It’s CEO Season

There is much wailing and snarling in the news media and blogosphere right now about the estimated $21 billion in bonuses enjoyed by bailed out banking executives. Commentators have directed additional anger at the sports team sponsorships and executive jet purchases by these same billion-dollar welfare recipients. I join wholeheartedly in the snarling. The remedies for these offenses are obvious – ban bonuses, sponsorships, and frivolous purchases.

Nobel laureate Joseph Stiglitz recommends nationalizing the failing banks and thereby force them to behave in a manner consistent with our national interest. I am all for this. This would end the perks, fire the jerks, and also allow us to force a cramdown of troubled mortgages. In a previous post I noted that home prices, adjusted for inflation, were almost double historical levels in 2007, and way out of whack with median income levels. A cramdown would reduce the principle of all those troubled mortgages to a sustainable level and transform all those mortgages with time-bomb interest rate hikes into long term fixed interest loans. The banks would end up with 50% of something instead of 100% of nothing. Then that $400 billion of worthless mortgage backed securities would be worth perhaps $200 billion. Nationalization would wipe out bank stockholders, but that’s the risk one takes on Wall Street. Let’s face it, those stocks aren’t looking at a bright future right now anyway.

Another big issue is revenue. The U.S. government is about to borrow $800 billion to stimulate the economy and try to keep us from swirling down the economic drain. I have advocated stimulus with payback, but there is still a shortfall. There is a cheap way to stick another $100 billion a year in the national coffers, and I’d recommend that you contact your elected representatives in Washington about it.

Find and prosecute millionaire tax cheats. According to Senator Carl Levin (D, Michigan) the Treasury loses about $100 billion a year because millionaires (and billionaires) hide their money in illegal offshore accounts. The international banking firm UBS is under investigation for creating these accounts, and there are many others out there willing to stash money in shell companies for rich Americans. If the IRS could get an extra few million and the authorization to let loose the dogs on millionaire tax cheats the return on investment would be 10,000 to 1.

The outrage is fresh and hot, and the momentum is out there. This is an opportune time for kicking some ass and closing some loopholes for those in the income stratosphere. They made a killing getting us into this mess. Aside from merely obeying the law, it is only fair that they pay proportionately for getting us out of this mess.

Inaugural Indicators

I promised a post on the lead-pipe clues about policy that President Obama put in his inaugural address. History and Obama’s left-handed signature have passed me by on a couple of subjects.

As you probably have read elsewhere, Obama signed an order that will close the detention center at Guantanamo Bay, Cuba within the year. He also ordered the closing of all secret detention centers run by the CIA and ordered an end to torture of detainees. All these were directly foreshadowed in his address.

“At these moments, America has carried on not simply because of the skill or vision of those in high office, but because We the People have remained faithful to the ideals of our forbears, and true to our founding documents.”

“As for our common defense, we reject as false the choice between our safety and our ideals. Our Founding Fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience’s sake.”

Obama has established himself as not only a scholar of the Constitution, but also one who respects the Constitution.

He also has imposed serious restrictions on the hiring of former lobbyists to posts that involve their former clients. He tipped that one as well: “And those of us who manage the public’s dollars will be held to account - to spend wisely, reform bad habits, and do our business in the light of day - because only then can we restore the vital trust between a people and their government.”

What else can we expect?

Obama will make renewable energy, energy efficiency, and global warming a priority.

“…each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.”

“We will harness the sun and the winds and the soil to fuel our cars and run our factories.”

“With old friends and former foes, we will work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet.” (This one also presages some anti-proliferation work with Russia, China, Iran, and Pakistan.)

“…nor can we consume the world’s resources without regard to effect.”

We can expect a return to multilateralism and diplomacy.

“Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.

We are the keepers of this legacy. Guided by these principles once more, we can meet those new threats that demand even greater effort - even greater cooperation and understanding between nations.”

This will include an end to the “Axis of Evil” approach to our adversaries. Most likely this will include a warming of relations with Iran.

“To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist.”

Here is the one that gladdens my heart:

“We will restore science to its rightful place,…”

This applies to many policy areas, including global warming, stem cell research, sex education (abandoning abstinence-only), and environmental protection. Can we hope for rational drug policy? Probably not quite yet.

A related, overarching theme is one of pragmatism trumping ideology. He explicitly stated this in terms of government intervention.

“The question we ask today is not whether our government is too big or too small, but whether it works - whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end.”

“On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn out dogmas, that for far too long have strangled our politics.”

“…the stale political arguments that have consumed us for so long no longer apply.”

There is more. He mentioned humanitarian foreign aid, and Hillary Clinton, our new Secretary of State, opened her tenure with a commitment to increasing such aid. He alluded to issues of labor and wages, and the distribution of the benefits of our economy. Congress has already delivered an equal pay bill to his desk and a union organizing bill should soon follow.

I’m feeling reasonably optimistic. We’ve gone from desperately losing ground and grinding our teeth in frustration to actual progress in a week. If President Obama delivers on a quarter of this I’d be happy, and I think he’ll do much better.

Adulthood

I watched the inaugural ceremonies with a great sense of relief. A dear friend put it best: It is as if we’ve had our collective heads held underwater for eight years and finally we’ve been allowed to lift our heads up and breathe. I was impressed with President Obama’s inaugural address and I’d like to parse it out.

The theme that ran through it was adulthood. The key phrase was his quote from the bible, arriving a sixth of the way through the address: “We remain a young nation, but in the words of Scripture, the time has come to set aside childish things.” Truly, the United States has been childish, as a government and as a people.

Childish in its self-centered arrogance and exceptionalism
Childish in its ignorance
Childish in its unilateralism
Childish in its petulance at dissent (Freedom Fries, anyone?)
Childish in its uncontrolled anger
Childish in its unquestioning acceptance of authority, no matter how misguided
Childish in its fawning over celebrity
Childish in its desire for unearned wealth

President Obama repeatedly touched on the themes of adulthood, responsibility, and hard work, invoking the efforts of previous generations.

“Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.”

“…we understand that greatness is never a given. It must be earned.”

“It has not been the path for the faint-hearted - for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things - some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.”

“Time and again these men and women struggled and sacrificed and worked till their hands were raw so that we might live a better life.”

“But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions - that time has surely passed.”

(Referring to soldiers) “We honor them not only because they are guardians of our liberty, but because they embody the spirit of service; a willingness to find meaning in something greater than themselves. And yet, at this moment - a moment that will define a generation - it is precisely this spirit that must inhabit us all.”

Making hard choices, facing the unpleasant, earning one’s reputation, taking risks, thinking beyond the self, making sacrifices for future benefit; these are the activities of an adult.

“For as much as government can do and must do, it is ultimately the faith and determination of the American people upon which this nation relies.”

This is not the president who, after the September 11th attacks, told Americans to go shopping.

“But those values upon which our success depends - hard work and honesty, courage and fair play, tolerance and curiosity, loyalty and patriotism - these things are old.”

Here President Obama throws the much blathered but little obeyed precepts of the corporate conservatives back in their faces.

“What is required of us now is a new era of responsibility - a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.”

This is an adult talking to adults about the mature pleasure of a job well done.

“This is the price and the promise of citizenship.”

We are citizens after all, and not passive consumers. The benefits of citizenship and community require personal effort.

Naomi Klein, in her excellent book Shock Doctrine, writes about despots taking advantage of people in their traumatized, infantilized state. People in shock tend to regress to childlike behaviors, making them vulnerable to emotional manipulation. Despite the panic brought on by our foundering economy, President Obama did not play the paternal card. He was not a father alternately scaring and comforting children. He spoke to us as an equal speaks to equals, reminding us of our shared duties and responsibilities.

This approach gives me confidence about how the Obama administration will conduct its business.

Next essay: Lead pipe clues in the inaugural as to Obama administration policies.

Gunfire, F.I.R.E., and Hard Reality

With eight endless years of the Cheney/Bush administration coming to an end and an economic crisis facing us, I’d like to step back and look at our economic policies from a long-term perspective. I’d like to explore three concepts: planned obsolescence, inherent obsolescence, and capital intensity.

Planned obsolescence is a familiar concept to most people, so I won’t dwell on it. It took hold in the auto industry in the 1930s, when the market was beginning to saturate with used vehicles. Up until then, car models came out periodically, but the automakers started coming out with the yearly model changes familiar to us today. The apex of this appears to be the computer industry, with last year’s desktop or notebook being hopelessly outclassed in both price and features by this year’s model.

Inherent obsolescence is a simple concept. Consider the candle. You buy it, you light it, it burns, and you need another.

Capital intensity is the quality of a business that churns great quantities of money in its operations compared to its production. One could contrast it with labor intensity, the quality of a business that requires relatively large amounts of human effort per unit of production.

These three concepts explain the economic appeal of the military industrial complex. By appeal I mean appeal to big business, not ordinary people. Especially not ordinary people who live where the bombs get dropped.

Military spending through the ages has been a profitable promoter of inherent obsolescence. Perhaps the best and simplest example of inherent obsolescence is the bullet. It is made (by the millions) to exacting specifications at high cost, because its failure could be fatal to its user. It is shipped at high cost to a battlefield, where it is fired. Then you need another. The problem with using the military version of inherent obsolescence is that it requires a war to really chew up projectiles, weapons, and the vehicles that carry them. Therefore, the bigger the better, because bombs cost thousands of dollars per death instead of a fistful, even with precision guidance. This is capital intensive war. Fewer soldiers mean fewer aggrieved relatives and a smaller constituency for peace.

We did have a way around this, for a while. We had the Cold War and the nuclear arms race. In the Cold War we managed to farm out some of the fighting, allowing military industries to make money without costing us voters’ sons. The nuclear arms race, however, was a brilliant program of capital intensive planned obsolescence. Military contractors designed and built incredibly complex bombs and missiles. The budget and details were secret, limiting oversight. The nukes were vital to our national security, so contractors could completely overrun their bids without penalty. When a missile was finished, it would be stuck in an incredibly expensive secret hole in the ground. At this point it would be obsolete, because the Soviets might already be ahead of us. The design and production of the next money churner would already be in place. As some persistent investigators later found out, we had always been ahead of the Soviets in the arms race, in both technology and quantity, and the insiders in Washington knew this. It was a great hog trough while it lasted.

There was the problem of taxes, and it was twofold. First, the government has to get taxes to pay for the endless stream of obsolete hardware, and this annoys the voters. Second, the few people who become rich from all this flim-flam pay a share of these taxes. President Reagan’s advisors solved this quite simply: Cut taxes on the wealthy and borrow money to make up the difference. During the Reagan years the national debt nearly doubled, deficit after deficit.

But then the damned Soviets collapsed on us and the party was over. People were talking about a peace dividend; the money we’d have left over once we stopped blowing it on nukes, tanks, and submarines. Heaven forfend. Luckily, with some encouragement from Secretary of State James Baker III and his ambassadorial minion April Glaspie, our angry pocket dictator Saddaam Hussein invaded Kuwait.

“We [The United States] have no opinion on your Arab-Arab conflicts, such as your dispute with Kuwait. Secretary [of State James] Baker has directed me to emphasize the instruction, first given to Iraq in the 1960s that the Kuwait issue is not associated with America.” Ambassador to Iraq, April Glaspie, July 25th, 1990, one week before the Iraqi invasion of Kuwait, in a meeting with Sadaam Hussein.

Back to capital intensive inherent obsolescence with a vengeance.

Our invasions and occupations of Iraq and Afghanistan have had the cash registers ringing all over the military industrial complex. Bush II and a compliant Congress cut taxes on the wealthy even more, so deeper in the hole we went. Of course, the bankers felt left out, so in the late 1990’s banking laws were relaxed and we had the credit boom. Talk about capital intensive – it was all about shuffling virtual money.

Consider that banking isn’t really an end in itself for ordinary people. It is a means to some other end, generally storing money or owning an expensive object such as a house or a car. Banking and its costs are a drag on the real economy of goods and services. A couple of decades ago finance, insurance, and real estate (FIRE) accounted for less than 15% of our Gross Domestic Product. More recently it has grown to around 18%. Meanwhile, our manufacturing sector dropped from 27% of GDP to less than 20%.

(Click on thumbnail to enlarge)

(Data Source: Bureau of Economic Analysis, U.S. Dept. of Commerce)

What we are experiencing now is a return to reality. Our titans of finance cheerfully shuffled money around with a myopic eye on short-term profits and made a bundle of vapor. All they proved was that with a high enough credit limit anybody can look like a big shot…for a while. We have run full speed into the cold, hard questions of life. How much real stuff are we actually extracting from the earth and turning into useful things? What everyday services are we providing for each other? How much of our nation’s real wealth is ending up in the pockets of ordinary working people? How much can an average family really afford to spend on a house? How deep in debt can we go before bankruptcy engulfs us, as individuals and as a nation?

Big business will always be attracted to the profligate, wasteful nature of war and the unbounded, non-material world of finance. Politicians will always be tempted by deficit spending. I am somewhat heartened by Mr. Obama’s talk of Main Street superceding Wall Street in his stimulus plans. However, I doubt that he and Congress, filtered and threatened by big money, can spurn the advances of bankers and military suppliers. The material realities of nature and society will eventually force them to comply, but how much battering will we endure between here and our inevitable destination? I’m hoping for some uncharacteristic foresight.

Persistent Stories

I was at a party recently where I overheard a man talking about his close connection with his mother. He told a story about how he had been away at college and had developed this overwhelming feeling that his mother was in trouble. He called his parents’ house, got his father on the phone, and told him of his sudden concern. His father said that his mother was upstairs, that he (the father) had spoken to her just ten minutes before, and that she was fine. The son insisted, the father went back upstairs, and (you guessed it) the mother had just been stricken with pain and needed her medicine. The people standing around this man at the party nodded and commented on this mysterious connection.

I could have told a similar story, but I didn’t want to be obnoxious. I’ll tell it to you now. A friend of mine, who grew up in Connecticut, went to away to college in California. About six weeks after she arrived, in the middle of the night, she had a sudden, overwhelming feeling that her parents were dying. She called her parents, got her mother on the phone, and told her about the premonition. “We’re fine,” said her mother, “Go back to sleep.” She did. And her parents were fine. They still are doing well, even now, 20 years later.

Boring, huh?

Imagine the millions of college students who separate from their families and hometowns for the first time every fall. Out of these millions, almost all feel some separation anxiety. For hundreds of thousands, it is intense. Some tens of thousands act on that anxiety and call home. Occasionally, something has actually just happened to their loved ones. Those stories persist, for obvious reasons of drama. The vast bulk of the stories are like my friend’s story and get quietly forgotten.

There are thousands of stories like this. A dog gets agitated and howls at (roughly) the same time that its owner dies hundreds of miles away. Ignore the fact that this dog has howled hundreds of times before, as have millions of other dogs, without any dying owners. The fact is, we as a species like patterns. Looking for patterns is an ingrained and useful technique for making sense out of our world. The problem is that we find patterns in disconnected occurrences.

I read about a classic study involving pigeons. The researcher, the famous B.F. Skinner, put pigeons in so-called Skinner boxes, where there is a lever for the animal to push and a hopper that dispenses food pellets. The researcher can put all sorts of conditions on the relationship between the lever and the hopper – a colored light being on, for instance – and find out about the animal’s learning ability or color blindness. In this case, Skinner removed the lever and had the hopper open on a fixed schedule. Soon afterward he found the pigeons doing surprising repetitive things. One bobbed its head to the side. Another spun in circles. Another made vague pecking movements. He had created superstitious pigeons. A particular pigeon, having randomly performed the same movement several times just before the hopper swung into place, decided in its little pea brain that the movement produced the hopper. It proceeded to repeat the movement over and over and, voila, eventually it “worked.” The food reappeared.

Apparently we are little better than pigeons in this respect. We wear “lucky” clothing, perform little rituals before trying to start the car on a cold morning, and pass on stories of miraculous coincidences that are just that – coincidences. I hope all who read this will look more skeptically at such things in the future…knock on wood.