The Politics of Finance

“My business is writing for corporations (mostly Microsoft),” writes a reader, “so I pay close attention.

“Even though I agree with your politics, I prefer not to see anyone’s political views in my financial newsletters.”

Our reader goes on to suggest these reasons why we should omit politics from our writing:

* Including political views instantly loses you half your potential readers. And it doesn’t really endear you to the rest

* Including political views panders to your political preference, and curries favor. That’s uncomfortable and patronizing.

“Worst of all,” says our reader “it makes me wonder if you ever unconsciously – God forbid, consciously! – shade your financial advice to conform with my political views.

“You make me doubt your veracity and research. Do you ever give me financial advice you think I emotionally want to hear, rather than giving me your best, coldhearted financial research?”

Ahh to provide coldhearted research. We humbly submit… Politics are the problem, and you ignore them at your peril.

Exhibit A: The “Republican response” by Rep. Paul Ryan (R-WI).

“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe… Their day of reckoning has arrived. Ours is around the corner. That is why we must act now.”

We couldn’t agree more. We published the first edition of Financial Reckoning Day in 2003. Two months before a Republican Congress passed a Republican president’s plan to create a vast new entitlement program called Medicare Part D. Which, according to the Medicare Trustees has exceeded its projected $1 trillion price eightfold, adding $9.4 trillion to the pile of US government’s unfunded liabilities.

It passed with the enthusiastic support of Rep. Paul Ryan.

Mr. Ryan has since scrubbed this press release from his website, but it’s still floating in cyberspace.

“I am convinced that this is a step forward for Wisconsin seniors,” he said at the time, “and that it will help save Medicare for future generations, including the 77 million baby boomers who will begin retiring soon.”

Sure they “saved” Medicare, but at what cost? The true cost never gets discussed. We wonder… Is pointing this out a political view?

For his part, the president offered to freeze “some” discretionary spending that would trim the deficit by $400 billion…over the next 10 years. That met with some applause and approval during the speech.

But let’s do the math. $400 billion over 10 years is $40 billion per year. The Congressional Budget Office (CBO) announced this morning they project the 2011 deficit to come in at $1.5 trillion. So the cut in discretionary spending works out to just 2.7% of this year’s deficit.

This proposal will get about as far as the promise he made last year to freeze “some” discretionary spending for three years, saving $250 billion. Is making that observation a political view?

The president also threatened to veto any bill with “earmarks.” The promise went over well with the “Bridge to Nowhere” crowd, yes, but earmarks typically make up just 1-2% of overall federal spending.

Even that’s a side note. Eliminating earmarks actually does nothing to cut the overall amount of spending.

“Because earmarks are funded from spending levels that have been determined before a single earmark is agreed to,” wrote our friend Dr. Ron Paul (R-TX) two years ago, “with or without earmarks, the spending levels remain the same.”

The president promised to get the infamous 1099 provision of the health care bill repealed. But if it’s such a bad idea, why did it pass both houses of Congress and get signed into law in the first place?

Too, there’s a pledge to cut the corporate tax rate, second-highest in the world behind Japan. It’s not the first time the administration has talked about this.

These are two good ideas. But what, if anything, is on the table for addressing the deficit? The debt? Unfunded promises to provide security, health care and retirement over the next 75 years?

“We know what it takes to compete for the jobs and industries of our time,” says the president. “We have to make America the best place on Earth to do business… The first step in winning the future is encouraging American innovation.”

“Novel concept,” wrote our friend Mark Gordon of Odyssey Marine, a true innovator in the use of robotic technology to recover sunken treasure. “The government needs to support American businesses that are creating innovation breakthroughs that in turn will create employment and strengthen our economy!”

We can forgive Mark for feeling a little churlish, seeing how both the Bush and Obama administrations sided with the Spanish government in a court case over the $500 million “Black Swan” treasure that Odyssey found in 2007.

Some of the WikiLeaks cables released in December reveal the fruits of Odyssey’s labor were offered up by the State Department to the Kingdom of Spain in exchange for a painting a wealthy political family from California says was stolen by the Nazis and now hangs in a museum in Madrid.

“I know that I sure feel like the beneficiary of that government support!” Mark says.

“Our free enterprise system is what drives innovation,” the president continued. “Throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need.”

But what does this really mean? The answer may well lie in something the president didn’t even touch on last night.

Uncle Sam is getting into the business of developing new drugs. The Obama administration is launching a $1 billion agency called the National Center for Advancing Translational Sciences.

Seems someone in the White House has decided the pharmaceutical industry isn’t developing new drugs fast enough. “The center will do as much research as it needs to do so that it can attract drug company investment,” The New York Times explains.

“Nothing good will come from this,” says one of Patrick Cox’s contacts – a scientist who’d been in charge of new drug approval for a Big Pharma firm.

“I’m not telling you his name or the company, however, because everybody lives in fear of the FDA,” Patrick says. “If you irritate the gatekeepers to the market, the regulators who control the drug approval process, you are in serious trouble.”

The “problem” isn’t that drug companies are failing to innovate…rather, they have a miserable time running their innovations through the FDA’s gauntlet.

Example? A weight-loss drug called lorcaserin. “It was denied approval,” Patrick explains, “because rats in the test had a minuscule, within the margin of statistical error, increase in cancers. On the other hand, obesity causes huge and verifiable health problems in people, but the FDA decided we can’t have lorcaserin. Madness.”

“The beneficiaries” of the new federal agency “will almost certainly be Big Pharma companies that supported the President’s health care plan. They also benefit from the high regulatory barriers because small drug startups can’t afford to go through the regulatory process. As a result, they are forced to cut bad deals with Big Pharma.”

We could go on, but we wouldn’t want politics to interfere with our coldhearted research.

Addison Wiggin
for The Daily Reckoning