DISORGANIZED CRIMES goes international…

Accounting fraud at WIRECARD.

Every so often a seemingly deliberate accounting fraud deceives investors and accountants and winds up stimulating regulatory zeal.   The financials debacles of 2001-2 and 2008-9 led to Sarbanes-Oxley and Gramm-Dodd. We should expect that if the Corona-virus causes immense financial dislocations, we will see financial fraud and regulatory actions grow apace. Before the curtain on new episodes of Congressional Propriety goes up, we should begin to ask whether regulators have succeeded in the past and what costs are imposed? The recent disclosure of a large financial fraud in a large German public company (Wirecard) is a signal for the fraud parade is beginning. We don’t really have the essential facts to analyze this case but the similarity to our previous work elicits a few comments

1) Most accounting frauds of major public companies are detected by some market participants long before regulators are ever alerted.   Regulators don’t like short sellers so they are often late to the crime and by then the major damage to the “longs” has been done.  Next come the lawyers, but that is a story about insurance law and rewards to successful class action litigators.  There are several lessons here worth remembering. One might be if E&Y, Wirecard’s auditor noticed anything from Wirecard’s price volatility much earlier? If so, why didn’t they act much earlier. The usual answer is that they don’t wish to lose a client. More on this below

  1. such frauds usually begin with companies already on a losing path.  The resulting frauds are designed to conceal true operating losses.  Enron and WorldCom are class one exhibits

  2. frauds of this kind usually involve auditors who have long standing ties to the fraud company. (ah, yes… should we be asking for term limits for auditors once again?). We can count on the advocacy of those most affected (accounting firms) and political friends to be assured that meaningful term limits are not likely

  3. another question to ask is “Where were the Directors?” But even without the facts in this case, we know that Directors are more often there to bless and shield their managements. They are not likely to probe too deeply in searching potential corporate financial behavior for mismanagement or fraud cases. Company managements get very uncomfortable with a overly-zealous Director

2) Is regulation imperfect as an answer to deter financial fraud?  Again, case details are important, but generic punishments without individual liabilities for Directors, Auditors and Corporate General Counsels make ongoing investigation difficult and unrewarding to outside agencies tasked to protect investors.  Conclusion:  the corporate establishment that includes auditors, directors, general counsels, credit raters, underwriters, and even some bankers is all to willing to sacrifice by investing in more errors and omissions insurance and reliance on the long lag between crime and punishment in exchange for avoiding personal liability. (“You can’t blame me for dishonest clients!”)

It is another example of the famous line in the movie A Few Good Men, when Defense Counsel (Cruise) demands the truth, Colonel Jessup (Nicholson) answers, “YOU CAN’T HANDLE THE TRUTH.” We call this Jessup’s Law. It needs to be a part of every class in Corporate Governance!

In short, Frauds like Crime are inevitable because for some individuals, the probable rewards of fraud exceed the expected value of their personal losses.

Of course, we could do better, but the costs of fraud protection via regulations rise as well.   We could do better, perhaps, but we infer that Society believes the optimal quantity of financial fraud is not zero. The costs of prevention are not zero, while the praise for corporate honesty from Philosophers, Pastors and Op-ed Writers is insufficient to enforce a more rigorous anti-fraud environment.

Bloomberg’s report on Wirecard can be found at https://www.bloomberg.com/news/articles/2020-06-26/wirecard-auditors-say-elaborate-fraud-led-to-missing-billions

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

please find our post at www.ecomentary.com and use any browser EXCEPT GOOGLE CHROME You can use the following URL http://ecomentary.com/trumps-policies-campaign-promises-and-the-realities-of-governance/

As we have reported before, Google Chrome tagged the www.disorganizedcrimes.net web site even though there is NO MALWARE.Unfortunately, Google Chrome runs by its own rules and no matter what is submitted to them they post the “potential Phishing site” even if one tells them otherwise and makes sure the site is clean.Power Corrupts Absolutely


Happy Thanksgiving

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.” http://www.wsj.com/articles/a-nobel-idea-to-pay-ceos-what-theyre-actually-worth-1479168732

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.

RIPON-RIPOFF: knowing nothing and promising everything

The immigration Trigger

Observers of the current Presidential campaign who are familiar with American political history cannot ignore the striking parallels between this election and the electoral scene of America in the mid 1850s. In that pre-Civil War period, the Whigs and the Democrats were torn apart over the issue of slavery while the country was also deeply troubled by large flows of Catholic immigrants coming to the United States from Germany and Ireland. The decades prior to the Civil War also featured significant reductions in shipping and communication costs that stimulated large movements of foreign direct investment as well. It was a period similar to our recent era of globalization. Capital from Europe flowed into railroads, coal mining and many new factories accompanied by a plentiful supply of labor willing to work at what seemed to the existing work force to be low wages. While international trade and finance expanded, there was a rapid rise in discontent from both the labor and middle class over the new immigrants that in turn caused huge political upheavals.

Beginning in the 1840s, the anti-immigration wave coalesced in a number of political parties. By 1843, these nativist sympathies coalesced into the American Republican Party and spread into Pennsylvania under the name of The American Native Party, even sending a representative to Congress in 1844. Perhaps the best known was the No-Nothing party. Stimulated by anti-Catholicism and nativism, local and state elections were heavily impacted in the 1840s and 1850s. . The No-Nothings swept state elections in Massachusetts and were influential in a number of other states. Secret orders were started that reflected these prejudices and the feelings of disenfranchisement threatened by the flow of cheap labor.

The Anti Slavery Movement and the new Republican Party

The more vocal issue in the 1850s was of course slavery and the anti-slave movement weakened the Whig Party (the major alternative to the Democratic Party). By the 1850s the surge of immigration had quintupled the immigrant flow of a decade earlier. It wasnt outsourcing that aroused the political passions of the day. It was the in-sourcing of cheaper labor fleeing disturbed conditions in Europe while American industry expanded through foreign capital inflows and cheap European labor. Inflamed passions riled the traditionalAmerican political parties, leading to the view that the extant Party structure no longer reflected the needs ofAmerican voters. To respond to these passions effectively, however required political leadership.

The split in the Whig party over slavery irrupted in Ripon, Wisconsin in 1854 culminating in the formation of the Republican Party and the early emergence of Abraham Lincoln as a national politician. In 1856, the Republicans unsuccessfully ran a Presidential candidate, General John Fremont. The die was cast for the struggle over the Union. While Lincoln lost his seat in Congress, he became a growing force in the new Republican Party through speeches and press coverage. His famed debates with Senator Stephen Douglas in the Illinois senatorial contest of 1858 increased his national prominence.

In a democratic society, Politics often reflects the passion rather than the insight of voters. Consequently, the true leadership quality of a candidate is frequently obscured until after the votes are counted. It is a danger that the Founders recognized, but never were able to totally circumvent. Rational politics begins with a more careful assessment of both abilities and plans laid out by the candidates. The endgame is measured by electoral success.

The Republican Party was very clever. It needed mass and in order to gain sway over a larger portion of the voters, it allied itself with the Know-Nothings (in spite of their nativism) as well as other parties (e.g. the Free Soilers) that did not share many Republican views on other issues. With the breakdown of political amity in Washington, the election of 1860 was the quintessential fragmenting experience for America. Lincoln became President, but he but did not represent a majority of voters. He also didnot disavowed some of the more extreme nativist sentiments of the Know Nothings. He was a thoughtful politician who didnt want to make enemies. He won by focusing on what he stood for and ignored extremist views of his own allies. He won in the electoral college where it counted, letting ambiguity rule over extremist views of his allies. In 1861, his leadership gifts allowed him to take each of his principal rivals for the Presidency into his cabinet. He was a living realization of the old Mafia shibboleth about keeping ones friends close but ones enemies even closer.

Nativism and Immigration in the Current Campaign

This campaign illustrates what can happen to more traditional politics in a time of great economic dislocation. Trump expresses a kind of nave nativism in his tortured presentation of Muslims migrating into America masking the entrance of potential Jihadists. Even when called out for his nativism, he identifies Islam with terrorism, slipping away from a more careful and nuanced delineation that is needed between a religion and terrorism.

Great leadership could make that distinction, but itt appears Trump is not interested or not capable of drawing a fine line between the two. He appeals to more base sentiments. He relishes his nativism as if it really pointed to solutions for America as a whole. Similarly, he espouses a modern form of America First, jettisoning more than a century of American tradition to be a banner for liberty and the bearer of the torch of freedom internationally. He disdains European allies as weak and unable to carry out their mutual defense burdens with the United States. He even goes so far as to praise the leadership of Americas former Cold War enemy. His slogan make America great again, is devoid of any practical content. He waves the flag, but is unclear what his flag stands for. Careless phrases and potentially divisive sloganeering are his daily script. Who can sit under his flag today in America: the disgruntled; those who seem to have fared less well in our rapidly globalizing economy; those who feel theyhave been disadvantaged by Americas attempt to right its blighted racial history. Were he to be elected, it is unclear what his policies would embrace. His tax and spending plans are as mysterious as his unrevealed tax returns. He promises nothing to our modern-day Know Nothings.What about his opponent

Mrs. Clinton seems to have a program for every claimed ailment in America. She evidently believes that by changing the law or the administration of the law she has a fix for every minority. On the economics front, it is a return to Keynesian spending but ignores the fundamental forces that promote growth: incentives to invest in both physical and human capital. This may be a winning political strategy, but it is an economics strategy that can only lead to disaster. Without growth, even the current commitments of our Federal system cannot be supported.

Her most well known economist advocate, Larry Summers, has recently written about the necessity for the Democratic Party to pay attention to measures that will improve our growth rate. That said, one is not sure that anyone in the Democratic Party is listening or even recognizes the difference between Keynesian spending and curing the disincentives that militate against revived economic growth. Nine tenths of the iceberg is beneath the water. Without growth, even when you cant see how it is going to occur, the Titanic of Federal Expenditures will overwhelm us all in the next two decades. Democrats tend to think of Big Government as the equalizer for the disadvantaged, but fail to see the conflict with proper incentives for economic growth.

Big Government has neither achieved the sought for equality or the economic growth that are cardinal elements in an enlightened Democratic view of contemporary economic problems. Clinton bashes Wall Street, setting up the straw man that Wall Street banks are the enemy of the people while running away from the inferences that the Clinton foundation trades access for donations. A plan for all problems is not a plan. A plan means choosing between competing alternatives while paying attention to the national budget constraint. A program to fix everything provides a rhetorical excuse to fix nothing. The great irony of the 2016 campaign is that it has become a contest between knowing nothing and getting nothing important done.

The present contest fits a sad historical pattern of America in the middle years of the 19th century. We have seen it before. Our inability to reach a political settlement between North and South resulted in the worst casualties of any war in our history. It left a legacy of disenfranchisement and ultimately an attempt to make Government provide what economic progress had not.

What is the likely outcome of Nothing vs. Everything A failure to deal with the root causes of slowing economic growth and diminished opportunity. Blame replaces insight, but blame doesnt cure. It just provides a rhetorical excuse for empty-headed policy making. We have heard this music before. It is not the sound of a lively march into the future. It is a dirge that memorializes our failures. Every band and every parade needs a leader, not just followers. What the election of 2016 represents is a massive leadership deficit, a turn to the past and a very clouded future. A modern day Lincoln we do not have,

The disorganized crime of this election is the disorganized politics of its two candidates and its two disheveled Parties. Despite our need, another Lincoln is not waiting in the wings. Neither Nothing nor Everything will work. Its time for a new Ripon for the Republicans. Its time for the Democrats to stop Ripping Off the tax paying electorate by promising both bread and circuses to its sliced and diced voting minorities. Leadership is what we badly need and do not have.

The Upside of the Downside

The election is a bitter pill for Americans looking to end the dissonance and hoping for a government that does what it can and should while recognizing the limits that Big Government presents. If, as is likely, the Democrats not only win the White House but recapture the Senate, many things will change, not all of them beneficial to a resumption of growth or the defeat of excessive inequality. In fact, low growth really means even less equalitarian outcomes are on the horizon. Rapid growth is the best weapon against poverty.

The downside of a Republican defeat is the likely hood of larger tax burdens on the rich, on corporate profits, the collapse the Trans Pacific Trade Agreement and the strong likelihood of an activist Supreme Court that further unbalances our politics. But surely, after themassive defeat thatseems to be likely, there will be strong forces to re-make the Republican partyto end its flirtation with nativism—and to develop a comprehensive program of tax reform.

Above all else, defeated Republicans should look for a new Ripon based upon competitive and free markets, free trade, muscular internationalism and constitutional restraints on the actions of the Federal Reserve. The Republican Party has to open its doors to all races and religions by stressing its desire for equal access not equal outcomes. The incentive to improve is the sine qua non of rapideconomic growth. Republicans need to march away from their own cronyism and open the tent. They must not be afraid to deal with environmental or infrastructure problems. They need to reaffirm their faith and support of free, competitive markets here and within the economies of their trading powers. Above all, they need to constantly renew their focus on creating the right incentives for human capital and physical capital improvements. Their narrative must shift from the condemnation of certain minorities toa re-assertion that America welcomes those who can contribute to its citizens well being. Not every great idea or innovation is American, but an American economy free of the vast constraints now imposed and now projected can provide the bountiful harvest needed to satisfy our many residents. Its time to go back to work.

Ripon revisited cannot come any too soon. Maybe the new slogan should be A Positive Program for American Progress. A great deal can change from January 2017 toNovember 2020. Its time for vision and great leadership. If necessity is indeed the mother of invention, it is time to realize how necessary it is to create a new, progressive American conservatism open to all and focused on all. On to Ripon II.






Hysteria and Denial: the Dragons’ Teeth of current American politics

Firm believers in the American Experiment are no doubt deeply troubled watching the evolution of the 2016 nominating campaigns. Troubling may be too tepid a description. For some, it has become outright despair. Has the brilliant experiment in a self-governing democracy ended in a wave of hysteria, hyperbolic rants and suggestions that violence is an appropriate mode at a political rallyThis campaign reminds some observers of the failed Weimar Republic of Germany in the 1920s.

The candidates oscillate between outright fabrications of asserted facts and tendentious policy recommendations that have little chance of passage on Capitol Hill during the next Presidential term. Or do they Are we at the beginning of a political revolution that threatens our 240-year-old experiment

Is it possible that the newly emerging extremist plurality will cram it down the throats of the sliced and diced minorities that make up the balance of the electorate After 13 years of war overseas, and nearly 15 years since 9-11, the public appears too tired to carefully examine the underlying premises and the policy rubbish thrown out by the three remaining candidates.

What is perhaps most distressing is the voluble rallies that feature the worst of extremist pronouncements. Bernie Sanders wants to finance a massive further intrusion of the State into the economy—although no respectable economist can confirm that his tax proposals are viable. The more likely outcome is that to finance these additional Government efforts, not only will there be gaping deficits going forward, but the deficits themselves will cause a huge retreat from US Government Securities. The ensuing rapid rise in interest rates will force even the present level of government expenditures into a growing and massive Government budget deficit. Yet, Sanders is cheered by the 21st century’s version of the No Nothings. Their shouts of approval blot out any thoughtful political discourse or examination of the substance of his proposals.

Meanwhile, the debate between the two front-runners, Clinton and Trump has become the political equivalent of the old saw that the second liar has no chance! If you listen to The Donald, you have to conclude there is ‘no manufacturing left in America,’ despite the fact that the value of U S manufacturing has never been higher! He doesnt want the voters to know that. Perhaps, he doesnt know that either! What is true is that it takes much less labor for the manufacturing sector to produce its higher output. Productivity—the real source of economic growth—has risen sharply over the past few decades even if it appears to be slowing at present. It is also truethat the most recent data continue to show rising employment and output—which is what we should expect if productivity continues to rise. Growing output and falling employment are reconciled via growing productivity. The key fact is growing output—but that is absent in the political discussion. The discussion should be on how to raise productivity in order to make the economic pie grow.

One might ask Trump how can we begin becoming more productive again The question is never raised because the discussion starts with we are losing. The mistrust in which Clinton is held shows up in her favorability ratings that are essentially as bad as are Trump’s. Clinton’s policy measures move steadily toward her Democratic party opponent’s solution fantasies. What you hear depends upon which day you listen. Each of the candidates obscure the facts. It stretches ones faith to believe that they know anything about how the economy actually works.

Why is it that these facts never enter the current political ether The answer is that the candidates dont want the voters to which they are appealing to understand the real facts. Maybe the candidates are themselves are ignorant, but their advisors arent even if they are disingenuous. They are surely quite familiar with basic economicstatistics. How then explain the collective political spin of candidates on the far left, and the ordinary left The answer is simple but repugnant: many voters are unhappy with their own personal outcomes. That is the mass that the candidates wish and need to attract. If the country is getting richer, why are the horizons of this mass seemingly contracting Whose horizons or outcomes are improving Aaaah! You know who is doing well! Take it from them and give it to us! It is not the first time that a pariah has been found to provide an easy political answer.

Once you start with that kind of political arithmetic, the Democratic assault on Wall Street, the “Banks,” the 1%, or the special interests that finance these political campaigns, the conclusion is obvious. The politicians need to convince you that all that is needed is to redistribute the outcomes. The basic message on the left side of the aisle is that it is high time that the inequality of outcomes becomes the central theme of the campaign. The problem in their view is that the pie isnt growing fast enough now, so its time to recut the portions! the real problem of making the pie grow faster is simply ignored.

What about the other side of the aisle Is Trump running from the right or the left Here, we have the answer to the conundrum of the putativeRepublican nominee. Somehow, the Trump campaign has to define the them that is the cause of the current unhappiness. He can’t indict his own class! You dont have to look very hardto find them. If the fault is not “ours” it must be coming from outside. The foreigners and the illegals are his “them.”

Look carefully at the Trump attack points: unwanted and illegal immigrants; cheap Chinese labor combined with the theft of American invented technology; American expenditures in solving problems in foreign countries. Each of those targets consist of non-voters. Trump identifies the source of our problemsas lying outside our political boundaries. Its them, not us! The answer then is to do better against the them! Keep the illegals behind the Wall and build more Walls to keep out cheap imports, and place restrictions on where America spends its blood and treasureoutside of our continental boundaries.

As to how to start winning, elect a Winner! The drumbeat is the evident stupidity of the current politicians and bureaucrats of Washington who dont know how to win. They never ran successful businesses. They exist on the support of our taxpayers and then they give away Americas rightful place in the world. The answer to start winning, is to throw out those Bums and replace them with someone who is an evident Winner.

This raises a most difficult question: can democratic self-governance work in a Kingdom of Lies Have we passed the point of no return where the Big Lie becomes the only driver of political success Of course, if you trust one or the other of the candidates, you are leddown his or her path,accepting their assumptions and their respective conclusions. But believing in fantastical conclusions doesnt make the conclusions correct or their remedies likely. Treating a sick patient with the wrong medicine because you have misdiagnosed the problem can only result in tragedy.

There are historical parallels to our current political morass. In the 1850s, the American political spectrum was badly divided and the existing parties (Whigs and Democrats) were factionalized. Neither could provide a solution. Within each of the old parties, there were serious divisions over the issue of slavery. Only a new party that grappled directly with the issue of slavery could do that.

The Republican Party was formed in 1854 in Ripon, Wisconsin. The new party incorporated many of the splinter parties of the times (the Free Soilers, the No Nothings, the Liberty Party) plus segments of northern Democrats and Whigs.

The Republican Party ran an unsuccessful campaign in 1856. The country was rent by the issue of slavery and the threatened secession of the southern slave states. During his unsuccessful Senatorial candidacy in 1858, Lincoln uttered his famous line a house divided against itself cannot stand. Shortly after his election in November of 1860, his prophecy came true. The bloodiest war in American history followed at a terrible human cost. The Union would have failed under a less resolute and far seeing leader. The political lesson is clear.

The existing structure of our two party system has failed to address our current problems. Each party fails because it combines too many internal contradictions to allow for a clear solution path. American politics is at an impasse because the centers of each party have more in common with each other than within the extremes of their own party. “Centers” don’t provide the needed extra votes necessary to win an election. It is the “extremes,” where the candidates focus. Attempting to overcome those internal divisions, the candidates are now attempting to draw in new blood, by hysterical appeals that mislead the public with solutionsbound to fail. This leads to extremist appeals. What is needed is a massive political realignment. This is not new dilemma in American political history. It has happened here before.

The 1850s and 1860s also were terrible times of hysteria and denial. America was fortunate then to have a (minority) President dedicated to saving the Union butwilling to incur a terrible price in doing so. Lincoln did not begin as a dedicated abolitionist. While he hated slavery, he began first by trying to save the Union. In the process of the terrible Civil War, he moved from emancipation to abolition. What made Lincoln unique was his combination of morality and acute political insight. He fashioned a winning policy out of opposing forces within his own cabinet and within the Congress while enduring a succession of failing military leaders. Despite the considerable internal pressure from opposing factions within his own party and within his own cabinet, he found a winning combination by focusing on the true problems that faced our nation..

Sadly, Lincoln’sassassination cut short his own vision of reunification and delayed for too long the healing of the wounds caused by centuries of slavery. Reconstruction didnt successfully deal with the legacy of slavery and that legacy has haunted us since. We have made progress with overcoming those issues but we are not yet home.

This country is tormented by the problem of factions, which was recognized by our Founders in writing the Constitution. Factions was the Founders nomenclature for the problem of majoritarian politics. Those problems remain. Each of the existing parties wishes to establish a majority that must, if it follows the dictates of its own platform, scourge the minority. That is the continual political dilemma of a democratic republic. It is time to honestly recognize the problem and begin building a new consensus that can re-energize American idealism. Perhaps, the place to begin are theimmortal opening lines of Lincoln’saddress at Gettysburg.

Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure.

Lincoln’s focus was on the equality of opportunity, not the equality of outcome. This campaign addresses outcomes, not opportunities. It does so with denials of fact and hysterical presentations. Hopefully, we can find the leadership to bring about a badly neededchange. Hysteria and denial are the Dragons Teeth of democratic government. It is time to stop cultivating these monsters.

Political Disaster as Opportunity

Nearly everyone familiar with American political history of the 19th century is aware that the Republican Party was founded in 1854, ran its first Presidential candidate in 1856 (John Fremont) and elected its first President, Abraham Lincoln, four years later.

Members of all political parties in the United States have accorded Lincoln a unique place in our countrys history. If Washington was our countrys first father, Lincoln has to be its second for saving the Union and opening the doors once again to a much-expanded vision of liberty and freedom for all inhabitants of this great land. While Lincoln fell tragically in1865, the Republic survived. A new breath of freedom issued forth as we struggled to wrest ourselves from the incubus of slavery and to use the benefits of strong economic growth to lift our people into an ever expanding cornucopia of economic progress.

Our progress, however, has not been a linear succession of triumphs. We have suffered many setbacks, but we have periodically leapt out of our dismal periods of seeming defeat to become a stronger and more abundant economy, a nation that has offered increased opportunities to all our people, and a beacon on the hill to many troubled peoples around the world.

Since those fateful years of Civil War, the American Republic has become a global leader, suffering much loss of blood and treasure in the process, in an effort to not only improve the livelihood of its own citizens, but also to offer a rays of hope to many enslaved masses whose strivings for liberty and freedom and opportunity have surged throughout the world. Those surges have repeatedly put immigrants on our doorstep. Immigration has a long, beneficial history in America even though some candidates now seem to revile it.

The recently concluded primary campaigns for Presidential nominations of both political parties have shown us to be angry and troubled, fearful over our future, no longer unified by the firm principles of our Founding Fathers or the great expositors of freedom and progress who have arisen to lead us from time to time. We are exhausted by the arguments and dispirited over the results. We are divided into balkanized factions, shouting our likes and dislikes, and largely intolerant of differing views as to our future. Unless one party sweeps the forthcoming fall elections, we are again likely to get a divided Congress. We may indeed face once more a Presidential succession that is bereft of a clear governing majority.

Some will see this an obstacle to a massive reform of the purposes and instruments of Federal governance. Others will see it as a margin of safety against relentless majoritarian and intolerant governance. If the electoral results do not produce a clean sweep, we will again be faced with a bitter political campaign two years hence. Such a campaign is likely to divide between policies that increasing the power of the majority to right alleged social wrongs, and broad based attempts to stop the avalanche of increased Federal interference in our lives, in the economy, and with our traditions of free choice and free expression. That is not a happy prospect.

It is now clear that the vital center of governance at the Federal level has collapsed, torn apart by extreme views on both the left and the right over the role of Government. Many will focus on the collapse in the Republican campaigns of the last two candidates to oppose Donald Trump. But we should not ignore the extreme left wing views of Bernie Sanders that won another state primary. Hillary Clinton may indeed become the Democratic nominee, but at this stage she hardly holds command over the hearts and minds of nominal Democrats or independents looking for a vehicle for their hopes and protection against their own fears. Trumps nomination campaign has already splintered nominal Republicans. Republicans are unsure of where their party is headed. Will Trump run from the Right of Clinton or from the Left. That depends upon the issue one uses to make a left-right comparison. Shades of 1860 once again.

Great political despair, however, can also produce a great political opportunity. The lack of central cohesion within both parties suggests an opportunity for a new party to emerge from the splintering of both traditional parties. This may provide a golden moment for coalescence around fairly clear values now widely held by thoughtful members of both existing political parties. Some will argue that a Third Party should now arise. We agree with that view, but we disagree on its timing. In our view, the best timing will emerge if and when Clinton wins the Presidency and perhaps the Democrats regain the Senate while the Republicans tenaciously hold the House.

Yet, even that outcome holds a threat since judicial appointments with no inhibitions to strong interventionism under a Clinton Presidency can change the character of our Supreme Court for more than a generation.

There could also be a growing coalition even within Democratic Senate to coalesce with some part of the House to find a common ground that will preserve our Union and preclude a massive move to overwhelming Federal power. Lets look at the issue agenda that a new party would have to address and from which a centrist bond must be forged. We focus on the following six issues.

Trade Policy; Taxation; Migration; Personal Liberty and Responsibility; National Defense and Budgetary Thoughtfulness.

Each of these arenas of contention contains a potential center. Each also needs national and local leadership to arrive at the center.

Trade policy: What dominates the extremes today is the pernicious notion that our trade agreements have resulted in unfairness. Contrary to populist opinion, growing international trade has been a net benefit to the American economy. Opening our borders has indeed created strong pressures to reduce some traditional manufacturing jobs. At the same time, it has created a wealth of opportunity for the more highly skilled and the more flexible in our work force. We need to encourage and reward those traits in our future labor force. As the global economy expands, there will be new soft spots in which other still extant manufacturing firms will want to move to take advantage of the expanded global supply chains that now exist. Some jobs will be lost, but some jobs in higher paying industries such as finance, technical services, programing, health care, etc., will grow. That is what a dynamic economy dictates. The key question is not whether growing international trade helps everyone, but how far expanded trade can improve our growth rate. We will return to this issue below

Taxation and Regulation: To supply the expanding fiscal needs that we have for various social services, (health, social security, education, environmental services), it is absolutely necessary to totally reform our tax system. We are punishing ourselves with a taxation system no one understands and depresses economic growth. It is a very simple issue. Growth comes from the bottom, not the top. Increased regulation is restraining new, small firms whose resources are not sufficiently large to cope with the hugely enlarged regulatory state we have erected since the end of World War II. What is necessary for expanded economic growth is to reduce, even abolish the corporate tax, and make it easier for new businesses to get started. Regulation and taxation, as we currently deploy them, are job killers and job movers. Large corporate mergers that take advantage of the economies of scale to lobby and to fight regulation are not job creators. They are job destroyers as they end duplicate jobs and services. Further, our global income taxation code insures that even more, large corporate firms will want to change their tax domicile. We have sowed the dragons teeth by allowing our corporate tax rates to rise relatively and absolutely as compared to other industrial nations. We are insuring ourselves lower corporate tax collections without incenting new business formation. In short, we are becoming our own worst enemies.

The resentment of growing inequality of wealth and income has put a hood over our political vision. We are getting the governance we deserve. The strong and large can fight, but the weak and small cannot be born and grow. We are in an endless cycle of job reduction and job movement overseas. It is an illness of our own making. We need to focus on improving economic growth and lessening the barriers to new business formation. To put it symptomatically: we need to stop hurting ourselves. If we are digging a hole out of which we are facing increasing difficulty to climb, we need to stop digging! Flatter taxation, replacing the corporate income with a lower, more efficient consumption tax, reducing the scope of rule making authority of our regulators and reducing the scope of ad hoc intervention in the economy are measures that will increase economic growth. An economy that is growing at 4% a year in real terms will generate far higher tax revenues. We can have a win-win growth and tax policy. Increase measures for growth and we will get more benefits from the growth we generate. Trade, better taxation systems and lowering the amount and extent of regulation and rule making authority can become a virtuous circle.

For those whose concerns are growing inequality, stop shooting yourself in the head and the foot. Move away from more mandates that increase costs to business and deter growth. Move away from arbitrary rule making that can confronted only by larger firms with large legal and lobbying staffs. Regulation is a prime source of slower growth and increased political corruption. We know there is a degree of correlation between the ease of doing business in a country and its rate of growth.1

Immigration: the false claims and rabid hysterics that have emerged in this primary campaign are shameful. First, some obvious points. Net immigration enhances growth. It is not a deterrent to growth. Second, net immigration is turning toward zero or maybe has now become negative. Three, immigrants are not the major source of welfare and health cost growth. That is simply baloney, as a quick look at the stats will tell you. Domestic safety and security are the first responsibility of the President. We need to protect our borders, but not bar entry to highly motivated individuals and families that wish to come here and work, invest, create new opportunities not only for them, but also for existing businesses. If there is one thing a new political party needs to implement, it is to create a secure, but not an impenetrable border. We need both skilled and unskilled workers to work in jobs that are difficult to fill with our existing work force. Instead, some zealots railing against income inequality want to raise minimum wages and make it even more difficult for young people to get jobs and job experience.

Environmentalism: Often by Executive Order, we are creating very difficult conditions for new business in the form of increased restrictions by the EPA and other environmentally empowered regulators. The caricature is the believers versus the deniers, of anthropomorphic sources of environmental degradation. Despite this Presidents claim, there are scientific questions yet unanswered. Unfortunately, our current President, has made the issue of Science in the argument over global warminga litmus test of over expanding regulation. Sadly, there are many scientific questions still to be answered. The argument that if we wait to do more, we will have more to do is a sophistry of the first order. If the President doesnt know this, he ought to. And his successors in the Democratic party ought to be wised-up as well Other countries who are vast sources of environmental degradation have to Walk the Walk not just Talk the Talk. If we are truly confronted with global warming caused by human agency, then we must understand the costs as well as the benefits for imposing severe restrictions on the US economy. Setting a good example for the rest of the world is not a costless demonstration project. Ranting that Science has proven its case is a complete distortion. The dialogue must shift to costs and benefits.

Personal Liberty and Responsibility: There are many false issues floating about this campaign, such as abortion rights, gay rights, gun laws, and the war against drugs. The common element is human behavior and whether there should be some limits on what residents in America can or cannot do. What is most evident in the campaigns on both side of the aisle is that Federal prescription dominates the field. The issues of abortion and gay rights have some common elements. One of them is our tax law. The question that any citizen should deal with is whether budget policy should fund abortion. Abortion rights are comingled with the issue of whether a woman should have the right to control her own body. But that is not where the rubber meets the road. It is over who pays for that right for those who do not have the income to pay for an abortion themselves. That is a question of externalities. What costs are imposed upon society by bearing children that might not otherwise be born if abortion costs are publicly subsidized One never hears that issue at all. Rather than spending fruitless hours on whether women have a right to abort a pregnancy, we need to shift the argument to the costs of unwanted children

The argument over gay rights is another question of equality under the law. The issue is very simply whether or not a family unit, under our tax and benefit laws, must be a man and a woman Why not just deal with the question of what constitutes a household for tax and benefit purposes and skip the unresolvable religious question of what marriage is or is not. Governments are not well prepared to treat philosophic or religious issues and the US has a long-standing prohibition for mixing up the two.

Gun laws involve another issue of rights. As they are now dealt with, fundamentally it is an issue of public safety versus constitutional rights. The science here is squelched. Everyone abhors mass shootings. They impose both personal and social costs. That seems to dictate a close connection between who uses weapons and under what conditions we can we demonstrate that the purchase of a gun and its misuse are intimately connected. The Government spends a lot on research for what may seem quite unusual investigations. The gun laws issue is loaded with statistics. We ought to be able to tell the true connection between purchased weapons and mass shootings from the data. Notice, we have focused on the so-called copy cat mass killings. Criminals usually dont buy guns so the real issue is public safety, particularly for our police. Furthermore, the issue of the existing stock of weapons is usually obscured. Without closing that loop, gun laws usually prove to be both inadequate and inadequately enforced. This is the time for clarity on what must be done to promote public safety and what the costs of doing just that may be.

Finally, we come to our drug laws and the continuing Governments war on drugs. One would think that given our history and experience with the prohibition of alcohol and the intimate connection to crime that Prohibition created could shed light on current policy. If we were truly focused on crime, we would change our drug policy entirely. Our war on drugs has created a very wealthy criminal class and the suborning of foreign country politicians. Narco States are direct consequences of our drug laws. Narco States pose geopolitical threats to our safety. The first step is to recognize what our current drug policy has created. It certainly has not restrained the use of drugs in the U.S.

National Defense: We live in a dangerous world. We have States equipped with growing nuclear prowess. This is a Federal problem to be surenot one to be dealt with separately by our 50 States. Second, we have non-State actors who threaten our safety. We have proven the efficacy of a volunteer army, but we need to insure that our military equipment is adequate and modern, sufficient to deal with small wars, and terrorism. With the smallest Navy since 1916, it seems that we are not providing sufficient equipment for our volunteer forces to cope with a very complex world. Further, the scope of global terrorism has expanded sufficiently to require much larger volunteer services (Army, Navy, Air Force, Coast Guard, and the intelligence support needed by these services). Since terrorism represents a global threat, we need to be in constant and direct communication with many countries, but we need to be perfectly clear to our allies concerning our willingness and capabilities to deal with threats. It does not seem prudent for the President to put public limits on the extent to which the Commander in Chief is willing to go to counteract terrorism anywhere in the World. Finally, once committed, our military commanders must be given the wherewithal to complete their mission. There is considerable controversy between the Parties and between their presumptive candidates. The public needs to know where these candidates stand on the use of force and the equipment needed to successfully deploy that force in our defense.

The Federal Budget: The Federal Government now consumes a substantial portion of overall economic activity. Promises made to potential political supporters grow exponentially with each election cycle. That is how voters are recruited. But all government budgets have inherent limitations. We can always prescribe a level of benefits and Federal activity that will exceed even the most expanded budget. There are always tradeoffs and the notion that expanding the Federal budget is good for the economy is simply another one of the chicken in every pot arguments that fail sound economics.

We are now well beyond the issue of whether we will have an expanded national health care systems or increased social security. The evidence is that the majority of the voting public wants both and wants more not less. There are only two courses: expand them to meet continually rising demands or begin a slow but steady process of replacing parts of each of these programs with privately funded mechanisms. There is no right answer, except real answers require total candor. Both Parties need to come clean. They need to tell it like it is. How much is required and who pays

When you listen to the debates, what you hear is invective and obscure funding mechanisms that fail to answer the question. It often revolves to some philosophic issue of what rights people possess. This is hypocrisy. Another fallacy is that the rich can pay for the poor, obscuring how an improperly instituted taxation system destroys growth and therefore limits Federal resources.

Fundamentally, we get a Government we cannot afford. It is time for some serious truth telling by our national politicians. Politicians win elections by promising voters benefits — even when the same politicians cannot clearly spell out who will pay and how much taxation will be required. The source of the problem is not the budget. The source of the problem is our electoral system that rewards a slice and dice approach to elections. The real solution is to change our electoral system, particularly at the Federal level.


When politics is no longer a way of life, no longer a permanent occupation with benefits determined by the current office holders, we will have cut the umbilical cord between promising more than we have and the continued electoral success of incumbents. We can argue about the extent of the term limits in the House and the Senate, but a rational approach might be one term in the Senate (6 years) and two terms in the House (four years). Cut off from using other peoples money, rational politics will be right around the corner.

Its time to turn the corner. Then, one can ask, what about the term of the President Maybe a single 6-year term would work there as well The existing parties and their enlarged political structures will surely tell us that term limits wont work because experienced hands will be needed at all times to prevent misguided legislation. Based upon the record that statement on its face must be false.

The Founding Fathers had a very different conception of politics–citizen legislators that had their own (other) occupation. They were right about a new birth of freedom. I think they were also right about citizen-politicians. We need to de-professionalize politics. Politics should not be a permanent occupation. Professional politicians have added only an expanding level of debt and an insufferably long debate about what to spend that debt on! They have produced little else for their voters. Its time to change the system. To do that, we will need a new party!







  1. See John Cochrane WSJ Growth Oped, The Grumpy Economist (johncochrane.blogspot.com) May 4, 2016. []

America?s Leadership Deficit and the Art of Political Pandering

If you were hoping that Americas Leadership Deficit would end this November, you are going to be sadly disappointed. If the Republican debates didnt destroy your hopes for meaningful change, it is highly unlikely you will find your enthusiasm lifted by watching the Democratic debates.

Last night, I decided to tune turn off a reasonably competitive basketball game to glance at the latest Clinton-Sanders soap opera. I could stand only about 15 minutes. The debate was moderated by PBS anchors no doubt to emphasize that this year the US can (and likely will) elect its first female President. Will that remedy our leadership deficit la mme chose.

When I tuned in, the two candidates were resorting to their typical sophisms that characterize American political discourse. Theyshowed no specific remedies other than throwing more government resources at the problems, and advocating higher taxes on the “rich,” to pay for it. The rhetoric of treating American social failures was predictable. The solution set ofeachcandidate was truly null and void.

Sanders excoriated the truly lamentable statistics on the number of Americans now in prison—which he claimed without any substantiating evidence— now exceeds the totals imprisoned in China with a population five times greater. (Hard to know his source of information on the Chinese penal system). Forgetting the hyperbole, it is true that at the end of 2014, over 1.5 million people were held in American prisons. It is sad, never mind the Chinese comparison.

The candidates focused on the composition of the male prison population that includes some37% black males, 33% Hispanic males and 22% white males. No gender equality found here! Moreover, and this was the real point of the debate—drawing in minority voters—the most obvious remedy was overlooked, and their attention centered almost exclusively on cleaning up American police force methods and police profiling. They ignored the fact that more than 50% of those incarcerated got into prison via convictions for drug offenses. The obvious solution—repealing our current drug laws—was never mentioned. Instead, our criminal justice system was condemned for carrying out the laws that legislators such as these two have passed or allowed to remain on the books.

Neither candidate —at least during the few minutes I could stand to watch—took up George Shultzs recent Op Ed piece in the WSJ (“We reduced smoking, why not drug use” 2/9/2016) that focused on the abject failure of our War on Drugs. Doing that should have been obvious, but these two candidates werent really interested in effective solutions. They were interested in pandering tovoters. Since non-whites aresome 70% of the prison population, it was obvious that discrimination against non-white drug offenders was rampant. With low skills, poor education, deficient family structures, are we surprised that the lucrative earning power of dealing drugs by unemployed and unskilled males is compelling Neither candidate questioned whether the real problem in America was punishing people for their sumptuary preferences and the large economic rents these productsgenerate to those willing to risk catering to that demand. Instead, what was recommended was teaching policemen to be unprejudiced in their law enforcement efforts and making the racial composition of the police forces mirror the racial composition of the neighborhoods they policed.

We dont have to exonerate police who have frequently used racially focused tactics, including unofficial racial profiling, when they arrest suspects. Even with explicit withdrawal of racial profiling, policemen know the stats and their arrest behavior is understandable. The problem is not profiling: the problem is our drug laws are out of step with the population and our War on Drugs tends to arrest the foot soldiers of drug distribution. Regarding the nature of the social ills that our society suffers, tastes have changed. Marijuana is not viewed as a scourge. Many states allow its production and use and some its distribution, taxing the drug that they cannot control with police and prisons.

What cries out inany rational assessment of Americas drug demand is that we need to reduce the gains from dealing drugs. That means ending criminal prosecutions for these offenses and making our police instruments of civilian safety, not alocal drug gendarms. As for usage of harder drugs, Schultz cited the clear and well-documented drop in smoking that stemmed from well-documented research coupling smoking to serious diseases. What counts is to reduce the demand for dangerous substances, and not creating a black market in drugs that draws in the uneducated and low-skilled populations who distribute such products. Ironic and sad it is that two legislators, now Presidential seekers, dont focus on the obvious changes in our Federal criminal statutes that would reduce the scope of the problem. Neither do they put forward a solid program for instructing our people about the consequences of (hard) drug use. Americans growing use of drugs is not dealt with. Instead, Americas police, who try to enforce a much-outdated set of laws, are the whipping boys to advance these candidates electoral interests.

Perhaps the most cynical attack was from Sanders. He advocates more education in prison; re-training of prisoners; early release and continuing government transfer payments to low-income individuals. Any one who looks at the rather unfavorable statistics of retraining or improving education has got to feel that simply throwing more Federal money at the problems of low income, low skill people, is not going to be more effective than it has been to date. That is political escapism, at best, political pandering at worst. What it is not is real political leadership. That deficit is not going away soon!

In modern society, those that are poorly educated, poorly socialized and vastly unemployed gravitate unsurprisingly to benefitting fromthe rent streams that our faulty laws produce. What is needed is to reduce those rewards. That would berelatively easy, if not a sexy political pander job. Is that not obvious

Why dont the candidates deal directly with the problem and advocate realistic changes in our drug laws The answer is that would require real political leadership. The candidates, if they are expert in anything, are masters of pandering to the voters and offering more bread and circuses. Sadly, Americas leadership deficit is not about to end.


Leaderless Politics and the ?Immigration Crisis?


  • I was pleasantly surprised by the positive reaction I received to my blog yesterday1. For those of you who wrote in, thank you. That said, I wanted to rewrite it, but didnt quite get to it. I would have changed the title to read Failed Leadership: organizing disorganized crimes.” Why As I have thought more about the woeful state of the world with its wide-spread absence of good leadership, it seemed to me that when important institutions and organizations suffer from a leadership deficit, what might have otherwise been disorganized crimes, are more likely to become organized criminal activity.
  • At first blush, this might seem paradoxical, but common sense and thoughtful reflection provide good evidence for the proposition. A family that suffers from inadequate parenting creates risks for its children. The data on this are overwhelming, and most of us know this from our own life experiences. Mentoring a child is terribly important to the childs progress. Professor Gary Becker, who made his life work the study of Human Capital2in its various dimensions, gave us a model to understand this process. Parents invest in their children by educating them and leading them with good role models. In general, more investment in those children leads those children to higher levels of human capital, and as a consequence, the choices and opportunities open to children with higher human capital are better and last longer. They tend to finish high school with greater frequency. They go on to college in greater numbers. They get better jobs and their lifetime incomes are substantially higherthan those with significantly lesshuman capital. They live longer and as a group, they experience less crime and far fewer penal outcomes.
  • You can reverse that causal sequence in a poorly parented family. An absent parent is not a leader. A single parent has greater leadership responsibilities and often, single parents cant carry the load of being both a breadwinner and the leader in the family at the same time. In a family with poor leadership, children are first disorganized and then they become self-organized by leadership outside the family. Some of those leaders outside the family provide unhealthy lessons for these children. Mentoring by outside “parents” can involve joining a street gang or becoming attracted to the drug trade. It often leads to poor schooling experience and an ultimate drop out. This is why the absence of leadership is critical. Deficient leadership can convert disorganized lives into organized crimes.
  • The inference we draw from this sketch is that rules organize human activity and that social organization works best with good leadership. Whoever leads generally follows some schema of rules but not all rules are good rules. Bad rules are often based on an uninformed prejudice, not credible facts. Some prejudices become the fuel for outrageous displays of Xenophobia. Xenophobia lies at the root of the so-called Immigration Crisis. Is it a crisis, or is there substantial misperception, deliberate or otherwise
  • No area of American (and European) life seems more fractious than the issue of immigration. Xenophobia also runs through European politics. Sadly, it is infecting the American Presidential campaign.3. In our view, the immigration crisis, is largely based on bad data or in the worst cases, no data at all supportive of such xenophobic contentions. In the era of Big Data, it is shocking to see those claiming to be leaders, basing their outrage and their solutions, on such an uninformed basis. It is particularly shameful for those who claim to be true conservatives or libertarians to fall prey to these claimed facts that are simply not true.
  • Poor leaders thrive on phony data, on facts that are untrue, or on lies that are politically expedient and dangerous to the body politic. Have we learned nothing from the horrors of World War II as well as all the other ethnic cleansing stories in recent years from countries led by awful officials Repeated intensively, the big lie, becomes the factual basis of a terrifying cure. What is the Mexican problem, after all—a revival of the Jewish Question We should know better and we should demand that our potential leaders immediately stop pandering to big lies. It will take courage for these candidates to get their head wrapped around the real facts and our own American historybut isnt courage one of the vital qualities that we look for in our leaders To lead well, they must begin with the truth.
  • As I have listened to these debates from alleged conservatives, I could not help but think, not only is the US suffering from a huge leadership deficit, but campaigns such as we now observe, extend and intensify that leadership deficit. Over the long run a leadership deficit will bring more trouble to this country than a fiscal deficit. We can cure the latter even in a modest amount of time. We reduce the size of government and much of the fiscal deficit will disappear as economic growth takes place. All of this is so well known by those who wish to know that it scarcely seems necessary to point it out. Yet, immigration, legal or illegal, has become the whipping boy of slow wage growth, increased crime and an expanding fiscal deficit. Resort to such factually empty explanations only underscores our growing leadership deficit. What about immigration, then Is it or is it not a serious problem
  • This country was built on immigrants. Immigration, particularly the heavy immigration of the later half of the 19th and early 20th century was positive for growth, positive for the growth of real wages and positive for the existing residents and surely positive for the immigrants. Those were years of mighty economic expansion, but note, there was no welfare state. That is a big difference as compared to today. The economics of that period is well understood by economists. Yet, some economists think that our immigration problems today are different. They are and they arent. Lets carefully understand where differences between our 19th and early 20th century experience and our current circumstances in the 21st Century lie, particularly since the 2007-2008 economic crisis.
  • The late Professor Milton Friedman made the issue of immigration totally clear years ago to Americans of every political stripe. As frequently happens, however, lesser men and women didnt understand or distorted what he said. Worse, they misquoted him and turned his powerful logic upside down. Heres the long and the short of it.4
  • The existence of the Welfare State changes the game. A legal immigrant by definition lowers welfare of those already here! An illegal immigrant raises welfare! Thats a paradox that seems at first blush difficult to understand. Clearly the Presidential candidates dont understand it. But, it is actually quite simple as Professor Friedman explained. It all depends upon who gets the welfare!
  • Suppose that all legal immigrants are entitled to the welfare benefits that existing citizens possess once they enter the U.S. And, for the simplest case, imagine that the sum total of all these welfare benefits amount to a trilliondollars (of course this is just a simple illustration). Further,imagine that there are no new immigrants in the first instance. Then, the per capita welfare benefit of a trillion dollars is divided over the existing population (excluding immigrants). Now suppose new immigrants (legal and illegal) appear and are entitled to the same benefits By definition, the rest of us suffer a diminution of welfare. Of course, our leaders can easilyincrease the welfare budget and laythe expenseon future generations. In either case, our welfare declines.
  • Now suppose there isonly illegal immigration An illegal immigrant cant qualify for benefits (when the rules are enforced). Thus, if a million illegals enter, the work force expands, (more GDP) but no more is spent on welfare than before they came. Whoops! Welfare for the rest of us goes up, because output goes up with no extra Federal Expense! Wheres the rub Simple: if you dont have a welfare state, then immigration (of either kind) is beneficial because output rises. Professor Friedman concluded that as long as we have a welfare state (which we are not ready to truncate), legal immigration can reduce our welfare, but illegal immigration, where welfare benefits are strictly enforced and illegals dont qualify, is welfare increasing! Ok, Candidates! Wrap your heads around that one!
  • The Candidates have it exactly wrong. They should all either agree to abolish the welfare state—in which case legal and illegal immigration benefit the rest of us—or they should permit only illegal immigration and enforce the law!
  • There is a moral to this story. If we have a rule, we need to enforce it. If we have a welfare state that we are unwilling to give up, then enforcing rules is very important. Politicians who find ways to leave rules unenforced, walk our citizens into a trap. But that is what we observe from our politicians who have huge leadership deficits.
  • At the end of the day, most of what comes out of the so-called immigration crisis, is gibberish in the best case, awful pandering or the Big Lie in the worst of cases. And, dont forget, at the base of this pile of dung, there are politicians who have failed at their most basic task: to be leaders. World history offers literally endless examples of States gone sour when their leaders failed to properly lead their citizens. Our founding fathers knew this, and they were deeply worried about how to prevent the future destruction of the Republic they had delivered to the world.
  • They started from the Articles of Confederation that had produced a weak national government and left the citizens of the new Republic as potential victims of foreign powers who would meet a fractured and weakened country. They labored in Philadelphia to produce a founding document that would answer the observed defects of prior, failed Republics. Together with the first 10 Amendments (The Bill of Rights, demanded by the Anti-Federalists as remedies to absolute power by the State), they produced a remarkable document. The Constitution has flexed and swayed and adapted to the exigencies of a rapidly growing country, suffused with immigrants who were building the New World. Implicit in this construction, however, was the need for thoughtful, courageous and diligent leaders. We were very lucky to have survived the early years of the Republic.
  • You know the rest of the story. Fourscore and seven years ago. To advance the cause of liberty and freedom, we found ourselves in a great Civil War that tested our principles and our leaders. Fortunately, when we needed them most, we did not have a leadership deficit and we entered the 20th century as a surging, growing, expanding, young nation ready to take on the world. We did it with masses of immigrants who arrived here looking for a better life than the one they had left. Those immigrants did very well, and so did the residents they joined. They were a powerful force for building America. We absorbed them, and they helped to transform America. Germans, Irish, East European Jews, Italians and a multitude of other nations and cultures. They took the jobs that those already here were not willing to take; they raised their children, they learned our language and our customs and they rose or fell strictly on their own efforts. There were no requirements for entry into the U.S. until we again got that immigration crisis mentality and started to restrict who could come here and under what conditions in the 1920’s. In the years after World War I, we had a series of business cycles that disrupted and changed America. Immigrants were blamed again. We began restricting entry.
  • We are now living in difficult times when many more demands are placed on Government to help the disadvantaged, and create a security blanket for those already here. When the immigrants come today, they dont face thenarrower government of the 19th and early 20thcenturies. They see an expanded Welfare State and by neglecting the rules, we have gotten into the habit of passing out the benefits to newcomers as well asexisting residents. That makes some people mad, but their causal reasoning is terribly faulty. We dont seem to have leaders willing to tell them the truth. Instead, we have politicians who want to use the immigration crisis as a path to office and power.
  • We have seen this movie before. Its time to shut it down. We have to stop confusing the so-called immigration crisiswith the problems that stem directly from the Welfare State we have created and the ‘leaders’ who run that state. Lets face it. We dont have an immigration crisis. We have a leadership crisis. Its time to put the leadership crisis to bed.










  1. DISORGANIZED AND ORGANIZED CRIMES: failed leadership and its consequences []
  2. Gary Becker,Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, UChicago Press []
  3. The Immigration Boogeyman: Separating Fact from Fiction, at wharton.upenn.edu, 9/30/2015 []
  4. What Milton Friedman really said about immigration,Classically Liberal, May 8 2008 at freestudents.blogspot.com/2008/02/what-milton-friedman-really-said.html []

FAILED LEADERSHIP AND ITS CONSEQUENCES: disorganized and organized crimes

It has been an amazing past few weeks. In less than a month, we have witnessed massive failures in political and economic governance world-wide and a moving spiritual appeal for individual responsibility by the Pope on his visit to America. The Papal message of individual responsibility (self-governance) was combined with an extraordinary focus on those left behind. It was was a badly needed rejoinder to the leadership failures we see every day, here in America and elsewhere as well.

The political and economic malaise that is evident globally stems from an appalling lack of leadership in both government and industry. The Pope stressed the importance of spirituality in motivating personal responsibility. His visit was a stunning display of respect for individual lives and a call for individuals, institutions and countries all over the world to address global problems with compassion and charity. Our politicians and business leaders have undermined our trust in government and business. Sadly, they seem not to have heard the Pope’s message. They neither lead nor do they listen.

Among our current economic and political failures, we can include:

Massive migration into an ill prepared Europe stemming from four years of warfare in Syria and Iraq. The failure of Western leaders to marshal sufficient resources to cope with the breakdown in Syria and Iraq and the growing strength of ISIS, who now controls the largest amount of territory in the two states combined, means emigration into Europe will dominate political life in Europe far into the future. The flood is only beginning.

Russian military intervention in Syria that underlines the failed leadership in the US and in Europe to deal seriously with the Syrian disaster. Leading from behind has been demonstrated to be a much-faulted strategic conception combined with feckless political leadership. Put simply, leading from behind is not leading at all.

Iranian Nuclear deal that now goes into effect is not a treaty (that would require two/thirds approval by the Senate), but as an executive agreement. Leadership that skirts American constitutional process in order to ram home an agreement whose full terms have not been disclosed is a travesty to our traditions of governance. Those who lead in this manner show a total disregard for allowing the judgment of the people’s representatives. Whatever the outcome in Iran, here in the US, it is a bad example to follow.

Unexpected resignation of the Speaker of the House shocked the politicos within the beltway. It leaves the Republican opposition disorganized and the Administration praying that the Boehner walk away will at least provide passage of continuing resolution so that the Government will not be shut down. The shambles into which the Republican Party has fallen is not a good omen for political governance. We are reminded of Ring Lardners great baseball quote. “Although he cant field, he cant hit either.”1This leaves non-elected officials (such as the Supreme Court or the Federal Reserve) in charge of policy. Leadership failure has very long term consequences.

Growth slowdowns in emerging markets have thrown prices for basic resources into the toilet. The effects on employment in the resource industry have just begun, but the effects on the prices of resource stocks have been devastating. In case you havent noticed, equity markets worldwide are in a state of panic. Partly, the collapse of basic resource prices is responsible, but not entirely. The loss of direction in economic policy displays the same failure of leadership noted in the political arena.

Federal Reserve vacillation in choosing a definitive policy stance and communicating its direction going forward has added to the bearish movement of equities. The best characterization of the FOMC may have has been the recent translation of its acronym: the Federal Open Mouth Committee. The Fed has pulled a Lucy, as one economist has pointed out.2If the Fed knows where it’s going, it hasn’t let the market in on its big secret.

Exposure of Volkswagens fraudulent auto emissions gimmick is just the beginning of a continuing set of disclosures that reek of massive failures in VWs corporate governance. The damage to the worlds second largest auto manufacturer is incalculable at this stage. The damage will not be limited to VW. The German auto industry employs one of of seven in the labor force. The consequences will be manifold. Government has failed as well. VWs contravention of environmental regulations in both Europe as well as the United States indicates the regulators on both sides of the Atlantic were asleep at the switch or perhaps suborned from their real duties of protecting the public. Public confidence in government regulation should and will fall sharply. Our trust in our governments falls when leadership fails.

Disorganized Crimes has mainly focused its attention on continued examples of corporate misgovernance in the US. However, we have always thought that corporate governance is a subset of a larger governance structure that takes account of government, the courts, and our institutional arrangements. Those institutions include what we term as the regulatory state. And, no state today, is without that panoply of regulatory bodies that effect day-to-day governance. We have all become dependent on this massive regulatory state to guard the public interest, the more so when individual shareholders cannot control the operations of the companies they own. The parallel to 2007-2008 is striking. Firms failed and the regulatory bodies failed with them. It was not a case of deregulation. It was repeated failures to apply the existing regulations. Don’t let the government deceive you by blaming the “other guy.”

What we are witnessing in the VW disaster is a twin failure: the failure of corporate governance at VW and the regulatory failures in Europe and America. The regulations are suppose to stand guard for the public. The agencies charged with overseeing compliance to environmental law have behaved as dupes over a long period. They remind us of the investors in the Bernie Madoff scandal, each relying on their friends continued investment with Madoff to assure themselves that nothing was wrong. When business leaders in public companies fail, shareholders can and now often arise to throw out failed executives. When government regulators fail even to execute their own mandates, the public interest is not only trampled but citizens lose their belief that their government will be there to act in their interest. What then

What should we make of this extraordinary regulatory failure Clearly, the leaders of these agencies have failed to lead. They are not even able to carry out the regulations they demanded to be placed on the books. It is scarcely satisfying to see these failures in virtually every country irrespective of its political ideology. No matter what the ideological underpinnings, regulatory failure is also leadership failure. It undermines our belief that somewhere, someone is paying attention to the needs of the citizens, and doing it competently, honestly and regularly.

Where does the public go from here In 1961 John F Kennedy aroused the passions of many Americans with his clarion calI: Ask not what your country can do for you! Ask what you can do for your country.3 The exact quote is And so, my fellow Americans: ask not what your country can do for you, ask what you can do for your country. The public needs to turn this phrase around and ask ‘What is Government, which dictates so much of my life, doing for me’ Can Government keep me safe from terror, from economic decline When I retire, will there be sufficient resources for me in my old age Will the national health plan be there when I fall ill Can government provide the moral compass to judge who are the organized criminals in our society Maybe not Maybe I ought not to trust my future to a government that seems to function in a directionless fashion headed by leaders who are leading from behind

By his speeches, and the locations of his visits, the Pope seemed to be saying, Do what you can to alleviate the suffering in the world. It is your responsibility. It struck a spiritual chord in America that our deficient political leadership would do well not to ignore. Politicians and administrators who fail to lead, lose the respect of their countries citizens. In the next emergency, if government is not respected, government can no longer lead. Who then will follow

This past week provoked me to remember the actor Peter Finch crying into the night in the movie Network, Im mad as hell and I am not going to take this anymore.4 People in America are mad as hell. Who can blame them

They are mad in Europe. They are mad in China. They are mad in Russia. The flood of immigrants into Europe are not only mad, they are escaping a geography that is no longer a state.

When we speak of the United States, we think of an organized polity with recognized borders, recognizable leaders who direct our attention and to whom, ordinarily, we accord our respect. That is not our present State of the Union. Today, in America we are ‘mad as hell.” Are we going to “take it anymore”

  1. This is how I remembered it from my youth. Looking it up on the web, the best I could find was Although he is a very poor fielder, he is a very poor hitter. I may have read the remark in an old Grantland Rice book and to me it reads better as it is in the text. []
  2. David Malpass, “The Fed Pulls a Lucy,” WSJ 9/17/2015 []
  3. John F. Kennedy, Inaugural, Washington January 20, 1961 []
  4. Network, United Artists (1976). The speech and its repercussions can be found at https://www.youtube.com/watchv=q_qgVn-Op7Q []