End of a bad year

H.M. Queen Elizabeth II summed up 1992 with the words: "Annus horribilis." Those two words are sufficent to describe 2008.

Since Americans are optimists by nature, let us look forward to better times in 2009.

Israel and Hamas

The end of the [more or less] ceasefire between Israel and Hamas in the Gaza Strip brings to mind something said, in 2004, by Bertie Ahern the former Taoiseach (Prime Minister) of the Republic of Eire:

"As long as we have a position - I won't move until you move - and won't do this until you do that - you'll never get anywhere."

He was referring to the situation in Northern Ireland but there doesn't seem to be a better, or more succinct, way of summing up the progress, or lack thereof, of the Middle East peace process since the 1979 Israeli-Egyptian peace treaty.

A new ice age (2)

Earth's orbit is far enough away from the sun that, without help, the planet would be too cold for liquid water and there would be no life as we know it.

Without carbon dioxide and other greenhouse gases in our atmosphere, we would have difficulty surviving. Mars has almost no atmosphere and therefore little ability to retain heat. As a result it is far colder than its distance from the sun would suggest. The temperature on Venus - at some 900 degrees Fahrenheit - is far hotter than its distance from the Sun would suggest: a runaway greenhouse effect is the cause.

Earth's atmosphere, historically, has acted as a thermostat and, for billions of years, has generally kept the planet at a temperature which permits carbon and water based life to exist.

The Vostok Project, completed in 1999, involved drilling into the Antarctic ice. Scientists recovered cores (going back 400,000 years through four complete glacial cycles) and were able to match atmospheric CO2 levels to temperature. The CO2 levels in the record were as low as 180 parts per million in the cold periods (i.e during ice ages) and reached 280 in the warm periods but never higher. Current CO2 levels are now in excess of 380 ppm so we can expect a very warm period in the near future.

By emitting so many greenhouse gases, we are conducting a massive experiment on our planet. Although there are many who doubt that the increasing levels of greenhouse gases put our way of life at risk, the burden of proof must be theirs. The risks of continuing along our present path are existential.

On the other hand, should we totally abruptly abandon the use of fossil fuels, it would not take all that many years, at least in terms of geological time, for atmospheric CO2 levels to drop precipitously. Global cooling and a new ice age would soon be the climate problem at hand.

Caution is necessary but inaction may be fatal.

A new ice age (1)

The environmental panic of the 1970s was the coming Ice Age. It was based on apparent evidence of just two decades of worldwide cooling together with a 1971 article in Science that suggested that an increase in atmospheric aerosols – such as sulfur dioxide and particulate matter emitted by diesel engines and coal fired power plants – would provide enough cooling to trigger a new ice age.

The two decades of global cooling was overestimated, and the trend was soon reversed, while the science was just plain wrong. At that time, no one understood the extent that other atmospheric constituents, such as methane, contribute as much to planetary warming as does carbon dioxide. Meanwhile the industrialized West has successfully cleaned up much of the sulphur and particulate emissions so their cooling effect is largely lost.

The Earth appears to be in a cycle of ice ages followed by warm periods. It is also true that, all other things being equal, we could expect another ice age sometime in the near – at least by geological standards – future. It is true, as well, that Earth's orbit lies outside the "habitable zone" around the sun where, absent other influences, liquid water can exist.

But all other things are not equal and human impact on our planet has certainly postponed the onset of the next ice age - perhaps for ever.

First, the invention of agriculture led to more and better food. The result was an increase in population followed by deforestation to provide additional arable land. As a result, more CO2 was released. Then, the domestication and spread of cattle, sheep, and goats for labor, milk, and meat increased the amount of methane released into the atmosphere. Finally, in the three hundred years since the beginning of the Industrial Revolution, the ever increasing consumption of fossil fuels – coal, oil, natural gas – has increased the load of heat retaining gases in the atmosphere to levels not found in the last 650,000 years.

Studies of Antarctic ice cores show a remarkable correlation between temperature and atmospheric CO2 levels so, unless we do something - but not too much, it looks like we are in for a hot one!

More tomorrow.

Banks and losses

Last year John G. Stumpf, CEO of Wells Fargo and Company which is one of the few relatively healthy large banks in the country, was quoted as saying:

"It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine."

Perhaps, in 2009, banks will return to their proper line of work: making payments, collecting deposits, and lending money to those who are reasonably likely to repay it. I am not holding my breath.

The credit crunch will last until commercial bankers stop being terrified. Once that happens, they will start lending again. But when they do, we must hope that they remember how it works: assets provide something of a safety net - but no more - against default, actual repayment can only be made out of cash flow.

And it isn't going to be different next time!

Closed for the Holiday

Have a very Merry Christmas.

Customer service

It should not come as a surprise when one experiences good customer service but it does. Unfortunately, regardless of the economic situation, few companies seem to understand that the best way to keep a customer is to provide exceptional treatment.

Six weeks ago, the battery in my laptop died and the best that the manufacturer's website (name withheld to protect the guilty) offered was 'usually ships in four weeks'. So I went to www.batteries.com who shipped me a replacement battery almost immediately. Unfortunately, it did not work but, after a short telephone call, Batteries.com sent a return mailing label by e-mail and a new battery duly arrived in about a week.

So far so good. Regrettably the replacement battery was also defective. When I called, the customer service department asked, without having to be prompted, whether I wanted a second replacement or a refund. I opted for the refund and the return label, once more, arrived by e-mail in less than 15 minutes. No arguments, no fuss, no need for me to ask or have to fight for decent service.

While the company did not get my business for the laptop battery (I am now waiting patiently for the manufacturer to send one), I am still a customer for future battery orders and will recommend then to anyone who asks. It cost the company in the short term but, in the long term, they have kept a customer.

Would that more companies could learn this simple trick. The recession will end one day and customers will be back. Reputation and service will be critical in determining the number of currently dormant customers that return.

Living for ever

There seems to be a cultural imperative that demands that we live forever. Unfortunately, any attempt to do so risks making ourselves bored and boring - if not miserable - while we try.

In reality, I am of the persuasion that being rolled into the funeral home, totally worn out - but happy after an exciting ride - is the way to go. If I can manage to run out of money the day before I die, then I have succeeded at another level.

This joke, circulating around the Internet challenges the pretensions of the 'live forever at any cost' crowd:

I recently chose a new primary care physician. After two visits and exhaustive lab tests, he said I was doing 'fairly well' for my age. A little concerned about that comment, I couldn't resist asking him: "do you think I'll live to be 80?"

He asked, 'Do you smoke tobacco or drink alcoholic beverages?'' "No," I replied: "and I don't do drugs, either."

Then he asked: "Do you eat rib-eye steaks and barbecued ribs?" I said: "No, my other doctor said that all red meat is unhealthy!''

"Do you spend a lot of time in the sun, like playing golf, boating, fishing or relaxing on the beach?'' "No, I don't." I said.

He asked, 'Do you gamble, drive fast cars, or have a lot of sex?'' "No," I said. "I don't do any of those things."

Then he l looked at me and asked: "Then why do you care about living to 80?"

Enjoy your holidays because life is for today!

Statistics

As year end approaches, we will be bombarded by stories which attempt to sum up the year that is about to pass. There will also be many stories that purport to predict what will happen next year.

Most of these stories will be packed with statistics - many incomplete, others simply misleading and some that are almost impossible to interpret. Since few of the authors, and even fewer of the readers, have ever studied Statistics, we are well advised to be cautious in our interpretation and use of the information provided.

Aaron Levenstein summed up the situation particularly well with this thought: "statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital."

Fixing things

The world is full of people who are severely mechanically challenged. For these people, fixing things can best be categorized by the statement: "this is a problem that can be solved by the application of cash."

Then there are those who claim that anything can be fixed by hitting it with a hammer. While sometimes (often?) true, knowing where to hit, and how hard, takes great skill and training.

For the rest of us, with limited mechanical ability, there are only two tools: duct tape http://tinyurl.com/5g6ayp and WD40 www.wd40.com If it moves, and it’s not supposed to, use the duct tape. If it doesn’t move, and it should, use the WD40.

Bailing out the economy

Here is an analysis - only partly tongue in cheek - of the government's economic bailout program http://tinyurl.com/4vuhwd offered by former Senator Fred Thompson. In this short video, he suggests that we got into the present mess as a result of too much spending and borrowing and that the government's solution is to do much more of the same.

If political incorrectness is the act of challenging conventional wisdom, then Senator Thompson is one of the masters of that valuable art.

Strategy and achievement

The late Professor John W. Tukey, when he was Chair of the Department of Statistics at Princeton University, summed up the strategic issues facing most organizations this way:

"People, researchers, companies and various other institutions usually make one of three kinds of error:

1. Cannot define the problem they need to solve in order to move forward.

2. Define the right problem but solve it too late.

3. Define and solve the wrong problem."

While this describes President Bush's administration all too well, it is not clear whether the Administration or Congress is more at fault. Unfortunately, even if President-elect Obama's administration turns out to be competent, it will be able to achieve little - at least in the long term - unless Congress can manage to prove Professor Tukey wrong.

Too good to be true - again

It is possible to have some – but only a little – sympathy for the victims of the Ponzi scheme operated by Bernard Madoff. His pitch was that he offered really good, although not spectacular, returns regardless of market conditions. There was at least some level of plausibility since hedge funds – big losers this year – used to make the same claims.

On the other hand, there is much evidence to show that consistently beating the market for any extended period of time is rare. Those who doubt this last statement should ask Bill Miller, an honest and skillful mutual fund manager, from Legg Mason www.leggmason.com who, amazingly, beat the market for some fifteen years but whose formerly stellar reputation is now much diminished..

The real lesson, endlessly repeated and endlessly ignored, is that when something looks too good to be true, it probably is. Even if it is true, for a while, there is often a painful ending.

The delicious irony in this case is that Mr. Madoff’s name is pronounced “Made Off” as in ‘he made off with their money’.

Nothing wrong in Illinois?

Illinois Governor Rod Blagojevich claims that he has done nothing wrong and, therefore, has no reason to resign. What he really means is that he has been arrested, charged and released on [fairly modest] bail, but has not yet been convicted of any crime. Given the presumption of innocence in American criminal law, that is true but falls far short of being the whole truth: the evidence of wrongdoing, so far, appears overwhelming.

There are many things that are, or were, perfectly legal but, nonetheless, wrong. Slavery, racial segregation, denial of women's right to vote are major examples from the past. A modern legal, but wrong, curiosity is the denial of voting representation in the United States Senate and House of Representatives to some four hundred and fifty thousand citizens who reside in the District of Columbia. It is not hard, either, to think of things that were illegal but right: the Boston Tea Party, America's unilateral Declaration of Independence and, not least, Rosa Parks's famous refusal to give up her seat on a bus.

Those who remember President Clinton's most memorable phrase, "it depends what the definition of 'is' is", will continue to be appalled to learn of yet another gross pollution of our language by those who possess law degrees.

It is no surprise, at least to this writer, that [soon to be former?] Governor Blagojevich is an attorney. He is, also, a member in good standing of the ignominious company of Senators Ted Stevens and Larry Craig who both, notwithstanding their convictions - one by a jury and the other as a result of a guilty plea, still maintain that they did nothing wrong. They, too, declined to do the right thing by resigning from the United States Senate.

Banks aren't lending

Politicians are agonizing over the fact that banks are not using taxpayer funds (bailout money) to increase lending. If they don't understand what is going on, then they are showing greater than usual stupidity. If they do know what is going on and are posturing - again - it only shows that hypocrisy is a critical part of the foundation of a political career.

Here is what is really happening. Banks indulged themselves with years of promiscuous lending to people, and businesses, whose cash flow, and therefore ability to repay, was doubtful. They could manage this magic because they could package the loans into strange and complex securities that were sold to investors whose greed greatly exceed prudence. Having done so, they could declare profits.

Unfortunately, these banks then took the next steps to disaster. They loaned money to these investors and, even worse, bought many of the toxic securities based on worthless loans. The result was, and continues to be, vast losses.

Now investors are missing, as they contemplate their losses, and bank loans can no longer be unloaded. Since banks have to keep these loans, they are the ones who will suffer if the borrowers default. Not surprisingly, they are taking much more care about their lending decisions.

If politicians are surprised by the actions - or rather non-actions - of banks, they should contemplate this question. Would you lend your own money to someone who is unlikely to repay you?

Ice storms in New England

On Friday a severe ice storm struck northern New England and at least 1.5 million households lost power. Some will not have electricity back until the end of this week.

Since ice storms are not exactly rare in that part of the world, it might have been a good idea to have buried the power lines. That [sensible] course of action, however, increases capital costs which are borne by the utilities and their customers. Perhaps the economics work better when a public company does it the cheap way - at least in the short term - with overhead wires and then gets Federal Disaster Aid when the inevitable happens.

This sounds like the Wall Street bailout again: just another case of privatizing profits and socializing losses.

Infrastructure and economic stimulus

Part of the reason that we are so rich is our investment in infrastructure: roads, bridges, railways, dams, water and sewer plants, pipelines, airports and the electrical grid to name a few. For the past thirty or more years, however, we have been addicted to consumption. As a result, not only have we not completed - let alone started - much in the way of new infrastructure projects, we have grossly neglected the proper maintenance of our existing infrastructure.

President-elect Obama plans to stimulate the economy by spending vast sums to improve and restore our infrastructure. At first sight, this looks good and there is little opposition to maintenance projects. The problem is that so-called shovel ready, deferred maintenance, projects account for, perhaps, $120 - $150 billion in spending. Since Senator Obama is suggesting that $600 - $750 billion (perhaps more) of economic stimulus is needed, it is not clear what projects will actually be funded.

The first issue is that major infrastructure projects take a lot of time to plan, for bids to be requested, and for contracts to be awarded. The second, and probably greatest problem is NIMBY - or Not In My Back Yard. People just don't want electrical transmission lines, power stations, new roads and rail, not to mention sewage treatment plants or trash incinerators anywhere near where they live.

Worse, there is an influential subset of extremists, highly skilled at using the legal system to impose major delays on infrastructure projects, who want us to return to a rural ideal that never actually existed. Their philosophy can be summed up with the word BANANA - or Build Absolutely Nothing Anywhere Near Anything. Between NIMBY and BANANA, it will be a great surprise if anything much gets done in a timely manner.

All of which brings to mind the old, and cynical, definition of an environmentalist as someone who already has his cottage by the lake and who is resolutely opposed to any future building.

Malicious thoughts of the day

Tom Donlan, Editorial Page Editor for Barrons Magazine http://www.barrons.com/ is responsible for today's malicious thoughts.

Mr. Donlan is a student of capitalism and the author of a couple of very worthwhile books http://tinyurl.com/donlan . He strongly opposes a bailout of the automobile industry but, being a realist, he recognizes that three large and grossly mismanaged companies will soon be the recipients of cash that, if not just created out of nothing, is extracted, under duress, from the long suffering taxpayer.

Mr. Donlan also accepts that, having thrown cash at the Detroit Three, the Administration and Congress will create a so-called Car Czar to supervise the waste of our hard earned money. Mr. Donlan - and here is where the malicious thoughts are found - offers some names to fill this post. He starts with former Vice President Al Gore on the grounds that Mr. Gore might come to understand, at first hand, that Detroit doesn't build fuel efficient cars because the average citizen is not yet interested in paying through the nose for undersized and underpowered mini-boxes.

As an aside, the [Hybrid] Toyota Prius is ugly. It is bought mostly by the trendy 'see how green I am' crowd. Evidence for the nature of the Prius's owners is found in the fact that the Honda Civic Hybrid is just about as fuel efficient, a little larger, no more expensive compared to its gasoline engined cousin than is the Prius, and is much better looking. Sales, however, are nothing special because the Civic fails to do a decent job of advertising the green credentials of its owner. In this case, being ugly appears to be one of the Prius's critical design features.

Having offered up Mr. Gore as the sacrificial lamb, Mr. Donlan then provides the names of some very competent executives (Jack Welch, Lee Iacocca and Ross Perot) before suggesting a person for whom 'paybacks are hell' is an appropriate description. Mr. Donlan's reasoning is that, since the United Auto Workers Union is at least fifty percent responsible for the automobile industry's current mess, it would be only fair that UAW President Ron Gettelfinger be given the fruitless task of trying to sort out the industry.

If new loans would help the Detroit Three get their acts together, why won't the private sector provide the money? Even though the U.S. economy is suffering from a serious credit drought, the answer to that question should be obvious.

How hard is it to understand that new loans to the Detroit Three fall into the category of 'throwing good money after bad'? Since it doesn't really matter who is appointed to supervise the delayed death of three once proud companies, we might as well allow ourselves some small entertainment as yet more of our cash goes up in flames.

Political correctness

Political correctness is an ever present pollution of public discourse. Resistance to such an abomination, however, should never cease because, in a manner that George Orwell would have well understood, political correctness greatly increases the sloppiness, and dishonesty, of our discussions. The result is that decisions and actions are deeply flawed.

I have been unable to find a source for this definition of political correctness but it sums up the situation well:

'Political Correctness' is a doctrine fostered by a delusional minority, and the mainstream media, which holds forth the proposition that it is entirely possible to pick up a large lump of manure by the clean end.

Enough said.

Investing

Some companies, but not many, make a great deal of money during a gold rush: most make little or nothing. The same applies to whichever investment strategy is all the rage - whether it be real estate, dot coms, emerging markets, alternative energy or something else that has caught the eye of the mob.

The people who make solid - just not spectacular - profits in a gold rush are those who supply picks, shovels, beans, transport and, most particularly, saloons. When the next gold rush starts - and there will be one someday - keep in mind that investing in the supporting infrastructure is certainly safer, and may well be much more profitable, than trying to pick winners.

Arrogance and its consequences

The best, and fastest, way to get into real trouble is to start believing your own press releases. A little modesty, a lot of humility, and an aversion to the spotlight, except when strictly necessary, will do much to prevent self-inflicted wounds.

A simple enough program, but given human nature, not all that easy to execute.

Getting an early start on scandal

One down. How many more?

Since there is no evidence that he is involved, it is not quite fair to blame President-elect Obama. However, a major scandal - with some indirect links to him - has erupted even before he has taken office.

Democratic Governor Rod Blagojevich of Illinois was arrested today. He is accused of trying to collect cash, and other financial benefits, in exchange for making the appointment to the Senate seat being vacated by Mr. Obama.

Mark Twain famously said: "It could probably be shown by facts and figures that there is no distinctly American criminal class except Congress." On the other hand, the number of corrupt State, City, and Municipal politicians, who have been arrested since Mark Twain's time, is legion. Twain should, perhaps, have deleted the word 'Congress' and substituted 'Politicians'.

For all our fulminations about corruption in third world hell holes, we sometimes look just like them - only richer.

UAW might take an equity stake in General Motors

A report today on the Wall Street Journal website http://www.wsj.com/ suggests that the United Auto Workers Union is considering taking an equity stake in GM in exchange for "concessions". The proposed concessions are a deferral of the required payments into the VEBA Health Care Trust and suspension - but not abolition - of the Jobs Bank where laid off employees are paid nearly their full wages to sit around, play cards, and "be available" for work if needed.

These concessions are totally inadequate. What is needed is a complete abrogation of the productivity destroying work rules contained in the current UAW contract. That layoffs will be the result is inevitable and unfortunate. That work rule reform is vital to the long term existence of the company is the 800 lb gorilla in the room that few are willing to discuss.

If work rules are flexible, pay rates for blue collar workers can be really quite high. If work rules are inflexible - turning every management decision into a negotiation - minimum wage may be more than the business can afford. The problem is not the amount of money that the workers get for working: it's the amount that they get for not working.

The last major buyout of a large and financially desperate company took place in 1994. Then, the Air Line Pilots Association (ALPA) and the International Association of Machinists (IAM) took a 55% equity stake in United Airlines on behalf of their members. They also gained three seats on the twelve member Board and right of veto over the appointment of the Chairman and CEO.

Sometime employee ownership works, but often it is a disaster for all concerned. In the case of the United deal, the unions found themselves with a conflict of interest between their duty to represent their members and their fiduciary duty to all of the shareholders - including the Employee Stock Ownership Plan (ESOP) through which the employee shares were held.

Needless to say, ALPA and the IAM resolved the conflicts, over both wages and work rules, in favor of the short term wishes of their members. Management incompetence, union intransigence, and the dysfunctional economics of the airline business drove the once proud airline to the edge of bankruptcy. The aftermath of the attacks on September 11, 2001, which strained even relatively healthy airlines, just pushed United over the edge. A Chapter 11 filing took place in 2002.

The UAW's officers are elected by its members - and these officers are very well paid. That being so, the UAW will resolve its conflict of interest in favor of the short term interests of its members rather than the company's financial health. The result will be that the inevitable is deferred, but only for a short while, and taxpayers suffer much for little gain.

GM must be restructured: Chapter 11, with a tough Bankruptcy Judge to knock heads together, is the place do it. Sooner, rather than later, is better.

On being connected to popular culture

I am quite proud of my ability to say that my connection to popular culture is a bit tenuous. In spite of being highly curious about many things, I am also short of time. As a result, I do not seek it out. When it finds me, however, I find much of it to be jaw-dropping, and often entertaining, but still low on my priority list.

In spite all that, I am glad to be able to say that I do not meet this, perhaps slightly dated, test of an intellectual snob as proposed by former CBS News Anchor Dan Rather:

"An intellectual snob is someone who can listen to the William Tell Overture and not think of the Lone Ranger."

The law that really governs the Universe

Physicists are working hard to develop a so-called Theory of Everything which will explain how (although not necessarily why) the universe exists and works. Their major problem is that two really useful theories that work very well, in their own areas, are incomplete and incompatible.

(For the curious, the first of these theories is General Relativity, proposed by Albert Einstein, which deals with time, space and gravity from atomic to galactic scales. The other is Quantum Mechanics, developed by Neils Bohr, Werner Heisenberg, P.A.M. Dirac, and Richard Feynman, to name just a few, which is equally useful when dealing with sub-atomic particles and their actions.)

In reality, they are all wasting their time. The single law that governs the Universe has already been discovered and is known as the Law of Unintended Consequences. One formulation reads as below:

"The more actions that a organization (usually a government) takes, the more likely that really unpleasant and unpredictable things will happen to innocent bystanders while the totally undeserving raid taxpayers' wallets with total impunity.

Let us hope that Congress, the Federal Reserve Bank, President Bush, President-elect Obama and the rest of the world's political leaders (and central bankers) keep this in mind as they desperately search for a way to end a nasty - but necessary - recession.

Political Dynasties

Republican Senator Mel Martinez of Florida has announced that he will not run for re-election in 2010. The only curiosity is that he plans to leave - after only single term - when Senators normally stay well past their 'best used by' dates. That a politician, absent some great scandal, should decide on early retirement is refreshing and we should all resolve to encourage more of this behavior.

Unfortunately, former Governor Jeb Bush has stated that he is considering a run for the soon to be open seat. After Senator Prescott, followed by Congressman and President George H.W. who was followed by Governor and President George W., the idea that another member of the Bush family wants to occupy high public office is offensive.

We don't need any more Kennedys, Udalls, Gores, Daleys or Clintons either.

There were discussions in the Continental Congress about offering the job of King to George Washington. Wisely, and greatly to our benefit, he refused - in quite strong terms. His attitude is expressed well in a 1786 letter to John Jay (Secretary of Foreign Affairs):

What astonishing changes a few years are capable of producing. I am told that even respectable characters speak of a monarchial form of Government without horror.

From thinking proceeds speaking, thence to acting is often but a single step. But how irrevocable and tremendous! What a triumph for our enemies to verify their predictions! What a triumph for the advocates of despotism to find that we are incapable of governing ourselves, and that systems founded on the basis of equal liberty are merely ideal and fallacious!

Would to God that wise measures may be taken in time to avert the consequences we have but too much reason to apprehend.

The intent of the following clause, found in Article 1, Section 9 of the U.S. Constitution, also clearly demonstrates that the founders intended to avoid a hereditary aristocracy:

No title of nobility shall be granted by the United States:

While members of the above mentioned political dynasties have not actually been granted titles of nobility, they seem to believe that they are entitled to rule us. Regardless of their party affiliation, or proposed policies, they may all count on my determined opposition to their political ambitions.

Stupid PR stunts

Stupid PR stunts are generally the province of crazed rock station DJs.

Now the CEOs of the Detroit Three automobile companies have joined this not very distinguished group. Responding to - arguably justified - criticism about their use of executive jets on their begging mission to Washington two weeks ago, all have chosen to drive, using hybrid cars made by their companies, to Washington for their Congressionally mandated do over.

The things that turn this into a stupid PR stunt - and reduce their credibility - are these:

1. Detroit is approximately 520 miles from Washington DC. Unless you have a family, when the cost of airfares increases by the number of persons, and really need a car at the other end, driving doesn't make economic sense.

2. Hybrid vehicles don't really get much better mileage than regular cars at highway speeds. The real savings are found in stop and go city driving. If they had wanted to save fuel, they should have driven in modern diesel powered cars.

Unfortunately, none of the Detroit Three make modern diesel powered cars.

3. Driving at the speed limit - mostly 65 and 70 mph on this trip - and allowing for reasonable stops for food, fuel, and bathroom breaks, this is a ten to eleven hour trip. Again, unless the objective is to save a lot of money, flying from Detroit to Washington DC only takes about four and one half hours - even allowing for check in hassles and air traffic delays.

These CEOs should have better things to do than driving for ten hours. Or did they employ drivers at substantial additional cost?

The American people are not so stupid as to be taken in by this publicity stunt. Nor are they so vindictive that they would consider forcing these executives to buy coach class air tickets instead of travelling first class.

The CEOs might, however, have been wise to have experienced, at first hand, the hassles and discomfort that most of the rest of us must endure at the hands of the airline industry. Had they done so, they would have held the moral high ground over publicity seeking Senators and Representatives who have long forgotten what airline [no] service really means.

Beggars on the Hill

The Detroit Three came back to Congress yesterday with their alleged business plans.

General Motors and Chrysler did little more than hold out their tin cups demanding large sums of taxpayer money before Christmas, and more in January, to avert a collapse. If this is the case, why did senior management not disclose it when they testified before Congress last month? If they did not know, what does that say about their competence?

This just looks like an attempt to panic the Congress into throwing money. As a first step, Chrysler and General Motors CEOs Robert Nardelli and Richard Wagoner should resign - without any severance pay.

As a second step, Cerberus Capital, a very large private equity fund that owns 80% of Chrysler, should immediately institute a capital call for at least $4 billion while simultaneously converting its existing loans to Chrysler into equity. Why should the long suffering taxpayer put up cash if the managers of Cerberus are unwilling to ask its investors to contribute more capital?

There is probably no solution for the problems of General Motors other than Chapter 11. It has few exciting products among an excess of brands. The scare stories about the impact of a Chapter 11 filing are undoubtedly overblown.

Only Ford seems to have a plan and the products, in the form of high quality small and medium sized automobiles designed and made in Europe, to succeed. The company is asking for a $9 billion backup line of credit that - just possibly - might not be required. Provided that such a line is accompanied by a substantial issue of warrants - and therefore the possibility of a decent return to taxpayers - the risk of backing Ford appears to be reasonable.

There has been enough promiscuous scattering of taxpayer cash. Let us hope that Congress - even though the Democratic Party can often be described as a wholly owned subsidiary of the AFL-CIO - will look at these requests with the objective of ensuring value for our money.

But I am not holding my breath.

Secretary of State

President-elect Obama has announced that he will nominate Senator Clinton to serve as Secretary of State.

A charitable analysis reaches the conclusion that Senator Obama, who has expressed much admiration for President Lincoln, is following a similar 'Team of Rivals' strategy. That is, he is willing to assemble a cabinet of 'all the talents' and is confident that he can lead them effectively. If so, this is a refreshing change from the current administration whose selection criteria emphasized loyalty and ideology with little concern for competence.

For the more cynical, Senator Clinton's appointment proves an old political adage: "keep your friends close and your enemies closer." Referring to FBI Director J. Edgar Hoover, President Lyndon Baines Johnson's version of this was, characteristically, much more basic: "better to have him inside the tent, pissing out, than outside the tent pissing in."

Whatever Senator Obama's motivation, he has effectively removed the threat of a 2012 primary challenge by Senator Clinton and, quite possibly, ended her political career. Whether she has the skills to be an effective Secretary of State remains an open question.

Responding to hard times

The United States economy is either in recession or heading there very rapidly.

Companies, responding to the ultra-short termism of Wall Street - and knowing that a dollar saved is a dollar added to profit, are doing their best to cut costs. A corporate myth is that there are some easy places to cut quickly without apparent immediate harm: advertising and marketing, as well as research and development are among them. As a bonus, there is often a quick rise in the company's share price.

At least the claim is that there is no harm.

Except that hard times end and good times return. When they do, potential customers have forgotten those who cut back on their advertising and marketing efforts. They flock to buy from those who have maintained or grown their share of mind.

Much the same applies to those companies that slash research and development costs. When customers regain the urge to buy, these companies have few new and interesting products or services to sell.

Companies need to distinguish between waste - and there is waste in almost every department - and expenditures that are really investments. The campaign against waste and duplication should be part of a continuous improvement program (as invented by Toyota) rather than a panicked response to hard times.

Who is to blame, other than senior management, when the announcement is made that, for example, two thousand white collar jobs will be eliminated at a major company? Why did that same senior management permit these two thousand surplus, and presumably unproductive, people to be hired in the first place?

Unfortunately accountability, at least above a certain level of management, is lacking. It is refreshing, although rare, to see bonuses cut or eliminated. Golden parachutes (an Orwellian term describing rich rewards for failure) remain a curse upon business, however, and seem unlikely to vanish anytime soon.

Iraq's Civil War

On Thanksgiving Day, the Iraqi parliament approved a Status of Forces Agreement (SOFA) with the United States. This agreement replaces United Nations Resolution 1790 which authorized the US presence and permitted us to take military action in Iraq.

A key provision of the SOFA is that the deadline for withdrawal of all US troops is now December 31, 2011. This is compatible with President-elect Obama's campaign promise to remove all combat troops within a sixteen month period.

So far so good but we should not be in too much of a hurry to give thanks. For a nation to emerge into the company of civilized democracies, it appears that a necessary - although not sufficient - condition is that it hold one or more civil wars.

The medium term outcome of the SOFA may be that Iraq has agreed to schedule its first.

More on the bailout

Yesterday the Federal Reserve Bank created $800 billion out of nothing (that’s the sort of dangerous magic that Central Banks can perform) and threw it out of the proverbial helicopter.

The Fed will buy up to $600 billion of debt issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks and up to $200 billion in financing to investors buying securities tied to student loans, car loans, credit-card debt and small-business loans. The intent is to jump start lending to consumers.

Given the state of the economy, and the excessive burden of debt already being carried by consumers, why would any self respecting financial institution want to lend more to people who are all too likely to fail to repay what they borrow? If they do lend, and improvident consumers default, then the taxpayer loses - again - and the cost is passed to the next generation.

Another scenario is that inflation – whether it is another asset bubble or skyrocketing wages and prices – takes off as a result of this promiscuous creation of money. If so, repayments will turn out to be worthless and our economy will pay a high price.

Just later.

Those who have lived reasonably frugal lives, saving for retirement and significant purchases, are now the ones who will suffer. Life is not fair (my mother taught me that) but trouble ensues when enough people are imposed upon by the undeserving - or at least those perceived to be undeserving. This is fertile ground for the rise of a demogogue and, unfortunately, the USA is not immune from that political disease.

Recessions are an essential part of the economic cycle. They serve to flush out capital misallocations, and other excesses, that occur during good times. Panicked attempts to avoid the inevitable will surely be negated by the Law of Unintended Consequences.

Those results are rarely to our liking.

Science, ideology and religion

There is a difference between ideology (including religious dogma) and science. Ideology is little more than opinion while religious dogmas rely on revealed truth as written by unknown scribes. Neither have much use for evidence and facts.

Science is based on theory. Theories are supported, but never proven, by facts and observations. Any true scientific theory can be disproved, at any time, by inconvenient facts and observations. Modern science, influenced by philosopher Karl Popper, now believes that, for a statement to be considered scientific - as opposed to being an ideology or a religious point of view - the premise must, in principle, be capable of being disproved.

As an example, Newton's basic Law of Gravity has survived unchallenged for over 400 years. While the law states that the force of gravity is attractive, a single observation of a single apple, flying off into space unaided, would be sufficient to disprove what we currently treat as fact.

The arrogance of ideologues, and of the perpetrators of religious dogmas, is irritating as well as often being dangerous to our health, our prosperity and even our survival. The modesty of great scientists is refreshing and offers hope for humanity.

Two Nobel Prize winners - both physicists - epitomize this modesty and the realistic view of life needed to be a scientist who is able to make great discoveries:

"There are two possible outcomes [of an experiment]: If the result confirms the hypothesis, then you've made a measurement. If the result is contrary to the hypothesis, then you've made a discovery."
Enrico Fermi

"The first principle is that you must not fool yourself – and you are the easiest person to fool. So you have to be very careful about that. After you’ve not fooled yourself, it’s easy not to fool other scientists. You just have to be honest in a conventional way after that."
Richard Feynman

If President Bush understood science and scientists, he and his administration might have made fewer wrong decisions in areas where science really does matter.

In financial difficulty - for good reason

In May 2006, I bought a new car. Since I own a small boat and tow it to various sailing events, I wanted the version with the larger engine. Needless to say, when ordering for stock, dealers only specify that engine in combination with every imaginable option and accessory.

Included in the price, among many other things for which I had very little need or desire, was a satellite radio receiver and a one year subscription to Sirius Satellite Radio. Out of curiosity, and because I had already paid for it, I activated the service.

In April 2007, I received a call from Sirius. The representative asked me if I wished to continue receiving its service. I responded that it was quite nice to have but not worth paying money for. The conversation ended - pleasantly enough - on that note.

Sirius, in spite of having merged with XM Radio, its only competitor, continues to exist but suffers many financial difficulties. Two reasons come to mind: the first is overpaying for talent - including $500 million in cash and stock to obtain the dubious services of shock-jock Howard Stern. The second is sheer incompetence as evidenced by the fact that, in spite of my refusal to pay to receive its signal, I was not cut off until October 2008 - seventeen months after my subscription expired.

This episode simply provides additional support for the hypothesis that, were the competition not as incompetent - or worse, there are few reasons for any given company to avoid bankruptcy. Having merged with its only direct competitor, that may be where Sirius is headed and, with its shares trading at 14 cents, the stock market is certainly predicting an early demise.

Bailing out the Detroit Three

Yesterday, Speaker of the House Nancy Pelosi and Senate Majority Leader Harry Reid sent a letter to the Detroit Three automakers. In the letter, they lay out some the conditions to be imposed if a taxpayer funded bailout is to go ahead.

That Congress should be demanding a business plan - and some assurances that any loans can be repaid - is good. However, in spite of UAW President Ron Gettelfinger's earlier assertions that there will be no concessions, nothing in the letter supports the urgent need to rewrite the existing contracts between the companies and the union.

Will the Detroit Three CEOs dare to include contract revisions in their response to Congress? Or, given that the Democratic Party is entirely beholden to the unions, will they surrender to political correctness?

Unless the union contract issues are addressed, taxpayers are likely to lose all of their hard earned investment money while the long overdue reorganization of the domestic automobile industry will merely be deferred for a few months. Liquidation, rather than reorganization, may become the only option if the Detroit Three, Congress, and the UAW decline to face reality now.

Senator Clinton as Secretary of State

The media are full of reports that Senator Clinton will be nominated to serve as Secretary of State in the next administration. If she accepts the job, our country will be ill served and so will she.

While Senator Clinton serves on the Senate Armed Services Committee, her foreign policy experience is far from adequate. Given the natural tension between the Secretary of State and the National Security Advisor, her appointment will tilt the balance of power towards the White House.

A very wise former National Security Advisor once said: "you can't run the foreign policy of the United States with a staff of one hundred and thirty - no matter how brilliant they are. The State Department has to be a fully functioning partner."

Since there is an institutional imperative for the President, and the National Security Advisor, to concentrate power in the White House, the State Department's assets (yes, there are many - along with quite a few liabilities) are marginalized. If Senator Clinton is outmatched by the National Security Advisor, then the chances that we will have a successful foreign policy are markedly reduced.

Then, of course, there is the baggage that she would bring with her in the form of her husband, President Clinton. No more need be said on that topic!

I also believe that Senator Clinton would be making a personal mistake. Her Senate service to date has suggested that she may have the talent to become a true legislator - that is, a person with the skills to reach across the aisle and help to get bills passed.

Perhaps she, and we, would be better served if she were to follow the example of Senator Edward M. Kennedy who, after his defeat in the 1980 primaries by President Carter, refocused his ambitions on legislating. While I do not often agree with Senator Kennedy's policy positions (and have much the same regard for Senator Clinton's), he has been a useful member of the Senate during the past three decades. She can be too.

More on the Detroit Three

The CEOs of Ford, Chrysler and General Motors managed to commit yet another spectacular blunder when they traveled to Washington in their corporate jets. The irony of watching beggars claiming penury, while spending company money - not their own - like drunken sailors, is almost too much to bear. The fact that Rick Wagoner of GM received total compensation of $15.7 million in 2007 and Ford CEO Allan Mullally received $21.7 million merely compounds the irony.

If Congress (i.e. the taxpayer) is willing to bail out the domestic automobile industry, it should not do so by means of low interest rate loans that are unlikely to be repaid. It would be better, by far, for each of these companies to undergo a "prepackaged" Chapter 11 bankruptcy. As a part of exiting from Chapter 11, the taxpayer would provide funds in the form of equity. An appropriate form of equity investment would involve Convertible Preferred Shares, which pay a substantial dividend, plus Warrants to buy Common Stock. Although the prospect that any of these companies will return to profit is not high, at least taxpayers would make a substantial profit were it to occur.

Shareholders and bondholders would take the biggest hit but they largely deserve it. In addition, all members of senior management, as well as all Directors, should be replaced for lack of performance. More importantly, however, Chapter 11 would offer the opportunity to completely rewrite union contracts that are entirely unaffordable.

Auto workers, including retirees, have lived in a financial fantasy world for the last thirty five years and the day of reckoning is close at hand. The United Auto Workers Union (UAW) did its job by asking for the the sun, the moon, and most of the stars. Management's greatest failure was to surrender in the face of the short term costs of a lengthy strike. By acceding to these demands, the companies accepted a cost structure that could only be supported by the sale of large, and expensive, gas guzzlers with little practical use to most purchasers.

That the current generation of employees must suffer for the greed of previous generations - and the incompetence of management - is regrettable but reality must be faced. It will be hard for employees to accept rewritten contracts, but far harder to suffer extended unemployment with few prospects.

Gay Marriage

On May 16, 2008, the California Supreme Court found that gay marriage was a right. In response, California voters have just approved Proposition 8 which changes the State Constitution to define marriage as being between one man and one woman and denies recognition of gay marriages.

This leaves some 18,000 couples, who thought that they were legally married, in some sort of legal limbo. It is also possible that the proponents of Proposition 8 did not follow the correct procedures for making this constitutional change so the courts will be doubly busy. Perhaps Proposition 8 should have been titled 'The California Lawyers and Judges Full Employment Act of 2008'.

The problem with any discussion of gay marriage is sloppy thinking - with ideology and religious fundamentalism added for good luck. Few are willing to recognize the fact that there really are two separate issues involved.

The first issue is the fact that marriage, as defined by most religions, is a sacrament. As such, it is normally restricted to one man and one woman although the Mormon Church practiced polygamy - polyandry was never acceptable - for many years and Islam permits up to four wives. On the other hand, marriage - as defined by the State - should have no requirement for any church involvement whatsoever. In many states, judges perform more marriages than do members of the clergy.

For religious people who are opposed to gay marriage, there is a solution: mind your own business and don't marry one.

The second issue is what, for lack of a better term, might be described as the formation of a company called 'Family Economic Unit, LLC' to undertake the business of life. The government provides quite a number of legal, financial, and tax advantages to this company: the spousal exemption from estate taxes, reduced income tax rates, and the ability to determine the medical care to be provided to another member are among them.

None of these benefits depend on the religious sacrament of marriage. They are provided equally to all those whose marriages have been registered - whether or not a church was involved. This is in accordance with the First Amendment's establishment clause ("Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;"). The establishment clause certainly makes any government requirement for a marriage to be performed in a church unconstitutional. It also prohibits any requirement that a marriage conform to specific church doctrines.

That the government provides certain incentives to 'Family Economic Unit, LLC' is desirable. That the government should specify the composition of 'Family Economic Unit, LLC' may well be unconstitutional under the equal protection clause of Section I of the Fourteenth Amendment ("... nor deny to any person within its jurisdiction the equal protection of the laws.").

More importantly, we have seen much damage done by the breakdown of families. It simply makes sense to encourage more stable family relationships. Allowing gays to marry would seem to serve that cause.

By the way, I am very straight - just a campaigner for freedom, the Constitution, and common sense. Of course, there are times when these causes conflict but not, I believe, with respect to this issue.

A long line at the public trough

The Detroit Three automakers (remember when they were called the Big Three?) are up on Capitol Hill today begging the Congress for more cheap loans from the public purse.

Congress has already authorized $25 billion to help them meet the new 35 mpg fuel efficiency standards that must be met by 2020. Those loans are arguably OK. It is, however, worth noting that the private sector is not optimistic enough about the future performance of these companies to be willing to fund such a project.

The domestic automakers now want additional money to help them get through the current economic downturn. Their plan is that the taxpayer will hand another $25 billion, or more, of our money to three of the worst managed companies in the country.

Proponents attempt to justify the expenditure by talking about the effect on employment in the companies themselves, in the auto parts industry, and at dealerships. That they are able to keep a straight face verges on the miraculous.

Here are the real problems:

1. The United Auto Workers refuses to consider additional "concessions" with respect to excessively high pay rates and, worse, the disastrous work rules that reduce productivity and grossly increase costs.
2. The Detroit Three, after years of turning out poor quality vehicles that were also boring and/or ugly, have a revenue problem. The average sales price of a Ford Focus (quite a good car now) is about $3,000 less than that of a Honda Civic which is competing for the exact same market segment. Even though the Detroit Three are now making some decent cars, there are few potential customers willing to pay the premium prices that Toyota, Lexus, Honda, Acura, and BMW can command.

As a result of revenue shortfalls and high costs, the companies are burning cash at a very high rate and it is quite possible that they will all run out of cash by the end of 2009. The likelihood that they will start to enjoy positive cash flow, in the two or three years after 2009, is also low.

So, if loans are made, how will the money be repaid? This one looks like an expensive loss for the taxpayer and a short delay in the long needed reorganization of the domestic industry.

If the taxpayer is to help, then management, shareholders and UAW members are all going to have to take a very big haircut. That, however, may not be enough to save these formerly proud companies from forty years, beginning with the Chevrolet Vega, of incompetence and mismanagement.

Wall Street Bonuses (2)

Today, the Wall Street Journal http://www.blogger.com/www.wsj.com reports that the top seven executives of Goldman Sachs will receive no bonuses for 2008. Even though the company's results were better (i.e. less bad) than the rest of Wall Street, shareholders have still been hammered.

Since most of us care about absolute returns, the fact that our money managers "only" lost $40,000 of the $120,000 in our retirement accounts - rather than, say, $60,000 - provides little consolation.

The top three executives, Chief Executive Lloyd Blankenstein as well as co-presidents, Gary Cohn and Jon Winkelried, each took home $67.5 million bonuses for 2007, so this is not a trivial amount of money. Further, since the other major Wall Street players - Morgan Stanley, Lehman Brothers (in Chapter 11), Bear Stearns (bought by J.P. Morgan Chase in the first shotgun marriage of the year) and Merrill Lynch (bought by Bank of America in another shotgun marriage) - did worse, we may hope that a precedent has been set.

That zero bonuses are well deserved is clear. The situation does, however, raise the question of whether Warren Buffet (CEO of Berkshire Hathaway) is behind the curtain pulling strings. If so, it is good that a private investor, with a stellar record of placing shareholder interests above those of management, is calling the shots. (Full disclosure: I own Berkshire Hathaway shares). The far less attractive alternative is that government bureaucrats will be in charge of micro-managing compensation decisions.

Gasoline prices

When the cost of a gallon of gasoline exceeded $4.00 this summer, Americans began to make changes in their lifestyles. Public transport ridership rose, casual trips were abandoned, and sales of over sized SUVs and pickup trucks plunged. Some governments and companies even began creative programs to reduce commuting.

To ensure our long term financial health, and to reduce negative effects on the environment, a reduction in the use of energy - particularly energy derived from fossil fuels such as oil, coal and natural gas - is still a priority.

Now that the price of gasoline - at least in some places - is below $2.00 per gallon, we can soon expect a collective loss of memory about the pain inflicted by a $4.00 price tag. Really brave politicians (an endangered species unfortunately) should immediately begin raising gasoline taxes. $2.00 per gallon, say, over a four year period would be an entirely appropriate amount.

If revenue neutrality is an objective, then governments could reduce income tax or just rebate the proceeds to all. On the other hand, a strong argument can be made for investing much, or all, of the money in the development and maintenance of our transportation infrastructure.

Falling oil consumption generates two additional benefits. It deprives countries that really do not like us - Venezuela, Iran, Saudi Arabia and other third world hell holes come to mind - of our money while simultaneously creating jobs at home.

It's really hard to outsource infrastructure maintenance and investment jobs to India and China!

The economic situation...

Governments around the world are responding to the current economic situation by throwing money at large, mostly financial, corporations. Although these governments are acquiring some level of ownership, the stakes are do not seem to be large enough to compensate for the risk that some of these companies will never return to financial health. Shareholders are being protected from the consequences of their inattention to the obligations of ownership and the new owners are neglecting to insist on a wholesale replacement of incompetent management.

The result, which few want to discuss, is that profit remains privatized while risk is socialized.

Before throwing more money around, our leaders may wish to pause and think. As they engage in what may be an unfamiliar activity, they should take note of George Orwell's warning:

"[Our language] becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts."

While government (i.e. taxpayer's) cash seems to be in plentiful supply, there is a shortage of clear thinking. Both are needed.

Just another ex-customer - at least for now

Given that the time required to get through airport security is totally unpredictable, I arrived early yesterday at Washington National Airport for a flight on US Airways. As it happens, the line at security was minimal and the TSA screener, unlike some, wasn’t interested in aggravating a passenger (myself) traveling in a wheelchair.

I arrived at the gate one hour and forty five minutes before the departure of my flight. Since it was forty minutes before the departure of the next earlier flight, and it was leaving from the same gate, I asked if I could travel on the earlier flight.

The gate agent, who clearly got out of bed on the wrong side yesterday morning, told me that a) there wasn’t time to switch me to that flight and b) even if there was, I had to travel on the flight for which I had a boarding pass, and c) even if I didn’t, it would cost me $50 to change.

So I waited.

The current condition of airlines in the USA puts them close behind the Detroit Three automakers in terms of financial weakness. Given that most airlines have extensive experience with Chapter 11 of the bankruptcy code, one might expect that customer service would be high on everyone’s list as a possible strategy to avoid another episode.

Apparently not!

The last airline that pulled this stupid, customer unfriendly, stunt on me (you can’t go on the early flight – even though we have lots of empty seats) was Southwest. That was ten years ago and I haven’t flown on Southwest since.

It is sad to say that few people make a choice of airline based on the quality of customer service. Some would, perhaps, if such a thing existed but it doesn't. We are forced to make decisions with the major criteria being price and "least worst". That airlines should have become trapped in a cheap fare, zero service, business model says much about the [in]competence of management and, to be charitable, the dysfunctional economics of the airline business.

I would like to think that there is a market segment of those, like myself, who are willing to pay a bit more for decent customer service but whose budgets do not run to First Class - let alone corporate or fractional jet service.

I am not holding my breath.

Political Change

Change was the primary policy - or maybe it was just a slogan - offered by Senator Obama during the recent election campaign.

After his victory, all of us would be well advised to heed these wise words spoken by Thomas H. Huxley:

"The results of political changes are hardly ever those which their friends hope or their foes fear."

If President-elect Obama really plans radical change, let us hope that there are some in his administration who are aware of this thought from Jacob Burckhardt:

"Great historical transformations are always bought dearly, often after one has already thought that one got them at a bargain price."

Politicians are panicking about the prospects for a severe recession. Driven by public opinion, the temptation to do something - anything - is almost overwhelming. Since the Law of Unintended Consequences must always be reckoned with, caution is likely to be a safer course of action. The old proverb 'decide in haste, repent at leisure' applies to our current situation.

Computers and computing - the future

Electronic computers began their evolution as calculators and, for most science and engineering applications, are still primarily used for that purpose. When the word processor replaced the typewriter and graphics applications were created, the modern era of computing began.

Computers, however, are no longer just faster and more flexible replacements for existing tools. Only thirty years ago, computers were large and expensive boxes, in climate controlled rooms, with a "new priesthood" of IT specialists presiding over them and dictating the uses to which they may be put. Now, memory is cheap and processors are quick. Fast software to index and search documents is old news. Computers are available to all of us and have become the essential tools for storing, managing, and presenting information.

Paul Otlet, a Belgian bibliographer whose work was almost entirely ignored, came close to describing a version - albeit incomplete - of our modern computing environment. In the 'Treatise on Documentation', published in 1934, he wrote:

"The workspace is no longer cluttered with any books. In their place, a screen and a telephone within reach.

Over there, in an immense edifice, are all the books and information. From there the page to be read in order to know the answer to the question asked by telephone is made to appear on the screen.

A screen could be divided in half by four, or even by ten, if multiple texts and documents had to be consulted simultaneously. There would be a loud speaker if the image had to be complemented by oral data. This improvement could continue to the point of automating the call for onscreen data. Cinema, phonographs, radio, television, these instruments taken as substitutes for the book will in fact become the new book. The most powerful works for the diffusion of human thought. This will be the radiated library and a televised book."

Although M. Otlet did not foresee mobile computing, which includes smart phones and GPS devices as well as laptops, I do not believe that he would have been surprised. The important question, now, is to determine if there are any, among the legion of self promoting futurists, who can provide some insight into the next fifty years.

Seeing the future is always hard but one thing is certain: conventional wisdom is unlikely to provide many useful answers.

Computers and computing (2)

In this series of posts about computers and computing, it is worth considering some of the history of the technology and the way things used to be.


The first computers were real live people who solved equations and performed other lengthy calculations for scientists and engineers. The technology available to them included mechanical and electromechanical calculators as well as slide rules. The Manhattan Project employed hundreds of "computers" to support the design of the first atomic bombs.

Then came electronic computers. Even though the transistor - the most critical component of any computer - was invented in 1947, the process of miniaturisation and cost reduction took decades. By 1957, however, the cost of transistors (a "transistor radio" given to me as a birthday present that year had exactly three transistors - each the size of a thimble) had finally dropped enough that they had become competitive with vacuum tube technology.

The earliest electronic computers enabled scientists, at least in well funded applications such as nuclear weapons and reactor design, as well as the space program, to dispense with their armies of living "computers".

As much as any organization, NASA is responsible for driving computer miniaturization and improved performance during the 1960s. The cost of moving mass to orbit - and even more so to the moon - was so high that saving ounces mattered. Minimizing the use of electrical power was another critical objective. Replacing vacuum tubes with transistors saved space and mass while reducing power consumption and increasing reliability. We take the extreme miniaturization of transistors for granted now but there was no reason to do so then.

Even so, it took until the early 1970s for the first electronic calculators to become affordable for consumer use. I recall buying a basic four function calculator (with a memory) in 1974. The cost, then, was approximately $200. Using today's depreciated currency, that would be equivalent to about $800!

I bought my first personal computer in 1982. It was an Osborne 1 whose operating system was one of the many versions of CP/M. It was slow - taking as long as 15 seconds to save a ten page document - but for a writer whose typing skills were less than stellar, the ability to edit and revise a document without spending hours retyping, was the major benefit. Easy correction of spelling errors was a bonus. More important than being a word processor, however, the Osborne 1 was capable of running one of the early spreadsheet programs.

Since much of my work was, and still is now, the provision of advice and assistance to entrepreneurs, the use of this newly available tool provided me with major productivity and quality improvements. No longer was I forced to create financial projections on 14 column spreadsheet pads where, since errors were inevitable, the work was done in pencil and losing one's eraser was a disaster!

As annoying as the modern computer - and the uses to which it is put - can be, it is hard to imagine returning to the days of typewriter, pen, paper, and pencil. What we now regard as historical curiosities, with minimal capabilities, still provided major productivity improvements.

Computers and computing (1)

Not until 1945 did the term computer begin to refer to a machine. Before that, a computer was a person, for some reason generally female, who solved equations and did calculations by hand or, more often, using a mechanical calculator and a slide rule.

People as computers, although no longer referred to by that name, survived for many years after the invention of the electronic computer.

In 1965, I worked at the Special Projects Laboratory at the Zinc Corporation in Broken Hill, New South Wales. After a day running our experimental equipment, we would spend the next day, sometimes longer, calculating the results.

Two of us, using different technologies, performed the calculations. One sat at a desk, using an electromechanical calculator to do addition and subtraction while scribbling down the interim results. The other person, standing behind the desk so that he could read the interim results, would use a slide rule to do the necessary multiplications and divisions. Then the interim results from the slide rule were written down so that they could used for the next set of additions and subtractions. After a while, we switched positions.

It all took a very long time. Because of the intrinsic limits on the accuracy of a slide rule, as well as the lack of a printed record to catch input errors, the accuracy and precision of the results was usually OK but no better than that. Ensuring quality required that the calculations be repeated to check their accuracy.

Had a personal computer been available, running an early spreadsheet such as VisiCalc, only one person would have been needed. Work that formerly required two man days could have been completed in an hour or two with greater accuracy.

Those who long for the "good old days" neglect the fact that highly qualified scientists and engineers spent far too much of their time just performing very routine calculations. If they did not do the calculations themselves, then they were expensively supported by a small army of living and breathing "computers".

There are few recent innovations that have contributed as much to increased productivity - and therefore wealth - than the invention of the electronic computer and the demise of its flesh and blood predecessor.

Where next for the Republican Party?

Three obsessions come to mind when one hears the term 'Republican Party'. They are abortion, gay marriage, and tax cuts.

While opponents of the first two, and proponents of the latter, are passionate about their causes, these issues alone are far from sufficient to win elections or, having won, to govern.

All of us would rather pay less in taxes. However, even if taxes are increased to the rates proposed by President-elect Obama, the effects on incentives will be trivial. Compare his proposals to the situation that existed prior to the Kennedy tax cuts of 1964 when the top income tax rate was 91% (not a typo). The top tax rate remained at an extortionate 70% level until the Reagan tax cuts of 1981.

Abortion and gay marriage simply do not resonate with the part of the electorate which would rather have the government stay out of its personal business. Many such citizens are naturally inclined to support Republicans but regard freedom from government regulation as paramount.

That a center right electorate should entrust the Presidency to a very left of center liberal merely emphasizes the intellectual bankruptcy of the Republican Party.

Senator Barry Goldwater's defeat (losing all but six states) in 1964 was more comprehensive but marked the real beginning of an intellectual and philosophical renaissance which culminated in the election of President Reagan. The defeat of the Soviet Union and the destruction of the conventional wisdom that confiscatory taxes were legitimate can both the attributed to the fact that the Republican Party's actions and policies were underpinned by a political philosphy rather than a mere desire to wield power.

Republicans will not soon regain the White House, the Senate, or the House of Representatives until they are seen to stand for something positive. There is an almost endless list of difficult issues - relations with other nations, radical Islam and terrorism, poverty at home, health care, climate change and energy to name only a few - that demand the development of serious policies. Mere opposition to left wing conventional wisdom will not be sufficient.

It is not obvious who will lead (there is no clear successor to William F. Buckley) but there is a very big question that needs to be answered.

What do we Rebublicans believe America stands for - at home and abroad?

Enough stuff?

The election is over although some votes remain to be counted and the results of three Senate races are still unknown.

Meanwhile, the state of the economy may be indicating that old ways are coming to an end. Certainly, the tasks facing us - and our newly elected politicians - will require new ways of thinking. Albert Einstein put it well when he said: "The significant problems we face cannot be solved at the same level of thinking we were at when we created them."

Since the end of World War II, economic growth in the United States, and the developed world, has been driven by consumers. For the past twenty five years, unrestrained consumer spending has been supported by a flood of credit card and mortgage debt. The idea of "buy now, pay later" became quaint and old fashioned compared to the apparent reality of "buy now, never have to pay at all".

An economy driven by ever increasing consumer spending is a house built on sand. As shown in the retail sales numbers (almost all major chains are reporting sharply lower sales), the financial storm of excess debt is threatening to wash away the "more" culture. While there are many in our country who live in poverty, most of us have far more "stuff" than we really need. The danger that our possessions, and our expensive activities, will come to own and define us is all too real.

The transition from a society of borrowers and spenders to one of producers and savers will not be easy. If we make it successfully - and there are no guarantees - the greatest benefit will be time to spend with family and friends, or in reflection, rather than existing on a treadmill that takes us from work to store and back again.

President Eisenhower, reflecting on a past period of economic turmoil, summed up the situation this way: "Some people wanted champagne and caviar when they should have had beer and hot dogs."

Socrates, during his trial for heresy, indirectly made the case for time with this remark: "the unexamined life is not worth living."

Frugality and modesty are the heresies of the consumer culture. In the long run, however, intangibles - friendship, love, service, the acquisition of knowledge, and the time to enjoy all of these - are likely to add far more quality to our lives than the mindless acquisition of "more stuff".

After losing the election...

Many politicians concede defeat without much grace. Here are two remarks that, although lacking grace, are worth repeating:

"You may all go to hell and I will go to Texas." Davy Crockett (conceding defeat in his 1835 re-election bid for the U.S. House of Representatives from Tennessee)

"The people have spoken, the bastards." Rep. Morris Udall (on the collapse of his Presidential Campaign in 1976)

Senator McCain's concession speech demonstrated his genuine concern and love for our country. Parts of it are also worth repeating:

"Senator Obama and I have had and argued our differences, and he has prevailed. No doubt many of those differences remain. These are difficult times for our country. And I pledge to him tonight to do all in my power to help him lead us through the many challenges we face.

I urge all Americans who supported me to join me in not just congratulating him, but offering our next president our good will and earnest effort to find ways to come together to find the necessary compromises to bridge our differences and help restore our prosperity, defend our security in a dangerous world, and leave our children and grandchildren a stronger, better country than we inherited.

Whatever our differences, we are fellow Americans. And please believe me when I say no association has ever meant more to me than that. It is natural. It's natural, tonight, to feel some disappointment. But tomorrow, we must move beyond it and work together to get our country moving again."

Now that the election is over, the Republican Party must determine what it stands for and who will lead it.

President Bush and Vice President Cheney pushed socially conservative policies, exhibited an authoritarian approach to the problems of terrorism and jihad, alienated our allies, and successfully subjugated the national interest to the short term desires of large corporations - all with an irritating attitude of self-righteousness.

They have severely damaged the party and created a recipe for electoral defeat far into the future.

The Republican party could once be described as encompassing a wide range of generally conservative views. Now, as our nation appears to be more polarized than ever, old style moderate Republicans, who can also appeal to Independents and dissatisfied Democrats, appear to be increasingly unwelcome. In opposition, the party must be aware of the error, albeit on the other edge of the political spectrum, of the British Labor Party whose 1983 manifesto (platform) espoused such extreme views that it was trenchantly described as the longest political suicide note ever written.

The party also needs a leader. It is not clear who will emerge but Governor Palin, an ill-educated, uninformed, quasi-rock star with no coherent political philosophy, is not the leader that our nation, or the party, needs.

Senator Obama's victory...

It is not strictly accurate to describe Senator Obama as President-elect until after the Electoral College meets in December. Nevertheless, all else being equal, he will be our next President so, in spite of my usual insistence that words be used with a certain level of precision, I intend to grant him the courtesy of the title.

In his acceptance speech, President-elect Obama was gracious and said many of the the right things. Particularly:

So let us summon a new spirit of patriotism; of service and responsibility where each of us resolves to pitch in and work harder and look after not only ourselves, but each other. Let us remember that if this financial crisis taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers – in this country, we rise or fall as one nation; as one people.

Let us resist the temptation to fall back on the same partisanship and pettiness and immaturity that has poisoned our politics for so long. Let us remember that it was a man from this state who first carried the banner of the Republican Party to the White House – a party founded on the values of self-reliance, individual liberty, and national unity. Those are values we all share, and while the Democratic Party has won a great victory tonight, we do so with a measure of humility and determination to heal the divides that have held back our progress.

As Lincoln said to a nation far more divided than ours, “We are not enemies, but friends…though passion may have strained it must not break our bonds of affection.” And to those Americans whose support I have yet to earn – I may not have won your vote, but I hear your voices, I need your help, and I will be your President too.

President-elect Obama is young and his political experience is limited. He will be sorely tested in the early days of his term in office and we must hope that he, his cabinet, and his staff will be up to the task. If he is serious, however, about changing the nature of American politics, he will have to pass a major test before he even takes office.

That test is whether he can bring to heel the Democratic Party's icons of the old, vicious, partisan politics.

These icons are Speaker of the House Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV). It is all too likely that they will try to ignore the reality that the size of the party's victory in the Presidential, House, and Senate races owes much to the intense disapproval of President Bush' record and little to the performance of the Congress since their party won back control in 2006.

That they will have the votes to pass number of very liberal (this is an Orwellian euphemism for left wing) programs is clear. That they will voluntarily exercise restraint is less so. We must hope that President-elect Obama can lead the whole of his party rather than just the part of it that controls the Executive Branch

The world would be well served if politicians, and citizens, were to remember that restraint is often - admittedly not always - the best course of action even when the right, the power, or the votes exist to act unilaterally.

Election Day

I voted today. The lines were long and absentee, or 'early', voting might have taken less time. On the other hand, I consider voting to be a community, not a solitary, affair.

Since the choices were quite unpalatable, I held my nose (not too hard because I didn't want to hurt myself), and voted against those that I did not like. On the other hand, in Alexandria, Virginia, we were spared the avalanche of Questions, Initiatives, and Constitutional Amendments that afflicts voters in many - mostly western - states.

We usually exhibit a spectacular lack of trust in our politicians - often expressed by permitting laws to be passed by Initiative while also requiring some spending and borrowing to be approved by the voters. That is no bad thing although obsessive single issue voters may have more influence than we might like.

The initiative process becomes a problem when Constitutional Amendments appear on the ballot. Constitutions should concern themselves with process not policy. Matters that are properly addressed by constitutions include the organization of government and its method of operation, the powers granted to the government, the limits of government power and the rights and obligations of citizens. When constitutions stray into matters of policy, trouble often ensues.

That was certainly the case when the Volstead Act, which legislated Prohibition, became nearly graven in stone with the ratification of the 18th Amendment in 1919. The damage to society caused by organized crime - and by turning ordinary citizens into criminals - was recognized quite quickly. Prohibition, however, could not end until the Congress finally proposed the 21st Amendment in February 1933 and it was ratified by the states in December 1933.

Legislation that turns out to be bad or misguided can be repealed - and the authors evicted from office. It is hard to repeal ill thought out Constitutional Amendments and even harder to hold the authors responsible. Better, then, to avoid entrenching policy decisions in Constitutions.

Upcoming election (3)

Very high turnout is predicted for our upcoming election. While many will go to be polls, at least by American standards, many other countries consider our efforts to be somewhat lacking.

There are far too many citizens who do not bother to vote because of laziness or lack of interest, work and family obligations (even though absentee or early voting is available), an inability to make a decision, a mistaken belief that their vote will not count, or just plain disgust with all of the candidates.

For an American citizen, voting is a right. As a naturalized American, I consider voting to be my duty. Even if I am appalled by every single candidates, I will still vote although I may just write "none of the above" or some other more creative insult on my ballot

See you at the polls tomorrow.

Upcoming election (2)

As the election approaches, we may be tempted to think that we are seeing the light at the end of the long dark tunnel of President Bush's miserable tenure.

Don't be so certain. There is an all too strong possibility that we are actually seeing the headlight of an oncoming locomotive.

The probability that Senator Barack Obama will be our next President is high. Although lacking age and experience, he does say some really good things. That some of those things are very politically incorrect only adds to his appeal.

He may also share President Ronald Reagan's ability to attract, and listen to, some really competent advisers. Of note are Paul Volcker (former Chairman of the Federal Reserve Board), Robert Rubin (former Treasury Secretary in the Clinton years) and Warren Buffet.

Perhaps he will be able to attract an equally strong foreign policy team. Certainly former Secretary of State Colin Powell's endorsement provides some encouragement.

The real dangers of an Obama Administration will appear if the likely results in Senate and Congressional races come to pass.

There is a high probability that the that the new Democratic majority in the House of Representatives will be such that controversial, and highly partisan, legislation can be passed without the need for serious discussion or compromise. In the Senate, it is also likely - although not guaranteed - that the Democratic Party will have a filibuster-proof majority of 60 or more votes. These majorities will permit the Democratic Party to impose its will on the nation with little need for reasoned discussion or compromise.

This sort of power, in the hands of honorable and substantial Senators and Representatives, is dangerous. When the likely wielders are highly partisan lightweights such as Speaker of the House Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Appropriations Committee Chairman Harry Byrd, the Chief Porker of Legislative Branch, we have good reason to worry.

Worse, Senator Obama, if he is President, is likely to be sparing in his use of the power to veto such legislation.

Much as I am disappointed in Senator McCain, and appalled by Governor Palin, I shall hold my nose and vote for divided government. It works at least as well as, and usually better than, a government where one party controls both the White House and Capitol Hill.

Upcoming election (1)

As we approach Election Day on Tuesday, it is important to remember that, as well as voting for President and Vice President, we also elect all of the Members of the House of Representatives and one third of the Senate.

Given the Congress's pathetically poor performance (polls give it an approval rating even lower than that of President George W. Bush) over the past eight years, Oliver Cromwell's 1649 dismissal of the Rump Parliament is worth considering:

"You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go"!

If in any doubt, then, vote against the incumbent.

Healing - or just business?

Recently The George Washington University Hospital mailed me an eight page full color entitled “Health News”.

The title was about as misleading as it could be.

Providing real news about health issues is useful, but this was not news. Excluding the small part of the back page used for my address, the entire publication consisted of advertisements for services offered by the hospital. Six pages were devoted to surgery and physical therapy for back and neck pain, one page to listing upcoming “seminars” which were clearly designed to drum up business, and the remaining two thirds of a page offered membership in their ‘Senior Advantage’ program (whatever that may be) as well as breast cancer screening with the latest and greatest [really expensive] technology.

Infomercials on television are clearly labelled as 'Paid Programming'. This publication was nothing more than an unidentified advertisement designed to sell expensive procedures and services. All it will really do is contribute to the current excessive consumption of medical products and services.

Perhaps the idea of doctors as healers, above all else, is naive and old fashioned. Sadly, the current situation seems to be that most organizations and individuals are in the health care business for financial reward.

Really low interest rates

Interest rates are extraordinarily low and the Federal Reserve is keeping them that way. Yesterday the Fed lowered the target rate, otherwise known as the Federal Funds Rate, for overnight interbank lending to 1.0%.

The commentariat talks about the help that low interest rates provide to commercial and individual borrowers but largely ignores a group that suffers severely from interest rates significantly below the rate of inflation. That group is composed of savers – many of them elderly – who wish to avoid risk and who keep their money in FDIC insured bank accounts, money market funds, and certificates of deposit.

It is not just individuals, either, that are being punished. Many small businesses, clubs, condominium associations and other non-profit organizations have cash reserves which may be needed at short notice (liquidity) and safe (FDIC insured). The interest rates offered to these groups can best be described as pathetic.

Low interest rates transfer wealth from the prudent and thrifty to borrowers - some of whom are far from prudent.

Worse, everyone has agreed to pretend that all interest is real income, on which tax can justifiably be levied, when a large part of it is merely compensation for the declining value of money.

Since governments tax the nominal return, rather than the real (i.e. in excess of inflation) return, the result, except in extraordinary times, is a distorted wealth tax - rather than an income tax - with rates that increase with the inflation rate. So, in addition to the destruction of wealth caused by inflation, savers incur real tax bills on phantom income.

We may hope that Federal Reserve Chairman Ben Bernanke has learned from the mistakes of his predecessor. His objective must be to return interest rates to a normal level as soon as the present panic has ended. Since it is unlikely that the "geniuses" of Wall Street have learned any long term lessons, the risk of yet another asset price bubble is high if he does not.

The conviction of Senator Stevens

There is little doubt that Senator Stevens (R - Alaska) is a nasty piece of work who deserves everything that he is going to get. His conviction, on seven counts of felony corruption, is an outrage but not the only one.

That the voters of Alaska should have elected and re-elected such an obviously corrupt person is the first outrage. As citizens and voters we have a duty to our country to reject those whose sole objective is to raid the Federal treasury for our parochial benefit. We have all too few Senators and Representatives who are willing to act in the interests of our country as a whole.

Senator Stevens's relatively minor crime of lying on his financial disclosure forms is, I suspect, only the tip of the iceberg.

That, however, is not the point.

Think about the prosecution of Al Capone who, in 1931, in spite of his long history of racketeering and violence, was tried and convicted of the relatively minor offense of tax evasion because prosecutors were unable (or unwilling) to address the real crimes. Mr. Capone was also a person who deserved everything that he got but, as in the case of Senator Stevens, the outrage is that the power of the state is used to "get" an undesirable rather than to seek real justice.

A third issue in the trial of Senator Stevens is prosecutorial misconduct. Withholding potentially exculpatory evidence and encouraging false testimony, as happened in this trial, is another outrage.

The founders of our nation had little trust in the government's ability to wield power. We, in our turn, must constantly demand that the government's use of power conform to both the letter and the spirit of the Constitution.

Thomas Jefferson warned us about granting too much power to government:

"A government big enough to give you everything you want, is strong enough to take everything you have."

Theodore Roosevelt, were he still alive, would have understood Senator Stevens:

"When they call the roll in the Senate, the Senators do not know whether to answer 'Present' or 'Not guilty'."

Voting for a warmonger?

Those who consider that John McCain, if elected President, will be a warmonger should consider his experience.

His war (Vietnam) began as a pilot, insulated from the particular horrors of ground combat and able to sleep between sheets each night. It ended with five years as a prisoner of war enduring, without a break, torture, untreated wounds, and solitary confinement for longer than most of us can imagine.

This simple statement sums up his philosophy:

"War is wretched beyond description, and only a fool or a fraud could sentimentalize its cruel reality."

The last President with a real understanding of war was Dwight Eisenhower. His aversion to war was as real as his determination to defend the interests of the United States. War was to be avoided but never to be ruled out if truly necessary.

I believe that Senator McCain will, if elected, follow this same path.

Surviving the financial storm

As we try to make sense of economic conditions - now and in the future - there will be more than enough comments and advice from the pundits.

My only advice is that a high degree of scepticism is warranted. After all, these are the people who failed to see that a bubble existed and that it would burst - sooner rather than later.

These words from economist John Kenneth Galbraith are worth considering:

"The only function of economic forecasting is to make astrology look respectable."

Enough said!

Medicine and the market

There are a number of conditions necessary for a market to operate effectively. Among them are these:

• there is a provider who is paid and a buyer who pays;
• the buyer has as much access to relevant information as the seller;
• the costs and benefits associated with the goods or services in question are reasonably clear and available to the buyer.

On November 4, Arizona voters will be asked to approve a Constitutional Amendment (Proposition 101) which is designed to prevent, in Arizona, the implementation of a possible future National Health Service, as in the United Kingdom, or a single payer system as in Canada.

Proposition 101's premise is that the market is the most efficient way to allocate resources. The current financial crisis, however, casts considerable doubt on such a belief.

The exact text is this:

ARTICLE II, SECTION 36. Because all people should have the right to make decisions about their health care, no law shall be passed that restricts a persons freedom of choice of private health care systems or private plans of any type. No law shall interfere with a person or entity's right to pay directly for lawful medical services, nor shall any law impose a penalty or fine, of any type, for choosing to obtain or decline health care coverage or for participation in any particular health care system or plan.

Leaving aside the dangers of writing policy, rather than process and organization, into a constitution, there is little in the way of a working market for medical products and services:

• patients, who are purportedly the buyers, do not pay for the majority of the goods and services delivered by the sellers: insurance companies and government (Medicare, Medicaid, Veterans Administration and TriCare) are the primary payers;
• the uninsured pay little for the care provided through emergency rooms. Costs are shifted to those who can pay.
• few patients have the information, or the ability, to evaluate the merits of any proposed course of treatment.
• the more that sellers "do" to the buyer, the more that they get paid.
• doctors' actions are driven partly by remembered knowledge which may no longer be accurate or complete, partly by patient demands - fueled by direct to consumer advertising, partly by self interested desires for higher incomes, partly by "conventional medical wisdom", partly by fear of tort lawyers, and all too rarely by scientific evidence.

Proposition 101 is intended to perpetuate the present dysfunctional system. Arizona voters should vote 'No'.

The current payment system is largely socialistic - not free market - because it relies on pre-paid medical care plans rather than insurance (a catastrophic, high deductible, plan is real insurance), on government payments, and on cost shifting.

Market failures come about when one person (the doctor or seller) decides what is to be done to a second person (the patient or buyer) who has inadequate information and knowledge to evaluate the proposed course of action. Asymmetry of information is a primary cause of inefficient markets and leads, with few exceptions, to overpayment by customers. Any used car salesman from the pre-Internet era will attest to that!

(In the interests of full disclosure, I did sell used cars - and learned many interesting lessons - for a while in 1971.)

The biggest reason for market failure, however, is that a third person (government or insurance company) pays but has little to say about the cost effectiveness and value of the proposed therapy. Since patients do not pay, they have no financial incentive to seek out the most cost effective treatment. When insurance companies deny reimbursement for treatments that they consider unnecessary or ineffective, they are universally condemned for their heartless behavior.

Politicians who maintain that a free market system can address the woes of the present medical care system are either uninformed, lying, or merely stupid. Our present system is broken and, in the long run, unaffordable. There are surely good reasons why every other civilized country has a universal health care system. Almost all of them - Canada is a notable exception - permit private payment.

The need for leadership is critical. Perhaps, Senator Obama or Senator McCain (whichever is elected next week) will dare to challenge the conventional wisdom, the sterile ideology, and the special interests. Medical care costs will, sooner rather than later, swallow our economy. This must be a priority for our next President.

I may be naively optimistic that either of these two politicians will challenge the special interests over the structure of a sector that accounts for approximately one sixth of our economy. The American model, unfortunately, delivers worse results than the much less expensive and more effective, but "socialist", European models. Given, however, that Senators Obama and McCain appear to be men of intelligence and integrity, we can hope.

At my age, I have little at stake in the decision. I will likely be in another place before the crisis reaches its full flower. I do, however, feel a moral obligation to the next generation, so I will continue to encourage. Others may describe it as nagging, but I beg to differ.