Baseball only for Red Sox Fans

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On this morning’s drive in, radio said Big Papi is looking to NY Yankees, is tired of the “drama” in Boston.  Is that a plausible excuse for jumping for the money?  Is it better than Roger’s?  How about Damon’s?  It is of course bullshit but is it good bullshit?

You know the other side of all this is a growing belief that tickets should not be bought at all.  I know, I know, I have waxed eloquent about how in the Spring men cannot resist the call of the green viewed through the ramp when you first enter the ballpark, but this is Fall, heading for Winter, so I am not there yet.  If you think about the team without Pap, Tek, Wake, Papi, a  questionable Scutaro, maybe Beckett, Bard as no real closer’s closer, Crawdaddy feeling even more pressure, looks like a solid lock on third place.

BTW, remember how careful the team was to relieve the players, platoon them, not over-work the pitchers, so there would be general gas in the tank for the year-end?  I thought Francona was really smart in that way and what did it get us?  Not sure it mattered one way or another, but perhaps it backfired?  The winning teams I think (need data here) just played balls to the wall all year.  Like a good race horse, you don’t run a loose race, it ruins the animal who always should be looking straight ahead.  That’s what blinders and whips are for.

Plus you just cannot get comfortable in rooting for a team when its key elements go out the revolving door all the time.  Remember when you could recite from memory the starting line-up of most teams?  More important than where you finish is, how do you feel spending $500 to take your family to the ballpark?  You should not feel angry.  Right now I have this floating anger.

Morning headlines: our sainted teen-aged General Manager likely is going to Chicago.  Radio says he will be promoted to President, etc. and get $15M for five years.  The same guy who John Henry is quietly firing ala Francona (you’re fired, now go out to the microphone and say you quit).  The same guy who brought us the much criticised 2011 Red Sox!  Either the Cubs are nuts to hire this loser or the baloney in the press about the Red Sox dream team being garbage is simply space filler for the Globe.  I vote the latter; we lost, we won lots of games, we lost two starters, we had a team of overpaid, immature morons (like every baseball team), so what’s new?  What GM can hire or predict team cohesion and hunger?  My only wish is that Theo takes Crawford with him as a doorstop.

Playoff games last night were really fun.  Good to see some other teams show their grit.  These guys want it bad, you can tell.  My partners from the hinterlands (not NY, not Boston, not Philly) are emailing about how good this is for fans and baseball, albeit not for Fox TV.  Likely Fox will be mildly surprised by how much TV attendance they will get for the Series, they will get my attention regardless of who is playing from among these four survivors.  I have respect for teams that act like teams.  But no doubt the Series loser, whoever it is, will be skewered in a tell-all mega-press article about how they hated each other really and further how they never washed out their jocks after an extra-inning game.

I see deja-vu.

OR, as in the children’s rhyme:

I see London, I see France,

I see Papi’s ————-.

Shareholder nomination of public company directors

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There seems to be some confusion about what has happened to the movement to compel public companies to place shareholder nominees on the ballot for directorships.  Let me try to sort out the state of play:

1. Federal nomination rule defeated: The SEC adopted Federal Rules to compel companies to place nominees of certain shareholders on the ballot.  The National Chamber of Commerce and the Business Roundtable sued and successfully sank this proposal; the SEC gave up.

2. Companies themselves may elect to permit shareholder nominations:  A proposal to amend SEC Rule 14a-(1)(8) to permit a company to itself adopt a bylaw controlling shareholder rights to nominate directors was not objected to and has become effective as of September 20, 2011.  This Rule permits what is known as “private ordering;” a company can permit, or not permit, shareholder nominations and can define the conditions of those nominations.

3. Effect: What that means is that shareholders as a first step can compel a company to place in its proxy statement a proposal to set the terms for shareholder nominations.  This does NOT mean that now a shareholder can make a nomination and compel proxy inclusion of that nominee; that is the very thing that the rejected SEC rule calling for Federal nomination procedures attempted to achieve.

4. What can we expect?

5. Anticipated shareholder actions:  Activist shareholders, such as pension funds or aggressive hedge funds, my offer proposals for establishing a methodology to permit future shareholder nominations.  Companies with poor performance, or already under attack on other grounds, can expect an assault of this type during the coming proxy season (2012).  Such proposals must be made prior to the company’s regular cut-off date for submission of proxy proposals by shareholders; figure four months before the anniversary of  last year’s solicitation date.   That means the November-December time frame for most calendar year-end companies.

6. Possible pre-emptive board actions?:  Boards may choose to be pro-active in one of two ways.  A Board can itself forthwith amend its bylaws to provide a board-favored methodology for permitting nominations, stealing the thunder of any possible shareholder proposal.  If a company proposes a plausible methodology, then a shareholder will have to argue that ITS proposal is better; a weaker stockholder position.   Alternately, a well-run company with a confident board may try to seize the high ground by announcing that corporate success is the result of the company’s excellent board succession processes and that the board will not recommend adoption of any shareholder proposal to institute shareholder nominations, all in hopes of scaring off or positioning any shareholder who would offer such a proposal.

7. Rating agencies:  The ISS, notable among the investor advisory services, has yet to speak as to its standards for evaluating boards that resist shareholder nomination proposals, and likely those that propound proposals which are insufficiently liberal in granting shareholder rights.

8. Nominator requirements:  Note that not every shareholder will be able to make a proposal for proxy inclusion; a shareholder must hold at lest $2,000 or 1% of the company’s voting securities  for at least a year, and must hold them at meeting time.

9.  State law important:  Since the SEC rule leaves it to the company to define the rules for shareholder nominations, if any, one must look at state law to see how to achieve an effective proposal (that is, a proposal to establish shareholder nominations which must be included in company proxy solitications, which proposal in turn MUST be included in a company proxy statement under SEC Rule 14-a).

10. Private companies: None of this affects private companies (although the Delaware corporate law specifically permits such a bylaw, for all companies that solicit proxies, and that general permission would extend theoretically to private companies; see section 112).

As with all things SEC, there is plenty more detail, and some forms (including form 8-K requirements), but the above should give a basic orientation as to what has, and has not, been adopted.

Say on Pay: You don’t say!

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The SEC has mandated public companies to vote at least every three years on executive comp; shareholders must take a nonbinding (advisory) vote on whether they approve comp levels and golden parachutes.  The idea is, no doubt, to pressure the board to keep a cap on management greed.

Without speculating on whether or not boards of directors will in fact feel pressured on such matters, we can look at a recent case in which a court threw out a lawsuit by a Teamsters retirement fund, which raised one issue under the SEC say on pay scheme.

In September a Georgia court, interpreting Delaware law, threw out a claim by the Teamsters Fund against the directors for allowing excessive compensation for a management team that brought a $34 Million loss to the bottom line.  As with most law suits, there are a lot of issues and twists and turns, but what is of interest here is the claim that the directors breached their fiduciary duties by recommending that shareholders approve the compensation in its advisory vote which was compelled by the Dodd-Frank Act.

Among various holdings, some of which the court went out of its way to reach (the judge shot the plaintiffs down six ways to Sunday), the court found that since a board can in the exercise of its business judgment compensate any way it chooses (absent fraud or self-interest), it cannot be a breach of duty to ask the shareholders to bless the board decision in a process compelled by SEC regulation.  The court notes that in any event no conclusion can be supported based on a negative shareholder vote, or a positive shareholder vote, as say on pay votes are non-binding and thus failure to have shareholder approval does not at all prove excessive pay, let alone a breach of duty.

Less than 2% of companies which have held the required say on pay vote have experienced shareholder negative votes.  It is not at all clear that Dodd Frank and the say on pay SEC rules have accomplished anything of use, although I suppose a downward trend in executive comp (not in evidence yet) might in the future alter that preliminary analysis.

Law buffs might want to look at Teamsters Local 237 vs McCarthy et al, filed September 16 2011 with the Deputy Clerk of the Superior Court of Fulton County, Georgia.  If you have trouble finding it, let me know.

Yankee Executive Suite, the next morning

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Cashman (nervously): So, Georgie ,did you happen to catch the game last night?

Young Steinbrenner (annoyed):  What, are kidding or something?  And don’t call me Georgie.

Cashman (slightly abashed): We didn’t look too good, did we?

Young Steinbrenner (coldly): That’s why we pay you the big bucks, I guess.  For your incisive analysis.

Cashman (defensively): Well, it wasn’t ME out there on the field, stinking it up.  It’s all Gerardi’s fault.  I think we oughtta Francona him.

Young Steinbrenner (unsure): Francona him?  What’s that?

Cashman (eagerly): You know.  Fire him and make him go on TV and resign.

Young Steinbrenner (pensive): I dunno.  What would daddy do?

Cashman (musing): I don’t know.  Maybe bring in Billy Martin to manage.  (softly) Ya DO know, Georgie, the old man is dead now.

Young Steinbrenner (curtly): You don’t think I know that?  And DON’T call me Georgie!

Cashman (sucking up): Well, I know you will think of something brilliant.

Young Steinbrenner (pensive): Right now all I can think about is mailing back all that seat money for the Series.  And also–how are we going to sell those $500 field box seats next year?  We gotta sell ’em, Brian.  Look at our payroll.

Cashman (with growing fear):  Well, we can lighten ship.  You know, trade the fat guy who used to be our ace until he gave up the winning run.

Young Steinbrenner (aggressively): I got a better idea.  Let’s make all the executives under me buy those seats and then let THEM have the job of remarketing them.  Yeah!  So how many do YOU want, Brian?  A thousand?

Cashman (apprehensive): With no bonus this year, I don’t think we can afford the tab.

Young Steinbrenner (eyes narrowed): Hey, did you hear the rumor that Epstein is talking to the Cubbies?  Let me give you John Henry’s direct dial, there may be an opening in Boston.

Cashman (sweating profusely): Oh, you kidder, you.  You know I got us the best talent.

Young Steinbrenner (angry as hell): Then how come we were knocked out in the first round?  By some no-names from the Rust Belt, fa Chrissake!!!  (quietly now)  Twenty-seven banners and it comes down to this. Our guys golfing with the Bosox and Rays while Detroit and Texas are playing baseball in October….  (tears in his eyes now)  Oh, daddy, you never told me there’d be days like this.

Cashman (with an effort at a smile):  Wait til next year.  We’ll get Big Papi and David Price and…

Young Steinbrenner (steel in his voice): Brian, you are SO fired.

Even Vegans Want to Slaughter Pigs

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When I was an up-and-coming lawyer I moved my young family to the top of Belmont Hill, a pretty fancy address with big lawns and big mortgages.  It was then that I started to have “the nightmare” that sometimes even woke me: hoards of protesters, angry that people like me had so much wealth when times were hard (as times are always hard for many) finally did what Americans never did: the rose in true mass social protest and marched up my street and broke into my house and took my stuff and burned my fancy valuables and moved into my basement (a la Dr. Zhivago).

The “nightmare” faded; since then I have lived in a series of nice places and not once did the unwashed masses parade down my street.

Today is my first day back in the office from an extended business trip, and as I glance out of my elegant office I look down on Dewey Square, an open area in front of the Boston Federal Reserve Bank.  And what do I see?  Dozens and dozens of tents, of people camped out protesting corporate greed.  Not so large a showing as in New York City (where last Friday my cab driver had to take a detour to get me where I was going at the Battery) but a lot of people.

Down at street level, because the noise rose all 25 stories and penetrated my windows and broke my concentration, I faced something like “the nightmare” in real time.  Hundreds and hundreds of people of all sorts marching, chanting, waving signs of a most un-Capitalistic nature.  The police, themselves having learned something since I proctered the marches in the 60s and 70s for the Civil Liberties Union, stayed way in the back, an occasional polite policeman in regular gear directing the traffic through the financial district.  No cops with shields and dogs.

So what did I learn?

The tents are part of “Occupy Boston,” a knock-off of “Occupy Wall Street,” a protest against corporate greed still pending in New York.  The event, as usual for such events, attracted protesters of almost every ilk and disrepair; my collected literature urges an end to war, higher wages for the poor, and something a bit more ambitious from the Revolutionary Communist Party.  Men, women, students, workers in union shirts, and a large number of nurses were on the march and the main thrust was the inequality in our country when it comes to economics.  Signs and chants proclaimed :”Wall Street got bailed out, we got left out;” “We–are–the–99%;” “Wall Street, you cannot hide, we can see your greedy side;” “Take it back–Tax Wall Street;” and my favorite, for which this post is named.

Now America has not suffered the level of class violence and animosity of many other countries and I suspect there are numerous reasons, but the greatest to my mind has been the open-ness of the American dream, the improvement possible for each person and for each successive generation.  Certainly there has been unrest but it has been episodic and contained, and primarily driven by labor issues (there are exceptions for draft riots, bank foreclosures on farms, etc., but basically we have escaped mass sustained class animosity).

But the American dream, that soothing ointment that salves the class abrasions in our society, is fading (as my nightmare faded) and perhaps also fading, in face of the growing wealth disparity, is the lack of belief that it is temporary or can be overcome.  Will circumstances at last unleash my reborn nightmare?  Certainly the march today was peaceful, almost like a summer outing; but many an anti-war march during Nam started that way and ended up with stones through the windows of the Cambridge Trust Company by the time the hoard reached Harvard Square.

The complacent business folk who observed the march, took the literature and exchanged sympathetic looks with the cops, did not believe I am sure that this is “the beginning” of something big; nor do I.  But my fear is that it is the symptom of the start of the beginning of something that is systemic and that our society is not in a position to address over time.  Tom Friedman’s new book, That Used to Be Us, makes a case for what is needed to respond to the possibility of our society becoming a class-divided also-ran.  Although many conservatives dismiss Friedman as a knee-jerk leftie, the book (co-authored with Professor Mike Mandelbaum of Johns Hopkins) is a great take and I recommend it.

Meanwhile, if you live in a nice house, you might want to check your door locks and stock up your panic room….

Law, Banks and the World Economy

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What’s wrong with the economy?  Why is the US in such a sorry state?  Why don’t banks lend more freely?  What is the prognosis?  These matters, as well as principles of corporate governance, were explored at this morning’s meeting of the New England Chapter of the National Association of Corporate Directors.

Now, the slant of this group is not hard to guess; they are for business, against regulation, want sound banks and want responsive government.  These are not evil goals and, indeed, many would say they are noble as these goals represent the road out of where we are.  (Disclosure: I am on the chapter board of NACD.)

In any event, this morning’s panel, headed by Jay Hooley, CEO of State Street Bank and a member of major DC-based advisory groups that meet regularly with Bernanke and Obama, made some sobering observations, which included the following:

*Regulation of business in the US is excessive, and costs US business between One Trillion and One-and-a-Half Trillion Dollars a year.  Just monitoring Dodd Frank compliance at State Street takes 200 employees and an annual budget of $50-75 Million.

*Increased demand for capital from banks is substantial; larger banks under the Basel III accords will need to maintain capital of 10-13% (compared to 3.5% today under Basel I).  The result is, simply, decreased lending capacity.

*We will have a protracted recovery with economic uncertainty well into the future, resulting in “massive structural changes” in business and government.

*The deadlock in Washington is “probably worse than it appears” and politics interferes with “good decisions.”  Idealogues on both sides are to blame.  But “if you want to feel good about the US, just look at Europe….”

*Europe is going through our 2008 right now.  What sinks banks is not lack of capital, it is lack of liquidity, observed Hooley, and he noted a recent growing liquidity crunch in Europe.  Further, at least here we had TARP to help us but Europe is 27 countries and some banks owned by governments, and “all roads lead to Germany” and that presents its own political problems.  “Europe is the rock in the road of global recovery.”

*What will restart the world economy?  In the long run, the US which is the country with the greatest ability to reinvent itself and thus drive growth.  Just remember this is a long-term observation.

*What does all this mean for corporate governance?  Two emphases: board focus on strategy and on enterprise risk must be robust and continuous.  Two-thirds of directors believe that strategy is the board’s top priority.  It is discussed often at every board meeting, at length, as the day to day jobs of the board devolve more to the committees.

* A quarter of larger public companies (twice that percentage of large financial service companies) have Risk Committees.  The State Street Risk Committee reports to the compensation committee quarterly on corporate performance on a risk-weighted basis (indicating at least some traction for the SEC efforts to link comp with risk management).

*IT risk is the next wave.  Given the fact that now the attacks are sophisticated, hit companies in so many functions, and are sponsored by other companies and indeed by other governments (not just random hackers), more and more attention must be paid to protect company secrets and personal data.  One director predicted that the next trend would be establishment of IT Committees of Boards to monitor this technical area.

*Demands of strategic thinking, audit committee needs, excessive US reporting that has made the US an unfriendly business venue, and IT issues have changed the game in board succession planning.  Now many skills are needed and yet we still need diversity and people with current practical experience in the business of the company.  Fewer CEOs have the band-width to serve as directors of other companies.  Boards are increasing mandatory retirement age for directors to facilitate succession planning.

Sobering thoughts in sobering times….

Fight Night

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Normally it is better to attend any event in person, rather than suffering the misimpressions, disconnection (and commercials) dictated by television. I remember for example how much the people who saw on television my favorite fight, Sugar Ray Leonard beating up Marvelous Marvin Hagler under the Vegas stars in 1987, missed about that evening: the buzz, the distractions, the intensity, the globs of sweat from the ring reaching to the third row of patrons, and the truly superior talent of Leonard; TV viewers thought the fight was a close one, which it was not.

But on this past Saturday night, if you were foolish or bored enough to shell out $69.95, you learned that sometimes what happens on television focuses an event, even shapes it.  If you payed your money, you were connected by Pay Per View to Las Vegas,Nevada to witness the hyped boxing match between Flloyd “Money”  Mayweather (an undefeated super-welterweight of undeniable skills) and a guy named Victor (Vicious) Ortiz, yet another tough Mexican kid fighter of the type that fills boxing venues from Staples Center to Madison Square with Hispanic fans who have transferred their personal dreams of glory onto the shoulders of a countryman.

And so you find yourself in Las Vegas, a city so cheesy that it has become, gladly, the mecca of US boxing.  After suffering through three truly boring preliminary bouts, with all six boxers of Mexican descent  (what happened to those nights when places like the Eastern Parkway Arena were filled with Jewish, black, Irish clubfighters who dominated the sport during various eras, is it true that our poor lower classes that fuel boxing are now almost fully occupied by Mexican kids?), we are introduced to the main combatants, a 34 year old Mayweather who carefully selects opponents he is certain to defeat and a 22 year old smiling orphan who, the announcer reminds us,  grew up on some streets somewhere and has fought his way to respectability (or at least to the side of the incredibly stunning young woman who walks nearly into the ring with him).

The fight doesn’t matter until the end, which comes quickly in the fourth round.  Ortiz head-butts Mayweather (who bleeds slightly from his teeth on cue), the referee temporarily halts the fight to announce he has deducted a scoring point from Ortiz as a penalty, and as the fighters re-engage at center ring and the polite Ortiz leans forward to express apologies, Mr. Mayweather sucker-punches him with a left and a right and the kid is down for the count.

What is really great, however, is the post-fight interview with the winner.  The TV commentator, a venerable old dude with wavy white hair, sticks his mike into Mayweather’s face and asks, in essence, how it feels to win a fight against a kid with a sucker punch while the kid is trying to apologize.  Mayweather starts by thanking God for His grace in allowing him to win the fight (and presumably to get a chance to sucker punch a kid), and then says that he was head-butted and then threw a left and a right and knocked his man out.  Yes, the commentator pursues, but what happened at the end when you sucker punched him?  Well, explains a patient Mayweather, I threw first a left and then a right and the kid fell down and didn’t get up which means I win!  Trying one last time, the commentator asks if it were not true that said kid was trying to apolgize and that when the first blow landed did the kid not turn to the referee for an explanation of whether the official time out had expired?  “You never give me a fair break.  Never!” shouts Mayweather, losing his calm exterior and (likely) driven to say it by the very same deity who granted him his sucker punch; Mayweather puts his face right into that of the commentator and screams, “Never a fair break.  You’re shit!”  Nonplussed (I guess being a commentator for boxing matches inures you to a great degree), the commentator replies, ” I wish I were 50 years younger, I’d kick your ass.”

You don’t get that kind of drama  watching the fight while sitting live in your seat at the MGM Grand.  No siree.

But let us turn to the defeated challenger, sitting on his stool in his corner of the ring, a magnanimous concussion-induced grin across his open and unmarked face.  The mike enters the frame and the commentator’s voice is heard to inquire as to how if feels to have your clock cleaned by a sucker punch.  But the kid is from central casting, he knows the mantra, he knows the game he is in, and he wants his rematch, that’s for sure.  “You know,” he observes sagely as if invoking a philosophical truth handed down to us by the Greeks, “ya gotta protect yourself at all times….”

That’s TV! Those are the money shots.  I go to sleep pleased with how I have spent my $69.95.

I’ve Been Thinking…The wrong questions

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Why does public debate focus on the wrong questions?

It is not about whether the pledge of allegiance has educational value or is fascist.  It is about whether it violates the establishment clause of the Constitution (as does our form of currency)  and whether (as Governor Patrick allowed in a moment of atypical candor) we don’t have better things to worry about.

People who claim that the pledge is a fundamental part of our heritage of course don’t have much of a clue about history.  The pledge, although first published in 1892, was formally instituted by Congress in 1942 , well after World War I, the Spanish American War, the Civil War, the War of 1812, the American Revolution, the Shot Heard Round the World, the Louisiana Purchase, the founding of the American West, the birth and death of all the Founding Fathers and just about every revered political and literary figure in American History.  It was adopted around the time we were herding Japanese Americans into concentration camps, but let’s not get too sardonic here.

Also, it was written by a socialist (gasp) as part of a proposed celebration of Columbus Day, a day in honor of someone born in another hemisphere who is honored for a discovery he did not make, and in form pledges allegiance to a flag, which is an emblem used for centuries as a signal or identification of armies during warfare. Quite a pedigree….

Then, since I am already in trouble with those who respond reflexively to the soft symbols of simple emotion without marking ideas or feelings to the market of logic, let me jump fully into the quagmire of the just-concluded 9-11 rememberances.  The debate isn’t whether we are better off reliving in detail those events or whether we are best to now — after a full decade — move on to consideration of the future.  The question asks us to elect between two choices which are not choices at all.

How can one not remember?  Most of us do remember and, until we are overtaken by senility, cannot forget.  Modern media will enshrine these events in our collective cultural heads for so long as there is a country here; we even Remember the Maine, the Alamo, 54-40 or Fight, all sorts of elements of history/culture of far less substance.

And how can we not move onward anyway?  The calendar compels no other choice.  We do not live in the movie Groundhog Day.  I bet, since today is September 12, that when (if) we awake next time it will be — September 13, tomorrow!  And although as I have pointed out  we will of course remember 9-11, because of the WAY in which remember  such  things (as emotional mind-bites), that rememberance will not interfere with the functioning of tomorrow (unless you are flying through Newark and trip the security sensors, in which case all is lost).

H. L. Mencken described our country’s general population as “homo boobians.”  It is a harsh sentence, but one worthy of consideration.  It is not so much that we do not know the answers that makes us dangerous to all living things including ourselves; it is that we don’t even know the questions.

Private Property

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On Cape Cod, there is an old rail bed that reaches 22 miles from Harwich to Wellfleet, running mostly through scrub pine and an occasional marsh, and a few times jumping the tracks to weave though a town where all traces of the old railroad have been covered by paved streets and souvenir shops. Over this rail bed is a modest bicycle path used by riders, walkers, skaters, dog walkers, runners and, based on the occasional scat trail, various local fauna.

Many home owners, motels, resorts and restaurants have opened sandy paths from their back yards to the edge of the trail.  Many more have not; their yards and parking areas abut, overlook or touch upon the trail in silent co-existence.

Perhaps half way down the trail, on the Western side (after the turn North at the elbow of the Cape), there is a stretch of perhaps one hundred yards that is posted in red and black signs, five of them: “Private Property.”  There is a fence for some of this distance, a sharp dip in terrain for some of it, and for almost all of it a wall of greenery and brambles, and (no doubt) lurking ticks bearing Lyme Disease and mosquitos (no doubt) bearing encephalitis, that is about as impentrable as you can get these days, since the took down the Berlin Wall and since our wall along the Mexican border seemingly is porous in the extreme.

You cannot tell what is on the other side, the forbidden side of these signs.  The woods are deep enough that, when you try to figure it out from the Route 6 side there are not enough clues to decipher the geography and, indeed, enough overgrowth that it is quite possible that the other side of the signs contains — nothing.  Nothing but bushes and trees and disease-carrying insects.

Why is this land “posted”?  Did some poor misguided lawyer tell the owner that such posting would protect the land from being claimed by others who trod upon it?   It is not possible to tread.  Deep in the woods is there some secret governmental installation producing $3 T shirts with pictures of clams on them?  I would have been told.  Is the land owned by a crusty old Yankee who has just about had it with the New Yorkers on $1600 bikes with 40 gears who tear down the path at high speed, to the peril of the five year olds out for their first family bike ride?  A nice thought, but unlikely.

I once had a client who lived on the beach and wanted to keep the public away from his line of vision.  He inquired about fencing down into the water.  He inquired in an academic but scary way about the Massachusetts law on trap guns.  Misguided and misanthropic as he was, there was at least a reason you could ascribe to his misanthropy.

As Samuel L. Jackson confessed to Clint Eastwood, “I just gotta know.”  I am awaiting the falling of the fall, and with it the falling of at least some of the leaves.  I will be left with brambles and conifers and logs and watery peat and some fencing and five signs, but I am going to go back up the Cape, get on my bike, bring a knife of functional dimension, and hack my way a few yards (or more) to the West.  If I am successful, I will report back on my discovery; or report that there is indeed nothing there but — nothing.

Does anyone wish to join me?  As Clint famously replied, “how lucky do you feel?”

Facts and the Economy

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Our economy is deeply distressed and won’t get better soon because our problems are systemic and will not respond to any of the policies recommended by either party.

The trigger for this blog is last Thursday night’s  debate of  Republican candidates, who seemed secure in the truth that untaxed businesses and their untaxed executives create jobs and wealth.  This is not unconvincing in two senses: it reflects the myth of  American experience, and it reflects the logic that when the economy is suffering from lack of liquidity you do not take money out of the system by taxation.

It seems, however, that on analysis of  facts, the problem is more complex and, regrettably, more fundamental.  (I do not fault the Republicans; the Democrats too seem to ignore the controlling facts I cite below.  I am not taking sides here as I find both parties are not so much wrong as they are discussing the wrong things.)

Fact: the gross national debt as a percentage of our gross domestic product has increased in thirty years from about 30% to almost 100%.  (source: OMB 6-30-11) (The only President who reduced it was Clinton, and likely for reasons of happenstance; but my inquiry is not concerned with who did it, but rather with what it is.)

Fact: The economic gains from our accelerating productivity have flowed to corporations and the rich and not to the workers.  (source: Conference Board, US Census, Bureau of  Labor Statistics)

Fact: Real average hour wage from 1970 to today has declined, notwithstanding improved productivity. (source: OECD Main Economic Indicators, IMF International Financial Statistics)

Fact: From 1985 to now, employment as a percentage of our work-aged population has fallen from 77% to about 74%, and from a couple of intervening peaks of over 80%.

Fact: from 1950 to the end of 2009, the share of total income earned in the US by the top 1% of earners has increased from about 11% (which in 1950 was within three points of the same statistic for Japan, France and Sweden) to about 18% (which is 2-3 times the percentage in those three countries).  (source: World Top Incomes Database).  Put another way, the disparity in earnings between the richest and poorest earners in the US has increased by over 50% and is disproportionate also on a world-wide basis.

What do these facts suggest?

*As observed by Jeremy Grantham in his GMO quarterly newsletter (August 2011), for 30 years before 2000, consumers compensated for flat hourly wages by working harder and longer  and workers constituted  a higher percentage of the total labor-eligible force; but in the last decade the hours worked have flattened (hitting a natural maximum perhaps?), the percentage of eligible workers actually employed has fallen, and so sustained middle class spending in that decade was supported not by earnings but by borrowing and the perceived “income” from rising housing values.

*Putting aside the risk of social unrest over time that comes from great economic disparities, since workers cannot work harder and since they are earning less and since they cannot borrow, there is no way they can purchase goods.

*But two thirds of GDP in the US has been domestic consumption.

*US companies, notwithstanding Romney’s assertion that corporations are people, are gaining profit by cost savings, including driving down wages; but  that kind of cost savings cannot be sustained as we are running out of runway on cost-cutting, and greater squeeze on labor is likely to be counter-productive when viewed from a consumer consumption vantage point.

* How do you get more money into the economy without printing it?  You increase labor costs (as many countries including China are), driving a revitalization of the middle class as originally fostered in the United States by Henry Ford (see the blog Naked Capitalism by Yves Smith, as of last February the fourth most visited business blog, and by no means a bastion of liberal knee-jerk rhetoric).

*You lower the actual income of, and increase the taxes on, business and the upper reaches of  US earners (again, see Grantham’s GMO quarterly for August 2011).  We could for example engineer ourselves down  to the level of income disparity obtaining in the Eisenhower years, half the disparity of today during a period of  sustained economic growth in the ‘50s (carried into the ‘60s).

*When you take cash out of  the system by taxation,  does it in fact reduce job creation?  Corporations are sitting on vast cash reserves.  The very wealthy the same.  But we do not now have job growth today, we have increasing profits based on cost squeezes.  How do you re-circulate those funds?  They are not trickling down.  The statistics tell us that fact.  If one were to have government undertake major projects that would create liquidity in the middle class, with funds obtained from a rationalized tax structure (see George McGovern’s open letter to Obama in the August issue of Harpers), the economy would unfreeze significantly.

Parenthetically, Warren Buffett’s suggestion, reported today, that it is appropriate and necessary to increase taxes on the wealthy is not the whole answer.  That alone does not create enough economic activity even if pumped back into the economy through government programs, whether works or entitlements.  To fund the middle class buying machine requires altering the relative  pre-tax incomes of corporations/high earners compared to middle class earners.  You need not only to tax the top, you need to raise up the middle.

Think about the trickle down approach.   Pass over the statistics we have been discussing  until now that suggest that there isn’t any trickle.  Let’s look at WalMart, a company that drives down labor costs.  This reduces the pay of its employees and reduces the cost of the goods WalMart sells.  The system should and likely does allow the families to pay less for WalMart goods.  But where does the pay of the WalMart family (and other squeezed families) get applied?  To underwater mortgages which are not cheaper.  For gasoline and food that are priced based on a different economic model.  For  products generally not purchased at  WalMart (or from many of the other companies that operate on the same model).

It is a heresy for a business lawyer with entrepreneurial and banking clients and a proclivity for free markets to suggest that labor needs a bigger share.  But we expect labor to pay down mortgages and not default, to reduce household debt, to survive pressure on social programs, to handle abandonment of  old-fashioned pension funds that often sustained retirements with defined benefits – putting aside one’s social views or economic philosophy, it is just hard to understand how the US is going to pull this rabbit out of a hat without pumping actual dollars into the middle of the US economic engine.

Returning one last time to Grantham’s report, and I quote:

“The average worker, with flat wages for decades and with 16% to 18% of the workforce out of work (9%), discouraged to look for work (4%), or forced to work only part-time (5%), must feel as if he (or she) is in a depression.  … Corporations are spending on capital equipment but are doing little in the way of domestic recruiting.  Profit margins in the financial system were protected, along with bonuses, which in some cases set records last year despite the undeniable fact that these were the guys who helped bring the Western world to its knees.”

These are not the view of a wild radical Democrat, or a dogmatic Republican.  These are the perceptions of someone who runs a significant investment fund.

And I do not think that Washington,  the debating Republicans or the Democrats in the White House, are thinking this way.