Archive for July, 2011

An explanation for Obama’s actions

Saturday, July 23rd, 2011

The debt ceiling debate has dragged on creating frustration and some anxiety about the economic consequences of default. President Obama has even threatened to withhold Social Security checks, claiming there would be no money for payment. Through most of this he has seemed to me to be unserious about the matter and using it chiefly to try to improve his chances for re-election. Fred Barnes has now come up with what I consider a good explanation for his behavior, including the last moment maneuvers yesterday.

First, the trade treaties:

The path to ratification by Congress was greased after President Obama renegotiated trade treaties with South Korea, Colombia, and Panama. Obama would supply Democratic votes. Republicans were already on board, President Bush having put together the treaties in the first place. It had the look of a done deal.

It wasn’t. In May, the White House suddenly insisted the treaties be accompanied by roughly $1 billion in Trade Adjustment Assistance, or TAA as it’s known in Washington. Organized labor was demanding TAA funds be set aside for workers whose jobs might be lost as a result of the treaties. Obama took up the cause.

Then there was the oil pipeline from Canada:

The Keystone XL pipeline from the oil sands in Canada to refineries on the Gulf Coast is another win-win issue for Obama, if only he’d embrace it. Canada is America’s leading foreign supplier of oil. The more Canada exports to the United States, the less we’re forced to rely on unfriendly folks in the Middle East and on Latin American countries (Mexico, Venezuela) whose oil production is declining. With the new pipeline, Canada would increase its exports by as much as 700,000 barrels a day. (The United States consumes 10-11 million barrels daily.)

A permit to build the pipeline was requested nearly three years ago by TransCanada. Because it would cross an international border, approval must be granted by the State Department. This was expected to be a snap, particularly after gasoline prices reached $4 a gallon. White House aides thought so, and Secretary of State Hillary Clinton indicated she was ready to approve it.

Then the environmental lobby, led by the Natural Resources Defense Council, began a campaign against approval, and the Environmental Protection Agency joined in. It criticized the State Department’s first environmental impact statement, which found the pipeline would have little effect on the environment. Clinton buckled, and a second impact statement was ordered. Last month, EPA said the new study was “inadequate.”

Both of these initiatives promised thousands of new jobs and would seem to be helpful to Obama in his quest for a second term. In both cases, a left wing member of his base intervened and his support collapsed.

Now, the debt ceiling:

The Speaker and the President had nearly agreed on a plan that included $800 billion in “revenue enhancements” but did not raise rates. What happened ?

House Speaker John Boehner’s (R., Ohio) office is pushing back against White House claims that the new revenue in the “framework” being discussed in the now defunct negotiations would have been generated by letting current tax rates expire. “That is simply false,” writes Boehner spokesman Michael Steel.

In reality, Steel writes, the White House offered a “ceiling” of $800 billion in new revenue over 10 years that would be achieved through comprehensive tax reform (e.g., eliminating loopholes, credits and deductions) in a way that would stimulate economic growth. This would not constitute a tax increase.

Following the release of the Gang of Six proposal, however, the White House then insisted on an additional $400 billion in actual tax increases, for a total of $1.2 trillion in revenue that would become the new “floor” for revenues. Additionally, the administration backed away from several aspects of the tax reform package they had already agreed to, including a protection against tax hikes on small businesses and a guarantee that they would only be three tiers of tax rates, the highest of which would be below 35 percent.

In regard to Social Security, the two sides had agreed on a change in the way the government calculates inflation (the so-called “chain CPI”) that would extend the program’s solvency. However, the White House reneged on a previously agreed-upon solvency target and offered a weaker target that would yield 25 percent less in savings.

If true, clearly the two teams were playing in two separate stadiums.

What had happened was that the “Gang of Six” report was released and the revenue increases looked better to Obama so he reneged. There was also considerable discussion that Democrats were furious with him because he had not insisted on tax increases.

No. I think what happened is Congressional Democrats got a whiff of a possible deal where you get entitlement cuts and tax reform, say, next year — which might increase revenue or might not — and they panicked because a) they have a religious belief in raising the taxes. If you don’t have that, you can’t have a deal, so it created a kind of a theological panic.

Obama, it seems, cannot stand up to the rest of his party. He will negotiate but once some interest group objects, he is gone. No deal.

It’s a good thing the Soviet Union is gone.

UPDATE: More on the Democrats’ insistence that any deal has to raise taxes. This is probably tactical as they hope this will alienate the tea party.

Statistics and Poverty

Monday, July 18th, 2011

I am repairing a gap in my education by reading Thomas Sowell’s classic, Vision of the Anointed, which was written in 1992 but is still, unfortunately, as valid a critique of leftist thought as it was then. As an example of his methods, he constructs an experiment in statistics. This concerns poverty and inequality and, in particular, the poverty of leftist thinking.

He imagines an artificial population that has absolute equality in income. Each individual begins his (or her) working career at age 20 with an income of $10,000 per year. For simplicity’s sake, we must imagine that each of these workers remains equal in income and at age 30, receives a $10,000 raise. They remain exactly equal through the subsequent decades until age 60 with each receiving a $10,000 raise each decade. He (or she) then retires at age 70 with income returning to zero.

All these individuals have identical savings patterns. They each spend $5,000 per year on subsistence needs and save 10% of earnings above subsistence. The rest they use to improve their current standard of living. What statistical measures of income and wealth would emerge from such a perfectly equal pattern of income, savings and wealth ?

Age Annual Income Subsistence Annual Savings Lifetime Savings
20     $10,000                 $5,000          $500                               $0
30    $20,000                  $5,000       $1,500                      $5,000
40    $30,000                  $5,000       $2,500                    $20,000
50    $40,000                  $5,000       $3,500                    $45,000
60    $50,000                  $5,000       $4,500                    $80,000
70              $0                   $5,000               $0                   $125,000

Unfortunately, even with an Excel spreadsheet, I cannot get these numbers to line up properly.

Now, let us look at the inequities creates by this perfectly equal income distribution. The top 17% of income earners have five times the income of the bottom 17% and the top 17% of savers have 25 times the savings of the bottom 17%. That is ignoring those with zero in each category. If the data were aggregated and considered in “class” terms, we find that 17% of the people have 45% of the all the accumulated savings for the whole society. Taxes are, of course, ignored.

What about a real world example ? Stanford California, in the 1990 census, had one of the highest poverty rates in the Bay Area, the largely wealthy region surrounding San Francisco Bay. Stanford, as a community, has a higher poverty rate than East Palo Alto, a low income minority community nearby. Why ? While undergraduate students living in dormitories are not counted as residents in census data, graduate students living in campus housing are counted. During the time I was a medical student, and even during part of my internship and residency training, my family was eligible for food stamps. The census data describing the Stanford area does not include all the amenities provided for students and their families, making the comparison even less accurate.

Statistics on poverty and income equality are fraught with anomalies like those described by Professor Sowell. That does not prevent their use in furthering the ambitions of the “anointed.”

The Social Security “Trust Fund”

Thursday, July 14th, 2011

In the talks about raising the debt ceiling, or not, president Obama made a Freudian slip that will permanently affect the reform of entitlements. Social Security was supposed to have a trust fund that would guarantee payment for another 30-40 years. Ask any Democrat, especially one who is opposed to reforms that convert part of the account to a private investment account.

Obama said he “could not guarantee” that Social Security checks would go out after August 2 of the debt limit had not been raised. That is the end of the trust fund fiction.

In 1960, the Supreme Court ruled that workers do not have a legal right to their Social Security benefits. Congress can cut them any time it wants, which it’s done several times. And, because there are no ownership rights, if you die the day you retire after making a lifetime of payments into Social Security, your heirs get nothing.

That was 50 years ago but the truth may finally sink in now.

Obama’s math skills

Saturday, July 9th, 2011

President Obama has made many gaffes suggesting unfamiliarity with things like military medical personnel, otherwise known as corpsmen. This time he has shown himself to be unfamiliar with the defense budget and arithmetic.

“The nice thing about the defense budget is it’s so big, it’s so huge, that a 1 percent reduction is the equivalent of the education budget,” Obama said, immediately noting he was “exaggerating” the exact numbers.

“But it’s so big that you can make relatively modest changes to defense that end up giving you a lot of head room to fund things like basic research or student loans or things like that,” the president said.

In fact, his numbers are wildly wrong.

“Contrary to his wildly exaggerated statement, a 1 percent reduction to the Pentagon’s proposed fiscal year 2012 base budget would be $5.5 billion—or 7 percent of the Department of Education’s proposed FY 2012 budget,” wrote Brownfield.

The political left has exaggerated the size of the defense budget for years. The fact that a left wing president would do it is an example of how far from reality they are.

Debt, interest rates and gotterdammerung

Thursday, July 7th, 2011

The debt limit talks seem to go on forever. Obama and the Democrats seem oblivious to the danger. All they think of is re-election. All is politics. Our present day ruling class seems even worse than those who saw the Civil War come and the Panic of 1893 and 1903. The last presidential administrations that seemed to understand economics were those of Harding and Coolidge and Eisenhower. Both preceded the “Great Society” of Lyndon Johnson that began the race to the bottom.

What we have had since Reagan is a Congress, and often a president, who ignored all rules of economics and saw government spending as the key to re-election. We are about to pay the price.

Here is an analysis of the effect of interest rates on our debt.

We have seen very low interest rates as a result of the fact that the Federal Reserve has been buying Treasury debt. What would happen if that debt had to be sold to others at a price determined by a market in interest rates ? Note the 1981-1990 scenario. It adds $5 trillion in debt by 2021, only ten years from now.

Instead, let’s look at an “alternative scenario” with the books uncooked by CBO.

You could look at the pdf file. Or you could look at some simple projections.

CBO estimated that 1 percent higher interest rates each year could increase deficits by $1.3 trillion over ten years. CBO also estimated a few other “rules of thumb” to show how changes in inflation and economic growth have significant impacts on budget forecasts. The projections show that lower economic growth of just 0.1 percentage point each year could increase deficits by $310 billion over ten years, while 1 percentage point higher inflation each year could add almost $900 billion to deficits.

The alternate scenario chart shows the debt going to 250% of GDP, about where Japan is now. Japan has had a “lost decade” that has lasted 20 years.

We will have a Greece style collapse before then, probably led by public employee unions.

Happy Fourth of July

Monday, July 4th, 2011

This is Omaha Beach in late June 2007. We were there for two weeks and spent a week in Normandy so the girls could get an opportunity to appreciate what the Fourth of July means. The National Guard Memorial is at the right edge of the photo.

Here is the US Military Cemetery at Omaha Beach. We spent an hour there.

A few days later, Cindy and I had our lunch at this cafe. It is on the south side of Pegasus Bridge and was intimately involved in the landing on June 6, 1944, of the British paratroopers in their gliders. The cafe owner, awakened by gunfire, opened his cafe for use as a first aid station. He had hidden wine in his garden and some of this was served to British wounded while they waited to be evacuated. His small daughter who witnessed the battle, still owns the cafe and made our lunch.

From Wikipedia– Arlette Gondrée, who now runs Café Gondrée, was a small child living in the home when it was liberated.

I hope the kids will remember this as more than a vacation.

Neville Shute Norway

Friday, July 1st, 2011

One of my favorite novelists is Neville Shute. He was an engineer, and so was I, plus he writes about people with an ability to show their humanity and their deeper motivations without a lot of explanation. He is the engineer’s novelist, the businessman’s novelist and should be on every list of conservative novelists. I have read all his post-war novels, most of his wartime novels and a selection of his pre-war novels. He died in 1960 and all his books are still in print.

I was a college student when “On the Beach,” possibly his most famous novel, came out. It scared me so badly that I have not been able to enjoy rereading it, as I have his other books. I was a college sophomore and familiar with his other work at the time. I had read his aviation novel, “No Highway,” and was aware that the plot device in that book, of metal fatigue causing a new airplane to crash without explanation, had been prophetic. Shortly after “No Highway” had come out, the British Comet jet airliners had begun to crash and, when finally identified, the cause was metal fatigue.

Shute had written another prophetic novel in the late 1930s, called “Ordeal,” which predicted the effects of the Blitz on London. Both of these books, with their predictions borne out by history, caused me to be very shaken by “On the Beach.” A rather successful movie was later made from this novel, which Shute hated because it had suggested that the two principle characters, played by Gregory Peck and Ava Gardner, had slept together while he believed it important to establish their morality, even when doomed.

I very nearly dropped out of school after that book and spent a year or two getting over the idea that I would soon be fried in a nuclear war. My reaction was based as much on my regard for his novels as for the topic, itself. A quite good movie was made from “No Highway” with James Stewart, Glynnis Johns, and Marlena Dietrich.