Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Transparency and the Public Sector

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One reason I believe that the US government has grown so large and has been able to rack up so much debt is because of a general belief (especially among young people that)

– Government is fair, transparent and effective
– the private sector is scheming and opaque

The general public didn’t always feel this way. Back when the “Reagan Revolution” swept through he made the famous crack that we should always fear the comment “We are from the government, and we are here to help you”. There was a widespread belief that the private sector should lead the way and that government should play a supporting role, running things like the military and infrastructure spending, but not to generally take over key functions of the economy.

Younger people, in order to get into any sort of exclusive college, need to “volunteer”. In past years’ in the US volunteering typically meant joining a constructive organization or working with your church, but now there are a wide array of programs that students filter through in order to have a convincing resume to apply to these selective schools, and likely putting down church activities doesn’t help much at all. I think that people are confusing these sorts of volunteer organizations with the reality of how governments actually work, which is quite different, since government organizations have an innate tendency to 1) propagate 2) expand their domain 3) put themselves first in terms of salaries and benefits rather than focusing on value to the taxpayer. These sorts of behaviors also occur amongst volunteer organizations but not to the same degree.

People also have a more trusting belief that the government role is actually EFFECTIVE. In reality, government is usually a bystander when events occur. For instance Sarbanes-Oxley was invented in the wake of Enron to prevent financial scandal through making companies’ financials more transparent and other “reforms”. However, these “reforms” did nothing to prevent the 2007-9 meltdown where major companies went from financially sound and a clean audit opinion to utterly bankrupt in a matter of months, often for opaque balance sheet related items that were conceptually similar to the Enron-esque accounting items that Sar-box supposedly fixed. And as far as the BP spill; government employees by the thousand supposedly had oversight of that sort of behavior and yet were in fact ineffective in preventing the events in the gulf. The SEC did nothing to catch or track Madoff despite many warnings due to institutional bias and failure; even now they are trying to catch up to Wall Street, despite having a huge budget and thousands of staffers.

I recently received this summary of Exxon’s compensation policies since I am a shareholder. While Exxon is universally maligned among the left in fact their behavior is completely optimal as far as incentives for executives, and transparent. From the document:

The compensation program supports the retention of these and all other executives by holding back and putting at risk a large percentage of annual compensation until retirement and later.

Other practices include 1) no employment contracts 2) no payments or benefits are triggered by a change in control 3) no severance programs. In addition all of their US executives participate in the same programs so that they are aligned.

The government, on the other hand, despises transparency and accountability, along with their related organizations. The Chicago Tribune had an excellent article titled “Stimulus funds wasted in national home weatherizing program, critics say“. The article discusses one of the many “stimulus projects” that the government created as part of the massive effort to prop up the economy; all taxpayers will be paying for this for years to come in the form of repayment on our Federal debt.

The money spent… is a tiny fraction of the $90.5 million federal and state officials are pouring into the nonprofit CEDA to weatherize homes for the poor, but hundreds of jobs have been plagued by workmanship problems, according to state and federal records. As CEDA’s part in the federal stimulus program heads into its final months, contractors continue to fail 1 in 7 inspections, and a federal plan to fix mistakes revealed in a blistering audit last year still hasn’t been completed, federal officials said.

And not only is the program not working as intended, the government and their partners in the non-profit sector (that sprang up to eat at the trough of the stimulus funds) is extremely reticent to provide information to the journalists at the Chicago Tribune, which seems at odds with their public mission (although predictable to anyone that has a basic understanding of how governments actually function).

And by the state doling out money to a nonprofit, which is not subject to open-records laws, officials have kept from the public how millions of taxpayer dollars are spent. CEDA refused to provide information about its contractors, some of which have lengthy records of complaints, the Tribune found.

As the government moves into a larger sector of the economy, paid for with taxes taking from businesses in the private sector and their employees, you should expect grudging transparency at best, muted and confusing responses when problems occur, and no accountability among government officials for failures and outright lies. For instance no one would be fired related to the mis-management of this program, for example.

We need for people to understand how the “dead hand” of bureaucrats will strangle the country and that problems and denials should be expected as the norm and not an exception when these sorts of programs run amok.

What Do Arab Dictators Offer Their Subjects?

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Since I am a student of history and interested in the middle east I have been following the uprisings there closely, from the uprisings in Tunisia and Egypt to the civil war in Libya and now the spreading violence in Syria. It is more difficulty for me to tell whether the situation in Yemen is more or less chaos than usual in that semi-failed state so I find it less compelling. Iran too is simmering I think that with the victories by the opposition elsewhere we will see that state rise up again.

As far as Syria, we have the supposed “modernizer” ophthalmologist son Bashar al-Assad, son of brutal former dictator Hafez al-Assad now facing an uprising. In past decades his father dealt harshly with uprisings, such as his infamous “Hama Massacre” where 20,000 – 40,000 were killed to put down a challenge to the regime in 1982.

Now the son is using tanks on unarmed civilians in the town of Deraa, according to this article. Deraa has been a center of unrest and now the military has sent in armored vehicles and positioned snipers on the roofs of buildings to keep people indoors.

I would be quite interested to know what al-Assad would say to the nation if given the opportunity to speak about WHY he should be elected president, if there were elections that weren’t completely rigged. He took this opportunity when he addressed the nation on March 31 as summarized here. Assad was defiant and blamed the usual suspects:

From the opening remarks of the speech and a further near dozen times, President Assad referred to the “conspiracy”, “plots” and “sabotage” targeting Syria from outside, of which the protests for change which have centred in the southern city of Daraa, “a border area”, were a part. “The objective was to fragment Syria, bring down Syria as a nation to enforce an Israeli agenda,” said the president, a message that resonates with his supporters.

It is interesting. The primary purpose of Syria, per Assad, is for it to EXIST in its current form, under dictatorship of Assad’s minority group, and not be “fragmented”, likely into units that could potentially represent themselves. And also for Syria to continue to fight Israel.

This really is how he is presenting the VALUE of his regime to his nation, although about half the people are under 21 and have no memories of even minor engagements against the Israelis and virtually no one alive except the elderly remember the “real” wars of 1967 and 1973 much less 1948 and 1956.

It is amazing the childish nature with which he openly treats his subjects; without an ubiquitous and arbitrary security apparatus, the state would apparently implode and disorder would break out everywhere. And this is what the dictatorship of him and his father, since 1970, for over 40 years, has purchased? A simmering state about to explode the second he takes his boot off their neck?

It is difficult for me to understand how he will be able to re-integrate in the community of nations after using tanks against his own people when they are unarmed. By this I mean have himself and his rich friends travel to Europe for fine meals, medical care, and all the other things he denies his own people. This is something that he will care about, being confined in a state of seething rage surrounded by murderous neighbors and wailing about Israel, a country that for practical purposes poses no threat and doesn’t impact their day-to-day existence.

As he puts down revolts and only offers further promises of violence and nothing else to hold together his state, without a counter-vision there is nothing. Blaming Israel for every failure of your regime may buy you 40 years in the Arab world but it can’t buy you an infinite life span.

The end game may take many forms but the army of conscripts and the fact that his people are in a small minority and have a web of alliances may take him down. God knows what may replace him but it is likely that those he hit with violence (other ethnic or religious groups) won’t look kindly on those that propped up the regime for 40 years on the way down. It won’t be easy and obviously Assad will stop at nothing (along with his relatives, who may actually be ruling the place, anyways) but without some vision other than the threat of death his regime is dead.

The Devaluation of the US Dollar

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Back before 9/11 I traveled to Australia and it was a great trip. That country is amazing although I proved unable to consistently drive on the other side of the road. One item I remember clearly is that the Australians seemed to treat $50 Australian currency as if it were more like a $20 US currency item. They would get $50 Australian notes out of the ATM machines and frequently use them to purchase beer or other items at the bar. This is exaggerating a bit but not by a lot.

As you can see from this graph the US Dollar was worth almost twice as much as an Australian dollar at the time (around 2000) so this makes sense. Taking out a $20 Australian from the ATM wouldn’t buy you much if it was worth around $10 USD, so why not dispense $50 Australian instead?

Today the Australian dollar is roughly on par with the US dollar. Our currency has depreciated roughly 50% against the Australian currency over the last decade. That is an amazing slide.

While slightly tongue-in-cheek it isn’t too much of a stretch to think that this ATM I saw recently in Chicago is preparing for the continuous devaluation of the US dollar; someday instead of getting $20 USD out of the ATM you may get $100 instead; more likely we would go down the Australian route and start making $50 USD bills ubiquitous.

It is absolutely important to think about the impacts of the declining USD. I am not a currency expert and not talking about the policy changes that led us to this path but about the practical impact on ordinary Americans far removed from these sorts of currency gyrations.

In the grand scheme, if you are buying something and competing against the Australians (or Canadians, or Chinese, or someone with a Euro) you are going to have to pay a lot more US currency to buy that same item. Michigan Avenue in Chicago is swarming with tourists right now and I am sure a lot of them are buying up goods that seem like a huge bargain to them, paying in these foreign currencies. Dan and I were recently in a mall in San Francisco that was absolutely packed to the gills with people of Asian descent buying like there is no tomorrow. Why is this? Because their currency goes a lot further in the US than it does in their home countries.

Things that are denominated in dollars like oil, gold and US grains are soaring. There are many other reasons (such as the war in Libya) but in general if you price something in dollars and the dollar goes down in value the price goes up. If you own these commodities (or something that produces these commodities, like farmland) then you are going to make a lot of money.

On the other hand, expect foreigners to come here and snap up US dollar denominated assets like real estate and even whole companies since valuations are attractive to them. While this isn’t always a bad thing (it probably is going to bail out Florida real estate and suck up all those condos on the market, as well as California) don’t plan on winning a bidding war against a foreigner when your currency has lost half its value. This is just simple math.

Soon you will see ATM’s start to kick out $50 bills or maybe we will just jump to $100 bills. This is the wave of the future. And soon the Australians will come to the US and be confused about this, just like I was back before 9/11 on my trip to Australia.

Cross posted at Trust Funds for Kids

Around San Francisco April 2011

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Recently Dan and I took a trip to San Francisco to run in the Presidio 10 across the Golden Gate bridge (they don’t close the bridge to car traffic like they do for the “Bay to Breakers” race but there is plenty of room to run on the sidewalk). Unfortunately I was unable to run but went anyways and Dan did well and was happy with his time.

Upper left – the ubiquitous Powell street cable cars. I don’t know if this is classified more as a “tourist attraction” or as a means of public transport. The sign shows all the “don’ts” especially for out-of-towners. Upper mid-left – we were at the Owl Tree bar which had great drinks on tap and the Ukrainian waitress made very strong drinks; this glass was pure alcohol and destined to be two martinis. Upper mid-right – there was an amazing shopping mall near the Powell street transit station which was packed to the rafters; it was as if the recession had never occurred. Dan and I were joking that everyone buying there came from a country with a positive trade balance. Upper right – a happy newlywed couple in a Powell street cable car. Lower left – Dan doing his version of the “Boulevard of Broken Dreams”. Lower mid – someone is drawing on the sidewalk with Koi fish as well as a playful cat. Middle right – Alcatraz Island. Lower right – stretching before the race in front of the Golden Gate bridge.

Cross posted at LITGM

Happy That Russian Military Modernization is Failing

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I read an article a few days ago that positively buoyed my spirits – this WSJ article titled

“Russia’s Fading Army Fights Losing Battle to Reform Itself”

Russia was attempting to move away from an all-conscription army and towards a mix of volunteers and conscripted soldiers. In common parlance an all-conscription army generally has poorer morale and is less able to run high technology equipment that is necessary for today’s battlefield. In addition, draft evasion is high and there is a great deal of incentive to avoid conscription due to its brutal nature as practiced by Russian officers, who commonly physically abuse the draftees as well as extorting their pay. From the article:

The enlistment drive’s failure puts constraints on Russia’s reach. When ethnic rioting in June threatened to tear Kyrgyzstan apart, its president appealed for Russian peacekeepers, the kind of force Moscow once deployed routinely as a political tool. This time the Kremlin demurred—in part, defense analysts say, because the army couldn’t spare a full brigade of professional soldiers.

I remember books from the 70’s about how America’s post-Vietnam war fighting was being crippled by the difficulties of the transition from a conscription-based army to an all-volunteer army. Someone who is closer to this could provide better information but I’d say it wasn’t until the first Iraq war that we’d made this type of long term change and worked effectively into an all-volunteer army that was capable of dealing with wartime issues.

While we currently are not having significant difficulties with Russia, their invasion of Georgia shows that they are capable of projecting force to protect their interests, and often their interests are not compatible with their neighbors. It is generally good news for the US that this modernization effort failed; how you can run a high technology army with integrated command control consisting of demoralized conscripts that represent the “bottom of the barrel” since all others desperately try to avoid the draft, is beyond me.

Another element I found surprising is that individual Russian soldiers spoke about their conditions in the army and were named…. this takes a lot of bravery in Putin’s Russia today and I hope that they escape with their lives.