February 22, 2017

Don’t Panic!

No question these are scary times. The new President, to be charitable, has made a lot of rooky mistakes. His grasp on reality slips in the face of any criticism, and he is faster to go on an ad hominem attack than a pit bull. Things are pretty scary on the other side as well. Most of the press thinks that the most important issue facing the nation is how the President treats them; they confuse criticism with censorship. Most importantly, the country is badly and deeply divided. That’s real. People on both sides of the divide, but particularly on the now-out-of-power left, are reacting with panic.

The best description of panic I ever read is in the novel Norwegian By Night by Derek B. Miller.

“Panic is the enemy,” said Staff Sergeant O’Callahan in 1950. “Panic is not the same as being scared. Everyone gets scared. It is a survival mechanism. It tells you that something is wrong and requires your attention. Panic is when scared takes over your brain, rendering you utterly fucking useless. If you panic in the water, you will drown. If you panic on the battlefield, you will get shot. If you panic as a sniper, you will reveal your position, miss your mark, and fail your mission. Your father will hate you, your mother will ignore you, and women across this planet will be able to smell the stench of failure oozing from your very pores.”

Panic isn’t pretty. It isn’t helpful, either. Dangerous times call for calm and judgment. If we want to stop really bad things, you’ve got to distinguish them from the things we just disagree with. We can’t automatically assume that everything Trump does is wrong – or right, for that matter. We can’t assume every news story we disagree with is false – or assume that it is true just because we agree with it. We can’t imagine ourselves as heroic members of the resistance when we go to a police-protected demonstration; that’s an insult to the people in the Syrian resistance being gassed and barrel-bombed by their government. Equally we are not the “Indians” of the Boston Tea Party because we demonstrate against the bailout of banks (that is the first thing the modern day Tea Party was against).

It’s a scary time; we can’t panic.

There’s another great paragraph in Norwegian By Night. This time Miller is writing about Oslo, where he lives as an American ex-pat. The book was published in 2012 so he wrote this before the last great migration, but he's writing about part of what divides us today.

"Recent immigration from Africa and Eastern Europe— and Muslim countries farther east— created a new social tension in the city that still lacked the political maturity to address it. The liberals expounded limitless tolerance, the conservatives were racist or xenophobic, and everyone debated from philosophical positions but never from ones grounded in evidence, and so no sober consideration was being given to the very real question now haunting all of Western civilization— namely, How tolerant should we be of intolerance?"

February 20, 2017

Is Border-Adjustment the Answer to Broken US Corporate Tax Structure?

The US corporate tax system combined with globalization turns free trade into unfair trade (see last post). Profits domestic companies make overseas are not taxed until they come home; so, naturally, corporations invest these profits abroad and build new factories abroad and favor the output of their foreign factories even if the cost of labor is the same or somewhat better in the US. To add insult to injury, while we are favoring imports with our tax code, most of our trading partners (including all OECD countries except us) favor their exports by rebating value added tax (VAT) when goods leave their country.

If we are going to continue to have the benefits of free trade and globalization, we must make sure free trade is fair to American workers. Sanders and Trump voters are right in saying that these benefits are flowing to the 1% at the expense of American workers. I’m embarrassed not to have thought about this before being hit alongside the head by the strength of these voters’ anger.

One proposal to solve these two problems in the corporate tax code is called a border-adjusted tax. Here’s how The Economist describes it:

“Firms currently pay corporate taxes on their profits. Border-adjustment would change how those profits are calculated. Accountants could no longer deduct imports—say, goods brought in from China—as costs. And their exports would no longer count as revenues. For tax purposes, “profits” would be domestic sales minus domestic costs. Effectively, imports would be taxed, and exports would be subsidized.”

Let’s take a toy which can be purchased by Walmart’s in China for three dollars and which costs twenty cents to bring home. Since the VAT in China is 17%, the refund to Walmart on export to $.51. The net cost is $2.69. Suppose the toy can also be purchased from a factory in the US for three dollars and local transportation is only a nickel. Since there is no refund of corporate taxes in the US like the VAT refund, the cost to Walmart for the US product is $3.05 - $.36 higher than the Chinese toy. Let’s suppose the toy sells for $3.99 at your local Walmart. Under the current system Walmart has a gross taxable profit of $1.30 on the Chinese toy and of $.94 on the US equivalent. Assuming for the sake of example that Walmart pays the effective US corporate tax rate, which is about 26% according to the GAO, the after tax profit on the Chinese product is $.96 and only $.70 on the US product, even though manufacturing costs were the same and transportation from China is more expensive. How do you compete with that?

One answer is border adjustment. Let’s border adjust the example:

This time Walmart is not allowed to deduct the cost of the imported product when calculating its taxable profit, which we’ll assume includes transportation (actually depends on the version of border-adjustment). The full $3.99 sales price is now taxable incremental income to Walmart and the tax due at 26% is $1.03. Walmart will now have an after tax loss of $.07 cents on the Chinese toy as opposed to a gain of $.70 on the US product. Guess who gets the order for the toy – even if the US cost of manufacture is actually somewhat higher.  If, after the tax change, Walmart still wants to make the same after tax profit on the US toy that it used to make on the Chinese toy, it will have to raise the selling price from $3.99 to $4.34. There’s no question that’s an added cost to US consumers (although it might not all be passed through); but all of the cost of the product stays in the US economy.

Walmart is NOT in favor of a border-adjusted tax nor are most other retailers or processors of imported raw materials like refineries. The Koch brothers are against it. See this website for many arguments against.

Suppose the US and China are competing to sell the toy to a third country and transportation is the same and suppose that both factories have a cost of goods and labor of making the product of $2.00. They both sell nominally at $3.00; but the net cost to the buyer of the Chinese toy to the buyer is only $2.49 after the VAT refund. Guess who gets the sale. But, with a border-adjusted tax, the US seller essentially has been forgiven tax on the whole selling price – a savings of $.82 at the effective tax rate of 26%. Now the US manufacturer can afford to drop its price and will win the sale – even if the US price of labor is somewhat higher, the US still gets the sale. The US is more likely to be selling airplanes than toys so add eight zeros to the end of all these numbers.

Boeing is in favor of a border-adjusted tax as are most US manufacturers, drillers, and miners. Farmers are on the fence because of fear of foreign retaliation. This website is sponsored by a who’s who of companies that a border-adjusted tax would benefit.

In a perfect world neither imports or exports would be advantaged. But we don’t live in that world; all of our major trading partners DO advantage their exports. Border-adjustment is one way to enable US workers to compete fairly – even if we pay a little more at Walmart. It’s the best way I’ve seen so far and far better than a set of punitive tariffs – although some countries might challenge it as unfair and we might suffer some retaliation (but they already have VAT refunds). If we had a border-adjusted tax, we could drop a crazy-quilt of tax exemptions whose purpose is to make our products competitive as well as subsidies like the Import-Export Bank.

A border-adjusted corporate tax is part of the tax reform plan Speaker Ryan has been working on for years. It is not clear whether it has enough Republican support to pass nor how much Democrat support to can muster. President Trump is ambiguous on it.

The real shame will be if this important debate gets lost in the noise of hyper-partisanship and the lobbyists keep control of the tax code.

February 17, 2017

The US Corporate Tax Structure Is an Incentive to Send Jobs Abroad

The way the US currently taxes corporate income is toxic for American workers when coupled with globalization. It turns free trade, which I think is a good thing, into unfair trade. It is a bizarre structure which only its parents – lobbyists and those corporations which benefit from it – could love.

Problem 1: in theory, the US taxes domestic corporations on their worldwide income with a deduction for foreign taxes paid. But, besides the obvious problem of ever discovering what the true income is in places immune from audit, there’s a huge loophole. Foreign income is NOT taxed until it’s brought home. Obviously, this is incentive NOT to bring the foreign income home if there’s any use at all for it abroad; this costs tax revenue.

Even worse, there’s an incentive to turn domestic income into foreign income. Here’s one easy and very popular way: transfer corporate patents to a subsidiary in a low-tax country like Luxembourg or Ireland and then charge the US corporation huge fees for the use of the patents. The overall corporate earnings don’t change; they just get shifted to the low-tax subsidiary – but they don’t get taxed “until the profits come home” -  like never or not until Congress passes a “tax holiday” to get the money back into the country.  This causes indirect job loss (as well as tax loss)because the incentive is to invest these profits abroad rather than here

But there’s worse. If the corporation build a subsidiary factory in the low-tax jurisdiction and charges a high price to the parent company for goods it buys from that factory, these goods are cheaper to the corporation as a whole than if they were purchased in the US – even if the cost of manufacture is actually the same – because no present taxes are due to the US on the profits of the foreign subsidiary. Now American workers not only have to compete with foreign workers who may or may not be paid less, they also are disadvantaged by their own tax code. That’s a high hurdle to climb.

Problem2: Our competitors mostly use a tax system which rewards exports from their countries at the expense of imports. It’s called a value added tax (VAT) and it’s rebated on exported goods (if you travel and are as diligent as Mary, you may have claimed your VAT rebate at the airport before coming home). The US taxes export sales at the same rate as imports. That sounds fair but it isn’t if everybody else is favoring their exports. The effect is that goods imported to the US are cheaper by the amount of tax that was rebated on them than goods made in the US which are fully taxed. Once again, American workers are paying the price for this disparity in tax policy between us and our trading partners – they either have to get paid less or lose the sale.

Mea culpa: I blindly assumed globalization is a good thing because it IS in economic theory. It took the revolt which propelled Sanders and Trump and even made Clinton a protectionist (after she wasn’t) to make me look harder at whether globalization has resulted in fair trade as well as free trade.

Next post: is a border-adjusted tax the answer?

February 15, 2017

It Depends How You Ask the Question – The Asian Disease Problem

Which explains a lot of where we are today

Quotes are from Michael Lewis’ The Undoing Project describing the work of Israeli psychologists Daniel Kahneman and Amos Tversky.

“Problem 1. Imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimate of the consequence of the programs is as follows: If Program A is adopted, 200 people will be saved. If Program B is adopted, there is a 1/ 3 probability that 600 people will be saved, and a 2/ 3 probability that no people will be saved. Which of the two programs would you favor?”

An “overwhelming majority” of people chose Program A which saves 200 lives for sure.

Now ask this question:

 “Problem 2. If Program C is adopted, 400 people will die. If Program D is adopted, there is a 1/ 3 probability that nobody will die and a 2/ 3 probability that 600 people will die.”

An “overwhelming majority” of the group given problem 2 chose Program D. Note that Program A and C are identical in their outcomes as are B and D. The questions are just framed differently. When A was framed as a gain, people chose it; when it was phrased as a loss (as it is in C), people rejected it.

This is scarcely new news. Every salesperson worth his or her salt knows that fear sells. Sales 101 (which I only attended by osmosis) teaches “first create anxiety in the prospect.” IBM famously used FUD (fear, uncertainty, and doubt) in the early mainframe days to convince IT managers not to buy cheaper computers from competitors like Burroughs and Sperry Rand (remember them?). “You’ll never get blamed for picking IBM”… but, if the cheap computer you chose breaks, ….

As we’ve seen, a political campaign based on xenophobia and fear of job loss (they overlap but they’re not the same thing) can be successful against long odds. And as we see now, fear of President Trump is a potent fund-raising theme and impetus to demonstrate even where it is not clear exactly what the demonstration is against.

Framing may explain why so many polls about BREXIT and Trump were wrong. Probably unconsciously, pollsters phrased their questions in a way likely to elicit the response they expected. The lesson of the quotes above is that people respond to the framing of a question, not to its actual content. I will never again pay any attention to a poll unless I see the exact question that was asked.

More broadly framing may explain why some people persist in socially dangerous anti-vaccination behavior: they are avoiding what is explained to them as a risk, which we tend to do at almost any cost. Framing may also explain why discussions on what actions should or shouldn’t be taken to avoid climate change are shouting matches rather than exercises in reason: the two sides have the question framed differently in their minds.

More on The Undoing Project is here.

February 13, 2017

Don’t Believe the Experts

A frightening study

We know from recent experience that political experts don’t have a very good track record but we’d all like to think that a doctor’s opinion is a fact. This scary old story is from Michael Lewis’ new book The Undoing Project.

Way back in 1968 Lew Goldberg published a study of how consistent doctors were in diagnosing ulcers from x-rays. Here’s how Lewis tells the story:

“The researchers then asked the doctors to judge the probability of cancer in ninety-six different individual stomach ulcers, on a seven-point scale from “definitely malignant” to “definitely benign.” Without telling the doctors what they were up to, they showed them each ulcer twice, mixing up the duplicates randomly in the pile so the doctors wouldn’t notice they were being asked to diagnose the exact same ulcer they had already diagnosed….

“More surprisingly, the doctors’ diagnoses were all over the map: The experts didn’t agree with each other. Even more surprisingly, when presented with duplicates of the same ulcer, every doctor had contradicted himself and rendered more than one diagnosis: These doctors apparently could not even agree with themselves. ‘These findings suggest that diagnostic agreement in clinical medicine may not be much greater than that found in clinical psychology— some food for thought during your next visit to the family doctor,’ wrote Goldberg. If the doctors disagreed among themselves, they of course couldn’t all be right— and they weren’t.”

The really interesting – and scary –  part for me is that each doctor contradicted himself or herself at least once.

1968 was a long time ago. We have much better imaging technology. It’s likely that doctor training has gotten better. But my point is about experts. These were the experts of their time.

Now here’s the good part of the story if you’re a nerd like me. The same researchers asked the same doctors how they made their diagnoses. They took the doctors’ answers and wrote a simple computer algorithm to do the analysis the way the doctors said it was supposed to be done. The computer did better than even the best doctor in the group!

Lewis’ conclusion is “You could beat the doctor by replacing him with an equation created by people who knew nothing about medicine and had simply asked a few questions of doctors.” But he is also an expert and he isn’t telling us 1) how the programmers decided what method to use when doctors disagreed and 2) how the model got access to the data; back in 1968 computers read punch cards, not pictures. I suspect some human read the pictures and coded them for the computer so that human actually had a hand in the diagnosis.

You could conclude that the doctors didn’t follow their own prescription or that that the algorithm was crowd-sourced wisdom and therefor better than what any one doctor would do. You could also say we still need experts to come up with the rules which become the programs which do the diagnoses. The latter was true but artificial intelligence and big data available to be processed is all about generating rules. That’s how cars learned to drive themselves.

But surely we need experts (nerds) to write the programs that process the data that make the rules that do the diagnoses… but for how long?

February 09, 2017

No Job is Bad

Raise the Minimum Wage AND Remove Disincentives for Work.

This is a radical non-partisan proposal; probably both the left and right will hate it.

The national and Vermont unemployment rates ignore huge numbers of people who could be working but aren’t – the people who aren’t actively looking for jobs. At least part of the cause of the drug epidemic raging in America is the demoralizing effect of joblessness. The economy is held back both because potentially productive people are not productive and because we have a vast and duplicative welfare apparatus to support both those who aren’t working and those whose jobs don’t pay them enough to get by. Children who grow up in a house without a wage earner are less likely to successfully enter the labor force themselves.

For many people, not working is currently a good personal economic decision even if it is a poor lifestyle decision and bad for the economy as a whole. The jobs they can get pay less than the benefits they are eligible for if they don’t work. We need to address both sides of the equation: raise the pay for entry level jobs and reduce or eliminate benefits for not working – except, of course, for those who can’t work.

These two steps have to be taken together. Together they will be very powerful. This is part of how we put America to work again.

Let’s look at some of the objections that will be raised:

  1. Employers like restaurants can’t afford to pay more. The truth is that they can’t afford to UNILATERALLY pay more. If McD pays 30% more than Burger King, it will price itself out of business. If both pay 30% more, the price of fast food will go up but neither of them will be at a competitive disadvantage.
  2. Prices will go up. This is true (see above). But taxpayers are subsidizing the low wages and low hamburger prices by paying needed supplements (welfare) to those who can’t get by on what they’re paid. If wages go up, it IS essential that this be reflected in a reduction or elimination of benefits for those who will now be able to support themselves. We will pay more for hamburgers but less in taxes and less in the social and dollar cost of permanent unemployment. One over-simplified way to look at this is that the middle class is subsidizing low wages to benefit the 1%.
  3. Some jobs will disappear if the minimum wage is raised. This is also true; the incentive to automate will get even larger. However, a stronger economy will produce more jobs; people who earn more spend more. Right now in Vermont there are MORE minimum wage jobs available than people willing to take them – look at the help-wanted signs in every fast food restaurant. Employment - real employment – can go up even if some jobs are eliminated. However, it is important that these steps be taken at a time when there are jobs available. This isn’t a strategy for a recession; it’s a strategy to make us stronger before the next recession.
  4. It will be harder for kids to find part time work. This is true and needs thought. An apprentice program with a lower minimum wage would be good for kids but might drain too many jobs from adults. Overall I think it’s most important that kids have the example of working parents.
  5. It’s inhumane to tell people they will lose their benefits if they don’t take jobs they don’t find fulfilling. No Job is Bad. It is very bad not to have a job. Any job which is safe and pays a living wage is better than no job. It is inhumane to discourage people from working with our current policy of an historically low minimum wage AND high benefits for not working. It is inhumane to force those who are working to also become dependents of the welfare system to get by.
  6. What we really need are more higher-paying jobs and people trained to fill them. Yeah, we need those things, too. But we must immediately address the problem of people without fancy skills. Moreover, there is no better job training program than a job.
  7. It’s not so simple. We’ll need a transition. We’ll need to make sure people don’t fall through the cracks. Health care is still “unaffordable”. Child care is an issue. But the tradeoff of higher wages for lower subsidies needs to be set in law and set in motion.

Because we do have both unfilled entry-level jobs in Vermont and people who have left the labor force but can work, we are in a position to implement this here now. We don’t need permission from the Feds. We might set a good example, which we always like to do. The motto might be Everyone Works for a Living Wage.

February 06, 2017

Good news: Climate Change Page Still on EPA Website

Bad news: It’s still misleading

Last week Reuters ran a story headlined “Trump administration tells EPA to cut climate page from website: sources”. That would be a bad thing. However, at least so far, it hasn’t happened. The climate change page still has a link on the front page of epa.gov and the link is still live. Moreover, noaa.gov, the website of the National Oceanic and Atmospheric Administration, still has a link on its front page saying “2016 marks three consecutive years of record warmth for the globe”.

Good. We really don’t want to suppress information. But I have a complaint: both the NOAA headline and the NASA report pointed to by the EPA site are inaccurate and misleading in the same way as they were under Obama. This isn’t just a quibble; what’s happening climate-wise is important and the government ought to be reporting it accurately. These websites shouldn’t be used for propaganda of any kind.

The inaccuracy is that the difference in measured temperature between 2015 and 2016 was less than the margin of error in the methodology used to derive the number. NOAA says that temperatures in 2016 were .07 degrees Fahrenheit higher than in 2015 (NASA doesn’t give the actual difference in their story). But NASA does say that the likely uncertainty in recent annual data is .09 degrees F. This error margin is actually much less than what is claimed in the United Nations IPCC report – about .36 degrees F. Either way, there is no statistical difference in the average temperature for 2015 and 2016. That means that no scientist should say that one year was hotter than the other. The data is not conclusive.

The UK Meteorological Office – firm believers in anthropogenic climate change – nevertheless manages to be accurate in reporting the data; their headline is “2016: one of the warmest two years on record”. That is what the data shows. They are clear that the difference is less than one-tenth the margin of error.

Why does it matter if 2016 was the hottest year in the relatively short time we have been collecting such data or only tied for hottest? Well, it obviously mattered enough to whoever wrote the stories for NASA and NOAA to violate the norms for reporting uncertain data. It matters because we know we’re in a warming trend since the last ice age AND we know we’re adding greenhouse gasses to the atmosphere AND we need to make important, expensive decisions based on how much of warming is attributed to those gasses and how much is a long term trend we may not be able to influence.

According to a Wall Street Journal column by Holman Jenkins, leaving the uncertainty interval out of climate press releases started in the second year of the Obama administration. The Trump administration can improve public knowledge of scientific information by making sure it is reported accurately and completely on government websites. Press which is, rightfully, obsessing about government telling the truth should make sure its reporters know enough to ask the right questions when they get a “scientific” press release from a government agency. The Trump administration isn’t the first to have an agenda to support and it won’t be the last.

February 03, 2017

Worried About an Imperial Presidency? Support Gorsuch

If you’re worried, as I am, that President Trump will both threaten civil liberties and expand the power of the Presidency even further than Obama took it, you should support the nomination of Neil Gorsuch to the Supreme Court. His record indicates that he will defend the constitution and our rights under it.

Neal Katyal was an acting solicitor general in the Obama administration. He knows Gorsuch both personally and professionally. Here’s some of what he wrote in a New York Times op ed:

“I am hard-pressed to think of one thing President Trump has done right in the last 11 days since his inauguration. Until Tuesday, when he nominated an extraordinary judge and man, Neil Gorsuch, to be a justice on the Supreme Court…

“I have no doubt that if confirmed, Judge Gorsuch would help to restore confidence in the rule of law. His years on the bench reveal a commitment to judicial independence — a record that should give the American people confidence that he will not compromise principle to favor the president who appointed him [emphasis mine]. Judge Gorsuch’s record suggests that he would follow in the tradition of Justice Elena Kagan, who voted against President Obama when she felt a part of the Affordable Care Act went too far. In particular, he has written opinions vigorously defending the paramount duty of the courts to say what the law is, without deferring to the executive branch’s interpretations of federal statutes, including our immigration laws.”

Yes, Gorsuch is a conservative in the same way the late Antonin Scalia was; he is a strict constructionist. He does not think it is the job of the courts to rewrite the Constitution to accomplish goals which Congress or the States have not accomplished, no matter how worthy those goals. He does not support executive branch attempts to legislate by misinterpreting statute (see above).

Most importantly, as a strict constructionist, he does not think that court rulings should reflect the personal views of the judges. This makes his personal views on social issues largely irrelevant. For example, he has written that he is against assisted suicide. I do think it should be allowed. If a case on assisted suicide comes to the Supreme Court, I think Gorsuch would vote that states have a right to permit or deny the practice even though he thinks (personally) it should be banned.

The elephant in the room is Roe vs. Wade, the Supreme Court decision that states cannot ban abortion although they can regulate it like any other medical procedure. This decision ended an era of hypocrisy when I was a young adult in which rich guys’ pregnant girlfriends could get abortions (often in Canada) and poor couples had shotgun weddings. Also women had very dangerous illegal abortions. I think this decision got the right result in the wrong way – judicial legislation. The danger in that is now clear: if unelected judges can make law, they can also unmake it.

If Gorsuch is confirmed, the court will have the same liberal-conservative balance it had before Scalia’s death. Justice Kennedy is often the crucial swing vote, although, on any particular issue, the Chief Justice may vote on the “liberal” side – as he did in a key decision on Obama Care. Roe vs. Wade is probably not endangered by confirming Gorsuch. However, if Trump appoints a replacement for a liberal Supreme, it may be. The worst case, I think, is that the court rules that states “may” ban abortion. The good news is that we can all weigh in at the state level.

Some of Gorsuch’s decisions have benefited businesses; others have not. As far as I can tell, he has followed where the law and constitution lead. It is not the role of the courts to achieve any outcome except adherence to applicable law and the constitution. If the law is wrong but constitutional, then the law must be changed legislatively.

Please forget the fact that Republicans did not allow hearings to be held on Obama’s Supreme Court nominee. 1) we’re not going to go four years with filling Supreme Court vacancies; 2) this is very much an inside the beltway issue with senators shamelessly changing sides depending on circumstance.

Here’s what Senator Schumer said back in 2007 at the end of the Bush Presidency: “We should not confirm any Bush nominee to the Supreme Court, except in extraordinary circumstances.”  Way back at the end of the elder Bush’s term, Joe Biden was chair of Senate Judiciary. He said that the President “should consider following the practice of a majority of his predecessors and not name a nominee until after the November election is completed.” There turned out not be a vacancy, but, had there been one, Biden said his committee should consider “not scheduling confirmation hearings on the nomination until after the political campaign season is over.” (these quotes are from a Wall Street Journal story).

The practice of appointing Supreme Court Justices for life is a good one; it makes them independent.  Many presidents have been “disappointed” by the rulings of their appointees. If Trump tries to trample constitutional rights, I think he’ll find Neil Gorsuch an obstacle. We need a constitutional firewall against growing executive power in general and this President in particular.

February 01, 2017

Tough Love in China

Recently I visited my 18-month old grandson and his parents in Lanzhou, China. The sign below is from the playground school he goes to a couple of times each week.


I suspect that even this disclaimer would not protect the school from lawsuits in the US when the falling and head-bumping happens.

But I think they’re right. I also think that kids need to eat some dirt as they grow up.

When they get to college, they should be subject to intellectual bumps and bruises. There should be no such thing as an intellectual safe space.

In life they’ll encounter bad bosses, unpleasant co-workers, profound differences of opinions, the difficulties of making an intimate relationship work, and election results they don’t like. If they’ve had their share of bumps and bruises, eaten enough dirt, and learned that good people can disagree, they’ll know that there is a world of room between passive acquiescence and a hissy fit.

January 30, 2017

We Need Infrastructure, Not Another Stimulus Bill

Democrats and President Trump seem to be in agreement that America needs another trillion-dollar stimulus program to build infrastructure. It’s ironic that this rare agreement is also wrong. It ignores the lessons of the last trillion-dollar stimulus package at the beginning of the Obama administration: it didn’t work.  If it had worked structurally, we wouldn’t still be looking at the same problems of decayed and inadequate infrastructure we have today. If it had worked economically, we would have had a much more robust recovery from the great recession.

Why didn’t it work to aim all that money at projects which desperately needed doing? I was Vermont stimulus czar, responsible for trying to make best use of the almost billion dollars of stimulus that came our way. Why isn’t Vermont infrastructure much better because of it? (there have been some improvements in telecom and electric metering because of stimulus dollars but minor compared to what could’ve been).

The problem isn’t lack of money for infrastructure; it’s a regulatory process which makes it take at least 20 years to a medium-sized project, whether that project is funded by the public or private sector.

I wrote the post below at the end of my stimulus career so you could take it as an excuse for not accomplishing more. But I think we need to learn these lessons from not very long ago to make America greatER.

Twenty years of major construction projects are bottled up in regulatory queues. If the time in queue were shortened to a maximum of two years, we'd have a flood of new construction AND much of the infrastructure we need to be competitive in the globalized years ahead. No subsidies from the deficit-ridden federal government are required. Conversely, tax revenue from those directly or indirectly employed on these projects and the economic value of the projects themselves will increase government revenue and help close the budget gap.

The majority of these projects have private sector funding lined up. American corporations are sitting on piles of money, waiting for a chance to invest it for future profit. In the short term, they're not going to hire more people to make more things until demand picks up [now demand has improved]. But, planning for the long term, they will invest in infrastructure for their future growth IFF given the opportunity. How do I know? Because all over America there are pipeline, power grid, oil drilling, gas extraction, broadband, wireless, factory-building, shopping center, and even a few nuclear power plants projects queued up waiting almost endlessly – and, what is worse, unpredictably – for the permits they need to proceed and then the long slog through decades of appeals. [I didn’t know then, of course, that Keystone would be rejected; Dakota Access halted when almost complete; or the Vermont Gas Pipeline expensively delayed after it was approved.]

State and local governments have transportation projects queued up in the same way. Even with a flood of stimulus money, all we could do was permitless repaving; the big projects are stuck in regulatory hell. Nothing in America is shovel ready. The stimulus dollars allocated to broadband and smart metering are just beginning to be spent; these projects may still forfeit their federal funding because of the time required to get permits. Another stimulus bill – besides being unaffordable – would run into the same roadblocks. But, if projects can be accelerated out of queue, credit-worthy states will be able to build them. More significantly, the huge stash of private dollars waiting for opportunity will come into play.

We don't need another "regulatory review". Ask regulators to review their regulations and they'll write some new ones. We need to set a goal that every project gets to yes or no within two years of initial application and remake the regulatory processes at the federal, state, and local levels to assure that the goal is met. Even a fast “no” is better than a twenty-year “maybe”; it frees up money for other projects which may get approved.

We have to redo the laws which allow virtually anyone (anyone who has access to lawyers, anyway) to impose a delay of almost any duration on any project at virtually no cost to themselves but huge cost to the project. BTW, it not just "environmentalists" or people protecting the view from their backyards who delay projects; business is very adept at using regulatory delay to stymie would-be competitors. The law should require anyone who appeals a granted permit to post a bond equal to the cost of delay, such bond to be forfeit if the appeal fails. Note that this does not discourage participation in the initial regulatory process by those opposed to a project.

Faster regulation is better regulation. During a twenty-year approval process, the world changes. Yesterday's projects finally get approved for today's world. Project benefits are delayed; and stop-gap measures have to substitute for larger projects.

A shovel-ready America will be an awesome competitor in a globalized world. We will build the infrastructure we need to link our mines, forests, fields, dams, power plants, and factories – just as we have done at least before with canals, railroads, pipelines, and highways. We'll build 21st century information infrastructure. The projects are already in queue; the money is in hand; but we're not shovel ready.

Related posts:

Energy for Jobs – Vermont Version

What Government CAN do to Create Jobs

Confessions of a Stimulator

January 27, 2017

The Secret of the Twist Off Lid

I have broken the male code and told Mary how to get balky lids off bottle. Since I’ve already betrayed my gender, I might as well make it public.

You know the drill. Woman takes bottle out of fridge or off a back shelf. She wraps her hand around the lid if her hand is big enough, strains to turn, and the lid doesn’t budge. She may try once more with a dish towel around the lid for better purchase. Still no movement.

Woman turns to man assuming one is handy. “Here, big strong boy, please open this for me.”

Man takes the bottle in hand, disdains the dish towel wrapper. The veins pop out in his forehead and his arm muscles (if not covered by fat) ripple. He grunts. “Here, my dear.” He hands her the jar with the now loosened lid.

In words or looks she says “Oh, you’re so strong.”

But it’s fraud! The popping veins and bulging muscles are used, as a magician would, to distract attention from what the hands are really doing. As the torque is ramped up, the top hand wiggles the lid. Every stuck lid yearns to be free. Brute pressure against whatever is blocking the threads rarely helps; but the wiggle lets the lid find its own path to release. It’s all in the wiggle.

Of course, now that Mary can open anything she can get her hands around, I am of even less use during food preparation. That’s the price of being a traitor to my gender.

January 25, 2017

The World Economic Forum at Davos - Continued

The world elite in a happier time.

The World Economic Forum at Davos was probably a happier place in 2000 at the height of the Internet bubble than it was lat week. Back then globalization seemed a huge success (at least to those who were succeeding), the World Trade Center still stood, and Donald Trump was still an iconic playboy (but wasn't at Davos). Even peace in the Middle East seemed a possible dream. There were some anti-globalization protestors then but they seemed like a radical fringe and were held back by the Swiss Police with water cannons, which are very effective on cold nights,

I can tell by the headlines and bylines that many of the same people still attend Davos. I imagine, but don't know, that Brexit, Trump, and whatever may come next seemed like cold water thrown on their party. The story below is about Davos as we saw it in 2000 and is from my book hackoff.com: an historic murder mystery set in the Internet bubble and rubble. The fictional characters are hackoff.com CEO Larry Lazard, his wife Louise, and their new Israeli friends the Roslovs.


On Saturday afternoon, Bill Clinton speaks. Tickets to the Great Hall are almost impossible to get, but there are a sufficient number of listening rooms furnished with headsets which translate to many languages and wide screen television views of the podium. Larry and Louise are in one of these.

There is a delay. Apparently the American Secret Service has become alarmed and want everybody out of the hall so that they can go through and look for bombs. They have both dogs and electronic noses ready. But they can’t empty the room because of the crush of people trying to come in. There is a dissatisfied mutter about the arrogance of the Americans who are not satisfied with security arrangements, which were, after all, good enough for everyone else.

The Secret Service compromises on just clearing the first five rows since these will be closest to the President. This is doable but means that the VIPs who have these rows will have to be shuffled out, so more offense is taken. To make matters worse, once the Secret Service and its hounds have finished, the relative plebeians flock into the seats meant for the patricians. It takes most of the staff and tact of the WEF to sort this out.

Finally, it’s time for Herr Klaus to introduce the President. “You graduated from Yale University. You were a Rhoades Scholar who studied in London,” he says to the President. “You were Attorney General and then Governor of the State of Arkansas. In 1992 you were elected to be President of the United States of America; and, in 1996, you were re-elected. You have pursued a strong domestic agenda and you are well-known and well-liked in the capitals of the world. You have been a strong voice for negotiated settlements to the world’s problems.

“President William Jefferson Clinton, it gives me great pleasure to introduce you here at World Economic Forum 2000 in Davos, Switzerland. The delegates look forward to your remarks.”

Clinton beams. He likes the audience and the audience likes him. He jokes about the security and he is forgiven for it. He speaks nonspecifically but sincerely about a “shared vision”. The audience shares this nonspecific vision.  When this likeable man speaks, it does seem that differences will disappear, that prosperity will overcome despair, that the darkest, coldest corners of the world will be lit and warm — that, indeed, the spirit of Davos, the vision of Davos, the inclusiveness and well-meaningness of Davos, can and will become the spirit of a happier world.

“He was good,” says Louise afterwards.

“He didn’t say a fucking thing,” says Larry.

“He doesn’t have to,” says Louise.

Saturday night is the big night at Davos; on this night a tux or equivalent national dress is suggested. The main hall at the Congress Center has been transformed into a huge nightclub with small tables in front of a large stage.  Counters of food line the edges of the room with ample small bars between them. Larry and Louise have come early and take a table near the stage.

Simon Peres, his wife, and another couple take the table in front of them.  Peres nods to Larry and Louise but it is not clear whether he recognizes Larry from the meeting or is just friendly. [nb. See previous post for how Larry met Simon Peres.]

There is much table-hopping. The Peres table is visited first by the new King of Jordan and his wife. The women are on cheek-kissing terms. The men shake hands warmly. The Jordanian royalty chats with the Israelis for ten minutes or so before moving on. Various delegates in national garbs stop by to pay their respects to the Pereses; a good percentage of them are in Arab robes.  Peace seems possible at Davos.

The premier act of the night’s entertainment is a group of 200 gypsies playing violins. They fill the huge hall with rich sounds alternating between joy and sorrow. The country-less violinists are a hit with the delegates, all of whom have countries of their own at the moment.

After the nightclub dinner and show, there are national parties to discover throughout the Congress Center. Sometime during the entertainment, Larry’s new friend Chaim Roslov has joined them at their table with his wife Devorah. Larry and Louise and Chaim and Devorah go first to Mauritius for a party. It is in and around a huge pool, perhaps used as a swimming pool at other times, in a building which connects through a huge walkable (and warm) hose to the Congress Center. The awesome Mauritian band is on a platform in the middle of the pool as isolated as Mauritius itself is in the middle of the Indian Ocean. It’s not clear how they got there or how they’ll get back. They can’t and don’t take breaks.

At one end of the pool is food, which is presumably Mauritian. There are large variety of vegetarian dishes ranging from mild to extremely spicy; these are the contributions of the island nations’ mainly Hindu population. There are also a variety of the spicy pork and goat dishes favored by the minority Creole population. Most confections have a coconut base.

At the other end of the pool is a dais where some Mauritians give speeches. They are very glad to have the delegates visit their party and hope that they soon will visit Mauritius. They will find it is a country that realizes its future is within and not isolated from the world economy. To that end, the Prime Minister has begun a program of legal reform to create the required transparency and to assure that contracts are respected. Protectionism is as dead in Mauritius as the dodo which once thrived there.

It would be helpful if the developed world would remove punitive tariffs on the agricultural and manufactured products of Mauritius and would stop unfair subsidies to domestic sugar growers. That is, the world should notice, all that Mauritius is asking in addition to some reasonable forbearance of debt contracted by previous profligate regimes. Mauritius is not asking for foreign aid. The new loans it seeks are economically sound and can be amply repaid.  Even the old loans can be repaid if only those unfortunate and unproductive tariff barriers were just to be removed.

The Mauritians are good hosts who speak briefly and smile often. The band plays very danceable Reggae, and the delegates and their spouses dance standard American dances on platforms erected on the sides of the pool. Magdala, the Lazard’s appointed guide to the WEF, is there with her “significant other”, a tall thin Swiss of about thirty with a German accent. He is a consultant and dances well. Chaim and Larry each dance a couple of times with Magdala and each other’s wives while Magdala’s significant other makes sure no trailing spouse is left a wall flower. Chaim has a brief conversation with Magdala and the significant other in German.

Next to the food tables there is a bar. A very potent punch, which may or may not be indigenous to Mauritius, is served there, as well as a standard selection of bar wines, beers, and hard liquors. It is not clear what the scion of an Argentinean steel company was drinking before he fell off the dance floor and into the pool. No matter; he is quickly and efficiently hauled out by a combination of wait staff and quickly-appearing security forces. The dancers stop to cheer as he is helped wetly away. The puddles behind him are immediately mopped.

Chaim exchanges a few words of Hindi with some of the hosts.

The US party features blues from Chicago sung by a very sexy black woman who is an expatriate Chicagoan, but usually to be heard in Europe and sometimes Japan. The room is dark, partly illuminated in ultraviolet, and with creative neon outlines of jazz instruments on the walls.  Either there is no speaker at the US party or the Lazards and their new friends the Roslovs arrived too late to hear them. These blues are not meant to be danced to, although some people try.

Chaim and the singer speak Italian for a few minutes.

The Russian party is renowned for its vodka and caviar — especially the caviar. The Lazards and Roslovs first heard rumors of the Russian caviar while still in Mauritius. In Chicago, between blues numbers, they speak to people who have actually been there and seen and eaten the mountains of tiny eggs. But no one can describe exactly how to get to the Russian party. Undeterred, the Lazards and Roslovs set out to find the land of vodka and caviar.

In one of the many sublevels of the Congress Center, they follow music hopefully into a loud room. Wrong country: it’s France. But it would be rude to tear yourself out of the grip of the buxom French farm women with plunging décolletage who pull you into the room. The food here is mainly elaborately constructed pastry. Champagne bubbles from a replica of the fountains of Versailles. A chamber trio plays baroque music in a corner.

Now, unfortunately, there will be a short speech. It is in French, which Larry understands not at all, and Louise only a little. However, Chaim translates concurrently: France is very much in favor of economic globalization. After all, the French invented international trade. However, there is a danger in globalization. This danger is cultural. One country in particular has imposed its culture on much of the world to the detriment of other cultures everywhere.

“Yeah, we make everyone wear fucking jeans…” says Larry a little too loudly. He is hushed by Louise and some of the people around them.

The speech goes on to regret that the benefits of the Internet — an outgrowth, one might say, of minitel, which was invented, of course, in France — these benefits are denied to much of the world because so much of the Internet is in English. In fact, the Internet, which ought to be international is fast becoming a mechanism for dangerous cultural imperialism. It is to be hoped that the delegates gathered here in Davos can work together to stem these unhealthy excesses of globalization and restore balance to international culture and…

“Anyone know where the Russian party is?” asks Larry rather loudly and very rudely of his neighbors. They either don’t know, don’t speak English, or don’t care to answer.

Chaim engages one of the security guards in a conversation in an unidentified language. He swears he has obtained the true location of Russia. To get there one must go up one staircase and down another; one must also go east in one hallway and west in another. There are various detours north and south and a final half story descent into a hallway at the end of which is, sure enough, the fabled land of vodka and caviar.

The mountains of caviar have suffered the ravages of time and appetite. You can deduce their former scale by the diameter of the plates the crumbled hills and scraps still sit on. Cracker crumbs have been ground into the floor and pasted down by squashed eggs. There are no longer crackers on tables with caviar nor is there caviar on tables with crackers. Condiments, in general, are available only on tables with neither crackers nor caviar. The persistent can still find more or less clean plates, load them with crackers from here, add caviar from there and find condiments somewhere else. This is what Larry and Louise and Chaim and Devorah do.

Here, as in France, breasts push up from low-cut peasant blouses. The Volga boatwomen are better-endowed and certainly more friendly than their French counterparts. Ignoring the women and the caviar, but drinking vodka freely and usually neat, there are multi-national clusters of over-dressed men.

“What do you think they’re talking about? Basketball?” asks Larry looking at an almost seven-foot Cossack in a black suit talking to an over seven-foot Chinese in a yellow suit. “I don’t understand Russian.”

“Actually,” answers Chaim, “they are speaking Mandarin and they are discussing oil in large quantities which does not pay taxes.”

“Really?” asks Louise. “Are people allowed to do business at the World Economic Forum? I haven’t seen or heard anyone else doing that.”

“Russians make their own rules,” says Chaim. “They are new to Davos as capitalists and they are enjoying themselves. But they still can bang their shoes on the table if they want to. Over there, for example, there is a Chechen discussing ‘precious weapons’ with a Kuwaiti.”  He is looking at a very small man in electric blue talking to an equally small man in Arab robes.

“Shouldn’t we tell someone?” asks Louise. “I mean that can’t be good, especially if precious means what I think it means.”

“Actually, I believe that the Kuwaiti works either for the CIA or Mossad so he is on the way to finding this source.”

“How could you possibly know that?” asks Larry. “If the Chechen doesn’t know who he’s talking to, how would you know?”

“I have sources, my friend,” says Chaim. “Didn’t I find Russia for us?”

By 3:00 AM the countries are a blur. Most of the food is gone, although there is apparently no end to the liquor or the music. Larry and Louise head unsteadily down the hill to Sunset Reising. It is bitter cold and a wind is blowing seriously. A few lights on the mountain sides illuminate huge swirls of blowing snow across and around the avalanche fences.

The water cannon and its accompanying troops are gone. There is no sign of protestors. Globalization is apparently safe for the time being, at least in Davos.

January 24, 2017

“Risk free” Investing

TIPS May Be the Answer

Someone I know is coming into a moderate sum of money and asked me how he can invest it “risk free”. He was very clear that he isn’t looking for gain on the investment, just safety; so, although no investment can be truly free of risk, given some assumptions it’s a very reasonable question. However, if you act on my answer, you are doing so entirely at your own risk.

Although it may sound contradictory, the main question for a risk-intolerant investor is what risks ARE you willing to tolerate. For example, I know that my advisee is investing in US dollars. He does care if these dollars lose purchasing power (inflation) but doesn’t care if the dollar declines against any other currencies so long as his purchasing power at home is not affected. He is willing (I think) to accept the risk that the US government will default despite having a president very versed in “restructurings”. A very important risk he is willing to take – and you may not be – is that, if he needs the money sooner than he thought he would, his investment will NOT have been risk free; he may take an actual loss.

OK, with all that out of the way, what I think my advisee should do is buy TIPS – Treasury Inflation-Protected Securities. These are interesting bond issued by the US Treasury which protects against loss of purchasing power. Like most bonds it pays a fixed interest rate which is determined by auction at the time of issue; the interest rate is fixed for the life of the bond, which may be 5, 10, or 30 years. What is not fixed is the principal amount of the bond; that is adjusted daily based on inflation – more precisely on “the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U) published by the Bureau of Labor Statistics of the U.S. Department of Labor.”

Here’s what this means: suppose you buy $1000 of these things at auction with an interest rate of 0.375% (yes, this is low) and a maturity date 10 years from now; $1000 is your ORIGINAL principal amount. Each day the Treasury calculates the ration between the CPI for that day and the CPI for the day your bond was initially sold at auction. This adjustment affects both the dollars of interest you receive at each semiannual interest date and, most importantly, the principal you receive back when your bond matures.

You really don’t care about that index on a daily basis so let’s skip forward 10 years to when you are going to cash in your bond. If the CPI has increased 50% over that ten years (used to happen all the time), you will be repaid $1500. You haven’t really made a profit; your purchasing power is still the same as $1000 had when you invested it. But you did almost protect against inflation. The “almost” part comes from the fact that Uncle Sam wants income tax on the $500 nominal gain; since it is a federal bond, it doesn’t pay state or local income tax.

If there was no inflation as measured by the CPI, you will get back just the $1000 you put in. You’ll still have the same purchasing power you started with (and you won’t owe any tax because you had no nominal gain).

But suppose there’s deflation. Most economists will tell you that doesn’t happen long term but experts are often wrong, especially lately. Suppose the CPI is at 75% of where it was when your bond was auctioned. You still get back 100% of the principal you put in. You will have an actual (untaxed) gain in purchasing power. Of course most bonds promise to pay back 100% of the principal so can be considered to include deflation insurance. But most bonds don’t protect you against inflation. From my PoV, this is a free lottery ticket that comes with TIPS – but my advisee isn’t out to make money, just wants to protect what he has; so we’ll ignore this now that I mentioned it.

The inflation adjustment to your principal also affects the interest payments you receive semiannually. For example, If the CPI is cumulatively 1% higher six months after you bought your bond than it was on auction day, your principal will have been adjusted up by 1% to $1010 dollars and interest will be paid on that adjusted principal; you will receive $1.89375 ($1010 x .00375/2) instead of the $1.875 ($1000 x .00375/2) you would have received had there been no adjustment. “Whoopee!” you say, “big deal”. But remember, we’re in this for safety and not income. However, there is no ratchet in the interest calculation. If deflation were to take place, the dollars of interest you earn could go down.

Like any bond, if you want to sell your TIPS before they mature, no one is guaranteeing that you’ll get your principal back. You sell them on an open market. If the rate of inflation has accelerated, you’ll probably lose money. If it’s decelerated, you may gain.

TIPS are a really boring investment. But they may be right for you if you are willing to forgo future gain in return for safety – at least on part of your portfolio. If you want to buy them, you can get them directly from the Treasury at auction. See here for instructions. You can also get them through a bank or broker but check the commissions; you’re not earning much on this asset. If you’re a sophisticated investor, you may want to buy or sell on the secondary market – but in that case you don’t need my advice.

January 23, 2017

Both Parties Lost the Election

Occupy Washington May Be The Winner

This is certainly not a time of Republican triumph at the presidential level. Trump’s trouncing of Republican establishment candidates (one of whom I supported) was much more overwhelming than his victory over a weak Democratic candidate with many self-inflicted wounds. At least up to the end, Hillary was probably more the candidate of the REPUBLICAN establishment than Trump was. That’s because the establishment is establishment first and Republican or Democrat second. It’s quite possible that Trump would’ve lost to Sanders. Republicans can take pride in the way they’ve been winning state elections.

Democrats, on the other hand, couldn’t win behind an extremely well-financed and experienced candidate running against an opponent whose polling negatives haven’t been matched in recent history by anyone (except the Democratic candidate), who has a demonstrated lack of self-control, and who was opposed by most of his party’s establishment. Yeah, in a close election any one factor can be picked out as decisive – but Democrats have to ask themselves how did this ever get so close in the first place.  The context is that Republicans kept control of both houses of Congress and won control of more states. WikiLeaks and James Coney didn’t do that.

None of the above is actually the party that won the presidential election. If you add up the Bernie voters and The Trump voters and subtract the overlap; I believe you will find a very sizable majority of Americans both in the heartland and on the coasts who are very angry at the establishment and very ready for change. Washington, DC is very practiced at the swing from R to D and back every couple of elections; now it’s being occupied by outsiders.

It’s not surprising that Washingtonians, who gave Trump only 5% of their votes, didn’t turn out in droves to hear him denounce their city as the den of all evils which inflict America. What is amazing and very unfortunate is 1) Trump was surprised by the low turnout 2) (and much more important) his thin-skinned and intemperate reaction to it. He became obsessed; he rained on his own inaugural weekend.

Like most Americans on the left and right, I think we need fairly radical change in many areas. I do think America wanted an outsider (even if they differed as to which one) as their president. Change isn’t easy or even always pretty. Change agents are often strange people. But I also think the new President has to calm down and settle down quickly. I hope he does. I think most Americans feel the same way.

January 20, 2017

Inaugural Hopes, the Radio Show, Today

Today, inauguration day, it turns out that I’m on a radio show here in Vermont which happens to be at 11am ET right before the inauguration with my friend host Bill Sayre. We’ll be talking about my hopes for the new administration, some of which are in yesterday's post. You’re welcome to call in with your hopes and fears or comment here. It’s on WDEV in Vermont at 550 AM or 96.1, 96.5, or 101.9 FM and live streamed from www.wdevradio.com. Call-in numbers are 802 244 1777 and 877 291 8255.

January 19, 2017

Things to Hope for in the New Administration

Granted, there’s plenty to fear from the new administration, the temperament of the president-elect not the least. But I hope Trump will succeed; I also hoped Barack Obama would succeed.

The resentments that led to Trump’s narrow victory stem from these legitimate grievances: 1) the wealthfare state with its bank bailouts, corporate subsidies, and lobbyist-designed tax code; 2) a failed educational system mired in political correctness but failing to enable opportunity; and 3) America sputtering helplessly in a dangerous world and not even willing to name Islamic terrorism (I did not say all Moslems) as its enemy.

I’m an optimist. Here are the things I hope a change in leadership can make possible. They won’t all happen but they all require change – which we are getting like it or not –  to have a chance.

Education. Our educational system is in terrible shape. Obviously we have some great teachers. But, at this point, most of the teachers themselves are the product of a shoddy and undemanding education. Democrats are in thrall to the teacher unions which have fought reform to protect their workers. Now Republicans (with Democrat support I hope) can lead us to a system where incompetent teachers are fired, failed schools are closed, and education can be the road out of poverty it was for my grandparents.

Regulation. Our infrastructure is crumbling and deficient; we need the jobs that would come from rebuilding it. That doesn’t mean we need to pour additional trillions of government money into infrastructure as I hope the new president learns quickly. It takes more than 20 years to get through the regulatory process to build even a small road. A pipeline project at either the state or federal level can be held up long after approval and even after it is almost finished by legal challenges or illegal vandalism. We need a permitting process which gives a quick – and lasting - yay or nay to a proposed project after a single very thorough review. Any legal action after approval which seeks to delay a project should require the plaintiff to post a bond equal to the cost of delay, which is returned only if the appeal is upheld. Criminal obstruction of projects should result in criminal prosecution. If these actions are taken, we will have a wealth of new construction in both the public and private sector. Much less money will go to lawyers and the cost of delay and much more to the construction and jobs which are needed.

Local and regional banks need to be freed from the strictures of Dodd-Frank so that they can resume lending to the new and small businesses which actually create jobs. All bank investors need to be exposed to the risk of failure; that’s the most effective regulation. That means dismembering any institution so big that we would be forced to bail it out. It was the bank bailout (TARP) which first ignited the flame under the teak kettle.

Tax reform. An early test of whether the wealthfare state has been overturned will be whether the tax policy which allows venture capitalists and hedge fund managers to pay only capital gains tax on their income is repealed. More consequential to the economy is ending the tax policies which encourage corporations to move their earnings or even their operations abroad.

Health care. It’s still broken. Whether you call the needed fix a repair of Obamacare or a replacement is just political semantics. Yes, many people have been added to the ranks of the insured. However, the cost of doing that, as we’re seeing this year, is a cost shift: those who used to be able to afford health insurance are now seeing it take a hugely increasing share of their income, if they can afford it at all, while deductibles go through the roof. This will need a bipartisan fix. The problem would have had to be addressed no matter whom we elected.

An assertive America on the world stage. Cozying up to Putin is not the way to get there. There are no more reset buttons to be pushed. Where redlines must be drawn – North Korean nukes and Iranian cheating are two examples, we must never tolerate their being crossed. We must rebuild the military. If we free up oil and gas drilling (safely and responsibly, of course), build pipelines to our ports, and encourage exports, our adversaries including Russia, will lose the oil revenue they need to do a matching buildup as well as the ability to threaten our allies with embargoes.

The end of political correctness. College campuses should be cauldrons of controversy. Speech must never be criminalized. Dissent and debate are essential to democracy.

Good luck to us all.

Friday inauguration day it turns out that I’m on a radio show here in Vermont which happens to be at 11am ET right before the inauguration with my friend host Bill Sayre. We’ll be talking about my hopes for the administration. You’re welcome to call in with your hopes and fears or comment here. It’s on WDEV in Vermont at 550 AM or 96.1, 96.5, or 101.9 FM and live streamed from www.wdevradio.com. Call-in numbers are 802 244 1777 and 877 291 8255.

January 18, 2017

The World Economic Forum at Davos

The More Things Change...

You may have noticed that this week many news stories are being filed from Davos, Switzerland. That is because the World Economic Forum (WEF) is being held there this year – as it has been almost every year at this time – and reporters important enough to be invited can write about almost nothing else. I wrote the post below in 2006; but, since it sounds like the WEF has changed less than the world itself, I'm re-posting with only minor edits.

In 1999 (before the IPO of our dotcom era company) and in 2000 (just after our IPO), Mary and I were invited to the WEF. Our stock which had debuted at $12 was near its all time high of $120. The dotcom bust was still months away. In many ways, this trip was the apogee of our lives inside that fantastic bubble and Davos is the setting for a chapter of my book hackoff.com: an historic murder mystery set in the Internet bubble and rubble.

The World Economic Forum is an organization “committed to improving the state of the world”. It’s members are some 1,000 of the world’s largest corporations. They pay large dues, rumor says up to 300 thousand per year. And their executives are appropriately invited.

But many other people are invited as well. Political leaders are invited and come; for Davos 2000 they included Bill Clinton and Tony Blair, Israeli Prime Minister Ehud Barak and Palestinian leader Yasser Arafat, former Israeli Prime Minister Simon Peres and young King Abdu’llah of Jordan, and many, many more. There was an expectation that deals would be made; peace and commerce advanced.

The anointed thought leaders from the press were invited; Thomas Friedman, of course, but also David Kirkpatrick of Fortune and — much to the point that year — Tony Perkins of Red Herring and Upside fame. No one who hadn’t read both of these was anywhere near an IPO.

The corporate leaders for 2000 included Bill Gates of Microsoft and Scott McNeally of Sun (they had less use for each other than Barak and Arafat).  Jeff Bezos from Amazon was here as well as Michael Dell. Michael Bloomberg — who was not yet a mayor — attended as a business leader. [Bloomberg and I were on a committee together which was chaired by Carly Firiona. His open contempt for her inanities would have made you believe he never could have a political career.] There were Asian billionaires as well; Richard Li of Pacific Century Cyberworks and Masayoshi Son of Softbank were the most prominent. European business was represented mainly by the third to tenth generations of old companies with a sprinkling of telecom executives. South America and Africa were “underrepresented”.

To the discomfort of some the members, a smattering of Internet IPO CEOs had been invited as well. We were thought of as nouveau riche, which we were; some of us didn't stay riche very long. We were not asked to participate in the major panels but were on small panels. Some of us were invited in 1999 and 1998 before most of us were rich but when we were already hard at work changing the world. Most of us were not invited in 2001 or ever again.

The scene below is from the book I wrote about my strange time in the Internet bubble. I’m going to extract some of it in this post and some in a subsequent one. The fictional characters are Larry Lazard, CEO of hackoff.com, who, in this flashback, has not yet been found dead in his office; his wife Louise; and a Israeli friend Chaim Roslov, who Larry met while chairing a small session at the WEF. Simon Peres, of course, is an historic character and a meeting very much like the one I describe in the book actually did happen except for Larry and Chaim’s contribution which is fictional.

We join them just after a meeting which Larry chaired:

Chaim buttonholes Larry as they leave the luncheon: “You are going back to the Congress Center.”

“Uh … yeah, my wife and I are.”

“So we’ll share a taxi.”

“Yeah, sure,” says Larry, not sounding sure. “This is my wife, Louise.”

“Hello, Louise,” says the Israeli. His name is Chaim Roslov, pronounced with a guttural like Chanukah.

The driver of their cab doesn’t speak English but the multi-lingual Israeli establishes Spanish as a lingua franca and directs him to the Congress Center.

“You are Jewish,” says Chaim to Larry. It is not a question.

“Only half,” says Larry. “How do you know?”

“I know,” says Chaim. “Your mother was Jewish.” Apparently question marks are not in his English vocabulary.

“Right,” says Larry.

“Then you’re Jewish.”

“Right,” says Louise, amused.

“But I don’t practice,” Larry objects.

“I’m not asking you to synagogue,” says Chaim. “Practice does not matter. But you are a Jew.”

“I guess…”

“You are free for breakfast tomorrow,” Chaim asserts.

“I think so,” says Larry. “For what?”

“There is an important meeting. Simon Peres is coordinating this. We must do something to create opportunity for Palestinians. There must be hope for them or there will be no peace. We have a plan; we want your help.”

“I don’t even know any Palestinians,” says Larry. “I don’t think I can help.”

“You can help,” says Chaim. “You must come to the meeting.”

“We will come,” says Louise.

“Only your husband may come.”

“Why?” asks Louise. “Are you orthodox? Are you afraid of women? I’m Jewish — all Jewish.”

“Your husband is the principal. It is he who must come. If you are the principal, you would come. It must be that way.”

“Why must it be that way?” asks Louise.

“It must,” says Chaim flatly.


The breakfast meeting is in another hotel in a medium-sized conference room. The chairs have been arranged in an oval, and Simon Peres sits in the middle of one of the long sides of the oval. Larry takes an empty chair near one of the ends. Chaim is towards the other end but there is no seat open near him.

A young, black-haired functionary from the WEF speaks first. “The World Economic Forum has a proud history of being the venue for progress on otherwise intractable issues. Much of the discussion that led to the Oslo Accords began here in this neutral territory where direct communication is possible. In the midst of unparalleled global prosperity and relative peace, we must do what we can to solve the world’s most intractable problems. We may not succeed, but we have no excuse not to try. Prime Minister Peres has been kind enough to host this breakfast so we may discuss part of what we can do. Before we start, I’d like to go around the room and ask each of you to identify yourself, your country, your company, and state briefly why you are here.”

When the introductions reach Larry, he says: “I’m Larry Lazard; I’m an American. My company is hackoff.com; we do security for e-commerce. I don’t know why I’m here. Chaim asked me to come.”

Peres turns his large gray face to Larry: “We’re glad you’re here, Larry Lazard,” he says. “You’re here because you can help.”

After the introductions, Peres himself speaks: “We are here because there are problems which must be solved,” he says. “The greatest obstacle to peace in the Middle East is the lack of hope among young Palestinians. We are doing something about that. The danger is that, in the Middle East, hope is its own worst enemy. There is a story about an asp and a camel who meet on the banks of the Suez Canal. ‘Take me across on your back,” said the asp to the camel.’

“‘I can’t do that,’ said the camel to the asp. ‘You will sting me.’

“‘I won’t sting you,’  said the asp.  ‘If I sting you, you will die and I will drown.’

“‘Okay,’ the camel said and the asp got on his hump. Halfway across the canal, the asp stung the camel.

“‘Why did you do that?’ asked the dying camel.

“‘Because this is the Middle East,’ said the asp before he drowned.

“We cannot allow ourselves to be drowned — to remain trapped in this cycle of despair and violence,” continues Peres. “We must create hope where there is no hope. We must give young Palestinians an alternative to violent death. That alternative comes from jobs. We must export some of the potential of the Israeli economy and the world economy to the Palestinian territories.

“We are doing that. We are establishing businesses and factories there.  We are creating jobs and we are creating hope. But there is great resistance to this when it is perceived to come from Israel. There is a brave Palestinian woman who has risen to be the plant manager of one of the enterprises we created. She has risen above the squalor and despair she was raised in. But her own father has called for her death; a local imam has declared a fatwah against her. She may not live long although this brave woman does live today.

“So we need you who are not Israelis to create jobs in Palestinian territory, in the West Bank and in Gaza. We need you to create hope.  We need you to create an alternative to violence and death. We will help you; we will put you in touch with the right people; some of them are here at the conference. But we must be invisible and you must be visible. Otherwise this remains the Middle East. The asp will bite the camel. And both will die. Will you do this?”

Many say they will. Names are taken; appointments are made.

“Will you help, Larry Lazard?” asks Chaim, who is now somehow seated next to Larry.

“I would like to,” says Larry. “I mean this sounds like a very good thing, but I’m not sure how I…”

“My friend Larry Lazard and I will help,” says Chaim. The great head turns toward them. “We will work to create jobs in the territories. We will outsource there. We will create well-paying programming jobs there and we will save money for our companies doing this. It is what our friends the Americans call a win-win.”

“So,” Larry explains to Louise later, “I’m going to be put in touch with a Palestinian who’ll be our contact for contracting some of our programming to a group in Jenin. They’re supposed to be good; they can do it cheaper than we can get it done in the US. And we save them from being suicide bombers.”

“Was Barak at the meeting?” asks Louise.[She meant Israeli President Barak, of course. She wouldn't have heard of the Illinois state senator with the funny name yet.]

“No, why?”

“Isn’t that strange?”

“The whole thing is strange,” says Larry. “Davos is strange. Being a billionaire is strange. I don’t know.”

“We’re there any Palestinians at the meeting?” asks Louise.


“Does that tell you anything?”

“No. I told you; I’m going to meet a Palestinian. This is a good thing.”

“We’ll see,” says Louise.

“Why are you so negative?” asks Larry. “You’re the JAP. You’re the 100 percent pure Jew. You had a Bat Mitzvah, for Christ’s sake.”

“I don’t know,” says Louise. “I don’t know. We’ll see. I am glad you’re trying. I’m glad that chauvinist pig Chaim recruited you.”

“So that’s it; you’re still pissed off that you weren’t invited to the meeting.”

“No, that’s not it,” says Louise, then: “Yes, it is. I AM pissed off. But that’s not what’s bothering me. I don’t know. Try. It’s the right thing to do.  Meet the Palestinian. And remember the camel.”

January 17, 2017

Dodd-Frank and Me

The Magically Receding Bank Loan

Software companies usually don’t borrow money; I blogged long ago about the loan my old company couldn’t get to buy a switchboard. But in 2011 Mary and I started a new company, NG Advantage LLC, to truck compressed natural gas. Our idea was to bring the economic and environmental benefits of natural gas to companies located beyond the reach of pipelines. We were the first to do this in the US and there is a lot of demand.

But my inexperience with borrowing and then Dodd-Frank almost did us in.

One of the new technologies which make trucking natural gas viable is carbon fiber trailers. A trailer with carbon fiber tubes can haul twice as much gas per trip as the old trailers you may have seen with steel tanks that look like something a giant would use for SCUBA. These carbon fiber trailers, at the time, cost $500,000 each. Since customers use the gas directly from the trailer, there are usually two of these sitting at each customer location (active and standby) and then there are some more trailers being filled or going to and from customers. There is also very expensive equipment at each customer site and then a station full of compressors built on a pipeline to put the gas into the trailers. In other words, you need a lot of stuff to be in this business. I knew that; I’d made a spreadsheet.

My assumption was that, since I had successfully built businesses before, once I had customer contracts, I’d be able to borrow enough using the equipment as collateral to get the business started.

“No,” said the bankers. “We can’t do that. Your company has no track record; your industry doesn’t even exist!”

“But I’ll have contracts to prove that there’s a need and the equipment will be collateral. Isn’t this just like a car loan only a little bigger?” I argued.

“Now you’re talking,” they said. “If you want to personally guarantee the loans and put an amount on deposit with us to cover them in case of default, we can probably do something.”

It didn’t seem like a very good idea to lend them our money (even if we had enough) at 1% so they could lend it back to us at 7%. “How much of a track record do we need before you can finance us without a personal guarantee?” I asked.

“One year of EBITDA-positive operation,” they said without even having to think about it. [If you’re not familiar with the concept of EBITDA they meant they wanted to see us generating cash from operations.]

“OK,” I said.

We raised money from angel investors; we got an economic development loan (which we did have to personally guarantee); we got seller financing on the land we needed for the compressor station; and we got some very, very expensive loans from non-banks which, at first, we had to personally guarantee.

We built the compressor site; we bought the trucks; we signed contracts and delivered gas. We had a backlog of customers signed up. And we had been EBITDA-positive for a year. Deploying new customers meant we needed more trucks and everything else. Back to the bank I went.

“No,” they said. I reminded them of what they had said last time.

“That was then and this is now. Under Dodd-Frank, we can’t make risky loans to new companies. We need you to be EBITDA-positive for two years.” We got more very high interest loans and raised more from investors.

Dodd-Frank is a law which was passed after we bailed the banks out under TARP (see We’ve Been T*ARPED). The premise was that, if we’re going to bail out banks, we have to regulate them to make sure they won’t need more bailouts. Actually, I agree; that’s one of the reasons we shouldn’t have bailed them out. And, although only the money center banks got bailed out, even local banks, who had been more likely to lend on reputation, came under the same strictures.

After two years a very senior banker assured me we had a loan. “Just have to go to committee,” he said. “Just a formality.” He was crestfallen when he told me he’d been turned down in committee; hadn’t happened to him in fifteen years. “It’s Dodd-Frank,” he said.

The story ended well for us. Banks do now lend to us and we borrowed money at reasonable rates to repay the money on which we had to pay outrageous interest. We paid back the economic development loans. But we were only able to succeed because we’d been lucky enough to succeed before and had the ability to guarantee some loans and to raise capital from people who’d made money by funding us before.

Since the passage of Dodd-Frank, the big banks which caused the crisis have gotten bigger; the big four in the US now control 45% of total bank assets.  Dodd-Frank took away the flexibility which made local and regional banks competitive. A first step in putting capital back in the hands of job-creators should be to exempt all but the biggest banks from this law and allow more money to flow to Main Street. Second step should be to make sure that any of the huge banks which is too big to fail are also too big to continue. If a bank is a systemic risk, it should be broken up. Once it is clear that we can’t be blackmailed into bailing out banks again, the rest of Dodd-Frank can be dismantled. Then capital-intensive startups can borrow to grow after they’ve proved themselves by being EBITDA-positive for just one year. And we will have new jobs and rising wages.

More on the harm Dodd-Frank has done at How the Fed and Dodd-Frank Killed Jobs and more on how much I had to learn about capital-intensive businesses at The Difference Between Venture Capital and Private Equity. See  It Was TARP that Boiled the Tea for some of the 2010 anti-establishment fires which are clearly still burning.

January 15, 2017

Tweets Are DIY Headlines for Politicians

Tweets notoriously have room for only 140 characters so how can they possibly be used to convey a serious position? Well, headlines only have about 60 characters. Sound bites are not much longer. Many of us absorb most of our non-Internet news in headlines and sound bites. The advantage of tweets from politicians’ PoV is that they get to write the tweets themselves.

Way back in 1980 I was running (unsuccessfully, obviously) for the US Senate. After much research I produced a position paper and held a press conference to deal with the fact that the social security trust fund was headed for bankruptcy. My proposal was to raise the retirement age to 67 for those currently under 40 (which included me). The headlines and sound bites were “Evslin Proposes Raising Social Security Retirement Age”. At least half the newspaper articles included somewhere, usually way down in the story, whom would actually be affected; the TV coverage only had the sound bite of my calling for increasing the retirement age and neither the explanation of why or the protection for those 25 years or less from retirement.

Poor Mary was campaigning at the VFW that night. She was accosted by furious veterans near retirement who believed I’d proposed that all their plans be upset and they be forced to work two more years with almost no notice. (BTW, my plan became law without me.)

My tweet obviously would’ve been “Evslin Proposes Plan to Protect Social Security Benefits”. I hope there still would’ve been a position paper behind it; but, frankly, it’s the headline (or tweet) that makes most of the difference. All of us who have run for office wish we could’ve written the headlines. Now we can.

The Internet is a force for disintermediation. We don’t need phone companies to make “phone calls”. Anyone can blog. We can borrow without a bank and crowdsource our funding. Now any prominent politician can write his or her own headlines. This is forcing media to redefine its role which is not a bad thing.

Most national politicians probably have staff that does their tweeting. The President Elect apparently does not. I wish there were links from his tweets to full explanations of his positions; I disagree with some of his tweets and find some of them offensive; but actually I’m glad to know directly what he’s thinking rather than have it filtered through staff or a headline writer.

January 12, 2017

The Difference Between Venture Capital and Private Equity

A Whole New Ballgame

Once NG Advantage LLC, our compressed natural gas trucking business, started to grow, we needed a lot more capital. Moving into a new region requires at least a $5 million investment to build a station to compress gas from a pipeline into the trailers which deliver it to customers. Adding even one new customer can require a million dollars or more in new trailers and equipment. Even though we were EBITA-positive, we were still new so banks still couldn’t lend to us because of Dodd-Frank (thank you, Senators Dodd and Frank). We could now borrow from non-banks (at high rates) but we still needed cash for down payments on all this equipment.

So we had to sell some equity. “Been there, done that,” I thought. Knew we were too small to go public but didn’t know what I didn’t know. Last time I ran a pre-IPO startup we raised money from venture capitalists (VCs). I quickly learned that VCs don’t do investments as big as we needed, in fact don’t do capital intensive businesses at all. It’s private equity firms, which tend to have much bigger pools of money than VCs, who provide early stage financing for businesses like ours. Just like VCs, I thought, but more zeroes on the check.

Because I didn’t know any private equity firms, we hired an investment banker to manage the process. Together we did a five-year plan (as if anyone knows what’s going to happen in five years). We put together the “book” which described our successes, our market, our competitors, and our plan. Anyone could plainly see they’d make a lot of money by investing in us.

The investment bankers shopped a teaser to private equity firms and lined up thirty of them for us to present to in New York City during a three-day period. It was intense although not as intense as the IPO road show I’d done fifteen years before. At least I didn’t have to travel somewhere new every night although we did walk around midtown New York. I got sick of the sound of my voice making the same pitch ten times a day but answering questions was fun. The bankers were gentle when they pointed out after the first presentation one morning that I was somehow wearing one brown shoe and one black one.

About ten firms had enough interest to come up to Vermont to see our first compressor station and meet the team. One snowy day, a delegation’s return flight was delayed for a few hours so we took them to dinner near the airport.

“What’s the downside risk?” one of the partners from the investment firm asked me.

“What do you mean?” I asked, surprised by the question.

“I mean, in the worst case, what would happen to our investment?” he asked surprised that I was surprised by the question.

“Well, we’re a startup. You could lose all of your investment,” I said. trying not to sound like I thought I was talking to an idiot. The conversation abruptly switched to sports.

“Why did he ask me that question?” I asked our investment bankers once the private equity guys were gone.

“He wanted to know the answer.”

“No venture capitalist ever asked me that and I’ve talked to hundreds of them. They understand that most startups fail. That’s obvious.”

“You don’t understand the difference between venture capital and private equity,” the banker said.

“That’s obvious, too,” I said. “Please tell me.”

“Venture capitalists do well if they have a batter’s average; private equity needs a fielder’s average.” [note to anyone who didn’t grow up with baseball statistics: players do well when they get a hit more than 30% of the time they bat (.300 average in baseball talk); in the field they are playing poorly if they make an error more than 5% of the time they are involved in a play (.950 average).]

Venture capitalists make a large number of small bets relative to the size of the fund they are investing. If five of them are complete losses, four of them return the investment money, one returns 5 times the investment money, and one returns twenty times or more, the fund is a success from investors’ PoV. This, of course, is what I was used to. It’s why VCs don’t look at investments that don’t have huge potential returns. They only need a few winners but they need them to be big. They swing for the fences, to go back to baseball talk.

Private equity firms make relatively few investments from each fund but each investment is big. If one of them goes down the tubes, ALL of the rest have to do very well in order for the fund to perform reasonably. The capital-intensive companies which private equity firms invest in don’t have products that “go viral” like software or social media. If they grow (like NG Advantage) they require even more capital. When they go public, it is not an astronomical multiple of the early investment. If they fail to make it big, the hope is that they can sell assets or themselves and that the investors will break even or avoid losses.

Lesson learned. We did raise the capital we needed but that’s another story for another day.

For much more on the difference between venture capital and private equity firms, see What VC Can Learn From Private Equity by my friend and super-VC Fred Wilson (aka @AVC). If you are a CEO or CFO talking to both types of firm, you really want to read Fred's post.

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