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Friday, October 06, 2006

MY TAKE ON THE HP/DUNN AFFAIR   My column today:
The Hewlett-Packard boardroom spying scandal has now reached a new and dangerous phase. This week California Attorney General Bill Lockyer obtained arrest warrants for former H-P Chairman Patricia Dunn and four others alleged to be involved in the plot.

I happen to know Patricia Dunn quite well. Pattie may be a jerk, but she's probably not a crook. More important, if I were an H-P shareholder, at this point I'd just want the cops to stay the heck out of things and let the company get on with its business.

I worked side by side with Pattie for 11 years at Barclays Global Investors. Pattie is a brilliant saleswoman and a gifted manager, and I'm grateful for having been her colleague.

That said, I've also seen her dark side. When I left Barclays, one of the knives in my back was Pattie's. Machiavelli wears Prada.

One of Pattie's knives was probably in the back of former H-P CEO Carly Fiorina, too. Pattie played a key role in Fiorina's firing, and became chairman when Fiorina was ousted. The queen is dead. Long live the queen. That's the way the game works.

So it's no surprise to me to hear that Pattie masterminded a scheme to spy on her own board of directors. Extreme? Yes. Distasteful? Yes. Bad business? Yes.

And yes, there's a part of me that is glad to see Pattie blow herself up. But this kind of corporate rough-housing isn't a crime. People get hurt, but in business that's all part of the game -- and everyone who plays expects it.

Between companies, the idea is to put your rival out of business if you can. Within companies, the idea is to elbow ahead of the other guy to get to the head of the board table.

Business is not a democracy, it's a jungle. And thank goodness. The freedom of American business to compete with itself and with global rivals, and for American corporate executives to compete with each other for power and riches, is what makes our economy the strongest in the world.

Still, there are laws against fraud and identity theft. And those are what Pattie stands accused of breaking.

But let's be clear about a couple of important points. First, Pattie and the others are not accused of any wrongdoing aimed at consumers. The fraud and identity theft in question were targeted against H-P's own board members, and against media reporters who covered H-P. And even there, the purpose was not to steal money or make fraudulent credit-card purchases or all the usual scams -- it was to discover who was leaking corporate information to the press.

I don't have a lot of sympathy for the victims here. They chose to play the dangerous game of corporate power-seeking -- they were well compensated for it and shouldn't be too shocked by what happened to them.

Business reporters are part of the corporate power game, too. And besides, if some investigative reporter had used the same shady techniques to get information for a story, he wouldn't be prosecuted for it -- he'd win a Pulitzer Prize.

Second, Pattie has claimed that she wasn't aware that illegal methods were being employed. Reading the arrest warrant, it's not at all clear to me that Attorney General Lockyer can prove that she was.

What is clear from reading the arrest warrant is that an act that took place within the special rules of corporate gamesmanship is now being treated like down-and-dirty street crime. Because of this warrant, Pattie is going to be fingerprinted, have her mug-shot taken, the whole nine yards -- as though she were a rapist or a drug dealer. I'm not convinced she deserves that kind of treatment.

From what I can tell, the reality here is that this is another case of self-promoting government prosecutors and sensation-seeking reporters ganging up on a successful businessperson, pandering to the public with the persecution of someone who can be portrayed as a wealthy corporate criminal.

This isn't Lockyer's first high-profile prosecution built on evidence that's less than solid. Just before issuing the warrant for Pattie, he announced that the State of California will be suing the top six American and Japanese auto makers for causing global warming.

Is there really any evidence -- that a courtroom would accept, that is -- global warming is even happening? If there is, is there any evidence that automobiles caused it? But if you're the attorney general, and someday you want to be governor, it costs you nothing to file a lawsuit. Never mind that it will cost millions upon millions for the auto makers to defend themselves. And never mind that the attorney general's time could be better spent tracking down rapists and drug dealers.

Think of the headline-grabbing cases against businessmen brought by New York Attorney General Eliot Spitzer. By publicly threatening companies with criminal prosecution, he was able to coerce some spectacular monetary settlements. But every time Spitzer met a victim who wouldn't just roll over -- someone who had the courage to take it all the way to a jury trial -- Spitzer has lost.

Think of the case of Frank Quattrone, another California businessman whom I know personally. Frank, an investment banker, had to endure no less than three separate trials on federal charges arising from his management of high-tech initial public offerings during the "bubble" stock market of the late 1990s. Finally, after expending millions of dollars and five years of his life defending himself, Quattrone has been exonerated.

For investors, the real story here may not be the tawdry tale of Pattie's little corporate intrigues. It's the larger story of the way over-reaching prosecutors are making it harder and harder for companies to find good executives to lead them. And the risk that Congress will pass some new law, like Sarbanes Oxley, that'll impose huge costs on all businesses because of the infractions of a very few.

The best thing to come out of this whole mess is that with Pattie out of the way, Mark Hurd, the supremely talented executive who has been H-P's CEO, is now its chairman, too. If Hurd can stay out of Bill Lockyer's clutches, then H-P may actually have a chance to once again be a great company.

Posted by Donald L. Luskin at 10:16 AM | link  

NOW THAT'S THINKING!   From Razor Sharp Claws:
The Honorable Paul S. Sarbanes 309 Hart Senate Office Building
Washington DC, 20510

Dear Senator Sarbanes:

As a native Californian and excellent customer of the Internal Revenue Service, I am writing to ask for your assistance. I have contacted the Department of Homeland Security in an effort to determine the process for becoming an illegal alien and they referred me to you.

My primary reason for wishing to change my status from U.S.Citizen to illegal alien stem from the bill which was recently passed by the Senate and for which you voted.If my understanding of this bill's provisions is accurate, as an illegal alien who has been in the United States for five years, all I need to do to become a citizen is to pay a $2,000 fine and income taxes for three of the last five years. I know a good deal when I see one and I am anxious to get the process started before everyone figures it out.

Simply put, those of us who have been here legally have had to pay taxes every year so I'm excited about the prospect of avoiding two years of taxes in return for paying a $2,000 fine. Is there any way that I can apply to be illegal retroactively? This would yield an excellent result for me and my family because we paid heavy taxes in 2004 and 2005.

Additionally, as an illegal alien I could begin using the local emergency room as my primary health care provider.

Once I have stopped paying premiums for medical insurance,my accountant figures I could save almost $10,000 a year.

Another benefit in gaining illegal status would be that my daughter would receive preferential treatment relative to her law school applications, as well as "in-state" tuition rates for many colleges throughout the United States for my son.

Lastly, I understand that illegal status would relieve me of the burden of renewing my driver's license and making those burdensome car insuranc e premiums. This is very important to me given that I still have college age children driving my car.

If you would provide me with an outline of the process to become illegal (retroactively if possible) and copies of the necessary forms, I would be most appreciative.

Thank you for your assistance.

Your Loyal Constituent,

Gene Baker

Posted by Donald L. Luskin at 9:50 AM | link  

WELL, WHAT DO YOU KNOW?   Turns out this economy has been stronger than anyone has thought. From Bloomberg, covering this morning's jobs report:
The report also showed job growth during the 12 months ended in March may have been about 45 percent higher than previously reported. In a preliminary estimate, the Labor Department said payrolls for the 12 months ended in March 2006 will be revised higher by 810,000, the biggest revision since the Labor Department started benchmarking numbers in 1991. Currently, figures show 1.8 million jobs were added during that time. The final estimate will be issued in February.
Reader Shawn Smith opines,
To think of how much the employment numbers move markets and influence the political world, you would think that with revisions like this someone would lose their job or the New York Times would vilify the Bureau of Labor Statistics for not reporting their numbers correctly in the first place...
Shawn, the Times would only vilify the BLS if the revision had gone the other way. There is no penalty for doing just what the Times does -- systematically underplay the strength of the economy, especially where jobs are concerned.

Posted by Donald L. Luskin at 9:45 AM | link  

SHORT-SELLERS AND THE SEC, TOGETHER AGAIN FOR THE FIRST TIME   A nice op-ed in the New York Times this morning, celebrating the market efficiency role of the short-seller of stocks, and decrying the way short-sellers are vilified and over-regulated. Almost libertarian! But this is the New York Times -- inevitable was the last paragraph, suggesting how short-sellers might better aid market efficiency by aiding (of course) regulators, in the battle against the corporate crooks the Times loves to editorialize about.
Congress should provide the S.E.C. with discretion to pay bounties, similar to those available in insider trading cases, for tips resulting in successful financial fraud cases. This would give some degree of recognition to those contrarians who help keep the market honest by flagging problems concealed by companies — and missed by institutional analysts.
And who is the author of this piece, using the Times to suggest this unholy alliance between short-sellers and regulators that would produce a new revenue stream for short-sellers?
Richard Sauer, a former administrator in the Securities and Exchange Commission’s enforcement division, joined the management at a short-biased hedge fund this week.
Thanks to our anonymous DC lawyer/lobbyist friend for the link.

Posted by Donald L. Luskin at 8:33 AM | link  

Thursday, October 05, 2006

ANOTHER CONSPIRACY THEORY   The GOP is doing it's best to blow itself up ahead of the November elections. But one thing it's got going for it is a strong economy -- which is why you don't hear much on the economy from the Dems these days. Leading the charge of economic good news is the drop in gasoline prices. Here's the best the Left can do to find something wrong with that:
WASHINGTON, October 5 -- According to Bob Woodward, in 2004 Saudi Ambassador Prince Bandar Bin Sultan promised George Bush that the Saudis would help bring oil prices down before the election by increasing the country's crude oil production.

Just weeks before this year's elections, oil prices have been falling fast and several reports suggest that this time, too, it is partly the result of a deliberate strategy aimed at helping the Republicans at the polls.

Goldman Sachs, formerly run by Bush's Treasury Secretary Paulson, announced in July that it had changed the unleaded gasoline component of its widely used commodity index from 8.45% to 2.30%, forcing investors to dump speculative positions in gasoline and consequently pushing down prices.

In another development, the Bush administration changed its original plan to postpone oil deposits to the Strategic Petroleum Reserve until the fall, announcing recently that it will hold off purchases of oil for the government's emergency reserve through the upcoming winter, so until after the elections.

While arguably not the primary force behind the falling oil prices, the foregoing moves do raise questions about whether the Bush administration is using energy policy for strictly political purposes again.

Posted by Donald L. Luskin at 10:25 PM | link  

UH OH...   Things are getting worse for the Republicans in the Senate. The individual Tradesports Senate contracts have been showing 4 losses for the GOP, and 3 for the Democrats. Now Tennessee has fallen below 50% for the GOP, making 5 losses -- and New Jersey has moved above 50% for the Dems, making only 2 losses.

Posted by Donald L. Luskin at 8:30 PM | link  


Posted by Donald L. Luskin at 9:52 AM | link  

GUNS 'N' BUTTER   Here's a new blog featuring laughs from the vast right wing conspiracy. Check out a few of their headlines:

U.N. airlifts food to starving French fashion models

Mexico to build 700-mile-long ladder

Scientists: Al Gore primary cause of global warming

Posted by Donald L. Luskin at 12:08 AM | link  

Wednesday, October 04, 2006

WORST JOB IN THE WORLD   Which circle of Hell would this be, exactly? For one's sins, one spends eternity as a Democratic spokesman with the duty of finding a rationale for why everything is terrible:
According to one Democratic operative, the Dow's record close is "not an achievement but a failure." Robert Weiner, a Democratic strategist and former member of the Clinton administration, said people should remember it's taken nearly seven years for the Dow to break its previous record close, which happened on Jan. 14, 2000 - near the end of Bill Clinton's presidency... He said Tuesday's stock market milestone is "at best a modest achievement and in reality a sad statement of a slow return to prosperity, delayed and not assisted by current Administration economic policies."
Thanks to reader Keith Mitchell for the link.

Posted by Donald L. Luskin at 9:06 AM | link  

STUDY-BIAS IN STUDY OF BIAS   An academic paper on the possible political effect of Fox News:
They find that the introduction of Fox News had a small but statistically significant effect on the vote share in Presidential elections between 1996 and 2000. Republicans gained an estimate of between 0.4 and 0.7 percentage points in the towns that broadcast Fox News. They also find that Fox News had a significant effect on Senate vote share and on voter turnout. Their estimates imply that Fox News convinced 3 to 8 percent of its viewers to vote Republican according to a first audience measure, and 11 to 28 percent according to a second, more restrictive audience measure.

The authors also analyzed whether Fox News affected voting in those races where it did not cover the candidates directly, as was the case in most Senate races. In that way, they are able to estimate whether the influence of Fox News is candidate-specific or whether it extends to general political beliefs. The researchers find that Fox News significantly increased the Republican vote share for Senate, by 0.8 percentage points. Additionally, the effect was not larger for the one Senatorial race that Fox News did cover heavily, the New York state race between Hillary Clinton and Rick Lazio. Fox News appears to have induced a generalized ideological shift.

I haven't seen any commentary about this paper anywhere, but I have no doubt that the Left will use it to try to prove that Fox is Right-biased. Fine -- but such a comment suggests, as this paper seems to, that Fox is uniquely biased. As the late entrant into the 24-hour cable news game, Fox suffers from being uniquely able to be studied by academics looking for marginal effects -- such studies, by their very nature, treating the status quo ante as a neutral backdrop. What if Fox had been first -- and what if television news had been generally Right-biased as, in fact, it was Left-biased -- and CNN the new entrant? Then no doubt we would see in the study's results an influence to the Left.

Thanks to Jameson Campaigne for the link.

Posted by Donald L. Luskin at 12:31 AM | link  

Tuesday, October 03, 2006

WRONG PROBLEM, WRONG SOLUTION   Economist Joseph Stiglitz writes for the New York Times this morning "How to Fix the Global Economy."  What's wrong with it in the first place? He really doesn't say much about the global economy -- his gripe is entirely with the United States. According to Stiglitz, "the United States borrows close to $3 billion a day." But that's a substantial exaggeration. According to the US Treasury, the US government's net borrowing for the month of August, 2006 was $64 billion, or just about $2 billion a day (see page 20). You think even $2 billion is a big number? Maybe. But why didn't Stiglitz think it was big enough to cite it accurately? How are we to trust anything Stiglitz subsequently says when the first paragraph of his column gets a critical figure like that wrong by a factor of 50%?

And you don't even need to read the column to know his prescription. It's utterly predictable: "...expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans." Oh, yeah. That will help. Force rich people to sell their Treasury bonds so that those Treasury bonds can be redeemed, confiscate the proceeds, and give it to poor people so they can buy more potato chips at Wal-Mart.

Posted by Donald L. Luskin at 8:41 AM | link  

THE FOUNTAINHEAD ON TV   The 1949 film of Ayn Rand's great novel of individualism, The Fountainhead, will be shown on the Turner Classic Movies channel tomorrow. It's a campy classic, whose campiness actually serves to underscore the romantic power of Rand's theme. Economists and investors will love the scene where the villain, Ellsworth Toohey, sneers into the camera this immortal line: "I play the stock market of the spirit -- and I sell short!"

Don't miss tomorrow's broadcast. Turner always shows very fine prints, and runs them without commercial interruption. Also, for the first time, The Fountainhead is scheduled to be released on DVD on November 7. You can pre-order it from by clicking this link.

Thanks to our correspondent "Irrational Exuberance" for the heads-up.

Update... And then, there's this great movie line.

Posted by Donald L. Luskin at 7:56 AM | link  

Monday, October 02, 2006

CLOSE CALL IN THE SENATE   The Club for Growth has put together a "Senate Control Index," based on aggregating data on the Tradesports futures contracts on all the individual Senate races. At last posting, the Club is estimating that the GOP will lose 3 seats (and that the Democrats will gain those 3 seats). I've done the same exercise with slightly different methodology, and come up with slightly different results. I show the GOP losing 4 seats and the Dems losing 3, for a net GOP loss of 1. But that's too optimistic, because one of those Dem losses is Joe Lieberman, and another is Jim Jeffords -- two races in which a Dem loss is not a GOP gain. On the other hand, you could argue that the GOP loss of Chafee isn't really a loss -- true in terms of voting, but not true in terms of the margin of control which determines committee chairmanships. This is going to be close.

Posted by Donald L. Luskin at 2:09 PM | link  


Reader Mark Spahn points us to this book review on the Gene Expression blog of Moral sentiments and Material Interests, edited by Herbert Gintis, Samuel Bowles, Robert Boyd, and Ernst Fehr.

The book's starting point is an empirical look at the actual economic behavior of individuals, in order to see whether it matches the rational-self-interest assumed by economic theory. It is found that it doesn't, and the actual behavior observed is next interpreted in terms of evolutionary psychology. Finally, the political and social significance of these new observations is sketched.

...The authors define three mechanisms leading to altruism and social cohesion: strong reciprocity, conformity, and "costly signaling". These are made possible by innate dispositions evolved in two steps -- simple reciprocity first at the early primate small group level, and the more complex behaviors next at the early human. Altogether they make possible genetic selection for altruism, via net fertility advantages for all members of organized social groups (not simply biological groups or kinship groups) which are successful because their members behave altruistically. Biological competition within the group is suppressed by non-innate social and cultural mechanisms, giving an advantage to members of the group on the average, but not to every individual. This way, with gene-culture coevolution and mutualism, there can be genetic selection for a degree of innate altruism in a way that there could not be without culture and society, which form a kind of artificial environment.

"Strong reciprocity" is what replaces "rational self-interest". It consists of the weak reciprocity described by Axelrod (initial cooperation, continued until the partner defects) plus an additional altruistic propensity to punish defectors even if there's no personal advantage in doing so. In a society of strong reciprocators (altruists both in giving and in punishment), defectors do not have an advantage, whereas in a society of non-punishing altruists, the defectors have an advantage which causes the defector gene to drive out the altruist gene.

Two other behaviors are mentioned. "Conformity" is a weaker principle explaining social uniformity in the absence of the threat of punishment, and mostly applies to cases in which there is no clearly-perceptible advantage or disadvantage for the individual, so he just does what everyone else does. "Costly signaling" only appears in one chapter, which uses the biological concept to explain generosity of the potlatch / largesse / big man type. To me these are less immediately interesting than strong reciprocity, though "costly signaling" is a step on the way toward defining a more complex heirarchal society extending beyond the face-to-face level.

A significant advantage of this book is that it describes a social world which, like the world observed and described by historians, has "multiple equilibria and tipping points" and is thus less stable and less predictable than the imaginary world of equilibrium economics.

Readers of my blog know that I have no sympathy for the simplistic ways that economists apply the apparent axioms of economics to complex real-world problems. Yet I find the fundamental assumption of "rational self interest" nevertheless a completely compelling axiom. We can argue about what is meant by "self" -- is it an individual, a family, a social collective, a gene? -- but regardless, assuming self interest somehow defined is a practical necessity: somehow, we have survived and prospered, so whatever it is we have been doing all these years must be rational self interest.

I fear that many who attack the science of economics for its embedded exaltation of "selfishness" are really engaging in culture warfare, not science. They start with the ethical commandment that individual's interests should be sacrificed to some greater good, and seek to undermine any purported science that seems to achieve reasonable explanatory and predictive power by assuming selfishness. If the nature of selfishness is more complicated that economics typically assumes, if it is indeed tied up in considerations of family, friends, nation, species -- whatever -- then let the science of economics try to adopt itself to those complexities. But those complexities merely redefine and broaden the meaning of selfishness, they do not overturn it. They do not even begin to justify systematic self-sacrifice or coerced altruism. Nor do they lead to scientific rationales for why particular collectivist policies touted in the name of the greater good are either moral or effective.

Update... Economist John Seater opines,

Beautifully expressed. I couldn't agree more. I agree with your skepticism (stated in the first paragraph) of many attempts to explain complex phenomena with current underdeveloped economic theories. Economists know about the limitations of existing theories and always are looking for ways to improve the theories. That's what economic research is all about. In the meantime, they try to use what they've got. For some applications, it works; for others, it doesn't.

Posted by Donald L. Luskin at 1:58 PM | link  

Sunday, October 01, 2006

REAGAN: THE BEST!   Reader Jameson Campaigne sends along the links to the speeches that Ronald Reagan gave every year to the American Conservative Union. As Jameson says, "These are wonderful and fun. Save, dip into every now and then, pass on." Will do. Here are the links:

I started at the top, with 1988. I was stunned by this passage, revealing that Democratic spin doctors back then were pulling the same tricks they pull today, to downplay the economic success of a GOP-led prosperity:

...some people—and I'm not mentioning any names because I don't want to build up any candidacies before New Hampshire but you know who they are-have actually taken it upon themselves to prove to the American people that they've been worse off under this administration than they were back in the Carter years of the '70s.

Now I agree with you, this takes some doing. How do they manage it? Well, you see, any statistical comparison of the two recent administrations would start with 1977 to 1981 as the budget years of the last administration, and 1981 to 1987 as the pertinent years for this one. Now, that sounds reasonable enough. But our opponents have a new approach, one that would have embarrassed even the emperor's tailors. They take the years 1977, to up to 1983—and then they stop. So you see, not only do 1984 and 1985 not get counted in their database, but they include in this administration's economic record four years of the last Democratic administration. As columnist Warren Brookes pointed out in an article published in the Washington Times, "All of the foreshortened Reagan gains are nullified by the Carter losses, so they look like no gains at all, or, worse, losses." Our successes, in short, are buried under the last administration's failures.

But the truth is otherwise. Because under the last administration real per capita disposable income rose at only one percent annual rate, only half the two percent rate of increase under this administrations gain that has totaled 12.4 percent in six years. Under the last administration, median family income declined 6.8 percent while under this administration it went up 9.1 percent. Or take the real after-tax labor income per hour, If you use the approach adopted by our liberal critics, you see a 4. 5 percent decline. But the truth is that that figure fell 8.5 percent under the last administration and we turned this around and accounted for an 8.9 percent increase.

Under the last administration, the average weekly wage went down an incredible 10 percent in real terms, which accounted for the worst drop in postwar history. Here again, we've stopped the decline. And that's not to mention what all this has meant in terms of opportunity for women, for blacks, and minorities, the very groups our opponents say they most want to help.

Well, since the recovery began, 70 percent of the new jobs have been translated into opportunities for women; and black and other minority employment has risen twice as fast as all other groups. Minority family income has also increased at a rate over 40 percent faster than other groups. In addition, since 1983, 2.9 million people have climbed out of poverty, and the poverty rate has declined at the fastest rate in more than 10 years.

So, think for a moment on what these statistics mean and the kind of political nerve and desperation it takes to try to sell the American people on the idea that in the 1980s they never had it so bad. The truth is, we're in the 63rd month of this non-stop expansion. Real Gross National Product growth for 1987 was 3.8 percent, defying the pessimists and even exceeding our own forecast—which was criticized as being too rosy at the time—by more than one half percent. Inflation is down from 13.5 per cent in 1980 to only around 4 percent or less this year. And there's over 15 million new jobs.

So, believe me, I welcome this approach by the opposition. And I promise you, every time they use it, I'll just tell the story of a friend of mine who was asked to a costume ball a short time ago -- he slapped some egg on his face and went as a liberal economist.

Reagan was the best. Command of the facts. Genuine wit. And a sense of personal warmth that showed through even when he was savaging his opponents.

Posted by Donald L. Luskin at 12:20 AM | link