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Tuesday, December 4, 2012: The President's "Offer"

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The President's ""Offer"": That is not a typo. I intended to have two sets of quotation marks around the word "offer". That's because it is unspeakably absurd to call what the president proposed on the fiscal cliff an offer. It was more like a liberal wish list. There was literally nothing in this proposal for Republicans to like and a liberal (pun intended) sprinkling of elements that most Republicans absolutely hate. For example, the proposal (I will no longer flatter this monstrosity with the label "offer") raises taxes on families making over $250,000 ($200k for individuals) by more than would result from going over the "fiscal cliff". On top of that, Obama threw in some stimulus spending, an extension of the 99 weeks of unemployment benefits, and an extension of the payroll tax "holiday" - which means more and more Social Security benefits are borrowed. This package actually both increases taxes and increases the deficit because there is so much additional spending. As a false gesture towards something reasonable, the president says they will make some unspecified changes to Medicare that would save some money......starting no more than 10 and more likely 20 years from now. So, the tax increases are specific and go into effect in less than 30 days, but the spending reductions are unspecific and don't start for at least 10 years!!  Seriously?

Speaker Boehner called this proposal "not serious". I call it absurd and counter-productive. You all know that I was a car dealer in my private sector life. How would you react if you walked into my dealership and my first proposal to you was to buy the car for double the window sticker price, but we also get your trade-in for free and you have to finance the car with us at 30% interest? You would storm out of the place and go buy a car somewhere else, or not buy one at all. The president's proposal is the equivalent of this scenario. It was not just a worthless offer. It actually moved both sides farther apart.

So, why would the president do this? I obviously don't know but I will postulate a few ideas:

• Arrogance: He is used to getting his way on everything, and doesn't see how others view this proposal.

• Intention: He really wants to go over the "cliff" and wants to act like he tried before there is no agreement.

• Inexperience: He has little experience in negotiating and doesn't really know how to do it.

• Perspective: He doesn't understand the concept of a win-win negotiation and only understands I win/you lose.

Maybe it’s a little of all four of those things. This is very similar to the style and posture of the newly elected President Obama in 2009 when he famously rejected all of Eric Cantor's (R-VA) suggestions with the simple comment: "Eric, I won". But, there is a difference. Then, Democrats controlled the House and the Senate. This time, we won, too.

I am pretty pessimistic right now that anything reasonable can be worked out with this president. As I often say, I hope I am wrong, but I fear that I am right.

 

Thursday, November 29, 2012 - Taxes and Culture

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Taxes and Culture: Being a CPA and all, I often opine in these pages about things fiscal, financial and economic. Today, in the mainstream, establishment press, all you hear about is the "fiscal cliff" and taxes and such. I care a great deal about taxes and the deficit, as you regular readers well know. And, you will hear much from me about these issues in the coming months. But, the underlying issue before us right now with the so-called "fiscal cliff" is, in my opinion, not actually fiscal or financial. It is cultural.

As you may not be aware, I have always believed that the culture of an organization is the biggest single attribute that will determine the success or failure of said organization. In my 25 year business career, I was obsessed with the culture of our company and with that of companies we might acquire or with which we might do business. A business with a strong culture of customer service will empower people with service skills and will change or weed out those people who don't care how they treat others. If a company has a culture of dishonesty, even an honest person will cheat now and then because it’s the way it’s done there. And of course, the dishonest person will feel justified in whatever they do. Organizations of all sorts - companies, charities, churches, colleges, high schools, military services - all have a culture. The culture may have been established over time, or it may be created by the people in charge at the moment, or a combination of both. Anyone reading this who used to work in one of my companies (or my staff who work with me now), understand how much effort I put into establishing culture and how important this has and will continue to be to me. And, most will testify to the effect that a strong culture has on the behavior of those in that culture.

Countries have cultures too. America has a uniquely American culture. It is not British culture. It is not French culture. It is not Mexican culture. It is vastly superior to all of those. American culture has developed over the first one hundred years of this republic and cannot be ascribed to any one person or event. It has changed little since. Much of our prosperity and success can be attributed to the exceptional and superior nature of our culture. This culture is American Exceptionalism - a phenomenon which our president does not appreciate.

Our culture has a number of facets. But, one of them has always been that we are a culture of aspiration and opportunity. We don't envy those who are more talented than we are or who have achieved more success, we admire them. We don't strive to bring them down, but instead try to bring ourselves up. These feelings are rooted in the idea that those who succeed in a free society do so largely as a result of their own labors, be that through invention or hard work or good timing. Of course, this is not a cultural norm world-wide. Certainly, you can resent the peers of pre-20th century English society whose station was achieved by birth rather than achievement or the caste societies of India which limit the opportunities of those of a certain social status. In communist societies past and present, opportunity is handed out only as a favor to those who submit and obey a ruling class. Therefore, it is understandable to resent those whose fortune was acquired in such a manner as these.

But, that is not what happens in this country. Oh, sure, some successes seem to be the result of luck more than skill, but that is the exception rather than the rule. We admire and respect those of accomplishment because, by and large in this country, they got theirs on their own. The wealthiest people in my district almost without exception started with little or nothing and a large percentage of them are first generation immigrants. Most famous actors or talented athletes got there through work and dedication and talent. I wish I could throw a football like Aaron Rodgers. I pretend to do so in my backyard, rather badly I might add and occasionally with the result of throwing out my shoulder. I would enjoy his salary. I don't resent him. I admire that ability, which I don't have. I'm thankful he has it, because it’s entertaining to watch. And, I'm not even a Green Bay Packers fan! (Go Chiefs and Lions and Jets!)

But, President Obama and his minions want to change this perspective. He is promoting a new culture of envy and, in his own words, "revenge". He believes and wants you to believe that the success of Aaron Rodgers (or fill in any other person's name of achievement) has made you poorer. Success is only worthy of "revenge" if it was achieved wrongly or unfairly. Much of our nation's strength results from the fact that we do not have barriers to achievement. Therefore, our society respects and admires that achievement. We owe Steve Jobs a debt of gratitude for creating so much growth and prosperity and for enabling so much in our lives, not the other way around. Did Steve jobs not contribute his "fair share" to society?

So, how do the tax increases fit in here? The president does not even pretend that raising taxes on the much despised people who earn more than $125,000 per year if you are single (the $250,000 is only for married couples) will do much for the deficit. It won't. Not even close. It maybe addresses 2-3% of the problem. You can confiscate all income over these thresholds and have those people work at the point of a sword as slaves and it won't cure the deficit. He has said this is about fairness. No, it’s about envy, it’s about revenge. That would be a fundamental change in American culture, which would regress us to the failed cultures that the founders of this country abandoned. If this president has his way, talented people who have the ability to create new opportunities for the rest of us will be less likely to do so in order to avoid the resentment of society and because they will not be able to keep most of the fruits of their labors. We will be a less prosperous, more resentful, and much less happy society. Being more like France or Mexico is not something to which I subscribe.

In Britain a few years back, they raised the tax rates on incomes over 1 million pounds (about $1.6 million) to 50%. They had 16,000 taxpayers in Britain at that level when the tax was increased. Today, there are only 6,000. Some have left the country. Others have chosen to no longer work, invest and make money. Either way, a lot of middle class Britons lost their jobs and opportunities because of this new tax rate. In my home state of California, the top tax rate will be 56.7% on January 1st if the federal tax rates go up. You do the math.

The tax increases are bad. Millions of people will lose their jobs because of them. But, that's not the worst part. The worst part would be if this president and his minions interpret his 50-48% victory as a mandate to turn America back into a feudal society of envy, division, and revenge. That's why I vigorously oppose these tax increases, and I frankly don't care at what income level they draw the line. It’s not about the taxes. It's not about the economy. It's about who we are as a people.

 

Tuesday, November 13, 2012: Compromise

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Compromise: First of all, thank you to all those who live in the new 45th Congressional District in California for your strong support of my reelection. It looks like I will have won by a margin of 18 points in spite of a new district (50% of which I have never represented), a poor year for Republicans and another opponent who spent many times more money than I did and spent it largely on negative advertising. I appreciate your confidence in me. I will not let you down.

But, I must confess, it didn't feel much like a winning night. Frankly, I haven't been this saddened in a very long time. Yes, I won convincingly, but politics is a team sport. I need friends and allies to get stuff done, and a lot of them lost.

I will let others do the political analysis of why the election turned out as it did. But, I will tell you that my sadness is much deeper than it was four years ago. In 2008, we were pretty sure that McCain was going to lose, and we had some hopefulness that Obama wouldn't turn out to be as bad a president as we feared. But in 2012, we were pretty sure that Romney/Ryan were going to win, and we are pretty sure that Obama, if reelected, would get even worse, if that is possible. So in 2012, the stakes were higher and the opportunity greater. That makes the loss all the harder to bear. Mitt Romney is a wonderful man with a wonderful family and he would have made a great president. But, it is not to be so. Add to that the fact that my home state of California slipped dramatically deeper into a political abyss from which I fear it may not recover without an intervening crisis.

It's a week since the Election, and I write you this on a nighttime flight back to Washington. I can't seem to shake the sorrow that I feel. It's not just that we lost an election. That happens a lot. It seems that we are losing something much deeper…something more fundamental - Freedom. The agenda of the left in this country, embodied by the newly reelected president, is increasingly to sacrifice freedom for dependency, opportunity for equality and growth for a misguided idea of fairness. As Winston Churchill said, "The inherent vice of capitalism is the unequal sharing of its blessings. The inherent virtue of socialism is the equal sharing of its misery." The state of my birth seems to be following a well-known and well-traveled path to failure, which I fear is irreversible in the near term. It has always been said that California leads the nation in many trends. I fall to my knees to pray that this axiom is not true in this instance.

When I was in college, I read Ayn Rand's book, Atlas Shrugged, which was given to me by my mother. The message of that book has shaped my philosophy ever since. I give a copy of it to everyone who interns in my office either in Washington or Irvine along with the following inscription that I write:

"This book is the penultimate work on the power and dignity of the individual over the power of the state or collective. It is not an easy read, but worth it."

A quote from that book is apropos right now:

"When you see that trading is done, not by consent but by compulsion - when you see that in order to produce, you need permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them but protect them against you - when you see compulsion being rewarded and honesty becoming self-sacrifice - you may know that your society is doomed."

Atlas Shrugged was first published 55 years ago. The words read as though they were written 55 hours ago. The policies of Harry Reid and Barack Obama fit neatly into that description of a then future society. But, we are not doomed. However, Tuesday was a move in that direction.

And, I'll be damned if this member of Congress is going to be a participant in that motion. I am not going to go along with a slow move towards socialism rather than a fast one. This game is not over!

The House of Representatives is a coequal branch of government with the executive. We are Article I of the Constitution, the president is in Article II. He won, but so did we retain the majority in the House. History said that we should have lost after having just won 63 seats the election before. But we didn't.

With Republicans firmly in control of the House and Democrats firmly in control of the Senate and the White House, it is clear to all eyes that compromise must be reached for anything to be accomplished. But, let's examine what compromise really is.

The president wants to raise taxes on everyone making over $250,000 per year. We don't want to raise taxes on anyone. Raising taxes on people making over $250,000 a year is NOT compromise at all. That is his starting point. But, he says it is "non-negotiable".

Ok, Mr. President. Let's look at another issue - Obamacare. You want to keep it in place. We want to completely repeal it. A compromise would be to repeal part of it. Leaving it alone is NOT compromise.

Now, real compromise would be, for example, to raise taxes on people making over $250,000 per year AND repeal Obamacare completely. That is compromise because the president gets his way in one area and House Republicans get ours in another.

It is NOT compromise to keep the status quo on American energy development. It WOULD be compromise to stop subsidizing inefficient wind and solar projects OR start developing our domestic oil resources in Alaska and other places OR removing the barriers to coal use. But, stopping all of that is the president's position and is NOT compromise. Doing the Paul Ryan Medicare reform is not compromise, but neither is leaving the unsustainable Medicare program alone. Making some reform short of the Ryan plan is compromise.

I could go on, but you get the point. There are actually many areas to compromise on in order to move the country ahead a little without another lurch towards socialism. But, this president's track record on compromise is not good. Every "accomplishment" of his administration occurred when Democrats had supermajorities in both the House and the Senate. Since he lost the 60 votes in the Senate, he has not worked with or compromised with us on anything. In the 44 years since 1968, the presidency has been held by a member of a different party than at least one of the houses of Congress for 30 of those years. Stuff got done during those 30 years because Presidents Nixon, Reagan, Clinton and both Bushes worked with the other side. Will this president extend an olive branch or will he spend the next 2 years doing nothing and trying to blame Republicans for everything he can? His history would suggest the latter.

I was wrong about who would win the election. I pray I am wrong about this. If I am, I will be the first to admit it.....and to celebrate it.

I am disheartened and mournful and melancholy. But, I will not yield and I will not give up. And, neither should you.

Drive fast and live free!

   

Monday, October 22, 2012 - A World of Debt

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A World of Debt: It is no surprise to readers of these pages that we have a debt, spending, deficit and growth problem in the United States today. What you may not know, however, is that the rest of the developed world is suffering from the same malaise, albeit to different degrees. And, the causes of said malaise are the same the world over, again with variations only in degree. But, what is really disturbing is that governments around the world seem to be implementing exactly the same "solution" for the debt, spending, deficit and growth problems that abound everywhere. It's disturbing because this "solution" will not work - at least it won't work without potentially severe side effects that may make the medicine as bad or even worse than the disease.

Allow me to explain.

The U.S., Japan, the U.K. and continental Europe are all currently either in recession or experiencing very slow growth. All have massive, if not record, budget deficits, and all have record debt to GDP ratios. That means that the debt issued by the respective governments is a greater share of their economies than ever before. In fact, the debt issued by governments around the world is now nearly 3 times greater, as a percent of the world economy, than it was in 1970. That means that the last 40 years have seen governments of all the developed countries running deficit after deficit and borrowing the difference.

The debts, deficits and spending in all of these countries are largely being driven by the same two costs: government-provided medical care and pension costs. These costs have skyrocketed as a percentage of revenue because of two things: growth is down and people in the established economies are having fewer children to pay for the costs of an aging and longer-living population. It is fascinating that every developed economy in the world has followed the same pattern since World War II. At first, these benefits were paid for by thriving post-WW II economies with growing populations of younger workers whose taxes paid for the benefits of older persons. But since then, governments have steadily expanded the benefits offered to the population, people have lived longer and collected those benefits for more years than originally planned, and declining birth rates have resulted in fewer young people to pay for benefits provided to older ones.

The debt and deficit situation in the U.S. is better than that of much of the developed world because a higher birthrate, more immigration and less generous benefits have allowed the math to work a little more in our favor. For example, although our debt to GDP ratio is now about 100%, the same ratio in Japan is 235%. Japan is in such a pickle because their birth rate (actually known as a fertility rate) is 1.39 babies per woman. The U.S., in contrast, is 2.06. The population in the U.S. is rising because we have a stable fertility rate and some immigration. The population in Japan is falling because of a fertility rate that will not replace the current population and very little immigration. Add to that more generous government benefits and little economic growth for decades and you have a big problem.

Obviously, these deficits could be erased through increased taxes. And, governments around the world have been raising tax rates for decades. But, the tax increases have not kept pace with the increased benefits and declining younger populations. I have discussed in these pages before that it is very easy for a politician in the U.S. to offer people free pensions or health care and promise that someone else will pay for it. But, once you run out of other people's money and you have to increase taxes on the recipients of the benefits, they recognize that it is no longer free and the allure of the benefit declines. This doesn’t just happen in the U.S. either. This political phenomenon has occurred throughout the developed world as politicians give people benefits only to find raising taxes to cover those benefits politically unachievable. Of course, cutting the benefits is also politically difficult once people have gotten used to having them.

It doesn't matter whether it's in Athens, Tokyo, Paris or Chicago, the pattern continues and the deficits and debts pile up. Strong economic growth could help pay for some of this. But, the low fertility rates discussed above, coupled with the economic dampening effect of increased taxes and other government policies, have dramatically reduced growth in developed economies over the last 40 years.

So, what have governments done? Print money. All of them. The U.K. was the first to begin an open-ended process of flooding liquidity into its banking system to keep it afloat. Then, the European Union followed in an attempt to prop up the failing economies of southern Europe. Japan has done this for some time. And now, the U.S., with so-called QE (Quantitative Easing) forever, has joined the party.

The problem is that printing money does not fix the fundamental problem. It only covers it up. The problem ultimately has to be fixed by increasing revenue through economic growth and adjusting the benefits paid to the corresponding level of tax collected. If you continue printing more money without any wealth creation, the value of that money in tangible terms must decline. Inflation and stagnation or economic decline will consequently result.

This has to stop or the fallout could be catastrophic. We must enact policies that generate real growth, stop printing money and align benefit programs with the taxes coming in to pay for them. And we, the United States of America, must lead this effort and be the adults in the room. The Europeans have huge structural problems with the euro and massively over-generous public benefits. The Japanese (and actually the Chinese, as well) have a demographic problem. The developing world (China, Brazil, India, etc.) are too small economically to lift up the rest of the world, even if their growth continues (although their growth is actually slowing, in part because of the fact that ours is). But, America has no impediments to enacting the right policies - no impediments, that is, except for misguided and rigidly ideological politicians, including the current president.

We can lead. We have to lead. The United States and the United Kingdom saved the world from imperialism, Nazism and communism with our military might and acumen in the last century. Now, in a new century, we must do it again with our economic and political might and acumen.

And, in doing so, we will save ourselves as well.

 

Wednesday, September 28, 2012 - Shifting Strategic Perspectives Abroad

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Foreign Policy: My parents, who have now passed away, were both born around the start of World War I. They were of the "greatest generation" that came to adulthood during the depression and World War II. They grew up in a world where it was us and other democracies against the fascists and imperialists across the oceans. We had the white hats. They wore the black hats. The white hats won. It was all pretty clear.

I was born in 1955, square in the middle of the "baby boom" generation. We came of age during the Cold War and the Vietnam War. It was still pretty clear. There were 3 worlds: us with the white hats, the communists with the black hats, and the "third world" that we and the communists fought over. The Vietnam War was America's first experience with a conflict that arguably did not result in the defeat of the opposition, which spoiled our air of invincibility. But, our objective for the Cold War, as Ronald Reagan famously described, was, "We win. They lose". And, that is what happened. Also pretty clear.

After the Cold War came the "peace dividend" and a hope, if not an expectation, that there were no more black hats left. We could enter a time of harmony in which the weapons and armies of the past would become unnecessary. But, it was only 9 months after the Berlin Wall fell that we were at war in the Persian Gulf. The attacks of 9/11 would come a decade after that.

There are very few things that are less "black and white" then diplomacy and foreign relations. But, my generation and the generations before us became accustomed to such clarity during the conflicts to defeat fascism and communism. And, since there is no single great military power out there wearing a similar black hat, many Americans think that the threats in the world are minor or distant and of little concern. That complacency is misplaced.

There is a tremendous amount of instability in the world. The potentials for conflicts, especially of an irregular and unconventional nature, are great. And, it is not always clear who is wearing a white hat, a black hat or perhaps a grey or blue one.

Obviously, there is massive unrest in the Middle East rooted in a complex web of causes. But, the Obama administration, falling back on the black and white hat foreign policy, has determined that the existing tyrants were bad and that whatever government replaced them would be good. This is clearly wrong. The execution of our Ambassador and 3 others in the country that our military helped "liberate" from Gaddafi shows that conditions there may now be worse rather than better as a consequence of our intervention. Syria is even more complex. Here again, the mainstream press and the Obama folks would have you believe that all ills can be cured by the elimination of Assad, which will supposedly bring flowers and happiness to this country. This is flawed thinking. Al-Qaeda appears to be running the "rebel" operation now. The Russians have a lot of national pride and security interest in their deep water port there. The Turks have a keen interest in the stability of their neighbors and the Syrian unrest is causing them a myriad of problems. Is the "Arab Spring" becoming a situation where one dictator gets replaced by another who is every bit as brutal but rules under the guise of “democracy”? Despite the Administration and the mainstream press' attempt to attribute the murder of Ambassador Stevens to a 6-month old, little known YouTube video, it is now pretty clear that this was a well-planned and orchestrated attack that used the video as an excuse to incite public support in the Islamic world for their already planned actions. The Middle East is becoming more unstable and more hostile since the "Arab Spring", not less. Of late, the US has exhibited weakness and indecision around the globe. And, as a result, we have created more rifts with the Russians, Turks and Israelis. As I have made abundantly clear, this is difficult stuff to deal with at the strategic level. But, it is equally clear that this Administration's foreign policy has failed miserably in this part of the world. And, I haven't even talked about Iran or the disaster in Afghanistan.

However, that is not the world's only hot spot. People in China are calling for death to all Japanese as a result of conflicts of the ownership of islands in the China Sea. China is having economic problems. That is well known. But, they have political ones, as well. We in the west tend to assume that communist countries have no political issues because they are....well....communist. But, communists have been killing each other for the last century in order to capture the reins of power from other communists. (Remember Stalin's purge in 1938?) In much the same way, China has succession issues which could result in serious violence and instability there. And, of course, there are the long-standing conflicts between China and Taiwan, North and South Korea, and we should not assume that age-old issues between China and Russia are all warm and fuzzy now.

India and Pakistan have been on the verge of war for decades and both have nuclear weapons. Indonesia has its own Islamic Extremist elements that threaten stability there. It seems we pay little attention in this country to the multiple conflicts and tyrants in sub-Saharan Africa, but they are there and many, many people are dying.

Even Europe is not quiet these days. The Euro and the EU were part economic union and part an attempt for countries that had been at war with one another for centuries to bind themselves so close together that they would never want to fight again. But, as the Euro strains, nationalist tendencies are rising again in Europe.  If the Euro breaks up, the flames nationalism could be fed again. If it stays together, there could be social unrest if the populace of one part of the continent rebels against another part that they believe is causing their economic depression. Is conflict or unrest in Europe imminent? No. Is it possible? Yes.

History does not repeat itself. But, there are historical echoes. Prior to World War I, there were not black or white hats per se. There were a couple of democracies and a lot of monarchies, many of whom had family ties. The British Empire, upon which the sun never set, had kept a hand on things in the 19th century since the defeat of Napoleon. But, British influence and control weakened. And, in 1914, the assassination of a single Archduke led to a war that would claim the lives of over 15 million people. The alliances of the past were all jumbled up. The British, who had been at war constantly with the French since 1066, became their allies. The US, which had been enemies of the British but friends of the French and the Germans, ended up siding with British and French.

This is not 1914 or anything close to that. But, I bring up this example to show how alliances and black hats and white hats can and do change over time. The world, in my opinion, is heading into a very turbulent and uncertain period. We cannot apply the simple “us vs. them” foreign policy strategy of the cold war. We cannot police the world. But, an unquestionably strong United States, respected by many and feared by the rest, is the best insurance policy we can have. How, where, when and why we use that power is not simple and is a matter for debate. But, we need to have that debate!

What is clear is that this President has failed in this arena, and the media will not cover it. Do you remember how the media was all over how we were hated and disrespected around the world as a result of President Bush's foreign policy errors? Well, we are more hated and more disrespected now. Is that somehow Bush's fault, too? Maybe it’s Nixon's fault?

I don't have all the answers. But, what we are doing is not working and we need to change it. We should be looking at all of this through a different prism than used in the recent past. We need to stand with our rock solid allies, such as the British and Israelis, and defend against radical Islam wherever it may rise. But, from this point there are many complicated cross-currents which we need to carefully navigate.

World War I was declared "the war to end all wars" by the generation that fought it. They were wrong. Let's not make a similar mistake.

   

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