Mitt Romney Just Helped Create 52,000 Jobs

by Kevin D. Williamson

I’d never heard the name Max Kohl until a few hours ago. But I like the guy.

Kohl’s, the department store he founded, is looking to hire some 52,000 or so people in the coming months — good news for job-seekers across the country. The downside is that these are seasonal jobs for the holidays, but the more interesting fact is that the number of seasonal employees the store is seeking is up 10 percent over last year, a very good indicator of the firm’s expectations for the all-important holiday retailing season, and a good indicator in general.

But expanding operations is not easy. It requires, in a word, capital. Lots of it. Tons of it. Where did Kohl’s get the capital to do this? As it turns out, Mitt Romney had something to do with it.

Kohl’s is a typical American success story: Max Kohl, a Jew born in Poland in 1901, decides that there’s a richer future for him in the United States than in Poland. He ends up in Milwaukee. He starts a grocery store. He does this in 1929, incidentally — not the best year in American history to launch a new business. But he weathers the Depression, adds a store, then another, and by the 1960s he’s the owner of the state’s largest grocery-store chain, employing more than 5,000 people. He then does the same thing all over again with a chain of department stores. And if you’re building department stores, why not build the shopping centers they’re located in? So he does that, too, and pretty soon he has so much real estate that he has to start a real-estate company to keep up with things. On top of having more real estate than he can keep up with, he has more money than he can keep up with, so he gives wagon-trains of it to Brandeis University, the Jewish National Fund, and a bunch of local charities and religious groups. By the time of his death at 80 he had, like so many immigrants, made more of the opportunities afforded to Americans than most sons of the soil do. Well done, Max Kohl.

His businesses lived on. The department-store chain went through a couple of ownership changes, first being acquired by BATUS (a division of British American Tobacco), which ultimately decided that Kohl’s didn’t fit in well with the rest of its portfolio, namely such high-end properties as Saks Fifth Avenue. Kohl’s managers thought that they could do a better job with the chain than their smoky corporate overlords, and so they — irrationally optimistic capitalists that they were — bought the company, now comprising 40 stores, and took it private. The managers changed the merchandise mix and implemented forward-looking retail practices such as digital inventory management. Kohl’s wasn’t a market revolutionary like Walmart, but it was smart and careful, staking out turf between the low-end discounters and the higher-end department stores. Kohl’s prospered to such an extent that it caught the attention of a major investor, the Morgan Stanley Leveraged Equity Fund, which bought the company in 1988 with the intention of taking it public. Aggressive expansion ensued, and sales nearly trebled in the next four years, when the company went public. More innovative management practices were introduced, and an enormous distribution center was constructed. By 1999 there were 259 Kohl’s stores, and revenues were more than $4.5 billion. All this from Max Kohl’s little grocery and the villainous leveraged-buyout artists.

Around the turn of the century, Kohl’s ran into a little trouble, with declining sales and profit. Max Kohl said he attributed his success to selling good stuff and being nice to his customers. Kohl’s doesn’t put it that way, but that is essentially what they were failing to do at the time, making some bad decisions about inventory and allowing their stores, now in numbering in the hundreds, to fall into disarray. Investors were not happy. Heads rolled. Kohl’s recovered and began to grow again. Today it operates 1,100 stores and employs about 140,000 people, more than the population of Alexandria, Va., or Savannah, Ga. It makes a lot of money and wins praise for its environmental practices. That’s what happens when Max Kohl’s plan to run a better grocery store collides with the free market, including the critically important capital market.

The list of the firm’s top shareholders is heavy with big hitters: T. Rowe Price, State Street, Vanguard, BlackRock, Morgan. And a bit down the list you’ll find Brookside Capital, a hedge-fund operator and subsidiary of Romney’s firm, Bain Capital, which as of June had a position of about $100 million in Kohl’s, up significantly from the March reporting period. Because Kohl’s is now a $12 billion firm, Brookside is not a particularly big investor, and Kohl’s isn’t an especially big part of Brookside’s portfolio, which is heavy on Apple, DirecTV, Anheuser-Busch, El Paso Corp., Google, Kinder Morgan, and less cutting-edge firms, such as Macy’s.

Forget every stupid thing you’ve ever heard a politician say about “job creation” — this is what it really looks like. Entrepreneurs have ideas, management teams seek incremental improvements, and investors invest. Sometimes it works out, sometimes it doesn’t. There’s nothing dramatic about it, no great speeches, no grand plan to create 140,000 jobs at a single firm. It just happens. Sometimes a company makes a big bet on a promising firm, like Bain with Staples or Morgan with Kohl’s. Sometimes it is a quiet, conservative bet, like Brookside with Kohl’s. Both are necessary in the marketplace, and that is where the money comes from to make a couple of stores into a national retail powerhouse that sometimes needs an extra 52,000 employees to see it through the busy season. Maybe a part-time job at Kohl’s is not what you’re looking for, but those jobs at Apple and Kinder Morgan are a result of the same process. They sure as hell aren’t the result of politics. In the world of politics, one guy — the president — has an outsized role in everything. In the real world, lots of people play lots of small roles in making big things happen. 

That Mitt Romney has allowed himself to be put on the defensive over his role in this business says something about him, but it says more about the American electorate. Barack Obama gives speeches about job creation. But this is how it’s done. Obama’s demonization of investors and Romney’s unwillingness to offer a compelling defense suggests that both sides are betting that the American people are too stupid to understand what makes their economy work.

Another Fine Moment in Republican Statesmanship

by Kevin D. Williamson


Those of you who have criticized me for being soft on taxes may have a point: Back home, I’m something of a liberal:

A Lubbock County, Texas, judge, the panhandle county’s chief administrator, is asking for a tax increase to hire deputies for the inevitable civil war he believes would follow President Obama’s re-election.

The way he puts it, Judge 
Tom Head wants to prepare for the “worst”, which to him means “civil unrest, civil disobedience” and possible “civil war”, according to a report from Fox 34 Lubbock.

Judge Tom Head and Commissioner 
Mark Heinrich told the station this week that a 1.7 cent tax increase for the next fiscal year was necessary to prepare for many contingencies, including Obama’s re-election. He also mentioned to the station that the county needs a pay increase is needed for the district attorney’s office and more funds to pay for more sheriff’s office deputies.

He’s going to try to hand over the sovereignty of the United States to the (United Nations), and what is going to happen when that happens?” Head asked the station during a Monday interview. “I’m thinking the worst. Civil unrest, civil disobedience, civil war maybe. And we’re not just talking a few riots here and demonstrations, we’re talking Lexington, Concord, take up arms and get rid of the guy.”

Wrote a local columnist: “His words border on sedition, the incitement of discontent or rebellion against a government.” That’s the good part, of course — but an unnecessary tax increase? The budget’s already balanced.

Milton Friedman: An Economics of Love

by Kevin D. Williamson

When the Stranger says: ‘What is the meaning of this city?
Do you huddle close together because you love each other?’
What will you answer? ‘We all dwell together
To make money from each other’? or ‘This is a community’?
And the Stranger will depart and return to the desert.
O my soul, be prepared for the coming of the Stranger,
Be prepared for him who knows how to ask questions.

—T. S. Eliot, Choruses from ‘The Rock’

Today marks the 100th anniversary of the birth of Milton Friedman, whom I never met but have always regarded as one of my favorite teachers. William F. Buckley was the reason I wanted to become a writer, but it wasn’t until discovering Milton Friedman that I really understood what it was I wanted to write about.

If those of you from outside of Texas need another reason to envy the Lone Star State, wrap your head around this fact: When I was at Lubbock High School, economics was a required course, and Milton Friedman’s Free to Choose was required reading in that course. This meant that I spent my teen-age years among friends and classmates among whom there was practically none who had not read Milton Friedman. Some were moved by Free to Choose, some merely digested it for examination purposes, and some hotly rejected it, but everybody knew it, at least superficially. That was really something. T. S. Eliot once remarked that he thought his students at Harvard might have been better off if they had read fewer books but had read the same books, and there is much to recommend that belief. Education is a conversation.

I had learned many things before encountering Free to Choose, but the work of Milton Friedman was the first thing I learned that seemed to matter. I had been a good student, and schoolwork had been for me simply a theater for performance: I was good at most subjects, but none of them seemed important to me. I gravitated toward literature not because it seemed to me (dread word) “relevant,” but because reading books and writing about them was pleasurable. I was going to be reading books and writing, anyway. But Friedman was something different — my first real memorable contact with organized political thinking. Everything of course seems intense and unprecedented in adolescence — because everything is new — and there is something of the quality of romance to a first intellectual love. For me it was Walt Whitman and Milton Friedman, my church and state. I thank the heavens that my literature curriculum hadn’t included Ayn Rand and that my economics teacher didn’t assign us John Kenneth Galbraith. (And surely you know the joke: All great economists are tall, with two exceptions: Milton Friedman and John Kenneth Galbraith.)

The libertarianism of Rand (and she hated the word “libertarian”) was based on an economics of resentment of the “moochers” and “loafers,” the sort of thing that leads one to call a book The Virtue of Selfishness. Friedman’s libertarianism was based on an economics of love: for real human beings leading real human lives with real human needs and real human challenges. He loved freedom not only because it allowed IBM to pursue maximum profit but because it allowed for human flourishing at all levels. Economic growth is important to everybody, but it is most important to the poor. While Friedman’s contributions to academic economics are well appreciated and his opposition to government shenanigans is celebrated, what is seldom remarked upon is that the constant and eternal theme of his popular work was helping the poor and the marginalized. Friedman cared about the minimum wage not only because it distorted labor markets but because of the effect it has on low-skill workers: permanent unemployment. He called the black unemployment rate a “disgrace and a scandal,” and the unemployment statute the “most anti-black law” on the books with good reason. He talked about two “machines”: “There has never been a more effective machine for the elimination of poverty than the free-enterprise system and a free market.” “We have constructed a governmental welfare scheme which has been a machine for producing poor people. . . . I’m not blaming the people. It’s our fault for constructing so perverse and so ill-shaped a monster.”

I knew what he was talking about, because I had seen the monster up close. Not too many years before encountering Friedman, I’d found myself in the odd position of having to talk my mother out of signing our family up for food stamps. (Yeah, I was precisely that kind of ten-year-old.) I do not recall what arguments I made, but I am sure that my motive was impeccably childish: the avoidance of stigma. My mother relented, and that particular rough patch was passed over, in no small part with the help of a month’s worth of groceries that mysteriously appeared on our doorstep one evening. Some time later, we were able to buy a larger house (things had become pretty crowded at home) from a neighbor who was retiring to his vacation home. My mother would not have qualified for a mortgage, and the deal was done by means of a contract drawn up at the kitchen table. Having the old house as a rental property made an enormous difference in our family prospects, and suddenly my mother was in her small way a small-business owner. Those things don’t happen in societies in which everybody is poor and desperate, but in societies in which people generally have enough and expect to have even more in the future. Being a rich society is, as Milton Friedman knew, a choice, and being a rich society leaves you free to choose lots of things, like helping out your neighbors. Americans are not the sort of people who are going to let their neighbors starve in the streets — not then, not now.

Free to Choose gave me the intellectual framework to understand what I already intuited about the welfare state, about the man from the government who says he is here to help. And that is what really should be remembered about Milton Friedman: He didn’t argue for capitalism in order to make the world safe for the Fortune 500, but to open up a world of possibilities for those who are most in need of them. The real subject of economics isn’t supply and demand, but people, and to love liberty is to love people and all that is best in them. And it is something that can only be done when we are free to choose.

The China-Hating Season Is Upon Us

by Kevin D. Williamson

It must be an election year: Washington has noticed that the brutes in Beijing still aren’t reading their Bastiat, and a World Trade Organization complaint is in the works. I do not think that the Obama administration, even if it knew what to do, would be willing to do what it takes to radically improve U.S. economic competitiveness vis-à-vis China, since he was carried to Washington upon a great swell of votes from the less productive corners of the fruited plain, but it’s nice to have inscrutable foreigners to blame. Really, what would Washington do without the Chinese?

On the one hand, it is good that the United States and China are members of a free(ish)-trade convention, giving them a forum at the WTO for resolving differences. WTO rules are arcane and convoluted, but the organization enjoys reasonable credibility in settling disputes that arise under its purview. As China becomes a more mature and normal country, it is important that it learn to comply with the obligations into which it has freely entered. (Not that the people of China can be said to have “freely entered” into anything, but you know what I mean.) U.S. China hawkery does tend to ebb and flow with election cycles, one cannot help but notice.

So, free trade would be a good thing, and free(ish) trade under the WTO is probably a second-best outcome preferable to other politically available options. So, rah-rah for us.

Sort of.

I cannot help but notice that our own customs regime is an embarrassment. (“Not as bad as in China!” isn’t exactly a ringing endorsement of public policy.) For example: We charge a relatively straightforward protectionist duty on imported passenger cars and special-purpose vehicles, depending on various features (interior capacity, size of engine, number of engine cylinders, etc.), but then, of course, we mess with it. Some car parts get attached post-import, so Mercedes-Benz is required to do a separate parts-duty calculation for the aluminum roof racks that are permanently affixed to M-class sport-utility vehicles. (Read all about it here.) Never mind the 2.5 percent duty — consider the trade consequences of the fact that Mercedes-Benz has to go to the federal government for an official ruling about its roof-racks before it can do business. It’s not just the cost of the tariff per se, but the cost of compliance, too — Mercedes sells five different classes of SUVs and crossovers in the United States, with multiple models in most classes.

So, Mercedes-Benz gets hassled, but sometimes imported parts get preferential customs treatment. If you’re Nissan Forklift, you get to participate in the foreign-trade zone program that allows for delayed or reduced duties on imported parts — provided, of course, you are doing your business in the home district of a sufficiently powerful member of Congress. American mercantilism is a lot like Chinese mercantilism, but less patriotic. It’s the makework fallacy as national policy.

Lest you think that there is anything other than straightforward protectionism going on, take the program administrators at their own word:

This event was notable in that it opens the door for a new industry sector to lower its Customs-related costs through the Foreign-Trade Zones Program. How does this event benefit the the Marengo area? “By utilizing the FTZ program to level the playing field with its overseas competitors, Nissan Forklift can be more competitive. This results in job retention, and capital investment; and both of these lead to increased economic activity in Marengo as well as providing much needed support to the U.S. manufacturing base,” says Craig Pool, President of the Foreign-Trade Zone Corporation. 

Clear enough? U.S. trade policy provides publicly funded benefits for rent-seeking business interests and acts as a tax on U.S. consumers of foreign goods and many domestic goods containing foreign components. There is little or no evidence that it accomplishes anything that makes the U.S. economy more productive, or that it improves wages or employment. But it is a good way for congressman to send goodies back to the district.

And it is not as though the United States is totally shut out of the Chinese market: It’s worth noting that the best-selling passenger vehicle in China is a Buick — weirdly enough, a Buick is a status symbol in China. Consumer preference still matters, and in many sectors in which the Chinese economy is relatively open to imports, the United States is outperformed by other countries.

So, sure, make China play by the WTO rules — but don’t expect to get too much out of it.

Why I Am Not Too Worried about Obamacare

by Kevin D. Williamson

While I had been hoping for an assist from the Supreme Court, my opinion about Obamacare today is the same as on the day it was passed: Don’t sweat it. We are going to see the law replaced with something more sensible, and we are going to get major entitlement reform in the deal to boot. That is going to happen regardless of who wins in November, or the Novembers after that.

If Obamacare were left in place (and even if we set aside our well-grounded suspicions about its real fiscal impact) and the other major entitlements remained unreformed, federal spending on these programs would in a few short decades hit 19 percent of GDP, meaning that we would be spending each year on a handful of entitlement programs about what the federal government spent in total in the average year in the decade leading up to President Obama’s election. Since we will presumably still have an army, the FBI, federal courts, etc., and since much of the rest of the federal budget is still going to be there, it seems to me unlikely that this spending will in fact be possible. CBO estimates of federal spending in 2050 run to 30 or 40 percent of GDP, with debt levels exceeding 200 percent of GDP. It seems to me implausible that the federal government is going to be able to sustain spending levels that are double the recent norm, especially considering that the rising ratio of debt to GDP is going to make deficit financing more difficult and expensive, forcing Congress to rely more heavily upon taxes.

We aren’t going to spend X trillion dollars on Obamacare, because we do not have X trillion dollars to spend. The trick is for voters to get that through Washington’s thick skull before the bond market does.

The Court may not have been on our side today, but the math still is.

Real-Estate Roulette

by Kevin D. Williamson

Foreclosures are down year-over-year but spiked sharply in May — up 9 percent. Both home sales and prices have recovered a bit recently, both up about 10 percent year-over-year. What seems to be happening is that a great number of foreclosures that were delayed in the past year are now getting under way as lenders begin to figure out how to prove that they own mortgages in default, having fecklessly failed to do so previously.

As usual, politics is making things worse, extending the problem rather than mitigating it. Nevada’s anti-foreclosure law, for instance, which increases documentation requirements, seems to be effective mainly in lengthening the foreclosure process, rather than in keeping people in their homes. (Though there is no excusing the mortgage industry’s shockingly shoddy documentation process.)

More houses going into foreclosure will put downward pressure on prices, because banks don’t like to be homeowners, and consequently dump properties ASAP. Bank-owned homes sell for a third less than other houses.

The underlying problem, as ever, is negative equity — which is increasing, in spite of all of the political attention focused on the problem. This has had some perverse consequences. A great deal of those recent gains in house prices have occurred at the bottom end of the market, where there is the highest level of negative equity. Simply put, people with significant negative equity can’t really sell their houses, so the number of low-end houses on the market has decreased, driving up prices for the remaining inventory. But negative equity also correlates with mortgage default. So a significant rise in housing prices could draw a lot of new product onto the market, possibly reversing recent housing gains, while a significant economic downturn — say the result of a worldwide financial crisis resulting from the collapse of European financial institutions — could send a lot of borrowers into default and houses into foreclosure. And if current free-money mortgage-interest rates should start going up, sales and prices are sure to suffer. Short version: We’re still playing real-estate roulette.

Negative equity has some other less obvious economic consequences, too, such as inhibiting labor mobility. If you are anchored in California because you cannot afford to take a $30,000 hit selling your house, it is more difficult to take that job in Texas.

The Obama administration’s response to the housing meltdown is widely held to have been a comprehensive failure (when you’ve lost Businessweek . . .), but then there was no ingenious idea from Washington that was ever going to have changed the fundamental problem: Lots of people bought houses they couldn’t afford, and lots of people irresponsibly lent them money to do so, in part as the result of a wildly popular bipartisan consensus that government should encourage people to buy houses. Remember that the next time some guy seeking elected office tells you he is going to fix the economy by legislating away economic facts.  

Detroit: The Moral of the Story

by Kevin D. Williamson

The Left’s answer to the deficit: raise taxes to protect spending. The Left’s answer to the weak economy: raise taxes to enable new spending. The Left’s answer to the looming sovereign-debt crisis: raise taxes to pay off old spending. For the Left, every deficit is a revenue-side problem, not a spending-side problem, and the solution to every economic problem is more spending, necessitating more taxes. The problem with that way of looking at things is called Detroit, which looks to be running out of money in about one week. Detroit is what liberalism’s end-game looks like.

And Detroit does in fact have a revenue problem, as I argued in the May 14 National Review (“Let Detroit Fail”): “Revenues declined by more than $100 million between 2007 and 2011. Income-tax revenue dropped by 18 percent, utility-tax revenue by 17 percent, property-tax revenue by 2.3 percent. Seeking a quick fix to its revenue problems, Detroit chartered several casino-gambling operations, only to see taxes from them begin to decline (by 1.5 percent last year) after a period of early growth. Detroit, once the wealthiest city in the United States by per capita income, is today the second-poorest major U.S. city.”

Detroit is evidence for the fact that the economic limitations on tax increases sometimes kick in before the political limitations do. The relationship between tax rates, tax revenue, economic incentives, growth, and investment is complex, to say the least, and deeply dependent on the historical and economic facts of particular places at particular times. We have theories of growth, but no blueprint. But Detroit was not reduced to its present wretched circumstances by historical inevitabilities or the impersonal tides of economics. It did not have to end this way, but it did, and understanding why it did is essential if we are to avoid repeating Detroit’s municipal tragedy on a national scale.

One lesson to learn from Detroit is that investing unions with coercive powers does not ensure future private-sector employment or the preservation of private-sector wages, despite liberal fairy tales to the contrary, nor do protectionist measures strengthen the long-term prospects of domestic firms competing in highly integrated global markets. We cannot legislate away comparative advantage or other facts of life. But the problem of unions’ coercing distortions in the private sector is at this point a relatively small one, given the decline of unionization outside of government. Organized labor being a fundamentally predatory enterprise, its attention has turned to the public sector, where there are fatter and more stable rents to be collected.

The second important lesson to be learned from Detroit is that there are hard limits on real tax increases, a fact that will be of more immediate significance in the national debate as our deficit and debt problems reach crisis stage. Even those of us who are relatively open to tax increases as a component of a long-term debt-reduction strategy must keep in mind that our current spending trend is putting us on an unsustainable course in which our outlays will far outpace our ability to collect taxes to pay for them, no matter where we set our theoretical tax rates. The IMF calculates that to maintain present spending trend the United States will have to nearly double (88 percent increase) all federal taxes to maintain theoretical solvency. Those tax increases are sure to have real-world effects on everything from investing to immigration. At some point, the statutory tax increases will not increase actual revenue.

Even the best tax regimes are cannibalistic: Every tax is an incentive for the taxpayer to relocate to a more friendly jurisdiction. But tax rates are not the only incentive: Google is not going to set up shop in Somalia. Healthy governments create conditions that make it worth paying the taxes — which is to say, governments are a lot like participants in any other competitive market (with some obvious and important exceptions). The benefits of being in Detroit used to be worth the costs, but in recent decades millions of people and thousands of enterprises large and small have decided that is no longer the case. It is not as though one cannot profitably manufacture automobiles in the United States — Toyota does — you just can’t do it very well in Detroit. No one with eyes in his head could honestly think that the services provided by the city of Detroit and the state of Michigan are worth the costs.

The third lesson is moral. Detroit’s institutions have long been marked by corruption, venality, and self-serving. Healthy societies have high levels of trust. Who trusts Detroit? This is not angels-dancing-on-the-head-of-a-pin stuff. People do not invest in firms, industries, cities, or countries they do not trust. Corruption makes people poor.

What is true of Detroit is true of the country. Our national public sector not only is bloated and parasitic, it is less effective, less responsible, and less honest than that of many other developed countries, including New Zealand, Canada, Australia, and Germany. I am not an unreserved admirer of Transparency International’s global corruption-perceptions index, but I believe that it is in broad outline accurate. Liberals are inclined to learn the wrong lessons from the relative success of countries such as Canada or New Zealand, concluding that what we need is a bigger welfare state, government-run health care, etc. (Conservatives, for our part, tend to overemphasize the role of comparatively low taxes and light regulation in the success of countries such as Singapore and Hong Kong. Those are important, but there are other equally important factors.) In reality, there is a great diversity of health-care arrangements and social-spending levels among the countries that have more effective institutions than ours, while many countries with the sorts of institutions liberals admire (take Italy, Spain, Greece, and Portugal for starters) are in crisis, in significant part because of plain corruption. What the more successful countries tend to have in common is a public sector that is less intent on looting the fisc.

Sure, Hong Kong and Singapore have lower levels of government spending (as a share of GDP) than does the United States. So do Switzerland and Australia. At 38.9 percent of GDP, our public-sector spending is indistinguishable from that of Canada (39.7 percent). It is not obvious that we have much to show for it. 

The city fathers of Detroit inherited one of the richest and most productive cities in the world, and they ruined it in a generation. The gentlemen in Washington have been entrusted with the richest and most productive nation in the history of the world, and the trendline does not look good. Those of us seeking to radically reduce the footprint of government must remind ourselves from time to time that our case is as much ethical as economic, that the ethical and the economic are indeed closely intertwined. 

Emotional Onanism

by Kevin D. Williamson

If I have learned anything over the past few years in my part-time employment as The New Criterion’s theater critic, it is that unless it is articulated with great skill and artistry, there is nothing so boring as a display of human emotion. Ideas, even mistaken ones, have a great potential to be interesting; sentiment less so. But of course you could learn as much reading the op-ed page of the New York Times or the comments section of any website publishing disputatious content.

I was put in mind of that fact reading two books recommended by left-leaning friends: The first was Paul Krugman’s End This Depression Now! (I am generally skeptical of policy books with exclamation points in their titles, and Professor Krugman’s book has fortified my skepticism.) The second was the late Tony Judt’s Ill Fares the Land. To the existing criticism of Professor Krugman’s policy preferences I have little to add except to reiterate my belief that while I can see the overall logic of Keynesian stimulus-spending arguments, I do not share the Keynesians’ belief that it does not matter what we spend that money on. To Professor Judt’s policy prescriptions I have nothing at all to add, inasmuch as his platform is almost entirely content-free, consisting in the main of an incontinent fondness for railroad stations. (I am not exaggerating — please do read the book if you doubt me.)

What struck me most about the two books, and about Professor Krugman’s recent journalism, is the constant exhortation to anger. End This Depression Now! begins and ends with such exhortation, and, writing in the New York Times, Professor Krugman is forever going on about the necessity of being “angry at the right people.” Among those people he believes it is right to be angry at are academic economists who do not share his views, and who therefore must be, in his analysis, acting out of bad faith in order to pursue ends that are “cruel and wasteful.” Professor Judt likewise fills his little book with demands that we be enraged at the alleged malefactors he identifies, and similar demands that we regard post offices and train stations with sucrotic sentimentality.

The problem with being enraged is that it prevents thinking, and causes one to write dumb things, e.g.:

For the alleged productivity surge never actually happened. In fact, overall business productivity in America grew faster in the postwar generation, an era in which banks were tightly regulated and private equity barely existed, than it has since our political system decided that greed was good.

What about international competition? We now think of America as a nation doomed to perpetual trade deficits, but it was not always thus. From the 1950s through the 1970s, we generally had more or less balanced trade, exporting about as much as we imported. The big trade deficits only started in the Reagan years, that is, during the era of runaway finance.

And what about that trickle-down? It never took place. There have been significant productivity gains these past three decades, although not on the scale that Wall Street’s self-serving legend would have you believe. 

So there is the obvious: Professor Krugman writes that the productivity surge “never actually happened,” and then a few sentences later concedes that there were “significant productivity gains,” but they didn’t work out the way he’d have liked. But the main problem with the paragraphs above is that they entirely ignore the uniqueness of the post-war economic situation. In short, it is easy to be a trade-balancing industrial powerhouse when a cataclysmic war has cleared the economic playing field of competitors. The economic conditions that prevailed from the late 1940s to the middle 1970s were not the result of ingenious industrial policy at home but the result of the destruction of the rest of the world’s economic infrastructure. Dead men make no widgets, and the factories and shipyards of Nagasaki weren’t doing a hell of a lot of business after getting nuked. Real incomes for American men 25 and over began to decline in 1973, not after the ascent of high finance in the 1980s. One minute’s thinking would reveal that the story is much more complicated than Professor Krugman suggests, but thinking is not on his agenda, at least so far as his New York Times work is concerned. And he is not alone in that: Have a look at William Cohan’s “Don’t let go of the anger” for further evidence.

Josef Joffe, writing in the New York Times, noted that Professor Judt’s book is “a cri de coeur – an outburst of rage and sorrow in equal parts,” but then added the critical qualifier that “unless the reader belongs to the choir to which Tony Judt preaches — call it the Europhile liberal left, who would rather sell their Prius than forgo their New York Review of Books — he or she may ask: Where have we heard this before? A pugnacious reader might stab a felt pen at every other paragraph and scribble: ‘Caricature!’ or ‘What about . . . ?’” Which is correct. But Professor Judt’s book is not an invitation to think; it is an invitation to feel. Like Rachel Maddow, Professor Judt has very warm feelings about large-scale public-works projects such as the Hoover Dam, which, while indeed majestic, was obsolete before it ever came on line and generates about one-third the electricity of a typical nuclear power plant. Our aesthetic appreciation of such enterprises should not stop us from asking the relevant questions: Does it work? It is the best use of our scarce resources? I admire New Deal–era post offices and Paul Cret’s fascist architectural vibe as much as the next guy, but we should probably fire a great number of the people who work in those buildings, because they do not produce much of value.

I have written about the surfeit of emotion on the right from time to time, and it is, needless to say, no more useful or interesting than the perpetual emotional adolescence on the left. We have extraordinarily difficult problems in front of us. And we are not alone: I have just returned from Spain, where the unemployment rate among the young is 50 percent and where public finances are probably unsalvageable. (My report will appear in the next issue of National Review.) We need clear thinking and cold-eyed analysis, not wishful thinking or blinkered emotionalism. Getting righteously angry is an exercise in self-gratification, a fruitless indulgence.

Romney, Day 1

by Kevin D. Williamson

Mitt Romney has some big plans for Day 1. But where are the spending cuts? TBD, apparently.

Mr. Romney has promised a 5 percent cut in non-defense discretionary spending, which is to say: approximately squat. Non-defense discretionary spending runs around 15-17 percent of the budget. A 5 percent cut in that amounts to very little in terms of the big Fiscal Armageddon picture. We could cut non-defense discretionary spending to $0.00 and we’d still be running a big deficit. Not good enough.

We cannot turn around the fiscal picture (and consequently our long-term economic prospects) without cutting Social Security, Medicare and Medicaid, and defense. We do not have to cut them all in the same way or by the same amount, obviously, but to take any 20-percent slice of federal spending and declare it sacrosanct is the mark of fiscal unseriousness — and putting four such slices off limits (I’m including “other mandatory” and interest, which really is mandatory, as the fourth slice) is unseriousness times four.

Sure, that’s going to be hard to run on. But if there is such a thing as a Romney administration, there is still going to be a Congress. Maybe it will be a strongly Republican Congress. Maybe not. But it is not as though any of this gets easier after the election. I am increasingly of the opinion that if you won’t run on it you won’t do it.

Spending cuts on Day 1: Somebody put that on Mr. Romney’s Outlook calendar. 

Extremism Is Not the Problem; Bipartisanship Is

by Kevin D. Williamson

This weekend op-ed from AEI’s Norman Ornstein and Brookings’s Thomas Mann has drawn a great deal of criticism, much of it arguing that, contra the authors’ claims, Democrats are as ideological, as extreme, and as unbending as congressional Republicans, and are at least equally to blame for the current sorry state of affairs in Washington, if not more so.

That argument has a great deal of truth to it: It was Democrats, not Republicans, who ensured that the recommendations of President Obama’s bipartisan deficit-reduction panel were D.O.A. It is Democrats in the Senate, not Republicans, who have refused to pass a budget since FY 2009’s. It was Democrats, not Republicans, who turned the confirmation process into a pageant of bare-knuckles politics (consult Robert Bork about that). It is Democrats, not Republicans, who insist that any plan to balance the budget take more than half of all federal spending off the table. Etc.

But while the authors focus on the allegedly extreme partisanship in Washington, anybody who has been watching our national descent into insolvency must conclude that the problem has been too much bipartisanship, not too little. For more than a decade now, the operating model in Congress has been that Democrats more or less support Republicans’ tax cuts (though sometimes howling about it for the benefit of their base) while in return Republicans support Democrats’ spending (also howling about it). That is the substance of the national suicide pact that Congress has signed us up for.

Divided government can sometimes have good results, as it did during the Gingrich– Clinton years, but it can also have bad ones. When the government is divided, or when the majority party holds only a very small majority in one of the houses, there are very powerful incentives to accede to the least painful of the other side’s demands. Democrats have been energetic in condemning the “Bush tax cuts” and blaming them for the high deficits currently afflicting us, but they have made no serious effort to repeal the bulk of them, because the majority of the tax cuts went to households earning less than $200,000 a year. In fact, Democrats have touted the payroll-tax  deal as a key domestic achievement, as though talking Republicans into supporting an irresponsible tax cut were one of the labors of Hercules.

The sins on the Republican side of the ledger have been too thoroughly documented to require much revisiting here, but the spending chart from 2001–09 tells the story. As Vero reminds us:

During his eight years in office, President Bush spent almost twice as much as his predecessor, President Clinton. Adjusted for inflation, in eight years, President Clinton increased the federal budget by 11 percent. In eight years, President Bush increased it by a whopping 104 percent. 

Republicans had a lot of things they wanted to get done from 2001–09, and the easiest way to keep things moving was by talking a great deal about spending without actually doing much of anything about it. Likewise, if we judge them by their actions rather than by the speeches they make, Democrats are broadly content to go along with a great deal of the Republican agenda on taxes. I’m sure that if they thought they could get away with it Democrats would raise the top rate to 90 percent, but they know they can’t, and the ones who take the time to look at the numbers know that it is the bottom two-thirds of U.S. taxpayers who are unusually lightly taxed, not the top third. But there isn’t much juice in running against the interests of the middle class, which is why Mitt Romney has embraced President Obama’s magical $200,000 mark as the AGI above which many tax cuts will not apply.

Those who complain that there’s not a dime’s worth of difference between the parties are mistaken — there are a great many dimes’ worth of difference between Paul Ryan’s vision and Barack Obama’s — but the day-to-day reality suggests that there is a bipartisan modus vivendi in Congress, and it is killing us.

It is particularly galling that Ornstein and Mann cite the passage of No Child Left Behind as a worthy example of Democrats behaving in a bipartisan fashion. NCLB is not an especially good piece of legislation; bad legislation that has bipartisan support still is bad legislation. (Those of us who are skeptical of the wonders of bipartisanship might be forgiven for applying the hairy eyeball to anything that had the backing of both George W. Bush and Teddy Kennedy. I would not trust a Bush-Kennedy accord on pizza toppings.) Sometimes good ideas have bipartisan support, and sometimes bad ones do. We’ve seen more of the latter than the former in recent years, and Republican accommodation of Democratic priorities on entitlements, domestic spending, and tax-code shenanigans would have left the country worse off, not better off. By all means, the Republicans should embrace good ideas when Democrats offer them. You know who else should support good ideas offered by Democrats? Democrats. But as Erskine Bowles and Alice Rivlin know, when it comes to the budget the best and most responsible Democrat-backed initiatives are dead on arrival in Nancy Pelosi’s caucus.

The Economics of Ann Romney

by Kevin D. Williamson

Ann Romney, after a boorish attack from Democratic operative Hilary Rosen — who sneered that she “has actually never worked a day in her life” — responded in traditional family-first terms. Which is fine, but I wish she had responded in plain economic terms.

The Romneys are unusual in that they have five children and in that they are very wealthy. But like families with fewer children and less money, Mitt and Ann Romney as parents faced essentially two kinds of scarcity in their household: scarcity of economic resources and scarcity of parental time. (It is worth remembering that the word “economy” comes from the Greek word for household.) The Romneys solved that problem with a classic application of gains from trade and comparative advantage.

Mrs. Romney is by all accounts a very bright and ambitious woman, but there is not much in her educational background (Harvard B.A. from the extension program) or subsequent biography that suggests she was going to be well suited to a career like her husband’s. But let us assume, for the sake of argument, that she could have, had she so chosen, become a senior-level executive at a medium-to-large business enterprise — not CEO of ExxonMobil, but not making minimum wage, either. The typical salary range for chief financial officers at U.S. corporations runs from $61,786 to $265,882, according to, depending upon the size and complexity of the business and the particular industry. Let’s assume that Mrs. Romney would have earned top dollar, $265,882. Would it have been a good idea for her to go to work?

According to one estimate from a hostile party, Mr. Romney earned about $6,400 an hour at Bain Capital. The Romneys’ personal net worth is somewhere between $190 million and $250 million, but that understates things a bit: The Romneys set up a trust for their grandchildren worth an additional $100 million or so.

Assuming a 2,000-hour work year, Mrs. Romney as a higher-end CFO would have earned about $132.94 an hour, or about 2 percent of her husband’s hourly wage. A 40-year career at $265,882 would have given Mrs. Romney lifetime earnings equal to about 3.5 percent of the family’s net worth.

The Romneys, who are notably charitable people, have given away far more money than Mrs. Romney probably would have earned in a career that would be considered by most of us wildly successful and highly paid.

Conclusion: Ann Romney is economically a hell of a lot smarter than Hilary Rosen.

The marginal value of the wages earned in a typical C-level career would have been almost nothing to the Romneys. But there is that other scarce resource: parental time.

It is difficult to put a dollar value on parental time, but it is clear that to the Romneys one hour of Mrs. Romney’s time at home with the family was worth far more than one hour in C-level wages; further, a 2,000-hour annual block of time invested in earning C-level wages would have fundamentally changed the character of the Romney household for the worse, while providing negligible economic benefit. Instead, she provided the family with a critical good that Mr. Romney, for all his riches, could not acquire without her cooperation. If we think of the household as a household, Ann Romney’s decision to stay at home makes perfect economic sense: Her decision to be a full-time mother enormously improved the quality of life for Mr. Romney, for the couple’s five sons, and — let’s not overlook this critical factor — for Mrs. Romney herself.

Mrs. Romney’s personal investment model — marry a man who turns out to be wildly successful in business and politics, escape the tedium of what is sometimes described romantically as “a career,” have five children and the pleasure of raising them — is not open to everybody, of course: The supply of future centimillionaires is limited, and they are not easy to identify. But making intelligent decisions about forming a household and about the division of labor within that household is an option open to many of us, though unhappily not to all of us, given the state of the family.

Ms. Rosen’s remarks were criticized as being snide; the real problem is that they were stupid.

Obama Subsidizes Dirty Chinese Coal Power

by Kevin D. Williamson

The Obama administration has done something I would call odd, if odd weren’t the norm in this White House. The administration is worried about global warming. It also is worried about the American economy, particularly manufacturing, and international competition, particularly from China. The administration’s response, as you might expect, has been to enact new regulations that will increase greenhouse-gas emissions worldwide, cripple one U.S. industry and increase costs for practically all others, discourage domestic manufacturing, and subsidize manufacturing abroad, particularly in China. It takes a kind of perverted genius to do that much wrong in one move, as though the Marquis de Sade had been reincarnated as an economist advising the president.

I refer, of course, to new EPA regulations that will in effect ban the construction of new coal-fired power plants in the United States. And that is not all it will do: Power-plant operators have already said that they will be forced to shut down some 300 facilities producing a total of 42 gigawatts, or nearly 4 percent of the nation’s total generating capacity.

There are many laws that are not amendable by EPA fiat or by acts of Congress. Among them are the laws of China and the law of supply and demand. This inconvenient fact makes the administration’s move particularly bone-headed.

What happens is this: With new coal-fired plants off the table, future U.S. demand for coal is reduced. Lowered demand reduces the price. Demand for coal is still very strong in the rest of the world; India and China in particular are full of people who will want to consume more energy and energy-intensive goods as they continue to lift themselves out of poverty, and lower coal prices will encourage and enable them to do so. Energy-intensive industries, such as heavy manufacturing, also will benefit from cheaper coal, unless those businesses have the misfortune of being located in the United States, where they will be denied that benefit.

Reducing U.S. consumption of coal will not reduce world consumption of coal; it will shift consumption from the United States to other countries — including countries with electricity-generation infrastructure that is relatively old and unsophisticated compared to that of the United States. Coal will be redirected from relatively clean U.S. plants to relatively dirty Asian plants.

By way of illustration, here is a Chinese coal ship, demonstrating China’s famous environmental sensitivity by tearing a two-mile hole in the Great Barrier Reef and dumping fuel oil in it:

China, to be fair, is building a lot of greener, high-tech coal-fired plants. It’s also building a lot of old-fashioned ones. And the plants equipped with the green tech do not always use it, because it is expensive and cumbrous to do so.

If you are worried about global warming — and let’s just grant the entirety of the anthropogenic thesis for the sake of argument here — then what you have to worry about is not emissions from the United States but emissions from the globe, global warming being a notoriously global phenomenon.

Coal at its very best is environmentally problematic, to be sure. There are no pretty coal mines. But burning coal, like fracking for gas, presents environmental problems that are manageable, unless your idea of management is imposing arbitrary and counterproductive rules that achieve the opposite of everything you had hoped to achieve, in which case you might want to think about a career in politics.

The United States may be the first country in history to colonize itself, reducing the world’s most advanced and complex economy to a raw-materials supplier for sophisticated manufacturing economies abroad. Worse, we may not even be able to do that: One of the few U.S. firms that stand to benefit from increased Chinese coal consumption, SSA Marine, is having a terrible time trying to build a new West Coast coal terminal, called Gateway Pacific, to enable it to better serve our competitors abroad. Everybody from the EPA to the Whatcom County (really) municipal government is standing in the way of the project, and the main impetus behind the opposition is not local environmental concerns but ideological opposition to the world’s use of coal, period. Given the rarity of hearing something coherent from somebody affiliated with the Chamber of Commerce, it’s worth hearing at length from the chamber’s man in Whatcom:

These opponents wish to end the world’s use of coal and they intend to make a point by derailing the Gateway Pacific Terminal.

Stopping the terminal will not stop China from using coal; the world has plenty. It will only stop China from using our cleaner coal, which has less mercury, sulfur, and nitrogen oxides. Opponents say the coal China uses affects our air quality. So if they use our coal, our air will actually be cleaner.

Stopping this terminal will not even stop U.S. coal exports. The U.S. has at least 10 coal-export terminals and will export more. British Columbia has three coal-export terminals, and all are capable of expansion. If opponents succeed in stopping Gateway Pacific, the coal trains will continue to run right past us up to Canada, which will get the jobs and tax revenue.

Frankly, what we should be concentrating on is taking care of our local environment. The project is starting an exhaustive environmental review under the oversight of federal, state and local agencies. Let’s allow these agencies — and SSA Marine — to do their jobs instead of arbitrarily opposing something without all the facts.

As with opposition to fracking, most of the opposition to Gateway Pacific is really about opposition to the use of the commodity per se. It may be that the Obama administration is cowed by the malignant antihumanistic environmentalists who play an outsized role in Democratic affairs, particularly in campaign financing. It may be that the administration really believes its risible rhetoric about the so-called green-energy economy that’s always right around the corner (waiting for a federal handout). But a policy cannot be judged by the intentions of the men behind it; it must be judged by its actual results, which in this case means subsidizing dirty Chinese coal at the expense of the U.S. economy.

30-Second Fact Check on David Sirota

by Kevin D. Williamson

David Sirota writes:

In the apartment building the Times profiles, domiciles go for $7 million a year, including a 300-square-foot “en suite sky garage” that “would be valued at more than $800,000 if priced at the same rate per square foot as the rest of the apartment.” No doubt, the view from the garage is so good, the car’s owner can see the vast swaths of the city’s outer boroughs — the places where people are lucky to make $800,000 in their entire lifetimes.

This sounded fishy to me. It is: The apartments are for sale, not for rent, and the apartment in question is on sale for $7 million; it does not rent for $7 million a year.

Easy enough mistake to make (and Sirota corrected it after I pointed it out). But what about this? “No doubt, the view from the garage is so good, the car’s owner can see the vast swaths of the city’s outer boroughs — the places where people are lucky to make $800,000 in their entire lifetimes.”

The poorest borough in New York City is the Bronx, where the median household income is $34,264 a year, or $1.37 million over a 40-year working life. Given that they would have to be making a good deal less than the median Bronx income, you’d have to be unlucky to make only $800,000 in your lifetime. (About 44 percent of people living in the Bronx are either under 18 or over 65, so I’m using household income rather than per capita income.)

I lived in the South Bronx for a few years, and it is indeed poor. (My congressional district was the poorest in the United States.) But people in the Bronx would not be any wealthier if rock stars and movie stars (I’m told Mick Jagger and Nicole Kidman live in the building in question) had to park their Rolls-Royces  on the ground level. The two things are not related.


Even if you take the less representative measure of per capita money income, New Yorkers outside of Manhattan would have an average 40-year income of $975,760, meaning that an income of $800,000 would make them unlucky, not lucky.


Sirota writes that even at $7 million once rather than $7 million per annum, the apartment is still [expletive deleted] “nauseating.” But why?

The apartment in question is selling for five times the median in Manhattan. Sirota lives in Denver. Here is an apartment selling for five times the Denver median. Two bed, two bath — nauseating? And it doesn’t even have a Ferrari elevator! If anything, Mick Jagger et al. seem to be getting a relatively good deal. New 1 percent motto: Better with money than you are.

Drip, Drop, Drip, Drop

by Kevin D. Williamson

Pennsylvania’s capital city cannot pay its bills:


(Reuters) – Pennsylvania’s distressed capital city, Harrisburg, will skip $5.3 million of debt payments due next week, the first time the city has defaulted on its general obligation bonds, to ensure there is enough cash to fund vital services.

Pennsylvania’s capital of 50,000 people is mired in $326 million of debt due to the expensive retrofits and repairs of its troubled trash incinerator.

There is something poetic about a trash incinerator bringing down Harrisburg. If only they’d put more spending measures into it.

And in Rhode Island, the pension tsunami is rolling ashore:


The smallest city in the nation’s smallest state — Central Falls, Rhode Island — is bankrupt. The main reason is it can’t afford the pensions for its retired city workers. How the city is digging out of its financial hole may have consequences for city pensions in other cash-strapped towns across the country.

For years, city officials promised robust union contracts and pensions without raising revenue to pay for them. Last August, the math caught up with them. Central Falls was broke, its pension fund short $46 million. It declared bankruptcy.

I wonder how many states and municipalities will be insolvent on Election Day, 2012. Guesses?

Who Won the Payroll-Tax Fight?

by Kevin D. Williamson

Who has the power in Washington? Who won the payroll-tax battle? Not Republicans, not Democrats — government employees.

The new deal on the payroll-tax extension (which will do little or nothing to benefit the economy) was held up by a largely unrelated matter: requiring federal workers to contribute more toward the costs of their own pensions. (More, Congress? How does 100 percent strike you?) The original proposal would have required all federal workers to bear more of the costs of their own retirements, but Democrats representing Maryland, that tony little suburb of Leviathan, shrieked. The compromise instead will cover only new hires.

I’m still tickled that the Obama administration’s great political victory here is getting Republicans to agree to a stupid tax cut with no offsets — stupid tax cuts with no offsets being a Republican specialty — but the outcome is grim: The combination of stupid spending and stupid tax cuts is a potent one, and it may be an indicator of worse things to come. If we should revert to the Bush-Hastert-Pelosi model, in which Republicans and Democrats simply swap tax cuts and spending increases between themselves to keep the machinery moving, the consequences for our national debt will be, in a word, terrifying.

But as the ship takes on water, you can bet that federal workers will continue to loot the fisc until the last rapidly depreciating U.S. dollar has been spoken for.

A Non-Deal on Foreclosures

by Kevin D. Williamson

In Lyndon Johnson and the American Dream, Doris Kearns Goodwin (just Doris Kearns in NR’s copy of the book — we’re old-school) has one interesting observation about LBJ: He never got out of the legislative mind-set, and his measure of success when crafting his hallmark programs, from Medicare to the Civil Rights Act of 1964, was simply getting the bill passed. Never mind the contents of the program: Just get something signed into law. Tragically for LBJ, he didn’t have a Nancy Pelosi around to tell us that we had to pass Medicare so we could find out what’s in it.

I get the same feeling for President Obama’s new mortgage settlement: Never mind what it does, or whether it does any good, just get everybody’s signature on the deal.

Here’s what it does not do: It isn’t going to prevent a lot of foreclosures (and may in fact cause some), it isn’t going to assuage the terror in the mortgage markets, and it probably isn’t going to clean up the system that caused some number of homeowners to be foreclosed on without proper documentation.

Like the fiasco that was HAMP, this settlement will encourage homeowners to become delinquent on their loans: There’s $10 billion set aside for principal writedowns for delinquent homeowners, but paid-up borrowers only get $3 billion to encourage the refinancing of underwater mortgages. U.S. homeowners are upside-down to the tune of more than $750 billion, with more than a fifth of homeowners underwater. So, even if you think that the federal government ought to be in the business of trying to micromanage mortgage refis, this is four-tenths of 1 percent, assuming maximum utilization.

Also, those writedowns are going to cover (probably exclusively) mortgages that have been securitized. Guess who owns those? Fannie and Freddie have a pot of them, as well as pension funds, particularly large, government pension funds. So the banks are going to be taking a writedown: The taxpayers are going to be taking a writedown. (Though the markets probably have already discounted those securities by this point, so that point may be moot.)

And one of the biggest problems — the mortgage documentation system — goes largely unaddressed. Basically, the new rules say to fast-and-loose mortgage servicers: “Don’t do that again, and pay $1,500 to $2,000 to everybody you foreclosed on without proper documentation.” Given the complexity of assembling proper documentation and the legal costs involved, $2,000 per offense is a great bargain for the wrongdoers, practically an invitation to keep doing exactly the same thing. Everybody gets worked up about robo-signing, but robo-signing is not the root of the problem, only a symptom of it: The root of the problem is that the underlying system for keeping track of mortgage ownership in an age of securitization and mass default is entirely inadequate to the task. So far as I can tell, the new servicer rules basically say, “Document stuff the right way next time,” but don’t do much to spell out what that looks like and creates incentives not to comply. If the price of fraud is lower than the benefit to be derived from the fraud, then what is the disincentive to fraud?

None of this will stop President Obama from doing a little preening and bragging that he got the banks to cut homeowners a break, even though this deal costs the banks basically nothing and does basically nothing for homeowners.

I am not super-enthusiastic about most kinds of financial regulation, but the basic rule of law requires that you be able to legally document your right to foreclose on a house before you foreclose on it, and the current system does not provide that easily. We’d have been better off taking $27 billion to Google and asking them to design a proper document-management system.  

Armageddon at the Strip Mall

by Kevin D. Williamson

Remember 2007? Glory days, right? Everything was booming, and nothing was booming quite as much as real estate — especially commercial real estate. Malls, hotels, warehouses, industrial parks: Everything was being built, and everything was being financed on ridiculously generous terms. Remember interest-only loans? Good times.

But commercial real estate is different from residential in one important way: Your standard residential mortgage goes 20 to 30 years. Your standard commercial loan goes for five years, at the end of which you either make a big balloon payment (what it is that balloons remind me of?) or you refinance, the idea being that five years is long enough to get your project built or developed, to secure tenants and leases, get your cash flow flowing, etc. Five years: Seems like it was only yesterday. By my always-suspect English-major math, that means that a whole bunch of commercial mortgages written at that poisonous sweet spot when prices were highest but lending standards were lowest are coming due . . . oh, any minute now.

In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year. The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP. That’s going to be a little awkward: The value of U.S. commercial properties has declined by an average of 45.7 percent since their all-time high in 2007, according to Real Capital Analytics. Those 2007 vintage loans weren’t exactly bulletproof: Typical terms included a 20 percent down payment and a five-year payment schedule that required little more than interest payments. An $80 million mortgage on a $100 million property is not so bad, but an $80 million mortgage on what is now a $60 million property is a problem. More than half of the 2007-vintage loans are expected to have trouble refinancing, and maybe well more than half.

This is true even for borrowers who have never missed a payment. Banks are required to take into account a number of factors when rating commercial mortgages. One of the most important is the loan-to-value ratio, which has a lot of borrowers over a particularly uncomfortable barrel: They may have the cash to make their payments, and they may have the cash flow to continue making payments on a refinanced loan, but their properties still are worth less than their mortgages, so nobody wants to refinance. And those are the lucky ones: Just as those loans were mostly for five years, most commercial leases are for about the same length of time. With retail and office-space rentals down, lots of commercial borrowers are sitting on largely vacant properties that are not producing much in the way of cash flow. Among the more high-profile cases, the WTC 3 tower at the World Trade Center still has not located an anchor tenant, which could put the much of the project on ice. Thousands of strip malls across the fruited plains have empty storefronts, and thousands of office buildings have floor upon vacant floor.

Standard & Poor’s advises: “One-third of maturing loans are for office properties, for which five-year lease terms are fairly common — and if tenants don’t renew these leases, securing new, long-term lease commitments may be more difficult in the current environment. Those leases [were] signed in 2007, at peak rents will likely reset to lower levels as five-year leases roll.” S&P’s bottom line: “50%-60% of the 2007 vintage five-year-term loans maturing next year may fail to refinance, and retail loans are at the greatest risk.”

Translation: Armageddon at the strip mall.

And it’s not just a problem for New York City and other big, coastal cities. Richmond, Va., has it worse than Manhattan, Washington, or Los Angeles, according to the local Times-Dispatch, which reports that a dozen large commercial properties have gone into foreclosure recently and that 12 percent of the commercial properties in the Richmond-Norfolk market are “distressed.” In Bergen County, N.J., commercial foreclosures are up 7 percent this year over last year. In the first year of the recession, there were 373 foreclosure actions filed in Bergen County, while in 2011 there were 1,586. Commercial foreclosures are up 10 percent for the state as a whole.

In hard-hit Phoenix, about half of the commercial mortgages backing securities are at risk of default, and a couple of hundred, mostly strip malls and other retail, office buildings, and apartments, already are in default.

Taking a look at the commercial MBS (CMBS) market, Standard & Poor’s issued this advice: “Buckle Up.”

Trepp, a CMBS-analysis firm, in its most recent report (data as of October 2011) finds that the delinquency rate for multifamily-property mortgages is 16.73 percent; for hotels, 14.12 percent and rising; for offices, 8.95 percent and rising; for industrial properties, 11.59 percent and rising; and for retail, a steady 7.61 percent. Trepp managing director Matt Anderson does not sound like a ray of sunshine: “Overall, we do not expect 2012 to be a repeat of 2008, but there will be more disappointments than pleasant surprises in the New Year. The banking sector has not yet returned to ‘normal’ despite two years of earnings growth. With increased regulation and the temptation for banks to take additional risks in order to preserve margins, 2012 should be a very interesting year.”

Not as bad as 2008 — is there a better example of damning with faint praise?

Trepp gets to the real concern here, which is that these mortgages and mortgage-backed securities are sitting on the balance sheets of a bunch of still-wobbly banks. How wobbly? About 100 banks went under last year, and about 250 are expected to go under this year. Trepp finds that, of the banks that went toes-up in 2011, bad commercial real estate accounted for two-thirds of their failing loans.

This is a textbook case for the Austrian business-cycle theory: Artificially low interest rates and loose money produce overinvestment, by both bankers and builders, in a bubble — this time, offices, apartment buildings, and retail space — that can’t be sustained once the artificial stimulation comes to an end, as it must. In this case, that malinvestment has to be worked out at two levels: At the financial level, among the lenders and borrowers, but also at the physical level: There’s going to be a lot of dark storefronts out there, with serious long-term consequences for nearby neighbors and for local real-estate markets: Foreclosures will put more property onto the market, driving down rents and subsequently making existing loans less tenable as the cashflow of commercial properties is diminished. They called the Depression-era tent cities “Hoovervilles.” The next time you see a mile of half-abandoned strip malls, think “Obamaville.” 

Not as bad as 2008? Probably not — and let’s hope it is not even close. But there’s a $3 trillion commercial-mortgage market lurking out there, and a lot of CMBS investors — banks and insurance companies in particular — that Washington thinks are “too big to fail,” a problem we persistently refuse to address.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialismpublished by Regnery. You can buy an autographed copy through National Review Online here.

The Political Economy of Chuck Berry

by Kevin D. Williamson

1964: “It was a teenage wedding and the old folks wished ’em well / You could see that Pierre did truly love the mademoiselle.”
2012: New York Times: “Families Resigned as Young Americans Put Education, Careers on Hold.” — “The New Face of Poverty.” 

1964: “And now the young monsieur and madame have rung the chapel bell.”
2012: New York Times: “Economic Downturn Brings Backlash against Working Women.” Associated Press: “Child Brides, And Not Just in Afghanistan.”

1964: “C’est la vie say the old folks.”
2012: New York Times: “Elderly Americans in Desperate Need of Additional ESL Funding.”

1964: “It goes to show you never can tell.”
2012: New York Times: “For Elderly, a Time of Uncertainty.”

1964:  “They finished off an apartment with a two-room Roebuck sale.”
2012: New York Times: “With homeownership increasingly out of reach for young Americans, Pierre and his partner were forced to move into a sparsely furnished two-room rental.” — “The New Face of Poverty”

1964: “The Coolerator was jammed with TV dinners and ginger ale.”
2012: New York Times: “With food-stamp funding failing to keep up with soaring need, more young American families are resigned to a diet of cheap, frozen food and sugary soft-drinks. First lady Michelle Obama has declared her nutrition campaign ‘the moral equivalent of war.’” — “The New Face of Hunger.”

1964:  “And when Pierre found work, the little money coming worked out well.”
2012: New York Times: “Young Americans, still feeling the pinch of the Bush recession, are increasingly reliant upon low-wage jobs. ‘Little money is coming,’ says one marginally employed and wretched and basically destitute young man.” — “The New Face of Unemployment.”

1964: “C’est la vie say the old folks.”
2012: New York Times: “A Generation Later, Overlooked Immigrant Community Remains Largely Unassimilated.”

1964: “It goes to show you never can tell.”
2012: New York Times: “Elderly Americans Increasingly Insecure about Prospects.”

1964: “They had a hi-fi phono, boy did they let it blast / Seven hundred little records, all blues, rock, rhythm, and jazz / But when the sun went down, the rapid tempo of the music fell.”
2012: New York Times: “Though spending on consumer goods remained strong, the savings rate remains precariously low, especially among the young.” 

1964: “C’est la vie say the old folks / It goes to show you never can tell.”
2012: New York Times: “Among Elderly Non-English-Speakers, a Sense of Helplessness, Resignation.”

1964: “They bought a souped-up jitney / it was a cherry red ’53.”
2012: New York Times: “Americans Struggle to Keep Up with Car Payments.”

1964: “And drove it down to New Orleans to celebrate their anniversary.”
2012: New York Times: “With family vacations increasingly out of reach, young Americans make do with weekend road trips to nearby cities.” Associated Press: “For one young couple, the year brought a bittersweet anniversary.” — “Families Struggle in an Age of Reduced Expectations.”

1964: “It was there where Pierre was wedded to the lovely mademoiselle.”
2012: New York Times: “Gays Still Denied Marriage Rights in Much of South.”

1964: “C’est la vie say the old folks / It goes to show you never can tell.”
2012: New York Times: “For Struggling Elderly, Future of Social Security Remains Uncertain.” — “The Wrinkly Old Face of Poverty”

1964: “They had a teenage wedding and the old folks wished ’em well / You could see that Pierre did truly love the mademoiselle / And now the young monsieur and madam have rung the chapel bell  / C’est la vie say the old folks, it goes to show you never can tell.”
2012: New York Times: “Rural Americans Caught in a Cycle of Poverty.” — “Poverty: The Familiar Refrain”

What Not to Watch This Weekend

by Kevin D. Williamson

One of my other jobs is writing the theater column for The New Criterion, but I rarely get to write about movies. But, wow, lucky me, I finally get to share some cinematic observations. Having watched every minute of When Mitt Romney Came to Town, the Gingrich-affiliated super-PAC hit film about Mitt Romney’s career at Bain Capital — the things I do for you! — I have concluded that it promises to be a career-ender, and that the career it will end is Newt Gingrich’s. It is the most embarrassing, vulgar, illiterate outburst you are likely to find.

What should worry Mitt Romney is this: When it comes to filmmaking, the Democrats have a much deeper bench, better skills, and more effective distribution channels. When it comes time for Hope and Change Features to proudly present a Barack Obama production along the same lines, the Democrats will not make the same mistakes. If he wants to be president, Mitt Romney had better get a lot more persuasive than he is today when it comes to explaining his business career.

When Mitt Romney Came to Town employs every anti-capitalism cliché in the book: You want a guy blowing cigar smoke nefariously? You got it. Ominous fades to black-and-white? It’s in there. An attaché case full of $100 bills? Aplenty. (Because, as everybody knows, Wall Street tycoons do their business in old-fashioned paper Benjamins, and in fact derive all their professional practices from Wesley Snipes in New Jack City.) You want cheap xenophobia? Get a load of “He took foreign seed money from rich Latin Americans.” (Translation: “Eek! A Mexican!”) You want a sad-faced toddler watching the news (really, a four-year-old watching CNBC) while the talking heads go on sadly about the closure of KB Toys outlets? Yeah, they did that, and they superimposed a Red Chinese flag on one scene, too. Et cetera ad literal nauseam.

The sort of people who are going to be influenced by this illiterate little film weren’t going to be voting for Romney, anyway, since they’re busy occupying Portland or occupying Austin or occupying anything but an honest job. They’re Democrats or Ron Paul voters, if they are voters at all.

Spare a moment of sympathy — but not too much — for the laid-off workers exploited by the makers of When Mitt Romney Came to Town. They are hurt, angry people who are not terribly articulate, but who can be riled up to say banal and ignorant things for the purposes of cheap political theater. One woman, whom the filmmakers like so well they have her repeat the line three times, protests: “It hurt so bad to leave my home because of one man that’s got 15 homes.” But of course there are limits to sympathy (and this, among other things, is why I’ll never be president), and one is tempted to retort: “If you really think that the value of your labor is that high, how do you explain the fact that nobody else wants to hire you at the wage you were earning before your firm went out of business, and doesn’t that disparity suggest that the company was not especially well-run?”

I know, it’s hard to give that speech to Grandma. But the fact is that output is the production of an interaction between labor and capital and, as it turns out, those executives who are always saying “Our people are our most important asset!” often are not telling the truth. When capital gets put to more productive uses, the labor left behind discovers that its value without the capital that had been at its disposal is relatively low. That’s a hard fact to live with, but a fact nonetheless. If you want to improve the value of labor, you get it more capital to work with — and where might you go for that? The answer is: investors, including private-equity investors such as Mitt Romney. If you want to improve American employment and American wages, your main tools are going to be improving the American education system and improving the American investment climate.

On the other hand, if you view jobs as entitlements and believe that workers should be permanently protected from changes in the marketplace, you believe that profits from investing are nefarious, believe that less-productive enterprises should be somehow sustained indefinitely in order to preserve the less-productive jobs associated with them, then — wait, why are you voting in the Republican primary again?

No, Bain Did Not Get a ‘Bailout’

by Kevin D. Williamson

Left-wing blogs and Mitt Romney’s presidential-primary rivals — and who can tell those apart this week? — have charged that Bain & Company, the firm Romney once headed, was the beneficiary of not one but two bailouts: one from the FDIC, and one from the federal Pension Benefit Guaranty Corporation. These allegations are nakedly false.

A little background: Romney began his career at Bain Consulting in 1977 and then led the effort to spin off a separate company, Bain Capital, a private-equity firm, in 1984. He was good at it: During Romney’s years at the firm, its average annual return on investments was 113 percent. But back at the mother ship, Bain & Company, things were not going as well. There were disputes among the senior leadership, and there was the usual Wall Street horror show of irresponsible debt. It was a classic case of corporate self-dealing — in fact it is a textbook case, as a number of analysts have pointed out, and you can read all about it in The Governance of Professional Service Firms.

Basically, what happened was the founder, Bill Bain, and other senior executives wanted to cash out their ownership in the company, but it is really hard to sell consulting firms, because they don’t have a lot of assets other than smart people and expertise. They got somebody to value the firm at a price that allowed them to sell 30 percent of it for $200 million, and split the cash up among themselves. The “buyer” in this case, though, wasn’t really a buyer: The partners created an Employee Stock Ownership Plan (ESOP), which borrowed the $200 million and took the senior partners’ equity on the behalf of the junior partners. (If the junior partners did not think this was a good idea, nobody was much listening to them.) It was your classic strategy of taking some cash in hand while leveraging up the firm on overly optimistic assumptions about future growth, kind of like American public finances writ small.

The inevitable happened, as the inevitable does: The firm did not grow as quickly as planned, cash became tight, and the debt service on that borrowed $200 million — $25 million a year — soon began to look like it might be too much to support. The firm also owed money to other creditors, including $38 million to the Bank of New England, which was itself in trouble. (More about that in a bit.)

Bear in mind, this happened before Mitt Romney’s watch. In 1991, he was asked to return to Bain & Company to clean up this mess, which he did, with what basically all witnesses describe as an awesome display of technocratic competence.

Romney may have caught flak for saying that he likes being able to fire people, but at Bain he showed that he knows how to handle underperforming executives — including his old boss and mentor, Bill Bain. Romney wrested control of the firm from the senior partners who had run it onto the rocks, and twisted their arms into returning more than $100 million in cash and securities. In return for his doing so, many of Bain’s creditors agreed to write down some of the firm’s debts. When somebody owes you money, the last thing you want is for him to go into bankruptcy — better to get back 85 cents on the dollar of what you’re owed than to get back $0.00. Among the Bain debts written down was that owed to the Bank of New England, which had by that time gone bust and been taken over by the FDIC. Bain’s sole involvement with the FDIC in the matter was that the regulator, acting as receiver for a failed bank (i.e., doing its job) agreed to a run-of-the-mill debt writedown, like any number of creditors do any given day of the week.

The free-market purists among you might believe that there should be no such thing as an FDIC, but that is, at this point, a philosophical question. The FDIC, as I have argued in National Review, is the best-performing financial regulator we have, and what it does is the opposite of bailing out institutions. Bailouts are retrospective, cooked up after a company gets into trouble. What the FDIC does is prospective, ensuring that banks can cover their deposits and providing insurance in case of insolvency. Bailouts involve transferring taxpayers’ money to banks; the FDIC charges banks a fee (essentially an insurance premium) for its services. It is, in other words, exactly the kind of institution we wish we had in place to prevent bailouts. The FDIC is not perfect, but it gets the job done.

The Pension Benefit Guaranty Corporation is a similar organization: It charges pension funds a fee and guarantees pension benefits in the event that a fund becomes insolvent. That was the case with GS Technologies, a failed steel mill in which Bain was a major shareholder. When the company collapsed in 2001 (after Romney had left Bain, incidentally), its pension fund was severely underfunded, and the PBGC ponied up $44 million to make sure that pension checks got cut. Which is to say, the PBGC did what the PBGC was there to do. The PBGC is a less well-run organization than the FDIC, and its standards probably ought to be higher than they are, but those facts do not tell us anything about Bain’s investment in GS Technologies.

One might argue that the PBGC creates a moral hazard, encouraging managements to intentionally underfund pensions while offloading the risk onto the federal agency, but it would be difficult to make the case that this describes Bain’s actions in the GS Technologies case. Simply put, the U.S. steel industry got wiped out by lean and wily foreign competitors in those years: Half of the U.S. steel industry went belly-up around the turn of the century. Bain had both good luck and bad luck with its steel investments. Some of the firms thrived, and some did not. That is the nature of investing, which is another word for risk-taking.

If anything, Romney’s record in the Bain turnaround looks even better on closer examination — money was clawed back from no-account executives, and ownership of the firm was transferred to the general partners from the senior partners who led the company to disaster. Whatever else it was, it was nothing like a “bailout.”

— Kevin D. Williamson is a deputy managing editor of National Review.