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.

Where is my Mojo?

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I had it when I left New York.  Of course that was a long time ago, 48 years ago to be exact (being exact is, by the way, highly overrated).

When I moved to Massachusetts I took it off.  Actually it just fell off by its own accord.  But I picked it up and put it aside.  First on the dresser in my apartment in Cambridge, later in my basement in my first apartment, then in a clearly marked box in a series of houses, ready to be reclaimed or at least remembered.

Now, however, over this past weekend, I went looking for it but I just cannot find it.  Anywhere.  Have you seen it, perchance?

Why did I go looking?  Thought you would never ask.

Each week I get my “The” New Yorker magazine and I read it or pretend to read it.  But it has been getting harder and harder and, truth be told, this last issue wholly eluded me.  When living in New York City, even as a teen and college student, mojo insouciantly draped over my shoulders, I would flip through the magazine to guffaw at the cartoons, then go back and read the articles, or at least most of them, and even try the poems if they weren’t too long.

So Saturday morning I took the new issue and started flipping.  I ignored the loose reply mail subscription cards that fluttered down at my feet.  Starting at the back (easier to flip that way, and the cartoon don’t require a front-to-back sequence), I began reading.  Could not understand the humor in a single one.  Not one.  Tried again for irony, the new vocabulary of a jaded age.  No resonance there.  A third read for mere cleverness, a grin-inducing perception—nada.

Examples:

*people on a subway platform hear a loud speaker announcement saying “Due to an incident at the Bergen Street station, everything has changed and nothing will ever be the same.”

*four men dancing ballet in tutus turn to one man dancing in a suit: “Damn it, Hollister, you’re totally ruining casual Friday.”

*man at computer to his wife looking over his shoulder: “I’m too busy recommending things to experience them for myself.”

*one bowler to another: “You’ve got to learn how to bowl without irony.”

As for the articles?  Try these scintillating topics:

*Hunting Horsetails (about the New York Fern Society).

*Summer Fun for Boys (begins “You’re gifted, you’re pudgy and you’re nine.”)

*Reverting to a Wild State (a piece of fiction illustrated by a man with 6-pack abs wearing Jockey shorts).

And why are there full-page ads for electrical and natural gas power grids?  When was the last time a reader bought a power grid?

Is it the magazine or me?  I must believe in my heart of hearts that the professionals who produce the magazine—this is THE New Yorker, for Godssake, not Mad, not that most useless of all publications the scrap paper packaged as the magazine “Boston”—still had their totally cool finger on the wry experiences, the anomalies for which New Yorkers are ever attuned and which are recorded faithfully and promptly in their eponymous magazine.

It’s gotta be me.  I gotta get my New York edge back.  I need my mojo.  I haven’t much needed it in Boston; you need none in the suburbs of course, and being an attorney is not so much a matter of  mojo as it is a drill in chutzpah.

So I went through my basement.  I went through my attic.  I went through my memory.  I  am not lying, I am telling you it is lost.  Gone.  No clue, no resinous residue of remembrance where it once resided.  Just plain lost in time.

I threw out the magazine.  I feel better.

Fat, Body Piercing and Tattoos

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I am not into body piercing and tattoos.  In fact, when I sat down to write this blog I originally misspelled “tattoo,” that is how alien the whole thing is.

As for the “fat” part, as we say in the law racket, “Further deponent sayeth not.”

This weekend I drove through the moist warmth of a New England August and visited Canobie Lake Park.  For those who do not know it, the Park is an old-fashioned amusement facility that seems to have found a nostalgic niche in competition with more flamboyant and up-to-date amusement venues.  There are the kinds of rides that I rode as a  kid.  There is a water park with short safe slides, nothing – well—splashy.  There are entertainment venues with impersonators of Tim McGraw, Michael Jackson, Janet Jackson and Elvis.  The demise of at least half of those people seems to pass unnoticed.

You can even bowl Skee-Ball.  And earn tickets for high scores, redeemable for useless trinkets.  Just the way I grew up….

But there is a difference here.  And it has to do with, yes, fat, body piercing and tattoos.

I hasten to observe that although the Park draws an incredible diversity of people (the population more reflects the demographics of the region, with people of Asian and African and Latin background, than just about any other venue I can recall except perhaps Boston’s decayed Downtown Crossing), the phenomenon seems to ignore ethnicity, age, skin color, and everything else save the one common element: if you are fat, have lots of body piercing and/or are replete with tattoos, you are statistically much more likely to be at Canobie Lake Park than anywhere else – Boston City Jail only excepted.

And this is not a population gathered to make a statement.  You find these people as they are in real time: skin-tight T-shirts further shrunken by a drenching in the water park or some flume ride, shorts so brief as to make leer-ers of us all, tattoos on men’s arms and shoulders and necks and legs, tattoos disappearing into fatty crevices that polite people do not describe when referring to women, iron and brass sticking out of ears and noses and tongues and, yes, in visible outline under shirts from nipples and navels.

Are these people fundamentally slovenly as a group?  Well, frankly, yes they are.  Not dirty, just not suburban middle class neat, scrubbed and coordinated.  In fact, the key word is “uncoordinated.”  Nothing matches anything; the tattoos are blue and red, the do-rags around the head are black and white, the Celtics shirt is of course green, the shorts are striped, and the shoes are likely to be unlaced work boots on men, unlaced sneakers on women.

The kids can get away with it, but you just feel compelled to probe the adult adherents, hopefully in what seems a casual manner.  My efforts:

 

In line for a head-jerking spinning ride, me: “Nice tattoo.”  [Unspoken: does the tiger have a tail or has it lost it in a fight, the tiger’s butt has disappeared into a roll of fat sticking out of your shirt and falling down your back.]  Reply, “Thanks, man, got it in Iraq.”  [He looks like a jerk and he defended my liberty?  Oops….]

Eating an ice cream and turning to a sixty-ish woman with a nose ring, dripping powdered sugar down her shirt-front from her fried dough, me: “How long have you had the, you know….” Reply, “Last year, I got it in Hampton Beach, my granddaughter and I did it together.  You like?”  [Oh yeah, what do I mumble now?]

Stopping an enormous  woman with flabby arms, bright tattoos of snakes and a bar through her nose and with what seems like forty children under the age of seven in tow: “Excuse me, are all those children yours?”  Reply, “No, I got them in that booth there, if you break a balloon with a dart they give you one.”  [Whoops, a regular Mae West on steroids.]

There is no rhyme, reason or predictor except, here they all are.  In a ten minute “experiment” I find that 15% of all adults I see have tattoos, about 10% of the men have earnings, and fully half are what might be classified as “obese.”  Not chunky.  Not full-bodied.  Not overweight.  Just plain really really fat.

So what can you buy to eat, here at the Park?  I will spare you the litany, you can imagine.  One pushcart has fruit cups; one stand has salads in plastic.  No signage for either.  Advertising for all that is not good abounds (the signs for onion rings, fries, soft-serve ice cream and dough are ubiquitous).

The kids don’t care; they don’t see it, or it does not register.  They are at that lucky early stage where passing judgment on people with a different personal style is ahead of them (although from what I hear about Middle Schools, not all that far ahead).  For us button-down types in crisp khaki shorts and collared shirts and our backpacks filled with sun screen and deet-laden bug spray, it is an exercise in self-control and unrestrain-able snobbish moments.

On the way home we stop in an ice cream shop in our neighborhood in Newton.  The shirts have polo players or logos from golf clubs.  Even though these people are buying an ice cream, they are trim, their tops tucked neatly into crisp shorts or proper golf skirts.  Not a tattoo in sight.  No body ornaments except for those lovely small seashell gold earnings, and those are all on the women.  As for body fat – these people, even the pudgiest, are in the minor leagues of lard.

Safely at home in the neat suburbs, I have survived our August walk on the wild side.

Link to July Article on Supreme Court Class Action Case

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Below is a link to my July article for InHouse, the newspaper for in-house attorneys.  It discusses the US Supreme Court view on bringing securities law class actions, with an interesting sidelight on how the SEC proposes to clamp down on lawyers defending companies and directors in those kinds of lawsuits.  Let me know your thoughts and, particularly for counsel, any recent experiences with the SEC involving resistance to the mounting of a vigorous defense.

 http://www.duanemorris.com/articles/static/honig_neih_0711.pdf

Corporate Money and Corporate Democracy

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This seems a point in history when we are focused on the role of money in politics as never before.  The floodgates of corporate money were opened in 2010 when the US Supreme Court in the Citizens United case held that free speech included the right of corporations to finance candidates.  But more recent developments have put a sharper point on the issue:

*Editorial pages have suggested some cap on this corporate right to fund, lest our democracy suffer

*Today the press reports a suspicious funding path by which a short-lived corporation with seemingly no business purpose pumped large sums of money into the nascent Romney presidential campaign

*Two days ago a group of ten of our leading legal scholars in business law, led by Harvard’s Lucien Bebchuk (darling of the shareholder rights movement and holding no less a distinguished platform than as both Friendman Professor of Law, Economics and Finance at Harvard and Director of that Law School’s Program on Corporate Governance) petitioned the SEC to adopt a new disclosure rule requiring public companies to report to their shareholders their political contributions.

This latter point is fascinating.

First, the idea that the SEC these days doesn’t have enough on its plate is ludicrous; Dodd-Frank has imposed impossible burdens, the whistleblower regime just launched will further stress Commission capacity, and just the other day the SEC delayed some of its regulations on executive compensation (concerning pay for performance, ratio of median employee comp to CEO comp, clawbacks for executive officers) until next year.

Second, although the Bebchuk petitioners noted that the Court in Citizens relied upon the pressure of shareholder scrutiny to control corporate political spending and thus suggested that an SEC disclosure rule on contributions was consistent with judicial mandate, the petitioners also noted that almost 60% of all S&P 100 companies already in fact make such disclosure on a voluntary basis.

Third, while one might concur that corporate political giving draws us ever closer to oligarchy (no doubt many would argue strongly the other way, of course), it is hard to believe that what the US economy needs in its time of great pressure and loss of leadership and entrepreneurial primacy to foreign markets is yet another governmental requirement.

Thinking About the Deal

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Congress could not get out of DC fast enough after passing the debt deal, although it is hard to imagine why.  I am not sure that anyone would want to go home and answer the questions of constituents.

It is also hard to declare a winner here; first, who knows what either party really stands for; second, even if you could identify the teams from their uniforms, it is not clear if anyone prevailed.  Politicians call such a result a “compromise.”  Real people have a compound noun for that result, the first half of which depicts a bovine male.

How do you parse the alleged business slant of Republicans with the negative business effect of cutting expenses and hence jobs?  How do you parse the alleged liberal slant of Democrats with offering up for cutting the social programs (the requirement to share cuts between domestic and military budgets runs out after two years)?

The answer may be the removal of traditional political perspectives from the process we call politics.  Debate used to be about the social compact; how should government function in discharging its duties and inspiring the wealth and happiness of the population?  Now it is governed, overtly and implicitly, by social agendas.  How do we feel about poor people?  Foreigners?  Abortion?  Religion?  Is this a “good” development?  It certainly curtails civility and fosters the kind of intransigence we witnessed in Washington.

Democratic U.S. Representative Mike Capuano (Massachusetts) is what I call an old-fashioned liberal (it is amazing how that word – liberal —   has become pejorative; and I do not know why), and his tortured explanation of why he voted against “the deal” is full of factoids that are really make-weights on a troubled path being trod by a troubled soul.  But one such irrelevancy also was startling: only two countries, the US and Denmark, even have debt ceilings.  The stopping place of our debt ceiling is not designed with economic or social theory in mind, it just happens to be the number de jour.  Why do we have it at all?

Meanwhile, we look forward to this Fall’s mandated $1.5 trillion of additional cuts, per the wisdom of the joint Congressional committee.  I am preparing for this by getting new tires for my car and selling my convertible; there are going to be an awful lot of potholes and falling bridges on our highways in the near future.

Unless the unemployed volunteer to fix them for free.

All in the Family

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A brief article in the recent press reports that George Soros will convert his $25B hedge fund into a family office to avoid newly enacted SEC regulations affecting hedge fund advisers.  There are reports that many other hedge fund managers are considering following suit.

We must assume that surrendering a $25B business, and returning investor capital, is not a decision lightly undertaken.  Why would a smart guy like Soros do that?

Simply put, under Dodd-Frank the typical exemption from regulation under the Investment Advisers Act enjoyed by hedge fund managers was repealed.  The effect is to require hedge fund managers to register and be regulated.  However, Dodd-Frank mandated an escape clause from regulation for any fund that qualified as a family office.

New SEC rules, effective August 29 of this year, establish a formally defined family office exemption from the effect of Dodd-Frank under the Investment Advisers Act.  (Historically, the SEC would consider exemptions from regulation for family offices on a case by case basis.)  The exemption is not so broad as some commentators had hoped; a family must wholly own and control the office and run money only for “family” as closely defined.  But for families of wealth, the exemption creates a business model that works well enough.  And seemingly, regular hedge fund managers of great personal means, such as Soros, can appreciate the continuation of freedom from regulation that until now they have so profitably enjoyed.

For policy wonks, the SEC adopting release, which explains all this in great detail, is at  the SEC website.

We are left to ponder whether heightened regulation of hedge fund advisers, regulation that drives a successful adviser such as Soros who has created substantial returns to investors over the years, constitutes good policy.  Or does it just satisfy a desire to punish people who are getting “too rich” while many in society are struggling or sinking?  Is this SEC regulation just another facet of a social reaction, another aspect of the dynamic that also seeks a higher income tax treatment for the carried interests of the hedge fund managers?

In the unresolved debate between heightened regulation and the “free marketplace,” Soros’ decision marks the location of one of the minor battles, and it is unclear which side is the winner.

The Law of Clemens-y

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When the Rocket testified a couple of years ago before the House Committee on Governance, in-person observers were suspicious of his credibility. Boston fans were suspicious before that; after four very mediocre years at the end of his Sox career, Roger went on to forge a spectacular coda to his 192 Boston wins.

And it is hard to believe that a disgusting bag of blood and drugs did not prove his sins, although perhaps any person we believe capable of saving that bag could perhaps be capable of concocting it from unrelated elements.

Along comes a much-reviled prosecutor who presents hearsay evidence, on film no less, which the judge believes is prejudicial to the point of mistrial. We don’t have the benefit of a transcript and, well, it would take a bunch of lawyers to figure out whether the judge was correct or just didn’t want this tawdry but fundamentally irrelevant procedure on his docket. What we do know is, in common baseball and legal parlance, that Roger walked.

We now await early September when the judge decides if a retrial is even possible, while Rocket’s counsel ponders double jeopardy as a defense. If an impartial jury could have been found for the first trial, it is hard to understand why an impartial jury could not be found for a second; after all, the jury pool will not include anyone present at the first trial who viewed the offending film. If Rocket’s case was sufficiently non-topical before that a dozen people could honestly say they were fundamentally clueless, surely another dozen can be found who missed the Rocket’s red glare in the heat and blazing sun of their summer vacations.

We are left to ponder why the House of Representatives stuck their noses into baseball steroids in the first place. Today we have proof positive, on Capital Hill, that there were more important things going on in American governance and economics than worrying whether baseball players were shooting up. It may be that baseball is America’s game, but it is alas only a game.

Numbers, Baseball and Being American

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Much no doubt has been written about statistics and baseball. I think baseball is the National Pastime only because it is rich in numbers, has so many years of numbers to draw upon, and therefore reinforces the American passion for putting numbers on everything.

Look at grade schools: we teach reading and numbers. It is a very human thing. Our street games and our formal games are all shot through with numbers.

So Jeter is now a king of an important number, and gets all this adulation. As one of the Sox was quoted in the paper, Jeter is actually (now here is big surprise to all) a pretty great ballplayer and “there is a reason he has 3,000 hits.” Imagine, up to now I had sort of thought it was random, like getting a free cola from an occasional screw top soda cap.

I look forward to the Yankees coming to Fenway as I plan to stand up and cheer for Jeter because I love numbers too and think I can remember the batting averages of people from 60 years ago when I used to study the backs of chewing gum cards. I believe that most people at Fenway will do the same, particularly if a) the Sox are still in first place, and b) the Sox continue to own the Yankees, as they have all this year.

Joe Posnanski of Sports Illustrated, about the only blog I read (and only because one of my partners forwards his stuff to me), has had a lot of fun messing with numbers and their anomalies (things like Jacoby Ellsbury having many times the number of steals as Jackie Robinson or some infield substitute accumulating over a long and dolorous career more hits than Ted Williams). His piece on Jeter’s 3000th hit touches upon the simultaneous importance and irrelevance of the statistic. Real merit in a ballplayer has to do with integrity and grace and the occasional ability to pick up a team and carry it up a big hill all alone (and then in the locker room babble about how it is a team sport).

Which leads to a final melancholy; whatever the statistics, what can one really say about Manny Ramirez? That can be printed in a blog that my kid may read….

First Blog: Explanation and Apology

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I am continuing my blog (originally started with the limited focus on my law teaching trip to Russia) midst mixed feelings. As many know, I write continually about law, baseball and life’s incessant anomalies. My law writings typically get published somewhere. My baseball writings go to friends who are fans. My observations on life go selectively to friends who I think will gain wry recognition from particular circumstance.

I did enjoy blogging about Russia; many of you were kind enough to tell me you enjoyed reading those blogs, and those posts are stored on this site. But I have renamed the site and broadened the scope in hopes that some folks will enjoy, and join in, occasional discussions of interesting topics.

I do this with trepidation; in considering whether or not to proceed, I asked numerous friends, family and clients their views. My concerns were two-fold: that it is presumptuous to assume that which strikes me as worthy of comment would be of interest to other people; and that joining the flow of unedited content flooding the internet is more disservice than benefit.

I received many replies (thank you, all who replied) and the majority were positive. Additionally, by and large the younger the respondent the more enthused the support. Now one can say, it is the age of communication and of course younger people are more comfortable with the effort and less disturbed by the presumption. That is, however, too glib. I am of the view that as thoughtful people age, they continue to learn and further gain experienced judgment. On that scale, rather than dismissing older respondents as merely dated, one would weigh those responses more heavily on the merits.

But how wrong can I go, after all? Embarrass myself a bit in public? Not the first time. Take a false start? I have had many. Reveal an inflated ego? Join the list of those who have accused me. I have renamed the blog to take it away from its Russian roots, sent notice of it to friends and clients, and will see where it takes me. If posts are mundane then the trip will be lonely as no readers will go there with me. If otherwise, we will have some fun. I can only promise to try to avoid the one-liners, screeds and smarmy inside references that have made me a non-reader of blogs of others.

We shall see. My first substantive pieces, one on law and one on the relationship of baseball and human obsession with statistics, are linked to this post.