Time for a Wholesale Change in Congress

Left wing - and even relatively moderate Democrats - seem to think that it is reasonable for our country to adopt a financial position akin to a person facing the ocean while standing on one leg at the extreme edge of a high and crumbling cliff.

Their actions and policies have not yet culminated in a fall but, without real action to address our uncontrolled spending, disaster will surely happen. Right wing Republicans seem to think that the problem can be solved overnight and without raising any additional revenues. There is nothing in their program that recognizes the fact that turning around and moving back from the edge of the cliff must be done somewhat slowly and carefully while using every available foot and handhold. That means both cuts in spending and increases in revenue.

We, The People, elected these politicians and, therefore, must take responsibility. While our next opportunity to thank them for their service (service?), and wish them good fortune in their new lives, is not until the elections in November 2012, we must express our displeasure firmly, and frequently, up until that point.

Otherwise, we may find ourselves in the predicament that Benjamin Franklin foresaw. When asked what the drafters of the Constitution had produced, he responded: "A Republic, Madam, if you can keep it."

The growth of 'Big Government' and the Imperial Presidency has been almost uninterrupted since the inauguration of Franklin D. Roosevelt in 1933. As a result, we are in danger of losing our Republic.

Whether that be as a result of bankruptcy and chaos followed by authoritarian rule or merely by a process of increasingly large and intrusive government, with us playing the role of frogs in a pot of slowly heated water, as politicians responds to demands for 'more, more' is as yet uncertain. What is certain is that there is still some time to act to trim the government but less time than we would like.

Without prompt action, however, we will have to conclude that President Bill Clinton was engaged in wishful thinking when, in the 1996 State of the Union Address, he said that the era of Big Government is over.

Raising the Debt Ceiling

That the United States urgently needs a program to reduce its annual budget deficit is a given. That this should be done mostly by cutting spending, but also by rationalizing the tax code to eliminate outrageous giveaways - including, but hardly limited to, ethanol subsidies and, to kill some sacred cows, both mortgage interest and state tax deductions whose benefit goes primarily to those who need it least, is also reasonably obvious.

That these tasks are complex and will take time to complete is also true. If not done carefully, the Law of Unintended Consequences will govern and, as usual, it will do so to the detriment of us all.

Unfortunately there is a significant number of Congressional Republicans (mostly of the Tea Party variety) who seem to believe that allowing the USA to default on its obligations is perfectly acceptable. Some of them claim that no default will actually occur because the Treasury can manage the available funds so that interest on the national debt continues to be paid and maturing bonds are rolled over without the need to increase the national debt.

They are wrong: in August alone the ugly difference between expected revenue and scheduled expenditures is approximately $134 billion.

They are also right but only in a strictly technical sense. To avoid default on portions of the national debt, however, will require that others are not paid. What is a refusal to make payments, to recipients of Social Security, to doctors who treated patients covered by Medicare, to government contractors of all stripes, or to so called non-essential government employees who are furloughed, other than a default? That the government does not default on its debt is a mere technicality if it is also in default on other obligations. Who, then, will go unpaid?

To be a debtor is bad but to be a deadbeat is dishonorable.

These politicians should take a lesson from the millions of citizens whose houses, bought at the peak of the housing bubble, are worth less the mortgage balance. These people have not defaulted or mailed the front door keys back to the bank. Instead, they keep making their payments because it is the right thing to do.

They might also want to consider the case of President Harry S Truman. His haberdashery shop in Kansas City, Missouri, failed in 1923 leaving a pile of debts. When he became President of the United States in 1945, Mr. Truman was still making payments on those debts.

Most modern commentators would likely describe him as foolish for paying debts that he could have repudiated in bankruptcy court. That is a measure of our diminished morality. Your correspondent, on the other hand, thinks that he was an honorable man.

We urgently need all members of the House and Senate to recognize that there are two major tasks - and that there is no direct link between them. First, eliminate the possibility of a default and, second, set about the process of matching expenditure to revenue.

If our politicians refuse to act, then We The People, must ensure that they are duly punished at the next possible opportunity. November 2012 is not far away.

A Thought for Today

Most politicians and senior executives find humility and a little modesty - even false modesty - too much to endure.

All of us, not just those mentioned above, might be well served by contemplating the fact that most of us are born bald, naked and incontinent. When we die many of us are again bald, naked and incontinent.

Two Hundred and Thirty Five Years Ago...

... Congress approved the Declaration of Independence of the Thirteen Colonies.

As our great nation, although far from insolvent but cursed with politicians who lack both courage and the ability to lead and who seem to prefer posturing and self-advancement to serious work, faces the possibility of defaulting on its debts, it is well that we consider the commitments made by those who signed that iconic document.

All of them knew that they were liable, if captured, to be tried for treason, hanged and their assets confiscated. They did not act selfishly or seek preferment nor did they shrink from the task, stating in the last sentence:

And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

For those who do not have their copy of the Declaration close at hand, here is a link to the National Archives.

War in Afghanistan (3)

President Obama will speak to the nation this evening. He will tells us that he intends to begin the process of withdrawing troops from Afghanistan. Reports are circulating that the number is between five and ten thousand soldiers.

If the reports are accurate, then President Obama has got it wrong - again. Afghan President Karzai, referring to NATO troops as occupiers, has made it clear that he doesn't want us there. The Taliban, pressured by the combat capability provided by an additional thirty thousand troops in 2010, has reduced its activity but has not been defeated in detail. Nor, even with thousands more troops, will it ever be. Mostly the Taliban is keeping its powder dry as it awaits our scheduled departure in 2014.

Worse, while our stated objectives are to support the Karzai government in its efforts to establish control over the entire country, current levels of corruption and incompetence make this unattainable. To describe Mr. Karzai now, and in 2014 if he is still President, as no more than Mayor of Kabul is not entirely unfair.

When the United States invaded Afghanistan in 2001, our objectives were to destroy al-Qaeda and to capture or kill Osama bin Ladin. Now, Osama bin Ladin is dead and the original al-Qaeda so severely weakened that it is effectively unable to attack us. Admittedly, the branches of al-Qaeda that have sprung up in other countries are a problem but they will have to be dealt with in those countries: our continued presence in Afghanistan certainly does not help to weaken them and may even provide ideological succor and support.

A year ago, your correspondent suggested that we take the advice of the late Senator George Aiken (R-Vt) by declaring victory and leaving. The deal that we would want to strike with the Taliban has barely changed and there is no rational reason, if the Taliban is serious about controlling Afghanistan, for them to attempt to inflict a humiliating defeat on us.

Our primary objectives in Afghanistan have been achieved and we have no further strategic interests there but, if the Taliban decides to shelter our enemies, we do have the ability to undertake devastating punitive raids. There is, therefore, no reason to spend hundreds of billions of dollars (which we do not have and can not afford) in the next three years only to find Afghanistan in substantially the same condition as now.

If Mr. Obama tells us that he is ordering the immediate return of twenty thousand troops this year and that all, except perhaps for a small group of advisers - if the Afghan government wants them, will be home by the end of next year, then he will have got it right.

Your correspondent, however, regrets that he only sees more good money (and lives) being thrown after bad.

Headscratcher (13)

Rarely does a week go by without Sarah Palin demonstrating her total unfitness to serve in any elected office - or even as an elementary school history and civics teacher. Her latest version of "history as she is wrote" is captured in this news report. According to Ms. Palin, Paul Revere's famous ride was to warn the British that they would not prevail.

That there is significant support f0r Sarah Palin's as yet unannounced campaign for President is a true headscratcher but an expanation may lie in H.L. Mencken's definition of democracy:

"Democracy is the theory that the common people know what they want, and deserve to get it good and hard."

Enough said.

Temporary Hiatus

Your correspondent will be taking a temporary leave of absence while he recovers from a fall and the ensuing hip fracture.

Surgery tomorrow.

Raising the Ceiling on the National Debt

Consider a car racing down a highway at 150 miles per hour. Then consider that the highway leads to a river - quite a few miles away - and that the bridge over the river has collapsed. If nothing is done, the car will wind up in the river. The solution to this problem is relatively simple: slow down and stop before disaster occurs.

That analogy quite reasonably describes the United States government's twin deficit and debt problems. The rate of government spending is well over any sensible speed (the annual deficit is around ~ $1.5 trillion per year) and, as the national debt increases, the time approaches when lenders vanish and our car, as it were, sails into the river where we all drown.

The solution is for the driver of the car to take his foot off the accelerator, apply the brakes and stop before reaching the river. Admittedly this will take a bit of time and distance but both of these are still available - at least for a while. So too, for the government: stop out of control growth in spending (foot off accelerator) and start making serious cuts (apply the brakes). It will take a few years but, properly executed, the deficit and debt problems will be solved without major damage to the economy.

To claim that the problem of excessive government overspending can be solved by refusing to raise the debt ceiling is the equivalent of proposing that the best way to stop a speeding car is to run it into a tree. Undoubtedly that course of action will work but, as is too often the case, the side effects of the cure are likely to be worse than the disease.

Perhaps the ideologues - on both sides - will pick the sensible solution, before the bond markets over-react, but your correspondent does not believe that holding his breath will do anything other than make him blue in the face.

Headscratcher (12)

The most important feature of Hong Kong's tax law is a flat income tax with a universal rate of fifteen percent. Their entire tax law is written in about two hundred pages.

The United States tax code, as of 2010, filled seventy one thousand, six hundred and eighty four pages.

Taking into account all forms of revenue, the tax burden in Hong Kong is just under 16% of Gross Domestic Product. In the United States, taxes raised by the Federal government, between 1970 and 2009 averaged a little over 18% of GDP while inflicting top marginal rates of as much as 70% (prior to 1981) on the better off and rich. That the top marginal rate of tax is now "only" 35% is an improvement but still higher than is either fair or economically effective.

Few complain much about the relatively simple Hong Kong tax code, which raises almost as much as does the IRS, while almost everyone complains about the insane complexity of the IRS Code.

The difference, of course, is that the United States uses the tax code to engage in social engineering while partially - but only partially - mitigating the punitive effects of the higher marginal tax rates with a bizarre array of deductions, exemptions, and credits designed to reward favored groups and buy votes.

It is strange that there is not a single Representative or Senator who has dared to introduce a Tax Reform Bill based on the Hong Kong Tax Law. There are two features in every word processor that should make the task easy: they are 'copy' and 'paste'.

President Reagan made a good start with the 1986 Tax Reform but, in the past twenty five years, self serving politicians have largely emasculated that excellent piece of legislation. That Mr. Reagan's professed admirers are so disinclined to act is a headscratcher indeed!

Where Next?

Since the beginning of George H.W. Bush's Presidency in 1989, the United States has been in involved in major military actions in Panama, Iraq, Bosnia, Somalia, Kosovo, Iraq (again), Afghanistan, Somalia (again but at least only naval forces protecting against piracy in the Indian Ocean) and Libya. One may also suspect that small groups of special forces have been active in other countries.

In 1859, responding to a group of New Jersey legislators who were pushing for him to run for President, Cornelius Vanderbilt wrote:

"I am well satisfied that all of the results that have attended the labors of my life are attributable to the simple rule which I early adopted, to mind my own business…

Nor can I suggest one more appropriate for the regulation and conduct of the foreign policy of the American people."

Were our leaders to learn from the wise words of the Commodore, the question 'where next?' could, mercifully, be put to sleep - at least for a while.

Penny Wise and Pound Foolish

Reducing government expenditure is critical but those who would cut budgets need to remember the old adage that it is easy to be penny wise and pound foolish.

In a short sighted attempt to save a relative pittance - at the expense of reliability and performance - the Pentagon and Congress have canceled the development of a second engine for the F-35 Joint Strike Fighter which, in various versions, will replace all existing fighters (except the F-22) used by the Air Force, Navy and Marine Corps. It will also be sold to a number of allied nations. The total production run is expected to be at least 3,000 and possibly as many as 4,000 aircraft.

The history of sole source procurement provides a simple lesson: it is rare that the frequently conflicting goals of quality, reliability, performance and cost are met. When the F-15, F-16 and F-14 fighters first went into service, the engines were procured on sole source contracts. Verne Orr, Secretary of the Air Force and John Lehman, Secretary of the Navy, were instrumental in developing second engines for these aircraft. John Lehman, in an article published in the New York Post (click here to read the entire article), describes what happened:

"Nowhere was the wisdom of annual competition better demonstrated than in the establishment of an alternative engine for the Air Force F-15 and F-16 fighters. Despite strong opposition from his own bureaucracy, Air Force Secretary Verne Orr, fed up with constant cost growth and repeated grounding of all fighters due to flaws in the sole-source engine, forced through the qualification of an alternative engine and contractor, and had the two compete every year thereafter.

The benefits from this annual competition came swiftly, were many and have endured. There was steady improvement in reliability, performance and fuel economy and a dramatic drop in engine-caused accidents. By the second year of full competition, the cost per engine had dropped 20 percent. The Navy soon followed suit in choosing an alternative engine for the F-14 with similar benefits."

Following the Congress's refusal to appropriate funds to continue the development of the second engine for the F-35, the Pentagon bureaucracy has issued a 'Stop Work' order, as of March 31, 2011, to General Electric and Rolls Royce. The result is to leave Pratt and Whitney as the sole source provider. Given relentless pressure from the military for more features - and yet more features, all of which cause the sky to be blackened by streams of criss-crossing [and extremely profitable] change orders and contract modifications, it can reliably be predicted that the resulting engines will suffer from performance and reliability issues. Meanwhile costs will escalate uncontrollably.

The only small consolation is that General Electric has decided, at its own expense, to keep a small development team at work on the second engine. When politicians and the bureaucracy realize, or are forced to accept the fact, that competition in defense procurement is essential, it may yet be possible to realize some of the same benefits that Secretaries Orr and Lehman obtained for us in the 1980s.

Karl Marx claimed that history repeats itself, first as tragedy, second as farce but the F-35 situation simply seems to embody both tragedy and farce in equal portions.

Courage and Failure

Senator John McCain, in a lengthy article published in 2004 - a year in which he was not a Presidential candidate, discusses courage, failure, and responsibility. What he wrote then is more applicable now than ever.

"Courage is like a muscle. The more we exercise it, the stronger it gets. I sometimes worry that our collective courage is growing weaker from disuse.

We don't demand it from our leaders, and our leaders don't demand it from us. The courage deficit is both our problem and our fault. As a result, too many leaders in the public and private sectors lack the courage necessary to honor their obligations to others and to uphold the essential values of leadership. Often, they display a startling lack of accountability for their mistakes and a desire to put their own self-interest above the common good.

That means trouble for us all, because courage is the enforcing virtue, the one that makes possible all the other virtues common to exceptional leaders: honesty, integrity, confidence, compassion, and humility. In short, leaders who lack courage aren't leaders."

Later, he touches succinctly on the fact that, now, there is little accountability for failure:

"When no one takes responsibility for failure, or when responsibility is so broadly shared that individual accountability is ignored, then failure in public office becomes acceptable. It's hard to see how that serves the country."

Of particular note is what drives him, as often as possible, to do the right thing:

"In the past, I've been able to overcome my own fears because of an acute sense of an even greater fear -- that of feeling remorse. You can live with pain. You can live with embarrassment. Remorse is an awful companion."

The President and Congress will need all of their courage - and sense of accountability - as they address the extreme financial problems of our nation. If we are lucky, Senator McCain (although, in his own words, no economic expert) will be in the forefront - leading by example. Even though his two presidential campaigns were unsuccessful, Senator McCain still has much to give his country.

A link to the entire article can be found here.

Sleeping on the Job

Good management consultants are very well aware that poor performance on the part of employees is often (not always, admittedly) caused by system problems rather than by idleness, incompetence or lack of training and qualifications.

During the past three weeks, the media's response to reports of air traffic controllers who fell asleep on the job - leaving aircraft to land without direction from the tower - bring to mind the hypocritical words of Police Captain Louis Renault in the 1942 movie Casablanca: "I'm shocked, shocked to find gambling..." A fair question, however, is to ask whether there are many people who can reasonably work the midnight shift, in an environment where there is little activity, and not spend a significant amount of time fighting against sleep - and sometimes losing the battle.

The fault lies with the Federal Aviation Administration (FAA) which, in a shortsighted attempt to save money, assigned a single controller to midnight shifts at many airports where there is only sporadic activity during that time period. That the FAA's system created the problem, rather than the employees, is clear.

While the controllers in question have been suspended from their jobs pending the investigation, your correspondent believes that all of them, save only the one who made himself a bed of cushions and slept deliberately, should be exonerated. The solution is to have a minimum of two controllers in each tower on midnight shift, regardless of the expected level of activity. That is now the case and, since one of their priorities will be to keep each other awake, sleeping can now legitimately be considered grounds for disciplinary action.

In a workplace where poor performance can cost many lives, holding employees accountable is critical. Management, however, must do its part by providing the necessary resources. That Hank Krakowski, Chief of Air Traffic Control at the FAA, accepted responsibility and resigned is honorable: the fact that the National Air Traffic Controllers Association (the controllers' union) has been asking the FAA to address this issue for twenty years points out the real issue.

What other critical issues has the FAA left untended? For all our sake's let us hope that they are few and none are critical.

What's Next?

The media are full of reports that the government is now funded for the balance of the fiscal year. These reports are misleading - at best.

The real situation is that an agreement has been reached on the general contents of such a bill. To enable the real bill to be written, yet another short term Continuing Resolution, expiring on Thursday at midnight, was passed. While it is probable that the bill will pass the House, it will likely only be on a close vote. Many Democrats believe that the cuts are excessive and will vote against it while a significant minority of Republicans (of the Tea Party persuasion) are unpersuaded that the cuts are sufficient.

The Tea Party Republicans are right that the outcome is disappointing but they would do well to accept the half loaf of bread and move on to more important issues.

Our country has two critical financial situations facing it. First, a possible default on our debt if the legal limit is not increased and, second, the need to adopt a budget for 2012 which includes a comprehensive and credible medium term strategy for balancing the budget and beginning to pay down the debt.

If the Congress and the President fail at the first task, we will have to ask which of these ugly consequences will occur:

• Prolonged high unemployment?
• Wage and salary cuts?
• More reductions in the value of homes and financial assets?
• Loss of ownership of American companies?
• Price inflation?
• Higher taxes?
• Reductions in government services and benefits?
• All of the above?

Most likely we will suffer all of the above and, if we thought that the Great Recession was ugly, just wait. If they fail at the second task, then the ugly consequences described above will merely be delayed for a year or two.

Meanwhile, at the end of this week, ignoring the fact that the United States will reach its legally permitted limit on the issuance of debt by approximately May 16, members of the House and Senate will leave Washington for two weeks to engage in what is laughably described as a District and State Work Period.

Can anyone in the House or Senate spell V-A-C-A-T-I-O-N?

What are these people are thinking? Are they even thinking at all when they engage in this hypocritical self indulgence at such a time of crisis? Where is the outrage? Where is the political firestorm? Why do we tolerate such behavior from those that were elected to lead and to manage the affairs of our nation?

If we, the People, do not act we can be sure that we have exactly the government that we deserve.

Irony and the Tea Party

A recent article in the Washington Post reports on the activities of the Franklin County Patriots - a so-called Tea Party Group that holds its monthly meeting in Rocky Mount Virginia.

That Tea Party groups adamantly oppose government spending, even on what many would regard as necessary and desirable services, is axiomatic. That the Franklin County Patriots would have welcomed a federal government shut down is a given. That they hold their monthly meeting in the Rocky Mount Public Library - a taxpayer operated facility - at no cost to the group, would be deliciously ironic except for the fact that this is one of the groups driving an ill tempered political debate in which any compromise as regarded as equivalent to treason.

Their hero, former President Ronald Reagan, must be spinning in his grave!

Mark Twain may have described the Franklin County Patriots (and members of the United States Congress) perfectly with these words:

"Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it."

Enough said!

Government Shut Down

The United States Government's current fiscal year began on October 1st, 2010.

Last year, as so frequently happens, the Congress failed to pass the necessary appropriations bills before the beginning of the year and, since that time, the government has been operating on a serious of short term Continuing Resolutions. Unless an agreement is reached by midnight today, the government will only have the authority to spend money on non-appropriated items such as entitlements (including Social Security and Medicare), interest on the national debt and other mandatory items.

Of particular note - and an insult to all of us who pay taxes - salaries due to the responsible parties (the President, Members of the House of Representatives and Senators) are a mandatory spending item not subject to Congressional appropriation.

The result will be a partial government shut down: contractors will no longer be paid and employees whose responsibilities do not involve the protection of life or property will be furloughed. Those employees who are considered to be essential, including members of the armed services, will be required to work although there is no assurance that they will actually be paid for their time and effort.

As of now, the difference between the parties is $5 billion which, compared to the projected 2011 deficit of more than $1.3 TRILLION, is trivial. Republicans in the House of Representatives are also insisting on some policy riders, unacceptable to Democrats who control the Senate, relating to regulation of greenhouse gases by the Environmental Administration and abortion.

It is hard to understand why such a small difference regarding spending cuts can not be resolved. Matters of policy, specially those where opposing views are strongly held, should be debated and passed, or not, on their own merits rather than being used to hold critical spending bills hostage. That these issues are a matter of principle for some is one thing but they may wish to consider the old adage that the ends do not justify the means.

In a parliamentary system, legislators are quickly held responsible. Earlier this week, the Portuguese parliament failed to adopt spending cuts proposed by the government. As a result, the Prime Minister announced his resignation and the government fell.

Since our Constitution provides for both the separation of the Executive and Legislative branches and for fixed terms of office, irresponsibility is largely painless - at least in the short term - and the resignation of the government is not an option.

A possible solution is that the President, together with his senior staffers and the Cabinet, as well as all members of the House and Senate should be locked in an empty, unheated, warehouse with no food, water, furniture, or access to a bathroom until they have agreed on a bill to fund the government through the remainder of the fiscal year.

It would have been better had they been locked up on Monday but, since the damage resulting from a weekend shutdown is serious, but not critical, today would be better than not at all.

Nuclear Power

Murphy's Law says that whatever can go wrong, will go wrong, at the worst possible time. A corollary to Murphy's Law states that Murphy was an optimist.

A more subtle description of the ongoing disaster at the Fukushima Daiichi nuclear power plant is suggested by this quote attributed to engineer James Arnhein in the book Forensic Engineering written by Professor Kenneth Carper:

"Engineering: the art and science of molding materials we do not fully understand; into shapes we cannot precisely analyze; to resist forces we cannot accurately predict; all in such a way that the society at large is given no reason to suspect the extent of our ignorance."

Knowing this, design engineers generally add additional safety margins (i.e. fudge factors) as they attempt to compensate for the limits of their knowledge and of the unknown - perhaps even unknowable - events that may take place. Whether the problem is operator error, outside intervention, a catastrophic natural disaster, or some combination of all of these, human imagination is frequently unable to conceive of the forces, stresses and malfunctions that may actually take place.

On the other hand, a design that attempts to guard against every possible event, or combination of events, whether known or unknown and no matter how unlikely, will not only be uneconomic but, according to Murphy, will still malfunction. Since that is so, designers must rely on the much maligned cost-benefit analysis which, for all its appearance of objectivity, is essentially a political - sometimes a legal - rather than a technical decision.

Without minimizing the potential danger posed by nuclear reactors, the consequences so far (none dead and cost of $24 - $30 billion to replace the destroyed reactors) are almost trivial compared to the damage and loss of life (more than ten thousand dead and some $235 billion in property damage) caused by the earthquake and tsunami.

In spite of all of the shouting and fuss about this latest disaster, there is one simple reality: life can not be a totally risk free adventure. It would be useful if the public were to get used to that idea - sooner rather than later.

Nothing New Under The Sun

The President and Congress are engaged in in a grotesque game of economic brinkmanship.

First there is the continued funding of the government when the latest temporary spending authorization expires at the end of next week; second is an increase in the legally permitted debt ceiling that will be needed by the end of May - at the latest. If the latter does not happen, the USA - just like some third world hellhole - will be forced to default on its sovereign debt or simply to stop paying its bills.

Our situation brings to mind a thought from German sociologist and political economist Max Weber:

"Ultimately there are only two kinds of deadly sins in the field of politics: lack of objectivity and—often but not always identical with it—irresponsibility.

Vanity, the need personally to stand in the foreground as clearly as possible, strongly tempts the politician to commit one or both of these sins."

Given that Weber died of the Spanish flu in 1920, it is clear that our situation proves, once again, that there is nothing new under the sun.

President Obama on Libya

President Obama claims to admire President Lincoln as much - perhaps more - than any other American President.

Were President Lincoln to be reincarnated, and had he been forced to listen to President Obama's thirty minute speech about the situation in Libya, he would likely find some of his original words to be worthy of reuse:

"He can compress the most words into the smallest idea of any man I know."

It is hard, indeed, to communicate great ideas, when the speaker has none. Sadly, we are ill served, not just by Mr. Obama, but also by too many sitting politicians whose only ideas seem to be election and re-election to political office.

The words of Bill McKay, the character played by Robert Redford in the 1972 movie 'The Candidate', speaking to his campaign manager immediately after the announcement of his victory, seem to fit the current generation of politicians:

"What do we do now?"

Unions (2)

One man, one vote, one time was the modus operandi favored by many a post-colonial "Big Man" who subsequently took on all of the characteristics of a dictator. Much the same is true when a company becomes unionized.

The process of unionization begins when at least 30% of the employees of an 'appropriate' bargaining unit sign cards or a written petition. The second step is for an election, conducted by the National Labor Relations Board (NRLB), to be held. A simple majority is sufficient to authorize the selected union to negotiate a contract with the company.

Although the process sounds simple, it is not easy to organize a workplace in the face of concerted opposition on the part of the company. When a union is certified, however, there is good reason to believe that it really is the freely chosen representative of a majority of the employees.

In the United States, however, we elect political representatives for a fixed period. If they wish to continue in office, they must run for re-election.

With respect to union representation in a workplace, that single election is for an indefinite period: the only way for employees to fire their union is to go through the equivalent of a recall election. Known formally as decertification, employees who no longer desire union representation must go through a similar demanding process: petitions must be circulated and signed - again by at least 30% of the bargaining unit - and an election conducted by the NRLB.

Once a union has been certified, it will engage in contract negotiations. Since a union is a business and its revenue is derived from dues, one of its major objective will be to ensure that all employees of the bargaining unit are forced to pay dues - whether they voted for the union or not - by the inclusion of Union or Agency Shop language in the contract.

While the creation of a Union or Agency Shop is illegal in twenty two mostly Southern and Western States, a reasonable argument can be made that, a fair election having taken place, all employees of the bargaining unit should be treated equally and all should pay dues. That is democracy at work.

On the other hand, fixed terms of office and the right of voters to fire, or rehire, their representative on a regular schedule is a fundamental characteristic of democracy. That unions are not subject to such democratic discipline is a disgrace.

Your correspondent believes that real democracy would be well served by amending the Wagner Act (National Labor Relations Act) of 1935 and the Taft Hartley Act of 1947 to provide for regular certification elections every ten years.

Since we claim to believe in democracy, then the law should reflect our beliefs.

Unions

Tomorrow is the 100th anniversary of the Triangle Shirtwaist factory fire in which 146 garment workers died. The reason that the death toll was so high was that management had locked the doors to the stairwells and exits.

This anniversary, as well as the battles between Republican Governors and public employee unions in Wisconsin, Ohio and Indiana, brings to mind the idea that a series of pieces on unions might contribute to clearing a path through the propaganda emitted by both sides.

From the beginning of the industrial age until relatively modern times, industrial working hours were long, conditions were harsh - frequently more dangerous than necessary, and pay was low. In addition, poor treatment of individuals, or its reverse - favoritism, in terms of work assignments and discipline as well as hiring and firing was rampant.

Much of this was the result of a mismatch between the power of a corporation and the power of individual workers. For working conditions to become generally (emphasis added) decent took the power of government regulation supplemented by workers who banded together to bargain collectively and who, by withholding their labor (i.e. striking) albeit at some considerable short term cost to themselves, did much to make the modern workplace a more civilized place.

There are still businesses where the work is hard, dangerous and uncomfortable and where the power of an individual employee pales compared to that of the employer. Mining - particularly underground coal mining - is one of those where all too many employers adopt the attitude that production at all costs - regardless of threats to life and limb - must be the sole objective.

For manual workers, no industry is more dangerous than meat packing. While union members formerly amounted to more than 80% of the workforce, that is now below 50% and conditions are not improving. To link declining unionization and ongoing appalling working conditions is not a stretch.

Other industries, such as the harvesting of fruit and vegetables, where the work is hard, poorly paid and frequently performed by ill educated immigrants whose legal rights to be in the USA is often in doubt, suffer from too many employers who are willing to treat their employees in ugly ways. The fact that a minuscule number of these agricultural workers are unionized may also account for some of the conditions that they endure.

In spite of the fact that some industries - old line manufacturing, airlines, railroads and utilities for example - are heavily unionized, the usefulness of unions, or lack thereof, in the private sector is shown by declining membership. In 2009 only 7.2% of private sector employees were members of unions: a clear indicator that the "customers" are voting with their feet.

In the public sector, however, where working conditions are generally good and civil servants benefit from significant legal - in some States even Constitutional - protections, union membership amounts to over 37% of the workforce. Clearly government employees feel that they are getting something - and union dues are not a trivial expense - for their money.

They are right.

Check tomorrow for more thoughts on unions and their place in the modern workplace.

Rocks and Hard Places

The dilemma faced by governments in the Middle East was aptly summed up by Alexis de Toqueville some one hundred and eighty years ago:

"The most dangerous moment for a bad government is when it starts to reform."

Middle Eastern dictators and absolute monarchs, confronting riots and demands for reform, have few choices other than all out resistance - with some possibility of survival - or genuine reform and the likelihood of being deposed by leaderless mobs. Whichever direction they take still leaves them between a rock and a hard place.

Disruptions to the flow of oil are likely. We, therefore, having failed to curb our excessive dependence on a commodity that is controlled by unstable nations, have created our own hard place. Every President since Richard Nixon has warned of the danger but never has there been the political will to do anything about the problem.

Those who remember the Arab oil embargo of 1973 and the cessation of Iranian oil exports following the revolution in 1979 will find themselves pondering Mark Twain's insight:

"History doesn't repeat itself, but it rhymes."

The chance that anything constructive will happen this time is low but your correspondent would be pleased were he to find himself surprised.

Headscratcher (11)

If nuclear power plants are so safe, why is the Price-Anderson Act of 1957 still necessary? More importantly, why are the limits of liability so low?

For those who are unfamiliar with the Price-Anderson Act (click here for more explanation), utilities are required to buy the maximum amount of commercially available insurance. As of 2011, that is only $375 million - repeat MILLION - per reactor.

If there is a claim larger than the insurance coverage limits, every utility in the country is required to contribute up to $111.9 million for each reactor that they own. Since there are 104 reactors in the USA, the maximum amount of the fund, then, is approximately $12.6 billion. Any claims above this would have to be covered by the taxpayer.

Given that BP has taken a charge to earnings of $40 billion to cover its losses from the Deepwater Horizon oil spill, it is unlikely that a mere $12.6 billion would be sufficient to cover a really bad incident. The current problems in Japan indicates that massive costs will be incurred for many months - perhaps years.

Admittedly, payments made under the Price-Anderson Act, since its first passage, only amount to $151 million. That, however, should not be extrapolated into the future. A 'Black Swan' (apologies to Nassim Taleb) event can reasonably be expected - somewhere, sometime - and the costs of such an event can be anticipated to overwhelm the fund.

The score, in yet another game rigged against the citizens of the USA, is:

Corporate Welfare 104 Taxpayers 0

That we continue to put up with this sort of giveaway is a headscratcher indeed!

Full Disclosure: Your correspondent worked on issues (including the Price-Anderson Act) relating to nuclear power as a political and economic analyst in 1973.

He was also a management consultant on assignment at Westinghouse Nuclear Fuels Division in 1979 during the melt down of Reactor #2 at Three Mile Island where he learned much from some who had survived, and cleaned up after, some quite ugly incidents that were successfully contained but could easily have become uncontrollable.

Mother Nature Wins - Again

For the third time in less than twelve months, nature has inflicted massive disruption upon humans whose grand conceit is that they are in charge of the world.

In April 2010, an Icelandic volcano with an unpronounceable name (Eyjafjallajojull) disrupted air travel - particularly air freight - across the Atlantic Ocean. Then a series of unusually severe winter storms disrupted air and ground transportation throughout Europe during December.

The consequences of these two natural events were serious but mostly as a result of stranding unfortunate travelers and, for a relatively short time, closing down supply chains that were dependent on air freight. This time, however, an earthquake of magnitude 8.9 or 9.0 (it depends on the reports) off the coast of Japan, followed by a series of tsunamis, has caused major damage to infrastructure, homes, industry, roads and power stations.

Many major factories - among them manufacturers of semi-conductors, exported automobile engines and parts, aircraft engine and structural parts, home appliances, elevators and power-generation systems - are severely damaged and will take weeks, if not months or years, to bring back into full production. The consequences to the global supply chain are not yet known but will not be trivial.

The partial destruction of a major nuclear power station complex has resulted in electricity shortages that are likely to result in rationing by rolling blackout. Since many production processes can neither be started up nor shut down quickly, the use of backup generators will necessarily be extensive while energy related costs will increase significantly.

The result, then, will be reduced supply, increased prices, and lost business. For companies, if not for the Japanese inhabitants of the region, the situation is probably uncomfortable but not devastating.

The lesson that needs to be learned is the one described in Nassim Taleb's book 'The Black Swan': far worse things, albeit of low probability, than we ever really expect are likely to happen. The standard method of analyzing risk combines consequences with probability but when the consequences are devastating or existential, such a simplistic analysis entirely misses the point.

A few businesses are good at worst case scenario planning but most regard the expenditure of time on such matters to be a symptom of negativity. Since the career prospects of negative-thinking employees are dim, the consequence, in most organizations, is that relentlessly positive short term attitudes survive and real dangers are ignored.

The ancient Greek myth of Cassandra, able to foretell the future accurately but doomed never to be believed, is a lesson upon which politicians and senior executives should reflect. More important, however, is Warren Buffet's Noah Rule:

"predicting rain doesn't count, building Arks does."

Just because the probability of an event is low, does not make it any the less dangerous when it does take place. The reality is that, at the end of any given period, an event either happened or it did not. If the event does not happen, there is no problem but if it does, even if the probability was one in ten thousand years, the consequences are one hundred percent real.

Intervening in Libya

Numerous politicians, from a number of countries, are beginning to talk about military intervention in Libya.

President Obama is displaying commendable caution but is now coming under attack as a weak leader. That Mr. Obama lacks leadership ability is a given: his caution in this case, however, is appropriate.

The key questions are:

1. What are our vital interests that would justify the cost, in lives and treasure, were we to intervene?
2. Given that we are still engaged in two wars, what rapidly available forces do we have with which to intervene?
3. If we do participate in the overthrow of Colonel/Dictator Qaddafi, what will we do once he has been deposed?
4. Other than more borrowing, how would we pay for such an intervention?

The wars in Afghanistan and Iraq were highly successful up until the point of regime change. After that, we became mired in what seems to be a never ending occupation. Worse, in both countries, a significant fraction of the population is actively hostile and most of the rest would just like us to go away.

In an editorial page column yesterday (click here to read) in the Washington Post, George Will delivers an excellent analysis of the situation and the reasons why we should not intervene militarily. For those who would like the shorter version, these sentiments, expressed by Presidents John Adams and his son John Quincy Adams, are pertinent:

America does not go abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all. She is the champion only of her own.... (John Adams)

Wherever the standard of freedom and Independence has been or shall be unfurled, there will her heart, her benedictions and her prayers be. But she goes not abroad, in search of monsters to destroy. (John Quincy Adams)

Perhaps we should just mind our own business and leave the Libyans to sort out their problems. Acting as policeman to the world is no longer - if it ever was - in our national interest.

Leader Wanted

President Obama's recent budget strongly suggests that he doesn't believe that either of these two political opposites knew what they were talking about:

"The problem with socialism is that eventually you run out of other people's money."

Margaret Thatcher

"Nobody, no individual or country, can indefinitely spend more than he or she earns."

Raul Castro

The bond market, having registered its strong disapproval of the spending habits of Greece, Portugal, Spain and Ireland, seems to be taking a break. It will be our turn soon - unless we move rapidly to control spending - and there is no Germany waiting in the wings to bail us out.

We do, however, have options: default, inflate the debt away or cut spending. Raising taxes significantly is not a real option although rationalizing and reforming the tax system would likely increase growth and so raise some additional revenue. By itself, however, additional revenue will not be sufficient while default, or even the relatively modest inflation rate (nearly 14% in 1980) seen during the latter two years of President Carter's single term, is a recipe for greatly reduced living standards. Were inflation to rise to the level seen quite recently in Zimbabwe, only some of the well prepared and a very favored few others would survive financially.

The solution, therefore, is to reduce spending but the American people do not yet understand the seriousness of the situation. The sooner that politicians - President Obama as well as Members of Congress and Senators - become willing to lead, the better. Given Mr. Obama's pathetic lack of leadership with respect to the very real problems of health care, his careful avoidance of the eight hundred pound budget gorilla is, unfortunately, not surprising.

Without immediate action, the costs of Social Security, medical care (Medicare, Medicaid, Veterans Benefits as well as care for civilian employees of the government together with active duty and retired members of the military and their families) and interest on the national debt will soon consume the entirety of tax receipts leaving nothing for defense, diplomacy, infrastructure, research and development or education among many of the important activities undertaken by the government.

We would, perhaps, be better off if elected officials were to forswear opinion polls in favor of persuading the American people that some sacrifice - even quite a lot of sacrifice - now is preferable to great pain in the not so distant future. Edmund Burke, in a speech to the Electors of Bristol in 1774, accurately described the essence of an elected official's job description:

"Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion."

There is still time but not much. More time can be bought with leadership but there is yet little sign of such a thing among the self aggrandizing, re-election driven, publicity seeking political classes.

Regulating the Financial Sector

The Securities and Exchange Commission has proposed compensation rules that are intended to discourage irresponsible risk-taking - 'heads I win, tails I break even' - in the financial sector. Included in the proposed regulations is the deferral, for at least three years, of at least fifty per cent of the cash portion of incentive pay as well as the ability to claw back part of that pay to reflect subsequent losses.

Although this is a start, it is unclear whether it will be effective in reducing risk. The one certainty is that there will be unintended consequences as really bright bankers learn to comply with the letter of the rules while evading the intent. In short, the vast majority of bankers will continue to favor their own interests over those of the companies that employ them and, more importantly, their customers.

The financial sector would serve the economy better, with less risk, if every financial professional were to spend a brief period at the start of every day reflecting on this simple story:

One day, J.P. Morgan was listening to a younger banker who was enthusiastically describing the new yacht that he had recently purchased. Finally tiring of the younger man, Morgan silenced him with a single question:

"But where are the customers' yachts?"

If J.P. Morgan's attitude were the norm now, there would be much less need for costly and time consuming regulation.

A Government Shutdown

In spite of the fact that the fiscal year is almost half over, not a single appropriations bill has been passed by the Congress. As a result, the government is operating on a Continuing Resolution which permits spending at the same rate as last year and which was scheduled to expire two days from now.

Having, today, managed to pass a short term continuing resolution to fund the United States Government for just two additional weeks, Representatives and Senators likely believe that they are doing their jobs. If that is the case, they misunderstand the nature of their jobs - which include acting in a timely manner - and deserve to be fired for incompetence.

Unless action is taken in the next two weeks, the government will cease to pay its bills and all employees deemed not to be "essential" will be furloughed. The government was last shut down in 1995, in response to political war between President Clinton and Republicans, giddy with power after becoming the majority in the House of Representatives for the first time in forty two years. Those who were furloughed were eventually paid their full wages and salaries for the period - even though they had received an unscheduled vacation.

If a shutdown occurs this year, no one - specifically including Members of Congress and Senators - should be paid for the period during which they are furloughed. While furloughs would not be the fault of civil servants, there can be no justification for spending taxpayer money on work not performed. If a credible threat to refrain from paying salaries during the furlough period were to be made, then pressure from civil servants, who comprise a substantial bloc of voters, to resolve the budget issues would be close to irresistible.

Regrettably there is too much truth in the old cliche that a nation get the government that it deserves. It is, therefore, critical that Americans vote for honest and honorable candidates who will tell us the truth about our fiscal state and who will take timely action in the interests of our nation. We have too long suffered under politicians who focus on little but their own re-election and who pander to those who demand too much from the treasury without being willing to pay the taxes required to balance the budget.

Change is overdue. President Obama's 'Change You Can Believe In' turned out to be business as usual while the elections of 2010 merely provided our nation with another group of petty ideologues focused on their own importance rather than the real challenges, specifically entitlements and the cost of medical care, that we face.

Headscratcher (10)

Failure to pay timely attention to an automobile's fuel gauge often results in running out of gasoline. When that happens, a call to an emergency service will, after a modest wait for police or a towing service, result in the supply of a gallon of somewhat expensive gas.

The current eco-fad is to purchase overpriced electric powered vehicles. Simple plug-in hybrids do make a certain level of operational, if not financial, sense as does the Chevrolet Volt which is a battery powered plug-in vehicle with a 'range extender' gasoline motor.

The newly introduced Nissan Leaf, however, is a pure electric car with a range of about 100 miles, as claimed by the company, and only 73 miles as tested by the Environmental Protection Agency (EPA) . Reduce that - by a lot - when sitting in traffic jams on days when heat or air conditioning are required and the risk or running out of fuel becomes substantial.

Then what?

The answer is simple. Call a tow truck and, instead of purchasing an expensive gallon of gas, the vehicle will be hauled away to spend hours being recharged while the unfortunate eco-freak owner paces impatiently as he (women are likely too sensible to buy these impractical status symbols) contemplates the new damage to his bank account.

A headscratcher indeed!

Advice for New Dictators

Dear Dictator:

Congratulations!

Whether you acquired it as a result of a coup d'etat, a vaguely legitimate election (with no plans for any more), a rigged election or by the cancellation of any further elections, you have just acquired your very own country. The following suggestions should help to provide you with some guidance regarding your next steps:

1. Never forget that all dictatorships have a 'Best Used by Date'. It can sometimes be hard to determine that date but you do want to be long gone by the time it arrives.
2. Never, ever, believe your own propaganda.
3. When stealing money, don't overdo it. You only need a billion or two for a very comfortable retirement. If you have many children, wives and mistresses you may need four or five billion but stealing tens of billions is overdoing things. If you do, you will never work out how to enjoy it or even to hide it - and perhaps yourself - from those seeking vengeance after your retirement.
4. Give your children some of the money and encourage them to leave the country for a life of leisure and debauchery. Whatever you do, refrain from trying to establish a dynastic succession. Some dictators (and absolute monarchs) have been murdered by descendants who too much desired to take their place.
5. Hide the money well. This is getting harder - specially since Switzerland's bank secrecy laws are under attack. There are still some tax havens with good secrecy laws but you need to diversify. Don't put all of your ill-gotten gains in one place.
6. Keep some of your wealth as bullion (coins, small bars) in a reasonably secure warehouse. Use a company - registered in a country where 'Bearer Shares' are permitted - to buy the warehouse.
7. Give your retirement planner a decent share of the money that you have stolen and that he is hiding for you. Include him in your planning for retirement. If you do, there is a reasonable chance that he will only steal a modest part of your retirement fund.
8. If you catch your retirement planner stealing from you, execution - slowly and painfully - is appropriate pour encourager les autres.
9. Negotiate - well in advance - retirement homes in more than one country. Ideally these countries are run by fellow dictators but, in a pinch, an absolute monarch will suffice.

To sum up, don't steal too much or too obviously, keep your children away from the levers of power, hide the money well, and leave before you are deposed or, worse, executed.

Enjoy your new country and, after a while, your very comfortable retirement.

Sincerely

Your Friend

PS: if you feel that this advice is of value and were minded to wire a couple of million U.S. dollars to my bank account, I would be very grateful.