Guru #2

 

Jobs! Job! Jobs!

The Guru and I had been to the Home Depot store in St. Catharines to get some parts for his icewine bottling machine and we were now sipping lattes in the nearby Starbucks. (I should add that the lattes were fat free---we were both feeling a bit guilty about our ice cream binge two weeks before at the Avondale Dairy Bar.)

I asked him if he had had much reaction to his newsletter on the medium-term prospects for the US (see Posting #1 for discussion of that newsletter).

"Surprisingly good, given its bluntness---except for one fellow from Texas. He wanted to know what gave a Canadian the right to criticize the US, and added some nasty, rather unimaginative, slurs about my parentage. He ended by saying that if I didn't stop criticizing the US, he would cancel his subscription."

"What did you say to him?"

"I mentioned that one of our prime ministers had said that living next to the US was like being a mouse in bed with an elephant---that the elephant didn't care when the mouse rolled over but the reverse couldn't be true. That fact gave Canadians the right to study what was going on in the US and to comment on it. And then I poured gas on the fire by saying that the prime minister in question was Pierre Trudeau. Those old guys in Texas don't know much about Canada but they remember Trudeau, who they believe was a pal of Castro.

"That would certainly upset him!"

"And then I told him I would continue to write what I wanted and that if I hadn't heard from him in 24 hours I would cancel his subscription and return his money. Three hours later I got a two word email, "Don't cancel".

A student with a laptop in one hand and a large paper cup of hot coffee in the other was looking for a table close to an electrical outlet. We offered him our table, which was close to a wall outlet, and moved to another one.

There was a newspaper on the new table and I pointed to a headline that said that Obama was going to make a speech in September on the job situation in the US. "What do you think he is going to say?"

"He's in a tough spot. Since he took office in 2009 he and his people and the Fed Chairman have been trying to play down the potential impact of the financial crisis they inherited. That was totally understandable as they tried to restore confidence so that people would resume buying and investing. But it left the impression that this was just another cyclical recession, and that after a year of so in the doldrums the economy would suddenly start to produce new jobs at a great rate and unemployment would fall rapidly--- as happens with normal recessions. That's not happening, so he's in trouble."

"But the downturn triggered by the 2008 financial crisis wasn't the start of just another cyclical recession."

"True, but the White House hasn't seemed to be able to find the right words that would do two things: first, make the point that this isn't just another recession; and secondly, not scare the pants off consumers and investors. Perhaps there was no way to square that circle. It's going to take a decade to recover from the crisis. The 2008 book by two of your academic colleagues, Ken Rogoff and Carmen Reinhart, “This Time Is Different,” makes this point but the policy makers in Washington were already aware that this was going to be a tough slog, with higher than acceptable unemployment for a long time. There is no quick fix for what I think we should call 'the greedoholic's hangover' because it is the greedoholics that got us into this mess. The irony is that most of the greedoholics aren't suffering---they got their bailouts and are again getting outlandish bonuses---it is the rest of the population that is feeling the pain."

"What bothers me," I said, "is that some experts seem reconciled to letting millions of people suffer for years---students leaving school who are trying to find their first jobs, older workers who are losing their skills and motivation as they keep sending out resumes and going to interviews with no response. Something has to be done for those people, especially for minorities whose unemployment rate is double the national rate of 9%."

"I agree. As we were saying last time, letting unemployment fester is not just bad for the economy but it can produce a hurricane of social unrest, as the income gap gets greater and greater. I've been wondering if the White House should be looking at some of the programs Roosevelt used during the depression. For example, the famous WPA, the Work Projects Administration, that hired millions of unemployed workers for public works projects."

"I've been thinking about that as well", I said," but I don't see how Obama could ever get the  House of Representatives, with all its Tea Party members, to support a major Federal initiative like the WPA.  I think that the President should---instead of looking at FDR and the New Deal---be looking at Canada."

"Wow, what did you have the barista slip into your latte! Do you seriously think that anyone in Washington is going to pay any attention to  what my Texas friend calls 'a godless, socialist country'?"

"Hear me out. In the early 1970s in Canada we  had a huge jobs crisis. Canada had had the largest proportion of Post World War II baby boomers in the industrial world. We had mounted crash programs to build thousands of primary and secondary schools and hundreds of colleges and universities to educate them. By the early 1970s, these kids were coming out of the educational pipeline and there weren't enough jobs for them. You have to remember that there had been enormous student unrest in the 1960s, and that in Quebec young people were being attracted to the terrorist Front de Liberation du Quebec. And to make the situation worse, large numbers of housewives  decided that they would like to get jobs outside the home."

"And," the Guru added, "as is the case now in the US, the economy just wasn't generating enough jobs for all those people."

"Exactly! The Government of the day---the Trudeau government--- brought in a range of programs that sopped up a lot of that unemployment until the economy could start to generate enough private sector jobs. The programs---like the New Deal programs---weren't perfect but they helped Canada get safely through a difficult and even dangerous period in our history. It was an impressive success that has had too little attention. To help remedy that, I persuaded a bright graduate student---a few years before my retirement---to work with me on a paper about the steps the Trudeau Government took."

"I remember that period, there was some very creative programming."

"You may be thinking of programs like 'Opportunities for Youth", 'Local Initiatives Program' and some others."

"Yes", I remember the acronyms---Canadians are great creators of acronyms---OFY, LIP etc. Why exactly did the government move to those programs?"

"Well, they had been busy trying all the traditional and  'responsible' ways of soaking up unemployment. They tried using infrastructure projects, but they proved to be slow to get off the ground and the cost per job---usually over a million dollars a job---meant that although they were doing useful things they didn't have a big impact on unemployment. The government also tried paying subsidies to employers to hire workers, and although those programs had some impact, many employers took advantage of the subsidy for people they would have hired anyway.

"So as the economists say, the subsidy programs had low incrementality. People can always figure out how to 'game' the system".

"Right, so the Government decided that it needed to have a program that would get more bang for the buck. It would ask the unemployed young people (it started first with the young) to come up with useful projects and submit a proposal to a local panel that included the Federal Member of Parliament, municipal politicians, service club representatives, Chamber of Commerce officials. Tens of thousands of proposals were submitted and thousands were accepted. The successful groups then had to hire workers, train them and manage the workers and the project budgets."

The Guru nodded, "When you think about it, the Government was taking quite a risk. Kids could've used the funds to grow pot or do god-knows-what."

"There were a few---very few---problems that had to be dealt with but overall the program was a great success. A lot of young people were put to work quickly doing useful things and the annual cost per job was low, perhaps $35,000 in today's money and that included the cost of administration. Later on, the same general approach was used for unemployed adults."

"As I remember that period, a lot of projects had to do with tourism, building hiking trails, snowmobile tracks and so on."

"That's right, but there was an enormous range of project types---from creating small theatre companies to helping housebound seniors with their shopping---all of which were aimed at benefiting the local community. And then as the economy improved and private sector employment picked up, the programs were phased out."

"So", the Guru asked, "you think the US should adopt something similar?"

"I really do. I'm working on a op-ed piece that I plan to submit to the New York Times."

"Aren't you the ambitious little beaver! But where would the White House get the money and how would they get past the Tea Party to get Congressional approval?"

" I'm going to suggest they start with young people and have a hundred billion dollar program that would produce nearly three million jobs. If they can't find that money in their budgets, I would suggest that they do what some economists have been suggesting, that is do a deal with those big businesses that have trillions of dollars in profits hidden off shore to avoid tax. The Government could offer to let them repatriate a portion of that money without paying tax  so long as a substantial chunk goes into a Job Creation Bank. The Bank would finance these community-based projects."

"That makes sense, so long as it is tied to legislation that prevents companies from hiding profits away in the Cayman Islands of this world in the future. But what about getting Tea Party agreement?"

"Have you noticed that the Congressional representatives and senators who voted against 'earmarks' otherwise known as 'pork for the boys back home' are now having trouble finding ways of showing their voters that they are doing something for them.  The funds for the community program I am suggesting would be divided among the 435 congressional districts (with some money for the District of Columbia) based on some criteria including unemployment levels. But every district would get some money. And the representatives would be involved in the approval of projects. I think this approach would win over many of the Tea Party people."

"You've obviously been giving this a lot of thought", the Guru said.

"I have. It is just wasteful and immoral to leave millions of people unemployed while we wait for the economy to recover from what you are calling the 'greedoholic's hangover'. By the way, would you mind looking over my draft op-ed and giving me your views?"

"Sure, but can I give you a bit of advice?"

"Of course---what is it?"

"Don't mention Pierre Trudeau."

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If you have any comments, please leave them below or drop me a line at johnpathunter@gmail.com. The next Icewine Guru posting will appear on September 11th. The next Letter from Virgil posting  will appear on September 4th.

Guru #1

Introduction

For some time I have been writing a blog, "Letter from Virgil", that recounts stories collected over the years from family and work experiences.

I have decided that I would like to write a second blog, one that discusses current political, social and economic issues.

The two blogs will alternate, with Letter from Virgil one Sunday, the Icewine Guru the next.

Please give The Icewine Guru a try and let me know what you think.

What Is The Biggest Problem Confronting the United States?

The Guru and I were driving along a Niagara back road, flanked by vineyards, in his new Lexus Hybrid heading for a decadent treat---ice cream cones, two-scoops in sugar cones---at the popular Avondale Dairy Bar on Stewart Road. A sign proclaims," All our ice cream is made FRESH daily right here".

"Look at the weed killer that farmer is using", the Guru muttered pointing at rows of vines with long strips of brown grass below the green foliage.

"How are your experiments coming with an organic weed killer?", I asked.

"They're promising. I am till trying to find the right proportions of vinegar, salt and soap but I'm making progress. My mix kills grass and weeds above the ground but of course it doesn't' kill the roots, so I have to re-spray every few weeks."

He turned back to the road and I could tell from the way he grasped the steering wheel and the way his jaw was moving that he was upset about something.

Perhaps I should introduce us. The Guru took 'Business' (as it used to be known) at the University of Toronto, and after graduation studied successfully to become a Charter Accountant. He was hired by an international firm of accountants and gradually moved away from accounting to business management consulting. After a few years he set up his own firm specializing in interpreting future trends for large businesses and wealthy investors. He is semi-retired but is still picked up regularly by corporate jets at our local airport and whistled off to points in the US and overseas.

I took History and English at the University of Western Ontario, an MA in History at McGill, and then a DPhl at Oxford. (Oxford doesn't use the term PhD for its doctorate degrees). I taught social history (European and North American) as a professor at the University of Toronto for 35 years. I have written several books and too many articles to count for learned journals. Since retirement, I have been working on a history of prohibition in Ontario and its impact on the culture and politics of the province.

The Guru and I met after we both settled---with our wives---in Niagara-on-the-Lake a few years ago.  We became friends, and our wives did as well.

My role in this blog could be seen as my playing Boswell to the Guru's Dr. Johnson but that would be wrong. I will try to record our conversations but I won't be a fawning admirer like that pathetic Boswell. I have my own personality and views.

At the Dairy Bar, we made our choices from flavours such as Moose Tracks and Death by Caffeine (our choices were more sedate---chocolate for him and mango for me). The clerk put the cones on a scale to weigh them (70 cents an ounce---and worth every penny). We decided to eat at a table inside the Dairy Bar because it was so hot outside that the cones would have dripped all over.

It was mid-afternoon and we had the room to ourselves except for a mother and her little boy of 3 or 4 who had a huge cone of bubblegum ice cream that he was enjoying mightily. We took a table in the corner so we could talk.

Even with a cone in his hand the Guru looked preoccupied. I asked him if he was worried about something.

He bit off some ice cream---he's a biter and I'm a licker---and said, "It's my semi-annual newsletter on the US. I can't figure out how to end it."

In addition to jetting off to advise wealthy investors, and company chairmen and CEOs, the Guru writes a monthly newsletter on the medium-term investment situation for major countries. The newsletter, which has 'a ridiculously high subscription price' (his term, not mine) gives a blunt, no-nonsense assessment of the prospects for major countries.

"I'm really bothered by what is happening in the US but I don't know how hard to come down."

"Is it the deficit, debt and downgrade problem?"

"No, the US is a wealthy country and the deficit and debt problems could be easily resolved. The greedoholics are preventing a solution---for their own purposes."

"Greedoholics?"

"That's what I call the billionaires and special interest groups who are so hooked on greed that they have lost all sight of what is good for the country---if they ever had it. And they have also lost sight of what is in their own self-interest as capitalists, but they are too hooked on greed to see that."

"But you go on and on about the wonderful benefits of greed."

"Sure, I love capitalism and therefore I love greed. It produces innovation that makes us all richer. But you can have too much greed. It is like salt in cheese-making. If you don't have enough salt, the milk will just sour and go bad, but if you have too much salt, it will kill the bacteria and enzymes you need to produce the cheese."

"So, you're saying that there are greedoholics in the US who are making improper use of the debt and deficit issue?'

"Sure, they are using the issue to argue for cuts in social programs but they are refusing to accept any change in their tax rates or their tax loopholes. Trying to solve a debt and deficit problem without using both spending cuts and revenue increases is as dumb as trying to cut fabric with scissors that have only one cutting blade."

"So if you aren't worried about the deficit and debt, what are you worried about?"

"Look, I agree that the deficit and debt situation are out of whack and have to be fixed. What worries me is that the US will fix them in a way that makes their biggest problem even worse than it is now."

"OK, I'll bite. What's the really big problem?"

"The Income Gap. The gap between the super rich and the rest of the population is greater than at any time since 1928. That's what politicians should be worrying about. To paraphrase Bill Clinton: 'It's the income gap, stupid!'.

"I've seen a few articles about the income gap and the statistics are really horrendous." 

"A society can't live with that kind of disparity for long without the poor---and the middle class---rebelling. Sometimes violently. "

"Surely", I said, "you can't attribute all of the income gap to tax and other legislation that gives preference to the wealthy. Changes in the way the economy works---for example, a move away from manufacturing---have worsened the income gap, haven't they?" 

"That's right, but I would argue that those changes were allowed to happen without adequate measures to cushion the blow to the poor and middle class."

We stopped talking while we watched the mother try to console her child whose ice cream had fallen on the floor. What a voice the little kid had! A kind clerk finally got him some more bubblegum ice cream, and peace was restored.

"So", I said to the Guru, "you are worrying that sometime in the next 5 years or so, there is  a real risk of social unrest or even rioting in the US, and that your subscribers should take that into account when considering what to do about investments they now have in America or about possible future investments?"

"That's it."

"What about the riots in the United Kingdom? Do you think they are being caused by the income gap in Britain, which although considerable is but not as great as in the US?"

"You have to be careful in assigning causes. Everyone's digestive tract has noxious bacteria, that are controlled by good bacteria---so long as the body is generally healthy. In the same way every society has hooligans and anarchists who are kept in control so long as the body politic is healthy. Prime Minister Cameron decided that he would be heroic and correct the UK's deficit and debt problem not by gradual measures but by a shock and awe program of huge layoffs, and deep cuts in social payments and services. Those measures by themselves were sure to put the society under great stress but he then made matters worse by deciding to reduce the police by 19,000 bodies! That was really dumb---attacking the morale and capacity of the very people you need to fight the hooligans and anarchists!"

"OK", I said, "I agree that Cameron was dumb, but can I put on my historian's hat and try to give the income gap some historical perspective?"

"Sure."

"Isn't there a good chance that the US and other governments will take steps that will reduce the income gap before there is serious social trouble. I'm thinking of Britain in the 1840's. Remember that Marx as he wrote Das Kapital in the Reading Room of the British Museum was convinced that the proletarian revolution that he was predicting was inevitable in capitalistic countries, would happen first in Britain because of the enormous income gap at that time. But Parliament brought in legislation that improved the lot of the poor. Like passing a law that banned factory and mine owners from working women and children for more than 63 hours a week. By the way, the owners fought it hard but lost."

"See, those guys were 19th century greedoholics!"

"So why can't that kind of change happen in the US?"

"It could. The pendulum has been swinging to the wealthy since even before Reagan and it could start to swing back. The democratic political process has generally been pretty good at bringing about that return swing in the pendulum without a lot of social unrest and violence. But what is really troubling me is that in the US the greedoholics have been making changes in the way key institutions operate, changes that can may prevent the pendulum from swinging back."

"For example?"

"There are so many. But start with legislation to limit the power of unions, the natural counter-balance to the greedoholics. And then look at the financing of election campaigns. The Supreme Court has made it much easier for the greedoholics to 'buy' politicians, and destroy ones they can't buy with negative campaigns. And then think about the growing power of right wing media that distorts the facts. And fat cat lobbyists. But what worries me even more is the way the greedoholics have been able to 'capture' people who are suffering, and turn them around so that instead of supporting policies that would improve their lot, they actually support policies that make the rich even richer ."

"I agree. John Edwards had a lot of trouble keeping his zipper up but he was right that the poor and middle class were voting against their own self interests."

"Just take the Tea Party", the Guru carried on. "The greedoholics have been able to prey on the insecurities of worried people and convince them that what is wrong is not that the rich have too large a share of the nation's wealth but that it is 'godless socialism', 'gay rights', 'a president with a different skin colour', 'Sharia Law'---or whatever. They have a long list of issues that they can use to push the buttons of frightened people,  But, you know---and here I may be arguing against my own thesis---I sometimes think the greedoholics may have gone too far and created a kind of Sorcerer's Apprentice situation."

"Sorcerer's Apprentice?"

"Yes, surely somewhere in your liberal arts education you must have learned about the Sorcerer's Apprentice!"

The Guru, as I've said, is noted for his bluntness, a quality his clients admire, but when he is worried he can be downright rude. Often I ignore the rudeness, knowing that it is a reflection of things that are bothering him. Other times, I let him have it---in kind.

"No, I was just trying to figure out what version of the Sorcerer's Apprentice you were referring to: Goethe's poem of 1797, or Paul Dukas's orchestral composition of 1897, or whether with your accounting background you were more likely referring to the Walt Disney versions: Fantasia in 1940 or its sequel Fantasia 2000, released in 1999."

Silence, while the Guru studied my face.

Finally, "You're right that was stupid, and ignorant. I'm sorry."

"That's OK, I know you are under pressure. But let's talk about how the Tea Party resembles the Sorcerer's Apprentice. The Apprentice was told by the Sorcerer to get some water from the well while he was away. The Apprentice used the spell he had overheard the Sorcerer using to get a broom to carry pails of water from the well to the house. But he couldn't turn the spell off, and when he split the broom with an axe, both parts starting carrying water, and the more he attacked the brooms with the axe, the worse things got."

"Well", the Guru said, "the greedoholics hired organizers, poured in money and convinced worried people that the answer to all the nation's problem was to starve Washington. The 'spell' was wildly successful and the Tea Party took effective control of the House of Representatives in 2010. But the greedoholics can't turn them off. The Tea Party has become an embarrassment to the adult part of the Republic Party." 

"I like the analogy. Are you going to use it in your US newsletter?

"Probably."

"I've been thinking about your greedoholics. You aren't saying, of course, that all wealthy people are greedoholics?"

"No, certainly not. Take Warren Buffett. He has a good bit of greed about him but you wouldn't see him upgrading his yacht (if he had one) because it has just one heliport and he needs 'his and her' helicopters, like the hedge fund manager he plays golf with. I think Buffett is sincere when he complains about a tax system that means his secretary pays federal tax at a higher effective rate than he does. He's a Democrat but there are wealthy Republics who aren't greedoholics---some of them are my clients---who understand that the income gap is dangerous, but they are afraid to stand up to the greedoholics. It's sad---they know that an income gap this huge is bad for the country and bad for capitalism."

"So why are you bothered by what you should recommend in your US newsletter? Are you like your Republican clients---afraid to tell the truth?'

"Ouch! That hurts. But you're right. I have to tell them about the dangers I see. Perhaps it will encourage some of them to fight back against the greedoholics."

We gave our faces a good scrub with napkins so our cholesterol-conscious wives wouldn't know that we had sinned.

And walked back to the car.

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If you have any comments, please leave them below or drop me a line at johnpathunter@gmail.com. The next Icewine Guru posting will appear on August 28th. The next Letter from Virgil posting will appear on August 21st.