Jon Taplin's Home Page

Friday’s employment numbers have caused many analysts to set their hair on fire. Initially the Dow fell more than 100 points before saner money returned in the afternoon. This reinforces a theme I have been pursuing on these pages for the last year. For 22 years since George Soros made $1.5 Billion in a week, shorting the British Pound and forcing the Bank of England to devalue the currency on Black Wednesday, September 16, 1992, most of the great fortunes on Wall Street have been made short selling. Since that time, with the rise of the Hedge Fund Industry, built to take advantage of the misery of others–be they firms or whole countries as with Soros and the UK or with Paul Singer’s current pusuit of Argentina. The great fortunes made during the 2008 crash, were those betting the market would crash. Exhibit A would be John Paulson, who actually designed the catastrophically toxic mortgage securities, that he then arranged for Goldman Sach’s and his other banking partners to sell to money managers after they had paid the ratings services Moodys, S & P and Fitch to rate this crap AAA. This is what my finance mentor Richard Rainwater used to call a “self-fulfilling prophecy”. John Paulson bought all the short positions in these toxic bonds that he had designed to blow up and then just waited for the sound of the explosion to collect his billions.

Unfuckingbelievable.

And these guys are not in jail?

Anyway, back to my thesis. The great fortunes of the next fifty years will be made betting on the upside of an emerging global democratic capitalism that actually capable of delivering smart and reasonably priced services to all classes of society. People who bet on the short side are going to be the fools of the future. I agree with Ruy Teixeira, The Whole World is Getting Much, Much Better.

For many on the left, a positive attitude toward economic growth and globalization seems counterintuitive. After all, isn’t there a basic lack of progress in the world today—aren’t things just getting worse rather than better?

No, in fact they’re getting better — much better — and that is despite trends toward increased inequality which have damped down economic advance for average citizens in some countries. Consider the American case, where trends toward inequality have been particularly serious. In 1947, the median family income in the US was around $27,000 in today’s dollars. Today, median family income is around $61,000. Looked at another way, in 1947, 60 percent of families made under $30,000. But today only around 20 percent make less than that figure and 40 percent make over $75,000, a figure that was exceeded by less than 5 percent of families in 1947.

So let’s go back to those unemployment numbers and see why all this fear that the Wall Street Bears are constantly trying to gin up is really just guys “talking their book”. First, traders view the fact that the unemployment rate actually fell in a month when only 88,000 jobs were added, as if everyone had just given up looking for a job. What they hardly ever mention is that 300,000 boomers  Every Month are reaching retirement age, with fairly decent pensions and good Social Security Benefits.No wonder many of them are “leaving the workforce.” That’s what “Social Security” means. And in a few months at least half of those people’s positions will have to be replaced every month. Not everyone reaching 65 can or will retire, but we will witness a big transition in the workforce from the Boomers to the Millenials, and that in itself will change the way business is done.

That was also remarked upon by Teixeira.

By the end of the 20^th century, more technological advances had been made in the previous hundred years than in all of history before 1900.  There is no good reason to believe that this breakneck pace will slow in the 21^stcentury, since we are just on the verge of mastering knowledge gleaned from technological revolutions in three interwined areas: computer science, biomolecular science/engineering, and quantum physics.  Indeed, as we transition from an era where we have discovered the basic laws and building blocks in these fields to an era where we apply that knowledge, the pace of innovation, if anything, may accelerate.

We think we are seeing this same acceleration happen in the USC Annenberg Innovation Lab. All of this is counter to the End of the World Crowd, filled with idiots like David Stockman.

So here is my advice. Stop obsessing with the end of world theme. Stop reading the doom and gloom books, Stop buying gold. Stop trading in and out of stocks every time you get scared (like Friday morning). Invest in companies you think are innovative and have a long term plan and pay dividends. And stick with them. I can assure you, Groupon does not have a real long term plan. Apple does.

In your politics, work with candidates that want to build a world of justice and peace. Not with ones who want to scare you that a vote for the other party will mean the end of the world as we know it.

Watch and discuss

Here is a speech I gave last month to the Chattanooga Chamber of Commerce. It is as close to my “philosophy of everything” as you will get.

The New York Times is running an amazing series of articles about how corporate America has played city and state governments like a fiddle to extract generous subsidies for locating plants in their areas.

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

Game theory names this a collective action problem. Read more…

The phony Republican outrage after Tim Geithner’s visit to Congress yesterday shows what a pickle they are in. Geithner carried to the Hill the same proposal Obama made to Boehner and Co. last Friday, but this time the Speaker went public with his outrage as if he had never heard the proposal before. According to insiders, that’s because Boehner didn’t think Obama was serious last week and only now realizes the President is serious as a heart attack.

Time is on Obama’s side. If the Republican leadership won’t yield before December 31, the Bush Tax Cuts go away and Republican’s get blamed for raising taxes on the middle class. You can bet a bill changing that gets passed within days and so all this talk of fiscal Armageddon is pure nonsense. The bigger question for progressives is how to hold on to the big cuts in the Military budget that were part of the sequester. As Christopher Drew has pointed out, there is so much waste and incompetence in Pentagon weapons budgets, that cutting the billions from their budget is desperately needed to force them to get their house in order. This is where the Liberal-Libertarian coalition against the Military Industrial Complex has got to step up to the plate.

When a religious fundamentalist suffers a “crisis of faith” it is a mournful incident to witness. Such was the occasion when Alan Greenspan, former Chairman of the Federal Reserve appeared before Congress in the wake of the financial crisis of 2008. The man who had singlehandedly carried the faith of “the rational market” confessed that, “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in their firms.”

The revelations around the fraudulent LIBOR fix that are beginning to come forth have been greeted with half the outrage heaped on Bernard Madoff two years ago. Some would suggest that the reason Madoff seems to be the only corrupt financier behind bars is that he stole from the 1%, while the fixers at Barclays and the other banks that manipulated the $360 Trillion derivatives market got away with a mere dismissal and most of their bonuses intact. Eduardo Porter suggests the real reason for our non-chalance.

Perhaps the most surprising aspect of the Libor scandal is how familiar it seems. Sure, for some of the world’s leading banks to try to manipulate one of the most important interest rates in contemporary finance is clearly egregious. But is that worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a Triple-A rating to sell to some dupe down the road while betting against it? Or how about forging documents on an industrial scale to foreclose fraudulently on countless homeowners?

What is so shocking is that most of what purports to be mainstream economic theory today is based on this notion of rational choice theory. The whole Potemkin Village of Libertarian Free Market theory is based on a concept that takes no account of the tendency of “rational actors” to cheat if they think they can get away with it. Porter again.

Company executives are paid to maximize profits, not to behave ethically. Evidence suggests that they behave as corruptly as they can, within whatever constraints are imposed by law and reputation. In 1977, the United States Congress passed the Foreign Corrupt Practices Act, to stop the rampant practice of bribing foreign officials. Business by American multinationals in the most corrupt countries dropped. But they didn’t stop bribing. And American companies have been lobbying against the law ever since.

Extrapolating from frauds that were uncovered during and after the dot-com bubble, the economists Luigi Zingales and Adair Morse of the University of Chicago and Alexander Dyck of the University of Toronto estimated conservatively that in any given year a fraud was being committed by 11 to 13 percent of the large companies in the country.

This is the basic flaw in the Republican argument that we need less regulation of the financial markets. As Simon Johnson wrote this morning, The Market Has Spoken and It is Rigged. This is the torch the Democrats must carry from now until the election. Mitt Romney is the poster child for Savage Capitalism. His election would signal the end of democracy and the beginning of Oligarchy.

When my flight from Los Angeles touched down in Aspen, Colorado I counted 80 private jets parked at the airport. I had come for the annual Aspen Ideas Festival and what follows is a critique written with some affection for the institution but with the full knowledge that I may never be invited to speak there.

Aspen aspires to be an American Davos–a meeting in the mountains of top government policy makers, important pundits, authors and academics; all interacting with the corporate elite. Thus the enormous private jet fleet. It seemed to this first time attendee that the whole program was built on three suppositions.

1. That the economics of globalization are as inevitable as water flowing downhill on Frying Pan River.
2. That technological innovation is the salvation of society.
3. That American politics are so polarized that nothing can be accomplished at a national level.

These assumptions lead to a kind of philosophy of inevitability. Leadership is reduced to management and so problems really can’t be solved, they can just be managed. The pundits, politicians and managers on the stages of Aspen are there to tell us they know how to manage through crisis. This leaves the audience feeling as if there are no choices left other than the personal choice between eating steak or fish, wearing khakis or Levis, buying a Gulfstream or a Bombardier corporate jet. The notion of the political choice of fundamentally changing our society seems to be in the realm of the Higgs Particle. Does such a choice really exist and if so, how would we know?

On the stage the pundit interviewers were obsequiously polite with the politicians. Gillian Tett of the Financial Times never bothered to ask Larry Summers if he regretted eliminating Glass-Steagel at the behest of Citibank’s Sandy Weill. Charlie Rose sat mute as Mitch Daniels poured forth Romney talking points about how government regulation inevitably inhibits growth and how Obamacare was a tax on all Americans. The Atlantic’s David Bradley never challenged Pervez Musharraf’s assertion that military Coups were necessary to save Pakistan’s fragile and corrupt democracy. Tom Friedman allowed Ehud Barak to ramble on for minutes on why Iran’s joining the nuclear club would be different than any other previous nuclear aspirant, despite convincing evidence to the contrary by Kenneth Waltz in this month’s Foreign Affairs. Read more…

I’ve been thinking about this fiscal cliff all the pundits are warning us against. Since the election of Ronald Reagan the country has made two profoundly damaging mistakes. It has continually raised the Defense Budget, thereby robbing our education system and basic infrastructure (roads, bridges, broadband, etc) of the needed funding and dragging us down to second world status in those areas. The second mistake was to cut taxes on the top five percent. As Nick Hanauer’s astonishing Ted Talk (which was censored by TED until the outrage grew too loud) shows, this move to cut taxes on the 1% by both Reagan and Bush II was destructive beyond belief to our country.

So now if Congress DOES NOTHING in the next six months, both those disastrous mistakes will be fixed in ONE DAY, January 1, 2013. On that day the Bush Tax Cuts will disappear for good, and the Sequester (along with previously agreed upon cuts) will take at least $1 trillion out of the Defense Budget in the next ten years.

Why are Progressives and Libertarians not cheering for this to happen? It would quickly solve the deficit problem as Ezra Klein points out in this chart. Letting the Tax cuts expire and the Sequester go through is called the Extended Baseline Scenario in this Chart.

The Chart on the lower right, is what Mitt Romney and the Republican’s want. Now I am aware that the Keynesian effect of taking a lot of government spending (on planes and missiles) out of the economy might cause a recession and that’s probably why Bill Clinton said the stupid thing about the tax cuts this week. Quite honestly, a couple of quarters of flat growth to address the two biggest mistakes of the Conservative era and put our fiscal house in order, would be worth it.

It has been my contention since 2007 that global capitalism was entering a period of stagnation that could not be cured by the temporary fix of lowering interest rates. Yesterday’s grim unemployment report in the U.S. only compounded the problems in the rest of the world.

The report on American jobs added to the global pall that has deepened with Europe’s debt crisis and slowing growth in China and India. Global financial markets, weak in early trading on Friday, sank further on the report. The Dow Jones industrial average lost 2.22 percent, or 274.88 points, wiping out its gains for the year, and the main index of the German stock market closed down 3.4 percent.

The American economy since Ronald Reagan first started to push Supply Side economics (sometimes know as trickle-down economics) has increasingly skewed gains to the top 1% and flattened middle and lower class wages. In such an atmosphere the engine of consumer spending could only be fueled by easy consumer credit mixed with aggressive marketing efforts—the classic “keeping up with the Jones’s” routine. Fiscal stimulus depended mostly on aggressive military spending which seemed to grow even in the face of the collapse of the Soviet empire. The financial sector, which was once restricted to aiding the manufacturing economy, gradually became the driving force in the economy. Speculative finance became so important to keeping the dogs of depression at bay, that the Lender of Last resort–The Fed–essentially ended up becoming the backstop to the most egregious kind of derivative trading, pouring hundreds of billions into Wall Street investment banks. Read more…

As many of you know, David Brooks is one of the few conservative columnists that I regard highly. But occasionally he writes something that is so boneheaded, it makes you wonder. Such a column was his defense of Mitt Romney and the Private Equity Business this week. Here is Brooks.

Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.

The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient.

This version of the 1980′s could have been written by one the hundreds of Lobbyists deployed by the Private Equity Industry in Washington. That was probably where Brooks “researched” his story.  The real history of the era is quite different.The 1980′s was the start of the financialization of American business, with it’s wave of complex financial instruments that only a quantum math scholar could decipher. Writing after the Great Depression of the 1930’s, the economist Joseph Schumpeter spoke of “vanishing investment opportunities” by which he meant that the enormous growth of productivity, combined with the oligopolistic pricing structures of American capitalism generated a growing surplus which went beyond the capacity of system to absorb it. As I researched this post I began to wonder if Schumpeter’s concern still applied to the American economy and certainly Ben Bernanke in a 2005 speech called “The Global Saving Glut”, seemed to believe so. American capitalism had always been a boom and bust cycle as an historian of the Panics of 1837, 1857, 1869, 1873, 1893, 1903, 1907, and 1929 would know. However, by the late 1960’s economists had come to believe that fiscal and monetary policy had eliminated the extremes of the business cycle. But by the mid 1970’s, after the Arab oil embargo, the American economy began to fall into a condition known as Stagflation—a brutal combination of business stagnation and unemployment mixed with the inflation brought on by rapidly rising energy prices. Read more…