Defenestrating Thoughts from the Bivouac

I recently read Dave Barry’s Year in Review and I’m still laughing. It is extremely funny and you should read it in its entirety as Barry recaps the 12 months of 2008. Here are some of my favorite parts (one for each month):

• January – “In what some economists see as a troubling sign, Fannie Mae and Freddie Mac invest $12.7 billion in Powerball tickets.”

• February – “. . . when, amid much fanfare, Congress passes, and President Bush signs, an ”economic stimulus package” under which the federal government will give taxpayers back several hundred dollars apiece of their own money, the idea being that they will use this money to revive the U.S. economy by buying TV sets that were made in China. This will seem much more comical in the fall.”

• March – “In politics, Barack Obama addresses the issue of why, in his 20 years of membership in Trinity United Church of Christ in Chicago, he failed to notice that the pastor, Jeremiah Wright, is a racist lunatic. In a major televised address widely hailed for its brilliance, Obama explains that . . . OK, nobody really remembers what the actual explanation was. But everybody agrees it was mesmerizing.”

• “April -The economic news is also gloomy for the U.S. automotive industry, where General Motors, in a legally questionable move aimed at boosting its sagging car sales, comes out with a new model called ‘The Chevrolet Toyota.’”

• May – “In sports, both the Kentucky Derby and the Indianapolis 500 are won by Usain Bolt.”

• June – “Tiger Woods, in an epic performance, wins the U.S. Open playing on an injured and very painful knee, thereby proving, beyond all doubt, that golf is not a real sport.”

• July – “Speaking of trouble, the economic news continues to worsen with the discovery that Fannie Mae and Freddie Mac have sent $87 billion to a Nigerian businessman with a compelling e-mail story.”

• August – “Elsewhere abroad, war breaks out between Russia and Georgia over South Ossetia and Abkhazia, serving as a stark reminder that, in an increasingly uncertain world, we, as Americans, have no idea where these places are.”

• September – “But that is not enough, as major financial institutions, having lost hundreds of billions of dollars thanks to years of engaging in practices ranging from questionable to moronic, begin failing, which gives the federal government an idea: Why not give these institutions MORE hundreds of billions of dollars, generously provided by taxpayers?”

• October – “Obama, ahead of McCain by double digits in the polls and several hundred million dollars in money, skips the debates so he can work on his inaugural address. The New York Times declares his performance ‘masterful.””

• November – “As it becomes increasingly clear that the federal government’s plan of giving hundreds of billions of dollars to dysfunctional companies has not fixed the problem, the government comes up with a bold new plan: give more hundreds of billions of dollars to dysfunctional companies”

• December – “President-elect Obama, continuing to bring change in the form of fresh-faced Washington outsiders, announces that his secretary of state will be Hillary Clinton. The position of secretary of defense, currently held by Bush appointee Robert Gates, will be filled by Bush appointee Robert Gates.”

All the festivalities around Obama’s inauguration felt more like a coronation of some sort of God-King than that of a President. Given that we live in a constitution republic where the Executive Branch is constitutionally limited to the point where the President doesn’t really do that much, it was all very strange.

Of course, I’m not a big fan of pep rallies and distrust politicians, but a lot of people the past few days have been living in another world. I heard several people say things along the lines of, “Now that Obama is President everything is going to be so easy!” or “Watching him speak is like watching God speak.”

Maybe, just maybe, we should wait until he actually does something before we deify him. Talk is cheap, let’s see some action.

ABC News is reporting that Obama’s inauguration cost $170 million. During a recession.

And the party was paid for by the taxpayer and several rich donors:

They are not the $20 and $50 donors who helped propel Obama through Election Day,” said Massie Ritsch, communications director for the Center for Responsive Politics. “These are people giving mostly $50,000 apiece. They tend to be corporate executives, celebrities, the elite of the elite.

The biggest group of donors were none other than the recently bailed-out Wall Street executives and employees.

“The finance sector is well represented, despite its recent troubles,” Ritsch said. “Those who worked in finance still managed to pull together nearly $7 million for the inauguration.”

So Obama supports and votes for a pork laden bailout package for the banks. The bank executives get their “retention bonuses“. And the bank executives throw a big party for Obama. In the end, the taxpayers get the bill.

That doesn’t sound like Change.

It is, of course, very good that everyone is hopeful and inspired, but I hope we’re not piling all of our hopes and dreams in an unworthy vessel.

I don’t trust any politician. I’d love to be proven wrong if Obama fulfills his campaign promises and fixes all our problems. I just doubt it will happen. I guess we’ll find out soon enough.

Earlier I wrote about how government schools have no incentive to improve quality of education and that’s why we shouldn’t be surprised that their quality is awful. I also proposed that a voucher system would allow competition and choice, resulting in parents getting to choose from a plethora of government schools.

The main argument I heard against vouchers is how handicapped kids are really expensive to educate and the voucher would not be sufficient for them. Well, there’s a simple answer for that: give those kids a larger voucher valued at whatever the actual cost of the government school is.

I’m positive that someone can provide a better education for handicapped children at the same price point as a bureacracy-laden, government-provided service. In fact, I bet they could provide it for even cheaper.

Another indication of the lack of incentive to improve in government schools, is demonstrated by Obama’s choice for Education Secretary, Arne Duncan:

Duncan, hailed by Obama as a reformer, said he would like to take the lessons he learned in Chicago with him when he moves to Washington. “I’m also eager to apply some of the lessons we have learned here in Chicago to help school districts all across our country,” Duncan said after Obama formally named him to the job in Chicago (source).

Duncan “The Reformer” has been the Chief of the Chicago Public School for the past 8 years. Under his tenure, he’s collected an impressive set of stats:

• 17% of eighth graders tested at or above grade level in reading
• 13% scored at or above grade level in math
• 23% scored at or above grade level in writing

And when compared to the nation at large:

In math, Chicago Public Schools’ average score increased from 254 in 2003 to 260 in 2007. The national average for 2007 was 280. Seventy-five percent of Chicago students scored below 283 in the math assessment.

In writing, the average score for students in Chicago Public Schools increased from 136 out of 300 in 2002 to 146 in 2007. The national average in 2007 was 154. Approximately 50 percent of Chicago students scored below 148 in the writing assessment.

In science, the Chicago Public Schools average score was 124 out of 300; the national average was 147. Three-quarters of Chicago students scored below 146 on the science assessment.

In terms of funding, Duncan had a budget of $10,555 per student, which is over twice the cost of the average private school ($4,689 per year).

Given an immense budget and nearly a decade at the helm, Duncan was unable to improve any scores in a statistically significant way.

Now he gets a huge promotion and will be running the country’s schools.

In the real world, the inability to do your job gets you fired. In the government world, you get promoted.

When Duncan applies his management style to all our schools, we can expect waste and incompetence to increase. Apparently, the Chicago public school system bureaucrats decided they needed cappuccino machines and ordered 30 of them for $67,000. And in order to avoid getting competitive bids, they split the order into several pieces. In the end they paid 20% too much for the machines.

The amount they overpaid is the equivalent of the tuition to sending 3 kids to private school. The total cost of the machines was enough to send 14 kids to private school.

And in the end, it turns out that “most of the machines [are] going unused because the schools they were ordered for had not asked for them”.

I don’t know too much about Carl Icahn, but I love this quote of his:

A lot of people die fighting tyranny. The least I can do is vote against it. — Carl Icahn at Texaco annual meeting. Jan. 20, 1988

After writing yesterday’s criticism of Obama’s “American Recovery and Reinvestment Plan”, I came across some news that makes it even clearer that Obama’s plan stinks:

President-elect Barack Obama said his two-year plan to boost the U.S. economy will generate as many as 4 million jobs, higher than his previous estimates, the biggest portion of them in construction, manufacturing and retail (source).

So the plan went from creating 3 million jobs to creating 4 million jobs without increasing the cost. I see two possible explanations:

• The plan has a lot of waste and fat in it, so it’s trivial to make a small change that creates 33% more jobs.
• Obama has no idea what he is doing and making it up: “Um, yeah, it will cost, um, $800 billion, and make, um, 4 million jobs. Um, yeah, that’s what the plan is.”

So he’s either just another politician who loves waste and pork or he has no idea what he’s doing.

Obama thinks he can create something out of nothing. If his plan can really magically create 4 million jobs, why not spend 4 times that amount and create 16 million jobs?

Again, we are faced with the reality that government cannot “create” anything. All it can do is forcibly re-allocate capital, which is usually a malinvestment.

Now getting to the guts of it, Ticker Guy astutely points out that the foundation of Obama’s plan is completely wrong:

We considered multipliers for the case where the federal funds rate remains constant, rather than the usual case where the Federal Reserve raises the funds rate in response to fiscal expansion, on the grounds that the funds rate is likely to be at or near its lower bound of zero for the foreseeable future. (Source: Appendix 1 of the American Recovery and Reinvestment Plan)

In plain English, Obama thinks the Fed can keep rates at 0% for years and people will still buy US bonds, which in turn, will allow Obama to run record deficits.

Who’s going to be continually buying 0% bonds? Especially if the economy is recovering as Obama claims it will.

In the steady state, it’s an invalid assumption that people will buy 0% treasuries for years.

Now, if we assume Obama’s plan starts to work, money will flow out of Treasuries and into the recovering economy, which will necessitate increasing rates.

In summary, the stated goal of Obama’s plan invalidates the base assumption. Therefore, there is no way it could work as claimed!

In fact, here’s what Obama’s advisors say:

We confess to considerable uncertainty about our choice of multipliers for this element of the package. (Source: Appendix 1 of the American Recovery and Reinvestment Plan)

Would you spend $800 billion if you had “considerable uncertainity” on whether the plan would work?

Apparently Obama would.

There are so many things wrong with Obama’s “American Recovery and Reinvestment Plan” that it’s hard to know where to start.

At the root of it, we have to recognize that the government cannot actually create jobs. Any hiring the government does is by taxing the private sector. Thus, since all the government’s money is pulled from the private sector, all the government can do is re-allocate resources. Any job the government “creates” is just shifting a job from the private sector to the public sector.

Furthermore, due to the nature of incentives, government job “creation” is really a misallocation and malinvestment. The explicit goal of the government action is to create jobs. It doesn’t care about competitively producing goods for discerning buyers. It doesn’t care about the return on investment.

A great example of this is the destined-to-fail auto bailout; no private investor will invest in the Big 3 because the risk far outweighs the return. The government, which doesn’t have a strong incentive to invest wisely, will just throw money at the problem. The government’s incentive is to be see as “doing something”.

Simple math can show as that Obama’s “job creation” is a clear malinvestment:

He urged Congress to give its quick attention to his still-evolving economic stimulus plan, designed to create or save 3 million jobs at a cost of about $800 billion (source).

Dividing $800 billion by 3 million jobs tells us that each job saved or “created” will cost $250,000! What sort of jobs are these and where do I sign up?

Why does it cost the government so much to “make” a job? Probably the usual reasons: waste, pork, paying back special interests and simply not caring about spending wisely.

The latest job figures show us that 11.1 million Americans are unemployed. With $800 billion dollars Obama proposes spending, we could give them each a salary of $72,000. That would solve your unemployment problem pretty fast.

[T]he number one goal of my plan … which is to create three million new jobs, more than eighty percent of them in the private sector (source).

So roughly 20% of the jobs will be government jobs? That means there will be 600,000 new government bureaucrats! Each one costs a quarter of a million dollars.

And to put more money into the pockets of hardworking families, we will provide direct tax relief to 95 percent of American workers (source).

Calling it a tax cut while not cutting spending is disingenious. If the government “cuts taxes” and doesn’t reduce spending, it builds an even bigger deficit. And in order to pay back the debt, the government takes money from the taxpayer later.

So the “tax cuts” are really just forced loans. We have to pay back the money later. That’s not “stimulus” that’s just more debt!

Why is this so hard for politicians to understand? If debt got us into this mess, more debt won’t get us out of it! The old adage “Insanity is doing the same thing over and over again and expecting different results” applies here. Except instead of saying “insanity” I think it’s more accurate to say “stupidity”.

Credit will never be as free flowing as before. Now, you need to be creditworthy.

Consumers won’t be spending like crazy anymore. There’s too much debt in the system and individuals are now going to start paying down debts and start saving.

Obama’s stimulus plan is a joke. It’s getting pretty clear that this guy has no idea what he’s doing.

Government cannot create jobs. Government can just forcibly take money and re-allocate it. And since each job costs $250,000 I think it’s pretty clear that the re-allocation is a huge misallocation.

Right now we’re in a severe recession due to lack of capital. And Obama’s plan is to forcibly seize capital and then severely misallocate it. All this will do is make the recession last much longer.

(Source)

Since I already did resolutions on my birthday, I thought it would be fun to make some economic and political predictions for the New Year. Here’s what I think will happen by the end of 2009:

Unemployment tops 10% with real unemployment over 15%

We still have way too much capacity and since consumers can’t add more debt, we’ll continue the correction to bring production capacity in line with the reduced demand. This means more businesses closing or reducing their workforce.

Additionally, much of the recent employment growth (commercial rent estate, sales, etc) has been fueled by discretionary spending. This spending will decrease and those jobs will be lost.

Over 30% drop in the major US stock indices

I expect the Dow to be in 6000 range this year and possibly in the 4000 range. The economy will get worse and this is only partially priced in. Sales and earning will drop drastically — just wait until Q4 earnings are announced. Additionally, with increased unemployment, people will be forced to sell stocks in order to cover living expenses.

Plus, in a bull market no one cares about fraud, but when the chickens come home to roost, all the lies come out. So far we’ve seen Madoff and now Satyam; we’ll see more scandals through the year.

Deflation, No Hyperinflation

A big worry is that the US dollar will see Weimar or Zimbabwe style hyperinflation. While this is a risk due to the Fed’s policies, I think 2009 will be deflationary. Though, in 2010 and beyond, we’ll have to contend with the consequences of the Fed’s printing.

As assets get marked to market, the value will continue to plunge. There no way that Obama or the Fed can print faster than this. Even if they do print faster, lenders and borrowers will continue to be cautious.

Plus if stocks are dropping and the Fed holds the rate really low, there’s no way we can simultaneously have hyperinflation.

House prices drop over 25%

We still have a few storms coming here. Foreclosures have been up due to sub-prime loans, but we still have Option ARMs and ALT-A loans coming. We’ll see lots of selling from people who can’t make payments anymore, bank foreclosures, and new development projects that are now coming online.

And there won’t be buyers for all of these homes. It’s not that credit isn’t available, it’s because nearly no one is credit-worthy. The few credit-worthy are the prudent people who have saved money for a 20% down payment. Very few of these people will be buying a home while prices are dropping.

Personally, I had thought Crissy and I would be buying a home this summer (we have our 20% down ready), but as I expect home prices to drop all year long, we’re not buying. The only exception would be a phenomenal deal on short sale for a home that we deem “perfect” and would live in for more than 15 years.

Consumer savings rises to 3%

The American consumer will spend substantially less and start trying to live within their means. This means lots of debt will be paid off (a form of savings) and people will start building a nest egg.

Global unrest rises

It’s hard to quantify this, so I almost left it off the list. I expect to see China have significant unrest as their economy collapses. They have a much worse over capacity problem and unwinding this will be hard.

We’ll likely see more Gaza style battles scattered around the world. I wouldn’t be surprised to see Georgia flare up again.

Obama’s halo wears off by the end of the summer

Obama is widely popular as The Anti-Bush and The One that will solve all our problems. This veneer will wear off rather quickly. First off, even though most people didn’t realize it, his policies are very similar to Bush’s. His appointees are mostly Washington insiders. And in February, the Supreme Court will force him to publicly declare if he will allow torture.

Secondly, Obama’s crowd is split into many ideological camps. Throughout the election he was able to speak in very general terms, but now he will have to be specific. Economically, he voted for the bailout which the vast number of Americans were against. And yet, he’s already announced lots more spending. Socially, does he support gay marriage? His white liberal supporters do, but most of his African American supporters do not.

Lastly, Obama’s spending will be thwarted by the bond market. Foreign purchases of Treasury bonds will basically stop. Foreign banks will need to spend money domestically and instead of building reserves, they will be spending them. Obama will struggle to continue to run large deficits without just printing money.

These are obviously grim predictions, but I think it will be rough year. As I’ve told my friends and family, it’s important to be very prudent with money now. Build up savings, get out of debt, and don’t buy things you don’t need.

Since the blog hasn’t puked since yesterday, I’m ready to declare it “most likely back in business”.

We now return you to our regularly scheduled ramblings. :-)

I found a few more problems and hacked over them. Hopefully the hacks work and I can send some time this weekend trying to fix the problems permanently.

My last post was a bit pre-mature, I only got permalinks working temporarily. Now I think I have them working permanently, which fixed the RSS problem (all you RSS readers should now see this post). Here’s what I went through:

• Problem: Site completely down (wp-load.php parse error)
• Solution: At first I tried to restore wp-load.php with the original, but that just led to more parse errors in different files. So I reinstalled WordPress. Site back up, but RSS and Permalinks still broken.

• Problem: Permalinks broken
• Solution: Republish .htaccess file from WordPress. Temporarily fixed problem. Discovered .htaccess file was being reverted within minutes of publishing new version.

• Problem .htaccess file reverting
• Solution: Removed rewrite rules from WordPress block in the .htacess file. Now WordPress isn’t randomly overwriting stuff. This fixed the permalinks and RSS feed problems.

Hopefully no other problems show up. I’m still curious what caused this. I didn’t touch the blog for days before it went down. Perhaps my hosting service upgraded some of the servers or something. The traffic spike prior to the problems is also something I need to look into.

I hate software. :-P