June 23, 2009

Governor Sanford's Disappearing Act

The bizarre behavior of Mark Sanford, the Governor of South Carolina, last weekend through today cannot be explained. He apparently decided to go on a jaunt outside of the state and basically remained incommunicado during his absence.

Aside from the fact that the story sounds a bit strange, particularly since he is a father and it was Father's Day Weekend, his wife didn't even know where he was or how to reach him.

All of this wouldn't be a matter of public concern but he is the Governor of South Carolina and he was derelict in his duty to simply take off without advising the Lt. Governor or Law Enforcement. His absence also set off a panic of sorts in South Carolina. Valuable police and security resources were wasted in efforts to determine his whereabouts.

His explanation: I went hiking and needed some down time. Unacceptable! No one is denying him the right to take a vacation but E.T. call home. To vanish without a trace seems odd, at a minimum, for someone who is the chief executive of a state.

Fortunately, there weren't any major crises in South Carolina the past several days, but what if there were? What if a hurricane was approaching? What if some other natural or man-made disaster occurred and Sanford was MIA?

Perhaps he is suffering from stress, perhaps he is hiding something, perhaps there is some other explanation. Who knows? But, even if there were, the complete secrecy in inexcusable under any circumstances and it surely eliminates him as a future presidential candidate in 2012. Unless the Republicans are so desperate and stupid to try to explain this away to the American public.

Public officials aren't perfect, but we shouldn't make excuses for them either. Sanford acted irresponsibly and instead of taking responsibility now he is acting as if his absence was either no big deal or a misunderstanding. This does not pass the smell test and he needs to answer some tough questions not only about his behavior and the power vacuum it created and the needless expenditure of state resources, but also about his mental condition generally.

Frankly, I don't think South Carolinians want an oddball running their state. And, right now, Sanford definitely falls into that category.

June 22, 2009

Are Starbucks and McDonald's Primarily Competitors or Fortuitously Engaged in a Symbiotic Relationship?

A coffee war has been brewing for some time now between Starbucks (SBUX) and McDonald's (MCD). For years, Starbucks had the gourmet retail coffee market largely to itself. Sure enough, there were other large competitors such as Caribou Coffee (CBOU) and Peet's Coffee & Tea (PEET), but they didn't and don't possess the scale and cachet to eat into Starbucks' market share to any great degree. While McDonald's and other fast food establishments had always served coffee, it was merely a necessary menu item and certainly not a profit center.

Dunkin' Donut's is the obvious exception to this generality (along with 7-Eleven to a much lesser degree as it is a more direct competitor of Dunkin's transient and sporadic coffee customer), but it has always attracted a different demographic than Starbucks. Why do I make that statement? Because Dunkin' Donuts has been around since the 1950's and preceded Starbucks' existence by decades. Clearly, the two competitors played in different areas. And so it went for most of the 90's and the first few years of this decade. (The same analysis can also be applied to 7-Eleven.)

In the past few years, Starbucks finally awoke the sleeping giant. McDonald's, with at least 13,800 outlets in the U.S. and over 30,000 in the world,and continuing explosive growth in China and other areas of the globe, realized that Starbucks was not only eating into their coffee revenue but breakfast sales as Starbucks began selling more food items throughout the day, with an especially big push into the breakfast market.

After some fits and starts, McDonald's came out with a brand of speciality coffee drinks both hot and cold. And they tasted good and were cheaper than Starbucks' fare. McDonald's began to reverse the trend of market share declines and instead began to capture previous Starbucks loyalists. Starbucks' stock started a downward spiral exacerbated since 2007 coinciding with the overall economy. No longer was it affordable for many to spend $4 or more a day on their favorite Starbucks concoction.

Howard Schultz, Chairman of Starbucks and the mastermind of its phenomenal growth,
took back the CEO reins in early 2008. He adopted a plan to ward off McDonald's and the economic malaise. While his leadership has reinvigorated Starbucks, his results to date have been mixed though he has seemed to stop the hemorraging to at least a slow bleed.

But in the midst of the McDonald's challenge and the economic crisis, a funny thing has come to pass. McDonald's and Starbucks have become stronger competitors of each other and many of the independent coffee shops and small chains have gone or are going by the wayside. For while Starbuck's always threatened the independents' survival due to its size, scope and customer loyalty, the additional assault by McDonald's has proven too much. As a result, the fierce competition between Starbucks and McDonald's will actually benefit both of them in the future at the expense of many former coffee retail rivals.

Based on the above, I believe that the coffee market will be left with three behemoths, Starbucks, McDonald's and Dunkin' Donuts, all of which compete for a limited common target market, yet each of which appeals and will continue to appeal to its diehard demographic due to the difference in qualitative experience.

For example, according to Howard Schultz, Starbucks is what he refers to as the "
Third Place". That place away from home and the office where people can relax and hang out, surf the internet and conduct business with laptop computer in tow. It is a place for high school and university students to study and socialize, for yuppies to mingle with each other and their young kids. This is a predominantly Starbucks demographic.

McDonald's sells good coffee but is not a particularly desirable or "cool" place to hang out or go "wireless" via computer or other gadgetry. It primarily appeals to people in a hurry who are looking for value. They are not lingerers. It is not a "so-called" Third Place like Starbucks.

And then there's Dunkin' Donuts which has rejuvenated its coffee product line but still appeals primarily to the more middle-class demographic that it has always had before and after the emergence of Starbucks and the coffee ascension of McDonald's. Its growth story largely remains intact and it serves many rural markets that are not economically feasible for Starbucks. For this reason, I believe that McDonald's is actually a greater threat to Dunkin' Donuts than Starbucks because they do compete for the rural demographic. Having said that, Dunkin' Donuts owns the late-night crowd. It is typically open 24 hours a day in most locations not just for drive-thru but for in-store service.

While Starbucks has some stores that fit within that category, they are few and far between and, at least to this point, only seem economically sensible in large urban markets with a large clientele nearby a particular location that garners traffic in the wee hours. Similarly, McDonald's serves most late-night customers via drive-thru as it also only has a relatively small number of in-store service late night outlets, especially in comparison to the percentage of its outstanding restaurants vís-a-vís Dunkin'.

In conclusion, the brutal competition particularly between Starbucks and McDonald's has made each one stronger in relation to the overall retail coffee market. The competitive landscape has reduced the number of smaller competitors which benefits both of them. And while they have some overlapping clientele, they each present a different qualitative experience with a strong and loyal following and that is unlikely to significantly change in the foreseeable future.

Disclosure: Long: SBUX, No position: MCD, CBOU, PEET

June 14, 2009

The New Rules of Government Capitalism

To My Fellow Citizens:

Please be advised that effective immediately (i) the economic system heretofore known as "Capitalism" in the United States of America shall now be known as "Government Capitalism", and (ii) the following rules, to the extent not already in effect, shall be implemented immediately.

1. Any person who purchased a home or other real property without sufficient income to afford the mortgage payments and/or without sufficient documentation of his income, and/or who was advised by a mortgage broker or lender that his mortgage could be refinanced in the future because real estate values always go up in value (and without question accepted such assumption as valid because of greed, stupidity or ignorance), shall be entitled to a modification of his mortgage to the extent necessary to ensure that the owner will not only be able to make the modified loan payments based on a reduced principal amount, but also will be entitled to realize all of the profit generated from a future sale of the property without having to repay the amount of the reduction of the mortgage. The cost of the mortgage reduction shall be absorbed by such person's neighbors and other taxpayers, who have continued to pay their mortgages without government assistance and who only purchased properties they could actually afford based on their incomes.

2. All banks and other financial institutions that failed to properly manage their risk and instead sought to increase their profits by use of excessive leverage that was based on a continued increase in the value of real estate, and whose failure would cause "systemic risk", as arbitrarily defined by the Treasury Department and the Federal Reserve (since no written definition thereof exists, or if it does nobody knows how to apply it except arbitrarily), shall be entitled to billions if not trillions of dollars of government bailouts to create the artifice of solvency. The U.S. Government will increase the deficit by up to or exceeding $2 trillion in the next fiscal year (and trillions more in subsequent fiscal years) by borrowing money from the OPEC nations, China and Japan and other countries that currently maintain massive trade surpluses with the U.S.

3. In addition to U.S. Government borrowings, the Federal Reserve will print money to the extent necessary to fund any shortfall from the aforesaid borrowings. In addition, the Federal Reserve shall continue to loan trillions of dollars to the mismanaged financial institutions to guarantee that they make profits in the future at the expense of the American taxpayers and of retirees and other individuals who prudently saved money ("Risk-Averse Investors") on which they were anticipating a reasonable rate of return to fund their ongoing living expenses without having to deplete their principal balances.

4. Any financial institution that was insolvent based on
FASB mark-to-market accounting rules in effect until FASB buckled under political pressure and quickly changed them, and which received U.S. Government and Federal Reserve assistance shall remain in existence. Shareholders whose interests were actually worth nothing and were not entitled to retain an ownership stake in such insolvent institutions without infusion of additional capital from them, will nevertheless continue to own their shares in such institution on a diluted basis. Such dilution shall be as little as possible even though private investors in such institutions received or would receive a much higher percentage ownership of in exchange for the same level government assistance in such institutions, whether in the form of bailouts or continuing policies to funnel money to such institutions by the manipulation of interest rates by the Federal Reserve at the expense of, among others, the Risk-Averse Investors.

5. If a federally-chartered bank is sufficiently large so as to possibly cause said systemic risk, the FDIC will not declare the bank insolvent under any circumstances. The U.S. Government via the Treasury Department, in conjunction with the Federal Reserve and and the FDIC will devise a plan to manipulate the bond market and the stock market to benefit those parties who are the least deserving of assistance.

6. In accordance with Rule 5 above and as alluded to elsewhere above, the U.S. will never wipe out shareholders and become the 100% owner of in an insolvent bank because to do so would require the exercise of honest judgment and transparent economic policies and equal treatment amongst all banks.

7. Any secured lender of an automotive company filing for bankruptcy protection such as Chrysler or General Motors, shall not be entitled to a greater return as a result of its secured position as compared to unsecured lenders or trade unions possessing unsecured claims. In fact, such a secured creditor requesting a greater return on account of its secured interest shall be ostracized by the Federal Government and shall be treated as a scapegoat by an over-reaching Executive Branch.

8. Any automotive company filing for bankruptcy due, in part, to rising health care costs, exorbitant union benefits as compared to non-bankrupt automotive companies and excessive corporate taxes, all of which costs impede the ability of U.S. car manufacturers to compete effectively in the global market, shall be entitled to sell all of their viable assets via a government-sponsored sale, the end result of which will ensure either majority control of the reorganized entity by the U.S. Government or the United Auto Workers or some combination of both.

9. Any government-sponsored bankruptcy sale in an automotive bankruptcy case shall not be required to distribute the proceeds thereof or such other value obtained for the bankrupt's assets pursuant to the the various contracts and agreements of the subject automotive company or the priorities established by the Bankruptcy Code and longstanding legal precedent unless the government, in its sole discretion, decides to abide by the law.

10. Any Risk-Averse Investor or responsible banking institution shall be required to bear the cost of the foregoing policies along with the American taxpayers. No Wall Street executive or other highly-compensated individual of those institutions shall be required to disgorge any bonus payments made with respect to highly speculative transactions which ultimately contributed to the insolvency of those institutions absent government bailouts.

11. In addition to the recent change of the FASB mark-to-market accounting rules that required an institution to write-down the value of real estate to the best estimate of its current market value based on actual real estate transactions occurring in the marketplace, all new accounting rules and regulations by FASB shall permit irresponsible banks to reflect real estate assets on their books based upon a fantasy model of the value of such assets in the future and the assumptions underlying such fantasy valuations shall remain within the sole discretion of such financial institutions that were unable to manage their risk properly in the first place.

12. The term "Generally Accepted Accounting Principles" shall be changed to "Sometimes We Feel Like A Nut And Sometimes We Don't Accepted Accounting Principles. The organization called the Financial Accounting Standards Board or FASB, as referred to above, shall hereafter be referred to as the Insipid Financial Board of Standards or "IF-B.S.".

13. This is just a preliminary list of the rules of new Government Capitalism that will go into effect. Additional rules will be adopted and implemented if and when any of either the U.S. Government, Treasury Department, Federal Reserve or FDIC have a wild hair up their respective posterior.

We welcome suggestions for further changes to the previous system of Capitalism in order to conform more closely with the principles and philosophical foundations of Government Capitalism. We look forward to working with you to develop as many regulations as possible so as to undermine the principles of Capitalism that have led to the unprecedented and unequalled economic success of the U.S. since its formation.

Good luck on surviving the new Government Capitalism without filing for bankruptcy, losing your job or the value of a substantial portion of your net worth due to massive inflation in the coming years,

June 8, 2009

Justice Ginsburg's Stay of Chrysler Sale Defends Rule of Law

The problem with politicians, whether Democrats or Republicans, is that when the law doesn't suit their objectives, they simply disregard it or try to find around the intent and spirit of the law. When the Democrats believed that the Bush Administration had illegally tortured prisoners at Guantanamo, they expressed moral outrage, demanded hearings and requested the Justice Department to investigate for possible criminal wrongdoing. And they were entirely right to do so despite Republican objections and Dick Cheney's recent attempts to finger the Democratic Congressional Leadership as completely aware of interrogation techniques being utilized there. That is the nature of a system where the law is supposed to mean something -- people are called to account for their actions under the law.

But for all the moral outraged expressed by Democrats concerning the Bush Administration's failure to adhere to "the rule of law", that outrage seemed have dissipated when the Obama Administration chose to abrogate contract law and the entire bankruptcy process in the Chrysler Chapter 11 proceedings. In that case, the President Obama and his Democratic cohorts had no problems labeling legitimate secured creditors as holdouts for a Government bailout and unwilling to make sacrifices commensurate with other creditors despite the fact that by contract they has bargained for a senior security interest in Chrysler's assets in exchange for billions of dollars of loans. Based on the comments and heavy-handed actions of the Obama Administration, unsecured bank debt and UAW claims should either be treated equally with the secured lenders (in the case of unsecured bank debt) or receive significantly better treatment in terms of significant stock ownership in the reorganized Chrysler (in the case of UAW debt). Despite the fact that the Bankruptcy Code and substantial legal precedent did not support or justify any of the proposals of the Obama Administration which, blatantly, trample on the priority rights of secured creditors, there has been virtual silence from the Congressional Democrats about adherence to the rule of law. Conversely, the Republican who generally supported Bush Administration interrogation techniques are outraged by the debasement of the law in the Chrysler case.

So what is the takeaway? Is the rule of law important to Democrats and Republicans all of the time or only when it suits their provincial interests. The evidence to date generally suggests the latter. That is what is particularly intriguing about Justice Ginsburg's decision to stay implementation of the Chrysler asset sale, at least for the moment. Justice Ginsburg is unquestionable a liberal member of the Supreme Court and was appointed to it by Bill Clinton, a Democratic president. Therefore, it cannot be argued that her issuance of a stay was politically motivated and simply a means to carry out the Republican agenda. While more details will certainly emerge in the coming days, her action indicates that perhaps further thought should be given to the rule of law as it pertains to the Chrysler case. That is not to suggest how she or the entire court might ultimately decide the question, but is should give pause to the Obama Administration as to the limits of Executive Branch not only with respect to Chrysler but also with respect to the General Motors bankruptcy.

Justice Ginsburg with the stroke of a pen has implicitly if not explicitly stood up for the system of checks and balances set forth in the U.S. Constitution. For the proper role of the courts is to ensure that the rule of law is upheld despite the expediencies of the political process. Moreover, events have been happening so rapidly that a time to reflect on the long-term legal ramifications of trouncing on longstanding legal rights of creditors and other stakeholders just because the politicians prefer to do it their way.

In a way it is startling that the Chrysler case had to end up before the Supreme Court because the lower courts lacked the fortitude to seriously tackle the obvious legal injustices being perpetuated. This is also quite disturbing because it indicates that President Obama, a constitutional lawyer himself, the Justice Department, the Treasury Department and the Democratic Congressional Leadership and the Judiciary Committees in both the House of Representative and the Senate were willing to sacrifice the rule of law to buttress their political objectives regardless of their nobility.

While it will be interesting to see how Justice Ginsburg and the Supreme Court resolve the stay and the pending appeal of the Chrysler sale order, none of us should feel comforted by the abuse of power at Guantanamo or in the Chrysler case. However, we can take some comfort in the fact that we do have a system of checks and balances between the branches of government and Justice Ginsburg apparently recognized that our very freedoms depend on the judiciary remaining independent and not swayed by the prevailing political winds. For in the end, adherence to the rule of law is all that prevents overreaching by the other separate but equal branches of government.

Unemployment is a Lagging Indicator: Not This Time

The conventional wisdom filling the CNBC airwaives and the financial media these days is that unemployment is a lagging indicator. On this basis, the likes of Larry Kudlow and Jim Cramer, notably, dismiss continuing job losses and the burgeoning unemployment rate as essentially irrelevant. Not only is that shibboleth completely at odds with empirical economic data, but it masks the very real potential of a weak or non-existent recovery for the foreseeable future. See recent comments by Mohammed El-Erian of PIMCO and David Sokol, chairman of a Berkshire Hathaway subsidiary and a top advisor to Warren Buffett. That Kudlow and Cramer blithely ignore the unabated growth of the unemployment rate (notwithstanding the decline in job losses) and the correlative decline in buying power and from underemployment is, minimally, intellectually dishonest and dangerous.

Let's look at the so-called "rationale" underlying the "lagging indicator" myth. In the past, when the economy suffered an economic downturn or recession, job cuts ensued to rationalize expenses with income and to minimize the immediate blow to profitability. When the economy started to recover, job growth returned but at a much gradual pace than jobs were previously shed. Therefore, the notion was formulated that when the rate of job loss begins to slow, we are closer to a bottom or turnaround in the economy even though the unemployment rate continues to increase. But, this type of thinking inherently implies both that (i) a reduction of job losses (though still increasing) will likewise slow the rise of the unemployment rate, and (ii) those who are unemployed will be able to return to the workforce at or near their prior compensation levels. Unfortunately, both of these premises are questionable at best in the new reality of the current economic climate.

For the month of May, non-farm payrolls fell by 345,000, while the unemployment rate climbed to 9.4%. So, even though payroll losses declined by 159,000 compared to April losses of 504,000, the unemployment rate increased by 0.5%, from the April rate of 8.9, or 0.2% above consensus estimates. How can the unemployment rate increase at a faster rate than the decline in jobless claims? Easy. The number of newly unemployed encompasses a much larger group of people than those experiencing job losses, and the number of newly created jobs each month is unable to keep apace with the continuing surge in the number of unemployed.

Let's further analyze the May numbers to illustrate this phenomenon. The total number of unemployed persons rose to 787,000, representing more than a 440,000 increase of such persons above actual payroll losses. At first blush, the math doesn't seem to make sense. One would surmise that if job losses were 345,000, the number of newly unemployed would be the same or roughly comparable. But, as alluded to above and explained below, the rate of unemployment is not limited to only those persons actually losing their jobs.

Instead, the unemployment rate is designed to include all unemployed whether or not they are receiving unemployment benefits or became unemployed as a result of losing a job. For example, the unemployment rate includes the growing numbers of self-employed who are now searching for third-party employment. It includes those who have resigned or otherwise left positions without qualifying for unemployment benefits. It also includes new entrants to the workforce who are actively seeking work. Therefore, even if there were no new net job losses, the unemployed would still have risen by the 440,000 with a corresponding increase in the unemployment rate.

In my view, an increase of 787,000 unemployed is not anything to write home about as positive or irrelevant. It does not signal an end to the recession; rather, it demonstrates just how deep the recession really is and how long it will take for the economy to recover. Because a strange, though not wholly unexpected outcome, is occurring. As the unemployment rate skyrockets, more new job seekers are entering the market further increasing the unemployment rate. Why? Because if a household's income is adversely affected by a job loss, other currently non-employed members of that household will also be searching for work to make up the shortfall.

But the unemployment rate, though a more reliable economic indicator of the future health of the economy than measuring only monthly job losses, does not even attempt to measure the effect of underemployment on buying power. Underemployment occurs when someone assumes a position below their potential earning power based on prior employment and marketable skills. Numerous examples abound of this sort. Take the job losses in the banking industry and the manufacturing sector. Many of those now unemployed in those fields previously were earning substantially more than currently available jobs are paying, whether or not in the same sector, given their qualifications and experience. Consequently, while the unemployment rate is job neutral meaning that a replacement job at a lower wage or salary is treated the same from a statistical point of view as one who replaces a lost job with a new position at a similar rate of prior compensation, the economic reality is quite different. Disposal income is significantly diminished along with buying power. There are simply fewer dollars to spend for fewer goods by fewer people.

The point being that because of the fundamental restructuring of the U.S. economy since last Fall, which is likely to continue for some time, the overall unemployment rate is likely to remain high regardless of a reduction of monthly job losses. And the prospects for economy recovery will indeed affected by the adverse consequences of such unemployment on buying power regardless of those who are stubbornly unwilling or unable to differentiate the current recession from every other one since the Great Depression.

June 5, 2009

Increasing Foreclosures Equals Increased Consumer Spending: A Strange

Just heard an intriguing observation on the CNBC show Fast Money from a guest commentator that the increase in foreclosures may actually be a cause of increased consumer spending. The argument is that people whose homes are in foreclosure stop making mortgage payments; therefore, they have more money to spend on other consumer goods. So, the more people who don't pay their mortgages, the better the consumer spending statistics appear.

If true, that means we are going to see a long list of foreclosures for a long time. If that occurs, home values will continue to decline or certainly won't rebound. And I don't think that reflects well on the economy long-term. If a significant segment of the population is soon to be potentially homeless, it is only a matter of time before the economy will see a downward effect on consumer spending.

Let's look at this simply. If people aren't paying their mortgages due to pending foreclosures, at some point they are going to have to find some place to live and that probably means paying rent. Moreover, many of these delinquent homeowners are probably going to have to file for bankruptcy to wipe out the debt secured by their home mortgages and other obligations. Under recent amendments to the Bankruptcy Code it is harder to file for a straight liquidation under Chapter 7 as opposed to paying a portion of current income to creditors under a Chapter 13 plan. If and when we see a continuing increase in bankruptcy filings, consumer spending will necessarily be affected.

Not only will real estate values drop because of foreclosures but automobile sales and durable goods sales will be impacted as well. If someone has to use his current income to pay living expenses and past debt, there isn't much left to fund new capital purchases. So maybe we are in the midst of a consumer spending fantasy period, before economic reality hits the severely indebted.

We constantly hear analysts say that unemployment is a lagging indicator. However, that assumes that the unemployed will find new jobs at comparable income levels as the economy rebounds. There is nothing to suggest that is going to happen this time around. Many jobs have been lost forever in the financial services industry, automobile industry and other manufacturing and service sectors. Unemployment statistics are also inherently unreliable because they don't count people who have exhausted unemployment benefits or never received them in the first place even though they are unemployed. It also doesn't count new entrants to the workforce.

It is therefore only logical that the unemployment rate will crest regardless of whether more people are actually working. This is a fundamental flaw in the computation of this statistic. A more reliable indicator would be the number of people who have jobs and whether that number continues to fall at a rate greater than the increase in the unemployment rate. As usual, many governmental statistics provide little value as to what they are intended to measure especially when they are continually revised within weeks of release.

The market is digesting all the bad news and sloughing it off as irrelevant. Is that a function of a fundamental belief in the economy's improvement or money managers jumping back into the market so as not to be outperformed by their peers? Certainly, the market's rise has become a self-fulfilling prophecy as the more conservative managers remained on the sidelines while the market swung back with very limited economic data confirming that the economy is improving to an extent to justify the rally. My concern is that the herd mentality is still with us. It has always ended in mayhem as the last of the holdouts buy into the rally. Soon after, the market will plunge as it usually does as there are no more buyers and those with profits will sell to preserve as much of them as possible.

The tepid volume in this rally should make one wary. The conviction isn't there signaling that a reversal could occur if sentiment takes a pause or economic data begins to reflect the reality that consumer spending is nothing more that a temporary phenomenon not based on an improvement in the economy but a redistribution of household income away from housing expenses due to an unintended consequence of the foreclosure phenomenon (i.e., the artificial temporary increase in consumer spending that would otherwise be spent on housing expenses). If the uptick in consumer spending is to any degree based on this, which I believe it is based on personal observation of spending habits of those in foreclosure, we are headed for a rude awakening as economic statistics eventually confirm this anomaly.

June 3, 2009

General Motors: The Failure of Government Policy

While the management of General Motors over the past quarter century or more doesn't deserve any awards for stellar performance, I do view the GM bankruptcy filing as just as much, if not more, a failure of patchwork, inconsistent and irreconcilable Government policies during that time span. From the second highest corporate tax rate in the world to the lack of a unified health care system, the Government has time and time again interfered with the ability of GM to remain competitive. While the Government has continually imposed standards on the auto industry to improve mileage and reduce pollution, however well-intended, these policies have never been well thought out. As a consequence, GM, in order to cover its ever-expanding financial and regulatory obligations, was left with little choice but to manufacture a greater proportion of larger vehicles with higher profit-margins to help pay the cost thereof than otherwise would have been necessary with a more enlightened Governmental approach. Stated differently, Government policy caused GM to concentrate its manufacturing operations on a narrow focus of the automobile market as opposed to developing a more complete and well-rounded portfolio of products.

Over the years, the Government has also thwarted efforts to drill for oil offshore or in Alaska due to exaggerated environmental concerns. The result: America became more and more reliant on foreign oil. Meanwhile, the rest of the world continued to exploit their oil resources wherever located, onshore or offshore. So, in effect, this country unilaterally withdrew from the oil exploration business in the most promising areas for development.

What would have happened if the United States had promoted its own oil industry until the transition to alternative energy was possible? One benefit would have been a significant reduction of billions of dollars paid to Saudi Arabia and other OPEC members and a corresponding salutary effect on the U.S. dollar as balance-of-trade deficits would have been significantly lower. Perhaps the original Gulf War, principally fought to preserve the flow of reasonably-priced oil from the Middle East, would not have occurred or at least in a more more limited form. Instead of striving to become energy independent from OPEC and to build up our own oil output through proven reserves, we chose to defend oil fields far away with American lives because environmentalists preferred pristine coastlines to economic independence. The environmentalists bear culpability for relegating our nation's overall national security to their provincial interests.

Of course, we would all prefer as little environmental impact as possible while achieving energy independence, but difficult choices sometimes have to be made. We have now seen what happens when this country is beholden to foreign interests for our energy consumption. We have turned the MIddle East into a bastion of radical Islam by the very fact that we and other Western democracies have funded the oil producers instead of controlling our destiny without them. The billions of dollars dispatched to the Middle East, instead of being used by the OPEC countries to advance their societies economically, educationally and politically, have been used as hush money to covertly fund terrorist groups intent on destroying America to preserve the concentration of power and wealth in despotic regimes. More recently, the wars in Afghanistan and Iraq over the past eight years likely would have been quite different as well. Had we developed our energy resources properly, our involvement in the Middle East would have been significantly lessened and Islamic terrorism and hatred against the U.S. would have had fewer seeds upon which to grow.

In addition to failing to develop our own natural resources, the Government has failed to develop a coherent policy to deal with social security and medicare. Every year, employers face increasing costs as these programs are headed for certain bankruptcy. The demographics simply do not support a system where in the not to distant future only two workers will be effectively supporting one retiree. In the initial stages of social security the ratio was 16:1. That ratio, by definition, had to decline unless U.S. population growth surged beyond any reasonable prognostication of birth rates. Moreover, increases in life expectancy continues to put a further economic strain on funding. But, the failure to adequately address this time bomb even now has certainly imposed great economic strains on businesses, particularly those which manufacture goods and are more subject to international competitive pressures.

I am not advocating a reduction of current retiree benefits, but I am advocating that the system has to be redesigned to maintain its solvency. Already, the retirement age is slowing increasing, but that should have been done years ago. The social security tax is like a quasi-flat tax with one glaring deficiency -- it is only assessed against a portion of an employee's personal service income. There is no reason for this. If social security taxes had been assessed against the entire portion of an earner's income from inception or gradually increased to that level over time, the system would be significantly more financially secure today. It is frankly outrageous that people earning hundreds of thousands, if not millions, of dollars are paying the exact maximum social security taxes of people earning a fraction of their incomes. Moreover, proportionally shifting the social security and medicare tax burden to the people who earn the most is not only logical but fair (to the extent one believes a flat tax is fair). Such a policy could also be structured to cap an employer's contribution per employee regardless of income level.