to accomplish these goals.  But dreams must take reality into account.  Otherwise, failure and even making things worse are the likely outcome.

Every diplomat or desk officer with responsibility for the Middle East should be required to see Lawrence of Arabia and Khartoum every day for two weeks, followed by in-depth study of Shia-Sunni relations.  The last requirement is to spend a week in Baghdad changing coffee shops several times a day to get first-hand knowledge of frequent bombings.

Only then is reality likely to inform U.S. Mideast foreign policy.

Wednesday, June 29, 2011

Foreguess, Not Forecast

The Federal Reserve Board press release following the meeting of June 21-22, 2011, stated  “Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected.  Also, recent labor market indicators have been weaker than anticipated.”

And yet, the FOMC proceeded to project economic growth, unemployment, and other indicators through the fourth quarter 2013.  Huh?  If the Fed cannot forecast one quarter with any degree of accuracy, how they correctly forecast the next ten quarters?

Going further, how can any budget agreement accurately forecast ten years of budget savings?  Ditto for the Congressional Budget Office?

The answer is that they cannot.

The projections of the Fed, CBO, OMB, and other entities amount to foreguesses [conjecture], not forecasts [predicting, estimating].

Barry Ritholtz is more blunt.  His response to Ben Bernanke merits reading.

Tuesday, June 28, 2011

When is Major Hassan's Trial?

The trial of Major Nidal Hassan, the [alleged!?] Fort Hood shooter, has been put off for another four months until October 2, 2011, from its previously scheduled date of June 2.  The shooting took place on November 2009, nineteen months ago.

Why?

Thoughtful Ideas is not convinced by any of the official explanations.  TI believes that a decision has been made to keep postponing the trial until after the November 2012 election lest Muslim Americans be painted in a bad light.

Wait and see.

Monday, June 27, 2011

We the People

“We the people” are among the three most profound words written in any language.  Only now, thanks to the Internet, are they becoming reality.

Formerly a select group of elected, appointed, or self-anointed leaders governed human affairs.  The Internet, in its numerous and ever-growing modes, has now empowered hundreds of millions of people to have their say, even to the point of overthrowing corrupt, dictatorial regimes.

The Internet makes available audio, video, photos, skype, twitter, facebook, linked-in, blogs, iphone applications, email, ebooks, e-education, scribd, and  others to be developed.


        (Graphic:  Rosa Golijan, Technolog on MSNBC)

Government of, for, and by the politicians, lobbyists, bureaucrats, advisers, etc., will give way to government of, for, and by the people--despite the efforts of the ruling classes to hang on to their power and influence

Friday, June 24, 2011

Confucius Analect of the Week, June 24, 2011

Pu Shang said, "Remain sincere in purpose while studying widely, continuing to think while posing frank and open questions.  Therein lies Manhood-at-its-best."  (James R. Ware, Chapter XIX, Verse 6)

It's unlikely that Congress will place a statue of Confucius in the Capitol Rotunda.

Thursday, June 23, 2011

Hillary’s War

It is widely believed that Secretary of State Hillary Clinton and her supporters helped nudge President Obama into joining Nato’s military action against Colonel Qaddafi’s regime.  She stated that military intervention was required to prevent Qaddafi’s forces from committing genocide against the inhabitants of Benghazi.

If Libya, why not North Korea, Syria, Zimbabwe, Central African Republic, Sudan, Democratic Republic of Congo, Eastern Burma, Eastern Chad, and Somalia?

Just asking....

Wednesday, June 22, 2011

Winning Design for $200 Banknote

Both Euros and Swiss francs are issued in denominations of 200.  To compete with Europe and enable consumers to keep up with inflation, the Federal Reserve Board will soon have to issue $200 banknotes.

The issue of any new banknote requires serious consideration of a presidential portrait on the obverse side (front) and iconic American political scene on the reverse (back).  My choice for the front is Bill Clinton.  Why?  The Clinton administration was the only presidency in the past half-century in which budget surpluses, not deficits, were the fiscal rule.  Had the Bush administration stayed on the Clinton fiscal track, the U.S. would have been paying down its public debt, not increasing it by trillions of dollars.


My choice for the back is the Boston Tea Party.  It was an important event in the American colonies signifying opposition to Britain’s efforts to tax and regulate the American colonists.  Its reincarnation in the modern Tea Party demonstrates that the founding ideals are still alive in the American body politic.

The issue of this design will serve as a daily reminder of the benefits and virtues of limited, responsible government.

(HT:  Ellen Santiago)

Tuesday, June 21, 2011

Discrimination or Preference in Sports


In the past few decades, reflecting merit and a concerted effort by the leagues, the number of African-Americans has increased in the managerial and coaching ranks of professional baseball, football, and basketball, and will likely do so in the future.

At the same time, those watching professional sporting events in gymnasiums, arenas, and stadiums remain substantially homogeneous.

Hispanics are found in large numbers at professional soccer games.  Whites constitute the vast majority of observers at hockey, golf (as revealed among the spectators along the sidelines watching the U.S. Open during June 16-19, 2011), and tennis events.  Football and basketball attract large audiences of African-Americans.  So long as one can pay the entrance price at any of these events, there appears to be no systematic discrimination excluding one or another ethnic or racial group from attending the event of its choice.

Could these patterns be due to personal preference?

Monday, June 20, 2011

Why Does Colonel Qaddafi Keep Fighting?

A better question is why Hillary Clinton and other state and defense department personnel think he will quit and leave Libya.

After all, Libya is a paragon of multiculturalism and diversity, the model of statecraft the U.S. is pursuing in Iraq, Afghanistan, and elsewhere around the globe based on doctrines taught in American universities.

Too bad that Libya is a tribal society and that those supporting Qaddafi have cause to fear for their lives and welfare should rivals in Benghazi and elsewhere come to power.  Think in terms of Shia versus Sunni in Bahrain, Saudi Arabia, Iraq, Yemen, and Iran.  Qaddafi and his family are not alone in clinging to power.  It’s also his own tribe and southern Saharan tribes from Libya’s old southern desert province of Fazzan and others that have tied their masts to his.




At least, so far, Hillary has had the good sense not to take on Syria’s Assad in the quest to build a multicultural democracy in that nation.

Friday, June 17, 2011

Confucius Analect of the Week, June 17, 2011

Chung Yu asked how to serve a prince.  “Don’t deceive him!  Resist him rather.”  (James R. Ware, Chapter IV, Verse 22)

Wouldn’t it be nice if advisers to the president, Members of Congress, governors, mayors, and regulators told the unvarnished truth instead of  playing the loyalty game and nodding yes to their bosses, going along to get along?

Thursday, June 16, 2011

Bringing Economic Reason and Reality to the White House


How?  Easy.  Appoint Rick Santelli of CNBC to the post of the president’s official remonstrator on the economy.  His job would be to give President Obama a daily real-world briefing in the style of Santelli's two-minute rant.

In so doing, Santelli would force President Obama to begin each day with a cold bucket of ice water thrown over his wishful thinking and disregard of reality.  Indeed, to minimize his fear of the morning rant, Obama might actually begin to implement sensible policies.

Wednesday, June 15, 2011

Five Point Plan for 5% Growth


1.  Enact the Hall-Rabushka flat tax.

2.  Supreme Court invalidates Obamacare.

3.  Defund and remove all White House czars.

4.  Freeze all new federal government regulations.

5.  Free the domestic U.S. energy markets.

Add in some spending cuts and 5% looks easy.

Monday, June 13, 2011

Forecasting China’s Decline

It has become fashionable in the economic blogosphere to predict hard times ahead for China.  Naysayers point to thousands of vacant apartments, bad loans on the banks’ books, rising inflation, an undervalued currency, and other negative indicators.

Using standard economic models, analysts insist that China’s economy will overheat, that it cannot continue to grow at 9-10%.  Nouriel Roubini of financial crisis fame is the latest to chime in, projecting a hard landing in 2013.  Three decades of 9-10% growth must come to a crashing halt.

Thoughtful Ideas remains bullish on China.  The principal reason is China’s investment in high-tech education, in mathematics, science, and engineering.

China’s decline will set in when it begins to emulate the U.S. in higher education–when student enrollment at home and abroad stagnates in science and engineering and grows in law, psychology, education, self-esteem, counseling, and diversity.  At that point, value added will slow and value subtraction will rise.  Meanwhile, investment in high value-added skills and hard work continue to propel growth in China.

Friday, June 10, 2011

Confucius Analect of the Week, June 10, 2011

Sorry.  No analect this week.  Confucius is distraught that someone ordered the removal of his statue from Tiananmen Square in Beijing.

All the more so since over 300 Institutes of Chinese language and culture have been established in his name around the world.

Wednesday, June 8, 2011

U.S. Troop Strength in Iraq and Afghanistan

President Obama was inaugurated in January 2009.  At that time U.S. troops numbered 142,000 in Iraq and 23,000 in Afghanistan.  At the end of May 2011, U.S. troops totaled 45,000 in Iraq and, at the end of April 2011, stood at 100,000 in Afghanistan.

Obama withdrew 97,000 in Iraq but added 77,000 in Afghanistan for a net reduction of 20,000.  Put another way, four-fifths of those removed from Iraq were sent to Afghanistan.  (It should be noted that phased U.S. withdrawal from Iraq was agreed during the Bush administration.)

President Obama recently stated that he would order a significant withdrawal from Afghanistan in July 2011.  Barring a change in the U.S.-Iraq accord, all U.S. troops are scheduled to leave Iraq by the end of 2011.

A deficit reduction agreement with Republicans will be easier to reach if overseas military expenditures decline in keeping with projected draw downs of U.S. forces in both countries.

Tuesday, June 7, 2011

It Was the Best of Times, It Was the Worst of Times

The best of times in the Middle East:

Peaceful, stable democracy in Iraq
Democracy in Egypt respecting women and Christian Copts
Democracy in Tunisia
Democracy in Libya
Reforming Syria
Orderly transition to democracy in Yemen
Palestinian state recognizing Israel as a Jewish state
Harmony in Bahrain

The worst of times in the Middle East:

Eruption of Sunni-Shia-Kurdish separatism following U.S. withdrawal
Muslim Brotherhood takeover in Egypt imposing Sharia Law
Uncertain future in Tunisia
Muslim extremist takeover of Libya
Syrian regime slaughter of thousands of Syrians
Al-Quade takeover of Yemen
Another intifada
Renewed Shia uprising in Bahrain

Place your odds!

Monday, June 6, 2011

The fault dear Brutus...

“The fault dear Brutus, is not in our stars, But in ourselves, that we are underlings.”  (Shakespeare, Julius Caesar)

Recent weak data on May jobs and unemployment disappointed the forecasters that projected better numbers (save Rick Santelli of CNBC who was right on target), and Democrat politicians hoping for an improving economy.  Whenever the numbers fall below expectations, analysts and political apologists typically point to a combination of unique events that affected the prior month: Japan’s tsunami, Midwest floods, rising energy prices, and so on.

What’s missing from these discussions is the economic advice given presidents and Congress by a small army of advisers selected from elite universities and prominent think tanks.  Are they culpable, other than to admit they were shocked and surprised by bad numbers?  On leaving government, most write op-eds for the WSJ or NYT complaining that political realities and other uncontrollable factors threw a monkey wrench into their policy recommendations.  On rare, very rare, occasion, e.g., former Fed chairman Alan Greenspan admitted he misjudged the danger of the housing bubble, an apology is offered.

But most blame the stars, not themselves, and go on to advise the next round of policy makers.   

Saturday, June 4, 2011

Confucius Analect of the Week, June 4, 2011

“Great Man’s concern is that he may die without a good name.”  (James R. Ware, Chapter XV, Verse 20)

I guess this leaves out most politicians, political spinmeisters, blowhards, purveyors of falsehoods, misspeakers, and politically-biased reporters claiming objectivity.

Friday, June 3, 2011

A Fresh Proposal for Peace in the Middle East


The Muslim Brotherhood, by itself or in alliance with other Muslim parties, is projected to win a governing majority in Egypt’s September parliamentary elections.  The new parliament will move quickly to establish Sharia law.  This bodes ill for Egypt’s estimated 8-12 million Christian Copts, who are suffering increased attacks at the hands of emboldened Muslims.

What’s this got to do with the Israeli-Arab problem?

I propose a people-for-people swap.  There are an estimated 1.6-2.3 million Arabs resident in the West Bank and 1.7 million in Gaza.  These 3.3-4.0 million Palestinian Arabs would be swapped for 4 million or more Egyptian Christian Copts, funded by money from the G8 $40 billion aid fund for Egypt and Tunisia to insure that all swapped people are equally well-off or better off after resettlement.

The benefits are immediately clear.  Israel would no longer have a Palestinian problem and 4 million Egyptian Christians would no longer live under fear of Sharia law.  Ideally, even more than 4 million Egyptian Christians might be welcomed into the West Bank and Gaza,  The resulting combined Jewish Christian population would strengthen Israel.

Palestinians would no longer live under Israeli occupation and could participate in the political life of the new Egypt.

The political structure of the West Bank and Gaza would follow that of the Hong Kong and Macau Special Administrative Regions of China.  For the immediate future the Christians would enjoy internal autonomy save for defense and foreign affairs which would remain in Israeli hands.

People for peace, not land for peace!

Thursday, June 2, 2011

China Buying Eurobonds

The financial media is replete with stories of China holding over a trillion dollars of U.S. government bonds and buying euro bonds to help euro zone countries.

This is a remarkable turn of events from a hundred years ago.  Hanging on the walls of my home library are two Chinese government bonds that I acquired in Hong Kong many years ago.  One is an Imperial Chinese Government gold loan bond dated 1908, subscribed in sterling by Great Britain.  The other, dated 1913, was subscribed by Russia, France, Great Britain, and Germany.  Both are valued today only as collector’s items, not financial instruments of real value.

Who’d have thunk it?  Could the same happen to Treasury and Euro bonds?

Wednesday, June 1, 2011

Poet's Corner

And what is so rare as a day in June?
  Then, if ever, come perfect days;

(James Russell Lowell)

Tuesday, May 31, 2011

Kudos to Bob Hall


By way of Greg Mankiw and Tyler Cowen, I was referred to a wonderful 2009 essay by my colleague and flat tax collaborator Bob Hall, “Managing Your Career as an Economist After Tenure.”

Bob warns against alluring diversions from important work as an economist once tenure is attained.  These include writing textbooks, derivative articles of a seminal piece, writing too much of inferior quality, consulting, and government service.  “...you stand a good chance of permanent alteration from even a year or two in Washington.  Potomac fever is contagious and incurable.”

This advice is brave, courageous, and bold.  At Hoover and Stanford, Bob has no less than 10 economist colleagues who have spent considerable time in the federal government in Washington.

Friday, May 27, 2011

Confucius Analect of the Week, May 27, 2011


“The Master recognized four prohibitions:  Do not be swayed by personal opinion; recognize no inescapable necessity; do not be stubborn; do not be self-centered.”  (James R. Ware, Chapter IX, Verse 4)

The Master also wants to wish his American students a safe and happy Memorial Day.

Wednesday, May 25, 2011

Swiss Watches Are the New Growth Industry


Thoughtful Ideas spent last week in Central Europe attending a conference on global regulation and other events.

TI departed home from Zurich International Airport.  As might be expected, the airport’s duty free shops feature the full range of Swiss-brand watches, from the low-cost Swatch brand to top of the line luxury watches.  By far the largest selection is  Rolex watches ranging in price from $5,000 to $50,000.

Most of the customers at the Rolex counter were mainland Chinese.  TI knows sufficient Chinese to identify Chinese passports and understand basic Chinese conversation.  I observed a smiling Chinese gentleman admiring the watch he bought.

The Chinese middle class can afford to travel and buy luxury items in increasing numbers.  I fully expect the Rolex display to increase in size in coming years, and the same for ladies’ clothing and handbags.

Buying in Europe insures the purchase of the real thing, not a fake knockoff.  Returning from Europe with the real luxury item carries status in China.  Also, duty-free saves the VAT that that is paid on retail purchases inside China.

I will not be surprised to see want ads placed by Swiss companies for skilled watchmakers to meet the growing demand from Chinese travelers.

Tuesday, May 24, 2011

Mao Zedong Was a Generation Too Soon


In early summer 1957, Mao Zedong, chairman of the Chinese Communist Party, launched a famous campaign: “Let a hundred flowers blossom and a hundred schools of thought contend.”  Mao’s objective was to advance progress in the arts and sciences.  Instead the campaign produced an outburst of criticism against the Chinese Communist Party and its policies.  Mao ordered a crackdown bringing the campaign to a quick close.

If only Twitter, Facebook, and social media had existed in 1957.  Today the blogosphere is replete with hundreds of flowers blossoming and hundreds of schools of thought contending across a broad range of topics.  Efforts to constrain schools of thought typically fail.  Millions are free to speak their minds in plain language, or coded language if necessary.  Monopolies and oligopolies of thought are giving way to real diversity of thought.  Viva la revolution!

Monday, May 23, 2011

Coping With Islamic Extremists

There are several Muslim groups that oppose, sometimes violently, predominantly Western Christian countries and Israel.  They include Al-Qaeda, Taliban, Hamas, Hezbollah, Abu Sayyaf, Wahhabi, Salafi, Islamic Jihad, and Muslim Brotherhood.

Which, if any, can be persuaded to recognize Israel and accommodate the U.S.?  With Usama bin Laden out of the way, can the Taliban be induced to give up their violent ways and become peaceful participants in a democratic Afghanistan?  Or, was the Taliban revenge attack that killed 80 police recruits in Pakistan proof to the contrary?

Can one or more of these groups be bought off with cash and diplomatic gestures?  Does the U.S. have a coherent policy in dealing with the threats from radical Islam?   Or, will the U.S. continue to respond in what looks like an ad hoc manner, trying to take out Qaddafi but politely asking Syria’s Assad to show restraint, and the leaders of Yemen and Bahrain to undertake political reforms.  "Oh what a tangled web we weave..."

Friday, May 20, 2011

Confucius Analect of the Week, May 20, 2011

“Because of his lies Duke Wen of Chin must be considered less than upright.  Because of his uprightness Duke Huan of Ch’i did not lie.”  (James R. Ware, Chapter 14, Verse 15)

Are there ten politicians in America who match the uprightness of Duke Huan of Ch’i?  Remember what Mara Liasson of the Fox News All-Stars said on television about a politician some time back: “Lying is a benign accusation.”

Thursday, May 19, 2011

Why President Obama is Likely to Win Reelection


President Bill Clinton, in my opinion, was the greatest talker in Western civilization since Pericles.  He ate Republican opponents for breakfast, and still had the rest of each day to pursue his agenda.

Great as were Clinton’s oratorical skills, Obama’s are even better.  His gift of gab is so electric and compelling that he can probably persuade enough voters to give him the 270 electoral votes he will need for a second term, even if the economy remains weak and gasoline prices remain high.

A variation on one of Lincoln’s quotes is applicable:  you only need to persuade a majority of the electorate to vote for you a second time.  That he should be able to accomplish.

Would it be so bad to have Republicans control the House and Senate and Obama the White House.  Gridlock worked pretty good during 1995-2000.

Wednesday, May 18, 2011

"On Liberty"

In 1859 John Stuart Mill published “On Liberty,” one of his defining essays.  Here is a sample of lines that merit serious consideration.

The tyranny of the majority “practices a social tyranny more formidable than many kinds of political oppression.”  The Six Great Humanistic Essays of John Stuart Mill (New York:  Washington Press Square, 1963, p. 130)

“...the tyranny of the prevailing opinion and feelings...prevent the formation of any individuality not in harmony with its ways...”  (130-31)

“...there is also in the world an increasing inclination to stretch unduly the powers of society over the individual, both by the force of opinion and even by that of legislation:...”   (139)

“We have now recognized the necessity to the mental well-being of mankind...of freedom of opinion and freedom of the expression of opinion...”  (176)

“The despotism of custom is everywhere the standing hindrance to human advancement...”  (194)

Are these statements compatible with political correctness?

Tuesday, May 17, 2011

Egypt Spring.....To Be Followed by Egypt Winter?

The euphoria over Egypt’s “spring democratic revolution” may have been a bit premature.

Several troubling trends have emerged.  Muslim partaies are organizing for an electoral majority in September’s parliamentary elections.  If successful, they promise to impose Sharia Law.

Several presidential candidates are campaigning on a platform to reset relations with Israel.  What that could bring is cutoff of natural gas exports to Israel, renegotiating the Egypt-Israel peace treaty, and closer relations with Iran, to name a few.

Muslims are burning Coptic Christian churches and provoking religious conflict.  Christians may have to leave Egypt, as has about half of Iraqi Christians since the U.S. invasion in 2003.

And it’s only the middle of May.

Are these the objectives of U.S. foreign policy?  Just asking...

Monday, May 16, 2011

Illegal Immigrants Do Work Americans Won’t Do


Proponents of “comprehensive immigration reform,” a combination of stronger border control measures and a path to citizenship for those already here who may have entered illegally, argue that those already here and even more immigrants will be needed in the future to do the jobs lawful resident Americans won’t do.

Jobs Americans won’t do with unemployment at 9%, combined unemployment and underemployment over 16%, and several percent of the population having dropped out of the labor force no longer looking for work taking the total close to 20%.  Huh?

What if every year hundreds of thousands in the resident population decide to stop doing the jobs they formerly did because they don’t want to do them anymore?   Should we say “fine,’” and call for more low-wage immigrants to do that work?  And, by the way, widen the income gap between the well-to-do and the poor?  Is there any limit to this behavior?

Friday, May 13, 2011

Confucius Analect of the Week, May 13, 2011

Having read that 47% of the population of Detroit is “functionally illiterate,” Confucius is beside himself with despair.

How, he wants to know, is America going to win the future, to compete successfully with China, if nearly half the population of a major American city is functionally illiterate?  Not much point in offering Detroit another analect on the benefits of learning, is there?

Or, is “win the future” just political rhetoric?

Tuesday, May 10, 2011

Stanford Economics Major Becomes Successful Digital Entrepreneur

The Washington Post ran a weekend feature story on a thin pretty brunette who majored in economics at Stanford (class of 1994), and who recently discovered the magical, profitable, golden world of self-published e-books.  The lengthy article, with photos, explains her explosive growth in sales and revenue when she augmented her traditional print books with self-published, self-promoted e-books.

The young lady, with a husband, two children, and a home in the Sonoma California foothills, is Nyree Belleville, with three noms de plume: Bella Andre (for adult readers), Lucy Kevin (for tweens, teens, and young adults), and Bella Riley (for all ages).

By way of disclosure, her maiden name was Rabushka, and I am the proud father.

Monday, May 9, 2011

Scottish Nationalism Surges

Since the first election of members to a Scottish Parliament in 1999 (following the 1998 Scotland Act), Alex Salmon’s Scottish National Party (SNP) won an absolute majority of 69 of 129 seats on May 5, 2011.  He now has the votes to propose a Scottish independence referendum, an aim in the SNP’s policy platform.  Here’s hoping.

Why?

If Scots vote for and attain independence, it will be important for party leaders to establish policies that encourage firms and individuals to invest and do business in Scotland.  A quick way is to follow the examples of Central and Eastern Europe by enacting a low flat tax on individuals and corporations.

Continuing with the dream, a flat tax breakthrough in Scotland would open the door to other Western European countries taking steps to remain competitive, hopefully moving away from the tradition of steeply graduated high taxes to a low flat tax environment.

By way of disclosure, I have numerous in-law aunts, uncles, and cousins scattered throughout Scotland.

Friday, May 6, 2011

Confucius Analect of the Week, May 6, 2011

Confucius was in Lexington, Kentucky, getting ready for the Kentucky Derby.  As was his wont, he offered an analect for the occasion.

“When his stable was burned the Master returned home from the palace and inquired, ‘Was anyone injured?’  He did not ask about the horses.”  (James R. Ware, Chapter X, Verse 11)

Upon hearing his analect, Derby officials promptly escorted Confucius out of town.  Evidently Confucius did not understand the market value of Derby racehorses.

Confucius wants to wish all you moms out there “Happy Mother’s Day.”

Thursday, May 5, 2011

What Are Our Values?

With the passing of Osama bin Laden, the chattering classes on cable television, talk radio, and the new and old media have renewed their discussion on “what are our values.”  Going forward, should the U.S. engage in torture (even if torture provided the information to find bin Laden), wiretaps, preventive wars (Iraq invasion), killing foreign leaders and their family members (bin Laden and Qaddafi), and other aggressive actions?

The debate is really about the contents of one word: “our.”

Take the Hoover Institution.  Over the years it has developed a reputation as a home for conservative scholars and former government officials.  I and several of my colleagues disagree with members of the recognized Hoover foreign policy community.  Speaking for myself, I favor prompt full withdrawal from Iraq and Pakistan; they cost too much for a country borrowing 40% of its annual federal government spending. I oppose intervention in Libya and Syria.  Let the contending parties fight it out and limit U.S. measures to consequential direct threats to Americans and American vital interests.  I oppose trying to teach democracy to Middle East countries.  In the past few days (May 4-5, 2011), several dozen Iraqis have been killed and over a hundred wounded in suicide attacks, despite eight years of American occupation.

On domestic economic, social, and cultural matters, there is considerable variety of opinion within Hoover.  There is no consensus on a flat tax, a balanced budget amendment, pro-choice or pro-life, pro- or anti-climate change measures (or even if it exists), and other issues.

This post cites Hoover as just one an example of conflicting views and values on foreign and domestic policies and values.  Similar differences pervade think tanks, universities, talk radio hosts, and cable television programs.

So what exactly is “our?”  In the last analysis, “our” is rhetoric, whatever list of values an individual asserts to support his specific policy views and choices.  "Our" is Rousseau's "general will," the will of all, in modern parlance.  Or, I should say, the denial of diversity of opinion.  Unless, that is, diversity is our values, in which case there can be no consensus on a specific set of values.

Tuesday, May 3, 2011

Oh Canada!!!

On May 2, 2011, Conservative Prime Minister Stephen Harper’s party won an absolute majority, 164 out of 308 seats, in Canada’s House of Commons after governing as a minority during the past five years.  This is a remarkable turnaround from the 1993 election when the Progressive Conservative Party won only 2 (yes, 2) seats, a staggering defeat from 169 seats in 1988.  The Progressive Conservative Party was more progressive than conservative (a.k.a. “compassionate conservatism”).  Harper’s return to real conservatism has transformed Canada’s political and economic landscape.

Harper comes from Alberta, the province in Canada with a low, flat, provincial income tax.  The Conservatives are strong in the Western provinces and Ontario.  Harper plans to reduce the current 16.5% corporate tax rate to 15%.

Perhaps Harper could loan the Republican Party some of his advisers to help with tax reform and other real "conservative" policies.

Monday, May 2, 2011

Observe Faculty Deeds, Not Words

Every morning the BBW (Brilliant Beautiful Wife) and I complete the same two-mile walk around the neighborhood (limited to Stanford faculty and high administrative staff).  The largest segment is twice around a condominium development of 180 units.  Each owner has a garage and an additional space in nearby parking areas.  Most use the garage for storage.

This morning I counted 115 vehicles, sedans, SUVs, CRVs, station wagons, light trucks, and sports cars parked in the spaces near the condos.  Eight were GM, Chrysler, and Ford, made by union labor in Detroit or another U.S. plant.  The remaining 107 vehicles were largely Japanese (Honda, Toyota, Subaru, Nissan) and German (VW, Mercedes, BMW).  Many were likely made in non-union southern American plants.

Stanford resident voting results are concentrated in several precincts that are published after an election.  Typically 75-80% vote for Democrat candidates.  Democrats claim to be the party of union, working, middle-class households.  Detroit auto workers are among the leading union supporters and beneficiaries of Democrat politicians.

It seems that Stanford faculty and staff prefer non-union Japanese and German vehicles.

Friday, April 29, 2011

Confucius Analect of the Week, April 29, 2011

Confucius is in London attending the royal wedding.  As a gift to the newlyweds, he offered the following advice.

“Tuan-mu Tz’u asked about Great Man.
‘First he sets the good example, then he invites other to follow it.’” (James R. Ware, Chapter II, Verse 13)

Tuesday, April 26, 2011

Bernanke’s First Press Conference: Whither QE II?

Fed Chairman Ben Bernanke will hold his first press conference following Wednesday’s Fed meeting.  His press conference is the first in a series of four annual press conferences the Fed will hold to provide greater transparency in its decisions.

What will Bernanke say?

Will QE II (the Fed’s second round of quantitative easing totaling $600 billion, due to end June 30, 2011) end early, on schedule, or be extended?

Is there a QE III in Ben’s future?

Given the excitement over Will and Kate’s royal wedding), does Bernanke control the British throne?  If QE II ends as planned on June 30, and there is little to no chance of a QE III, is this a sign that Queen Elizabeth II should give way to her first-born son, Charles III?

Monday, April 25, 2011

Scorecard on U.S. Involvement in the Muslim World, 2001-2011

It’s been ten years since the U.S. removed the Taliban from power in Afghanistan.  Perhaps this is a good time to review American involvement in the Muslim world.  I assign letter grades in each case.

Israeli-Palestinian peace process: F.  Every U.S. president takes office pledging to give priority to the Israeli-Palestinian peace process.  Every president has failed to resolve the issue on leaving office.  The best thing a new president can do is to downgrade the peace process and leave the parties to settle their differences by themselves.

Gaza: F.  Hamas was voted into power with 70% of the vote, more than double the 30% projected by U.S. officials.

Lebanon: F.  Hezbollah, an ally of Iran, holds the presidency following the most recent election.

Iraq: D.  Muqtada al-Sadr, former arch enemy of U.S. forces in Iraq, is a member of Iraq’s governing coalition.  Those who praise the U.S. overthrow of Saddam Hussein and the establishment of a democratic coalition government in Iraq should wait a year or two to see if the country holds together after U.S. military withdrawal, or if it fragments into separate political units with the Shia majority in closer alliance with Iran.

Egypt: D.  Long-time ally Mubarak was thrown overboard.  The post-September election is likely to show greater influence of the Islamic brotherhood.  Mohamed ElBaradei , with more than 150,000 followers on Twitter and having expressed interest in becoming Egypt’s new president, has stated his desire for tearing up the Egyptian-Israeli peace treaty.

Yemen: INC.  Who knows what pro- or anti-American policies a post-Salleh government will adopt?  Projected grade: D or F.

Libya:  D.  It’s hard to imagine a worse leader than Colonel Qaddafi, but greater influence of Al-Qaeda and other radical Islamic factions is likely in Eastern Libya.

Syria: F.  No comments necessary.

Afghanistan: F.  Karzai government probably hopeless.

Pakistan: D.  Unpredictable, unreliable “ally.”

Iran: F.  No comments necessary.

Not a pretty picture.  During the past ten years, costs have exceeded two trillion dollars, thousands dead, and thousands more maimed and wounded.  In a fiscal sense, U.S. military involvement in Muslim countries contributed to the transformation of large annual budget surpluses into massive annual budget deficits and a huge public debt.

Sunday, April 24, 2011

How to Pay Off the National Debt and Solve Other Economic Problems


The competing deficit reduction proposals of President Barack Obama and Congressman Paul Ryan depend on long-run assumptions about economic growth, unemployment, and other economic variables.  Growth is clearly the most important factor.  Sustained high growth increases tax revenues more rapidly than planned expenditures (assuming no new major spending programs).

Therefore, the quickest and least painful way to eliminate deficits and pay down public debt is to project growth of 6% over the next 10-12 years.  If inadequate, raise the projection to 7%.  Learn from China!

A second problem is growing inequality in the distribution of income and wealth in America.  The top 1% has gained an increased share of national income and wealth in the past few decades.  One way to solve this problem is to change how we think about it.  We should consider the benefits going to the top 1% as a very powerful incentive for everyone to try to rise to the top 1% of income earners.

A third problem is to improve educational outcomes, especially in inner cities, so that America can win the future.   A quick solution is to lower the standards for success.  In that way, an increasing number of students will graduate with successful academic records.

Are these solutions any more absurd than what you hear from politicians and read from their supporters in the media and from some of the more ideological in the academy?

Friday, April 22, 2011

Confucius Analect of the Week, April 22, 2011

Confucius is on Holiday for Passover and Good Friday.

Wednesday, April 20, 2011

Liveblogging the Future: July 1, 2037

On July 1, 2037, Standard & Poors issued its 16th consecutive downgrade of U.S. sovereign debt, from AAA in 2012 to CCC+.  Interest rates on U.S. Treasury bills, notes, and bonds surged well past 100%, making it impossible for the federal government to meet its obligations.  The U.S. dollar had lost its reserve currency status a decade earlier.  The government could no longer print money to borrow in its own currency without catastrophic inflationary consequences.  China’s renminbi had become the world’s reserve currency, along with Swiss Francs, Brazilian Reals, Canadian and Australian Dollars, and several others of fiscally-sound countries.

U.S. currency was no longer accepted abroad.  Foreign currency had to be bought in U.S. black markets if anyone wanted to travel overseas.  U.S. merchants preferred cash payments in foreign currencies or precious metals.  The once-upon-a-time, good-as-gold greenback had become like the Revolutionary currency, which depreciated so badly during the war giving rise to the phrase “not worth a continental.”

The U.S. had run out of financial assets to sell to foreigners to sustain federal spending on retirement benefits, health care, unemployment benefits, public education, and infrastructure.  It had already privatized its property holdings.  All that was left was land, pure and simple.

In a last ditch effort to stay afloat, the federal government put American land up for sale.  The sovereign states could not object because they were no longer sovereign, surviving entirely on federal transfers.

The federal government initiated a series of one-on-one negotiations to sell chunks of U.S. land to the original foreign colonial powers, who had heeded Standard & Poors warnings.  These sales became known as “Land for Survival.”  As in the Northwest Ordinance of 1787, U.S. settlers residing in the new foreign domains would enjoy their customary rights for one generation, after which they and their successors would become citizens of the new foreign realms.

United Kingdom - New Jersey, Maryland, the Carolinas
Canada - Northern New England
Spain - Florida
France - Louisiana and other portions of the Louisiana Territories as required
Mexico - Southern Arizona and New Mexico (reverse Gadsden Purchase)
Netherlands - Manhattan and New York
Delaware - Sweden
Denmark - Virgin Islands
Russia - Alaska
China - California as a Special Administrative Region of China
Japan - Pacific territories

Historical Note: Each successive downgrade of U.S. sovereign debt was met by presidents and Members of Congress as a call to action, but invariably they resorted to politics as usual a short while later.

Monday, April 18, 2011

Fiscal Follies

There has been much caterwauling over $38.5 billion in what big spending liberals call draconian painful budget cuts as the price of a budget deal to avoid a government shutdown.

If spending cuts of $38.5 billion are draconian, what adjectives will be used to describe the targeted $4-6 trillion over 10-12 years as the politicians squabble over the competing Obama-Ryan deficit reduction proposals, not to mention the trillions in borrowing and hundreds of billions paid in interest?  Monstrous?  Unfathomable?  Inconceivable?  Catastrophic?  Gigantic?  Colossal?  Stupendous?  Staggering?  Humongous?  Astronomical?  Galactic?

“Paying Their Fare Share.”  What does it mean for the rich to pay their fair share in taxes?  Is there a once-and-for-all-time definition of “fair share” that does not change every two or four years?  Which tax-rate schedule of the last 90 years best approximates the rich paying their fair share?  President Wilson?  Harding?  Coolidge?  Hoover?  Roosevelt?  Ike?  Kennedy?  Nixon-Ford?  Carter?  Reagan?  Bush 41?  Clinton?  Bush 43?  Obama?  Pick one and justify that choice?

Over the last 20 years, President Clinton’s years look the best for growth (annual average 3.3% real growth 1992-2000), employment, and deficit reduction.  Does that make the Clinton tax rates the presumptive first choice?  If the Bush tax cuts were necessary to spark growth (2.2% annual average real growth 2001-08), why did the economy’s performance under his watch lag the Clinton years?  How were Clinton’s surpluses transformed into Bush’s deficits and debt?

Just asking...

Friday, April 15, 2011

Confucius Analect of the Week, April 15, 2011

“Great man is sparing in words but prodigal in deeds.”  (James R. Ware, Chapter XIV, Verse 27)

Talk is cheap.  Action speaks louder than words.

In political parlance, watch what politicians do, not what politicians say.  Judge them not by their eloquent talk and self-praise, but by their constructive deeds.

Thursday, April 14, 2011

REALCON

Conservatives and conservatism have been given a black eye.  Neocons erred by invading tribally and religiously divided Arab countries at a cost of over $1 trillion, five thousand dead, and thousands more maimed, with the intent of establishing democracies in places with little or no tradition of civil rights and civil society.  Compassionate conservatives erred in using government to implement programs that expanded public spending.  Together they turned surpluses into staggering deficits and brought liberal Democrats to power.

It’s time to replace neocon and compassionate conservatism with Realcon.  Realcon means constitutional government, limited spending, low taxes, balanced budgets, sound money, and resort to military measures only to defeat real threats to U.S. security.

Wednesday, April 13, 2011

The Great Budget Deal, Part 2

The Great Budget Deal of April 2011 promises $38.5 billion in spending cuts for the balance of Fiscal Year 2011-12.  We’ll see if the reductions materialize.

The deficit for the current fiscal year is estimated around $1.4 trillion dollars, which must be met with net new Treasury borrowing.  The Treasury auction schedule for 2011 reveals a mix of durations, from 4-week bills to 30-year bonds.  The schedule does not indicate the amounts of funds to be borrowed at each auction, so there is no way to estimate the interest cost of the current fiscal year’s borrowing.

How much interest will the Treasury have to pay on the current fiscal year’s net new borrowing of $1.4 trillion to finance the budget deficit.  At 1%, the cost is $14 billion.  At 2%, it is $28 billion, and so on.  Interest rates have fluctuated for the 5-, 7-, 10-, and 30-year notes and bonds in the past six months, which makes new borrowing costs difficult to forecast.

In 2010, net federal interest outlays totaled $197 billion.  Federal debt held by the public (excluding Social Security and Medicare) totaled $9 trillion.  Each trillion in debt averaged $21.9 billion in interest outlays.  On this ratio, assuming no change in interest rates throughout  2011, the $1.4 trillion deficit would entail $30.7 billion in additional interest.\, vitiating most of the spending cuts in the Great Budget Deal.  Big Deal!