Roy Ho’s Blog

Energy is increasingly becoming an important topic since it touches security (energy independence), pocket book (gasoline prices) and environment (egg head issue).  Of all, social security will have the greatest impact on the biggest voting block: seniors.  WSJ is having an article today about Obama’s social security plan.  The options for social security are very limited if America has no intent to privatize social security.  Obama is taking the least electorally costly option to him. In Obama’s vocab, that is “gimmick”.  Those options are listed here:

http://royho.wordpress.com/2008/03/25/what-options-do-they-have-for-social-security/

There are very few options available to Presidential candidates.  There are options outside of the social security program he can consider:

1)      Make retirement age more flexible.  In particular, make the age of social security flexible.  

2)      Tightening the control on the border to prevent illegal immigrants.  This will of course have some impact on inflation.  However, it could help the people who make minimum wage, i.e. higher social security payments.

3)      Modify the poll of immigrants.  Obama need not change the amount of immigrants.  Obama can simply modify the quota pool to attract the immigrants with higher productivity.  This could only work if there is enough buyer in the country.  So the fundamental philosophy of the American H visa system remains unchanged.

4)      Attract more investment immigrants.  The point is not only about taxing them, but also having them create more jobs here.

5)     

Lift up aggregate domestic demand without increasing fiscal expenditure.      

6)      Increase the amount in personal exemption and increase taxes on pollution to create more incentives for the next industrial upgrade.

The last point is the most difficult one.  How can Obama lower its fiscal expenditure when the military spending is so high? 

McCain announced his $300 million prize for a next generation of cars.  This election is increasingly turning to an election about environment due to the high gasoline prices.  While money is still favoring Obama, McCain is finally trying to close the gap on ideas.  If McCain can get more media exposure on his issues and ideas, McCain can sharpen Obama presidency.

McCain still needs to catch up with Obama on ideas.  So far, McCain is still reacting to Obama’s idea.  McCain’s $300 million prize is a good example.  McCain needs to be ahead of Obama. 

In addition, McCain can use security issue to frame the debate on energy, such as energy independence of Middle East.  McCain can also use religion to frame the debate on energy: save all God’s creatures on earth, not just fetus. 

Obama is actively courting the religious votes.  And he is very comfortable with his religion before the TV, comparable to Bush 2.  In a way, Obama can split the religious vote.  For Republicans to protect and expand the religious vote, abortion may fail in this year.  However, religious environmentalism may work. 

McCain’s move can also help revitalize the auto industry in America and compete against foreign car makers.  His idea is actually more cost effective since this program’s overhead costs is a lot smaller in dollar amount as well as a percentage of the funds than Obama’s venture capital fund.

McCain’s team needs to be more flexible and recycle the same issue to different audiences.

Although the environmental issues are getting into the debate, the Green Party cannot benefit any of it in the United States.

Obama changed his mind: he will not use public funding now.  Obama’s decision also reflects his comfort level of this campaign.  McCain says he will consider opting out as well.  The truth is McCain cannot afford not to.  McCain’s funding is so low that he can barely run a competitive campaign against Obama.  With Republican side running low on campaign personnels due to removals of lobbyists from the presidential campaign, low morale of loyalists and casualties’ from Bush years, McCain will have such a disadvantage that Obama may have a easy ride.  

For it not because Obama is a populist and a challenger with a very unpopular incumbent, his decision of using private donation would draw some fire.  America, because of Obama’s decision, now missed a great opportunity to debate what kind reform the US election laws should take, especially election financing.  

America champions itself as the model of democracy.  However, America has not spent much time formulating what kind of election financing system works best.  Obama’s decision actually buries this important question for at least another decade.  

No one likes politicians.  And using tax money to help politicians is unlikely popular.  

Why is this question important?  And isn’t his micro-donor system good enough?

Money is the mother’s mile of politics.  There are a few other big items we will not have a chance to reflect on the great intellectual capacities both McCain and Obama can provide us before the TV box:

1)       What shall we do with campaign surplus? 

2)       Who can lend money to a campaign?  And what to do when a candidate cannot pay off the debt?

3)       Who can be a donor?  Certainly only citizens.  What about companies?  Unions?  Non-profits? 

4)       Who can accept political donations?  Are political parties and candidates the only entities who can accept donations?

5)       What about third party campaigns during election times?  Say WWF or NRA running ads during election times without any references to candidates?

6)       What is the definition of a volunteer?  Some people may have very strong interests in being a volunteer full time.

These items may be mundane and uninteresting when compared to jobs, health care and foreign policy.  However, they decide who will have more face time with any aspiring candidates, running candidates and incumbents.  These items are no different than defining what an “eligible voter” is or what a valid ID is at the voting precinct.  

Gore finally made the endorsement to obama.  At about the same time, obama WSJ published their interview with obama regarding the other half of the fiscal policy, the spending side.  WSJ’s article does not capture everything Obama has in his website.  But then, WSJ’s responsibility is to synthesize the information, not to copy and paste.

WSJ highlights Obama’s $150B spending.  The source of the funding comes from the cap and trade energy auction.  The price of energy of course will go up.  No one has produced figures on how much the gas, heating gas and electricity will cost with this tax revenue source.  However, the tax revenue is expected to rebate back to the consumers’ utility bills.  If we assume the 300 million Americans are all eligible for this rebate, then each gets $500 back.  If we assume only the 100 million American tax filers are eligible, then it is $1,500 each.  

This has not figured in the program admin cost.  My usual figure is 1/6 of the total amount is program admin cost, i.e. $25B of the $150B.

Obama can achieve the same goal without incurring new program admin cost.  Instead of incurring new program admin cost, Obama can increase the personal exempt.  $1,500 in utility bill rebate is equivalent to $15,000 increase in tax exemption.  And this is not only about taxes, but also about strengthening his cause for energy independence.  Here is why.

When there is a rebate to the utility bill, the consumer needs to consume a certain amount of utilities, be it gas, heating gas or electricity.  Therefore, the incentive to modify energy usage is at best unchanged.  Consumers will be less mindful of usage simply because they may think they will get some money back.  The price after rebate maybe unchanged and if that were the case, then it is simply a job creation program for more civil servants.  All these unintended consequences are defeating the purpose of minimizing energy consumption and energy reliance on fossil fuel, foreign dependence and minimizing trade deficit.  

However, if the cap and trade revenue is refunded through income tax exemption, then the incentive to save energy consumption is stronger.  The tax refund can now be recycled into the discretionary income.  One may pay down his mortgage debt or buy another bicycle.  But having a rebate on the utility bill requires a consumer to consume a certain amount of energy.  Obama already refuses to cut corporate tax and chooses to cut personal income tax exactly because his platform is focusing (knowingly or not) on lifting domestic aggregate demand. 

Fiscal expansion policy does lift domestic aggregate demand.  However, an increase in aggregate demand by a single decision maker is not as effective as having the increase decided by the consumers themselves.  There is an efficiency issue.  And it is also a democratic issue.  Who is to say what is wanted by whom?  

The Irish vote against the Lisbon treaty becomes the Florida 2000 to EU.  3 million Irish blocked 490 million of Europeans.  Is this comparison fair?  What did they prevent?  What does it matter?  Who gets the most out of it?  What can we learn from it?

Ireland closed its referendum polls for the EU treaty called Lisbon Treaty.  CNN reports it is the only country that has a referendum because the treaty affects the Irish constitution while all the other countries make their parliaments ratify the treaty.  This is a close vote because the Lisbon Treaty means a lot.  Well, it meant so much that France and Netherland rejected the almost the same text back in 2005.   

Most quoted difference this treaty produce is all countries will cede their veto rights.  New rules will become effective when the committees pass the rules.  

This gives less accountability to the new EU body.  Voters of all countries will not vote on anything that EU does or the officers in the body.  In the post SOX era, governance or accountability becomes more and more important.  However the governance structure (accountability) in the new Europe is slipping away.  Power without accountability is a bad omen.  In America, governance requirement has evolved from publicly traded companies to charities now.  Europe is stepping back in this regard. 

All EU countries will cede some powers to EU and create a president and an EU foreign minister to be called “High Representative for the Common Foreign and Security Policy”.  

EU has been having a chair for European Commission.  However, that position is half a year long currently and without a budget.  The newly created position of president will have tenure of 2.5 years, renewable once and with a budget.  High Representative will also have a budget.  Once these two offices get their own budget, they will get their own legs to all sorts of places that voters cannot possibly dream of.  

Multi-National Corporations (MNC) will get the most of it.  MNC have access to Brussels.  EU has no accountability.  The already hierarchical society/economy in Europe will be even more restrictive.  Regulations will be more difficult.  Market entry barrier will be higher to starve off competitions from young companies.  A market environment like this will lead more mega mergers once these institutions matured.   

The Secretary of State of America will immediately see a big difference.  No longer will America be the representative of the West, of the democratic world.  There will be a strong voice about what “democracy” means.  And Europe may put an emphasis that America did not think of: peace.  Europe will give diversity to the interpretation and approach to the promotion of democracy.  However, Europe may not want to compete in that keyword.  Europe may find its own voice with the concept of peace.  With that, Europe may find itself more popular in the international arena than America.  

The lack of referendum in so many countries shows politicians want to keep the voters out of the decision process because politicians want to be brokers.  Letting voters have a direct say is making the outcome unpredictable (let’s assume this is not about their jobs and grease).  However, who else is a better jury for an important decision?  Should we not have a jury? 

Mainland China and Taiwan started their first negotiation in a decade.  A big topic of this negotiation is the direct flight between two sides.  This negotiation serves as an example to America how election campaign promises should be carefully drafted since the presidential election is under way, for instance the date of Iraqi withdrawal, whether to negotiate with Iran, North Korea, Cuba and the like.

This negotiation is the first priority for President Ma of Taiwan since one of his campaign promises is direct flight starting on July 1 of 2008.  

This campaign promise possibly led the negotiation team to have a very short time frame to draft their agenda and options during the negotiation and subsequently affect the negotiation result.  

Passenger flights are of top priority since the photo op of passengers getting off the plane is too valuable.  Therefore, the goods transportation is likely to be off the table.  However, that can be of higher importance to Taiwan.

Furthermore, Taiwan possibly left other aviation priorities off the tables.  Here are a few:

1)      Can flights fly to a second destination within the territory?  Example:  can a flight from Taiwan to Shanghai fly to Beijing afterwards?

2)      Can flights fly to another country afterwards?  Example:  can a flight from Taiwan to Shanghai fly to Japan afterwards?

3)      Can airlines establish maintenance hubs in the other’s territory?  

All these questions actually benefit more for the Taiwan side than the mainland side.  However, once a negotiation is over, another aviation negotiation probably will take another few years while the governments tackle other big political items, such as sea ports.  Thus, the next aviation negotiation probably will begin with another president term at best.

Now why are they important?

For the first question, Taiwan is a much smaller space. It has a lot fewer air traffic nodes.  The gain for Mainland airlines is actually small, especially the number of flights and airlines are supposed to be reciprocal in aviation negotiations.  However, Mainland China has another 100 cities each with a population of 1 million.  The gain for Taiwan aviation industry will take years to realize financially.  

For the second question, President Ma of Taiwan’s business plan is to be the bridge to China for the West, analogous to UK to continental Europe for America.  For that to realize, the first item to tackle is for Taiwan to become a transportation hub.  The second question becomes vital.

The negotiation is about flight between 2 sides and not about domestic aviation market.  However, having a hub in the other side is beachhead to fight the domestic market.  Since the mainland China’s domestic aviation is the ultimate price for Taiwan aviation industry, if economic integration is to follow through, eliminating this big hurdle is important.  The scale of a hub is of course negligible at this stage.  However, this will be an expensive item to negotiation in the future.  While the goodwill is overloaded, this should be item to cash in right now, right here.  

Aviation business has a long investment cycle.  Aviation manufacturing has defense implication.  Taiwan needs to muster every advantage at every step to prevent a big swallow by Mainland China in the future.  Therefore, this third question will add a lot of points to Taiwan.  If ignored, Taiwan will give up a great asset for a future show down of unification negotiation.

Because of a promise on a date of direct flight, Taiwan probably forgot a basket of items.  American voters have to see if the candidates are giving promises that will put the future presidency at an inflexible corner.

CNN is giving out a good introduction of the Obama vs. McCain platform contrast.  

http://money.cnn.com/2008/06/11/news/economy/candidates_taxproposals_tpc/?postversion=2008061113

I figure this is the right time for me start as well.  Obama has deep roots not only in the city of Chicago, but also the Chicago School of economics since he has been a faculty in the law school there.  Click here to read a contrast by Tax Policy Center.  

http://www.taxpolicycenter.org/taxtopics/election_issues_matrix.cfm

One central theme across the revenue side of the Obama’s fiscal policy is he is concentrating his effort on invigorating domestic demand:  he is trying to lift up aggregate demand.  All tax cuts are focused on low income groups.  A typical Democrat policy is to tax the rich and create programs for the poor.  This Democrat is minimizing the tax burden on the poor. 

Taxing a low income filer and then distribute welfare check to him is make work for the bureaucrats.  The real gain is among the civil servants.  The first relief to the poor is not the welfare checks but to make sure they do not even qualify to pay taxes.  There are too many of these points Obama raised that would any economics professor happy.  This, Obama is heading toward. 

And there are too many of those points to get listed here.  Please consult the Tax Policy Center website. 

A contentious point to-be for McCain is the corporate tax reduction from 35% to 25%.  If we consider the fiscal revenue since 1945, anyone can see that the tax burden of corporates reduce from 35% to 14% in 2007, while personal income tax continues to hover around 45% for the same period.  

McCain makes (or will make) the argument that employers need to be able to create jobs.  Most of the jobs are created by small businesses.  For that, Obama has a tax credit of 20 percent on up to $50,000 of investment in small owner-operated businesses; Eliminate capital gains taxation of start-up businesses; Provide capital gains tax break for landowners selling to beginning family farmers.  

What is really indefensible of Obama’s platform is capital gain.  Obama will increase capital gain tax.  What does it matter, you may ask, since capital gain is a rich man’s business.  It may not exactly be there.  It can affect your mutual funds, pension funds and alike.  Given social security is shaky, capital gain tax can have unintended consequences.  This will require a closer look at the proposal, compare it against the tax code and check the statistics.  

Obama is also encouraging saving through mandating 401(k) and IRA accounts.  It of course increases administration cost on the employer side.  However, a detailed look at the proposal is important for this one since this requirement can elevate some of the pains on Social Security.  The trade may be worth it. 

A real electioneering tax gimmick is the elimination of taxes for seniors with income below $50k.  this is on the platform because seniors are vote rich.  Increasing the personal exemption from $4k to, say, $8k is more effective in lifting aggregate domestic demand than concentrating on the seniors.  

Fiscal policy is a good place to address the environment agenda.  However, that is missing from both candidates.  Both advocate to close oil and gas loopholes.  Obama specifically want to make the R&D for renewable energy production permanent.  However, this is supply side economics.  Obama could levy taxes on this area and reduce more income tax.  

A simple glance at the fiscal revenue policy can tell that Obama team has put more effort into fiscal revenue policy than McCain team, although McCain is the Republican candidate. 

Is McCain having a retirement party?

Democrats are always weak on economy and defense.  However, Obama is from Chicago School.  Will that cover the weakness on the economy issue or defense/foreign affairs?  His VP choice will tell us a bit of what he thinks.  Economy always tops the list of election issues, especially when the economy dives south.  Obama already raises the issue of oil companies’ profit and claims the summer gas tax relief is a gimmick.  Summer gas tax relief is as much of a gimmick as taxing the oil companies like Exxon.  However, Obama’s idea of taxing oil companies indicates a politico-economic trend we will have to face due to higher oil prices: nationalizing or stringent regulation on vital businesses.

Oil prices are now hovering $150 US dollars.  There are plenty of articles out there to justify how it got to this price or even why the price will fall like the real estate prices.  With a high price like that, oil exploration business has such a long term investment cycle, oil wells are not “produced” anywhere and oil being a vital input for an economy, this business has a heavy politics component in it.  Therefore, the following is the trend we will have to live:

More and more governments will nationalize the oil exploration business.  Venezuela nationalized the oil not because he is a mad man (he did not nationalize everything, did he?) but because Venezuela, as an institution, needs to influence the buyer(s) of its oil, i.e. US of A.  Russia has been removing foreign oil companies step by step for the same reason.  If any government simply wants more revenue for their programs or even for their politicians’ wallet, the government can simply tax those exact companies or everyone to make the desired amount.  There usually 2 reasons to nationalize a business: domestic needs or foreign relations needs.  

Wealth will get increasingly gravitated toward the resources companies.  Oil is just the most high profile one in US.  This similar situation may happen to Thai on rice distribution business (in fact it is happening).  In order to pacify the domestic political needs to this wealth movement toward such a small group of people, governments tend to employ the easiest political solution: nationalize it in front of their TV box as homework for doing something.  

In terms of foreign relations, countries realize their resource export has such a big impact on the buyer country, in the example of oil.  So, a country like Venezuela gets a lot more chips against the States just because they produce oil (although I have never done research what Venezuela actually wants).  This is the same for Saudi.  Saudi is the chief broker of the States because it is the biggest seller of oil to the States.  

Now that we recognize this trend, what does it matter?

This is the same situation for food.  Philippines are stopping its rice export sales in order to make sure domestic demands are met.  Thailand is instituting price controls.  Indonesia is also having problems with rice.  With both China and India are big consumers of rice, no wonder Thailand would have proposed the idea of rice cartel.

Thailand quickly withdrew that idea.  However, the point hit home.  The food shortage will create as much problems years ahead.  And this problem will be concentrated on developing world, weaken their governments’ mandates and push more people and subsequently their governments to take more desperate actions.

For any aspiring politician, say an aspiring city councilor, Clinton has taught us a very good lesson, especially her Iowa race.  Since the lesson is most useful for an aspiring city councilor, I will focus on that particular case.  A primary is more similar to city councilor race (versus challenging an incumbent) than house/governor races since city councilor races usually remove the party affiliation; since all candidates in a primary are from the same party, party affiliation is also meaningless.  

There are almost always more than 2 candidates running for any city councilor seat anywhere in the country.  Not many candidates can run more than 2 full fledge campaigns in his life since campaigns are costly.  Therefore, one has to know if he has before pouring money in.  Alternatively, if $ is not a big issue, as in the case for Clinton, how much resources are you supposed to pour in to secure the Iowa race?

This is equivalent to: what is your self knowledge?  

First:

How many votes were cast in the last city councilor seat election?  How many candidates were there?  How many votes were needed to secure the seat?  If it is a challenger race, then please assume the incumbent will continue to get similar votes, no matter how incompetent he is.  If Clinton wanted to secure the Iowa race, Clinton should have checked properly how many people attended the caucuses, the amount of volunteers needed to mobilize attendance, the field staffs needed to find volunteers.  

Now that you know the votes,

Second:

Where are the votes distributed?  Which precinct got the votes?  How many eligible voters in those precincts?  What are the voting rates in each precinct?  

You will only want to spend your resources in the high voting rate areas.  It is not only about money, but also time.  For you to be a credible, competent, and winning candidate, walking the area is essential.  

In fact, this is why there are so many precinct captains.  These are the people who hold this kind local knowledge.  They walk for the parties every time.  They know which household is more receptive to this or that party.  They know which household votes.  They know if they will want to be a volunteer.  True, party affiliation is unimportant for local races.  Party is an institution that accumulates this kind of vital intelligence.  

This is where Clinton also failed.  Running Iowa was almost like an after thought for Clinton.  No enough research was done in Iowa.

Third:

If the party office of the local does its homework properly, then it should accumulate the information such votes / walking hours, votes / lawn signs for each precinct.  Now this is a good piece of information for you to see what kind results you should expect.  Can you get hold of last election’s voters list?  Can you get hold of last election’s voters check list?  Do you remember the scruntineers at the precinct?  They check your name off in order to prevent voting fraud.  However, the party collects this information over time.  A voter who voted last time is more likely to vote this time.  If you are short on pamphlets, then you know your priorities.  In fact, the purpose of a political party is to create an institution: knowledge accumulation, branding, and staffing fundraising operatives.

Fourth:

How many people do you need for your campaign machine?  Now that you know how many votes you need and where they are distributed, you get a rough idea about the man hours, pamphlets, lawn signs are needed.  Do you have the people to walk all the votes you need?

Exactly because Iowa was an after thought, Clinton did not have enough pay staff and volunteers.  And since Obama was an under dog and he was a field organizer in Chicago, he out performed everyone else in Iowa in terms of volunteer strength and field organization.

There are more lessons to be learnt from both this Obama vs Clinton in this classic and text book like election and fundraising campaigns.  And they are better discussed when the time comes especially since they are not related to Iowa.

There are 83 days between now (06.02) and Democratic Convention in Denver (08.25).  Yes, superdelegates can change their mind.  However, the earlier Clinton concedes the less political capital Clinton will attrite.  But what is the worst case? 

First of all, everyone is expecting a happy ending.  For one, Tom Daschle (former Senate Majority Leader), who is an Obama supporter, was expecting Clinton’s endorsement when he appeared Meet The Press on 06.01.  That can be taken as a sign Obama is able, willing and ready to buy.

If both Clinton and Obama believe Clinton will be productive for Obama’s quest and his administration, then Clinton will actually acquire more asset in this election and his presidency.  In this scenario, Clinton will concede quickly since both buyer and seller see a brighter career in the future.  If either one of them does not share this opinion, then it will be Microsoft-Yahoo again.  Clinton may dragged on until Convention day, late August. 

The worst case is at best speculative. 

The worst scenario is an Obama campaign with Clinton’s asset working against Obama.  How can Clinton work this out?

What Obama really needs is more than the Clinton name, i.e. the endorsement on a TV box.  Obama does not have a long political history.  He has not buildt up his campaign machine.  He motivated a lot of volunteers, donors and voters.  And he needs more political operatives.  

If Clinton were really into helping out the party (just not the presidential campaign), Clinton needs to make sure her operatives are working for someone else.  There are plenty of governors, first term congressmen and rookie candidates who need more help.  Clinton can simply transform her existing campaign into an election temporary staffing firm.  Her machine needs to pay off the debt anyway.  All these candidates would appreciate the assistance in monetary means.  After all, her public appearances are not cheap. 

What is the going price? Is it VP? Supreme Court? Cabinet position?  Or Clinton simply has already moved forward to 2012?