Quote of the Day

2. No person under the age of 35 will be allowed to work on Wall Street.

Upon leaving school, young people, no matter how persuasively dimwitted, will be required to earn their living in the so-called real economy. Any job will do: fracker, street performer, chief of marketing for a medical marijuana dispensary. If and when Americans turn 35, and still wish to work in finance, they will carry with them memories of ordinary market forces, and perhaps be grateful to our society for having created an industry that is not subjected to them. At the very least, they will know that some huge number of people -- their former fellow street performers, say -- will be seriously pissed off at them if they do risky things on Wall Street to undermine the real economy. No one wants a bunch of pissed-off street performers coming after them. To that end ...

- Eight Things I Wish for Wall Street, Mike Lewis

What I've Been Reading

The One Hour China Book: Two Peking University Professors Explain All of China Business in Six Short Stories by Jeffrey Towson and Jonathan Woetzel. Excellent read sans any bias; an hour well spent.

Our big assertion is that six mega-trends are driving most of China’s business today – and its interaction with the West. This is our simple framework. If you remember one thing from this book, it should be this chart.

Urbanization:
If you are building cities at a breakneck pace against a huge urbanization inflow, sometimes your supply gets ahead of your demand. That, plus some real estate speculation, gets you a ghost city. And sometimes your demand gets ahead of your supply and you get congestion (e.g., crowded Beijing). Sometimes you get it about right (e.g., Shenzhen). These things should be expected and are not as significant as newspaper headlines would have you believe.

Manufacturing Scale:
This is what investors call economies of scale. It is the point when you are so much larger than your competitors, relative to the market, that you can outspend them on research, factories, fixed assets, marketing and other fixed costs. It’s the point where you are very difficult to dislodge as the leader due to your scale. It’s what Warren Buffett calls the “survival of the fattest.” What we see in China today is exceptionally large manufacturing scale that is actually creating a stronger and stronger competitive advantage over time.

Rising Chinese Consumers:
Because when you look at actual incomes, it is clear that the future of the global economy is China and Asia. Middle class incomes in Asia will dwarf everything else. Forget Latin America (no offense). Forget Africa (same). It is the middle class of Asia that is the biggest economic growth engine going forward – similar to how the American middle class was the growth engine of the past century. Over the next 15 years, Asia will go from 20 percent to 66 percent of the world’s middle class.

Money and Lots of it:
The mega-trend here is not just the amount of money. It is the volume, efficiency and sophistication with which it moves within China. We are interested in the financial architecture itself. And how money moves between projects, companies and financial institutions. Also, in light of recent credit concerns, the system’s stability is a big question.

Ask a simple question like “who controls the Bank of China?” This should be a simple question to answer. Bank of China is, after all, publicly traded. It is certainly run like a banking corporation. And we know who the managers and shareholders are. However, it turns out the CEO does not really report to the shareholders and is not actually appointed by them. He is chosen by the Organization Department of the Communist Party, which technically owns nothing.


The Chinese Internet:
For example, Chinese has already replaced English as the primary language of the Internet. Another is that the money involved has become very large. Chinese e-commerce will likely surpass US e-commerce in total dollar terms within the next two to three years.

It’s not a coincidence that China was the first country to designate Internet addiction as a disease.

Forrester Research classified 47 percent of the online Chinese population as “creators”, meaning they actively create their own content online (blogs, web pages, videos, articles etc.). In comparison, only 21 percent of US Internet users create such online content.

The Brainpower Behemoth:

Chinese children often start their formal education at age two. Having tutors and taking extra classes on Saturdays is the norm. Becoming fluent in English is a given. And math and science skills are all far better than in the West. Right up until entering college, the whole system is very effective at developing valuable skills. 

There is, however, a lot of valid criticism that this system is too demanding. But this is not just a result of the educational system. It’s cultural. It’s historical. It’s something you see in family after family. Education in China is aggressively sought after and highly respected. Jiang Xueqin, deputy principal of Peking University High School said, “Chinese students love learning. They go to class and they have a real attitude that ‘education can change my life.” 

This is, of course, a big generalization. But some generalities are true and this is one of them. Underestimate it at your own peril.

George Soros On Euro Crisis

"To be a little more specific, let me suggest the outlines of a European solution to the euro crisis. It involves a delicate two-phase maneuver, similar to the one that got us out of the crash of 2008. When a car is skidding, you first have to turn the steering wheel in the direction of the skid, and only after you have regained control can you correct your direction. In this case, you must first impose strict fiscal discipline on the deficit countries and encourage structural reforms; but then you must find some stimulus to get you out of the deflationary vicious circle—because structural reforms alone will not do it. The stimulus will have to come from the European Union and it will have to be guaranteed jointly and severally. It is likely to involve eurobonds in one guise or another. It is important, however, to spell out the solution in advance. Without a clear game plan Europe will remain mired in a larger vicious circle in which economic decline and political disintegration mutually reinforce each other."

- More Here

Wisdom Of The Week

Definite Keepers

• Department of Defense: It’s still a dangerous world and we remain the steadying Leviathan amidst all those rising powers. But we also spend way beyond the “common defense.” One radical option: kill the Air Force as we embrace drones.

• Department of State: It’s still a world dominated by nation-states, and the ones doing best by globalization are those fielding the sharpest diplomats. Plus, the better State is, the more you can whack Defense.

• Department of Treasury: Money makes the world go round and America still owns the planet’s reserve currency of choice. Frankly, this is the most important department going forward – just like when we were starting out.

• Department of Justice: Nothing defines our “more perfect union” better than our judicial system, and our “federal police” (FBI, etc.) is tiny compared to most states.  Plus, the best counter-terrorism stuff is performed here.

• Department of Transportation: In the global economy, it’s not location that matters but infrastructure, infrastructure, INFRASTRUCTURE!  Ours is crumbling and needs a lot more federal attention.

• Centers for Disease Control and Prevention: In an interconnected world, during a century when biological science will dominate, this is the primary national security threat we face – to include bioterrorism.  Seen the movie “Contagion”?  You should.

• Government Accountability Office: Washington’s official – and sole – truth-telling entity.  They watch the watchers.

• National Science Foundation and National Labs: Our economy lives and dies with its high-tech competitive advantages, and these agencies spend time and money on the basic research that undergirds it all – you know, the “boring stuff” the private sector doesn’t bother with until . . . cha-ching!

Can’t Kill But Have to Radically Restructure

• The big 3 entitlements: The Supreme Court will decide on Obamacare (or whatever you want to call it) come June, but it’s clear that an aging America (a good thing, mind you!) can’t afford Social Security and Medicare – as is. Bottom line: expect to work a lot longer before retiring.

• Internal Revenue Service: Can’t have a government without taxation, but the complexity of our current code is indefensible, creating supreme inefficiencies throughout our economy. Tax simplification is desperately warranted.

• Intelligence Community: Seventeen agencies, really?  The need is compelling all right, but the redundancy here – not to mention the continuing lack of coordination – is stunning. The Brits get by with two primary agencies (one domestic and one foreign), and – frankly – they routinely outperform our Keystone collection.

• U.S. Mint: It’s time to ditch all coins except quarters. Heck, soon enough we should ditch all bills as well. Don’t believe us? Sweden, the first European country to intro bank notes (1661) is planning to move to a completely cashless economy!

• National Aeronautics and Space Administration: Okay, we still got a thing for JFK. But NASA should focus exclusively on the stuff beyond the Moon and leave all the close-in stuff to the private sector – meaning Richard Branson.

On the Bubble 

• Department of Homeland Security: Hard to argue against homeland defense (“As opposed to  . . .?”), but this massive kluge job was a disaster from the get-go and still stinks today. Most experts will tell you we’d all be better off sending all those adopted agencies back to their “birth” departments.

• Department of Commerce: Clearly, the promotion of U.S. trade is incredibly important in this “flat world” globalization, but Commerce isn’t worth the sum of its many worthy parts (National Weather Service, Census Bureau, Patent Office), most of which would be better off as independent agencies.

• Department of Labor: The key issue of labor in this country is “continuing education,” so either kill Labor and subsume under the Department of Education or vice versa. The regulations part can be a small independent agency.

• Department of Education: See, Department of Labor.

Deserve the Axe

• Department of Agriculture: We’ve got something like one Dept. of Ag employee for every dozen farmers in America – seriously. With U.S. farm exports booming, ag subsidies should be nixed in full, and this legacy department should be whacked down to a bare minimum and then shoved inside the Food and Drug administration.

• Department of Energy: Energy is important all right, but the Department of Energy has little to do with any of that, outside of badly running the National Labs (worth keeping) and maintaining the nuclear weapon stockpile (also worth keeping). Give the nuke duty to Defense and have somebody else run the Labs – case closed!

• Department of Interior: Hard to see why the U.S. Government should own “federal lands” across all 50 states. Harder still to understand why we need a cabinet-level department to manage them.

• Department of Housing and Urban Development: Federal public housing in this country is a disaster, and a costly one at that. If we want to spend Federal tax funds on this, given them directly to the states.

• Department of Health and Human Services: All social work programs, like politics, are local, so why the Federal role here?  Aren’t we always better off letting states experiment within our federal system?

• Department of Veterans Affairs: This is mostly about a ghettoized healthcare system for veterans.  It’s not a good one and shouldn’t be continued. Yes, honor their service, but simply pay for good care in the private healthcare system. This department can be folded within Defense with no great conflict-of interest danger.

• United States Postal Service: The time has come. Incentivize the private sector to make sure everybody’s mailbox is serviced and let’s move on to more important 21^st-century matters.

- What Should The Government Cut?

Wisdom Of The Week

"We Americans cherish our myths. One myth is that there is more social mobility in the United States than in Europe. That’s false. Another myth is that the government is smaller here than in Europe. That’s largely false, too.

The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.

The Organization for Economic Cooperation and Development recently calculated how much each affluent country spends on social programs. When you include both direct spending and tax expenditures, the U.S. has one of the biggest welfare states in the world. We rank behind Sweden and ahead of Italy, Austria, the Netherlands, Denmark, Finland and Canada. Social spending in the U.S. is far above the organization’s average.

You might say that a tax break isn’t the same as a spending program. You would be wrong."

- One of the most important article ever by David Brooks. Sadly, it would take a life time for ideologically driven citizens of this country to accept this fact as self-evident.

Self-fulfilling Prophecy & American Hatred For Anything Government

Francis Fukuyama has been exposing this dissonance, ever since he started blogging again. Someone had to do it but I never expected even in my wildest dreams that person would be Fukuyama. I admire and respect him even more now for adapting to changing facts (check out his new Governance Project @ Stanford).

"I would argue that the quality of governance in the US tends to be low precisely because of a continuing tradition of Jacksonian populism. Americans with their democratic roots generally do not trust elite bureaucrats to the extent that the French, Germans, British, or Japanese have in years past. This distrust leads to micromanagement by Congress through proliferating rules and complex, self-contradictory legislative mandates which make poor quality governance a self-fulfilling prophecy. The US is thus caught in a low-level equilibrium trap, in which a hobbled bureaucracy validates everyone’s view that the government can’t do anything competently. The origins of this, as Martin Shefter pointed out many years ago, is due to the fact that democracy preceded bureaucratic consolidation in contrast to European democracies that arose out of aristocratic regimes."

And the his five book interview is a must read as well:

I get the sense that the belief that government is bad and markets are good is almost like a religion. No reality check is ever going to be enough to make a difference.
It is true that it is a part of the American political culture, but that culture has changed over time. People believed that very strongly in the late 19th century. Then you had the rise of the Progressive movement, which shifted views towards the need for a stronger centralised state. Then it made a big comeback in the 1920s and then the Great Depression again shifted views. It may be a religion, but it’s not a religion that members believe in at all points.

There is also this problem that both you and Jeff Sachs have written on, that if you’re constantly critical of government, and say you don’t like government, the government you get is going to be of lower quality because it gets deprived of talent and resources. This, in turn, confirms your view of government as incompetent and it becomes a vicious circle.

It’s what’s an economist would call a low-level equilibrium trap. You don’t want to pay taxes to get better government services because you’re convinced the government will waste any money that you give them. So you’re never in a position to get out of that. A lot of Latin America is basically in that situation, and I’m afraid that the US has now been in this situation for some time.

Wisdom Of Martin Wolf

Enlightening piece from Martin Wolf on the future of economics... too bad politicians and people wouldn't heed to this wisdom and probably prefer to stay stuck in the quagmire of 20th century economic ideologies.

• Let a thousand flowers of thought bloom. There cannot be just one general model of the economy or just one approach to economics. Among the blooms discussed were behavioural economics, neuroeconomics, computer based modelling of processes over time. Participants recommended talking to political scientists and even sociologists. They also recommended looking at the causes of inequality, the economics of happiness, the role of institutions, the importance of culture, and the effects of power. Fortunately, economists are creative people. A great deal of imaginative stuff is going on.
• Time matters in economic processes, which are, in general, not reversible and not characterised by any sort of equilibrium. More broadly still, economics suffers from physics envy. It seeks to be an exact science, which is impossible.
• Even though economists get much wrong, they still have much to offer to non-economists who tend to assume that economic problems are far more simple than they actually are.

A Cure For Capitalism Concerns

"America’s political system, especially at the federal level, is letting us down, in ways that cut across political parties and span Presidential administrations and Congressional sessions. But it would be wrong to place either the U.S. competitiveness problem or its solution at the feet of the government. Business plays a role in creating even those problems that seem to stem from public policy. Take, for instance, America’s corporate tax code. The code is convoluted in part because government authorities have allowed it to be, but also because corporate leaders have relentlessly pushed for loopholes and subsidies that serve narrow self-interest. Part of the business agenda for U.S. competitiveness is to stop taking actions that benefit one’s own firm but, collectively, weaken America’s business environment.

Moreover, business can and must be a positive part of the solution to America’s competitiveness problem. Individually and collectively, firms can upgrade the business environment in the communities where they operate—by supporting educational institutions, building shared infrastructure, investing in workforce skills, deepening clusters, and so on. We are not suggesting corporate charity here. In our survey, we asked each respondent what would happen to his or her company if it undertook more activities to benefit the local community. A full 22% said that the company itself would be more successful as a result. Another 72% said that their companies could do more to benefit the local community without affecting company success. Only 7% felt that doing more for the community would diminish corporate success. Untapped opportunities exist for firms to upgrade the competitiveness of their local communities, and to benefit themselves in the process."

- More Here

Zakaria Interviews Obama - Why Won’t You Embrace Simpson-Bowles?

"Why won’t you embrace Simpson-Bowles?

I’ve got to say, most of the people who say that, if you asked them what’s in Simpson-Bowles, they couldn’t tell you. So first of all, I did embrace Simpson-Bowles. I’m the one who created the commission. If I hadn’t pushed it, it wouldn’t have happened, because congressional sponsors, including a whole bunch of Republicans, walked away from it.

The basic premise of Simpson-Bowles was, we have to take a balanced approach in which we have spending cuts and we have revenues, increased revenues, in order to close our deficits and deal with our debt. And although I did not agree with every particular that was proposed in Simpson-Bowles — which, by the way, if you asked most of the folks who were on Simpson-Bowles, did they agree with every provision in there?, they’d say no as well.

So this notion that the reason that it hasn’t happened is we didn’t embrace Simpson-Bowles is just nonsense. And by the way, if you talk to some of these same business leaders who say, Well, he shouldn’t have walked away from Simpson-Bowles, and you said, Well, are you prepared to kick capital gains and dividends taxation up to ordinary income — which is what Simpson-Bowles called for, they would gag. There’s not one of those business leaders who would accept a bet. They’d say, Well, we embrace Simpson-Bowles except for that part that would cause us to pay a lot more.

And in terms of the defense cuts that were called for in Simpson-Bowles, they were far deeper than even what would have been required if the sequester goes through, and so would have not been a responsible pathway for us to reduce our deficit spending. Now, that’s not the fault of Simpson-Bowles. What they were trying to do was provide us a basic framework, and we took that framework, and we have pushed it forward.

And so there should be clarity here. There’s no equivalence between Democratic and Republican positions when it comes to deficit reduction. We’ve shown ourselves to be serious. We’ve made a trillion dollars worth of cuts already. We’ve got another $1.5 trillion worth of cuts on the chopping blocks. But what we’ve also said is, in order for us to seriously reduce the deficit, there’s got to be increased revenue. There’s no way of getting around it. It’s basic math. And if we can get any Republicans to show any serious commitment — not vague commitments, not “We’ll get revenues because of tax reform somewhere in the future, but we don’t know exactly what that looks like and we can’t identify a single tax that we would allow to go up” — but if we can get any of them who are still in office, as opposed to retired, to commit to that, we’ll be able to reduce our deficit.

Now, to your larger point, you’re absolutely right. Our whole foreign policy has to be anchored in economic strength here at home. And if we are not strong, stable, growing, making stuff, training our workforce so that it’s the most skilled in the world, maintaining our lead in innovation, in basic research, in basic science, in the quality of our universities, in the transparency of our financial sector, if we don’t maintain the upward mobility and equality of opportunity that underwrites our political stability and makes us a beacon for the world, then our foreign policy leadership will diminish as well."

- More Here

Andrew On Obama

Andrew's Newsweek cover story - How Obama's Long Game Will Outsmart His Critics

"The first is the simple scale of what has been accomplished on issues liberals say they care about. A depression was averted. The bail-out of the auto industry was—amazingly—successful. Even the bank bailouts have been repaid to a great extent by a recovering banking sector. The Iraq War—the issue that made Obama the nominee—has been ended on time and, vitally, with no troops left behind. Defense is being cut steadily, even as Obama has moved his own party away from a Pelosi-style reflexive defense of all federal entitlements. Under Obama, support for marriage equality and marijuana legalization has crested to record levels. Under Obama, a crucial state, New York, made marriage equality for gays an irreversible fact of American life. Gays now openly serve in the military, and the Defense of Marriage Act is dying in the courts, undefended by the Obama Justice Department. Vast government money has been poured into noncarbon energy investments, via the stimulus. Fuel-emission standards have been drastically increased. Torture was ended. Two moderately liberal women replaced men on the Supreme Court. Oh, yes, and the liberal holy grail that eluded Johnson and Carter and Clinton, nearly universal health care, has been set into law. Politifact recently noted that of 508 specific promises, a third had been fulfilled and only two have not had some action taken on them. To have done all this while simultaneously battling an economic hurricane makes Obama about as honest a follow-through artist as anyone can expect from a politician.

What liberals have never understood about Obama is that he practices a show-don’t-tell, long-game form of domestic politics. What matters to him is what he can get done, not what he can immediately take credit for.

If I sound biased, that’s because I am. Biased toward the actual record, not the spin; biased toward a president who has conducted himself with grace and calm under incredible pressure, who has had to manage crises not seen since the Second World War and the Depression, and who as yet has not had a single significant scandal to his name. “To see what is in front of one’s nose needs a constant struggle,” George Orwell once wrote. What I see in front of my nose is a president whose character, record, and promise remain as grotesquely underappreciated now as they were absurdly hyped in 2008."

Quote of the Day

"Indeed, there are a lot of reasons to think that inequality will continue to worsen. The current concentration of wealth in the United States has already become self-reinforcing: as the economist Simon Johnson has argued, the financial sector has used its lobbying clout to avoid more onerous forms of regulation. Schools for the well-off are better than ever; those for everyone else continue to deteriorate. Elites in all societies use their superior access to the political system to protect their interests, absent a countervailing democratic mobilization to rectify the situation. American elites are no exception to the rule.
That mobilization will not happen, however, as long as the middle classes of the developed world remain enthralled by the narrative of the past generation: that their interests will be best served by ever-freer markets and smaller states. The alternative narrative is out there, waiting to be born."

- Francis Fukuyama

View This Article as Multiple Pages

Is Capitalism On Death Bed?

"In principle, none of capitalism’s problems is insurmountable, and economists have offered a variety of market-based solutions. A high global price for carbon would induce firms and individuals to internalize the cost of their polluting activities. Tax systems can be designed to provide a greater measure of redistribution of income without necessarily involving crippling distortions, by minimizing non-transparent tax expenditures and keeping marginal rates low.  Effective pricing of health care, including the pricing of waiting times, could encourage a better balance between equality and efficiency. Financial systems could be better regulated, with stricter attention to excessive accumulations of debt.

Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalism’s demise might be, the possibility seems remote. Nevertheless, as pollution, financial instability, health problems, and inequality continue to grow, and as political systems remain paralyzed, capitalism’s future might not seem so secure in a few decades as it seems now."

- More Here

Quote of the Day

In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could be dealt with in only one of two ways: massive cutbacks in public services or a default—or both. Whitney thought default unlikely, at least at the state level, because the state could bleed the cities of money to pay off its bonds. The cities were where the pain would be felt most intensely. “The scary thing about state treasurers,” she said, “is that they don’t know the financial situation in their own municipalities.” 

“How do you know that?”

“Because I asked them!”

- Michael Lewis

Wisdom of the Week

"We have called for at least $4 trillion in savings because it is the minimum amount of deficit reduction necessary to stabilize the U.S. debt and put it on a downward path as a percentage of gross domestic product. A package that achieved $1.5 trillion in savings would generate a great deal of opposition from affected constituencies but would still leave in place a large and growing debt burden.

When we presented our co-chairmen’s proposal to the rest of the fiscal commission in November, Washington insiders were shocked that we so aggressively exceeded our mandate. They were sure that the proposal would need to be scaled back to get a majority vote. It turned out that the opposite was true. The more comprehensive we made it, the easier our job became. The tougher our proposal, the more people came aboard.

Commission members were willing to take on their sacred cows and fight special interests — but only if they saw others doing the same and if what they were voting for solved the country’s problems. This spirit of shared sacrifice gained us broad bipartisan support, spanning from Democratic Sen. Dick Durbin to Republican Sen. Tom Coburn. We would not have garnered that type of support had we not taken on defense, domestic programs, the solvency of Social Security, health care, and spending in the tax code all at once.

The supercommittee’s work is not simply arithmetic. Its members must be smart in how they achieve savings. They should avoid making immediate deep cuts that would jeopardize our fragile economic recovery. They need to set priorities, such as reducing lower-priority spending while preserving funding for key investments necessary to compete in a knowledge-based global economy. And they should not make cuts that would harm the disadvantaged.

We are encouraged that President Obama has embraced the goal of stabilizing the debt and the target of achieving at least $4 trillion in deficit reduction. Unfortunately, his proposal falls short of this goal by counting war savings that were already planned; and while it does (barely) stabilize the debt, it does so at a dangerously high level and with no margin for error. We are disappointed, too, that the president did not address the long-term solvency of Social Security. Nonetheless, it represents a step forward.

The president has said that he won’t support major cuts to entitlements unless the package includes additional revenue, but the opposite must be true as well. The president must be willing to support real savings in entitlements that deal with long-term costs. We can’t simply cut or tax our way out of this problem. Bringing our debt under control will require tackling the growth of entitlements and reforming the tax code to promote economic growth and generate enough revenue to meet our commitments.

The work done by our commission and others has shown that it is possible to reform entitlement programs in a way that preserves and even strengthens the safety net for the most vulnerable while achieving significant savings. Similarly, by pursuing comprehensive tax reform that eliminates or reduces many of the $1.1 trillion in tax expenditures, we can raise revenue in a way that improves progressivity in the tax code — because these tax expenditures disproportionately benefit upper-income taxpayers — while promoting economic growth by removing economic distortions from tax expenditures and reducing marginal tax rates.

If the supercommittee is bold, it can put forward a smart, well-formulated deficit reduction plan that not only reduces our deficit but also maintains our economic health and restores public confidence in America’s ability to govern wisely and prudently. Failure to do so will incur a great price."

- Go Big, Be Bold, Be Smart  by Alan Simpson and Erskine Bowles

The End of the Future - Peter Theil

"The single most important economic development in recent times has been the broad stagnation of real wages and incomes since 1973, the year when oil prices quadrupled. To a first approximation, the progress in computers and the failure in energy appear to have roughly canceled each other out. Like Alice in the Red Queen’s race, we (and our computers) have been forced to run faster and faster to stay in the same place.Taken at face value, the economic numbers suggest that the notion of breathtaking and across-the-board progress is far from the mark. If one believes the economic data, then one must reject the optimism of the scientific establishment. Indeed, if one shares the widely held view that the U.S. government may have understated the true rate of inflation — perhaps by ignoring the runaway inflation in government itself, notably in education and health care (where much higher spending has yielded no improvement in the former and only modest improvement in the latter) — then one may be inclined to take gold prices seriously and conclude that real incomes have fared even worse than the official data indicate.

Most of our political leaders are not engineers or scientists and do not listen to engineers or scientists. Today a letter from Einstein would get lost in the White House mail room, and the Manhattan Project would not even get started; it certainly could never be completed in three years. I am not aware of a single political leader in the U.S., either Democrat or Republican, who would cut health-care spending in order to free up money for biotechnology research — or, more generally, who would make serious cuts to the welfare state in order to free up serious money for major engineering projects. Robert Moses, the great builder of New York City in the 1950s and 1960s, or Oscar Niemeyer, the great architect of Brasilia, belong to a past when people still had concrete ideas about the future. Voters today prefer Victorian houses. Science fiction has collapsed as a literary genre. Men reached the moon in July 1969, and Woodstock began three weeks later. With the benefit of hindsight, we can see that this was when the hippies took over the country, and when the true cultural war over Progress was lost."

- More Here

Why Politics is Polarized?

Psychology research shows that, when people with similar opinions are put together, their views become more radical. In Going to Extremes: How Like Minds Unite and Divide, Cass R. Sunstein, the legal scholar who is now administrator of the White House Office of Information and Regulatory Affairs, reviews a variety of evidence and concludes, “When people talk to like-minded others, they tend to amplify their preexisting views, and to do so in a way that reduces their internal diversity.”

It is true that several respected political scientists have suggested that elites play a larger role in polarization than my analysis would suggest. But those arguments founder on a simple point: Political scientist Gary Jacobson has found that people’s views on politics have not diverged considerably from those of their representatives. This suggests that polarization is not primarily an elite-driven phenomenon. As Bill Galston and Pietro Nivola of Brookings explain, “Polarized politics are partly here, so to speak, by popular demand. And inasmuch as that is the case, undoing it may prove especially difficult.”

- via Q3D

Wisdom Of The Week

"What’s a progressive consumption tax? First of all, it’s not a sales or value-added tax, neither of which takes individual income into account. Those taxes are imposed on the spot when someone buys a good or a service.


Under a progressive consumption tax, taxpayers would report their incomes, much as they do now. They’d also report their annual savings, much as they do for tax-exempt retirement accounts. The tax would be based on “taxable consumption” — the difference between their income and annual savings, less a standard deduction of, say, $30,000 for a family of four. Rates on additional expenditures would start low and rise gradually with taxable consumption.


Because savings would be tax-exempt, the biggest spenders would save more and spend less on luxury goods, leading to greater investment and economic growth, without any need for government to micromanage anyone’s behavior. Consumers in the tier just below, influenced by those at the top, would also spend less, and so on, all the way down the income ladder. In short, such a tax would attenuate the expenditure cascade that has made life for middle-income families so expensive.


Adopting a progressive consumption tax would be like creating wealth out of thin air. Its magical quality stems from the fact that luxury spending is strongly context-dependent, just as antlers are. If everyone spends less, you can still have the biggest mansion — or antlers — on the block, but you’ll also be able to do many other useful things. The money saved could help resolve the current fiscal impasse. And it could also be used to fix roads and bridges and support a host of other genuine improvements.


Changing the tax code in a fundamental way won’t be easy. But as the late Herb Stein, Richard M. Nixon’s chief economist, once remarked, “if something can’t go on forever, it won’t.” The dysfunctional system now in place threatens to destroy our economic future. If we don’t change it now, we’ll have to change it later.


Can anyone imagine anti-government conservatives embracing a progressive consumption tax? Actually, yes. It’s perhaps the only important policy option that could win support from both ends of the political spectrum. A version of it, for example, was proposed in 1995 by Senators Pete V. Domenici, a Republican, and Sam Nunn, a Democrat.


Many conservatives advocate a flat tax — essentially, a national sales tax — but most realize that its adoption is unlikely because it would fall disproportionately on people with lower incomes. If the alternative is to stick with the current income tax, however, a progressive consumption tax begins to look pretty good to many conservatives. And once they understand how it would reshape spending patterns, they often become openly enthusiastic about it.


In 1997, shortly after publishing an article advocating this kind of tax, I received a warm letter from Milton Friedman, widely hailed as the patron saint of small-government conservatism."

- Summary of the new book The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank (via MR)

Quote of the Day

Many of the same Republicans who fought hammer-and-tong to keep the George W. Bush-era income tax cuts from expiring on schedule are now saying a different “temporary” tax cut should end as planned. By their own definition, that amounts to a tax increase.


The tax break extension they oppose is sought by President Barack Obama. Unlike proposed changes in the income tax, this policy helps the 46 percent of all Americans who owe no federal income taxes but who pay a “payroll tax” on practically every dime they earn.


It’s a bad idea to raise taxes on working Americans in a weak economy and with interest rates so low the gains from reducing the deficit from current spending are low. Our political system is so dysfunctional, however, that Republicans may fail to support effective tax cuts precisely because a Democratic President regards them as important for economic growth.

- Alex Tabarrok, MR

Wisdom Of The Week

"In truth, rising life expectancy and growing health-care costs mean that today's elderly have contributed only a fraction of what they expect to receive from Social Security and Medicare. The government made a mistake in the past by not raising taxes to finance these programs or reducing the benefits that they promised. Unless the growth of these entitlement programs is curbed now, today's young will pay dearly for that mistake, in the form of higher taxes now and lower benefits when they are old.


But the elderly are politically active and powerful. Not only do many defend their entitlements strongly; some oppose growth in public spending in other areas for fear that it will weaken the government's ability to pay for the benefits that they believe they are owed.


These then are the roots of America fiscal impasse, which has produced passionate constituencies viscerally opposed to compromise. Any political deal significantly before the debt-ceiling deadline would have exposed politicians to charges of betrayal from their constituents."

- Raghuram Rajan

Bob Rodriguez On Deficit

His stock fund, FPA Capital (FPPTX), has returned 15% annually over the past 25 years, beating every single diversified equity fund, according to Lipper. His bond fund, FPA New Income (FPNIX), has never posted an annual loss. "He'd rather lose his clients than position their money in a way that he feels is inappropriate," says Stephanie Pomboy, head of institutional research firm MacroMavens. "It's almost sad that you can count the number of people who are willing to do that on, probably, one finger."

- More Here