Nothing New Under The Sun

The President and Congress are engaged in in a grotesque game of economic brinkmanship.

First there is the continued funding of the government when the latest temporary spending authorization expires at the end of next week; second is an increase in the legally permitted debt ceiling that will be needed by the end of May - at the latest. If the latter does not happen, the USA - just like some third world hellhole - will be forced to default on its sovereign debt or simply to stop paying its bills.

Our situation brings to mind a thought from German sociologist and political economist Max Weber:

"Ultimately there are only two kinds of deadly sins in the field of politics: lack of objectivity and—often but not always identical with it—irresponsibility.

Vanity, the need personally to stand in the foreground as clearly as possible, strongly tempts the politician to commit one or both of these sins."

Given that Weber died of the Spanish flu in 1920, it is clear that our situation proves, once again, that there is nothing new under the sun.

President Obama on Libya

President Obama claims to admire President Lincoln as much - perhaps more - than any other American President.

Were President Lincoln to be reincarnated, and had he been forced to listen to President Obama's thirty minute speech about the situation in Libya, he would likely find some of his original words to be worthy of reuse:

"He can compress the most words into the smallest idea of any man I know."

It is hard, indeed, to communicate great ideas, when the speaker has none. Sadly, we are ill served, not just by Mr. Obama, but also by too many sitting politicians whose only ideas seem to be election and re-election to political office.

The words of Bill McKay, the character played by Robert Redford in the 1972 movie 'The Candidate', speaking to his campaign manager immediately after the announcement of his victory, seem to fit the current generation of politicians:

"What do we do now?"

Unions (2)

One man, one vote, one time was the modus operandi favored by many a post-colonial "Big Man" who subsequently took on all of the characteristics of a dictator. Much the same is true when a company becomes unionized.

The process of unionization begins when at least 30% of the employees of an 'appropriate' bargaining unit sign cards or a written petition. The second step is for an election, conducted by the National Labor Relations Board (NRLB), to be held. A simple majority is sufficient to authorize the selected union to negotiate a contract with the company.

Although the process sounds simple, it is not easy to organize a workplace in the face of concerted opposition on the part of the company. When a union is certified, however, there is good reason to believe that it really is the freely chosen representative of a majority of the employees.

In the United States, however, we elect political representatives for a fixed period. If they wish to continue in office, they must run for re-election.

With respect to union representation in a workplace, that single election is for an indefinite period: the only way for employees to fire their union is to go through the equivalent of a recall election. Known formally as decertification, employees who no longer desire union representation must go through a similar demanding process: petitions must be circulated and signed - again by at least 30% of the bargaining unit - and an election conducted by the NRLB.

Once a union has been certified, it will engage in contract negotiations. Since a union is a business and its revenue is derived from dues, one of its major objective will be to ensure that all employees of the bargaining unit are forced to pay dues - whether they voted for the union or not - by the inclusion of Union or Agency Shop language in the contract.

While the creation of a Union or Agency Shop is illegal in twenty two mostly Southern and Western States, a reasonable argument can be made that, a fair election having taken place, all employees of the bargaining unit should be treated equally and all should pay dues. That is democracy at work.

On the other hand, fixed terms of office and the right of voters to fire, or rehire, their representative on a regular schedule is a fundamental characteristic of democracy. That unions are not subject to such democratic discipline is a disgrace.

Your correspondent believes that real democracy would be well served by amending the Wagner Act (National Labor Relations Act) of 1935 and the Taft Hartley Act of 1947 to provide for regular certification elections every ten years.

Since we claim to believe in democracy, then the law should reflect our beliefs.

Unions

Tomorrow is the 100th anniversary of the Triangle Shirtwaist factory fire in which 146 garment workers died. The reason that the death toll was so high was that management had locked the doors to the stairwells and exits.

This anniversary, as well as the battles between Republican Governors and public employee unions in Wisconsin, Ohio and Indiana, brings to mind the idea that a series of pieces on unions might contribute to clearing a path through the propaganda emitted by both sides.

From the beginning of the industrial age until relatively modern times, industrial working hours were long, conditions were harsh - frequently more dangerous than necessary, and pay was low. In addition, poor treatment of individuals, or its reverse - favoritism, in terms of work assignments and discipline as well as hiring and firing was rampant.

Much of this was the result of a mismatch between the power of a corporation and the power of individual workers. For working conditions to become generally (emphasis added) decent took the power of government regulation supplemented by workers who banded together to bargain collectively and who, by withholding their labor (i.e. striking) albeit at some considerable short term cost to themselves, did much to make the modern workplace a more civilized place.

There are still businesses where the work is hard, dangerous and uncomfortable and where the power of an individual employee pales compared to that of the employer. Mining - particularly underground coal mining - is one of those where all too many employers adopt the attitude that production at all costs - regardless of threats to life and limb - must be the sole objective.

For manual workers, no industry is more dangerous than meat packing. While union members formerly amounted to more than 80% of the workforce, that is now below 50% and conditions are not improving. To link declining unionization and ongoing appalling working conditions is not a stretch.

Other industries, such as the harvesting of fruit and vegetables, where the work is hard, poorly paid and frequently performed by ill educated immigrants whose legal rights to be in the USA is often in doubt, suffer from too many employers who are willing to treat their employees in ugly ways. The fact that a minuscule number of these agricultural workers are unionized may also account for some of the conditions that they endure.

In spite of the fact that some industries - old line manufacturing, airlines, railroads and utilities for example - are heavily unionized, the usefulness of unions, or lack thereof, in the private sector is shown by declining membership. In 2009 only 7.2% of private sector employees were members of unions: a clear indicator that the "customers" are voting with their feet.

In the public sector, however, where working conditions are generally good and civil servants benefit from significant legal - in some States even Constitutional - protections, union membership amounts to over 37% of the workforce. Clearly government employees feel that they are getting something - and union dues are not a trivial expense - for their money.

They are right.

Check tomorrow for more thoughts on unions and their place in the modern workplace.

Rocks and Hard Places

The dilemma faced by governments in the Middle East was aptly summed up by Alexis de Toqueville some one hundred and eighty years ago:

"The most dangerous moment for a bad government is when it starts to reform."

Middle Eastern dictators and absolute monarchs, confronting riots and demands for reform, have few choices other than all out resistance - with some possibility of survival - or genuine reform and the likelihood of being deposed by leaderless mobs. Whichever direction they take still leaves them between a rock and a hard place.

Disruptions to the flow of oil are likely. We, therefore, having failed to curb our excessive dependence on a commodity that is controlled by unstable nations, have created our own hard place. Every President since Richard Nixon has warned of the danger but never has there been the political will to do anything about the problem.

Those who remember the Arab oil embargo of 1973 and the cessation of Iranian oil exports following the revolution in 1979 will find themselves pondering Mark Twain's insight:

"History doesn't repeat itself, but it rhymes."

The chance that anything constructive will happen this time is low but your correspondent would be pleased were he to find himself surprised.

Headscratcher (11)

If nuclear power plants are so safe, why is the Price-Anderson Act of 1957 still necessary? More importantly, why are the limits of liability so low?

For those who are unfamiliar with the Price-Anderson Act (click here for more explanation), utilities are required to buy the maximum amount of commercially available insurance. As of 2011, that is only $375 million - repeat MILLION - per reactor.

If there is a claim larger than the insurance coverage limits, every utility in the country is required to contribute up to $111.9 million for each reactor that they own. Since there are 104 reactors in the USA, the maximum amount of the fund, then, is approximately $12.6 billion. Any claims above this would have to be covered by the taxpayer.

Given that BP has taken a charge to earnings of $40 billion to cover its losses from the Deepwater Horizon oil spill, it is unlikely that a mere $12.6 billion would be sufficient to cover a really bad incident. The current problems in Japan indicates that massive costs will be incurred for many months - perhaps years.

Admittedly, payments made under the Price-Anderson Act, since its first passage, only amount to $151 million. That, however, should not be extrapolated into the future. A 'Black Swan' (apologies to Nassim Taleb) event can reasonably be expected - somewhere, sometime - and the costs of such an event can be anticipated to overwhelm the fund.

The score, in yet another game rigged against the citizens of the USA, is:

Corporate Welfare 104 Taxpayers 0

That we continue to put up with this sort of giveaway is a headscratcher indeed!

Full Disclosure: Your correspondent worked on issues (including the Price-Anderson Act) relating to nuclear power as a political and economic analyst in 1973.

He was also a management consultant on assignment at Westinghouse Nuclear Fuels Division in 1979 during the melt down of Reactor #2 at Three Mile Island where he learned much from some who had survived, and cleaned up after, some quite ugly incidents that were successfully contained but could easily have become uncontrollable.

Mother Nature Wins - Again

For the third time in less than twelve months, nature has inflicted massive disruption upon humans whose grand conceit is that they are in charge of the world.

In April 2010, an Icelandic volcano with an unpronounceable name (Eyjafjallajojull) disrupted air travel - particularly air freight - across the Atlantic Ocean. Then a series of unusually severe winter storms disrupted air and ground transportation throughout Europe during December.

The consequences of these two natural events were serious but mostly as a result of stranding unfortunate travelers and, for a relatively short time, closing down supply chains that were dependent on air freight. This time, however, an earthquake of magnitude 8.9 or 9.0 (it depends on the reports) off the coast of Japan, followed by a series of tsunamis, has caused major damage to infrastructure, homes, industry, roads and power stations.

Many major factories - among them manufacturers of semi-conductors, exported automobile engines and parts, aircraft engine and structural parts, home appliances, elevators and power-generation systems - are severely damaged and will take weeks, if not months or years, to bring back into full production. The consequences to the global supply chain are not yet known but will not be trivial.

The partial destruction of a major nuclear power station complex has resulted in electricity shortages that are likely to result in rationing by rolling blackout. Since many production processes can neither be started up nor shut down quickly, the use of backup generators will necessarily be extensive while energy related costs will increase significantly.

The result, then, will be reduced supply, increased prices, and lost business. For companies, if not for the Japanese inhabitants of the region, the situation is probably uncomfortable but not devastating.

The lesson that needs to be learned is the one described in Nassim Taleb's book 'The Black Swan': far worse things, albeit of low probability, than we ever really expect are likely to happen. The standard method of analyzing risk combines consequences with probability but when the consequences are devastating or existential, such a simplistic analysis entirely misses the point.

A few businesses are good at worst case scenario planning but most regard the expenditure of time on such matters to be a symptom of negativity. Since the career prospects of negative-thinking employees are dim, the consequence, in most organizations, is that relentlessly positive short term attitudes survive and real dangers are ignored.

The ancient Greek myth of Cassandra, able to foretell the future accurately but doomed never to be believed, is a lesson upon which politicians and senior executives should reflect. More important, however, is Warren Buffet's Noah Rule:

"predicting rain doesn't count, building Arks does."

Just because the probability of an event is low, does not make it any the less dangerous when it does take place. The reality is that, at the end of any given period, an event either happened or it did not. If the event does not happen, there is no problem but if it does, even if the probability was one in ten thousand years, the consequences are one hundred percent real.

Intervening in Libya

Numerous politicians, from a number of countries, are beginning to talk about military intervention in Libya.

President Obama is displaying commendable caution but is now coming under attack as a weak leader. That Mr. Obama lacks leadership ability is a given: his caution in this case, however, is appropriate.

The key questions are:

1. What are our vital interests that would justify the cost, in lives and treasure, were we to intervene?
2. Given that we are still engaged in two wars, what rapidly available forces do we have with which to intervene?
3. If we do participate in the overthrow of Colonel/Dictator Qaddafi, what will we do once he has been deposed?
4. Other than more borrowing, how would we pay for such an intervention?

The wars in Afghanistan and Iraq were highly successful up until the point of regime change. After that, we became mired in what seems to be a never ending occupation. Worse, in both countries, a significant fraction of the population is actively hostile and most of the rest would just like us to go away.

In an editorial page column yesterday (click here to read) in the Washington Post, George Will delivers an excellent analysis of the situation and the reasons why we should not intervene militarily. For those who would like the shorter version, these sentiments, expressed by Presidents John Adams and his son John Quincy Adams, are pertinent:

America does not go abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all. She is the champion only of her own.... (John Adams)

Wherever the standard of freedom and Independence has been or shall be unfurled, there will her heart, her benedictions and her prayers be. But she goes not abroad, in search of monsters to destroy. (John Quincy Adams)

Perhaps we should just mind our own business and leave the Libyans to sort out their problems. Acting as policeman to the world is no longer - if it ever was - in our national interest.

Leader Wanted

President Obama's recent budget strongly suggests that he doesn't believe that either of these two political opposites knew what they were talking about:

"The problem with socialism is that eventually you run out of other people's money."

Margaret Thatcher

"Nobody, no individual or country, can indefinitely spend more than he or she earns."

Raul Castro

The bond market, having registered its strong disapproval of the spending habits of Greece, Portugal, Spain and Ireland, seems to be taking a break. It will be our turn soon - unless we move rapidly to control spending - and there is no Germany waiting in the wings to bail us out.

We do, however, have options: default, inflate the debt away or cut spending. Raising taxes significantly is not a real option although rationalizing and reforming the tax system would likely increase growth and so raise some additional revenue. By itself, however, additional revenue will not be sufficient while default, or even the relatively modest inflation rate (nearly 14% in 1980) seen during the latter two years of President Carter's single term, is a recipe for greatly reduced living standards. Were inflation to rise to the level seen quite recently in Zimbabwe, only some of the well prepared and a very favored few others would survive financially.

The solution, therefore, is to reduce spending but the American people do not yet understand the seriousness of the situation. The sooner that politicians - President Obama as well as Members of Congress and Senators - become willing to lead, the better. Given Mr. Obama's pathetic lack of leadership with respect to the very real problems of health care, his careful avoidance of the eight hundred pound budget gorilla is, unfortunately, not surprising.

Without immediate action, the costs of Social Security, medical care (Medicare, Medicaid, Veterans Benefits as well as care for civilian employees of the government together with active duty and retired members of the military and their families) and interest on the national debt will soon consume the entirety of tax receipts leaving nothing for defense, diplomacy, infrastructure, research and development or education among many of the important activities undertaken by the government.

We would, perhaps, be better off if elected officials were to forswear opinion polls in favor of persuading the American people that some sacrifice - even quite a lot of sacrifice - now is preferable to great pain in the not so distant future. Edmund Burke, in a speech to the Electors of Bristol in 1774, accurately described the essence of an elected official's job description:

"Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion."

There is still time but not much. More time can be bought with leadership but there is yet little sign of such a thing among the self aggrandizing, re-election driven, publicity seeking political classes.

Regulating the Financial Sector

The Securities and Exchange Commission has proposed compensation rules that are intended to discourage irresponsible risk-taking - 'heads I win, tails I break even' - in the financial sector. Included in the proposed regulations is the deferral, for at least three years, of at least fifty per cent of the cash portion of incentive pay as well as the ability to claw back part of that pay to reflect subsequent losses.

Although this is a start, it is unclear whether it will be effective in reducing risk. The one certainty is that there will be unintended consequences as really bright bankers learn to comply with the letter of the rules while evading the intent. In short, the vast majority of bankers will continue to favor their own interests over those of the companies that employ them and, more importantly, their customers.

The financial sector would serve the economy better, with less risk, if every financial professional were to spend a brief period at the start of every day reflecting on this simple story:

One day, J.P. Morgan was listening to a younger banker who was enthusiastically describing the new yacht that he had recently purchased. Finally tiring of the younger man, Morgan silenced him with a single question:

"But where are the customers' yachts?"

If J.P. Morgan's attitude were the norm now, there would be much less need for costly and time consuming regulation.

A Government Shutdown

In spite of the fact that the fiscal year is almost half over, not a single appropriations bill has been passed by the Congress. As a result, the government is operating on a Continuing Resolution which permits spending at the same rate as last year and which was scheduled to expire two days from now.

Having, today, managed to pass a short term continuing resolution to fund the United States Government for just two additional weeks, Representatives and Senators likely believe that they are doing their jobs. If that is the case, they misunderstand the nature of their jobs - which include acting in a timely manner - and deserve to be fired for incompetence.

Unless action is taken in the next two weeks, the government will cease to pay its bills and all employees deemed not to be "essential" will be furloughed. The government was last shut down in 1995, in response to political war between President Clinton and Republicans, giddy with power after becoming the majority in the House of Representatives for the first time in forty two years. Those who were furloughed were eventually paid their full wages and salaries for the period - even though they had received an unscheduled vacation.

If a shutdown occurs this year, no one - specifically including Members of Congress and Senators - should be paid for the period during which they are furloughed. While furloughs would not be the fault of civil servants, there can be no justification for spending taxpayer money on work not performed. If a credible threat to refrain from paying salaries during the furlough period were to be made, then pressure from civil servants, who comprise a substantial bloc of voters, to resolve the budget issues would be close to irresistible.

Regrettably there is too much truth in the old cliche that a nation get the government that it deserves. It is, therefore, critical that Americans vote for honest and honorable candidates who will tell us the truth about our fiscal state and who will take timely action in the interests of our nation. We have too long suffered under politicians who focus on little but their own re-election and who pander to those who demand too much from the treasury without being willing to pay the taxes required to balance the budget.

Change is overdue. President Obama's 'Change You Can Believe In' turned out to be business as usual while the elections of 2010 merely provided our nation with another group of petty ideologues focused on their own importance rather than the real challenges, specifically entitlements and the cost of medical care, that we face.