If nominated…

Caroline Kennedy has asked Governor Patterson to appoint her to Hillary Clinton’s vacant Senate seat. In the interest of Democracy, I have decided to do the same. I do this to offer the people of New York a choice, but not too much of a choice…. As it happens, Caroline Kennedy and I have a lot in common.

According to Wikipedia (oh come on, what? you think I’d do real research?), she “is an attorney, writer, editor and serves on the boards of numerous non-profit organizations.” I’m not an attorney, but I think I’ve practiced as much law as Ms. Kennedy has. I’ve also sat on the boards of non-profit organizations… I’ve also helped run non-profit organizations. I write and I’ve been an editor. Once, I was Black-Dragon editor for The Brandesian.

Kennedy went to Radcliffe, which was founded as a Harvard for girls. I went to Brandeis, which was founded as a Harvard for Jews.

No, I’m not Jewish. Neither is Caroline Kennedy.

Kennedy’s dad was President of the United States of America and a hero to millions. He said famous things like, Why does Rice play Texas? We choose to go to the moon.

My dad is a carpenter and computer programmer and he says things like, There’s nothing to fear but being chicken.

Her step-father was an international playboy and one of the richest men in the world.

My step-father is an international archaeologist and is the richest man in his house.

Her mother wore cute hats.

My mother is a senior partner in a major national law-firm and she looks even better in hats.

Kennedy supports legislation legalizing same-sex marriage and so do I!

Kennedy is pro-choice and so am I!

Kennedy has this thing against assault-rifles (go figure!). I don’t so much.

Kennedy is an honorary chairman of the American Ballet Theatre.

I was a theater major in college and have been to the ballet.

She also supports unity of Jerusalem and believes that Jerusalem should be the undivided capital city of Israel. I agree. Go Jerusalem!

Caroline Kennedy has never held political office and neither have I. Although… I did once run for Oregon State Representative. I didn’t win (I lost to the Republican, the Democrat and… so help me, an actual, honest-to-Stalin Communist.), but by virtue of a failed bid for state office some 15 years ago, I can honestly say that more people have voted for me than have ever voted for Caroline Kennedy.

Governor Patterson, I submit myself for your consideration. I expect to hear from you soon.

The Limits of Rules

From Frederic Sautet at The Austrian Economists,

Bernard Madoff’s alleged $50 billion fraud is another interesting example of the limits of governments to enforce their own rules. …The more rules governments must enforce, the less they will be able to do so adequately. Instead, one should rely on the incentives people have to successfully enforce the arrangements they themselves establish or on the reputation of others to enforce those arrangements. As the WSJ puts it:

The fact is that the only people who seem to have taken concrete action to protect investors from Mr. Madoff are private research shops like Aksia LLC. Its analysts did the real work of figuring out that Mr. Madoff’s claimed investment strategy couldn’t be happening at the volumes he claimed to be trading. Likewise, it was the short sellers who first blew the whistle on Enron, while the SEC was clueless and the firm’s auditors were asleep.

There’s a lesson here for investors and Congress. Instead of shoveling more money and power to the regulators who already had plenty of both, let’s take care not to overregulate the people who actually warned about Mr. Madoff’s miracle returns. Law enforcement is useful in punishing wrongdoers after the fact, which will deter some crooks. But expecting the SEC to prevent a determined and crafty con man from separating investors from their money is no more sensible than putting your life savings with a Bernard Madoff.

Rules aren’t always bad. Rules are often very efficient and sensible, as in much of the criminal law. They can also make sense in some civil situations. Generally, when a rule simplifies things, it’s a good rule. But if the rule–or set of rules–becomes too unweildy or complex, then the rules themselves work counter to their intent.

Richard Epstein makes the point in Simple Rules for a Complex World,

[U]nder the dominant constraint of scarcity, insist that every new legal wrinkle pay its way by some improvement in the allocation of social resources. All too often, today’s law does just the opposite: it makes more complex rules that hamper the productive efficiency of the society they regulate.

The SEC has a lot of rules and a lot of agents and a lot of money to employ both. Madoff was big, in plain sight, and the subject of many complaints. The SEC missed him because they were too focused on all the minutae of complex, inscrutable, profligate regulations. They simply missed the forest for the trees.

Note that the point isn’t that there shouldn’t be any rules, it’s that the rules should be simple, clear, and enforceable. You don’t need new rules to prosecute fraud, you just to attend to the prosecution. This is as true in the Madoff scandal as it is of the collapse credit default swaps. We don’t need more regulation; we need better, simpler and leaner regulation.

Exit strategy?

The NYT has an interesting piece on the Madoff affair, “Hey Ponzi, What’s Your Exit Strategy, Exactly?

I have never understood why someone would ever start a Ponzi scheme when, by definition, there’s no way to end it.

The scam works by bringing in new unwitting investors to pay off the old unwitting ones. Since there’s no actual investment involved — just a transfer of money backward, with some portion presumably pocketed by the Ponzi schemer — keeping the scheme going requires an endless supply of new investors. The schemer’s liabilities only get bigger as time goes on, and there’s no way to end the ploy. Other than jail, that is. Or death. Or perhaps faking one’s own death.

The U.S. Social Security system is a Ponzi scheme. Benefits for existing retirees are paid out of payments made by current workers. Whatever excess there is in current revenue is “invested” in special Treasury bonds (special because they cannot be traded). When outgoing payments exceed incoming revenue, the bonds will be cashed in, and those bonds will have to paid with general tax revenue.

Since there’s no actual investment involved — just a transfer of money backward, with some portion presumably pocketed by the Ponzi schemer — keeping the scheme going requires an endless supply of new investors.

The transfer of money backward is from current workers to current retirees. The portion pocketed by the Ponzi schemer (the Federal Government) is whatever current excess revenue exists.

Some people, of course, just pretend that Social Security is fine. Like Richard C. Leone of the Century Foundation,

Simply put, Congress is bound to pay the interest and principal on Social Security’s trust fund, which means that the system will be able to continue paying promised benefits in full until sometime between 2042 and 2052, depending on the forecast. There should simply be no misunderstanding about that.

He’s right. The bonds held by Social Security represent a claim that Congress has to pay. Out of general tax revenue. So, when payments begin to exceed income (sometime around 2014-2017), Congress will have to make up the difference by either a) raising taxes, or b) cutting benefits. Which would, you know, be radically different than if the Social Security Administration had to make up the shortfall by either a) raising taxes, or b) cutting benefits — A difference without a distinction if ever there was.

But maybe, the Social Security problem isn’t really that big a problem? Paul Krugman makes this argument,

Now it’s true that rising benefit costs will be a drag on the federal budget. So will rising Medicare costs. So will the ongoing drain from tax cuts. So will whatever wars we get into. I can’t find a story under which Social Security payments, as opposed to other things, become a crucial budgetary problem in 2018.

What we really have is a looming crisis in the General Fund. Social Security, with its own dedicated tax, has been run responsibly; the rest of the government has not. So why are we talking about a Social Security crisis?

Because existing Social Security/Medicaid shortfall is $40.8 trillion dollars, or four times greater than all other outstanding federal debt, that’s why.

Defense accounts for 20% of the budget. SS/Medicare/Medicaid account for 42%, interest and other mandatory spending (like congressional salaries) account for another 20%. Discretionary domestic spending accounts for 18%. So, say we trim defense back by 20% (which I’m not advocating), and we slash domestic programs by 50%. That gets us 13% of federal revenue, or enough money to pay the interest on about a quarter of the Social Security/Medicaid debt.

The schemer’s liabilities only get bigger as time goes on, and there’s no way to end the ploy. Other than jail, that is. Or death. Or perhaps faking one’s own death.

So, what’s our exit strategy? Exactly?

Who’s to blame at GM?

Michael Barone has a good article up at U.S. News & World Report, Who is at fault for the decline of the Big Three?

Picking up on Mickey Kaus’s article at Slate, Michael indicts “Wagner Act unionism.”

The problem… is not just the high level of benefits that the United Auto Workers has secured for its members but the work rules—some 5,000 pages of them—it has imposed on the automakers. As Kaus points out, unionism as established by the Wagner Act is inherently adversarial. The union once certified as bargaining agent has a duty not only to negotiate wages and fringe benefits but also to negotiate work rules and to represent workers in constant disputes about work procedures.

From Kaus,

Under the Wagner Act, management manages. What the union does is complain, and negotiate for a rule limiting management’s right to do what the union doesn’t like. A worker protests that his job should be classified as “drilling special and heavy” instead of “drilling general.” The parties butt heads, a decision is reached, and a new rule is deposited like another layer of sediment. At some GM plants, distinct job categories evolved for each spot on the assembly line (e.g., “headlining installer”). In Japanese auto plants, where they spend their time building cars instead of creating job categories, there is only one nonsupervisory job classification: “production.”

The nature of the relationship between union and management corrodes the quality of the manufactured product.  That adversarial relationship polarizes the two sides. Management tries to extract what efficiency it can from labor and labor tries to extract as much wage as it can for as little work as possible. This culminated in the establishment of programs like GM’s job bank, where workers are paid not to work.Barone places the start of the decline in the 1970’s.

So the big UAW demand that year was “30 and out”—assembly line workers could retire after 30 years on the job. This in turn led the union to demand generous retiree benefits. A worker who retired at 51 wouldn’t be eligible for Medicare for 14 years, and therefore the UAW negotiated incredibly generous medical benefits—elective dental work with no copayment is one that sticks in my mind.

The UAW also created a constituency within itself of retirees who have voting rights in union elections just as actual workers do, and there are now something like three times as many GM retirees as GM employees as voting members of the UAW. Retiree benefits account for the lion’s share of the difference between GM’s labor costs and the labor costs of foreign automakers in the United States.

The danger this poses has been obvious for a while, but the adversarial nature of the union/management relationship made it difficult to do anything about it. In Septemeber of ’07, the UAW finally agreed to absorb the cost of health benefits of retirees–if GM would pony up $30 billion in start-up cash. GM can’t afford that payment, and the bailout from Congress will go–in large measure–to offset that payment.

Kaus sums it all up,

That’s why Democrats are deluding themselves if they think they can save Detroit by mandating that GM and Ford build high-MPG small cars in the U.S.–thanks to inefficient work rules, they’ll be overpriced high-MPG small cars, and badly built high-MPG small cars. That’s why Republicans are deluding themselves if they think a wage cut that saves Ford and GM $800 per car is going to make all the difference–it won’t, if the trim still falls off and the carpets bunch up.

Sen. Corker’s proposed bailout compromise apparently did try to tackle the issue of work rules. But the UAW balked at the Corker requirements (which would also have cut pay to parity with Toyota and Honda’s U.S. factories) and the deal collapsed. That shouldn’t be a surprise. A “web of rules” is what adversarial Wagner Act unions were designed to produce.

The sad fact is that neither GM nor Chrysler (and possibly Ford) can remain competitive in either the global or the domestic market unless they radically increase both the quality of their cars and the efficiency of their factories. The current UAW labor agreements make that almost impossible.

$1 Trillion

From Reuters:

President-elect Barack Obama’s team is considering a plan to boost the recession-hit U.S. economy that could be far larger than previous estimates and might reach $1 trillion over two years, the Wall Street Journal reported on Saturday.

Obama aides, who were considering a half-trillion dollar package two weeks ago, now consider $600 billion over two years “a very low-end estimate,” the newspaper said, citing an unidentified person familiar with the matter.

The final size of the stimulus was expected to be significantly higher, possibly between $700 billion and $1 trillion over that period, it said, given the deteriorating state of the U.S. economy.

Because the one thing we really, really need is $1 trillion in more debt.

See the following.