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From the 2005 book ‘Greenspan’s Fraud‘ by Professor of Economics (SMU, Dallas) Ravi Batra:

The verdict of history is that ethics works, and deception designed to foster the interests of the few does not. Ethical policies start out with direct benefits to the poor and the middle class, whereas deceptive policies directly favor the affluent in the name of benefiting the poor and the middle class. Ethical actions generate a trickle-up of prosperity, whereas deceptive actions offer a trickle-down. Trickle-up means that the poor benefit the most, followed by the middle class and the affluent. Trickle-down, by contrast, signifies that the wealthy reap maximum reward, possibly followed by the middle class and the destitute.

Ethical prescriptions keep the tax burden low on the poor and those in the middle, while unethical policies transfer the tax burden from the wealthy to the poor and the middle class. Ethical ideas keep aggregate demand high through high wages stemming from free enterprise, whereas deceptive practices try to revive demand in the name of free enterprise by generating debt. Ethical measures work for the benefit of all, while unethical measures benefit the few and torment the most.

Let’s take another look at the 1950s and the 1960s, when high economic growth coexisted with confiscatory income tax rates, as high as 90 percent on top incomes, but never below 70 percent. Those were the halcyon days of ethical economic policy. The sales tax rate hovered around 2 percent, whereas the Social Security tax for an individual worker barely averaged 3 percent on the first $5,000 of wages.

The tax system was ultra-progressive in the 1950s and the 1960s. In addition, the minimum wage in the period averaged $1.25, which is about $8 in 2004 prices. The economic policy was highly ethical; it was designed to provide a living wage to the unskilled and minimize the burden on those who can least afford to pay taxes. It produced vast benefits for society. Growth averaged 4 percent in the 1950s and 4.4 percent in the 1960s even without the bonanza of the computer evolution; real waged soared for all, at the average rate of 2.5 percent per year; consumer, corporate, and government debt was extremely low. Unemployment fell to as low as 3.5 percent in 1969.

Now let’s see what unethical policies, such as Greenomics, have accomplished. Between 1981 and 1983, the tax system became ultra-regressive, and has remained so to this day. Today the payroll tax is 6.2 percent on a wage base of $87,900, along with a Medicare tax of 1.45 percent. Overall, the Social Security tax burden is now much higher than in the 1950s and the 1960s. You can see what an enormous weight these levies place on the poor and middle-income groups. The top-bracket income tax rate is now just 35 percent, with capital gains and dividends barely facing taxation. The ultra-regressive system is going to be even more regressive in the future, because just as tax rates fall at the federal level, those enacted by states are expected to rise to make up for lost federal aid.

What did Greenomics have to show for itself in 2004? A trade deficit exceeding $600 billion a year? A federal budget deficit in excess of $400 billion? A federal debt over $6 trillion, compared to just $366 billion in 1969? An overall debt level that is twice the level of GDP? Net foreign debt in excess of $3 trillion, compared to a surplus in 1969? An after-tax production wage, earned by 80 percent of working Americans, that is just three-fourths of its level in the 1960s? And, of course, a CEO wage that is several hundred times the production wage, compared to just 40 times during the 1960s. It is abundantly clear that the CEO club now owns the government and economic policy.

The fall in the after-tax minimum wage is really unbelievable. In 1968, the hourly minimum was $1.60 per hour. Since the cost of living has risen by a factor of five, the equivalent minimum wage in today’s prices is $8, compared to the actual level of $5.15. This amounts to a wage decline of 36 percent. Furthermore, the Social Security tax rate in 1968 was just 4.4 percent, compared to 6.2 percent today. So after the payroll tax deduction, the minimum-wage drop approximates 40 percent.

We’re nearing the latest Presidential campaign here in America, and on Control Congress especially, there seems to be a lot of anxiety over economic issues. I share in this anxiety, but my analysis of what plagues us is often very different from John’s and that of other posters. My number one concern heading into 2008 is that distraction will win out once again, as the basic tenets of economic theory go ignored in lieu of things like the debate over immigration. The problem I have with illegal immigration isn’t that it deprives jobs from native Americans, but that it lowers wages across the board. Employing illegal immigrants is a crime, and the risk/reward is such that employers are likely to commit that crime because it benefits them in so many ways. The largest benefit to employers is that they no longer have as many obligations to their labor force as they once did. An illegal worker is someone who is scared, and this reality tilts the scales unfairly towards their employer. When this group is exploited in such a way, it adversely effects the wages paid to legal workers.

Organized labor has been demonized by big business and the political party that represents them, and the laws that protect workers have been diminished or underenforced since the 1980s. No longer is an employer charged with a crime when they fire workers involved in organizing a union. By the same token, workers who might organize and serve as an internal check on a company’s exploitation of undocumented laborers, instead are forced to keep their head down. Meanwhile, the real wage of low income workers has been outpaced by inflation year after year, while the compensation paid to CEOs and other top positions in US corporations has gone from 40 times what a low wage employee earns in the 1970s, to over 550 times that amount in the late 1990s. To compound this problem of inequality, starting in the 1980s, taxes paid by the top 1% of earners has gone down over 50%, while taxes on the middle class have gone up. Look to the incredible growth in debt obligations from 1980 to today, now totaling well over $7 trillion, and only the most intellectually dishonest person capable of operating a calculator will argue that this isn’t a direct result of tax cuts.

Middle class families and low income families spend everything they make, with savings rates at times in negative territory due to the amount of debt each has taken on in order to purchase homes, cars and pay the bills. When the credit dries up, and millions fail to make mortgage payments, lose their jobs or get sick without having insurance, not only do they individually suffer, but their purchasing power is diminished. When wages fail to keep up with inflation, over time people spend less money and drive less. Demand diminishes, supply must react through the elimination of jobs, and GDP growth lags compared with historic periods where the income gap was much smaller. Anyone interested in learning about the effect of the income gap on GDP growth, can focus on the economies of the 1950s and 1960s to get a taste of what I’m laying out here. The American middle class is what made our country’s strength legitimate. Meaning, the economy wasn’t reliant on so much risk, credit, government spending on military production, and two income households.

Conservative economic policies have been given their chance to work since the early 1980s, and when the economy is discussed today, we’re not talking about the income gap, regressive tax policy or the decline of organized labor. Why is that? Certainly these factors have played a large role in reducing the middle class, while also creating the insane amount of debt we are burdened with today. Yet for the most part they go ignored in lieu of immigration or trade policy. It is obvious that both of those issues effect the economy, both with the lowering of wages and the export of manufacturing jobs, but if we continue to act as if those two factors alone have brought us to where we are today, then we’re missing the bigger picture. Not only that, but we’re ignoring the most fundamental truths about supply and demand. Even more importantly, we’re ignoring our own history, and the economic policies from that history which actually worked to the benefit of most Americans. Right now we’re living on borrowed money as a nation, and while wages lag in comparison with inflation and productivity, it is time for all of us to take a look at the arguments put forth in favor of the economic policies of the past 25 years, and honestly evaluate which ones were wrong based on the facts.

I think that regressive taxation and the income gap are two areas that can be fixed through legislation, and without the type of costly police or foreign policy initiatives that could be rolled out with the type of attitude that made our occupation of Iraq such a nightmare. At this point I’m more confident in the not-so-sweet science of economics than I am our ability to affect favorable change through large idealistic initiatives. There are things that can be done, and just because it clashes with the conventional wisdom of political economists (most of whom have been wrong about most things in the past 25 years), they shouldn’t be pushed aside. Let’s expand the arena of economic debate leading in to 2008, and make the case for what can be done at the lowest cost to achieve the highest benefit.

FED set to cut rates on Tuesday – The dollar is already going in the wrong direction, and a .25 or .50 rate cut this week will lower its value even more. I sold one of my three US securities (BAM – Brookfield Asset Management) two weeks ago, and dumped it all into gold, and while one of my other US stock (ORCL – Oracle) is in the sweet spot [corporations are cash heavy and looking to squeeze out productivity, enterprise technology investment - particularly in the service oriented architecture realm - will continue to be that shortest distance between most two points], there are solid companies selling bonds right now at yields above 10%. One in my area, Yankee Candle, I noticed last week they were selling 10 year paper at right around that yield. In 2017 Yankee Candle may have been gobbled up by a bigger fish, but all I’d have to worry about would be it going bankrupt between now and then, which it won’t. You’ll more than double what you put in.

I’m not 100% cynical, but pretty close at this point. Foreign currency, high yield paper from the right company, gold and some other commodities…it’s time to step away from the table at this point. If you’ve got retirement money in mutual funds, be sure to check on their allocations, and if it’s a domestic stock fund, perhaps one that could be especially hurt by a slowdown in consumer spending (what wouldn’t?), it’s time to hit the books and make an INFORMED decision to either hold what you’ve got, or like I’ve said, move that money off onto the sidelines.

This company manufacturers and sells a medical device known as the CPAP. Consisting of a motor, tube and mask, the CPAP pumps a steady continuous flow of air through the mask and into the nose of a person while they are sleeping. Sleep apnea and chronic snoring are both known to be 100% neutralized when using this device. History has been full of remedies for these two conditions, and up until the CPAP entered the market, none of them ever worked. The downward trend in RMD’s stock price over the past 4.5 months has been something I’ve monitored closely, and if my weekend number crunching hadn’t been put off until today due to school, I’d have struck when the market opened on Monday. That is not the case, but regardless, I’m going in for 2400 shares at 41.54.

My instincts began to take over on my speculation regarding State Street Corp. last night, as I had spelled out clearly in the prose written yesterday that my expectations weren’t anything more than 10% over a year. I think that’s a very conservative estimate, but my instinct was to write it, so that means something. It’s a good case study in whether or not I’m wise to trust first instincts in such a way, and if the stock breaks out I’ll learn something. RMD will easily become the most expensive stock I’ve ever bought, with a P/E ratio over 52. And so, I essentially have decided to forgo the reasonably priced sedan that gets excellent gas mileage in lieu of a sports car I’d been drooling over for a long time now.

I haven’t written about anything market-related in a couple weeks. This is mainly due to other demands on my time, but my reading regime hasn’t waned, so the ideas I have are plentiful. One thing that’s on my mind is how tremendously shady the world of investment banking appears to be, with not only the collapse of two Bear Sterns hedge funds (both recently launched) within a week due to more mortgage woes, but the involvement of US Treasury Secretary Paulson in preventing SEC Chairman Cox from writing an amicus brief to the Supreme Court on behalf of Enron shareholders. The ethical implications here are blinding, as Paulson came from Goldman Sachs to work in Bush’s cabinet, and the investment banks had already lost the trial. An appeals court overturned the verdict, and so the case was SCOTUS-bound, or at least it should have been.

My intention is to make sure that I’ve always got a piece of the finance-portion of the US economy in my portfolio, and now that BSC and GS are dancing the Charleston, I’m considering State Street Corporation. Their business is more about processing transactions on a global basis, so as individual regions expand, their revenue increases along with it. A single meltdown on the domestic side won’t derail State Street, and in times like these, when the known-unknowns (thank you Rummy) are piling up, this type of a business model is more my cup of tea. Clearly not as sexy as the aformentioned shadier banks – I’m not really expecting anything more than 10% if I hold it for a full year – the hundreds of sub-custodians (banks in countries abroad that act as weigh stations or distribution points for their nations’ customers) out there should see a regular increase in transaction volume month to month when compared with the previous fiscal year, and in the South Pacific especially, this will equal higher revenue for State Street. And since 99.999999999% of this extra work is completed by their internal information technology systems, the profit margin only grows from this trend.

Malaysia-focused ETFs are what I’m looking at right now, as along with the banking pick, I want to make sure that I’ve got an invitation to this party as well. What Latin America did for my portfolios from 2003-2006, a couple well placed purchases in this region could be just the thing to help rescue me from what has thus far been a pathetic showing this year through five months (+3.71%). Simply put, I’m looking outward for my piece of the near future. My trust in the FED is in tact, but with that said, there needs to be a lot more to smile at than a series of engineered statistics for there to be still this much juice left in the US stock markets for the rest of 2007.  Still bullish on energy, especially oil, gas and coal – I’m not the slightest bit nervous about my two technology picks Oracle and Adobe – Iphone or no Iphone, I’m scared of all retail stocks at the moment, with Dell being the only one on my radar.

Ticker/Price/(Buy)/Shares/Value
ACI 35.01 (34.37) 1000 $35,000
ADBE 40.37 (41.89) 1650 $66,610.50
BAM 40.55 (39.60) 7327.5 $297,130.13
CNQ 66.39 (62.66) 3535 $234,688.65
ORCL 20.00 (19.17) 4000 $80,000
PBR 122.31 (101.04) 1891 $231,363.85
TS 49.15 (45.93) 2000 $98,320.00
CASH $100,127.53
Total $1,143,698.69
Gain 3.71% $40,883.33

The following 5 stocks now constitute about 50% of my entire Portfolio B holdings. With all five of these, I’m in it for the long haul. For readers who tend to skip over my Professor Frink posts, but are investing for retirement, these are the five stocks that I’d suggest investigating on your own:

CNQ – Canadian Natural Resources – Today I carried out the plan I’d had for a week, to buy up a big chunk on the first correction or cross-market dip, which happened this morning. A theme you’ll see in the future with stocks I tend to favor is a critical aspect of my belief in this one in particular, and that is the edge in management talent CNQ has over its competition.

BAM – Brookfield Asset Management – This is a pick I made early into the launch of Portfolio B ($1M), and my buys were based solely on annual performance and my admiration for the talent of this firm’s management, in their ability to implement original business strategies in a sector that is full of squirrels all chasing after the same nut.

PRU – Prudential – A stock I’ve included in both portfolios since their respective inceptions, and in terms of management, I feel this company is at the head of the pack. Prior to going public about 5 years ago, a widespread shedding of institution-type dead weight took place throughout the company, along with the tired, ineffective management trends that went out with them. Headquartered in New Jersey, I’ve been unable to pick up on any tarnish in the local papers in the last couple years, the likes of which has hindered the stock performance of AIG and other competitors.

ADBE – Adobe Systems – This one is predicated less upon the stock’s fundamentals or its management, but almost solely on the quality of its products, the business strategy already in place for delivering these products to consumers and the fact that its signature product is the tool of choice for graphic arts organizations, regardless of (to me) an eye-popping cost. Apple PCs are gaining market share, and Adobe is partnered closely with them. I’m not expecting any breakouts in the near future, nor am I concerned about this year even. My target hold period for these shares is close to 5 years.

PBR – PetrolBrazil – A couple years ago I spent a lot of time researching the energy industry, and attempted to find the perfect producer/seller for my particularly burdensome ethical streak. Without getting into particulars, back then I posted on this company, and I’m still a believer today.