Saturday, June 27, 2015

Supreme Court Rescues the Republicans

In three important decisions the Supreme Court significantly improved Republican presidential prospects in 2016. First in upholding subsidies for the federal exchanges the Supreme Court took off the table the agonizing choices that the Republicans would have had to make with respect to seven million people losing their health insurance subsidies. Simply put the Republican Party would have been way too divided to come up with a practical solution.

Next with the Supreme Court legalizing gay marriage throughout the country, it essentially took a losing issue for the Republicans off the table. In its place the Republicans will find themselves on far more friendly terrain in their defense of religious freedom, Indiana notwithstanding. Thus the way is open for the Republican Party to become the party of pluralism and respect for individual beliefs.

Finally with the Supreme Court now, incorrectly in my opinion, allowing the use of disparate impact as dispositive evidence in housing discrimination cases we will witness a wave of litigation across the country pitting "civil rights" groups against local communities. This would be amplified if the "gosplanners" in HUD get there way to use federal power upend local control to achieve desegregation, both economic and racial. Here the fights will be ugly and it will redound to the benefit of the Republicans.

All that has to happen now is for the Republicans to avoid snatching defeat, as is their habit, from jaws of victory

Thursday, June 18, 2015

My Amazon Review of Philip Bobbitt's "The Garments of Court and Palace: Machiavelli and the World that he Made"

A Prince of a Man

International lawyer and historian Philip Bobbitt offers us a fundamental reinterpretation of Niccolo Machiavelli’s “The Prince.” Instead of it being a manual for tyrants “The Prince” is, in fact, an outline for the modern state that was to arise out of the feudal order. Bobbitt calls this new governmental form the “princely state” which he dates from the Treaty of Augsburg of 1555. For the reader not familiar with Bobbitt’s “Shield of Achilles,” his history of governmental order, this book can be rough going.

“The Garments of Court and Palace” combines a long book review with a biography of Machiavelli. To him Machiavelli’s priorities were to create a state to enhance the public good and to unify the feudal states of Italy into a unified whole. He puts into perspective one of Machiavelli’s most famous aphorisms, “the ends justify the means.” Taken literally this is a license for extreme actions, but Bobbitt notes that to Machiavelli the means have to be proportionate to the ends. When viewed this way, Machiavelli’s aphorism is a constraint on a ruler rather than a license.

Bobbitt has a lengthy discussion on the role of “virtu” and fortune in the affairs of a prince. “Virtu” here is defined as skill and resoluteness and fortune is the role of chance. A prince has to be constantly aware that fortune can overwhelm skill and effort or make a failed policy successful. Flexibility is the key and this also applies to previously entered treaties that no longer serve their original intent. Here I would add the comment of the 20th century political philosopher and baseball executive Branch Rickey who noted the “luck is the residue of design.” In other words a prince has to make his own breaks.

Machiavelli understood the feudal world was dying and a new form of governmental organization was required. To him a republic governed by a prince sensitive to the needs of his populace was the wave of the future.

Again as I noted above this book can be difficult going, but if the reader wants to get a sense of Machiavelli, his thoughts and the world he would make, it is worth the effort.

 For the full Amazon URL see:

Sunday, June 7, 2015

My Amazon Review of Francine Mathews' "Too Bad to Die: A Novel"

When Ian Fleming Became James Bond

Former CIA analyst Francine Mathews places the real life Commander Ian Fleming at the center of a German assassination plot to kill the Big Three at the Tehran Conference in late 1943. We first see Fleming at a pre-conference gathering in Cairo with Roosevelt and Churchill and their respective entourages. We get caught up in the political and sexual intrigues of such players as Pamela Churchill, Churchill’s daughter-in-law, who while longing for her boyfriend Averill Harriman, the U.S. ambassador to the Soviet Union, she had time to have an affair with CBS newsman Edward R. Morrow. There is also Churchill’s daughter Sarah Oliver who though married is having an affair with Gil Winant, the U.S. ambassador to Britain.

In Cairo Fleming, in his capacity as assistant to Britain’s director of naval intelligence, uncovers the German plot, code-named “Operation Long Jump”. He does this with the aid of Bletchley Park’s Allan Turing. As an aside “operation long jump” was a fictitious NKVD operation set up by Stalin to curry favor with the west to give him credit for foiling an assassination plot. Here it is all too real and as in the fictitious plot German commando and probably the exemplar of special operations Otto Skorzeny plays a leading role.

The plot involves an internal spy within the British or U.S. delegation code-named Fencer along with an accomplice code-named Kitten. It turns to Fleming to uncover the plot which takes us through the bazaars of Cairo and Tehran all the while we eves drop on the summit meeting that is setting the date for the invasion of Europe and beginning to redraw the map of Poland. Along the way Fleming is captured and tortured and of course runs into a very attractive spy. Here James Bond becomes his alter-ego.

Because we know the Big Three walked out of the Tehran Conference very much alive, the focus is on who is Fencer. For me that was an easy call, but despite that Francine Mathews knows how to tell a great tale of historical fiction.

Friday, June 5, 2015

"A Bump in the Road to 3% Growth," UCLA Anderson Forecast, June 2015

Just like last year, the economy hit a weather-induced
speed bump in the first quarter. Nonetheless we believe that
the economy will be back on its 3% real growth path by the
third quarter and continue at that pace through 2016. (See
Figure 1) At that rate of growth the economy will likely be
generating jobs at a 250,000/month clip and the unemployment
rate will close out the year at just below 5%. (See
Figures 2 and 3)
Figure 1 Real GDP Growth, 2007Q1 -2017Q4F
Source: Sources: U.S. Department of Commerce and UCLA Anderson

Figure 2 Payroll Employment, 2007Q1 – 2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

The Oil/Gas Price Conundrum

Although oil prices have rebounded from the first
quarter low they remain roughly half the peak levels
achieved in 2014. (See Figure 4) As we previously noted,
we expected the economic response to be a sharp decline in
oil drilling activity and a surge in consumer spending. Thus
far, we have gotten the drop in oil-related capital spending
where we forecast a $45 billion decline from peak to trough
at an annual rate. (See Figure 5)

However, we have yet to see the approximately $150
billion annualized reduction in gasoline prices to flow
through to consumer spending. (See Figure 6) Simply put,
instead of spending, it appears that cash strapped consumers
are paying down debt and increasing their savings. It’s
a thought echoed by Wal-Mart in its latest conference call
with investors which highlighted the soft retail environment.
Needless to say, this behavior is not accord with the historical
economics playbook. Nevertheless, for the time being, we
are assuming that the “tax-cut effect” of lower gas prices
will gradually find its way into higher consumer spending.

Figure 3 Unemployment Rate, 2007Q1 -2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 4 West Texas Intermediate Crude Oil Price,
2007Q1 – 2017Q4F
Source: Commodity Research Bureau and UCLA Anderson Forecast

Figure 5 Real Gross Investment in Mines and Wells,
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 6 Real Consumption spending,
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
2007 2009 2011 2013 2015 2017

Figure 7 Consumer Price vs. Core CPI,
2007Q1-2017Q4, %CHYA
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 9 Trade weighted Dollar with Majority Currency Partners,
Sources: Federal Reserve Board and UCLA Anderson Forecast

Simply put, service prices and especially residential
rents are rising in excess of 2%. Underpinning the increase
in service prices will be the early signs of increasing wages
across most of the economy with notable pressure on lowend
wages. As we noted in the past, increases in state
mandated minimum wages and the actions by such large
employers as Wal-Mart, Target and Aetna are accelerating
this trend. Thus, we would not be surprised to see hourly total
compensation rising at a 4% pace by yearend. (See Figure
8) This domestic pressure will more than offset the fall in
import prices coming from the stronger dollar. (See Figure 9)

Inflation and the Fed

With the unemployment rate essentially at the Fed’s
target, all eyes are now focused on inflation. It has been our
view for a while that the core inflation rate, that is, the rate
of inflation excluding food and energy prices, would soon
be above 2% and that the headline rate will be there too
once oil prices begin to rise, which they have. (See Figure
7) This data will put to rest all of the over-hyped deflation
talk we heard earlier in the year. As a result, the quarterly
run-rate for inflation by both measures will be in excess of
2% by the third quarter of this year and it will be there on a
year-over-year basis by the first quarter of 2016.

figure 8 Total Compensation per Hour, 2007Q1-2017Q4
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Thus, with the Fed’s dual mandate soon to be met, the
only question remains is the timing the move off the zero
interest rate policy that has been in effect since December
2008. As recently as last quarter we thought the Fed would
move in June. However, given the recent soft patch in the
economy our best guess is that the move will occur in September.
 We do not believe that a modest increase in the federal funds rate from zero
to 25 basis points will be traumatic. As Fed Vice-Chairman
Stanley Fischer recently noted, “we are going to be changing
monetary policy from the most extremely expansionary
we’ve been able to do in all of history to an extremely
expansionary monetary policy.”1

Thereafter we forecast that the Fed will only gradually
increase the funds rate at a pace consistent with 25 basis
point increases at every other meeting of the Open Market
Committee. (See Figure 10) Concomitantly, longer-term
interest rates rise as well, albeit at a slower pace with the
yield on 10-year U.S. Treasury bonds reaching 4% in 2017.
For those who fear the impact of higher short-term
interest rates on the stock market, we would remind them
that history suggests that it takes several rate hikes to cause
a significant correction in stock prices. Moreover, although
the Fed takes into account the effect of asset prices on the
economy, it would be a mistake to believe that Fed Chair
Janet Yellen is the stock market’s fairy godmother.

Figure 11 Yield on German Bonds, May 31, 2014 – May 15, 2015

Figure 10 Federal Funds vs. 10-Year U.S. Treasury Bonds,
2007Q1 – 2017Q4F
Sources: Federal Reserve Board and UCLA Anderson Forecast

Keeping a lid on long-term interest rates will be the
unusually low interest rates now in evidence in Europe.
As recently as April, the yield on 10- year German Bunds
approached zero! Since then they have more “normalized”
to about 60 basis points. Nonetheless, as deflationary fears
in Europe abate and the early signs of growth we are now
witnessing become realized, we expect interest rates in
Europe to rise as well.

Strength to Come from Housing and Equipment

Although we may have jumped the gun a bit last
quarter given the poor weather in most of the country, we
continue to believe that the housing market is strengthening.
Strong jobs gains, increased household formations, still low
interest rates, the easing of mortgage underwriting standards
and modest price increases will lead to a robust construction
market. Housing starts are forecast to increase to 1.16 million
starts this year and 1.37 million starts next year compared
to 2014’s start level of 1.00 million units. (See Figure 12)
Indeed housing starts rebounded in April to 1.14 million
units on a seasonally adjusted annual rate basis making
it the highest monthly total since 2007.

Part of the gain represented a catch up from the weather induced
 sub-one million
unit annual rate of starts in the prior two months. Moreover,
with rents rising well above the rate of increase in consumer
prices, recent shift from ownership to rental units will abate
leading to higher single-family and condominium starts.

On the business side, we forecast that investment in
equipment will rebound from a 5.7% overall growth rate
this year to 8.7% in 2016. (See Figure 13) Our confidence
in that eventuality stems from the waning of the negative
effects coming from the drop in oil-related capital spending
and the need for business to invest in the technologies being
embedded in a wide range of capital goods. That spending
along with housing will provide the fuel for our 3% real
growth forecast going forward.

Figure 12 Housing Starts, 2007Q1-2017Q4F,
Thousands of Units, SAAR
Source: U.S. Bureau of the Census and UCLA Anderson Forecast

Figure 13 Investment in Equipment,
2007Q1 -2017Q4F

Sources: U.S. Department of Commerce and UCLA Anderson

Military Spending to Increase

For the past year we have argued that increased global
tensions will reverse the four year decline in military spending.
(See Figure 14) We see nothing on the horizon to change
our thinking. If anything, we are concerned that the very
modest increases we are forecasting are too low. In fits and
starts Congress is moving in a more “hawkish” direction.

Despite the first quarter bump in the road, we think
the economy remains on track to a 3% growth path for real
GDP. As consumer spending begins to reflect the decline
in gasoline prices, the plunge in oil-related capital spending
abates and then reverses, housing starts and equipment
spending rise, the underpinnings are there for moderate
economic growth. In this environment, the unemployment
rate will drop below 5%, inflation will move above 2% and
the Fed will embark on a gradual tightening process starting
this September.

Monday, May 18, 2015

My Amazon Review of Adam Tooze's "The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931

America as Economic Super Power

Unlike most histories of World War I and the early inter-war years which have a European focus, Yale professor Adam Tooze trains his keen eye on the growing ability of America’s economic power to reshape the world in its own image. To him Wilson’s liberal internationalism is a cloak to extend the power of the United States. He views America’s role in the world as that of “privileged detachment” that began in with Wilson’s formulation of “peace without victory” in early 1917 and ends with Hoover’s reparations moratorium which was designed to bailout Wall Street’s loans to Germany.

He believes that it was Wilson’s goal to make America the arbiter of the world which Wilson and his Republican successors largely succeed at. The only difference between the Wilsonians and their Republican critics was that Wilson wanted to do that from within the League of Nations and the critics from without. Nevertheless the goal was the same.

Tooze chooses 1916 as the start date because it was in that year the Entente power were being bled dry in France in both a physical and economic sense. It was also in that year where the economic output of the United States for the first time exceeded that of the British Empire. The Entente had nowhere else to turn and from then on America became the banker to the world. And it was this financial power that forced all of the major powers to take into account the role of the United States. After the war German statesman Gustav Stresemann realized that the road to German recovery ran through Wall Street and it was Wall Street credits that triggered Germany’s rebound in the mid-1920s.

Tooze also notes that the U.S. was far from being isolationist in the 1920s; isolationism was more a creature of the 1930s. There was the Washington naval arms limitation conference in 1921-22, the Dawes Plan in 1924 and the Kellogg-Briand Pact of 1928.

Tooze’s book covers far more that Europe as he pans the world to include the Russian Revolution and its aftermath, upheaval in China, Britain’s struggle to hold on to India and the shifting coalitions of Japanese politics. My one criticism of the book is that it promises too much. There is far more discussion of the 1916-21 time period than that of the balance of the 1920s. It is far different from, say, Zara Steiner’s “The Lights that Failed” which is very Eurocentric, but that work covers far better the roles of the Locarno Treaty and the League of Nations in Geneva. Nevertheless, “The Deluge…” is a very worthy history of the time when America interposed itself on to the world scene. 

The full Amazon url is:

Tuesday, April 28, 2015

My Amazon Review of Andrew Krepinevich's and Barry Watts' "The Last Warrior: Andrew Marshall and the Shaping of Modern American Defense Strategy"

Yoda of the Pentagon

Andrew Krepinevich and Barry Watts have written a hagiographic biography of their former boss. Andrew Marshall, a not well known wonk in the bowels of the Pentagon served our country for over 60 years in developing defense policy. He worked first as an analyst at the Rand Corporation during its heyday in the 1950's and 60's and then established the Office of Net Assessment within the Pentagon, a post where he just retired from at the age of 93. He was the oldest government employee in history and deservedly earned the nick name of Yoda; not bad for a depression era working class kid from Detroit.

Along the way he worked with a who’s who of the leading foreign and defense policy theorists of the second half of the 20th Century. These personages include Graham Allison, Bernard Brodie, Harold Brown, Elliot Cohen, Alan Enthoven, Robert Gates (who wrote the foreword), Charles Hitch, Samuel Huntington, Herman Kahn, Henry Kissinger, James Schlesinger, Albert Wohlstetter and Roberta Wohlstetter. And this is only a partial listing.

His job at the office of Net Assessment was to evaluate the long term threats facing the United States and to come up with options to counter them. In his work he introduced the organizational economics Herbert Simon to predict Soviet behavior and leading academics on competitive strategy in the business world. As the Cold War was winding down in the mid-1980s he focused his attention on the rise of China and was quick to point out how the revolution in military affairs (precision weapons, computerized command and control and information warfare) in the 1990s would significantly change the nature of future battlefields.

A small gem in the book is that the authors point out that Marshall offered up the best argument in favor of anti-ballistic missiles. He argued that they do not have to, and cannot, stop all incoming missiles. All they have to do is to stop enough of them to create uncertainty in the Soviet Union making them fearful of a counter attack. Hence it works as a deterrent.

Although very wonky, I would recommend this book to readers interested in how defense policy was made in the U.S. over the past 65 years.

The full Amazon URL is:

Monday, April 20, 2015

Double-Speak from Iran's Foreign Minister

In an op-ed in today's New York Times Iran's foreign minister Mohammad Javad Zaref stated and I quote directly:

"On a broader level, regional dialogue should be based on generally recognized principles and shared objectives, notably respect for sovereignty, territorial integrity and political independence of all states; inviolability of international boundaries; noninterference in internal affairs; peaceful settlement of disputes; impermissibility of threat or use of force; and promotion of peace, stability, progress and prosperity in the region."

Would that only be true with respect to the State of Israel? I won't hold my breath waiting for President Obama, Secretary Kerry and their choir in the media to comment on this notorious example of double-speak.