The long view: don’t let the perfect to be the enemy of the good

Ronald Reagan In His Own Hand
Ronald Reagan thought out and thought through his own policies

I don’t remember exactly when, and I don’t remember the exact words, so I can’t provide a citation, but some time during all the rancorous politics of the 1990’s, George Will made the comment that for as much as conservatives disliked (and worse) Bill Clinton, he hadn’t done [or wasn’t going to do] any long-term damage to the Republic.

Now, I was a person who absolutely hated the Clinton presidency. He was so obviously a liar and a scoundrel, it was a travesty that a man like this should become President of the United States.

But after Will’s comment had a chance to sink in with me, I knew he was right. Having a President like Bill Clinton enabled the opposing forces within the Republic to coalesce; we had the small conservative revolution of 1994, and the Clinton presidency was largely neutralized, by forces that the founders had built into the American system some 200 years earlier. See Federalist 51, for example: “the great security against a gradual concentration of the several powers in the same department, consists in giving to those who administer each department the necessary constitutional means and personal motives to resist encroachments of the others.” This is not a fool-proof system, but this principle continues to function properly in our day.

The notion that that, whatever political forces were in the ascendancy at the moment, opposing forces would coalesce, works for both sides of the political spectrum. George Bush, who had promised a “humble foreign policy” but eventually posited “the Bush doctrine” of “preventive war” – was mightily opposed, first in the congressional elections of 2006 – the Democrats made a mighty surge to win back congress, much as the Republicans did in 1994 – then in the 2008 Presidential election, when McCain was called “Bush 3”, to elect an articulate spokesman for their own causes, Barack Obama. And we’ve seen the effects again even during the Obama presidency, as the Democrats tried to do too much, and various Republican and right-leaning movements coalesced to bring the Republicans back into power in the House of Representatives.

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In my lifetime, I have seen several schools of thought among Republicans as to “how to elect a Republican president”. Richard Nixon articulated the view that, as a Republican candidate, you should “run as hard to the right as you can to gain the nomination, then run as hard as you can back to the center in the General Election”. He did this, and it worked for him. Now, he had some problems of his own making, but those problems don’t necessarily negate the validity of this political strategy. In 2004, Karl Rove posited, and Rush Limbaugh popularized, the notion that we should exclude the center – and expand the right as much as possible, so as to create a right-leaning majority. Of course that seems to have worked for Bush in 2004 – but somehow Bush, Rove, and Limbaugh had promised too much, damaged the credibility of the party, and the backlash of 2006 and 2008 soon followed.

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Now the National Journal’s Ronald Brownstein has published a somewhat lengthy analysis of the Republican presidential campaign so far, specifically addressing the question “Why is a party that leans so far to the right poised to nominate a candidate whom many conservatives deeply distrust?” He concludes:

For many Republicans, [no alternative to Romney has] crossed the threshold as a credible president. … [No one of them] has emerged organically from the ferocious antigovernment backlash that emerged during the final years of George W. Bush’s presidency and then erupted early in Obama’s. None of the heroes of that movement—from New Jersey Gov. Chris Christie to Sen. Marco Rubio of Florida to Rep. Paul Ryan of Wisconsin—felt ready to run in 2012, either because they were too young or too recently elected, or both. Other veteran Republicans potentially attractive to those voters also passed, including Rep. Mike Pence of Indiana and Mississippi Gov. Haley Barbour.

Republican voters were left to choose from a field filled by an older generation that many of the newer activists view with suspicion. “In the next primary election, whenever it is, you’ve got a real group of potential candidates who are truly conservative and pro-growth,” says Chris Chocola, president of the Club for Growth, a leading economic conservative group. “It is an evolution. Republicans went bad, and now [the movement] is getting better, and it’s going up through the House and Senate, but it hasn’t produced a national leader yet.”

I would disagree with Brownstein that it was an “antigovernment backlash” that happened in 2006 and 2008. Nevertheless, we are at a point at which we may be left with Romney the nominee, and even maybe a “President Mitt Romney”. Which brings me to my point. Neither a Romney presidency nor an Obama presidency in 2012 is going to do long-lasting damage to the Republic. The system of government set up by the founders of this country is a pretty good one.

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There was another school of thought on “how to elect a Republican president”, and that was Ronald Reagan’s way. Reagan had lost an election to Gerald Ford, but meanwhile, he was hard at work. A “Goldwater” Republican during the late 60’s and early 70’s, Reagan was a person who took the time to think through how conservative ideas and principles ought to play out in the real world. It was his thought and his policies that led very quickly (within 10 years) to the demise of the Soviet satellite of nations and eventually the Soviet system of government. And it was his economic attitude and policies that enabled the US economy to recover from the stagnation of the 1970’s to become the growth engine that it had become through the 1980’s and 1990’s and beyond.

From this perspective, it’s very hopeful for Republicans to have names like Christie and Ryan and Rubio and Jindal in some high-profile places. Ron Paul has, and articulates, some good ideas, but the weaknesses of his libertarianism (and his personal weaknesses) are very evident. Sarah Palin may have been a pretty candidate who espoused conservative principles, but she was just a “stopper” and a window dressing. The real heavy lifting of the Republican party will need to be accomplished not by someone who merely claims the mantle of Reagan, but by someone who can genuinely do what Reagan did, and that is, to think through the problems of the day, and understand how best to solve these problems with the best of conservative principles.

The American System not only allows for that, but indeed, it encourages it.

The US moves toward oil independence

I saw this article over the weekend, and honestly, I find things like this to be far more encouraging than the “double-dip recession” stories are discouraging.

With six children who are going to grow up in “the new economy” (whatever that is), I’m constantly trying to understand how that new economy is going to work, and where the “growth drivers” are going to be. My oldest son is going into nursing, and while, with our aging population (especially here in Pittsburgh) it seems like the medical field will offer secure employment opportunities, it’s not truly a “growth opportunity” in the sense that fixing people is a lot like fixing broken windows.

Over the last five years, “America truly has been in the midst of a revolution in oil and natural gas, which is the nation’s fastest-growing manufacturing sector”.

No one is more responsible for that resurgence than [Harold] Hamm. He was the original discoverer of the gigantic and prolific Bakken oil fields of Montana and North Dakota that have already helped move the U.S. into third place among world oil producers.

How much oil does Bakken have? The official estimate of the U.S. Geological Survey a few years ago was between four and five billion barrels. Mr. Hamm disagrees: “No way. We estimate that the entire field, fully developed, in Bakken is 24 billion barrels.”

If he’s right, that’ll double America’s proven oil reserves. “Bakken is almost twice as big as the oil reserve in Prudhoe Bay, Alaska,” he continues. According to Department of Energy data, North Dakota is on pace to surpass California in oil production in the next few years. Mr. Hamm explains over lunch in Washington, D.C., that the more his company drills, the more oil it finds. Continental Resources has seen its “proved reserves” of oil and natural gas (mostly in North Dakota) skyrocket to 421 million barrels this summer from 118 million barrels in 2006.

“We expect our reserves and production to triple over the next five years.” And for those who think this oil find is only making Mr. Hamm rich, he notes that today in America “there are 10 million royalty owners across the country” who receive payments for the oil drilled on their land. “The wealth is being widely shared.”

One reason for the renaissance has been OPEC’s erosion of market power. “For nearly 50 years in this country nobody looked for oil here and drilling was in steady decline. Every time the domestic industry picked itself up, the Saudis would open the taps and drown us with cheap oil,” he recalls. “They had unlimited production capacity, and company after company would go bust.”

Today OPEC’s market share is falling and no longer dictates the world price. This is huge, Mr. Hamm says. “Finally we have an opportunity to go out and explore for oil and drill without fear of price collapse.” When OPEC was at its peak in the 1990s, the U.S. imported about two-thirds of its oil. Now we import less than half of it, and about 40% of what we do import comes from Mexico and Canada. That’s why Mr. Hamm thinks North America can achieve oil independence.

It is the current high-regulatory environment in Washington DC that is the biggest hindrance to this development. Ham says, “Washington keeps ‘sticking a regulatory boot at our necks and then turns around and asks: “’Why aren’t you creating more jobs,”’he says.”

Mr. Hamm believes that if Mr. Obama truly wants more job creation, he should study North Dakota, the state with the lowest unemployment rate in the nation at 3.5%. He swears that number is overstated: “We can’t find any unemployed people up there. The state has 18,000 unfilled jobs,” Mr. Hamm insists. “And these are jobs that pay $60,000 to $80,000 a year.” The economy is expanding so fast that North Dakota has a housing shortage. Thanks to the oil boom—Continental pays more than $50 million in state taxes a year—the state has a budget surplus and is considering ending income and property taxes.

It’s true, this is not a high tech growth opportunity, but more of a 19th century-style growth opportunity. Still, it’s a “driver of growth” that can lead to the development of manufacturing, refining, and infrastructure opportunities in the north-central U.S., and along with that infrastructure development will come the need for all the high-tech that goes along with it.

Now may be a good time to buy stock

Please don’t misconstrue this as investing advice. I don’t have any money now, nor have I ever had any money. But I remember a day not so long ago – in the mid 1990’s – when Apple Computer stock was at $25.00 per share. Don’t we all wish we had bought some of that?

Today, after a 600+ point drop, stocks are at a very low point, and gold is as high as it’s ever been. If your goal is to maximize the gains on your investments, to “buy low and sell high,” this is the time to get rid of your gold and buy stock.

I tend greatly to discount those who are saying that “a double-dip recession is coming”. The WSJ today has a good article today on why that’s so.

There are three fundamental differences between the financial crisis of three years ago and today’s events. Starting from the most obvious: The two crises had completely different origins.

The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector’s breakdown that caused the recession.

The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.

That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators.

The second difference is perhaps the most important: Financial companies and households had feasted on cheap credit in the run-up to 2007-2008.

When the bubble burst, the resulting crash diet of deleveraging caused a massive recessionary shock.

This time around, the problem is the opposite. The economic doldrums are prompting companies and individuals to stash their cash away and steer clear of debt, resulting in anemic consumption and investment growth.

The final distinction is a direct consequence of the first two. Given its genesis, the 2008 financial catastrophe had a simple, if painful, solution: Governments had to step in to provide liquidity in droves through low interest rates, bank bailouts and injections of cash into the economy.

A Federal Reserve official at the time called it “shock and awe.” Another summed it up thus: “We will backstop everything.”

The policy didn’t come cheap as governments world-wide poured around $1 trillion into the system. Nor was it fair to the tax-paying citizens who had to pick up the tab for other people’s sins. But it eventually succeeded in avoiding a global Depression.

Today, such a response isn’t on the menu. The present strains aren’t caused by a lack of liquidity—U.S. companies, for one, are sitting on record cash piles—or too much leverage. Both corporate and personal balance sheets are no longer bloated with debt.

The real issue is a chronic lack of confidence by financial actors in one another and their governments’ ability to kick-start economic growth.

And there’s one more thing. Crude oil prices have fallen to about $81 a barrel. When they were $112, we had $4.00 per gallon gas. The inflationary effects of that increase rippled through the economy, and I believe, with gasoline prices going the other way, we’ll see a similar easing.

No, it’s not the best of times right now. But it’s not the worst of times, either. And as our friend Rhology says, “Our God is in the heavens; he does all that he pleases.” Ultimately, we can trust Him.

High corporate taxes are keeping a trillion dollars-worth of profits out of the US

Of course, this is just the opinion of the Wall Street Journal, but consider what they say:

One trillion dollars is roughly the amount of earnings that American companies have in their foreign operations—and that they could repatriate to the United States. That money, in turn, could be invested in U.S. jobs, capital assets, research and development, and more.

But for U.S companies such repatriation of earnings carries a significant penalty: a federal tax of up to 35%. This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here.

The U.S. government’s treatment of repatriated foreign earnings stands in marked contrast to the tax practices of almost every major developed economy, including Germany, Japan, the United Kingdom, France, Spain, Italy, Russia, Australia and Canada, to name a few. Companies headquartered in any of these countries can repatriate foreign earnings to their home countries at a tax rate of 0%-2%. That’s because those countries realize that choking off foreign capital from their economies is decidedly against their national interests.

Many commentators have pointed to the large cash balances sitting on U.S. corporate books as evidence that the economy is still stalled because companies aren’t spending. That analysis misses the point. Large cash balances remain on U.S. corporate books because U.S. companies can’t spend their foreign-held cash in the U.S. without incurring a prohibitive tax liability.

Especially with corporate bond rates falling below 4%, it’s hard to imagine any responsible corporation repatriating foreign earnings at a combined federal and state tax rate approaching 40%.

By permitting companies to repatriate foreign earnings at a low tax rate—say, 5%—Congress and the president could create a privately funded stimulus of up to a trillion dollars. They could also raise up to $50 billion in federal tax revenue. That’s money the economy would not otherwise receive.

The amount of corporate cash that would come flooding into the country could be larger than the entire federal stimulus package, and it could be used for creating jobs, investing in research, building plants, purchasing equipment, and other uses. It could also provide needed stability for the equity markets because companies would expand their activity in mergers and acquisitions, and would pay dividends or buy back stock. And when markets go up, confidence increases and businesses and consumers begin to spend.

Signs of hope in the economy

I’m still encouraged by signs of hope in the economy, and I’ve pulled a couple of articles.

First, Target Stores fared a wee bit better than Wal-Mart in the 2nd quarter. If you recall, Wal-Mart was one of two organizations (the other being McDonald’s) that showed a sales increase over the last recession.

Target Corp., which reported softer-than-expected sales Wednesday, said company initiatives like more grocery options and credit-card discounts should help offset tepid consumer spending.

The retailer’s two key steps—adding more fresh produce to stores and giving customers 5% off for using their Target credit and debit cards—should bring in more customers and spur buying that otherwise wouldn’t have occurred, executives said during a conference call.

“It’s clear that the second quarter marked a change in recent trend,” Chief Executive Gregg Steinhafel said. “Following stronger results in the last two quarters, gross domestic product growth softened considerably and our sales trends leveled off as well.”

The shift has Target positioning for a “slow and inconsistent” recovery in which comparable-store sales could grow as little as 1% in the third quarter but likely fare better in the holiday season’s fourth quarter, Mr. Steinhafel said.

Given that some 70% of our economy is driven by consumer spending, retail is now the new heavy industry, and hopeful signs here are appreciated.

As well, we’ve seen the emergence of new private, profit-based organizations that are actually making money by helping homeowners to avoid foreclosures:

As the nation struggles with the worst foreclosure crisis since the 1930s, Mr. Ranieri’s investment fund and others like it are emerging as the best hope for the roughly seven million U.S. households behind on their mortgage payments. Nimble, flush and willing to strike deals with borrowers, these funds have an edge over banks and other lenders that can be mired in bureaucracy and hampered by government rules about which loans can be renegotiated and how.

Borrowers less lucky than the Reynolds family must work with middlemen—loan-servicing firms that don’t actually own loans, but represent banks and investors, and collect mortgage payments on their behalf. These firms follow often-ambiguous rules set by the owners of the loans. In cases where a loan has been bundled into a security, it might have thousands of owners scattered around the world, making it impossible to know all their preferences.

By contrast, Mr. Ranieri’s Selene is the sole owner of its loans and has a servicing affiliate that can negotiate directly with borrowers. “Every case is individual,” Mr. Ranieri says. “There’s no template.”

But the main reason Mr. Ranieri can strike deals with borrowers is that his firm buys loans, mostly from banks, at steep discounts to the balance due. If his fund pays $50,000 for a loan with a $100,000 balance due, for example, it can make a profit even if the borrower ends up paying back only $70,000.

Since mid-2007, nearly 3.4 million households have received loan modifications, according to industry data from the Hope Now alliance of loan servicers.

Creative entrepreneurs will always find a way around government regulations and through the tough economic times.

U.S. Productivity Leaps

Full article here. (Subscription may be required; let me know if it’s not.)

U.S. productivity staged its biggest gain in nearly six years in the second quarter despite the contraction in the overall economy, suggesting companies have adjusted to the recession by cutting jobs and workers’ hours. … The data help explain why companies have been able to post good earnings figures, having moved quickly to slash jobs and cut costs.

“In short, good macro news, but it reflects painful job losses,” Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., said in a note to clients.

Over the long run, productivity is key to improved living standards by spurring rising output, employment, incomes and asset values. While the jump in productivity could suggest that the economy is poised for a strong recovery once it reaches bottom, that could be offset by the negative impact on consumer demand from job losses.

Labor market conditions are expected to remain difficult, though the 247,000 drop in nonfarm payrolls in July was the smallest decline since August 2008. The economy has also shown signs of stabilization, with gross domestic product registering a 1% contraction in the second quarter. …

Joshua Shapiro, chief U.S. economist at MFR Inc., said that despite signs of improvement in the economy, the job market will likely remain tight. “Looking ahead, stabilizing output ought to prompt a less aggressive approach to cost-cutting on the labor front, hence a commensurately slower rate of decline in hours worked,” he said in a note. “However, we do expect efforts to boost productivity to continue, and therefore any labor market recovery to be late in arriving and tepid when it does begin.”

Are we in for a robust economy?

Poised for a rapid job rebound?
Poised for a rapid job rebound?

Robust not only in the sense of a growing GDP, but in the sense of rapid job creation? The WSJ’s Outlook column today seems to be projecting that very thing.

“Firms were unusually aggressive in cutting costs and cutting employment,” said James O’Sullivan, an economist with UBS. “The flip side of that remains to be seen, but it could mean that companies will be quicker to bring back people because they were more aggressive about getting rid of them.”

… To be sure, even as more companies begin to hire as the economy recovers, it could take years before payrolls reach their prerecession level. With Americans spending more cautiously in response to the massive losses in wealth associated with this recession, some jobs may simply never come back.

That said, one thing different about this recession — and one more reason the job market may come back more quickly than in the downturns of 2001 and 1990-91 — is that so many of the job losses have been at the service-related companies that have come to dominate U.S employment. Since the recession began, 3.3 million service-sector jobs have been lost, a 2.9% decline that is the largest in data going back to 1939. In comparison, the previous two recessions each saw service-sector jobs fall by 0.5%. …

But the biggest reason jobs might bounce back quicker from this downturn than the past two recessions, said Comerica Bank economist Dana Johnson, is that the economy looks likely to see a much bigger bounce as it recovers.

Gross domestic product — the value of all goods and services produced by the economy — has fallen by 3.9% since economic output peaked last year, marking the steepest decline since the end of World War II. In contrast, the 2001 and 1990-91 recessions were among the shallowest on record.

History says that given the depth of the downturn, GDP should grow at a 6% to 8% rate over the next year, according to Mr. Johnson. But because of the financial stress that has come with this recession, he expects it will grow at a 4% rate.

Corroborating that notion, the Journal this morning carried stories that car sales have been very strong in both India and China over the last six months. In fact, General Motors set a new monthly sales record in China in July.