Depending on Technology

Yesterday, SKYPE, the company which provides a not quite indispensable Voice Over Internet Protocol (VOIP) service, offered updated software. For those, like your correspondent, who downloaded and installed the new version, the result was yet another lesson on the dangers of being dependent on technology: SKYPE's servers promptly developed some unspeakable malady and the service went down for hours.

The loss of the ability to make telephone calls for no, or little, additional cost beyond the price of a reasonably fast (at least by American standards) Internet connection is inconvenient rather than critical. Businesses, however, that depend on air transport - just an older form of technology - have suffered two major disruptions this year: the eruption in the spring of the [Unpronounceable Name] volcano in Iceland and the present cold and snowy weather in Northern Europe.

Just in Time (JIT) supply chain management is one of the modern mantras of business and, indeed, when all goes well is responsible for significant contributions to reduced manufacturing costs. The problem is that things don't always go well which leads to disruptions that are both time consuming and expensive.

Perhaps business (and all of the rest of us who depend on technology) should adopt a more modest attitude. Murphy's Law states that 'whatever can go wrong, will go wrong'. Since Murphy's Law always applies - and there are those who believe that Murphy was an optimist - JIC (Just in Case) stockpiles of goods and materials can serve to reduce the costs when Mother Nature decides to assert herself.

We should always remember that, at the end of the game, the score is likely to be:

Mother Nature 5 Technology 2

Your correspondent would be remiss if he did not note the irony of the fact that he is writing this blog on the 12th floor of a high rise apartment building where he relies totally on electricity for elevator service. The good news is that the building does have a generator to provide emergency lighting and elevator service (but not much more). Your correspondent is confident that management has stocked up on diesel fuel.

Just in Case.

Tax Follies

Last week, after much posturing and empty rhetoric, the Congress managed to extend the so-called Bush Tax cuts for another two years.

The good news is that the economy avoided a threat, at a time when the risks of a tax increase, are higher than anyone should like. The result of tax increases in the USA (in 1937) and Japan (in 1997) played a major part in reducing economic growth to a crawl.

The bad news is that the Congress extended, and added to, a grotesque collection of porcine subsidies demanded by special interest groups and others who can afford to pay for the services of the K Street mafia - better known as lobbyists. The worse news is that there seems to be little willingness to address the gross distortions caused by the current tax code or the soon to be entirely unaffordable overspending that grows ever larger every year.

The latest tax follies, passed in haste, are just about bearable provided that the President is willing to follow the example of Ronald Reagan who, in 1986 with the help of two very liberal legislators - Senator Bill Bradley (D-NJ) and Rep. Dick Gephardt (D-Mo), was able to persuade the Congress to pass a really good tax bill. The Tax Reform Act of 1986 reduced tax rates in exchange for the elimination of many deductions and credits. Since then, the special interests have loaded up the tax code with so many additional deductions and credits that the benefits of the 1986 bill are long lost.

For those who even vaguely care about taxation and its effect on the economy, your correspondent recommends these thoughts:

• High marginal tax rates act as a disincentive to hard work.
• The hated Alternative Minimum Tax system is remarkably close to the nearly zero deductions flat tax supported by many Republicans. With some simplification, reduction of rates, and in combination with a consumption tax (VAT or Federal Sales tax), it could work well as the basis for the taxation of individual and family income
• How, exactly, are capital gains so different from other income that a lower tax rate is justified? Consider that the tax can be deferred almost indefinitely until the gain is actually realized.
• Subsidies should be explicit and made through the appropriations process. If my housing costs are to be subsidized, make it explicit, appropriate the funds, and send me a check. If I am a multi-millionaire with a mortgage on my vacation house, the absurdity - even immorality - of such a program becomes immediately self evident.
• Economics 201 teaches that the result of subsidies granted to enterprises that require the purchase of a significant asset (houses, farms) merely results in the value of the subsidy being capitalized in the price of the asset. The result is that only the owner of the asset, when the subsidy is first awarded or if it is later increased, will actually benefit. Everyone else loses.
• Farm subsidies - and the central planning that goes along with them - should be ended. It is hard to see any sense in the practice of giving large sums of taxpayer money to farmers so that they may use highly subsidized (really underpriced) water to grow cotton and alfalfa (two of the thirstiest crops known to man) in the Central Valley of California (a desert). But it happens: your tax money at work!
• Consider the inconsistency with respect to the deductibility of State and Local taxes: property taxes, yes; state income taxes, yes; state and local sales taxes, no; gasoline, cigarette, liquor and other local excise taxes, no. What possible sense does this make other than to trick people into moving to low income tax states but all the while forgetting that the states will raise the money that they need one way or another.
• Corporations don't pay income taxes, they collect income taxes that would otherwise be paid directly by shareholders.
• Consumption taxes don't apply to criminal activity but the proceeds of criminal activity (fancy cars and other bling) do get taxed. That would be more than happens today.
• Consumption taxes remove the IRS from inflicting itself on individuals because only businesses need to be audited. The efficiency of the tax collecting process is increased and the tyranny of the government is reduced.

The list above describes a tiny corner of the current waste and abuse of taxpayer resources. The real question, however, is whether there is a sufficiently large cohort of honorable, and clear thinking, citizens who are willing to trade deductions and credits that directly benefit them in exchange for lower tax rates, reduced government, and a more vibrant economy. If there are, the special interests will suffer a significant defeat. If not, the economy will suffer and our country will become ever more divided.

We should also remember the warning given by Thomas Jefferson: "a government big enough to give you everything you want, is big enough to take everything you have."

If President Obama can pull off anything like Mr. Reagan's feat, he might deserve a second term. If not, the economy, government overspending, the looming health care mess and class warfare over the renewal of the Bush tax cuts in two years, will likely send him into early retirement.

If so, he will not be missed.

Immigrants

The passage below surely has a familiar ring and might have been written by a far right wing Republican lamenting the culture and prescence of ethnic Hispanic immigrants:

"Few of their children in the country learn English: they import books from [country]... The signs in our streets have inscriptions in both languages, and on some places only [the other language], which (although I think it ought not to be) are allowed good in our courts, where the [ethnic group] business so increases that there is continual need of interpreters: and I suppose in a few years will also be necessary in the [legislature], to tell one half of the legislators what the other half say."

Rather than using Mexico, Spanish, and Hispanic for 'country', 'language' and 'ethnic group', Benjamin Franklin writing in 1751 (as quoted by H.W. Brands in his excellent biography 'The First American') was referring to German immigrants who, he feared, would overrun and dominate Pennsylvania.

Demonizing immigrant groups has a long and inglorious history in America. In addition to persons of Hispanic origin, the list includes Germans, Portuguese, Irish, Poles and Jews - all of of whom are now considered mainstream rather than despised interlopers. It is very likely that those of Hispanic origin will, too, become ordinary Americans distinguishable, but only sometimes, by nothing more than their names.

Surely it is time for the right to stop obsessing about immigrants and read a little about the successful integration of formerly despised ethnic groups. And why should anything be different this time?

Headscratcher (8)

The wonder is that the Wikileaks affair came as a surprise to anyone.

Nearly forty one years ago, your correspondent went to work as an assistant to a former very senior advisor to the President of the United States. He taught me two things, which I have never forgotten, on my first day at work:

• Lesson 1: there are no secrets so act accordingly, and
• Lesson 2: never put anything in writing that you would be embarrassed to see on the front page of the Washington Post.

While much of what has been disclosed is merely the day to day communications of the lower levels of the diplomatic corps and the military, the first lesson applies. No one, therefore, should be surprised when all is revealed.

The frequently gratuitous, and insulting, remarks about foreign leaders may indeed be accurate - and are certainly entertaining to the casual onlooker - but they have added some complications to the conduct of American foreign policy. Those complications could have been avoided had the authors of the diplomatic cables paid even the slightest attention to the second lesson.

It is definitely a headscratcher that so many supposedly intelligent and knowledgeable people should fail to understand one of the very basics of the 'Washington system'.

Thought for the Day

Douglas Adams, writing in 'The Hitchhiker's Guide to the Galaxy', maintained that the ultimate answer to the ultimate question of life, the universe, and everything, was 42.

Some of us who race sailboats are not entirely convinced by his argument and strongly believe that the real answer may actually be found in Rule 42 (Propulsion) of the Racing Rules of Sailing.

Not Actually the End of the Line

During the Thanksgiving Holiday, your correspondent was chatting with a longtime friend, who happens to be a former high government official and now senior executive for a major company. During the conversation, he strongly encouraged me to resume publication of this blog.

After considerable thought, I have decided to resume my commentary on life, the universe and everything.

Watch this space.

End of the Line

Blogging was enjoyable but, in the end, too time consuming.

I thank all those who have read and commented.

Who's Next?

If life was a reality show, President Obama would be a serious candidate, along with former Presidents Johnson and Carter, for the 'Most Unpopular After Two Years' award. Neither of those unfortunates (for our country) served a second term and your correspondent would be pleased were Mr. Obama to join the pantheon of one term Presidents.

It is worth noting that Mr. Obama, prior to - indeed even after - becoming a public figure had never run anything. Nor does he appear to have spent much time contemplating, or developing, policy or a political philosophy of greater sophistication than 'big government knows best and will fix everything for you'.

His sole successes - while not quite equivalent to being famous for being famous - involve two bestselling books of little distinction and the ability to get himself elected to the United States Senate and, subsequently, the Presidency. That the USA now lacks a leader of substance offers a major opportunity for Republicans in 2012. It is critical, however, that they consider the previous jobs held by the candidate that the party puts forward in 2012.

Forget charisma and the ability to attract adulatory crowds: just concentrate on substance.

Mitch Daniels, currently Governor of Indiana and formerly Director of the Office of Management and Budget might be a choice worthy of serious consideration.

American Socialism (7)

That the means of production and distribution should be owned by the State was an essential part of Karl Marx's socialist/communist vision.

Why then, in the United States - supposedly the land of capitalism and free enterprise, do nine States, including the Commonwealth of Virginia, have a monopoly on the sale of wine and liquor within their borders? While Virginia Governor McDonnell is considering privatizing the state owned liquor stores, there is serious doubt that the necessary legislation can actually be passed. The reason being that the business, even though it is state run, is so profitable that the politicians are reluctant to let go of the revenue.

While the situation is a hangover from the profoundly illiberal, but mercifully brief, era of prohibition, we do not live in those times now. The hypocrisy of political opposition to socialism, while the Commonwealth of Virginia simultaneously benefits from a state owned business that generates nearly $250 million in profits, would be hilarious if it did not say so much about the intellectual honesty - or lack thereof - exhibited by politicians.

The United States Constitution both celebrates, and requires, limited government. The intent of the founders was that government should only do what individuals, business, and the free market can not. Running liquor stores for profit scarcely falls into that category.

Better that Virginia's liquor stores are sold sooner rather than later. If there is an imbalance between spending and revenue, then the politicians should first look to spending cuts and, only if absolutely necessary, additional taxes.

Enough said!

Return

Your correspondent's right arm has recovered enough so that typing - at least with three fingers - is now possible. Getting through the day is still hard and very time consuming, so posts will not perhaps be as frequent as before.

Temporary Hiatus

Your correspondent is taking a temporary break while recovering from a broken right arm.

Headed to Europe

Your correspondent is headed to the Netherlands today and will have only limited access to e-mail and the Internet. There will, therefore, be a ten day hiatus before commentary resumes.

The Declaration of Independence of the Thirteen Colonies In CONGRESS, July 4, 1776

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. --That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. --Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain [George III] is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing Judiciary powers.

He has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance.

He has kept among us, in times of peace, Standing Armies without the consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil power.

He has combined with others to subject us to a jurisdiction foreign to our constitution and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For Quartering large bodies of armed troops among us:

For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us, in many cases, of the benefits of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences:

For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies:

For taking away our Charters, abolishing our most valuable Laws, and altering fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War against us.

He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty and perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages, whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by the Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Corporate Immunity

$75 million dollars is currently the limit of liability for damage caused by oil spills. To describe this as a trivial sum, compared to the size of the corporations involved and to the actual damage that is being caused as a result of BP's Macondo well blowout, is not an exaggeration.

Carol Browner, formerly Administrator of the Environmental Protection Agency and now White House energy and climate advisor, says that there should be no cap on damages from oil spills. While "no kidding!" is a suitable response to her blindingly obvious remarks, changing the law will require hard work in the Congress to overcome the lobbying efforts of the oil industry.

Given that big oil's reputation is now even worse than that of politicians, peddlers of complicated derivatives, and used car salesmen, its lobbying efforts will likely result in little. Perhaps no more than the purchase of additional designer suits, and custom made shoes, for the denizens of K Street.

There are, however, real challenges to the passage of a properly reformed law on oil spill damages. Specifically, objections are already being heard from companies that are small in terms of the oil industry but really quite large by any objective standards. Their position is that, if they face unlimited liability, they will not be able to afford to drill in deep water and so should be spared full responsibility for their actions

Tough. Why should such smaller - but not small - companies receive special treatment at the expense of all of us?

Former Secretary of State Colin Powell's formulation of the [actually non-existent] Pottery Barn rule 'You broke it, you bought it' must apply to all offshore drilling regardless of the water depth. The size of the corporation is irrelevant while the grant of a permit to drill must, among many other things, be conditional upon adequate insurance to cover the possibility of very substantial damage to the environment, to infrastructure, and to the livelihoods of bystanders. Your correspondent does not have the knowledge to specify an adequate amount of insurance but suspects that it should be several billions of dollars.

A positive side effect of very large insurance policies would be that insurance companies would soon acquire significant expertise in the evaluation of such risks. Steam boiler explosions, common one hundred years ago, are now rare. Much of that can be attributed to the development of safety procedures and practices by The Hartford which was, and remains, the largest insurer in that field. There is no reason why the same process would not operate to reduce drilling risk.

There are bigger questions, however, posed by the present pathetically low limits on liability for damages caused by oil spills.

Why was the limit set so low? Who is running our country?

Are we, as citizens, and as contemplated by the Constitution, in charge? Or does the money wielded by Corporations, Unions, and other large associations such as the National Rifle Association or the Sierra Club provide the sort of control over our elected representatives that, were they to know about it, would set the Founding Fathers spinning in their graves.

Perhaps words once written by that A.J. Liebling will provide food for thought: "Freedom of the press is guaranteed only to those who own one." It is surely a certainty that more money equates to a larger press and, thus, to more influence.

Canada Day

There are still some Americans who wonder why Canadians celebrate the 4th of July on the 1st of July.

Could it be that they believe that the results of the War of 1812 were misreported?

Your correspondent offers his best wishes to our northern neighbors. May freedom and prosperity endure on both sides of our border.

Abuse of Power

Before they spend more so-called stimulus money, both President Obama and the Congressional Democrats should carefully consider these words written by Scottish philosopher David Hume who lived from 1711 - 1776:

"The practice of contracting debt will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to empower a statesman to draw bills upon posterity."

Republicans, too, should contemplate their part in the fiscal follies of the George W. Bush era. It is one thing to cut taxes: the simultaneouse increase in spending, at the highest rate ever, surely amounts to High Crimes and Misdemeanours.

Unfortunately, there is no way to impeach Representatives and Senators but we can vote all of them out of office.

This year.

Not Set in Stone

Those who believe that the United States Constitution should be set in stone may wish to consider these words written by Thomas Jefferson:

"Some men look at constitutions with sanctimonious reverence, and deem them like the Ark of the Covenant, too sacred to be touched. They ascribe to the men of the preceding age a wisdom more than human, and suppose what they did beyond amendment. . . . Let us follow no such examples, nor weakly believe that one generation is not as capable of taking care of itself, and of ordering its own affairs . . . Each generation is as independent of the one preceding, as that was of all which had gone before."

Times changes and our fundamental laws may well need to change with them. Both slavery and the denial of women's suffrage were permitted by the Consitution as originally adopted. The first was an unpleasant political compromise lest the new nation never come into being and the latter merely reflected the custom of the times.

Eventually, however, those wrongs were righted.

Still outstanding is the denial of representation in the House and Senate for the six hundred thousand citizens of the District of Columbia. Can we, with a straight face, describe ourselves as a democracy when we disenfranchise so many people for no other reason than the fact that they live in a particular jurisdiction?

The Constitution is a good, but still imperfect, document. It could become better if the fundamentalists were to recognize that Mr. Jefferson actually gave us permission to amend it.

Big Corporations and Short Term Thinking

BP's management, like that of many other large companies, seems to have been so focused on short term earnings and cost avoidance that it forgot an old adage:

You can pay me now or you can pay me [a lot more] later.

In the world of big corporations, thinking is driven by the fear of the effect that modestly reduced profits next quarter will have on the stock price. Corner cutting and risk taking, as well as ferocious lobbying to reduce the number and scope of applicable regulation, are a standard part of such short term thinking. They appear to have been major contributing factors to the Macondo oil well disaster and in several other incidents where BP has been involved.

It is only rarely that such behaviors result in an incident. When, however, things do go wrong, they go very badly wrong indeed and the costs are frequently extraordinarily high. Nor is the company the only one to bear the burden: many innocent bystanders also suffer. The Macondo oil well disaster is a classic case.

Regulation would not be necessary if honorable, far thinking, managers were to take it upon themselves to adopt state of the art safety practices and to take into account the real risks of their technologies and business models. The only government body needed, then, would be one that was charged with disseminating information about new and improved safety technologies and procedures. Perhaps even that would not be necessary if there were an enlightened industry association to do the job.

Few humans, however, are capable of thinking accurately beyond the short term. Further, since a positive attitude is a necessity for success in business, most employees grossly underestimate the risks that are being taken. As a result, the need for regulation cannot be avoided. Mere compliance with regulations, however, is insufficient even though compliance with applicable regulations is often offered as a defense in court.

Although it is not remotely possible to avoid all disasters, an attitude of "doing the right thing" for the benefit of all stakeholders can certainly reduce the frequency of such events and the unintended damage that is caused when the inevitable occurs. It is, however, a reality that those who focus on the risks being taken are regarded as merchants of gloom and doom, Cassandras, or just as undesirable negative influences. That they should be removed from the company as soon as conveniently possible is accepted by almost everyone.

Unfortunately, laws governing corporations require their directors and managers to act solely in the interests of shareholders. Worse, many courts have spoken in such a way as to interpret 'in the interests of shareholders' as 'in the very short term interests of shareholders' thus encouraging the very behaviors that too often leads to disaster.

So, at the very least, changes to corporate law and company by-laws are needed. A more radical thought would be to consider the abolition of corporations and a severe reduction in the limits of liability.

If Corporations were to be replaced by Limited Partnerships, there could be limited liability for passive investors. Senior executives, members of the Board, and owners of more than, say, ten percent of the company, would make up the General Partnership and be subject to unlimited liability. Little harm would likely occur if an exception to this rule were made for small privately held businesses.

Such a structure would remove many of the perverse incentives that encourage corporations, and their managements, to do the wrong thing.

Consider, after all, the generally constructive activities of Goldman Sachs when it was organized as a General Partnership. In 1999, the company became a corporation with its stock being publicly traded. The risks that it took, in search of quick profits, would have been unacceptable to the former Partners Committee of the company. When short term greed replaced long term greed, the consequences included a major contribution to the current financial crisis.

Your correspondent does not expect that corporations will soon be abolished. Instead, the dead hand of new regulators, and regulations, will impose procedures and costs that will have some impact although little of it will be positive.

It is the nature of big corporations to create problems. Since those problems can only rarely be addressed by regulation, it is reasonable to expect a regular stream of disasters whose underlying cause is short term thinking.

Unfortunately, we have little alternative other than to expect the worst. The Boy Scout motto "Be Prepared" provides a valuable road map.

Interesting Surprise

"There are two clocks: one of them is counting down the time to our debt crisis; the other can wake us up to see our situation as it is, not as we want it to be, or as our ideologies say it should be. And the kind of country our children will live in -- growing or stagnant, on the rise or in decline -- depends on which clock goes off first."

"We can keep making easy choices and hoping that the crisis clock just keeps ticking. But sooner or later, if that's what we choose, there will be a time when we find that we have hardly any choices left at all."

Sometimes a politician is actually brave enough to speak truth even when it contradicts the prevailing attitude of his party. Surprisingly, the statements above were actually made by the Majority Leader of the House, Representative Steny Hoyer (D-MD).

In keeping with the old adage that no good deed goes unpunished, your correspondent strongly suggests that Congressman Hoyer take up residence under any convenient table. His own party will soon be accusing him of gross disloyalty while assembling vast stockpiles of rotten fruit and vegetables to use as missiles.

Republicans, meanwhile, will watch gleefully as the Democrats take another step towards self destruction and a major loss in the mid-term elections this year. That Republicans will likely win is a given but they will only deserve the victory if they, too, are willing to speak truth to the voters.

War in Afghanistan (2)

In 2001, when the United States first sent troops to Afghanistan, the country was ruled by the Taliban who then provided a safe haven for our real enemy, al-Qaeda. The initial military operations were largely successful in that al-Qaeda was driven into hiding and its operations severely disrupted. To have captured, or killed, Osama bin Ladin would have been a bonus but the fact that it did not happen does not significantly reduce the success of the initial operations.

The Taliban can reasonably described, at least by Western standards, as really unpleasant religious zealots with a primitive medieval outlook on human and, specially, women's rights. On the other hand, we only have one real issue with them which is that they still supply a safe haven, albeit less useful than before 2001, for our enemy. The task (see also mission creep) in Afghanistan has now morphed into an attempt to create a functioning nation state from what has only ever been a collection of warring tribes whose ferocity, and determination to remain autonomous, cannot be questioned.

Between 1839 and 1922, the British fought three Afghan Wars and found the task of controlling the country to be impossible. The Russians retired in disarray in 1989 after ten years of fierce fighting. The only successful invaders of Afghanistan were the Arabs in 656 AD. Even then, it took more than two hundred years for the country to be made safe for Islam.

Given that we are now fighting a war on behalf of a weak and corrupt government, we seem doomed to fail. Creating a nation in Afghanistan will not take years or even tens of years. It will take centuries.

The only possible solution - other than years of fighting for little gain - is to make a deal with the Taliban that might look something like this.

1. So long as you, the Taliban, promise, in the name of Allah, to refuse safe haven for al-Qaeda or any other terrorist group that is sworn to destroy America and its allies, we will depart and leave you alone.
2. You must give us safe passage to leave.
3. If you kill or capture Osama bin Ladin and his senior colleagues, we will send you large sums of money.
4. If you renege on this agreement, we will use air power and missiles to turn your cities into smoking ruins.

There is a not so small problem with believing any such promises by the Taliban: some extreme interpretations of Islam permit believers to lie to infidels if that will serve the cause. On the other hand, we would be gone and the loss of lives and treasure would end.

Perhaps this proposal is too simplistic but, had we acted on the advice given to President Lyndon Johnson by the late Senator George Aiken (R-Vt) during the Vietnam War, it is not clear that the long term outcome would have been much different. Let us, then, borrow Senator Aiken's words: "Declare victory and leave" so that we may begin to prepare for the very real threats posed by a nuclear armed North Korea and a soon to be nuclear armed Iran. Unless we are prepared to use our own nuclear weapons, we do not have the resources to fight in Iraq and Afghanistan while still providing a credible deterrent against these other enemies or an adequate response if worst comes to worst.

Our leaders, therefore, must establish priorities and your correspondent believes that Afghanistan is low on the list.

General McChrystal

Anyone who has a much contempt for his superiors and colleagues (President Obama, Vice President Biden, Ambassador Eikenberry and several others) as General Stanley McChrystal is going to have a hard time doing his job effectively.

While his judgement may be accurate, senior members of the military are expected to give their best advice to the civilian leaders of the nation. When their advice is not taken, or conflicts with the strategy that has been adopted, their next step is to accept the decision and keep their mouths shut in public while taking all possible actions to execute the strategy. In short, say "Yes, Sir", salute, and charge up the hill. If that is too difficult, retirement or resignation are both honorable alternatives.

General McChrystal acted appallingly - perhaps even dishonorably - when he communicated his negative opinions to his staff. Worse, he and his staff then passed them on to a journalist working for Rolling Stone magazine. That the result was an inflammatory article, likely harmful to U.S. interests in Afghanistan, should be no surprise to any thoughtful person.

General McChrystal's actions indicate that he is sadly lacking in leadership skills and, therefore, unfit to serve in the position of Commander in Chief of U.S. and NATO forces in Afghanistan. It is your correspondent's opinion that he should be relieved of command for incompetence.

On the other hand, if the Commander in Chief, President Obama, is feeling generous, he may wish to accept what is reported to be General McChrystal's offer to retire.

Either Thursday or Friday of this week would be a good day for a retirement ceremony.

The National Guard and the BP Oil Spill

President Obama has mobilized seventeen thousand members of the National Guard to help with the oil spill clean up. Since many of these people have civilian jobs, there will be businesses which suffer hardship and inconvenience as employees depart, for an indeterminate time, and return with little notice.

The United States Employment and Re-employment Rights Act (USERRA) protects employees from adverse personnel actions when they are called to active duty. The Act also entitles them to be re-employed when their period of active duty ends. The exercise of these rights inevitably involves costs that are borne by businesses. That is, however, an acceptable price to pay to ensure the proper treatment of those who serve our nation in the armed forces. The President should, however, take care not to activate the National Guard when there is an alternative.

What special skills are required to clean up oily beaches? If specialized skills are required, do these members of the National Guard possess them? Why not offer these jobs to those who are currently unemployed? Surely there are many who would welcome the ability to earn their own living again - even if for a limited time - rather than existing on a government handout.

If there is paid work available but the unemployed don't want to do it, stop wasting taxpayer money on them. Worse, to take members of the National Guard away from their jobs, while there are others available to do the work of oil spill clean up, is idiocy.

How else to describe this than just another exercise in government mismanagement and incompetence?

Enough said.

Getting Real About Energy

When he spoke to the nation on Tuesday, President Obama offered the usual cliches and platitudes - perhaps better described as processed organic refuse ejected from the south end of a northbound bull - about ending our 'century old addiction to fossil fuels'. Since he did not offer any solutions, the only conclusion that can reasonably be reached is that Mr. Obama entirely deserves the title of Posturer in Chief.

What then should the President have proposed?

Start with a very simple concept from Economics 101. If the price of a good increases, the demand will decrease. The President, then, should have proposed a substantial tax - say $5.00 per gallon - on fossil fuel used for transportation and a somewhat smaller tax on all other energy derived from fossil fuels. The reason for the different rates is to take into account the fact that users of fuel for transport can more easily and rapidly reduce their energy consumption than can industrial, residential and commercial facilities.

Because of the time required to improve the fuel efficiency of equipment and vehicles, alter behaviors, and change housing patterns (suburban sprawl and long drives to jobs), these taxes will need to be phased in over a fairly substantial period of time. If the taxes are to be effective, the phase in period should last no more than seven years which, not coincidentally, is the average length of time that people own each of their homes and less than the average length of time that they own their vehicles.

How should the receipts from these taxes be used?

A good solution would be to rebate the tax by reducing the Social Security and Medicare taxes paid by employers. Since this will significantly reduce labor costs, demand - and therefore employment - can be expected to increase. In addition, demand for labor will increase as companies and homeowners take action to reduce energy consumption. The result will be that the market, through the price mechanism which is generally efficient, rather than government, using always inefficient subsidies, will determine the future of non-fossil fuel energy sources. Although there will be winners and losers, the net impact on tax revenue is zero with the likelihood that business competitiveness improves and fossil fuel use is reduced.

Approval from most Democrats can be assumed while many Republicans, save only those those who are entirely consumed by chants of 'No New Taxes' or by mindless opposition to anything proposed by a President from the other party, should be able to support such a program.

Take inspiration, Mr. President, from these many times written words of Winston Churchill: "Action this day."

A Thought for the Weekend

This is an election year in the USA and, so, we should consider the words of Edward Langley, an artist who lived from 1928 to 1995, as a call for action:

What this country needs are more unemployed politicians.

Enough said.

Democrats and Business

BP is clearly at fault with respect to the massive oil spill in the Gulf of Mexico.

The political universe, however, is consumed by the attacks - for little more than short term partisan advantage - currently being made on the company by President Obama and many other members of the Democratic Party. When the oil spill problem is over, the punishment can begin but, until then, these criticisms are counterproductive.

All of which simply reinforce some of the contradictory attitudes of Democrats:

• they love jobs but hate employers.
• they love businesses but hate owners who become rich because their businesses are successful.
• they love small business for creating jobs but ignore the fact that small businesses fail at much higher rates than large businesses.
• they love small businesses for creating jobs but hate them because they can not afford to provide uneconomic levels of pay and benefits.

BP has proven that a small government zero regulation policy, as favored by many Republicans - particularly the Tea Party and Libertarian movements, is a disaster waiting to happen. A more positive attitude, however, on the part of Democrats, towards businesses, owners, and executives, would improve our nation's economic prospects significantly.

A Step Toward Tyranny or Merely Posturing?

Last night, President Obama spoke to the Nation about the oil spill in the Gulf of Mexico.

While he has no solutions, he is more than able to pretend that he is doing something. Nor does he lack the arrogance to assume powers that do not exist either in law or the Constitution. Although he is a lawyer by training, his statements, about the ways that BP will be made to pay for the damage that the company's negligence has caused, are either nonsensical or border on the tyrannical.

Perhaps both.

Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company’s recklessness.

And this fund will not be controlled by BP. In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent, third party.

Under which laws - or what part of the Constitution - does the President have the authority, absent a court order, to seize assets from a privately owned business? Even if the President did have such authority, how will the terms 'legitimate claims' and 'fair and timely manner' be defined and by whom?

When President Harry S Truman seized the nation's steel mills in 1952, it did not take long for the Supreme Court to rule that no such authority existed and the mills were promptly restored to their rightful owners.

If BP chooses to make voluntary payments to those that it has damaged, that is its right and such a course of action is likely to be better business than awaiting court action. To the extent that individuals or businesses do not feel that they have been adequately compensated, they may go to court where liability will be determined and damages assessed in accordance with the law.

President Obama states that the fund will be administered by a so-called 'Independent Administrator'. Does any thoughtful, and intellectually honest, person exist in our country who seriously believes that extreme political pressure will not be brought to bear on such an administrator to interpret 'legitimate claims' and 'fair and timely manner' in curious ways that favor political agendas?

The purpose of Mr. Obama's fund, then, seems to be to punish BP - while rewarding favored groups - rather than to make individuals and businesses whole from the damage that they have suffered. That BP deserves punishment appears to be self-evident but that is a process that takes place in court. In addition, the company's [former] customers may inflict further punishment by choosing to buy elsewhere.

In 1780, John Adams described America as a 'Nation of Laws, not of Men'. Notwithstanding the fact that he taught Constitutional Law for a period in his career, President Obama seems to be willing to ignore that statement in favor of granting unfettered power and discretion to a single person.

What Mr. Obama is attempting to do can, perhaps, be described as akin to an act of Royal tyranny - a term that your correspondent does not use lightly. From 1775 to 1783, Americans contributed many lives and much treasure to ensure that, never again, would such a form of government exist in our country.

We are left, then, with two equally unappetising conclusions: either Mr. Obama is just posturing or that he has taken a long step down the road towards tyranny. Whichever is the case, the sooner that Mr. Obama is no longer President, the better.

Headscratcher (7)

After twenty five minutes of frustration, your correspondent has just given up trying to get help from one of Symantec's call centers.

The first step was to listen to, but only understand less than half of what an Indian customer service (customer service?) representative, with an incomprehensible accent, was saying. The second step was to wait to speak to a supervisor whose accent was only marginally easier to understand. That was followed by another wait to be transferred to a technical expert who, after listening to the problem description, stated that he was not trained to address Internet related problems.

This episode is a clear example of the old adage that you don't always get what you pay for but you rarely get more.

Why, then, do companies think that outsourcing their call centers to India is good business? Money - perhaps substantial amounts - is saved in the short term but, frequently, the long term result is to alienate their [about to be former] customers.

Or are these companies so arrogant that they actually believe that their customers have no alternatives?

A headscratcher indeed.

Academia or Politics

Barack Obama's performance as President - too cool, too professorial, too detached - suggests that he is not really one of us and that he has little clue as to the desires and feelings of the American people.

He also bring to mind the famous statement made by the late William F. Buckley Jr. who said that he would rather be governed by the first two thousand names in the Boston telephone book than by the Harvard faculty. It is a shame that President Obama abandoned academia, where he belongs, for politics where, it seems, he is as disconnected from us as was President Jimmy Carter.

After President Clinton's disastrous second term, and George W. Bush's general ineptitude, America needed a successful President. We can only hope that Mr. Obama's similarities to President Carter include his retirement, whether forced or voluntary, after a single term.

Wrong Answers

Among the spectacularly wrong - but not actually harmful - historical misjudgements is this statement made by Heinrich Hertz:

"I do not think that the wireless waves that I have discovered will have any practical application."

Lord Kelvin merely compounded the error when he said:

"Radio has no future."

So, be sceptical - very sceptical - of those who claim to foretell the future.

Public Discourse

In spite of general disdain for some of the old fashioned virtues, the public forum would be more civilized if participants were to heed these words written by Mark Twain:

"It is by the goodness of God that in our country we have these three unspeakably precious things: freedom of speech, freedom of conscience, and the prudence to never practice either."

Mark Twain understood that having the right to do something does not always make the doing wise. Let us try to practice what he preached and, perhaps, make the world a slightly better place.

Memorial Day

Memorial Day is not about beer, hot dogs, barbeque, hamburgers, the pool or the beach. It's about those who sacrificed their lives so that we might be free.

Nor should we forget the warriors who survived but with wounds that cause them permanent disability. We owe them special thanks and remembrance too.

Sarah Palin and Feminism

One of Sarah Palin's feminist inspirations, she claims, is Susan B. Anthony.

Your correspondent wonders if Ms. Palin has considered that her new heroine once said:

"I distrust those people who know so well what God wants them to do because I notice it always coincides with their own desires."

Enough said.

Corporations Acting Badly

The recent oil spill in the Gulf of Mexico appears to be much more than a mere accident. Shoddy workmanship, corner cutting and deliberate disregard of warning signals all appear to have contributed to the disaster.

The situation brings to mind something that Freeman Dyson, arguably the best physicist never to have received a Nobel Prize, once said:

"Wherever one looks in the world of human organization, collective responsibility brings a lowering of moral standards."

Cutting corners, taking actions that are ethically suspect even if they are not quite illegal, and ignoring the accepted bounds of decent behavior are all too often characteristics of corporate life. The Hall of Shame has no shortage of exhibits. Enron, Goldman Sachs, most of the medical insurance industry, the vast majority of tort lawyers, a whole gallery of grossly overpaid and under performing CEOs, another gallery of predatory sub-prime lenders and, now, BP are all prominently displayed.

It would be nice to think that there is a solution but the population is too large, and modern life too complex, for a return to Thomas Jefferson's ideal of an agrarian paradise where, among other things, individuals take total responsibility for their own actions. When faced with low standards of behavior, the statement 'we don't do that here' is powerful but it needs to be repeated - very frequently - by parents, teachers, managers and executives. That is, everyone in any position of authority.

Such is your correspondent's desire. Unfortunately, he has a strong suspicion that he may merely, in the words of William F. Buckley Jr., "be standing athwart the path of history shouting STOP."

The Corruption of Language (10)

John Brennan is President Obama's top counter-terrorism advisor. In a speech, today, at the Center for Strategic and International studies, Mr. Brennan is quoted, by the Washington Post, as saying:

"Our enemy is not terrorism, because terrorism is but a tactic. Our enemy is not terror, because terror is a state of mind and, as Americans, we refuse to live in fear.

Nor do we describe our enemy as jihadists or Islamists, because use of these religious terms would be play into the false perception that al-Qaeda and its affiliates are religious leaders and defending a holy cause when, in fact, they are nothing more than murderers.

The United States is at war. We are at war against al-Qaeda and its terrorist affiliates."

Reading these clear and simple words, compared to the mangled syntax of most bureaucrats (and that of former President George W. Bush), is a rare pleasure.

The rate at which George Orwell is spinning in his grave is surely a little slower.

Oil Spill in the Gulf

Out of control oil wells used to be common. Now there is technology that, when it works, quickly brings a gusher under control. As a result, in the past forty years, there has not been a major oil spill in US waters.

Until now.

This time, the Blow Out Preventer, which is the device designed to shut down a runaway oil well, failed. The wonder is that anyone was surprised that such a thing could happen. All technology fails - for one reason or another - as this version of Murphy's Law states:

"If anything can go wrong, it will and at the worst possible time, in the worst possible way."

The wonder is that BP seems not to have had a plan to manage a runaway well in the conditions in which it was operating and, more than a month since the blowout, is still making things up as it goes along. Worse, the Minerals Management Service, an Agency of the Department of the Interior, does not seem to have required that there be a plan. Worse yet, neither the Coast Guard nor the Environmental Protection Agency seem to have a plan, or access to sufficient resources, to respond effectively to what may become one of the worst environmental disasters ever in North America.

Those who undertake potentially risky and dangerous, albeit often very valuable, activities should make detailed plans to respond to things that, inevitably, will go wrong. When making these plans, they should also keep in mind another really important adage:

Murphy was an optimist.

Drilling for oil, in the deep waters of the Gulf, is important to our national and economic security. While the current situation shows that much more effective regulation is required, let us hope that the Congress can refrain from taking, or forcing, hasty and ill considered actions that serve no better purpose than to create sound bites and generate campaign contributions.

The first objective must be to maximize the chances that drilling can take place without a major spill occurring. The second objective is to ensure that there are plans in place, complete with the necessary resources, to minimize the damage that will occur when the inevitable technology failure occurs.

Last Word on Rand Paul

Dr. Rand Paul, a darling of the Tea Party Movement, is now the Kentucky Republican Party's candidate for election to the United States Senate. His reported opinions on such Federal laws as the Civil Rights Act of 1964 and the Americans with Disabilities Act can only be described as both eccentric and extremist.

As soon as the furor broke over Dr. Paul's remarks, he ran for cover. After presenting an incoherent defense of his position in various interviews, Dr. Paul then canceled his scheduled appearance on NBC's 'Meet the Press', one of America's most significant news shows.

While his words may indicate that Dr. Paul is just a common or garden variety bigot, his actions certainly show that he lacks courage.

Worse, while peddling snake oil in the form of a Balanced Budget Amendment that will never be ratified, Dr.Paul opposes any cuts in Medicare which, after Social Security and Defense, is the third largest budget line item - and the one that is most out of control. Perhaps it should be no surprise to find that that Dr. Paul is an ophthalmologist and, according to various reports, at least half of his patients are covered by Medicare.

That makes Dr. Paul just another politician who is unwilling to do the right thing if it would include any sacrifice on his part. While bigotry, cowardice, and hypocrisy are all common characteristics of politicians, they usually go to great lengths to conceal them. For failure to conceal these faults, add incompetence to Dr. Paul's resume.

The world will be a better place if the voters of Kentucky permit Dr. Paul to continue his medical career by not forcing him to work in the United States Senate.

More on Rand Paul

Dr. Rand Paul, following his victory in the Kentucky primary election on Tuesday, is now the Republican candidate for election to the United States Senate in November.

Among Dr. Paul's less acceptable ideas include his apparent belief that the Civil Rights Act of 1964 and the Americans with Disabilities Act of 1992 represent gross intrusions by the Federal Government into matters that are properly the responsibilities of the States. He also seems to believe that the right of free association, as guaranteed to citizens by the First Amendment, allows businesses to exclude or otherwise discriminate against those that they do not like - for any reason or none. For more detail, see this article from the May 20th edition of the Washington Monthly: http://tinyurl.com/2dchh29

A citizen does indeed have the right to associate with, to avoid, or to dislike anyone, for any reason, whether good or bad. Notwithstanding the Supreme Court's recent curious decision in the matter Citizens United vs. Federal Election Commission, that right to discriminate or avoid applies to individuals, and does not, nor should it, apply to corporations and businesses or to individuals acting as agents and employees of those businesses.

Notwithstanding the provisions of the Fourteenth Amendment, ratified on July 9, 1868, which guarantees equal protection under the law, none of the former Confederate States, prior to 1964 and the passage of the Civil Rights Act, had any intention of changing the invidious and hateful 'Jim Crow' laws that enabled - and frequently mandated - discrimination and segregation. There was, therefore, no alternative to Federal action. Similarly, when it comes to treating disabled people properly and fairly (full disclosure - your correspondent is a double leg amputee), there are times when only government action can force businesses to do what is both morally right and, as it happens, good business.

Before Dr. Paul again expresses his views on these matters, he would be well advised to read the Declaration of Independence which, while not a legal document by which we are governed, well describes America's ideals and aspirations:

"We hold these truths to be self evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness..."

What more need be said?

A Just Reward

Politicians usually get away with unprincipled acts. Just occasionally, however, they do receive their just rewards.

Last year, Senator Arlen Specter switched parties for no other reason than the fact that, as a moderate Republican, he was unlikely to win the 2010 Pennsylvania Republican primary. This was no act of principle: just a desire to keep a job that he had already held for too long.

Senator Specter's analysis was more acurate than he thought. Not only was he unlikely to have won the Republican primary but, yesterday, he was solidly defeated (54% - 46%) by Representative Joe Sestek in the Democratic Party primary.

Our country will be a slightly better place without a man who, having held the job for nearly thirty years, now seems to define himself as a Senator rather than as a man who is serving his country in the United States Senate.

Enjoy your retirement Senator Specter. Your country will be happy to see you enjoying the quiet life.

Balanced Budget Amendment

Today is Primary Election Day in Arkansas, Pennsylvania and Kentucky.

In the Kentucky Republican Senate Primary, Rand Paul is the favored candidate of the Tea Party movement. Part of his campaign speech includes a commitment to fight for a Balanced Budget Amendment to the United States Constitution.

The idea of a Balanced Budget Amendment is nonsense and Dr. Paul should know better than to be promoting it. If he does not, then he lacks sufficient knowledge of economics (and of the United States Constitution) to serve effectively in the United States Senate. The world, then, would be a better place were he to return to the practice of ophthalmology.

A modest deficit - in the range of two percent of the Gross Domestic Product over the economic cycle - is entirely supportable provided that the money is spent on real investment such as infrastructure (roads, bridges, ports, air traffic control systems etc) that will provide significant returns over many years. Basic research, where the value of any given project is unpredictable and therefore will not be performed by corporations, is also worthy of funding with debt. Deficits also allow for some automatic stimulus - the deficit grows a bit - in recessionary times and some automatic fiscal restraint - the deficit shrinks or even becomes a modest surplus - in boom times.

Another use of government debt is to provide a benchmark interest rate for debt that is free of credit risk. In addition, there is a desire, on the part of retirees, pension funds, banks and other financial institutions, for highly liquid investments that carry zero credit risk.

Even if there was no good economic rationale for government debt, the likelihood of a Balanced Budget Amendment ever being adopted is close to zero. The Constitution is extremely hard to amend (see Article 5 http://www.usconstitution.net/xconst_A5.html) because it requires a two thirds vote in each of the Senate and House followed by ratification by three quarters of the States. The only Amendments that have survived this process are those that command overwhelming support.

Even were a Balanced Budget Amendment to be adopted, there still remains the hard labor of deciding what expenditures to cut and, if that is not sufficient, what taxes to increase. To do that work does not require that the constitution be amended.

Since the proposed 2011 budget shows that the Federal Government plans to borrow more than thirty cents of every dollar it spends, abolishing foreign aid and other trivialities like the Departments of Energy and Education, will hardly make a difference.

Rather than engaging in Orwellian doublespeak, perhaps Dr. Paul would like to tell us what cuts he proposes and whether they will be sufficient to achieve a balanced budget. If his proposed cuts are insufficient, then he should tell the voters whether he will abandon the effort or whether he will propose increased or new taxes.

There is an old adage that a nation gets the government that it deserves. If we fall for lies and misinformation, dressed up as easy solutions, then we will indeed deserve what we get.

Starting Right

The United Kingdom's fiscal problem bears a strong resemblance to America's: too much debt and too large a budget deficit.

The only redeeming factor is that the bond market vigilantes, who have hammered Greek government bonds and are now eyeing those of Spain and Portugal, have not yet turned on either the USA or the UK. As a result, interest payments on our monstrous debts are, at least for the moment, relatively modest.

At its first meeting, the new British Cabinet decided that the Prime Minister, and all members of the Cabinet, would take an immediate five per cent pay cut. Not a pay freeze but a real cut. While this is a largely symbolic act, it is also a distinct sign that there are politicians who do understand some of the basic concepts of leadership. The message is clear:

Times are going to be hard, and there will be savage spending cuts, but we are all in this together.

It would be wonderful if President Obama and his Cabinet would make the same sacrifice. Even better would be to see some of the multi-millionaire political appointees and members of the Congress - specially those serving [themselves] in the Senate - decide that it would be appropriate for them to work for their country as 'dollar a year men'.

Don't hold your breath waiting, you will only turn blue.

The Corruption of Language (9)

Last month, at a press conference, President Obama made a big announcement: he had ordered his Cabinet Secretaries to find $100 million dollars in spending reductions.

At the time of the announcement, your correspondent was unable to find suitable words to describe that paltry sum compared to a total budget of some $3.7 TRILLION dollars and a projected deficit of about $1.3 TRILLION dollars. This short video, however, makes the point clearly, understandably and concisely: http://www.wimp.com/budgetcuts/.

President Obama claims Abraham Lincoln as one of his heroes. Perhaps he, and every member of his staff, would be well advised to spend some time, every day, thinking about President Lincoln's views on "spin":

"You can fool some of the people all of the time and all of the people some of the time but you can not fool all of the people all of the time."

All Mr. Obama has done with his posturing is to cast doubt on his seriousness while, simultaneously, causing an increase in the speed at which George Orwell is spinning in his grave.

Customer Service

We are still enduring the aftermath of a serious recession and it will be months, more likely years, before the economy is back to normal. Companies, therefore, should be competing hard - both on price and service - to attract as much business as possible.

Some do but many do not.

There are too many companies that have forgotten - or never learned - how to pronounce the words CUSTOMER and SERVICE. They also seem to have forgotten that there are other suppliers and, in a time when frugality is becoming cool again, the option to do without is real.

Although not widely regarded as a management thinker, Mahatma Gandhi understood the real relationship between a business and its customers:

"Who is a customer? The customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption of our work. He is the purpose of it. He is not an outsider in our building, he is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so."

Those are simple thoughts but many business failures can be linked to neglected or ill treated customers. Sometimes the issue is incompetence and lack of interest on the part of the company's employees. More often, however, the culprit is fixation on routine together with resistance to any deviation from established process and procedure.

Because employee judgement is far from perfect, it is inevitable that companies, which trust their employees to do the right thing, will incur losses. The gains, however, so greatly outweigh the losses that any other course of action can only be based on a misunderstanding of the real world.

Acting in accordance with the old adage 'doing well by doing good' actually works. What more needs to be said?

The Nature of Lawyers

As primary election season begins, one of the noteworthy features of the political landscape is, as always, the number of lawyers who are reinventing themselves as politicians.

Since lawyers thrive on conflict, they make poor politicians when there are, as now, hard choices to be made. Anyone who doubts their love of conflict should consider this old adage:

The only lawyer in a small town will be poor. If a second one moves to town, both will soon be rich.

Lawyers can provide useful services but they are technicians rather than leaders and strategists. J.P.Morgan exactly characterized their nature when he said:

"I don't hire a lawyer to tell me what to do, I hire one to tell me how to do what I want to do."

Enough said!

Goldman Sachs and the SEC (2)

Recent reports in the Wall Street Journal www.wsj.com indicate that Goldman Sachs's management is showing interest in a settlement of the civil fraud charges filed by the SEC.

CFO David Viniar and Vice Chairman J. Michael Evans are both reported as saying that the company would be happy to settle. Viniar is further quoted as saying: "the company does not want to antagonize the SEC."

Only two conclusions can be reached from these reports. The first is that Goldman's senior executives were lying when they denied any wrongdoing. Given that both ethics and honor appear to be endangered species in the Wall Street jungle, such actions are, while more than regrettable, merely part of the background. Were the Senate Finance Committee to ask the Department of Justice to bring charges of perjury against Goldman's executives, with respect to their testimony - under oath - before the committee, the world would be a slightly better place.

The second conclusion, based on the quote about 'not wanting to antagonize the SEC' is that the government has successfully blackmailed an innocent company - although, admittedly, it can hardly be described as either honorable or sympathetic - and will, eventually, extract large sums of shareholder funds in a so-called settlement. Your correspondent uses the qualifier 'so-called' because the payment would be better described as ransom.

If the latter situation is the case, then Goldman is facing yet another example of excessive and unrestrained government power. That the power is being directed at one of the current villains does not make its use right.

Wasn't there a successful revolution in America, about two hundred and twenty five years ago, that was provoked by the abuses of power committed by the British King and his Ministers?

Head Scratcher (6)

The United Kingdom, like the USA, holds its elections on a work day: Tuesday for America and Thursday for the British.

Today is Election Day in the United Kingdom and the polls opened at 7:00 a.m. which is the same as the usual opening time in the USA. British polling stations, however, will be open until 10:00 p.m. in contrast to ours which generally close at 7:00 p.m or in some places at 8:00 p.m.

The head scratcher, given our generally poor turnout, is why we do not keep our polls open later so that it is easier for those with jobs, and difficult schedules, to vote. Perhaps the election workers get tired (poor dears!). Or, worse, are demands from the television channels for prime time results overwhelming the democratic process?

Your correspondent begs to differ with those who claim that on-demand mail in ballots can solve the problem. Voting is a civic duty but so is paying attention to the entire campaign. Other than in exceptional circumstances, voting three weeks before election day does not meet the test of engaged citizenship.

There is a relatively simple solution. The wonder is that so few are interested in considering it.

To Pay or Not to Pay...

According to a report in the Washington Post today, the Internal Revenue Service has notified the Department of the Interior that, as of September 30, 2009, 2.36% of its employees owe back taxes. A check of the Department's website http://www.doi.gov/employees/ shows that it has approximately seventy thousand employees. Simple math leads to the conclusion that there are approximately 1,650 delinquents.

Since these people are violating their obligations, as citizens, to comply with the law - regardless of whether or not they like it - they should be summarily dismissed. Better, since tax deadbeats are likely not the most productive of employees, they would hardly be missed and there would be no need to replace them. Such action would be a start, albeit somewhat modest, in the process of reducing the size and cost of our government.

But why stop at the Interior Department?

The process can be repeated in every other Department and Agency. Assuming that the percentage of delinquents is substantially the same throughout the government, and given that there are approximately 1.43 million civilians employed by the Federal Government, there is an opportunity to reduce the size of government by nearly 34,000 deadbeats.

Just don't hold your breath waiting for it to happen!

Free Markets

Following the financial crash, there is much bloviation on the subject of free markets. While markets are clearly better than the alternatives, they suffer from defects even though far too many right wing politicians seem to suffer from the delusion of market perfection.

For markets to work effectively, honesty and transparency are essential. Whether those conditions can actually be achieved without government regulation is doubtful given the market power of large corporations. Then, too, there is the very human tendency to feel little obligation to engage in ethical and honest behavior when a stranger, specially one with little ability to take effective revenge after being wronged, is the other party to a transaction.

Given the imperfections of markets, some level of government regulation is essential but it should be light and, to the maximum extent possible, based on principles rather than detailed rules. Penalties for those proven to be doing the wrong thing should be draconian: starting with jail without parole for executives and dissolution for corporations

The principal objective of government regulation must be to keep market participants honest and the playing field level. Keeping the players honest includes insistence on full disclosure in order to avoid excessive asymmetries of information. Much of the reason for the contempt in which we hold old style used car salesmen is because of their reliance on such asymmetries for a large part of their income.

Regardless of the government's skill in creating and enforcing regulations without inflicting excessive costs or reducing the benefits of free markets, there is a major imperfection that will never resolved: that is the all too human tendency to refuse to read the instructions or the fine print. Effective government regulation is not a good reason to believe that fools will be protected from crooks and con men. Although government can, to some extent, deter fraudulent and dishonest behavior, there are no guarantees.

Unfortunately, the increase in rules based regulation has often made it possible for the unethical and dishonest to follow the letter of the law while making it hard, even for a sophisticated market participant, to detect the wrongdoing. Those who refrain from caution and vigilance will soon relearn, the hard way, that a fool and his money are soon parted and that if something seems to be too good to be true, it probably is.

Free markets are good but participants must always keep in mind the old adage: caveat emptor (buyer beware).

Investing Strategies (3)

The annual meeting of the shareholders of Berkshire Hathaway took place yesterday in Omaha, Nebraska. Presiding over the festivities, sometimes referred to as Woodstock for Capitalists - although lacking the hallucinogenic, and other mind altering, recreational substances that were abundantly available at the original, was Chairman Warren Buffet.

Worthy of note is that fact that the Berkshire has never lost money in the latest technological fad, whether it be computer hardware or software, dot coms, alternative energy, bio-technology and the like.

Nor has the company ever made money in those sectors. Since Mr. Buffet does not understand the technologies, and since it is nearly impossible to determine how, if, or when, the companies involved will make money, he declines to invest.

For an historical insight, consider automobiles - the hot new technology of 1900. By the 1920s, there were still many companies making automobiles in the USA. Vicious competition and economies of scale, however, ensured that only a few prospered. Most are now long gone: American Motors, Packard, Hupmobile, Studebaker to name only a few. Wikipedia's very comprehensive list of defunct automobile manufacturers http://tinyurl.com/defunctautos is an eye opener.

Between 1850 and 1875, railroads - another hot new technology that changed the world - went bankrupt almost every month.

Whatever the latest and greatest 'change (or save) the world technology' may be, things are not going to be different this time. Except for those, such as venture capital funds, with the ability to make many early investments in a given technology, the risks far exceed the likely rewards.

For individual investors (disclosure: your corespondent owns a modest stake in Berkshire Hathaway), these principles, derived from studying Mr. Buffet's record, may be of value:

• Only invest in businesses that you understand.
• Never overpay: 'buy high, sell higher' is for gamblers, not investors, and the odds are against you.
• Have enough cash on hand to avoid leverage while still being able to take advantage of opportunities.
• Complicated investments are associated with high - sometimes really high - fees and expenses. As a result, sellers may well have their, not your, best interests at heart.

A starting point, from which a competent investor may realize decent returns without taking on excessive risk, is 'keep it simple, stupid'.

Enough said!

The Financial Crisis (5)

At the beginning of the first Clinton administration, the President's tax and spending proposals drew an extremely negative reaction from the bond market. Mr. Clinton revised his budget and one of his principal political advisers, James Carville, was moved to say:

"I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."

After a long period of somnolence, the bond markets are awake and have turned on Greece. Regardless of the proposed EU and IMF bailout, the Greek government will, within the next three years, likely default on some, if not all, of its debts. Naturally, such a default is being described as a restructuring but that merely attempts to disguise what is really going to happen.

Many banks, governments, hedge funds, bond funds and individuals are going to lose a lot of money.

Next to suffer will be the other so-called members of the PIIGS group: Portugal, Ireland, Italy and Spain. Only Ireland has taken significant actions to address its debt problem but it remains to be seen if those will be sufficient.

So far the USA has escaped the bond market's ire. That this should be so is something of a mystery. Specially as there currently seems to be exactly zero political will to address deficits that stretch from here to eternity.

Those who believe that we can continue to live beyond our means are living in an hallucination that will - sooner rather than later - become a nightmare. When the bond market turns on us, there will be three alternatives and all are equally unacceptable. We can raise taxes and cut spending to such an extent that we endure a severe recession - possibly even a repeat of the Great Depression, we can default on our debts, or we can print so much money that the resulting inflation will reduce the debt to a pittance in real terms. Countries that have defaulted have seen serious reductions in living standards while Weimar Germany and Zimbabwe both followed the path of hyper-inflation with even uglier consequences.

If we wait until the crisis, we will suffer a greatly reduced standard of living while watching China become the leading political and military power in the world.

There is still time to act but delay will only, and inevitably, lead to disaster.

As election season approaches, we must express our willingness to accept the hard policy changes that will be required. That includes voting against weak kneed politicians who pander to our very understandable desires to put off - for just a little longer, please - the foul tasting medicine that we must take to cure our current economic problems.

The use of this phrase, frequently written by Winston Churchill, is appropriate: "action this day."

More on Arizona

The issue of illegal immigration is almost entirely about jobs.

Americans no longer want to do the back breaking work of picking fruit and vegetables, packing meat, unskilled construction work or landscaping - to name only a few. At least, they don't want those jobs at the wages that employers, driven by relentless pressure for cheap goods and services, are willing to pay.

Hence a plethora of jobs for illegal aliens. Without demand for their cheap labor, however, these migrants will go home.

Here are two possible solutions.

First, even though the Federal Government actively regulates business, the States have greater powers. In particular, they have the power to issue Certificates of Incorporation and of Registration as a Foreign (that is incorporated in different State) Corporation. One of those is necessary to do business in every State of the Union.

States, then, have ample opportunity to cancel the corporate status of entities that are found to have hired or contracted with, whether deliberately or negligently, illegal aliens who do not have the right work in the USA.

If Corporation risked being put out of business as a result of hiring illegal aliens, they would be much less likely to do so and that should materially reduce the availability of jobs for illegal immigrants. True, a shortage of labor would increase its cost but that is the nature of a free market.

A second alternative is for the Federal Government (it is preferable to have a national policy) to make it a criminal offense for an employee of a corporation to hire, knowingly or negligently, an illegal alien. A minimum sentence of at least one year in jail - no parole, no suspended sentence, no work release, no halfway house, no "country club" minimum security jail - would also go far to reduce demand.

Then add a 'The Buck Stops Here' provision to the law which would provide for jailing the Chief Executive Officer in the case of generalized and widespread violations. Such a provision would likely put an immediate stop to almost all unlawful employment.

Since politicians seem to be in thrall to large corporations, and the political contributions of their executives, the chances of any such reform are not high. Add the screams from consumers, who who will have to pay more for the goods and services that are supplied by businesses where illegal immigrants are widely employed, and the chances of effective reform drop to near zero.

The need is for politicians with courage who will dare to stand up to corporations and short sighted consumers. Right now, nothing is happening at the Federal level but, in Arizona, our liberties are under threat from would be authoritarians, who don't believe that the Fourth Amendment is necessary - or useful, and who seem to have forgotten why America was founded.

It would be nice if Arizona's politicians took heed of New Hampshire's motto:

Live Free or Die

Few of us think that uncontrolled illegal immigration is good for our country but our freedom must take priority. The ends do not justify the means.

Arizona and the American Gestapo

Immigration and border control, however mismanaged, are the responsibility of the Federal Government.

Notwithstanding that, Arizona Governor Jan Brewer (R) last week signed a bill passed by the Republican controlled State Legislature. Arizona law now requires police to question people about their immigration status if they have reasonable suspicion - not probable cause - to believe they they might be in the USA illegally. The crime, if they are here illegally, is criminal trespass in Arizona.

Needless to say the law is aimed at persons of Hispanic origin but, undoubtedly, to demonstrate that they are not engaged in racial profiling, police will find it prudent to pull over a reasonable number of blue eyed white people. That process already takes place at airports where TSA Screeners take aside eighty year old Great Grandmothers, with artificial hips and accompanied by small children, for intrusive pat downs.

"See, we're not profiling people who look like they might be from the Middle East"

Your correspondent is an immigrant - and proud of it. He is also an American citizen and proud of that but, in spite of having lived in America for over forty years, still speaks with a detectable foreign accent.

One of the freedoms of being an American is that we do not have to carry an Identity Card at all times. So, when I, an American citizen, am stopped by a member of the local Gestapo somewhere in Arizona, how do I prove that I am entitled to be here?

Why do I have to prove that I am a citizen. What happened to that quaint concept of 'innocent until proven guilty'? Where is the probably cause? To be detained by the police on the grounds of 'reasonable suspicion', particularly when the only basis is how a person looks or speaks, is hardly acceptable to a free people.

Papieren!

Jawohl, mein Herr.

Sieg Heil!

There is a resemblance to Nazi Germany that is not pleasant to contemplate.

Needless to say, as a matter of principle, your correspondent will not be going to Arizona until after this law is repealed or struck down by the courts.

Perhaps not even then.

The Financial Crisis (4)

Frank Borman was an Astronaut who commanded the Apollo 8 mission that orbited the moon in December 1968.

After his retirement in 1970, he was employed by Eastern Airlines, and subsequently served as Chairman and Chief Executive Officer from 1975 to 1986. After Eastern was sold to investor Frank Lorenzo in 1986, the airline subsequently filed for bankruptcy protection and was liquidated in 1991.

Mr. Borman knew what he was talking about when he said:

"Capitalism without bankruptcy is like Christianity without hell."

Those who are constructing new schemes to regulate Wall Street, as well those who make their livings there, would do well to remember Mr. Borman's simple insight.

Goldman Sachs and the SEC

It is not clear that the Securities and Exchange Commission (SEC) will prevail in the law suit that it recently filed against investment bank Goldman Sachs.

Certainly, if the case goes to trial, the SEC will need a lead attorney whose highest skill is to explain, in very simple terms, what Goldman Sachs actually did, why this is a civil fraud, and who was defrauded. All the while managing to prevent a majority of the jury from falling asleep within twenty minutes of arriving at the courthouse and taking their seats.

That will not be an easy task.

The twelve unfortunates, plus alternates, chosen for the Jury may be spared such an ordeal if Goldman settles. If there is a settlement, it will be because the disclosure of embarrassing and reputation destroying e-mails becomes too much for Goldman to endure. In that case the SEC will have won - but only by using blackmail rather than on the merits of the case.

Whether the SEC wins in court, or whether a settlement is reached, the SEC's actions appear to be a gross abuse of government power. There is no question that it is the job of governments to enforce the criminal laws. It is hard, however, to see the choice of a civil suit as anything other than a stratagem to avoid the requirement of criminal law that guilt be proved beyond a reasonable doubt.

If the buyers of the relevant financial instruments feel defrauded, let them sue. That they have not is highly suggestive: their reputations, too, would be on the line and their lawyers may well have reached the conclusion that the chances of winning, given their clients' stupidity and carelessness, are low.

None of the players had real assets in this game. All they did was to place very large bets on the direction that the value of certain real assets - owned by others - would take. One side wins, the other loses and the investment banker (casino operator) takes a fee for running the game.

In addition, Goldman appears to have rigged the roulette wheel (yes, it can be done), but even that was likely to have been disclosed in the prospectus. Were it not, a decent analyst should have been able to tease out the relevant information. More importantly, perhaps, no one forced the losers to place such unwise bets.

Goldman's actions appear slimy and unethical and the company undoubtedly deserves to be punished. If what they did is criminal, let criminal charges be filed: if what they did is civil fraud, let the losers sue, not the government. Otherwise, let the damage to Goldman's already tattered reputation take its own toll.

Those who lost money should have taken more care in their due diligence. Their analysis - or lack thereof - of the prospects for the American housing market, and the poor quality of mortgages supporting it, appears to have been entirely incompetent. Worse, they neglected the most basic principle of dealing with investment bankers:

READ THE FINE PRINT!

Your correspondent is unable to muster much sympathy for those who lost money as a result of their own stupidity and incompetence.

Enough said.

The Financial Crisis (3)

Up until sometime in the 1980s, Wall Street actually provided useful services to society:

• It gathered capital and provided it, in the form of debt (bonds) and equity, to new and growing businesses.
• It allowed those who had invested in the early stages of business to reap their just rewards by underwriting Initial Public Offerings.
• It gathered capital to lend to governments at all levels
• It provided advice and valuations when companies decided to engage in mergers and acquisitions.
• It facilitated the purchase of what is effectively 'price insurance' using uncomplicated and relatively easy to understand derivatives such as futures and options.
• It allowed investors to trade their holdings.

The financial sector's role was to act as an intermediary by facilitating transactions that had real economic value. For this service, they took a modest scrape - at least by modern standards - and relatively little risk. The financial sector acted as the grease that lubricated the real economy.

In the early 1980s things changed. Salomon Brothers was only the first of the major investment banks to change from being organized as a General Partnership, where the partners were liable for all of the company's obligations - without any limit, to becoming a corporation where shareholders could lose their entire investment - but no more than that. Managers, instead of owning the entire company and being liable for all its losses, now owned only a tiny part. In addition, since they could keep much of their wealth outside of the corporation, there was a safety net. The incentive to take enormous risks was irresistible because the worst that could happen was that they lost their jobs and their unexercised stock options.

Investment banks, instead of being middlemen, saw that the big money was to be made through proprietary trading - taking a position on which way the markets would move. Then they amplified the rewards (and the losses) with vast amounts of borrowed money.

The repeal of the Glass Steagall Act of 1933, which had separated deposit taking institutions (commercial banks) from investment banks, brought another major change. Investment banks, once solely conduits for capital flows, now performed that service only as a sideline while focusing on speculation for their own accounts. Commercial banks as well as Savings and Loans, neither group known for the quality of their management, joined the mob of speculators with the advantage of an explicit government guarantee in the form of deposit insurance provided by FDIC and FSLIC.

The relationship between management, shareholders and the taxpayer, became 'heads I (management) win, tails you (shareholders and taxpayers) lose'. The inevitable result was risky and dysfunctional behavior.

In an ideal world, big banks would be allowed to fail. Since, in 2008, the expected effects of major bank failures on the real economy of goods and services were so dire, the government - not unreasonably - felt that it had to intervene. The Wall Street bail out pleased few but arguably saved us from a catastrophic economic meltdown.

While your correspondent is reluctant to see another expansion of government power, a very good argument can be made that President Obama should act in the same sort of manner that President Theodore Roosevelt - a former Republican President of whom he thinks highly - did with respect to the industrial trusts. Break up the financial institutions that are too big to fail because too big to fail simply means too big.

Period.

Then provide suitable penalties for those that remain organized as corporations and certain benefits for those that are organized as General Partnerships. Couple that with a very modest limit on total compensation ($250,000 say) for those who are not Partners so free rides (heads I win, tails you lose) are no longer part of the game.

Let the senior executives put all of their net worth - and more - on the line and see whether they continue to take outrageous risks. If they do that, then there are no limits to how much they can make but, perhaps, the financial sector will return to its roots as a net contributor to society and our economy.