Christian Fong

Pundits can talk about the demise of America, and opine about why we are no longer great.  Media elite can talk about the post-America geopolitics of the world.  But though it makes for good press, preying on our fears of decline and the loss of the American way, the numbers tell a different story. 

America is still the land of opportunity.  It is still where the world’s best and brightest come to improve the lives of themselves and their children.  The numbers don’t lie.  Where are they coming from?  Graph of the day…

For the past century, a politically independent central bank has proven, at worst, "the least bad thing" for long-term economic stability.  A reading of monetary policy history, in particular Friedman's work, gives an appreciation for both why and how it works.  We can thank the Fed for keeping borrowing rates predictable.  The low volatility leads to lower rates, as the imbedded option prices are lowered.  The lower rates then keep inflation at bay, even as the Fed pumps up the money supply like a weather balloon, right?  And low inflation keeps the stock market and broader economy from a downward spiral, right?  That's the traditional argument, anyhow. 

But this is where a pair of economic findings in the last few days step in. The first link started the discussion a couple of days ago, showing the link between inflation and the stock market since the beginning of 2008 (i.e. during the Recession).  The second link, from a blog posting this morning, broadened the study to the beginning of 2003 ...

Five things I think I learned from yesterday's Iowa Caucus:

1) Iowa as Presidential filter.  Every four years we are reminded that Iowa does not consider its role as "kingmaker."  Once again, the message from all corners was that Iowa could support various candidates that had a unique message, 50-state viability, or great retail-politics dedication.  The intense face-to-face scrutiny we give the candidates as individuals exposes flaws that no camera or stadium event can.  Ignoring Huntsman (as he ignored Iowa), as of this morning, it looks like four candidates will move on.  Iowa does its job well, and deserves to keep it.

2) Media Rules, but Social Media rises:  The traditional media made the rules, through its debates that were masterfully scheduled like a fall prime-time television, reality-show series.  Both Santorum and Gingrich were the beneficiaries of strong debate performances, and Perry ("Oops") and Bachmann ("I'm a serious candidate!") had media/debate gaffes.  But there was little doubt that Ron Paul ruled the social media debate, in keeping with his youth-dominated base, and I think it propelled him to his strong finish.  Does media rule the process?  Yes. But the shift to social media is real, and Iowa showed that either can provide a winning media strategy.

3) Romney is not inevitable.  By Thanksgiving, I suspected Romney would "pop" in the late days, due to his 20% support base, the strong Romney vs Obama polling, and the sense that the up-and-down polling meant that others were being considered and rejected.  I was wrong.  Romney never did "pop", and his caucus support was just about the same in 2012 as in 2008.  I talked to many people who said, "I don't really know who Santorum is, but I might as well."  Really?  The Romney campaign will spin, but it is clear that Romney is having trouble connecting with GOP voters.  Going forward, a smaller field gives someone the opportunity to consolidate support. He's still the front-runner, and time will tell if it's a fatal weakness.

4) Negative politics still rules Iowa.  Gingrich stayed positive...it didn't work.  What works?  Millions of dollars of attack ads.  Forget the polls, the focus groups or the polite Sunday conversations.  Iowans have been trained to speak kindly and talk about sportsmanship and loyalty, but dig a little and one might find Iowa is more Roman than Greek: they prefer blood sport in the arena to polite discourse on Mars Hill.  (Santorum stayed positive, but did not face the attack ads...he will now.)  By the way, I lived for five years in New England...it isn't much different up in Yankee country!

5) Gingrich as McCain?  The parallels are impossible to ignore: Santorum as Huckabee, Gingrich as McCain, Romney as Romney.  Gingrich and McCain?  Both carry a bit of maverick unpredictability.  Both had campaigns left for dead, only to come back for decent 4th place caucus finishes.  Both had national viability, strong name ID and broad support, leading to a lower need for an Iowa win.  Plenty of reasons to reject this comparison: 1) McCain put in a minimum Iowa effort in 2008, while Gingrich worked hard in 2012, 2) Ron Paul is still very much in the mix and 3) McCain is about to endorse Romney.  Still, the similarities are hard to ignore.

Bloomberg News reported on the $586 Billion "bailout" program executed by the Federal Reserve, with terms that make it impossible to track who got the money.

The report is here.

Ah, the problems with a secret half-trillion dollar public program are many.  Increased chance of fraud.  Too little public accountability.  Lack of public knowledge about which institutions needed it (most of us would care if our personal savings were in a bank being propped up by the Fed).  But consider this basic Free Market reason:

Consider a system with two banks: One, SafeBankCo, offers products to the market at a slightly higher price, required by ultra-safe banking practices.  RiskyBankCo does the opposite, and offers lower prices through much of the economic cycle.  When times get tough, RiskyBank goes to SafeBank to transfer risk, and must pay the higher price to do so.  The system not only can accept the two levels of risk, but over the long run there should be an equilibrium by which RiskyBankCo has more market share (i.e. lower prices attract more customers) but transfers profits to SafeBankCo during tough times.  In fact, there is nothing inherently wrong with either business model.  SafeBank foregoes profits during the boom years, then makes it up in recession years.  RiskyBank knows it will have to pay excessively high prices for protection during a recession, but with proper management has reserves built up during boom years to do so.

Nothing is wrong, that is, until the Fed sets up a secret $586 billion program.  Now RiskyBankCo has no need to go to SafeBankCo, and instead gets propped up at continued "cheap money" rates.  SafeBankCo, realizing that their business model is obsolete has no choice but to take risks at the same pace, in the same practice, as RiskyBankCo.  The existence of the secret bailout programs creates a race to risk for both banks.  In our example it is just two banks, but the same holds true for an example of two hundred banks.

Public "bailout" at least has the reputational cost associated with taking bailout money.  Secret bailouts do not.  By removing a business reason for any bank to adopt the SafeBankCo business model, the entire system is made more risky.  Who bears the risk?  The people, the currency, and the system itself ultimately must pay the price for the risk, though almost always by pushing the price into the future.

It bears repeating: There is something grossly immoral about a system that externalizes costs onto the future to pay for the systemic fiscal addictions of today.

Four years ago the generational divide might have been best captured by whether one had a social media account.  Today, that divide is better measured by whether one can get a job.  The recession has been brutal on young people.  Surprised?  Politically-savvy economists wouldn't be, since the political ruling class is bound to value the predictable votes of older people rather than the transient youth.  But it is going to be hard to imagine a youthful tidal wave of support for any incumbant politician tied to the inabilitily to turn energy, education and effort into progress.  Just how bad has it been? 

Since November 2007, about 6 million people are out of work.  But the picture has brightened recently for older Americans.  The younger ones are still taking it on the chin, especially those who have just entered the workforce.  Imagine a new family or a fresh college graduate, with no back-up assets, a new baby on the way, college debt and just trying to get going.  The numbers from October-11 to November-11:

Age 16-19: +18,000

Age 20-24: -145,000

Age 25+: +405,000

Remarkably, jobs lost by teens were 25% of the jobs lost in the Great Recession, despite them being just 3% of the workforce.  So we told them, "Stay in School!  Go to college, as the economy has changed."  Now they are graduating from community colleges, some from four-year programs.  Just in time for...nothing.  Fewer jobs for this generation means the Generational Divide continues, unabated by recovery for the rest.

See the graph at the blog "Political Calculations."

With all due respect to the other GOP candidates, the final 5 weeks before the Iowa Caucus are suddenly looking like Newt Gingrich and Mitt Romney.  I took a moment this morning to find their economic plans, because it is coming time to drop the charade of "politics as entertainment" and think long and hard about who will make the best President and CEO of our country.

The Gingrich Jobs and Prosperity Plan

Romney's Plan for Jobs and Economic Growth

Which one makes for the best plan in our economic crisis?  I'd suggest reading them with an eye toward similarities first, because the media surely focuses on the differences. After spotting the similarities, then look through for differences.   Finally, take the differences, and look for which of them are done through Congressional action (less likely) and which through executive action (more likely).

Politics and faith do not always mix well.  "The Response - Iowa" is an exception.  It simply says, "Let's get serious about considering, through the lens of faith and prayer, the choice our state is making."  That is worth participating in.  (Registration is free, but required.)

The basics: The Response event, hosted in Cedar Rapids, will be on December 6th.  The formal event at 7pm, I heard that the music starts at 6pm.  I'm considering it an informal kick-off to the real caucus season, which will be just 4 weeks from The Response.

http://theresponseusa.com/iowa/

I spent the late evening at the Occupy Oakland site, watching an event that seems to have been taken over by professional protesters.  On the edge of the tent city were 5 pre-school kids (and another sound asleep on the concrete) banging away on drums on the other side of the Oakland City Center square in the "kids' tent."  Never mind that the drums were out of rhythm, nor that there were no adults in the "kids tent," at least when I went by.  A bunch of kids in tents, with drums out of rhythm.  No adults in the room.  Somehow that seemed to sum up the whole event.

The site was set up a bit like a shopping mall.  Want a little anarchy?  Join the ones standing under a gigantic "Death to Capitalism" sign draped across a 3-lane road with a dramatic downtown Oakland backdrop.  How about some peace and understanding?  There was a "Chill out" tent just around the corner from an interfaith tent that had Peace written on flags in various languages, surrounding three people meditating amidst candles.  Are you the media, looking for a quick quote?  There was a message center, dominated by a projected image of twitter feeds based on #OccupyOakland tag, and people looking more or less quote-ready.  And of course the tents.  Lots of them, and nearly all more expensive than any tent I've ever owned.

Today, The Economist noted that in 2000, the top 1%, by market capitalization, of listed companies in America accounted for 53% of the market value.  In 2010, the top 1% accounted for 40% of the market value.  In this case, the top 1% have actually lost quite a bit of their grip. 

It makes for a less exciting "Occupy" sign though.  The original article found on the excellent blog:

The Daily Chart

An interesting thought experiment.  Say you start a company, with the intent presumably of making money.  You want to be "for profit" since companies that don't make money don't last very long.  You do such a good job of convincing the market that your product is indispensible that pretty soon everyone wants it.  There is competition, but not much of it, due to your brand management.  Even Warren Buffett wants to invest in you.

Best case scenario?  Sure.  But what if the market says that your great company is so indispensible that you need to place "for the public good" over the desire to make money?  Tough luck...

Welcome to the unusual state of rating agencies.  Bloomberg had an article today headlined, "Credit Rating Companies Favor Firms Paying Most."  In any other industry it would be a "well, duh!" moment.  It poses an interesting situation.  When does a for-profit company become captive to its branding (i.e. "impartial, indispensible")?  Here's the article:

Credit Rating Companies Favor Firms Paying Most

This comment from the mayor of Atlanta caught my eye, as reported today on CNN.   "There are elements in that movement that are willing to engage in violence," Mayor Kasim Reed said. "So I'm not going to let that stand."

The "movement" being cracked down on is one exercising a Constitutional right.  A right that our nation's founders discovered that, when encroached upon, was always the spirit of tyranny at work.  Always a first step in a broader move toward the misappropriation of political power.  Always an early sign that political power was being used in way that did not value "life, liberty and the pursuit of happiness" of the individuals that gave power to the political body.

At this point, one might wonder which right is being encroached upon?  Perhaps a bunch of right-wingers, those supporters of the Second Amendment right to bear arms?  There are indeed some elements in that movement that COULD use violence.  Perhaps a bunch of leftists, using the Occupy movement's peaceful assembly as their megaphone to the Establishment.  Either way, it seems that the mere possibility of violence is not justification for removing the right.  If you are on one side of the aisle or the other, consider that the same passion for preserving rights exists on the other side.  The same arguments apply.  And the same Establishment wants to deny both.  In this way, the recent news is not about left vs. right, not rich vs. poor, but very much about exercising oft-neglected Constitutional rights.  Thoughtful civic leaders everywhere can support that.

This is getting interesting.  Latest poll, from "Insider Advantage" has the GOP race at:

Cain: 26%

Romney: 18%

Gingrich: 12%

Bachmann: 11%

Paul: 10%

Perry: 6%

Click here for details:

Insider Advantage Poll

Four areas a city needs to excel.  And if it can't excel, at least it can be measured.  ("You get what you measure," my Dartmouth professor of management said.)  And if a city resists measuring it, well, that's usually because its leaders know it would fail, and they'd look bad.  Just saying...   Still, while these aren't new, they are useful to take a look at:

"There are four categories to measure competitiveness:

• Human Resources are the most important factor in determining the competitiveness of a region. It is measured through education, training, skills, work experience, entrepreneurship, creativity, and risk tolerance.
• Economic Structure can be determined through variables such as: analysis of output, employment and investment data. There are several technical methods for this analysis, including location quotient, shift-share analysis, economic base analysis, productivity analysis, regional income indicators, investment indicators, etc.
• Territorial Endowments are measured through hard infrastructure such as: assets of a place, including markets, location and access, infrastructure, amenities, capital and finance, cost structures, and city image.
• Institutional Milieu is not as easily quantified, but social scientists have defined it by the following: social capital, such as trust, norms, and networks, that can improve the efficiency of society by facilitating coordinated actions. It is evaluated by governance, champion institutions and individuals, networks and interconnectivity, and norms and convention.

A fascinating study that includes a review of the economic drivers of small-town / regional wealth creation.  A must read for Iowans dealing with the issues of NOT living in an economy that wraps around big city business districts. Four main drivers of economic growth are identified.

See the report here, in pdf format.

To summarize the key list, the four drivers are:

To an economist, the idea that labor mobility increases productivity is fairly intuitive.  It comes from at least two sources: First, a worker with increased skills in one setting can bring those skills to a new place, enhancing the productivity of that new place.  Workers don't work in isolation, and the people around them in both setting gain from learning.  Both places emerge with higher productivity.  Second, the skills learned in one specific place can lead to innovation in another.  A worker with a specific skill in, say, commercial roofing, can bring new ideas in safety, efficiency and quality to residential roofing.  Of course it works both ways, and both industries emerge better.

From a regional economic development standpoint, a certain level of labor mobility is required to bring about regional productivity growth.  It is well understood that regional productivity leads to wage growth (i.e. individual wealth creation) but less clear if it leads to overall business profitability.  This interesting study, published in spring 2011, settles the question.  Labor mobility DOES lead to business growth, through higher return-on-assets (or ROA).

Donangelo on Labor Mobility