Bank Pay Cuts

When a company takes in major investors’ money, it usually comes with strings attached – a board seat, special control rights, and, often, a defined role on compensation committees.  This is especially true when the company has no better choices available than to take the money, along with the strings.

It is disingenuous for the Wall Street Journal to decry this when the investor happens to be the Treasury or the Fed.  Bloomberg got it right, quoting a Delaware investors’ lawyer, saying “…it was inevitable, and it was their own damn fault.”

This is not creeping socialism, but tough, hard, unforgiving capitalism coming back to bite its most aggressive proponents and successful beneficiaries.

Taxpayers to banks: If you wany my money to run your bank, you’ve got to agree to my conditions.  If you don’t like it, get your money elsewhere.  If you can’t find the money, and you’re insolvent, well, we’ve got the FDIC to take care of you.  Take your pick.

Health Care 2.0

Hillary Clinton snatched defeat from the jaws of victory in her bungled attempt to reform heath care by over-reaching what was politically possible. She failed to take advantage of the enormous momentum she achieved. Conservatives were falling all over each other to enact a major insurance reform, lest their failure to accept meaningful reform would be their undoing. She should have taken the deal.

This time around the battle is shaping up rather much the same, with a difference. There’s a pragmatist at the helm who should not let his avant-garde control the outcome. Look for a climb-down from the White House to accept a needed restructuring of private insurance, handing business and a smattering of Republicans a compromise that looks a lot better than what they’ll get if the dig in for a fight.

Here are the necessary elements:

1. Non-Discrimination requirement, that is, like grocery stores, taxi services, or phone companies, insurers should be obligated offer each and every health plan to anyone who will take it, at the same price to all for that particular plan, regardless of such factors as pre-existing conditions, age, race, gender, genetic markers, etc;
2. Mandatory Minimum Insurance requirement, that is, each citizen should be required to carry a health plan that meets certain minimum requirements, such as covering medical emergencies;
3. Free Market requirement, that is, employers may continue to offer a short menu of health plans as they do now, but each employee should have the right to take any competitive health plan they want, with the employer contribution redirected for that purpose, and the employee capturing 100% of the savings or paying 100% of the extra cost;
4. Subsidy for poor people to help them pay for mandatory minimum health insurance. It may be necessary to create an “assigned risk” pool and a government-set premium for the minimum insurance, or a public plan to provide the mandatory minimum insurance where necessary.

Items 1 and 2 combine to prevent adverse selection on either side, and prevent individuals from externalizing their health risk to others. Item 3 enables consumer choice market forces to drive prices down and quality up in a way that the current employer choice scheme cannot. Item 4 is not that different from the “free” care poor people get now at the emergency room, so the cost to the public would be the same or better, and more controllable.

These are the necessary minimums. Democrats would be well advised to take this much now while Republicans are on the ropes, and Republicans would be well advised to do what it takes to prevent the inevitable loss of business support and ultimate socialization of the system if they fail to accept solid, meaningful reform.

The Marginal Utility of More

Economists like to measure the health of an economy by looking at growth.  But is there a point where we will simply have enough stuff, and the real human utility of additional industrial production will be zero?  Perhaps the current economic crisis a reflection, in part, of a world in which demand for more goods and services has faltered for the best of reasons – many people simply have enough.   The job losses and foreclosures of today may be an unintended by-product of an economic system that depends on continuous growth for stability, and has not yet adapted to finite demand.

Some economists are preparing Americans for a reset – a step back to lower asset values, perhaps a lower standard of living, and then a return to more moderate growth rates, fueled less vigorously by excessive leverage.  Perhaps instead they should be preparing for an economic system that will be healthy and stable as economic growth approaches a natural limit.

An Idea Just Crazy Enough to Work

If the intent of Israel’s periodic attacks against the Palestinians is to deter or prevent future attacks against Israel, the policy has not been particularly effective.

Israel should adopt a new publically declared, predictable, and proportionate use of force in response to Palestinian attacks.  Israel should calculate the quantity of ordinance used in new Palestinian attacks against Israel, and launch its own attacks using ordinance only up to a limit of 80% of the ordinance expended by the Palestinians.  An objective measure, such as kilograms of TNT-equivalent power, should be used.  The figures should be updated and publically announced by Israel following each attack by either side.

A policy of responding to attacks with counter-attacks that are potent, but objectively less severe, may be a more effective deterrent than alternating periods of cease-fire and excessive retaliation, and both sides may find a way to spiral down the cycle of violence.

Green is Not Enough

Cash and internal restructuring are not enough to save GM.  What will it take?

First, someone (other than management) must have the legal authority to unilaterally write down debt and re-write labor contracts.  A bankruptcy court is the usual scheme, but the atmospherics around that scare everyone.  Congress should empower an oversight board of bankruptcy, turn-around and non-detroit auto experts to do what a bankruptcy judge can do.

Second, higher gas prices are a must.  GM will be under political pressure to build more Green cars than the market requests.  This can only succeed if the cost of gasoline is artificially kept above a certain floor.  Without higher gas prices, consumer demand will rapidly shift away from Green, and GM will be left holding the bag.  We need a gradually rising floor tax on carbon-based motor fuels.  Start at $2/gallon today, and rise towards $4 in 6 years.  That will move Detroit faster than any C.A.F.E. standard.

Recall, too, that Saudia Arabia is not going to sit still, either, while we attempt to break their monopoly.  Look for a flood of cheap oil.  It’s already begun.  In the 1970’s, the Saudis successfully scuttled a drive towards energy independence, and they’ll do so again, unless we make it impossible with a tax that puts non-oil energy at a competitive advantage.

The Credit Card and the Car Industry

If we’re going to continue to buy Japanese cars, Arabian oil, Chinese goods, and so on, then we must have something to sell, too.  We have a national ‘credit card’ with the highest credit limit of any nation in the history of the world, but for all that, it is also a finite credit limit.  To pay the bill, we must export.

Pat Buchanan is right to recognize this problem, although his prescription, pure protectionism, is outdated and won’t work. He is also correct in his observation that the world will be buying literally billions of automobiles in the next decades.  The Economist estimates that by 2050 the world’s automobile fleet will grow from 700 million cars today to over 3 billion, with China alone driving more cars than the entire world fleet today.  We must have a substantial piece of this market, and that is why the bailout question is so vitally important.

Think U.S. automakers don’t stand a chance?  Think again.  A record 65% of GM’s sales in the first quarter of this year were outside America.

Barack Obama put it succinctly when he said the stakeholders in the auto industry must devise together a plan to create a sustainable auto industry.  If they will do it, that’s an investment worth making.

What Would Saudi Arabia Do?

What would Saudi Arabia do if its largest customer got tired of spending endless blood and treasure to buy and secure foreign oil, in what T. Boone Pickens calls “the largest transfer of wealth in the history of mankind”?  What would Saudi Arabia do if the price for its oil was so high that it would be cheaper for its largest customer to switch – i.e. to invest in developing its own supplies of nuclear, solar, and wind?

What they would do is exactly what they have just done – lower the price to keep that from happening.  Oil producers have a lock on the market simply because the consumers have been too short sighted to stop it.  And the solution for us is so very simple.  A one-time transition to an energy cost of about $60/barrel will enable all the capital and government research spending needed to transform our energy economy.  We need a floor tax, and we need the political courage to stay with the program, even when Saudi Arabia tries to lull us to sleep again with another flood of cheap oil.

The Shock Doctrine

Naomi Klein’s The Shock Doctrine is required reading if you want to understand the failure of the neo-cons to deliver prosperity.  She argues persuasively that economic crises have been used, repeatedly and effectively, to short-circuit emerging democracies and disastrously divert the wealth of nations, in such extreme measure that these societies have become needlessly impoverished and hopelessly in debt.  Sound familiar?

I think it’s safe to say that many of the Chicago School neo-cons who brought these economic policies to the developing world had envisioned far more beneficial outcomes, had not understood that their policies could only be implemented by brutal and criminal means, and have yet come to grips with their failure.  Read past the polemic radical tone.  There are valuable lessons to be learned here.

Oil Prices

Too high, too low, and too volatile.

Why too high?  All the yammer about supply and demand missed the fundamental: demand did indeed drive the price, but it was not demand for oil per se, only demand for oil futures from those who never intended to use the oil.  Too much cash, much of it leveraged, chasing oil futures.  Then the credit crunch, de-leveraging all around, and speculators pull their cash out of the futures market.  Thunk.  Oil returns to a price driven by true demand.

Why too low?  If we’re ever going to get off of foreign oil (a must for continued prosperity), we need a floor on oil prices.  Investors in domestic oil, wind, solar, nuclear, etc. cannot justify these projects without a reasonable assurance of a market at the end – and that means an oil price at or about $60.  Newsweek was correct in calling for a penny-a-month increase in gas taxes (same on non-motor users such as power plants), but the tax should automatically adjust down if oil rises above $60.  Floor tax.

Why too volatile?  Imagine trying to run an airline when one of your biggest costs can’t be predicted.  How many planes do you lease?  How many employees do you hire?  Imagine trying to design cars two years out – first everyone wants SUVs, then you can’t give them away, then the price of gasoline falls to half in a few weeks.  Detroit has enough problems of its own creation.  We don’t need to make it any more difficult.  Policy fix?  See above.  Floor tax.  Keep oil at $60 or more.  Use the revenue for domestic energy R&D.

Motor City Blues – Shared Pain Shared Gain

If there is a bailout, it should like a whole lot like a planned bankruptcy.  What’s that look like?

Stockholders – wiped out.
Creditors – fully at risk, substantially written down, and in control.  Including Uncle Sam, who will be last in, and should be first out.
Management - the creditors get to decide.  Largely out.
Board – the creditors pick a new board.
Employees – contracts void, wages down, numbers down.  Toyota’s U.S. plants will be the benchmark.
Suppliers – ordered to continue to supply.

Good for GM and good for the country.

Letter from America

To my Dear Friends Overseas,

 

There are times when I am especially moved and grateful to be an American, and this election day was certainly one of those times.  Many of you have shared your congratulations and good wishes.  Thank you for that.  As one of you observed several months ago, part of the wonder of America is its ability to adapt, to change, and to correct mistakes.  After a dark period hardly exemplifying our best qualities, I hope we have begun to do that now.

 

The feeling of joy and hope here is palpable, on the streets, in the way people looked at each other yesterday knowing we have accomplished a great thing, and although that may be a function of the views and politics here in the … section of the country, it is perhaps most surprising to see that even among the ranks of conservatives and supporters of John McCain, many of them had tears in their eyes as they spoke on television about the historic event that has happened here, and about the remarkable leadership qualities of this individual.  Secretary of State Condoleezza Rice spoke emotionally of her pride.  Even President Bush seemed moved as he spoke of the Obama family stepping through the doors into the White House on January 20.  I will be [decade] years old in a few days, and I can tell you that, even during the dark days of Watergate and Vietnam, both of which I remember very well, when the fabric of our democracy seemed close to tearing by political division, I have never seen an election that moved so many to vote, and so many on both sides to tears.  Although only time will tell, I hope we have chosen a good leader, and that he and our nation will live up to our best qualities and ideals.  Thank you again for your thoughts and kind words.

 

Some of what we have seen and heard:

 

From the New York Times (http://www.nytimes.com/2008/11/05/us/politics/05global.html):

 

GAZA — From far away, this is how it looks: There is a country out there where tens of millions of white Christians, voting freely, select as their leader a black man of modest origin, the son of a Muslim. There is a place on Earth — call it America — where such a thing happens.

 

Even where the United States is held in special contempt, like here in this benighted Palestinian coastal strip, the “glorious epic of Barack Obama,” as the leftist French editor Jean Daniel calls it, makes America — the idea as much as the actual place — stand again, perhaps only fleetingly, for limitless possibility.

 

“It allows us all to dream a little,” said Oswaldo Calvo, 58, a Venezuelan political activist in Caracas, in a comment echoed to correspondents of The New York Times on four continents in the days leading up to the election.

 

Tristram Hunt, a British historian, put it this way: Mr. Obama “brings the narrative that everyone wants to return to — that America is the land of extraordinary opportunity and possibility, where miracles happen.”

 

But wonder is almost overwhelmed by relief. Mr. Obama’s election offers most non-Americans a sense that the imperial power capable of doing such good and such harm — a country that, they complain, preached justice but tortured its captives, launched a disastrous war in Iraq, turned its back on the environment and greedily dragged the world into economic chaos — saw the errors of its ways over the past eight years and shifted course.

….

 

Former Secretary of State Colin Powell “wept at Obama victory”: http://www.cnn.com/video/#/video/politics/2008/11/05/colin.powell.reaction.cnn