TRUMP’S POLICIES: campaign promises and the realities of governance

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TRUMP’S POLICIES: campaign promises and the realities of governance

The surprising electoral victory by Donald Trump (and his loss in the popular vote) has the media intensely speculating on the likely domestic and international polices of the incoming Administration. The pre-campaign rhetoric is being searched for relevant inferences on the new Administration ‘s likely policy agenda of economics and international policies. That is likely to be misleading precisely because Trump ‘s election campaign was so different from traditional Presidential campaigns. What it took to win might be quite different than what it will take to govern. Even the early appointments do not yet give us a definitive picture to the actual governance menu that Trump presents.

The gap between campaign promises and likely policies should serve as a warning that predicting the actual policy menu of this President is likely to be fraught with more than the usual uncertainties. Without sufficiently definitive statements from the President elect, since his victory, preconceived hopes and inherited prejudices rule, particularly in the media. After Henry Kissinger’s meeting with Trump, his comments to the press referred to the difference between election promises and substantive policy. He was puzzled as well.

Still, markets are forward looking and responses have been seemingly positive at least regarding economic policies thought to be likely. Yet, market reactions often fasten on previously noted criticisms of people and industries without any definitive explication of what actual Presidential preferences will be. Trump ‘s criticism of some major Silicon Valley giants has been cited as a reason in the decline in their shares, but at this point no one really knows how policy will be shaped by his relatively weak connections to the Hi-Tech industry. The transition between the old and new Administration is likely to contain unexpected surprises.[1]

Presidential transitions have traditions and both the President and the President Elect at their first meeting seemed to recognize that both can gain from a smooth transition that excludes painful pre-election charges and focuses instead on what will be good for Americans of every stripe. The “progressive and/or liberal” media has been less forgiving of the transition process, as have some of the badly bruised Democratic politicians. Democrats are still in disbelief that voters turned against what they thought were their needed “progressive” ideas, particularly since major polls predicted victory. Rather than looking at their own their own agenda and bias, the “kept” media and the progressive zealots are trying to assign blame to external events, such as the querulous behavior of the FBI, to explain the Democratic Party defeat. The claim that FBI Chief Comey caused Clinton ‘s loss seems like “sour grapes,” but it will provide impedance to a smooth transition and opposition to the Trump policy agenda in its first 100 Days. Perhaps even more importantly, that continuing disbelief and heavy criticism of the President Elect will serve to prevent the Democrats from a useful inward meditation over what American voters want as opposed to what Democrats told them they ought to want.

We had long thought the Republican Party would need a thoroughgoing internal revolution beginning with what they believed their Party stood for, but as it has turned out, their victory has closed off that review, at least for now. Instead, it is the Democratic Party that has been badly split open. The split between the parties, however, surely will widen once the actual Trump agenda becomes public accompanied along with the appointments in the new Administration. As the new Administration formalizes its policies, it is quite likely that bitter factional disputes will still emerge from under the Republican tent.

At this stage, then, appraising the likely Trump legislative and administrative agenda is chancy and predictions may fail when the rubber finally meets the road. Nonetheless, we try below to put together what we think the top policy advisors and the President Elect will choose as their main lines of policy. We divide our analysis between International Economics and Politics and Domestic Affairs, even though they are clearly interdependent.

Geopolitics and Geo-economics

As Commander-in-Chief, the President will be faced with immediate decisions because while our troop involvement is in the anti-ISIS campaign is small, significant military and economic resources are deployed and there is no immediate “discharge of the war.” Trump is on record saying, “I will destroy ISIS” but the practical content of that intended destruction has not been made clear.

Trump’s foreign policy pronouncements have also included objecting to the Iran “deal,” supporting Israel, demanding NATO members increase their support, a possible change in our stance toward Russia, immigration reform (including the Wall), protecting the homeland, China (both currency “manipulations” and Chinese exports) and ending the traditional “free trade” orientation of American international economic policy. That forms a very big agenda and clashes with traditional Republican preferences in many areas.

The list requires attention to both foreign and domestic affairs and would tax even the most well prepared President Elect. Unfortunately, after such a strenuous political campaign, the new Administration has to have policies for these areas immediately without perhaps sufficient internal deliberation as to the form such policy changes are to take.

It doesn ‘t seem that Trump undertook major policy reviews during the campaign and with less than two months before inauguration, the new Administration is going to be extremely busy developing the details of its policy agenda. Moreover, because the Trump utterances during the campaign challenge traditional Republican ideas, Trump will have to spend a major effort to argue his policy case to the American and foreign publics. At the same time, we should expect significant interruptions to policy formulation from events outside the US that operate on their own time clock.

Iran and Russia: Trump repeatedly denounced the Iran deal. He claimed US negotiators got snookered. A simplistic approach that worked in the campaign requires significant articulation when it comes to implementing changes. Still, it seems that Trump will be unlikely to leave this running wound alone. He will need to do something not only to be consistent with his campaign statements, but also because Iran is so heavily involved with the various American allies in the Mideast. The news will still carry reports of deaths and casualties to our troops abroad, so the wars there can scarcely be avoided. In addition, European allies of the United States endorsed the agreement and already are promoting business deals in Iran. Can Trump construct a strategy that is at least consistent with his pre-election critiques while maintaining the support of European allies that previously supported the ending the Iran embargo Possibly, by linking a change in the Iranian agreement with a new look ‘ at Russia. If he chooses to deal with both Iran and Russia (Putin) at the same time, he may find he has some leverage. This would be a bi-modal policy menu. Let’s begin with Russia.

Clearly, the embargo has hurt the Russian economy. Without access to international capital markets, much investment to improve the Russian economy has been neglected. This surely affects Putin directly, but in a larger sense, reviving economic growth in Russia benefits not only Putin, by solidifying his position with his own people, but also such investment could improve Russian life while creating better tax resources for the Russian government.

Suppose Trump offered Putin an end to the embargo and entry into western capital markets in exchange for Russia ending its Iranian love affair Would Putin be willing to substantially cut back support for Iran and perhaps withdraw Russian military support for Assad How much benefit does Russia gain from shipping military hardware to Iran and spending precious resources keeping the Russian military occupied in Syria The devil will be in the details of any Russian pull back in Iran. Trump could offer US relief on Crimea and the Ukraine if Putin agreed to move out of Syria and stop supplying weaponry to Iran. Trump would also have to find a way to separate US interests in the Baltic States from his apparent disinterest in the Ukraine and Crimea. Separating Iran and Russia could offer additional benefits for Trump. A weakening of the military supply pipeline to Iran might make it easier for the US to exert tighter control on Iranian support for terrorism around the world (particularly for Hezbollah) and tamp down terrorist threats to Israel. That might create further openings for peace negotiations between Israel and the Palestinian Authority. In addition, negotiating an accommodation with Putin would bring German domestic politics into play because a substantial portion of inbound Russian investment has traditionally come from Germany. With the possible exit of the UK from the EU, German business might well be supportive of a Putin-Trump negotiated end of the Russian embargo. The political left in the EU that wanted expansion to the East is not a Merkel ally anyway, and she will need to button down her center and right wing support for the upcoming elections this spring. Merkel undoubtedly was not pleased by the Trump rhetoric on Muslims, but her own political survival will be her immediate focus. If Trump can move the Russians out of Syria, the enormous pressure of potential Muslim immigration into Europe could be relieved, making Germany’s neighbors in the EU much happier with their prospects.

The Obama administration was addicted to a kind of naive idealism that sacrificed the domestic interests of many of its allies. That came back to haunt Democrats in American voting booths, even when not well revealed by faulty polling. One could not expect Clinton to have gone back on the Iranian deal that she so heavily endorsed, but Trump ‘s victory has left him with an opening to satisfy both foreign and domestic critics of his election rhetoric. A successful deal with Putin would mark finished to the Democratic Party contention that Trump was “unqualified” to be President.

China: Trump’s focus on “exported American jobs,” and his complaints about Chinese currency manipulation have also seemed simplistic. The progressive media denounced his views on China because they claimed a trade war would ensue, but one can also read this situation quite differently. Given the collapsing bubble in China, does it make sense for the Chinese to take a hard line against Trump if he tries to tamp down Chinese exports to the US, particularly steel and aluminum China has an immense capital flight problem that exacerbates its currency depreciation. Suppose China is induced by Trump negotiators to put on its own export quotas (a feat that the Clinton administration accomplished when faced with rapid Japanese auto exports in the 1990’s) Trump could claim some victories for his “Art of the Deal,” technique. How many jobs such export controls would produce is perhaps less meaningful then the demonstration of loyalty to the blue-collar Democrats that crossed over and sustained his election. Similar export quotas applied to a few other “visible” industries would give Trump some credibility with his new domestic allies. Would China be willing to do that

An export quota also offers the Chinese Communist Party some leverage on its own cronies. China has an extensive crony reward system, so it could help XI Jin-ping to discipline some members of the industrial elite and their allies in the CCP. After all, it is the rich who have the money that seeks exit from China. Export controls offer a new stick with which to beat the Chinese moneyed classes. China is not a “Free Trader,” so they would have no ideological reservations of exerting more controls at their own border. They can ration the implied rents that come from enforcing such export controls. Export controls reward the “old” versus the “new,” and it is the old industrialists that they need to keep in tow. If China would put non-cooperation with North Korea on the negotiating table, they might get some additional leverage in future negotiations with the new US Administration. By now, even the Chinese realize that controlling North Korean nuclear and ballistic missile ambitions is becoming more dangerous for China itself.

Critics will assert historic Chinese pride that resists “bowing down” to an American President and would likely doom such an outcome from the beginning. Perhaps, but Great Powers can still negotiate without appearing to be subservient. It is always a balancing of interests. There is leverage here for both political leaders. Giving kudos to Trump, the Chinese could also earn some credit at the table on other issues important to China in the geopolitical arena. Trump is not an ideologist. He will look for short-term gains wherever he can find them. The “Art” in such a “Deal” will appeal to Trump.

Trump on Brexit: The new administration can hardly object to the UK’s wish to regain its domestic sovereignty and thereby control its own borders. Trump is preaching from the same pulpit to a similar American choir. He wants to be less tied down by foreign entanglements, and be less responsive to European demands on climate and immigration. The UK will still be the US’s closest ally and supporting the UK will put pressure on NATO members in the EU to carry more of the defense burden that Trump has criticized. It may also make EU members more willing to be supportive of a program to crush ISIS. Trump inherits a lot of possibilities that his predecessor has left him, and he can continue to draw the line more solidly between his new administration and the policies of his defeated opponents

Immigration, the Wall and North American economic relations: Now elected, Trump can gain domestic political support by showing he is going to carry out his “Wall” proposal even if in a less drastic way than implied during the campaign. The Wall doesn’t have to be a huge infrastructure project that will be difficult to finance and to engineer. He can build a bit of brick and mortar and use chain-linked fence and then move to a much more sophisticated monitoring program, carrying a “Big Stick to get some help from Mexico. What he really needs is improved joint-enforcement. Mexico can reduce extensive brick and mortar by actually helping to police trips to the border by Mexican and other Latino migrants. Once it becomes known that Mexico itself is policing the new “Wall,” we might expect a much smaller volume of immigration. More adequate surveillance can come from better technology on both sides of the border instead of brick and mortar. If Trump builds a little (probably essential to calm his supporters to build a “Great Wall” structure) while massively engaging in digital deterrence, it will slow down illegal crossings and win support of US technologists. He can even make hay politically by showing he is “rounding up some of the usual suspects” without appearing to be a “racist.” Furthermore, capturing and deporting those immigrants who have committed crimes or those who don’t have the proper documents, need not trigger huge outcries from civil libertarians, if done thoughtfully and humanely. He will, however, have to face the “family breakup” issue. Legal support for such a program doesn’t need new Congressional agreement. The law is already there, but it does need thoughtful and sensitive enforcement. His ideological critics will shriek, but this could be managed with conscience and constant monitoring of the program. It will need support of the bureaucrats, as will other domestic programs (see below). With the right kind of leadership, it is definitely possible. His first requirement is to show he is stopping the flow.

International Climate Policies: The politically motivated assertion by the Obama Administration that climate issues were already scientifically determined and only right wing ideological objections remained to be quashed was both misleading and actually counter-productive. Trump has a chance to lead with a fresh stance. There are many thoughtful scientists who don’t think the climate issue is merely politics. The inability of long-term climate models to predict shorter-term climate behavior has led to some serious questioning of whether or not we already have the proper model. Nonetheless, Trump can steer around the current impasse by coming to a nuanced position that says in the absence of certainty, policies should go part of the way. Then, the argument shifts to how much, at what cost, and which nations will jointly underwrite the cost of less carbon in the atmosphere. Broached this way, some of the political toxicity is taken out of the argument while a focus on the efficacy and the cost of such measures comes to the fore. That can be welcomed by both climate change doomsayers and climate skeptics. It also points the way to deal with the international aspects of large-scale coal burning in developing countries such as India and China. Shifting the debate from the extremes has to be a plus for all participants, although we should recognize it will not still the voices of those who have made “saving the planet” a religious undertaking. The Art of the Deal cannot please everyone. The lesson is not to try to please everyone, but move ahead on a defensible basis. A similar approach can be implemented with regard to issues such as overfishing and forest burning.

The extreme climate crowd shouts doom and gloom. A thoughtful approach that moves coherently and economically might never quell the alarm of the “doomsayers,” but it does not have to face the criticism that “nothing is being done.” A simple program of carbon taxation will take out much of the bite from the climate crowd.

Domestic Economics

Trump is in a good position to move ahead on tax policies as long as he is caring of traditional Republican budgetary concerns. Again the Art of the Deal means essential focus on the details of cutting taxes but not throwing the US onto a sharply growing budge deficit path.

The economy has grown far too slowly over the period since 2009. While the deficit has shrunk as a percentage of GDP, that percentage could fall even faster with faster growth GDP growth. The Democratic taunt of “trickle down economics” can be defanged. Tutoring Trump ‘s enlarged voting public on the importance of increasing economic growth can weaken those fears. Even Larry Summers spoke to this issue during the campaign, chiding his Democratic colleagues that they needed to be growth-oriented. Getting to 3 or 3.5% growth will take a lot of strain out of the tough decisions over Medicare and Social Security. Growth of business investment spending has been poor during the past eight years and if a higher growth rate is to be achieved, business spending must grow sharply. Cutting corporate taxes should help, but quelling erratic and inconsistent Government regulatory interference will create a more certain environment for CEO’s and CFO’s to invest. A multi-year tax plan will give business the chance to properly isolate better from poorer projects and give business confidence that increased earnings will turn out to be increased earnings net of tax. Proper incentives are the first step in winning this game. In addition, the Trump Administration can hold the carrot of a much reduced “repatriation” tax (say cut to 7 or 10%) that will quell much of the concern of domestic business over higher interest rates in the future and generate needed tax revenues. Again, it is a question of details, not direction. The progressives will cry “trickle down,” but if the Administration moves strongly in the first year, some results might well appear before the next bi-election in 2018 and perhaps cement Republican control in the Senate even further.

Trump appointees will have to concern themselves with two potential pitfalls: thousands of bureaucrats who are in charge of implementation and the inertial momentum bureaucrats supply and second, the “balanced budget” Republicans that are rightfully (no pun intended) concerned with allowing the deficit to grow after a major tax reform is put in place.

The corporate and personal income tax rules must be drastically changed. Simplicity, lower rates, and less cumbersome collection procedures would improve growth and incentivize expanded business investment and personal savings. This is supply side economics coming to the fore. It couldn’t happen at a better time. If US imports are restricted by either foreign- operated export controls or higher tariffs, US exports will not grow as fast or may actually decline. That means the economy will need more stimulus from domestic consumption and investment. A more predictable tax environment will enhance both. Trump rightfully criticized the lack of transparency and the crony capitalism of the prior administration. He has a chance to show he can that he can lead but also demonstrate credible results through a simplified tax code that leaves less to crony manipulation and more to predictable tax receipts. Provided that budget savings can be found, a simplified tax code that doesn’t lead to excessive deficits will provide great economic thrust in the coming years.

Most economists would prefer a simple consumption tax that rewards savers, but that might be one bridge too far in the initial year of the Trump administration. Progress on tax code simplification will open that door to even a more simplified tax system if ensuing growth causes Trump to be re-elected. The charge that growth leads to very unequal income and wealth outcomes can be answered by stripping special provisions such as incentives to convert income gains to capital gains due to large differences between tax rates on income and capital gains. An income tax rate of say 20% and a capital gains tax rate of 20% have much to recommend it. It avoids the shifting issue and the distortions that ensue from that differential. The new Trump tax techies should be running the numbers now on what might occur from a huge simplification of tax rates on income and capital plus eliminating much or all of the penalties on repatriating overseas business income.

Finally, we come to perhaps the most political parts of the tax code, estate taxation. From his earlier statements, one might predict that Trump will seek a substantial reduction in the estate tax rate, if not eliminate it entirely. The estate tax doesn’t raise sufficient revenues to create concerns for the deficit monitors, but it is a highly charged from the standpoint of growing wealth disparities. (Estate and Corporate taxes at the Federal level represents some 9% and 11% of Federal Tax Revenues). In addition, wealthy taxpayers are the source of significant charitable contributions, often motivated, at least partially, by the fact that the donor has a partner—The US Internal Revenue Service—in making gifts. A top marginal federal tax rate of nearly 40% implies that the cost to the giver is only 60 cents for every dollar gifted. Will the wealthy be less giving if marginal income tax rates drop sharply along with substantial reductions in estate taxes

Economic forecasting, much as we might think it is scientific, is likely to stumble when predicting in an environment of rapidly changing economic growth and complex changes of both income and wealth taxation changes at the same time. One can hazard a guess that rising wealth that can be passed to heirs at relatively low or zero tax rates might well create even more charitable giving on the grounds that a larger relatively untaxed estate would provide even more reasons for the wealthy to increase their charitable activities.

While this is an interesting theoretical problem for tax experts, the real debate will not be about efficiency and growth. It will be about perceived wealth and income inequality politicized by incorrectly characterized by the inequality issue. What we saw in the Sanders and Clinton campaigns was a huge display of rhetoric, not much based on solid economics. For example, the 99%-1% juxtaposition turns out to be quite faulty. Where inequality has really shown up is not in the 1%, but in the .001 (a tenth of one percent) segment of the income distribution. The progressive argument against the wealthy is more noise than substance. That debate, however, will pale against the claims and cries of the Progressives who have long built their case on massive wealth redistribution. What is needed is a factual debunking of the argument, but the data are there to do just that. Trump will have to tread artfully through this political economy jungle to hew a thoughtful program of tax reform.

Health Care: If it was not clear during the campaign that the simple statements about abolishing Obamacare were at best wishful thinking, it has since been made quite obvious, even admitted by the President Elect in his “60 Minutes interview with Leslie Stahl on November 13th. The new administration can ‘t just abolish the Affordable Health Care Act. Too many people would be left without any healthcare program. That means that the obiter dictum will be change, not abolition.

Here, the terrain gets tricky as the new Administration must navigate between the extent of coverage and the coverage costs. The new Administration will start from the fact that rising costs to those now covered are making potential converts on both sides of the aisle. The existing structure of coverage and the shattered private insurance market that has been created by the rise in costs has created a sharp break in expectations. Even those arguing for a more extensive health care system now realize that rather than “bending the cost curve downward,’ (the mantra of those policy wonks that supported the AHC act), has been an illusion. Moving 20 million people onto the health care rolls plus the rising costs of an aging population simply overwhelmed any cost saving that might have arisen by covering everyone. Much sooner rather than later, health care costs have risen so sharply that even the most progressive of the health care advocates realize the present plan is unsustainable. This means that the debate must shift and that will test the political acumen of the New Boys in Town. A Trump health care plan will come, but the tug of war between budget sanity and the political necessity that government provided health care is here to stay. That will define the playing field. Some tough choices will have to be made between how much expense the changed health care system will allow for the aged. Extending massive health care to those in their last few years of life is not a pleasant theme even for dedicated Progressives. At the end of the day, there is neither a free lunch nor free health care. If cost controls are not put on the expense of the ‘last years of life,’ there can be no permanent cost control. Conservatives rejected the death panel approach to governing the extent of care that should be paid by Government, but some answer to this vexing question will have to emerge if health care costs are to be controlled. This issue remains in the background, but since 60% or more of the health care budget comes from those in the last two to three years of life, it is an issue that cannot be avoided. For the country, it may be better that the past opposition to AHC must re-frame the issue and its solution.

The last hurdles will be pre-existing conditions and coverage of young adult family members living at home. The President Elect has already conceded on these two points so the struggle will be over the precise content of the reformed features, not the essential element of Government coverage. The Progressives on the Democratic Party side will attempt to skew the argument to show that the new Trump administration is “taking benefits away.” That is politics within the Beltway. At the end of the day, the Republican majorities in both Houses confirm the fact that changes that satisfy the budget watchers will be the only ones that pass both houses of Congress.

A similar kind of argument will take place over changes in Social Security, even though the time line of Social Security Insolvency is longer. It is possible that with so much to do on other domestic issues a well as a considerable agenda on the foreign policy side, that the new Administration might not get anything done substantively in its first two years. The domestic priorities will be tax reform and health care. Reforming Social Security may slip even if it too is a ticking time bomb.

Financial institutions Reform: Despite the throaty moral outrage of Senators Sanders and Warren, the 24,000 odd pages of the Dodd Frank (DF) bill need real scrutiny. It is questionable whether DF has really solved the To Big To Fail problem. It is has clearly made large banks less willing to take risk and the Volcker rule has cut earnings of these denizens of the finance world. It has done so however through an enormous posse of regulators now housed in the banks themselves while moving much lending to the shadow banking market that is not heavily regulated. This confirms the well-known effect that regulation changes where the problem is pushed without solving the issue. Dodd Frank directed attention away from the GSE ‘s who were considerable contributors to the collapse of 2008/2009. Worse, the Obama Administration restructured property rights of the owners of GSE debt which was raised by the GSE ‘s before they were conservatorized. That issue is still in the courts, but the current Administration has adroitly hidden the causal role played by the GSE ‘s in the mortgage market collapse of 2007-2008. Almost surely, had Fannie and Freddie not underwritten the subprime market, the housing bubble could never have grown to the size it did in 2007. Neither of these entities were paragons of accounting virtue prior to the collapse, but they were intimately involved with the Congress and were difficult to stifle. Neither Sanders nor Warren discuss the cronyism and corruption of the GSE ‘s despite prior criminal cases successfully prosecuted against them. This is only one of the main areas that need to be cleaned up for the US to have a viable and sensibly regulated financial sector.

During the current Administration, the largest financial institutions paid literally billions of dollars in fines that nearly always were set by agreement rather than definitive court proceedings. That is an unhealthy process for Government and it is part and parcel of the cartelization of the finance business that has taken place during the Obama administration. Similarly, competition in other areas of the economy, such as media and communications, airlines and internet sales, to name just a few industries, is now characterized by a few large firms with plenty of clout within the Beltway. Whether the Trump administration is willing to take on the anti-competitive pressures that have built over the last eight years is questionable despite Tumpis express concerns over AT&T ‘s proposed acquisition of Time Warner and his concerns about Amazon ‘s principal shareholder, Jeff Bezos. While nothing explicit has been said about these areas of the economy, they clearly need attention. Cartelized capitalism is neither good for growth nor for freedom.

The Judiciary and the Fed

It is easy to see that Republicans dodged a generational bullet in the Supreme Court by holding the Senate and winning the Presidency. A much more liberal (statist) Supreme Court would have certainly arisen with a Clinton victory. While the Democrats may now play the old Republican filibuster card on Supreme Court nominees, the new Republican Senate majority can, if it so chooses, change the voting rules by using its majority. Despite Senate Majority Leader reluctance to end the filibuster, it might be the only alternative in order to fill the vacancy on the Supreme Court. The famous line in the movie Independence Day, says it all: payback is a bitch! That said, this is not a major strategic issue. It is simply tactical maneuvering.

The Federal Reserve: Another area for payback stems from the eight-year period of low interest rates engineered by the Fed. Oversight is coming, notwithstanding the attempts by the Fed to escape a legislative lasso. Among many economists, former Chairman Bernanke’s immediate efforts in 2008/2009 to resurrect our credit markets, are applauded, but that support does not extend to the long period of QE and a near decade of low, often zero interest rates. Savers have been punished and the reach for yield suggests significant distortions in the allocation of savings and credit.

The fact that the Fed has been able to do this largely without significant Congressional oversight doesn’t mean it will be able to do this again in the future. The Congress will in fact pass legislation to interrupt the Fed’s total independence. Chairman Yellen ‘s reign extends only until February 2018, and she will not be reappointed. While there is no current suggestion she will resign before her term expires that could occur if the Congress gets extremely testy with the present Chair. The new administration will be appointing two new members of the Fed’s Board of Governors and it is likely that the new appointees will pair with some of the current members who oppose Yellen’s policies. This will create an unusual situation in an institution that thrives on consensus decision-making. It could create momentum for Yellen to end her Chairmanship prior to the end of her designated term, because a badly split FOMC would create great incredulity in financial markets. How the Fed is finally treated by the new administration will also be related to how this administration deals with the much-hated Dodd Frank bill. Dodd Frank reform will become a circus dominated by cronies and lobbyists. There is considerable support to end the autonomous and separately funded, Consumer Protection Bureau. It is hard to see that agency not getting its wings severely clipped. The Congress wants to and will assert its powers of governance over the Bureau, if it does not kill it entirely. Surely, Congress will end its unlimited funding via the Fed.

The Clinton-Trump contest offered voters a juxtaposition of two rather distinct economic policy formulations. Clinton ‘s focused on further regulation of economic agents. Her menu would have replaced market choices with regulatory expansion and increasing taxes to pay for more Government programs notorious for their inefficiency. Inevitably, that would have meant even more cronyism and corruption. Whether it would have produced more equality of outcome is doubtful because the wealthy have more access to modifying offensive regulation than the poor.

The Political Revolution What did voters choose

The ideology behind the Clinton policy menu implied that Democratic policy mandarins would have been happier if the economic pie were more equitably distributed perhaps even if that resulted in a smaller pie. Aside from the morality of such a choice, it is a highly questionable political theory because the wealthy invariably have more escape remedies than the poor. The proof may lie in the simultaneity of massive regulatory expansion and the evident decline in the US economic growth rate over the past decade. Is the alleged reduction in equality of income and wealth that we now observe merely an accident or a principal outcome of increased regulation and interference over many decades One suspects that there is a latent connection here.

The Trump menu also has two prongs: one is to diminish our integration with the rest of the world economy. One implication of such policies is rising prices of imports and import substitutes and a reduction of labor supplies formerly produced by immigrants without proper papers. That has to raise costs to consumers which is welfare reducing. Reducing the international specialization of labor could produce more domestic jobs, although that is not clear. Current exports could be reduced or grow more slowly either through higher costs or retaliatory measures from overseas customers. In that case, domestic jobs growth could slow or even decline. Indirect effects are often not properly foreseen when a major policy orientation takes place.

The second prong encompasses proposed tax rate reductions on personal income, corporate income and inherited wealth. Taken in isolation tax cuts should stimulate economic growth. Unfortunately, while growth could improve, tax reduction is likely to have negative consequences for the US budget deficit. That means that the outcome is not likely to be predictable until one specifies the rest of the economic policy menu. One needs to know what will be cut from the budget as a consequence of decreased tax revenues. Put another way, there are supply side effects and likely aggregate demand effects at work at the same time. Without specifying the mix, it is difficult to be confident when predicting the impact on growth from each of the two parts of the Trump menu.

In many ways, neither the Clinton nor the Trump campaign promises represented optimal strategies for the US from a strictly economic point of view. That was not their intent. Both candidates focused intensely on bringing different slices of the voting population to their cause, and neither spoke to the larger dimensions of stimulating economic growth sufficiently. By way of contrast, forgetting which classes of voters benefit most, what would a more ideal policy menu look like

The dominant economic problem in America is the evident decline in our growth rate. Choice expands when economic growth improves; both at the household and firm level but also at the policy level as well. When the economy moves from a 2% to a 4% growth trajectory, the traditional guns ‘ ‘ versus butter division gets much less constraining. However costly our current health care policy is, a bigger economic pie and larger government revenues make the collapse of the health care system much less imminent. Similarly, fixing Social Security gets a longer time horizon. Moreover, financing substantial infrastructure improvement becomes more plausible.

What about jobs, even for those whose skill content has not kept pace with modern technology It is inevitable with higher growth that the demand for labor all kinds of labor—will improve. Higher growth does not mean that the wages of the less skilled will become relatively more attractive, although tightening labor markets undoubtedly will push up wages across the board. Will tax reduction move the economy toward a higher growth path Nearly all economists would agree this is the most likely outcome although the distribution of income and wealth might not become more equal.

The only negative aspect of more growth comes from the old Starve the Beast argument: namely, there will be much less pressure to reduce the scope of Government activity when the Government coffers are fatter.

The second part of the story relates to the increased constriction of our possible economic growth possibilities due to increased regulation. It is not just a question of reducing taxes. It is surely a question of simplifying our tax codes and reducing the punishment on the supply side of the economy from the existing, overly complicated and activity-reducing tax mix at the margin. Corporate taxes are shifting American industries abroad. High personal tax rates create huge incentives for tax avoidance through complex tax schemes. High corporate tax rates lead to more tax competition between countries. If we wish to increase growth, we have to reduce the disincentives to growing.

The same incentive theme appears throughout any sensible economic policy agenda. Our regulatory state offers disincentives for both investment and saving at the corporate and personal level. We can see this most clearly by the sharp drop over the past two decades in new business formation as well as the reduced levels of business investment in current GDP measures. It has simply become too complicated and too expensive for many entrepreneurs to create new firms. New firms are the source of job growth. Older firms buy expansion through external acquisition, often reducing jobs as a consequence. This is where the growth story is most telling and where the job story is so depressing. Less new firm growth means fewer new jobs. It also means that large corporate enterprise finds more opportunities from external acquisition rather than internal growth. That leads to more cartelization of the economy and expands the crony capitalism that has become such a political hot button.

Going forward, the Trump administration will be constrained by the promises made during the campaign. That is an unfortunate consequence of a democratic republic. It is simpler on the campaign podium then it will be when policy choices have to be made within the new Administration. Simplicity of campaign slogans disappear when real governance must begin.

Elections have consequences: let the games begin

As Obama famously said at the beginning of his first term: “elections have consequences. I won.” This one will be no different, and the ire of individual Congressmen, now empowered by Trump’s unexpectedly long coat tails, will play out, as they become judge and jury on pet Obama-inspired programs. The ancient Chinese proverb, May you live in interesting times, should be remembered for how it was first uttered: it was the curse of a defrocked Chinese Mandarin, exiled after being fired from his Government post in the capital.

The games formally begin on January 20, 2017 but the jockeying for priorities and for the people who will lead the new Administration has begun in earnest. Political leaders in countries outside of the US don’t quite know what to expect from this new Administration. This is true in the U.S. as well. We really don ‘t know the who and the what of the Trump program at this stage. The power of the Presidency is unlike almost any other democratic republic, and this President has gotten his win by articulating complaints more than by making many promises to his rather widened constituency. Some of these promises worked to attract voters, but cannot largely satisfied as stated.

Some astute historians and political writers have likened Trump’s win to Andrew Jackson’s win in 1828. Jackson was also angry and outspoken, but was a hero to many. He was a very active President, known for inviting in the “Folk” to the White House, mud on their boots notwithstanding. He offended the powers of then Washington political denizens and he flouted his authority by tossing insults their way at every occasion. He saw his victory as one of the “people over the political elites.” Sounds like Trump, doesn ‘t it with the Tweet replacing the Shout Jackson was very ‘down home’ and when he didn’t like something, he said so. Trump has insulted many and was particularly scathing to his opponent. American Presidents wind up with cronies no matter how they vituperate against the existing Beltway crowd. Jackson had his, and we can be sure, this President will have his own as well. Trump liked to claim he would drain the Swamp within the Beltway. It is doubtful he has a big enough pump. American history has rhymed, once again, even if it has not repeated.

[1] Amazon, whose founder, Jeff Bezos, owns the Washington Post was criticized by Trump. AMZN trade above 844 on October 5 but fell to 719 on November 14 (the week following the election). It has since risen to 785 on November 22.

Indexing Stock Options or Granting Stock: which is a better method of compensating executives?

Rewarding a CEO (or for that matter, any senior corporate official) by using an indexed stock option only goes part of the way in properly compensating management and they fail to adjust for the risk that managers take but do not disclose.[1] In nearly every case over the past several decades of corporate misgovernance, shareholders and sometimes Boards, only learn after a corporate disaster that huge, undisclosed risks were taken along the way. Options, indexed or not, offer leverage to managers but provide no downside penalties for bets that turn out badly for the shareholders. One-way optionality is a serious problem for corporate governance.

It is not wrong for corporations to take risks, nor is it wrong that benefits from risk taking are shared with management. What does matter, however, is that equity holders be well informed about the kind of risks to which their investment is exposed well before they purchase their shares. For that, shareholders depend not only upon what managers tell them in quarterly and annual reports, but also upon competent and well informed Boards who monitor the managers. Our current system of corporate governance doesn’t accomplish that as we have clearly outlined in our book, Disorganized Crimes that captures many of these issues since the 1990’s Boom through the financial disasters of 2007/2008.

It is highly unusual for Boards to reward significant performance without judging corporate performance against the company’s corporate peers. Sadly, however, Boards often don’t know or understand the risks that their managers take and are less likely to know about risks taken by competitors. Indexing stock options doesn’t do anything to disclose those risks. Options are still a one-way bet with no downside for managerial misbehavior, incompetence or excessive risk taking.  What’s the alternative

Granting stock, rather than a stock option, is a better alternative. It would at least put managers in the same risk position as their less than well-informed shareholders. It would also make managers far more aware that they are gambling their own money as well as that of their shareholders when they place the company into a high-risk situation.   ‘Heads I win, tails you lose,’ is a bad compensation metric, even if it is indexed against the performance of the industry.

It’s about time to deal with the real problem, not the taxation aspects of different compensation forms. If it ever turns out that income tax rates on currently earned income versus capital gains income get equalized, the real issues of managerial compensation would appear far more distinctly.   Compensation based upon transparent risk reporting and corporate accountability is what shareholders really need.

Let’s focus on the real problem to be solved, not the tax system that makes option compensation seem so attractive. Options distort the reality of undisclosed managerial risk taking. It’s time we pay attention to the

[1]This is a reply to the OpEd of Robert C. Pozen that appeared in the WSJ on November 14, 2016. See “A Nobel Idea to Pay CEOs What They’re Actually Worth: Indexing stock options would reward only skilled executives who beat their industry average.”

Options, equity grants and corporate governance

The following post was sent to the WSJ as a reply to Robert C. Pozen’s Op Ed (WSJ 11/14/2016) ostensibly as praise for the recent Nobel prize awarded Professor Bengt Holmstrom.   As the Journal didn’t reply (surprise), we post it here to our smaller but more well informed audience!

Paying a CEO (or for that matter, any senior corporate official) using an indexed stock option only goes part of the way to properly reward management for its efforts. It fails, however, to adjust for the risk that managers take but do not disclose to achieve the results which their efforts sometimes achieve. In nearly every case of corporate misgovernance over the past several decades, shareholders and sometimes Boards, learn that huge risks were taken along the way only after a corporate disaster. Options, indexed or not, offer leverage to risk taking managers with no downside penalties for bets that turn out badly for the shareholders. Indexed options don’t solve that problem and such misaligned incentives are indeed a significant cause of corporate misgovernance.

It is not wrong for corporations to take risks. They should and do so every day as a matter of normal corporate strategy. What does matter, however, is that equity holders be well informed about the kind of risks to which their investment is exposed even before they purchase their shares and the sometimes disguised incentives for risk taking given to management.   Shareholders depend not only upon what managers tell them in quarterly and annual reports, but also upon competent and well informed Boards to monitor what managers do on a day to day basis. Our current system of corporate governance doesn’t accomplish that as we have clearly outlined in our book, Disorganized Crimes and which captures many of these issues from the 1990’s Boom through the financial disasters of 2007/2008.

It is highly unusual for Boards not to reward significant performance and frequently Boards do judge the particular company against its peers in distributing such rewards. But, Boards are often unaware or understand the risks that their managers have taken. They hear good news quickly and easily. Bad news arrives slowly, often only after financial disaster strikes the shareholder. Indexing stock options doesn’t disclose those risks when the company’s share price is rising. Equity options are still a one-way bet with no downside for managerial misbehavior or incompetence. Granting stock, rather than an option, however, would at least put managers in the same position as their less than well informed shareholders.  Granting the stock itself would make managers far more aware that they are gambling their own money as well as that of their shareholders when they take the company into a high risk situation. Heads I win, tails you lose is not a good compensation metric, even when the option is  indexed against the performance of the industry. It’s about time to deal with the real problem, not the taxation aspects of different compensation forms.

If income tax rates on currently earned income versus capital gains income get equalized, something implicit in the incoming Administration tax proposals, the real issues of managerial compensation would appear more distinctly. Compensation based upon transparent risk reporting and corporate accountability is what shareholders really need. It’s time to focus on the real problem to be solved, not the tax system that distorts the common reality of undisclosed managerial risk taking and the no lose equity option that promotes that behavior.

Political Change and Political Corruption III

The Aftermath: revolt of the “Nobodies”

Having a lot of company when you are wrong on a forecast is not consolation. It is simply evidence that it never pays to be insufficiently skeptical of the American media’s constant attempt to paint conjecture as fact. The Media got it wrong; the Clinton campaign got it wrong; the professional pundits (that is the ones who get paid for telling people what they should think) got it wrong. Misery loves company, but I would prefer to pick my own friends!

Yesterday morning, when I voted in New Hope, I was struck by the length of the queue waiting in line at 6:45 to vote. I had never seen such a long line at the polls. I should have paid more attention. What was driving people to the polls in a state well programmed to be Blue? Apparently, even No Hope has a lot of Nobodies, voters who were angry with what they sensed was passing for governance in America. I did chat up one or two but of course I had no way of knowing that some in this long line must have been part of the “great unwashed” who generally didn’t vote. This time they had an opportunity to tell their “betters” that they weren’t happy with what they saw in America. At the margin, a few extra voters who generally didn’t always show up on election-day made a difference. The popular vote may go for Clinton—we won’t know what the actual numbers are for a number of days—but Clinton was defeated in the Electoral College in a shocking fashion. The States that put Trump over the 270 needed electoral votes were those “swing states” that had confidently been predicted to fall into the Clinton camp: Florida, North Carolina, Pennsylvania, Michigan and Wisconsin. Despite significant “minority’ votes, the Nobodies, who didn’t go to college, were mad….and ‘they weren’t taking it anymore.’

At the end of the day, Trump’s understanding of the pulse of America was far better than the professional punditry. Forget the polls, look at the crowds. Yes, it was entertainment and Trump had a long TV career. The “betters,” despised his architecture, his self-promotion, his truculence, his coarse language, his infrequent lack of knowledge about the intricacies of geopolitics. He had a very simpliste message. “Make America Great Again,” but above all, tell his audience that he was going to change things for the Nobodies. They weren’t going to be ignored anymore.

The Nobodies had not done well in the great transition toward globalization. They were trapped in their old houses, with jobs that didn’t allow them to keep up with their “betters.” They weren’t sophisticated about global trade and finance. All they knew was that their lives seemed less rewarding than they had imagined when they were youngsters. They knew their government was very distant and run by people like them. They were mad and Trump’s focus on how diminished their lives had become was appealing. They wanted change, a big change at that.

Some of the punditry are bemoaning the apparent success of his crudity, disguised racism, and xenophobic rumblings. They see ‘darkness’ and ‘whitelash’ striking back against the limited progress made on poverty, on civil rights and global warming. What that illustrates is how education has created such a great divide in America with the less well-educated less able to compete and to cope in the modern world.

Education and personal progress has also created estrangement and alienation among many in America. Somehow, the America the Nobidies knew wasn’t anymore—it was a society governed by economic and political elites who spoke differently, thought differently and were far removed from Joe the Plumber (in the election of 2012). It was a time for change and as Trump said with such staged humility, “I am only your messenger.”

Bottom Lines: there indeed will be intraparty restructuring. The progressive wing will shout that HRC was a weak and imperiled candidate, far removed from Sanders supporters who also clamored for change. Had there been no Superdelegates, Bernie Sanders’ legions might well have triumphed. Within the Democratic party, there will be a thoroughgoing revolution—-and it may lead to departures of centrist elements within the Democratic Party. The central question will be, where do they go?

Similarly, the Republican Party is now in great disrepair—the Tea Party elements will be less cooperative with the centrist leadership of the Republican Party. The Republican Party was not completely supportive of Trump. Significant Republicans actually refused to support him. Some ran away from him. Results have consequences. It will take delicate leadership by Trump to bind up the wounds in the Republican Party.

An interesting question to ask is whether the two “centers” have more in common with each other than with their nominal party members. Both Parties are now convulsed, one with victory and the other with defeat.

Saying No: What does it mean?

As the election nears, those who rallied away from the Democratic Party and cheered the negativism of the Trump campaign will again be disappointed. Just saying “no,” turns out to be not enough.   The Brexit “no” offers a poignant but sad reminder that just saying no to economic and political disenfranchisement is not enough for meaningful change.   It will be the same after the Trump defeat and the shearing of Republican majorities in both the Senate and the House.

As the WSJ pointed out this morning, (James Freeman: “Doesn’t Clinton Embarrass Democrats”) a “no” vote can topple a government (viz. Brexit ), but creating a solid program that creates inclusiveness and reform of Big Government is not the same thing. British voters turned against the prevailing support of EU by Tories who had supported Britain’s EU membership albeit wishing to allow for “local options.” Working class naysayers identified the Brussels Bureaucrats as the source of the evident loss of their political and economic status.   Yet, no program of inclusion or reform of British government has appeared.   Surprise Hardly!   “No” doesn’t constitute viable reform. The pertinent question going forward in the UK will be, “Where will those disappointed in the consequences of their revolt now head”   A similar question will arise after the Clinton election. Where will the disappointed Trumpeans go History suggests extremism could be the next step.

At a deeper level, Freeman asks several profound questions about the ascendance of “Crooked Hillary.” The recent Wikileaks disclosures pretty much close the case on Clintonian corruption and cronyism while our free press hardly comments. When your children ask, “How can I become a millionaire, tell them “become a successful politician.” All too often, Big Government functions on cronyism and corruption, and few politicians ever pay the price for crossing the line. The acceptance by our “free” public information system that legislators and administrators can be bought and paid for is the ultimate cynicism in a democratic state.

Freeman raises a painful reminder of the relevance of our modern press in current politics: why do both print and media journalists scourge Trump on his nativism but leaves the Clinton trespass into conflict of interest politics untouched Surely the facts are not in dispute The Clinton mob’s emails aren’t even denied anymore, merely ignored. That amounts to a blatant indictment of modern-day muckrakers that affirms corruption and modern American government is joined at the hip. Dog bites man is not newsworthy. Corruption is an everyday affair.

When an American business firm is charged with polluting the environment or raising the prices of pharmaceuticals (enhanced by Government paying the bill), the press corps is relentless in excoriating the overstep while it appears perfectly legitimate to use a public office to seek donations for the Clinton Foundation and those who derive economic benefit from running it. The corruption of the press is the ultimate undermining of a democratic republic.

The importance of a vital and free press to our Founders is embedded in the ordering of the Bill of Rights. The First Amendment anointed a vital free press as the key monitor on the behavior of our public officeholders. Our current press is virtually silent on the Clinton excursions. Can we have limited Government and probative public service without an objective press that digs out critical information and brings it to the public’s attention

We have forgotten the ultimate line of the Gettysburg Address: “…that government of the people, by the people, for the people, shall not perish from the earth.” R.I.P. is the ultimate “No,” isn’t it

Psycho Politics: Trump’s punishments

The final debate confirmed Trump’s infantile political campaigning. Clearly Trump is playing on a different field than any prior presidential candidate. That conclusion should lead observers to question his true motives in running for the nomination in the first place.

If we presume it was simply intemperance that led him to fall into the trap of denying the importance of the legitimacy of succession in a democratic republic, then we are left with trying to explain his response the next day. Reiteration not restatement We have seen that kind of Trump response before. Attempting to explain the response takes us into the realm of political psychoanalysis, not political science, just conjecture.

I suggest two possibilities: 1) Trump has been perpetually at war with traditional Republicans presumably because many Republicans don’t recognize the legitimacy of his candidacy or 2) Trump never really wanted to be the President and campaigned only because he loved being in the limelight. He hardly put his own money where his mouth was. He let a supine media provide his ammunition. The latter equates to a something to do when you have done everything else, a kind of occupational narcissism, hardly a solid motivation for becoming the leader of the free world. In any case, concluding with an abject failure of strategy, the presidential race ended Monday if had not already done so after the first debate. The legacy of his failure, however, is yet to be played out. What might it be

Consequential Outcomes: If you subscribe to the predictive quality of recent polls you may conclude that the Republican Party is about to suffer a monumental defeat in Congress. Then what Higher taxes, bigger government, a monumental shift to a more invasive Supreme Court, lesser judicial appointments that create a long term pattern of more judicial interference and a more permanent establishment of Presidential authority via Executive Orders Each is a very real possibility. It is a constellation of majority over minority interests. It is the worst case scenario feared by our Founders.

If this is the ultimate consequence of the Trump campaign, the Republican party will be at the crossroads of political survival, hemmed in by Tea Party non-cooperation and continuing defeats at the polls of reasoned Republican conservatism.’ In those Congressional districts that continue to send Tea Party representatives to Congress, there will be total disillusionment with our conventional political institutions. In districts that cannot elect a Tea Party candidate, moderate Republican candidates that believe in our political institutions even when they are the minority party will find themselves increasingly isolated. In either case, R.I.P. will be the current Republican Party’s obituary.

That leaves open Ripon II as the ultimate outcome of this campaign disaster. It has happened before, and perhaps it is necessary for American politics to experience a monumental revolt in order to revive some semblance of a viable two party system. Ripon I destroyed the old Whig party and created the foundations of a new and vital party that could be a majority party when it fused the parochial interests of many small, one-issue parties such as the Free Soilers, Abolitionists and Know Nothings to a semblance of Whig principles. What could a Ripon II achieve

The central governance arguments of modern conservatives are that effective property rights create the basis for human rights, that the evidence of failure of Big Government is overwhelming and that the movement of political power from local to national control is a fatal weakness in a republican democracy. The Founding Fathers were fearful of overweening Federal power, and rightly so. The triumph of a majority faction, over the minority was the central fear of the Founding Fathers when writing our Constitution.

Republicans have strayed far from the path of limited government, particularly in the second Bush Administration. A failure to understand the importance of limits to Federal power and catering to the demand for more rights led to a true inconsistency in Republican political philosophy. Doing the right thing, became increasingly less important than winning the next national election. What is the best that modern Liberals (using the 19th century notion of Liberalism) can hope for What should they do on Election Day

My answer is to pull the Libertarian lever at the top of the ballot and then carefully cruise down the ballot to select Republican candidates that might block the further accretion of federal over local decision-making. Perhaps the Libertarian party will wind up with more than 5% of the total vote and a chance to evolve into a major alternative Perhaps, it can become one of the critical sources of Ripon II.

Bottom Line: Not voting for Trump but still voting is important in bringing about the massive change needed in the Republican Party. Not voting at all defeats even the possibility of reform. Get over this defeat and think constructively about the future. That is the message of this abortive campaign for those still believing in the American Experiment.

Learning Nothing and Forgetting Nothing: the Wells Fargo Residuals

Once one begins thinking about the recurrent failings of corporate governance, particularly of large public companies, it is hard to stop thinking about the many, repeated occurrences of corporate misgovernance, “disorganized crimes,” as we have so titled them.

The Wells Fargo charade is only the latest, but sadly, not the last one in this recurring story. Without the special knowledge that will inevitably be dredged up over many months by investigative reporters and public displays of Congressional mourning for account holder losses, we are forced to merely conjecture about how the Wells Fargo saga took place and to explain how long it lasted.   Surely, some of the executive management team, and certainly some of its ‘distinguished’ Board of Directors were familiar with the many occurrences of pas corporate misgovernance, particularly since the Enron affair. “Learned nothing and forgot nothing, as Talleyrand once remarked about the Bourbons of the French revolution

Perhaps the Board was blinded by the apparent ease of Wells’ passage through the financial crisis of 2007/2008 or mesmerized by its former CEO’s railing against Wells Fargo’s forced acceptance of Government funding in 2008[1]   Wells had an enviable post-crisis record of earnings growth and was the darling of investors such as Warren Buffett.

Undoubtedly, such an exalted status creates sizeable insulation from thoughtful probing by a Board. But, that is precisely the point. Shareholders who are lulled by apparent earnings prowess and “above suspicion” accolades are those most vulnerable to the shock of corporate misgovernance. So are Boards of such impeccably credentialed public corporations.  Being lulled is not an excuse.   Weakening earnings are not the usual antecedents of corporate shock. It is almost always just the reverse. A firm that “stands out’ among its peers should evoke some thoughtful examination. ‘How does my company do so well when its competitors struggle’

It is a rare Board that will question the sources of apparent and long-standing success, ignoring the proverbial wisdom of “pride goeth before a fall.” Sadly, that is when the common shareholders need their Boards to work especially hard in understanding the daily operations and risks taken by corporate management.

Cross selling was not the sin. The failing was using a highly publicized incentive program for employees to do the cross selling and such incentives were bound to push excessive and perhaps illegal behavior on the part of the ‘cross-sellers” without a very careful examination of the details of that cross selling program. When an employee is incentivized to induce customers to take on additional “features,” even when they have no interest in such opportunities, there is an implicit warning sign that should not be ignored by the Board.   Incentives are powerful behavioral devices. Without constant supervision and a careful delineation of proper responsibility, it is simply obvious that some employees and some of their managers will overlook how the cross sale is achieved

Employees and managers are not angels. They are human and subject to greed and avarice. So are we all. Boards surely must know that from their own, individual experiences. Why believe otherwise that each employee and each manager, rewarded for increased cross selling, would not step over the line Apparently some managers knew where the line was and employees were indeed “fired,” for behaving irresponsibly and possibly illegally.

It is far more likely that excesses were known to top management and judging by previous cases of corporate misgovernance were at a loss as to how to put the genie back in the jug. I personally know of one case of an employee resigning because he felt that Wells was behaving improperly.   Surely, there will be many others that will come forth to tell a story about how Wells managed to induce their employees to cross sell, rewarded their achievements and ignored internal protests that there was “fire in the hole.”

All of this brings to our attention once again what we should expect our Boards to do: look closely, ask hard questions and report fairly to the shareholders that seemingly wonderful earnings stories are founded on truly good corporate behavior.   And, when there is smoke, look intensively for the fire and not be afraid to pull the alarm when the fire is detected.

The clawbacks of corporate rewards have begun. Shouldn’t the Wells Fargo Board be subject to the same mechanisms ‘No pain, no gain.” It is time to assess penalties on the watchdogs whose job it is to police issues of corporate governance.  Quis custodiet ipsos custodies














[1] Former CEO and Chairman Kovacevich (allegedly raged against Henry Paulson, the US Secretary of the Treasury, forcing the 9 largest banks to take in multi-billion dollar infusions in 2008 under the Secretary’s threat that a bank’s refusal to accept such funds would trigger severe reactions by particular regulators. (See Andrew Ross Sorkin, Too Big To Fail, p.525. Sorkin quotes Kovacevich as follows. “”I’m not one of you New York guys with your fancy products. Why am I in this room, talking about bailing you”’ At which point Paulson replied, “Your regulator is sitting right there.” Later, “And you’re going to get a call tomorrow telling you you’re undercapitalized and that you won’t be able to raise money in the private markets.”

Trump, Testosterone and Trauma

Some days, the WSJ, for all of its quite evident bias against the welfare statism of the Democratic Party, gets the basic analysis of American politics quite right. The Journal and its opinionators can be devastatingly accurate about America’s conditional political morality in all of its myriad inconsistency. Tuesday’s Ops were right on, particularly William McGurn and Heather MacDonald with their scornful remarks about Democratic moralisms over sexual predation. (McGurn: And the Winner is Bill Clinton; MacDonald’s Feminists Turn Victorian).

Does this excuse Trump’s intemperate remarks of 2005 or the recent disclosures about his groping No, but it puts his sexual banter and furtive approaches to women where they belong. He is a sexual seeker and a boaster about his alleged sexual triumphs (not that we have any way to calibrate his asserted success nor should we applaud it). He would like to portray himself as a major Lothario with a great record of business triumphs. Neither his sexual musings nor his undisclosed tax returns really tell us much.

Bill Clinton’s conduct was better documented, as was his lying about it. (I did not have sex with that woman. ). Clinton’s answer should have been two fold: 1) who cares with whom I indulge my sexual appetites Hillary doesn’t seem to worry, so why should you’ 2) Yes, I lied about Miss Lewinsky and her predecessors, but what does that have to do with doing my job as President’

The answer is that Bill Clinton was also the chief law enforcement officer of the United States and fundamental respect for the Presidency was jeopardized by the entire episode. Lying in front of a Grand Jury is perjury, and that is a horrid example of political governance. It was a great disruption to our political system and the multitude of decisions that must be made daily by a disciplined chief executive. Bluntly, we got a part time President who was focused on avoiding an impeachment conviction. To use Hillary’s vernacular, was he temperamentally unfit to be President

Miss MacDonald had an even sharper knife. After discussing the interviewer’s (Ms. Zucker) partly clad attire and demeanor, on meeting Trump in 2005 on the set of Days of Our Lives,” MacDonald wrote, It is particularly galling to see the selective resurrection of Victorian values from the same crowd that has been pushing transgender locker rooms in the world in an effort to destroy the last shred of a girl’s innate sexual morality.

The Bottom Line: Trump is no doubt temperamentally different from well-scripted politicians of the present and recent past. He erupts; he tweets; he interrupts and his usually unthoughtful personal mouthing’s of his likes and dislikes offend many voters. You don’t like his behavior Okay, don’t vote for him. You prefer someone who lies cleverly and clearly Vote for Hillary! In the meanwhile, spare me the false malevolence of your political preferences. Just ask what the consequences might be for the erosion of your liberty as Government expands. Then, pull your preferred lever in the voting booth. Give them both credit for what they do well. Trump appeals to those white males who feel left out and deserted by their Government that is making equal outcomes override efforts for equal opportunity. Hillary is an establishment Liberal who believes there is no Government program she won’t support or increase to assist those who claim to be victims. She doesn’t address supply side programs that will increase economic growth. She is a relentless advocate for programs that will fuel the burgeoning scope of Government. She is for redistributing the wealth even if it makes economic growth even more difficult and less likely.

We may or may not be future victims of Trump’s temperament. If Hillary becomes President, we will be treated to an economy that grows slowly and whose consequent budget deficits will sap the vitality of the American economy. Choose your poison, Mr. and Mrs. Voter. It is up to you.

Trump’s testosterone seems unlikely to send him to the White House. Clinton’s hubris over the efficacy of Big Government is likely to lead to further restrictions to our freedom of choice. Testosterone or Trauma—either way, it will not be a happy outcome


The Trumpian Proletariat

(This was written last week but not blogged prior to the latest Clinton-Trump exhibition that could hardly be called an edifying debate.)

Last Tuesday, (October 4) several friends asked if I had watched the Vice Presidential circus. I didn ‘t. Too many good things to read or good music to listen to waste time over the Veep candidates trying to elevate a sodden Presidential campaign. What could I have learned that I haven ‘t distilled from the most desultory Presidential campaign in our lifetime Subsequently, the revelations of Trump ‘s behavioral problems have nullified any gains his running mate might have made during the VEEP debate.

The VP debate exhibited the usual display of bad manners interspersed with painfully few occasions by which voters could differentiate between the candidates based on the issues. That shouldn ‘t have surprised. The long campaign and its repeated TV-Ops have surely thrown cold water on the idea that a rational debate on the issues can be conducted during either the primary season or subsequently in the actual Presidential campaign.

Is it the quality of the candidates that nullifies a thoughtful exposition of policy or their leadership We will have to wait until the 2020 campaign to be sure, but we have long ago moved away from the 19th century standard of a quality exposition of ideas such as the Lincoln Douglas debates of the 1858 Illinois Senatorial contest. Instead, we are inundated by the worst parody of a reasoned debate between men and women of high personal character. The 2016 burlesque is a tragedy for educating young voters on the merits of attentive citizenship.

The entire debate sequence has now been scrambled once again by the airing of a tape that seemingly has exposed some of Trump ‘s worst character traits. It would have been hard to imagine the Democrats inventing a tape of similar impact. It is far too awful, but it is revealing that we are dealing with a choice between someone of exceedingly dubious moral qualities and someone whose morality has allowed her to repeatedly cross the line between personal and public interest. Being excused by the head of the FBI for her email breaches only highlights the old maxim that justice is a class question. ‘ In this case, she was and is a part of the ‘ruling class.’

Perhaps the singular takeaway from the latest Trump imbroglio is that his core supporters are not swayed by his previous or current character revelations. This tells us that the anger with our current politics is deep-seeded and surely will not be dissipated by a Trump defeat, now all but assured. The latest ‘Trumptest’ has or will drive away most of the respectable Republicans, ‘ but Trump will still no doubt garner much of the blue collar working class that feels that the system is stacked against them and ignores their interests Young college educated voters will stay away, no doubt, because they are the most infused with political correctness. ‘ The number of potential women and minority voters not already repelled by prior Trump crudities must have shrunk dramatically with the latest revelation. It is not possible to imagine a remedy or an apology that will limit the damage to his campaign from this tape .

I am reminded of Marx ‘s curious line that history repeats, first as tragedy and second as farce. The tragedy is the choice America now faces between worn out solutions that have not worked well in the past, and a nihilistic rant that attributes our current problems to the unamericans who have come to dwell in our Promised Land. The current Republican candidate exudes a nativist chant that is a shocking contrast to the optimistic vision of morning in America of the first Reagan campaign. Making America great once again by raining personal or ethnic insults on any who disagree cannot be, under the best of circumstances, a winning political strategy. Its appeal is strictly limited to the Angry Mob. This is a profound tragedy.

The farce is the taped revelation that reveals Trump ‘s demeaning view of women and locker room self image. Sadly, however, this farce is also a play within the play. The larger drama is one of voters victimized by two low quality candidates that keep shoveling invective at one another while leaving unanswered the real issues facing America. Only the Trumpen Proletariat is left among the voters that will still be able to pull the Republican lever. 1








  1. Marx described the lower end of the working class that was largely made up of the most unskilled and the most depraved as the lumpen proletariat In his view, they were insufficiently engaged in the class struggle to even be part of the vanguard, the working class to which Marx screamed, you have nothing to lose but your chains. The Eighteenth Brumaire of Louis Napoleon (German: Der 18te Brumaire des Louis Napoleon), originally published in Die Revolution New York 1852 []

Political Gardens: cronyism and corruption of the American Mandarins

In the strangest election in our memories, the No Knothing candidate seems to be drawing closer to his much debilitated opponent in recent poling results. Many intellectuals and professionals are amazed that Trump has been able to generate such broad support, much of it among white males, in spite of a long history of insulting or denigrating various minority groups.

The shift is upsetting conventional political wisdommuch as Trump upset much touted collective wisdom in the Republican primaries. It is unclear where we are headed, but at the least it is hugely upsetting.

We seem to be watching another popular surge for Trump in spite of his outrageous demagoguery. Are we also seeing a more developeddisgust with Clinton regarding her private activities as Secretary of the Clinton foundation while she was the Secretary of State The continuing controversy over her private email server has not faded.

It is an ugly campaign. Both candidates suffer from the highest disapproval ratings in the history of Presidential campaigns. The disgust of minorities and women with Trump is clear. He continually fans those flames. In spite of his commentary, something serious underlies the popular mistrust that prevents Clinton from sweeping ahead in the campaign.

It appears to us that large segments of the public view the fund-raising activities of the Clinton Foundation as direct evidence of a huge conflict of interest between public responsibilities and the accumulation of private wealth. It dovetails with the absence of a clear explanation of the use of a private email server while serving as Secretary of State. Clinton continues to suffer daily disabilities through continued revelations and evolvingexplanations that shift with the wind. The old saw that the second liar doesnt have a chance, seems to plagueher campaign.

The recent focus on her joint tenure as Secretary of State and secretary to the Foundation reeks of a terrible conflict of interest made worse because suspicion can easily replace substantive facts. Many Democrats have called for the shut down of the Foundation. It is doubtful that will happen, and even if it did, it might well confirm the public suspicion that there was more hidden conflict in its appeal to potential donors and supposed additional access to important government officials that such donations secured. Public distrust will continue to rise unless a coherent and documented explanation of both the server and the a coherent counterargument to thepay for play charge can be established. That will be difficult task for Clinton this late in the campaign.

The deeper suspicion aroused by this campaign is that donors from both here and abroad have captured our Government, It will be hard to shed that mantle. Washing and cleaning ones clothes after having been perfumed by a skunk is a tedious and long process. Sometimes, one just has to throw away the soiled clothing. The average man and woman feel the growing distance between his governors and his daily life. Alienation abounds in the electorate. Somehow, we feel that the politicians shouldno longer count on our historical support. Many think theirvotes are taken for granted.

The same symptomology has recently been evidenced in many so-called democratic states (Australia, Canada, Great Britain, and even in the recent State elections in Mecklenburg-Pomerania in Germany). There is a long, continuous thread that links protests against the so-called 1%, the amazing popularity of the Sanders campaign and the continual accusations of Trump that Clinton is representative of interests other than her oft-proclaimeddevotion to the poor and middle class. Moreover, Clinton suffers from her continual resort to enlarging the scope of government in our everyday lives. That breeds suspicion all on its own. She wishes to further feed the Beast of enlarged Government.

The populace of many democratic republics instinctively knows that Government is distant and anonymous and that its mandarins have their own ideas of what is suitable government activity. Voting populations also see that while the nominal economy seems to be okay, numerous individuals feel leftout. Too many have departedthe labor force so the unemployment rate (even when at very low levels) doesnt impress. For the masses, cleansingthe Augean stables of cronyism and corruption is an appealing invitation even it one thinks it is fanciful. The popularity of the promise toclean out the Beltway will not die soon. Yet, practical men know that the likelihood of a slimmer and more efficient government is a chimera. The public is gradually absorbing the realization that Government is not the solution and that more government invites more cronyism and corruption, but the cry to throw out the rascals still resonates.

Bernie Sanders called for a revolution. One is in the making, but who leads it and where it is going is quite unclear at this stage. Ancient China had its Mandarinate. When a Chinese mandarin retired or was banished from the Imperial Court, he often retreated to his home and built a garden. When our Mandarins retire or are pushed out of office, they garden as well. Sadly, their gardens are populated by rolodexes and contacts and rows of growing cronyism. The fruit in those gardens is influence. The populace is revolting against the fare being offered to and by the higher ups.

This revolution is based on popular alienation with traditional politics. It is going to go on well past this election. We are headed down a new road but as yet we cannot see the destination. It doesnt seem as if we are headed toward the Garden of Eden. Even if Trump is defeated, the Dragons Teeth of hysteria, hyperbole and radical political extremism have been planted. The voters who followed Trump and even some of those who followed Sandersthe ones most alienated from the current political process—will still be there. A clever, disciplined and perhaps more sinister leader could yet arise, perhaps in the next Presidential election Those techniques, polished and capably financed, could well emerge again in a campaign by a dedicated politician who will learn from Trumps mistakes.

The parallel of Germany between 1928 and 1933 is a piece of history that this generation has largely ignored. Santayanas warning about the consequences of ignoring history should be kept in mind for those who deeply believe in the American experiment.