The phony Social Security crisis-2: Double talk on Social Security

(For previous posts in this series, see here.)

We currently see this curious double-talk taking place about the US bonds that form the assets of the Social Security trust fund. When trying to scare people about Social Security, people in this administration talk about the bonds in the trust fund being ‘worthless’ pieces of paper. But when trying to actually sell the bonds in international markets to finance its deficits, the government talks about how robust the US economy is. Like all double-talking politicians, the two different faces are presented to two different audiences, with the hope that the audiences will not overlap.
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Some campaign thoughts

Today is voting day in the Ohio, Texas, Vermont and Rhode Island primaries, and is as good a day as any to discuss the nature of the race.

This day is being breathlessly marketed as a crucial, decisive, make-or-break day, just like the Potomac primaries day before that, or Super Tuesday before that, or the New Hampshire primary before that. On the basis of the results, reporters will declare that one candidate has the momentum and start urging the other candidates to drop out of the race just because they think those candidates are unlikely to win. Why do the reporters care? The candidates have every right to continue for as long as they can or want to without being accused of somehow ruining the process by staying in. Why not just let the voters decide when they have had enough of a candidate? As a result of the elections, if Obama or Clinton or Huckabee or Paul refuse to concede and decide to go on to Pennsylvania on April 22 and even after that until the final elections on June 3, let them do so without being hounded to get out. Even if Huckabee (say) has no mathematical chance of winning his party’s nomination, surely the voters in the remaining states have a right to express their preference for him if they want to?

On another point, with the final primary being on June 3, there will be almost two whole months before the party conventions. So as a result of all the leapfrogging that took place with so many states trying to get in early, we will now have the summer doldrums where nothing happens for two months. Couldn’t they all have started about six weeks later?

I have not been writing about the significance of the Democratic presidential nominee being, for the first time, either a woman or an African-American. Not that this isn’t an important development but before we sprain our elbows patting ourselves on the back, it might be good to realize that this is long, long overdue. After all, many other countries have elected both women and minorities as heads of state much earlier. My own country of origin (Sri Lanka) elected the world’s first female executive head of state way back in 1960, when Sirimavo Bandaranaike became prime minister.

Our reaction here shouldn’t be “Isn’t this great?” but “Why did it take so long?”

But progress is progress, however belated, and should be welcomed. At the very least, this development should put to rest tiresome discussions about whether the US is ‘ready’ for a woman or minority president.

But just at the moment when the possibility of a female US President is being savored, along comes this extraordinarily silly article in the Washington Post by Charlotte Allen in which she argues in support of all the absurd negative female stereotypes that we have long striven to eliminate from our discourse, such as that women are dumb, bad at math, looks-obsessed, shoe-fetishizing airheads, governed exclusively by their emotions, who can’t even drive properly.

The editor of the section of the newspaper in which the article ran now says it was meant to be tongue-in-cheek, but the first rule in humor and satire is to be funny. If you are not, people have a right to take what you are saying as intended to be serious. There are suspicions that this explanation was a story designed to protect themselves from the furious denunciations the article received. What is the Post going to do as a follow up? Run another ‘tongue-in-cheek’ article by an African-American arguing that black people really are stupid and lazy and shiftless?

Charlotte Allen should get some tips from Dave Barry, who is a great example of a writer who exploits all kinds of stereotypes for humor and you are never in any doubt as to his intent. His classic essay The Difference Between Men and Women is a brilliant example of how to use gender stereotypes to humorous effect.

Finally, just the day before the primary elections, we in Ohio were deluged with poll results about the Democratic race, with conflicting predictions. What is the point of such last-minute poll results? It does not help the campaigns since it is too late for the campaigns to do anything with this information. Are the polls meant to influence voters? What kind of voter would choose a candidate on the basis of a last minute poll? Frankly, I cannot think of any good reason to release such last-minute polls except that the polling outfits think that real point of elections is to see which of them is better at predicting election results, so that elections become a test of the polls.

POST SCRIPT: Save the economy! Buy more junk!

Berkeley Breathed’s excellent comic strip Opus comments on the absurd ‘economic stimulus package’ that our wise leaders in government have come up with.

The phony Social Security crisis-1: Understanding the system

There are many who would have you believe that Social Security is in dire straits and that it will go broke soon, so that younger people who are paying into it now will not get any benefits when they retire. While Social Security regularly requires tinkering to remain solvent, this kind of rhetoric is misleading but has been systematically promoted to make young people think that they are being swindled by the old, and thus generate intergenerational warfare. It is the tried-and-true divide-and-rule strategy. The goal is to scare people into agreeing to give private investors access to the money in the Social Security trust fund. (For a fascinating history of how the various forms of social safety nets, including eventually the Social Security system, came about, see here.)

Social Security is designed as a ‘pay as you go’ system, with the money being taken in now in so-called payroll or employment taxes (officially called FICA taxes) going to pay the benefits of those currently retired. It is presently running a surplus (i.e., each year it takes in more money than it spends) so that there is an increasing accumulation of reserve funds in the account, which is called the ‘trust fund’.

The confusing thing about understanding the government budget is that since Social Security is not an independent financial entity, the money that comes in as Social Security revenue is not kept separately from other government revenues, i.e., the ‘trust fund’ is not a separate vault of cash. What the government collects as revenue in any form (Social Security taxes, Medicare taxes, income taxes, import duties, etc.) can be used to fund general government expenditures.

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The brave new world of finance-14: The next bubble?

(For previous posts in this series, see here.)

In this final post in this series, I want to look at what might be the next bubble looming on the horizon.

In his article The next bubble: Priming the markets for tomorrow’s big crash (Harper’s Magazine, February 2008) Eric Janszen says that the total value of real estate, if priced according to historical growth rates, should be about twelve trillion dollars. But the real estate boom drove the prices up to about double that, to twenty four trillion. If this is truly a bubble phenomenon and real estate values drop to what they should be historically or even below, suddenly twelve trillion dollars worth of assets would have essentially vanished into thin air.

It may not be that catastrophic. As has been pointed out elsewhere, real estate prices have not dropped that precipitously as yet (and in some areas of the country have not dropped at all) and some are speculating that it won’t. Such people argue that while prices have declined from the peak, that it has now reached a new equilibrium and will not sink further. I think we won’t know for sure which is the case for a couple of years, until all the dust settles from the subprime crisis and all the losses have been tallied. At present, there is considerable guesswork as to the full extent of the losses, both real and potential.

But there is a serious danger that the subprime losses can trigger a recession or even a depression and both the government and the business sectors are trying to find ways to stave it off.

Janszen argues that to make up for the losses generated by the subprime crisis, the financial sector is already gearing up to generate, and thus benefit from, the next bubble sector. What area of business would make a good candidate for the next bubble? Based on recent history, Janszen says that it has to meet certain criteria:

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed not by billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

He looks at various possible candidates for the next bubble, such as the health care, pharmaceutical, and biotechnology industries, and finds each one problematic for various reasons. He thinks that the only sector that meets all the criteria is alternative energy, because it is one of the few sectors big enough to serve the purpose. He thinks that this is already in the process of being “branded” as the next big thing.

Riding the wave of the environmental movement and people’s concern about the future of the globe, he says we are going to see immense investment by the government in alternative energy sources (nuclear, hydrogen, geothermal, solar, hydrogen, ethanol), not because of any deep environmental concerns, but because it will enable the government to subsidize the energy industry by the tens of trillions of dollars necessary to make up for the disappearance of the assets incurred by the collapse of the real estate bubble.

He predicts that we will soon start seeing highly increased hype for various forms of alternative energy and companies that deal in them will start going public, issuing stock and cashing in on the hyped-up interest in this area, just the way internet startups did a few years ago. Janszen also points out that Al Gore has joined the big venture capital firm of Kleiner, Perkins, Caulfied & Byers that was involved in the IPOs of Google and Amazon. Thus despite the initial skepticism Gore received from traditional business and media when he raised the alarm about global warming, he may turn out to be useful to them as the poster boy for the new alternative energy bubble. Joshua Frank also raises questions about the support that the energy industry (including nuclear and coal) are giving Obama and what they might be expecting in return.

I must say that initially I was skeptical about Janszen’s fingering of alternative energy as the next bubble but more recently I have seen disturbing reports that he may be on to something. President Bush, John McCain and Congressional Republicans are now talking enthusiastically about the virtues of alternative energy and green technologies, even while ridiculing the notion of global warming and strongly resisting efforts at conservation. President Bush, for example, now talks up hydrogen-powered cars and solar and wind power as the way of the future, even as he opposes far more direct energy conserving measures such as raising fuel efficiency standards for cars and trucks.

Like many other people, I am very worried about the long-term health of the planet and in favor of reducing our consumption of all resources, including oil. One has the sense that the tide is turning on this issue, that more and more people are beginning to think that we cannot go on consuming resources at the current rate. It is very disturbing to think that the government-industry-Wall Street complex will hijack the general public’s very real concern and cynically use it to siphon yet more vast amounts of public money into the hands of private investors and speculators, the way people’s support for home ownership was used to pump up the profits of those financial institutions involved with real estate.

The next president will play an important role in determining whether we have real conservation efforts or are merely going to create an alternative energy bubble, and we clearly need to watch developments carefully.

POST SCRIPT: Will Tim Russert denounce and reject his ties to Stalin?

Yesterday, I wrote about Tim Russert’s appalling performance as moderator of Tuesday’s debate. General J. C. Christian is worried about what might happen if Tim Russert’s tortured logic in linking Obama to Farrakhan is applied to Russert himself.

The rise of Tim Russert and the decline of journalism

I watched the Democratic primary debate held in Cleveland on Tuesday. It was the first debate I had watched live so far during the primary season. Who do I think won? I think such questions are meaningless. These kinds of debates are not meant to provide that kind of result.

But the losers of these debates are quite easy to pick: they are usually the moderators. What I hate about these debates is not the candidates’ performance (they actually come off quite well) but the moderators, who come across as preening and vain and self-important, and who seem to think that the debates are all about them.

And of that breed, there is no doubt that Tim Russert is the most obnoxious. No one epitomizes all the problems of modern journalism better than him. His shtick is really wearing thin. He often makes it a point to refer to himself as just a ‘blue-collar boy from Buffalo’, as if that makes him an outsider, just like you and me, a regular, working class guy like his daddy, so that we will overlook the fact that he is a well-connected Washington insider, a consummate Villager, someone who is completely at home with the moneyed-classes that rule the country.
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The brave new world of finance-13: The new bubble cycle

(For previous posts in this series, see here.)

Karl Marx famously argued that capitalism, while being remarkably resilient in overcoming problems and capable of releasing enormous productive capabilities, also carries within itself the seeds of its own eventual destruction because of its incapacity to accept an equilibrium state. Capitalism requires that companies have to push for continuous expansion and growth and this leads to the creation of monopolies and instabilities that inevitably result in crashes. I never quite understood that aspect of the Marxist critique of capitalism. After all, why couldn’t a company, once it had developed a good product and business model, just continue to plug away at a steady rate of manufacture and sales and profits? Why did it need to grow and expand in size in order to survive? I know that it cannot simply stay the same since developments and competitors will leave it behind. I can understand the need to improve products, even change the product line, and increase efficiency. But why must there also be an imperative to increase market share and profit margins, which often means that one must take actions that are harmful in the long run? Is it caused by simple greed? It seems to be too simplistic to ascribe human emotions as drivers of macro-economic behavior.
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The brave new world of finance-12: The consequences of the primacy of shareholders

(For previous posts in this series, see here.)

As I discussed in the previous post, the instability caused by shareholder demands for steadily increasing rates of return infects every area of business for the worse. Furthermore, the law requires of management that businesses be run purely for the benefit of its stockholders. While this is meant to prevent management from acting negligently or even fraudulently to enrich themselves, it also has the effect that even an enlightened management has to be very careful about taking measures that are (say) motivated by concern for the environment or by the needs of its employees or the community in which the business is situated. Unless those actions can also be justified as leading to greater stockholder value, the stockholders have a legal right to accuse the management of acting illegally and to sue to demand changes.
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The brave new world of finance-11: The changing emphasis of business

(For previous posts in this series, see here.)

The problem with the modern business world, as I see it, is that it is no longer enough that a company be successful in the traditional sense of steadily producing revenues in excess of expenditures. That model of a successful business is considered hopeless naïve these days. What investors want is not steady profits but a steadily increasing rate of return on investments and this is leading to chronic instability.

Let me give an example. Suppose I start a business that returns a 20% profit on my investment. That is a nice return, allowing me to provide good salary and benefits to employees, reinvest something in the company to improve the product, expand and improve the product, and so on. You would think that if I could continue to produce roughly 20% profits every year, I would be having a good company. After all, I am employing people, producing useful things, and making a reasonable amount of money. And as long as the company is privately owned by me, that might be true.
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Is there any hope for Obama?

In the previous post, I pointed out the surprisingly strong early backing that Obama has received from Wall Street, which raises the obvious question: Why would Wall Street invest so heavily in him? One reason is that the business sector always covers its bets so that whoever wins, they have ties to them. But another major reason is that the pro-war/pro-business interests in the US cannot get all that they want from Republican administrations. The Republican Party is too closely identified in the public mind with big business to overcome the public’s suspicion that they always are seeking to enrich the big moneyed interests at the expense of the poor. Some of the desires of big business can only be met by Democratic presidents and Congresses, who have managed to convey the impression that they are the party of ‘the little guy’, and thus can neutralize some of the suspicions and do things that Republicans cannot.
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The problem with Obama

Given my concerns about Hillary Clinton, one might think that I would be an enthusiastic Barack Obama supporter, but at this point I must say that I am somewhat underwhelmed by him. I have not been bowled over by his alleged charisma, perhaps because I almost never watch TV, preferring to read about events instead, and charisma is hard to convey with the printed word. I definitely prefer him to Clinton, but on many issues, it is hard to tell them apart. But the key difference with Clinton is that I think that Obama (unlike Clinton or McCain) is not (yet) completely in the maw of pro-war/pro-business party that rules the country, although the process by which those interests swallow up political leaders and turn them into zombie-like creatures that do their bidding seems dangerously far advanced in his case.
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