Tuesday, April 26, 2016

My Amazon Review of Lawrence Haas' "Harry & Arthur: Truman, Vandenberg and the Partnership That Created the Free World"

Politics Stop at the Water’s Edge

Would that be true today, but it was true for a brief moment from 1945-1949 when Republican Senator Arthur Vandenberg worked hand-in-glove with President Harry Truman to craft a revolution in American foreign policy. Lawrence Haas, a former communications director to Vice President Al Gore, tells the story about a partnership that ended a century and a half policy of isolation and turned the United States towards a policy of full-throated internationalism. All of this was done against a back drop of highly partisan domestic politics. Recall that Harry Truman called the Republican Congress of 1946-1948 the “do nothing Congress” all the while the Republicans were over-riding his vetoes on labor and tax legislation.

Not only did Vandenberg work with Truman directly, he had very cordial working relationships with Secretaries of State Stettinius, Marshall and Acheson and the very influential Under-Secretary Robert Lovett. So important was Vandenberg’s role was the Truman placed him on the U.S. delegation to the founding United Nations conference in San Francisco in 1945. Truman clearly did not want to make Wilson’s mistake by failing to appoint any Republicans to Versailles conference a quarter of a century before. At the conference Vandenberg was the author of Article 51 which enabled defensive military alliances outside of the United Nations. That article paved the way for the Rio Pact in 1947 and, more importantly, NATO in 1949.

What Truman and Vandenberg wrought was the United Nations in 1945, the Greek Turkish Aid Act of 1947 which was a direct product of the Truman Doctrine, the Marshall Plan of 1948 and NATO in 1949. All of this was accomplished as the United States policy makers were coming to grips with a very aggressive Soviet Union in the early phase of the Cold War. Both Truman and Vandenberg recognized that Britain was done as a major power and only the United States had the ability to protect Europe and its periphery. Having the power is one thing, having the will is another? The alliance Truman and Vandenberg forged provided the will. Furthermore Vandenberg not only provided policy ideas, he shepherded the necessary legislation through the Congress.

The bipartisan era ended with China falling to the Communists in 1949 and the Korean War that followed in 1950. By then McCarthyism was on the rise and Vandenberg was dying of cancer. A return to bipartisanship would have to wait for Eisenhower’s arrival in 1953.

The lessons for today are obvious as Haas points out. With the United States under President Obama engaged in a strategic retreat from the world, there is no power present to take its place. When Britain retreated the United States was there. Thus without the United States’ will to act the world has become a more dangerous place. Where are a Truman and a Vandenberg when we need them again? I would recommend this book to all of the members of Congress and those who are now running for President. I don’t know whether it would help, but it is worth a try.

For the full Amazon URL see:

Thursday, April 21, 2016

My Article on Zocalo: "The U.S. Can no Longer Remain an Island of Economic Tranquility"


How’s the economy?
We have so many indicators to measure, you’d think the answer to that question would be as straightforward as the answer to the question of “How’s the weather?”
It never is, of course, for a number of reasons. The “economy” in the aggregate covers many activities and sectors, some of which can be booming while others are in a rough patch. Similarly, some individuals suffer economic hardship in supposedly good times, while some people manage to thrive in down times, so one’s feelings about “the economy” don’t always correlate with the latest macro statistics and headlines.
But there is a more novel reason for the confusion surrounding how people feel about the economy: the perceived seesaw relationship between the U.S. economy and the rest of the world. For the past decade, our fortunes and those of nations beyond our shores haven’t been moving in tandem. Even more worrisome, in the political realm the two are increasingly described as being in a zero-sum, adversarial relationship.
Go to URL above for the full article.

Tuesday, April 19, 2016

The Hard Political Truth about Carried Interest

Liberal Democrats have wailed for years about the ability of hedge funds and private equity partners to convert ordinary income into capital gains. They are the villains of the piece. However the use of carried interest is far broader than in canyons of Wall Street and the leafy suburb of Greenwich.

Two key Democratic constituencies also water at the trough of carried interest. They are the venture capitalists of Silicon Valley and the arts community of Hollywood/Broadway. How do you think start-ups get financed? Answer: Venture Capital Partnerships. The same goes for Broadway productions and more than a few movies.

So next time the issue comes up you should look to the money bags of Silicon Valley and Hollywood to ante up. We will see if the Democrats will gore their own oxen.

Monday, April 18, 2016

My Amazon Review of Adam Hochschild's "Spain in Our Hearts: Americans in the Spanish Civil War, 1936-1939"

La Sangre de Espana (The Blood of Spain)

Adam Hochschild’s beautifully written, if somewhat biased book, tells the story of the Spanish Civil War though the eyes of several of its participants mostly on the Republican side.  It is clear where his biases lie, but then again, it is hard to cuddle up to Franco and his henchman. It is not what he leaves in, but rather what he leaves out. Although he discusses the role of the Soviet NKVD in Spain he doesn’t give full treatment to its perfidious role. As I have written elsewhere many of the participants in the civil war were pawns in a larger geopolitical struggle.

That said there is no question about the heroism of the Republicans he portrays. His heroes are Robert and Marion Merriman, American communists who go to Spain to fight against the growing fascist menace. In the lingo of the day, they were premature anti-fascists. Merriman is the model for Hemingway’s hero Robert Jordan in “For Whom the Bell Tolls.” Merriman would ultimately lead the Lincoln Brigade and die in a fire fight towards the end of the war. Unlike, “Hotel Florida” which deals with the comings and goings of the journalists covering the war, Hochschild focuses in on the war fighters and the daily tribulations they suffered from.

The villain of the piece is Texaco chief Torkild Rieber who turns his company into an oil depot for Franco. It was Texaco aviation fuel that powered the German bombers over Guernica. And it was Texaco personnel throughout Europe who alerted Franco of incoming supply ships to Republican Spain.

A failing of the book for all of the leading personalities he discusses, he leaves out Steve Nelson, an American Communist who was the political commissar of the Lincoln Brigade. To see the world through his eyes and the purges that were undertaken both in Spain and later in Moscow would have offered a much greater insight into the day-today role of the Russian security services in the war.

Hochschild ends his book by discussing a counterfactual where the Republicans win the war. Would European history be fundamentally different, Hochschild generally thinks not and he doesn’t believe that Spain would have become a Soviet satellite given its inability to occupy the country. However, Cuba proves that the Soviets could have a satellite without military occupation.

My own counterfactual is what would have happened if Franco won quickly in late 1936 or early 1937. Had that happened there probably would have been no story, Hitler would not have been able to test his weapons in combat, there might have been less fear of aerial  bombardment in London and maybe a million Spanish lives would have been saved. Or alternatively it would have been another signpost that fascism was on the march and the Western democracies had better get out of the way.

All told Adam Hochschild has written a terrific book that takes you back to an era when politics meant something.

For the Amazon URL see:

Saturday, April 9, 2016

Donald Trump and the "Enviro-Liberals"

I was in Los Angeles earlier in the week for the UCLA Anderson Forecast and an audience member brought up the lack of affordable housing in Southern California and what it means for the regional economy. One of my colleagues argued the problem was intractable because amenity-rich Southern California will always suffer from excess demand.

I then chimed-in with the comment that Donald Trump wants to keep people out by building a huge wall along the Mexican border. In in Southern California and other places the "enviro-liberals" are far more subtle. They have convinced government to impose strict zoning and environmental regulations to limit the supply of housing that have the same effect as Trump's would be wall. Simply put the regulations work to keep people out.

The only difference between Trump and the "enviro-liberals" is intent. To the liberals their intentions are good and Trump's are bad. No matter, the results are the same.   

Thursday, April 7, 2016

Disturbances in the Force, UCLA Anderson Forecast, April 2016

The January to February drop in stock prices, down
13% from early December, sent shivers through the economy
engendering fears that a new recession was at hand. (See
Figure 1) The markets were disturbed by fears of a far bigger
slowdown in China, continued stagnation in Europe
and Japan, a break in oil prices to $10 below the financial
crisis levels of 2009 and that the European banking system
was on the brink of a new crisis. (See Figure 2 which uses
the share price of Deutsche Bank as an example) However,
the markets soon calmed down and wiped out much of
their earlier losses as strong data from the consumer side
of the economy indicated that retail sales were solid and
employment growth remained robust. Simply put, aside

Figure 1 S&P 500, March 2015-March 2016
Sources: Standard & Poor's via BigCharts.com

from modest declines in the industrial sector, there was no
recession in the data.

However, there are more disturbances on the horizon.
In June, the United Kingdom will vote on whether or not it
will stay in the European Union, commonly known as the
“Brexit” referendum. Whether leaving the European Union
is a wise move or not, the transition period will likely be
occasioned by increased market volatility. In the U.S. there
are two major presidential candidates who want to “blow
up” the global trading system as we have known it since the
end of World War II. Economists might not know all that
much, but trade wars usually do not lead to prosperity,
quite to the contrary.

Although we continue to believe the economy remains
on track for moderate growth, we are not as ebullient as
prior forecasts. The inventory correction we were looking
for last quarter is taking longer than we expected and though
the ramp up in single-family housing starts continues, it is
tracing a shallower path than what we previously thought.
(See Figure 3) For example, inventory accumulation added
$78 billion to real GDP in the fourth quarter of 2015; this
sector will only add $25 billion in this year’s third quarter,
a contraction of $53 billion. Thus, instead of looking for
3.3% growth in real GDP for 2016 on a fourth quarter-

Figure 2 Deutsche Bank Stock Price, March 2006-March 2016
Sources: BigCharts.com

fourth quarter basis we are now calling for a more modest
2.7% growth rate. (See Figure 4)

Despite the slower GDP growth rate, the economy
remains on track to create 2.4 million jobs this year and
1.5 million jobs next year as the economy operates at full
employment. (See Figure 5) Similarly, the unemployment
rate which stood at 4.9% in February, is on track to decline
to 4.6% by yearend. (See Figure 6) The rate of decline will
be slower than in the past few years as for the first time the
labor force participation rate is on the rise, a good thing.

Figure 3 Change in Real Inventory
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 4 Real GDP Growth
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 5 Payroll Employment
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 6 Unemployment Rate
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Monetary Policy: From ZIRP to NIRP

While the Federal Reserve left its zero interest rate
policy (ZIRP) behind last December, the European and
Japanese central banks have embarked on a negative interest
rate policy (NIRP) with unknowable consequences. Apparently
the $12.5 trillion of bond buying that the global central
banks embarked upon since 2008 hasn’t been enough to pull
both Europe and Japan out of the quagmire they now find
themselves in. In a negative rate regime instead of paying
interest the borrower receives interest and lender pays interest.
It is truly an “Alice in Wonderland” world. Reflective
of the dour outlook, negative yields are common in many
developed markets. (See Figure 7)

The obvious problem with NIRP is that it will destroy
the business models of life insurance companies and pension
plans and has the potential to do the same for the banking
system. We don’t know how much lower negative interest
rates can go and we don’t know whether it would be legal
for the Federal Reserve to undertake such a policy if it is
deemed necessary.

Meantime, the Fed appears to be ready and willing
to raise interest rates this year. Consistent with the March
Fed statement, we expect two or maybe three increases
in the Fed Funds rate this year with the first one likely
to be in June. (See Figure 8) Thereafter, we expect gradual
increases with the Fed Funds Rate ending 2017 at about 2%.
With much of the world in NIRP territory, policy rates will
be constrained in the U.S. The same holds true for longerterm
rates where we forecast the 10-Year Treasury to end
2016 at about 2.6% and end 2017 at about 3.6% compared
to a mid-March rate of 1.9%.

Figure 7 Government Bond Yields in Selected Countries,
March 18, 2016
Sources: The Wall Street Journal

Figure 8 Federal Funds vs. 10-Year U.S. Treasury Bonds
Sources: Federal Reserve Board and UCLA Anderson Forecast

Figure 9 Consumer Price Index vs. Core CPI
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Nevertheless, the Fed will be under pressure to raise
interest rates because it is about to get the inflation it has
been praying for. Specifically, as of February, the year-over-year
increase in core consumer prices was 2.3% and it is
forecast to approach 3% by 2017. (See Figure 9) Similarly,
with oil prices likely to have bottomed earlier this year, and
with the tightening labor market finally working its way
into employee compensation, headline consumer prices will
be rising at a 3% clip by the end of 2016. (See Figures 10
and 11) We would note that as of mid-March the price of
oil was tracking above our forecast and whether that trend
continues could very well depend upon an OPEC/Russia
meeting scheduled for April 17.

The U.S. Consumer is in Good Shape

Despite issues concerning the distribution of income
and debt burdens, the U.S. consumer remains in good shape
overall. Consumption will continue to be on a 3% growth
path throughout 2016 and it will be accompanied by a saving
rate in excess of 5%. (See Figures 12 and 13) Where
previously we thought that much of the consumer benefits
flowing from lower gasoline prices would be spent, a goodly
portion of it was saved. That being said, the lower gasoline
prices seem to have found their way into generating near
record automobile sales.

Housing starts continue to improve, albeit at a slower
pace than we previously thought. After reaching 1.106
million units in 2015, we forecast starts to increase to 1.24
million units and 1.43 million units in 2016 and 2017, respectively.
(See Figure 14) Our prior forecast for 2016 was
for 1.4 million units, but the forecast for 2017 is much the
same as before. Homebuilders did not ramp up single-family
production as fast as we thought and they concentrated their
activity on the higher end of the market. There is now anecdotal
evidence that the builders are shifting their emphasis
towards starter homes where there is real pent-up demand
coming from increased household formation, modest income
growth and rising rents. Our prior forecast for multi-family
starts of in excess of 400,000 units a year remains on track.

Figure 10 Oil Prices, West Texas Intermediate
Sources: Commodity Research Bureau and UCLA Anderson Forecast

Figure 11 Employee Compensation
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 12 Real Consumption Expenditures
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 13 Savings Rate
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 17 Real Private Gross Domestic Investment in
Commercial Buildings
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 16 Real Gross Private Domestic Investment in
Mines and Wells
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Capital Spending Growth Remains Tepid

With the industrial economy in a shallow recession and
oil exploration capital spending dropping below the nadir
of 2009, we should be thankful for the modest increases in
capital spending we are witnessing. Specifically, we forecast
that equipment capital spending will increase at a 4-5% pace
over the next few years, not great, but certainly not a recession.
(See Figure 15) On the other hand, investment spending
on structures is in the midst of a two-year decline triggered
by the collapse in oil exploration spending. (See Figure 16)
Specifically, real investment in mines and wells will have

Figure 14 Housing Starts
Sources: Bureau of the Census and w Anderson Forecast

Figure 15 Real Gross Private Investment in Equipment
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

declined by 60% from $137 billion in the fourth quarter
of 2014 to a forecast $56 billion in the first quarter of
2016. Most people don’t realize that construction in the oil
exploration and production sector was far larger than the
entire commercial construction sector, no more.

On the other hand, commercial construction is gaining
strength. Improved fundamentals for office and industrial
construction are driving spending in this sector that is being
fueled by an abundance of capital seeking modest yields in
a low-yield world. (See Figure 17) In contrast, spending on
retail structures is now being driven by negative fundamentals brought about by e-commerce. Major malls are seeking
to remain relevant by making huge investments in renovation
on the order of $500-$800 million per mall at the high end.

Exports Remain a Real Risk

With a strong dollar and weak economic growth in
Europe, Japan, Canada, China, Brazil and the Middle East,
the U.S. export sector remains under pressure. We are still
forecasting minimal growth this year, but the real risk is that
we can very easily have a decline. (See Figure 18) If you
want to tell a story about a U.S. recession it would have to
begin in this sector, but even with a modest decline it would
not be enough to put the U.S. into a recession.

Figure 18 Real Exports
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Government: A Modest Positive

After several years of decline, federal purchases are
once again on the rise. Whether federal spending continues
to rise over the intermediate term will largely be dependent on how this year’s election turns out. (See Figure 19) The
increase this year is due to the temporary lifting of the
sequester that has been in place since 2013. Similarly, the
much larger state and local sector has been growing since
2014, but it will once again face the twin pressures of higher
pension and Medicaid outlays as the decade ends.


We don’t see a recession this year or next and we do
envision inflation rising above the Fed’s 2% target. As a
result, we are forecasting slow and steady increases in the
Federal Funds rate over the next few years. And although
we have continued growth in 2018, a forecast that far out is a
conjecture. Growth will be driven by increases in consumer
spending and housing along with the end of the inventory
correction we are now going through. The risks we envision
largely come from outside of the U.S. domestic economy
where disturbances in Europe and Asia along with domestic

politics have the potential to cast a pall over the economy.

Saturday, April 2, 2016

My Amazon Review of Karl Rove's "The Triumph of William McKinley: Why the Election of 1896 Still Matters"

The Realignment of 1896

My advice to readers of this very fascinating history is to ignore the name of its author. Karl Rove is extraordinary as he is controversial as a political strategist. Nevertheless if a reader checks her political baggage at the door, she will find a very well written biography of William McKinley that focuses on his election to the presidency in 1896.

McKinley a Civil War hero and the last of the Civil War presidents was a highly organized politician and a strategic thinker. Although McKinley is remembered today as an establishment politician he, in fact, ran against the bosses of his day, successfully represented striking workers in Ohio and he opened up the Republican Party to masses of immigrant workers that were flooding into America’s factories.  He practiced the politics of inclusion by having a Rabbi open the 1896 Republican Convention and was very comfortable working with the black politicians who represented the core of the Republican Party in the South. He understood the fundamental truth that political parties grow by addition, not subtraction. Unfortunately all too many of today’s Republicans have failed to heed that lesson.

In Congress McKinley was known as the “Napoleon of Protection”.  Instead of arguing for Capital, he argued that protection set a floor underneath American wages therefore his high tariff policies protected workers as well as factory owners. In 1896 he wanted to run on that issue. Instead the locomotive of history made the “money question” the issue that year. It was the question of the gold standard versus free silver and its champion was William Jennings Bryan.

Rove is especially good at covering the Democratic Convention of that year and he shows step-by-step how Bryan won the nomination. You can almost hear the crowds cheering his “Cross of Gold” speech. The money question split both parties, but in the end it hurt Bryan more than McKinley as the “Gold Democrats” ended up with more heft than the “Silver Republicans”. Further Rove explains how McKinley successfully convinced working class voters that it was against their interests to be paid in a debased silver currency. Simply put, what was good for indebted farmers was not necessarily good for the urban working class.

Along the way Rove introduces us to the master insider Mark Hanna who runs and finances McKinley’s campaign, the 30 year old Charles Dawes who runs McKinley’s Midwestern operation who later becomes a Vice President and authors the Nobel Peace Prize winning reparations plan in 1925 and Theodore Roosevelt who greatly aids McKinley’s efforts in New York.

My quibbles with the book is that Rove spends too much time on inside baseball minutia and leaves out important details as to how McKinley financed his campaign where on a conservative basis he outspent Bryan 10-1. He also credits the rise in crop prices in the fall of 1896, the October surprise of that year, which undercut Bryan’s free silver campaign to bad crops in Australia and India. A closer look would have indicated the gold shortage of the 1890s that was deflating the economy was coming to end with the introduction of the cyanide process that was ramping up South African gold production and the discovery of gold in the Yukon in August of that year which set off the Klondike Gold Rush. With gold no longer scarce, the deflation ended and the need to inflate the currency with the introduction of silver disappeared. Thus what McKinley accomplished laid the basis for Republican dominance over the next 36 years.

The full Amazon URL is: