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Monday, February 23, 2009

An Alternative Unofficial SOTU: 2009 Edition

President Obama is scheduled to deliver his first address to a joint session of Congress on February 24, 2009. Though not formally promoted as such, the speech will essentially be interpreted as a State of the Union report to Congress and the American people aimed at outlining efforts to be initiated in the coming months to address a litany of dire, vastly complicated and highly interrelated problems facing the country.

So what is the state of the union? A pretty frightening picture emerges from examining trends in just three key areas -- finance, housing and war.


Finance

The first major legislation enacted in the Obama Presidency committed $787 billion dollars over two years to stimulate the economy via spending on a variety of projects at the federal and state level and tax cuts for individuals and corporations. Ignoring the political debate over the need for a stimulus, the size of the stimulus or the nature (spending versus tax cuts) of the stimulus, the impact of the plan on the nation's larger fiscal balance sheet has gone largely unanalyzed.

According to a July 2008 estimate, the Federal deficit for fiscal 2009 (October 2008 through September 2009) was forecasted to be around $482 billion dollars. (#1) Kinda makes you nostalgic, doesn't it? A mere $482 billion. Since those rosy days of July 2008, the following items have been tacked on the nation's credit card:

* $80 billion dollars for Iraq and Afghanistan (only 6 months of war spending was included in the July 2008 estimate)
* $700 billion for the October TARP bailout, half of which is already spent and the other half likely to be spent in the next few months
* $15 billion dollars for immediate cash flow relief to Ford, GM and Chrysler
* $393 for the first half of the two year spending of the $787 stimulus package

That puts the 2009 Federal deficit at $1.67 trillion dollars and the total national debt at $12.47 trillion dollars and doesn't include the cost of the next round of automotive bailouts for Detroit, a mortgage relief bailout for consumers or the next round of bailouts for major banks.

The REAL picture on that debt emerges after a quick review of interest rates on US Treasuries in 2008 and 2009 (see #2 and #3). Interest rates on 30-year T-bills have varied from 2.69 to 4.77 percent and are currently sitting at 3.56 percent. Interest rates on 1-year T-bills have varied from 0.34 percent to 3.17 percent and are currently sitting at 0.64 percent. Short term rates were driven lower in part due to a flight to (relative) safety as investors attempted to sell out of a falling stock market and find a safe place to put their cash.

What's the true cost of this borrowing? For 2008, interest payments on the national debt were $412 billion, nearly a third of the yearly budget. That's an effective interest rate of about 3.8 percent which implies most of the debt has been shifted back to longer term Treasuries since the 30-year bond was re-introduced in 2006. The extra $1.67 trillion (and counting…) in spending will add another $59.4 billion in interest payments for a single year.

A more enlightening picture emerges looking at debt as a percentage of Gross Domestic Product, as show in the graph at Wikipedia. (see #4) In that graph, the 1970s marked the low point of debt as a share of GDP. Ah, the 70s. Weren't those the bad old days of stagflation, oil shocks and high unemployment? For over a quarter century, we've been told that low-tax, pro-business policies were the solution that jolted us out of that funk. The graph of debt as a function of GDP would appear to clarify exactly where the solution came from -- our children's pockets. Only now, it's becoming apparent that solution produced a great deal of phantom growth, in the form of fictitious "financial sector" profits which have been completely erased by the losses over the past two years and an asset bubble in real estate that's destroyed the equity of probably 10 to 15 percent of all homeowners in the country. If the value of that phantom portion of GDP was erased, the percentage of debt as a function of REAL GDP would be skyrocketing even faster.

Finally, there is absolutely zero assurance that American's megabanks will behave predictably and wait to collapse until Congress and the President have time to haggle over a coherent, rational strategy for properly recapitalizing those in trouble. In fact, between February 20 and 22, the US dollar dropped five percent against most currencies over rumors Citi was privately asking the Treasury to provide emergency injections of capital to avoid a collapse. (#5)

Without any exaggeration, the financial condition of the United States is in dire shape. Debt incurred over the past quarter century hasn't improved the competiveness of our manufacturing, hasn't maintained our roads, sewers, bridges and power grid, and encouraged highly speculative business models which have collapsed at the same time the consequences of our mis-investment have made us even more dependent upon the availability of continued credit.


Housing

The same day the 2009 stimulus plan was signed into law, an additional $50 billion dollar plan was proposed to reduce the number of foreclosures driving home prices down even further. Again, seeing the real picture behind the debates about the plan requires digging out a calculator and doing some basic math. Over 274,000 borrowers received foreclosure notices in January of 2009. (#6) Monthly foreclosures throughout 2008 were probably in the 220,000 range each month so that would reflect roughly 2.69 million mortgage defaults for the past 12 months. The $50 billion dollar plan amounts to $18,587 for each of those mortgages. That sounds like a significant amount but what if the economy worsens? If unemployment worsens and another one million jobs are lost triggering another one million foreclosures, the amount per mortgage drops to $13,550 or about one year of mortgage payments.

Analyzing the impact of the $50 billion program requires an attempt at answering two key questions:

1) for individual borrowers, what exactly is the core problem being faced and how big is it?
2) does a micro level solution provide any synergy to help our macro level problems?

For question #1, borrowers face at least one of two problems -- an interest rate jump on their loan that pushes their monthly payment beyond their means or a job loss or other major event that eliminates their ability to handle ANY mortgage amount. Assuming each loan is an average FHA mortgage of $175,000 (#7) with a 30 year term, the monthly payment with a 5% rate would be $939.44. For those facing a rate hike jumping from maybe 3% to current market rates, the monthly dollar jump might be about $240 per month.

A $50 billion dollar program clearly has the potential to keep current borrowers on the bubble of foreclosure from dumping their homes on an already depressed market -- for at least a few months. If the current economic downturn was going to only last 12 months and home prices could stabilize at current prices, we might have a winner. Unfortunately, a twelve month downturn is a long shot. Unemployment may continue to grow for 12 to 24 months and economic output may continue to decline for the same period. If that holds true, the program would only defer the inevitable for a larger portion of loans and continue to prop up home prices at unsustainable levels. At that point, more analysis of the macro impacts of the plan is required.

If a $50 billion program isn't the right answer to the foreclosure problem, maybe we're targeting the wrong problem. If the 3.69 million at-risk borrowers are 15 percent of the overall mortgage pool, that still means there are 20.91 million other homeowners who ARE able to keep their homes in the downturn. Curiously, those homeowners are the real problem. Why? Because they are smart enough to look at the current distorted market and avoid it until prices stabilize and they see neighbors' homes sell in less than nine months. Even families who can afford their current home, afford a new home, and afford to move are unlikely to risk a capital loss on their existing home, risk an additional loss on a new home by buying before the bottom and risk having to pay two mortgage payments while they wait for their existing home to sell.

Stated concisely, the problem is not a meltdown in 15 percent of the mortgage market, the problem is a complete freeze in the other 85 percent. It's worth stating explicitly this is NOT a "psychological" problem that exists merely in the heads of these qualified buyers. This reluctance is a sign of rational thought on their part in an otherwise broken market. The only thing that will return these buyers to the market is stabilization of home prices and a return to more normal velocity in home sales. Unit sales shouldn't return to 2005 levels but inventories should drop well below nine months for "regular" homeowners to consider getting back into the market.


War

We're still fighting two wars. After seven years of effort, more than $600 billion has been spent, more than 4903 American troops have been killed and it is becoming more difficult to answer a single question.

What are these wars really about?

The answer?

Nothing.

We are literally fighting wars about nothing. Afghanistan is a prime example. The country is landlocked with no beaches, ports or major rivers and the terrain is austere and mountainous, making travel difficult and modern farming virtually impossible. The climate doesn't make anyone's list of vacation resort hot spots. The culture is tribal, Islamic and famously hostile to all outside parties. Though it has some potentially valuable natural resources, the other elements mentioned previously have inhibited any serious attempt to begin leveraging those resources. As a result, modern nations have virtually no economic, cultural or political interest in engaging the country. It might as well disappear from the map.

What possible value could such a country be to anyone on the planet? Well, such countries are of great value to two particular types of groups which thrive in such vacuums --- drug dealers and terrorists. Wouldn't you know it, that's exactly what we have in Afghanistan. In fact, we have terrorists participating in opium production which makes up nearly a third of the country's economy to produce funds to aid terrorist activities. Call them narco-Islamic terrorists. A trifecta of trouble. Pashtun areas of Pakistan exhibit many of the same traits and threaten to topple an actual nuclear power

The former Soviet Union spent ten years fighting in Afghanistan and lost 14,453 troops attempting to combat forces using insurgent tactics with conventional tactics. Sadly, America has never been particularly adept at learning from the mistakes of others and the Soviet invasion of Afghanistan would have been a particularly valuable lesson to learn. The Soviet misadventure in Afghanistan was more than an object lesson in the danger of fighting insurgent forces in a desolate climate. It was also a lesson in military jujitsu and the defeat of an enemy by sucking them into a war they were not prepared to fight. What most Americans don’t know is that America actually played a lead role in sucking the Soviet Union into that war. Under a Presidential order, the CIA began conducting propaganda operations against the Communist puppet government months before the full Soviet invasion. (#8) The National Security team for President Carter viewed Afghanistan as a trap waiting to snap on the Soviet army. It did and played a major role in the final demise of the Soviet Union. Yet only twelve years after the Soviets lost and withdrew in 1989, America launched its own war in the same country trying to root out bad guys who actually got their start via American aid during the war against the Soviets.

We are at a crucial point in our battle against terrorism. It took three and a half years for the military to acknowledge we were losing in Iraq and using the wrong tactics. A better mix of tactics was used in Afghanistan but we still shorted troop levels and jeopardized the effort and drove the enemy into neighboring Pakistan, further destabilizing that country as well. We have burned out our military and have contributed over $600 billion to the country's debt load for absolutely zero perceptible benefit to date.


The Coming Social and Economic Ctl-Alt-Del

In prior posts, I've used the idea of an economic and social "Ctrl-Alt-Del" sequence being applied to correct some of the problems we face. The analogy is very apt. In many regards, the United States as an economy and a society is acting like a home computer riddled with viruses, spy-ware and other parasitic processes. We have a tremendously powerful society and economy with virtually unlimited potential yet flaws in our "operating system" are allowing parasitic processes to run inside the machine. For years, despite a few billion dollar glitches like Enron or Worldcom, enough of the system's behavior appeared normal and didn't trigger any major concerns. However, the effects of the parasitic processes have become so ingrained in the larger system, we have lost track of what "normal" is and have failed to realize the degree of impairment.

With computers, rebooting halts everything running in the machine, takes the system back to a known, clean starting point, then reloads the original operating system to allow normal functionality to return while programmers attempt to fix the code before similar inputs produce a similar lockup. Of course, like parasites in nature, many computer viruses poison this reboot process to ensure they get re-installed and remain running. Many of the parasites affecting our society and economy will attempt the very same thing, whether in the form of special tax favors, special regulatory exemptions or entitlements for "one-time" emergencies that somehow become permanent.

The arrival of a "Ctl-Alt-Del" is not really an "if" question at this point. The only question involves the nature of the changes that will result from the reboot. To avoid having the viruses and worms of our economy re-establish control over our rebooted society and economy, Americans need to be re-educated in some of the basic mechanics of a sound business, sound industry and sound regulatory environment. Perhaps the best way to start is for President Obama to create a calendar of topics for the next two months and dedicate a week to a single topic, ranging from personal and government finance, infrastructure, transportation, energy and taxation. Our problems weren't created by 535 people in Congress or 10,000 people on Wall Street. They were created by 300 million Americans, partly out of misplaced optimism but mostly out of ignorance or willful suspension of disbelief.

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

#1) http://www.npr.org/templates/story/story.php?storyId=93018389

#2) http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml

#3) http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_2008.shtml

#4) http://en.wikipedia.org/wiki/United_States_public_debt

#5) http://finance.yahoo.com/news/Govt-reportedly-mulls-taking-apf-14434394.html

#6) http://www.realclearmarkets.com/news/ap/finance_business/2009/Feb/12
/foreclosures_fall_from_dec_to_jan.html

#7) http://mortgagedataweb.blogspot.com/2009/01/fha-average-mortgage-amount-plateaus.html

#8) http://en.wikipedia.org/wiki/Soviet_war_in_Afghanistan

Monday, February 16, 2009

BOOK REVIEW: The Gamble

The Gamble - General David Petraeus and the American Military Adventure in Iraq, 2006-2008 -- Thomas E Ricks, 325 pages (394 pages with appendix, notes and index)

Along with COBRA II by Michael Gordon and Bernard Trainor (see #1), Thomas Ricks' previous book Fiasco provided a definitive analysis of the political and military planning of the Iraq War and the first two years of its execution. Both books came to the same inescapable conclusion that both the initial planning and execution of that plan were fatally flawed. After the publication of those books, the situation in Iraq worsened considerably, focusing public and political debate on the potential costs and benefits of what came to be called "the surge" strategy. Ricks' latest book The Gamble may prove to be not only the first but the definitive analysis of the surge phase of the Iraq War.

The book provides a well researched summary of the principles of counter-insurgency now most commonly associated with General David Petraeus and the evolution of that strategy from a successful but initially ignored "one-off" in a single territory of Iraq to a formal analytical project led by Patraeus in 2005 at Fort Leavenworth to finally the core of a new strategy for reducing violence within Iraq and providing sufficient stability for political processes within Iraq to institute a more lasting peace. In tracing the evolution of counter-insurgency techniques within the US military, Ricks reinforces concerns about the original thinking that led to the war. He also highlights what appear to be recurring problems of dysfunction and incoherence within the US military command structure that delayed recognition of the failure of the original tactics and interfered with adoption of better tactics. Most importantly, Ricks concludes with a sobering discussion of the continued disconnect between the expectations of American politicians and voters and the real state of the War in Iraq -- a war Ricks argues persuasively is nowhere NEAR a conclusion for Iraqis or Americans.

Counter-insurgency: In Theory and Practice

The Gamble does a great job summarizing the principles of counter-insurgency and tracing their use from one province early in the war to official US military strategy for the larger war. The narrative begins by using the events in Haditha in November of 2004 as a reflection of the larger state of the war and the troops fighting it. In Haditha, 24 Iraqis, mostly women and children, were killed by American troops in response to a roadside bomb that killed one American soldier. As Ricks states (page 5):

-------------------------------
What happened that day in Haditha was the disturbing but logical culmination of the shortsighted and misguided approach the U.S. military took in invading and occupying Iraq from 2003 through 2006. Protect yourself at all costs, focus on attacking the enemy, and treat the Iraqi civilians as the playing field on which the contest occurs.
-------------------------------

A few pages later, the impact of that mentality on the day to day conduct of troops in combat was summarized using statistics from an Army Surgeon General report covering 1,767 soldiers serving in combat (page 7):

* one third of respondents okayed torture if they thought it would provide information on insurgents
* more than one third approved of torture if they thought it would save the life of a fellow soldier
* two thirds of Marines responding would not report a fellow soldier for mistreatment of civilians
* half of Army troops responding would not report a fellow soldier for mistreatment of civilians
* ten percent of respondents acknowledged personally mistreating non-combatants

Counter-insurgency tactics turn those traditional tactics on their head. As later summarized by David Kilcullen, one member of the brain trust formed by Petraeus, the nutshell principles of counter-insurgency amount to the following (page 140):

* secure the people where they sleep
* never leave home without an Iraqi
* look beyond the IED -- get the network that placed it
* give the people justice and honor
* get out and walk -- patrol on foot

In contrast to traditional military tactics, these seem somewhat revolutionary but in reading the book's summary of the effort to reorient the military around those tactics, the delay in recognizing their value and implementing them seems puzzling. It's not like the American military lacked prior examples (good and bad) from which to learn. The French experience in Algiers in the 1950s is mentioned in the book, but we also have forty years of nightly news reports on failed Israeli attempts to control territory with traditional tactics of draconian blockades, nighttime raids and overwhelming force as well.

Perhaps the most concise contrast between the initial war strategy and the improved version that replaced it involved the initial focus on Forward Operating Bases (FOBs) and "commuting to the war" by getting in Humvees and driving to local communities to root out insurgents. Kilcullen and others documented huge drawbacks to this approach:

* more time spent in transit rather than protecting civilians
* soldiers appear in the open in groups in easily identified vehicles
* soldiers travel predictable routes in those vehicles at predictable times
* troops in vehicles are seen as faceless, transitory enemies rather than human partners

In other words, the "commuter war" produced no tangible ability to eliminate insurgents while magnifying the exposure of troops to their attacks.

The tactics formulated by Petraeus and his team kept more troops in the communities they were protecting, focused on establishing personal relationships with local leaders, reduced the vulnerability of civilians to insurgent retribution after cooperating with troops, and reduced casualties when troops were attacked by spreading them out. Of course, any American living near any major metropolitan area recognizes some of these tactics under a different name -- community policing. Counter-insurgency strategy is the military equivalent of encouraging police officers to live in the communities they protect, park their car outside at night for extra "presence", and walk the beat instead of driving around in Chevy Malibu cruisers isolated from the crack dealers and gang bangers they're supposed to be identifying and arresting.


A Dysfunctional Chain of Command

One of the most disconcerting aspects of the evolution of the Iraq war strategy is how it mirrors the broken mechanics of management in Corporate America -- nearly to the T.

A revolving door model for assignments and promotion among officers created an ineffective, inconsistent, "punch your ticket and get out" mentality among senior leaders. It not only interfered with local operations by preventing relationships from being maintained with local Iraqis, it perversely rewarded failures and failed to correct flawed patterns of decision making and implementation. Sound familiar?

The work to combine a counter-insurgency based approach with a temporary increase in troop levels was essentially outsourced to strategists associated with the American Enterprise Institute -- the same think tank that concocted the original war strategy -- to get the ball moving in December 2006, when the answers were already available within the military. Petraeus had spent nearly all of 2006 formalizing an official Army counter-insurgency manual, yet senior brass apparently felt the need to bring in "experts" to help sell the Joint Chiefs and the President on abandoning a strategy that had failed miserably for a strategy already proven to be successful in part of Iraq. In at least one instance, the surge team used information on remaining troop strength publicly viewable on the Internet to nail down the final timing of additional brigades, much like a consultant looking at your watch to tell you what time it is. Sound familiar?

The command model between the field commanders, the military infrastructure, the Joint Chiefs of Staff and the President amounts to a bizarre "matrix" style organization chart that introduces conflicting direction, allows personality conflicts and personal alliances to dominate clear, accountable communication and decision making while still leaving critical tactical and strategic analysis gaps. Sound familiar?

In the case of the Iraq war, the chain of command

* was selectively ignored during the original invasion planning,
* was completely ignored at times during the CPA post-war era (Bremer disbanding the army)
* ignored the need to change strategies for three years into a disastrous war
* promoted generals (Fallon) into positions who actively thwarted adoption of the new surge plan

Here are two stunning paragraphs about the relationship between General Petraeus and his boss, Admiral William Fallon who was put in charge of Central Command in March of 2007: (page 234)

-------------------------------
Petraeus generally was open during a series of interviews done for this book in 2007 and 2008, but the subject of his relationship with Fallon as one area where he not only grew closed-mouthed but testy. "Look, this isn't a soap opera," he snapped in January 2008, showing more anger than is his wont. "This is a a deadly serious endeavor and we talked about things in a deadly serious way, but not some great kind of emotion." He dismissed a rumor circulating at the time that Fallon had called him "chicken****." Among other things, he noted, he wouldn't stand for it. "It's bull****," he said, "If some ****ing guy told me that, I would walk out of the office. I'd say, 'Here, you got it, take over.'"

Fallon declined to be interviewed for this book. But in a previous interview with me in December 2007, he conceded that he might occasionally have stepped on subordinates' toes. "If you're trying to lead," he explained, "you're never going to have everyone wanting to do the same thing." Fallon never seemed to grasp that even though Petraeus was technically his subordinate, the general held all of the cards. As long as Petraeus, Odierno and Crocker held a united position, and Keane was in the background conveying their views to Cheney, they outweighed not just Fallon but the entire Joint Chiefs of Staff as well. As one of Petraeus' aides put it, "If there's a beauty contest between the chiefs, Fallon, Casey, and I don't know who else -- well, Petraeus wins."

-------------------------------

Political intrigue and a certain amount of back-biting are to be expected in any large organization but encountering this type of personality conflict and strategic disagreement at this point in the war constitutes a much larger problem within the military and its civilian superiors. At the time Fallon was put in charge of Central Command, thousands of Americans had died, hundreds of thousands of Iraqis had died, the war was going NOWHERE, and the President had formally staked the future of the war on a "surge" strategy and identified David Petraeus as the point man, Yet, at the same time, Central Command leadership changed from John Abizaid, who favored troop reductions as a method to reduce the "irritant factor" to William Fallon, who also didn't agree with the surge strategy publicly promoted by the President as our new, best hope for a turnaround in a major war. More disconcerting is that Fallon lasted a year in his role and his departure in March 2008 had nothing to do with his interference with the surge strategy. Instead, he was chased out after ill-advised comments that depicted him as the sole thinker keeping President Bush from pursuing an invasion of Iran were published in Esquire magazine. (see #2)


The Real Consequences of The Surge

Ricks ends the book with a comprehensive analysis of the immediate and long term impacts of the surge. Categorizing the surge as a success or failure is impossible without first nailing down a definitive goal for the surge, which, of course, no one has done. If the original stated goals of the war from 2003 are used as the benchmark, the surge has in no way produced a robust democracy and a country free of insurgent terrorists capable of defending its borders. If the pared down goal of creating a period of calm in which Iraqi political factions could come together and stabilize the economic and political balance between local, provincial and national government layers is used as the benchmark, the surge still comes up short of the mark. If the goal is reduced to a significant reduction in Iraqi deaths, American deaths and a brake on some of the factors that encourage participation in the insurgency, the surge has been an unqualified success.

During the first few months of the surge, Iraqi deaths declined but American troop losses actually went up as a more active presence attracted more attacks. However, the increased presence of American troops at the local level reduced the ability of insurgents to move about, driving up the amount of communication between insurgent groups, allowing that communication to be intercepted with new intelligence programs which allowed more of the insurgent network structure to be identified then eliminated. The down side of the reduction in Iraqi casualties is that part of the reason for the downturn was that much of the ethnic cleansing had already been completed by the time the surge began. Entire Sunni neighborhoods were systematically purged as Shi'ite militias operating between 2004 and 2006 gradually tightened the noose around Sunni neighborhoods, killing entire families or simply driving many to flee the country. Over two million Iraqis left the country in the first years of the war. Ricks makes a crucial point that as surge forces are redeployed out of Iraq, the first forces to be removed will likely be from the more "successful" areas of the country, potentially delaying recognition of the real damage to come from removing American troops from less stable areas. When millions of Iraqi Sunnis run out of money abroad and attempt to return to their homes, more sectarian violence is virtually guaranteed.

The counter-insurgency tactics adopted during the surge have also led many insurgent groups and militias to cooperate with American troops once they began seeing a continued presence in their communities. Prior to the surge, American forces would clear a town of insurgents and al Queda forces then leave it, allowing insurgents to immediately return and kill those who cooperated with Americans, drastically reducing cooperation the next time around. The counter-insurgency approach also gave more latitude to local American commanders to deal with insurgent groups and militias to gain cooperation and share local policing duties. Ricks notes many success stories in which former insurgents have been converted into well-disciplined, highly effective forces. Sounds great, right?

Maybe not. The nature of those deals and the long term loyalty of those forces to a unified, national force have raised serious questions in the minds of virtually everyone within the US military as well as the Iraqis. Ricks' book has attracted media attention in part due to his analysis of formal programs established by local American commanders to pay former insurgents and militia members for their services in local forces. Interrogations of militia and al Qaeda members found very few had any religious or philosophical motivation for their participation. Sheer survival for their families was the driving factor. American commanders came to the conclusion that paying Iraqis $300 per month to work for local security teams beats having them work for the opposition and planning roadside bombs. These programs were instituted without any direct approval from senior civil or military American command and without consultation with the Iraqi national government.

The problem with the payments is that they cannot ensure continued cooperation after the payments stop and / or Americans leave the local scene. American commanders are in fact worried that local militia members may be simply taking the cash, taking the training and improved weapons and preparing for the time when Americans leave, at which point prior sectarian battles will immediately return with a higher degree of lethality. Leaders in the Shi'ite dominated national government are deathly afraid these deals at the local level with Sunnis or tribes hostile to the national government are strengthening forces which will attack the national government once American force levels dwindle to the point the national government must stand on its own. In other words, the payments may be producing a false calm before a much more intense civil war once American forces back out.

It Ain't Over

As Ricks wraps up The Gamble, he summarizes the political deadlock between Republicans and Democrats over the original surge strategy and subsequent discussions of troop levels and withdrawal timelines. The net analysis is that virtually no authorities on the subject from any political persuasion believe American troops can be precipitously removed from Iraq in two or three years. In fact, many experts foresee a presence of 30,000 to 50,000 troops in Iraq for ten to twenty years. The current deployment of 130,000 troops is costing America nearly $343 million per day or $10.3 billion per month or $123 billion per year. So far, over $597 billion has been spent. (#3) A continued presence of 30,000 might cost $28 billion per year. That could mean another $280 billion to $560 billion under the best of scenarios.

And not a single person on the planet can describe a plan to bring the Iraqis together to solve the real problems of the country while we burn another $280 to $560 billion and sentence another generation of our military to getting shot at in the desert.

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

#1) http://watchingtheherd.blogspot.com/2006/05/book-review-cobra-ii.html

#2) http://www.esquire.com/features/fox-fallon

#3) http://www.nationalpriorities.org/costofwar_home

Sunday, February 01, 2009

Entitlement in the Upper Echelons

January 30, 2009 provided two examples of the core problem facing any effort to turn around the American economy and fix the mechanisms that produced the problems in the first place. One event involved the disclosure of a payment of over $140,000 in back taxes owed by Tom Daschle, the nominee for Secretary of Health and Human Services. The other event was an appearance by former General Electric CEO Jack Welch on Charlie Rose and a comment he made about bonus payouts on Wall Street amidst hundreds of billions in losses. The problem? These events epitomize the complete disconnect between the world of privilege and entitlement perceived by leaders in government and big business and the real world of mistakes and consequences in which the rest of us live.

In the case of Daschle, after his nomination to become HHS Secretary became public on November 19, 2008, the former Democratic Senator apparently felt a slight twinge of guilt regarding roughly $140,000 in taxes he owed, but in fact did not pay, for use of a car and driver provided to him by InterMedia, a private equity firm which employed him as chair of its advisory board. (#1) The back taxes were actually paid on January 2, 2009 but news of the payments and underlying "mistake" only became public on January 30.

Stop and think about the magnitude of this "mistake." In a situation involving the failure to pay over $140,000 dollars in taxes, the $140,000 dollar amount isn't the real number to be concerned about. To owe $140,000 dollars in TAXES, a much LARGER amount of INCOME on which the tax is owed is involved. Daschle's marginal tax rate should be 35 percent so the $140,000 oversight involved over $400,000 of taxable income over the tax years involved. From the most cynical perspective, are American voters and taxpayers really expected to believe someone capable of becoming Senate Majority Leader and a member of the Senate Finance AND Ethics Committees somehow overlooked $400,000 of income? How much income do you have to be earning for $400,000 of income to be so incidental you fail to remember it for three straight years of tax returns?

More interestingly, remember that Daschle paid the back taxes the minute he knew the spotlight was going to shine on his dealings during the confirmation process. That means he didn't really 'forget" the income, he just thought the processes by which the car/driver benefit could be tied to his taxpayer ID were loose enough that under normal IRS operations and capabilities, the connection would never be made to force payment of the additional tax. Once he was nominated, he knew more manual efforts to identify all employers and benefits provided to him would be undertaken and turn up the extra taxable benny. Quite an example of ethical and moral leadership there.

Even if one attempts to give Daschle the benefit of the doubt and one assumes he didn't realize the value of having a personal valet and car pick him up and schlep him about town constituted taxable income, is that really any better of an excuse? What sense of reality is a person who thinks it's normal to have a car service provided free of charge going to bring to the management of health care in the United States? President Obama and numerous Daschle supporters continue to state Daschle provides some sort of unique, singular insight into the health care crises facing the country and his appointment to lead HHS shouldn't be derailed by a little detail like a $140,000 mistake on his income taxes. If he can't handle one "little" detail like $140,000 in his own legal tax obligation, what kind of trillion dollar detail might he overlook crafting some new healthcare policy?

Daschle should be dumped on the curb of K Street immediately. Find someone else to run HSS. No questions asked.

In the case of Welch, he appeared on Charlie Rose on January 30, 2009 for a round table discussion of the current economic crisis with economist Martin Feldstein, New York Times columnist David Leonhardt and Senator Chuck Schumer. He was asked about the seeming hypocrisy of paying billions in bonuses to the senior management of firms which not only lost billions of dollars but lost so many billions of dollars they required hundreds of billions of dollars of taxpayer money to even survive.

His response?

Unfortunately, the interview is not yet posted on the Charlie Rose website to obtain an exact transcript but he basically said this:

Look, I operate a private equity firm and I understand you have to pay for talent. If you can't pay your top talent, they're going to leave and you'll be stuck trying to run the company with all the bums working in the carcass.

(The part in bold is a direct quote.)

Wow. Quite a motivational speaker, that Jack Welch. Is he really saying that all the people working in giant American corporations who AREN'T pulling in $2 to $10 million in salary are "bums" and if not for the brilliance and wisdom of those that ARE pulling in $2 to $10 million, those companies would be worthless without them? Go back and read his comment. That's EXACTLY what he said. The rest of us are losers and suckers, lucky to even HAVE a job working in the engine room while the geniuses on the mahogany bridge set a course for the nearest iceberg, loot the company during the clear sailing then commandeer all the lifeboats.

The world Tom Daschle and Jack Welch inhabit is a great place. Make a $140,000 mistake on your tax return over the course of three filings and not only do you simply get to just pay the back tax plus some interest and NOT have to worry about going to jail, you actually stay in the running for a Cabinet post at the very top of government. Devise and implement fraudulent banking and investment strategies which inflate earnings that produce outsized salaries and bonuses during the buildup to a collapse, then get the public to bail out your firm during the collapse AND use some of the bailout money to pay "combat pay" to encourage the people who produced the disaster to stick around and do more damage.

Nice work if you can get it.

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#1) http://www.nytimes.com/2009/01/31/us/politics/31daschle.html