The Rise and Fall of McMaverick

The 2008 Presidential Election is less than 1 week away. American and the world are about to witness the exciting and historical event that an African-American intellectual and activist from an average family becomes the leader of the most powerful nation on earth. My crystal ball says that Barrack Obama will defeat John McCain in an electoral landslide of 354 to 184 with a nationwide popular vote margin of 10% or 55% vs. 45%. Also the voter turn out, as measured by the ratio of the number of voters over the number of eligible (including those did not register) voters, will be over 60% like the highs during 1960s.

A little digression on the election rule: American President selection is not determined by the majority of the popular vote of the country. Rather, it is elected formally with the majority of its Electoral College of 538 representatives from 50 states who are in practice bounded by their state’s election results. That is, the next president is the candidate who wins 270 or more electoral votes. The number 538 came from the idea that the Electoral College needs to reflect the federated government system whereby each state has 2 senators and congressional districts and thus representatives whose number is proportional to the state population. There are currently 435 congressmen and 100 senators. In addition, Washington D.C. has 3 congressional seats. Thus the total number of electoral is the magic number 538(=435+100+3). Further, except for Maine and Nebraska who adopted the so called Congressional District Method in allocation of their electoral votes (4 and 5, respectively) according to the state popular votes, the rest all use the “winner takes all” system in which the candidate who won the majority votes as little as 1 vote, will be given ALL the electoral votes of that state. Thus it is possible that in this federated government system with the electoral allocation methods, a candidate who won in total populate votes of the nation may not be the next president that was exactly what happened in 2000 when Al Gore lost the election to George W. Bush. who received about half a million popular fewer votes.

While McCain and Palin continue to campaign and pray they may still win, and while their advisors and handlers are busy blaming each other, I would offer my humble observation of why McMaverick is doomed to lose this election from the beginning.

McCain has always been fond of and played up his maverick image of his 26 years of services in congress and in Republic party. To be a maverick, you need to define yourself with what your are NOT and the contrast of a contesting and dominating theme that you are against. That is, you are frequently on the minority side and can’t be seen to be a part of the main stream of your political party and ideologues. Of course, it is a possible niche position where you can retain some of your independence within the party and at the same time be perceived and admired as such by the larger public. That has been exactly John McCain’s favorite position and self-image.

Unfortunately, it is very different when running for a national office like the president. One needs to make the transition from maverick to one who can rally key constituents of the party to follow you and at the same time retaining the maverick image and core supporters in and outside the party. The bottom line is McCain has failed to accomplish the transition miserably. Instead, he appeared to be erratic, warbling and hopelessly lost.

McCain should know better; he was tested before in 2000 when he lost the Republican South Carolina primary to George W. Bush’s smear campaign. He is seen “correcting” his mistakes in this campaign and tried a few dirty tricks but just could not go all the way. He tried hard to appease the Republic base with moves such as having Sarah Palin as the Vice President candidate but just could not agree to and embrace some of their ideas. His overly simplistic gut views and beliefs, coupled with reactionary approach and lack of vision, are so shallow that he had nothing substantial or coherent with which he can persuade his own party and others. At the end, he failed to win the party right wings over and at the same time, lost the support of conservative intellectual in the process.

I reject the argument and excuse by some that it is all because of the bad economy and bad timing that McCain is behind in polls. I do believe people are making a rational choice as one has a rare chance to get a better insight of the candidates through the crisis before rather than after the election.

Like the idiom says, “He who lives by the sword dies by the sword.” John McCain won the primary and will lose the election because he is a maverick - John McCain runs against John McCain; both lose.

Talk to you soon!

Tax and Joe the Plumber

“Joe the plumber” from Ohio had become an overnight celebrity when John McCain mentioned him 21 times on the last presidential candidates’ 90 minutes debate on Oct 15^th. McCain has used him repeatedly since as the face of the claim that Senator Barack Obama, if elected, will raise taxes and hurt small businesses. McCain, Palin and their campaigns have also been pounding on and amplifying it further; they accused Obama being a socialist that has been one of the most derogative labeling in US politics, short of calling someone a commi.

While one may discount it as a desperate move of McCain’s in the final weeks of the struggling campaign, I was a bit concerned for a while since such an attack had worked against democrats before. Fortunately the odd is it would not work this time around, primarily because the lack of coherent and credible policies and ideas by McCain. Nevertheless this is an important issue and warrants a deeper look. As one reviews the video footage of Obama’s 2 minutes tax policy discussion with Joe the Plumber on the street (that is wonderful), one can see how Obama came to step onto a significant mine field of American politics when he said to Joe at the end “When you spread the wealth around, it’s good for everybody.”

Of course, such a comment can be interpreted in many different ways; that is where the fuss is about. At one extreme, it could be construed as a basic socialistic concept, that is exactly McCain is trying to do, where government, i.e., a centralized authority would “collect and re-distribute the wealth” to care for all somehow.

Being a federated nation where the revolution was started on a spark like the Boston Tea Party (protesting against the British’s unfair import tax policy of the colonies) in 1773, U.S. has had an interesting history and evolution of its tax system. Benjamin Franklin, one of the founding fathers, was quoted to have said “… In this world nothing is certain but death and taxes.” Thus the issue and debate were never about if there need be some taxes but rather who shall be paying for how much and on what bases. It would not surprise anyone that most of us react myopically and selfishly that the best tax policy is one that takes the least from “me” directly. Over the years, the result is the United States Internal Revenue Code, Title 26 of the U.S. Code (26 USC) that stands at about 8,000 letter-size pages long with over 3 million words. Indeed there is a huge industry of many segments whose primarily purpose in life is to support (and make a living of) the tax system from legislation through interpretation and implementation, to enforcement. To give you some ideas, the software giant Intuit whose popular TurboTax software dominates the market had generated over $700 million dollars revenue in 2006. Yet that is only 3-4% dollar wise of the tax preparation market that is dominated by professionals of CPAs and alike!

Perhaps more interestingly, it wasn’t until 1913 when the 16^th amendment was ratified that Federal government could impose direct tax on personal incomes as the Constitution had previously required the federal tax be levied in proportion to each State's population. Today, tax structure wise, federal government generates (and spends) its revenue primarily through income tax of individuals and corporations of many flavors, big or small or one-person. On the other hand, state governments tax mainly on income and consumption, i.e. sales and exercise taxes and local governments tax mostly on wealth like property tax. All together, the total tax revenue is about 28% of our GDP. Note that according to the IRS statistics for FY2007, net collections of federal individual and corporate income tax were approximately 1.1 trillion and 370 billion dollars respectively. The rest, approximately 900 billion dollars, was mostly employment taxes such as for social security.

Thus the first take-away is that U.S. corporate income tax is quite modest unlike what McCain and many Republicans have been claiming (that American business needs more tax breaks because its top marginal income tax rate is 35%, one of the highest among developed countries.) The truth is that according to the recent OECD (Organisation of Economic Co-operation and Development) Report, the actual U.S. corporate income tax as a percentage of the GDP is at about 3.3% and is one of the lowest among the developed nations in the world. The only logical and intuitive conclusion is that thanks to pages and pages of all kinds of loopholes and tax credits/deductions for business by the congress with the “help” of lobbyists, marginal tax rate table does not tell us much about the effective tax.

Now let us turn our attention to the individual income tax that accounts for almost half and is the biggest chunk of the federal government revenue. There are tons of statistical data and analysis of all kinds on this for a long time. According to the IRS statistics of tax year 2006, there were about 135 million income tax returns (thus some include more than one person) with positive AGI (Adjusted Gross Income) after deduction etc. Out of these returns, about 43 million returns paid no federal income tax or in some cases, received refunds (note this does not suggest these returns are necessarily low incomes). Further the top 10 percent of those filings contributed about 70% of the total income tax revenue and the top 5% of those filings had AGI of at least 150+K dollars. This would probably explain Obama’s target and claim of tax breaks for 95% of people whose income (before adjustment) are below $250K. Thus it seems reasonable to expect his tax cut plan for modest and lower income families are doable since it accounts for less than 20% of the total federal tax revenue.

The more important question though is what observations and learning can one derive from these voluminous data; that is where different ideas, ideologies, and biases began to show. If you look at the analyses of these IRS data by conservative think tanks like the 2007 Hoover article or of conservative-leaning organizations like the recent Tax Foundation Report, you will notice that they highlighted the trend that the top individual income tax payers are accounting for increasingly more percentage of the total federal revenue. This is where the difference of conservatives vs. liberals lies: the conservatives argue this is unfair to the “rich” who would have to contribute to a larger share of the revenue. The liberals, on the other hand, noted that this proves that middle class hard working majority of Americans are not keeping up and falling further behind, not to mention the increasing populations of the poor and gaps (that drove down the % of contribution).

I have no desire to go into the debate of the impossible fairness question. It is more productive to look at the fundamentals so that we don’t get fooled by the half truths and labels. Let us be real; U.S. has had a long history of being a capitalistic society that is not going to change anytime soon. Further, a nation’s tax-to-GDP ratio is a more widely accepted quantitative indicator of degree of influence by government on social policies and how socialistic it is. Compared to socialistic democratic countries like Sweden and Denmark whose total tax revenues are close to 50% of their GDP, U.S. scored at about 28% and the tweaking of the marginal tax rates will not change much of anything; the socialism accusation of Obama’s is clearly a red herring.

I am not optimistic there will be any fundamental changes with the U.S. tax policy as there are too much imbedded interests and inertias. I do wish some smart guys would come up with a better policy that can simultaneously increase the total economic output, boost the middle class, and reduce the gap between the rich and the poor. Until them, I would be happy if the tax code can be streamlined and simplified significantly so that at the minimum, we do away with the wrong incentives and waste of non-productive work.

If McCain wants to engage in a more serious ideological debate, let me point out there are other indices of interest such as “happiness” (he doesn’t look very happy lately, does he?). Not that long ago, there was a Business Week report of a ranking of world’s happiest countries by researchers from Britain's University of Leicester. U.S. ranked 23^rd in that study. And 9 out of the top 12 most happy countries including Canada, Denmark, Sweden have their tax-to-GDP ratios higher than U.S.’s (the other 3 were not available), and are more socialistic than U.S. in some sense. Senator McCain, just remember: keeping more money in your own picket does not necessarily buy you more happiness!

Talk to you soon!

Economic Crises - Act III: 2008, Who Ate My Lunch?

As the U.S. (and global) economy teetering on the brink of a meltdown, Act III of the Modern Economic Crises was formally unveiled on Thurs evening, Sept 18, 2008 as Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr. made an unusual visit to the Congress; see e.g. the New York Times report of the event. Two weeks later, on Oct 3^rd, after much fanfare and drama as well as backroom arm twisting and deals, Congress passed a $700 Billion dollars rescue package and President G.W. Bush quickly signed it into law. In the last 20 days since Sept 19, the Dow Jones Industrial Average (DJIA) stock market index of 30 of the largest and most widely held public companies in U.S. has dropped by over 2,000 points or nearly 20%. In comparison, the stock market crash of 1987 (for different reasons) brought the DJIA down by over 30% in 6 days starting from the black Monday, Oct 19, 1987.

Why Act III? After the Panic of 1907 over 100 years ago, the structure of the system guided by the Classical Economics that were developed initially by Adam Smith, the father of the modern economics, was found insufficient. Federal Reserve System, a version of the Central Banks found in Europe, was subsequently established to provide government an additional significant tool to intervene and to alter the behavior of the market when needed. Since then, we have witnessed two historical and trajectory changing episodes: Act I - Great Depression of 1929-1941 that ushered Keynesianism that believes in active government intervention using principally fiscal policy (through controls of government spending and taxation) and monetary policy (through control of money supply by Federal Reserve).

Act II began 40 years later when Keynesianism met its own limitation and was discredited in 1970s as its framework failed to address stagflation, a simultaneous occurrence of economic stagnation and inflation. For the last three decades, the synthesis of Keynesian on macroeconomics and neoclassical on microeconomics – so called Mainstream Economics emerged as the dominating framework with monetarism being the principal guide and monetary policy being the principal instrument of intervention as Alan Greenspan aptly demonstrated for almost 20 years from 1987 till 2006.

While economists continue the debate and analysis about how and why we get to where we are, and Presidential candidates are busy convincing us they are the right person to lead us out of the crisis, I can’t stop wondering am I one of those blind men in the Indian fable of Blind Men and an Elephant 瞎子摸象? Or worst yet, are we, the blind men, also parts of this continuously transforming elephant as well?

Let us pause for a moment to examine the basics if there is any hope for average person like me to begin to comprehend something as complex as economy. Before we explore further, Let us keep in mind that in practice there is no pure form of any ideology so we don’t get distracted by political terms and labels like “socialism and redistribution”, “tax and spend”, “fiscal conservative”, “de-regulation”, “free-market”, etc.

In 1978, Libertarian Vienna School economist and writer Henry Hazlitt added a new chapter “Lessons After Thirty Years” and published the new edition of his popular 1946 book Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics. Now another thirty years has passed, have we learned and done anything differently? The short answer is no.

In his 218 pages book of 1978, Henry Hazlitt first summarized the single lesson of the whole of economics in one sentence: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” He then went on to illustrate, with 23 easy-to-understand examples, most popular economic fallacies.

The main take-away for me was that we, the blinds, are so easily confused by the half-truths that flood all channels that, intentionally or not, make us forget the fundamental law of economics “There is no free lunch” and the fundamental law of physics “Conservation of the Total”. The simple cruel reality is that the only possible real growth is to increase our collective economic outputs with more efficient production, delivery, and use of resources (that determine the Total in the conservation law). Everything else is a matter of when and who gets which part of the pie and how. As Gretchen Morgenson of NY Times noted in her 8/19 interview with Bill Moyer about this current crisis “…this is privatizing gains and socializing losses. So when things are going well, the managements make out, the shareholders make out, the counter-parties are fine. All the private sector people do well. But when something goes wrong, when decisions are made that turn out to be bad decisions, the U.S. taxpayer has to take on the problem…” There is no denial that we are all participants of this game, willingly or not, and there are no completely innocent but only ignorant bystanders. There are those who cleverly ate others’ lunches of the future before our very eyes and we don’t even see it! Remember the “trickle-down theory”? Have you ever wondered who got the crumbs and who got left out at the end?

Few experts did see and had warned us that we were approaching a cliff, noting several indicators and trend; see for example articles by NYU Professor Nouriel Roubini on his Global EconoMonotor. However, many of us including myself could not comprehend nor judge the intricate principles and operations, nor knew of crucial indicators of credit market such as TED spread. At the end, many of us fell back to wait-and-see and leave it to the “experts”. However, being wonderful social beings, we take cues and learn from each other; we “follow the herd” when fear erodes our confidence, shake our beliefs, and challenge our judgment at the most critical moments. Some tough it out and many caved in to validate the self-fulfilling prophecy. Then the cycle repeats itself again.

Is it really that hard to understand what is going on at least at an intuitive level? There appear to be inevitable oscillatory dynamics at various time scale due to the delayed actions-reactions. There are familiar examples in other systems such as the familiar alternating congestion of roadways due to reported congestions of one and the subsequent mass reroutes of affected drivers. Other examples can be found in Internet, chemical plants and so on. Indeed, it is well understood that inherent time-lags in these systems can cause oscillations and instability of the system. And ad-hoc well-intended but ill-designed and flawed monitoring and control attempts will only exasperate and worsen the situation. I am convinced that this is the basic nature of the system for which we are an integral part of it. I would challenge our smart economists please explain to us if this is true and why can’t we figure out alternate and more stable frameworks instead of arguing about how to tweak and fine-tune an inherently unstable and flawed system?

Of course, I might sound a little too critical of economists who are not really the ones to be blamed. As Henry Hazlitt pointed out at the end of his new chapter of the book: “the main problem we face today is not economic but political”. 30 years later, nothing had changed since what we have is still a fundamentally unstable political economical system. What we did manage to accomplish beyond incremental adjustments is the nuances of accelerated globalization and creation of “virtual capital”.

One of the things globalization did is to enlarge the system to include an increasingly larger part of the populations on earth, thereby allows us tapping into more resources and further leveraging more capitals. It effectively allows us pumping more air into a bigger balloon, sharing risks among more entities, and thus delaying the (louder) bursting of the bubbles and subsequent contraction. What made it worse was the creation and leverage of what I would call “virtual capital” whose excessive growth in forms of credits and risks pushed us over the edge. Do you know unlike traditional banks, investment banking companies like the bankrupted Lehman Brothers, the acquired Merrill Lynch, and the re-registered Goldman Sachs and Morgan Stanley were not required to have any reserves to operate? By the way, the best explanation of the word “virtual” I have ever heard was from Internet pioneer Bob Kahn a long time ago. He once said “virtual is something you can see but it is not there (and transparent is something you can’t see but it is there)”. So, there you go.

It is tempting for us to believe that we can change and control the world. It is too convenient for us to have the wishful thinking that interventions by government through hands and mouths of politicians and experts can solve the problems and save us all. Democracy and Free Market ideals seem no longer compatible not to mention the market was never “free” to begin with. We expect multinational corporation maneuvers and government interventions on behalf of us by democratically elected politicians whenever things don’t quite work the way we’d like. We reward our politicians by electing and re-electing those who can benefit MY community and MY interest most, and then we complained about other “special interest groups”. We entrust our assets and savings and reward Wall Street with outrageous compensation as they are finding bigger and bigger stake tables globally, hoping that we all get rich fast.

There is an old saying, “Fool me once, shame on you. Fool me twice, shame on me.” How many more times do we want to get fooled? American philosopher and aphorist George Santayana had also said in his work The Life of Reason, 1905. “Those who cannot remember the past are condemned to repeat it.” How many more times do we have to repeat it? It is time to change the fundamental structure of our political economical system.

Talk to you soon!