Withdrawal symptoms

People with serious additions to alcohol or some drugs face a difficult period when they quit - withdrawal symptoms include chills, fevers, delusions, pain and all sorts of other unpleasant effects. Nations addicted to debt face similar problems, as we can already see in places like Greece.

We as a nation need to cut the federal budget by about half. Set aside the problem that our politicians can't bring themselves to make the hard decisions.  When someone finally makes the decision, or is finally forced by the bond markets to make the decisions, the question will be how to manage the withdrawal effects.  Millions of people are on the federal payroll, either directly or as contractors and suppliers.  How do we ease them off the addiction to federal funds without bankrupting thousands of companies and putting million more on the unemployment rolls?

If we had enough time, we could make this a relatively soft landing by simply ceasing to hire more federal employees, slowly reducing the volume of contracts, and letting natural attrition and retirements prune the workforce.  Unfortunate, the longer we wait to face the problem, the less time there is to manage a soft landing.

Politicians, and we the voters who elect them, ought to pay attention to this problem, because it is a big one.

Deck Chairs on the Titanic

Amidst all the fuss and political theater surrounding these last minute negotiations to avoid the so-called "fiscal cliff", let's keep things in perspective by remembering that whatever deal (if any) is reached at the 11th hour, it amounts to no more than rearranging the deck chairs on the Titanic as it goes down.

First, nothing being proposed in the way of spending cuts or tax increases makes more than an insignificant dent in the truly massive $1 trillion+ per year federal deficit.  To even stop the debt from growing (let alone pay any of it back) we need to cut spending and/or raise taxes by something like a TRILLION dollars a year. Neither party shows any signs of tackling the real problems.  The Republicans, to their credit, at least talk about it, though when in power they didn't do anything about it.  The Democrats won't even acknowledge that the problem exists - a sort of fiscal climate-change denial.

Second, the whole point of the fiscal cliff legislation in the first place was to force Congress and the administration to finally come to grips with the deficit problem.  If they couldn't hammer out an agreement (and they couldn't) then these "automatic" cuts and tax increases would occur anyway. Now they propose to nullify the automatic cuts and tax increases as well.  So the result is, that after four years in office, the Obama administration will have done absolutely NOTHING to deal with the debt and deficit, and many things to make it worse.

 And we, stupid voters that we apparently are, just voted almost all of these people back into office despite their ineffectiveness.

The real crisis, not much discussed in the sensationalist press, is not the impending "fiscal cliff" in the next few days, but the fact that our government is still borrowing the nation into bankruptcy at the rate of about $1,000,000,000,000+ (a million million dollars+) a year and there appears to be no political motivation in either party to deal realistically and effectively with the problem.

Highly recommended: Antifragile

Nassim Taleb’s last book The Black Swan, carried forward his analysis begun in his first book Fooled by Randomness. The essence of his argument in these first two books is that most statisticians and those who use their products and models, like economists, corporate planners, policy makers and Wall Street "quants", don’t really understand the nature of random events. In particular, they have no way of accurately predicting rare, unanticipated and unexpected events (those way out on the tails of a normal distribution), and so typically discount them, or ignore them entirely in their predictions and models. The result is that they generally fail to anticipate the most severe dislocations and crises – the “Black Swans” –  that show up from time to time to disrupt the economy, the environment, and civilizations.

Taleb’s latest book, Antifragile, carries this argument to its conclusion by asserting that in fact one cannot predict many things in life (despite the pompous assertions of those who make a living by pretending to), and so the most durable systems are those that are designed not only to react to unexpected events, but to thrive on them and improve because of them – the evolution of living things being a prime example of such a system.  If one looks at most aspects of our current wonderful, complex, highly integrated and interdependent civilization from this point of view, we are setting ourselves up for disastrous crises. The very policies we pursue from the best of motives to maintain stability are in fact setting us up for eventual (and unexpected) massive instability. This is not a new idea - engineers have known for a long time that reducing the variability in a feedback system leads to instability -- variability is information, and if one reduces it one also reduces the information needed to keep the system stable.  But Taleb expands this idea, profitably, to whole new domains.

This book reads like a trip through the Lebanese souks of Taleb’s childhood – wandering from one exotic subject to another but always tied to the central theme, with the odor of Taleb’s disdain for those who profess to predict the future permeating everything. There are profound and important ideas in this book.  Many will read this book, some will understand it, but I would guess few if any will heed its warnings or apply its principles in time.

More’s the pity.

Recommended: Misery is Humanitarians’ Gift to Aleppo

Walter Russell Mead, over on the American Interest website, has a sobering article:  Misery is Humanitarian's Gift to Aleppo. It is simply another example of the old saying that "the road to Hell is paved with good intentions". We Americans talk a lot about improving the world and bringing help and democracy to others, but when push comes to shove we too often make promises we can't keep, or worse yet, promises we don't keep, raising hopes (and sometimes even revolutions) and then dashing them.  Syria is a classic current example.

Worth thinking about.

More on gun laws

Two intereting articles in the past few days about the gun law issue:

In an article by William Bennett, CNN, Dec. 20, 2012: Case for Gun Rights is Stronger than you Think, Bennett makes the case that the evidence doesn't really show that banning guns increases safety. As he points out, most of the recent shooter incidents have occurred in places where guns were already banned, so the victims were unarmed even though the shooter wasn't. The 2007 shooting at the New Life Church in Colorado Springs was halted because an off-duty policeman happened to have his weapon with him and shot the intruder before he could cause any more damage. Would Newton have been different if the principle, who lunged at the shooter at the beginning (and was shot dead) had been armed instead?  Perhaps.

In The Atlantic Steven Hill and Robert Richie have an interesting article Why America Can't Pass Gun Control in which they explain why, as a matter of political calculation, it is hard to get effective gun control.  It all hinges on a small number of mostly rural House districts that are key for both Republicans and Democrats in controlling the House. These districts are solidly pro-gun-rights, so doing the "right thing" on gun control might also involve losing control of the House.  It shows that this gun control issue is not nearly as simple as it seems on the surface.

Blog comments

Many blogs allow readers to post comments. It is sometimes instructive to read the comments.  It tells you a great deal about the American public.

I just read a posting on Mark Mardell’s blog entitled “Obama Chooses Gun Control Fight”. It is a good, thoughtful piece.  Then I read a selection of the 381 comments posted to date, which are mostly childish, petulant, ill-informed rants, many going off on rants on other subjects completely.   Many of the comments are snide replies to earlier comments. It reads like what I would expect from a group of ill-educated  5^th grade boys (and the spelling and grammar is about at the same level, too).

Now granted that comment posters are a self-selected group (I almost never post comments), and probably not representative  of the population at large. Still, it is dismaying to see so much shallow thinking, so many knee-jerk ideological reactions, and such childish behavior. 

Truth to tell, much of the social media interchanges seem to be of this quality as well.  It reminds one once again of H.L. Mencken’s comment “Nobody ever went broke underestimating the intelligence of the American public.”

Committing political suicide all over again?

As if Republicans hadn't already committed political suicide once in the election that just passed, with their religiously-based social agendas and their denial of global warming, just to pick two issues on which they held unpopular positions, now they seem poised to do it all over again on gun control.

The president's initial proposal, to ban assault weapons and high-capacity magazines (things only needed on the battlefield, or by drug gangs, or for a shooter intent on a massacre), and require registration and background checks for all firearms sales (after all, we require car drivers to register), is a fairly moderate one. It doesn't threaten hunting weapons, and it doesn't threaten handgun ownership. Of course the NRA is absolutely against it, and will pull out all the stops to prevent ANY new restrictions.

But the real question is whether Republican politicians will accede to these reasonable and moderate restrictions, or whether they are so deep in the NRA's pockets that they will once again alienate independent voters by sticking to an indefensible ideological position, bought and paid for by a powerful lobbing group. If they do, they will continue to marginalize their party, which in the long run is not a good thing for the nation.

Gun control

The school massacre in Newtown, Conn., has (finally) reopened the gun control debate. Why previous similar events haven't already changed gun control laws is beyond my understanding, but perhaps this one will finally start a sensible debate on the topic. Then again, perhaps we will once again forget about it in week or two until the next one.

It is a hard issue. For one thing, controlling guns is not likely to really make much impact on these lone shooter events. A suicidally-inclined mentally ill person still has plenty of other ways of produce havoc in a crowded place -- bombs, gas, etc, etc.  But it would make it at least a little bit harder.

For another thing, the NRA is correct in at least one saying - "outlaw guns and only outlaws will have guns". Criminal gangs, especially the violent drug gangs, will have no trouble getting guns illegally, since the world is awash in such weapons, and gun legislation isn't likely to make much difference there.

Though I am not a hunter myself, I can respect the rights of those who do want to hunt.  I don't think it is reasonable to eliminate legitimate hunting weapons from the market, though it is perfectly reasonable to (a) register them all, (b) to require comprehensive background checks of anyone purchasing them, and (c) to make owners financially and criminally liable if they don't keep them adequately locked up and out of the hands of children or others not authorized to use them.

All too often these lone shooters get their weapons from their parents or other adults who don't keep their weapons adequately locked away. What about making them criminally liable if it can be shown that their inadequacy protected weapons were stolen or borrowed and used in a crime?

I see no reason at all why any civilian ought to be allowed to own working assault rifles, any more than they ought to be allowed to own machine guns, bazookas, hand grenades, or tanks. These are not hunting weapons; they are built for only one purpose, to kill people on the battlefield.  Collectors might be allowed to own replicas or samples that have been thoroughly deactivated and made useless as weapons (and not easily returned to working order), but that is all.

 Handguns for personal protection will be a hard issue.  It is not clear if a population carrying handguns is safer because criminals never know if their victims or bystanders are armed, or less safe because armed people losing their temper in arguments can lead to gunfights.

This will be a difficult debate, but at least we ought to finally have it

The essential liberal problem

Stand back and take the long view and one realizes that liberals have in fact already achieved most of their dreams. With Social Security, Medicare and Medicaid, unemployment insurance, student loan programs, food stamps, OSHA (Occupational Safety and Health) regulations, and myriad other federal programs, liberals have, since the days of Franklin Roosevelt, managed to put in place most of the social protection programs they wanted.

The central liberal problem is that, having put them in place, we have discovered that we can't pay for all of them.  We are short by about a trillion dollars a year. We have papered over the problem for the past decade or so by borrowing extravagantly from the world, and more recently by simply printing money (sorry, the current euphemism for printing money is "quantitative easing"), but anyone can see this can't go on indefinitely.

So liberals face an unpleasant choice - either raise taxes substantially (like doubling them), or cut benefits substantially (like halving them).

Europeans, who got to the liberal dream faster and more completely, are of course now in dire straits financially. Hence the endless Euro zone crises.  But they face the same problem.  All the liberal social programs cost a lot of money, and the only place to get that money is from taxes, and if one raises taxes high enough, businesses and entrepreneurs quite naturally begin to leave and go somewhere else with lower taxes, thereby making the problem progressively worse.  Europe's long history of lower productivity and entrepreneurial stagnation shows what happens when one makes the business climate unfriendly enough.

That is not to say the conservatives are in any better shape, as they wander in their self-created right-wing religious wilderness.  But it is to say that liberals, having gotten what they wish for, now have to figure out how to pay for it.

Jobs and the entitlement mentality

After writing the preceding piece about the impending Michigan right to work law I was reading some of the liberal commentaries on this battle, and President Obama’s speech yesterday on the issue, in which he characterized the new law as the “right to work for less” law.  It occurred to me that all of this fuss has embedded in it an unrealistic entitlement attitude.

There is much talk about how companies should pay workers a “living wage”, and about how the government should “create jobs”.  This is simply a departure from the real world.

Companies exist for one reason only, to make money for their owners and/or shareholders.  That is their primary obligation.  If they fail to make money, they go out of business in the “creative destruction” process of capitalism, and are replaced by better-run competitors who do make money.

In this context, an employee of a company is only worth hiring if their activity makes the company more money than the employee costs in direct (wages) and indirect (pensions, management cost, facilities cost, etc) expenses.  That is why minimum wage legislation, however well-intentioned, often simply puts people out of work – some people simply are not worth the minimum wage (ie –even at minimum wage  they cost more than they make for the company), so they aren’t hired, or their job is outsourced or automated or simply eliminated as unnecessary.

In fact in a free society no company, government or individual “owes” anyone else a job, or a particular wage level.   Instead it is incumbent on each member of the society to acquire skills that are in demand in the labor market.   If one wants higher wages, one needs to acquire skills that are more in demand and therefor command a higher wage in the labor market.  If an individual feels they aren’t being paid enough, then it is incumbent on them to upgrade their own skills in order to command a higher wage level in the labor market. It is no one else’s responsibility (despite some liberal arguments) to make them more employable at a higher wage – the responsibility is their own and their own alone.

This of course means some people would need to stop spending the weekend watching reality shows or football games and go back to school if they want to be more employable or make more money.  And lots of young people would have to stay in school rather than drop out, or take night jobs to work through post high school classes or training. . They don’t have to do that, of course, because this is a free society. But if they choose not to do that, then they have to live with the consequences of their own choices, which often means lower wages, or even unemployment.

Capitalism seems like a harsh system, and it is. Nature is harsh. But this very harshness is what drives innovation and progress. We have already lived through a generation seduced by the socialist dream of a benign system in which government “takes care” of everyone.  And we have seen (unless we simply refuse to see the evidence) how dismally such systems fail and stagnate and morph into autocracies or kleptocracies or dictatorships because the incentives are all wrong. In such systems, as the old Soviet joke goes, "they pretend to pay us and we pretend to work".

If liberals were really concerned about improving worker's wages and making more people employable, they would get active on the side of improving our educational system, specifically the K-12 part of the system, instead of defending the obstructionist teacher's unions who are impeding progress in this area.

The Michigan right-to-work law

Much attention is being paid in the news today to the impending passage of Michigan's new "right to work" law, making it the 24th state to enact right to work legislation.. Unions are of course fighting it tooth and nail, as is the Democratic party, since union dues provide hundreds of million in campaign funds to Democratic candidates. Nevertheless, Michigan voters in this last election soundly defeated a union-sponsored proposition to embed union power in the state's constitution, so the public is clearly behind this move.  And so it should be, since states that have enacted right to work laws have seen immediate inflows of companies and jobs (from union states).

In truth, "right to work" laws are not anti-union, though of course unions describe them that way. They simply say that no worker can be forced or required to join a union in order to get a job, nor can unions automatically deduct union membership fees from a worker's pay.  In our free society one would think that would be an obvious right anyway. It is interesting that in states that enact right to work laws, a very large number of union members promptly stop paying their union dues, reasoning no doubt that the union doesn't give them enough benefit to justify the dues.

But in fact unions were always a bad idea, even at their inception.  Certainly something was needed in the early days to oppose the coercive power of big businesses and defend the basic rights of workers, but the union wasn't the right answer, though I have to admit that right off the top of my head I don't know what would have been the right answer. But certainly companies in which workers are part owners and/or shareholders get the incentive structure in the right direction.

There are three fundamental problems with the union idea:

1) Unions are, in fact, labor cartels, and have the same problems that any cartel has in a free market.  They distort prices. We prohibit corporate cartels for just that reason -- colluding to raise prices above what a free market would support distorts the market and raises prices to the consumer.  Unions do exactly the same thing, colluding among workers to raise wages above what they would be in a free market.  The increased prices of goods imposed by unions are, in fact, just a hidden tax on consumers.

2) The incentives are all wrong. The incentive for union leaders is to maintain their high-paying jobs, not to keep their worker's companies healthy and competitive. So they are always negotiating for higher pay, more benefits, more jobs and fewer layoffs for any reason.  That leads to "featherbedding" jobs (unnecessary jobs, as when the railroad unions forced railroads to keep a brakeman on each train, even after trains stopped carrying cabooses or needing brakeman.). I had a friend years ago who was a sheet rock hanger.  He joined a union job in Washington DC, and hung 120+ sheets the first day.  At the end of the first day, the union foreman came by and told him that union members never hung more than 88 sheets per day, and if he continued to exceed that, "something bad" might happen to him.  That artificial union limit of course raised the cost of construction.

The recent baker's union debacle with the Hostess company revealed that unions required different products from the very same factory to be delivered in different trucks, and that truck drivers were not allowed to unload their own truck; another union member had to do it. All of these abuses make companies less competitive, and in the end drove many companies, and even entire business segments (like domestic steel production), into extinction as more competitive foreign companies took their business.

Perhaps the most obvious current example of how the incentives are all wrong is in many of the teacher's unions across the country, which are resisting tooth and nail educational innovations that would benefit students, just because it might cost some teachers (especially senior but ineffective teachers) their jobs.  The teacher's unions talk a lot about their students, but their actions make it plain that educating students better matters a whole lot less than preserving union teacher jobs.  Clearly the incentives are wrong here.

3) The vast amount of dues money collected from members, with little or no member oversight on how it was spent, quickly attracted all sorts of abuse. The mobs quickly realized the potential, and took over many unions to plunder the funds and use the threat of strikes to extort money from businesses.  Union bosses awarded themselves extravagant salaries and lived in luxury. Some raided the pension funds. Union dues were, and still are, used as a powerful political weapon at the discretion not of the members but of the union leadership elite.  All in all it is an arrangement just begging for abuse.

So in the end it is probably inevitable, especially in this new era of austerity and global competition, that union membership and union power will continue to decline precipitously.  No doubt the fight will go on noisily, with lots of political posturing from Democratic politicians (Obama was doing just that yesterday), but the end is probably inevitable.

Quote of the week

"What is plaguing us in the United States is not the two-party system, but being stuck with the same two parties. Parties don't have organic built-in expiration dates."

Nassim Taleb, in his new book Antifragile

Go for it!

Actually, the more I think about it the more I think the best thing for the nation in the long run would be a failure of the "fiscal cliff" negotiations.  It would allow all taxes to increase (which we need), and it would impose modest cuts on spending, including military spending (which we need).  Of course all sorts of special interests will scream that the sky is falling, that little babies will die, that the nation will go back into recession, that we will lose our dominance in the world, etc etc.  But if one ignores the self-serving predictions of doom, it would actually begin to reduce the deficit a little, which neither party seems willing to do any other way.

If all the terms of the "fiscal cliff" (the the Budget Control Act of 2011) were to go into effect, it would cut next year's federal deficit, as a percentage of GDP, about in half. It would increase federal revenue by a bit over 25%, though it would cut federal spending by only a fraction of 1%. That is a significant improvement, though still not enough to eliminate the annual deficit.

Needless to say this is certainly not the ideal way to reduce our deficit.  A better deal would increase taxes less, and cut far more of the federal spending.  A better balance would be in the range of $2-$3 in cuts for every $1 in revenue increase.  But at least it is A way, and there is no evidence that either Democrats or Republicans are going to do it any other way.

Impasse

The real impasse in the current fiscal cliff negotiations can't really be blamed on either the president or the Republicans in Congress. The real culprits here are the extreme wings of both parties. House speaker Boehner is under tremendous pressure from the right not to raise any taxes.  President Obama is under tremendous pressure from the left not to cut a penny from entitlements.  Since realistically it will take both tax increases and entitlement cuts to make any difference at all in the current fiscal problem, this resistance from both extremes makes these negotiations almost impossible.

I would guess that the president is prepared to go over the fiscal cliff rather than drop his demand to raise taxes on the wealthy, even though, as I have pointed out before, taxing the wealthy more makes almost no difference to the problem. But he campaigned on this as a populist position, and seems determined to go through with it even though it is only a cosmetic change.

He would be unwise to do that, though, because he faces yet another fight in a few months when we once again reach the federal debt limit and he has to ask Congress to raise it again.  If he proves too intransigent in these talks, and leaves the Republicans embittered enough as a result, the Republicans may well decide they have nothing to lose letting the country default on the federal debt in response.

A reasonable deal would let all taxes, including middle-class taxes, increase significantly and would make significant cuts in both entitlements and military spending.  But it would phase these changes in slowly, over several years, so as to limit the drag on the slowly-recovering economy.  That would require both sides to compromise. But it's not likely to happen. 

Getting real

As we watch the orchestrated daily drama from both Democrats and Republicans on the "fiscal cliff" negotiations, with each side maneuvering to blame the other side for the stalled talks, let's not forget the real facts:

 As a number of writers have been reminding us, the real American problem is that we as voters seem to want big government services with small government taxes. Can't be done. There is no free lunch. So far we have (unwisely) let the Washington politicians buy our votes with borrowed money, but it isn't rocket science to see that can't go on forever.

Currently we are running a federal budget deficit in excess of $1 trillion per year, or about $10 trillion over 10 years. Now the highest number I have seen proposed as cuts thus far from either side is about $4 trillion over 10 years, and about half of those proposed cuts are smoke and mirrors (not real cuts, just accounting tricks). By contrast, what it would take to really eliminate the deficit -- not even paying back the $16 trillion we already owe, just stopping it from growing more -- is something on the order of $10 trillion in real cuts (not accounting tricks) over 10 years. Neither side has proposals anywhere near that figure.

Democrats of course would like to solve the problem by raising taxes. We can do that. Roughly double everyone's (personal and corporate) taxes and we would be in the right neighborhood. Would the American voter stand for having her/his taxes doubled? I doubt it.

If we had a deal such as was proposed in the Simpson-Bowles proposal, with about $2 in cuts for every $1 increase in taxes, we would need about $6.6 trillion in real cuts over the next ten years, and all our taxes would go up about 50%.   I don't see anything near that being proposed either by either party.

President Obama would like us to have a system like the Europeans have - generous pensions, free health care for everyone, federal help (and regulation) in all phases of our lives, cradle-to-grave government care. It sounds great until one looks at the fiscal mess Europe is currently in because of these policies. Somehow that doesn't seem to deter the liberals who are arguing for the European model. I guess evidence doesn't count with them.

It's too bad the Republican party has gone off the deep end with their religious right. We badly need some sound fiscally conservative politicians to help steer us away from the real fiscal cliff looming over the next few years as the real entitlement problems begin to arrive -- fiscal cliffs that make the current fiscal cliff look like a molehill.