Subjective Notes: December 2011

Occupy Wall Street is a headless (or multi-headed) unstructured movement that presents no demands and asking for everything and that burst into American public life like a Spring Jerk from a vintage Tabaco box. It’s so multi-faced and multi-voiced that everyone has multiple reasons to hate and to love it at the same time. I included...

I disgust militant xenophobic (and anti-Semitic) participants of OWS rooted in the old SDS (Students for Democratic Society) from 1950^th and 60^th and ultra-left anarchists. However, the story is not about it. The story is about changing of American social fabric and what comes with it.

American Middle Class

In 1914 Henry Ford made a revolution by effectively doubling his assembly line workers daily rate to $5 and reducing a work day to eight hours (from customary nine at the time). Personally Henry Ford was very unpleasant person in my view – a bigot and an anti-Semite who perpetrated Blood Label accusations and published (and authored) anti-Semitic pamphlets. So, he’s not someone I would enjoy as a Friday dinner guest, but all his vices are overshadowed for me by what he implemented in 1914 – $5 for an eight hour day.

Mr. Ford wasn’t altruist – he was a businessman: his calculation was correct and his actions resulted in doubling of his revenue in just two years as a result of creation of Middle Class Working America. He created mass-market demand for wide range of goods (including Ford’s cars) that, in its turn, created conditions for implementing economics-of-scale principal that is fundamental for our modern industrial model. All our material prosperity would be impossible without large prosperous money spending Middle Class (because poor don’t have discretional monetary resources and reach don’t have necessity – volume – to consume output of our ever growing production capabilities).

Nowadays we see this, Ford-created, American Middle Class disappearing with ever accelerating pace. This evident in both aspects: (1) the share of the Middle Class in the total population and (2) its diminishing wealth. Last 30 years see significant reduction in real wages even in well-to-do occupations:

By published statistics the median salary in Information Technology field in 1980 was $49,000/year and by year 2009 it grew to $67,000. It constitutes growth by 37% in 29 years. However, at the same time period inflation rate accumulated above 160%. So, in the reverse calculation $67,000 in 2009 is equivalent of just $25,734 back in year 1980. It’s 47% reduction in real wages! Don’t forget that we took well paid very prosperous rapidly expending occupation in the years of its enormous growth with qualified labor shortages during Y2K and Internet bobbles!

Disappearance of the Middle Class is the biggest ever strategic survival danger that the United States of America ever faced and will ever face.

Occupy Wall Street is our last chance to alleviate this danger and to survive as a Country and Society as we know it. The stakes are the sky-high for all of us, the 99% as well as 1%. And we’re all in the same boat.

Our society based on our competitive consumer-driven economy. We’re usually swallowing “consumer-driven” part as a well familiar advertisement peace that manifests itself in commercial breaks in the least appropriate time in our favorite TV shows. The fortunate 1% (that are bitterly divided between supporters and detractors of OWS – later we’ll talk about it too) deriving its prosperity – directly, through ownership, or indirectly, through stack holding – from successful commercial enterprises that in long-term all depend on a healthy American (well, developed countries, but America is the elephant among ODEC members) consumer market. Disappearance or even significant reduction in purchasing power of American Middle Class will result in diminishing returns on investment for those enterprises and will make fortunate 1% somewhat less “fortunate” (even if we’ll ignore other risks that this 1% is facing in such scenario). Sure, it won’t happen overnight and nowadays financial do-wells have a good chance to die in prosperity, but their heirs may not be that lucky.

Welfare State, Socialism, and Wealth Redistribution

Welfare State was created (and named) in Bismarck’s Germany in late 19^th century. If someone thinking that Chancellor Bismarck was a selfless altruist will better study his biography. The reason why he implemented social welfare was very pragmatic: to insure social stability in his country. It’s it! From the beginning the social welfare (and associated with it wealth redistribution) was implemented for the benefit of the ruling elite and well-offs to insure that they will continue to enjoy their prosperity without fear of things like this disgusting Revolution that shocked France just hundred years earlier!

This was beginning of European socialism. Needless to add that Marxist communist theory treated this type of socialism as bitter enemy. Much more bitter enemy then its contemporary capitalism that it marked for destruction: creation of the welfare state took out the steam from communist revolutionary agitation and left communists with only marginal groups of disaffected youths and social outcasts that aren’t covered by social welfare security net!

This is why Bolshevik Revolution of 1917 happens to be in the poor under-developed agrarian Russia without social welfare; even Marxist’s theory was targeting advanced industrial nations like England and Germany (in both countries communist activities – both, legal and illegal – were very substantial).

Who is Job Creators?

With all my due respect nor Hollywood and NBA stars, nor hedge fund managers and high-earning stock traders are job creators. And not even Warren Buffet is ether.

No business, big or small, can survive without consumer that buying it products or services. Marginal tax rate is a very secondary (“marginal”) consideration in any business plan. More than this, it can be make-it-or-break element only when external financing (loan) involved.

When Sylvester Stallone, Bruce Willis, Demi Moore, and Arnold Schwarzenegger joined their resources to start “Planet Hollywood” restaurant chain in 1991 they didn’t look at marginal tax rate as their goal was to promote their individual “brand”.

Wealth owners in our society have very limited options what to do with their wealth:

1. Keep it in non-appreciating assets: like cash, durable goods (like precious metals and stones), etc. and to see deprecation of their wealth (in time of crises gold and diamonds can temporary raise in price as “safe haven” options, but it’s only temporary) due to constant inflation.

2. Keep it in a variety of financial accounts (banks, mutual funds, bonds, etc.) that have some appreciating rate that may or may not match inflation rate.

3. Invest in a stock market.

4. Invest into individual businesses.

Only 4^th option is a “job creation” option. First option is a “lose-lose” option as it withholds resources from economy and reduces actual wealth of their holders. Second option is a “passive investment” that not affected anyhow by tax rate as taxable income is anyway better than no income at all. Third option is also not affected by marginal tax rate (but affected by variety of fees and penalties designed to discourage or eliminate “short sales”).

Now the 4^th option:

It’s the most risky, but less regulated option. It promises the better return-on-investment than any other and has less “gamble” element in it than stock trading. Building your own business or investing in any other start-up business initiative (ether as “angel” or “venture” investor) has multiple underlying reasons. Marginal progressive tax rate won’t change it as long as it will allow retaining profit higher than return from safe financial havens (like government and municipal bonds) and the investment losses can be deducted.

But investment by itself is not job creation as any business can exists only if it has sustainable distribution market that is and only justification for its (business) existence. When a new restaurant created it’s not adding jobs, but realigning it as it takes customers from its competitors. As a new (and better) product hitting our crowded market it pushing its competing products out and its makers (potentially) out of business (example: new Samsung Galaxy – Google Android based – smart phones and iPhone both targeting the same consumer; no wonder animosity from Apple toward Samsung and Google with Steve Jobs promising to fight Google’s Android to the last breath, as he did). This is not resulting in adding / creating jobs, but – very often – in total job reduction as winners tend to have higher productivity per job position.

Well, if wealth holders aren’t Job Creators, than who is?

The Middle Class is.

In the modern Western consumer-based economy the actual Job Creator is the Middle Class. The Middle Class is the core and backbone of the distribution market that creates and supports financial in-flow that enables functioning of any modern business, big or small, and making American Dream possible.

Middle Class, Mass Market, Credit, and Wall Street

As mass market demand creates new job opportunities it does it as long as this demand backed by market purchasing power. The primary source of this purchasing power is the Middle Class income (primary salaried income). However, some goods (example: real estate) just too expansive to be purchased on a single payment for a vast majority of market participants and in other cases purchaser needs / wants product delivery before he can accumulate sufficient funds to pay for it and seller is motivated to sell it sooner than later in order to secure sell and to support his least stressful production schedule.

In those two cases credit comes into the play. It can be backed by seller or, more often, by a third party: banks and credit companies – The Wall Street. The credit is based on expected future income of a borrower and lender takes risk that those expectations will fail and for this it charging premium to cover statistical loss of write-offs, which is the core income source – ideally – of the financial industry as write-offs always expected to be marginally less than combined premium charges. Therefore, lenders (a.k.a. Wall Street) are interested – ideally – in healthy earning prospects for Working Middle Class as it will reduce volume of write-offs and will increase their profit.

This is ideally, but – for good and for bad – life is not that simple and logical as Adam Smith’s “Wealth Of Nations”.

Is it Wall Street fault?

So, if Wall Street that fundamentally interested in Middle Class prosperity, how it can be its fault the Middle Class ruined?

The short answer is “the short term incentives”.

By established practice performance of publicly traded companies (including financial institutions) assessed on annual bases. It makes short-term tactical successes more important for hired performance-based paid top management than long-term considerations.

Variety of financial tools and accounting options are making it possible to win on the short run even in a very troubled market. Good example would be Lehman Brother’ financing of Greece government debt with simultaneous betting on its default!

Risk taking on the Wall Street is highly encouraged and reworded when associated losses are never accumulated by individuals who are responsible for it, but by anonymous stock holders, even when direct financial penalties imposed, which in fact penalizing stock holders (including pension plans, 401Ks, etc.) twice: loss from bad financial practices and loss from penalties, when implicated executives getting out of it without any real loss. What behavior change we can expect from those penalties?

It would be unreasonable to expect any real changes on Wall Street without real reassessment and significant overhaul of our financial practices.

Taxation with Representation

Big Money has big political cloud. Wall Street has Very Big Money (even they in fact borrowed from the public). Every year all major banks sending their respective employees email soliciting political contributions for their favorite causes and candidates (mostly due to legal limits on corporate contributions, but not only). The silver lining is “if we are prosperous, than our employees are too”. Nothing is farther from truth: the same employees who giving contributions from their private resources getting layoff and fired exactly the same as their non-contributing peers.

The financial cloud gives Big Corporations unfair amount of influence over our political process.

But it's not all: as issue of "corporate personhood" got support of the US Supreme Court (and at the present moment the petition initiated by Senator Sanders for Constitutional amendment to reverse this) the analyses of its merit is in order.

A modern US-based multinational corporation as a "person" (for the narrow purpose of the First Amendment rights or in any extended meaning) isn't really represented by multitude of its employes and shareholders - many of which are not American citizens and even not US-based and, therefor not a part of our internal political process - but by its top business leadership: CEO and board of directors. So, in practical terms, "corporate personhood" is providing those individuals on the top of corporate ladder with additional voice: one as private individuals and the second as corporate "person" (which cares significant political and financial cloud). This is a direct violation of the "one person - one voice" principal that fundamental for our democratic process (if we won't discuss "electoral college" mechanism issues).

More then this, US-based multinational corporation may have CEOs and board of directors' members who aren't holders of the US citizenship and protecting "corporate personhood" of those corporations in fact giving political influence to individuals who otherwise aren't part of the process and, more often then not, have significant conflict of interest or, indeed, loyalty to the outside (foreign) powers.

Main Street: “Spend your way to Prosperity”

Well, if consumer spending is so critical element of our economic engine, can we just borrow money; spend them on what we pleased and just by doing this to revive all our economy?

Well, our two opposite economic – and political – camps giving two completely opposite answers: “yes” and “no”.

The progressive-based liberal economists are saying: “Yes, we can. We did it under FDR in years of Great Depression by instituting public works projects and [minimal] price control. It worked then, it’ll work now.”

The conservative economists are saying: “No, we can’t spend our way to prosperity by borrowing and passing our debt to our children. It didn’t work that well under FDR ether and only War in Europe – with it big industrial demands – effectively pulled American economy out of the sinking hole of 1930^th.”

So, who is right and who is wrong here and can’t be those two opposite opinions reconciled?

I would like to leave this question open (and be accused of in “indecisiveness” and all other vices) than try to give an answer in this limited format. I’ll just say that in my opinion both positions have merit and right answer is somewhere in-between.

I’ll also add that ability to spend by our Middle Class – the “Main Street” – is absolutely vital for our economic recovery, but should it be done by borrowing or other means is a separate question.

“Go get a job!”

This cry is often heard from bashers of OWS: their presumption that it’s a bunch of do-nothing kids. I don’t see it as a fair statement, but for the sake of argument let asses how our hiring process is works and if everyone can “get a job”.

With growing rift between Reach and Poor manifests itself in “Help Wonted” ads which can be quiet easily divided into two groups: (1) low wage service jobs and (2) well paid professional jobs. There is no bridge between two of them – you’re in the first or the second. Flipping burgers in McDonalds and pizza delivery may work well as high-school kids’ summer job, but taking such job for professional is sign of complete desperation and often a career ruining move. For college graduates, that deep in unpaid loans, it also spells life of poverty (assuming no external financial backing).

On the other hand in these hard economic times with no clear future prospects the hiring businesses looking for exact professional match to their immediate needs and not ready to invest in a long-term employee training (which is often needed for a fresh college graduates). Even for highly experienced professionals finding a new position is hard as they may not have one out of dozen required skills listed. I’m saying this form the firsthand experience as I lost my job in a large bank for outsourcing (one that President Obama praised for it sound business practices; I’m working now, but I have Master’s Degree and more than a decade of experience in my current field, it took me just two month, but some of my former co-workers still without job well beyond end of their unemployment benefits).

So, people who are yelling “Go get a job!” most loudly, likely never themselves passed this rough route.

Also, by available statistics only 15% of OWS active participants are unemployed when 53% have a full-time job.

Universal Health Care

Role of universal health care goes well beyond issues of fairness and social welfare. Among OECD countries only United States has no universal health care, but just voluntary private health care insurance. All other members of OECD (which represents world advanced economies) have combination of public and private health insurance with differences in implementation and efficiency, but with proven overall effectiveness as entire general population medical safety net.

When it is many examples that show us that (1) universal health care can work and (2) what errors in its implementation we should avoid; our political fights for and against single-payer public health care system not just often misguided, but missing one critical element: it stated very rare that our employer-based health care insurance can’t work any longer.

Leaving aside all moral and social arguments, I’ll address only one aspect of it:

Employer-based health care insurance model is based on expectation of employment stability that no longer valid: looking at “help wanted” list for major occupations (take information technology for an example) primarily showing project-based contract positions with good hourly rate, but no benefits. Trying to obtain health care insurance through contracting intermediaries or on the privet market is resulting in getting very expensive policies with insufficient coverage (underinsurance is spread much wider than we would like to think).

As a result we have severally reduced professional mobility of highly experienced professionals who due to age-related health risks can’t willingly take majority of available work opportunities.

On the other hand health care insurance is the single most expensive employee related item on employers’ book. Competing with products and services from countries that are not taxing employers with providing health care insurance (that becomes more and more expansive every year) is an unfair game.

Stock Market: gamble or insider trading?

Stock market trading is the heart of modern market economy. In CNN reader’s comments I saw this conversation (slightly re-phrased):

Reader One: “I’m working two jobs and it’s not enough to get a dissent living to my kids!”

Reader Two: “You can’t work your way to prosperity. You need to take calculated risk and invest in the stock market!”

Well, for Reader One playing lottery would be a much more informed decision: at least it gives no illusions.

Those are three ways to an individual investor to operate on stock market:

1. To do it random based “got feeling” and general trend.

2. To study all openly available information about companies in his portfolio and all potential additions.

3. To use information from “well informed people”.

The first one is a clear gamble.

Second requires significant professional skills, time allocation, and ready access to publicly available, but obscure information, like annual and monthly reports, etc. This is full-time professional occupation.

Third option can be called “insider trading” if “well informed people” have access to non-public information (look at case of Marta Stuart who made split second decision to follow advice of her stock broker who, in his turn, interpreted stock selling instructions from his other client as a market status indicator; this split-second decision cost her jail term).

So, in short, my point is that working people with modest resources, the Middle Class, have no more chances to gain prosperity from stock investment / trading then from throwing dice in Las Vegas – both are gamble. It may or may not happen.

Getting indirect stock investments through mutual funds, 401K, etc. isn’t bringing much prosperity as intermediaries ripping most benefits, but can bring some financial cushion. However, this is more of the saving (and not earning) option that expects some current disposable income and plays in the long run.

Is Social Security a Ponzi scheme?

Comparing Social Security to a Ponzi scheme is a very contagious topic for a public discussion. It’s so troubling that cost some Republican presidential forerunners their place in the race.

Well, but I’m not running for President and bringing this topic up will cost me at worst some disgusting looks (I hope).

First, let’s assess two opposite views on Social Security from an “entitlement” point of view:

1. It’s not an “entitlement” – its insurance that I paid my premiums all my life and now I just want you to keep your part of the bargain as I kept mine.

2. Social Security running out of money because of mismanagement, overpayments, and diminishing collections. I don’t want to pay it because my money going for paying entitlements for current beneficiaries, but it’ll be empty when I’ll need to collect it. It’s a day-time robbery! It’s a Ponzi scheme!

The first argument you would hear from people who are at or near retirement age. The second argument is coming from a younger generation that just starting its working life. Who is right?

As it happens often in life both are right: Social Security is an insurance program that based on a Ponzi scheme where current beneficiaries paid from collections from future beneficiaries.

When Bernie Madoff created his infamous enterprise he did exactly the same thing as Social Security Administration: he paid to his old clients from money collected from the new clients. So, why Mr. Madoff is in Federal Prison and Social Security Commissioner Michael J. Astrue is not?

The difference is that Commissioner Michael J. Astrue can enforce adding new “clients” and Mr. Madoff had no such power.

Dispute all “anti-government” sentiments all sides of our political spectrum (from Democrats to Republicans to Libertarians) agree that Government has its valid place in the modern society and fulfill number of vital functions, namely:

1.      Common defense

2.      Preservation of Law and Order

It also agreed that Government has number of monopolies needed for performing those functions, namely:

1.      Monopoly for use of force

2.      Monopoly for tax collection

This last one is what makes Social Security different from a regular Ponzi scheme: everyone who is entering workforce automatically becomes subscriber of Social Security.

Madoff’s scheme ran into a ditch in time of financial crises when withdrawals exceeded the new recruitment (it’s nothing new: first bank runoff in France in 1720 – John Law and Mississippi Company – happened in very similar circumstances). Social Security heading to the same direction as Madoff’s scheme – running out of new subscribers – due to a different, but equally uncontrollable, reason: changing demographics as less young people entering workforce than old people leaving (retiring Baby Boomers is just a spike that accent even more the steady misbalance in our diminishing workforce flow) and, due to longer life expectancy, total payments projected to grow and [likely] outrun resources. This happens in the United States and, even more evidently (due to much lower birth rate), in Europe.

America vs. Europe: alike, but not the same

The current crises started here in the US and now, even without easing its grip on US, it shifted heavily to Europe. It’s tempting to say that we, US and Europe, are alike in this mess. When it’s a significant truth in this statement, it’s more important to understand that we have differences that will make our solutions not alike.

As it said: “All happy families are alike, all unhappy are different.”

Historically European nations run by paternalistic Governments. It’s the Government and the People. In each European country, with some simplification, development went from absolutist monarchy to representative government. The best example is the Great Britain: from defining the basic human rights in “Magna Carta” in 13^th century the broader rights ware transferred from King to People by mechanism of taxation – imposing new taxes by King was conditioned to granting more privileges to Parliament. Effectively People have bout rights from the King by paying taxes.

So, in European mentality the Government is the source of Power. The People have Power as Government has vested it into them. If People and Government disagree they negotiated through petitions and elections and if this negotiation fails the riots and revolutions are in order.

The European Governments are tasked with preserving greatness of their nations.

American story is different. America is built by emigrants from, predominantly, those European countries, who didn’t like this paternalistic relationship and saw themselves as individuals (and not nations) as self- sufficient. The Founding Fathers and the American Constitution are very clear that People are the Source of Power and Government is just a limited tool to serve their collective needs, primarily tasked with providing common defense.

America is the Nation of Individuals. Individuals who live in the Land Of Free. It created American entrepreneurial spirit and made it a Great Nation.

But nowadays it creates a number of problems. Our big enterprises acting just like individuals: they don’t count themselves responsible to America as a Nation, but only to their board of directors and abstract shareholders (but not concrete people who vested in pension plans and 401Ks). In the Global Economy they moving operations where it’s cheap with little or no regard to effect it creates at home. Our accounting practice not helping much ether as their growing profits counted toward total national gross income and offset loss of live-hood to their displaces former domestic employees. For a time the domestic market was sustained by growing personal credit debt, but this is temporary resource that ran out.

In the competitive global economy American corporate behavior proliferated in Europe too.

This individual-like corporate behavior needs to be change. The ways to do this will be different in Europe and in America.

What does China has in it?

There are many voices that putting China in a superior position due to visible manifestations of the current economic crises concentrated primarily on the West and China visibly benefited from vast reserves of hard currency (primarily US dollars and EU euro) and booming industrialization.

A few decades ago, at the heights of the Cold War, other debt crises griped Western World: poor performing underdeveloped economies of South America and Africa fought US, European countries, and International Monetary Fund over large loans that getting due. Governments of those countries threatened to default on it.

As it said: “If I owe you one dollar, I’m in your hands, but if I owe you a trillion dollars, than you’re in mine.”

At the time Western Economy was prosperous and completely self-sufficient, the trade surplus was positive and unemployment low. It was only about money and statute of donors and recipients of Western financial ad. It was about politics and Cold War. No survival of Western debt holders was in question.

This time the picture is opposite: Western economies are in debt and China holding vast chunk of it.

But there is end of similarities: China success and even economic and social survival are depends on the value of these debt assets that it holds. If the vast reserves of cash euro and US dollar will lose its value it will bring China back down the slope that it climbed that hard over last decades. More than this: collapse of the Western economies means that all Chinese industrial facilities that build to supply Western markets will became worthless as China industrialization is export-driven and in very many cases has absolutely no internal or regional market (production of Halloween decorations for US market is a good example).

China is led by very autocratic and very pragmatic leadership. I’m sure they understand that survival of prosperous Western economy is in their own vital interest.

Who supports OWS and why?

Occupy Wall Street is “like a box of chocolate” it’s enough in it for everybody to like and to hate. The public support poll numbers fluctuate reflecting unsettled nature of the movement that turns to public with its nice or ugly face.

Supporters of OWS ranging from American Nazi Party to American Communist Party to Ayatollah Khamenei of Iran to Communist Parties of North Korea and China to Nation of Islam and Black Panthers. This brings a range of accusation of OWS in numerous vices from anti-Semitism to Communism to Nazism. I’m sure that some of this is valid accusations (like documented anti-Semitic rants) by specific individuals from OWS camps and demonstrations. Multiple groups and organizations have many different reasons to support OWS: Ayatollah Khamenei professing downfall of the “Great Satan of America”; same going for North Korea and Hugo Chavez; Nazi, Communists, and Nation Of Islam with Black Panthers want to get a “free ride” and hijack antiestablishment current of OWS; etc. All this are insignificant and very artificial issues. The important is where American public stands on all this.

When positive approval among American public is prevailing, some available statistics are especially interesting:

When majority of OWS direct participants are young people in age under 30, the strongest popular support it has in 50 to 64 group with annual income from $50K to $70K. So, the large Baby Boomers Middle Class aspirations are presented by actions of much fewer Gen-X action group!

So, essentially Occupy Wall Street is a centrist cross-generational social movement!

Future of OWS

The coming year, 2012, is the year of Presidential elections. When many (32%) of active participants of OWS are Democrats it has wide centrist aspirations that neither party can adequately represent. It may not be late to transform this unstructured social protest into third political force in our country. Time is running short, but we still have a chance...

Can it be done?

I don’t know: it’s up to the people.

Does it have a chance?

Yes, it does.

Can it be hijacked by political opportunists?

Yes, it can.

Would I vote its candidate?

It depends on who it will be and what he will offer.

What Should We Do?

Now, as I write it in late-December 2011, I see Occupy Wall Street as our best chance to save America as we know it.

It won’t be easy and we don’t have much room for error. But if we won’t use this chance we’ll sure be sorry.

Next year I’ll turn 50. I don’t expect rosy times ahead and not count on comfortable retirement even in 20 years down the road. But I have kids...

Subjective Notes

Friday, December 30, 2011

Review: "The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future" by Martin Ford

Sunday, December 25, 2011

Occupy Wall Street in 2012