Who's to blame for our Fiscal straits?

Someone sent this OpEd to me the other day: America the retirement home. To which, I replied:

I agree that the President should lead the national discourse on this subject. It is simply too important for him not to. I also agree that we need to control the ongoing and projected costs of retirement.

But there are several of Samuelson's assertions I don't agree with at all.

 

First, federal entitlement is not the primary reason other spending is being crowded out. Another reason is that most recent budget reforms have focused squarely on discretionary spending. As such, non-entitlement's share of the federal budget shrank because there was a deliberate effort by both GOP and Dem to reduce the size of the federal government. I think that a good deal of that was right-sizing and needed. We now need to work on entitlement reform again, but not because other funding is being crowded out.

In the case of defense, cyber-attack preparation was gutted, not by entitlements, but by spending on the war on terror and Iraq. Before 9-11, Rumsfeld had already embarked on what would have been the largest downsizing of the US fighting force. The intent was to focus away from massive ground operations and replace it with smaller fast-reaction tactical warfare capabilities. This would have also meant major base closures and the mothballing of many weapons systems. All that was cast aside after 9-11. The re-introduced downsizing is something that was supposed to happen 12 years ago, and most of the weapons on the scrap list were identified as obsolete back then.

Another reason that non-entitlements is crowding out core military spending is the fact that because of advances in medical technology, more soldiers are surviving what would have been fatal injuries in the past. This is increasing long-term medical, rehab and psychological costs. Fighting a protracted guerilla war on foreign soil where the enemy uses mostly small arms and improvised explosives doesn't help. While parties had a part in incurring that cost, the GOP is more to blame. And even after backing such a war, a GOP administration, despite all its rhetoric about supporting our military, wasn't willing to fund the obligation. It sadly took a Democratic president to fully fund veterans' care.

Even if we reform some of the calculations for entitlement qualification, it doesn't change the fact that the US economy has to spend money on retirees. The GOP solution of gutting Social Security and Medicare only offloads the burden to states and to individuals. But the costs don't go away and will still be a drain on the entire economy. Whether the federal government pays for it as a pass-through entity or individuals is pretty moot. 

There are several things that really need to happen. Samuelson hits on only one, increasing the age for when SSI benefits begin. The really big elephant in the room is the absolute cost of medical care. Like it or not, Obama/Dole/Romney-care is the closest the federal government has ever come to broaching that subject. Some states have begun to try to work on this, but they simply don't have the market power that the federal government does. The US spends more money on medical care than any other developed country. It doesn't have to do with over medication, more administrative costs, abuse of insurance benefits,... The same routine simply costs more in the US than anywhere else. The same medication costs more. The same checkup costs more. Yet, we spend about the same as other systems on administration and have just as many per capita routines as the global average. One large buyer with real economic power needs to bring some sort of transparency and normalization to pricing. Second, we need to massive tort reform and limited liability on malpractice.

Going back to retirement age... Increasing the age will help, but it doesn't deal with why many Americans don't want it to increase. The fact is that the educated elite start working later and later in life, they work for a shorter period, yet they max out their SSI benefits eligibility before hitting the retirement age while blue-collar Americans start working earlier and until they're older but only barely hit maximum benefit when they retire. Not only should the age increase but there should also be a consideration for the number of years worked. Someone who only begins working 30 and retires by 55 shouldn't get the full SSI check at 65. 

The really sad thing about all this is that the only Presidents who have ever talked frankly about the long-term economic ramifications of federal spending are Jimmy Carter and Ronald Reagan. No President since has ever come clean. Clinton sort of touched on it but neither of the Bush's ever did. And to place all the blame on Obama after Bush 43 presided on the degradation of the political partisan atmosphere is a bit ridiculous.

Foreigners and Economic Opportunities for Singaporean

K. Shanmugam Singapore Minister for Foreign Affairs and Law speaks on a TV show and a friend of mine forwarded the link to me.

I did, either the incredibly stupid or honest thing of responding to it directly on Minister Shanmugam's Facebook page. Following is what I posted:

As a foreigner living in Singapore, I found this discussion fascinating and insightful. 

I think it is important to distinguish whether there are enough job opportunities or if the opportunities available are for the right jobs. Given the fact that Singapore's unemployment rate is significantly below what is considered to frictional unemployment (the level of unemployment due to natural transition of workers between jobs, 5% is generally thought of as being frictional at full employment; Singapore's unemployment rate is 1.8% - 60% lower). So, there is no shortage in absolute number of jobs in Singapore. The real shortage is in the lack of workers. 

When an MNC moves a major office to Singapore from another country, it needs to be able to ramp up to full capacity as quickly as possible or the cost of moving will be too great and those MNCs won't move here at all. To make that transition time short, the companies bring senior people from their other offices or hire people with significant experience because they already know the industry, the clients, the culture of the company, the procedures,... And those staff will tend to be senior because that is whom you need to manage the transition and to train the local team. But over time, the MNCs should endeavor to fill as much of their staffing, both senior and lower, with local hires. First, it makes economic sense to do so, because a foreign employee often requires an expat package since they need to pay private market rates for housing and children's education, and no senior manager is going to move to Singapore while suffering a degradation in living standards. Second, doing so makes for good corporate citizenship to the host country, Singapore. In other words, it's the right thing to do.

The question then becomes: why aren't senior roles offered to locals when an MNC has already had a long tenure in Singapore? The fact is that there simply aren't as many Singaporeans with comparable qualifications as there are positions to be filled. At least not YET. The government must develop ways to work with MNCs to create management training programs for Singaporeans. These programs should be applied with both a carrot and stick method. For Singapore to be able to take care of its retirees, more and more of the senior positions need be filled by Singaporeans. But it's important to note that the fact that MNCs are placing senior managers here is a plus for Singapore. It allows Singaporeans to be exposed to and to aspire to these senior positions. It also puts in place the business infrastructure and management infrastructure to support those managers, thereby creating other tertiary jobs. And it provides an invaluable pool of potential mentors for Singaporeans to learn from as they take an increasing number of senior roles. Simply welcoming MNCs to your shores with a smile isn't enough, there must be a proactive approach to developing the local talent pool.
In creating the management training opportunities, the government needs to admit that the government itself competes for native managerial talent. Today, too many of the best and brightest Singaporeans become government employees where their youthful vigor and the steepest part of their professional learning curve is spent in becoming bureaucrats instead of dynamic, tactical and strategic problem solvers. I understand the argument that there needs to be a highly competent public sector to plan for Singapore's continued success, but as that success take root more and more, the most valuable resource of this nation - its people - should be unleashed on the private sector at a greater and greater rate. In fact, the government should encourage national scholars to buy-out of their bond, not discourage it. Afterall, those young professionals who buy-out of their bonds are paying back into the system so that other young Singaporeans can be afforded the opportunity for a world class education.

Some articles I've been reading and my quick take-aways...


http://blogs.reuters.com/chrystia-freeland/2012/11/30/income-inequality-government-warren-buffett-and-growth/

Trickle-down economics wouldn't have a rival if had worked. The fact is, there is no, none, zero, zip zilch empirical evidence that supply-side economic policy works. When I worked in economic policy research, we were more focused on smaller economic effects, but there was lesson in there that I learned is profoundly applicable to the macroeconomy. When government contracts were cut up into smaller pieces so that smaller contractor could bid for them, the total cost (not just the value of the contracts, but also the final administrative cost of managing more contractors) was significantly lower than awarding large contracts. We used numerous statistical tests, not just anecdotal data, to measure the validity of these results and found our results to be robust and statistically significant. Yet the march toward large consolidated public contracts continued everywhere from local to federal levels.

Democratizing of the economy is not about a socialist utopia, it's actually about avoiding it. No one, other than the nuts would argue for income congruency, what is being talked about is equity instead. That means a truly level playing field of opportunity.

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http://www.guardian.co.uk/world/2012/nov/21/singapore-least-emotional-country-poll

Within months of arriving in Singapore, I confided in Anggred that I while I rarely saw things like homeless and utter despair in Singapore, what troubled me was the fact that I saw very little joy. Certainly, there is plenty of safety, comfort and satisfaction here, but there is precious little rhapsody or spontaneity. I don't mind watching Leave it to Beaver on TV, but I wouldn't want to live in that world, yet that is what the engineers who built Singapore have done. They've constructed the most highly engineered society with on a company set.

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http://www.bbc.co.uk/news/business-20544108

I'm cautiously nervous about US growth, use a little play on words... The fact that the economy was largely lifted due to inventory restocking is not entirely surprising since this is expected when economies recover and because it happens every year before Christmas. But what causes me to worry is how much of the growth was fueled by restocking. If there isn't corresponding demand and consumption, then we will may see a big drop off in factory orders and increase in idol manufacturing.

China Politics, Oil Needs Risk Conflict In S. China Sea

PRC's recent and ongoing escalation on this issue is highly provocative to say the least, and some experts having noted that the PRC has no intention of even "ceding an inch" indicates it's bellicose posture is both intentional and premeditated. 


When China was swept up in Confucianist fervor during the 15th Century, it destroyed its entire naval fleet and even forbade the private ownership of any vessels suitable for ocean voyage. Further, it made every effort to even destroy records of past trans-oceanic voyages to prevent future generations from venturing away from the motherland. In doing all this, China effectively quit all sovereignty claims to offshore lands.


Even if China wishes to visit the idea of reclaiming those islands a determination must first be made as to who has the legal authority to argue such a case before international bodies. If my memory serves me right, the ROC, when it ceded rule of the mainland of China, did not cede its claims to any outlying territories. And for its first 40-50 years, the PRC made no attempts to refute these claims. (I welcome any citation that can either support or refute the accuracy of my recollection).

Nationalistic fervor has always been something despotic regimes harnessed to legitimize their rule and to deflect public dissatisfaction away from domestic conditions and onto a foreign enemy. Quite often, this manipulation of public sentiment has ended with disastrous results.


It is somewhat understandable why the Communist Party has opted to exploit nationalism. The Party is poignantly aware that every dynasty is China was either overthrown by a foreign power or violently overthrown by a peasant uprising. But it should also keep in mind that the last dynasty to exploit nationalism, during the Boxer Rebellion, only ended up further humiliating a proud nation, increased foreign exploitation and likely only hastened the sponsor dynasty's end.


In the case of the PRC, there are several ways by which this recent rise in nationalism might cause outright conflicts both domestically or with its neighbors. In a conversation with a former senior US intelligence official, I learned that one of the greatest fears among the global powers is that a rogue midlevel PLA officer would engage in direct military skirmish with a neighbor. While there is relative confidence that the PLA's senior officers are disciplined enough to not escalate any conflict unilaterally, some of the new rising officers are not as well known. Even some within the Communist Party, there are concerns that the new corp of officer is not disciplined and is more power hungry than their career military men predecessors. This is partly due to the recent filling of the officer ranks by some  princelings through connections, rather than merit-based, appointments.


On the domestic front, this rise in nationalism leads me to think that while the PRC should move towards a liberalized multi-party democracy, the most likely second party after the ruling Communist Party would be an ultra-nationalist, proto-facist one. Such a party could be a serious challenger to the communists and would likely sideline a more liberal and reform-minded party. As such, the Communist Party would have no option but to move further into nationalistic posturing to maintain its base.


The rise of nationalism in China is a powder keg. One that can derail its steady march toward economic and political development. There doesn't seem to be as yet many pivots that the West can do to try to ease this dynamic into something  productive or just more benign.

Osama bin Laden's death

NY Times article on the mission to kill Bin Laden

Upon hearing the news of Osama bin Laden's death, I didn't feel any stirrings for a desires to celebrate the event, nevermind chanting "USA". If there is any sweetness, the bitterness of this 'victory' overwhelms it. There is no satisfaction, because that would only allow this man to matter more than the lives lost on September 11, 2001.

I spent my time mourning the loss of innocent lives rather than celebrating the death of a madman. Afterall, his death won't likely not diminish the chances of another attack, nor will it afford us the opportunity to bring our military personnel home, away from the toils of combat any sooner.

On September 11, 2001, I watched, in shock, the attacks on the World Trade Center unfold through my living room and bedroom windows which had unfettered views of the towers a few hundred yards away. I grimaced as bodies fell from the north tower raging like a monolithic pyre. Some of those bodies seemed to be alive, as I imagine that some might have taken their own lives after watching the south tower collapse just minutes earlier.

I found it compelling and reassuring that our government, in planning an assault to kill or capture the most wanted man, had taken the time to decide how his body would be laid to rest. I wondered if Al Qaeda ever made such considerations when planning one of their deadly attacks. I don't imagine they did. Even in planning out our most violent acts where the safety of our own people is supreme, our leaders took the time to pay respect to the religious beliefs of this man who so hated our way of life that he sent 19 men thousands of miles for the sole purpose of committing mass-murder.

It makes me wonder, how can they call Americans the infidels, the barbarians when they defile their own morality to sate their lust for hate?

Debt, Government spending and other date conversation topics for married people...

A friend of mine recently forwarded me this piece from J. Kyle Bass of Hayman Advisors.

My response:

From what I understand, an economy can not expand during credit contraction (This stands to reason since whenever there is a credit contraction, the people who find it hardest to access credit are small- to mid-sized businesses who are the engines of growth; however, governments of developed economics rarely find it hard to access credit even at such time. I think this more a function of the markets than policy. As those of us in the asset management have seen, there is usually a 'flight to quality' -aka: US Treasuries- during periods of distress.). But saying so, assumes that all debt is equal. In modest recessions, I think government's incurring debt has a stimulative effect, especially if it is incurred to maintain money flows and some capacity building infrastructure projects.

But in times when public sector debt is already high and interest rates are low, new public debt must be incurred very carefully. Initially, it should only be done for stop-gap measures to prevent an all out financial meltdown; after that, towards measures that transfer funds to consumers and businesses with urgent spending needs for critical expenditures such as housing and ongoing salaries, but this can't be done for very long because it risks creating a long-term entitlement mentality. After this, the next thing that government should spend on are deferred maintenance projects rather than new ones. This is because maintenance and retrofit projects can usually get going with little ramp-up time and such projects can increase economic capacity while providing short-term stimulus.

But the fact remains that we must pay down our aggregate public debt, and we must restrict the incurring of new debt to only equal to spending on either capacity building expenditures or on acquisition of assets with long useful lives. Further, there must always be a policy for paying down and retiring old debt. We should not be borrowing to service current liabilities, especially entitlements and pensions. In fact, funds for deferred future liabilities, such as pension and benefits of government employees, should be set aside as they are incurred, not paid with future revenues.

I think most rational policy people would agree with the above conditions. And up to this point, I agree with true conservatives (not the opportunist GOP politicians currently in Congress or the wacko Tea Party-ers). Where true liberals and conservatives diverge is on the right level of taxation and types and levels of entitlements. So, what level of taxation is sufficient to pay for services that the people deem as being the mandate of the government (national security, judicial, police, fire, primary education, maintenance of public assets, safety and equity regulations,...). On top of this, we need to add to this the cost of paying down and servicing existing debt. Pretty quickly, even with a pared down government, we get somewhere near 20-30% of GDP in my estimation.

From what I understand, no society has ever been able to maintain law and order on anything less than the government commanding less than about 20% of GDP. If there are examples refuting this, I'd certainly would like to see them.

Koffie Fabriek Aroma of Bandoeng

Good coffee, good real coffee is aged, well roasted - but not charred, it is raised organically at the right climate and elevation for each variety of bean. Good coffee should be added to milk, but milk should never be added to good coffee.

1 kg bag of Armona's arabica whole bean coffee

An original logo from the days when Indoneisa was still a Dutch colony

This is the best coffee I've found so far. I've tried Blue Mountain from Jamaica (cheesy marketing gimmick), aged Ethiopian, varietals Ethiopian, Kenyan, Sumatran, Sulwesi, Papuan and from all over the Americas.

This is a blend of Indonesian varietals. Sold only fully roasted, never as green beans.

Koffie Fabriek Aroma, in Bandung Indoneisa, is now run by the third generation of its founding family. They've been making coffee the same way since their founding. The owner travels through the islands of Sumatra, Sulawesi and Java within the Indonesian archipelago sourcing from specific growers who are all also family owned small farms only using organic farming practices. Aroma produces only 200-300 kilos per day, and they have no intention of increasing their output.

The current owner is almost fanatical about coffee. When I visited, he was covered in residue of ground coffee, husks of drying beans and ash from the roasters. Coffee has been his life. He meets with the grower himself and travels around continually sourcing the best beans. He takes extraordinary pleasure in discussing coffee and describing Aroma's approach to coffe making.

Aroma roasts both arabica and robusta beans. I'm sure that if you're a coffee fan, you've been told that arabica is the way to go for any serious coffee drinker. BS! The most important thing to good quality coffee beans is that they are grown properly for the specific bean. Robusta beans from the lower volcanic slopes near Solo on Java is far, I mean FAR, superior to any Central American blend of arabica you'll find at Starbucks, Peat's, Seattle's Best,... This is because those arabica are grown on massive plantations without native plants to offer any subtle flavors and at elevations too low to produce flavorful cherries and beans.

Green coffee beans aging in Aroma's wharehouse

Aroma gathers its beans from a handful of growers, and offers its buyers a choice of either pure robusta or pure arabica blends. The robusta beans are aged 5 years, the arabic matures for 8 years. Throughout the aging process, the beans are checked to cull beans that aren't aging properly. They are routinely aired and dried in open air and sun behind the factory. The beans, as a result, lose most of their moisture, and the bean's nautral oils mature to become more complex and flavorful. The final roastable beans are beige to medium brown, not green, yellow or light beige like you see with pre-roasted commerical beans. You won't find this being done by any of the large coffee chains or retailers. And the few aged beans they do sell are usually sold at prices starting around $20 per pound.

The coffee roasters from behind.

The round drum is where the beans are placed for roasting. The furnace below the roasting drum is wood fired using rubber wood. Coincidentally,  SE Asia is the largest producer of natural tree rubber.

The factory is more like a workshop, a ramshackle of all things related coffee and its roasting. 

Then there's the way they're roasted. Aroma roasts its beans in custom made roasters based on old designs. They're slowly roasted at a low temperature using a wood buring furnace. The fuel wood is rubber wood, which burns at a low, consistent temperature. There are no computers, not a single piece of automation. Most of the space is even natural lit by skylights and celestory windows; the scales are mechanical with needles and judged by a human eye, not digital. So it stands to reason that the beans are tended to by hand. Once the beans are properly roasted, they are air cooled, not in cooling vats. The aging of the beans means that they don't need to be charred as is the case with the premature beans at most coffee houses and shops. Those other companies have to burn their beans to burn off the edge left from not properly aging and drying the beans. Aroma's beans are roasted between a medium and dark brown, and though you wouldn't think so from sight, they yield an amazing shot of espresso. The slow medium roasting process also means that it produces great Turkish coffee (the way coffee was first drunk), because the coffee doesn't over-steep or scald easily.

Aroma is in a bit o a dilemma, though. The owner has only daughters and though he would like to keep the company in the family to carry on the traditions, most of the places he travels to in search of beans can still be dangerous, especially for a woman travelling alone. He wants Aroma to hold true to the way it makes coffee and offers it at a price that a common Indonesian can afford, about $5 per kilo ($2.40 per pound). He certainly doesn't do all this for the money. The owner teaches business courses at two local universities, and he founded and funds a charity that cares for local orphans.