Congress and Madam President

President Hillary Clinton’s first two years in office will offer her a limited window of action on the agenda promised in her campaign.

Based on current polls, the Senate has a good probability of flipping into Democratic leadership. Clinton may be able to clear the backlog of Federal judgeships and get one or two Supreme Court justices confirmed. The utter failure of Trump at the polls combined with Mitch McConnell’s position that the next President should decide will be a lash at the backs of the GOP Senate to abandon the obstruction game they have played with both Obama and the previous President Clinton.

The election’s effect on the House is less clear. The combination of self-selection and gerrymandering has been to create safe House seats for the GOP that are occupied by the faction of the House Freedom Caucus. If the election is an embarrassing blowout but not a total landslide, Paul Ryan will remain Speaker. However, his caucus will have shifted further into the pugnacious, bomb-throwing corner as it is most likely the moderate Republicans that will be swept out of office.

The result will be no movement on Clinton’s legislative agenda – college tuition, single payer, none of it. Any action at all on these items will require Democratic control of the House, which in turn will require a yuuuge, very classy win. It just might happen, after all we haven’t had the debates yet. But I’m thinking it will be a bridge too far.

And then the reaction

The 2018 midterms will roll back these gains for the Democrats in both House and Senate. The Senate seats up for election threaten more Democrats than Republicans. What isn’t clear is if Trump will still be dragging down the GOP two years after his loss. My guess is yes, and the Senate will retain a thin Democratic majority throughout President Clinton’s (first) term.

The House may see the effects of a few redrawn districts in 2018, so the classic mid-term reaction against the President’s party may be muted. (Looking at you, North Carolina.) It will also be interesting to see if the GOP establishment will be able to pick off a few more Freedom Caucus members, as they did with Tim Huelskamp this year. In any case, no movement on Clinton’s agenda.

This outlook gives Clinton’s term the same shape as Obama’s first term, with Trump’s campaign playing the role of the Iraq War and the financial crisis in terms of creating a space for Clinton to achieve something. GOP leadership can choose to continue the oh so successful obstructionism, and the result will be the expansion of executive power. I rate bipartisanship possible but unlikely.

PS – I would like to thank Donald J Trump for making it possible to write the phrase “President Hillary Clinton” this early in the process. I am bigly grateful.

Writing the unwritten rules

It isn’t until someone tries to bend or break the rules that most rules get written down. For what everyone else takes for granted, some jerk will say “Nobody told me it wasn’t allowed.” “It isn’t written down anywhere that this is forbidden, so it must be allowed.” And then it gets written down, because somebody had to be a jerk.

Welcome to today’s session of writing things down that should even need to be said! Our topic – Candidates should be nice.

The actual requirements for running for President of the United States are few. Be over 35 and a natural-born citizen. Changing the Constitution to refine these criteria would take a long time and eventually fail. However, we can take advantage of the fact that two major parties control access to the Presidency, and they are private organizations that can make up their own rules. Given the right pressures, political parties can be very responsive.

So here is my list of requirements for anybody running for President with a major party:

  1. Be transparent – Share 10 years of tax returns.
  2. Be inclusive – Spend 100 hours in community service in the last year.
  3. Travel – Meet elected officials from 10 other countries.
  4. Be electable – You must have held elected office before at the state or Federal level, or as the mayor of a large city.
  5. Be knowledgeable – Take a test and allow your score (and right and wrong answers) to be public. There will be essay questions.
    1. World history and current events
    2. Probability and statistics
    3. Macroeconomics and finance
    4. Basic science and current issues
  6. Be clear – Respond to the current party platform and say how you would change it.
    1. Extra credit – Respond to the other party’s platform as well.
  7. Take the truth seriously – donate to the other party for being caught in a lie by a fact-checking group.
  8. Be direct – Agree to at least three debates.
  9. Renounce hatred – Hate speech against any protected class will be disqualifying.

Candidates should agree to these things at the start of their candidacy, in writing, as part of their contract with the party whose nomination they are seeking. Either the party or the candidate may terminate this contract at will, at any time, without recourse. Terminating the contract ends the candidacy.

I realize some of these requirements might be controversial. That’s OK, they are meant to start the discussion, not end it. In particular, the idea that you have to demonstrate electability might strike some people as overly restrictive on ‘outsiders’. Sorry, the last counter-example is Eisenhower, and the last counter-counter-example is Trump. A little road-bump between a military career and political office is not a bad thing.

It used to be that we could expect our parties to put forth the best and the brightest, without worrying the exact details of what ‘best and brightest’ entailed. Apparently that is not possible anymore. So here we are.

After Trump

What will the Republican Party look like after the November election?

Today, I see the GOP as a coalition of three regional parties. The first is the Dixiecrats, the white supremacists of the Old South. As most know, they switched from Democrat to Republican after the passage of civil rights legislation in the 1960s. The next is a Far West anti-Federal government party (think Cliven Bundy and Dick Cheney) for whom making the Federal government smaller and less intrusive is the key issue. Lastly, there are the pro-business technocrats of the North-East/coasts/suburbs.

As long as the white supremacists were just a base that could be called out to vote for the pro-business candidate, the GOP was happy to exploit them and coddle them. Reagan-Bush was a classic example of the coalition electing a Western, anti-Federal President and a North-Eastern, pro-business Vice President with  the votes of the white grievance faction.

However, the grip of the pro-business faction on the party leadership has been slipping, as can be seen by the length of the contested period during the GOP primaries. From Bush to McCain to Romney, it was taking longer to beat back the Mike Huckabees and Ted Cruzes. Changing the rules to allow the pro-business candidate to win faster had the unintended consequence of allowing Trump’s candidacy to succeed.

Procedural changes such as proportional voting and closed primaries will help the next time. But in the short and long term, the party has to deal with the surfacing of white grievance as the driver of so much of what the GOP has stood for.

Just recently, voter suppression laws have been shot down that were latest attempt to keep minorities from voting. Gerrymandering is also slowly being eroded as a tool of party support. Corporate influence in politics, exemplified by the Citizens United ruling, will also come under attack in a new Supreme Court that will shift to a more moderate equilibrium after Scalia’s replacement is seated.

Prior to the accession of Trump, the center of the GOP was almost perfectly represented by the Koch brothers. The Kochs, working with others, have spent a lot of money making the Republicans the vehicle for their beliefs. Much of that is now at risk.

But will it fail completely?

No. If for no other reason, the billionaire class still wants a return on their investment.

Trump is so far from the conservative norm, it will be relatively easy for down ticket Republicans to repudiate his failure as a personal failure, not a failure of the brand or philosophy of conservatism.

I expect that state-wide elections will be the first place to see the effect of changing perceptions of the GOP brand. Senators and governors will have to react to a shift to urban and minority voters animated by Trump long before Representatives and state legislators in safely gerrymandered districts.

Aligning the Senate and the White House will give the Democrats a window to set the Supreme Court in a progressive direction, and pursue foreign policy without fear of contradiction. Aligning the state executives with the Federal executive will ease the implementation of healthcare reform.

The Trump disaster may affect the GOP’s ability to mount a mid-term reversal of Democratic gains. However, it remains true that Clinton’s first two years are her best opportunity to pass tax hikes on the rich that will directly counter income inequality and pay for stabilizing Social Security, free college, or single payer health care.

At issue will be whether the pro-business Republicans can use the moment of Trump’s collapse to free themselves from the Tea Party fanatics. Paul Ryan will have to choose between the complete obstructionism of Newt Gingrich that created gridlock for 12 years (the last 6 years of Clinton and Obama) or reaching across the aisle to govern with Democratic moderates for as long as he holds the gavel.

In the end, the GOP control of the House depends on the fate of the Dixiecrat wing. Jeff Sessions will be a key example of whether the GOP South can move to leaders like Nikki Haley fast enough to hold off electoral losses that will lose the GOP the House majority.

It is in no one’s best interest for the GOP to collapse. We need a voice calling for efficient and right-sized government. We need a robust two-party system. But the GOP really does need to exorcise the demons of racism at the core of one of its key constituencies. The 2012 reform package will need to be implemented and then some. Crush the racism of the Dixiecrats, and the GOP might survive. Repudiate the intransigent dickishness of Gingrich, and begin to thrive.

Brexit and the dream of Apartheid

“I don’t want to sound racist, but I think there are just too many people coming into the country. I moved out here from Dagenham four years ago, because Dagenham was looking like a foreign country.”

Nobody wants to sound racist, but sometimes racism happens.

The referendum vote in Britain has been an object lesson in the dangers of direct democracy. This is what we hire politicians for.

It is also an object lesson in the dangers of loose confederacy over a tight Federal union. The greatest triumph of American statesmanship was to replace the Articles of Confederation with the Constitution. The states were bound together much more tightly by the Constitution, and it was a one-way street.

David Cameron has given Vladimir Putin the best bit of news the Russian dictator has had since the Ukrainian Revolution. Why join? Why stay? These questions are so much easier to ask, today.

The effects within the UK are still to be assessed, but already we see that English relations with Scotland and Northern Ireland have been vastly complicated, perhaps fatally for the Union. At the same time, London will face the largest threat ever to remaining a more important financial center than Frankfurt.

North Korea and Myanmar have been stark lessons in the success of going your own way. All Britain is, I’m sure, breathless to hear what Nigel Farage’s juche advice will be. The rest of us are simply shaking our heads.


What government can learn from Einstein

A scientific theory should be as simple as possible, but no simpler.

In some sense, a government is a theory, or at least a hypothesis, about human behavior. Louis XIV had a theory of government that  maximized the benefits to him. The Kim family of North Korea has a theory of government that maximizes the benefit to their family. And the United States has a Constitution which maximizes the benefit to all Americans.

Right on the tin

How do I know this? Well, it says so right on the tin. “…promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, etc. etc. etc.” The hypothesis of the US Constitution is that, among other things, the job of government and in specific the Federal government, is to promote welfare. This promotion is not aimed at the benefit of any single person, family or class. It is the general welfare, and it is not limited in time any more than space. The Federal government is supposed to maximize the total welfare of all Americans extending indefinitely into the future.

That is a big job. There are some of a libertarian bent that would like to pretend these phrases don’t exist. Certainly the other phrases they tend to focus on are important as well. Establishing justice through a court system and legal system. Providing for the common defense against all enemies foreign and domestic. Also central to the hypothesis, but not to the exclusion of the general welfare.

The best government

I prefer a government theory that follows the Einsteinian maxim. The best government is one that is as simple as possible, but no simpler.

Why is the transport infrastructure of the country mainly owned and maintained by the government? Roads and bridges, subways and trolleys, ports and airports – they all used to be private. And then they went bankrupt, often because of delayed maintenance expenses. It appears that there are some things that private enterprise does not do better than government.

Food and drug safety, occupational safety, transport safety. Clean water and air. Support for education and a social safety net. All of them, clearly the job of the Federal government under the theory laid out in the Constitution. The Constitution does not exist to simply clear the ground for competition. It does not say that the only recovery to a wrong is through the courts. An ounce of regulatory prevention (that benefits everyone) is better than the pound of cure( that only benefits that specific person). The government itself has an active role to play, certainly within spaces where private enterprise does not work.

Private enterprise may fail for many reasons. Profits may be uncertain, or the payback period too long. As with all the failed private infrastructure companies throughout the years, the short-term profit focus starves maintenance, or investment in innovation. Companies fall victim to tyrants, to demagogues, as often as countries do. One has voters, the other has shareholders, each can be lied to. The mere existence of the corporate structure is no guaranty of efficiency or virtue. “And our Posterity” is rarely if ever part of the corporate shareholder value equation.

So, yes! I am in favor of a small government! As small as possible, but not smaller.

Is Crowdfunding a good model for capital formation?

Soon you will be able to raise capital and float shares using sites like Kickstarter. The effective date for the SEC’s Reg Crowdfunding (they gave up on finding a single letter) is close upon us. I’ve funded things on Kickstarter, but color me skeptical about using it for capital.

Like many things, it sounds good in theory. Going back to Michael Millken and the junk bond empire of Drexel Burnham Lambert, there is a theory that backing lots of risky businesses will succeed because the few winners will more than make up for the many losers. For example, I could have invested in every PC maker from 1977 onwards and made up for all the losses with one winner, Apple.

Wash, Shrink, Repeat.

If it worked for small and risky companies, the theory goes, it will work eversomuchmoreso for even smaller, riskier companies. Never mind survivor effects that have already winnowed the field, etc.

Also running in favor of the idea is the desire to even out income inequality. Very large fortunes are made today by being in on the start of small companies that grow big. Crowdfunding capital formation would spread that opportunity across many more individuals than have it today. This is a very positive and valuable goal.

The SEC stripped me of investor protection, and all I got was this lousy T-shirt

The fly in this ointment is that capital formation has historically been a way to rip people off. It is easy to forget that the SEC set up all the rules about floating shares in the first place to protect potential investors, not prop up investment banks. (Full disclosure, I used to work for one.)

Go public without audited financial statements? Fine! Who needs independent confirmation of facts when we want rampant speculation?

No. No. No. The rules are there for a reason. We learned our lesson, and I would rather not unlearn it.



Half the story and no punchline

Marketwatch recently published a piece on the sad history of the Central States Pension Fund of the Teamsters union. As a quick update for those that do not know why there are jokes about Jimmy Hoffa being buried at the fifty-yard line of Giants Stadium in New Jersey, the Teamsters were a very powerful union in 20th century America, covering the trucking industry and related trades. It fell under mob influence and union leader Hoffa is widely believed to have been murdered by the Mob to keep him from cooperating with the FBI investigation.

The Central States fund is a classic underfunded pension. Many truckers today are not union members, so the ratio of working to retired is 1 to 5.2, according to the article. Investment management of the fund was taken away from corrupt union officials in 1982 and put in the hands of Wall Street firms such as Morgan Stanley, Goldman Sachs (a former employer of the author), and Northern Trust.

The Marketwatch article opines that Wall Street did worse for Central States than the mob did. But is that true? It appears that part of the strategy to deal with the underfunded pension was to invest in higher risk/reward assets than the typical pension. When the financial crisis hit in 2008, this strategy means that the fund’s losses were also magnified.

That’s all the story tells us, but that is only half the story. Yes, the downside in stocks was worse than bonds in 2008, but the rebound was also better. The long-term outperformance of equities over all other asset classes has persisted after the crisis of 2008. And if the mob was still in charge and heavily invested in Vegas casinos – that would have been better for Central States? Of course not.

The real problems here are two, in my opinion. Did the investment managers abandon their equity-heavy allocation at the bottom of the market? That would be a tragic misstep. Did the investment managers consider the average retirement age of the members in their asset allocation decisions? This should have driven concerns for generating cash vs growth. There is a tension between these two, but that is why GS and NT were getting paid the big bucks.

As a piece of financial journalism, this article doesn’t close out the issue it raises in the headline. A stock-heavy allocation does make sense (in my opinion). That in itself is not the problem. Changing strategy at the bottom – now that is a problem. But the article doesn’t document that that actually happened. We have only half the story and no punchline.