Archive for February 2009

Did Obama Cross the Line Yesterday?

I am starting to wonder if Barack Obama crossed the thin red line between traditional American liberalism and socialism yesterday.  Traditionally, liberals in the US have taken pains to generally argue that the rich need to pay for their programs because theyare most able to pay.  This differs a bit from socialists, who would argue that the rich should pay because they are guilty.    For a libertarian like myself, it tends to be a pretty subtle difference, but I think it is important -- are taxes on the rich enforced charity, or are they reparations?

I woke up this morning profoundly depressed, which is unusual for me.   I have a good friend who is having some personal problems, so it is hard for me to separate effects in my mind, but I really feel like Obama stepped over a line yesterday.  TARP pissed me off, but we have bailed out companies before (though not for this much).  The stimulus bill absolutely offended me, but we have seen stupid pork spending insanities before (though not for this much).  But Obama's plan to remake tax law and the budget began with this paragraph:

This crisis is neither the result of a normal turn of the business cycle nor an accident of history, we arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C.

From the rest of the rhetoric in this document, and that of Obama and his supporters, the overriding message is that "the rich are being taxed more because they have sinned.  This is pennance."  This is all the more amazing to me because Obama (and to be fair, his predecesors in the Bush administration) have gone out of their way to interrupt the normal market processes that punish failed behavior.  Normally, if you take out a mortgage you can't afford, you default and lose your home, and are hopefully wiser the next time.  If you lend to someone who can't pay, you lose your principal.  If you make products no one wants to buy, you go bankrupt.

But every one of these market mechanisms are being interrupted.  Its as if Obama and the feds not only want to hand out penance, they want to have a monopoly on the process.  No longer will the market dictate winners and losers -- we in Washington will.  It's thoroughly depressing.

Postscript: I guess I am the last person in America to believe it, but I DO believe that this is "a normal turn of the business cycle," or at least that it started out that way until everyone from Paulson to Obama worked to convince folks otherwise.   It is clear that there was an international over-exuberance of lending that goes far beyond just CDO's as the culprit, or even mortgages in general.  And such bubbles do occur from time to time.

PPS: It will be interesting to see which race is tighter -- Obama's race to spend money so he can take credit for a third quarter recovery which is going to happen anyway, or Obama's race to put in CO2 limits in time to take credit for the global cooling cycle many solar observers are starting to predict.

PPPS: I really didn't want to open global warming discussions in general with the last bit of snark.  I have a whole website for that.  I have a subtle enough understanding of the issue to know both that 1) CO2 is causing some warming 2) warming estimates are likely way overblown, for a variety of reasons that include feedback assumptions and 3) behaviors of temperatures over decade-long periods are not necesarily indicative on long-term trends.  If we want to talk about climate modeling and model accuracy vs. current trends, see this post or this post.

The Big Lie

I try to never use "lie" or "liar" when discussing politics.  They have become perhaps the most abused and overused words in political discourse, and seldom do they add much to a discussion.

But I simply have no other way to reconcile Obama's promise that he is not raising taxes on 98% of Americans with his imposition of a cap-and-trade system for CO2.

For years, Al Gore supported a carbon tax on fuels as a way to fight CO2.  As I have written a number of times, if one really feels the need to reduce CO2 emissions (which I don't), then a carbon tax is far, far more efficient, fair, and effective than a cap-and-trade system.  There are only two advantages to a cap-and-trade system over a carbon tax, and neither has anything to do with Co2 mitigation or program effectiveness:

  1. The tax is hidden, so politicians can pretend the did not really impose a tax.  The author of California's AB32 cap-and-trade system admitted as much to me in a face-to-face debate we had last year
  2. There are numerous opportunities for politically favored companies to create dubious offset and measurement systems under cap-and-trade which don't exist under a more straight-forward carbon tax.  Which may explain why Al Gore, who sits on the board of over $2 billion in investments in such companies peddling various offset quackery, now supports cap-and-trade over the carbon tax

Here is the basic economics, a topic on which it is rapidly becoming clear that Obama is completely ignorant**.   First, we have to assume that whatever cap-and-trade system that is implemented is actually effective at reducing CO2 emissions.   This is far from an absolute given, as it can be argued that the European system has done all of about nothing to reduce Co2 emissions (they will claim that it has been effective, but the majority of European CO2 emissions have come from a) British coal-replacement strategy, initiated for reasons other than Co2; b) fall of the inefficient Soviet economies and the shut down of their worst polluting industries; and c) unification of Germany.

But, assuming that cap-and-trade actually reduces CO2, then it HAS to increase costs for consumers.  There is no way around it.  It will do one or both of the following:

  1. Raise prices due to increased producer costs.  An example is electricity generated from any sort of fossil fuel will simply have to be more expensive
  2. Raise prices due to increased scarcity.  In industries where the supply and demand dynamics do not allow cost increases to be passed to consumers, then reduced production and scarcity will result.  In the electrical industry, older coal plants that can't afford to pay for the Co2 permits may need to shut down.

Recognize that this HAS to occur, especially #2, or the cap-and-trade system won't be working.  Another way to put it is 1 and 2 above are what designers of the system want and expect to occur.

So how is this not a tax?  Well, this is an old, old strategy.  Rather than tax consumers directly, the government taxes business.  When companies inevitably pass the cost on, it is not the government at fault, it is the business for being greedy and raising prices.  Politicians insulate themselves from criticism.

Further, Obama and the environmental crowd have been laying the groundwork over this for years by arguing that such "green" initiatives actually help the economy and improve efficiency.  They have no proof of this, but they repeat it A LOT.  Repeat something enough, and some people believe it.  This despite the fact that there is no way in the world that obsoleting perfectly good production capacity and requiring its replacement (e.g. coal plants) is a net positive for the economy.  (It can be a net positive for human well-being, but to say it is net positive for the economy is to fall into the broken windows fallacy).

So expect that when power companies inevitably raise prices due to cap-and-trade, politicians will respond by saying that the companies are being greedy and simple minded, and if they were really smart, the cap-and-trade system would not have cost them anything.  It would have made them more efficient.  it would have been a net positive.  And that this failure of theirs to see this probably will drive calls on the left for more government oversight and regulation of these industries.

Don't believe me?  Think this last paragraph is exaggerated?  Well, here are two things to think about.  The first is from our former Arizona governor, arguing that she got a bunch of government employees into a bull session in a conference room for an hour or so, and they all decided that cap-and-trade would be a net benefit to the power industry:

Napolitano brushed aside questions of what effect the plan will have on utility rates.

"First of all, that it may increase electric bills doesn't mean it will increase them now," Napolitano said...

Napolitano said there is "lots of data" to suggest that utilities eventually will be able to save money "by moving to a system of "˜green' energy.""¦

on a long-term basis, there may be cost savings.

So if utilities raise their rates, its obviously because they are greedy profiteers, because all of us here in government think it's obvious that paying for carbon allowances should result in cost savings.  If it doesn't, well, maybe we are smarter than they are, and have to provide more government leadership of the industry.

They would never go that far, you say?  So why has Obama created a government commission to restructure the auto industry on the implicit assumption that a couple of smart government guys in a room can do what the industry itself has not been able to do for 30 years?

** This is not to say that Obama does not have highly educated economic ad visors.  But the President's own knowledge, assumptions, comfort-level and outlook on a subject are critical, no matter what the quality of his advisers.  For example, even if I were crazy enough to want the job, I would never run for President because I know, by outlook and knowledge, I am not qualified to manage foreign policy or be commander-in-chief of the military.  Sure, I could surround myself with advisers, but there are proven limits to the "rely on advisers" approach.  I might argue that Bush's foreign policy is an example of such limits.

New Online Interface

The NY Times has an alternative web interface they are testing.  I kind of like it.  Find it here.

Voting With Their Feet

Arthur Laffer and the ALEC have a report out with lots of economic, tax, and regulatory data about the individual states.   This chart caught my eye:

states

They have a hundred pages explaining why these trends might be, but you and I already know, don't we,  just from looking at the names of the states.  It is fairly clear that the current Administration is emulating the policies of the bottom 10 in its recovery plans.  Which brings me back to the question I have asked before:  Where do we all migrate to for freedom when we have screwed up this country?

My Idea For the World's Worst-Selling Product

This bit of eco-goofiness got me thinking

I ran into a friend at the corner drugstore the other day. This friend happens to have both beautiful looks and powerful progressive politics. She was standing in the cosmetics aisle looking bewildered. Which products might be best for the planet and healthiest for her face?

What would be the worst-possible green product, from a financial perspective?  I finally settled on this one:  Low carbon handgun ammunition, for the progressive Bay Area resident who is worried that her concealed carry Glock 9 is creating too many greenhouse gasses down at the firing range.

Postscript: Because I almost never post much on gun topics, I will take the opportunity to plug my friend's new product, a barrel stabilizer for a Ruger mini-14.  It looks great, it works, and it is about half the price of other solutions.  His web site for the Mo-rod mini-15 barrel stabilizer is here.

Litmus Test

A lot of the time, the left can reasonably argue that their increases in the size of government are made out of concern for the common man.  For example, they argue that government needs to massively expand its involvement in health care to help the poor get better treatment.  I think they are wrong, but that's a different story.

But there are occasionally important litmus tests where the left must decide between the interests of government (and its expansion) and the interests of the common man.  I think the DC school voucher program is such an occasion, and its pretty clear that the Democrats in Congress are landing on the side of government.  No matter than most Democrats in Congress send their kids to private schools rather than DC public schools.  No matter that our new Secretary of Education was unable run a public school in Chicago that our current President was willing to send his kids to.

I think proponents of school choice have been very smart in creating school voucher programs that preferentially target poor kids in failing schools.  It eliminates the typical class warfare argument that the program is just about giving rich people a break on their private school tuitions.  Democrats are forced to declare on whether the well-being and education of kids in a program that is dominated by poor African-Americans is more or less important to them than sealing a crack in the government education monopoly.

My Hush Money Theory Looks Pretty Good Right Now

I just skimmed through Obama's speech.  I am not particularly good at parsing this political stuff, so I won't.  The speech had a lot of the typical politician's assertions about features of his programs that have no basis in their actual design.  For example, he asserts that home bailout money won't go to the irresponsible, but there is no such design element in his actual plan (homeowners are eligible for bailouts based on various hard-wired value formulas and ratios -- there is no step where their motivation for becoming overextended is or even could be assessed, nor any step where the government may exercise discretion).

Anyway, the one overriding sense I got from reading the speech was that I was totally correct when I wrote this:

So you ask, will we get any stimulative effect?  I would answer:  Just one.  Obama and Congress will now shut the hell up trying to panic everyone into battening down the hatches for the worst economy in history, and folks can get a bit of breathing space to look around them and see that business opportunity is still there.  This is $800 billion in hush money, a bribe we are paying Obama and Pelosi in the form of passing a lot of their pent up leftish wish list, in return for them taking some ownership interest in real economic health.

The $43 Billion Dollar Propaganda Film

I think everyone was blown away by the Olympic opening ceremony last year in Beijing.  I usually yawn at such events, but this one was spectacular.  I enjoyed it, even though I knew in my heart I was watching the modern version of "Triumph of the Will."  I would have enjoyed it much less if I had been paying for it, and probably even less if I was organizing the show in London four years hence and expected to top such an event.

Well, it appears that it was not just the opening ceremony that was a one-off propaganda push, but the entire rebuilding of the city center (via the Sports Economist)

Reporting from Beijing -- "Empty," says Jack Rodman, an expert in distressed real estate, as he points from the window of his 40th-floor office toward a silver-skinned prism rising out of the Beijing skyline.

"Beautiful building, but not a single tenant.

"Completely empty.

"Empty."

So goes the refrain as his finger skips from building to building, each flashier than the next, and few of them more than barely occupied.

...The government spent $43 billion for the Olympics, nearly three times as much as any other host city. But many of the venues proved too big, too expensive and more photogenic than practical.

...The National Stadium, known as the Bird's Nest, has only one event scheduled for this year: a performance of the opera "Turandot" on Aug. 8, the one-year anniversary of the Olympic opening ceremony. China's leading soccer club backed out of a deal to play there, saying it would be an embarrassment to use a 91,000-seat stadium for games that ordinarily attract only 10,000 spectators.

The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall in several years, its owners announced last month.

A baseball stadium that opened last spring with an exhibition game between the Dodgers and the San Diego Padres, is being demolished. Its owner says it also will use the land for a shopping mall.

The Executive Power Mistake

I have often criticized any number of recent Presidential administrations, in particular the Bush administration, for their various power grabs that attack the spirit, if not the letter, of Constitutional separation of powers.

One issue I have never really thought about, mainly because I really can't stand thinking about political strategy and am not very good at it, is just how bad use of executive power can be in carrying off an ideological agenda.

I think many folks have become aware that there is a short list of executive orders that are the routine first step of any administration when the party in office has shifted.  I can't remember them all -- they include some abortion funding issues and some union rules issues -- but Obama, like Bush before him and Clinton before him, issued them as one of his first acts.  Most of these aren't world-shattering issues, and they act as a quick sop to the ideological base, but the whole point of the rule of law in this country was that we didn't have to do the constant bob-and-weave people had to go through with Medieval kings or modern banana republics to adjust to the new ruling clan.

But it is pretty clear that the Republican's strategy over the last 8 years of letting Bush take the heat on tough ideological issues by trying to tackle them with executive action rather than legislation is a complete flop.   Much of the Republican Congress probably agreed with Bush's environmental regulation philosophies, but were content to let Bush try to implement them through regulatory policy (or non-policy) rather than legislation.   Now, though, much of Bush's position has been thrown out in court, and the remainder will likely be changed by Obama.

Seriously, looking back on it, did the Republican Congress between the '01 tax cuts and prescription drug disaster and when they were tossed in '06 leave any kind of legislative footprint behind?  Jeez, Republicans are whining now about all kinds of stuff, but what were they doing for 6 years?  Offshore drilling is a classic example.  They whined about the Democrats blocking more drilling last year, but what did they do about it the previous years when they controlled Congress and the White House?  I honestly think they were waiting for Bush to do something by executive order and take away any political responsibility off their shoulders.

Really, Really Awful

Radley Balko has been on Mississippi state medical examiner Steven Hayne's case for years.  He has gathered a fair bit of evidence that Hayne is not only an unqualified hack, but that he has a history of saying anything and everything, no matter how bizarre, that a prosecutor wants to hear in court to get a conviction.

The case of Jimmie Duncan is as bad as any.  In this case, Hayne and his "dental expert" Michael West are seen on video mutilating an unmarked corpse with castings of Duncan's teeth in order to manufacture evidence for a conviction.  Balko has the story, lots of links, and the video here.

The case would be troubling even if Hayne was just a one-off problem.  But the absolute unwillingness of the state to investigate Haynes and many of the convictions he helped obtain, despite evidence of egregious incompetence and outright fraud, demonstrate that few in government have any interest in policing over-zealous prosecution.  The experience of the few prosecutors like Craig Watkins who are willing to re-open convicted cases when the evidence changes (or evidence of past railroading emerges) lead me to think that lots of innocent men are still rotting in jails.

All this is the major reason why I gave up on supporting the death penalty years ago -- simply put, I don't trust the state to get it right.  Back 25 years ago when I called myself a "conservative,"  I tended, like others on the right, to make exceptions for the untrustworthiness and incompetence of the state when it came to a) the military and b) the police and prosecution.  No longer.  There just is no rational evidence that the incentive problems and abuse of power issues that plague other branches of government don't affect these as well.  Which is not to say there are not honorable people in these institutions  -- its that I would rather have a system in place that didn't assume their were honorable people in these positions to functions correctly.

Postscript: People sometimes argue with me on the military exception above.  They say "look at the US military.   It seems so powerful and competant in battle.  It pulled off Omaha beach.  And Desert Storm."

Well, yeah, but the thing is, it is only competing with other government-monopoly operations.  Its like saying the US post office is better than the French post office, or that Amtrak kicks butt on the Mexican National Railway.

As to D-Day, well, there are few opportunities in private life to demonstrate the heroism under fire that was common on Omaha Beech, but logistically, was it anything special compared to what is routine today?  I won't let myself get caught comparing apples and oranges, but I have seen the Air Force's logistics system and it is a sad joke compared to Wal-Marts restocking of 100,000 sku's every day in 10,000+ stores around the world.

Civil Liberties in Britain

I am always ready to criticize the US and our steady slide into police state tactics against our own citizens.  But I think that those who have some rosy picture of European countries being some sort of civil liberties ideal towards which we should aspire are mis-informed.  Granted that a number of these countries have more sensible attitudes both towards drugs as well as sexual relationships that don't fit a biblical script, but their state police forces have powers over their citizenry we (at least not yet) don't tolerate.

Today's object lesson is Britain:

For the past couple of years the British government has been extremely aggressive in installing surveillance cameras "” CCTV on high streets, speeding cameras on highways, and so on. If you are a typical British citizen, your actions are captured on camera hundreds of times a day, and you can be watched with suspicion even without the government having any probable cause reason to suspect you of anything. Relatedly, they have also been challenging people taking pictures in public, and have recently essentially made it illegal to take pictures of police officers (with the justification being the possibility of terrorist abduction of officers). The erosion of civil liberties in Britain has been short and sharp.

Now some local authorities are witholding liquor licences from pub owners unless they agree to install CCTV inside the pub. One striking recent example is The Draper's Arms in Islington, a borough of London. As the Londonist notes:

Nick Gibson is attempting to re-open The Draper's Arms on Barnsbury Street, a former Evening Standard pub of the year winner that shut its doors last August. But to regain a licence, he's been told he must fit CCTV cameras that capture the head and shoulders of everyone entering the pub, and be willing to hand over footage whenever the police ask for it.

Gibson is furious at what he sees as erosion of civil liberties. However, his local MP and the Metropolitan Police keep blithely citing "˜public safety'. We find that a bit rich, considering studies have shown CCTV is less effective than increased street lighting at cutting crime, and CCTV footage is used to help solve just 3% of London robberies.

My Favorite Comment on the Oscars

From John Scalzi:

I'm delighted Kate Winslet finally got a Best Actress Oscar, because she deserves it for being so good for so long but also because now that means, pace Halle Berry and Charlize Theron, that she will now immediately make a God-awful action film in which she wears very tight black latex, and I'm all for that.

When the Story Does Not Fit the Facts

Cooler heads are looking at the world economic data, and starting to come to the conclusion, voiced by yours truly a number of times, that the US financial crisis was/is a symptom of a world economic slowdown, not the other way around

Compare the decline in real GDP over the past 4 quarters (from The Economist):

U.S.

-0.2%

France

-1.0

Germany

-1.6

Britain

-1.8

Italy

-2.6

Japan

-4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American "illness has spread" to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

Those Stable, Happy 1950's

From an article about the Edsel:

total new car sales in the United States declined 31% from the 1957 to 1958 model years

Gosh, and we managed to get out of that without spending a trillion dollars.  Wow.

Postscript: Sometimes it is hard for fiction to top reality.  In vacation, the movie-makers tried to create the ugliest station wagon they could imagine.

truckster

They didn't even come close to topping reality

edsel

Price and Value

I am an early-adopter of the Amazon Kindle and must say that I have been thrilled with it, despite a number of design flaws I hope to see fixed in the new version.  Most of my complaints have to do with industrial design, not with the feature set  (from an industrial design scale where iPod=10 and the original MS Vista packaging =0, the Kindle and its case were about a 4.)

I was perusing a number of "reviews" of the Kindle 2 today.  Pre-release reviews can have a really wide spread, as they tend to be populated either by insiders who are trying to promote the product, or by folks who haven't used the product but have some problem with its basic concept (or manufacturer) they want to vent on.  Which makes pre-release reviews worthless.

One such person in the second category is "Bohemian," who seems to want to vent on Kindle because it is not open source, DRM-free, etc.  He is also upset that it does not have built-in solar power, lol.  But the line that really caught my eye is this one:

Overpriced - should be around $100

That is hilarious to me.  The Kindle has been absolutely sold out (at the current price of $300-$400) for months and months.  There is a waiting list, particularly since Oprah recommend it.  So how is the price too high?  My take on it would be the price is too low, since even at $359 demand is exceeding supply.

This is a common mistake by people across the political spectrum -- mistaking one's own personal assessment of value with what a price "should" be.  The correct statement for this review would have been "I would not pay more than $100 for this product."  And in a free society, he doesn't have to buy it.  But obviously there are a lot of people, in fact more people than Amazon can currently satisfy, who think the Kindle is worth at least $359.

By the way, one other note on DRM and proprietary platforms.  I am the last one to spend much time defending DRM, but proprietary platforms are totally normal for new technologies.  The thing that is often ignored about the Kindle is that ... it just works.  You log on, download the books you want, and they are there in seconds and display correctly and reliably.  I lost my first Kindle, and when the second one showed up, all my books from my first Kindle where already on my second.  No crashes, no need for tech support.

People give Microsoft loads of well-deserved cr*p for problems in its software and for playing too many proprietary tricks, but the real reason PC's can be a pain and can be tech support nightmares is because PC's are not very proprietary -- they are really a wide open platform, and try to integrate a hodge podge of components and software from a variety of sources, and sometimes things inevitably go wrong.  People tend to forget that the reason the Mac and the iPod are so compelling in the user-friendliness and stability is that they are proprietary, tightly controlled platforms.

I personally prefer the PC, because I like the flexibility and am not scared off by the occasional integration challenge.  Over time, I have realized that I am in the minority.  Most people want their electronic devices to freaking work, and don't care if they don't have access to the 100-item micro-configuration menu and probably will never have a desire to transfer the book file on their Kindle to be read on the LCD on their refrigerator.

Some Thoughts on the Chrysler Restructuring Plan

The Chrysler web page for their restructuring plan they presented to the Feds is here.  The summary pdf my comments are based on is here.  Thoughts:

  1. It is criminal that this is going to Congress, not a bankruptcy judge.  This is a conspiracy of management (looking to hold onto their jobs and equity), equity holders, and employees to usurp value from the senior debt holders, who would normally be first in line in a bankruptcy.
  2. There is no WAY I, as a private investor, would put one additional dime into Chrysler based on this plan.  All the Same-Old-Incremental-Sh*t, with no explanation of what they are going to do differently.   Somehow they are going to cut half their models and lay off tens of thousands of employees but hold fast on market share, somehow reversing years of steady decline.  No explanation of how.
  3. In section one, they blame it all on the credit markets.  Specifically, the lack of ability of the Chrysler finance arm to lend to customers.  But I showed the other day that consumer lending is still strong by banks.  What they are really saying here, but they are smart enough not to utter the actual words, is that their sales depended on a finance arm that was willing to lend at below-market rates to people with bad credit scores, and the lack of this hidden subsidy is what is making it hard to sell their cars.  Credit exists -- what no longer exists is zero-percent-interest-to-anyone-who-walks-in-the-door-no-questions-asked financing.   Instead of figuring out how to make cars that don't require hidden subsidies to get off the lot, they are trying to get the government to fund their hidden subsidies.
  4. The present value calculation is a joke.  I could spend 3-4 business school classes discussing problems with it, so I won't now.  But one element that stuck out at me was that they come up with a terminal value in the calculation as a multiple of EBITDA  (Earnings before Interest, Taxes, Depreciation, and Amortization).  Really?  EBITDA is a common metric, but it is beyond meaningless when looking at a company going bankrupt under the weight of interest costs and capital spending.  Besides, they have the gall to assume that net cash flow (excluding financing activities) will be positive for the combined years 2009-2010.  Im-freaking-possible.  Remember, if any private investor in the country believed these numbers, Chrysler wouldn't have to be begging at Congress's door.  Congress is their last chance to find a sucker who will give them more money.
  5. OK, I can't totally leave aside the NPV calculations yet.  They have a table of NPV's at different rates of return  (which is meaningless because their cash flow assumptions can't be believed).  The rates of return are 5%, 10%, 15%, and 20%.  This is ridiculous, though many may not recognize it.   20% is a low rate for the discounting of about any large equity investment, but it is absurdly, ridiculously low for a high-risk investment in a company that has been burning cash for decades and is facing its second near bankrupcy in 30 years.  Any savvy investor in the world would smell a dead fish here, but Congress won't because Chrysler is waiving electric cars at them
  6. And speaking of electric cars, any intelligent restructuring plan would recognize that electric cars, even if they are successful in the marketplace, are not going to be anything but a cash drain for years.  This kind of thing has to be put on hold while the company gets back on its feet.  But instead, since this is a political and not a business document, Chrysler is practically leading with it.  In fact, the sections "4:  Commitment to Energy Security and Environmental Sustainability", "5:  Compliance with Fuel Economy Regulations," and "6:  Compliance with Emissions Regulations" all come in priority order ahead of "7: Achieving a Competitive Product Mix and Cost Structure."  In fact, this section about costs and competitive products comes dead last in the plan.  LOL, a "business" plan, indeed.
  7. I thought it was funny that on the cover of the report, they have all kinds of happy politician-grabbing stats about how many red-blooded Americans they employ and how much of their production is made in the good old USA.  But their entire restructuring plank #3, which is labeled "strategic alliances," seems to boil down to a bunch of outsourcing to foreign partners.  Which is fine with me, but probably would freak out the Dems they are selling it to should they figure it out.

In the new corporate state, this is what business plans will look like.  Because were aren't selling returns and wise investment of capital, we are selling the care and feeding of political constituencies and pressure groups.

Postscript: OK, I realize I criticized the plan without suggesting what should be in it.  Here is what I would demand as an investor:  An achnowlegement and discussion of the reasons for past market share slide, and targeted actions to reverse these trends.  As Chrysler has said they have been working on this problem for 30+ years, the proposed solutions will need to sound radical, not incremental.  Further, they need to stop complaining that below-market rate consumer financing does not exist, and explain how they are going to sell cars at a price that covers their costs as well as a return for shareholders.

Mis-Reading the Recession?

The narrative is that this recession is driven by a credit crunch.  So why is consumer lending arguably stronger than in any of the past 9 recessions?

consumerloans

So, Tax Rebates are OK?

I remember Democrats scoffing at GWB's on-time tax refund checks last year.  I agreed with them at the time, thought potentially for different reasons, saying that one-time rebates are far less attractive than permanent rate changes, and a rebate that just increased the national debt was robbing Peter to pay his dad.

So I am not sure how the Democrat's explain this any differently (from an email I got from the SSA)

Dear Colleague:

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. This new legislation provides a one-time payment of $250 to Social Security and Supplemental Security Income beneficiaries.


Over 60 million beneficiaries will receive a one-time payment. We expect all payments to be delivered by late May 2009. To assist us in issuing these payments as quickly as possible, beneficiaries should not contact Social Security unless they do not receive their payment by June 4th. As we move to implement the new legislation, we will continue to provide updates to keep you informed of our efforts in this area.


You can learn more about these one-time payments at www.socialsecurity.gov.

We ask that you share information about these efforts with members, colleagues and any parties who would find them of interest.


I look forward to the opportunity to discuss this important legislation with you.


Sincerely,

Cheri Arnott

Associate Commissioner

for External Affairs

The only difference I see is 1) the rebate is going to a lot of people who do not even pay taxes and 2) by giving it to social security beneficiaries, the generational wealth transfer is all the more stark.  Now we are robbing Peter to pay his grand-dad.

Dead, Unproductive Investments

Well, while I was gone this week, GM asked the government for another $21.6 billion, on top of the $17.4 billion taxpayers handed them just two months ago.   Reading between the lines of GM statements, it is probably not crazy to assume they are burning cash at the rate of $5-$8 billion a month, which means this new infusion would likely get the company only through May or June.  This burn rate should not be surprising, as GM was burning $2.5 billion a month before the recession even really started, and they have really done nothing substantial to restructure the company.  By throwing the company to Congress to help save its managers and equity holders, the company has subjected its restructuring not to hard-headed bondholder representatives in a bankrupcy, but to the vagaries of the political process:

When the president's auto task force meets today to begin trying to fix the broken U.S. auto companies, it must balance dozens of competing demands.

Yeah, I am sure that will go well.  GM can have its money as long as it puts a factory in West Virginia and names it after Robert Byrd. The bondholders are pissed, as well they should be.  The senior debt holders have first claim in a bankruptcy, so another way to look at this political process is that it is the action of all the other constituents of GM (employees, equity holders, managers) who are trying to get Congress to interrupt the typical subordination of interests in a bankruptcy and allow them to get ahead of the senior debt holders in the line for what limited value remains in GM's shell.

I am tired of Keynsians and their assumptions setting the tone of the economic debate.  Here is the question I would ask them:

I understand that you Keynsians think that there are under-employed assets in the country, and that you think the government can redeploy prvate investment capital to more productive use.

Ignoring the individual liberties issues assosiated with this approach, as well as the fact it has never worked in the past, answer me this:  How are we going to turn around the economy by forcing capital to flow to the assets, industries, and management teams that have proven themselves to be the least productive?

We send money preferentially to the industry (autos) that has been showing some of the worst returns on capital in the entire country, and in particular to the company (GM) that has performed the worst in the industry.  If we really wanted to create auto jobs, wouldn't we send the money to the company that has historically invested money the most productively? It would be as if venture capitalists were about to complete their 27th round of financing to keep Pets.com afloat.  I have been in a company that eventually failed and couldn't get new financing.  At the time we were trying to convince the investors that they should give us just one more round, one more chance to prove the thing out.  In retrospect, I am embarrased they funded us as long as they did.  They should have pulled the plug way earlier.  Investors have a saying "your first loss is your best loss."

And don't even get me started on housing.  A deader, less productive investment asset can't possibly be identified.  A million bucks spent on a house produces 30 jobs for 6 months.  A million bucks spent on a factory expansion produces 30 jobs indefinitely.  For years, Democrats have hammered the Republicans over the jobless recovery of this decade, which in fact has shown a fairly unique jobs profile.  I wonder how much of this could be traced to the myriad incentives that were put in place to pour our available capital into these dead assets?  And now, with the bailout and the new mortgage bailout, the government is investing even more money to prop up the value of these non-productive investments.

Ant and the Grasshopper

It has been interesting to watch the reaction to Obama's mortgage-holder bailout.  Certainly the plan is expensive, likely largely ineffective, and has terrible long-term impacts on incentives.   To my libertarian eyes the plan is awful, but no more awful, and actually less expensive (incredibly!) than other bailouts and legislation pouring out of Washington of late.  Like everything else we are seeing, it is a hair-of-the-dog plan:  fix government over-promotion of home ownership with more government promotion of home ownership;  Fix the fact that individuals are over-leveraged by trying to keep them in their mortgages.

But this issue changes the political map to some extent.  The usual rhetoric about milking one group to help another who are "on the outs by no fault of their own" is just stretched past credulity on this one.  Sure, there are enough folks who were really tricked or scammed in their mortgages to fill up any length of a news segment with tearful anecdotes.  But the 50% of the country that rents or the large percentage of homeowners that didn't chase around after zero-down house-flipping deals don't seem to be buying that their tax money is now flowing to innocent victims.

Postscript:  I know there is a tendency to leap onto this "fraud" excuse to help assuage one's ego.  Yeah, I wasn't stupid, I was tricked!  Well, I am in some financial tough times, and I will declare it here publicly:  It is all my fault.   I got overly exuberant in expanding the business, and doubled down on my mistake by agreeing to a large financial commitment based on a bank's loan commitment letter, rather than an actual loan (a commitment letter that was pretty much worthless as the bank went into FDIC receivership).   I have found, by the way, that my banks have been very reasonable about restructuring commitments as long as I come to the table with a plan showing how I intend to pay them back every cent that is theirs  (yes, I said it, it is theirs -- it is their money) though just with altered terms and timing.  The good news is that a ebbing tide reveals a lot of rocks, and the business has been vastly improved by the thorough review and restructuring we have put it through of late.

Observation About the US Mail

We do payroll at headquarters and send checks all over the country.  We built the payroll process years ago to allow for one week for the US Mail to carry the paychecks from our office to arrive at their destinations in time.  Steadily, over the last five years, office by office, we have had to replace the US Mail with UPS.  It apparently is increasingly impossible for the US Mail to get a letter across the country in a week (which is six working days for the USPS).

Today was the final straw.  For the third payroll in a row, the US Mail has not been able to get mail from our office in Phoenix to our office just outside of Los Angeles in a week.  The payroll was mailed last Monday and it is not there now onthe following Tuesday.  Pathetic.

The Baseline

One problem with the stimulus bill is that it is so diffuse, so poorly understood, and so impossible to measure, that it will allow its supporters to claim anything about its effects.  If no one knows what is in it, how do you measure effectiveness?  Long recession?  Those dang Republicans slowed the bill and kept the size too low.  End of 2009 recovery?  It's because of the stimulus bill (never mind that the money will not have even really been spent).  So, in the interests of setting a reasonable baseline, here is the pre-stimulus economic projections:

gdp_forecast

Via Carpe Diem.

In case you are not infuriated enough over this bill, remember that Obama is looking at exactly this data when he makes his proclamations of continued economic doom to scare folks into passing his pork-spending liberal wish list stimulus bill.    Remember when Obama said "My economic advisers have told me this recession will last 4-5 more months, and then we will start to see a recovery?"  Yeah, neither do I.  I remember him projecting another 5 million lost jobs.   Do you think if he said "the economy will start growing again in 5 months" he could have passed a 10-year "stimulus" bill?  Fat chance.  Maybe he is the new FDR, but with a new phrase "The only thing we have to promote is fear itself."

Carpe Diem also has a useful comparison to 1981:

1981

Back then, we responded with tax cuts and a focus by the President on reducing the size of government.  Twenty-five years of prosperity followed.  Today we are responding with a trillion dollars of money for government bureaucrats, increases in welfare, and pork for favored corporations.  I am not hugely confident.

Score One For "Unfettered" Capitalism

I think most readers of this site will understand the meme that somehow the recent Wall Street meltdown represented "unfettered capitalism under George Bush" is absurd.  The US financial industry is the most highly regulated sector of the economy, and George Bush was in no way a free market capitalist.  Bill Clinton, for example, had a better laissez faire record than Bush, in my scoring.

But those pushing for a Euro-Japanese style corporate state (e.g. Barack Obama) might beware.  It probably comes as no surprise the US economy has outperformed the EU and Japan over the last decade, but would you believe we have also out-performed them over the last year?  The chart below is from Paul Kedrosky, and shows GDP indexed to 4Q07  (the graph is not the way I would have drawn it -- the third small hash mark is actually the fourth, not the third, quarter).g3gdp_4

As I wrote the other day:

This is why our recessions tend to be shorter than those in Japan and Europe.  These other economies are generally more of a corporate state, with a major goal of the government to maintain the incumbents in the corporate world.   I would argue that the key determinants to recovering from a recession quickly are asset, capital, and labor mobility.  Japan has many structural limitations on these, and it dragged their recession out for years.

Getting It Exactly Backwards

The mechanism for this recession seems pretty clear:  A bursting asset bubble has left both lenders and consumers over-leveraged, so everyone is trying to reduce their debt.  This means less consumer spending for a while, as well as tighter lending.

Running a small business over the last few months, I have found that the credit we need to expand is not unavailable, but is harder to get.  Banks and individual investors are asking for tougher terms, more collateral, and are being pickier about what they will fund.  All totally normal and unsurprising (though stressful if you are in the middle of it).

The one thing small borrowers like myself have in our favor:  Eventually, lenders have to lend and investors have to invest.  They simply cannot just put all their money in the vault or the mattress.  The money they hold, in deposits and CD's and whatever else, has a cost, as do their operations staff.  These costs have to be covered.  The only way they have of doing so (short of switching businesses) is to put their free cash to work.  They have to lend it and invest it.  It's  a useful thing to remember in this world dominated by the cult of victimization and helplessness  -- that even as a borrower, you have power.  Banks need you as much as you need them.

So, what does the government do now?  Well, very soon, the Obama administration is going to be marketing to banks and investors an additional trillion dollars of government bonds backed by the full faith and credit of the US taxpayer as an alternative investment to funding my business.  Uh, yeah, that's sure going to help.  On Thursday, I had some power with investors.  Given time, they were going to have to consider my business as a place to put their money to work.  Now, however, everyone can run out and park their money in a trillion dollars of new government securities that have features attached I can never match (e.g. the ability to print money or grab it at gunpoint to repay the loans).

But don't worry about me, I will figure it all out.  I just will not grow the business or hire as many people as I thought I could given new investment capital.  But everything will be fine for the country as a whole as long as you believe that Nancy Pelosi and Barack Obama, with their vast business experience, will invest this trillion dollars more productively than I, and other like me, would have.

Give Me A Break

I got a spam email today that linked to this article:

The statistics are alarming. One out of every five children is solicited for sex online but only 25% of parents ever hears about it.

According to cyber investigators, the average child predator is a white male between the age of 25 to 45, middle to upper income. He maintains a professional job, sometimes in a career involving children, and uses the computer to reach his victims because of its perceived anonymity and access. That means that, as parents, we have to be proactive and involved in what our kids are doing online, whether we want them using them or not.

Really?  One in five?  Does this pass any kind of smell test?  Let me put it this way:  If someone gave you a small team of middle age white males and made it your job to contact 20% of the kids in America, do you think you could do it?  My guess is that you would have to resort to Santa Clause logistics to figure out how so few people could contact so many.

It is just incredible to me that the media will reprint any number whatsoever from an activist.  This is the post-modern "fake but accurate" impulse once again.  If you asked the media person, they would say "Yeah, its probably exaggerated, but its for a good cause."

Update: Just to head off the obvious comment.  I am sure that it occurs, but this occurrence rate is absurd.