Glenn A Knight

Glenn A Knight
In my study

Monday, April 26, 2010

What Did Goldman Sachs Do?

Some of these financial cases are very, very complicated. This one is pretty simple. Daniel Gross provides a good description of what the SEC charges against Goldman Sachs amount to. He uses one analogy, but I might try my hand at another.

Suppose I sell you a market basket of vegetables. We all know that the vegetables are going to rot sometime, but you're betting that most of the vegetables won't rot before you can sell them at a profit. What you don't know is that I have intentionally selected the vegetables that are most likely to rot quickly. So your market basket is loaded for failure. Why would I do that? Because another customer is paying me a large fee to take his bet that your vegetables will rot.

Nice, huh?

Sunday, April 25, 2010

An Addition to Current Reading

Slowly but surely I'm updating the Current Reading list here to show you what I'm actually reading. I just added Journey to the High Southwest to that list. This is a really good travel book, as may be evidenced by its having gone through eight editions. It covers the Four Corners area of Arizona, Colorado, New Mexico, and Utah (not in that order), as well as Santa Fe. We traveled extensively in the Four Corners area last fall - see albums at my Facebook page - and we visited New Mexico again in late March, spending two nights in Albuquerque and a night in Santa Fe. We found this book helpful in Albuquerque, as it steered us to the old Plaza area, to La Hacienda restaurant, and to great birding at the Rio Grande Nature Center State Park.

More later.

You Can't Get from Here to There Via a Tea Party

As I said over on my Facebook profile, I mostly post articles by smart people, that is, by people who agree with me. This column by Douglas Schoen and Pat Caddell is an exception. I think there are a lot of things wrong with Schoen and Caddell's argument, but I'd really like to pick on one paragraph. I think the following indicates both their cynicism and their wrong-headedness.

"[Democrats] must adopt an agenda aimed at reducing the debt, with an emphasis on tax cuts, while implementing carefully crafted initiatives to stimulate and encourage job creation."

In other words, pander to the Tea Partiers by telling them the same lies that the Republicans are trying to sell. Let me repeat this so you'll know it is true:

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

You cannot reduce the deficit by lowering taxes.

The mechanics here are pretty clear: The additional economic activity stimulated by a tax cut may generate additonal tax revenue, but it won't generate enough revenue to make up the losses caused by the tax cut itself.

So what about the Laffer Curve? What about supply-side economics? What about the Kennedy tax cuts?

It has become a shibboleth on the right that cutting taxes raises revenue because of the increased economic activity. But this isn't true at all times and in all places. The law of diminishing returns applies to tax cuts, as well as to a lot of other human activities. When the marginal top rate of Federal income tax was 90%, as it was in the Roosevelt and Truman administrations, cutting taxes released a lot of activity and it diminished the amount of tax evasion that had been going on. Cutting taxes from 90% to 71% made it less profitable to hide income, and it provide people with money that they were eager to spend. The postwar boom didn't ride on tax cuts alone, though. During the war demand had been suppressed by forced savings - all those war bond drives with Deanna Durbin and Betty Grable stored up a lot of money, and by rationing. After the war all that stored-up money was turned into cash and used to by newly-available houses, automobiles, and business opportunities.

Similarly, the Kennedy tax cut of 1962, when the top marginal rate dropped from 71% to around 52%, reinforced, but did not cause, a boom that was really led by the German economic miracle, and the recovery of the other countries devastated by World War II. This recovery would eventually turn around and bite the U.S., but in the early 60's we were busy selling stuff to satisfy the recovering demand around the world. And, again, lowering tax rates tends to diminish tax evasion and fraud. Moreover, the Kennedy tax cut was overridden by the stimulus package of the 1960s - Vietnam plus Great Society equaled overheated economy and booming inflation, which made it looks as if tax revenues rose enough to make up for the cuts.

We could go through a lot of economic history, some of it quite contentious. Here's the truth, the whole truth, and nothing but the truth. Taxes are low enough now that we can't hope to release a store of pent-up demand and hidden income by lowering them a little more. Instead of a pile of forced savings on hand, people and companies are serious in debt. The demand isn't there to be released by lower taxes. So cutting taxes will simply reduce government revenue and increase the size of the deficit. Thus endeth the lesson.

(By the way, in the interest of full disclosure, Pat Caddell, who was President Clinton's favorite pollster, was a consultant to the TV show The West Wing. Helen and I watched every episode of The West Wing and loved it. On that basis, I hold a certain affection for Caddell. That doesn't mean I don't think he's serious wrong on the present topic.)

A Feel-Good Column on the Economy

Economics has been called "the dismal profession," and economists are prone to shed an atmosphere of gloom and doom. In this column, Daniel Gross is all sunshine and rosebuds. Spring is here, and so are some good signs for the economy. That is to say, for the real economy, if not for the epiphenomenal world of high finance.

I particularly liked the part about Big Belly Solar. This is a new company which makes solar trash compactors. This is great! Because it compacts the trash, each refuse can holds a lot more and doesn't have to be emptied as often. This saves the city on labor for trash pickups. And I suspect it diminishes the problem of the overflowing wastebasket surrounded by trash.

Spring is here, and it's time for some good news about America.

Saturday, April 24, 2010

Another Book Completed

Today I finished reading N. A. M. Rodger's fine history, or, as he calls it, anatomy of the Georgian Navy, The Wooden World. One reason the Georgian Navy is of interest, is that this is the navy which fought the Seven Years War (or, as we call it in America, the French and Indian War). This is a thoroughly researched book - one of the appendices covers the number of men being treated for venereal diseases, and well-written. One couldn't call The Wooden World light reading, but it does move along.

Rodger's big point is that the Navy, like the rest of British society at that time, was governed by a combination of personal followings and mutual advantages. A British naval officer of the time didn't so much order his men about, as persuade them that an action was for the good of the ship. And the men, knowing full well that they had valuable and irreplaceable skills, stood up for themselves in a variety of ways.

One of the manifestations of this communitarian, rather than command, relationship, was the tendency for men to follow a good officer from ship to ship. In some cases, an entire ship's complement was transferred into a larger ship with the captain. There were even cases in which men deserted from one ship in order to serve with a familiar captain on another.

Such incidents raises another significant point. While there were 200 capital crimes on land at that period, there were only nine at sea, and most of them used infrequently, and pushed all the way to execution even more rarely. A deserter was likely to be executed only if that crime were aggravated by murder, say, or robbery, while away from his post.

Another strength of the book is Rodger's attention to the recruitment of officers and men and their motivations. Why did men choose such dangerous work, far from home and subject to violent death? Among other things, it was relatively well-paid (at the period in question), and it was far from home - which, when "home" was a pig farm in darkest Lancashire, was a positive advantage.

Good book, good read, and a means of gaining a deeper understanding of a period which has influenced history down to our own day.

Monster Change to the Reading List

I finished reading The Monster Book of Zombies on March 4, and it's now April 24, so it's about time to remove it from the Current Reading list. It was a very entertaining book, and it's a really good value. The most surprising story in the book was the last, "On the Far Side of the Cadillac Desert with Dead Folks."

On the other hand, zombie stories are very much a matter of taste, so I'm not going to give this one an unqualified recommendation. If you like zombie stories, or if you think you're in the mood for some bedtime reading that might give you some odd dreams, The Monster Book of Zombies could be a good choice for you.

Globalization in Action - in South America

Years ago, when I was in graduate school at Duke, I studied Bihar state in India. Bihar is in northeastern India, next to West Bengal. One of the few shining lights in Bihar was Jamshedpur, named for Sir Jamshedji Tata. At that time, Tata was a big company by Indian standards, but had hardly been heard of elsewhere. Now, Daniel Gross is at the Colombian office of Tata Consultancy Services (TCS), talking about Tata's involvement in other "third-world" countries, and how this is sign of progress for Colombia, Uruguay, and Argentina, as well as for India.

My company has a branch in India - Verizon Data Services India, so I deal with people in the new high-tech world of the subcontinent often. One of the development directors whose people work on projects I manage just made a long trip to Chennai - I suppose he's back in Texas today, if the ash cloud hasn't interfered with his itinerary.

Once again, Gross shines a little light into a promising economic trend, and finds an example that connects to a lot of other developments around the world.

The other really interesting bit in this article is that Tata now owns Jaguar and Land Rover. It was bad enough when the essence of British automotive style was owned by Ford, but to think of Jaguar as being run from Jamshedpur ... the mind boggles.

Participation in America's Business

I started cleaning out my e-mail (Hotmail) today, and I found a number of notices from Charles Schwab about annual meetings of companies in which we own stock. I have never gone to an annual meeting, even though Forest Oil has its shareholder meetings up the road in Denver. But the annual meeting invitations also include an opportunity to vote my shares. Not that I have enough shares to swing an issue, but I do try to vote my shares every year. It's my way of helping to keep American business a little participatory.

I rarely vote against the nominees for the Board of Directors of any company. For a while, I was voting against board members who were over 70, on the ground that the companies needed to bring in some new blood once in a while. And I always voted against John Deutsch for the board of Citigroup; Deutsch was a former head of the CIA, and not a particularly distinguished one. Well, distinguished by incompetence.

This year I waited too long and missed my chance to vote my shares in Citigroup and Pfizer, but there's always next year.

Reading List Changes

Good morning! Of course, it may be evening where you are by the time you read this, but so it goes. In the virtual world, it's always morning somewhere.

I note that I have a couple of books sitting in the Current Reading list that I finished back in March, so they aren't all that current now. I'm going to be removing some books, and I'm going to be adding some books as I go today.

The first one to remove is Majestrum by Matthew Hughes. This one was a (2009) Christmas gift from a friend, and it was a good read. It's a science fiction novel set in the far future, with a couple of nice twists. For one thing, the powers of magic are rising, and this makes our ultrarationalist hero anxious. For another, he has another consciousness sharing his brain.

Hughes is a good writer with a wicked sense of humor. Both my wife, Helen, and I enjoyed reading Majestrum, and another Hughes book, The Spiral Labyrinth, is a prospect for future enjoyment.

Saturday, April 10, 2010

Reporting World War II

Reporting World War II: American Journalism 1938-1946. New York: The Library of America, 1995, 2001. xxiii + 874 pages. Preface by Stephen E. Ambrose. Introduction by Samuel Hynes. Chronology 1933-1945. Maps. Bibliographical Notes. Note on the Texts. Acknowledgments. Notes. Glossary of Military Terms. Index.

This is not a review of this book, because I haven't finished reading it yet. But it's been on my current reading list since February, and I wanted to assure you that I've been reading it. It's a big book. There are some 65 news articles, radio reports, and bulletins in here, from William L. Shirer's account of the cession of the Sudetenland to Germany in 1938, to John Hersey's account of Hiroshima after the bomb fell. There are some very famous journalists represented here: Edward R. Murrow, Ernie Pyle, Margaret Bourke-White. There are also some who have been almost forgotten.

And no wonder. World War II was a long time ago. I graduated from high school 19 years after World War II ended. This May we'll celebrate the 65th anniversary of V-E Day, though I doubt there will be much of a celebration; everyone's forgotten about it, most of the people who lived through it are dead, and they don't teach history in the schools anymore.

The thing about Reporting World War II is that this isn't history. These are stories written during the action by people who were witnesses to these events, or who spoke with actual witnesses when the grime of battle was fresh on their uniforms. It takes us back to when defeating the Germans and the Japs was not dead history but a matter of life and death.

I'm nearing the end of the book (as of this morning I had read just over 70% of it), so I can say that it's worth reading for anyone with an interest in World War II, in how America was sixty-odd years ago, or even in what your grandparents did when they were young.

By the way, this is the one-volume paperback edition issued in 2001. It was cut down from the two-volume hardcover edition published in 1995.

Sunday, April 4, 2010

Catching Up with April Posting: Republicans

Is the Republican Party sticking its collective head in the gas oven? Are Republicans swallowing the tailpipe of an idling Lincoln Continental? Is the conservative movement so blinded by its hatred of the left and its own self-righteousness that it is failing to see clearly?

I would say "Yes!" to all of the above. David Frum, former Canadian, former Bush speechwriter, conservative policy wonk was apparently fired by the American Enterprise Institute (AEI) for saying something like this. And Ron Radosh, in this reflection on l'affaire Frum, is singing to the same sheet music. Tactically speaking, American political parties must appeal to the broad squishy center of the political spectrum. Frum questioned Republican tactics in the healthcare debate, and he no longer works at AEI, because conservatives don't want to hear that they need to change. If they wanted to change, they wouldn't be conservatives, would they?

Next time you see a stegosaurus in the park, ask him how that refusal to change thing worked out.

(The title of this piece? It's April 4 and this is my fourth post in the month of April. Now I have to go do my daily Bible reading.)

Are We Nostalgic for 1934?

In general, people may not have a lot of fondness for 1934. It was smack in the middle of the Great Depression, and things were pretty bad. But, as Daniel Gross points out, it was better than in 1930 or 1932, and the economy was growing. So Mr. Roosevelt's party, the Democratic Party, the party of Woodrow Wilson, didn't lose seats in the House and Senate, as conventional wisdom says the president's party must in the off-year. No, the Democrats gained seats, increasing their majorities, and positioning themselves to carry out the "Second New Deal."

Can this happen again? A lot depends upon just exactly how much the numbers move between now and November, but the Republicans should beware of counting their chickens before they are hatched. Of course, it the Republicans are disappointed in the fall, think how unhappy the Tea Party patriots, Fox News, Sarah Palin, and members of various armed militias are going to be!

Saving the Opposite of Debt

Some of you might have found the title of my last post obscure, or even confusing. I hope not, but just in case, here's the deal. In economics, debt is negative savings (and savings are negative debt). This makes perfect sense is you think back to Mr. Micawber, who pointed out that if your income exceeds your outgo, you have a happy situation, but if your outgo exceeds your income, you will be in misery.

So, if you started out with neither debt nor savings, and you make $100 per week more than you spend, you will save $100 per week. If you make $100 per week less than you spend, you're going to have to borrow $100 from somewhere.

Where it gets a little tricky is if you already have some debt. Suppose you have a mortgage in the amount of $150,000. All other things being equal, if you reduce that mortage by $10,000 per year, this is the equivalent of saving $10,000 per year. So, when people pay down their credit cards, pay off their car loans, and accelerate their mortgage payments, they are increasing their saving just as if they were pouring that money into a savings account.

Remember: Saving Is the Opposite of Debt

Daniel Gross' column notes that corporate debt has declined to the level of 2006. Households are also relying less on credit, and more on cash. Gross mentions a family that has gone "all-cash." He doesn't mention Dave Ramsey, and, indeed, the envelope system wasn't invented by Ramsey. Back when I was working at Money Concepts, we would sometimes talk up the idea of paying all your bills in cash. Budget a certain amount each month for each category, put that amount in a labelled envelope, and don't spend more than is in the envelope. One of the "enforcers" is that, as the food envelope, say, gets emptier, you'll shy away from blowing it all on dinner out, and you'll eat rice and beans at home.

I haven't gone all cash, and I don't intend to. I do use my debit card for a lot of purchases. I generally use only one bank credit card (and one gasoline credit card), and I keep the others in folders in a file cabinet. And I pay the balance every month, so I'm not paying out any finance charges. The key here, if there is a key, is that one should never use credit to buy something one cannot afford. That is, one should use credit to buy things for which one could have paid cash (with the exception of a house or, I would say, an automobile), and then use the cash to settle the borrowing immediately. A credit card should be a convenient way to pay, not a means of supplementing one's income.

Now, if we could just get the federal and state governments to go all-cash!