Wednesday, October 27, 2010

I am Hank Reardon

From The Wall Street Journal:

World’s Richest Man: ‘Charity Doesn’t Solve Anything’

The Mexican billionaire [Carlos Slim], who Forbes still lists as the world’s richest man, said in 2007 that he could do more to help fight poverty by building businesses than by “being a Santa Claus.”

Mr. Slim’s signature also has been noticeably absent from the Gates-Buffett Giving Pledge. At a conference in Syndey last month, Mr. Slim said that charity accomplishes little.

“The only way to fight poverty is with employment,” he said. “Trillions of dollars have been given to charity in the last 50 years, and they don’t solve anything.”

His point seems to be that society would benefit more if the wealthy channeled their creative energies and talents toward building job-creating businesses rather than doling out cash. It is the 21st century billionaire version of the old adage, “give a man a fish and he eats for a day, teach him to fish and he eats for a lifetime.”

In these populist times, some might argue that Mr. Slim is being a selfish billionaire who’s simply justifying his own wealth accumulation. But he raises two good questions–ones I have heard from an increasing number of wealthy entrepreneurs:

Would Bill Gates and Warren Buffett be doing more for society by putting their time and money into new businesses rather than funding philanthropy?

Has philanthropy solved any major social problems in the past 50 years?

Tuesday, October 26, 2010

I am Wesley Mouch

John Cochrane's brilliant op-ed in today's Wall Street Journal:

Economists are full of bad ideas. Terrible ideas seem to emerge when the gurus get together to talk about coordinating their bad ideas. Last week's public letter from Treasury Secretary Tim Geithner to the G-20 finance ministers is a great example.

Mr. Geithner starts with a dramatic proposal: "G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP [later reported to be 4%] over the next few years."

Since when is every trade surplus or deficit an "external imbalance" in need of correction? It makes sense for a country that has good investment prospects to import a lot of goods, run trade deficits, and borrow money. Years later, the country puts the resulting products on boats to pay the lenders back. The U.S. borrowed abroad to finance our railroads in the 19th century and ran surpluses when Europe was rebuilding after World War II. Were these "imbalances"?

Or consider a country (say, China) with a lot of middle-aged workers who need to save for retirement. It makes perfect sense for them to put stuff on boats and send it to a second country (say, the United States) whose people want to consume the goods. The people in the first country invest their earnings, say, by buying the bonds issued by the second country. And as they retire, they cash in the bonds and buy goods flowing the other way.

Do these and similar stories exactly account for current trade patterns? I don't know. But nobody else does, either. In particular, the army of economists in the basements of the International Monetary Fund (IMF) has no clue exactly how much each country should be saving, or where the best untapped global investment opportunities are around the world—including whether trade patterns are "normal" or "imbalanced."

So what policies would Mr. Geithner have countries undertake to bring economies around the world into his idea of better balance? He says that G-20 "countries running persistent deficits"—that's the U.S.—"should boost national savings by adopting credible medium-term fiscal targets consistent with sustainable debt levels."

So Mr. Geithner knows that trade surpluses in the end come down to saving and investment. And he knows that in the U.S. people are trying to save right now. Our government is undoing their efforts with massive fiscal deficits. Mr. Geithner recognizes that most of the trade "imbalance" comes down to a big fat fiscal imbalance centered in Washington, D.C. But there's the catch. "Medium term" means "not now" and "not long-run entitlements." "Target" means "promises." Even if a target would make a difference, who believes in targets from our government? We don't know what the rate of taxation will be in three months!

Mr. Geithner goes on to say that "countries running persistent deficits" should "strengthen export performance," but he doesn't say how, or what other "performance" we should weaken to get it. Is this a code word for export subsidies, devaluation and industrial policy, and a plea that the rest of the world should let us get away with it?

His advice to the other G-20 countries, those "with persistent surpluses," is that they "should undertake structural, fiscal, and exchange rate policies to boost domestic sources of growth and support global demand." In particular, "G-20 emerging market countries with significantly undervalued currencies and adequate precautionary reserves''—have you figured out this means China?—"need to allow their exchange rates to adjust fully over time to levels consistent with economic fundamentals."

He argues for a brave new system, coordinated by the IMF, of international discretionary currency interventions: "G-20 advanced countries will work to ensure against excessive volatility and disorderly movements in exchange rates."

How does anyone know if a currency is "undervalued" or not? The economists hidden away in the sub-basements of the IMF may try to decide what currencies "should be" worth across vastly different countries, but this is a hopeless task. Is $2 a day the "right" wage in China, or should that be $2.20 per day because the currency is "undervalued?" Good luck.

Why push China to manipulate its currency upward, but ignore its capital and exchange controls? We should push China to abandon those controls instead. A freely pegged currency is a great idea, especially for a fast-growing, trade-based economy with a weak central bank like China.

What's the right policy toward China? They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We're in the process of devaluing again. The Chinese government's accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.

Yet Mr. Geithner thinks that the Chinese somehow hurt us. There is at work here a strange marriage of Keynesianism and mercantilism—the view that U.S. consumers supported the world economy by spending beyond our means, so that other people could have the pleasure of sending things in exchange for pieces of paper.

This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find "imbalances," properly diagnose "overvalued" exchange rates, then "coordinate" structural, fiscal and exchange rate policies to "facilitate an orderly rebalancing of global demand," especially using "medium-term targets" rather than concrete actions. The German economics minister, Rainer BrĂ¼derle, called this "planned economy thinking." He was being generous. Planners have a clearer idea of what they are doing.

Sunday, October 24, 2010

I am Mr. Thompson

From Charles Krauthammer:

In an increasingly desperate attempt to develop a narrative for the coming Democratic collapse, the Democrats have indulged themselves in what for half a century they’ve habitually attributed to the American Right: the paranoid style in American politics...
But after trotting out some of these with a noticeable lack of success, President Obama has come up with something new, something less common, something more befitting his stature and intellect. He’s now offering a scientific, indeed neurological, explanation for his current political troubles. The electorate apparently is deranged by its anxieties and fears to the point where it can’t think straight. Part of the reason “facts and science and argument does not seem to be winning the day all the time,” he explained to a Massachusetts audience, “is because we’re hard-wired not to always think clearly when we’re scared. And the country is scared.”
Opening a whole new branch of cognitive science — liberal psychology — Obama has discovered a new principle: The fearful brain is hard-wired to act befuddled, i.e., to vote Republican.

Saturday, October 23, 2010

I am Ellsworth Toohey

From Zero Hedge:
How much would it be worth to you to see arch-Keynesian Paul Krugman debate a top-notch Austrian theory economist on business cycle theory?

Krugman has prattled for years about Austrian theory being a flawed dead-end of economics. My guess he has never read anything by Mises, Hayek, or Rothbard, the greatest scholars of the Austrian School. He doesn't understand it in any way; I have read his critiques and they are uniformed.

Robert Murphy, one of the bright young lights of Austrian theory economics, has challenged Krugman to a debate. Now let me say others have tried to draw Krugman out, but he won't do it. Murphy, who got his Ph.D at NYU, has made an offer of debate that Krugman will be hard pressed to refuse. Here's the challenge:

When Krugman agrees to debate Murphy at the Mises Institute, $100,000 will be donated to the Fresh Food Program of FoodBankNYC.org, a non-profit dedicated to feeding the hungry of NYC .

Murphy is soliciting donations for the debate through The Point, a web site that hosts campaigns. Launched only 4 days ago, they already have raised $22,000. I just pledged $100. If Krugman doesn't accept the challenge, I will not be charged. If he does, I get a charitable donation deduction to the Food Bank of NYC.

Here is where you can donate: Murphy-Krugman Debate. Please join me. This will be money very well spent.

I am Howard Roark

Steve Scully on being Steve Jobs' boss:
Steve, from the moment I met him, always loved beautiful products, especially hardware. He came to my house, and he was fascinated, because I had special hinges and locks designed for doors. I had studied as an industrial designer, and the thing that connected Steve and me was industrial design. It wasn't computing.
Steve had this perspective that always started with the user's experience; and that industrial design was an incredibly important part of that user impression. He recruited me to Apple because he believed the computer was eventually going to become a consumer product. That was an outrageous idea back in the early 1980s. He felt the computer was going to change the world, and it was going to become what he called "the bicycle for the mind."
What makes Steve's methodology different from everyone else's is that he always believed the most important decisions you make are not the things you do, but the things you decide not to do. He's a minimalist. I remember going into Steve's house, and he had almost no furniture in it. He just had a picture of Einstein, whom he admired greatly, and he had a Tiffany lamp and a chair and a bed. He just didn't believe in having lots of things around, but he was incredibly careful in what he selected.

Friday, October 22, 2010

I am Mr. Thompson

From Opinion Maker:
In the case of President Obama...a president who is suffering from Nixonian levels of paranoia, depression, and schizophrenia, has some top-level administration officials considering the first-ever invocation of Section 4 of the 25th Amendment — the involuntary removal of the president from office. The White House meltdown has the Washington political circuit buzzing under the surface.

...Obama’s paranoia and severe depression over his correct belief that certain interests are out to get him have been mitigated by First Lady Michelle Obama and domestic policy adviser Valerie Jarrett. Mrs. Obama has been telling Obama that he should forgo a second term because he is “too good for the American people” and he has a future role on a “bigger world stage.”

Tuesday, October 19, 2010

I am Hank Reardon

From Institutioanl Investor:
[Since the retirement as CEO of] Bill Gates in January 2000...on a split-adjusted basis, the stock [of Microsoft] has lost more than 50 percent of its value... Whereas Microsoft’s stock price outpaced the company’s profits in the 1990s, today — to the astonishment of anyone who remembers the go-go years — its price-earnings ratio lags that of the Standard & Poor’s 500 index.

Tuesday, October 12, 2010

I am Wesley Mouch

From Harvard economics professor Greg Mankiw's blog:
Barney Frank, Then and Now
A news story from 2003:

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry....

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
A news story from yesterday:

In a sharp-edged debut debate, US Representative Barney Frank, a Democrat, and Sean Bielat, his Republican challenger, squared off yesterday over national security, illegal immigration, and the roots of the mortgage crisis....

Bielat, a former Marine officer from Brookline, said Frank had contributed to the downfall and subsequent recession by supporting lenient lending standards for prospective home buyers.

“He has long been an advocate for extending homeownership, even to those who couldn’t afford it, regardless of the cost to the American people,’’ said Bielat, 35.

Frank, a leading liberal who has represented the state’s Fourth Congressional District for nearly 30 years and became chairman of the House Financial Services Committee in 2007, said he and other Democrats fought to curb predatory lending practices before the recession but were thwarted by Republicans. He said he had supported efforts to help low-income families rent homes, rather than buy them.

“Low-income home ownership has been a mistake, and I have been a consistent critic of it,’’ said Frank, 70. Republicans, he said, were principally responsible for failing to reform Fannie Mae and Freddie Mac, the mortgage giants the government seized in September 2008.

Thursday, October 7, 2010

I am Ellsworth Toohey

From New York Magazine's "Daily Intelligencer" blog:
Niall Ferguson vs. Paul Krugman, Round 347

"He can’t claim that the ideas of Keynes are eternal verities like the ideas of Newton; they’re not. Nothing in economics is that scientific. I’ve got history on my side, and he’s got an economic model from 1936. And we’ll see who was right." —Scottish historian Niall Ferguson at last night's NY Historical Society History Makers Gala, responding to remarks made by nemesis Paul Krugman on his LiveJournal, Conscience of a Liberal, in which Krugman declared victory in a skirmish between Keynesian economists such as himself and classical economists such as Ferguson.

Tuesday, October 5, 2010

I am Dagny Taggart

From today's Wall Street Journal:

Ms. McMahon and Mr. Blumenthal faced off Monday night in their first debate of the Senate race, arguing mostly about jobs and the economy but also attacking their respective records in corporate life and in government.

Ms. McMahon, who resigned her post as a professional wrestling executive to run for office, spent much of the night highlighting and defending her record as the former CEO of World Wrestling Entertainment.

Mr. Blumenthal repeatedly attacked her as an executive who built her wealth by shipping jobs overseas, laying off workers and providing substandard benefits to her employees.

In return, she charged Mr. Blumenthal, who has been attorney general for nearly two decades, was "a lifelong government person'' who did not know how to revive the struggling economy.

"How many jobs have you created?'' she asked him, before pressing the point again: "How do you create a job?"

Mr. Blumenthal answered vaguely that jobs are created through creative policies, prompting Ms. McMahon to sarcastically say: "Government, government, government. Government does not create jobs. It's very simple how you create jobs. An entrepreneur takes a risk.''

Monday, October 4, 2010

I am Austin Heller

CNBC's "The Kudlow Report," October 4, 2010:

I am Austin Heller

On today's Wall Street Journal editorial page:

The Trade and Tax Doomsday Clocks


The nearby chart is an update of one I showed on this page in early July. It depicts how the stock market over the last year and a half has followed a path eerily similar to that of 1937. This week corresponds on the chart to mid-August 1937, when the cumulative effects of massive hikes in personal and corporate tax rates, severe monetary tightening, and aggressive business-bashing by the Roosevelt administration tipped the economy into the "depression inside the Depression." From there, stocks were in for the longest and second-deepest bear market in history.

Thankfully, we're not repeating all the mistakes of 1937. But Congress and the Obama administration are flirting dangerously with one of them by failing to extend the expiring low tax rates for all Americans. What's worse, we're close to repeating the mother of all policy errors, the one made not in 1937 but in 1930—the one that started the Great Depression. We're on track to resurrect the 1930 Smoot-Hawley Tariff Act.

Let's start with taxes. If today's low rates expire at year-end per current law, that would at a stroke reduce after-tax income for every working American, the average reduction being 3.3% according to the Tax Policy Center. Do the math: 94% of income goes to consumption, and consumption is 70% of gross domestic product. All else being equal, if the Bush tax cuts don't get extended, that's a 2.3% hit to 2011 GDP. That means instant double-dip recession, starting at midnight, Dec. 31.

Why won't the Democrats who control both houses of Congress switch off this doomsday clock? It's because Democratic leaders and the Obama administration want to roll the dice for the sake of ideology, by giving tax relief only to the middle class while letting rates rise for higher earners. A growing number of Democratic dissidents have joined with Republicans in insisting that, in this weak economy, it's more prudent that relief be given to all Americans.

Some have even undergone a supply-side conversion. Forty-seven Democrats have sent a letter to House Speaker Nancy Pelosi citing the urgency of preserving low tax rates on dividends and capital gains for the sake of more job-creating capital formation.

Democratic leaders blocked Congress from taking up the matter before the October recess, fearing a humiliating defeat. Last Wednesday a resolution permitting the House to adjourn without dealing with the doomsday clock passed by a single vote, over unanimous Republican opposition and nays from 39 Democrats.

When a bill comes before the House in the lame-duck session later this year, the games will really begin. House rules allow Mrs. Pelosi, as speaker, to offer legislation under what's known as "suspension of the rules," which limits time for debate but requires a two-thirds majority to pass, rather than a simple majority. If Mrs. Pelosi offers a bill under suspension that excludes the highest earners, there's little chance she'll get enough GOP votes for the supermajority she needs. That way she can blame Republicans for the defeat of an already doomed bill many Democrats oppose, shaming the GOP for "voting against middle-class tax cuts."

Meanwhile, as we await New Year's Day when today's low tax rates expire, American taxpayers, already beset by crippling uncertainty, have no choice but to keep listening as the ticking of the doomsday clock gets louder and louder.

Now to protectionism. Last week the House passed the Currency Reform for Fair Trade Act. It's an amendment that gives dangerous new protectionist powers to the notorious Smoot-Hawley Tariff Act, the proximate cause of the global Great Depression, which after all these years is still on the books. Democrats—all but five of whom voted in favor of the bill last week—would do well to remember that in 1932 Franklin Delano Roosevelt ran as a free-trader, pledging to lower Smoot-Hawley's tariff walls. The 99 Republicans who voted aye should know that Herbert Hoover's name lives in infamy for erecting them. Instead, Wednesday's vote was a bipartisan move to build those walls higher using currencies as the bricks and mortar.

The bill, if passed by the Senate and signed by the president, would mandate that the Department of Commerce take a foreign country's currency interventions into account in determining whether its trading practices are unfair. In the case of China—the target at which this bill is aimed—Commerce would determine that the amount by which the yuan is allegedly undervalued. The number being thrown around now by supporters of the bill, such as the AFL-CIO and the United Auto Workers, is as much as 40%. The cost basis of Chinese-made goods exported to the U.S. would then be adjusted upward by that amount to determine whether they are being sold below cost, an unfair trade practice known as "dumping." Not a single Chinese export good could survive such a test—virtually the entire volume of China's exports to the U.S. suddenly would become subject to countervailing duties.

Surely China would retaliate. That makes the bill a nuclear threat of mutual assured economic destruction. If carried out, it would crush trade between China and the United States, which are huge export markets for each other.

Suppose China blinks and revalues the yuan to avert the nuclear threat. Even if this creates some American jobs, which is doubtful, it would do so by making all Chinese goods more expensive in the U.S.—an immediate inflationary tax on American consumers.

At the same time, it would make goods priced in dollars cheaper for China to import, supposedly a boon to U.S. exports. But an unintended consequence is that it will make China an even more voracious competitor for oil. That's because oil is priced in dollars, so a revaluation would make it cheaper in yuan terms. Remember, during the period from 2005 to 2008 when the yuan was revalued under similar political pressures from the U.S., the price of oil rose, not coincidentally, to $147 per barrel from $60. That could happen again—and it would be another inflationary tax on U.S. consumers.

Both issues—extending today's low tax rates, and protectionism against China—are animated by the coming election. Once that has passed, presumably cooler heads on both sides of the aisle will prevail, and these twin threats to our fragile economic recovery will fade away.

But sometimes such things can take on lives of their own. And sometimes in the heat of politics cooler heads do not prevail. If that happens now with issues as critical as these, then the economy and the stock market will be doomed to repeat the tragedies of the 1930s.

Mr. Luskin is chief investment officer at Trend Macrolytics LLC.