Detailed Abstractions

In a stunning example of truthfulness, AFL-CIO President Richard Trumka gives the perfect reasoning to why government is inherently inefficient.  While discussing the President’s recent pledge to review business regulations for balance (here), Mr. Trumpka said (here via The Hill):

…the White House’s planned government-wide review of regulations could end up being a “distraction” for agencies already dealing with scarce resources.

“To the extent that analysis draws them away from enforcing the regulations and protecting the health and safety of workers, we think it’s a distraction,” Trumka said. “We think we would have rather not seen it.”

And there you have it – since the incentives to pass and sustain business regulations for the AFL-CIO are political and not about the workers, business regulation becomes and end in itself; with the means already justified.

Short sighted of course, as getting rid of regulations which work to stall economic growth (regardless of  the regulations’ initial intentions) would help more people get hired.

Additionally, the reduction in the number of regulations could in fact realign the scarce resources dealing with these issues towards the most important regulations instead of being bogged down with the more political regulations.

But when the incentives are more about political power than worker protection, this is the end result.  Just as Mr. Tumpka stated,   even working towards improving the balance between economic growth and worker protections, is by itself, by definition, wrong.

Infinite Monkey Theorems

Headlines 

Worth Reading 

….or at least pondering and forgetting….. 

From the First Amendment Center, the new Alabama governor displays amazing religious intolerance and arrogance.  I thought this was 2011….. (whole thing here): 

BIRMINGHAM, Ala. — Alabama Gov. Robert Bentley told a church crowd just moments into his new administration that those who have not accepted Jesus as their savior are not his brothers and sisters, shocking some critics who questioned yesterday whether he could be fair to non-Christians. 

“Anybody here today who has not accepted Jesus Christ as their savior, I’m telling you, you’re not my brother and you’re not my sister, and I want to be your brother,” Bentley said Jan. 17, his inauguration day, according to The Birmingham News. 

From the Obama Administration: Remember Obamacare?  Which was going to add 39 million previously uninsured people to the status of insured (here via CBO)?  

Well, here we are in 2011 – a time when Obamacare is *not* implemented and the provisions that have gone into effect only went into affect on January 1, 2011. 

Apparently that’s a very long time though….. as according to the WhiteHouse via the Department of Health and Human Services, repealing Obamacare will put 129 million insured at risk (here via HealthCare.gov). 

Seriously?  I wonder if DHHS is still accepting information on those (here via DA) dealing in misinformation with regards to Obamacare? 

From Wired, a meaningless, and based upon presented evidence, a false headline [emphasis added] Supreme Court Upholds Intrusive Government Background Checks.   

The actual article?  

The Supreme Court ruled that private contractors working for the government cannot be shielded from background investigations based upon a right to privacy.  That government contractors can in fact, by virtue that they are basically government employees, be treated just as any other federal employee. 

Maybe it’s just me, but subjecting yourself to a background check that resembles the exact same background check of others you work with doesn’t seem to be intrusive.  

Which is irregardless for Wired anyway, as even *if* this decision could be argued logically as intrusion, the article doesn’t even attempt to offer proof of such an assertion. 

From eScience News, US Office of Naval Research announces big news on the “Cool Things That Kill” front (here): 

Scientists at Los Alamos National Lab, N.M., have achieved a remarkable breakthrough with the Office of Naval Research’s Free Electron Laser (FEL) program, demonstrating an injector capable of producing the electrons needed to generate megawatt-class laser beams for the Navy’s next-generation weapon system. 

Artist's Rendering "PHALANX WITH LASER CANNON" Source: Raytheon

To put a little context into what megawatt means (1,000 kilowatts), Scientific American reports in July 2010 (here): 

In a grainy, black-and-white video that looks like a home movie of a UFO attack a sleek aircraft streaks through the sky one minute, only to burst into flames the next and plummet into the sea…. 

Using a 32-kilowatt laser (article cont’d): 

The defense contractor says it depicts part of a test conducted in May during which the U.S. Navy used a solid-state laser to shoot down unmanned aerial vehicles over the Pacific Ocean…. 

& Lastly – ESO’s Hidden Treasure Contest reveals winner (here): 

M78 for ESO Processing contest. WFI camera on 2.2m telescope

Hidden Treasures gave amateur astronomers the opportunity to search ESO’s vast archives of astronomical data for a well-hidden cosmic gem. Astronomy enthusiast Igor Chekalin from Russia won the first prize in this difficult but rewarding challenge…. 

More amazing astronomical artwork here: Top 100 from ESO

President Obama is planning to sign an executive order to review business regulations (via LA Times here):

WASHINGTON (AP) — Taking another step toward mending his relationship with the business community, President Barack Obama will order a review of federal regulations with an eye toward getting rid of those that stifle job creation and hurt economic growth.

Upon hearing this news, I was immediately reminded of the Simpsons’ episode.  The episode is about NASA, who having problems with funding, decides to put an average man in space for marketing purposes.  The press conference (here):

Scientist: Ladies and gentlemen and members of the press.  I’d like to
           present the new generation of NASA astronauts: the average
           American.
            [Curtain rises to show Homer wearing a "Hail to the Chef"
           apron and Barney dressed as a golfer]
Reporter: Jim Wallace, Associated Press.  [clears throat] Is this a
           joke?
Scientist: [cheery] Far from it, Jim.  One of these men will prove space
           travel is within the reach of the common man.
Reporter: Toby Hunter, Minneapolis Star.  No really, is this a joke?
Scientist: No, Toby, and no more questions about whether this is a joke.
            [Everyone lowers their hand, dejected]

Please don’t misunderstand – I’m hoping, like a lot of people, that the President is serious about this.  However, almost every single action taken by this administration shows an absolute love of controlling by regulations, even when no obvious reason for doing so exists.

This is after all the same President who gave us an executive order which prevented anyone from drilling for oil offshore due to one oil spill on a platform owned by BP (DA post here). 

This was all prior to the government report released late last year, which held BP accountable, but even after blaming BP for the entirety of the incident, they announced a month later continued blanket regulations against an all of the industry.

Even the President’s own fact finding commission is wondering what many others questioned before – what is this continued ban is supposed to fix?  They plan to press the administration on the issue soon.

And that’s just regulations for a small part of the energy industry.  This is also the same administration who pushed for financial reform.  Financial reform which as pushed before they had anyone had any idea what took place.  The reform which included controls on market segments which are known to have little to no impact on the financial crisis like hedge funds, derivatives, executive compensation and more (here & here).  (more…)

After some political arguing about who stands to gain what, why ratify a treaty in a lame duck session, the START Treaty (Strategic Arms Reduction Treaty), was ratified in the Senate last week.  & now with praise from Russian President Dmitri A. Medvedev and movement in the Russian Parliament, it’s likely only a matter of time before the treaty between Russia & the United States is in full effect.

With all the rhetoric being pushed around however, true analysis tends to get lost in the noise…. which is where Stratfor enters; not only asking pertinent questions and attempting to answer them, but in giving the treaty the full historical context it deserves.

First, what is the START Treaty (whole thing here)?

….The original START was signed July 31, 1991, and reductions were completed in 2001. The treaty put a cap on the number of nuclear warheads that could be deployed. In addition to limiting the number of land- and submarine-based intercontinental ballistic missiles (ICBMs) and strategic bombers, it capped the number of warheads that were available to launch at 6,000…. START I lapsed in 2009, and the new treaty is essentially designed to reinstate it….

What Sratfor notes however, is the difference in geopolitical relationships from START I to New START, mainly that the original treaty began in a very different climate in the 1980′s (article con’t):

…The political relationship that existed between the United States and the Soviet Union in the 1980s is not the same as the relationship that exists today. Starting in the 1950s, the United States and Soviet Union were in a state of near-war….

In what was basically a balancing act by the two major global powers at the time, conventional and nuclear weapons, were built and deployed as the United States & Russia tried to gain an advantage (article con’t):

…The differences between them were geopolitically profound. The United States was afraid that the Soviets would seize Western Europe in an attack in order to change the global balance of power. Given that the balance of power ran against the Soviet Union, it was seen as possible that they would try to rectify it by war.

Since the United States had guaranteed Europe’s security with troops and the promise that it would use nuclear weapons against the Soviet Union to block the conquest of Europe, it followed that the Soviet Union would initiate war by attempting to neutralize the American nuclear capability. This would require a surprise attack on the United States with Soviet missiles. It also followed that the United States, in order to protect Europe, might launch a pre-emptive strike against the Soviet military capability in order to protect the United States and the balance of power….

This process of seeking global influence, resulted in many things, like the Cuban Missile Crisis, Star-Wars (BMD), a build up in both strategic and tactical nuclear arsenals, and basically a stable, but highly tense situation of mutually assured destruction.

Then in 1991, the need for this policy was diminished for both sides with the implosion of the Soviet Union.   Even at that time one could argue the need for such a treaty was minimal, but when the process started during higher tensions in the 1980s, and given the level of fear around the world, going forward with the pact seemed reasonable.

Which brings us forward to today (article con’t): (more…)

A DA Post earlier this week (here) wondered if the level of rhetoric during the tax debate, like calling for pitchforked mobs or referring to the GOP as terrorists, seems a little odd now that we have President Obama’s compromise which includes continuing the same tax basis for all.

The President has even argued in that no so distant past (2009) that raising taxes during a recession was bad policy, but apparently he is now against the policy he was sort of for, but then again against….

Speaking on Monday he explains what really, really, might, sort of be true, depending upon whether he’s for it or against it… (whole thing here):

…A few minutes later, Chuck Todd of NBC News asked the president what he had to say to fellow Democrats. That prompted a different analogy – that he was trying to prevent harm to the American people, who were essentially being held hostage in the tax debate.

Quick side bar – I wonder how the voters who just sent this group of legislators to Washington DC feel about being associated with hostage takers?  Meh, probably nothing.  Continuing:

“I think it’s tempting not to negotiate with hostage-takers, unless the hostage gets harmed,” Mr. Obama said. “Then people will question the wisdom of that strategy.”

With all due respect, I think people should be questioning the wisdom of a sitting President who seems to be so insecure about a recent decision, that he feels the need to use inflamatory rhetoric in order to distance himself.

Though seen through this light, the Democrats’ prior inflamatory statements probably fits into the overall strategy for re-election.  When the President can “trumpet” the tax deal, while other top Democrats talk about the inevitable “screwing” without the deal, then you can see a basic strategy to take credit for the deal most Americans agree with, while simultaneously distancing himself from the deal his backers don’t like (poll info here).

But the best part of the President’s discussion on this issue has to be this:

“I don’t think there’s a single Democrat out there, who if they looked at where we started when I came into office and look at where we are now, would say that somehow we have not moved in the direction that I promised,” he said. “Take a tally. Look at what I promised during the campaign. There’s not a single thing that I’ve said that I would do that I have not either done or tried to do. And if I haven’t gotten it done yet, I’m still trying to do it.”

Which for those playing the home game means, “I know I haven’t done everything I said, but my intentions are in a good place.”

Just like the world’s worst surgeon saying something like, “I know I keep killing patients, but honestly I’m trying desperately not to”, the President is telling us directly, all that matters are his intentions.

If only it were that easy.

Writing in the NY Times, an MIT Professor for the Sloan School of Management, Simon Johnson explains how bad budget deficits will be if we allow the Bush tax cuts to continue.  Basically he tells us, if we fail, it will only be due to the fact that taxes aren’t high enough and we’re not spending enough money on the right things. (here):

According to the Congressional Budget Office, extending all the Bush tax cuts would add $2.3 trillion to the total 2018 debt. The single biggest step our government could take this year to address the structural deficit would be to let the tax cuts expire. Such a credible commitment to long-term fiscal sustainability should reduce interest rates today, helping to stimulate the economy….

According to Mr. Johnson, even though critics say letting the tax cuts expire would retard growth, that money could be used more effectively (he continues):

…If the goal is to boost growth and employment immediately, it would be better to let the tax cuts expire and dedicate some of the increased revenue to real stimulus programs…

You mean, stimulus programs like “Cash for Clunkers” (NBER working paper here)?

…Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended….

Or how about the stimulus plan we were told would keep unemployment rates to 8% (DA Post here), while they currently hover around 10% (here):

…in August, and the unemployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today.

Or…maybe the government takeover/purchase of GM (post here):

…in reality, the US Treasury through pressure by the Obama administration spent $50 billion dollars to own 61% of the shares.  With roughly 500 million shares available, this means the US government current owns 305 million shares.  At the current stock price today of .375 dollars, their 50 billion dollar investment is worth roughly 115 million dollars….

Or maybe controlling healthcare costs by passing a bill no one understands…. which has already started failing as insurers have already started raising rates more than goverment predictions (post here):

…The economics and logic of these required rate increases are undeniable.  If someone, in this case the government through force of law, tells a private business that they must increase their spending, under force of law, some, if not all, of those new expenditures will be passed on to consumers…

So to sum up Mr. Johnson, even though evidence, extremely recent evidence, demonstrates what economic thinkers have told us for centuries:  government can not create jobs – the problem doesn’t lie with government spending, but instead in allowing people to keep their own money.

I don’t know when we start understanding what Albert Einstein expressed so eloquently so many years ago, “The definition of insanity is doing the same thing over and over again and expecting different results.” but let’s hope it’s soon.

For more, excellent Cato article The Stimulus: The Government Job Creation Myth

As most know, late last week, smaller health insurance companies sent out press releases detailing a simple fact – when mandates increase, so will premiums (via WSJ here):

…Aetna Inc., some BlueCross BlueShield plans and other smaller carriers have asked for premium increases of between 1% and 9% to pay for extra benefits required under the law, according to filings with state regulators….

To most, this might seem an obvious consequence of the legislation.  The economics and logic of these required rate increases are undeniable.  If someone, in this case the government through force of law, tells a private business that they must increase their spending, under force of law, some, if not all, of those new expenditures will be passed on to consumers (WSJ continues):

…Weeks before the election, insurance companies began telling state regulators it is those very provisions that are forcing them to increase their rates….

…Aetna, one of the nation’s largest health insurers, said the extra benefits forced it to seek rate increases for new individual plans of 5.4% to 7.4% in California and 5.5% to 6.8% in Nevada…

…Regence BlueCross BlueShield of Oregon said the cost of providing additional benefits under the health law will account on average for 3.4 percentage points of a 17.1% premium rise for a small-employer health plan…

…In Wisconsin and North Carolina, Celtic Insurance Co. says half of the 18% increase it is seeking comes from complying with health-law mandates….

Not only should this seem obvious, but in a free country, any company should be able to set their rates for their services.

This of course assumes you don’t work for the government – then the news is shocking (WSJ continues):

…The White House says insurers are using the law as an excuse to raise rates and predicts that state regulators will block some of the large increases.

“I would have real deep concerns that the kinds of rate increases that you’re quoting… are justified,” said Nancy-Ann DeParle, the White House’s top health official. She said that for insurers, raising rates was “already their modus operandi before the bill” passed. “We believe consumers will see through this,” she said….

Not only shocking – but so wrong that even more force is needed.

Enter the Department of Health and Human Services threatening private business, for making private decisions, solely because those decisions disagree with the government’s predictions (via HHS website – bold added):

It has come to my attention that several health insurer carriers are sending letters to their enrollees falsely blaming premium increases for 2011 on the patient protections in the Affordable Care Act.  I urge you to inform your members that there will be zero tolerance for this type of misinformation and unjustified rate increases….

…We estimate that that the effect will be no more than one to two percent….

…Given the importance of the new protections and the facts about their impact on costs, I ask for your help in stopping misinformation and scare tactics about the Affordable Care Act.  Moreover, I want AHIP’s members to be put on notice: the Administration, in partnership with states, will not tolerate unjustified rate hikes in the name of consumer protections….

Think carefully about some of  these words/phrases used by government officials against private businesses in a free country: zero tolerance, misinformation, not tolerate, unjustified….all for raising theirs rates at a greater rate than the government assumed.

Maybe it’s just me, but when the government threatens people for fishy emails, then moves forward to threaten private business for deciding what to charge for their services…. well, it certainly doesn’t appear to be a free society.

As Thomas Jefferson stated so many years ago:

When the people fear their government, there is tyranny; when the government fears the people, there is liberty.

Well currently, the question is moot as the US government does own 61% of GM stock.  So they are the controlling shareholder, but it seems once again, pundits, journalists, and the rest are acting as if it’s a good thing only because it’s not as bad is it could be.

Via the Economist (here subtitled: An apology is due to Barack Obama: his takeover of GM could have gone horribly wrong, but it has not):

AMERICANS expect much from their president, but they do not think he should run car companies. Fortunately, Barack Obama agrees. This week the American government moved closer to getting rid of its stake in General Motors (GM) when the recently ex-bankrupt firm filed to offer its shares once more to the public…

Which sounds nice in theory, but in reality, the US Treasury through pressure by the Obama administration spent $50 billion dollars to own 61% of the shares.  With roughly 500 million shares available, this means the US government current owns 305 million shares.  At the current stock price today of .375 dollars, their 50 billion dollar investment is worth roughly 115 million dollars.

So even if a theoretical IPO that generates excitement were to happen, in order for the government to recoup $50 billion dollars the stock price will have to increase to $163 dollars a share or by more than 400 times it’s current price.

But of course when it’s not your money you lost, but taxpayers money, I guess that changes the calculus….

The Economist continues:

…Many people thought this bail-out (and a smaller one involving Chrysler, an even sicker firm) unwise. Governments have historically been lousy stewards of industry. Lovers of free markets (including The Economist) feared that Mr Obama might use GM as a political tool: perhaps favouring the unions who donate to Democrats or forcing the firm to build smaller, greener cars than consumers want to buy….

& here’s where it gets more confusing.  After stating the obvious concerns one would normally have when any business starts making decisions based upon politics instead of what’s best for the company (& also what they are legally bound to do, their fiduciary responsibility), they tell us those fears are wrong:

…Mr Obama has been tough from the start. GM had to promise to slim down dramatically—cutting jobs, shuttering factories and shedding brands—to win its lifeline. The firm was forced to declare bankruptcy. Shareholders were wiped out. Top managers were swept aside….

While simultaneously explaining to us how they did in fact make tons of political decisions:

Unions did win some special favours: when Chrysler was divided among its creditors, for example, a union health fund did far better than secured bondholders whose claims should have been senior….

DA posted about how the Obama administration used their leverage and power to bend the law to help the Unions over other creditors who should’ve legally be first in line for any monies (here).

But of course, that wasn’t the only political meddling in GM (the Economist):

Congress has put pressure on GM to build new models in America rather than Asia, and to keep open dealerships in certain electoral districts. But by and large Mr Obama has not used his stakes in GM and Chrysler for political ends….

Then why does the Economist think it’s a good idea?

[President Obama] his goal has been to restore both firms to health and then get out as quickly as possible. GM is now profitable again and Chrysler, managed by Fiat, is making progress. Taxpayers might even turn a profit when GM is sold….

& there we have it.  So long as there wasn’t a huge amount of political intervention and there’s a possibility that the government might recoup all their money…. Thing are good for The Economist.

Of course “good” is being defined by potential future results.  The truth is, the US government buying up private businesses creates far more implications that whether the stock prices rise enough to recoup the money they were given.

Enter Harvard Law School on Corporate Governance and Financial Regulation.  Instead of asserting some win based upon theoretical future value, they asked the more important question (here):

In our paper When the Government Is the Controlling Shareholder, recently made publicly available on SSRN, we analyze the ways in which existing corporate law structures of accountability change when the government is the controlling shareholder, and the extent to which federal “public law” structures substitute for displaced state “private law” norms.

& the implications are vast.  In their full research paper (here), they ask a much more serious and long term question.  Which is, what rights do other shareholders have when the government owns a controlling interest and is forcing companies to make decisions that will not benefit shareholders in the long term?

Normally, shareholders have legal rights at the state level where officers of any company are held legally liable to their fiduciary responsibility:

In the handling of money and when one acts as a corporate or individual trustee, there is a fiduciary responsibility owed to the principal party. It is defined as a relationship imposed by law where someone has voluntarily agreed to act in the capacity of a “caretaker” of another’s rights, assets and/or well being. The fiduciary owes an obligation to carry out the responsibilities with the utmost degree of “good faith, honesty, integrity, loyalty and undivided service of the beneficiaries interest.” The good faith has been interpreted to impose an obligation to act reasonably in order to avoid negligent handling of the beneficiary’s interests as well the duty not to favor ANYONE ELSE’S INTEREST (INCLUDING THE TRUSTEES OWN INTEREST) over that of the beneficiary. Further, if the agent should find him/herself in a position of conflicting interests, the agent must disclose the dual agency (acting for two parties at the same time) or risk being accused of constructive fraud in regards to both or either principals….

What this is for, is so shareholders can be protected.  If a company you own shares in decides to willfully make decisions which are counter to this responsibility, shareholders can sue for compensatory damages.

But what if the main decision maker is the federal government?  Even though the Economist seems to be ok with this, though recent history shows this is an incredibly naive position to take (from the full report):

Even though government investment started less than three years ago, there are already troubling anecdotes….

For instance, after the government purchased 71% of AIG and AIG gave 165 million dollars in bonuses which were contractually guaranteed, the “owners” responded with threats.  Senators and Congressmembers bemoaned this.  Told us it was unethical for AIG to follow their contractual obligations because the government owns them.  Even President Obama:

….urged Congress to draft legislation that sends “a strong signal to the executives who run these firms that such compensation will not be tolerated.”

As if Senators, Congressmen, and the President have any idea what pay should be in the first place… (DA post here), but they went further (from the full report):

Barney Frank, chairman of the House Financial Services Committee pushed the idea of suing AIG….

Since they have majority ownership:

[Barney Frank] “I still believe that we have a right legally to recover this, because we can assert our ownership rights and say, yes, you may have a contractual right to a bonus but your rotten performance means you should forfeit it”…

Additionally:

…”senior Treasury officials have been meeting several times a week all spring to review, one by one, the payments to the company’s executives. But the time-consuming discussions have never been resolved whether any of the executives should get paid.”  Now, even routine bonuses are pre-cleared with Kenneth Feinberg, the “compensation czar.”

& what of the bank bailouts?

…bailout recipients faced mounting pressure from the President and Congress to increase lending.  President Obama said he would “hold banks ‘fully accountable’ for the assistance they recieved and that they ‘will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer’”…

What about foreclosures, from people who can’t pay their mortgages?

Rep. Barney Frank “acknowledged that struggling homeowners [weren't] getting help as fast as many in Congress had hoped”, and urged bank executives to put in place a foreclosure moratorium until the government could implement mitigation programs.

These same people who also went after GM & Chrysler for closing too many dealerships.  And then there’s Citigroup, Bank of America, etc, etc, etc. (DA post here).

But this is Harvard, so they talk about ways other countries have handled this.  For instance, the UK started another government agency.  Theoretically it’s independent of politics, with a sole goal to find businesses which need to be saved and to save them.

Which of course is an entire other conversation…. why anyone believes the government can make the bad decision of buying a failing private company and solve the conflict of interest by simply building another government agency is…. well, it’s stupid.

It would be like having an entire corrupt police force arguing that the solution to the corruption is to merely hire more cops.

& therein lies the true problem.  When the press, politicians, and us normal voters, refuse to look into the future to see the true implications of such actions, we end up with answers like “since our [government's] original plan didn’t work, it must only be because we didn’t go far enough.”

I would submit to those willing to critically contemplate, that the decision itself was wrong & all these implications were obvious, known, and serve as further proof that politics and business don’t mix.

More importantly however, they fail in their analysis on a fundamental level.  True critical thinking can never rely on results as proof of anything.  Because it’s always possible to make a bad decision, and have positive results in spite of it.  It’s also completely possible that you make the most perfect decision ever, but it still fails.

So no – the question isn’t really whether the government made a good investment, whether taxpayers will actually recoup the $50 billion spent, or whether GM ultimately succeeds in the long run.

The question should be- should we have done it regardless of the answer to any of those questions?

& I would proffer the answer is easy: no.  The long range implications of such dangerous behavior isn’t worth saving one single car company.

Of course, that’s just my two synapses firing…. they could always be misfiring