Stop Me If You've Heard This One...

A well-heeled man is sitting alone in a hotel bar when a well-endowed young woman walks in and sits nearby.  After having a friendly conversation for a while, the man asks the young woman if she would sleep with him for a million dollars.  She readily agrees.  He follows up by asking if she would do so for a dollar.  “Of course not,” she replies.  “What kind of girl do you think I am?”

“We’ve already established that,” says the man.  “Now, we are just haggling over the price.”

In Michael Sandel's new book, What Money Can't Buy, he posits that capitalist theory has so invaded our culture that our values are now in question.  They have been replaced by the practice of putting a price on everything. 

Residents of the state prison in California can buy cell upgrades for $82 a night.  One can contract for the services of a surrogate mother in India for $6,250.  Doctors have established “concierge” services that provide superior responsiveness to their wealthy patients, denying such service to those less well off.  Lobbyists pay line-standing companies to wait in line so they get a seat at Congressional hearings, denying the public access to the process of governing. 

If everything is for sale, Sandel asks, what does that say about the character of our society?  Is it okay to pay kids to read books or get good grades?  Should good healthcare be available only to those who can afford it?  Good people can disagree on the answers to these questions.  But, almost everyone would agree that a line must be drawn somewhere.  For example, we might all agree that it is not okay to sell a child.

Sandel traces the commoditization of almost everything to the 80’s, a decade during which the Soviet Union crumbled and the market theories of Reagan/Thatcher were vindicated.  (He is not critical of those two leaders or of capitalist theory.  He is just questioning the extent to which the concept has inculcated society.)

In this country, it is a concept grounded in our origins.  The Age of Enlightenment, which gave rise to both the French and American revolutions, espoused the theory that principled behavior arises from the nature of human beings not from the authority of the church.  This philosophy formed the basis of Thomas Jefferson’s secular approach to the Declaration of Independence and the U.S. Constitution.

Thomas Paine

Thomas Paine who authored the Age of Reason was perhaps the most prominent of Americans promoting these beliefs.  Paine criticized the church which he saw as corrupt.  His writing style appealed to the masses and made secular philosophy a part of American culture.  To that time, the crowned heads of Europe derived their authority from the “Divine Right of Kings” granted them by the church.  Coupled with the market theories of Adam Smith, American culture was grounded in the self-reliance of free enterprise. 

It seems logical that capitalist market theory would be embraced the world over in the wake of the Soviet collapse.  But, if Sandel is correct – if everything is for sale and ethical behavior has no bearing – then the pendulum has swung too far in the wrong direction.  It is within this framework that our elected officials must spend vast amounts of time raising money from well-heeled donors and wealthy individuals fund SuperPAC’s that espouse their views.  Is our government for sale too?

During the last thirty years, we have had three two-term Presidents – Reagan, Clinton and Bush – who found a way to galvanize support, not by their policies but rather by delivering a message that voters identified with.  For Reagan, it was that “government is not the solution; government is the problem”.  Clinton pledged a “new beginning” and positioned himself as a New Democrat – liberal on social issues but pro-business.  Bush’s leadership centered on the War on Terror and defeating the “axis of evil”. 

Each of these Presidents was controversial in their time.  They each had their loyal fans and their detractors.  But, love them or hate them, there is no denying their success.  They each had their way with Congresses of the opposite party; and, they did so by delivering a message that resonated with the public.

I am left to wonder which of this year’s candidates will deliver a resonant message – a message that conveys the character of society, a national ethic that people will embrace. Thus far, all we have heard are the attacks intended to mischaracterize the other guy. 

Each candidate has well thought out economic, social and foreign policies, as well they should.  However, pollsters tell us that, in the end, it won’t matter whose policies are most valid.  It will matter whose message the American voting public most identifies with.  That is how elections are won.  The candidate who best defines the national character garners the support of the governed.

If neither candidate can galvanize public support in that way, it will be the Super-PAC’s and big money interests that win.  So, I ask you…  

What kind of nation do you think we are?  Will our character prevail?  Or, are we now just haggling over the price?

WHO WILL LEAD?

Kodaktown and the Two Bobs

Kodak Brownie Camera

Our vacation home in Canandaigua, NY is near Rochester, once nicknamed Kodaktown after the erstwhile great company that was its largest employer in a bygone era.  The company, founded by George Eastman, filed for bankruptcy protection since we last visited.  Eastman’s legacy is preserved in his estate on East Avenue, now a museum.  He is credited with democratizing photography with the invention of roll film and the Brownie camera.  The production and sale of small inexpensive cameras supported Kodak’s cash cow – film – for decades.  The company also invented digital photography but ignored its potential.  You know the rest of the story. 

Eastman wasn’t unique among 19^th Century entrepreneurs but he was, perhaps, unique in Rochester.  It is estimated that his philanthropic donations exceeded $100 Million.  He founded the Eastman School of Music at the University of Rochester and was also the prime mover and contributor to the establishment of the dental school there.  The Rochester Institute of Technology has a building named after him in recognition of his donations to that institution as well. 

His legacy is evident in Rochester although most residents take it for granted.  It’s always been a white collar town.  Its well educated workforce gave rise to other companies famous for their intellectual capital, Xerox and Bausch & Lomb. 

Eastman created a paternalistic corporate culture that emphasized the security of its employees.  For nearly a century, Kodak was the employer of choice for the locals.

My brother in law went to work for Kodak right out of school.  He was a lifer.  He took an early retirement package about 20 years ago.  For most of his career, he worked on a Top Secret program that he couldn't talk about.  When the program was declassified last year, we learned that his division made lenses and other apparatuses for the U-2 spy plane.  He is rightfully proud of his work at Kodak and truly bummed out by its bankruptcy filing.

I asked the Two Bobs about the impact of Kodak’s bankruptcy.  They both gave me the same answer:  no impact.  Rochester’s economy has been adjusting to the loss of Big Yellow’s job growth engine for 20 years.  By the time the company went into bankruptcy, it was expected – overdue even. 

Eastman School of Music

Who are the Two Bobs?  Well, one is my niece’s husband.  He is an electrical contractor who grew up here.  Over the last few years, any discussion of the economy started with his head shaking from side to side.  His work was coming from school construction.  Once it ran out, he didn’t know where the work would come from. Now, he knows.  He has moved on to commercial construction.  Xerox and Paychex are among Rochester’s other big companies that are expanding their facilities. 

Bob reiterated his comment of last year.  He doesn’t think that the economy is humming but he believes it’s not as bad as the pundits make it out to be.  In other words, it would be better if everyone wouldn’t talk it down so much. 

The other Bob is my old school chum, Bob Cannan.  His company, Eagle Productivity, is booming.  Once a regional company, he has now gone global.  He specializes in innovative training solutions.  Are you implementing a new business process?  Rolling out globally?  Expecting your Salesforce to embrace some new technology?  Eagle guarantees – that’s right – guarantees 90% adoption of the new program.  Eighteen of the twenty largest pharmaceutical companies are his clients.  His global expansion is driven by their global presence.  He now has over 130 employees and an office in Germany to support rollout in the EU and Russia. 

The economy be damned.  The Eagle is soaring. 

Bob and his team at Eagle have developed expertise in “human factors”.   This is a sometimes overused term when describing the interaction between people and technology.  In the 80’s, we called it “user friendliness”; in the 90’s, it was “usability engineering”.  But, the study of human factors is a much broader field that encompasses psychology, engineering and industrial design.  Human factors describe the cognitive abilities of people interacting with their environment. 

Human factors and its use in training is not a patentable process like Eastman’s invention of roll film in the 1880’s.  So, the key to Eagle’s growth is the passion with which the concept is applied to their process and the excellence of their implementation with their customers. 

Bob and I were in the Navy before it was co-ed.  So, I got a big chuckle when he told me that 70% of his staff is female.  “How’s that going for you?” I wondered aloud.  “Great” came the reply.  Women are very concerned about their community at work, says Bob.  What is the culture?  How do they relate to their co-workers?  Their clients? 

I know it’s a bit sexist to generalize in these matters; however, his experience squares with mine from the days when I was managing big call centers largely populated by women.  So, the management culture and the client engagement are as much driven by human factors as are the products, services and implementation projects. 

I am delighted at my good friend’s success.  I am also pleased to see the positive evolution of Rochester’s community and economy.  While George Eastman fostered a paternalistic culture that was well suited to the industrial revolution and became THE place to work through most of the 20^th Century, Bob Cannan and hundreds of other entrepreneurs have created a new economy culture well suited to the 21^st. 

I usually close by asking, “WHO WILL LEAD?”  In this case, the question answers itself. 

Is the Education We Want, the Education We Need?

German apprentice steelmaker

My Dad never went to college. He was about four months into a six month hitch in the Army on December 7, 1941 -- that day of infamy. When he returned from the war four years later, one thing led to another and… well, he never went to college.


Perhaps for that reason, I was programmed to go to college from an age earlier than I can remember. It was a matter of faith. I never questioned it -- never felt the need to. So, it seems odd to me that some people are questioning the value of a college degree.

Last week, the Wall Street Journal published an article (Education Slowdown Threatens U.S. ) summarizing the studies of two Harvard economists. Professors Claudia Goldin and Lawrence Katz have calculated the average years of schooling for native born Americans since 1876. Today, the average 30 year old has only 8 months more education than their parents. This contrasts to 1980 when the gap was about 2 years. The Journal posits that this factoid does not bode well for our nation. After all, college grads have fared pretty well during this extended down turn with an unemployment rate of 4.2%, about half of the rate for those with only a High School diploma.

From the Wall Street Journal

The article included a graphic comparing the percentage of the US population that has attained a college degree to other countries. The US was 14th on a list that was led by S. Korea, Canada and Japan. What struck me, however, was that Germany – that’s right, Germany – was 25th on the list.

We all know about Germany, right? It is the economic engine of Europe. It is highly industrialized, produces great manufactured products and runs a trade surplus of about 15 Billion Euros per year. So, if a college degree is so important, how does Germany do it?

Perhaps part of the answer lies in Germany’s apprenticeship program. The tradition of apprenticeship in Europe goes back to the Middle Ages. It is embedded in German society, driven by industry demand and put to good use by high tech manufacturers. The “dual education” system combines on the job training with classroom vocational instruction. Young Germans can choose among 356 occupations including medical assistant, industrial management or optician. It is also a government program.

In this country, ‘A’ students go to Harvard, MIT or Stanford if they can afford it. If not, they may have the opportunity to attend great public universities like the University of Michigan, Indiana University or the University of California at Berkeley.

But, what about the ‘B’ students and ‘C’ students? Many are getting business degrees at lesser schools. Is there value to that approach?

Early in my career, I worked at Citicorp and Goldman Sachs. We hired the best and brightest from the top business schools including those mentioned above. They were management trainees and were paid very well. Smaller businesses couldn’t compete with those compensation packages.

In a small company, you need people with experience, not trainees. So, who will hire the ‘B’ and ‘C’ students? What value is there in a business school degree from No Name University?

Here in Florida, the Dean of the business school at Nova Southeastern University, Dr. Michael Fields, created an innovative program – a Sales Institute -- requiring every business school student to attend at least four courses in sales and sales management. Dr. Fields met resistance from his most important constituents – the faculty and the students.

However, there was one group that loved the program – business owners. The idea that they might be able to hire people who were ready to produce revenue was very appealing. Faculty and students don’t see the value in the less intellectual skill base of the sales profession. Employers see dollar signs.

But you don’t go for an MBA to end up as an apprentice. And, that was the perception of Nova’s program.

But, what’s wrong with apprenticeships? What if we had an education system that provided the real world skills that industry demands?

In Albany, NY, the College of Nanoscale Science and Engineering was started with $1B provided by the state of NY and an additional $13B from industry. The college is educating Americans in nanotechnology used in the manufacture of computer chips and other miniaturized electronic devices. The college has created over 13,000 jobs in that rust belt city and promises to produce graduates with world class skills.

The US Department of Labor has created a program to support structured apprenticeships through the office of Education and Training. Reflecting the political reality of this country, the DOL uses funds that have been reallocated from other projects to support industry led efforts to create apprenticeships.

One example is the National Information Technology Apprenticeship System created by the Computer Technology Industry Association (CompTIA). NITAS took two years to develop and has a goal of training at least 7 million workers in the IT trades. The structure is noteworthy. The government sponsors the program but does not fully fund it, regulate it or make it mandatory. The industry set standards and participates voluntarily because it sees benefit in hiring workers who are more productive on Day One of employment.

The net is this. A better trained, more productive workforce will make it more attractive for free enterprise corporations to invest and create jobs in this country. These jobs will have higher wages than low skill service jobs. Higher wages increase demand for goods and services and grow the economy.

There has been much written about our broken public education system. And, indeed I agree with most of the criticisms. But, if you could fix the problem tomorrow for, say, all the third graders in America, we would still be 20 years away from feeling the economic impact. Apprenticeships can have an almost immediate impact and don’t require tax dollars to develop.

The ultimate question is whether initiatives that take us in this direction will encounter the same resistance that Dr. Fields encountered. Are Americans ready to have their children become apprentices rather than college grads?

Or, to put it another way, would my Dad have approved? Or, your Dad?

Is This a Claude Rains Moment?

Claude Rains as Captain Renault

I love old movies. Perhaps it’s because I grew up watching them. In those pre-Sesame Street days, after school television was largely a choice between soap operas and the Million Dollar Movie. Independent NY channel 9 (WOR-TV) would run the same movie twice a day for five afternoons. So, I grew up watching old movies from the 30’s and 40’s. Perhaps that would explain my poor social skills.



One of my favorites (and, I am not alone on this) was Casablanca. The romantic WW II classic starring Humphrey Bogart and Ingrid Bergman had a great supporting cast including Claude Rains as a corrupt French policeman.

The ordering by the Nazi’s to find a reason to shut down Rick’s Café (Bogart’s establishment) elicits the following dialog between Rick and Rain’s Captain Renault

Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.

I thought of him this week when the news broke of members of the Secret Service and (gasp!) our very own military were discovered to have engaged the services of prostitutes in Colombia. I am shocked, shocked to find that members of our military and Secret Service engaged the services of prostitutes.

But, this is not a joke. There are a couple of issues here:

Prostitution is legal in Colombia. What's the controversy? Are we to hold these public servants to a standard that is above the law? Who sets the standard? How does a member of the Secret Service know what the standard is?

Well, there is a higher standard. It’s called a security clearance. And, though I seriously doubt that everyone who engages the services of a prostitute has had theirs lifted, in this case, that’s exactly what happened.

But, I wonder. Are activities that are legal some places but not others permissible? Drugs are legal in Switzerland and prostitution is legal in the Netherlands. Should members of the Secret Service be precluded from engaging in legal activities in other countries if they are not legal in the US?

The larger issue, of course, is the potential security risk associated with inviting prostitutes into a hotel room that houses the President's itinerary and other details of his trip to South America. What's to stop a potential terrorist or assassin from paying a prostitute to spirit away some of the confidential documents that contain these details in the middle of the night?

Something nearer to me personally is the scandal that just broke about alleged rapes at West Point and Annapolis and the associated cover-up. Two women – one from each of the Academies – have alleged that they were raped as students (cadets, midshipmen) and that senior officers were unresponsive to their complaints. If true, it is unconscionable. Women were first admitted to the Academies in 1976. By now, their participation in our armed forces and their evaluation on the basis of merit should be a matter of routine.

I am reminded of the Tailhook scandal in 1992. Navy Lt. Paula Coughlin was forced to run a gauntlet of drunken pilots who groped her and tore at her clothes. The annual Tailhook convention was attended by some of the same senior officers who should have been preventing this type of behavior.

When the story broke, then Secretary of Defense Dick Cheney asked for and received the resignation of the Secretary of the Navy (the Navy’s CEO), Lawrence Garrett III. Several senior officers were relieved of their responsibility and punished for the cover-up. The Navy embarked upon an education program to prevent future occurrences of sexual harassment.

It’s time for a refresher course.

There will always be breaches of acceptable conduct and there will always be cover-ups. The larger question is how will the leadership of these important institutions respond?

The Catholic Church covered up sexual abuse of children for decades, a breach that I still find the most egregious of any in my lifetime. Richard Nixon and his close advisors engaged in a cover-up of the Watergate burglary. The cover-up was worse than the crime.

So, it will be interesting to watch the events of the next few weeks. How will the LEADERS of these important institutions respond as the facts unfold? What will the current Secretaries of the Army and Navy do? How about the head of the Secret Service? How will they respond?

Will they act like true LEADERS? Or, will they act like Claude Rains?

WHO WILL LEAD?

Precious Dollars

My last post (One Issue and One Issue Only) stimulated a variety of responses. Many fell into the “Right On!” category; others were more circumspect. Over lunch, one of my readers commented that “every dollar in the federal budget is precious to someone”. That’s a great insight. It explains why pollsters tell us that the vast majority of Americans agree we should balance the budget but few agree that we should cut something that affects them – Social Security or the home mortgage deduction, for example.


Many self-described liberals reacted negatively though none challenged the economics. One described the post as “more blah, blah, blah”. Others merely asserted that I “must be for” raising taxes, eliminating the Bush tax cuts or reducing defense spending. I was a bit taken by surprise as I didn’t intend the post as a political statement but rather a brief on economics. I believe the economics are important because we are sitting on a ticking time bomb.

Sometime late this year or early next, Congress will have to approve another increase in the debt ceiling. Almost simultaneously, the Bush tax cuts will expire – not just those on the rich but the middle class as well. The last debt ceiling deal requires that mandatory cuts be made across the board unless a new deal can be made. So, we will have a sharp increase in taxes accompanied be a dramatic reduction in government spending. In the context of today’s political environment, it’s hard to envision a solution.

If you’re into shock therapy, you may think this will be a good thing for us. However, the abrupt cessation of government deficits is likely to be a shock to the economy, leading to massive unemployment and stalled growth.

It’s easy to buy into the theory that one cannot get out of debt by taking on more debt. It sounds logical. But, an economic collapse will likely result from putting it into practice. We have seen evidence of this in Greece, Ireland and Spain.

It is better to come up with a plan for sustainability that adjusts the current course over time. The President recently submitted his idea to Congress in the form of a budget for fiscal 2013. It was rejected by, not only Republicans, but also every Democrat in the House of Representatives – a vote of 414 to 0.

There are other approaches. Congressman Paul Ryan (R-WI) has put forth his Roadmap for America (see, Every Dogma Has Its Day). It was the basis for his 2013 budget proposal. Now the Chairman of the House Budget Committee, Ryan’s budget proposal has lost some of the bi-partisan approach evident in the original Roadmap.

There is much to criticize in the Ryan budget plan. MIT's Simon Johnson points out that, while Ryan would make substantial cuts to government expenditures, he does little to “stabilize revenues”. He also points out that the Ryan plan is regressive. That is, it cuts substantially from programs that affect the poor. All of that said Ryan does get us on the path to fiscal sustainability according to the bi-partisan Congressional Budget Office.

A more bi-partisan approach was taken by the President’s own commission. The National Commission on Fiscal Responsibility and Reform (often called Simpson-Bowles) first met in April of 2010. Their charter was, according to the President, to identify “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”.

Alan Simpson

Recently, the commission’s co-chairs, Alan Simpson (former Republican Senator) and Erskine Bowles (former Clinton chief of staff), were interviewed by Charlie Rose. Simpson joked that his wife noted the “lilt” in his step of late. She said it was because he had finally pissed off everyone in America instead of just a few.

He cited cuts that his bi-partisan commission recommended to student loans, Medicare, defense spending, farm subsidies and veterans benefits. There were increases in gas taxes and the elimination of tax deductions that would affect the middle class.

The plan was criticized by those on the left (Paul Krugman, Nancy Pelosi) who don’t want cuts to government programs and the right (Defense contractors, the American Enterprise Institute) who don’t want to see taxes increased.

Those who occupy the middle of the political spectrum (including me, see "Why I Like Ike") were more friendly, viewing it as a starting point for compromise (Third Way, Concord Coalition).

Personally, I remember being hopeful when the commission’s report was released. I thought perhaps the President would take up the banner and fight the good fight as he had promised – the “grand bargain” he has called it. I wrote about it in a blog post the morning of last year’s State of the Union address (see "Adam Smith: Communitarian").

Everyone will hate getting to a balanced budget. Simpson was only half joking when he talked about pissing off everyone one in America. But, perhaps that is the only way this will work – if everyone makes a sacrifice.

So, how do we get out of this mess? There is only one answer in my view: presidential LEADERSHIP.

Apologists for our current President will point out that the Republican opposition won’t pass anything the President proposes. But, didn’t both Clinton and Reagan have their way with a Congresses of the opposing party? And, didn’t George W. Bush get anything he wanted from a Democratic Congress – the Iraq War, the Patriot Act, the tax cuts?

Has our current President abandoned the hope of his “grand bargain”? Is he capable of leading the nation to a more sustainable course? Is it time for a change?

WHO WILL LEAD?

One Issue and Only One Issue

I’m a boring guy. While most folks like to argue politics from their heart – women’s contraception, gay marriage, the war(s) – I like to discuss data and charts. What can you expect? I studied economics in college despite its label as the dismal science. BORING… right?

Now, if I haven’t lost you already, I’ll tell you that – boring or not – I am zealous about the economy this year. Why am I so zealous? Because we are headed for disaster unless someone changes the paradigm in Washington.

Here’s where we are headed. Unless we get our deficits under control, all of the federal government’s revenue – that’s all the taxes we pay – will go toward interest payments on the debt within 10 years. Nothing left for Social Security or Defense or whatever your favorite program is. A simple way to think about it is to look at how much money the federal government spends per household compared to the income of the average household. Here’s a chart from a White House publication on the budget:

Think about the impact of a household making $50K per year having additional debt of $30K on top of their mortgage, credit card debt, student loans and whatever. And, that’s $30K more each and every year!

But, you’ve heard all this before. You listen to cable TV, right? You’ve heard all the pundits. What am I saying that isn’t just more of the same? Well, here goes…

There are four schools of thought in economics: Classical (Irving Fisher), Keynesian (John Maynard Keynes), Austrian (Ludwig von Mises, Freidrich Hayek) and Monetarist (Milton Friedman). If I were to expand on each, this would go on for pages and pages. My goal here is to make it simple. So, where is the central truth that cuts across all four schools of thought? Here’s my try at it:

The most common measure of our economy, Gross Domestic Product (GDP), is the sum of consumer spending, investment, government spending less the trade deficit (or plus the surplus in the case of Germany or China). Simple representation:

GDP = C + I + G – Net Imports

The “C”, consumer spending, is the lion’s share of the economy (about 70%) so, in a recession, Keynesians focus on stimulating demand. Recently, that has taken the form of programs like “Cash for Clunkers” which provided a short term boost to consumers who needed to buy a car. The key is that it is short term. The data suggest that a stimulative boost today results in an equal subtraction from GDP in about three years. That might work in a short term cyclical recession but it doesn’t in a long term credit crisis like the one we are recovering from right now. It is also important to note that Keynes’ assumes that any short term stimulus that would generate a deficit would be repaid once the economy was restored to growth. With the exception of Clinton, it seems that all Presidents for the last 40 years were absent on the day they taught that lesson in Econ 101.

I’ll come back to the “I” (Investment) in a moment. Let’s skip to the “G” (Government). When the government spends money, there is no “Multiplier Effect”. In other words, a dollar spent by the government results a dollar of GDP. Whereas, a dollar spent by a business results in $2 to $3 of GDP. Why? Because businesses only make investments that will generate a return on investment. Governments are not that picky. For validation, you might want to read what Obama’s former chief economist, Christina Romer, wrote about it by clicking HERE.

Okay, back to the “I” in our formula, Investment. Investment equals savings, plain and simple. Whatever people and companies don’t spend equals investment. Sounds simple enough. But, the bigger question is where does that money go? If it’s your money, you might put it into a mutual fund or buy stocks and bonds. If it’s a company’s money, they might invest in equipment to make their businesses more efficient. Either way, investment “multiplies” in GDP terms. Another way to think about is that the only element of the GDP formula that creates jobs is the “I” – investment.

However, if the government takes away the excess capital – our savings -- in the form of taxes, there is no multiplication. So, when you hear conservatives talk about government spending “crowding out” private investment, that’s what they mean.

Okay, so what? You might ask.

That brings me to the deficit. Before I start, I should tell you that I am not fanatic about a balanced budget. In fact, I don’t think we need to balance the budget – so long as the annual deficit is less than the annual growth in GDP in percentage terms. Bear with me while I provide an example.

Suppose you own a business that generates $1 Million per year in profit. Now, suppose you borrow $10 Million dollars at 5% annual interest. That’s $500K in annual interest payments, right? No problem unless your income drops below $500K per year. And, if you invest the $10 Million wisely, you might grow your business and increase your income and create a few jobs.

Now, let’s compare that to the federal government. Our annual GDP growth is about 2% (optimistically). Yet, our annual deficit is about 8% of GDP. So, we need to fund that deficit of 8% or about $1.3 Trillion. The government does this by selling bonds (only if the Congress approves raising the debt limit). And, who are the buyers? Well, if we assume that everyone who exports to us uses the dollars received to buy US Treasury bonds, that would cover about a third of it. And, the rest? Well, the buyers of late have been investors afraid of the consequences of owning Euro bonds. Europe is a few years ahead of us and nearer to collapse.

But, the fall back, if we can’t find enough investors, is the Federal Reserve Bank. What has been referred to as Quantitative Easing or QE, is the creation of money by the Fed to buy US Treasuries. This matters a lot. When the Fed increases the supply of dollars, the value of the dollar goes down. And, the price of every commodity and product produced overseas – food, oil, manufactured goods – goes up.

A lot of people like to criticize the Fed for taking these actions; however, it’s worth remembering that the Fed couldn’t buy US Treasuries if they weren’t for sale. In other words, if Congress and the President would balance the budget, the Fed’s actions would be unnecessary.

So, what is the impact of the national debt rising as depicted on this chart? Bear in mind that it’s going up at a rate of more than $1 Trillion per year.

Lower growth, higher inflation, less employment!

The four schools of economics differ on many factors or behavioral models. But, all of them would agree on these basic principles.

So, there you have it. My simplified version of the economics of our government. Government spending does not generate growth. And, deficits prevent job creation and are at the root of inflation. I could make it more complex; but, why bother?

Now, back to my zeal. If you buy into my dissertation as expressed here, you must be focused on the presidential candidate who offers the best chance of wrestling the deficit and national debt to the ground. There are no happy solutions to this problem. Any solution will cause us all to object to something.

So, the question isn’t whether we should do something about it. The question is WHO WILL LEAD?

Let Israeli do it: Not So Fast…

Iranian Hovercraft

There’s been lots of talk about going to war with Iran lately. The recent state visit of Israel’s Prime Minister made headlines and the Republican presidential candidates had to make tough guy statements to avoid being labeled wimps.


But, aren’t we all a little war weary? It was outgoing Defense Secretary Robert Gates who last year said, “Any future defense secretary who advises the president to send a big American land army into Asia, or into the Middle East or Africa should ‘have his head examined,’ as Gen. [Douglas] MacArthur so delicately put it”. (MacArthur’s advice was provided to JFK at the onset of the American military build-up in Vietnam.)

Maybe that’s why many American’s think the easy way to eliminate the Iranian nuclear threat is let Israel take them out through an air or missile attack. If that’s the way to go, it won’t be easy. US involvement will be an essential part of the Israeli plan.

There’s been news coverage describing the number of countries whose airspace Israel would have to violate to successfully attack Iran. Less covered is the degree of US participation that would be necessary.

Aside from the permission the US would have to provide to allow the Israelis to fly over Iraq (a problem in and of itself), there is the challenge of the dealing with the Iranian Navy in the Persian Gulf. Not much of a challenge, you say? Well, you would be correct. However, that doesn’t mean that we don’t have to deal with it.

Any plan to mount an attack on Iran would have to include pre-emptive strikes on Iran’s Navy or risk disruption of oil tanker traffic.

It was with great fanfare that the US Fifth Fleet sent a carrier group through the Strait of Hormuz into the gulf the last week of December. It was done on the heels of Iran's sabre rattling over how they would use their naval base in the strait to close shipping lanes in the event of an attack by Israel or the US.

But, what would an attack by Iran’s navy look like. It wouldn’t be a traditional naval battle with large ships lobbing shells at one another or using fighter jets to take out the enemy. It’s Iran’s asymmetrical attack capability we should worry about. In military parlance, asymmetrical means they will use small boats and submarines to covertly attack our Navy ships or oil tankers. Much as a small rubber raft loaded with a bomb blew a hole in the side of the USS Cole in 2000, they would seek to use small victories for propaganda effect with a view toward shutting down the shipping lanes that carry about 30% of the world’s oil cargo to market.

So, before Israel could mount an air or missile strike on Iran’s nuclear facilities, the US Navy would have to take out as many of the small bases that house small craft as possible.

The US sanction regime on financial transactions with Iran is starting to take hold. Once Iran cannot get its oil to market, they have little to lose financially by shutting down the strait. However, an attack on the US Navy would give us an excuse to attack their Navy. So, I don’t think it is likely unless they are provoked. No, the most likely cause of military conflict would be the desire on the part of the Israeli’s to take out Iran’s nukes.

Vice Admiral Mark Fox

Here’s what Vice Admiral Mark Fox (USNA ’78), the man in charge of the US Navy within the Central Command (COMUSNAVCENT in military parlance), had to say about the prospect of this war. “The Iranians’ ability to impose high costs on their enemies by exploiting Iran’s imposing geography bear careful consideration today by potential opponents.” He was talking about Iran’s 1300 mile coast line on the Persian Gulf which is littered with small coves that hide small boats and cruise missiles.

Are we ready for a war with Iran? Setting aside the incredible financial and human cost of the wars winding down in Iraq and Afghanistan, it is noteworthy that Iran is three times the size of Iraq and has five times the population.

Are we ready to take them on? Maybe we should ask Robert Gates.

WHO WILL LEAD?