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Sunday, January 31, 2010

 

State of the Union

The President reported on the state of the union Wednesday night. Well, that was what he was supposed to do, but for at least half the speech, he again lapsed into campaign mode. This is so unfortunate since Mr. Obama's oratory skills when not in campaign mode are unquestionably of the highest order. The end of his speech, a plea for a return to the days of bipartisanship and a reaffirmation of faith in America, was arguably the strongest. Here are some Musings and critiques on some of his major points from Wednesday night.

Why it was necessary for a recap of the first year accomplishments of the administration, I am not sure, (OK, I do understand, but this speech is supposed to be more forward looking), but it did serve as a reminder of the bankruptcy of liberal ideas. So we heard yet again about all the tax cuts for people who don't pay taxes, which therefore have had no impact on consumer spending. Those who did increase take home cash were intelligent enough to use it to pay down debt. Bragging that there has not yet been a single tax increase completely misses the point since huge tax increases are in the pipeline with the expiration of the Bush tax cuts. Though the cuts may be extended at lower income levels (not a guarantee if they have to be "paid for"), small business owners who hope and expect to be in higher brackets are paralyzed in terms of making new business investments and hiring decisions by looming tax increases for them.

Obama's analysis of the stimulus impact also misses the point of his GOP critics. Sure, public sector jobs in the states were saved by direct handouts to balance state budgets, but those jobs will again be at risk this year or next when stimulus funds run out. The fact is that states will never have an incentive to fix their budget holes under this regimen, and state baselines are unsupportable (not to mention unsustainable). This is just exacerbating the result that public sector jobs are replacing private sector employment, and that public sector compensation packages, counting retiree benefits, have become much too rich. But of course, that's the point, the Dems are merely serving their SEIU constituency.

One of the constant irritants repeated by those trying to fix whatever "caused the Great Recession" is the need to "get banks lending again." The truth is, from what I have been hearing, there is little or no loan demand. Who would start or expand a business with tax increases of all kinds and a possible health insurance mandate hanging over your head? Those, plus all the other uncertainties promoted by Pelosi, Reid and Obama, make it imprudent for businessmen of all types to move aggressively. The idea that encouraging lending is a legitimate government activity is one thing that distinguishes liberals from conservatives, who prefer to let people figure out their own economic decisions.

Many economists believe, and in fact predicted, that too much debt at all levels and in all sectors would cause the economic bubble to burst. Why start all over again? What we need is for government to stand down, reduce its own debt, and put equity investing on a level tax playing field with debt. Interestingly, Obama's idea about reducing capital gains taxes, or giving us a holiday from them, especially for small business, is a good start. A better approach would be to simply index all capital gains for inflation.

In fact, midway through the speech, Obama reeled off several ideas which should gain bipartisan support, albeit after careful analysis of what is actually in the proposal. For example, I agree that the US should return to its stance of aggressively pursuing trade pacts, especially with developing democracies like Columbia. However, when Dems are in charge, the labor and environmental strings attached are usually unpalatable for our would-be trading partners. Why is it always our way or the highway on these deals?

I was less enamored about Obama's suggestions for support for higher education. Next to housing, no sector of the economy has been more subsidized than our colleges and universities. All of this financial support has not helped students and their families afford more schooling. On the contrary, faculty and administrative compensation keeps going up, with no end in sight, even as faculty productivity is pitiful. University administrators are certainly among the most useless drones in all of society. The job of most college presidents is chief fundraiser, not CEO. My experience is that the deans in our public universities make Animal House's Dean Wormer look reasonable!

So, no I would not be in favor of tax credits and loan forgiveness for students, since colleges will simply find that another excuse to raise tuition.

As for the proposed commission to study the federal fiscal mess, that is a fairly obvious political ruse to obtain cover for what Dems want to do anyway. The proposal I saw would set up an 18 person panel, with Dems choosing 10 and the GOP getting 8. Republicans are right to decline, thank you. Make it 9-9, with no tiebreaker, and you have a real bipartisan discussion of equals. That's the only way I would agree to play. Otherwise, the GOP is smarter to sidestep this trap and bide its time until they recapture the House in November.

The low point of the speech was Obama's sore loser criticism of the recent Supreme Court decision restoring First Amendment rights to corporations and unions. The silliest comment of the whole night was Obama's proposal for a law "reversing the decision." I don't know how you pass a law reversing a decision that nullified the unconstitutional parts of an earlier law. Wouldn't the new law be unconstitutional by definition? The only way to reverse such a Supreme Court decision should be by amending the Constitution, or by presentation of a new case (perhaps with new Justices in place) that gets decided differently.

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The last week or two have been pretty bloody in the markets, and it seems that we are in the midst of a long overdue 10% correction before it's done. That doesn't mean we are headed for a double dip recession, though that is not beyond the realm of possibility. On Tuesday, we bought 700 shares of Great Lakes Dredge and Dock (GLDD), a recommendation from our full service broker, at 6.0987. This is a "zero buy." On Thursday, we bought 25 shares of Con Ed preferred (ED.PR.A) at
87.90.

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