Wall Street

All this Wall Street pay business is red herring. Changing the salaries of a handful of people at the top of a hadful of firms is a superficial move, pure politics. It's not unfair though. If we're bailing them out, we can tell them what to do with tax payer money.

Here are a few tougher changes that would be good but that don't seem to be in the works, because our political leadership is surprisingly timid, given what we've just been through:

Resurrect Glass Steagall. (Resurrectionism! See the NYTimes piece on Paul Volcker
NYTimes.comwww.nytimes.com/2009/10/21/business/21volcker.html) Split up the super global financial instiutions and force the businesses that get the benefit of the discount window and FDIC insurance to perform the banking services that we actually need, such as lending to small business.

Force interest rate swaps and other derivatives to be traded in an exchange, rather than over the counter. Having these instruments rely on the credit of the counter-parties puts a very difficult to determine amount of risk on thousands of company and government balance sheets, unnecessarily. Standardize agreements, and pool credit.

Bring back the uptick rule on short-selling. Eliminate naked short-selling. The short-sellers effected a self-fulfilling prophecy by causing a run on Bear and Lehman in 2008. The banks were overleveraged, but a soft wind-down would have been more pleasant for all of us. Hey, I'm no defender of bubbles. But making a killing by wiping out a vulnerable big company is unwholesome.

Let shareholders vote on senior executive pay packages.

If a trader's annual profits are contingent on iffy "mark to markets" of illiquid assets, leave some compensation for the future, when the real results are known. You could easily have a situation otherwise, where bankers are gaming their employers because they know how they'll get compensated, and are sticking shareholders with risks they wouldn't want to own themselves.

stimulative taxes?

The US has a tough economic problem here in late 2009. Growth is extremely sluggish and expected to stay that way for at least a year. And the budget deficit and debt situation strikes many people - including currency markets, who are driving the dollar down - as so serious that significant fiscal stimulus, in the form of new spending or tax cuts may not be possilble.

What's the answer?

Stimulative taxes. We have to identify fiscal initiatives that will lower the deficit while not further depressing the economy, and if such a thing is possible, find taxes that can actually stimulate investment.

One way to do this would be to pass laws today that have taxes rise gradually over time. This helps with long-term fiscal imbalance while not dragging dollars out of a bad economy. Also, businesses will have a chance to respond to the coming tax hikes, potentially in stimulative ways. If we're going to impose a gas tax that will gradually rise to $2.00 a gallon, we need to start designing more efficient cars. If electricity from coal is going to go up with excise taxes, we need more windmills and solar panels.

health care reform

I agree that we should reform the US health care "system."

Here are some of the reasons:

1. Fee for service insurance plans drive up costs of services and of premiums.
2. 48 million cannot afford insurance and don't get healthcare they need.
3. Preventative care should be encouraged.
4. Competitive businesses that must compete with other countries - i.e. manufacturing - compete at a disadvantage if they provide high-cost American healthcare.
5. High cost pushes down quality. We can't buy as much when something is more expensive.
6. Attaching health insurance to employment increases the cost of hiring people and therefore reduces employment.

Here's a simple plan that addresses all of these issues:

The federal government should define a set of services that it wants provided. It should comprise a fairly comprehensive offering, but more importantly be a very well defined list. Once the package is articulated a cost can be estimated. I would take a less ambitious package at this point, because a successful program can be expanded. And a basic program would help the situation immensely.

To deliver the package in the most cost-effective way, it should then hold a bidding process in each of the 438 Congressional districts. The winning bidder would be the enity that can credibly provide the specified service for the lowest price. The price would include a regular payment from the government, based on population covered, plus small co-payments from the users, designed to produce appropriate levels of use.

The cost of the program would be paid for by new taxes. These taxes should be designed to not discourage employment. OK things to tax would be personal income, corporate profits, excise taxes on goods we want people to use less, such as oil.

The entities that I envision bidding would be amalgams of existing hospitals, medical offices, drugstores, etc, depending on the services articulated, but organized under a single managerial umbrella for the purposes of delivering those services.

Each of the resulting regional health providers would be a multi-billion dollar business, but the job wouldn't be so enormous that it necessarily creates an oppressive bloated bureacracy. Think of an entity about the size of a state police force or a county school system. Having multiple providers would lead to a variety of innovations, which would then be copied around the country. The service would be offered to all comers, but would not rope in the entire health industry, so people who wanted to spend more for what they think are better services would be free to do so. But the public package would be subject to renewal every, say, five years, so that the provider would have to perform or one of the other providers would likely win the next time around.

Use Gas Tax to Solve Social Security Concerns

I'll leave health care until tomorrow but the other concerns of our nation can be dealth with a single policy proposal that I call a houseboat with wheels because it can do more than one thing. Here are the objectives:

1. Increase fuel efficiency of cars in order to reduce our economy's dependence on fossil fuels and to reduce carbon emmissions.
2. Overfund social security so that we don't need to raise income taxes significantly in the future when we will have far fewer workers for each beneficiary.
3. Invest in US infrastructure, such as electrical transmission, renewable energy generation, mass transit, high speed rail.

All these things can be done with one new thing. We have a rare political consensus now that we need dramatic change in the way the US economy has been moving. Here's what we should do:

1. Impose a tax on gasoline consumption. The federal excise is low now, about 20 cents a gallon. I would like to see it increased gradually over the course of the next 15 years. Say 10 cents in 2010, 20 cents in 2011, etc. through 2024. This would give the auto industry some time to create more fuel efficient cars. The policy would be good for them because it would encourage people to replace their old inefficient cars.
2. Take the proceeds of the tax and put them into the social security trust fund.
3. Do not buy US treasury bonds with the proceeds. The point of the trust fund is to fund the certain increase in social security costs over a longer time period, by starting now. Using the fund to buy US treasuries just delays the tax consequences, undermining it's raison d'etre.
4. Instead buy municipal bonds with the proceeds. Direct muni purchases to new, clean, sustainable infrastructure projects, such as renewable energy, electric transmission, trains.
5. Structure the muni securities to pay debt service when we need it for social security, 2030 - 2050.

Why Patton and Fast Times

Some of you may be wondering why I chose to review two such different movies, Patton and Fast Times at Ridgemont High last month. Maybe I should explain. The point is, these pictures mark the beginning and the end of the best era of American film-making. Stick to movies that came out between these two.

Patton upped the ante on psychological insight. After Patton (1970) came The Conversation, Five Easy Pieces, Dirty Harry, Taxi Driver, Dog Day Afternoon, Two Lane Blacktop, Dirty Mary Crazy Larry, movies with crazy heroes, sick individuals with real beating hearts. Compare their heroes with Mr. Tibbs in In the Heat of the Night (1968). In the Heat of the Night is a great movie, with a great score and the always entertaining Rod Steiger, but Sidney Poitier's hero is totally inhuman once you get to know him. Likewise Steve McQueen's Thomas Crown (1968) is a super cool zero. Gregory Peck in To Kill a Mockingbird (1962) is another good example. Heroic, but too pure, too simple. There's no aha! this is real life! You have to go back to the 1950s, say to Marlon Brando's Terry Malloy to find to find a high level of complexity in a central character. But On the Waterfront was a rarity. Even genre movies in the 1970s had substance and psychological complexity.

At the end of the decade came Fast Times. Like a 1970s movie, it's serious about journalistic integrity and serious about taking on the tough issues. There's an abortion. All the characters have depressing part-time jobs at the mall or in convenience stores, other than the one who scalps concert tickets. But it's also funny. The history teacher says Aloha all the time. And it's sexy: Phoebe Cates reveals her chest to great effect, especially on poor Judge Reinhold. Hollywood learned the wrong lessons from the seminal Fast Times. The teen movie industry that blossomed in its wake told touching stories of early romance, but rarely would a viewer recognize what he saw. The independent Dazed and Confused came the closest. But in general, the movie makers copied the Fast Times surface: show sexy kids in sunny climates triumphing over their own foolishness and some mild adversity. Hey I loved those movies as much as the next guy, but they were not sufficiently challenging. The imitations delivered pleasures but didn't leave an impression and don't hold up. War Games was fun, but Matthew Broderick, like Tom Cruise, is a piece of cardboard. He's a smile in a pair of chinos. Compare them with sweaty Mike Damone in Fast Times. Things just got saccharine.

I recommend Smile, written by Jerry Belson, and directed by Michael Ritchie. A beauty pageant in the California hinterlands. A sophisticated ensemble story about the politics of how to play in rigged games in a small town. It came out in 1975, five years after Patton and seven years before Fast Times.

Smile

Bob's and Eric's Ideas for the Economy

My friends Eric Weaver and Bob Palmer wrote some good opinion pieces on the current economic troubles in the US. Eric argues that stimulus dollars flowing to banks should include money for commmunity development banks, not just because their work is important, but because they've been fulfilling their mission while the rest of the financial services sector has been buttering its belly. Bob lays out a plan for mortgage relief. Nice job, guys.

http://progressillinois.com/2009/1/16/palmer-six-steps-foreclosure-crisis

http://www.sfbayguardian.com/entry.php?entry_id=7926&catid=4&volume_id=398&issue_id=416&volume_num=43&issue_num=18

I'm not normally an iconoclast or crank, but I can't understand why the land purchase program I have described in this blog is not being taken up. Here's an op-ed I submitted to the NY Times:

I keep reading that a rebound in the housing industry will be a balm for bank and household balance sheets and a potential key to ending the US economic crisis. This formulation glosses over the fact that housing is two competing industries, both sick. Curing both, however, may not be what's best for the economy. The housing industry includes the sales of new and of existing homes. In fact, the credit crisis and the foreclosure crisis both stem from the decline in the price of existing homes. The decline in the new home construction industry hurts homebuilders and their employees, but that pain does not radiate out to the financial system or American homeowners generally. In fact, there are a lot of benefits from a decline in new home construction.

The contraction in credit markets has led to sharp reductions in investment and consumption and a broad fiscal stimulus is now necessary to sustain businesses and households through the worst of the slow-down. But a targeted plan identifying existing homes as the root of the problem, and protecting or restoring their value might have saved us from this monumental effort. At this point, a targeted initiative increasing the value of existing homes might be one of the most efficient investments of stimulus dollars, and would accomplish a variety of other worthy aims. To achieve this aim, the government should provide dollars to states for the purpose of buying undeveloped land to be set aside for conservation. Removing potential home lots from the marketplace would immediately add to the value of the existing lots, adding to homeowners' wealth and increasing the value of the home mortgages on bank balance sheets.

Homebuilding is an important industry in the United States. Americans prefer newer homes and economic vitality depends on the existence of affordable, appealing places to live located close to desirable jobs. New homes, though, can come from already developed property as well as from forest or farmland. Industrial and commercial property can be converted into lofts and apartments. Old houses can be torn down and rebuilt, remodeled, added to, or just renovated. The fact is, though, the large homebuilding corporations sell new homes on a very large scale. Their business model depends almost entirely on new home construction. The proposal here is to push back on that business model, increase the ratio of reconstruction to new construction, and give existing homeowners some much-needed market power.

New home construction has been too easy for a long time. In addition to the familiar story of the financial encouragement, the regulatory environment has also been helpful in that home-building permits are awarded at the local level. The metropolitan areas we live and work in are ungoverned. Changing land use and traffic patterns have a regional impact, but permitting is handled locally, and the narrow aim of increasing the local property tax base is usually a significant factor. The resulting sprawl strains city and inner-ring suburban economies and tax bases, and leads to longer commutes, more traffic, and more air pollution, while legacy mass transit systems are made less and less relevant.

Buying undeveloped land is a simple solution to a complex problem. Many states and localities have "land banks" in place. Their traditional role is to take temporary possession of blighted properties and eventually resell them to owners who put them to good use. With sufficient funding they, or other land conservation groups, could fight blight before it happens, rather than after a decade or two of disuse and decline. If a homebuilder sells, say, 2,000 acres of land outside a metropolitan area for $30,000,000 and undeveloped land is made more expensive by the program, the builder would dial down new home construction on undeveloped land in favor of investing in existing homes or other properties and transforming them into more desirable properties. The program could make reinvestment along these lines a condition of the sale. This would be a great benefit for the owners of existing homes, who have seen years of price declines and with inventories at very high levels, face difficulties selling their homes at all.

For 10 months in 2008, the inventory level of existing homes for sale in the United States, was more than 4 million, representing more than eleven months of sales, according to the National Association of Realtors. The annual rate of housing starts (new homes) in December 2008, twelve months into the recession and three months into the credit crisis was 550,000, according to the Census Bureau. That's 45% below the rate of housing starts one year ago, but it's still adding to the available inventory. In December of 2008, the inventory of existing homes for sale finally dropped below 4 million, dropping in fact by 490,000 even though only 360,000 homes were sold. The difference must be a result of would-be sellers giving up. That's not surprising as sales prices in December were 19% below the 2007 level.

One could argue that the time to guard against oversupply of housing has come and gone. New construction has slowed down tremendously, and the four million people who want to sell their homes have little to fear from the half a million new homes currently being made. But the question is, how do we turn the problem around? The key may this: home prices reflect expected appreciation in addition to current supply and demand. The home-making machine is humming quietly today, but the volume will certainly get louder if home prices start to stabilize. Home-builders have substantial amounts of land inventoried, have debt service payments to make, and have an incentive to make and sell houses as soon as and as long as the sales price is greater than the cost of construction. Given this possibility, why buy now? A nationally funded land purchase program would give us a tool to steer, to some extent, new home-buying dollars toward much needed home price appreciation and redevelopment of languishing existing property, rather than toward unneeded additional home construction.