New Paternalists

POSITIVE EARNINGS REPORTS lifted the major equity indices to a very solid week. By the numbers, for the week ended Friday, July 17, 2009, the Dow Jones Industrial Average closed at 8743, up 597 points, or 7.3%. The Standard & Poor’s 500 closed at 940, up 61 points, or 7%, and the NASDAQ Composite closed at 1886, up 130 points, or 7.4%.

Earnings season is in full swing. Goldman reported earnings of $3.44 billion on revenue of $13.8 billion. The supporting cast includes a $10 billion federal aid package, which has been repaid, and friends in high places. Goldman has set aside 48% of this revenue, or $6.6 billion, as a bonus pool for employees for 2009.

Except for the $1.45 billion fine that European federales extracted from Intel, the chip company would have earned $1 billion on revenue of $8 billion in the first quarter. Google reported earnings of $1.87 billion on revenue of $5.52 billion. Bank of America earned $3.2 billion on revenue of $16 billion, though there were write downs due to derivatives liabilities and other challenges.

Dell, Nokia, and Ericsson all reported difficult quarters in what has become a commodity business for each of these companies. CenturyTel has become the country’s fourth largest telecomm company. It started life in 1930 as a small local carrier in Louisiana.

Everyone has an opinion as to the direction of the market and the economy. Ron Muhlenkamp, of the fund with the same name, has suggested that the worst is behind us, although the definition of future growth will be entirely different than it has been in the past. Ron’s thought is that the wild card is tax rates, and their effect on the incentive to work and to hire employees. Regarding taxes and work incentives, I have to agree with Ron.

Others would suggest that the current momentum is running on fumes, and a major adjustment is on its way. Economist Gary Shilling is suggesting an S&P 500 of 600 by year end. What to believe? There is merit to the thought that we should be wise as serpents and harmless as doves.

At the moment, insider selling is substantially higher than insider buying, with selling exceeding buying in May by a multiple of 22. I question the quality of earnings posted by all the large financial institutions. At some point, the debt load of governments around the world will have to be accounted for, with higher taxes, service reductions, or inflation that makes the 70’s seem tame.

Mario Rizzo, an associate economics professor at NYU, in a June 2007 Forbes article, suggested that some economists have become New Paternalists. According to Rizzo, these economists support ideas such as automatic enrollment in your company’s 401k plan, or a fat tax on junk foods to help us avoid junk food. The New Paternalist thinking is that these ideas are good for you, and actions you would take anyway, if you were thinking clearly and logically. The underlying assumption in the proposals of New Paternalists is the claim that they know what people really want. Do they?
Dallas Willard said that the history of God and man is God’s consistent desire to give man power and authority, and man consistently unable to live up to the task.