Month: September 2010

Since I’ve written about some pension funding issues in previous postings (example), let me point readers to a couple of news articles. From today’s Wall Street Journal, “Pension Gaps Loom Larger”, about how public and private pension funds are assuming 8 percent return on investment over the coming decades. And today’s New York Times has “The Illusion of Pension Savings”, about Enron-style accounting gimmicks that enable states to look slightly less bankrupt.

In some ways the WSJ article is more interesting. Here in Boston an 18-year-old hired by the MBTA can retire at age 41 and is entitled to an inflation-adjusted pension from age 41 until death at perhaps age 100. So the pension fund managers need to be looking out for about 80 years. The assumptions that they’ve made are that the U.S. needs to grow about as well for the next 80 years as it did during the years 1920-2000 (and the 2000-2010 period needs to be chopped out!) or the fund and therefore the company or state goes bankrupt. Not only does the U.S. need to continue to be doing great, but returns to investors need to continue to be high. The flood of savings from newly wealth Chinese, Brazilians, and Indians, for example, cannot result in competition that reduces the return to capital below what it was in, say, the 1950s. When you think about it, the risk that these guys are comfortable with is rather breathtaking. Without a letter from God promising that the next 80 years will look like the 1920-2000 period, why do we allow corporate managers and politicians bet the future of their organizations?

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When health care costs, payroll taxes, and wrongful termination lawsuit risk rise while education levels fall, economists say that businesses will tend to substitute capital for labor…

(captured with a Motorola Droid 2 mobile phone that I’m testing out)

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Today’s nytimes carries a story about American politicians in the upcoming election distancing themselves from their party (link). We’ve got a system where an individual politician can get reelected to a lucrative comfortable enjoyable job even when his constituents aren’t happy with what the government is doing. This is simply not possible in most of the world’s democracies, where a party is held accountable through the parliamentary system. The U.S. system results in much more stability, in that incumbents are almost invulnerable (especially after Gerrymandering the districts so that they can choose their own voters). We can be sure that mostly we’ll see the same faces in power next year. But as I’ve noted recently in some responses to reader comments, it seems that the U.S. system is less able to adapt when things aren’t going well.

From a recent comment: Sweden, for example, was able to scale back its welfare state in the 1990s after a period of economic decline (taxes as a percentage of GDP have declined in Sweden (source)). The United Kingdom, right now, is dramatically cutting spending in ways that would be unthinkable in the U.S. (they’re going to cut government spending by roughly 8 percent of GDP; in the U.S. that would be $1.1 trillion in spending cuts, equivalent to eliminating the military ($660 billion) and Medicare ($530 billion)). The UK Prime Minister has taken to flying on commercial airlines rather than chartering massive private jets (source). See this Bloomberg article for what they’re up to.

One could argue that the U.S. system can’t be that bad, since we’re still here after 223 years (1787 to 2010). The government was successful in responding to the crises of the Civil War and Pearl Harbor. It looks to me, however, as though the U.S. government is best at responding to crises that are challenges to the power of the government and to which a reasonable solution is growth in government size and power. When the crisis is “Americans aren’t doing well”, the response often includes growing government but does not ameliorate the problem.

Let’s consider slavery. It was observed even in 1787 that black slaves were not enjoying a good life. Yet it was not until the 1950s that black Americans enjoyed full civil rights, e.g., with Brown versus Board of Education. Lyndon Johnson’s War on Poverty was launched 46 years ago in response to a poverty rate of 19 percent; after literally trillions of dollars in spending and millions of government workers hired (the U.S. had 845,000 social workers in 2006 (source)), the poverty rate is expected to be 15 percent in 2010 (Washington Post). The [First?] Great Depression of the 1930s was prolonged by government action, according to The Forgotten Man. Richard Nixon launched the War on Drugs 39 years ago and we’ve spent more than $1 trillion on law enforcement and incarceration yet the availability of drugs is similar to what it was in 1971.

Thus it looks like our political system can be effective when government power is threatened and the government needs to grow in order to maintain its power. But our political system does not seem to have a strong record of success where the solution requires shrinking the government or where the problem is that individual Americans aren’t enjoying the quality of life that they might.

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Flying with a student yesterday, we had a 13-year-old passenger in the back of the helicopter. I thought “wouldn’t it be fun to take this kid right over his house” so asked him where he lived. “Needham,” he replied. Inside or outside of 128? [Our state highway 128 coincides in this area with Interstate 95, a ring highway around Boston] “I’m not sure. Inside, I think,” he said. Perhaps he didn’t understand the concept of a ring highway, so I asked whether 128 was to the west or east of his house. He didn’t know (which means he can work for T-Mobile in Framingham). Most of Needham is outside of 128, so despite his statement that his house was inside, I directed the student to fly towards the Needham town center. After 15 minutes of orbiting, our passenger finally located his house, about 5 miles west (outside) of 128.

The kid goes to a private school inside of 128. Thus every day he fails to notice that he must cross a six-lane superhighway in order to get to school. Every day he fails to notice the massive green signs with “I-95” painted on them and exotic destinations such as Providence, Rhode Island. Every day he fails to notice the “paid for by the American Recovery and Reinvestment Act” signs. His father called me later to thank me for taking his son up in the helicopter. My response was “It made me wonder whether anyone from this generation will be able to find his ass with both hands once we are dead and gone.”

Growing up in Bethesda, Maryland, back in the 1960s and early 1970s, I don’t remember any of us kids having trouble understanding the difference between going into the city (further inside the Beltway) and traveling onto or outside of I-495. I wonder if one difference is that we traveled in an unairconditioned Chevy station wagon with the windows open and no entertainment options other than punching siblings. If alone with a parent, we occupied the front seat supplemented by a booster seat. Today’s children, by contrast, travel in armored SUVs and sit in the back with the windows rolled up and the air conditioner on. Instead of looking out the windows at the “now crossing I-95” signs, they can look inside at a movie playing on an LCD screen or at a text message from a friend.

[Yes, I know that this post officially makes me an ancient curmudgeon.]

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Super Sad True Love Story is an interesting book that I’ve just started. The author has extrapolated from current trends to create a near-future that has the following characteristics:

• The dollar has been devalued about 50:1 against the yuan, which has become the world’s reserve currency, along with “northern euros” (there might be a southern euro, but nobody wants it)
• The U.S. is no longer a desirable place for emigrants, except for a handful of Albanians. U.S. consulates worldwide have posters saying “the boat is full, amigo”.
• Women shop for a brand of clothing called “JuicyPussy”
• The general decline of economic activity in the U.S. has led to a lot of mergers, resulting in UnitedContinentalDeltamerican (which operates “peeling 737s” against “sleek new dolphin-nosed China Southern Airlines planes”) and LandO’LakesGMFord.
• there are tanks and armored personnel carriers at airports and in cities throughout the U.S. with National Guardsmen performing various security checks; most of the active duty soldiers are bogged down in a disastrous war against Venezuela
• Immigrants with poor credit ratings are deported; those who stay in the U.S. find that they have done worse than relatives who remained back in the home country
• People get their news on mobile phones from a service called “CrisisNet”
• Potemkin Villages are set up when the Chinese central bankers come to visit to see if the U.S. will ever be able to repay any of its debts to China

The political system of the U.S. has changed into a single-party state, with everyone asked to join the Bipartisan Party. A powerful new agency, the American Restoration Authority, administers a lot of new government powers and fills the country with signs that end with slogans such as “Together We’ll Surprise the World!”

[I’ve finished the book now. The last two-thirds aren’t as thought-provoking as the first third, but it is a well-written novel. Is the author’s vision of New York City strange? Not as strange as the reality, e.g., this woman complaining about a guy who crushed her Dodge Charger by falling on it from 400′ and surviving.]

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I spent the day in Washington, D.C. We started out with a trip to the Natural History museum, finding a parking space right in front of the building and going in (admission free, but security check required) to chase after a 2.5-year-old girl who loves elephants, butterflies, and almost everything in between. She pointed at a Clownfish in the aquarium and said “Nemo!”. The Washington Mall now offers free WiFi in addition to free museums.

Next stop was East Capitol Hill, a neighborhood I would have been afraid to visit in the 1970s. We walked a Samoyed bitch from her home on 10th Street Southeast to Lincoln Park. Most of the row houses have been renovated and many sported beautiful gardens. The Park at lunch time was patronized by nannies strolling babies, white people walking Labs and Goldens, and black guys walking unneutered Pit Bulls. In a city that supposedly has bountiful jobs for everyone, I was distressed to see a woman reading How to Be the Employee Your Company Can’t Live Without.

Next stop was Eastern Market and the surrounding shops, then a trip down into the Metro for a ride to National Airport. Some of the Metro stations have been almost blanketed with advertising banners from vendors trying to sell things to the Federal Government. Today it was Dell selling some sort of security system. Everything at the airport that was run by the government was shiny and modern. The Cesar Pelli terminal, opened in 1997, glittered with glass and steel. The TSA had new signs proudly proclaiming their use of millimeter wave technology and the TSA machines indeed gleamed with shiny newness and sophistication.

Stepping out of the government- and tax-funded world into the private sector was rather a let-down. The 15-year-old regional jet that I boarded for the flight to Boston was one step from either the glue factory or flying the lords of poverty around Africa. After the one-hour fight, I boarded the MBTA for what turned out to be a one-hour trip to Harvard Square (it is about 7 miles away by road). During the many pauses, I read Super Sad True Love Story, which promises to be a near-great novel, while the young couple next to me were riveted to a videogame on their touchscreen smartphone (Samsung/Sprint). The marketing for smartphones stresses all kinds of business uses for these devices, but I wonder if the main use won’t end up being brain-wasting games (just as TV was originally thought to be a place where Harvard and Yale lectures would be distributed to America’s living rooms).

By the time I stepped out of the MBTA Red Line train, I had heard approximately 50 recorded announcements over public-address systems in the various airports and mass transit systems. These reminded me to be alert for suspicious behavior by fellow passengers and to report unattended baggage.

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Just finished The Baburnama: Memoirs of Babur, Prince and Emperor, a book by the great-great-grandfather of Shah Jahan, the builder of the Taj Mahal. Babur (1483-1530) is considered the founder of the Mughal dynasty that ruled portions of central Asia and India for several centuries (Wikipedia). Given the multi-decade involvement of the U.S. in Afghan affairs, a very interesting part of the Baburnama describes the author’s conquest of and day-to-day life in present-day Afghanistan.

Emperor Babur spends most of his ink on military and political events, e.g., “The Domain of Kabul is a fastness hard for a foreign enemy to penetrate”. Much of his effort was in dealing with the treachery of family and friends, any of whom could be relied upon to grab for power if Babur went away for a few days. Babur finds time to describe cities and forts, however, and the climate and agricultural riches of various areas: “[Kabul has a very pleasant climate. If the world has another so pleasant, it is not known.”

Babur talks about his own love and sexual desire for a young boy (see nytimes.com and foxnews for how this tradition endures) but mentions almost nothing about young women except that they can be married for political advantage and that sometimes produce children. Drugs and alcohol are consumed in abundance, though Babur recognizes this as un-Islamic and mentions a desire to return to strict observance of Sharia upon his 40th birthday. Babur describes the mix of ethnic groups in Kabul and the profits possible for traders. Babur and his fellows have a tremendous passion for hunting, fishing, and bird-catching.

The last portion of the book covers Babur’s forays into present-day India and Pakistan (whose split, in a way, he can take credit for, having installed Islam in India). Shades of modern-day Fortune 500 companies, Babur marvels at the inexhaustible supply of reasonably skilled labor available in India.

The book can be a bit tough to follow for a Westerner since about half of the people described are named either “Muhammad” or “Hussein” or both. Also, the violence described might make the book disturbing to children. Dogs are treated with cruelty (though not killed, per some of Mohammed’s orders regarding dogs). Enemies may be beheaded, skinned alive, and tortured. Some Muslim groups coexist with Babur’s army, but non-Muslim tribes generally have their men killed and their women and children enslaved. Modern-day Afghanistan is like a tea party compared to the violence described by Babur, who was in fact the perpetrator of much of the violence.

One big difference between Babur’s expeditions and ours is that Babur never went anywhere except for a profit. He was after tribute, taxes, and plunder and would not have engaged in a cash-draining war.

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My brother, who got all of the genes for looking good, dressing well, and speaking diplomatically, appears here in a TV interview about the next scene in the U.S. health care harlequinade.

[Harry is the Chief Medical Officer at Dell Services, acquired in from Perot Systems.]

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I was chatting today with an executive from an Internet media business that collects tens of millions of dollars in advertising fees annually. He has invested as much as possible in direct salespeople because of the heavy commissions extracted by Google and Yahoo. Google won’t say exactly how much of a rake they are taking from Adwords, but he estimated that as little as 20-25 percent of what advertisers pay flows through to the sites where ads appear and that Google adjusts this number in order to meet quarterly earnings targets. Google thus collects a 75-80 percent commission. How does that compare to the bad old inefficient pre-Internet world? Standard ad agency commissions were 15 percent.

[Google has itself apparently divulged some accounting figures and claims that they rake off only 32 percent (source), which means that in the best case they are taking twice as much as the bricks and mortar ad agencies.]

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Boring but maybe important: Barack Obama has proposed one element from the economic recovery plan that I published in November 2008: allowing businesses more flexibility in capital expense depreciation (nytimes story). Note that this doesn’t change the amount of the deduction that is allowed, just when the deduction is taken. Fewer businesses will have to face the risk of owing a significant tax to the federal government in a year when their operations are cashflow-negative. This is especially important in the U.S. because we have among the highest corporate tax rates in the developed world (Forbes says that we are at about 40 percent state/federal and Europe is at 23.5 percent).

[Consistent with the U.S. plan to cheat its way to prosperity and with the idea that the Collapse of 2008 was not indicative of any structural problems, Obama suggests that this change in the tax code apply only in 2011. After that, things go back to the way they were and somehow the economy is not supposed to go back to the way it was. The change therefore may make the U.S. less efficient economically, since companies may buy stuff in 2011 that they wouldn’t have needed until 2012 or 2013. Lawyers and accountants will benefit, as they do any time there is a change in the law.]

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