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With a Democratic
administration likely next year, it is a good time to think about traditional
Democratic interests, which mainly circle around the lower 50% of income
earners. These are the lower middle class and the lower-lower middle class,
and the genuinely destitute.
I birng this up because
most Democratic solutions -- dopey tax credits for daycare, for example --
don't really accomplish anything at all except serve as a Works Progress
Administration program for accountants. Other "solutions" -- like
taxing capital gains at 28% or higher with no inflation adjustment -- do
absolutely nothing for those with lower incomes, but definitely impair
economic progress, with the inevitable result of higher unemployment,
declining wages, and all the other symptoms of economic stagnation. You need
only look at Britain before Margaret Thatcher to see where all this
ultimately leads. As for "tax credits," it would be much better to
apply a $50,000 exemption, or a "tax credit for living." I
mentioned $20,000 per adult and $10,000 per child, but why be so chintzy. How
about $40,000 per adult and $20,000 per child? If you want to do something
for those with lower incomes, here's an idea: don't take their money.
Most people with economic
understanding tend toward the Republican stance, which is something like:
"if the economy does well overall, it should be better for the middle
and lower-middle class." Which is generally true, but that's typically
about as far as it goes. There are many commentators who feel a great
compassion toward the difficulties of what is really 50% or more of the U.S.
population, but they typically have little economic understanding and come up
either with ideas that make businessmen very nervous due to their potential
negative economic effects, or amount to small-scale government handouts with
little real effect at all. In general, the businessmen have it right -- you
can't make the less-well-off better off by a method that cripples the economy
as a whole.
One things about
"poor" people today, in the U.S., is that they have vastly higher
incomes than most people in the world, and enjoy a rather high standard of
material abundance. Starvation is practically unheard of. If anything,
obesity is a bigger problem. Most everyone has electric lights, hot and cold
running water, and functional sewage systems. Even, despite the government's
official "fork you" stance, a certain level of government health
care, if you are poor enough and know where to look. And yet, there seems to
be an experience of extreme lack.
Part of this seems almost
entirely psychological in nature. A graduate student of marine biology might
have an income that falls solidly in the second or even first quintile
(bottom 20% or second 20% of income), but the graduate student considers
himself (or herself) as a member of the intellectual elite. Even after
receiving their degree, and becoming a junior adjunct professor of some sort,
they may make less than many construction workers, but they retain their
elite cachet. Plus, the work is a lot more fun. So, part of the experience of
being "poor," is, I believe, the sense that you are a loser in a
game in which there are winners and losers -- not so much because of physical
hardship per se. If you were a cleaner of hotel rooms for example, you would
probably have the daily experience of being rather badly treated by one boss
or another.
Within this category of
psychological issues is the notion of expectation or entitlement. Today,
there are a great many immigrant workers who seem to be able to work
low-paying jobs (drywaller, dishwasher, grass-cutter) but manage to save a
quarter or even half their income, which they send back to their family in
Guatemala or southern Mexico. Indeed, the savings rate in China is about 40%!
A dozen may live in a three-bedroom house, in a suburb near you, which keeps
individual rent down. They may not own cars, but ride a cheap Wal-Mart bike
to work (if you're willing to work cheaply, usually you don't have to travel
very far). And, they eat the simple rice/beans/corn/tomato based foods that
they are already accustomed to. I get the impression that most illegal immigrant
workers don't particularly like working in the U.S. -- they prefer their
rural Mexican villages in terms of lifestyle. Plus, they tend to look upon
the U.S. as a Nation of Assholes. Nevertheless, it has been an environment
where they have been able to thrive, in their very modest way.
Then there are the
dropout artists -- like Ran Prieur for example, who has carefully organized his life so that he needs
only about $400 a month to live. Most of his time is spent lackadaisically
enjoying his afternoons, much like any ski or climbing bum without the skiing
or climbing. People have been doing this forever, such as this famous book
published in 1978:
Possum Living
"Do you remember the
story of Diogenes, the ancient Athenian crackpot? He was the one who gave
away all his possessions because "People don't own possessions, their
possessions own them." He had a drinking cup, but when he saw a child
scoop up water by hand, he threw the cup away. To beat the housing crunch he
set up an abandoned wine barrel in a public park and lived in that.
The central theme of
Diogenes' philosophy was that "The gods gave man an easy life, but man
has complicated it by itching for luxuries."
Apparently he lived up to
his principles. But despite that handicap he seems to have had the most
interesting social life imaginable. He not only lived in the center of the
"Big Apple" of his day (5th century B.C. Athens), he also had the
esteem and company of many of the most respected, rich and influential
citizens, including that of the most expensive prostitute in town.
When Alexander of
Macedon, the future conqueror of the known world, was traveling through
Greece, he honored Diogenes with a visit. Alexander admired Diogenes' ideas
to the point of offering him any gift within his means. Diogenes, who was
working on his tan at the time, asked as his gift that Alexander move aside a
bit so as to stop shading him from the sun. This to the richest and most
powerful man in the Western world.
Parting, Alexander
remarked, "If I were not Alexander, I would be Diogenes." Diogenes
went back to nodding in the sunshine.
Diogenes was fair and
just to all but refused to recognize the validity of man-made laws. He was a
good old boy, one of the first back-to-basics freaks in recorded history. He
lived to be over 90. Alexander, The Mighty Conqueror, drank himself to death
at age 33."
Diogenes didn't have jack
squat, but he wasn't poor.
One of the things that
makes poor people poor in the U.S. -- not the only thing by any means, but
we're going one at a time -- is the American Dream. Not the independent
rise-to-success one, but the one that's all about ownership, of a
single-family house that looks like a farmhouse, and of course a car or
three. The American Dream is mostly just what people are told to buy by their
television sets. For millennia, people got by by doing basically what
everyone else was doing. If you were born in Switzerland, you probably raised
cows and made cheese, or maybe chocolate or cuckoo clocks, because that is
what everyone else was doing, and it worked, and it was too hard to figure
out an alternative way. One of the reasons this monkey-see-monkey-do strategy
worked is because it was based on reality. You could see that the cow raisers
and cheese makers were more-or-less successful, because they were right in
front of you and you could confirm it with your own eyes. Also, if you did
figure out an alternative way, you might not be included in the social
gatherings of the cow and cheese people, which could have been pretty tough
in rural Switzerland of yore. I don't think Diogenes made it too well with
the women, until maybe after he was famous and hobnobbing with Alexander the
Great. Who wants to raise kids in a wine barrel?
This process has been
co-opted somewhat by the marketing people. Instead of seeing a cow-and-cheese
person, who is genuinely, in real life, satisfied with their situation, you
see a person on TV -- an actor --
acting satisfied after their purchase of a plasma TV. After enough exposure
to this sort of thing, a person concludes that everybody but them owns a
plasma TV, and seems happy about it, so they should to -- even if this is not
really the case at all. Over time, it actually becomes the case: people in
the neighborhood own this or that, and act like they are happy about it, just
like the people on TV.
There is no end to such
things. I have an interesting little book called The Exurbanites, which is
about the upper-middle-class people who live in the exurbs of New York City,
most of whom commute to the city. It was published in 1952! The book is about
the whole ring of residential communities, but it is especially about
Westport, Connecticut, which is where the author lived (before moving back to
NYC), and also where I lived for some time. As part of his research, he
talked with the local accountants, who know better than anyone who is really
making the dough and who is just putting on a show. The accountants told him
that, such was the level of expenditure necessary to maintain this exurban
lifestyle (and this is upper-middle-class, not upper class), that practically
everyone making under $60,000 a year in 1952 dollars (about $750,000 today)
was barely getting by! Westport is an interesting little study, because, in
the author's day, it was a sort of model of the suburban, upper-middle-class
ideal. (The rich are in Greenwich.) It still holds that mantle today, as it
has long been the home of Martha Stewart, who exported a sort of Westport
ideal across the United States and the globe during the 1990s. The author
said the same thing of Westport in 1952. It was where the advertising people
lived, and, whether consciously or unconsciouly, this ideal was transmitted
across the country as What People Did. That's why people in Arizona or
Nevada, places with no trees or water, live in wood-framed houses with a lawn
in the front and back. In Connecticut, there are trees everywhere, and after
you cut down the trees to make your house, a lawn remains.
The point is, we are
drenched in a media creation which projects an image of a lifestyle that
costs about $250,000-$500,000 a year to maintain -- not only through
advertising, but through the television shows themselves, which generally
portray people fairly close to the socioeconomic class of television
producers. This is difficult enough for well-paid New York executives to
maintain, and practically an impossibility -- even the KMart version -- for about 70% of the
U.S. population.
There is no limit to
where the "keeping up with the Joneses" game can go. I knew a
fellow making about $3m a year who lived in Greenwich CT, which used to be a
good Greenwich income, but who started feeling poor after a while. He flew
commerical airlines, while the neighbors flew on NetJets, and raised his own
kids rather than foisting them off on a platoon of nannies, tutors and
governesses. Fortunately, he was of retirement age, and had the good sense to
escape to Montana. Probably this is where some of the urge to tax the
"rich" to oblivion comes from. (Most rich people don't pay much
taxes -- they own companies -- so the high taxes mostly fall on the upper-middle
clas.) Gotta slow down the Joneses.
The point is, one of the
reason people feel "poor" -- this aching lack -- is that they are
chasing an ideal that they can't afford, but what appears to be "what
everyone does." One of the most absurd manifestations of this tendency
is Rent-A-Center, a scarily-successful store where you can rent home furnishings by the
month or week. It targets low-income people who can't scrape together $200 to
buy a sofa at Ikea. You would think that
the stuff at Rent-A-Center would be super cheap, sort of sub-Wal Mart. Not at
all! These marginal low-income customers are buying -- er, renting -- stuff that would be
right at home in the second living room in a Westport mansion. Look for
yourself:
Rent a Center's Home Entertainment
Center offerings
Actually, such is the
material abundance of U.S. society today, that you can furnish a house for
damn near nothing at all. Just browse around Freecycle or Craigslist. It is
not hard to find someone who is happy to give away -- for free, or nearly so
-- perfectly nice and functional furniture, simply because they have the urge
to buy something new. It is piled up in every basement and attic from the
Atlantic to the Pacific. The immigrants seem to understand this well. Last
year, I gave a piano to a Chinese guy from Brooklyn, who had to bring along
an interpreter because he didn't speak English. He wasn't the fastest, either
-- I had it listed on Craigslist for weeks as a "free piano," but
no English-speaking people showed up at my door with a truck. Maybe they're
all renting pianos from Rent-A-Center.
I think the point of this
is: the problem is not that many people are not participating in the
"American Dream," as a "limousine liberal" might
conclude, but that trying to live up to the marketers' fantasy makes people
poor. The reason I bring this up first is: before you get into the details of
how to achieve certain outcomes, it is good to think about the outcomes you
want to achieve.
Okay, so far I haven't
got anywhere beyond "poor people should suck it up," a typical
Republican response, and this is supposed to be for Democrats. We'll work on
this project more in the future.
* * *
Fannie and Freddie: Good
job. Fannie
and Freddie were always acccidents waiting to happen. They took on such
absurd leverage -- about 50:1 -- that any significant housing decline would
push them to the brink. While the situation with these entities was always
rather dubious, with the shareholders in effect profiting from the implicit
government guarantee, the Treasury's solution for Fannie and Freddie is about
as good as can be expected in this situation. That's why it's nice to have a
real banker, like Paulson, involved, rather than some politician who is in
waaaay over his head. Could you imagine a solution desgined by Barney Frank?
The Treasury is talking about a $15B recapitalization of Fannie and Freddie,
which means that existing shareholders will probably get diluted into
oblivion. As of the end of Friday, FRE had a market cap of about $5.0 billion
and FNM had a market cap of about $10.0B. (There could be more than $15B
coming in the future.) Which implies that, at $15B, the US government would
own about half of these entities. Well, that's what should happen. They were
government agencies to begin with, and could go back to that. The
shareholders enjoyed the profits, now they get the risk. The libertarians
would argue that the Fannie/Freddie bondholders, in other words, the holders
of all that MBS, should also take a haircut. Maybe so, but we don't want mass
chaos either.
A recap plan --
especially one where the errant management gets a swift kick in the butt, and
maybe a perp walk on top of that -- is not a "bailout" in the
classic stealing-from-the-government fashion that was common in the 1980s and
1990s.
Privatize the profits. Socialize
the losses.
I would much rather see
the U.S. government take an equity stake in Bank of America, diluting the
existing shareholders and brooming top management, than the existing plan to
bail out BofA by making them whole on their busted mortgages. Since the
federal government is involved, you could even set it up so the top
maangement gets booted with no payout whatsoever, and even that they lose 70%
of all their previously-paid compensation of the last five years. (That would
play well on TV, and if the management is smart, they'll take the deal and
act like it actually hurts.) Remember, most of BofA's liabilities are to its
depositors, which are mostly FDIC insured in any case. Thus, whether the US
government backs up BofA's depositors via a capital injection or via
insurance payouts in bank liquidation, the US government is picking up the
shortfall in either case. Actually, the capital injection route is probably a
lot cheaper overall, because in the chaos of a liquidation of a major entity,
much larger losses are likely to occur. Not to mention that the broader
economic effects would probably be worse. Also, the process of liquidation,
as happened to the S&Ls in the early 1990s (or Indymac as we speak), is
an avenue whereby a great many people with government connections got wealthy
by scamming the government to sell them assets at stupid-low prices. And, an
equity stake in Bank of America could be sold back to the market at some
future date. The government might even make a profit from the deal.
S&P said recently
that a federal government takeover of Fannie and Freddie would cost about $1
trillion. I doubt it. They have about $5 trillion of mortgage exposure,
including guarantees, so that would mean about a 20% hit to their held and
insured mortgages as a whole. These are fairly good-quality mortgages.
Although the ones that foreclose might have a 20% loss rate, if that is 20%
of the whole (a whopping huge number), that would imply about a 4% loss
overall. Plus, the companies are still profitable on a pre-credit losses
basis, so some of those credit losses would be offset by income. Maybe $100
billion overall, which is not really that much compared to what the
government is sending up in smoke in Iraq.
* * *
Super high mileage car
watch: Volkswagen 1L at 235 mpg!
From the company that
brought us the Beetle duing the road-boat era in the 1950s, and the
50mpg diesel Rabbit in 1976, comes this two-person
concept car that gets 235 miles per gallon on a
standard (non-hybrid) one-cylinder diesel engine, which produces 8.5
horsepower. It weighs 639 lbs. (The Honda Goldwing two-seat motorcycle weighs
about 900 lbs.) Now, 8.5 horsepower is arguably not a whole lot, but then,
the Volkswagen Beetle had only 28hp, pushing 1,500 lbs. So, the power/weight
ratio is about the same, especially taking the improved aerodynamics into
account. Volkswagen is expected to start a limited production run in 2010.
Chevy Volt? -- not a chance against this one. Okay, it has only two seats,
maybe one-and-a-half seats really. But, most trips are with one person, and
most of those that have multiple people are with two people. In practice,
either a) the owner will have a second, four-seat car for use when needed, or
b) if you have three or more people who want to go somewhere, at least one of
the three will have a four-seat car, and you'll take that one. I used a
two-seat Mazda Miata as an only car for four years, for my wife and I, and it
was never a problem. Cars don't use gasoline when you don't drive them. Keep
the Suburban in the garage, and put 2500 miles a year on it when you need to
carry big loads or lots of people.
Volkswagen 1L info
More 1L info
* * *
Okay, now that we've had
some car porn, it is time to balance out with some train porn! Trains are a
much better solution than cars, even 250mpg cars. Not that you can't have a
car -- Japan is a country with seven international car companies -- but it
should stay in the garage, with most of the trips by train, bike or foot. At
least in urban areas, which is where most people live.
This is a train map of
the Greater Tokyo area. Wow! Much better than trying to keep the whole
suburban disaster above water a little longer with higher-mileage cars.
http://www.u-bourgogne.fr/monge/g.dito/poisson2006/images/tokyo_trainmap.pdf
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset management.
Lewis has written for the Financial Times, the Wall Street Journal Asia, the
Japan Times, Pravda, and other publications. He has appeared on financial
television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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