Sunday, June 21, 2020

The Conservative Approach to Defunding the Police

This post was published in Rochester's daily newspaper, The Democrat & Chronicle, on June 21, 2020

Will Hurd is the only black Republican in the House of Representatives.  In a Wall Street Journal op-ed, he laid out his proposal for reforming the police.  Included was the implementation of best practices for police departments to be eligible to receive their portion of the $2 billion the federal government provides to police departments annually.  Implicitly, Rep. Hurd is saying Congress will defund police departments that don’t meet federal standards.


The clarion call to defund the police sounds like one end of a binary choice: either eliminate police department budgets or leave things as they are.  Of course, neither of those options are acceptable.  


At a local level, defunding the police will take a different form in every community.  In 2013, the city of Camden NJ dissolved its unionized police department and signed a service agreement with the county to provide shared services according to Bloomberg News.  The police were trained in non-crisis intervention and provided with body cameras.  The result has been a reduction in crime and improved community relations.  Last week, Camden police marched in solidarity with #blacklivesmatter protestors.  


Would Camden’s solution work in Rochester?  


The best approach is for each city to adopt solutions well-suited to their specific communities.  Can the federal government extrapolate a single, one-size-fits-all solution for the nation?  Would connecting that solution to funding have its intended purpose?  It’s unlikely. 


There are effective resources the federal government can apply to assist communities.  However, the very nature of large, well-funded federal programs attracts influencers who would undermine its intent and render it ineffective.  By the time lobbyists for police unions and lawyers for social justice organizations got through with it, there would be nothing left of Rep. Hurd’s good intentions.  Bureaucrats would create a set of rules, mayors would declare themselves in compliance, police chiefs would issue carefully worded policies, and nothing would change.  

How about this?  Eliminate the $2 billion in federal funding altogether.  The overall system of taxing Americans and redistributing the funds through federal programs is inefficient, ineffective and unresponsive to the needs of our communities. It would be better to leave the funds in our communities and trust local leaders to affect change.  They would be more responsive and more likely to craft something that works.   

Of course, that’s my libertarian fantasy.  It’s not as though eliminating $2 billion in funding would return that money to taxpayers or the cities we live in.  Two billion dollars is a rounding error on a federal deficit funded by funny money created by the Federal Reserve.  So, we must have our portion of the $2 billion.  But I would rather trust our African-American mayor and local community leaders address our need for reform.  Central planning doesn’t work.  Never has; never will. 



Monday, June 1, 2020

Bailouts, bankruptcies and the Middle Class

Our pre-pandemic stop in the Atlanta suburbs to visit my brother and his wife began a months-long dialog about the state of the nation.  On that occasion, we shared wine and political views --  simultaneously.  That can be a deadly combination but we somehow, we managed our way through it without resorting to violence.  Kidding aside, we had no major differences of opinion largely because we are members of the American, suburban middle-class. 

Our political views are affected by our shared values.  What the suburban middle class has always had in common is our desire to provide a secure home for our families, to support our children’s aspirations and to be financially secure in our retirement. Yes, we have that in common with others who are not in like socioeconomic circumstances.  But the middle class have shared experiences that bind us.  We have endured the ups and downs of the economy, job losses, mortgage crises without an expectation that a government bailout will carry us through.  My brother and I both have been small business owners.  We have gone through years of reduced or no income and still managed to pay the mortgage and save for our kids’ college education.  

I have always assumed we were in good company – that our neighbors shared our values and habits.  But, as I wrote last year (Borrowing Our Way to the American Dream), middle-class families are carrying more debt than they should to maintain their lifestyle.  Middle class living became more luxurious as two income families became prevalent.  Two jobs mean you need two reliable cars (we had one when I was a kid). All that hard work deserves a bigger house and bigger houses mean the kids no longer have to share bedrooms (as we did).  After school activities require big expenditures for travel and sports equipment (it was free, or we didn’t do it).  

In a recent email from my brother, he expressed his astonishment (okay, he ranted a bit) over a news report “showing long lines at food banks.”  The report was a public service call for contributions to keep the food bank stocked. Unemployed middle-class people were understandably concerned their children might go hungry.  His reaction matched my own although he was more eloquent: “You’re driving a frickin’ new SUV and you don’t have enough cash to buy food?”  

It’s hard for me to imagine that the combination of weekly unemployment checks and a $600 kicker from the federal government will cover all their expenses.  So, yeah, they’re suffering, at least in the short term.  But, as my brother ranted, “I made personal sacrifices to save money and plan for contingencies.  Now, these people are asking for my money to feed their kids.   These are the same people that claim they can’t afford health insurance and college is too expensive.   Their priorities are clear.  They want that brand-new SUV, but they want someone else to be their safety net.  I [have] the same anger when I hear politicians talk about ‘college for all.’  Wait a minute, I [sacrificed] to save in a 529 account.  Why can’t they do that?”

We now live in Bailout Nation.  Our government overextends itself in good times and, therefore, lacks the capacity to respond to crises.  And, the same can be said for families and businesses.  Our last firewall against total disaster is – as it was during the 2008/09 financial crisis – the Federal Reserve.  During this pandemic, those in government have the same rational fear as a decade ago.  The crisis may be more than our economy can endure.  So, we flood it with newly minted cash.  

But this time is different. In the weekly newsletter of the American Institute for Economic Research, Scott Burns describes how the Fed has used its emergency powers in this crisis.  The last crisis affected the financial system.  This one is in the “real economy.”  That has cast the Fed in the role of commercial bankers lending to businesses by purchasing corporate bonds and extending credit directly to companies a banker wouldn’t touch.  Something the Fed has never been good at.

Much like my brother, the companies that have managed their balance sheets well don’t need and won’t get relief.  Those that have been profligate get a bailout under favorable terms.  Our economic future would be made more secure if those companies were to go through Chapter 11 reorganization under the bankruptcy code.  The shareholders would lose everything; the bankers would take a haircut.  But the companies’ operations would continue under new ownership, ownership that would be more careful to avoid that same fate.  And, a hard lesson would be learned by the next generation of corporate leadership. 

Of course, crisis conditions place us at risk were we to allow this to happen.  Were too many companies to fail all at once, it could cause a supply shock to the economy accompanied by massive unemployment.  The depth of economic harm could cause another Great Depression.  

So, how did we get here and how should we move forward?

Burns refers to the work of George Selgin on this matter.  It’s difficult to summarize his 322-page whitepaper in a few sentences.  But I’ll give it a try.  Just STOP!  The Fed should outline its operating framework in such a way that those who run banks and industrial companies know what facilities might be available to them under crisis conditions – PERIOD.  

Oh, and there’s one more thing.  One should ask why so many corporations have placed themselves in jeopardy.  The answer is they are doing what the federal tax code incentivizes them to do.  Capital gains are taxed at a lower rate than personal or corporate income.  So, companies engage in extensive borrowing at the aforementioned zero interest rate and use the cash – not to invest it in building a better company – but rather to buy back their own stock, raising the price and lining the pockets of officers, directors and shareholders.  

Raise interest rates to a more normal range, eliminate the disparity in the tax code and watch what happens.  By the time of the next crisis, we might be better prepared.  


Monday, May 18, 2020

Your choice: Democrat ineffectiveness or Republican hypocrisy

Sometimes you read something so obvious you can’t believe you didn’t figure it out for yourself.  Such was my experience when I read Russ Roberts’ piece on Medium titled “The Economist as Scapegoat.”  Roberts doesn’t just punch holes in a habitual argument.  Rather, he slams you between the eyes with a two-by-four.  He presents data that contradicts the idea that life has gotten worse for many Americans because of Reagan era policies based upon the philosophy of Nobel-winning economist Milton Freidman.  In other words, this convenient trope is not borne out by reality.  

In reality, Freidman’s proposals have never been implemented.  During the so-called Reagan era (the last 40 years), the nation’s budget has been managed more by the prescription of liberal politicians than conservatives, even – or especially – when Republicans are running the government. 

Over the last 50 years, government spending has increased both in real nominal terms… 

Government regulations have increased not decreased… 

And, out-of-pocket healthcare costs have decreased while government spending on healthcare has increased.  

Roberts argument motivated me to do some digging.  What about other liberal tropes?  Do they stand up to scrutiny.  The press likes to trumpet that the wealthy don’t pay their fair share of taxes. Here’s what the Congressional Budget Office has to say: 

Another persistent trope is the comparison to the economies of Europe and the progressivity of our tax code.  This analysis compiled by Bloomberg from OECD data presents an interesting, if complex, picture.  

The figures in the left-hand column are those most often quoted in the press.  But the figures in the right-hand column tell the tale.  The larger the ratio, the more progressive the tax code.  The largest economies in Europe, including the Scandinavian countries, have tax codes that weigh more heavily on the middle class than the wealthy.  

The Bloomberg article goes further to show how the generous benefits of European countries are financed in large part by consumption taxes (Value-Added Tax in Europe; sales taxes in the U.S.) that affect the poor and middle class more than the wealthy.  

American politicians want us to believe the system is rigged against us.  It’s only fair to tax the wealthy to pay the bill, right? Europeans follow a more moral path:  citizens who want government benefits are willing to pay for them.  

All of which suggests to me that what has failed us is not a decline in government investment but rather the persistent failure of the welfare state to address the needs of those who need it most while threatening to bankrupt the economy in the process.  So, perhaps, it’s a good idea to examine what got us here and consider restructuring our efforts.  The challenge, of course, is that doing so relies upon an overthrow of highly educated people who have promoted the idea they are omniscient and, therefore, worth every penny they are paid to spout nonsense.  This faulty presumption leads to bold predictions about how a large, unmeasurable, complex system (the American economy) will respond to government inputs (fiscal policy and regulations).  To be clear, I’m talking about how wrong our politicians and policy elites get things on an ongoing basis.

While the data support the idea that the welfare state has failed, the other side of the coin is perhaps more telling.  Far from following the “starve the beast” philosophy defined during the Reagan administration, Republicans have hypocritically done the opposite.  They have consistently voted for bigger and bigger deficits.  Far from reducing the size of government, they have allowed liberals to tempt Americans into an addiction to government programs while promoting their own brand of addiction: lower taxes.  


Tuesday, May 5, 2020

A serious personality disorder

In a moment of frustration, an old friend (a consultant in organizational development) blurted out: “in order to be CEO of a major corporation in America, one has to have a serious personality disorder and broadcast it widely.”  We were in my office and, after we had a few laughs about it, I replied, “Truth is… everyone has a serious personality disorder.  It’s just that, when you’re a CEO, it’s broadcast widely.”  I might have added, “even more so if you’re a political leader.”

Whether in politics or corporate life, the chief executive is rarely the expert on what to do.  However, he or she must be the expert on how to communicate what to do.  The absence of clear, credible communication leaves people in a state of fear which, in turn, leads to panic and the spread of misinformation.  People need to believe what their leaders are saying in order act responsibly and hang together as a community. 

Clear communication means being honest about what is known and what is not.  It means being open about what’s being done to find the answers and achieve the best outcomes.  And, the pronouncements from on high must match the ground level reality.  It does not reassure the public to say we can test everyone for coronavirus when everyone knows that’s not true.  Indeed, it makes matters worse.  It’s a breach of trust that leads to people not trusting anyone. 

There is not a clear path to containing coronavirus, keeping the public safe or balancing the risk of disease against the need to keep the economy moving.  In matters as complex as the pandemic, our leaders should encourage us to shed our tendency toward binary choices: extreme action versus fiddling while Rome burns.  In such times, it’s important to be guided by principles and values.  Despite our differences on fairness and the role of government, we share common values.  We believe in the sanctity of human life; the reciprocal obligations within our communities; and, respect for the rights, differences and dignity of others. 

So, what must be communicated?  In a word – Hope!  Hope makes our current situation more bearable.  Hope provides motivation to contribute our efforts to our community.  Hope links our current difficulties to a better future.  During this pandemic, what we hold dear is what is most challenged.  Our economic future is challenged; the health of our families is challenged; and, our psychological well-being is challenged.  A message for a hopeful
future must connect our current situation to a brighter future by being honest about what’s happening; communicating our plans to restore our communities; and, assuring the public of a consistent effort that marshals all our resources.

All of that can be communicated and should be communicated in spite of our personality disorders. 


Monday, April 20, 2020

Coronanomics Revisited

I recall lining up for polio shots when I was in school.  The vaccine provided at no cost by the federal government eliminated polio from the United States over the course of two decades according to the CDC, the organization on the front lines of the battle against COVID-19.  That’s what it will take before I personally feel safe again -- safe enough to resume normal life or whatever passes for normal on the other side of this.  Best case – two years!  Am I overreacting?  Maybe.  A preliminary study of Santa Clara County, California suggests the mortality rate of COVID-19 is no worse than seasonal flu.  So, I might be at the extreme end of a spectrum whose opposite is defined by those protesting the shutdown of the economy (the Walking Dead?).  You might be somewhere in between.  

A panel of experts from the American Association for the Advancement of Science has modeled the impact over the next five years.  They assume that, like the flu, immunity may not last forever.  Vaccinations might be an annual requirement.  Further, their model assumes there will be new waves of outbreaks as we begin to reopen the economy.  History provides examples.  In the Spanish Flu pandemic of 1918, cities that reopened quickly – Denver and Philadelphia -- dealt with a second wave that decimated their workforce and disabled their local economies.  

Despite the absence of anything resembling leadership from the president, a task force has laid out a three-phase plan to reopen the economy based upon some broad and easily understood criteria.  It wisely leaves the implementation to governors and local government officials.  But it’s clear that there must be federal support for it to work.  The governors can decide when to open up businesses and scale back stay-at-home orders.  However, there are serious resource constraints on what the task force describes as “Core State Preparedness Responsibilities.”  Left on their own, the states would be competing with one another for supplies of test kits, vaccines and protective gear.  And, of course, the states lack the funds to follow through.  The New York Times has reported on a Harvard University study calling for testing at triple the current as a prerequisite for reopening the economy.  As it stands today, we have no national plan or infrastructure to support testing on that scale.  Nor can we perform contract tracing to ensure proper treatment in a more open economy.  Both are part of the strategy outlined by the presidential task force.  But a strategy without a plan is just a wish.   So, for now, we are sticking with medieval rules: isolation or risk death.  

So, what happens to the economy? Well, for starters, we’ve got a thirteen-figure hole to fill.  That’s just my back of the envelope calculation.  But I figure that a 20% unemployment rate will amount to a $3 trillion dollar drop in annual GDP.  Add the budget gap in the states most affected and the need to shore up hospitals and you’ve got another trillion or two.  The $2 trillion CARES Act won’t be enough.  

A few weeks ago, I predicted a short-term drop-in GDP or a V-Shaped recovery.  I also said, the real long-term risk was a supply disruption.  Well, that’s what we have.  There are those who suggest that weak businesses should be allowed to fail.  Corporations have loaded up on low-interest debt over the last decade.  Now, they should pay the price.  Only the stronger firms should be allowed to thrive.  In most circumstances, I would agree.  However, much like federal response to the banking crisis of the last decade, allowing global businesses to fail may be too much for the economy to bear. 

To some degree, our prosperity relies upon the efficiency of supply chains that run from raw materials to manufacture to distribution to retail to consumers. Too much disruption will result in massive unemployment that will not resolve itself when we’re all permitted to go back to work.  Products won’t get to market; companies will shut down; and, people won’t be earning paychecks.  

The one economic bright spot in all of this has been the response of the Board of Governors of the U.S. Federal Reserve System.  Having learned the hard lessons of the 2008/09 financial crisis, they have focused on ensuring liquidity not just domestically but also globally, opening lines of credit for foreign central banks.  These actions will serve us not only in the near term but also in the long term as sovereign governments as well as foreign investors continue to see U.S. Treasury Bonds as the safest of safe havens in times of crisis.

After all, how else can we fund those multi-trillion-dollar fiscal deficits?  


Sunday, April 5, 2020

Cuomo and Crozier: contrasts in leadership

Governor Andrew Cuomo

We returned from a shortened seven-week vacation last week.  Part of getting resettled in our home was reinstalling a Roku we’d taken with us.  It’s an easy task I’ve done many times before.  Nevertheless, I tested it to make sure it worked properly.  Coincidentally, I turned it on as Governor Andrew Cuomo was giving his daily press briefing.  I never watch TV news (see Stop Watching Cable News Now); so, I hadn’t seen our governor in action despite hearing wonderful things about his leadership during the current pandemic.  

Regular readers know I am not a fan.  Yet, I was struck dumb as I listened to him.  Who is this guy? I thought.  He is calm, rational and articulate.  Where is the arrogance to which we’ve become accustomed?  Even his tone of voice had changed.  He answered questions directly without evasion.  If he didn’t know the answer to a question, he said so.  If a member of his team couldn’t provide a good answer, he said they’d find out.

There is no doubt he will have to make some tough choices in the days and weeks ahead.  He’ll move equipment to where it is most needed, move patients to facilities better prepared to handle them and approve triage protocols that sacrifice some in favor of others (much like it’s done on a battlefield).  The trust he has engendered will give him the credibility to make those decisions on behalf of the citizens he serves.  

Contrast Cuomo’s leadership with that of Captain Brett Crozier who, this week, was relieved of the command of the USS Theodore Roosevelt, a nuclear-powered aircraft stationed in the western Pacific.  The whiners in the Twitterverse and the great grandson of the man for whom the ship is named have called him a hero.  I submit that not only is he not a hero, he has failed in his basic responsibilities as Commanding Officer.  

I must digress for a moment.  Americans take the security provided by the military for granted.  It took one hundred fifty years for the US Navy to achieve dominance of the seas.  In the post-Revolutionary War years, American ships were attacked routinely by the British Navy and the United States did not have the sea power to respond.  We have achieved our current status by virtue of the century-long pursuit of Manifest Destiny, our victories in World War II and the Spanish-American War (in which the aircraft carrier’s namesake was a central figure) and a deal made by FDR to take over the North Atlantic British naval bases prior to entering World War II.  Despite our diminished status (the US Navy has half the ships it had a decade ago), no foreign power would dare challenge the US Navy directly.  
Captain Brett Crozier (USNA '92)
What the military does to ensure our security is described as “readiness.” There is a lot of protocol or S.O.P. involved.  In battle, no one should have any doubts who’s giving the orders.  So, we observe a chain of command.  Since readiness is what we must achieve to go to war at the drop of a hat, we provide reports of our status up the change of command. Today, as has been the case since well before I received my officer’s commission, the movement of ships and their readiness to go to war are highly classified. 

An aircraft carrier is at the center of the Navy’s military capability and strategy.  To reveal its operational status on an unsecured communication channel is an egregious breach of a process meant to ensure the national security of our nation.  That’s why Crozier should have been and was properly relieved of his command.  

In his op-ed in the New York Times, Tweed Roosevelt describes Captain Crozier as a hero because he sacrificed his career to do what he thought was right.  Unfortunately, he wasn’t right.  The official statement of the Secretary of the Navy outlines the reasons why. 

As a midshipman at Crozier’s and my alma mater (U.S. Naval Academy), we were trained to say, “I’ll find out” rather than “I don’t know.”  We were trained to say “no excuse” when asked why we screwed something up.  The admiration heaped upon Cuomo has rightly resulted from his adoption of those kinds of responses.  He has exhibited true leadership where Crozier failed.


Thursday, March 26, 2020

The Aftermath: the future is now

We left on a two-month vacation the day after Presidents Day – February 18.  At the time, there were only 25 cases of Coronavirus reported in the U.S.  Like most of you, we were caught flatfooted by the pandemic and its astounding spread.  A graphic in the online New York Times tells the tale.  China’s delay in recognizing the disease and its effects led to millions of people leaving Hubei province, many carrying the virus, over two months.  Nine hundred per month were destined for New York now the epicenter of the crisis in the U.S. 

As I write this, the Senate has approved a $2 trillion stimulus package to keep the economy on track during the Coronavirus crisis.  In a post last week, I suggested now is not the time to worry about fiscal deficits.  Let’s focus on keeping people healthy first.  But the virus and our response to it will have some long-lasting effects – some good, some bad, some ugly. 

The Good

The future is now!  Trends predicted to take shape over the next decade or two have taken root overnight.  We are telecommuting and teleconferencing at work.  Similarly, universities have moved coursework online, shedding expensive infrastructure and adopting a model I predicted in 2015.  Will there be a snap back to the old model, or will there be a shift to a new way of working and learning? 

Traffic is lighter just about everywhere.  Demand for fuel has dropped dramatically (I paid $1.99/gallon the other day).  That means reduced emissions and stress on our infrastructure.  Will work at home become a lasting effect of the crisis?  

No one will be denied healthcare because of a lack of insurance during this crisis.  Bernie Sanders points to the need to nationalize healthcare like, you know, Italy… um, maybe not a good idea.  And, Republicans are unlikely let go of their objections to any solution.  It is perhaps Joe Biden’s incremental approach to reforming Obamacare that might lead to the best outcome.  Will that lead to universal coverage?

Crisis response has necessitated that government regulations pretending to protect us have been set aside to, well, protect us.  FDA has eased up on guidelines for testing drugs and manufacturing ventilators, and companies are repurposing without the obstacle of licensing rules.  Will the crisis cause us to question the need for all those regulations? 
New York Governor Andrew Cuomo
Governors are stepping up to respond according to the needs of their individual states. Wyoming doesn’t need what New York needs. So, there is a renewed focus on the effectiveness of regional and local response.  States have powers not afforded to the federal government according to Constitutional experts.  Only states have police power to enforce quarantines or compel vaccinations, for example.  Will governors finally press the point and take back authority they have abdicated to Washington? 

The Bad

In the last twenty years, we have consistently been failed by our institutions of government. The 9/11 attacks revealed a weakness in national intelligence, particularly the CIA.  Hurricane Katrina placed the failures of FEMA at center stage.  The Great Recession was caused primarily by banking regulators not doing their jobs.  And, now there’s COVID-19 which has revealed the soft underbelly of our ability to protect our citizens from a pandemic.  Meanwhile, congressional politicians can’t seem to set aside their dysfunctional behavior for the sake of the nation.  

The era of free trade, that was nailed into place by China’s entry into the World Trade Organization, has restructured supply chains so that we no longer have the manufacturing capacity to make critical supplies.  Meanwhile, China is providing Europe with masks, gloves and other medical supplies.  It sounds like an echo of the Marshall Plan. It’s another way in which we have abdicated our role in global leadership. 

The Ugly

This ain’t the 1950’s, a time when the nation was led by a war hero whose minimalist approach to governance resulted in the paydown of war debt while maintaining a balanced federal budget, the construction of the interstate highway system and the inception of NASA.  No, Democrats, we aren’t going to raise marginal tax rates to 90%.  And, no, Republicans, we aren’t going to shrink government to balance the budget.  Bipartisanship in the 21st Century means more government spending and debt not less.  That’s how the coronavirus stimulus went from $1 trillion to $2 trillion in the course of a week.  

A former business partner suggested a scenario I deem likely.  Likely because of the way in which the nation’s institutions responded to the financial crisis a decade ago.  The first round of QE or Quantitative Easing by the U.S. Federal Reserve Bank in 2009 was viewed as a positive step toward getting investors to invest and get the economy moving again.  In this process, the Fed purchased U.S. Treasury bonds and mortgage-backed securities to keep interest rates low and encourage the acquisition of assets.  Low interest rates help those who can invest in stocks and real estate but they penalize savers and retirees.  

Back to my former partner’s prediction:  the Fed will not only purchase the additional U.S. Treasury debt but also will write it off, he says.  In other words, since the Fed can create as much money as it wishes, they can also reduce the government’s debt with the stroke of a pen.  

Two years ago, the election of Rep. Anastasia Ocasio-Cortez made a big splash in the national news.  Among her more controversial suggestions was that the nation’s economy could be managed by Modern Monetary Theory (MMT) – the creation of money out of thin air.  There was a minor uproar in business and economic circles.  Now, under the cover of a pandemic, MMT may become the government’s tool of choice to feed our addiction to debt.  

Conservatives warn this approach will result  in hyperinflation, citing Post-WWI Germany as the relevant example.  Liberals, led by Nobel economist Paul Krugman, have pointed out that we’ve been pursuing MMT for the last ten years and inflation is low.  They’re both looking in the wrong place.  Hyperinflation hasn’t occurred in consumer prices.  It has occurred in asset prices – stocks, bonds and real estate – enriching those with the capital to invest at the expense of everyone else.  

Once the crisis has passed, we’ll applaud those who have crafted and voted for the $2 trillion package and reelect them in the Fall.  And, there will be no one to stop this juggernaut.