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Monday, January 22, 2007

An Alternative SOTU: 2007 Edition

It's State of the Union season in America again -- the time each year in which a constitutional obligation of the President to report on the basic health and operation of our government is used instead to distract us from chronic problems often created BY our government by promising us long lists of new solutions paid for by other people's money (the best kind of money). The ritual calls for multiple references to wildly controversial goals such as "more jobs", "safer streets", "a brighter future for our children", etc. The only absolute requirement of the ritual is that the President conclude the state of the Union is sound.

Well, maybe sound asleep.

Here's an attempt by one humble citizen to summarize an alternate perspective on the State of the Union in 2007. Forgive me if this seems little changed from the 2006 version, but many important problems remain.


NATIONAL SECURITY

The wars in Iraq and Afghanistan have failed to destroy Al Qaeda and the Taliban, have failed to produce environments which can withstand attacks on their democratic governments without American help, and have produced additional sectarian tensions which have the potential to widen the conflict and put American "allies" in different corners of the fight.

How damaging have the wars in Iraq and Afghanistan and the policies for replenishment been to our military? Think of our readiness as a spreadsheet tracking the readiness at the beginning of a year, the "spend" on actual military operations and the "buy" of replacement gear / troops. Next year's readiness is

readiness 2007 = (readiness 2006) - (spend 2006) + (buy 2006)

America's longstanding policy has been to maintain military troops and equipment that allow two separate wars on two separate fronts to be fought simultaneously. Okay, that's "2.0". For the purposes of those "planning" wars, Iraq certainly counts as one solid war. Given that Iraq turned out to be much more expensive than the Pentagon expected, let's call it about 1.2 "wars". However, our troop and equipment commitment in Afghanistan only registers "0.21" on that scale (24,000 troops in Afghanistan versus 140,000 in Iraq) (#1). That puts our "spend" at "1.41" per year. So how much new equipment are we buying to replace the equipment used up each year? Judging from comments by state governors and National Guard units, it seems clear the Pentagon is failing to replenish the gear brought to the war by Guard units. (#2) The number of batallions serving two and three tours of duty in Iraq and the redeployment of troops from Afghanistan to Iraq to staff the surge (#3) seems to make it pretty clear the "buy" figures are not keeping up with the "spend" either within the core military.

How big is the shortfall? One estimate for the total spending on the war through March 2007 at roughly $400 billion (#4) However, current estimates from the Army, Marines and National Guard put their "reset costs" at $17 billion, $12 billion and a whopping $23 billion -- $52 billion total. Those are not external estimates -- those are figures being requested BY those military branches. (#5) That puts the cumulative "buy" at $400 / $452 or 88 percent of "spend." or 1.24 for one year.

If you plug in those numbers into a crude yearly spreadsheet using the previous formula, you get something like the following estimate of our current readiness:

Readiness Burn Replace
April 2003: 2.0 1.41 1.24
April 2004: 1.83 1.41 1.24
April 2005: 1.66 1.41 1.24
April 2006: 1.49 1.41 1.24
April 2007: 1.32 1.41 1.24
April 2008: 1.15 1.41 1.24
April 2009: 0.98 1.41 1.24



In words, the above "spreadsheet" means by the time the next President takes office, the capability of our military will have been eroded to the point we can barely sustain a one-front war. Of course, this assumes we don't open any other fronts between now and then. That's not a good assumption.

Despite the peril posed to our military readiness, the Bush Administration is actively increasing the likelihood of additional military commitments by saber rattling towards Iran and Syria and actual military actions in Somalia. Details on the actual results of the Somalia attack are fuzzy. An anonymous US official stated on January 9, 2007 that the attack killed five to ten Al Qaeda targets working out of southern Somalia. Comments from the Ethiopian President indicated one of the targets killed was Fazul Abdullah Mohammed who planned the 1998 embassy bombings in Kenya and Tanzania while officials in Washington stated they had no information Fazul was eliminated. (#6)

Confused? Any attempt to identify Al Qaeda terrorists and eliminate them is an admirable goal. However, if we cannot accurately confirm what an attack accomplished ten days afterwards, it seems highly doubtful we can obtain enough actionable intelligence before an attack for a successful "surgical strike." Of course, the area involves a multitude of long-standing tribal and sectarian battles involving Christians and Muslims so any chaos we help expand with our geopolitical tinkering will fit in fabulously with the rest of our portfolio.


THE ECONOMY - MACRO VIEW

On the surface, the American economy in aggregate did relatively well in 2006. Approximately 2 million jobs were added and unemployment as reported by the government declined from 4.9% to 4.5%. (#7) The Dow Jones Industrial Average closed up 16.3%, the NASDAQ up 9.5% and the Standard & Poor's 500 up a whopping 26.4%. (#8)

On the negative side, troubling statistics remain. The final estimate for the 2006 budget deficit was $248 billion, down from the $290 billion estimated only three months earlier. (#9) However, the previous discussion about "reset costs" in the military is just one example of how the deficit has been artificially lowered below "true" figures beyond the normal Washington smoke and mirrors. The American trade deficit continued to rise to staggering levels and likely exceeded $717 billion for 2006, despite a vastly weaker dollar against most currencies which is supposed to make American goods more affordable overseas. (#10) Over $1.2 trillion dollars in US debt is held by just three countries ($637 billion by Japan, $346 billion by China and $224 billion by Britain). Interestingly, Japan's holdings have been declining during 2006, while China and Britain pick up the slack. (#11)

Attempting to predict exactly what the economy will do and when it will do it is futile. However, a quick review of write-ups on macro trends by investment firms is highly educational. A good example is the 2007 outlook published by Deloitte (#12) which highlights the following items:

* China's overall national savings rate is a staggering 50% of GDP
* China's consumer spending is only about 41% of GDP
* China's internal banking mechanisms are state owned and not terribly efficient
* Japan's aging population is beginning to increase spending rather than saving

These findings imply that two of our biggest creditors may likely begin spending vastly larger amounts of money internally rather than buying US debt in the coming years. In the case of China, an overheating economy operating with state run banks which may be carrying larger amounts of local bad debt than is reflected in their books could drastically slow down their economy, reducing their ability to absorb our debt. Our economy is dependent on low interest rates to allow our consumer-debt culture to thrive. That environment will vanish if interest rates rise to counteract a drop in demand for US treasuries at current rates.


THE ECONOMY - MICRO VIEW

The microeconomic view of the American economy looks vastly different than the macro view. A graph available on the website of the St. Louis Federal Reserve Bank shows the personal savings rate for Americans remained below 0% for the past two years, ending 2006 around minus one percent. (#13) If a negative savings rate means Americans are digging the hole deeper, the problem becomes much more frightening after considering the depth of the hole the average American has dug. While impossible to break down to the individual level, in aggregate, total household personal debt (not including each household's share of government debt) is at 130.9 percent of household disposable income. (#14)

The good news is that withdrawals from consumer home equity lines of credit slowed by $300 billion recently. The bad news is the change appears to be due to homeowners re-financing their original mortgages to take advantage of 30-year rates that are below the prime rates that drive most home equity loans. The worse news is that as consumers refinance, they are borrowing even more with the new loan -- an average of 5% more than the prior mortgage. (#15)

Cynics will argue that Americans are dependent upon borrowing to fund a lifestyle of plasma TVs, McMansions with 3-car garages and $40,000 SUVs in each stall and therefore, Americans can back away from this excess if things really went south. No big woop. The problem is that the current anemic employment growth levels are only being supported by this dangerous deficit spending. Cut off the deficit spending at the household level and job growth will vanish.


OUR DEMOCRACY

In the 2006 version of the alternative State of the Union report, I identified the following grains of sand in the figurative transmission of our democracy:

  • government agencies that are distorting / withholding information owed to the public about matters of public policy

  • government officials who have been outright purchased by special interests

  • election processes that have produced material questions of fraud in pivotal states in two consecutive Presidential elections in favor of the same candidate



Suppressing Science

In 2006, there were numerous additional reports of consistent efforts to alter or suppress government research that conflicted with official policies:

* the National Science Board formally cited concerns about suppression / distortion of government research (#16)
* mandatory screening of all public documents issued by the USGS (#17)
* Administration suppresses scientific recommendation on endangered Arizona bald eagle (#18)

The effort to suppress research findings about global climate change is indicative of the head-in-the-sand approach of the Bush administration. On January 22, 2007, just one day before the State of the Union address, a collection of 10 large multinational firms formally issued a "Call for Action" requesting a government imposed framework of emission credits. The credit concept allows firms across a variety of industries to trade the credits on an open market so that firms and industries able to most efficiently achieve emission reductions can sell their credits to other firms so the next incremental dollar spent on emission reductions goes to the entity able to make the biggest reduction/cost improvement.

This plan will likely be blasted by hard-core environmentalists due to the concept of pollution as some sort of market "right" but there ARE sound public policy arguments for allowing market mechanisms to speed the process. What's fascinating about the proposal, besides the timing, is that NONE of the corporations involved with the proposal question the impact of carbon emissions on the climate. It appears the Bush Administration EPA is the only organization with lingering doubts about global climate change.

Political Corruption

2006 was not a good year to be a corrupt politician (thank goodness).

* Rep. William Jefferson (D-LA) arrested after being videotaped accepting $100k in cash
* Rep. Bob Ney (R-OH) pleads guilty to corruption charges related to Jack Abramhoff
* Rep. Tom Delay (R-TX) resigns after being indicted for PAC money related issues
* Rep. Bob Cunningham (R-CA) convicted for accepting $2.4 million in bribes
* Rep. Mark Foley (R-FL) resigns over allegations of multiple inappropriate text messages to House pages

While these arrests, indictments and convictions couldn't have happened to a more deserving collection of the political class, virtually nothing has been done to break the cycle of fundraising and influence peddling that originates most of this behavior. The new Democratically controlled House made an initial attempt at ethics reform (an interesting oxymoron -- how do you "reform" ethics? -- you have them or you don't) but it appears the moment has been lost. Half the Senate has already announced their candidacy for President in 2008 and the other half is still mulling it over so there will be little time for serious debate on campaign finance improvements that can cure Washington's biggest disease.

Improving Election Processes

The 2006 mid-term elections ended with only two or three close Senate races (Virginia, Tennesse and Missouri), that had national impacts and few allegations of electoral oddities arose in those races. A common rhetorical question posed by conservatives after the 2006 elections was "OK, liberals, why no uproar THIS year about electronic voting fraud?", implying no one cares about faulty voting systems as long as Republican candidates lose.

WRONG. I have confidence the results of the 2006 mid-terms DID reflect the voting public's intent in the voting booth but only because the margins of actual intent were significantly larger than the margin of error (unintended or otherwise) possible in the new systems. Another situation with closer 50.9 / 49.1 margins will still produce the same doubt. Americans still deserve a more rigorous review of the machines being sold to count the votes to ensure they are not only fool-proof but hacker-proof as well. (#19) (#20)

The War In / On / Over Iraq

The year 2007 could pose the most interesting test of our democratic system since Watergate or the Great Depression. The actual war in Iraq is not only going poorly, it is going nowhere. There is no viable strategy for systematically engaging the actual terrorist enemy to eliminate them directly so we are essentially stationing soldiers in harm's way to draw fire then try to shoot where the bullets and bombs come from. Quite a tactic there. Political and sectarian divisions within Iraq are preventing any compromise that can move the country forward as a unit so the factions are choosing what's familiar --- distrust and violent revenge. At the same time, the Bush Administration seems bent on finding every opportunity to assign blame for the lack of progress on the Maliki government -- essentially declaring war on the ruling coalition we claim to be supporting. All of this is leading to a war over Iraq between the Bush Administration and, well, just about everyone.

After the mid-term election, George Bush conducted his own two month "not listening tour" of commanders in Iraq, Pentagon staff, State Department staff, Congressional members and our allies. He had to rotate out two more top commanders in Iraq to find a replacement who believed a few more troops are capable of resurrecting a success from a failure with a three-year head start. The real battlefront isn't in Baghdad, however.

The real battlefield is in Washington, DC. On one side, we have a President claiming his powers as Commander in Chief give him the right to commit additional forces to widen a war in order to win it. On another side, we have a Congress which failed to perform adequate due diligence before the war, failed to perform its oversight role throughout the war, and is now still reluctant to actively exercise the power of the purse to check the decision making of a President with a virtually perfect record of incompetence in all matters military.

On the third side of the battlefield sits the American public. Watching? Or sound asleep?


=======================

#1) http://www.csmonitor.com/2006/1220/p01s02-usmi.html

#2) http://www.nytimes.com/2006/02/27/politics/27govs.html?ex=1298696400&en=a7ec19fa9b989f54&ei=5088&partner=rssnyt&emc=rss

#3) http://www.baltimoresun.com/news/nationworld/bal-te.afghanistan07jan07,0,3288686.story?page=1&coll=bal-attack-headlines

#4) http://www.msnbc.msn.com/id/11880954/

#5) http://www.spacewar.com/reports/US_Department_Of_Defense_In_Cash_Crunch
_999.html

#6) http://www.usatoday.com/news/world/2007-01-10-somalia-airstrikes_x.htm

#7) http://www.latimes.com/business/la-ex-jobs5jan06,0,3356027.story

#8) http://www.usatoday.com/money/markets/us/2006-12-29-stocks-year-end_x.htm

#9) http://www.cbpp.org/10-11-06bud.htm

#10) http://news.yahoo.com/s/afp/20070110/ts_alt_afp/useconomytrade_070110182222

#11) http://www.ustreas.gov/tic/mfh.txt

#12) http://www.deloitte.com/dtt/cda/doc/content/dtt_GlobEcon07_091506.pdf

#13) http://research.stlouisfed.org/fred2/series/PSAVERT/Custom?cs=Medium&crb=on&cf=lin&cosd=2000-01-01&coed=2006-11-01&seid2=+%3CEnter+Series+ID%3E&cg=Go

#14) http://www.americanprogress.org/issues/2006/12/economic_review.html

#15) http://www.marketwatch.com/news/story/more-homeowners-refinancing-tap-equity/story.aspx?guid=%7B2F12B44C-5425-43BD-8C4E-BA15232901E9%7D

#16) http://www.nsf.gov/nsb/meetings/2006/0509/major_actions.pdf

#17) http://www.msnbc.msn.com/id/16193443/

#18) http://www.ewire.com/display.cfm/Wire_ID/3596

#19) http://www.msnbc.msn.com/id/14825465/
#20) http://www.theregister.com/2006/05/14/diebold_e-voting_flaw/