Even Republicans are losing faith

Financial Review

PUBLISHED: 22 Sept 2012

Anna Bernasek 

America has had no shortage of successful businessmen who think national politics will be easy. Many people enjoyed watching the presidential aspirations of Donald Trump. And then there’s Mitt Romney.

Business politicking isn’t for the meek. But that’s small potatoes compared with the real thing. Maybe that’s why Romney has been looking like a rank amateur.

While Americans are divided over who to vote for this November there’s one thing they can agree on: Romney has run a lacklustre campaign.

According to a USA Today/Gallup Poll, almost 60 per cent of Americans expect Obama to win the presidency. Intrade, the widely watched online betting site, tells a similar tale. Romney’s chances of becoming president have been steadily dropping. At present the odds are two to one against him.

The fact that Romney is struggling shouldn’t really come as a surprise. Not long ago we had an agonising series of Republican primaries. From the outset Romney was perceived as a lousy candidate by many within his own party.

The way Romney ultimately gained nomination was essentially brute force: applying more money and more personnel to the process than his rivals could match.

That’s been his current strategy, too. Romney seems to hold an unwavering belief that if he outspends Obama and the economy stays weak, he will win. That’s it, nothing more. He hasn’t offered many specifics, and the vague promises he has made haven’t gained any traction with the public. No matter what has come his way, he’s stuck to that simple strategy. Romney is no improviser.

But Romney’s approach hasn’t worked. In the long presidential campaign, candidates are scrutinised for their political skill, intellect and personal appeal. Time and time again, on those fronts, Romney showed he’s no match for the President. Obama lacks business experience and has a paltry fortune compared to Romney. But when it comes to politics he makes Romney look like a schoolboy.

Remember the last time Barack Obama made a mistake? Most people don’t. It was two years ago, when he was faulted for insulting conservative voters in Pennsylvania when he speculated that bitterness over the economy caused them to cling to their guns or their religion.

Since then Obama has run an absolutely flawless campaign. Romney’s campaign is a different matter, with gaffe after gaffe. It’s reached the point where even other Republicans and fellow conservatives are beginning to distance themselves from him.

The fun started when Romney maintained that “corporations are people”. Trying to elicit sympathy for companies at a time of booming profits and lousy wages didn’t endear him to voters. Then, when he went to London before the Olympic Games to preen over his success in organising the Winter Games in Salt Lake City, he wound up insulting his hosts. A tabloid headline said it all: “Mitt the Twit”. Prime Minister David Cameron helpfully pointed out that organising an Olympics in the “middle of nowhere” is a bit easier than doing it in one of the busiest cities there is.

Next came Romney’s comments relating to the death of Ambassador Christopher Stevens during a violent outbreak in Libya. Before he learnt what really happened, Romney attacked Obama for sympathising with anti-American protesters. There was just one problem. Romney’s assertions were blatantly false.

Polls show a large majority fault him for the unseemly attack while those in the know shuddered at the lack of temperament.

And finally a media storm erupted over a leaked video showing Romney telling a group of $US50,000 donors he doesn’t care about 47 per cent of Americans. “Well there are 47 per cent of people who will vote for the President no matter what … so my job is not to worry about those people,” he assured them. Romney went on to explain that the 47 per cent believe they are victims who are dependent on the government and won’t take responsibility for their lives.

Romney’s claim that those 47 per cent don’t pay income taxes was clearly false since all workers pay payroll tax even if they don’t pay other income taxes. And Romney has paid shockingly low taxes himself, so low he’s too embarrassed to release the details. By putting income taxes front and centre with the public, he hasn’t done any favours for his wealthy constituents who enjoy very low taxes compared with many workers.

Read a lot of news accounts and they’ll say the presidential race is still close. But what becomes apparent when you look closer is that Romney is not only behind but losing. The US electoral college system is winner-take-all in most states. The nationwide popular vote is legally irrelevant.

That’s why candidates spend all their money, energy and time on states that are up for grabs. And lately Romney is having trouble in states he must win to have a chance at the presidency. A key trouble spot is Ohio, where Romney is significantly behind Obama.

A Louisiana political candidate in 1983 famously quipped: “The only way I can lose this election is if I’m caught in bed with either a dead girl or a live boy.” Obama is too smart to make that kind of boast, but it seems to apply nonetheless.

 

Labor stats needn’t be such hard work

Financial Review

PUBLISHED: 15 Sept 2012 

Anna Bernasek

It should have been good news that the US jobless rate fell last month from 8.3 per cent to 8.1 per cent. Surprisingly, that message landed with a thud.

Since peaking at 10 per cent less than three years ago, unemployment has fallen by almost 2 full percentage points. Yet instead of good cheer, Americans seem more pessimistic.

It didn’t help that the main news story from August’s job numbers was that the drop in joblessness was due to a sharp decline in the workforce. The labour force participation rate – percentage of the adult population employed or actively seeking work – dropped to 63.5 per cent, its lowest level in more than three decades.

Commentators automatically assumed it was due to discouraged workers leaving en masse. Perhaps that’s correct. But official figures don’t break it down in a meaningful way. The drop could be due to any number of reasons; there’s no official way to be sure.

Most accounts of the job figures focused on the bad news – a paltry 96,000 new jobs created last month – and more or less ignored the lower jobless rate. That says a lot about the official “headline” unemployment number: it’s not particularly useful.

The jobless figure comes from a government survey of households. The method dates from 1940. The survey has been updated over the years but relies on a crude binary paradigm. Those who answer the survey are either employed or not; there’s no in-between.

The Bureau of Labour Statistics, which compiles the report, says the basic concepts “are quite simple”. People with jobs are employed. People who are not working for pay and who are looking for a job and available to work are unemployed.

The BLS says being employed means getting paid for anything or earning profit on work done. It also includes pitching in on a family farm or helping out at a family restaurant even if you don’t get paid. People who are not employed and either not looking for work or not available to work are not in the workforce.

Simple, maybe. But way out of date. Those concepts arose in a world long gone where men worked at a job for life, women kept house and kids went to school. Looking back at the 1940 cohort, nearly anyone looking for work in the US that year would find it before long.

The labour market has only become more complex. These days there’s a whole spectrum of work from traditional full-time work, various part-time occupations, moonlighting, freelancing, volunteering, and entrepreneurial roles. A person in a job may not be earning to her potential, and a person out of a job may be very productive.

If the official job numbers tend to include everyone who gets a pay cheque, they’re not an effective measure for what we want to use them for: a guide to national economic wellbeing. The BLS does publish an alternative measure. But they are just additions to the base unemployment number and, therefore, not fundamentally different.

Of most concern is that we’ve come to rely on an official statistic that doesn’t tell us very much. We still have little idea how much unused labour capacity is being wasted and how financial hardship arising from that unused capacity is distributed among the population.

It’s not just the jobless figure though. For instance, the poverty line that we use to set critical policy has been long criticised by economists as needing a complete overhaul to keep up with changes since it was introduced in 1963. The measure assumes an average family spends one third of income on food, yet today that’s more like 12 per cent.

While economists remain stuck in the typewriter age, the rest of mankind is in the middle of the biggest revolution in data and information in history. The cost of acquiring and analysing data has fallen so far, so fast, that it has become possible to measure the economy on a granular level. Many government agencies would like to modernise the major economic measures but often the talent and funding just aren’t there.

Meanwhile, outside government, thousands of economists pore over the same dubious numbers month after month. Private sector economists could devote more time and energy to making innovative measurements of the economy.

A few enterprising economists have done just that. Bob Shiller, Karl Case and Allan Weiss devised a national housing price index. Introduced just in time to capture the housing bubble, the Case-Shiller index provided invaluable help in understanding the extent and impact of the housing crash.

Today’s digital economy needs and deserves better economic data. Developing better ways to measure economic performance may be the single biggest opportunity in economics today.

Words may be action enough for ‘invisible man’ Fed

Financial Review

PUBLISHED: 08 Sept 2012

Anna Bernasek

A week ago, America’s economic glitterati gathered at a resort in Wyoming with the spectacular backdrop of the rugged Grand Teton mountain range.

The Jackson Hole conference, hosted each year by the Federal Reserve Bank of Kansas City, brings together an elite group of central bankers, policymakers, academics and Wall Street economists. It’s America’s answer to Davos, and those who get invited feel very much on the inside of the power elite.

The Federal Reserve chairman is the star, and his address is eagerly anticipated, sometimes revealing a new insight, idea or even policy move. Papers presented by other guest speakers fuel discussions, and new ideas can at times percolate out of the two-day symposium. This year’s meeting was named “The Changing Policy Landscape”.

So what exactly came out of Jackson Hole, 2012? Zilch. At least as far as the Fed is concerned, the policy landscape may change but policy remains the same.

Fed chairman Ben Bernanke spoke about monetary policy since the financial crisis. He extolled the virtues of non-traditional monetary policy tools, namely quantitative easing, whereby the Fed bought up stacks of bonds from institutions and investors. But he stuck to an almost wooden script, announcing no actions but promising that the Fed was ready to do something if needed.

It’s been the same story since the last major round of quantitative easing ended a year and a half ago.

Yet, even as Bernanke spoke, the signs of a weakening economy were evident. Just before his speech, the Commerce Department said second-quarter growth figures for the US economy were revised down to an annual 1.6 per cent from the previously estimated 2.4 per cent. Since then the August data has been weak. New home sales slowed sharply and manufacturing, the lone bright spot post-crisis, contracted for the third month in a row.

The problem is the more Bernanke says the Fed is standing by, the less reassuring he gets. Could somebody remind him of the old adage that actions speak louder than words? With Europe collapsing and the US in stagnation, the Fed is the invisible man of the global economy.

Bernanke knows that by law he has a dual mandate: to promote price stability and full employment. Price stability isn’t a problem, but employment is far from where it should be. Setting aside economics entirely, there’s a legal requirement for Bernanke to act that he’s been simply ignoring.

And when you consider the economics, continued Fed inaction borders on the reprehensible.

Labour economists recognise that an extended period of high unemployment results not only in a short-term, dead-weight loss of economic output, but a long-term destruction of skills and earning potential that will haunt the economy for years. The US needs action now.

Some observers call for a third round of quantitative easing, a so-called QE3. But with $US2 trillion in bonds already sitting on the government’s books, others are concerned about the costs. That’s because when the Fed bought those bonds it printed the money to pay for them out of thin air. As a result the Fed isn’t lifting another finger.

It doesn’t have to be this way. There are other potentially far less expensive tools. To take one example, a paper presented at Jackson Hole by Columbia University economist Michael Woodford argues the Fed could nudge the economy without spending any money at all.

Woodford analysed the options central banks have for boosting the economy when interest rates sit about as low as they can go, near the so-called “zero bound”. He focuses on two areas.

The first he calls forward guidance. By that he means explicit statements by the Fed about the outlook for future monetary policy. The second he calls balance sheet actions. That’s when the central bank changes the size or composition of its balance sheet, for example through quantitative easing.

Woodford suggests that the more effective approach is to change future inflationary expectations. The Fed could help the economy by making an explicit promise to hold off on interest rate increases even after a stronger recovery takes hold.

That would signal that while inflation remains low now, the Fed will tolerate a bit more once the economy gets going. Woodford reasons that this would actually be more effective than further quantitative easing.

The beauty of Woodford’s argument is it doesn’t cost anything. If the Fed embarks on a publicity campaign to change inflationary expectations and it doesn’t work, the Fed can change its tune. Isn’t that exactly the role of the Fed chairman, to communicate with the public?

Whether you buy Woodford’s argument or not there are surely things the central bank can be doing instead of sitting on its hands. With so much destruction caused by high unemployment, it’s past time for the Fed to take the lead.

Standardised results fail to pass the good education test

Financial Review

PUBLISHED: 01 Sept 2012

Anna Bernasek 

As September dawns, the “back to school” season begins in America. Millions of families prepare their offspring for new schools and new classes in the coming academic year.

So how is the American school system doing? The answer isn’t particularly reassuring. Formerly the most admired education system in the world, US education seems costly, inefficient and increasingly ineffectual compared with other systems.

Education is a big business. Americans spend more than $US600 billion a year on public elementary and secondary education. Meanwhile, survey after survey shows American students on average are slipping in educational attainment compared with the rest of the world, at least as far as standardised tests can measure.

The centrepiece of American education reform to date has been to link teacher evaluations to student test scores. In 2009, $US4.35 billion worth of federal grants went to states with teacher evaluation systems based on student test performance.

So popular is the idea of measuring teachers based on student test scores that the Obama administration is hoping to spread the use of standardised tests to the university level.

The idea is to use the standardised tests as a way to compare results to costs at colleges. Over the past 30 years the cost of college education has soared in the US. College remains a major financial challenge for many families, leaving many wondering if it’s really worth the expense.

Standardised testing has broad support. In addition to President Barack Obama, even fierce opponents such as conservative Republican governor of New Jersey Chris Christie believe it’s a great idea.
Christie just signed a teacher tenure reform bill tied to student test scores. Now when teachers are evaluated for tenure after four years, student test scores will be taken into account. Although the actual weight of test scores is still to be determined, Christie wants test scores to count for half of a teacher’s tenure evaluation.

In neighbouring New York, after a two-year fight, the state passed a new teacher evaluation system in February. School districts can link up to 40 per cent of a teacher’s pay to student test scores.

The appeal is that test scores are simple. They can be easily ranked and applied to teachers and schools as well as students. They seem objective. But while measurement is crucial in business and economics, you have to measure the right things, the right way.

Consider how reliable standardised tests actually are as an indicator of future performance. On that score standardised tests have plenty of flaws. Often they don’t accurately represent what students know or understand. They certainly can’t measure a student’s interest or engagement in a subject. And standardised tests tend to promote narrow, literal interpretations over nuance and creativity.

As standardised tests gain currency with students, teachers and schools, the school curriculum becomes dominated by test preparation. Unfortunately teaching to the test rather than teaching other intellectual skills students need to grow and develop can actually limit or hinder academic achievement.

There are some unintended consequences. For one, cheating seems to have become more widespread. With so much now riding on the results, Americans have experienced cheating scandals involving not only students at our best schools but even teachers and administrators as well.

And then there’s the business of test marking and scoring. In the US that’s a $US700 million market dominated by a handful of big companies: Harcourt Educational Measurement, CTB/McGraw-Hill, Riverside Publishing (a Houghton Mifflin company), and NCS Pearson. Recently Rupert Murdoch’s News Corp announced plans to enter the market. These companies not only supply tests but also test-preparation materials, curriculum content and teacher evaluation. It’s a self-reinforcing market where sales of one service lead to sales of the others.

There’s no doubt teachers need to be evaluated in the job. High-performing teachers need challenge and reinforcement, and low-performing teachers need to improve or move on.

But standardised test scores are a poor substitute for thorough supervision. They are far too narrow a measure to form a true picture of teacher performance.

There are other ways to do it. In fields where education is crucial, for example law or medicine, standardised test results are used to weed out the most unprepared or ill-equipped students. But individual evaluations by knowledgeable professionals are the gold standard for determining who are the top law and medical students, as well as the top schools and teachers. Beyond a threshold, test scores aren’t particularly important in these professions.

So while Americans struggle to reform their education sector, they haven’t spent enough time answering a basic question: what does a good education consist of? Without that answer, all the testing in the world won’t do much good.

Romney tax returns a nightmare for Republicans

Financial Review

PUBLISHED: 25 Aug 2012 

Anna Bernasek 

What’s keeping the Republican Party up at night? Surprisingly, it’s not the fear of losing the next presidential election. In fact, it’s Mitt Romney’s tax returns.

Romney has drawn a line in the sand, refusing to release his tax details before 2010. He has been mighty vague about his reasons.

For decades the convention has been for presidential candidates to release their tax returns as a test of their integrity. Democrats were quick to remind Romney of his own father’s decision to release more than 12 years of tax returns when he ran for president in the 1960s.

The issue just won’t go away, and Republicans are beginning to hate it. Coverage of this keeps a harsh spotlight on something very dear to the party – the surprisingly low tax rates for the already wealthy. The issue has been hidden in plain sight for a while. For the better part of a century “capital preservation” lay at the core of the Republican coalition. Social issues such as racial integration, abortion and gay marriage can come and go, but low taxes on accumulated wealth have been a consistent Republican aim.

The contretemps about Romney’s tax returns comes at a time when pressure has mounted to raise taxes on the wealthy to help control America’s enormous budget deficit. Just last month the French government touched a nerve by proposing 75 per cent tax rates on higher incomes. In the US that was front page news.

So if Romney won’t disclose his taxes, what can he be hiding?

So far, Romney has revealed that in 2010 he paid an effective tax rate of 13.9 per cent on income of $27 million. That tax rate matches households earning about $80,000 a year rather than millions. But it ignores something crucial. While America’s income taxes are moderately progressive, its wage taxes, which are also income taxes but apply only to wage earners, are harshly regressive. An $80,000 household would have borne the burden of an additional 16 per cent in wage taxes over and above the 13.9 per cent income tax that Romney paid. Romney probably didn’t pay any of that.

An undisclosed portion of Romney’s wealth is kept in offshore tax shelters. The information he has released provides little clarity about precisely how much money he holds overseas and where. It has revealed that millions of dollars sit in a Swiss bank account and in the Cayman Islands. But Romney also apparently has investments in Germany, Luxembourg, Australia and Ireland, which were not detailed in his 2010 tax release.

Democrats plan to make much of Romney’s low effective tax rate and refusal to detail more about his finances. Earlier this month, the highest ranking Democrat in the Senate, Harry Reid, made an explosive allegation. According to information Reid says came from a Bain investor, Romney hadn’t paid any taxes over 10 years.

Romney denied the claim and confirmed that he wouldn’t release any more financial information. But when asked if he ever paid an effective tax rate less than 13.9 per cent, he said he couldn’t remember.

Senator John McCain could have come to Romney’s rescue. When McCain was running for president in 2008 and considering running mates he vetted Romney for the vice-president role. McCain examined 23 years of Romney’s tax returns up to 2008. It would have been easy to say Romney paid taxes every year but that wasn’t the message from McCain.

He sidestepped when asked whether Romney might not have paid any taxes in the last 10 years. “I can personally vouch for the fact that there was nothing in his tax returns that would in any way be disqualifying for him to be a candidate,” McCain said. That doesn’t rule out the possibility that Romney paid zero or near zero taxes in one or more years.

The problem for Republicans is the more Romney refuses to release details on his finances, the more he looks like he’s got something to hide. At the same time, if Romney does release more information and it shows he paid zero taxes in a year when wage earners paid plenty, it will amplify the huge inequities in the US tax system. That’s an issue Republicans just want to go away.

Capital gains and dividends in the US are taxed at a maximum rate of 15 per cent. The maximum rate on earned income is 35 per cent.

The American public may be waking up to the many glaring inequalities in the tax code. If Romney becomes the poster child for raising taxes on the rich, the Republicans could lose everything they have worked so long to gain. In that case, perhaps Republicans would rather have Barack Obama win and let the tax issue die, along with Romney’s presidential chances.

Imperial CEOs rule supreme in corporate realm

Financial Review

PUBLISHED: 18 Aug 2012

Anna Bernasek

One of the great puzzles of American economics is a phenomenon known as the “imperial CEO”.

In our free-market system there should be mechanisms to hold executive power in check. But jaw-dropping salaries and seemingly guaranteed tenure are familiar features in the corporate landscape.

The mechanism for controlling executives is simple. Shareholders elect a board of directors. Then directors decide who gets the chief executive’s job and set the pay.

Simple and elegant, perhaps. But in practice the system doesn’t seem to work well.

Take the case of Forest Laboratories, a publicly listed pharmaceutical company with $US4.5 billion in annual revenue, based in New York City.

Forest Labs built the bulk of its value on the antidepressant called Celexa, introduced in the late 1990s. A few years later Forest developed a closely related compound, the blockbuster drug Lexapro.

Despite plenty of cash to spend, Forest hasn’t been able to come up with a compelling second act. This year, it lost patent protection on Lexapro and generic versions flooded the market. Forest Labs’ first-quarter profit sank 79 per cent.

The company also pleaded guilty to obstructing justice and to fraud relating to the illegal marketing of antidepressants to children and adolescents, and distribution of an unapproved drug. Forest Labs paid a $US313 million fine in 2010 to settle the case with the United States government.

Just one year later, regulators threatened to exclude Forest’s CEO from doing any further business with the US government. That’s not an everyday threat against a corporate chieftain, and it wasn’t made lightly.

Fortunately for the company, the government backed down.

But the brouhaha attracted the unwelcome attention of activist shareholder Carl Icahn, who invests in companies he believes are mismanaged to force them to change. Icahn hasn’t always been right but along the way he’s made $US14 billion in personal winnings.

He now owns nearly 10 per cent of Forest Labs’ shares, making him one of its biggest shareholders. And for the past two years, Icahn has demanded the head of Howard Solomon, the company’s CEO.

Icahn claims Solomon puts his own interest ahead of the company. “Corporate governance failures at Forest are among the chief factors leading to its dismal results,” Icahn says. “Forest Lab’s enterprise value has declined by $US7.9 billion, or 55 per cent, during the last 10 years.”

“Moreover, we believe that Forest was inadequately prepared for the Lexapro patent cliff, resulting in an estimated 80 per cent decline in earnings.”

Icahn slams the board for generous payouts to Solomon while profits fell and the company battled charges of wrongdoing. He claims Solomon is grooming his son to take over in a dynastic succession.
And Icahn has uncovered change-of-control clauses in Forest Lab’s licensing deals that seem intended to keep management in place.

Howard Solomon, 84, has been in the top job since the 1970s. Unlike Icahn, Solomon holds under 1 per cent of the company’s shares.

Despite the many issues, the board has backed Solomon. Icahn took his case to shareholders last year but failed. And last week, shareholders re-elected Solomon and his nominees to Forest’s board, with an Icahn crony winning a single seat.

In a show of modesty, Solomon asked for his base pay not to be increased in 2012. It is expected to be a mere $US8.5 million, down from $US8.8 million.

According to Icahn, Solomon received $US60 million in cash, equity and other compensation over the past eight years while the stock price fell 50 per cent. Meanwhile, Solomon apparently sold around $US500 million worth of stock while publicly promoting the company’s prospects.

Icahn isn’t alone in his criticisms. Institutional Shareholder Services, a respected independent service, has agreed with many of Icahn’s charges.

There may be a good reason why the board backed a CEO who has been around for so long – three of the 10 directors were current or former executives of Forest, and two others were on the board for 10 years.

Solomon’s response has been consistent. The company says that Icahn is “distorting the facts” and the board claims shareholders are better off with them than with Icahn.

It seems like a good case for change. But the US shareholder process marches to its own pace.