February 14th, 2012

Recently I came across a post on Facebook illustrating all the types of marriage mentioned in the Bible.  I respect the artist’s copyright, so you can find it here:  http://bostonbravery.files.wordpress.com/2010/12/bible-marriage.jpg

Obviously, the point is to show that the “Adam & Eve not Adam & Steve” crowd who vocally oppose gay marriage are doing some selective interpretation of the scriptures.

It’s a cute joke—a perfect example of reductio ad absurdum, or (to quote Rush Limbaugh) “illustrating absurdity by being absurd.”  It’s clever to show that the Old Testament is filled with examples of marriages that don’t fit the “one man, one woman, one position, once a night” paradigm that the vast majority of Christian churches adopted some time between the Council of Nicea and the hippie Jesus movement.

But ultimately, the joke undercuts its own point.  With a few notable exceptions—murder, theft—that all major religions forbid, there isn’t a lot of overlap between American law and Biblical law.  As far as I know, it’s not illegal anywhere in the U.S. to disrespect your parents, take the Lord’s name in vain, or eat bacon.  And while I’m no Torah scholar, I doubt that any of the Old Testament books prescribe stoning for insider stock trading or drunk driving.  Despite the musings of the Religious Right (and the paranoia of the Secular Left), the U.S. is hardly a theocracy; our laws are not based on religion.

The reason Solomon could have 300 wives or a brother got to marry his widowed sister-in-law is because society at that time accepted this as “marriage.”  Marriage is a social institution, and therefore reflects what the people in a given society think it should be at that moment in history.  Based on this, if the majority of early 21^st Century Americans think marriage is uniquely between one man and one woman—and pretty much all of the polling and referendums I’ve seen reinforce this fact—well, then that’s what marriage is.  Whining about Newt Gingrich’s ex-wives and Kim Kardashian’s quickie marriage doesn’t change it.  Multiple divorces and weeks-long nuptials are accepted in 2012, just like having concubines was back in 950 B.C.; two men tying the knot isn’t, again, just like back in 950 B.C.

There is another way to think about this, though.  Perhaps we should consider marriage solely to be a religious rite.  After all, our Constitution provides equal rights for all, it doesn’t differentiate between married couples and singletons (the so-called “marriage penalty” aside, that’s a debate for another day)–the government should ultimately have no interest in whether or not you get hitched.  If the right to enter into a marriage is strictly a religious matter, then I think we have an amendment that  says that it’s none of the government’s Lord’s-name-in-vain business.  If you’re a gay couple and your clergyman wants to marry you, mazel tov!  If he doesn’t, well…find another church, because it’s not our place to tell him he has to.  Rather than a heated debate over the true meaning of 3,000-year-old texts that have been translated at least four times, why can’t we just leave this question to individuals and their own consciences?  Isn’t that ultimately what the First Amendment is all about?  Two men you don’t know getting married aren’t going to affect your life anymore than some hillbilly out in West Virginia handling a snake, so just let it be.

Our Constitution may not be as interesting prose as the Bible—how do you top the story of Noah?—and it may or may not have been as divinely inspired, but it’s ultimately a far more practical document.  It’s clear and concise, and for the first time in the history of mankind, it specifically articulated rights given to us by our Creator.  I’d much rather see policy questions debated and settled under it than the Good Book (or the Koran or the Book of Mormon or whatever it is Buddha wrote).

February 1st, 2012

Two U.S Supreme Court decisions came down last week that touch on Fourth Amendment issues regarding searches…

In Ryburn v. Huff, two Burbank, California, officers responded to a call at a high school where the principal informed them that a student, Vincent Huff, was rumored to have written a letter threatening to “shoot up” the school; he asked them to investigate.  The officers interviewed Vincent’s classmates and learned he was a frequent target of bullying who had been absent from school for two days.  This worried them, as these characteristics are common among perpetrators of school shootings.  The officers decided to continue their investigation by interviewing Vincent.

At his house, the officers knocked on the door and announced several times they were with the Burbank Police Department.  No one answered.  One of the officers then called the Huffs’ home telephone. The officers could hear the phone ringing inside the house, but no one picked up.  They next tried calling the cell phone of Vincent’s mother, Mrs. Huff.  When Mrs. Huff answered the phone, she indicated that both she and Vincent were inside the house; however, when the officers indicated they were outside and asked to speak with her, she hung up.

One or two minutes later, Mrs. Huff and Vincent walked out of the house and stood on the front steps.  The officers advised Vincent that they were there to discuss the threats.  Vincent, apparently aware of the rumor that was circulating at his school, responded, “I can’t believe you’re here for that.”  An officer asked Mrs. Huff if they could continue the discus­sion inside the house, but she refused; in the officer’s experience, it was “extremely unusual” for a parent to decline an officer’s request to interview a juvenile inside.  He also found it odd that Mrs. Huff never asked the officers the reason for their visit. The officer then asked if there were any guns in the house.  Mrs. Huff responded by “immediately turn[ing] around and r[unning] into the house.”  The officers followed her in.  There, after a brief argument with Vincent’s father, the interview continued for 5 to 10 minutes; the officers concluded the rumor about Vincent was false and left.

The Huffs brought an action claiming the police violated their rights by entering their home without a warrant.  The Court disagreed, finding that Mrs. Huff’s odd behavior, combined with the information the officers gathered at the school, could have led reason­able officers to believe “that there could be weapons inside the house, and that family members or the officers them­selves were in danger.”  Therefore, exigent circumstances excused the normal Fourth Amendment requirement for a search warrant before entry.

I don’t think anyone should be surprised by the outcome of this case.  The Court has long protected the right of officers to undertake limited warrantless searches solely to ensure their own safety, such as a pat-down (first allowed by Terry v. Ohio) or  a protective sweep of a home following the arrest of a resident (allowed by Buie v. Maryland).  The odd behavior exhibited by the Huffs would certainly raise alarm bells in the mind of a reasonable officer, and I think the Court did the right thing in ruling that officers need not wait for bullets to start flying before trying to get a handle on what is possibly shaping up to be a violent confrontation.

I was more surprised by the second case, U.S. v. Jones, where the Court ruled that installation of a GPS device on a vehicle,  and the subsequent use of the device to monitor the vehicle’s movements, constitutes a “search” within the meaning of the Fourth Amendment that can only be done with a warrant.  This seems counterintuitive at first—after all, if officers simply tailed a suspect, like in an 1970s cop film, there is no “search” because all of the suspect’s movements are exposed to the public.

However, the Court seems troubled by the use of advanced technology to conduct searches.  While the use of binoculars and flashlights by police have been upheld over the years, in Kyllo v. U.S., a 1991 case, the Court found that warrantless police use of a thermal imager, which measured the amount of heat emanating from different areas of defendant’s house violated the Fourth Amendment.  (Marijuana growers often use lamps that give out above-average amounts of heat in their cultivation, so the thermal images showed who was likely growing weed in their bedroom closet, even with the blinds closed.)  The equipment measures light energy freely exposed but not visible to the human eye—this superhuman ability seemed to trouble the Court.  Similarly, while there is not a lot of explanation in Jones, it does seem to reflect an underlying belief that human surveillance could not possibly keep a round-the-clock eye on a suspect 24 hours a day for a month (the surveillance in the case lasted 28 days).   The as yet unarticulated rule seems to be if a human couldn’t do what the equipment does, you need a warrant.

January 29^th, 2012

Being 39 and above the age of 30, I suppose I fall into the class of individuals – those over 30 – who the younger generation should, rightfully I might add, not trust.  While time will invariably mend that fence, a very real divide has materialized between the ‘Twit’ Generation, double entendre intended, and the generation happy to share their lives on Facebook.

The upcoming IPO for Facebook looks to be another blockbuster of a deal for yet another internet company whose earnings will not match the offering price. The last debacle was LinkedIn a company whose IPO had absolutely no connection to its ability to actually earn profits. Even looking at LinkedIn today, January 29^th, 2012, the stock is trading at $72.39 despite earning only $.06 per share.

Of course, while I predict an obscene Price/Earnings ratio for Facebook’s IPO which alone should give a rational investor pause.  What investors really should be looking at is the dichotomy between the older Facebook using generation and the Twitter Generation.

Simply put, Facebook just isn’t cool for 17 year olds who are compelled to befriend their older relatives. Most 17 year olds are losing interest in posting status updates that are viewable by their parents and grandparents and frankly, who could blame them. Of course, this generation will maintain a Facebook account for their official ‘G’ rated posts and their official public persona that they must maintain for their family, but underneath all that, the actual action is going to be taking place on Twitter.

So, if you’re thinking about a long term play betting on Facebook, you should probably think twice.  While Facebook’s offering price to earnings ratio will almost assuredly be obscene in and of itself, take a good hard look at the younger generation and in them you will see that Facebook’s days as the premier social media network might be numbered.

After watching the State of the Union address it was clear that a major theme was that things would be great if only those darned millionaires and billionaires would just pay their fair share.  I have many problems with this, not the least of which being the President’s implied definition of “fairness” and his assertion that a higher tax rate is what we need to get our finances in order.  For the life of me I can’t understand what brings them to this conclusion.

Our Federal government has run a deficit every year, for the past 50 years; Through Democrat controlled, Republican controlled and split governments!  This includes eras of both high tax and low tax, with the highest income tax rate in this era being 91% (1946-1963) and the highest effective capital gains tax rate in this era being 25% (1996)!  Through these periods of both extraordinarily high tax, and relatively low taxes, the deficits continued and the national debt grew!

Our congress has proven itself susceptible to Parkinson’s Second Law – expenditures rise with income – and are unable to spend within its means, no matter which party is in control, and what the tax rate is.  Despite not being historically accurate liberals constantly fall back on the idea that if the “rich” paid more taxes all of our problems would be solved.  But recent history makes it clear that the problem isn’t the tax rate; the problem is the system and the people spending the money.

It’s commonly said that “doing the same thing over and over again and expecting different results” is the definition of insanity.  Until we, as voters, hold politicians to a higher standard of fiscal restraint, raising taxes and expecting it to end deficits and reduce the national debt is insanity! But do I think liberals are actually “insane?”  No, I think liberals are politically savvy.

It would be politically unpopular for them to come right out and say that their ultimate goal is to play the role of a political Robin Hood, taking from the rich and giving to the poor.  To get around this they’re using a hollow, Trojan horse, argument by masquerading their idea of “fairness” as the silver bullet solution to our reoccurring deficit and sky rocketing debt.

The truth is that, to liberals, government enforced “fairness” takes precedent over historical facts, sound fiscal policy and the personal property rights of the “rich”.  So, the next time you hear a liberal claiming that higher taxes will reduce the deficit make sure you don’t buy into the insanity.  Their real goal is to impose their vision of “fairness,” facts be damned!

January 25th, 2012

The Hunger Games, the first of a best-selling trilogy of novels being turned into a movie this Spring, is described as young adult literature. And while it definitely spends quite a bit of a time on a teen love triangle, there is more going on beneath the surface than I expected. The story takes place in a future world where the Leftists seem to have won.

[MAJOR SPOILERS FOLLOW—if you haven't read the books yet, I encourage you to do so, they're quick but good reads, the author knows how to turn a phrase and build suspense.]

At some unspecified future date, the US, now called “Panea,” has been divided into 13 “Districts,” under the control of an authoritarian government known as “the Capitol.” Every year, the Districts, which are all riddled with poverty, must send a randomly selected male and female teenager to compete in the “Hunger Games,” a televised battle to the death in an outdoor arena. Sort of The Lord of the Flies meets Survivor meets The Running Man. Our heroine, Katness Everdeen of District 12, volunteers to go to the Games to save her sister, whose name gets pulled in the lottery. Throughout her story, we see pieces of Panea that give us insight into its culture. A culture that reflects Right Wing fears of what a Left Wing America would look like.

For example…

• Peacekeepers. The shock force SS-types Panea uses to keep its districts in line are called “Peacekeepers.” Same as the baby blue-helmeted UN troops who fueled many a paranoid “New World Order” scenario. I don’t know how that can be coincidence.

• Gun Control. Well, technically, restrictions on all weapons, but same idea. Katness has to hide the bow she uses to hunt in the woods, because if the Peacekeepers caught her with it inside her home district, she’d be executed for rebellion. Clearly the Capitol did away with the Second Amendment at some point in The Hunger Games alt history.

• Taxes. Have to read between the lines here—it’s still young adult literature, not an economics treatise—but Rue, the involuntary contestant from District 11 (a farming area) mentions that the Capitol only allows her District’s residents to keep a small amount of the food they grow. Sounds like a metaphor for confiscatory tax rates to me and in kind taxation of this sort is a medieval form of taxation common on the manor.

• Food Stamps. No stamps involved, technically, but the Capitol also controls its citizens by rationing out food (the book does mention that food supplies are short due to some vaguely described planetary crisis, possibly global warming—although residents of the Capitol have so much to eat that they drink ipecac at at parties so they can vomit then taste more dishes, like the decadent Romans in the time of Augustus). Favored Districts, such as District 2 who are basically the Capitol’s lapdogs, get more food, while potential tributes get extra rations if they put their name into the Hunger Games lottery more than once. It isn’t much of a jump to see “support for the Capitol gets you more bread” is just an evolution from “give someone an EBT card and they’ll keep voting Democrat.”

• Religion. Again, reading between the lines here, but there is no mention of churches in the 13 Districts, no mention of a benediction before the Games, no sign of any tribute praying in the face of danger. The most likely explanation is that the Capitol outlawed religion years ago, making Panea like a Communist country. Again, this plays into New World Order paranoia—I’m a bit surprised the Capitol’s hovercraft weren’t described as black helicopters, though I guess hovercraft are the sci-fi equivalent.

• Homophobia. Definitely more of a stretch here, but the residents of the Capitol are most often described as “flamboyant.” They wear outrageous, colorful outfits, with pink wigs and gold tattoos. They have an affected, mincing accent the people in the Districts love to mock. The majority we get to know by name work in the fashion industry. None of them are physically tough like the hardened residents of the Districts. And, oh yeah, the Capitol is located somewhere west of the Rockies—most likely the former LA or San Francisco. Ultimately, the people of the Capitol are portrayed largely as a “flyover country” stereotype of homosexuals—a hobgoblin of the right-wing evangelical Christians.

• Nuclear Deterrence. OK, this isn’t the Capitol’s policies, but in later books it’s revealed that District 13—which propaganda suggested was wiped out—in fact survived in a location that is clearly supposed to be Mount Weather, locked in an uneasy truce with the Capitol because its residents have control of nuclear weapons. This is pure Ronald “there’s a bear in the woods” Reagan. A strong nuclear defense ensuring freedom from the Evil Empire. Just one more thing that makes the book read like an Ann Coulter fable.

I’m curious how much of this makes it into the movie come March. If it’s true to the book, who knows, it may end up becoming Ron Paul’s ultimate campaign ad.

President Obama has called for tax fairness invoking the oft repeated statement that Warren Buffet’s secretary pays a higher rate than Warren Buffet himself.

Government spending as a percentage of GDP (gross domestic product) now exceeds 40%. Obviously the government is running a budget deficit and is borrowing, heavily I might add, but total government spending still remains the best overall measure of the actual impact of taxation on a society. Literally 40% of all the goods and services produced in the United States move from the private sector to the public sector.

The Democrats and Republicans in Congress, because ultimately it’s the Congress that spends the money and both parties are jointly and severally liable for the spending, have enacted social programs and military programs that are not sustainable. The realization has suddenly come to fruition that the United States is going to have difficulty borrowing in excess of a trillion dollars per annum.

Naturally, in this nation’s march to emulate the European social market economy, President Obama needs to make the case to the American people that taxes need to be raised. And if the social market economy is the goal, he is correct. Nevertheless, Americans have proven to be leery of new taxes, so the government needs an argument, and preferably an equitable argument to justify increases in taxes.

Of course, a general tax increase is completely out of the question, President Obama might lose the 2012 election as a result and the Republican House certainly won’t agree to a general tax hike, so, in order to make tax increases politically palatable, naturally those tax increases need to be on the rich, the 1%, those making over $250,000 per year, who, by the way aren’t in the 1%.

This argument is based on Warren Buffet’s statement that he pays a lower rate on his income (17%) than his secretary, who ostensibly pays higher rates based on her ordinary income as an employee of Berkshire Hathaway. Of course, looking at this myopically, it would seem quite equitable that somebody as wealthy as Buffet should pay a rate higher than his much poorer secretary. Most reasonable people would actually agree with that basic premise.

Nevertheless, the Buffet Rule is based on a fallacy, a false premise. Buffet’s individual rate of taxation on the 1040 that he files might very well be 17%, honestly I haven’t seen it; but to get a rate of this nature necessarily requires that a significant portion of the income be in the form of long term capital gains. Long term capital gains are taxed at 15%. This is not the totality of the taxation however. Buffet gets taxed on the long term capital gain at 15%, plus he pays the reduced value he receives for his shares since the corporation paid taxed over the course of Buffet’s ownership of the shares.

Corporations in the United States are subject to double taxation. The Buffet Rule and the premise underlying the equity of that rule focuses on only one half of that double taxation and completely omits the other half from the analysis.

Los Angeles, CA

Determining Mitt Romney’s Presidential suitability solely based on Bain Capital is naïve, at best.

Over the past month, there has been a deluge of critics, including other Presidential hopefuls, taking issue with Romney’s ability to serve as US President based on his business background. The primary attacks on Mr. Romney include his moral compass with respect to business and the issue of job creation…to which I reply – how on earth are those relevant?

This begs the simple question of whether people actually understand what private equity is and how it works. To start with, let’s dispel what seems to be a recently created urban myth – private equity is NOT about job creation. It is about making money for the firm and the firm’s investors who are known as limited partners.

In the simplest terms, private equity is capital used to invest in private businesses. If private equity is used to invest in a start-up or early stage company, it is known as venture capital. This is a very risky approach, for certain, as the majority of start-up’s do ultimately fail. They can, however, be exceptionally financially rewarding if the underlying company becomes a success. Example – Peter Thiel’s $500,000 investment in Facebook in the summer of 2004 for a 10% stake in the company. While there has been an inordinate amount of debate regarding Facebook’s valuation (in late 2011, the company announced that it is targeting an initial public offering at a $100 billion valuation – double what it was valued at last January), I think that it’s safe to say that Thiel’s investment was indeed wise.

Private equity can also be used to facilitate a company’s management to purchase the company from its owner, a “management buy-out”. If debt is utilized to facilitate the transaction, it is known as a “leveraged buy-out”. But the bottom line is private equity firms, such as Bain Capital, are in the business of creating additional value for existing businesses so that they may ultimately sell the company at an increased valuation, sell the company’s assets, etc. In order to create additional value, frequently cost efficiencies are pursued, consolidation occurs, divisions are closed, workers are terminated and unions get angry. But this doesn’t make private equity firms “bad”. They create value through increased efficiency. In many cases these measures enable companies to flourish, expand and both hire more workers and create value for stakeholders. So you can take that moral compass argument and throw it out the window.

With respect to the issue of job creation and much to Newt Gingrich’s delight, Romney did himself a huge disservice by telling the media that he had “created 100,000 jobs”. It led him into a trap whereby he has to repeatedly justify that figure. Moreover, that’s not the point. The point is that Romney’s experience at Bain both proves how adept he is as a businessman (a highly attractive quality in this period of economic malaise) and underscores both his intelligence and how dynamic he can be. Private equity firms are most definitely not in the business of job creation. Job creation may well be an ancillary benefit of the firm’s activities, but it is not their concern.

Judging Romney’s Presidential suitability based solely on his tenure in the private sector is ridiculous. One can infer certain points (salient or not) from an analysis of his overall success during this period, but it is certainly not an all-encompassing approach. If one wants to judge his “moral compass”, take a look at his values, his family, or his religion. And if you’re angry that private equity firms currently fail to operate as staffing services, you’ve got a long wait ahead of you.

My first political memory goes all the way back to August 8, 1974.  At age six, I watched Richard Nixon resign the presidency, for the first and only time in our nation’s history.  Since then, I have avidly watched our presidential elections, trying to understand how we have gotten the presidents we have.

It’s taken nearly 38 years, but I finally got it: of the candidates in the general election, the one who wins is usually the one whose last name sounds cooler and more presidential than his opponent’s last name.

You may laugh – or otherwise shake your head in disbelief (while offering a referral to a mental health specialist) – but if you think about it, this theory successfully predicts the winner 71.43% of the time.  Only 21.43% of presidential elections have seen the less presidential name win the election.

Granted, this is a highly subjective test, and there are gray areas.  Sometimes, the names are either equally good (1880) or equally bad (1908, 1988 and 2000).  But for the most part, a clear winner and a clear loser can be chosen.  Probably the clearest exception, though, would be the 2000 election, between George W. Bush and Al Gore – both names equally bad, and culminating in the most contested election in contemporary times.  That W ultimately prevailed merely demonstrates the victory of sex over violence in America, at least in name.

I’ve never before applied this test to a primary election, and I must admit the potential results could be intriguing.  It would explain why Mike Huckabee lost the nomination in 2008, but not necessarily McCain over Romney (probably about even), and it would certainly explain why Obama and Clinton were close that same year.  So, while we only have one party’s primary to work through, it’s worth considering.

One rule that emerges is that any candidate whose last name starts with “P” clearly loses.  The alliterative quality of “President Paul” or “President Perry” is just too much for me to take.  Indeed, we’ve only had two such presidents before – James Polk in 1844, and Franklin Pierce in 1852.  And now, as a result of this article, you have now heard of those two presidents.  In three other elections, the losing candidate’s last name started with “P.”  They not only lost, but you probably have no idea who they are.  (Charles Cotesworth Pinckney in 1804 and 1808; Alton Parker in 1904.  And now you’ve heard of those two failed candidates.)  Therefore, clearly Rick Perry and Ron Paul – in that order of preference – cannot possibly win the primary, lest Obama have the biggest landslide of this century.

Santorum is the next least desirable name, mostly because it sounds too much like Latin.  If he were elected, the oval office would become known as the sanctum Santorum.  I don’t think the country could survive that.

Technically, Gingrich’s name is worse than Santorum’s, on mere cacophony alone.  But really … how can anyone resist “The Gingrich who stole Christmas”?  It’s way more amusing than Santorum’s joke, and so I bumped him up a bit on the list for that reason alone.

I need to back up a moment and deal with a few candidates who have left the Republican field this time around.  Tim Pawlenty might have given us pawlenty of laughs for a little while, but a President Cain would have been too likely to kill the United States’ younger brother (whoever it is) after having some bad nightmares of reading Bachmann’s Books.

And Huntsman, now – who has just dropped out today – never really inspired amusement, scorn, or much of anything else.  His name isn’t quite as uninteresting as Smith (lost to Hoover in 1928, a successful application of the theory) or Johnson (beat Goldwater in 1964, another successful application), but it’s still pretty boring.  So boring, in fact, that he barely registered in the South Carolina polls – right behind native son Stephen Colbert.

In any event, needless to say, on this theory alone the Republican Party has been setting itself up for failure in this year’s election, on the candidates mentioned so far.

This leaves Romney, the only Republican in the field whose name sounds even remotely presidential.  He still doesn’t beat Obama, but he could at least put up a credible fight, which is why he’s destined to win the nomination; lose the general election; and go down in history as … well, something.

-IJS
1/15/12

The platform of the Republican party has remained largely unchanged for decades but, when in power, the GOP failed to live up to its rhetoric.  This failure to fulfill its promises and its lack of dedication to its values left many conservatives feeling disenfranchised by the party.  This political discontent is not limited to one party but it does effect the GOP more.  A Gallup poll shows that, while Americans equally associate with the two major parties, 4% more are willing to officially register as Democrat than Republican.  This is only one of many signs that conservative voters are unhappy with the Republican party.

A Pew Research Poll shows that more Republicans than Democrats want to see their own representative lose an reelection bid.  That same poll also shows less than half of Republicans approve of the GOP leadership.  Another Pew poll shows that only 51% of Republicans say that the party’s Presidential field is good or excellent, compared to 68% at this same time in 2008.  Suffice it to say the Republican party has neglected its base and left a lot of conservatives feeling unhappy and unrepresented.

This disaffection brought about the rise of the Tea Party in 2008 and the same disaffection will cost the GOP the 2012 presidential election in a landslide.  Its already evident that the discontent is taking its toll and the current field of candidates is reinforcing the negative stereotypes.  These candidates are, in theory, the leading lights of the Republican party and they have already begun to disregard the values of the party when they feel its politically expedient.  Instead of leading the party into a new era of reaffirmed conservative political ideology they continue to remind every disaffected conservative why they registered independent, voted against an incumbent Republican or any other action they’ve taken in protest to the party.

For now too many long term GOP incumbents remain in Congress for the conservative base to have its faith restored in the party.  Never in memory have so many conservatives been so cynical about the Republican party and its leadership and so far as I can tell that trend will continue.  If the Republican leadership wants to right the ship then it needs to live up to its rhetoric, lead by example and put the country before political victories.  Until then, to many conservatives, a Republican victory is a hollow victory with nothing truly gained, a Pyrrhic victory.

January 14^th, 2012

Over the course of several years, the United States and South Korea negotiated the terms of KORUS, the acronym for the free trade agreement between the two nations. The United States ratified in 2010 and South Korea finally ratified the treaty in November of 2011. The provisions of the treaty will be phased in over five years, essentially eliminating most duties and tariffs on the nearly $100 billion dollars in bilateral trade that flows between the two nations.

Free trade is typically thought of in terms of trade between two different countries, but the same premise exists domestically which permits residents of New York to trade freely with residents of Florida or California, one of the basic premises underlying the ratification of the US Constitution was to prevent states from erecting trade barriers; delegating the substantive power to regulate interstate commerce exclusively to Congress. Of course, no relevant political movement suggests that the free trade that does exist between the states of the United States is anything other than beneficial.

Of course, to a large extent, the reason free trade between the states is largely uncontroversial is because the states’ economies integrated long ago and the short term losers that result from free trade are a distant memory. Furthermore, within the United States, we share the same currency, the same US dollar funds the same transactions in Florida, in New York, and everywhere in between and amongst the several states.  This currency union prevents Florida or New York from unilaterally undermining the value of an obviously nonexistent local currency to promote exports or to deter imports. As a matter of fact, the concept of domestic free trade is so ingrained that statistics of state exports/imports to one another are not kept, probably are impractical to keep and obviously are not even thought of as foreign trade to begin with.

However, with respect to foreign nations, this is not the case, globalism and the resulting strains that will invariably occur from the integration of two formerly closed systems, as the markets wring out the losers and assign production to those locations with a natural competitive advantage, have obviously not resulted in a seamless economy by any stretch of the imagination.

For starters, unlike the domestic trade of the United States, most countries, with the exception of a few smaller economies that have dollarized, continue to maintain their own fiat currencies.  In most economic paradigms, this doesn’t present an issue since, as two economies integrate, their fiat currencies, which should be subject to a freely floating exchange rate, will see swings in value based on the relative demand for that country’s products, which, by definition creates demand for that particular country’s currency.  Ultimately this will result in a situation where importing creates the conditions for future imports to cost more and a self-sustaining system can emerge.

Unfortunately, the export-led model of development has led to a situation where “export-dependent” countries – dependent in the sense that those countries deem it necessary to subsidize exports to maintain full employment – have developed pro-export monetary policies, specifically intervening in the markets to purchase US dollar denominated assets, creating artificial demand for the US dollar creating the conditions where the relative value of the exporting nation’s currency remains undervalued.

The United States has responded to the anti-market currency manipulators and has enacted laws and established policies to identify and mitigate the effects that currency manipulation has on our foreign trade. A case in point is China, which, as an ostensibly NME (non-market economy), does not subject the yuan to the rigors of a floating exchange rate. China has continuously undervalued the yuan to maintain export oriented, labor intensive industries. Formerly subjected to a de facto pegging of the yuan to the dollar at a fixed rate of exchange, the Chinese government has recently permitted the yuan to be pegged to a basket of currencies and to fluctuate within a ‘narrow band’ of currencies. Despite being undervalued by as much as 30%, the yuan, in the past year has appreciated by approximately 4%. The US Treasury, tasked with identifying countries that engage in currency manipulation, stated the obvious, that China’s currency was undervalued. Yet the US Treasury failed to formerly designate China as a ‘currency manipulator.’

Why doesn’t the United States label China a currency manipulator? The US Treasury states that “the new mechanism [China’s allegedly new method of valuing the yuan] remains, in practice, a tightly managed currency peg against the dollar.” However, the US Treasury stated that it decided not to cite China as a currency manipulator under US currency manipulator laws because of proises it had received from the Chinese that China was committed to “enhanced, market-determined currency flexibility” and that China would put greater emphasis on promoting domestic sources of growth, including financial reform. Essentially the US Treasury, obviously for political reasons, is failing to designate China a currency manipulator, in the present, because China is promising not to engage in currency manipulation, in the future.

Other countries have also been chided for engaging in currency manipulation, most pertinently Japan and South Korea. Its patently obvious that under current law, the US Treasury simply will not formally designate a nation as a currency manipulator, even those countries with an overt public policy to undervalue their currency. In 2011, the US Treasury noted foreign exchange (FX) transactions engaged in by Japan and South Korea which were designed to decrease the value of their currencies – by selling the yen and won on the international markets which causes the yen and won to depreciate accordingly.

Because of the inherent imbalances in global trade, Japanese and South Korean exporters, now dependent on foreign sales, need their currencies to be undervalued and when these countries accumulate foreign reserves and create the macroeconomic conditions for their currencies to appreciate, they complain to their governments who respond accordingly and sell their local currencies to ensure that the exporters can continue to export.

This is simply unsustainable and is placing insurmountable burdens on our industrial middle class to sustain their living standards.

In 2010, President Obama promised to double US exports by 2015 and in light of the economic circumstances, there does not appear to be any real choice; either the United States is going to have an export-led recovery or the unsustainable global dance of entrenched exporters and entrenched importers is going to collapse.

At the end of the day, the United States is committed to a policy of free trade. This is a commendable policy, in theory. However, in reality, the United States just entered into a free trade agreement (KORUS) with a known currency manipulator with apparently little intention of doing anything about it.