Monday, December 6, 2010

Electric Cars Boom?

There are only about 40,000 electric cars and trucks in the U. S. today compared to a total for all cars and trucks of 246 million. That works out to about 1/60th of 1% marketshare for electric vehicles. This will change dramatically beginning in 2011. According to a study commissioned by the Center for Entrepreneurship & Technology at University of California at Berkeley published in August 2009, by 2030, less than 20 years from now, U. S. electric car sales are forecasted to account for 64% of light vehicle sales and comprise as much as 24% of the entire light vehicle fleet!

How do we know this very major vehicle transformation is likely to happen? Why is this very important? And what are the consequences for our economy and government policies? Aside from this study, we know this boom is likely to happen for a number of reasons. One big reason is the big success in recent years for the hybrid cars, especially the Toyota Prius, which run on both electricity and gasoline, developed and sold by most of the major manufacturers. Another reason is the very ambitious plans many of the manufacturers have for building and selling all-electric cars, including the all-electric version by Toyota of its Prius, General Motors' Chevy Volt, Ford's Focus, and Renault-Nissan's Leaf.

A big third reason is the performance and ambitions of a little known 42 year old very smart guy from Israel named Chai Agassi. (I don't know if he's related to Andre, the tennis player.) I saw him interviewed on TV a few days ago on Charlie Rose's TV program and was very impressed. He started out at 18 as a computer programmer who later founded some software development firms. Then in 2002 he joined SAP AG, the very large German headquartered business management software concern where he quickly became their chief technology officer. In 2003 at age 35 Time magazine named him Most Influential Businessman in the World!

Agassi left SAP in April 2007 to pursue interests in alternative energy and climate change and in October 2007 founded a company he named Project Better Place, having been inspired by a question asked by a fellow participant at the 2005 World Economic Forum in Davos, Switzerland. The question was "How do you make the world a better place by 2020?" The focus of his company was developing a green transportation infrastructure based on electric cars as an alternative to the current fossil fuel technology, i. e. cars fueled by primarily by gasoline.

What has Agassi done with his company now called just Better Place since its founding a little over three years ago? It's pretty amazing. He has developed a business model wherein customers enter into contracts to purchase driving distance similar to the mobile telephone industry where customers contract for minutes of airtime. The electric cars will be built and sold separately from their battery pack provided by Better Place, just like today's cars fueled by gas are sold separately from their fuel. Customers won't own the battery packs, but must lease them from Better Place, who will build a network of battery pack switching exchanges where customers can obtain new installed batter packs in just a minute or so, much faster than one can typically fill a car with gas at a gas station.

As of April 2009 Agassi had raised $400 million in venture capital to finance initial operations and received tax break offers from several countries and states. The investors include the big investment banking firm of Morgan Stanley. The initial implementation of his business model will take place in Israel with all needed agreements already in place in a partnership with Renault-Nissan who will build the electric vehicles. Renault has committed to spend $600 million over three years to develop a car with swappable batteries. Last year Better Place successfully demonstrated their switching station in Yokohama, Japan at the invitation of the Ministry of the Interior. In April this year they launched a 90 day similar demonstration for taxi electric cars in Tokyo using three Nissan Rogue crossover utility vehicles that had been converted into electric cars. Apparently this also went well.

The company has also announced an agreement to set up a network in Australia with energy firm AGL Energy and financial advisor Macquarie Capital Group and expect to raise hundreds of million in capital there. And in October this year announced a commitment to launch a three year demonstration program with electric-powered taxis in the San Francisco Bay Area in partnership with the cities of San Francisco and San Jose, taxi operators, several consumer and environmental organizations, plus the San Francisco Public Utilities Commission. Better Place has also announced that they have selected Denmark and Hawaii as two other test markets where network electricity will likely be generated by renewable energy from solar and wind farm sources. Finally, the company is currently in talks with more than 25 additional regions in the world, including Canada, California state-wide and Oregon. Interestingly, Better Place is now headquartered in Palo Alto in the middle of Silicon Valley.

It seems to me that Agassi and Better Place, just three years from its founding, are well on their way to being a major player in the electric car industry, assuming he has good, experienced people in place to help him manage their innovative, varied and growing world-wide activities in the U. S., France, Israel, Japan, Denmark, and Australia.

Why is this projected boom in electrical cars important? One of our national priorities is energy independence, especially from the Middle East and other unstable areas. U. S. oil imports in 2030 under the electric vehicle deployment scenarios are projected to be 18-38% lower than the scenario of improved internal combustion engine fuel efficiency, and this is equivalent to 2.0 -3.7 million barrels per day. In 2008 we imported 2.3 million barrels per day from the Persian Gulf. So one benefit from the boom is greater energy independence from lower oil imports. Another related benefit is an improved trade deficit, considering that 59% of our 2008 trade deficit was from oil imports.

Other reasons why the boom is important lie in health care cost savings and new attractive investment opportunities. The projected health care cost savings come from lower emissions of airborne pollutants when vehicles are charged using non-polluting sources of electricity. The net present value of these savings have been estimated at between $105 billion and $210 billion to 2030. That's obviously quite substantial. New investment opportunities are primarily in domestic battery manufacturing and deployment of battery charging infrastructure such as planned by Better Place. This ought to also provide opportunity for more U. S. exports in these areas, improving our trade balance. At present nearly all batteries in U. S. vehicles are made in Asia, especially China, South Korea and Japan.

Consequences for our economy and U. S. government policies? Our economy certainly should benefit, assuming the right government policies are in place to encourage the projected boom in electric vehicles. The benefit comes from greater energy independence, a better trade balance, new investment opportunities, higher net employment from new investments, and health care cost savings. Many different existing and prospective new government policies will and should be affected by this boom. Among those coming to mind are trade agreements with other countries, tax policies and incentives, congressional earmark legislation, environmental rules and regulations, and policies adopted by state and local jurisdictions as a result of federal policies and incentives.

In the policy realm there should, among others, be meaningful tax incentives to support domestic investments in battery technology and battery charging infrastructure, The federal government should develop plans to purchase primarily domestically manufactured electric cars for their large fleets, and trade agreements should serve to support the development of our domestic industries in these fields.

I realize there are opponents and skeptics to this electric car boom scenario. The oil industry, those who own gas stations, and those who supply parts to the combustion engine auto industry are likely to be both opponents and skeptics. You can bet that there will be lobbying pressure to stop or at least slow down the boom. Many car buyers will no doubt be skeptical about the capabilities, driving range and the convenience of charging or battery replacement stations related to electric cars. Environmentalists will no doubt have concerns with the electricity sources that will recharge and replace car batteries. Certainly there will be significant challenges.

However, what is quite positive about all this is that there will definitely be much more competition and innovation in the transportation industry. This should be very good for consumers, opportunistic investors and businesses, as well as our economy overall.

Wednesday, December 1, 2010

Our Unsustainable Federal Budget Deficit

As most Americans no doubt know, our country has substantial financial problems that require urgent attention. If appropriate action is not taken, the problems will only get worse and become much more difficult to deal with. Virtually all of us will ultimately be materially affected, depending on what happens or doesn't happen.

One of the biggest problems is our unsustainable federal budget deficit, that is the annual fiscal year difference between U. S. government revenues or receipts and spending or outlays. For both years ending September 30th in 2009 and 2010 the federal deficit has ballooned to roughly $1.4 trillion, equivalent to between 10% and 11% of the country's Gross Domestic Product (GDP), the highest rate since the end of World War II. So the government is spending $1.4 trillion more than its receiving in taxes and other receipts and can only do so by borrowing this amount from creditors, including especially in recent years China.

The borrowing adds to our outstanding public debt, which totaled $13.56 trillion or as much as 94% of annual GDP at the end of the last fiscal year. It also adds to huge amount of interest we must pay on this high debt level, budgeted at $164 billion for fiscal 2010! As the debt increases with large annual deficits and interest rates very likely growing significantly in future years, the interest burden will increase dramatically. Obviously this financial situation is unsustainable and moreover it is threatening our prosperity and important role in global affairs.

Recognizing the seriousness of this issue, President Obama appointed an 18 member bipartisan deficit commission in February this year co-chaired by former U. S. senator Alan Simpson, a Republican, and former chief of staff under President Clinton, Erskine Bowles, a Democrat. In a 59 page report the commission has come up with a large number of prudent proposals that reasonably well address the difficult deficit problem and likely become starting points for President Obama's budget plan for FYE 2012 as well as the budget plan to be put together by the Republicans when the new Congress convenes in January.

The full commission is scheduled to vote on the proposals at a meeting tomorrow. If 14 or more members vote favorably on the package, the commission will issue a formal recommendation to Congress and the White House. Even if that doesn't happen, I think the commission has done its job and its proposals will still probably serve as reasonable starting points for the plans of both parties.

The commission's report is based on a plan to reduce the deficit 75% through spending cuts and 25% through revenue (largely tax) increases. Among noteworthy spending cut proposals are freezing pay for federal workers, including members of Congress, for 3 years; cutting congressional and White House budgets by 15%, eliminating all congressional earmarks; and increasing the minimum age for receiving full Social Security benefits over a long timeframe. Revenue increases would come from, among other sources, a 15 cent per gallon gas tax increase (rate is currently 18.4 cents) and reworking the IRS tax code including eliminating itemized deductions and interest deductions on mortgages above $500,000 on individual tax returns, and closing tax loopholes which induce American companies to base operations abroad. Most of these changes are not planned to be implemented until 2012.

How the panel proposed to deal with the huge $453 billion spending on Medicare and $290 billion on Medicaid is rather complicated and not entirely clear, but they have recommended to increase cost sharing for Medicare recipients, reduce payments to physicians for services rendered and to hospitals for medical education services, and focusing more on eliminating Medicare fraud, among a long list. Importantly, the panel seems unanimous in not wanting to adversely impact the very poor in our population in their recommendations.

I generally have no problem with the above proposals, given what's at stake, except that we shouldn't necessarily wait to implement every proposal until 2012, such as beginning to cut Defense expenditures by closing down unnecessary or marginally needed overseas military bases. Other reactions:

1. With 70% of aid going to the largest 10% of agribusinesses, why not finally eliminate all farm subsidies, which can save us $25 billion annually, rather than just a fraction of this aid?

2. The current tax deduction for interest on mortgages apparently costs the federal government $130 billion annually. Retaining the deduction for homeowners whose mortgages are under $500,000, but eliminating it for those who have a larger mortgage makes sense. I'd also be open to a tiered structure where the elimination partially begins at say $300,000 and gradually increases to the $500,000 level. Hopefully any of the realistic options could save us close to $100 billion each year.

3. How about increasing the federal tax on cigarette sales, currently $1.01 per pack, and other tobacco products? It might not have a significant impact on current federal revenues, but it may induce fewer people to smoke, especially teenagers, and thereby reduce future federal spending on health care through Medicare and Medicaid.

4. We should consider reasonable means testing for Social Security recipients, so that those who earn more than, say, $250,000 in current dollars, who do not really need this income, do not receive any Social Security, or perhaps no more than 50% of what they would have been eligible for.

5. Noting that the panel is recommending 15% cuts in the budgets of Congress and the White House, why not the same cuts for all the federal departments and agencies, or are these included already in the White House budget?

We won't know exactly how all this will turn out for at least several months, and it could be years, but I'm cautiously optimistic that the government is finally on the right track toward a more viable and balanced budget. Hopefully, Speaker-elect John Boehner and President Obama and their staffs can work together to get this achieved on a basis that can be approved by Congress and judged fair and satisfactory by the majority of the American people. However, unfortunately there is a real possibility that stubborn and ill-advised partisanship pushed by the more radical groups on both the left and the right will jeopardize and delay a prudent outcome.

Thursday, November 4, 2010

Reactions to 2010 Political Campaigns and Elections

There's no doubt the Tea Partyists and Republicans, as well as the owners of the TV stations, did extremely well in this year's political cycle, highlighted by results of the elections on November 2nd, and President Obama, as he acknowledged, took a "shellacking". The Republicans gained solid control of the House of Representatives, narrowed the majority held by Democrats in the Senate, and gained many more state governorships and legislatures under their control. With nearly an incredible $4 billion in campaign spending, a record for midterm elections, much of it on television advertising, the TV station owners must have had a great year.

However, with Obama in office for at least two more years, and having the powerful bill veto power, and with 53 colleagues and allies in the Senate compared to 47 for Republicans, the Democrats still have substantial leverage. It's also some comfort for Obama that like opinion polls for the Democratic Party, the Republican Party is not very popular either. Of major concern for the Democrats going forward, though, for the next ten years until the 2020 census, is the material advantage Republicans will have in congressional redistricting, optimizing their prospects for keeping control of the House of Representatives.

I think most analysts and commentators agree that the Republican successes were primarily due to understandable anger, frustrations, and serious anxiety of voters at their personal economic situations caused by joblessness, underemployment, decline in home values, foreclosures, concern about potential upcoming cuts to Social Security and Medicare, and how all of these would likely affect their standard of living and ability to retire in any kind of comfort. Since the Democrats controlled Congress and held the White House, voters with some justification placed most of the blame on Obama, Senate Majority Leader Reid and Speaker Pelosi.

While the policies followed by Obama and the Democrats have been strongly criticized by the Republican leadership, especially by Senate Minority Leader Mitch McConnell, I'm not convinced the policies generally were wrong, given the precarious state of the deep recession and our fragile financial system at the time. However, it appears evident that Obama's Administration and Democrats in Congress did not focus enough on jobs creation, probably could have been more attentive to the needs of American businesses, especially smaller businesses, and no doubt were not as willing as they should have been to incorporate prudent input offered by Republicans on major legislation such as healthcare and financial regulatory reform.

Now just a few comments on the campaigns. As I believe I've commented on in earlier posts, in my view the campaigns go on for far too long, there's far too much negative advertising, far too much money is spent, voters too often don't even get a clear where idea where candidates really stand on many important issues, and it's embarrassing and sad that such a relatively small percentage of eligible voters actually show up to vote. Many reforms are needed, but unfortunately few will probably be approved and implemented, in part due to our Constitution's Bill of Rights, because the media doesn't do their job adequately, and because too many voters are cynical about politics, apathetic and lazy.

Well, what happens now? Democrats and Republicans will quickly be discussing and fine tuning what their objectives, priorities and strategies will be for the remainder of the year. Obama has apparently invited their political leaders to dinner at the White House on November 18th to talk about how they can cooperate in improving the economy and job opportunities for unemployed and underemployed Americans. Presumably McConnell won't use this opportunity to repeat his rather clumsy and overtly partisan statement that making sure Obama is only a one term president is his very top priority. Both sides are reluctant to compromise, but possibly willing to go ahead if it's not a very major issue, and/or they get enough in return. Hopefully there will be some general agreement on the directions we need to go on the economy, jobs, cutting the budget deficit and managing our public debt more prudently.

There are several areas where cooperation and compromise can and should be achieved. The most obvious one is on extending the President Bush tax cuts scheduled to expire on December 31st. Obama will no doubt be willing to compromise and include extension for households earning more than $250,000 as the Republicans are demanding, although it will likely add to our budget deficit until economic growth picks up. The question is the period of extension and if the $250,000 will be increased to $500,000 or even $1 million. Other areas of potential cooperation includes international trade and foreign policies. I doubt very much else of serious substance will happen legislatively before January 2nd when the new Congress convenes.

In 2011 I'd expect there will be serious political pressures to make at least some changes to the health care law passed this year that will be more acceptable to businesses, that will more convincingly reduce overall costs and that will serve to somehow limit expected federal spending obligations. We can also expect legislation on immigration reform, energy and public education reforms, and possibly some tinkering with the recently enacted financial regulatory reform law to make it more acceptable to Republicans.

It's rather obvious that both political parties will focus a great deal in 2011 on doing things that will please and solidify their respective bases, impress the increasingly influential political Independents, and position themselves favorably for the critical 2012 presidential and congressional elections, in addition to doing what they consider in the best interests of their party and the country.

Obama is a smart pragmatist and clearly recognizes he needs Republican support for the next two years and, as a result, will quite likely move more to the center and a little bit right, depending on the issues under consideration. The key person for him to try to work with on a bipartisan basis is Speaker-elect Boehner who has just emphasized that his agenda is the "public's agenda". We know it relates to job creation, limiting federal spending, keeping taxes low, and reducing our budget deficits. But what specifically? I guess we'll find out in the next few months.

It will also be very interesting to hear who among Republicans will move to the front as the leading candidate to oppose Obama in 2012. I can't believe it will turn out to be Sarah Palin, though Obama probably would hope it might be her, and suspect it will be one of the more moderate Republican governors. We'll likely know by summer next year.

Monday, November 1, 2010

California Proposition 19 - Legalizing Marijuana

Reportedly as many as 100 million Americans have tried marijuana (also known as "cannabis") in different forms for relaxation, pleasure and/or medicinal purposes, although I greatly doubt the actual number is that high. It's also reported that sales of marijuana products in California alone totaled as much as $14 billion annually in recent years, an incredibly high and a little hard to believe number.

As most knowledgeable voters know, Proposition 19 allows people 21 years or older to possess up to one ounce of marijuana, cultivate, or transport this hemp plant for personal use, but it will have no affect on federal law which generally still forbids these activities. I was originally leaning towards voting for the proposition, but after more research and reflection have decided to oppose it, though with mixed feelings.

There were a number of familiar reasons why I was earlier leaning to support the measure. Legalizing marijuana should restrict funding to the dangerous and criminal drug cartels operating in Mexico and other parts of Central America, as well as in South America, and the many criminal gangs operating in California. That's a good thing. It would probably also save substantial law enforcement resources that are now being spent on arresting misdemeanor marijuana possession cases which could probably be better deployed to combat much more troubling violent crimes. Another reason is that the measure would allow taxation on marijuana sales that, according to the state's Board of Equalization, could generate a badly needed estimated $1.4 billion in new annual revenue.

The above are very compelling reasons for legalization. However, there are also good reasons to oppose the measure as written. First, it doesn't make sense to me that each of hundreds of local municipalities should individually decide how to control and tax marijuana sales as opposed to having a uniform position throughout the state. Another disturbing factor in this debate is the federal government's current law against legalization and the fact that U. S. Attorney General Eric Holder opposes Proposition 19 and has made it clear that federal authorities will continue to prosecute those who violate the federal law. Approval of the measure will lead to a great deal of uncertainty for consumers and dealers, as well as for California authorities, in addition to the need to spend a lot of wasted moneys on lawyers for meetings in Washington, hearings,and trials.

Furthermore, passing the measure will very possibly have some serious unintended consequences affecting public safety and federal funding for our public schools. As opponents have claimed, the measure doesn't provide the Highway Patrol with any tests or objective standards to determine what constitutes driving under the influence, unlike the case with alcohol. It might well also create problems for employers, especially those of bus and truck drivers, who need a strict policy for employees to be drug free for the interest of public safety. Perhaps more important, given the federal law and Mr. Holder's position on prosecution of violators, the measure's passing could jeopardize California's prospects for obtaining federal contracts and funding for our public schools. One superintendent has stated that the school funding at stake could be as much as $9.4 billion! That's a great deal to risk.

While I support the concept of legalization for the reasons cited above, I agree with many of the well-known opponents, including the two main candidates for both governor and state attorney general, that Proposition 19 is not the right measure at this time. It would certainly be desirable for the state and the federal government to be in sync on this issue, and I'm not sure how much this has been pursued or exactly why there is a policy difference at present. That should be examined and the public advised. In any case, it seems to me that the new governor and state legislature should at least seriously pursue a modified proposition that would apply to the entire state and address the major weaknesses brought up by opponents, such as the public safety issues and the standards that would be applied by the Highway Patrol and other authorities.

Friday, October 29, 2010

California's Government Reform Angel

In America's business world, an angel investor, also just called angel, is generally a wealthy individual who provides capital and strategic planning advice for a promising business start-up, usually in exchange for different types of equity securities, giving the investor a significant ownership interest in the start-up. In this post I want to discuss a different type of angel, one who is providing capital and advice with the noble and highly ambitious objective of successfully reforming California's dysfunctional state government.

The little known and unlikely angel's name is Nicolas Berggruen, 49, a French born businessman whose net worth has been estimated by Forbes magazine at $2.2 billion, primarily earned from investments in a number of very different businesses, including a hedge fund management company, a leveraged buy-out company, windmill farms in Turkey, a large newspaper publishing firm in Spain, and a failing German department store group he took over earlier this year. He seems to be a very eccentric fellow, reportedly owning no home and no car, but travelling around the world in his own plane and living in fancy hotels.

What's his connection to the U. S. and California? Well, he got a degree in finance and international business from New York University. In his younger days he was employed by some American companies. He's a member of the Young Presidents' Organization, the global network of chief executive officers originally started in the U. S. He sits on the board of several major museums, including LACMA in Los Angeles and the Museum of Modern Art in New York. Berggruen came more into the public eye recently when he contributed $250,000 to oppose California's Proposition 23 that seeks to suspend the landmark global warming law. He has founded an independent non-partisan think tank and consultancy, the Nicolas Berggruen Institute (NBI), based in New York, dedicated to exploring new ideas for good governance suited to the new and complex challenges most governments, including California, are now facing.

Berggruen decided that California's government would be a worthy volunteer assignment for NBI and a few days ago announced that he was forming a high profile group he named Think Long Committee for California to work on pragmatic, non-partisan plans to fix the state government. The Committee's first meeting took place two days ago on the campus of Google hosted by one of its members, CEO Eric Schmidt, with Governor Arnold Schwarzenegger as a guest. Notable among the other Committee members are former secretaries of State George Schultz and Condoleezza Rice, former Assembly speakers Willie Brown and Bob Hertzberg, former governor Gray Davis, former state treasurer Matt Fong, developer and philanthropist Eli Broad, and partner of the investment firm TGP Capital, David Bonderman.

Berggruen has committed at least $20 million for the Committee to get this project off the ground. He's indicated he envisions a California government that is competent, flexible and efficient, able to close the innovation and entrepreneurship gap that is emerging between California and places like Singapore and China, and has emphasized the importance of thinking long-term. He has apparently given the Committee six months to come up with their report and specific recommendations for implementation.

There have been some other recent unsuccessful non-government efforts to try to reform California's government. One involved organizers for a state constitutional convention which had to be abandoned because they didn't have enough funds. Another major effort was made by a think tank, California Forward, a political organization created in 2006, that was advocating for a package of statewide propositions to be put on the ballot for next week's elections. Impressively the effort was encouraged by several socio-political groups and supported by $16 million in donations from five major foundations. Hertzberg has been a co-chair of California Forward. However, the think tank lost momentum when Sacramento legislators balked at its plans and surprisingly nobody, apparently including the foundations, stepped forward to provide the extra funding needed to put the group's proposals before the voters.

It obviously won't be easy for Berggruen and Think Long Committee for California to succeed, given the degree of dysfunction involved and expected resistance from the Legislature, the public employee unions, lobbyists and other special interests. However, he has assembled a very experienced and talented group with deep knowledge of California politics and strong private sector business management and finance skills. With Berggruen's financial resources and possible access to additional resources from Broad and some of the other well-to-do members, and perhaps also the five big foundations that supported California Forward, they should have adequate funding.

It's hard to understand why it should take someone like Berggruen, from France (and homeless!), to organize a serious independent effort to fix California's government, but I think it has a fair chance to succeed. As long as the Committee members work together cooperatively on a non-partisan basis, they will most probably come up with a viable report with sound recommendations. The public is certainly ready for prudent reform and for the most part will support the effort. The prime challenges will be in overcoming the resistance from political opponents and those who will be adversely impacted financially, and, of course, gaining final legislative approval.

I would hope and expect that our new governor, whether Meg Whitman or Jerry Brown, would also support the Committee's non-partisan recommendations and would urge the Committee to invite the new governor to one of their upcoming meetings. Thank you Mr. Berggruen for your initiative and generosity. Bon voyage!

Thursday, October 21, 2010

Education Reform Revisited

Despite stubborn resistance from the two large teachers unions, public K-12 education reform in this country seems to be slowly moving forward in the right direction, but there's definitely a great deal still to be done, and one has to expect that it will take many more years to complete what is needed.

I published two posts on education reform on my blog before which discussed most of the key problems and challenges and offered a long list of solutions. The first was titled "K-12 Public Education" published on 11/23/07 and the second was "Public Education" on 11/12/08, nearly two years ago. Certainly I agree with those who maintain that this issue should be one of America's top priorities, right behind national security and rebuilding our nation's economy.

Some of the key concerns cited were that in too many schools, especially in many of our larger urban areas, there are unacceptably high drop-out rates, disgraceful 40-50% graduation rates, poor test scores, clear evidence that a disturbing percentage of these students were not mastering the material taught, with the result that they had no chance to go to college and little chance to get any good-paying jobs. In fact, a great many of them in recent years have turned to crime and ended up in our crowded prisons. As I mentioned in my first post in 2007 as many as 75-80% of the 2.2 million people in our federal, state and local prisons and jails were high school drop-outs! Embarrassing, shameful and sad!

Just from an economic point of view, how much better off would our country and society be if our educational system, supported perhaps in many cases by better parenting and more effective community organizations, could get more of these kids to stay in school, graduate and obtain better jobs and staying out of trouble. The income and sales taxes they would pay, added to the large savings from not bearing the substantial costs of having many of them in jail or prison, could be quite substantial.

Why has this been happening? What and who are to blame? There are many different opinions. However, most knowledgeable educators, politicians and parents place much of the blame on poor performing and ineffective teachers and principals in many of our schools. This has been exacerbated by the difficulty and high expense generally involved in removing these people as result of terms in negotiated labor union contracts, particularly teachers and principals who have tenure, often achieved after just two years of employment.

The labor unions, primarily the American Federation of Teachers (AFT) and the National Education Association (NEA), have been effective in obtaining attractive benefits and job security for teachers and principals. But they have been unreasonably opposed to any significant education reforms, including meaningful objective teacher and principal evaluations and renegotiating the sensitive issue of tenure. Union leaders see their prime job as protecting their members, not providing a high quality education to their students, though, to be fair, they are of course also interested in that. These leaders don't want to see even justified lay-offs of their members because it would adversely impact the dues they receive which pays for their personal high levels of compensation and benefits. This is not acceptable and must be addressed in future contract negotiations.

Other reasons for the poor education results include, as most readers know, overcrowded classes, inadequate school facilities, starting teacher salaries that are often too low to attract more qualified personnel, schoolyard discipline, insufficient student fluency in English, negative impact of inner city gangs, unmotivated students, unsatisfactory parenting, and learning expectations for students by parents, administrators and teachers that are too low. There are two other reasons I want to add: insufficient affordable pre-K educational facilities and a bloated bureaucracy among federal, state and local education officials with overlapping responsibilities and unclear accountabilities. Obviously many schools are performing very well and these reasons don't apply to them. And, of course, the above conditions vary greatly among low performing schools.

The solutions to these problems are largely self-evident, especially: removing poor and ineffective teachers and principals, replacing them with higher salaried, higher qualified educators, more effective sharing of "best practices" by successful districts and schools, improving inadequate facilities, working with local police forces and community organizations to better combat gang interference, setting much higher expectations for student achievement, and getting rid of bloated educational bureaucracy and sharpen accountabilities. In most cases removing poor and ineffective teachers and principals will require tough negotiations and cooperation, backed by increased public pressure, with the relative labor unions.

Additional important and challenging solutions include better parenting and significantly increasing student motivation to get a good education, which clearly are closely related. Schools can contribute to better parenting by communicating effectively with parents at the beginning of each school year what the school expects of them and what parents have a right to expect from the school. This can be done by letter or by an orientation meeting for parents at school. Strengthening student motivation are responsibilities of both the school, primarily teachers and principals, and students' family, primarily the parents.

To my surprise, frankly, noted Newsweek columnist, Robert Samuelson, in his 9/13/10 column "Why School 'Reform' Fails", believes that frequently shrunken student motivation, especially in high schools, is the main reason why attempts at education reforms have largely failed in recent years. Motivation has weakened, he wrote, because more students "don't like school, don't work hard, and don't do well". I don't disagree with the latter, but the more important question is why. Parenting must be a big part of the equation in the majority of cases.

I should mention the "Race to the Top" competition initiative of President Obama and Secretary of Education Arne Duncan to distribute a total of $4.3 billion of federal money to selected states deemed most successful in implementing innovative and necessary reforms. In August Duncan announced ten winners including Washington, D. C., New York, Florida and Ohio, but excluding California. It seems to be a good initiative, supported by both Democrats and Republicans, but I'm concerned about the concept of spending that much taxpayer money to incent innovation and reform. It gets the attention of states to act, but is the process completely fair and is it necessary to spend that much money, considering the widespread concern with our budget deficit and national debt?

At the outset I said I felt that reform was slowly moving in the right direction. Why? The answer is in innovative recent reform initiatives by a small group of dedicated individuals that have gotten a great deal of favorable publicity:

1. The recently released movie, "Waiting for Superman", a very compelling public education documentary film by Davis Guggenheim, whose main point is that our future depends to a large extent on good teachers and that the coddling of bad teachers by their powerful unions virtually insures mediocrity, at best, in both teachers and the students in their care.

2. Innovative educator and reformer, blunt talking Geoffrey Canada, president and CEO of the Harlem Children's Zone school in Central Harlem, New York, who was a major commentator in Guggenheim's film and a guest on one of Oprah Winfrey's highly popular recent TV programs. A former teacher and consultant, Canada became very frustrated by the bureaucracy in our education system and the difficulty of effecting change. He has provided a pipeline for his students to follow from birth to college, giving them a safety net, so they would never fall of track. President Obama has described Harlem Children's Zone as a miracle and plans to try and replicate its success in cities across the country.

3. The new partnership among the Republican governor of New Jersey, Chris Christie, the Democratic mayor of Newark, Corey Booker, and Mark Zuckerberg, founder of Facebook, to completely reform Newark's very troubled school system. Christie is a native of Newark who won the election for governor last November on a strong promise to fix a "failed state". The three of them also were guests last month on one of Winfrey's TV programs. Christie said on the program that he will empower Booker to be in charge of the reform project and together they will choose the right new superintendent for the school system and discuss the major objectives and priorities of the project. The wealthy Zuckerberg announced he will provide a $100 million challenge grant to support the project! When asked why he would do that, Zuckerberg said he wants other children to have the same educational opportunities that he has had, and he really believes in Christie and Booker's commitment and abilities to accomplish the reform that is needed.

4. The popularity and success of the growing KIPP ("Knowledge is Power Program") of 99 schools in 20 states plus Washington, D. C., the nation-wide network of free open-enrollment college prep public charter schools in under-resourced communities. KIPP was founded in Houston, Texas in 1994 by two teachers, Dave Levin and Mike Feinberg, based on the following key education principles: outstanding teachers, more student time in school, rigorous college-prep curriculum, and a strong culture of achievement and support. In 2000 the co-founders of Gap, Inc., the large apparel retailer, Doris and Donald Fisher, gave KIPP a $15 million grant to help them finance expansion of the network. It's noteworthy that 95% of KIPP students are African-American or Latino/Hispanic.

5. The Bill and Melinda Gates Foundation of Microsoft fame is the biggest private player in the school reform movement providing a highly impressive $200 million annually in grants to elementary and high school education where innovation and reform are high priorities of its leaders!

Despite the substantial grants mentioned above, and their importance in providing needed funding for attracting top teachers and building quality school facilities, it's not always a requirement for education reform. A lot can be done by strong leadership, as was evident by what Michelle Rhee, chancellor of the school system, and Mayor Adrian Fenty, accomplished in initiating drastic reforms in Washington, D. C. Another example is demonstrated by the recently premiered "School Pride" TV program which shows what can be done by community volunteers, including teachers, parents and students, supported by local small business contributions of equipment and supplies, in renovating dilapidated schools, such as Enterprise Middle School in Compton, California.

The needed reforms will obviously not be achieved if it's left to the labor unions or even the politicians. It requires continuing public pressure and the active involvement on a sustained basis for years by tens of millions of parents and voters, supported by the local and national media. This clear conclusion is a no-brainer!!

Thursday, October 14, 2010

California Governor's Race

The nation's most populous state with an estimated 39 million residents has a well-deserved reputation as one of the best places to live, with a lot of things going for it, including unmatched climate, many excellent universities, and an incredible variety of superb recreational opportunities. Ironically, however, California these days is also a state known for its poor K-12 public school system, a generally unfavorable business climate, a very serious unemployment rate exceeding 12%, and a dysfunctional government with a lousy record in financial management.

The governor and his staff are expected to be leading the way to fix the problems in effective collaboration with the 120 members of the State Legislators, 80 in the State Assembly and 40 in the State Senate, currently controlled by a Democratic majority. For a number of reasons, the individual and collective efforts of the governor and state legislators have not been very successful in at least recent years, and many voters would probably say that their performance has been unacceptable or worse.

One of the reasons for this very unsatisfactory situation is that the politicians have been too ideological, have lacked pragmatic problem solving skills, and have not focused properly on meeting the needs of the state and its residents and taxpayers. It would also seem the majority of them were not independent enough to do what was right on too many issues, because of undue pressure from important campaign contributors, especially businesses in case of Republicans and public employee and labor unions in the case of Democrats.

The current governor, famous body-builder, actor, businessman and philanthropist, Arnold Schwarzenegger, a Republican, assumed office in November 2003 as result of a recall election removing Gray Davis, a Democrat. Schwarzenegger finished Davis' term and then was reelected in 2006 to serve through 2010. The upcoming election on November 2nd to determine the new governor is primarily a race between experienced business executive Meg Whitman, a Republican, 54 years old, trying to become the first female California governor, and veteran politician Jerry Brown, a Democrat, a still vigorous 72, whose father, Pat Brown, served as governor from 1959 until 1967.

As most California voters know by now, Whitman, one of the wealthiest women in the state, was CEO and President of eBay Inc., the large and successful internet auction and shopping firm, from 1998 until 2008. Before that she was an executive with The Walt Disney Company, DreamWorks, Procter & Gamble, and Hasbro. She was educated at Princeton and the Harvard Business School. Brown is the state's current Attorney General, assuming this position in 2007. Before that he was Mayor of Oakland, Chairman of the California Democratic Party, Secretary of State, and Governor from 1975 until 1983. He was educated primarily at U. C. Berkeley and the Yale Law School.

It looks like it will be a close race. According to polling by Rasmussen Reports as of October 4th, Brown had the support of 49% of likely voters and Whitman 44%, with 4% undecided and the remaining 4% for other relatively unknown candidates. On Tuesday Brown and Whitman had the third of their three debates over the past few weeks at Dominican University in San Rafael just north of San Francisco. The moderator was the well regarded retired NBC anchor and journalist Tom Brokaw. There were no special surprises and no outstanding performances, though I thought Brokaw did quite well. Democrats will probably feel that Brown won, and Republicans that Whitman did. Having watched all three debates, I thought they were about even in the first, Brown won the second, and Whitman had a slight edge in this last one.

As often happens in political debates, there was too much time devoted to relatively minor and insignificant issues and too little to the major substantive issues, such as specifically how the candidates will create the millions of new jobs they promise, keeping in mind that the governor has limited ability and authority to deliver, especially for private sector positions. Whitman clearly was more articulate with well rehearsed remarks, but I wish she didn't smile continuously throughout the debates. It seemed contrived. Brown, very passionate as usual, seemed to speak on-the-cuff most of the time, seemed overly serious and didn't smile hardly at all. Like most politicians, both Whitman and Brown have unfairly exaggerated the positions of their opponent on several issues.

Whitman's business experience is a big plus, but her complete lack of government experience and fact that she apparently didn't vote in political elections for the past 28 years are noteworthy negatives. I don't like the fact that she has spent more than $120 million of her own money financing her campaign, although it's not her fault that it's perfectly legal to do that. Furthermore, she makes a sound argument in saying that financing the bulk of her campaign herself makes her more independent from special interests compared to Brown, who has been much more needy of contributions from unions and others. Her changing and current position on reforming illegal immigration with no path to citizenship for any of them will most likely hurt her prospects with the Hispanic voters she has been courting in recent months. It may also hurt her with some non-Hispanic Democratic and Independent voters, although it will solidify her existing support from many Republicans.

However, I like Whitman's position that California needs to implement a comprehensive, innovative and effective program to retain and recruit new businesses to the state by making the business climate much more attractive by such as lowering corporate income taxes and streamlining state regulations to make us more competitive with other states such as Arizona, Nevada, Utah and Texas. While most owners and senior executives of these businesses might prefer to live in California, the overall economics too often makes it attractive to move their factories and distribution centers, as well as most of their non-executive jobs to these other states. I witnessed this trend in my career as a corporate and investment banker in southern California.

Whitman is right to think that the new governor needs to find ways to reduce state expenditures to help balance our recurring budget deficits and laying off people whose jobs are not really needed is certainly one way to do that. But laying off as many as 40,000 of the current total of 239,000 employees seems drastic. I think voters should have an idea of where those 40,000 workers are employed and what would be the financial and service consequences of laying them off when all the relative costs like pension obligations and potential termination litigation expenses are tabulated.

Brown's long experience in government in California and intimate knowledge of leaders in the Legislature and how issues are solved or not solved are significant positives for him, although it's also true that a "fresh approach" by a business experienced outsider such as Whitman might work well. Brown will most likely get more support from the increasingly important Hispanic block of voters, given the incident with Whitman's maid and the fact that he supports a path for citizenship for the illegals under prospective immigration reform legislation. I also suspect he will have most of the support from California's environmentalists, given his track record and Whitman's positions on the Global Warming Solutions Act of 2006 (AB32) and Proposition 23, which seeks to suspend implementation of AB32 relating to air pollution controls.

The business community, most Republicans and many Independents are likely to support Whitman because of her perceived strengths in dealing pragmatically with improving the economy, contributing to job growth, being effective in cutting expenditures and moving the state toward a balanced budget. These perceptions are reasonably justified and will have an adverse impact on Brown's prospects. However, she may well have a difficult time getting needed legislation through the Democratically controlled Legislature, depending on the composition of this body after the upcoming elections.

There are not likely to be any new campaign surprises to impact the election between now and November 2nd. As is often the case, the outcome will largely depend on the components of the voter turnout, only 61.2% in 2008, and how Independents and political moderates decide to vote. Both candidates have the ability and potential to be effective governors, but whoever wins needs to prioritize improving the state's economy with a much more acceptable unemployment rate, restoring prudent financial management, and fixing our K-12 public education system. The winner also badly needs a State Legislature whose leaders will pragmatically collaborate with the governor in solving these issues. It will largely be up to Independents and moderates to decide which candidate can best deal with California's priority needs.

Friday, October 8, 2010

U. S. Energy Plan

President Obama and Energy Secretary Steven Chu need to get going on finally putting together their comprehensive national energy plan. They have acknowledged it's an important priority, and have begun to implement a few good initiatives like funding clean energy technology and research. I'm fairly confident they'll get to it in the next several months, but the clock is ticking. No doubt the main reason for the delay is that the president has had his hands quite full with the weak economy, foreign policies, including the two wars, health care and financial regulatory reform, among many legislative issues.

The energy plan issue got a lot of provocative publicity about two weeks ago when General Electric's Chairman and CEO Jeff Immelt made a speech in Washington, D. C. at the Gridwise Global Forum, which happened to be co-hosted by Chu's Department of Energy. An article in the Wall Street Journal on 9/24 discussed his remarks. Immelt warned that the lack of a comprehensive U. S. energy policy and its "stupid" current structure are causing America to fall behind in new energy fields. He indicated that China is moving faster to develop clean technologies such as nuclear power, electric vehicles and wind power. New York Times journalist and author Thomas Friedman has commented on this as well in his recent book "The World is Flat."

In my blog post back on May 6th I also commented on this subject, emphasizing that the U. S. can learn a lot from other countries who are leaders in their respective fields of energy development: Germany with solar, France with nuclear, Denmark with wind and biomass, and China with electric vehicles and most of the others.

Important reasons why China is moving faster than us, Immelt pointed out, is that they, as well as Canada and Australia, have a much simpler regulatory structure for energy development and the government policies provide more support to the industry, handicapping opportunities for American companies like GE. Of course, China's centrally controlled government system doesn't have to deal very much with public opinion, special interests, and an independent judiciary, compared to the case in the U. S.

Immelt was also particularly critical of how the U. S. has failed to maintain and expand our nuclear power industry. He apparently indicated that only one new nuclear power plant is being built in the U. S. now, whereas there are close to fifty being built in the rest of the world, many in China. As is widely known, there are a number of key reasons for this situation: huge costs, limited appetite from prospective lenders to provide financing, environmental resistance, safety concerns, and lobbying by the utilities and coal mining industry. Right now there are 104 commercial nuclear power plants licensed to operate in this country and they currently provide roughly 20% of the nation's total electric energy consumption, coal-fired power plants providing 50% or so.

In some defense of President Obama, it should be noted that in February of this year his administration approved an $8 billion loan guarantee for the construction of two nuclear reactors in Georgia. If the project goes forward, these would be the first plants to start construction in the U. S. since the 1970's! And in May last year he announced a national fuel efficiency policy aimed at increasing fuel economy and reducing greenhouse gas pollution for all new cars and trucks sold here. The new standards, covering model years 2012-2016, ultimately require an average standard of 35.5 mpg in 2016 for cars and were intended as one step to move us closer to his goal of national energy independence.

Secretary Chu did acknowledge at the Forum that an energy policy overhaul is needed. Components of this must include close collaboration with Congress, the private sector, environmental interests, and the public on how we can best move forward aggressively to meet our energy needs as efficiently and prudently as possible.

Priority objectives should include maximizing clean and renewable sources and becoming as independent as possible of imports from the Middle East, Africa, and Latin America, but excluding Canada, a major supplier. Surely this means over time a much lesser reliance on coal-fired power plants, more reliance on natural gas, more selective drilling for oil in the U. S. and certain offshore areas, much more nuclear power for electricity, more electric vehicles, and much greater production of electricity from clean coal technology, solar, geothermal, biomass and wind power sources.

The tricky part is fairly balancing the needs of the private sector, consumers, taxpayers, environmentalists, and our government. This energy transformation cannot come at the undue expense of our state and federal governments. The ultimate though obviously challenging goal must be to manage this transformation so it fulfills the reasonable needs of all the above players, and promotes economic growth without a federal budget deficit and without adding to our national debt. Easy, right?

Monday, October 4, 2010

Afghanistan Exit Strategy

I spelled out my many continuing and serious concerns about the Afghanistan war in a post published on June 24th. I feel even more concerned now and would not at all be surprised if President Obama is already thinking about having one of his most trusted aides begin drafting up a highly confidential exit strategy. As I see it, this would be in anticipation of his planned December meeting with Defense Secretary Gates, Admiral Mullen, and General Petraeus to discuss the latter's war strategy review.

Why do I think Obama may be doing this? There are many reasons and several are discussed in Bob Woodward's newest book, "Obama's Wars", released just a week or so ago. The war is still not going well with almost daily reports of Taliban or other terrorist group attacks and continuing coalition casualties. One would have to be very skeptical of any claim at this point that we are winning the war. Cooperation with President Karzai, who has met recently with Taliban moderates and certain warlords to see if they can work out a joint political program, remains problematic.

Almost everyone agrees there is no real military solution in Afghanistan. Just a political one. Obama's Special Representative for Afghanistan and Pakistan, Richard Holbrooke, recently stated that no political deal between the Afghan government and the Taliban can be successful without clear Pakistan support. Many of the top Taliban leaders are believed to be based in Pakistan. Furthermore, there is widespread belief that elements within Pakistan's CIA, called Inter-Services Intelligence (ISI) are closely collaborating with the Taliban, even though we consider the Pakistan government a close ally of ours and we provide the government and military with billions in financial aid. However, the collaboration is denied by senior government representatives. All these factors make for a very complicated and fragile situation.

Obama has a large number of other important issues to deal with over the next few months that will require much of his time, starting with the upcoming mid-term elections that could give control of the House of Representatives, if not also the Senate, though that's less likely, to the Republicans. Another critical issue for him is the outcome of the very difficult peace negotiations between Israel and the Palestinians that, not surprisingly, are not going well. Another important issue is rebuilding and realigning responsibilities for his senior staff in the White House, following several key departures, with rumors that Secretary Gates and Obama's National Security Adviser, General Jones, may be leaving in the next several months as well.

In terms of more direct evidence, according to Woodward's book, Obama recently was quoted as saying that he wants an exit strategy. Reportedly Obama said "This needs to be a plan about how we're going to hand it off and get out of Afghanistan." Moreover, the White House is populated by Democratic political aides who don't want to continue the war who were reportedly outvoted by Secretary of State Clinton and Pentagon counterinsurgency enthusiasts last December when the escalation strategy was agreed to. There is no doubt the next three months will be extremely difficult for both Obama and Petraeus personally. Very probably it will also be very difficult for our 100,000 troops in Afghanistan, which is even more disturbing.

It is apparently generally accepted by those experienced in counterinsurgency strategy that if the government side is not winning against the rebels, it's losing. A tie goes to the insurgents. That would be the Taliban and other terrorists. A Taliban spokesman has reportedly said that while the U. S. and our coalition allies have watches, the Taliban have the time. They know the American public is increasingly unhappy with this war and that this will pressure the government to withdraw at least the bulk of our forces within the next two to three years, if not sooner, beginning next August. So the Taliban can be patient.

Unfortunately the odds are not in our favor to achieve a political "victory" either. That has been defined as development of Afghanistan as a viable democracy that can remain independent and at peace, with a competent publicly elected government that can provide basic services to all its people. This apparently will require a workable agreement with at least moderate elements of the Taliban, clearly supported by Pakistan, and include many of their leaders in a new coalition government. It will probably also require a significant amount of further foreign financial aid and advisory services. If the Taliban continue to be successful with their insurgent attacks over the next several months, my guess is that they will not want to negotiate with the Afghan Government. If Pakistan doesn't step up in a unified manner supporting the U. S. and Afghanistan, a victory is not going to have much of a chance.

Another path to a sort of "victory" would to my mind be if in the near term we could somehow deal a death blow to Al Qaeda, including killing or capturing Osama bin Laden, Chief of Operations Adnan Gulshair el Shukrijumah, and Deputy Operations Chief Ayman al-Zawahiri. Given how long we've been trying to do that without success, it obviously won't be easy. We would need luck, reliable informants, and assistance from Pakistan's military and ISI. We'll take any and all of those.

We need to pursue both paths urgently with a great priority being limiting civilian and American and coalition casualties. The earlier we can get any kind of honorable "victory", and get at least all our combat troops out of there, the better. I trust the great majority of Republicans, Democrats and Independents can all agree on that.

Capital Punishment

The recent news about a judge postponing the execution of Albert Brown at San Quentin State Prison in Marin County just north of San Francisco on a technicality got me to rethinking my view of capital punishment. Brown, who was convicted of murdering a young California girl in 1980, has been on death row for as long as 28 years. This is crazy! Obviously something is very wrong with our current system of criminal justice. Should we retain capital punishment in this country, or make other changes with our system?

Currently 15 states in this country, including New York, have abolished the death penalty, while the other 35 states still permit it, and that includes California and Texas among the largest states. In 2002 the U. S. Supreme Court held that those judged to be mentally retarded while committing their crimes could not be executed, and in 2005 the Court held that juveniles under 18 when they committed their crimes also could not be executed. However, all others could be, depending on the law of the state in which the crime was committed.

It's interesting that as many as 137 countries have abolished capital punishment altogether and this includes every country in western Europe, Canada, Australia and New Zealand. Also noteworthy, of those much smaller number who still have capital punishment, the three countries who have had most executions are China (by far the highest number), Iran and Saudi Arabia, followed by the U. S., Pakistan and Iraq.

A majority of Americans still favor retaining capital punishment, but my understanding is that this majority has declined in recent years, probably as a result of news coming out that quite a few prisoners on death row in various states have been found innocent as a result of new DNA evidence.

Proponents of retaining capital punishment usually cite deterrence, better closure for the family and close friends of those killed, making sure that a killer cannot kill again, and elevation of the value of life in our society. Sometimes they also make economic arguments relating to costs of keeping prisoners on death row. Another perhaps more compelling argument is that executions can lessen the rising concern with overcrowded prisons, requiring new unaffordable prisons to need to be constructed.

Those who favor abolition point to a long list of reasons. The most compelling, it seems to me, is that quite a few prisoners on death row have been found to be innocent, especially as result of new DNA evidence, but also recantation of testimony by key trial witnesses. Since 1973 the number of wrongfully convicted American prisoners released from death row totaled 138! That's a lot of innocent people who were close to being executed. Several people have been executed and later found out to have been innocent! That should, of course, never happen!

The other two most compelling arguments have to do with deterrence and relative costs. Scientific studies have consistently failed to demonstrate that executions deter people from committing crime any more than lengthy prison sentences, especially sentences where there is no possibility of any parole. From the evidence I've seen, the total costs of death penalty cases are substantially higher than non-death penalty cases, primarily because of the much higher costs of lawyers and trial expenses with death penalty cases, especially due to the generous rights of appeal that we have in our system. In a 2003 legislative audit conducted in Kansas it was 70% higher, in Tennessee it was estimated at 48% higher, and in California a 2008 analysis by a credible commission concluded even more convincing results.

There is also a serious social justice issue to be considered. The quality of legal representation received and the jurisdiction in which the crime is committed seem too often to be more determining factors than the actual facts of the crime in death penalty cases. Almost all defendants in capital cases cannot afford their own attorneys. In a high percentage of cases the court appointed attorneys are overworked, underpaid and less experienced than those engaged by middle class or upper income defendants.

Life in prison without parole is a sensible alternative to the death penalty. It's a lot less expensive for the taxpayers and leaves open the possibility, no matter how slight, of prisoners being released if later found innocent. The overcrowding in our prisons is a real concern, but I think that can be ameliorated by other means, such as deportation of many of the illegal immigrants in our prisons, releasing some of our non-violent prisoners into community service programs, and changing some of our sentencing guidelines.

Thursday, August 26, 2010

New New York Islamic Center and Mosque

I am not particularly knowledgeable about Islam, don't live in New York, and my blog for the most part focuses on national politics and significant public policy issues. People therefore have reason to wonder why I would want to dedicate any time or effort in discussing an Islamic building project in this city.

It's a fair question. Well, the project has recently become a national political and public policy issue for many different reasons. President Obama and Mayor Bloomberg have commented on it, and so have a number of other major political leaders. It's widely considered to be a very controversial project in the national media. Troubling information has come out about the project's main backer, 61 year old Imam Feisal Abdul Rauf. Furthermore, there is increasing concern about the project's funding. We're still fighting two costly wars and contending with terrorist threats across the globe against Islamic extremists, similar to the ones who attacked us on September 11, 2001. Terrorist group Hamas' official, Mahmoud al-Zahhar, has publicly come out in favor of the project.

As a reminder, Rauf and some unidentified Muslim supporters would like to build a $100 million 15 story Islamic community center and mosque two blocks from where the World Trade Center was destroyed about nine years ago, the area that became known as "Ground Zero". My understanding is that the property involved has already been purchased for $5 million. Mayor Bloomberg and local planning officials support the project as a freedom of religion and constitutional issue consistent with our basic values as Americans. President Obama expressed general support for similar reasons at a recent celebration of Ramadan meal. However, he seemingly backtracked a little bit the next day when he said in response to some media questions that he had not commented on the wisdom of building the project near Ground Zero.

Republican U. S. Senator David Vitter from Louisiana and Independent, formerly Democratic, U. S. Senator Joe Lieberman from Connecticut have come out against the project for moral and national security reasons.

What do I think and why? This is not a "no-brainer", but I think at best this project represents an insensitive and unnecessary provocation toward those who were directly affected by the 9/11 attacks and those who vehemently oppose the project as an insult to those who died or were injured on 9/11 or in the wars in Iraq and Afghanistan. At worst it's an inappropriate project that should be stopped, depending on what more is found out about Rauf's motives for this specific location, his real beliefs about the rights of Islamic terrorists, and the expected sources of the funding for the project.

It's not a freedom of religion issue. Assuming the best case scenario, it's a social sensitivity issue, respecting the strong feelings of the majority of New Yorkers and residents of neighboring states opposing the project who lost 2,976 family members or close friends in the attacks.

As far as I know, the public doesn't know very much at this point about Rauf's real motives for choosing this particular location for his project, though he has apparently claimed it would be building a monument to tolerance. His supporters consider Rauf a visionary for peace and progressive Islam, someone who has worked for decades to build bridges between the U. S. and like-minded Muslims around the world. We've learned that he has represented the State Department in the Muslim world and has been given contracts to teach FBI agents about Islam. What troubles me is his apparent unwillingness, as evidenced by past statements, to unequivocally condemn suicide bombings, agree that recruiting children for suicide bombings is child abuse, and to consider Hamas as a terrorist organization.

One would have thought the State Department could have found a better Muslim to have represented us, if these Rauf statements are confirmed to be correct.

The planned funding of the project also gives me some concern. $100 million is a lot of money and it's not likely an American financial institution would provide a loan or, as I understand it, that it could be raised solely by donations from American Muslims. Most likely the bulk of it would be raised by donations from wealthy Muslim individuals, governments or non-profit organizations in the Middle East. Perhaps the most likely major source would be Wahhabi organizations in Saudi Arabia, the conservative Sunni sect which has been known to be active in funding mosques around the world, as well as terrorist organizations like Hamas and Hezbollah.

All this said, the officials in New York City and New York state should make the final decision, whether the project should be built or not. If Rauf and his sponsors comply with all the applicable construction and development regulations and ordinances, they should probably be allowed to proceed. However, I think the officials should inquire beforehand about Rauf's motives for this particular location and the source of the funding to determine if this should impact the decision. I also think Rauf should seriously consider a different, less sensitive location, more distant from Ground Zero, in an effort to get broader local support for the project.

While it shouldn't at all be factored into New York's decision, the radical Muslim extremists we are fighting in the Middle East, who maintain the U. S. is at war with Islam, will most likely consider it a "victory" for them whether the project is built or not.

Friday, August 20, 2010

Israel and Palestine Peace Agreement

Last Chance? In my two posts in January 2009 titled "Israel and Hamas' Military Conflict", I discussed much of the background, the great challenges, and the relatively poor odds involved in securing a long sought fair, balanced and sustainable peace agreement that would result in a viable two state solution with full independence for Palestine and adequate security for Israel. A ceasefire was agreed to in June 2008, after lengthy mediation by Egypt, but no peace agreement.

Finally, today, after a great deal of preparatory work, Secretary of State Hillary Clinton and peace envoy for President Obama, George Mitchell, invited Israeli Prime Minister Benjamin Netanyahu and Palestinian Authority President Mahmoud Abbas to meet in Washington for the first direct talks in nearly two years. Importantly, this critical meeting was arranged in coordination with the United Nations, the European Union and Russia.

The right peace agreement should potentially be very beneficial to the great majority of individual Israelis and Palestinians, especially in the long run. It should also be a positive factor for the legacies of Abbas, 77, and Netanyahu, 60, which, like for most politicians, is very important to them. Additionally, this prospective foreign policy success could do a lot to help the Democrats in the upcoming mid-term elections and assist President Obama improve his public opinion polls, his own legacy, and, possibly, his prospects in the 2012 elections. Also significant, the right agreement should greatly facilitate improved relations between the U. S. and the other Arab states in the Middle East.

However, despite the above points, there are several major reasons why the odds of success are not favorable:

1. There has been a long history of unsuccessful efforts.

2. The leader of Hamas, the terrorist organization that has ruled the Palestinian territory of Gaza since June 2008, Ismail Haniyeh, has already stated he would not abide by any agreement reached by Abbas and Netanyahu in Washington.

3. Hamas, funded by Iran and donations from Saudi Arabian "charitable" organizations, incredibly does still not recognize Israel's right to exist and its charter calls for Israel's obliteration or nullification.

4. Some of the right-wing leaders of recent Israeli settlements in the West Bank, especially some of those close to Jerusalem, are very anxious about the peace talks and what may result. They might also not abide by any agreement reached by Netanyahu.

5. Several of the compromises expected to be part of a fair and balanced agreement, including the status of Jerusalem, recent Israeli settlements, prospective new national borders and rights to return to Israel of Palestinians who earlier were forced to leave, are very sensitive issues unlikely to be well received by important factions on either or both sides.

6. No matter the specific outcome of the talks, countries like Iran, Syria, Iraq, Lebanon, and, very importantly, also Turkey and Saudi Arabia, are likely to be skeptical of its fairness, and may withhold their support, in part because of their long-time view that the U. S. is strongly biased toward favoring Israel, and this, they believe, will be reflected in how the U. S. brokers the negotiations.

This may well be the last chance for serious direct negotiations toward a peace agreement in a decade or more. The stakes are high, especially for Israel, the Palestinians, and the U. S. Our role is very delicate. We want to firmly encourage Abbas and Netanyahu to come to a clear agreement, but we don't want to put too much pressure on them. If we are perceived to be doing so and the talks don't succeed, we will be blamed, at least in the Arab world. Even if we don't put any undue pressure on them and the talks don't succeed, there is a significant chance we will be unfairly blamed.

I think there is a real possibility that Abbas and Netanyahu will come to a conditional agreement, but it will likely be subject to approval by their respective legislatures and, in the case of Palestine, possibly their primary allies and supporters, especially Saudi Arabia, Iran and Egypt. That approval will be much more difficult. Most Americans will be very pleased if an agreement is reached and finally approved and signed. That includes me, but I just hope it doesn't include a provision in one way or another committing the U. S. to a substantial aid package that will add unduly to our budget deficits and public debt.

Friday, August 6, 2010

Income Tax Rate Changes

As the majority of Americans who follow the news know, we're at a very critical and sensitive point in time right now when it comes to the country's economy and finances. We have record high national debt and a huge federal budget deficit, a slowly recovering but still struggling economy, slow economic growth, and a most disturbingly high 9.5% official unemployment rate, which in reality, when underemployment is counted, is actually close to if not over 16%!

At the same time we are still fighting two expensive wars with associated nation-building type programs in Iraq and Afghanistan, providing substantial costly aid of many different types to many other countries, including Pakistan and Haiti, and maintaining dozens of marginally needed military bases in still others. Expenses and investments for these activities are one reason for our high debt and budget deficits. Another important reason was because of the federal initiatives and interventions considered necessary by the Obama Administration to help the country recover from our deep recession from 2008 to the present.

A third important factor was the sizable tax cuts pushed by President Bush and approved by Congress in 2001 in the Economic Growth and Tax Relief Reconciliation Act and other related legislation passed in 2003. The lowest income tier rate was reduced from 15% to 10%, the other tier rates were reduced by 2% each. The Act also reduced the capital gains tax, increased the child tax credit and reduced the so-called "marriage penalty". The stated purpose of the Act was to help us recover from the 2000 recession and stimulate economic growth. As most of us know, these tax cuts are scheduled to expire at the end of the year and revert to their former higher levels for 2011 and future years, unless Congress enacts legislation to prevent this.

President Obama has for some time indicated that he wants to see the current rates extended into 2011 and beyond for all income tiers, except for those households earning $250,000 or more annually, believing that these high earners can more easily afford to pay more. Additionally, he is very cognizant of the need to work on reducing our deficit and demonstrate to our creditors, including the Chinese, that we're serious about stabilizing our finances. Most of the Republicans in Congress are opposed to any higher tax rates, feeling that it has a good chance to weaken our economic recovery and harm many small businesses who are key players in potentially hiring a lot of new employees when the economy gets a little better and credit becomes more readily available.

According to the nonpartisan Tax Foundation, a typical middle-class family with a median income of $63,366 would pay $4,964 in taxes next year if the tax cuts expire, well above the estimated $3,423 the family would owe if the cuts were extended. So the difference is a little over $1,500, a fairly significant amount for a family in this position, having most likely limited savings and money to pay for any of their children's college education and their retirement. If all the tax cuts were allowed to expire through congressional inaction, something I consider highly unlikely, an estimated $3 billion would come to the U. S. Treasury over the next 10 years, an average of $300 billion annually. Considering that the federal budget deficit for the current fiscal year is projected by the White House to reach a record $1.47 trillion, and maybe a comparable level next year, it would certainly be tempting to let the cuts expire. But that won't happen.

Chances are good that President Obama will eventually either get his the bulk of his plan approved or will get a compromise approved, under which the reinstatement of the former higher rates for those earning over $250,000 would be phased in over two years. I also think there is a chance that tax rates for most of our middle class will go up a little from 25% to 26% or 27% in two more years, assuming the economy has largely recovered and the unemployment rate has declined to something like 7% or less. The most important index for Washington policies and public opinion polls in the next 18-24 months is the official unemployment rate. Tax rates will tend to stay relatively low, like now, if the unemployment rate stays above 8.5 or 9.0% and are more likely to increase if and when the rate approaches 7.0 or even 7.5% or goes even lower.

It is important to note that economists and other academics seem to be evenly divided between Obama's plan and that supported by most Republicans in the opposition. In my view, the major factors that will influence the outcome over the next 4-6 months, aside from changes in the unemployment rate include especially what happens in the November mid-term elections, new economic growth numbers, the latest developments in Iraq and Afghanistan, and revised numbers for the federal budget deficit.

I'm OK with what I understand of Obama's plan for the tax rates, given current economic and financial conditions, but, as mentioned in earlier posts, I also want to see comprehensive tax reform enacted next year where the entire tax system is greatly streamlined and simplified with reduced "administrative" costs for both the government and taxpayers. It will take a lot of time, in short supply bipartisan effort, and comprise to get what I support approved by Congress. Reform will definitely be opposed by tax lawyers and tax accountants, as well as other groups who are happy and make a good living with the status quo, but it is close to a no-brainer and will be good for America.

Wednesday, August 4, 2010

Political Identifications in America

It's widely accepted in America that at social gatherings one should preferably avoid initiating any conversations about politics and religion. You might offend someone or make them angry! Better to talk about the weather, sports, what people are doing these days, or about people's children and grandchildren. Right? This admonition also generally applies to one's political affiliation or leanings.

It is therefore interesting to note that in this country, except for in North Dakota, one has to register to be eligible to vote, and in all states except these six - Georgia, Michigan, Minnesota, Virginia, Wisconsin, and Washington - one is required to declare a political party affiliation. In some states the only choices are Democrat or Republican. In other states one has more choices, including Independent and "decline to state", among others.

We essentially have a two-party system in the U. S. dominated by Democrats and Republicans, and political scientists view it as inconceivable that any presidential administration would not be led by a Democrat or a Republican. However, almost everyone is very aware of the fact that blatant partisanship by many members of the Congress and the Obama Administration is hampering progress in solving many of our major problems. Our leading politicians are clearly not following the prudent advice of our first and one of the greatest of our presidents. In his farewell address given in 1796, George Washington noted that the first few sessions of the U. S. Congress were markedly nonpartisan, implicitly criticizing overt partisanship, and he warned against having political parties that he felt would jeopardize that pattern.

The Democratic Party was essentially founded by Thomas Jefferson in the late 1700's, but didn't become known as that until Andrew Jackson became president in 1828. The Republican Party was first organized in 1854, growing out of a coalition of Whigs and what were called "Free Soil Democrats". The Whigs were one of the two major political parties (the Democratic Party being the other) from the early 1800's until 1856. They were anti-slavery, supported the supremacy of Congress over the Executive Branch, and economic protectionism. The Free Soil Democrats were against expansion of slavery into the western U. S. territories and free land for settlers in these areas. On the key issue at the time of slavery, the Democrats concluded at their convention in 1860 that each state had the right to prohibit or recognize slavery.

At the very historical presidential election in 1860, a prominent U. S. Senator from Illinois, Stephen Douglas, the nominee of the Northern Democratic Party, lost out to the renowned nominee of the Republican Party, who, though born in Kentucky, also lived in Illinois, Abraham Lincoln.

Labels for political affiliations and leanings have greatly expanded in recent years, and it's getting more difficult to keep straight what each typically stand for. Conservatives are most often known as Republicans, but they might also be referred to as "on the right", "right-wingers", "Tea Partyists", and "Libertarians", among other names. Liberals are most often known as Democrats, but they are also referred to as "leftists", left-wingers", "progressives" and "socialists", among other names. However, both Republicans and Democrats can also view themselves as "Independents" and "Moderates", with many of their positions on major issues being close to the center of the political spectrum.

As is well known, Conservatives' most noteworthy political positions include beliefs in limited government, low taxes, limited government regulations, balanced budgets, free business markets, strong military, pro-life on the abortion issue, and limited controls on guns. Liberals' most noteworthy positions, on the other hand, include a larger role for government (especially the federal government), willingness to pay more in taxes for a higher level of social services, pro-environment, pro labor unions, greater gun control, and pro-choice on abortions.

At our most recent presidential and congressional election in 2008, 169 million or 71% of voting age Americans were registered to vote. Of these 50.8% registered as Democrats and 32.5% as Republicans. The actual voting participation rate was just 62.4% of the voting age citizens. Despite this 83.3% domination by Democrats and Republicans, at about the same time fully one-third of all voters reportedly considered themselves as Independent or unaffiliated and roughly 15% identified themselves as Libertarian, though some of these must have registered as Republican.

However, according to a June 2009 Gallup Poll, 40% of Americans interviewed in a national poll described their views as conservative, 35% as moderate, and only 21% as liberal, representing at the time a slight increase for conservatism since 2008. The 21% for liberals was apparently in line with what Gallup found in 2000. It would appear that many voters switched from Democrat or Liberal to Moderate or Independent between 2008 and 2009, likely due to concern with the financial crisis and some of President Obama's policy initiatives. With respect to the upcoming mid-term elections, the keys for party success will likely again include the size of the turnout as well as how Moderates and Independents vote. It looks like the Republicans and Conservatives have reasons to be optimistic, but a lot can still happen between now and November to affect the outlook.

My conclusions from all this?

1. We need to find ways to motivate a greater percentage of American citizens to vote regularly and get informed on major issues and candidates. This might include simplifying or eliminating registration requirements. Another important step would be our federal and state governments earning higher approval ratings from the public as evidenced by credible opinion polls, in order to minimize the significant public apathy and cynicism towards government and our politicians that currently exists.

2. We need to put more pressure on our elected representatives, and request support from the media, to minimize the present high level of blatant partisanship we are experiencing in our government which is hindering effective governance, fair and balanced solutions to major problems, and appropriate and productive use of taxpayer dollars.

3. We need to get approval in Congress for major campaign finance reform that will reduce the importance of money in campaigns, lessen the influence of special interests and well-heeled individuals and organizations, and allow candidates to spend less time on fundraising and more time meeting voters and explaining what they stand for and why they should be elected. With enactment of this type of reform, there is a high probability that we will see better candidates run for office. This is close to a no-brainer, despite constitutional hurdles!

4. Following the lead of George Washington back in 1796, we should work towards reducing the role and power of our political parties and voters should be encouraged to be less ideological and more pragmatic in making voting decisions. It would also be a positive development if voters could be encouraged to really think about why they are liberal, conservative or independent and prioritize what candidate elections and issues are most important to them and best for the country as a whole.

I am not so naive as to think all this will happen, certainly not in the next few years. However, I do think these needs and changes would lead to a better government and a better America with a more engaged and content population.

Wednesday, July 28, 2010

American Middle Class - Shrinking?

I decided to look into this issue and publish a post as result of an eye-opening article just written by Michael Snyder in "The Business Insider" in which he concluded that the "middle class is being systematically wiped out of existence in America!" I'm quite aware that the bulk of the commonly called "middle class" is being greatly challenged to survive and prosper these days. However, I'm skeptical of his claim about its imminent extinction, and assume Snyder was probably exaggerating to better gain our attention.

I've learned that President Obama also has significant concerns about this subject and, as a result, as presidents often do, established a Middle Class Task Force under the leadership of Vice President Joe Biden, soliciting ideas from his domestic policy advisors and other people around the country on how his administration should deal with this. Among unspecific initiatives they have in mind so far to promote are creation of a great many new green jobs, supporting high tech manufacturing, and making college more affordable for middle class families.

Who are members of the "middle class"? To effectively analyze this issue and come up with meaningful conclusions, it's helpful to have some definition. We all know "middle class" refers to people who economically speaking are in a broad group in the middle of the population strata, generally considered neither rich nor poor. Some would call the "middle class" just average Americans. Can we be more precise? Yes, although there doesn't seem to be a single definition broadly accepted by sociologists, politicians, and other academics.

Some sociologists think in terms of three classes: "lower income and poor Americans", middle class, and the "rich". Others like to divide middle class into lower and upper. Although the dollar amounts vary over time and also where in the country one lives, lower income and poor Americans tend to have household income, assuming they're employed, up to between $35,000 and $40,000 annually. Generally the employed are blue-collar workers with education up through high school, but usually not more.

The lower middle class tends to have household incomes between $40,000 and something like $80,000, and upper middle class between roughly $80,000 and up to around $200,000. The great majority of these middle class people have high school diplomas and at least two years of college. Many have college degrees. Of the so-called upper middle class, the majority probably have college degrees and often also a graduate degree.

Middle class Americans tend to be managers, supervisors, or professionals, including small business owners, doctors, lawyers, accountants, computer programmers, architects, and politicians, among many others. Financial writer Liz Pulliam Weston has offered another definition of middle class as being those "having the resources to cover all your needs and some of your wants, plus the ability to save for the future." I have no disagreement with that generalization. We can add that while middle class members can have some of their wants, they can't have everything they want!

The rich usually have inherited a lot of money, or have, or have had, incomes well above $200,000 annually, often many millions. Usually they have substantial personal assets in the form of expensive residences, stocks in large companies, and other financial assets. Virtually very brokerage, financial management and private banking firm seeks business relationships with the rich, due especially to their substantial financial assets.

Each firm has their own minimum standards for investable funds and standards to achieve their "preferred", "premium" or "Gold Star" client status, which often gets them waivers for most transaction fees and much more personal service from an experienced adviser. The absolute minimum is usually a portfolio valued at between $100,000 and $500,000. To achieve the higher preferred status, minimum required investable funds tend to vary between $1 million and $10 million. The rich tend to be successful business owners, current or former very senior executives in big companies, real estate investors, or elite professional athletes, authors, actors, and other major popular artists. Occasionally they may also include some successful professional gamblers and major lottery winners!

I haven't seen a current official breakdown of households in these three classes, but, after reviewing some dated surveys on the subject, my guess is that the poor and lower income class now comprises between 30% and 35% of American households, the middle class between 55% and 60%, and the rich between 5% and 10%. This rough breakdown takes into account income, personal assets, and probable standards of living.

Having covered this background, what's going on with the large and important middle class, which Vice President Biden has called the "backbone of this country," in large part, presumably, because of their relatively dominant roles in the job market, consumer spending, political activity, and in voting?

There is no question the middle class is generally being severely challenged by the results of our big national financial crisis. This is evidenced, of course, by the large number of job layoffs, continuing high 9.5% unemployment rate, cuts in pay and benefits, mortgage defaults, home foreclosures, and significant declines in home values and their overall personal financial positions. Moreover, the middle class, and our economy as a whole, is being adversely affected by a disturbing, but understandable, significant level of caution in hiring new employees and making of new investments by our business community.

I have not seen any reliable statistics documenting a specific shrinking of the middle class. However, it is very likely that a sizeable number of Americans in the last 2-3 years have moved from the upper middle class to lower middle class, and from middle class to the lower income and poor class. My guess is that these shifts have involved perhaps 15-20% of Americans. Others, though, have no doubt moved lower within their existing classes. So there has most probably been some shrinking. But, as noted at the outset, I do not believe that there is any realistic chance that what we call middle class is "systematically being wiped out."

Our economy will most likely largely come back within the next 3-4 years through renewed corporate hiring and investments, supported by government policies, including tax reform and other actions to contribute to economic growth, but it will be slow and painful, and dependent on sustainable economic recovery in our trading partners, especially in Europe and the Far East.

It obviously isn't advisable for the anxious in the middle class to wait for the economic recovery or government assistance. The majority of middle class Americans will, however, be helped by the anticipated economic recovery, but perhaps more so by their own prudent immediate actions, including continued caution in spending, increasing savings to the extent feasible, and making their future employment opportunities more positive through additional education, more focused job research and effective training. Those who are wise will also focus more on diet and physical fitness to contain healthcare costs and better prepare themselves for working longer hours and longer working careers, considering also what's going to happen with Medicare, Medicaid and Social Security reforms within the next two years.

What government policies and actions can we expect, regardless of the outcome in the upcoming mid-term elections and who wins the presidential election in 2012, although they will obviously vary somewhat in substance and priority, depending on whether the Republicans or Democrats come out on top? A very key focus has to be on policies and actions that will induce small and larger private sector businesses to begin to hire a lot of new employees to relatively well paying jobs and to convert part-time and hourly workers to full-time employment. This will lead to more consumer spending, more business investments, a rising stock market, more government tax revenue, and take some pressure off government to subsidize the unemployed and underemployed.

However, in order for this to have good prospects for happening, corporate tax rates should be lowered to help make businesses more competitive with major foreign firms and give them more cash flow to support growth, and market conditions need to be made more stable and predictable. The latter may have to entail temporarily easing requirements for limiting harmful emissions and some other environmental regulations. Comprehensive tax reform as recommended in an earlier post is also very desirable, including extending the lower income tax rates for small business owners and other middle class households and individuals that are currently scheduled to expire at year-end. Controversial and difficult as it may be, we also need to see a substantial cut in our defense expenditures, including those for the large number of less critical military bases we still maintain abroad, allowing us to move initially toward lower budget deficits, and ultimately a fully balanced budget, as well as a reduced national debt.

Since globalization is with us to stay, we also need to continue close cooperation with our G-20 partners to remove trade barriers wherever possible, promote economic growth, incent our large businesses to build factories and employ people here rather than abroad, and find ways to make U. S. exports of goods and services more attractive to foreign customers. Finally, I agree with President Obama that moving steadily toward substantial energy independence within the next 10-15 years is highly prudent for national security and financial reasons. Equally important, it will help the middle class by leading to the creation of a substantial number of new well paying green and high technology jobs, in addition to helping us environmentally over time with improved air and water quality, benefiting us all.