Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

© Copyright 2015 Patricia W. Chadwick

Since returning a day ago from a trip to Prague and Krakow, I have been pondering the stark contrasts between our country and the countries in Europe. The differences say everything about the drivers of our respective economies. I admit that I am oversimplifying the case, but I am trying to provide a little food for thought.

In Continental Europe there seems often to be a grand sense of calm, as though a higher being is overseeing and managing the place. (Of course this excludes all those strikes and demonstrations we have witnessed of late against the Governments. But I told you I was oversimplifying the case, so bear with me, please.) Europe is rule bound. There is order. The trolleys run on time; you can count on them to show up at exactly 11:05 and then at 11:11 and then at 11:17. The electronic clock on the trolley tells the exact time as the mechanical clock in the square. In Prague, the Astronomical Clock in the Old Town Square which dates back to 1410 strikes the months, days, hours and minutes to perfection.
Prague is an overwhelmingly secular city of 1.2 million people, more than 75% of whom say they are atheists. However, there is no hue and cry over the fact that a giant Christmas scene is erected on Government property. Political correctness doesn’t seem to be an issue. Tradition is important. It provides security. Change is not a good thing.

In Krakow, the streets are immaculately clean. There are people whose full time job it is to keep them that way. It gives one a sense of security to walk around in a tidy place. The Christmas market hums with hundreds of vendors selling everything from Italian gloves to kielbasa. The weather is frigid but no one is shivering for lack of warm clothes. Vendors sell their wares in a quiet and peaceful atmosphere; it is impolite to insult them by trying to bargain. The prices are reasonable and the experience is hassle free. There are a few beggars, but they are far outnumbered by street musicians whose talents are a pleasure to support.

Coal is still the fuel of preference in the countryside of Poland. It’s far cheaper than electricity. Despite the frigid weather while I was in the country, there was no sign of air pollution from the coal.

The invisible hand in all this calm and order is the Government. It is the overlord. And how does it achieve this apparent state of perpetual calm and equanimity? By taxing its citizens and redistributing that money into services for the benefit of all.

It sounds so wonderful. So what is the downside, one might ask. There is a downside and it is economic growth. The larger the Government’s piece of the economic pie (i.e. GDP) the less there is for the private sector. That is an economic truism. In the Czech Republic, the tax burden (i.e. Government’s share of the economic pie) is 36% of GDP and in Poland it is 35%. Contrast that with the U.S. where it is 27%. That is a vast difference.
Which brings me to the contrasting part of my rambling. When I landed at Newark Airport, I headed out into the balmy evening. As I waited for the WALK light to come on, I had to laugh as I observed that the two lights providing the countdown to zero for the WALK light were not even in synch. One was three seconds ahead of the other.

That’s the way it is in America. Our country is a messy place (at least compared to Europe). Americans chafe at too many rules. We are still young as a country – at least by European standards. The entrepreneurial spirit is the driving economic force in this country. That’s why high unemployment is such a loathsome blight. People want to be working. They don’t want Government support. They tolerate Government only to the extent needed because too much Government gets in the way of achieving their dreams.

And there is a price to be paid for living in the land of opportunity. The price is the uneven distribution of wealth. There are the very rich, the rich, the not rich and the poor. And the differences are vast. But before castigating the system, it is worth observing that Americans themselves are engaged in redistributing their own wealth. Of all the major countries in the world, the people in this country are by far the most generous. They give back without Government redistribution. Last year, charitable donations in this country reached $300 billion. That’s not a misprint – it’s $300 BILLION! And of that amount, more than 75% came from individuals. They supported their places of worship, hospitals, the arts, the poor, education.

The system is not perfect. No economic system is perfect. No political system is perfect. But for all the faults in our own economic system, its strengths seem to outweigh its weaknesses. That is why so many people want to emigrate from their own countries and live here.

Postscript: I was in Prague when the news came of the death of Vaclav Havel. It was evident how much the people of the Czech Republic revered him. And in Krakow, my hotel was directly across the street from the house where Pope John Paul II lived for a number of years. I felt close to two very great people.

The markets around the world are rattled silly this morning by the first ever downgrade of the U.S. Government’s debt by Standard & Poors. That is understandable but not, in my mind, rational.

There is no way the U.S. Government is going to default on its debt obligations. Its debts are no less safe this morning than they were on Friday or one year ago or ten years ago. It is true that our country’s balance sheet is less healthy than it was a decade ago, but look what we have been through – a recession the depth of which had not been experienced since the 1930’s while simultaneously engaging in two wars. Debt buildup and fiscal deficits were inevitable.

At the end of World War II, our debt as a percent of GDP was far higher than it is today. The Government spent huge amounts of money subsidizing mortgages and providing education through the GI Bill. The country emerged from that era into a sustained period of growth and prosperity which allowed the balance sheet to right itself.

Today we face more than a few challenging issues but they are not insurmountable if only our elected officials would work for the good of the people. There is a need first and foremost to get the economy revitalized. The reason that is proving so difficult to achieve is because the balance sheet of the consumer is still going through a downsizing. In addition, the banks are also continuing to downsize their own balance sheets. It is difficult to spend when you are trying to pay off debt.

Corporations are becoming the easy whipping boy for not hiring more of the unemployed. But they are not the culprit. They came through the recession in solid financial shape and they would like nothing more than to see good demand that would allow them to increase employment.

One thing is for sure – a massive tax increase will NOT be productive for the economy or as a means of reducing the debt levels of the Government. Such a strategy would be counterproductive. However, eliminating tax loopholes –the unfair tax treatments that allow large and profitable companies to pay nearly NO taxes – is an essential step in moving towards reducing the fiscal deficit. The same is true regarding individual taxes – the wealthiest individuals should not be able to take advantage of tax loopholes that allow them to pay the lowest tax rates. It is appalling that Congress cannot agree in a bipartisan way to eliminate tax loopholes – genuine loopholes, NOT the very legitimate deduction of mortgage interest and charitable contributions.

Longer term there is no doubt that the issues of Social Security and retirement health care must be addressed. At least they are now being discussed. Only a decade ago, they were referred to as “the third rail of politics”. So progress has been made. At some point in the not too distant future, Social Security will be means tested – as it should have been all along. And individuals will be required to work longer before receiving their benefit. This is simple arithmetic that goes hand in glove with the increase in life expectancy. A better solution would be to allow – no, to force – individuals to save for their own retirement. The money would be their own, not the Government’s, and they would be able to pass it on to future generations if not consumed in retirement. Admittedly, such a program would need to provide supplemental support for those who could not save sufficiently during their working life. That would be the Social Security part, but it would be necessary for the few not the entire population.
I admit that none of these issues is really simple but what is disheartening, or perhaps better said, infuriating is to watch our lawmakers on both sides of the aisle engage in brinksmanship rather than productive dialogue and action.

Congress spared no words demonizing ‘Wall Street’ for the recession of 2007 and the precipitous decline in the markets, never admitting their own culpability in the debacle. Today the turmoil in the markets can be laid right at the feet of Congress. Let’s hope they understand the seriousness of their criminally inept behavior.

The markets around the world are rattled silly this morning by the first ever downgrade of the U.S. Government’s debt by Standard & Poors. That is understandable but not, in my mind, rational.
There is no way the U.S. Government is going to default on its debt obligations. Its debts are no less safe this morning than they were on Friday or one year ago or ten years ago. It is true that our country’s balance sheet is less healthy than it was a decade ago, but look what we have been through – a recession the depth of which had not been experienced since the 1930’s while simultaneously engaging in two wars. Debt buildup and fiscal deficits were inevitable.
At the end of World War II, our debt as a percent of GDP was far higher than it is today. The Government spent huge amounts of money subsidizing mortgages and providing education through the GI Bill. The country emerged from that era into a sustained period of growth and prosperity which allowed the balance sheet to right itself.
Today we face more than a few challenging issues but they are not insurmountable if only our elected officials would work for the good of the people. There is a need first and foremost to get the economy revitalized. The reason that is proving so difficult to achieve is because the balance sheet of the consumer is still going through a downsizing. In addition, the banks are also continuing to downsize their own balance sheets. It is difficult to spend when you are trying to pay off debt.
Corporations are becoming the easy whipping boy for not hiring more of the unemployed. But they are not the culprit. They came through the recession in solid financial shape and they would like nothing more than to see good demand that would allow them to increase employment.
One thing is for sure – a massive tax increase will NOT be productive for the economy or as a means of reducing the debt levels of the Government. Such a strategy would be counterproductive. However, eliminating tax loopholes –the unfair tax treatments that allow large and profitable companies to pay nearly NO taxes – is an essential step in moving towards reducing the fiscal deficit. The same is true regarding individual taxes – the wealthiest individuals should not be able to take advantage of tax loopholes that allow them to pay the lowest tax rates. It is appalling that Congress cannot agree in a bipartisan way to eliminate tax loopholes – genuine loopholes, NOT the very legitimate deduction of mortgage interest and charitable contributions.
Longer term there is no doubt that the issues of Social Security and retirement health care must be addressed. At least they are now being discussed. Only a decade ago, they were referred to as “the third rail of politics”. So progress has been made. At some point in the not too distant future, Social Security will be means tested – as it should have been all along. And individuals will be required to work longer before receiving their benefit. This is simple arithmetic that goes hand in glove with the increase in life expectancy. A better solution would be to allow – no, to force – individuals to save for their own retirement. The money would be their own, not the Government’s, and they would be able to pass it on to future generations if not consumed in retirement. Admittedly, such a program would need to provide supplemental support for those who could not save sufficiently during their working life. That would be the Social Security part, but it would be necessary for the few not the entire population.
I admit that none of these issues is really simple but what is disheartening, or perhaps better said, infuriating is to watch our lawmakers on both sides of the aisle engage in brinksmanship rather than productive dialogue and action.
Congress spared no words demonizing ‘Wall Street’ for the recession of 2007 and the precipitous decline in the markets, never admitting their own culpability in the debacle. Today the turmoil in the markets can be laid right at the feet of Congress. Let’s hope they understand the seriousness of their criminally inept behavior.

As a Republican, I respect the concept of fiscal conservatism. However, fiscal conservatism must not be embraced at the expense of fiscal pragmatism.
For Republicans, whose track record of raising the debt limit over the last three decades belies any sense of fiscal constraint, to adopt a holier –than-thou attitude on the subject is blatant posturing and offers nothing towards resolving the current economic stress. The debt ceiling must be raised and it must be raised now; there are no two ways about it. Both Republicans and Democrats need to accept the responsibility for doing so. Issues of cutting spending and tax reform are of critical importance, but they cannot at this eleventh hour be used to hold hostage the debt ceiling crisis.
The U.S. economy today is not in good shape. This is primarily because the housing sector is in a state of morbidity. Talk to almost anyone in the homebuilding industry and they will tell you that business is non-existent. That situation will not turn around until the banks start to lend to individuals who want to buy homes. With all the delinquent mortgages they currently hold, it is difficult to see light at the end of that tunnel. Admittedly, it is not all the fault of the banks. Individuals who took on too much debt are now in a long and slow process of right-sizing their own balance sheets. This means an extended period of under-spending as they pay off their debt.
Another major sector of our economy that is faring poorly in 2011 is Government. The reason the employment numbers so far this year look poor is because of lay-offs at all levels of government – Federal, State and local. The private sector has actually added jobs, even if the numbers are not awe-inspiring. Public sector employment is being downsized as Governments struggle to bring their wage costs, retirement promises and medical expenses in line with declining revenues. Over the long haul, that is good. The smaller the public sector relative to the entire economic pie, the greater the opportunity for growth, profits and prosperity. That is a truism of capitalism.
But another economic truism is that government deficits act as a stimulus to the economy. That does not mean that they are not a matter for concern. Over time, no government, company or individual can endlessly run deficits. But to force gargantuan Federal spending cuts during a period of economic hardship can have the perverse impact of worsening unemployment and prolonging economic stagnation.
Fortunately for the economy, much of the private corporate sector is vibrant. Many public corporations have strong balance sheets, good earnings growth and are globally competitive. In large measure this is because they were aggressive in cutting costs and conserving cash during the recession – a process that continues. Now is the time to eliminate corporate tax loopholes. That does not mean doing away with sensible, legitimate business costs (such as the R&D tax credit and the very valid use of corporate jets). Rather it means leveling the playing field for all corporations by undoing the myriad special deals that corporate lobbying by the most powerful companies has achieved.
Another tax loophole that must be addressed relates to the taxation of dividends. The logic behind reducing the high tax on dividends was economically sound and President Clinton signed the bill into law. But the unintended consequences of that event have been hugely detrimental to the coffers of the Federal Government, as billionaires have been able to shelter what is de facto earned income through corporate structures that treat their gargantuan incomes as dividends. No less a beneficiary than Warren Buffett has admitted as much, and he says that the system needs to be fixed. That should be easy to do. It would be far more powerful than eliminating the deductions for (1) mortgage interest which middle class Americans use to their benefit and (2) charitable deductions which help to serve the needs of so many of disadvantaged.
With the issue of a potential default just two weeks away, Congress is now trapped. Republicans and Democrats must not put the national interest at risk. The patriotic stance is to do what is right for the country and raise the debt ceiling. Once that is done, Congress must then go to work on restoring a sense of fairness in our tax code by eliminating loopholes and making the wealthy pay their fair share.
Patricia W Chadwick
President
Ravengate Partners LLC
July 18, 2011

The Federal budget deficit cannot be brought under control or meaningfully reduced without addressing the looming insolvency of Social Security.
The heart of the problem lies in demographics. More than seventy five million baby boomers will be retiring over the next eighteen years. That is approximately one quarter of the entire U.S. population today. As they depart the workforce, they will immediately go from contributing to the funding of the program to taking from it. And thanks to medical technology, life expectancies continue to improve. Since the first baby boomer was born in 1946, life expectancy at age sixty-five has risen by nearly five full years. Good news to be sure, but it up-ends the arithmetic of funding. It is both logical and essential to raise the eligible retirement age for social security, even more that what has been done to date.
Most major corporate and government pension/retirement plans in this country are required by law to be safeguarded and managed separately from the operating finances of the company or government entity. The Social Security taxes received by the Federal Government, by contrast, are not segregated. There is no “lock box” into which Social Security payments are made and invested for future retirees. The system is truly “pay as you go” which means that the burden of funding the growing liability associated with the baby boomer generation will increasingly fall on their children and grandchildren.
Social Security legislation was signed into law by President Franklin Roosevelt in 1935 as part of the New Deal in the midst of the Great Depression. The law’s intent was to provide a social insurance program during a period of massive unemployment and poverty in this country. It certainly wasn’t intended as supplemental income for the wealthy.
Forty years ago, when I was hired for my first “real” job (which I define as one with a salary and not an hourly wage), I was excited at the offer of an annual salary of $10,800. I remember believing I was on the path to a career that would allow me to make enough money to forego Social Security when I retired. That was my goal.
Today, with the magical age of “retirement” and Social Security within sneezing range, I am pleased to have attained that objective. I neither need Social Security nor should I receive it. However, the system will not let me even opt out, much less allow me to register that I do not need it. And therein lies a big part of the problem. Social Security should be provided on the basis of need. The money withheld to fund social security is a tax pure and simple; it is not a savings plan. It is not my money, despite much rhetoric to the contrary. Means testing would be complicated no doubt. There are many who might appear to have adequate retirement income but in fact may be caring for children and grandchildren. But simply because the solution might be complex does not mean it should be eschewed.
I realize that I have already uttered what is heresy to many, so let me add more fuel to the fire. If a portion of the 6.2% of gross income that an employee pays into the Social Security system were instead put into a private personal savings account and invested over the forty years of her working life, it would generate a level of assets by retirement that would be able to supplement and possibly even exceed the social security benefits provided today. And most important of all, that money would belong to the person who saved it, not to the Federal Government. That means it could be passed on to the family in the event of death before retirement. It is a ”no lose” solution for workers. You can do the arithmetic yourself. Even if you use a conservative 4% annual growth rate for investment return, you will be amazed at the power of compounding. For minimum wage earners or those making too little money during their working years to build up a sizable private savings pool, they could still be provided social security through the contributions made by the employer.
The fiduciary oversight of those assets would need to be addressed. In the wake of the decimation of many 401(k) plans during the stock market decline of 2008/2009, there is much skepticism about private savings as a secure means of generating retirement income. But even if the private accounts invested only in Government bonds, they would be far ahead of the system today.
Social Security has been tagged as the “third rail of politics”: touch it and die. And since the “courage deficit” exceeds our budget shortfall, this growing fiscal crisis has been shunned and cast aside for some other lawmakers to address some other day. And now we face the next twenty years of having to pay the piper – well seventy five million baby boomer pipers lining up to be paid back after having contributed for forty years.
Here is the good news – it is not too late to solve this problem so long as there is a will to do it. Social Security can be fixed. It will take courage to change. The solution will almost certainly include raising the age of retirement, means testing and partial privatization. Let’s fix it for our children’s children.
Patricia W Chadwick
President
Ravengate Partners LLC
February 3, 2011

The Wall Street Journal’s weekend editorial “It Isn’t Working” lamented that “three years of spending and monetary stimulus haven’t helped jobs”. While making a number of valid points about lack of confidence and concern over costs as factors inhibiting firms from rehiring, it failed to point out that the Federal Government has provided a significant amount of valuable and essential stimulus to the economy with an important part of the stimulus program – namely, in refurbishing the highways.

All across New England (and I hear from friends around the country that the same is true in almost every state) there are thousands of private sector companies and individuals employed in long overdue construction and maintenance of our vast highway system. It is astonishing that it took an unprecedentedly deep recession to act as the catalyst in this matter. It is in fact a duty of our Federal Government, as the overseer of matters of interstate commerce, to keep our interstate highway system in proper order.

So it is fair to say that the stimulus program has indeed had some very salutary impact on both employment and on the transportation grid that is vital to the health of commerce in this country. The problem is that this critical obligation of the U.S. Government was funded only as an emergency measure in response to an attempt to provide temporary funds to tie the economy over until the private sector could get back on its feet. But in fact, the private sector on its own initiative does not and cannot undertake the indispensable maintenance of our roads and bridges. This spending which supplements the Highway Trust Fund should be a core element of the appropriation voted on by Congress each year. It should not be part of an emergency stimulus bill.

Highway construction, maintenance and repair are obligations of our government, just as the maintenance of capital plant and equipment are the obligation of private sector companies who produce goods. Since the invention of the wheel, successful economies have understood the unbreakable linkage between transport and safe roadways. It is a disgrace that the last several congresses and numerous administrations have declined to address the growing backlog of crumbling interstate infrastructure in favor of other spending.

Of course addressing the issue now begs the question of where the funds will be found. For starters, Congress could take all the stimulus money it earmarked for future projects that will do nothing to get us out of the current economic malaise and reallocate those funds to the here and now, making a significant down payment on our obligation by allowing highway refurbishment to continue well beyond its current scope. Those private sector jobs include architects, structural and transportation engineers, surveyors, construction workers and all manner of hi-tech modeling and planning operations that utilize the skills already developed in all fifty states. Many of these should be permanent jobs, not the whimsical beneficence of a nervous congress as a one-time event.

Fiscal stimulus is an important and valuable economic remedy that should indeed be employed by the Federal Government during periods of recession: the element of its timing makes it far more valuable to the national economy than routine discretionary outlays. Moreover, any addition to the existing deficit resulting such an investment is not inherently harmful to either the long term health of the economy or to the Government’s balance sheet.

During the recent recession and its timidly emerging recovery, I would argue that the Government has taken some very specific and importantly appropriate stimulative steps, and I would argue also that it should both extend that spending, particularly infrastructure spending and offer incentives – mainly through tax relief to small businesses – to enable them to grow and create new jobs.

Our gargantuan and staggering Federal budget deficit is a problem of a different nature, tied to gigantic issues as financing two wars with borrowed money, an aging population whose health care costs will increasingly fall on the shoulders of a younger and smaller workforce, and a social security system that urgently needs adjustment. Tackling those problems is essential if we are to reduce much less eliminate the deficit.

In the meantime, the roads and bridges that comprise the backbone of our continental economy must continue to be restored.

Patricia W. Chadwick

President

Ravengate Partners LLC

August 10, 2010

Now is not the time to cut off unemployment benefits in this country. Admittedly, extending the benefits will add to the Federal budget deficit, but not doing so will add to mortgage delinquencies and homelessness and will only serve to impede the still fragile recovery currently under way.

Today’s Wall Street Journal’s editorial argues that “supporting jobless benefits on compassion grounds…..keep[s] people out of the job market”. That is a simplistic notion which may carry a logical appeal, but it is neither accurate nor is it applicable in this economic environment. If that were really the case, then why have so many people given up looking for a job? How will cutting off unemployment benefits make a job miraculously appear? It is spurious logic.

Each recession has different causes, and those causes affect the duration. The causes also require different solutions. The last two recessions in this country (1990/1991 and 2001) might be termed ‘mini’ recessions. They were of limited duration and scope, and peak unemployment was less than 8%. The scope and impact of this recession has been the worst since the Great Depression, and the level of unemployment is unprecedented since the Depression, except for the back to back recessions of 1980 and 1982.

It seems unnecessary and tautological to state that the higher the unemployment rate, the more difficult it is to find a job. The average monthly rate of unemployment over the last 12 months has been 9.7%. There has been only one other time in the last 60 years when the level of unemployment even reached, must less was sustained at that level. That was during the inflation busting and oil crash recession of 1980 – 1982.

The majority of Americans in the workforce today have not experienced a recession like this one. Many of them were either children or yet unborn in the 1980 recession. They want jobs but jobs are not to be had. They need jobs in order to put food on the table, clothe their children, pay their mortgages, reduce their debt and save for their retirement. They are looking for jobs, but the jobs aren’t there. We all know that.

This recession is slowly working its way into a sustained recovery. But it was not your ‘normal’ recession; rather it was a balance sheet recession, i.e. a recession brought about by too much debt on the part of both consumers and the banking system. The deleveraging of balance sheets is underway and that is good, but a balance sheet recovery will be slow because by its nature it impedes discretionary spending.

Extending unemployment benefits is not simply the compassionate thing to do, it is the economically responsible thing to do. Not doing so will only serve to hinder the recover now under way.

There are many ways in which the Federal Government can and must cut costs to reduce the dangerously high budget deficit. However, cutting unemployment benefits for the nearly 10% of the workforce which is trying to find a job is wrong on both moral and economic grounds.

Patricia W. Chadwick
President
Ravengate Partners LLC

July 20, 2010

It seems that some days all news is good news to the stock market and the next day all news is bad news. And other times it seems as though the stock market extrapolates one single economic indicator as though it alone matters.

No doubt the May 6 “Flash Crash” has spooked many investors, most particularly individual investors who were just getting their sea legs after watching their life savings decimated in 2008 and early 2009.

It is evident that the economy is improving. But the momentum is too slow. What the market wants to see is substantive job growth – not public sector jobs but private sector jobs. Over the next several quarters, as the Federal Government’s stimulus program winds down, we will experience a decline in jobs that were funded by that program. I, for one, would be happy to see Congress forfeit all the pork it packed into the back end of the stimulus package (which is not stimulus at all) and spend that money now finishing what was some way overdue spending on roads and bridges across this country. That would be money well spent.

What we need now is new private sector jobs. Since the onset of the recession and so far through the first phase of the recovery, the corporate sector of the U. S. economy has done a masterful job of reducing costs, enhancing productivity, maintaining a pristine balance sheet and fortifying cash flow. But as a country and as an economy, we cannot be prosperous with an unemployment rate of anything close to 9% – 10%.

The US economy differs from economies in Europe in many ways, but most particularly in the fact that the primary driving force in our economy is capitalism, whereas in Europe, the role of Government is far more pervasive on economics and growth. As an example, for decades now the Government has provided the vast majority of the job growth in France.

Despite the increasing encroachment into the private sector of the U.S. economy by Government, through regulation, taxation or outright confiscation of authority, there is still a vast opportunity for private entrepreneurship, job creation and wealth in this country. It is a well known economic fact that in the U.S. job creation is derived from new, small companies. That will and aspiration has not died or even gone dormant. What it needs is some fuel.

Unfortunately, SBA (the Federal Government’s Small Business Administration) has sharply curtailed its spending. So too have private sector banks, as they try to get their overleveraged balance sheets back in shape.

But the corporate sector does indeed have cash and cash to lend. And so do credit unions. And it is encouraging to see that those non-traditional lending sources are opening up their spigots and providing funding for growth.

In the next few months, we will witness the shedding of Government jobs – seasonal census workers are already being dismissed and many state and municipal employees are likely to lose their jobs as state and local governments work to close their budget deficits. Those jobs should indeed be shed.

The U.S. economy is in far better shape than it was just two years ago – consumers have pared down their bloated balance sheets, have added to their savings and have started living within their means. That is good. On the production side on the economy, corporations have cut costs and have reaped the rewards in giant sized productivity gains as demand has slowly improved.

As growth continues, and I admit that the growth will be gradual, that stupendous improvement in productivity needs to be converted into new jobs. Only in that way will the growth feed on itself and be self sustaining. When the first inkling of solid new job creation is evident, I believe the stock market will break out on the upside.

Patricia W. Chadwick
President
Ravengate Partners LLC

July 19, 2010

There has been lots of haranguing and hand wringing about the level of U.S. debt, fiscal irresponsibility, the rampant printing of money and the ultimate inflationary impact from the profligacy of the current fiscal and monetary policies in this country.

But I think that view is missing some important points. Yes, the U.S. debt level is high and if spending continues unchecked, it will become a problem. But deficits and rising debt in the midst of a recession are inevitable. We have been there before – in fact many times since World War II. But we have reversed course when the economy improved and we can do the same this time as well.

Cutting off unemployment benefits will do absolutely no good and lots of harm. People who have been just holding on financially will fall off, and there is no economic benefit from that.

Raising taxes will only serve to impede economic growth. There must be concrete signs of real economic recovery before trying to solve the deficit. When the recovery has truly taken hold, then tax receipts will rise and tax rates can also be raised.

But the real problem that faces the public sector – Federal, State and local – is its lack of accountability, its lack of competitiveness and its bloated cost structure. That is where the knife needs to be used.

The private sector is lean. In fact, the corporate balance sheets of U.S. companies are in the best shape they have been for decades. Corporations are flush with cash; they don’t need to borrow and they can and are investing. Productivity continues apace, proving a point Jack Welch used to make over and over, “Productivity is infinite.”

Even the consumer is getting into better shape. Savings rates are up; spending is more in line with earnings and balance sheets are improving.

But the public sector – which is aggregating more power and scope, as the U.S. Government gets its tentacles into health care, banking, housing and energy – is a mess, to put it bluntly. Public sector wages and benefits exceed those in the private sector on a per capita basis!!! Featherbedding is the name of the game in the public sector and that, together with benefits that seem mindboggling to employees in industry, is what is wreaking havoc with deficits at every level from the White House to Main Street.

Once upon a time, public sector jobs paid less than private sector jobs – compensation for relative job security and guaranteed retirement benefits. Today, those same jobs command a premium in pay, but have foregone none of the benefits. The collective bargaining system in the public sector is broken. Elected officials at all levels of Government are beholden to the votes of union members, so there is little incentive for them to negotiate the kinds of cuts that are necessary to reduce costs and deficits.

It’s time for private industry to assume the management of entire chunks of the public sector. How about starting with the U.S. postal system at the Federal level and the Department of Motor Vehicles at the state level?

Patricia W. Chadwick

President, Ravengate Partners LLC

June 29, 2010