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The Bana.., er... California Republic: Inflation, Taxes and Budgets

Posted on Wednesday, July 30, 2014 2 comments

Wednesday, July 30, 2014

© Copyright 2014, Xanesti Creative Solutions
As you drive the beautiful California coastline, heading north toward San Francisco, you come across what is possibly the most unfortunately named community anywhere.  I have always wondered about the people of Half-Moon Bay.  Is this where California gets the reputation of being the land of fruits and nuts?  I mean, what can you say about a place that is two weeks shy of a full moon?

Oh, and it gets worse.  Keep driving and head inland to visit Sacramento and listen to our lawmakers tout their budget 'surplus'.  Even esteemed economists like Paul Krugman tout the 'Left Coast Rising'.


Banana Republic Booms and Busts

Krugman rather smugly credits the dubious "cash-in/cash-out" accounting surplus to the fact that Democrats have gained a political monopoly in recent years.  'Extremist' Republicans obstructing the majority was apparently the origin of our budget woes.  And those woes are now supposedly behind us.

Oh my.  Where do I even start?

Maybe with how badly leveraged our state tax system is to inflation, and I am not talking about the Consumer Price Index.  I am talking about the classic definition of inflation - of how when the money supply grows faster than the economy, prices eventually follow.  It is amusing, for example, to hear this administration report 'inflation' to be about 2%, and on that basis say that everything is OK with its monetary policies.  But then the President goes on Twitter (July 24, 2014 - see below) to campaign for a minimum wage hike with a graphic showing how from 2009-2014 the price of eggs has gone up 23%.  A previous tweet that same day showed that the price of milk has gone up 17% in the same period.  The outrage, of course, is that the minimum was has not been increased during that time.

So which is it?  Everyone who has made dinner lately can testify to getting less of things for about the same price.  The funny thing (if you can call it that) is wholesalers cannot do this either with milk (a gallon will always be a gallon) or eggs (a dozen will always be a dozen).  It is for this reason that things like milk and eggs are actually perfect indicators of true inflation.  And they also happen to be excluded from the Consumer Price Index.

But I thought inflation was 2%?
But back to California's fiscal bananas (forget the fruits and nuts).  From the California Budget Project:
Wide fluctuations in state revenues are partly due to ups and downs in California’s economy, but they also result from how the state’s tax system is designed. California’s economy is characterized by a number of very-high-growth sectors that tend to expand rapidly during upswings, and the state’s tax system is structured to capture a share of this growth. This is done through higher personal income tax rates for wealthier earners as well as through taxes on capital gains and other types of income that increase during periods of economic growth.

Technically, California does not have a 'capital gains tax'.  It treats 'capital gains' (e.g. an increase in the value of stock shares) as ordinary income.  What is definitely out of the ordinary, though, is the out-sized proportion capital gains income represents.  From 2007 to 2009 (the heart of the financial crisis) the capital gains share of California's general fund revenues fell from 12% to just 3%.  In hard dollar terms, that was no less than $9.3B (for all you jocks out there, that 'B' stand for 'billion').

This dynamic has been called the 'Facebook effect' because of how the initial public offering of Facebook in 2012 made millionaires out of the company's Menlo Park employees, resulting in a windfall of tax revenue for the state.  In 2008 0.8% of California taxpayers reported incomes in excess of $500,000.  This 0.8% accounted for no less than 82.5% of all capital gains tax revenues received by the state.

And this, then, brings us back to inflation.  With the Federal Reserve propping up bond prices both for U.S. Treasury bonds and for bonds backed by mortgages, interest rates have been artificially suppressed.  This forces investors to look elsewhere for a return.  And elsewhere has primarily meant the stock market.  As a price statistic, inflation is not seen in consumer prices because the CPI does not count the prices which will most accurately reflect underlying inflation.  (Those are the prices, by the way, which will be found most useful to politicians wishing to tweet a pose for their concern for the poor.)  It is seen, however, in the value of things usually held by those in the upper income brackets - land and stock.  And when your tax structure is progressive to the extreme, your general fund income will then be highly leveraged to that inflation.

This is why California's budget see-saws along with the stock market.  With stock index values currently at Quantitative Easing-fueled highs, the mirage of good budgetary news should not be any surprise.  But make no mistake, it has nothing to do with the Democrats' current monopoly.  And it is, in fact, a mirage.


Banana Republic Budgetary Gimmicks

And it only gets worse.  California is notorious for cooking its books to hide its public employee pension obligations.  Estimates vary widely.  Optimists put the liability at about $170B.  Pessimists estimate as much as $500B.  An LA Times article does an excellent job explaining the difference.  The optimistic estimate assumes an average rate of return on investments at 8%.  This depends, however, on riskier investments like hedge funds, the stock market and real estate - again, leveraging the income side of the books to inflation.  The pessimistic estimate uses the average municipal bond return of 5% as the basis of estimating an overall average return of 6%.  That the 2% difference translates to $500B(!) instead of $171B only reinforces how bad the problem really is.

The reason the supposedly good news is a mirage is because of what we will find when we arrive at what we thought was an oasis.  When the income side of our budget is leveraged to inflation, we are essentially being taxed on the sly.  In order for the budgetary math to hold up, we will have to assume inflationary monetary support for assets like stocks and real estate.  That inflationary support comes at the cost of purchasing power - as the system is goosed with more money, each dollar in our wallet buys less and less.  And you thought taxes were just dollars taken from your paycheck?  It is also food taken from your table.  Those who own a home and other assets like stock - namely the upper-middle class and the wealthy - have something to offset this loss of purchasing power.  The lower-middle class and poor?  They are watching powerlessly as their standard of living slips away.  Inflation is not only taxation on the sly, it is the most regressive form of taxation possible.

And this, then, goes to the heart of the ideas promoted by economists like Krugman; this is why money printing and progressive taxation - at least in its extreme California form - is self-defeating.  The more our state budget depends on taxes from the wealthy, the more it depends on inflating the value of those things which make the wealthy, well..., wealthy.  While the rich get richer via asset inflation, the dollars in the wallets of the middle class and poor buy them less and less.  Yet there Krugman and his Keynesian companions are, striking a pose for their concern for those same poor.


Banana Republic Ideas about Wealth and Taxes

At the heart of all of this is a complete failure to understand what wealth is and how it is created.  Printing money does not create wealth - and Krugman's Nobel Prize in economics will not change that.

The construction and purchase of a home is a perfect example of wealth creation.  Imagine the lot of land on which the home sits - before anything was built.  Without things like water, sewer, gas and electricity, the usefulness of the land was limited.  So a developer starts by bringing in 'utilities'.  The reason things like water, sewer and power are called 'utilities' is because that is what they bring - utility; they make it possible to use the land for stable shelter.

Having brought in utilities, the developer then builds a house.  The difference between what the land was worth 'unimproved' and what it has now become worth having been made useful for stable shelter is exactly what wealth is.  And then along comes a buyer.  The buyer arranges for a mortgage from the bank and begins making the payments.  Over the course of the mortgage, usually 30 years, the buyer gradually acquires this new wealth.

The creation of wealth, then, is about improving things.  It can be improving land to make it useful for things like shelter, commerce, recreation and education.  It can be improving the delivery of products and services.  The 'ARPANet', for example, was used only for the facilitation of government research - until the private sector commercialized the technology, and the 'Internet' was born.  And the resulting improvements to the delivery of products and services across a wide swath of the economy has created massive amounts of wealth.

Printing money does not improve anything.  But doing it in a way that suppresses interest rates and gooses equities (the stock market) creates the 'wealth effect'.  In short, as stock prices rise, people 'feel' wealthy and thus spend more.  The difference between conservative and liberal monetary and fiscal policies is perfectly encapsulated here:  Only in a banana republic would true wealth creation be replaced by 'feeling' wealthy - as a matter of public policy, no less!


Banana Republic Bar Tending

If your head is about to explode and you need a beer, well, that's perfect.  One of the ways investors value stocks is by dividing the earnings of a company per share of stock by the price of that share of stock (called the 'price to earnings' ratio, or P/E).  Historically across the stock market, the P/E ratio usually runs about 16.  That is your beer.  Today, the P/E ratio is at 26.  The difference is the head on your beer.

Just cross your arms, sit and watch.  What do you think will happen to the head on your beer?  It'll disappear because, after all, it's just a bunch of small bubbles.  But that's OK, by bar policy it's supposed to make you feel like there is more beer in the glass than there really is!

But back to budgets and banana republics.  Leveraging the income side of your budget to inflation guarantees you will have more head than actual beer.  I don't know about other places, but here in San Diego where we actually know something about beer, a glass of beer with a huge head on it tells us the barkeep has no idea what he's doing.  And a budget leveraged to inflation tells us exactly the same thing about our bean counters in Sacramento.

Lastly, a tax is - in every instance except for the looking glass of ObamaCare - a price attached to a transaction or exchange.  Let's imagine for a moment California did not charge sales tax on gasoline (which it does).  We would still have about $0.58/gallon in state and federal 'excise' taxes. (An excise tax is a fixed amount per unit of measure, e.g. a gallon of gasoline.  A 'sales' tax is a percentage of the total sale.)  So if you were to swing by the gas station and the sign were to say regular unleaded is $3.58/gallon, the price of the gas is actually $3.00/gallon.  The extra $0.58 is the price of the transaction, not the gasoline.

And here an immutable law of economics takes over.  If you want more of something, you do not make it more expensive.  Economic growth - and true wealth creation - is a function of the volume and value of transactions in the economy.  And taxes are, in each and every instance, the price of those transactions.  To point to an increase in taxes resulting in an increase in revenue - when the tax structure is progressive in the extreme and the value of what is being taxed is goosed by monetary inflation - is to mistake the head for the beer.

A return to smaller government, a less extreme progression of tax rates and overall lower taxes simply frees up resources which can be otherwise allocated to productive transactions in the economy - where improvements in products and services, and the delivery of those improvements, creates real wealth and generates stable tax revenues - a glass truly full of a fine Nut Brown Ale, not just a bunch of bubbles.

To borrow a line from the movie 'The King's Speech':

"Krugman's an idiot."

"But he has a Nobel Prize in economics!"

"Well, that makes it official, then, doesn't it?"

Maybe someday the bear will stop laughing at us.

Wanna Bet the U.S. Bails Out Argentina???

Posted on Saturday, July 26, 2014 No comments

Saturday, July 26, 2014

The chickens are about to come home to roost.

In his recent book, Stress Test, former Treasury Secretary Tim Geithner makes his case for bailing out the major banks during the last financial crisis.  The main thrust of his argument is that "bond holders" had to get 100% of the face value of their bonds, instead of taking what the bond market calls a "haircut."

Hang on, hang on...  Don't go screaming into the night (or clicking out of here) just yet.  We can actually push past the nonsense I am really starting to think is set up on purpose to keep ordinary people like you and me from asking inconvenient questions of the 'experts'.

A '10 year 16 oz. Bottle of Coke Bond'

I'll reprise an example I use in my book and in an earlier post here on my blog.  Let's say I pop my head over the cubicle wall you and I share at work and ask "Can I borrow two bucks to get a Coke from the break room?"

"Sure" you say.  You begin reaching for your purse or wallet.

"Uhhhh, the only thing, though," I add, "Is I'll have to pay you back 10 years from now."

You stop, raise your eyebrows a bit and think about it for a second.  But you're good at math, so you figure it out pretty quickly.

"No worries...You'll just have to pay me 10% each year.  And then when the 10 years are up, you can pay me back the two bucks."

Here's what's happening here.  You think about that 16 oz. bottle of Coke for a second.  What do you think it will cost you 10 years from now?  You settle on four bucks pretty quickly as a reasonable estimate.  Right now, you figure, your two bucks is 100% of the 'purchasing power' needed to buy that Coke.  10 years from now, though, with that Coke costing four bucks, your two bucks will only be one-half (that's 50% for you jocks out there - don't say I don't help you guys out) of the 'purchasing power' to buy that Coke.

So you put 10% terms on this little loan.  10% of $2.00 is $0.20, of course.  So you'll collect $0.20 each year from me for 10 years.  So at the end of those 10 years you will have collected another two bucks.  Add that to the original two bucks I'll return to you at the end of those 10 years, and you have the four bucks that bottle of Coke will cost you then.  You have protected your purchasing power.

This is how the bond market works.  A bond is a loan where you only pay the interest during the term of the loan.  At the end you pay back the full amount of the loan.  Those annual $0.20 payments are called 'coupon' payments.  Paying the original two bucks back at the end of the 10 years is 'redeeming' the bond 'at par' (100% of the original amount) when it 'matures' (the end of the 10 year period).

But let's say we get to the end of the 10 years... and I can't pay you back because I am overloaded with 'coupon' payments to other 'bond holders' whose bonds have not yet 'matured'.  Two things can happen at that point: Either I 'default' on the '$2, 10 year, 16 oz. bottle of Coke' bond I 'sold' to you over that cubicle wall, or you agree to 'take a haircut'.

I owe you the full two dollars, but can only afford to pay you one dollar.  You figure it is better to get one dollar rather than nothing if I default, so you agree to take a '50% haircut' (accepting one-half of what I owe you - $1 instead of $2).


The Next Bailout

This is what is happening right now in a Manhattan federal courthouse.  Argentina is negotiating with a group of bond holders led by NML Capital - an investment company who bought Argentina's bonds.  While other bond holders have agreed to take a haircut on their Argentina bonds, NML (and a few others) is refusing to do so - insisting that they are entitled to 'par' - 100% of the face value.  The problem for Argentina is that if NML Captial gets par for its bonds, Argentina's prior agreements with the other bond holders to accept a 'haircut' will then be challenged by those bond holders.

Either everyone takes a haircut, or Argentina will be forced to default on all of its bonds.

So why would NML Capital and the other few bond holders take such a hard line in these negotiations?  If Argentina defaults, they may get nothing at all.  Why not just take the haircut like everyone else and walk away?

Because when 'Junior' was at the helm of the Treasury (see here if you don't get the reference), he made it very clear that the U.S. would not allow those holding bonds sold by the banks which were failing to be forced to take a haircut.  By his rationale, to do so would only make the crisis worse by scaring off the remaining investors and any future investment.  And in his book he persistently derides those who warned what this would do going forward as "moral hazard fundamentalists" demanding "Old Testament" justice.

We are about to find out why he was wrong.  The chickens are about to come home to roost.

'Sovereign' bonds like those sold by Argentina are an even more 'systemic' form of debt than were the bonds sold by the banks.  If it is the policy of the U.S. Treasury not to force bond holders to accept a haircut on bank bonds, the calculation is that the U.S. Treasury will have to take the same approach to sovereign bonds like those sold by Argentina.

So why, then, would NML Captial accept a haircut when the Treasury has already put itself in a box on this matter?  If you felt you someone would step in to bail me out so I could pay you both of your original two dollars, why would you accept only one?

Stay tuned to the news.  And whatever you do, please don't switch the channel when you hear a story about the International Monetary Fund (IMF) - which is funded largely by the U.S. - and Argentina.  The chickens are due on July 30th.  And there is really only two possible outcomes: Either Argentina will be bailed out - largely by us - or they will default.

And if Argentina is bailed out, this will expose Junior's lie that doing what was done during the financial crisis would enable us to avoid having to do it again.


We Have Forgotten the Lessons of History

Posted on Wednesday, July 23, 2014 No comments

Wednesday, July 23, 2014

One month from today, August 23, 2014, will be the 75th anniversary of an inauspicious moment in history - one that our current President and his administration has completely forgotten.  As George Santayana observed, "those who cannot remember the past are condemned to repeat it."  Only in this case, the lesson came at the expense of no fewer that 20 million lives.

Think about that number for a second; it boggles the mind.  The entire 2010 population of Australia was estimated at 22.3 million, right about in the middle of the estimated loss of life.  Imagine an event which would directly result in wiping out the entire population of Australia, and you have an idea of the magnitude of this upcoming anniversary.

It was on August 23, 1939, that Germany and the Soviets entered into a 10-year non-aggression treaty.  Five years earlier, Germany entered into a similar pact with Poland.  The agreement with the Soviets would assure Adolf Hitler that his subsequent invasion of Poland would go unopposed.  And that having emboldened him, he would then go on to invade Russia - who would lose no less than 20 million people in the ensuing war and related famines.

If we add the approximately 6 million Poles killed in World War II (fully 20% of the pre-war population) we have a death total pushing north of 30 million.  2010 population estimates have Canada at 34 million people.  If the casualty figures published by the Russian Academy of Sciences are used, adding the Russian and Polish deaths brings us to an event with a result equivalent to the elimination of the entire population of our neighbors to the north.

The lesson we should have learned (or that we did, only to have forgotten) is that you do not defend your population from external threats with pieces of paper.  Not treaties, not "non-aggression pacts" - and certainly not policy memos.

In numerous interviews President Obama has articulated his desire to "get the policy right," believing the politics will follow.  And the families of 298 innocent travelers on Malaysian Airlines Flight 17 have found out what happens when you interpret the world around you through the prism of "policy."

And this is pretty much the story of the Obama administration on the world stage.  In 2009, shortly after taking office, Obama extended his hand to the Russians by canceling a missile defense pact with Poland and the Czech Republic.  He was supposed to get Russian help with Iranian nukes.  Yet he got absolutely nothing of substance in return - other than an emboldened Russia.  Evidently Putin hadn't read the policy memos.

It seemed like his policy in Libya was a success - or not.  It turns out Al Qaeda in Libya did not read the policy memos either, and an American ambassador died as a result.  But hey, "at this point, what difference does it make", right?

And so what had been an international "red line" (the killing of an ambassador) for over 500 years (today's international system was born out of the Treaty of Westphalia in 1498) was crossed with no consequences.  Was it any surprise, then, that Bashir al Assad calculated that Obama's "red line" concerning even the "movement" of chemical weapons - to say nothing of their use - likely did not mean anything as well?  We were treated to an unprecedented display of fecklessness watching the video of the "red line" speech, only to watch Obama later claim the "red line" was not "his" red line, but the international community's.  In a sense, he was right - because of a treaty.  He apparently thinks, though, that Assad retires in the evening to read treaties... or maybe the latest policy memo from team Obama.  And it has been painfully apparent to Syrian civilians that this is not the case.

Who knew?

And then came Ukraine.  Having come to the conclusion that Obama probably does retire in the evenings to read treaties and his team's latest brilliant memo, Putin calculated that as long as his forces were not actually wearing Russian uniforms, he had an international blank check to do as he pleased in Crimea.  After all, the policy memos have certain check boxes which express treaty obligations and expectations.  By not "invading" Crimea in the manners assumed in the policy memos, Putin was kind enough to provide Obama a way to save the face which otherwise might have been lost before the actual facts on the ground.

Oh, wait a minute now, I see... Obama actually has gotten something in return for his overtures to Russia.  Silly me.

And then here comes the reconstituted Al Qaeda in Iraq.  Calling themselves the Islamic State of Iraq and Syria - and having no doubt taken measure of Obama by way of his response to Russian actions in Crimea - they are on the cusp of overthrowing the Iraqi government.  And Obama is apparently hard at work, busily attending to getting the policy right - believing as he must that Abu Bakr al-Baghdadi is equally hard at work, studiously absorbing his team's latest policy memos.

He isn't.  Among his battle cries is "see you in New York."

But back to Ukraine, Crimea and Russian weapons and training.  Since 1944 the Chicago Convention on International Aviation has been the backbone of the sense that we can travel from country to country via commercial airlines, safely assuming that the countries of origin, destination and those in between whose airspace will be traversed have the same obligations and expectations.  But as we have now seen, the Chicago Convention - a piece of paper - cannot intercept a surface-to-air-missile.

Who knew?

As one tragedy is piled on to another, and as we enter into these next 30 days running up to the 75th anniversary of the last time world leaders thought they could secure the safety of their people with pieces of paper, it is time to hold this administration accountable for the lessons of history - lest we condemn ourselves to learning them again the hard way.

It almost seems ridiculous to have to point this out: We cannot defend ourselves with policy memos.  American foreign policy is utterly meaningless apart from a military strong enough to ensure the words of treaties and memos actually mean something and a President credibly thought by foreign actors to be willing to lead a hesitant country should the need arise.

We regularly hear this administration's resolve to hold people accountable.  Exactly what does this mean?  In exactly what way are these words anything other than pixels on the screen of a teleprompter?


Language Games: Abortion & the Things We Cannot Say We Do Not Know*

Posted on Friday, July 18, 2014 No comments

Friday, July 18, 2014

My wife was attended to by the nurse and made comfortable.  It's strange how the first thing you notice when the cover is pulled back is how the belly button protrudes - being pushed out by the little one as he grows in the womb.

The gel was applied and that little wand waved across the tummy.  The machine warbled and the screen came to life.  My wife and I shared that expectant, excited look with each other.  We had left the oldest - right about a year old at that point - with a babysitter while we went to find out whether he would have a brother or sister.  The first time around I just wanted a healthy baby.  But now with a boy, I was rooting for another one.  Slap the bunk beds together and hand down the clothes; we would be set.

It's amazing how at moments like this you can read expressions you otherwise would never perceive.  My wife saw it first - that look on the part of the tech that says: "Hmmm, that's strange."

Of course, the tech didn't say that.  He didn't have to.

"What?"

"Hang on, let me call the doctor.  He'll look and explain what he sees."

"Ohhhhhhh Kayyyy."

And that expectant, excited look we shared was suddenly gone.  Pursed lips, furrowed brows, and just a shared sense of foreboding - not quite panic yet - hung in the room.

The 'perinatologist' - an OB/GYN doctor specializing in high risk pregnancies - joined us and scanned my wife's womb.  He explained that what he was seeing could be one of two things:  It could be a part of the lung hooked up to the esophagus instead of the bronchial tree.  In this case, surgery at about three months could correct it.  Or it could be a cyst growing alongside the heart.

That would have been serious.  It could grow to the point it pushed the heart out of its proper place.  The possibility of that causing the death of the baby while still in the womb would be very real.  And if that happened, the remains of the baby could threaten my wife's life if not noticed and extracted in time.  We were not yet at the point of having to make a decision, but the possibility, under those circumstances, of terminating the pregnancy to mitigate that risk was broached.

The following two days were easily the worst of our lives.  We are an Evangelical Christian couple, both with seminary degrees.  We are active in our church.  While I would love for my friends at church, the faculty and my classmates at the seminary to all hold me in high spiritual esteem - at least as that is conventionally thought of in our circles - I would be lying if I did not admit that we thought "What if?" during those two days.  We even talked about funeral arrangements if we ended up faced with a tragic choice.

We consider ourselves tremendously blessed.  It turned out to be an extra lobe of lung hooked up to the esophagus.  Surgery at three months corrected the problem and that unborn child is now 14 and leaving a trail of smoke under his feet on the football field.

This is the context of the abortion debate.  This context is one of panic, worry and outright fear.  And sometimes the most crushing grief.  If we are not willing to enter into the real stories of our neighbors - stories of panic and worry like the one above; stories of heart-wrenching decisions and hearts shredded with grief, we simply have no business engaging in this debate.

And we cannot enter into these stories on the street corner with a picket sign in our hand.

The Supreme Court ruled recently on these protests.  While I will not call into question the motives of other conservatives who are compelled by their conscience to stand up for the rights of the unborn, I will point out here how the politicization of the issue tends to pull us away from the lives of our neighbors and toward the faceless abstractions of political arguments.  Even Justice Ruth Bader Ginsberg recognized that the Roe v. Wade decision took the matter away from the electorate, who could have advanced women's rights in a more targeted way which could have enjoyed wider public support.   But as I have pointed out elsewhere and in my book, the next conservative generation needs to be able to look at us and see a good neighbor before they hear a good argument.

This does not mean I am OK, though, with some of how the 'pro-choice' side of this issue is argued.  But let me be clear: I do not really have a problem with my pro-choice neighbor who is active in the community to protect the relationship between a woman and her doctor from excessive government interference. My problem is with some of the 'language games' which are played with the humanity of the unborn child.  Here is what I mean:

After the meetings we have in our community groups here in Mira Mesa, we like to hit the local Irish pub and restaurant.  Now imagine this 200 years ago.  We are relaxing at the table over beers debating the issues of the day.  The 'liberal' Abolition movement is staging protests against slavery.  But I am among the 'conservatives' of the time, so I have my Bible out and am plying my arguments from this chapter and that verse as to why the African slaves are less than human and thus unfit for freedom.

What would we think today if we came across a group like that in the pub, actually having that debate?  I would hope the proprietor would summarily boot them from her establishment!

But why is this?  What is different now, 200 years later?  I will propose it is this: those things which are written on our heart overcame the 'language games' which were played with the humanity of black men and women.

Look at it this way: If you go next door and talk with your black neighbor, you simply cannot return to your home and claim you do not know you just spoke with a fellow human being.  There are things we cannot say we do not know - truths that have been written on our hearts.

Likewise, you cannot look at that sonogram - especially today's 3D version, like the one at the top of this post - and claim you do not know you are looking at a fellow human being.  The language games which were played 200 years ago were despicable then; they are no less despicable now.

Justice Ginsberg's perspective on this is fascinating, and should be read and thought through carefully by conservatives.  She argues that the issue at hand is specifically women's rights - to what degree does the government have the authority to insert itself in the decisions made between a woman and her doctor?  But Roe v. Wade was more broadly - and unfortunately, according to Ginsberg - about a supposed right to privacy.  Conservatives call for an overturning of Roe v. Wade - a call in which I join.  We sometimes want to think, though, it is that simple.

But as neighbors in a community I am compelled by the worst two days of my life to tell it to you straight - it is not.  An overturning of Roe v. Wade would rightly return the issue to the electorate - us as neighbors.  But it would then fall to us to find that proper balance between recognizing the human dignity of the unborn child and the human dignity of the young woman.  It would be an immensely difficult process, one that likely would result in maddening moral contradictions.  But we simply have to be prepared to do more than march on a street corner.

I am optimistic, however, about this issue.  Gallup reports that Americans are increasingly pro-life.  But it is important to understand why - and it is not because we are winning the debate.  It is not because we have better arguments.  It is because the 3D sonogram is doing for the unborn child what the TV did in the 50's for the African-American population.  Back then, just by virtue of its novelty, we were glued to the TV.  And we saw the evils of racism and segregation for what they were.  But more importantly, we saw the human dignity of the African-American population in the face of this evil.  It became impossible to turn away from the TV and continue with the despicable language games which were played to deny the humanity of our black neighbor.

Likewise you cannot turn away from the 3D sonogram and continue with the despicable language games which are being played to deny the humanity of the unborn child.  These truths are written on our hearts - they are the things we cannot say we do not know.

But I am quite certain I have neighbors who will find themselves where my wife and I found ourselves.  And many will be faced with the choice from which we were spared.  While I want our laws to reflect a culture which cherishes life, I can relate to my neighbor who campaigns to ensure the relationship between a woman and her doctor is not unduly infringed.  If we see the human dignity of the unborn child, we cannot turn from the human dignity of the young woman.

And this means the abortion debate needs to be more than just clinic protests and faceless, nameless, abstract arguments. We can either be the 'expert in the law' or the 'neighbor' in the Parable of the Good Samaritan.  If we choose a good argument before being a good neighbor, I imagine we might be satisfied with the rightness of our arguments - as Jesus said the expert in the law was.  But his argument, although right, was not quite up to the hope he was seeking.

Or we can choose to put being a good neighbor ahead of making a good argument, and make this issue about the lives of our neighbors.  We must enter into their stories with a patient and sympathetic insistence that we are talking about the lives of two fellow human beings.


* I owe this phrase to an excellent book by Professor J. Budziszewski.

Nurturing Community: The Environment as Family Heirloom

Posted on Thursday, July 10, 2014 No comments

Thursday, July 10, 2014

In Spanish, "La Jolla" is translated "the jewel."  And the La Jolla Cove is indeed, a jewel of the San Diego coastline.  It is also Exhibit A for absurdities born when distant bureaucracies confiscate the care for the environment which might otherwise be nurtured among local residents.

Today at the Cove, when a pelican poops and the feces land in the ocean, well, that's just nature at work.  But if those same feces land just a foot away on the rocks of the Cove, they are now a 'pollutant' under the Clean Water Act.  Anywhere else, this would not merit mention in anyone's blog or on the Op-Ed pages of the daily news.  Occasional rain would wash it away before anyone notices. But here in San Diego - where we regularly go up to 180 days (that's six months for all you jocks out there) without measurable rain, the pelican poop piles up and the prevailing winds carry the aroma of the wonders of nature up to several miles inland.

The "Jewel" kind of loses its appeal at that point.

Here in San Diego - especially in La Jolla - we are not wanting for people who both care for their environment and have the expertise to actually manage precious resources like the La Jolla Cove.  But just try to bring common sense to the table - like the idea that washing the feces off the rocks before they accumulate to the point of endangering the surrounding ecosystem - and you will quickly discover what philosophers call the 'tragedy of the commons'.

You don't need a degree in philosophy to understand this.  Just note how when something is broken and nobody owns it, fixing it is always someone else's job.  Legislation like the Clean Water Act, while certainly well-intentioned, has effectively confiscated care for the environment from local communities which might otherwise take ownership of it.  No one is willing to own the problem only to end up being fined by one or more distant bureaucracies because they failed to apply for a permit, or missed a step buried somewhere in thousands of pages of regulations.


Oikophilia and the Environment as Family Heirloom

British scholar Roger Scruton writes about this in a fascinating book every conservative - at the very least - should read.  In How to Think Seriously About the Environment: The Case for an Environmental Conservatism, Scruton coins the term oikophilia from the Greek words for 'home' (oikos) and 'familial affection' (phileo).  He then takes the reader through numerous examples of where local communities nurtured this 'love of home'.  He compares them with the results of centrally planned, bureaucratic control over the environment to show that the results are uniformly superior when civil society - local communities and their many volunteer-led groups - are preferred over political society - government bureaucracies and their budgetary imperatives.

In my blog and in my book I have taken from Scruton's ideas and challenge conservatives to take a new look at the environment as a public policy issue.  The most pressing political need for conservatives today is to recognize that young people want to belong before they believe.  If conservatives wish to be heard on the other issues of the day, there is no better issue by which to foster a meaningful sense of belonging than the environment.

And those of us who have grown up here in Southern California should get this easily.  I remember having to remain indoors during PE in high school because of "Stage 1" and "Stage 2 Smog Alerts."  Our parents can tell of days when the smog looked like what we saw recently during the wildfires of 2003 and 2007.  I have also lived in Asia and have battled intestinal bugs due to poorly treated tap water.  We rightly prize our environment here in Southern California.  We should look at this place we call home and see a family heirloom - those things we take close care of that we might hand them down to our children, and they to theirs, and so on.


A Charter for 'Environmental Custodians'

As a conservative, then, I will agree to the need for federal and state legislation to protect the environment.  There is an inherent good to the environment, and our use of it incurs costs to these goods.  The concept of 'environmental justice' simply calls for those who incur these costs to be the ones who pay them.  And under no circumstances should these costs be pushed off onto subsequent generations.  If we can agree on this, then we are left to debate how to quantify these costs, and how to ensure they are mitigated or paid.  This is a public policy arena where I believe we can productively work together 'across the aisle'.

But in order for this to truly work (as opposed to merely expressing good intentions), civil society must be preferred over political society.  As a practical matter, federal legislation like the Clean Water Act, Clean Air Act and Endangered Species Act (and state laws such as the California Environmental Quality Act - CEQA) should have provisions creating a charter for groups I will term 'Environmental Custodians'.

To use the example of the La Jolla Cove above, this would be a local group in La Jolla with the expertise to properly manage the delicate ecosystem of the Cove.  They would petition the local jurisdiction - in this case the San Diego City Council - for official designation as the local Environmental Custodian of the La Jolla Cove.  As long they are organized and operate under the provisions of the federal (or state) charter, they would be considered automatically permitted to take the occasional necessary steps to preserve the Cove - including periodically washing the pelican poop off the rocks before it accumulates to a point where doing so would threaten the surrounding ecosystem.

The Endangered Species Act currently has something like this in a provision for "cooperative agreements with the states."  But for all practical purposes, all this does is replace one distant bureaucracy with another.  The preference for civil society over political society has to be firm and clear,


Stepping Back from the Precipice

It seems we are standing on the edge of a political cliff, about to plunge over the edge into an abyss of polarization.  Others have commented on the origins of our highly polarized politics.  I believe it simply stems from seeing more and more of the inevitable problems of our life together confiscated from local communities by distant bureaucracies.  Problems on which we could otherwise work together become ideological footballs instead.  Yet if we are actually able to own these inevitable problems, we will quickly find that we are too busy solving them together as neighbors to be off in our political corners, living vicariously through our favorite political media personalities, trying to out-ridicule each other.

No other issue bears greater promise for cultivating this life together as neighbors than our environment.  We all live here.  We all call this place home.  The call to love this place we call home resonates across political parties.  All we have left to do is take ownership.

Discussing Immigration on the LaDona Harvey Show - KOGO AM 600 in San Diego

Posted on Tuesday, July 8, 2014 No comments

Tuesday, July 8, 2014

This afternoon I had the pleasure of joining LaDona Harvey on her 12-3pm radio program on KOGO AM 600 here in San Diego.  We had an excellent discussion of my recent blog post on getting the immigration line moving, which was also carried by the Times of San Diego, an online only news outlet here in San Diego.

Click here to listen in to the 2pm segment from today's show.






Borders & Bureaucrats: The Unseen Roots of the Immigration Problem

Posted on Saturday, July 5, 2014 No comments

Saturday, July 5, 2014

On July 4th of this year I had the opportunity to reprise part of something which happened back in 1995.

In May of that year I struck out on a four hour round trip of joy and relief.  My then-fiancée had finally gotten through all of the wickets of the U.S. immigration system to get her fiancée visa.  She arrived at LAX, so I drove up from my home in San Diego to pick her up.  It was only two weeks before our wedding date - an event which I ended up having to plan largely without her as the visa application process dragged on.

On our wedding day, some friends commented that we did not look nervous.  "Nervous?" I replied.  "No, 'nervous' was Pauline going to the embassy for her final visa interview.  She's here now.  We're getting married today.  It'll be great if everything goes perfectly, but if it doesn't...  well, we're still getting married today."

I said it with a relieved smile.

She is now a U.S. citizen, and recently went home to Malaysia to visit family.  The drive up to LAX this July 4th to pick her up was cause for reminiscing.  And in light of some of the ugliness we have seen in the immigration debate with the recent flood of children crossing the border, it is important we dig a little deeper to discover where the real problem lies.

And it is not at the border and has nothing to do with border security.

When I first applied for my then-fiancée to get her visa I discovered the truth about immigration in America: The requirements are whatever the bureaucrat you happen to have in front of you says they are.  If you ask a question of the immigration bureaucracy, for as many different people you ask, that is the number of different answers you will get - to the same question.  And if you do get the same answer from two people, you will discover the first person didn't tell you all of the requirements; something new will be tacked on by the second person.

And so applications like mine get slow-rolled.  In my case, I reached out to the office of my Congressman to ask for help.  It wasn't until his office inquired about the status of the application that we started getting consistent answers and started making progress.

These are the unseen roots of this problem.  There is an unseemly ugliness right now to the debate, with protesters blocking roads and adults screaming at children.  But there is an even uglier reality we do not see.  It is the reality of human smuggling, of what we call 'coyotes' here in Southern California (the smugglers who prey on the impoverished in Mexico and Central America).  We have seen instances where people have been loaded into rail cars for the trip north - and then left there to die in stifling desert heat.  The question we are not asking is why a market exists for this kind of thing to begin with.

Pointing to the violence and crushing poverty in Central America - which is caused by systemic corruption - is very convenient.  It certainly tells part of the story.  But there is another part of this story which plays an even greater role in creating this ugly, dangerous and inhumane market for human smuggling.

Imagine you are in the supermarket.  You have a list and check each item off as you work your way through the aisles.  You then head to the front to check out.  The first thing you look for is the shortest line.  But you know everyone else is doing the same thing, so you do not really expect one line to be shorter than the rest.  So the next thing you look at are the carts of the last person in each line.  You are looking for the cart with the least amount of items; that will be the check stand you choose.  You are fifth in line; the guy in front of you only has two things in his cart.  You watch, though as the clerk hand-types the UPC code from each product.

"That's strange," you think.  "Why isn't she just scanning the label?"

If you were to ask, she would say that her procedures require she "enters the UPC code for each product."  She takes that to mean manually, so checking out that customer takes forever.

But she finally finishes with that customer.  As the guy next in line comes up, it is time for her to take a break.  But that's OK, someone comes to relieve her.  And he believes the procedures require him to call that customer's bank to verify that his check will clear.  He's on hold with the bank, so...

You look up at the ceiling and sigh...  The lines are all now twice as long as when you queued up.

The guy's check is accepted and he is on his way.  The next guy steps up, and before you know it there is a heated argument over what he can and cannot buy with his food stamps.

"For Pete's sake, can we just get to this guy in front of me who only has two things?"

If you do not think immigration in America is like this check stand, I've got really bad, first hand news for you.  But I've also got some really good, first hand news for you as well.  I grew up here in the San Diego area.  We lived in a city named Chula Vista ('beautiful view' in Spanish).  We called it 'Chula Juana' because we could see the hills of Tijuana from our front yard.  I was the neighborhood paperboy as a teenager - you know - 'that kid' with the canvas bag over his shoulder pedaling along, throwing papers over white picket fences and waving back at 'Ozzie' with a pipe in his mouth and a cup coffee in one hand.  (If you don't get the reference, you might be a jock.  But it's more likely you're just too young.  Call your mom, or maybe even your grandma, and ask her to explain - either way, she'll appreciate the call.)

Right after Daylight Savings Time started, it would be dark when I struck out to deliver the San Diego Union.   And I would occasionally turn a corner on my bike and come across them... a line of immigrants being smuggled through our neighborhood.  It was a little scary at first, but before too long I would just say "buenas dias" as I pedaled along and would get a smile and a 'good morning' in return.

The good news is this:  These folks are not criminals.  Here illegally? Yes.  Criminals?  No.  They are just people who are struggling to feed their families and found themselves at that check stand - in a line that was not moving.  And there is more good news: These folks are no different than you and I.  They are more than happy to 'follow the law' and 'wait in line' - assuming, just like you and I would - that the line is actually moving.

But it's not.

And that is why there is a market for the 'coyotes'.  That is why there is an even uglier reality than adults blocking roads, screaming at a bus full of children.  That is why human beings are stacked like animals in rail cars and left to die in the desert heat.

This problem is really no different than the problem at the Veteran's Administration.  The bureaucracy slow-rolls applications because their first priority is not facilitating immigration.  They are concerned first and foremost with making sure their budget is protected.  The backlog - the line that isn't moving - exists by bureaucratic design.

'Immigration reform' needs to start with a much clearer idea of exactly what the government should be doing here.  Any time we ask a bureaucracy to design, publish, accept and process applications (for anything) we are guaranteeing the least amount of efficiency as possible will be brought to the task.  Success at middle management in government service is very simple: if your budget is maintained or increased, you are a success.  If it is cut, you are a failure.  And in the world of government bureaucracies, you are either predator or prey.  If you don't have a backlog, you have a bulls-eye - on your budget.

Immigration reform also needs to take account of the people who have done things right.  We will not solve the problem of illegal immigration by making a sham of legal immigration and a fool of people like my wife and me who followed the law.

We will solve the problem when we get the line moving.  When we take the application processing portfolio out of the hands of government bureaucracies and contract it out to the private sector, we will see today's technology and streamlined processes demanded by investors start to whittle away at the backlog.  And then our neighbors in Mexico and Central America will see that the line is actually moving.  There will no longer be a market for the 'coyotes' and the ugliness of their inhuman trade.

And then there will be no more of the ugliness of adults blocking roads and screaming at a busload of children.

[UPDATE: Shortly after I posted this, The Times of San Diego carried it as an Op-Ed.  The following day I was invited to join LaDona Harvey for the 2pm segment of her 12-3pm radio show on KOGO AM 600 here in San Diego.  Click here to listen to the audio from the segment.]




Monetary Orientation - Financing "Team Noklu"

Posted on Thursday, July 3, 2014 No comments

Thursday, July 3, 2014

If you really want to enjoy your beer after a win, you really don't want 'Junior' here at first base...

And if you're in favor of economic growth - and new jobs - you don't want money going to 'Junior's' company.  You might as well buy stock in 'Team Noklu'*

Yep, here we go again.  Time to start banging your head on the desk.

This time I want to try and explain why all of this new money the Fed has created has not only not solved the underlying problem in our economy, but has mathematically guaranteed the next financial crisis will be even worse than the last.

Money and business is like nature and a vacuum.  Just as nature abhors a vacuum - something will eventually rush in to fill it - money in the economy has to go somewhere.  So the more money you inject into the economy in excess of what is needed for growth (e.g. 'inflation'), the greater the risk that money will be allocated to inefficient, risky uses - Team Noklu.

The last financial crisis should have taught us this.  The low interest rates which started after the 2000 real estate slump made an excess of money available to the real estate market.  Now there were only so many objectively qualified borrowers, so the 'bucket' of demand for mortgages to qualified borrowers was filled up long before all that excess money was lent out.  This left the banks in a quandary, with management and shareholders now at cross-purposes.  The shareholders would look at the balance sheet and see an excess of cash.

"Why isn't this excess cash being lent out to support our investment?" they would ask.

"We've already lent to all the qualified borrowers," would come as managements' reply.

"OK, that's nice," the shareholders would reply.  "But what, again, is all that excess cash doing for the share price of my investment?  There are people out there who would love to buy a house with it."

"But they don't qualify!"

"OK, so let's look at your lending standards."

Who do you think wins these arguments?  The shareholders, every time!  If management refuses to lend the money out, the shareholders will just fire them and replace them with new management who will.  And so more and more money was lent out to less and less qualified ('sub-prime') borrowers.  In many cases these were adjustable rate mortgages which started to reset to a higher rate.  The monthly payment increased beyond the ability of the homeowner to pay.  The mortgages started going into default, threatening the viability of the banks.

Former Treasury Secretary Tim Geithner writes about this in his recent book 'Stress Test'.  In this book, Geithner attempts to justify the way the federal government bailed out the banks.  He consistently characterizes the problem as one of 'capital deficiency' - meaning the banking system needed to be 'recapitalized'.

If you haven't started yet, this is where you bang your head on the desk.

It is very convenient to describe the problem this way.  It avoids having to come to terms with the truth about the last financial crisis.  The problem was not a lack of capital but an excess of bad debt - a result which was all but guaranteed by the excess of money in the economy.  The difference between these two ways of looking at things is important, but at the end of the day I don't want you to have to wear a helmet the next time you read my blog.

The lesson to be learned is that we will eventually end up right where we started back in 2008.  Just recently, the Obama administration actually started making noises about banks loosening lending standards to boost the housing market.  You can be forgiven for asking "are you kidding me?"

Nope.

Only this time it will be worse because it will not just be the housing market.  Junior up there at the top of this post - who wants to play first base on your team - runs a business and needs to raise some money.  But his business plan bears no resemblance to reality and his management team is - to use a word I hear from my kids these days - sketchy.  He wants to retain ownership of the company, so he doesn't issue shares of stock (otherwise known as 'going public').  Rather, he sells 'bonds'.

He is trying raise a million dollars, so he issues 100 bonds, each with a face value of $10,000.  But since his business plan is questionable and his management team is sketchy, the 'rating agencies' - who issue the corporate version of a credit score for these kinds of bonds - gives them a low rating.  They call them 'junk bonds'; which is just the corporate version of the 'sub-prime mortgage'.

But that's quite OK for banks these days.  You see, they now have the same problem they had in the early 2000's.  They are sitting on all this new money created by the Fed.  And the Fed is only paying 0.25% for them to keep this money on reserve.  The market for highly rated bonds isn't paying much better - the benchmark rate is about 2.5%  So the banks are 'reaching for yield'.  Junior and his sketchy team are living in a fantasy land, so the banks can charge him a higher interest rate, and are happy to do so.  Highly rated bond issues have already been fully subscribed and there is still money sitting around.

It has to go somewhere.  So it is going to finance Junior and Team Noklu.  And we'll go happily along as before because it also provides the illusion of economic growth.  And the illusion will eventually be exposed for the bubble that it is - after it pops and it is too late to actually get things right.

When will we ever learn?

I'll reprise the end of last week's post: In a couple years we will begin paying attention as candidates run for President.  While I am not much interested in endorsing candidates, I am very curious to hear what Senator Rand Paul has to say because he comes from the 'school' which believes we need to return to 'sound money'.  That 'school' has been out of favor with economic 'experts' for quite a while - until now.

Please, read and read a lot.  Start with Geithner's litany of excuses for bailing out the banks.  You'll see what it looks like when the Department of the Treasury had Junior at the helm of their team - without a clue about how the money supply set us up for all of these problems.  Then read Steve Forbes' new book Money: How the Destruction of the Dollar Threatens the Global Economy.  When you understand what an excess of money does to an economy, you will be ready to make an informed - and hugely important - decision when we vote in 2016.

-----------
* Actually, I owe the name to a group of guys I used to play softball against here in the greater San Diego area.  One of them is a friend and I have always loved their team name.  We were the "Stat Driven Bastards."  (I didn't pick the name, pastor.  Honestly, I didn't!)
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