In last week’s market, you could almost feel portfolio managers reacting to the prospect of missing a rally. Career risk drives many irrational investing decisions. And missing out on a rally is a cardinal sin for portfolio managers. This goes a long way toward explaining this week’s rally.
The consensus seems to be looking for a return to something resembling the environment before the credit crisis. They’ll be waiting for a long time. Sure, there are still lots of wealthy people. But the essence of the financial crisis has to do with most consumers and businesses stretching their budgets and capital spending plans in unsustainable fashion. The next few years will reverse this trend, and we’ll continue to see economic development in emerging markets maintain pressure on commodity prices.
Mr. Market is now testing the conviction of the bears. But through the rest of 2009, the momentum favors the bears. The stock market is far below its peak, but this is justified by long-term fundamentals. In fact, the recent rally has priced in very rosy earnings for many sectors and stocks, including our short ideas.
Remain patient with your short positions. This rally will end soon enough, probably by the time the fourth branch of government — the mega banks — are done reporting their paper trading profits and we learn more about the bleak outlook for earnings in the real economy.
Dan Amoss
Dan Amoss, CFA, is managing editor for Strategic Short Report and a contributing editor to Whiskey and Gunpowder. Dan joined Agora Financial from Investment Counselors of Maryland, investment adviser for one of the top small-cap value mutual funds over the past 15 years. As a buy-side analyst, Dan refined his value investing approach by meeting with corporate executives and sell-side analysts and writing proprietary research for the fund’s management team.
The House that Recovery Built
Madrid, Spain
- What those who didn’t see the mess coming have to say now,
- Who’s standing below when the roof comes crashing down?
- Capitalism, communism and the inevitability of the current crisis…
Joel Bowman, reporting from Taipei, Taiwan…
“Recession easing, but not over: survey.” This morning’s headline, as far as we can tell, only goes to prove that Mark Twain should be quoted far more often: “If you don’t read the paper, you’re uninformed. If you do, you’re misinformed.”
The news story above, which will no doubt be taken as Gospel by all and sundry who ingest it over the next 24 hours, summarizes a quarterly survey from The National Association for Business Economics.
Sara Johnson, one of the geniuses who helped read the report from its original stone tablet, told Reuters that it “provides new evidence that the U.S. recession is abating…
“Industry demand was still declining in the second quarter of 2009,” Johnson continued, “but the breadth of decline had narrowed considerably since late 2008, raising prospects for stabilization in the second half.”
We’ve gone over the “less bad as good” point many times here in these pages, so let’s skip ahead and look at what’s leading this “stabilization.”
“Of the four major sectors, financial services showed the strongest demand, with an index reading of +15. The transportation, utilities, information and communications sector had the lowest reading at -90.”
So, having just been handed the largest, system-wide smack down since the Great Depression, financial services are apparently back in the economic driver’s seat. Your editor remains a little dubious here but, even if we assume that this is the case and that the likes of Goldman and JP Morgan are in fact leading the way, is this really reason to cheer? In other words, is what’s good for Goldman and JP really good for America?
Earnings reports from Wall Street’s two remaining powerhouses last week showed that a huge portion of their second quarter profits came from “trading and investment banking results.” Who, besides these two institutions, wins when their traders are posting profits?
As Bill Bonner explains, “Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: whom were they trading against?”
“Speculating is a zero-sum game,” Bill continues. “No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?”
Your editor cheers the possibility of a recovery as much as the next guy. We prefer freedom, prosperity and apple pie for all. But we prefer the kind of recovery that is based in solid capital formation, robust productivity, job market growth and increased manufacturing. In increase in trading profits at a couple of government-coddled, risk-heavy banks is not the kind of basis for recovery that imbues great confidence, in other words.
When a Roman carpenter had finished building a new house, he was forced to stand under the doorway as the scaffolding was pulled away. If the roof ended up on his head, it was considered his punishment for erecting a dangerous structure. That way the homeowner avoided injury and the carpenter could never endanger another unsuspecting customer. We may have come a long way since those days, but when the roof comes down on the economy, the only people standing under the doorway are the poor fools who bought the place. The CEOs, economists and policy wonks responsible for the mess are already down the street, building a whole new development.
In today’s column, Bill Bonner returns to deliver Part II of his bubble commentary. You might like to keep it in mind as you endure the barrage of “expert opinions” hailing the imminent recovery over the coming weeks. Enjoy…
— Mayer’s Special Situations Resource Report —
Urgent Retirement Recovery Alert:
Closed to New Investors for the Last 6 Years — Now Open Again… The “Chaffee Royalty Program” That Turned Every $1 Into $50
In 2002, the same royalty “paycheck program” that paid out $50 for every $1 invested… decided to shut the door to new “members.”
In 2008, that door is open again… and it just got easier than ever to “make money while you sleep”…
But there’s no telling when it could close again…So you’d better collect your own “Chaffee Royalties” right NOW!
——————————————
Bubble Deniers, Part II
By Bill Bonner
If you ask a serious economist, “What was the lesson of the Soviet economic experience?” he would have a ready answer:
“It was that distributed information is more reliable than the centralized variety.” In the non-communist world, if a man had money and no bread, he exchanged the former for the latter…and sat down to dinner. As if guided by an ‘invisible hand,’ millions of people did the same thing. Everyone tried to get a bit more grease on his plate, by making his own decisions based on the facts before him. The result: standards of living rose for practically everyone.
In the centrally planned economies, on the other hand, neither the householder nor the baker had a choice. Their tasks were set by apparatchiks who presumed to know exactly how much of society’s resources should be devoted to making bread…and exactly how much each person should eat. But by the ’80s, it was obvious that central planning had failed. And by 1990, both the Soviets and their neighbors, the Chinese, had abandoned the experiment. Mankind breathed a sigh of relief. It seemed to have made a genuine great leap forward. Finally, it was generally accepted that people should be able to offer up their money as they did their prayers - to whatever god they chose.
The planners had made millions of people miserable over the course of seven decades; remarkably, none were hung from lampposts. Instead, they retreated to the universities, central banks and finance ministries. From these defensive redoubts, they continued their meddling. Soon, they were in the drivers’ seats…and headed for another wall. The crash of ‘08 cut world asset values by as much as $50 trillion. But did the planners learn anything?
“This is where I have the greatest problem with US economic policy makers,” writes Marc Faber. “I don’t think they have ever recognized that the excessive, credit-driven expansion of the US economy was unsustainable in the long run and that, sooner or later, the current crisis was inevitable.”
The bubble deniers deny there was a bubble and deny that their own stimulus caused it. They see nothing wrong with what they were doing and no reason to stop doing it. Instead, they add more stimuli…and create new bubbles.
In the gallery of Hell bent deniers, China is a special case. “To get rich is glorious,” announced Deng Xiaoping after coming to power in 1978. The state pulled back its long arm. People were free to run businesses, to pay wages, to keep bank accounts. Today, in many ways, the average Chinese entrepreneur is freer than, say, his counterpart in France or America. He faces fewer obstacles. Factories go up overnight…and he is in business.
So dynamic was the Chinese economy that it responded to America’s centralized monetary policies in record time. Spooked by the recession of 2001-2002, the Americans cut rates and boosted public spending. This brought a bubble in the housing sector…which gave English speaking consumers an appetite. Soon they were gobbling up boatloads of goods made by people who spoke Chinese.
Now, it is indigestion to which the central planners respond. An IMF report gives us a measure of the response. Add up all the loan guarantees, toxic asset purchases and other forms of bicarbonate administered by the G20 nations and they come to about a third of their combined GDPs. Those are just the monetary stimulus programs. The fiscal programs add another 5.5% of GDP.
America’s central bank adds reserves so fast it must be running out of storage space. As for its fiscal policy, this week it has passed the $1 trillion deficit milestone - with almost half the year still ahead.
For their part, the Chinese planners enjoy the liberty of the damned. With no creditor looking over their shoulder, they are free to fight the downturn even more recklessly. “China is back in bubble land,” says the Financial Times. In the first six months of this year, Chinese banks lent more than $1 trillion - or about four times the rate of 2007. They have more money to lend because reserves of foreign currencies are still increasing…and recently passed the $2 trillion mark. The money is coming in from speculators, who have taken stock market trading volumes to three times last year’s levels.
Chinese planners thought they were pretty smart. During the boom years, they fixed the yuan to the dollar and refused to let it rise. This spurred rapid growth in China’s export sector. But like all central economic planning, it backfired. China’s entrepreneurs were misled. They didn’t know their biggest customers were going broke. Now, they have too many factories producing too much stuff for too many people who cannot afford it.
But that is the beauty of being a central planner; you never have to say you’re sorry.
Instead, you double up. The Chinese economy is expanding at nearly 8% this year, according to official estimates. It is expected to generate 74% of the worldwide GDP growth in the 2007-2010 period. As for commodities, were it not for Chinese buying, prices would collapse. Of course, that could be said for a lot of things. Were it not for the Chinese stimulus, the whole world economy would probably be backing up. We’ll find out for sure…when this next bubble blows up.
—- The Richebacher Society Survival Report —-
Secretive Society of economists, market players, and world-class researchers and analysts reveal…
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Elite alliance of experts warn: don’t hold your breath waiting for a recovery this year or even in 2010. The three toxic timebombs they name below make a quick rebound next to impossible.
Yet, they also name seven “Super Shields” you can use to safeguard against further losses… plus at least five surprising “long” plays you can still use — even now — to get very rich. Read On Here.
Another Housing Bubble?
07/20/09 Vancouver, British Columbia “[We] must control the risk of real estate loans,” said a mystery banker. “In the first half of the year, our country’s banking loans expanded rapidly… but the loans growth has led to accumulated risks also increasing.” Our man of the moment said his banking sector had become “not prudent and impulsive” in issuing loans for new housing projects, many of which have falsified their capital levels to meet current standards. He urged lenders to “strengthen risk management” right way, before they loan themselves into poor credit positions.
So who is he? Robert Shiller, who just recently suggested another housing bubble could be in the mix? Or maybe some vintage Ben Bernanke, circa 2007? Nope… Liu Mingkang, the head of China’s version of the FDIC, said the above over the weekend at a conference in Beijing. China bulls take heed.
And at the risk of belaboring the obvious — he’s Chinese. We know what kind of exigency would get an American regulator to speak out against a bubble in the making. We imagine it’s far more politically dangerous for a member of the Chinese government to publicly go against the grain.
Ian Mathias
Ian Mathias is managing editor of The 5 Min. Forecast and AgoraFinancial.com. We discovered Ian working as a full time rock climbing guide and writing on the side. As it turns out, markets and global economics can be extreme too… at least enough to keep him around. Since working for Agora Financial, respected media outlets including Forbes.com, the Associated Press, Yahoo, and MSN Money have syndicated his writing. He received his BA from Loyola College in Maryland and is currently studying writing at the graduate level.
Financial Circulatory System
07/20/09 Tampa Bay, Florida
I was surprised to see that the government made $81.4 billion in cash out of papers, inks, and base metals in the last year, taking the total Cash in Circulation (essentially the M1 money supply) to $907.4 billion, whereas the M2 money supply is about $8.3 trillion (9 times larger) and (saving the best for last) the M3 money supply, which counts everything that can possibly be construed as “money” in the most liberal sense and making all kinds of assumptions, is almost $15 trillion, as close as anyone has been able to figure out, meaning that the money supply, at least as measured by M3, is now larger than the economy of USA!
For all you “velocity” freaks out there – and there are quite a few of them – substitute GDP as the “P” times “Q” part of Fisher’s famous equation MV=PQ (or, Money supply times Velocity of money equals Price of everything sold times Quantity of things sold) and you get a Velocity of less than 1! Hahaha! What in the hell is a velocity of less than 1? Hahaha!
Before you fire off another venom-laced email where you insult my intelligence just because I sound so stupid, act so stupid and look so stupid, I already know it doesn’t mean anything that I can understand, mostly because I am kind of, well, stupid.
But it is only an example of the kind of weird, strange crap you will see from now on, especially when all those trillions of dollars that have been created are exchanged for toxic assets, and all the future trillions of dollars to be printed by the Federal Reserve to finance the government’s massive deficit-spending, start burning a hole in somebody’s pocket, probably thanks to Congress coming up with some new “Get ’em buying!” tax scheme that will, inevitably, backfire and make everything worse and worse until it all collapses into what we hotshot professional economists call a Big Worthless Pile Of Financial Crap (BWPOFC).
And the reason that I am so sure of things turning into a BWPOFC is that, as Milton Friedman so famously said, “Inflation is always and everywhere a monetary phenomenon,” which seemingly guarantees inflation in consumer prices as a result of all of this new money flooding into the world’s economy, which is a monetary phenomenon in itself, in that it has only been tried by desperate countries in a last-ditch, kamikaze blaze of what they hoped would be glory, but was instead, always and everywhere, turned out to be just stupidly suicidal.
And how much inflation can one expect? Good question! The answer is remarkably symmetrical, as Howard Katz of thegoldbug.net says, “Over the past year, the amount of money in the U.S. has increased by almost exactly $1 trillion. This is a 70% increase from a year ago,” and “it will cause an approximately 70% increase in prices with a 1-2 year lag time,” which, looking at my watch before realizing it does not have a calendar, has already been 1 year of this “1-2 year lag.”
Billionaire Warren Buffet, who is not given to hyperbole and outlandish forecasts, says that he expects inflation to be as bad as it was in the ’70s. And how bad was that? Mr. Katz says, “The greatest price increase in American history was 13.3%, in 1979.”
And if you don’ think that gold will shoot up when inflation starts roaring like that, then you are obviously new at this investing business and you haven’t had time to look at what happened to the price of gold when it was $35 an ounce in 1970 and over $800 an ounce by 1980 when the inflation (from the vast expansions of the money supply needed to simultaneously finance the War on Poverty and the War in Vietnam) was rising along this same parabolic ride.
Until next time,
The Mogambo Guru
for The Daily Reckoning
Peter Brimelow
Is grousing about Goldman reaching critical mass?
Commentary: Questions are reaching the point where something might happen
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch) -- I'm amazed: Grousing about Goldman Sachs, and fury at the financial sector, is actually reaching the point where something might happen -- maybe even answers to questions we've been asking for a while.
As Jim Bianco of Bianco Research just noted in his News Clips/Daily Commentary service: "The amount of bad news that [Goldman Sachs Group /quotes/comstock/13*!gs/quotes/nls/gs (GS 160.15, +0.12, +0.08%) ] is generating with its record earnings is incredible. We cannot remember a company that has received so much scorn for making money."
Bianco linked to critical stories in the Economist and the New York Times, and a scathing op-ed column ("The Joy of Sachs") by Paul Krugman.
And that's only the beginning. Last week, Arianna Huffington in her liberal Huffington Post Webzine actually issued bipartisan praise of two Wall Street Journal pieces critical of Goldman and the bailout. (Her article is here; the WSJ pieces here and here.)
It's many years since Arianna and I were on the same politically incorrect side of one of William F. Buckley's Firing Line debates. She has since adroitly changed sides, and if she now thinks it's time to attack Goldman Sachs -- a major Democratic donor -- the firm is in trouble.
The most spectacular attack on Goldman Sachs: Matthew Taibbi's Rolling Stone article "The Great American Bubble Machine," posted in Rolling Stone magazine July 13.
This is a follow-up to Taibbi's earlier attack on the bailout, which he portrayed all too convincingly as a sort of Wall Street coup d'état. ( See March 30 column.)
Taibbi describes the extraordinary personnel interlock between Goldman Sachs and Washington, apparently regardless of the party in power. He thinks that a key development was the emergence of Robert Rubin, who became Goldman's co-chairman and then Bill Clinton's Treasury secretary.
Taibbi writes: "If America is circling the drain, Goldman Sachs has found a way to be that drain. ... The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere."
Of the bailout, he writes: "The numbers show that Goldman essentially borrowed a $5 billion salary payout for its executives in the middle of the global economic crisis it helped cause, using half-baked accounting to reel in investors, just months after receiving billions in a taxpayer bailout."
Sounds wild, but Taibbi makes a case. As a Rolling Stone reader says in the article's comment thread: "The last time I read anything this scary was the New Yorker article about Burmese pythons taking over Florida."
I've been reporting for years that key investment letters had come to the conclusion that the financial markets have been manipulated. ( See Sept. 9, 2005, column.) Now this suspicion is all over the mainstream media. Hmmm.
The scale that would be involved is so spectacular that it dwarfs another issue the letters have been asking about for years: whether the gold price has been systematically suppressed. ( See April 20 column.) Manipulating gold is an afterthought compared to what was allegedly going on.
I continue to think that a key part of this story is the mysterious 1998 Rubin-orchestrated rescue of Long Term Capital. ( See Sept. 29, 2008, column.)
And I'm increasingly confident all this will end with the appointment of another Pujo Committee, paralleling the one which investigated the so-called "Money Trust" in the wake of the Panic of 1907.
The consequences will be monumental.
Culture Wars Will Endure
By David Paul KuhnAmericans were consumed through the 1920s with debates over prohibition, the role of women, evolution and immigration. The Great Depression brought that era to a close. And in the rhyme of history, this Great Recession has eclipsed the culture wars of our time--for now.
Wars don't always end when one side hopes. Liberals have generally won the liberalization of our culture. Social conservatives now champion a working mother, Sarah Palin.
But the counter to the counter culture was the more powerful force in politics. And from Bill Clinton to Barack Obama, top Democrats of recent decades have attempted, and at times failed, to avoid those politics.
So we witness a president apprehensive about pushing for the end of "don't ask, don't tell." Earlier this year, Obama termed abolishing restrictions on abortions "not [his] highest legislative priority." They were campaign promises. But Obama fears the cost of those cultural fights.
Some leading liberals argue he need not. We are told that when economic recovery comes and the war is long over, cultural politics are not to return with our new normalcy.
History instructs otherwise. Our culture wars are less over than in détente. There is debate over an affirmative action case and a Supreme Court nominee. But the debate hardly enraptures the nation. It's not the Scopes Monkey trial.
The Great Recession remains the news. But in the years after our recession ends, we will surely see new cultural debates come to the fore.
At their core, the values disputes of the early and late 20th century derived from the same divide. To the sociologist James Davidson Hunter, who brought the "culture wars" into America's lexicon, debates over abortion or gay marriage were rooted in a contest of two mental archetypes.
Morality is the adherence to external doctrine. It's bible and Wednesday bible study. On the other side, morality is to be discovered through personal experience. We each can find our own subjective moral code from our backgrounds or pop-Buddhism or our flirtation with Descartes in college.
Values are either found in a turkey and mash potatoes or a multi-cultural buffet.
But last week's Center for American Progress report, titled the "Coming End to the Culture War," argues we will all soon be eating at buffets. The report was a lesson in a common misanalysis of cultural politics--one that mistakes symbols for substance.
Younger Americans are more socially liberal. Minorities vote less on cultural issues. And therefore, as both populations become more of our population, the culture wars shall end.
That's the case made by the report's author Ruy Teixera. Teixera is not alien to arguments that please his political sphere. (See this 50-page report on the "New Progressive America;" it argues long-term demographic change but ignores the stock market crash's immense impact on that change, as exhibited in tracking polls.)
Teixera's declaration of the end of the culture war presumes that debates over abortion or guns are over, because we are currently not consumed by that debate.
One reason we are not involved in those debates, of course, is Democrats' reticence to engage. They have learned the downside of values debates the hard way. Consider McGovern, Dukakis and Kerry.
The report also takes minorities' votes for granted. One consequence of a minority-majority America may be that minorities vote less on ethnic-class identity than culture. Consider the narrative of ethnic-white Catholics from the early to mid 20th century.
But in this case, the big picture is the picture. When a diverse affluent society suddenly encounters threats to that affluence, the society's concerns shift from culture to more basic concepts of survival and economic stability.
Immigration and generational change are also factors. The tension between Protestants and Catholics, Anglo and non-Anglo whites, between urban and rural, calmed in the early 20th century. But our debates are sometimes eerily similar.
Recall the 2004 ad against Howard Dean. As the Iowa caucuses neared, an older married couple tells Dean to: "Take his tax-hiking, government-expanding, latte-drinking, sushi-eating, Volvo-driving, New York Times-reading, body-piercing, Hollywood-loving, Left-wing freak show back to Vermont."
In the 1928 campaign, evangelist John Straton framed Democrat Al Smith as a purveyor of: "Card playing, cocktail drinking, poodle dogs, divorces, novels, stuffy rooms, dancing, evolution, Clarence Darrow, overeating, nude art, prize-fighting, actors, greyhound racing, and modernism."
What was "acid, abortion and amnesty" in 1972 became "God, guns, and gays" by the early 1990s. But each slogan was rooted in enduring divisions. And those divisions define the American experience.
But the nature of those divisions can change. Today, one side espouses economic populism. The other side espouses cultural populism. The former wins in hard times. And the two have not always been separate. Democrat Williams Jennings Bryan embodied both populisms a century earlier.
Not all moral change is also congruent. Today's youth are more liberal on gay rights but they are also slightly more conservative on abortion.
But the defining fact of moral politics may be its place in our politics. Back in 1840, the newly culturally populist Whigs characterized Martin Van Buren as an elitist.
"Wherever you find a bitter, blasphemous Atheist and an enemy of Marriage, Morality, and Social Order," it was said to be "one vote for Van Buren," wrote historian Sean Wilentz in "The Rise of American Democracy."
It would be foolish for Democrats to presume the culture behind our democracy is suddenly different.
Issues change far more rapidly than principles and peoples. This is a nation with an enduring religious strain, a brief history and an image constantly remade with immigration. It's principles that define the American idea. And for this reason, contests over those principles will continue to define our politics.
David Paul Kuhn is the Chief Political Correspondent for RealClearPolitics and the author of The Neglected Voter. He can be reached at david@realclearpolitics.com and found on Twitter and RSS'A trillion here, a trillion there'
We trimmed government spending, protected vital services and refused to raise taxes. (As is the case in any legislative body, some gave it a try). I can’t say our legislative session was much fun, but it was necessary, and it is the American way. Or, at least we thought it was.
In the meantime, I’ve been catching up on the news in Washington. I wish I had not.
Let’s review: the Troubled Asset Relief Program, bailouts for American International Group and others, CEOs of bankrupt businesses that receive billions of tax dollars running off with millions in bonuses, a $ 3.5 trillion budget, a nearly trillion-dollar stimulus that has not stimulated, unemployment continuing to climb, government in the banking business, and of course, the U.S. government now making cars.
We have record deficits, which are unprecedented in recorded world history. We have debt that is even causing our creditors in the Middle East and China to be worried. Oops, I almost forgot the new national energy tax that just passed the House. If it isn’t bad enough that you may have lost your job and been fighting off foreclosure, the government now wants to make sure you, and every other American, pay more in energy costs so former Vice President Al Gore can be happy. This here is a fine pot of gumbo.
I honestly do not know one single individual who is happy with this situation. Not one. Not a Republican, a Democrat or an independent. These actions are all problematic individually, but taken as a whole, they are devastating. So against that backdrop, we enter the health care reform debate.
I know a little something about health care policy, and I can tell you exactly the game that is currently afoot. If the House Democrats’ plan were to become law, the president’s statement that “if you like your health care now, you can keep it” will not be true. This is not an opinion, this is a fact.
Businesses will, in effect, be forced to send employees into the Democrats’ government-run health care. It’s really not something to argue about, it is a fact. A private health insurance system, otherwise known as what we have today, will not be able to compete with a taxpayer-subsidized government plan, and businesses faced with growing health care costs will opt to either lay off more workers or send employees into the government plan. One independent study already suggested that up to 119 million Americans will end up leaving their private plans for the public plan. To think otherwise requires one to suspend disbelief.
The plan the House Democrats are developing is a radical restructuring of health care in America. You may like it, you may not, but it is just that; there is no denying or sugarcoating it.
Let me be clear about something: I have no problem conceding that Speaker Nancy Pelosi, with whom I served in Congress, means well, even though I realize some Republicans get mad when I say that. But the simple fact is that House Democrats are determined to try to tax and spend our way back to prosperity. The past six months have made that clear.
Our federal government is currently just flinging stuff against the wall, in trillion-dollar chunks, to see what sticks. Congress’s own budget office has said the current “federal budget is on an unsustainable path” and that the Democrats’ health plan does not reduce “long-term health costs facing the government.”
The House Democrats’ plan would have the following consequences:
• Most Americans would end up, over time, with government-run health care.
• The only folks who would be able to stave this off are the wealthy.
• The quality of our health care would diminish.
• Someone other than patients and doctors would make decisions on the treatments and medicines we can have.
• The taxes on the rich, otherwise known as employers, would further damage the economy and potentially drive up unemployment at a time we can least afford it.
If you like those outcomes, then by all means, support the House Democrats’ health care plan.
The shame of it all is that there really is an emerging consensus among the populace that we need reform that reduces costs, improves outcomes and puts patients in control.
Imagine if the president proposed a reform package that made health insurance portable, ended frivolous lawsuits, allowed for pooling, required insurance companies to cover the sick, paid based on outcomes and not activity, used refundable tax credits to increase affordability and incentivized rather than penalized small businesses to provide coverage. Republicans would support those reforms, and the policy would benefit the entire country. True, it wouldn’t be the radical and exciting restructuring that Pelosi is pushing, but it would begin to move us toward common-sense, bottom-up solutions. Solutions! There’s an idea.
But wait, as the late Billy Mays would say, there’s more. Social Security and Medicare, our two biggest entitlement programs in this country, are perpetually underfunded and are always in danger of going bankrupt. Is it even remotely possible that we as a country are now considering adding an entire new entitlement program to our repertoire?
Would the last sane person in Washington please turn out the lights when you leave?
Bobby Jindal is the Republican governor of Louisiana
The ‘Tax the Rich!’ Reflex
Tap a typical democratic member of the House of Representatives on the knee with a rubber hammer and he or she will say: "Tax the rich!" If such a person, lounging in a lawn chair, is startled from a summer torpor by a cymbal crash, he or she will leap up exclaiming: "Tax the rich!" Forgive such people; they cannot help themselves. It is a reflex.
But people with only one idea really have no idea; they have only a mental default position. So, last week the House decided to solve the problem of finding $1 trillion for health care by increasing taxes on the income of the 1.4 percent of taxpayers who already pay 45.2 percent of the income taxes—the rich, understood, for now, as those with annual household incomes of at least $350,000. These people do a disproportionate share of society's investing and charitable giving, so there will be less of both if the House has its way.
Less of both would be an improvement, according to statists who think both should be done primarily by government rather than individuals, the better to engineer improved equality, understood as a more equal dependence of almost everyone on government for almost everything.
But there are unmentionable trade-offs. Richard Posner, senior lecturer at the University of Chicago Law School and judge on the U.S. Court of Appeals for the Second Circuit, says what no elected official dares to say: "As society becomes more competitive and more meritocratic, income inequality is likely to rise simply as a consequence of the underlying -inequality—which is very great—between people that is due to differences in IQ, energy, health, social skills, character, ambition, physical attractiveness, talent, and luck." Hence policies, such as steeply progressive taxation, that are intended to increase equality are likely to decrease society's wealth. They reduce the role of merit in the allocation of social rewards—merit as markets measure it, in terms of value added to the economy.
It is, of course, possible to argue that the gain in equality of condition is worth the net loss in affluence. It is, however, telling that no public official actually makes that argument.
Today, in the midst of what history may remember as the Great Recession, it is especially risky to siphon away still more of the resources of the investor class. It is prudent to expect that business investment will have to play a larger role in fueling economic growth than it has played in the last quarter century. This is because private consumption may not soon be what it was between 1983 and 2008.
Speculating in The Wilson Quarterly about a "new normal," Martin Walker, a senior scholar at the Woodrow Wilson International Center for Scholars in Washington, notes that for more than three decades after World War II, private consumption as a percentage of GDP varied within a narrow band, between 61 and 63 percent. In 1983, however, consumption began to rise, and reached 70 percent in 2007, fueled in part by $500 billion annually in home-equity loans.
Suppose the old, pre-1983 normal returns as the new normal. In 2007, personal consumption, at 70 percent of the $13.8 trillion GDP, was $9.7 trillion. Martin calculates that if it had been even at the upper end of the 1946–1983 norm, at 63 percent, 2007 consumption would have been $1 trillion less.
In 2007, Americans' savings rate was approximately zero. Today it is 7 percent of disposable income. Which is fine: -Daniel Akst, a contributing editor of The Wilson Quarterly, notes that the noun "thrift" is etymologically related to the verb "thrive." That should, however, be a sobering thought to a nation in which last year more than half of all college students had at least four credit cards. The credit card is one of what Akst calls the four horsemen of the financial apocalypse.
The other three are the automobile, the television, and the shopping cart: Cars made possible population dispersal and large lots for large houses with lots of room for stuff. Television, the powerful marketer in the living room, made it unnecessary to imagine new stuff; it showed what might be bought with credit cards, which separated the pleasure of purchasing from the pain of paying. And, says Akst, the shopping cart, although unknown in traditional department stores (carts in Marshall Field? Heaven forfend), is suited to all-you-can-carry, buffet-style shopping at Wal-Mart and Target. Carts are necessities for hauling superfluities to the large car for the drive to the large house.
If the age of conspicuous consumption is behind us and conspicuous -nonconsumption—frugality chic? "Notice how I am trying not to be noticed"?—is upon us, heaven help us. Heaven had better, because the investor class, squeezed again and again, might be too anemic to provide the economic propulsion that used to come from consumers.
The Squandered Stimulus
By Robert SamuelsonWASHINGTON -- It's not surprising that the much-ballyhooed "economic stimulus" hasn't done much stimulating. President Obama and his aides argue that it's too early to expect startling results. They have a point. A $14 trillion economy won't revive in a nanosecond. But the defects of the $787 billion package go deeper and won't be cured by time. The program crafted by Obama and the Democratic Congress wasn't engineered to maximize its economic impact. It was mostly a political exercise, designed to claim credit for any recovery, shower benefits on favored constituencies and signal support for fashionable causes.
As a result, much of the stimulus' potential benefit has been squandered. Spending increases and tax cuts are sprinkled in too many places and, all too often, are too delayed to do much good now. Nor do they concentrate on reviving the economy's most depressed sectors: state and local governments; the housing and auto industries. None of this means the stimulus won't help or precludes a recovery, but the help will be weaker than necessary.
How much is hard to determine. By year-end 2010, the package will result in 2.5 million jobs, predicts Mark Zandi of Moody's Economy.com. But as Zandi notes, all estimates are crude. They involve comparing economic simulations with and without the provisions of the stimulus. The economic models must make assumptions about how fast consumers spend tax cuts, how quickly construction projects begin and much more.
Depending on the assumptions, the results vary. When the Congressional Budget Office (CBO) made job estimates, it presented a range of 1.2 million to 3.6 million by year-end 2010. Whatever the actual figures, they won't soon mean an increase in overall employment. They will merely limit job losses. Since late 2007, those have totaled 6.5 million, and there are probably more to come.
On humanitarian grounds, hardly anyone should object to parts of the stimulus package: longer and (slightly) higher unemployment benefits; subsidies for job losers to extend their health insurance; expanded food stamps. Obama was politically obligated to enact a campaign proposal providing tax cuts to most workers -- up to $400 for individuals and $800 for married couples. But beyond these basics, the stimulus plan became an orgy of politically appealing spending increases and tax breaks.
More than 50 million retirees and veterans got $250 checks (cost: $14 billion). Businesses received liberalized depreciation allowances ($5 billion). Health care information technology was promoted ($19 billion). High-speed rail was encouraged ($8 billion). Whatever the virtues of these programs, many spend out slowly. The CBO estimated that nearly 30 percent of the economic effects would occur after 2010. Ignored was any concerted effort to improve consumer and business confidence by resuscitating the most distressed economic sectors.
Vehicle sales are running 35 percent behind year-earlier levels; frightened consumers recoil from big-ticket purchases. Falling house prices deter homebuying. Why buy today if the price will be lower tomorrow? States suffer from steep drops in tax revenues and face legal requirements to balance their budgets. This means raising taxes or cutting spending -- precisely the wrong steps in a severe slump. Yet, the stimulus package barely addressed these problems.
To promote car sales and homebuying, Congress could have provided temporary but generous tax breaks. It didn't. The housing tax credit applied to a fraction of first-time buyers; the car tax break permitted federal tax deductions for state sales and excise taxes on vehicle purchases. The effects are trivial. The recently signed "cash for clunkers" tax credit is similarly stunted; Macroeconomic Advisers estimates it might advance a mere 130,000 vehicle sales. States fared better. They received $135 billion in largely unfettered funds. But even with this money, economists at Goldman Sachs estimate that states face up to a $100 billion budget gap in the next year. Already, 28 states have increased taxes and 40 have reduced spending, reports the Office of Management and Budget.
There are growing demands for another Obama "stimulus" on the grounds that the first was too small. Wrong. The problem with the first stimulus was more its composition than its size. With budget deficits for 2009 and 2010 estimated by CBO at $1.8 trillion and $1.4 trillion (respectively, 13 percent and 9.9 percent of gross domestic product), it's hard to argue they're too tiny. Obama and congressional Democrats sacrificed real economic stimulus to promote parochial political interests. Any new "stimulus" should be financed by culling some of the old.
Here, as elsewhere, there's a gap between Obama's high-minded rhetoric and his performance. In February, Obama denounced "politics as usual" in constructing the stimulus. But that's what we got, and Obama likes the result. Interviewed recently by ABC's Jake Tapper, he was asked whether he would change anything. Obama seemed to invoke a doctrine of presidential infallibility. "There's nothing that we would have done differently," he said.
Obama’s Summer of Discontent
Pete, your cogent take is yet again corroborated, this time by the Washington Post-ABC News poll. What we see is an across-the-board erosion in not just the public’s overall approval of Obama’s performance, but in confidence in his ability to manage every significant domestic item on his agenda. The Post explains:
Heading into a critical period in the debate over health-care reform, public approval of President Obama’s stewardship on the issue has dropped below the 50 percent threshold for the first time, according to a new Washington Post-ABC News poll.
Obama’s approval ratings on other front-burner issues, such as the economy and the federal budget deficit, have also slipped over the summer, as rising concern about spending and continuing worries about the economy combine to challenge his administration. Barely more than half approve of the way he is handling unemployment, which now tops 10 percent in 15 states and the District.
The president’s overall approval rating remains higher than his marks on particular domestic issues, with 59 percent giving him positive reviews and 37 percent disapproving. But this is the first time in his presidency that Obama has fallen under 60 percent in Post-ABC polling, and the rating is six percentage points lower than it was a month ago.
The underlying figures are startling. Confidence in his ability to handle health care has plunged from 57 percent to 49 percent, while disapproval has jumped from 29 percent to 44 percent. On the deficit, respondents disapprove by a 49 percent to 43 percent margin. And it appears that Obama’s embrace of tax and spending policies has not gone over well:
Nearly a quarter of moderate and conservative Democrats (22 percent) now see Obama as an “old-style tax-and-spend Democrat,” up from 4 percent in March. Among all Americans, 52 percent consider Obama a “new-style Democrat who will be careful with the public’s money.” That is down from 58 percent a month ago and 62 percent in March, to about where President Bill Clinton was on that question in the summer of 1993.
Concerns about the federal account balance are also reflected in views about another round of stimulus spending. In the new poll, more than six in 10 oppose spending beyond the $787 billion already allocated to boost the economy. Most Democrats support more spending; big majorities of Republicans and independents are against the idea.
Support for new spending is tempered by flagging confidence on Obama’s plan for the economy. Fifty-six percent are confident that his programs will reap benefits, but that is down from 64 percent in March and from 72 percent just before he took office six months ago. More now say they have no confidence in the plan than say they are very confident it will work. Among independents and Republicans, confidence has decreased by 20 or more points; it has dropped seven points among Democrats.
Higher income Americans, who made up a key part of Obama’s coalition, have figured out health care is going to be paid by them if Obama has his way. Accordingly, the poll shows that “those with incomes above $50,000 now are split evenly between Obama and Republicans on dealing with health care. In June, they favored Obama by a 21-point margin.”
Moreover, the poll sampled all adults, not merely voters or even likely voters in 2010. It is quite possible that among actual voters Obama’s numbers are far worse.
Why does all of this matter? At the time in which Obama is thrusting himself forward to “sell” government-centric health care, his credibility on that on other issues is skidding. Furthermore, lawmakers can read these numbers too. They understand that the public is losing faith in a government-run health-care scheme and in the massive tax plan that would be needed to fund it. There is a reason lawmakers of both parties are openly challenging Obama’s timetable and vision for a massive health-care reform effort.
Meanwhile, the administration appears to be panicking, resorting to every trick in the book to stem the tide of discontent over its leftward drift. The A.P. reports:
The White House is being forced to acknowledge the wide gap between its once-upbeat predictions about the economy and today’s bleak landscape.
The administration’s annual midsummer budget update is sure to show higher deficits and unemployment and slower growth than projected in President Barack Obama’s budget in February and update in May, and that could complicate his efforts to get his signature health care and global-warming proposals through Congress.
The release of the update — usually scheduled for mid-July — has been put off until the middle of next month, giving rise to speculation the White House is delaying the bad news at least until Congress leaves town on its August 7 summer recess.
But this sort of sleight of hand rarely works, and in this case, Hourse Minority Leade Boehner is already going ballistic, arguing that the Obama administration is trying to “hide the fact that the policies of this Administration have buried our children and grandchildren under historic debt.”
If all that isn’t sobering enough for Obama-philes, there is this jaw-dropper from Rasmussen: in a potential 2012 presidential election match-up, Mitt Romney ties Obama at 45% and beats Obama among unaffiliated voters by 48% to 41%. Well, it’s very early but still. Wow.
Whether Obama, who possesses admirable oratorical skills, can own up to the fiscal train-wreck he is presiding over and reverse his slide in the polls, remains to be seen. But it may be that the problem is not Obama personally, nor a deficit in rhetorical skills. It may frankly be that Americans didn’t vote for a leftward lurch in their government and now are registering their extreme discomfort with a president who is trying to pull off one of the most audacious bait-and-switch political maneuvers in recent memory.
U.S., India Announce Defense, Power Deals
MATTHEW ROSENBERG
![[Clinton and Krishna]](http://s.wsj.net/public/resources/images/OB-EC188_0720cl_F_20090720134654.jpg)
Associated Press Hillary Rodham Clinton shares a light moment with Indian Foreign Minister S.M. Krishna after signing an agreement on an endowment fund for science and technology.
NEW DELHI -- The U.S. and India announced deals Monday that could bring American defense contractors and power companies billions of dollars in business, as Hillary Clinton wrapped up her first visit as secretary of state to the South Asian nation.
A long-running dispute over how to combat climate change threatened a day earlier to the sour the trip, which has been touted as an effort to strengthen ties between world's two largest democracies after decades of estrangement during the Cold War, when New Delhi often leaned toward the Soviet Union.
Monday's announcements ensured Mrs. Clinton's three-day visit brought tangible gains for both sides, setting the stage for further expanding military cooperation and two-way trade, currently valued at about $45 billion and growing.
"I don't think you can understate the significance of our relationship as two democracies," Mrs. Clinton said at a joint news conference with her Indian counterpart, External Affairs Minister S.M. Krishna. "We understand the difficulties of decision-making in democracies, and we respect the vibrancy of each other's democracy. That is a much stronger base for a relationship than any other in the world."
Mrs. Clinton said she had been told by Prime Minister Manmohan Singh, whom she met earlier in the day, that India had set aside two sites where U.S. firms will have exclusive rights to build nuclear power plants.
The sites will "facilitate billions of dollars in U.S. reactor exports and create jobs in both countries as well as generate much-needed energy" in India, which faces chronic power shortages, Mrs. Clinton said.
She didn't say where the sites would be. But the widely expected announcement is a major step toward implementing a landmark pact sealed last year between Washington and New Delhi that ended a 34-year ban on trading nuclear fuel and technology with India, which had developed atomic weapons outside the Nuclear Non-Proliferation Treaty.
Already, India has set aside sites exclusively for French and Russian companies. The U.S. sites announced Monday guarantee American access to a market for power plants valued at tens of billions of dollars.
U.S. Secretary of State Hillary Clinton gestures as she addresses Indian students and university officials during a function at a university campus in New Delhi July 20, 2009.
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