The General vs. The President by H.W. Brands : One book Mr. Trump ought to Read

One can almost hear President Trump’s first speech on foreign policy, “The principle purpose of the foreign policy of the United States is to maintain the liberty of our people. Its purpose is not to reform the entire world or spread sweetness and light and economic prosperity to peoples who have lived and worked out their own salvation for centuries.” In other words, America FIRST!

Almost, except that the quoted lines are not the words of Donald Trump. Rather, they come from a speech given  in January 1951 by Senator Robert Taft of Ohio, an isolationist of a prior period.

History is important and never more so than in the formulation of foreign policy. Robert Samuelson, a Washington Post financial columnist writes, “Ever since World War II, with some lapses, American leaders have embraced the notion that trade could foster prosperity and promote democratic societies.” Critically important is his observation that, “Trade was not just about economics; it was also about geopolitics.”

While Mr. Trump certainly understands business and corporate contracting he does not have, as Senator Jack Reed recently pointed out, “a wealth of experience in this (foreign policy) arena.” Samuelson writes that, “the danger of economic nationalism is that it deludes us into thinking that our problems mainly originate abroad and can be fixed by tougher trade policies.” But, those tougher trade policies depending upon the extent to which they go will have foreign policy implications as well.

Mr. Trump clearly telegraphed his Presidential trade policy several days ago in Cincinnati when he said, “Buy American and hire American.” In a  water bill before Congress language has been inserted requiring the iron and steel to be American made. Paul Ryan, “and others have begun raising objections,” according to the Wall Street Journal, “saying the requirement would pick winners and losers among U.S. companies.”

While that is true I believe it is far more important to understand the international implications that are equally far reaching. Mr. Trump has not even been sworn in yet but his positions with regard to Mexico, China and Russia are already having far reaching effects.

Even as Mr. Trump seeks to throw out the Trans Pacific Partnership (TPP) the Chinese are moving ahead. According to the Financial Times, “Chinese president Xi Jinping vowed … to open the door even wider to foreign business and play an even greater role in the process of globalization as Beijing moved to take advantage of Donald Trump’s election and fears that he may herald a new era of US disengagement from Asia.”

Henry Kissinger in the current issue of The Atlantic says, “that for the first time since the end of the second World War, the future relationship of America to the world is not fully settled.”

I think he is being kind. Mr. Trump the candidate was a trade guy, not a foreign policy guy. We don’t even have a Secretary of State, nor has the President elect been sworn in and we are already serving notice to the Chinese that things are going to be  more belligerent between our two nations. After all, America FIRST. But absent a well thought out strategy that understands the inherent connection between trade, foreign policy and peace, President Trump risks taking us down a road that may not end as he might hope.

Mr. Kissinger writes, “The United States and China will be the world’s most consequential countries….we ought to try to develop an understanding of how joint …action could stabilize the world. At a minimum, we should agree to limit our disagreements; more sophisticatedly, we should identify projects we can undertake together.

Clearly President elect Trump does not agree with this. Indeed he seeks to antagonize Mainland China with his early contacts with Taiwan. As he seeks to throw away the TPP, “because it “was designed for China to come in, as they always do, through the back door,” instead they are coming through the front door. “China will not shut the door to the outside world but will open it even wider, Mr Xi told business leaders.”(Financial Times)

The Chinese believe that by 2049, the 100th anniversary of the Communist state, they will be, according to Mr. Kissinger, “the equal of any other country in the …world and …able to insist on absolute material and strategic equality, including with America.” Their plan, despite their saber rattling building of islands in the South China Sea isn’t to accomplish this through war. Mr. Kissinger again, “President Xi (understands) that confrontation is too dangerous. A conflict with modern weapons leaves no winners.” They plan to achieve this econometrically.

The Chinese have a foreign relations plan that carefully integrates trade policy. The first part sounds much like Mr. Trump, “Asia for the Asians, but the second is the exact opposite of Mr. Trump’s approach to the world, “turning adversaries into partners.” This from Mr. Kissinger as well who notes that, “when you talk to Chinese strategists they talk about process rather than ad hoc issues.

They have focused on education for nearly three decades and graduate more individuals with advanced degrees than the rest of the Western world combined. They are our largest trade partner holding the greatest amount of U.S. dollars of any nation. You can see in these simple examples how their strategy fits into their focus and execution.

So, as Mr. Trump throws away the TPP, China is according to the Financial Times, “moving quickly to take a leadership role that many see being abdicated by the US as the advocate of free trade and open economies in the fast-growing Asia-Pacific.”

This cannot have a long-term benefit for the United States. Indeed,  the Prime Minister of New Zealand, a long time ally of America, “said he would work to try and convince Mr Trump of the value of the TPP and the importance of US engagement in Asia. But he also warned that his country and others would not wait forever. There needs to be a realization [in Washington],” that, “we like the US being in the region. But if the US is not there that void needs to be filled, and it will be filled by China.” Nor is it simply New Zealand saying that. The Prime Minister of Japan is also quoted in Politico as saying, “the China-dominated deal will likely become the preferred pact if Trump abandons the TPP as he’s promised.”

These are our allies and we are handing them over to the Chinese not because they don’t support us but because President elect Trump is acting in an ad hoc manner rather than with a long term vision that incorporates both trade and foreign policy.

The exact same thing is happening in Europe. Mr. Trump talks about abandoning NATO if other nations don’t foot their fair share of the bill and at the same time complements Mr. Putin as a better leader than President Obama and suggesting that, “if the United States got along with Russia, it wouldn’t so bad.”

In 1951, Mr. Taft said, “I do not see any conclusive evidence that they (Russia) expect to start a war with the United States and certainly I see no reason for a general panic on the assumption that they will do so.”

Clearly Mr. Trump believes that by making friends with Mr. Putin, America will be first. But, I suggest that, at best, this is the height of naiveté. The Heritage Foundation, a conservative think tank writes that, “Putin is seeking to recreate Russian national strength after years of what he believes to have been stagnation and decay.” Russia seeks to expand its, “sphere of influence in the “near abroad” and create a common market in the countries of the former Soviet Union.”

A new policy, since 2000, involves combining economics and security by having Russian companies purchasing the vital economic infrastructure (power grids; power generators; oil and gas pipelines) of countries in the “near abroad.” In other words, just like China, Russia, despite their actions in the Ukraine, would like to win economically if they can.

The Heritage Foundation goes on to say, “the economic incentive is critically important. Leaders of the Russian business community who are already involved in energy exports and have floated ADRs in the US believe that Russia’s future lies in exports to the West (particularly Europe) and in raising Western capital …. This means that this politically influential community will encourage Putin’s outreach to the European Union. Given the strong political, economic and business interests of Europeans-particularly in Germany-to cooperate with Russia, we can expect closer ties in the future.”

“Putin’s foreign policy is (designed) to maximize his ability to maneuver and keep opponents from coalescing against him. This means that Putin is neither pro-American nor anti-American. He will act on his perception of national interest….” In other words, Russia First!

“His global strategy appears to be to develop a multipolar set of relations with China, Middle Eastern states and the European Union to maximize Russia’s international influence, prestige and leverage-not to mention its finances (which explains Russia’s role in proliferation and its relations with some rogue states). Very often this will put Russia at odds with the United States. Moreover, there is a strong psychological desire to preserve the perception of Russia as a great power. Hence the need to appear independent from and equal to the United States, particularly in strategic matters.”

So, if the Russians think very much like the Chinese when it comes to power and prestige why wouldn’t our trade and foreign policy positions be relatively the same with regard to both countries? The answer to that is that Mr. Trump believes that the Chinese and Mexicans have taken all of our manufacturing jobs. Hence, we should treat them differently.

But Mr. Samuelson suggests something very different. “The often overlooked truth is that the U.S. economy, despite much rhetoric to the contrary, is less globalized than virtually all other advanced countries. True, we imported nearly $2.8 trillion last year but we also exported almost $2.3 trillion.

Mr. Trump argues that we’re going to get those manufacturing jobs back but that’s highly unlikely. First of all we’re very close to full employment now as seen in the chart below courtesy of the Wall Street Journal.

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Second, as Mr. Samuelson points out. along with numerous others, automation has already played a huge role in the loss of jobs and will be more influential going forward. Third, it has been widely reported that many manufacturing jobs have already left China for other Asian nations where the cost of labor is even lower. Are we really going to bring those jobs back?

A long long time ago my mentor explained to me that I was the epitome of, “ready, fire, aim!” He suggested that to be successful I needed to learn to get the order right. It took me a while but I came to learn that strategy comes first because only then can you have focus and execution.

I fear that when it comes to foreign affairs Mr. Trump is still of the ready, fire, aim approach. Unfortunately, the rest of the world won’t wait for him to learn and because things move so fast in our world innumerable mistakes and unintended consequences are likely to occur and they will not be in America’s best interests.

I leave you with this story:

After having defied everyone in the US command structure to include the President, General Douglas MacArthur had nearly taken all of Korea. Suddenly on October 26, 1950 his forces were ambushed by, “fresh, well organized and well trained units, some of which were Chinese communist forces.” On November 4, after studying the issue, the General wrote the Joint Chiefs that, “while it is a distinct possibility (of Chinese involvement with the full potential of its military forces) and many foreign experts predict such action … there should be no rush to judgment. I believe that a final appraisement should await a more complete accumulation of military facts.”

Just two days later he wrote, “men and material in large forces are pouring across all bridges….This movement … threatens the ultimate destruction of the forces under my command.”

In the real world it all happens in the blink of an eye. Thanks to General Ridgeway who saved the day for MacArthur we lucked out. But for President Trump to succeed he needs a coherent plan that has been vetted by others who don’t necessarily agree with him before he fires his next tweet or phone call.

That’s putting America FIRST.

 

 

 

 

 

 

 

 

 

 

 

Paul Krugman & Donald Trump Testing the limits of Debt

Two of the largest components of President elect Trump’s economic plan are to lower tax rates and to spend heavily on the Nation’s infrastructure. Most analysts believe that absent significant GDP growth or material reductions in entitlement these initiatives are likely to cause a significant increase in America’s debt structure.

Paul Krugman, a Nobel prize winning economist, appears to be in complete agreement with the President elect. Indeed, it might be said that Mr. Trump, the candidate, may have taken a page right out of Mr. Krugman’s playbook.

To begin with let’s take a look at how the U.S. compares to the rest of the world in terms of its GDP to debt ratio to as of October 2015. (data source: howmuch.net)

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America already has one of the highest debt ratios in the world. In fact, courtesy of Statista.com data shown below we find that in 2016 we are ranked tied for 9th among the world’s largest debtor nations.

It may be instructive to look at some of the Nations with a larger debt structures to see how they are fairing. That is, did greater debt result in a faster growing economy?

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Arguably, with the exception of Ireland, it has not. Japan as the largest debtor nation continues to experience economic difficulties, as the Wall Street Journal reports, even though they have had, “decades of blowout spending on airports, roads and bridges….”

We all know the story of Greece which is not one of success.Nor is Italy which the New York Times reports that, “Nearly one-fifth of all loans in the Italian banking system are classified as troubled …. That represents roughly 40 percent of all the bad loans within the countries sharing the euro.” I believe the point to be had here is that government spending can only go so far in creating economic health.

Ireland does stand out as having materially reduced their debt to GDP ratio but they did it through a combination of austerity and as CNBC reported in July, “data that can be totally bogus, and in this case they are. Ireland’s Central Statistics Office told the world this week that the country’s economy grew 26 percent in 2015,” which drove down the GDP ratio but, neither their production rates, income nor productivity grew at anywhere near those levels. The sole reason their ratio fell was as a result of tax inversions which artificially raised their GDP rate.

Thus, we really have no model of a nation carrying more debt to GDP than we are presently and managing to grow their economy in a healthy manner. The heretofore-traditional Republican Party position has been that we must control our deficit spending because it does not lead to economic prosperity.

But a friend of mine pointed out Krugman’s considerably different viewpoint on the subject. In August 2015 writing in the New York Times specifically about the matter of debt he said, “…There’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt…. a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.”

Certainly President elect Trump believes that. But, as with all issues, there always is the other side of the coin and a Forbes columnist writing at the time about Krugman’s article said, “Fiscal stimulus is a very useful thing to be able to do in the bad times, but we also want to do more than a bit of fiscal austerity in the good times….The net effect being that we should be in a roughly stable position over the business cycle with regards to the national debt.”

The bottom line being that while  government spending can be properly used to aid an ailing economy at some point it is the private sector that must drive the economy to enable a proper balancing of growth and debt.

Mr. Trump is betting that reduced corporate taxes and less regulation will free American businesses to reinvest and grow at home thereby creating a virtuous cycle of invention and jobs. All of us must truly hope that he is right because if it turns out otherwise our economic condition may be materially worsened.

To understand that is to focus on the plight of the Japanese. Italy, after all has not been a bastion of creativity and innovation since the Renaissance. Japan, however, was an industrial superpower. It wasn’t that long ago that their corporate success was seen as driving the world’s economy. What happened?

In the early 1990s Japan’s economic bubble burst. Krugman wrote about this in 2008 saying, “Japan’s banks lent more, with less regard for quality of the borrower, than anyone else’s. In doing so they helped inflate the bubble economy to grotesque proportions.” Importantly, just as Krugman was writing this, America’s own debt bubble was bursting with equally apocalyptic results.

A July 2016 Bloomberg article concisely describes the current Japanese econometric problems, “Japan has the world’s oldest population, as well as a low birth rate and little immigration, but its growth problems go far deeper. Japan started to suffer a shortage of workers. With the Japanese people unwilling to spend, companies are increasingly investing overseas rather than at home. A lack of deregulation further fuels the trend. Wages are stagnant and growth has stayed low, with frequent recessions.”

Fortunately, we are not in the same condition as Japan as the accompanying chart below shows. (Courtesy of Bloomberg)

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Additionally, President elect Trump’s regulatory approach favors free market initiatives. Arguably econometrically the Trump administration appears to be moving in the right direction.

Unfortunately, whether or not his plan works is not truly within his control. For the plan to work American business and in particular large American multinationals, which have the greatest job potential, must either bring jobs home from overseas or they must innovate in such a manner that product can be developed and manufactured within the United States.

Otherwise, while the President may get a stock market lift he won’t get either the job or GDP growth necessary to meet the expectations of his voters and the balancing of our country’s growth and debt.

Barron’s reports that, “the various Republican tax reductions being considered … represent a meaningful increase to the corporate bottom line….” But, it is how those new found profits are used that really matters in the context of the President elect’s plan.

Elsewhere in Barrons another reporter notes that, “Net debt to Ebitda (Earnings before taxes, interest, depreciation and amortization) is pushing a high … so some of the cash might be quietly steered to pare debt. And companies are using just 75% of their capacity, still below the long term average of 80%.”

It is this latter point that is very important. Barrons notes that, “the optimism implied in the (stock market) rally suggests the market expects Corporate America to reinvest some of those tax dollars in equipment and labor to get the economy growing again, rather than spending only to buy back shares.”

But, if firms are only running at 75% of capacity one must ask whether or not they will actually do that? It’s one thing to keep Carrier from sending 2000 jobs to Mexico, but it is an entirely different and more complex issue to get firms to spend on greater capacity when they are already well within the limits of existing capacity.

Consider, as the Wall Street Journal reports that, “for two centuries, economic theory has held that trade increases the size of the global economic pie. The problem is that gains from that growth are spread unevenly. The winners include U.S. companies that were able to substantially lower costs and boost profit margins.”

While the President elect seeks to impose additional trade barriers it is important to understand, as the Journal writes that, “it is surprising how critical global trade is for most major U.S. companies …. Exports and imports now amount to 27% of GDP versus 17% thirty years ago. Trade restrictions would hurt profits in multiple ways. Tarrifs on imports would drive up costs for businesses and consumers. Exporters … could face retaliatory trade measures.”

But for President elect Trump’s plan to work, it is essential that American businesses heavily redeploy their tax gains into R&D and domestic production, manufacturing and equipment in order to create the jobs the new President has promised. Absent that order of events the economy will not reach the necessary GDP growth levels to properly manage our debt structure across the business cycle.

The big question then, for both the President and America, is whether corporate America will comply and bet on the come or whether they will be content to live within existing capacity and drive their share prices up through increased profits from lower taxes which would likely lead to higher executive bonuses.

My personal guess is that while the President-elect has a plan, our Nation’s corporate executives may be thinking about something entirely different. After all the election did not change human nature.

Thus, As General Eisenhower once said in his 1957 remarks to the the National Defense Executive Reserve Conference:

“Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of “emergency” is that it is unexpected, therefore it is not going to happen the way you are planning. So, the first thing you do is to take all the plans off the top shelf and throw them out the window and start once more. But if you haven’t been planning you can’t start to work, intelligently at least. That is the reason it is so important to plan, to keep yourselves steeped in the character of the problem that you may one day be called upon to solve–or to help to solve.

It would behoove America and its leaders to think about that. It will be great if the President’s plan works but what if it doesn’t?

 

 

 

 

 

Ayn Rand & Donald Trump: Free Market Thinkers and the Environment Don’t Mix

A few years back a friend of mine purchased a first edition of Ayn Rand’s Atlas Shrugged. As you might imagine, he paid a pretty penny for the book that free market thinkers have come to love.

But, Ayn Rand was also one of the very earliest anti-environmentalists in America. “In her analysis, the leaders of the environmental movement are motivated not by a genuine concern for human life, but by hatred — hatred for technology, for man and for man’s basic tool of survival, his mind.” (ari.aynrand.org, where you can also listen to a one hour speech she gave on this subject) In that 1970 speech the effects of greenhouse gas were being debated even then.

I find it amazing that more than 45 years later we are still debating whether or not global warming is real and perhaps, more importantly, whether it constitutes a real threat to mankind. A recent Pew Research study shows that 48% percent of Americans believe the earth is warming mostly due to human activity. Yet, only 28% think the scientists understand the causes and only 19% believe the scientists understand the best ways to address climate change.

While 42% believe that a litany of harms to wildlife, habitats, the weather, water shortages, forests and plants and rising sea levels will occur those percentages vary widely between Democrats at roughly 60% and Republicans at about 29%. Little wonder then that Mr. Trump made climate change an issue in the election.

Complicating the matter further is the fact that we won’t pay for changes that might improve our future! The Wall Street Journal reports that while 77% of Americans believe that climate change is happening, 43% would not add $1 a month to their utility bills to combat climate change. “The reality is that while most Americans see climate change as a collective threat, they don’t see it as a threat to them personally. This is potentially bad news for climate policy,” the Journal’s expert said.

Thus, it is also no surprise as The New York Times reports that, “Mr. Trump has already vowed to “cancel” last year’s Paris climate agreement, which commits more than 190 countries to reduce their emissions of planet-warming carbon dioxide pollution, and to dismantle the Clean Power Plan, Mr. Obama’s domestic climate change regulations.”

While there are numerous individuals making all kinds of claims on the web with regard to what is happening to our global climate, both good and bad, the chart below is from NASA’s climate website (climate.NASA.gov). I leave it to you to judge but it appears to me that, while there is variability on a yearly basis, we have had a sustained increase in median temperatures since the mid to late 1960s and a longer term upward trend line since about 1910.

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NASA’s data also shows that, “the 10 warmest years in the 134-year record all have occurred since 2000, with the exception of 1998. The year 2015 ranks as the warmest on record.”

Equally important to our discussion is the following chart that shows that we have seen a near vertical rise in carbon dioxide (parts per million) in the atmosphere since 1950 to levels that are, today, well beyond any historical levels.

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That is material because it appears there is a pretty strong correlation between the increase in greenhouse gases and the corresponding rise in temperature. I think it is also important to note that population growth, greater industrial production and the material increase in the burning of fossil fuel all have an impact on greenhouse gas and temperatures.

But, now we get to the real meat of the matter. What does it mean for mankind? Is it a threat that we must act upon or is it merely a hoax as the President elect has stated?

As background a recent PBS show noted that, “For the last 10,000 years, the Earth’s temperature has been fairly steady…. Yes, it’s risen and fallen, but all of human existence, everything we have ever done as a species has happened in this narrow temperature range.” In fact, NASA notes that during the ice age when the northern United States was covered by 3000 feet of ice average global temperatures were only five to nine degrees cooler than they are today.

To be sure there are organizations that believe that global warming is not a problem. Chief among them in the United States is the Heartland Institute which says, “Most scientists do not believe human greenhouse gas emissions are a proven threat to the environment or to human well-being, despite a barrage of propaganda insisting otherwise coming from the environmental movement and echoed by its sycophants in the mainstream media.” The only problem with this statement is that it is not true!

According to the American Institute of Physics ( AIP.org, which has a great history of the science of climate change on their web site), “early this century (the 21st) the IPCC (Intergovernmental Panel on Climate Change) conclusions were reviewed and endorsed by the national science academies of every major nation.”

The IPCC is the international body for assessing the science related to climate change. Their findings state that the, “continued emission of greenhouse gases will cause further warming and long-lasting changes in all components of the climate system, increasing the likelihood of severe, pervasive and irreversible impacts for people and ecosystems. Limiting climate change would require substantial and sustained reductions in greenhouse gas emissions which, together with adaptation, can limit climate change risks.

The Brookings Institute as recently as this month says that while the President elect, “was dismissive of climate change and even called it a hoax perpetuated by the Chinese …. The science is clearer and climate change won’t go away. The health effects of climate change and continued burning of fossil fuel will continue to beset Americans.”

The AIP writes that, “it became clear that even if all emissions could be instantly halted the gases already in the air would bring some additional warming for millennia.”

The IPCC concludes that, “the risks of abrupt or irreversible changes increase as the magnitude of the warming increases. Without additional mitigation efforts beyond those in place today, and even with adaptation, warming by the end of the 21st century will lead to high to very high risk of severe, wide- spread and irreversible impacts globally (high confidence).

Personally, I’m a risk guy. I was paid to manage and control risk. In contrast to President elect Trump who is clearly a free market fellow the centrist in me, as well as the risk manager, does not believe global warming is a hoax. The data is overwhelming. It appears to me that there is a strong correlation between greenhouse gases and global warming. Given the risks described above it would seem prudent to me to make every effort to control those risks which is what the Paris Accord that the President elect wants to withdraw from is attempting to do. Honestly, this makes no sense to me.

The Brookings folks note that, “the U.S. has over recent years forged a role as a global leader on clean energy and climate change.” Why would we want to give that up? Why in the face of the science would we want to mine and burn more coal? Coal is the number one contributor among fossil fuels to increasing carbon dioxide in the atmosphere and it doesn’t matter if it is burned here or in China. In point of fact, China has signed on to the Paris Accord.

While the President elect, “pledged to bring the coal industry back, 100% by rolling back environmental regulations,” the Wall Street Journal notes that, “coal’s biggest problem is that it is no longer the cheapest fossil fuel around. It is being displaced by natural gas,” which also contributes far less to greenhouse gases. The CEO of American Electric Power, one of the nation’s biggest utility companies says of coal, “No matter who occupies the White House, it’s not coming back.”

That is because electric utilities that buy 95% of the coal are shuttering old coal burning plants in favor of natural gas plants. The Journal notes that, “Investors love gas burning power plants because they take less time to construct, cost less to operate and convert fuel into electricity with greater efficiency and half the carbon emissions.”

I really do understand that President Trump is a free market guy just as Ayn Rand was. I also understand he was running for office and wanted the votes in Pennsylvania and West Virginia. But, if we, as a nation, are going to be successful, not just today, but for our children and their children we need to see reality as it is, not as we might want it to be.

The future is not about fossil fuel no matter what the President elect might say. Coal isn’t coming back 100%, nor should it. The President elect, in my opinion, would be far better served to take the time to truly understand this issue and to continue leading America and the world in the development of the technology necessary to reach the goals of the Paris Accord. I believe that there are likely more jobs to be had in the energy production technologies of tomorrow than there might be in those of yesterday.

I don’t believe that Ayn Rand was right about environmentalists either. They are neither haters of technology nor intellect. To be fair though, she didn’t have the benefit of 45 years of data. One would hope that as a true free market thinker she would have wanted to see our investments in both jobs and technology going towards the development of a clean energy future so that we could both prosper financially and provide for the future safety and soundness of the world’s environment.

What’s Next: Making Up is Hard to Do!

Tomorrow is election day. I sincerely hope that everyone will vote. Nearly half of all Americans do not and that is truly a travesty. With regard to this election Jim Grant a former Barrons financial writer puts it nicely when he says, “what is truly depressing is the doleful realization that … one of them (Trump or Clinton) will win.”

I couldn’t agree more. But here’s the thing and it is comes from Howard Dean, the Vermont Democrat who ran for President in 2004, “you can’t run the country as divided as it is today. And you can’t govern with just 55% of the country.”

It won’t matter who wins if the moderates, the centrists as I would say, cannot regain a preeminent position within the politics of both parties. That is, statesmanship must triumph over partisanship.

Think about it; we have Senators Warren and Sanders pushing hard for a more liberal agenda when even the Washington Post notes that the party, “already has very progressive positions in the … platform.

Across the isle, the Freedom Coalition is already talking about impeaching Mrs. Clinton if she wins. Some in that same group are not satisfied with Paul Ryan’s leadership. Hard-liners,“want to see the House GOP take an uncompromising stance on spending cuts and immigration with no room for negotiation.”

Many of these representatives, both left and right come from districts where the electorate fully supports their positions and thus they are ‘safe’. As the Washington Post notes, “That dynamic gives them license to adopt a take no prisoners form of politics antithetical to the political finesses typically required to pass legislation.”

Instead of a Nation and its leaders focused on consensus building we are surrounded by Trump supporters chanting, “Lock her up!” as well as Clinton supporters who want to leave the country if Trump is elected.

As a nation we have become caught up in a fight or flight mentality that, left unchecked, will only further exacerbate partisanship as well as the ills of the country. The fact of the matter is that we must all live together and to do that effectively we must govern in a manner that enables us to get along and make decisions built upon consensus rather than from obstreperousness.

Otherwise we are at great risk. Karen Stenner is a political psychologist who studies, “the people who express an outsize share of political, racial and moral intolerance,” that is, the people who make up the far left and right. While these people have very different political views psychologically they are reacting to one, “immutable characteristic: They are inclined to want oneness and sameness.” When they feel that is the case she notes that they are relatively tolerant. “But, when their need for unity is threatened, as is inevitable in … democracies, they lash out.” The more diverse the world becomes, the more intolerant the left and right become. That leads to an unwillingness to compromise. Eventually, that destroys democracies.

Undoubtedly, rapid change only serves to heighten the stress for these same individuals. Yet we live in a world of incredibly rapid change. I was struck by an article written by a New York Times reporter who came back to America after serving 13 years abroad. In 2003 when he left, “George W. Bush stood beneath a ‘Mission Accomplished’ banner on an aircraft carrier …. Facebook hadn’t yet been turned into a company. The IPhone did not exist …. (He) missed the Great Recession,” and Brad and Angelina were still an item.

To that point, ISIS wasn’t a word in 2003. It would be three years before Twitter even began. More importantly, Americans had no idea that economic growth, jobs and wages were going to virtually stagnate for the next 13 years resulting in a populist movement that career politicians never saw coming. Pat Buchanan, an earlier Republican insurgent, who ran for President said recently, “I look around the world and I think all those countries are coming apart and I think ours is going to come apart. The melting pot is not melting anymore.”

I believe it is that last sentence that represents the overwhelming issue facing American politics today. Our nation is changing so rapidly demographically, racially and technologically that it has created a sense of fear in the body politic. But, when our internal fight or flight mechanism is forced to operate 24/7 for an extended period of time we can become afraid of fear itself. That is, we lose our sense of perspective.

That, in my opinion, is what has happened within American politics today. Nevertheless, it is instructive to note that American politics have always been rough and tumble. In 1798 Federalist Senator Rodger Griswold and Republican Congressman Matthew Lyon duked it out on the Senate floor with a can and a fireplace tong! In 1805 two Republicans set the record for the longest fist fight in the House lobby … it went on for 77 minutes! President Jackson and Thomas Hart Benton brawled and Jackson was shot …. Benton, the older of the two, “escaped significant injury because he fell down a flight of stairs early in the fight.” Even as late as 1945 two House Democrats fought when Missouri Congressman John Rankin was called a liar by Frank “Fighting Frank” Hook. Surprisingly Rankin even got some jabs in despite the fact that Hook was a former welterweight champion of Michigan, Illinois and Indiana.

For us to regain our sense of perspective we must learn to work together again; to find comprise again; to be statesman like in our thoughts and behavior and not just in Congress but in the nation as a whole.

For that to happen the political center of both parties must once again find its voice.

Let’s face it, living together is never easy and political reconciliations are even more difficult than marital ones. But, it can be done, if our leadership moves slowly and deliberately working around some issues of importance where consensus can be developed, voted upon and passed into law. It’s like taking baby steps to regain our ability to to work together. We might begin with infrastructure where both parties recognize modernization is necessary. That will also create jobs and good wages.

Our new President would be well served to recognize that rather than focusing on a divisive first step as President Obama did with ObamaCare, it would be far better to make their first step a cohesive one that enabled both parties to work together effectively.

Jane Jacobs, a journalist, author, and activist best known for her influence on urban studies wrote, “in her comparative study of fallen empires,” that there are certain, “common indicators of decline: cultural xenophobia, self imposed isolation and a shift from faith in reason with its future oriented spirit to looking backwards to fundamentalist beliefs for guidance and a worldview.”

Leadership, both Presidential and Congressional, might take a page from investment theory that recognizes fully ninety percent of returns come from proper asset allocation otherwise known as diversification. It recognizes the simple premise that you can’t put all your eggs in one basket, be they Democratic or Republican ones.

In other words, let’s begin a discourse that takes into consideration both parties thoughts and opinions in formulating public policy. We’ve already shown how we can put Social Security on a sound financial footing without harming anyone’s benefits. Even my very conservative friends can live with those suggestions. I’m sure that they wouldn’t be the exact ones Congress would pick but the point is that by tackling issues that need fixing and doing so in a bipartisan manner we can begin the process of returning American politics to statesmanship rather than internecine warfare.

As Conor Friedersdorf writes in the Atlantic Magazine, “counteracting polarization is not a lost cause, if only Americans are circumspect enough to recognize what we have in common.” Our American identity has always been about life, liberty and the pursuit of happiness. We can achieve that if we once again begin to work together as a team, albeit one with a diversity of opinions all of which need to be heard and considered in formulating our way forward towards consensus rather than a strong right hook!

Sometimes you can’t see the forest for the trees!

I think I’ve rewritten this article more times than there are Hillary emails! So, I hope I’ve finally gotten it right. As we head into the final days of the election, I have no idea who is going to win. For a while it appeared Mrs. Clinton was running away with it only to be slowed down by yet another Anthony Weiner email appearance!

Recently a number of articles have begun to appear discussing the future of the Republican Party, should they lose, and honestly, that was the original intent of this article. My research, however, took me in quite a different direction and I have come to a markedly different conclusion than the premise I began with.

A friend of mine suggested that if the Republican Party lost this election, “There’s going to be a lot of finger pointing.” Indeed, with every ‘professional’ politician in the party having been ousted by Mr. Trump, a true outsider, how could there be anything but that?

In a recent Wall Street Journal column William Galston wrote, “today’s Republicans are like Caesar’s Gaul divided into three parts; Establishment conservatives, small town, small government conservatives and populist conservatives.” Another friend of mine suggested there might be four distinct groups. While all of this is likely true it is not where the real strategic risk to the Party lies.

It is instructive to remember that twenty years ago it was the Democrats who were in disarray. A former Congressman I know used to say, “Never underestimate the power of the Democrats to screw it up.” The point here is that the GOP is not going away any time soon regardless of what might be suggested by the media. Nor are the Democrats likely to replicate the seemingly endless run of championships by the New York Yankees of yesteryear!

That’s because the establishment leadership of both Parties cannot see the forest for the trees! To understand the forest is to recognize that just as it is in the business world, political success is about strategy, focus and execution.

David Frumm, Senior Editor of Atlantic Magazine and a former speech writer for President George W. Bush notes that, “barring shocks, presidential elections turn on the fundamentals of economics, demography and ideology.”

Republican strategists thirty years ago found the ideological power of the religious right and they rode that wave for more than two decades until the forces of economic malaise created a long period of job and wage stagnation which lead to the surge of populism in this year’s election. You should not, however, mistake this simply as a Republican event. While the establishment Democrats held off the Sanders populists, they too are living on borrowed time.

Where ideology and economics drove the last thirty years, demography and economics are likely to drive the next thirty. While the Democrats have a seeming demographic advantage, a deeper dive into the facts reveals something very different.

A recent Washington Post article noted that America has become, “more diverse racially and ethnically, better educated overall and with a population that is aging.” The recent success of the Democratic Party is the result, among other things, of, “becoming less white, less religious and better educated at a faster rate than the country as a whole while aging at a slower rate. Within the GOP, the pattern is the reverse.” It should come as no surprise that the Republican Party today remains 86% white and white citizens vote! White voters today make up 70% of registered voters. However, that is down from 84% in 1992 and that percentage will continue to decline as the faces of America continue to change.

While today 61% of Americans are white, by 2055 that percentage falls to 48% (with current levels of immigration). While Republicans carry about 60% of all white voters they have not been able to garner more than one fourth of the non-white vote at best.

On the surface, that would appear to bode well for the Democrats. However, the underlying factors that are driving the rebirth of populism are going to affect Democrats as much or more than they are the Republicans. While it has been widely reported that Mr. Trump’s backers are largely white and less educated than the rest of the Party, there are equally large numbers of Democrats of all colors that are less educated and thus equally unprepared to compete for jobs and wages in a technologically driven world. In fact as you will see somewhere between half to two thirds of Americans fall into this category!

What the establishment of both parties have failed to recognize, according to Mr. Frumm, is that, “the angriest and most pessimistic people in America are the people we used to call Middle Americans.” Their economic insecurity is creating a sense of fear and that is not exclusive to the GOP. Research suggests that the Republican populists, “do strongly feel that life in this country used to be better for people like them and they want that older country back.”

Of course, it isn’t coming back, but for the less educated Democratic middle class voters the problems aren’t any different and their future is no more promising than their Republican counterparts. Establishment leadership of both parties have failed to grasp not only the issue but the numbers of people being affected. Equally important is the lack of understanding of the the underlying causes.

A Brookings Institute report notes that, “the United States lost 41% of its manufacturing jobs from 1979 to 2009.” That is an ASTOUNDING number! Keep in mind that unions have long supported the Democratic candidates yet the fact is that neither party has been able to stem the loss of well paying jobs. What is happening is that people are getting fed up in both parties and that has come as a shock to the establishment politicians who have for too long been insulated from the true conditions affecting enormous numbers of Americans. Thus, in my view, that is where the strategic battle of the future is likely to take place and the Democrats are no better positioned than their opponents.

The criticality of manufacturing to a comfortable and satisfied electorate cannot be overstated. The Brookings research notes that manufacturing, “remains a source of high-wage jobs for virtually all types of workers, but especially for those who would otherwise earn the lowest wages.” Americans who need these jobs, those without a college degree, make up roughly two thirds of the electorate and they are not just white Republicans. Moreover the inability of our government to lead the world in public education means that an American with only a high school degree will continue to have great difficulty finding a high paying job.

Census data from 2015 shows that while 60% of Asian Americans obtain a four year degree, only 43% of white Americans do. It is even worse for others. Only 32% of African Americans reach that level of education and an even lower number of Latino Americans at 23%. When two thirds of Americans cannot look forward to what was the American Dream,THAT IS UNTENABLE!

As an aside I would also note that it isn’t wages that make American manufacturing uncompetitive, nor is it globalization. Brookings notes that, “several other countries have higher manufacturing wages than the United States but have had less severe losses of manufacturing jobs.” It is a lack of leadership, both in business and politics and in my view the longer this continues the greater the chances that the electorate of both parties will become increasingly angry.

The establishment of both parties has failed to grasp this. Let’s be honest, the two candidates for President in this election are FAR from the best two candidates America could have fielded. Many voters are voting against a candidate rather than for one. Neither candidate is likely to last two terms and that is not just a reflection of how they might perform. They don’t have the answers to the most critical strategic issues of the future; jobs, wages and education. Absent solutions unrest in the electorate is only going to get worse.

Mr. Frumm notes that Mr. Trump’s followers are not ideologically militant, highly conservative or deeply religious by prior Republican standards. They simply want good paying jobs and a better future for their children. It is inconceivable that Democratic voters want anything different.

But, neither party has real answers for these strategic issues. Thus, they are content to focus, instead, on tangential issues such as borders, Supreme Court Justices, secured emails and candidate integrity. Those things matter but they are side shows compared to the real strategic issues of the day.

The current election remains in flux and will probably go down to the wire. But the future success or failure of both parties remains a question mark. No one can lead when they cannot identify a simple and clear strategy that leads to success. Obfuscating issues only leads to a lack of focus and an inability to execute. Moreover, the isolation of both party’s leadership from the real issues that matter most to the electorate is truly deafening.

So, don’t believe what you read in the press. Success in the elections to come remains completely up in the air waiting for one party or the other to truly lead America forward.

“SAY IT AIN’T SO JOE, IS IT?”

That’s what Hugh Fullerton, an AP writer, wrote of a young kid who approached Shoeless Joe Jackson as he left the courthouse in the wake of the Chicago Black Sox cheating scandal of 1919.

I and several of my friends find ourselves saying basically the same thing in the wake of Navy Federal Credit Union being fined $28.5 million by the Consumer Financial Protection Bureau (CFPB) for illegal collection activity covering a period of two and half years.

It is important to note that, according to the Washington Post, “Navy Federal did not admit wrongdoing in that statement (their press release), nor in its signed agreement with the CFPB. But in the document signed by Cutler Dawson, Navy Federal’s president and chief executive, the credit union stipulated, “that the facts described in Section IV of the Consent Order will be taken as true.”.

In other words just like Wells Fargo, Navy agreed to pay a large fine but refuses to say they did anything wrong. The CFPB is not so circumspect. Indeed, they found that Navy Federal:

“Falsely threatened legal action and wage garnishment,” by writing to 193,000 members but only following through on their threats 3% of the time.

“Falsely threatened to contact commanding officers to pressure service members to repay,” their bills. They only sent 115 of those letters, but they didn’t contact a single CO; even for those who failed to pay!

“Misrepresented credit consequences of falling behind on a loan.” They told members they would find it “difficult, if not impossible” to obtain additional credit because they were behind on their loan. But the credit union, “had no basis for that claim, as it did not review consumer credit files before sending the letters.”

“Illegally froze members’ access to their accounts … about 700,000 accounts after consumers became delinquent on a Navy Federal Credit Union credit product.” It is outrageous that 36,000 members were 5 days or less, past due when their accounts were frozen. It is beyond the pale to even assume that these members could have been notified before the action was taken. Another 480,000 were 16 days or less, past due. The freeze affected access to Federally protected benefits such as Social Security and Veterans benefits. The account restrictions also prevented consumers from having Social Security Administration verification requests processed.

In my career I worked with many regulators to include the CFPB. I can assure you that they don’t call something illegal unless they believe it to be. I would also note that threatening legal action, wage garnishment or contacting a Commanding Officer unless you actually intend to take those actions are considered, not just by the CFPB, but by The Federal Trade Commission as well to be unfair, deceptive and abusive trade practices. The FTC has previously taken action in a similar case. So, this is not an overreach by the CFPB.

Navy Federal admits that the facts are accurate but just like Wells Fargo they refuse to admit they did anything wrong. Except, of course, they paid nearly $30 million to settle the case. Unlike Wells Fargo this is a member owned institution. So this was the member’s money that they spent.

I have to tell you that all of this was shocking to me. I have known the leadership at Navy for a very long time. This was a credit union that truly cared about its members and most specifically about its military members. In the past they have always made every effort to take proper care of the members always going above and beyond in my opinion.

That, for me, is what makes this whole situation all the more egregious. It’s not that they erred. “Stuff” happens when you run a large company. But, just as with Wells Fargo, while they have nice words in their annual report; Navy wants to, “be the most preferred and trusted financial institution serving the military and their families.” In the end it is just BALONEY!

I say that because just as I said with regard to Wells and Mylan, their words and their actions do not match up. The credit union had to spend a lot of money to settle this problem. They weren’t simply settling a small nuisance suit. If for no other reason than that, they owe the membership, the owners of the credit union, an apology because Executive Management, the legal and audit staffs all failed their membership. Notably, but not surprisingly, the Board of Directors has been just as silent as the Wells Fargo Board.

The CFPB notes that, “No credit union executive or staff member was punished for the many transgressions or even tutored on proper conduct”…. Navy Federal “lacks documentation that any employees were disciplined, reprimanded, or subject to additional training.”

HELLO? Is anyone home at NFCU? Have they read anything about the mistakes Wells Fargo and Mylan just made in failing to accept responsibility for their actions? Or are they just like those firms and their collective corporate hubris is simply too great to be able to say we were wrong or even that we are sorry.

If you want my trust, I for one, need to know that when things are at their worst you will do the right thing; that you will admit your errors and stand up and be counted. Saying the facts are accurate but we won’t admit we were wrong, but we’ll pay tens of millions to settle is not, in my view, the mark of an organization with character. If a firm has no character how can it be trusted? It’s really that simple for me.

So as a member of Navy Federal, which I am, with a substantial amount of savings there I’d like to hear from the Board, not just the CEO. First, I’d like to understand how no one is accountable and responsible for events that lead to a material fine. If a teller lost $2850 they would be fired. That’s a fact. Does this principle stop once you get past the line employee level?

Second, I’d like to understand what, if anything, the Board is going to do about bonuses paid out over the last 30 months when all of this took place. Do we spend all that money to settle but everyone gets to keep their bonuses?

Third and this only came about because I looked at their annual report and while it isn’t relevant to the CFPB findings it is highly relevant to the corporate character of Navy Federal; I’d like the Board to explain how the entire 2015 Board of Directors happens to be all white males. That is not reflective of their membership nor of the military and I would argue that a firm lacking in diversity in the 21st century has no character.

Short of those answers someone would need to explain to me why any of us should trust Navy Federal Credit Union.

Dr. Harvey Frommer, author of many books on baseball wrote of the Black Sox scandal, “we are left with a baseball story that will not go away … It is still with us because of the lingering sense … that the ignorant were duped by the clever, that the powerless suffered and the strong prevailed….”

I truly wish Admiral Dawson could say it ain’t so, but the arrogance Navy is displaying by refusing to take responsibility and accountability for their failures places him and the Board in the exact same camp as Wells Fargo and Mylan.

When will they ever learn?

Doctors Orders: Drink a Strong Shot of Liquor; Breathe Deeply Then Read: How We Might Save Medicare

President Johnson signed Medicare legislation in July 1965. By 2028 the Medicare program will be out of money and only able to pay for 87% of what it covers today falling to 79% by 2040. Unlike Social Security fixing Medicare is not easy.

But, let me allay any fears you might have because on page 48 of the Medicare Trustee’s 2016 Report it states, “The Trustees project that both the Part B and Part D accounts of the SMI trust fund will remain in financial balance for all future years because beneficiary premiums and general revenue transfers will be set at a level to meet expected costs each year.” BALONEY! Even with substantive changes, we still can’t fully fund the program.

We are currently spending $12,500 a year per Medicare recipient in total. That’s the key thing to remember i.e. in total. The Government reports funding in a disaggregated manner that enables them to make the statement quoted above. But in the aggregate Premiums only pay for 13% of the total cost. Payroll taxes account for 38%, but the largest amount, 41%, comes from income taxes and other revenues together referred to as the general revenue of the Federal Government! The remaining 8% comes from a variety of incidental revenue sources. (Data Source: 2016 Medicare Trustee Report)

What the Trustees really are saying is, “don’t worry, be happy;” we’re just going to keep on taking on more debt and raising taxes to pay for all this. That is bad government!

Using the Trustee report for 2015, $273 billion came from general revenue transfers, not from premiums or payroll taxes! That is the only way we can operate an insurance program that is not properly funded. Despite what the Trustees say, this is not sustainable and they admit that when they tell us they are running out of money. In point of fact, they are talking out of both sides of their mouth.

For Medicare to operate without using general revenue transfers we must find $273 billion right now and then increase premiums and payroll taxes every year consistent with future Medicare spending increases. Alternatively we could also increase the age before individuals become Medicare eligible and/or drastically reduce benefits.

Regardless of what we do it is going to be painful for everyone. That is what the Trustees are not telling us. The only good news is that we could, potentially, reduce the annual Federal deficit materially if we reduce Medicare’s reliance on general revenue transfers and we don’t let the President or Congress spend the money we save on other things!

Importantly, all of my numbers to follow are estimates. There are all kinds of ideas for how to improve Medicare funding but very few actually have financial outcomes assigned to them. We are going to do that.

Our first few steps are painless. Big Pharma got legislation passed that does not allow Medicare to bid out drug costs. That needs to be repealed immediately! The VA bids out their drug plan and it saves 20% compared to Medicare. That’s $15 billion a year and it’s a have to do! (The Trustee Report breaks out expenses for every category so this calculation is likely accurate)

Second, Medicare fraud is estimated at somewhere between 3 and 10% by the FBI. The Congressional Budget Office says, however, that we can’t really measure fraud. BALONEY! Imagine a bank saying it had no idea what their fraud losses were. No one would accept that and we should not either. We need proper enforcement! At the midpoint fraud represents roughly $40 billion a year! We have to cut that in half for starters and then more from there. Thus we’ll use $20 billion as our savings and that gets us to $35 billion.

From here on, it becomes much more difficult. As with Social Security, the centrist is opposed to reducing benefits. Medicare has issues but in combination with Medigap the consumer can be certain that their health care costs will be contained. Additionally the program has contained cost increases better than the market in general. While physician participation is an issue in some areas in most States the majority of doctors and hospitals continue to accept Medicare. Thus, what it does for people is a good thing and we should not be reducing those benefits.

I am also opposed to increasing the age for Medicare for one very important reason. Too many retirees cannot afford market rate insurance once they retire. A 2012 Kaiser Foundation study showed that half of Medicare beneficiaries only earned $22,500 a year. Funneling them to Obama Care simply means we hide the subsidies they would receive somewhere else in the budget. We need to understand rather than obfuscate our costs so that we can deal with them.

That leaves us with funding this program the way any health insurance program is funded through premiums which in this case includes payroll taxes. That is really the only way we can insure that the program is on solid ground today and into the future. To do that, we need to find $238 billion a year to break even.

The current payroll tax is 2.9%, paid 50 % each by employers and employees. We generated $241 billion in revenue in 2015 from that tax. Thus, it would require doubling the payroll tax to fully resolve the problem. Ouch!

Premiums only accounted for $85 billion in 2015. They would have to increase 4 fold to fully fund the shortfall. Medicare would become unaffordable for at least half of all seniors at that point.

Nevertheless, it is clear that both must rise in some proportion that is manageable for everyone. Increasing the payroll tax rate to 3.9% (Split 50/50 employee/employer) would generate about $80 billion in revenue. (This number is pretty accurate using current revenues at 2.9% as the base) Raising premiums on average for Medicare recipients by $100 a month and adding a $500 annual deductible would raise another $70 billion. (This number is an estimate. It assumes all will pay but the amount would be graduated by income so that those with higher incomes pay somewhat more than those with less)

These increases will seem modest to some and egregious to others but even with that we are still $90 billion short of properly funding Medicare. That is, we still need $90 billion in general revenue transfers to fully fund the program. That’s a lot!

But by taking these actions it would reduce the Federal deficit by 34% for 2016 while resolve 66% of the Medicare funding problem at the same time. It ‘ain’t’ perfect; but it is a damn sight better than where we are today. Equally important, it would give us a substantial period of time to address overall health care costs. That is necessary for our society as a whole and would lessen the costs of Medicare as well.

But, the longer we wait to act, the deeper the problem becomes. Congress is certainly not acting. They are afraid to raise taxes or premiums for fear of not being reelected. The candidates for President are behaving similarly. Everyone is just waiting for a crisis to act. That is neither leadership nor good government!

So the Centrist urges you to speak up! If not for your own self, do it for your children. We all get old eventually!