Ruminations, April 18, 2010

Neddie runs for governor

Ned Lamont recently ran a political commercial on television. You remember Ned Lamont, don’t you? Sure you do; he was the guy who was the Connecticut Democrats’ nominee for Senator in 2006. After Senator Joe Lieberman (D, CT) came back from a trip to Iraq and announced that the war in Iraq was winnable and was worth winning, he so enraged the left wing of the Democratic party that they decided that Lieberman should not serve in the Senate any longer and made Lamont the Democratic nominee for Senator – and then Lamont lost the election to Lieberman who had run as an independent.

In 2010, Lamont has decided to run for governor of Connecticut. Recently he ran a commercial that emphasized (1) he ran for the Senate against Joe Lieberman and (2) he “stood up” against the war in Iraq.

So, let’s see.

1. Lamont ran as a Democrat for Senate in a state that had elected a Democrat in the previous seven Senatorial elections — and Lamont lost.
2. Lamont wanted to abandon Iraq to al Qaeda and to its neighbors Iran and Syria — and Iraq is now one of two democracies (the other is Israel) in the Mideast.

This commercial’s a joke, right? He can’t really be running on a record like that, can he?

Skin in the game

Investor Warren Buffet is credited with coining the expression “to put skin in the game.” Those with skin in the game, he posited, were those with a financial stake in an outcome and were therefore more likely to use money responsibly. Those who have no skin in the game are more likely to make irresponsible decisions since, with none of their own money at stake, a loss is irrelevant.

It seems that a lot of Americans don’t have any skin in the American fiscal game. Recent tax return statistics show that nearly half of all people filing tax returns last year paid no tax. President Obama and other political leaders have pledged not to raise taxes on those earning less than $200,000, in effect, pledging to keep that half who pay no taxes continuing to pay no taxes. Obama’s statement sounds fair, but is it really responsible?

It’s true that people on the lower rungs of the economic ladder are more strapped tor revenue and stand to be more adversely affected by taxes — and those on the very bottom can little afford to pay any taxes. But how high should income be before we start collecting taxes? According to a tax analyst at Deloitte Tax, “a family of four making as much as $50,000 will owe no federal income tax for 2009." Granted that a family of four with an annual income of $50,000 is not living in the lap of luxury but doesn’t $50,000 seem like an awfully high threshold for tax liability?

While there are charges that Obama’s tax philosophy of placing additional tax burdens on only those earning over $200,000 will not raise the hoped for revenues and will suppress investment, there is seldom any consideration as to how that policy will affect those who are at lower income levels.

Certainly, Obama’s present tax policy, whether or not it produces the desired fiscal results, presents a moral hazard — those who are insulated from taxes will have little regard for fiscal probity. And one way to avoid that hazard is to ensure that everyone has skin in the game.

Monetary Fund

Felix Rohatyn is back in the news. The 81-year-old investment banker was the key player in 1975, when New York City was three weeks away from bankruptcy. He created the Mutual Assistance Corporation that sold bonds backed by sales and other taxes that provided the city operating funds, averted bankruptcy and built a strong financial basis for future growth. So when it comes to bona fides in dealing with governmental financial crises, Rohatyn has it in spades.

Last week, in an interview in The Wall Street Journal, Rohatyn suggested that the United States form a domestic version of the International Monetary Fund (IMF).

The IMF, as you may know, uses the principles of macroeconomics on which it constructs financial aid programs to help countries in difficult financial straits (it is currently planning to participate with the EU in helping Greece to economically right itself). Money from the IMF doesn’t come free. In order to collect a loan or grant, the political entity must take steps that will show itself to be self-sustaining.

If we were to establish a domestic version of the IMF (DMF), it could provide funds for the states and municipalities that are seemingly headed toward bankruptcy. Of course, as with the IMF, the DMF would probably be the lender of last resort. When the IMF (and presumably an agency like the DMF) makes a loan, they often insist that the receiving political body enact strict spending cuts of a specified amounts and increase taxation. In one sense, it is good politics because by having an outside agency like the IMF or DMF impose fiscal controls, local politicians are covered from political fallout when they cut services and increase taxes.

An advantage that the IMF has is that it is not politically beholden to any of the entities receiving grants. If we were to establish a DMF, Congress or the President could come under the pressure to appoint individuals to the DMF who tend to impose more liberal terms.

And then there is the question of who would fund the DMF. From one perspective, it would be difficult to ask states that are scrambling for every dollar to fund this agency much as they would pay an insurance premium. On the other hand, it would be difficult to ask the United States government which is scrambling for every dollar, to fund this agency.

Nonetheless, the idea of a DMF is interesting and should be explored.

Summers vs. Summers

Larry Summers credentials read like the Mount Everest of economic accomplishments: a student at Massachusetts Institute of Technology at 16, Ph. D. from Harvard (where he studied under Martin Feldstein), Council of Economic Advisors under President Reagan, Chief Economist at the World Bank, Undersecretary for International Affairs under President Clinton, Secretary of the Treasury under President Clinton, Director of the National Economic Council under President Obama and numerous awards and distinctions.

That’s why it was interesting to read Summers’s criticism of The Wall Street Journal after the Journal had quoted Summers.

The Journal quoted Summers on the expansion of unemployment benefits. Summers, discussing long-term unemployment, had previously written: “Empirical evidence shows that two causes [of long-term unemployment] are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment ….” (To see the full subsequent article, go here:

http://online.wsj.com/article/SB10001424052702303348504575184802145949666.html?mod=WSJ_Opinion_AboveLEFTTop.)

Summers charged that The Journal quoted him out of context. Well, there’s context, and then there’s context — and then there’s political context. The Journal quotes three paragraphs with the intent to provide more context. However, without quoting the entire article, there is no way of telling if the larger context is accurately represented by the quote.

Summers, working within his larger context and not denying his statement on unemployment, focuses on neo-Keynesian macroeconomics. He says that the most important consideration in a precarious economy is stimulating demand and, therefore, pumping more money into the economy through extended unemployment benefits will create more jobs. He goes on to say that “temporary microeconomic incentives [unemployment insurance] during recovery from a severe recession should not be analyzed as if under full employment.” (For Summers full response, go here:

http://online.wsj.com/article/SB10001424052702303348504575184130005753358.html.)

But there is a third context: The political context. It is probably fair to say that in the closed conference room where the President maps out an economic strategy, all opinions are welcome and listened to. But when a decision is reached and the doors are opened, there is only one context coming forth. And that’s how it should be – and perhaps Summers’s response was influenced by the political context.

Both The Journal and Summers make good points. Unfortunately, to make its point, The Journal falls to reductio ad absurdum, sarcastically suggesting that unemployment “jobless benefits [be increased] to $100,000 a year per person to cause an even greater surge in demand.”

All in all, we’d have to say that the winner of the argument of Summers vs. Summers is – well, you decide.

Quote without comment

Felix Rohatyn, in a 2009 interview with The New York Times: “Maybe for the first time in history, the U.S. is faced with doubts about its destiny. In less than 50 years, we have gone from the American Century to the American Crisis.”