September 27, 2012

The Great Train Wreck

For those who might have nodded off during Econ 101, the Federal Reserve controls the nation's monetary policy: the cost of money (interest) and the amount and flow of money through our nation's banks into the economy. The Congress (not President Obama) controls fiscal policy: how much and in what manner the federal government spends money in order to expand or contract the economy.

In a recession, traditional fiscal policy calls for lowering taxes and increasing government spending. Monetary policy calls for lowering interest rates and increasing the money supply. Taken together, they should jump-start a spluttering economy. Trouble is, we've been doing that, and it hasn't made much of a dent. So the question becomes what do we do next.

I've often said that my biggest fear is that no one knows what to do about the economy. Turns out I'm not the only one. Here is a quote from Richard Fisher, President of the Federal Reserve Bank of Dallas, speaking about getting the economy back on its feet:
"We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course. The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank – not, at least, the Federal Reserve – has ever been on this cruise before."
Those discouraging words came during the debate over the recent decision by the Federal Reserve to buy $40 billion of mortgage debt a month from now until whenever and also to keep interest rates low until at least mid-2015. This is being matched by an emerging consensus in Europe to have the European Central Bank soak up all the sovereign debt that is currently sinking the economies of several of its countries

In essence, the central bankers in America and Europe have committed to buying our way out of the problem. Will it work? Who knows? It is a gigantic leap of faith, one that has no Plan B. That's what's really scary. If this doesn't work, then there is no choice but to let events run their course, and that could get very ugly.

The next big break point is Taxmegeddon, a train wreck set in motion by Congress's penchant for putting off problems to the bitter end. The crisis over raising the debt ceiling resulted in a binding agreement to inflict equally deep cuts on defense and domestic spending. That train is rushing headlong towards another train, the Bush tax cuts (and some payroll tax cuts), which expire at the end of the year.

Everyone agrees this train wreck will hurt the economy. No one agrees on how to avoid it. The Republicans and the Tea Party want to leave the defense cuts and keep the domestic cuts and all of the Bush tax cuts. The president wants to eliminate tax cuts for the wealthiest. Sound familiar?

Here's the kicker. Taxmegeddon is a problem with a known crunch time. On January 1st, the Bush tax cuts expire and a budget deal that nobody wants goes into effect. So somehow, between Election Day and the end of the year, Congress and President Obama will have to find common ground or else we will all take a great fall over the edge of the fiscal cliff, and all the Federal Reserve Bank's monetary horses and men won't be able to put the economy back together again.

Let me ask you. Do you believe in miracles?

September 22, 2012

The Disappearing Blues

It's early autumn, and the days grow noticeably shorter. I enjoy this time of year the most ... warm days and cool nights, a hint of winter waiting in the wings. Autumn is harvest time, when we gather up and measure the fruits of our labors. It's a time when I find myself sitting out on the deck reflecting on the year just past and the many years that preceded it, as viewed from the same perch on the cusp of the season.  If you put in enough years doing that, then weather turns to climate and events become trends.

Change is in the air. A shifting climate brings with it an uneasy feeling that what we knew is giving way to an unknown future we are ill-prepared for, an uneasiness that deepens as the gaze shifts to the political process that is supposed to deal with changing times and tides. My generation grew up believing that America was a nation that had all the answers. Now, it's hard to even  know what questions to ask.

That faith in a better future ... the anchor that steadied us against the winds of change ... a faith we got from our parents ... is now just another lost dream ... the disappearing blues. Americans always felt that we could somehow find a way through whatever was facing us. Not so much, anymore. The old answers aren't working any more, and as far as I can tell, no one has come up with any new answers. We continue to march to the beat of the same drummers ... left, right, left, right... heading towards the same cliff.

We all feel it, don't we, this sense that whatever bargain we struck with life has been declared null and void? Get a good education and a good job, get married and buy a house, save a little nest egg for those golden retirement years  .. none of that seems to work any more. A college education leaves kids deeply in debt before they even start, the jobs are overseas, the house is underwater, and the nest egg took a great fall.

I look at my kids and honestly have no clue how they will get by. Certainly, the life I had is no longer easily with reach. Buy a house? Why would you? Get a job with a good benefits? Good luck with that. Bootstrap yourself into little upward mobility with a good education? Sure, if you don't mind massive debt and no job prospects. And, oh, by the way, you'll need a masters degree if you want the really good jobs.

I know they will figure it out, just like every generation does. But it breaks my heart as a parent to know that somehow my generation has screwed things up to the point where the future is just one big uncertain mess. I hope they find a way through it. As someone who grew up believing in rugged individualism, I have trouble accepting the idea that the answers to the world's problems can be crowd-sourced, but maybe I'm just an old dog who can't learn the next new trick.

Think about it. One socially connected world pushing for one simple dream ... a little better life, a little freer life, a little healthier life ... one day at a time. Throw out the tired old regimes and start over. Like it or not, that's what's happening. Messy? Sure. A little bit of be careful what you wish for? Totally. The best hope for a brighter future. Time will tell.

I ease back in my chair and look up at the robins egg sky filled with mares tail clouds crossing over a pale moon sitting high in the southern sky. To the west, the setting sun is briefly tangled in the branches of my neighbor's trees before shaking loose to continue on its way to another dawn. A cool breeze nips at my arms; the dog nuzzles my hand. It's time to go in.

September 18, 2012

The 47 Percent

Mitt Romney stated that 47 percent of Americans don't pay federal taxes. I don't know about you, but that got my attention. I heard that and thought, "Wait a minute. That can't be right." Well, to give the devil his due, it turns out Mitt is right ... kind of, sort of.

The 47-percent figure comes from a report by the Tax Policy Center (TPC),  a joint venture of the Urban Institute and Brookings Institution. Their analysis shows that about half of the 47 percent who pay no federal tax don't make enough money, when you look at their level of income and the deductions they take. A family of four earning less than $26,400 won't pay any Federal taxes. And you have to make over $12 an hour to make that much, which you and I know a lot of people aren't making. Of course, there's the 13 million or so unemployed Americans who are making $0 per hour, so they are part of that 47 percent.

The other half of those who don't pay taxes are benefiting from tax breaks that benefit all income groups to some extent or another. About 75 percent of this group get such breaks because they are either elderly or because they are low income families with children.

So let's review the videotape. Yes, it is more or less true that 47 percent of Americans pay no Federal taxes. (Of course, they may well pay other taxes, such as payroll taxes, excise taxes or state taxes, but that's another story.) The major groups in that 47 percent are the elderly, the unemployed, lower middle class families, and the working poor.

Surely there is something of a natural constituency for Mitt among such a large group of people. Isn't he counting on his promise of more jobs to win votes? Wouldn't that appeal to those who aren't working? Isn't he promising better jobs? Wouldn't that appeal to the underemployed? Aren't older people more conservative by nature? They typically aren't seen as a slam-dunk for Obama. For Mitt to say these folks are never going to vote for him is hard to understand.

All of this begs Mitt's basic problem. There are a whole slew of Republican voters who don't much like him. He still hasn't won over the conservatives or the Tea Party. You have to wonder how many of them will take the time to vote for him. Then you have the 47 percent who "will vote for this president no matter what." And the women and Latino numbers aren't looking too good, either. You have to wonder just who will be voting for Mitt on election day?

September 11, 2012

Cyber-Attacks: The Next Big Threat

Eleven years ago today, America suffered a body blow to the gut. Two airplanes slammed into the World Trade Center in New York City, resulting in the collapse of its iconic towers. Another plane crashed into the Pentagon. A fourth hijacked plane crashed in Pennsylvania, killing all aboard. Nearly 3,000 people died on that day as a direct result of the attacks.

It was a day we vowed always to remember. It was a threat we vowed never to forget. Two wars and countless lives later, the threat posed by al Qaeda has clearly diminished. The threat posed by non-state terrorist organizations is still present, but the risks of a direct attack like the one on 9/11 on American soil has been greatly reduced.

Other threats persist. In my view, the clearest and most present danger we face is a cyber-attack. Daily probes and attacks by governments and gangsters and angst-ridden do-gooders are now routine. Pretty much anyone with a little know-how and an internet connection can play in this game.

What's at stake? President Obama, in a recent op-ed piece in the Wall Street Journal, described a simulated attack against the nation's rail system and selected water treatment plants. The list could easily be expanded to include the banking and energy infrastructure, as well as hospitals. Anything that is connected to the internet is vulnerable to a cyber-attack.

You think you have problems now? Imagine if your bank went down for a few days, and your accounts were not accessible or your credit cards wouldn't work? Or some gangster in Estonia steals your credit card account information? Got a pacemaker or maybe an insulin pump? You could be vulnerable to a cyber-attack. Bet you didn't see that one coming. Let me say it again: anything connected to the internet is vulnerable.

The irony is that President Obama may have been his own worst enemy here. The ill-considered use of a computer worm to throw a monkey wrench into the machinery used in Iran's nuclear program could result in major blowback down the line. The techniques and the technology behind the Stuxnet attacks are now "in the wild," as cyber-security experts like to say. (A Google search on the phrase "stuxnet source code download" gets over 100,000 hits.) Anyone can download the code and have a go at making their own improvised computer-destructive device that can be delivered to any business or government facility that has a gap in its computer defenses. That would be just about all of them.

The nation's businesses are shockingly lax when it comes to cyber-security. That laxness is matched by a hyper-vigilance when it comes to government efforts to impose some sort of minimal standards of cyber-security. Anything that would take away from the bottom line is quickly branded as being bad for business. And there are those who worry that the threat is being exaggerated and that the cure will be worse than the disease.

There are legitimate issues any time government seeks to extend its regulatory authority into new areas. But common sense argues that certain key industries have a responsibility and a duty to take minimal and reasonable steps to bulk up their cyber-security. We can't eliminate the threat, but we can make it more difficult to launch such attacks.

The hardest thing to accept about 9/11 is that intelligence analysts had been warning for some time that such an attack was possible, although the exact nature of the threat was hard to pin down, the timing unclear. That's not to say that the attack on 9/11 could have been prevented, but the lack of such attacks in the wake of vastly improved security measures shows that an ounce of prevention is still a good bargain.

There is nothing vague about the threats posed by cyber-attacks. We know the danger is real. We know they are happening every day. We know what to do to make it harder to launch such attacks. We have the way. All we need now is the will to get the job done.

September 8, 2012

Let the BigDog Bark

The Terminator series of movies describes a future that is coming at us pretty damn fast. The vision of robot warriors has evolved from science fiction to science fact at a rate that should cause folks to sit up and take notice. The face of war is changing. Robots are the next step in the evolution from citizen soldiers to an all volunteer army to a hybrid army of men and computer-guided machines, including robots. Not too hard to see what's coming. Hello Terminator!

Of course, that's not how these new robotic devices will be marketed. They will be heralded as new tools to do mankind's dirty work, making it unnecessary for humans to do the dirty jobs of war and peace. Some will say this is a good thing. I'm not so sure.

We have already made war too easy for the politicians. As citizens we have bought into the idea of an all-volunteer army. It's a devil's bargain of sorts. We the people pay the taxes to support whatever wars the politicians decide to fight. In return, we are promised that our sons and daughters will be left alone unless they volunteer.

Right now, we have troops engaged overtly and covertly in a number of arenas, but you would never know it. Mitt Romney recently got through his entire acceptance speech without once mentioning Iraq or Afghanistan. That isn't a knock on Mitt. He just reflects the way we all live in these days of endless warfare. We go about our lives for the most part heedless of the cost in treasure and blood we are paying every day. What will it be like when robots are doing the fighting for us?

As someone who fought in a war that was still mostly unplugged, this new face of war is alien and frightening. The vision of wave after wave of relentless machines advancing inexorably toward my position, leaping and bounding and clawing their way over every obstacle, the air filled with the ominous drone of their power packs, sounding for all the world like mournful robotic bagpipes ... this is not any kind of war I want to fight in.

September 4, 2012

To Legalize Pot ... Or Not?

The on-line New Yorker features a fascinating article entitled "The Throwaways," written by Sarah Stillman. The article talks about how police "convince" people caught with piddling amounts of marijuana to go undercover to arrange drug deals that can lead to future arrests in exchange for a recommendation to drop the charges. The result is often fatal, as untrained amateurs are sent out to interact with hardened criminals. I know for a fact this goes on where I live. You can bet it does in your town, too. It is a reprehensible practice, made all the more so when you compare the risk required versus the gravity of the original offense.

We hear talk of marijuana as a gateway drug that leads to the abuse of other, more harmful drugs. It helps to think of marijuana in this context as an important gateway drug used regularly by police as a handy-dandy excuse to conduct otherwise sketchy searches of homes and vehicles and to detain individuals based on the presence of even a single marijuana seed. The mere suspicion that marijuana might be present is good enough to justify a search.

As far as I am concerned, this practice alone makes me take a harder look at legalizing the sale of marijuana. Based on my experience in Vietnam, where I lived and worked with guys who smoked pot pretty much 24/7 with no obvious ill effects, I can't see where adding marijuana to the list of legally available relaxants such as alcohol and cigarettes — with the same social and legal restrictions such as prohibitions on driving while high or the sale to underage buyers — would have any appreciable impact on day-to-day living. Well, that's not entirely true. Society would stand to benefit in at least three different ways: more effective allocation of funds for the war on drugs; tax revenues from the sale of marujuana; and reduced prison populations.

First off, resources in the inaptly named war on drugs could be concentrated on more dangerous forms that should be banned. Legalizing marijuana sales would not in my view be a green light for consuming any and all drugs. Crystal meth and designer drugs of unknown lethality — and yes, cocaine and heroin — should continue to be banned and producers and distributors prosecuted. Same for the illicit sales of prescription drugs such as Oxycontin. Society should continue to send a clear mixed message here. Given the way bureaucracies work, you probably wouldn't see any immediate savings, but certainly resources to fight more dangerous drugs would increase.

Second, the underground economy of marijuana sales would enter the revenue mainstream. How much that would bring in to states and the federal government is hard to gauge, but we are talking billions not millions. The idea is that the street price already shows what people are willing to pay. Assuming that the legal street price is kept roughly the same, the profit would now be split between the government and legal purveyors, who would presumably keep more reliable tax records. Instead of funding the Mexican cartels, we would be building schools and roads and hospitals.

Third, incarceration rates for marijuana-related offenses would decline sharply. There are roughly 7 million Americans under some form of correctional supervision. What percent of those is due to the possession or sale of marijuana is highly contentious. Estimates range from one in eight to one in a hundred. Either way, you have to think that legalizing marijuana might not have any immediate affect on costs, but future growth in prisons would be slowed. The impact on young people arrested for simple possession would be huge. Too many young people are acquiring police records for possession of a few ounces or less of marijuana, at least that's how I see it.

What's the down side? You would have yet another regressive tax, based not on a balance between what government needs and what each taxpayer can afford to provide in taxes but rather on personal decisions to gamble, drink or smoke. Also, there are costs associated with treating those who can't gamble, drink or smoke responsibly. By some reckonings, these costs far outweigh the revenues gained. This is a valid point. But marijuana does have positive health benefits, as does the use of alcohol in moderation. However, excessive alcohol usage is very costly to society, whereas it remains unclear what ill effects stem from excessive marijuana usage.

And make no mistake about it, illicit sales of marijuana would continue. Minors will want to smoke. A certain percentage will want to combine marijuana with other illicit drugs such as PCP or even embalming fluid. Yecch! Selling untaxed (or lower taxed) alcohol and cigarettes across state lines is also a brisk business. We know underage young people drink alcohol and smoke cigarettes. Society tolerates this as the price for making these products legal. In fact, society tolerates a whole raft of undesirable consequences. Why subject marijuana to a harsher standard?

Finally, there is the whole question of marijuana leading to the usage of other, more dangerous drugs. There is no doubt that some users of marijuana will not stop there. Persons predisposed by environment or genetics to form addictive behaviors will still be around and will still be tempted to take marijuana to the next level, so to speak. Also, it does send a mixed message to kids, who under no circumstance should be smoking marijuana or cigarettes or drinking alcohol. But we already have legalized sales of alcohol and tobacco, so how much more of a mixed message would it be?

This is a tough question. Would we be a better society if nobody smoked or drank or gambled? Probably so, but then we wouldn't be human. This is what we do. This is who we are. We take our pleasures now. Marijuana is in the mix and will remain there. Already partially legal, we need to take the next step and begin making it fully legal for sale to adults. Illicit versions will continue for whatever reason, but if folks are determined to smoke a joint, we might as well bring it into the tax stream and make some money off it. It's the American way.

September 2, 2012

Let the Numbers Do the Talking

I started out looking for the impact of Bush tax cuts on jobs. Finding agreed upon figures was difficult, but the consensus is definitely that jobs were created, no doubt about it, but not at an extraordinary rate if you factor out the job growth that would have occurred with or without the cuts. And the impact of the resulting deficits may have dampened job growth, so the net effect is really hard to figure. One comment from a Forbes Magazine article really struck me as right on target. This from JoeK:
"... the real spenders in this economy are the Middle Class. And when their spending is curtailed, as it has been through this period, demand is down, and the “Job Creators” have no reason to add employees, until demand reappears. Want a jolt of economic adrenaline? Tax the rich, and give tax cuts to the middle class. They won’t buy yachts, but will buy lots of other stuff, for their kids and themselves,"
While doing the research on the Bush tax cuts, I found several interesting charts and graphs. They are not always without a slant, I'll grant you that, but the facts do seem to be solid as near as I can figure. As the political rhetoric heats up, I hope these charts will provide some sense of the reality lurking behind the claims on both sides. Click on the link below each image to find the related story.

(Discretionary spending: 18% of the budget; 100% of the cuts.)

(One of these is not like the others.)

(More work done by fewer people. How does that work out at your job?)

(Not what you expected?)

(Corporate profits way up. Where are the jobs?)

(Class warfare? Maybe, but who's winning?)

 (The Clinton tax hike calmed fears about debt, spurring growth.)

(This really surprised me.)

(Which brings us back to where we started.)