Free Markets, Free People

Obama Administration

NYT Asks: “Why Can’t Cerberus Foot the Bill?”

Welcome to the club. I’ve been asking that question for some time now. Better late than never, I suppose:

Chrysler said the only reason it was back asking for more money so soon was that the car market was worse than it had expected two months ago.

This cavalier approach to the public purse raises a very big question. If Chrysler is really on track for a turnaround and all it needs is some financing to get over a bad patch in sales and debt markets, why doesn’t Cerberus Capital Management, which owns 80 percent of the company, put up the money itself? Why should taxpayers have to take the risk? That’s what private equity funds like Cerberus are supposed to do.

Cerberus and Daimler, which retained a stake in Chrysler, have promised to convert $2 billion in loans to Chrysler into equity, which should help reduce its debt. But Cerberus said giving fresh money would violate its fiduciary duty to investors, breaking company rules limiting how much it can commit to any given investment.

We suspect these rules would be more pliant if Cerberus deemed Chrysler to be a good deal.

It seems the secretive private-equity fund is willing to gamble on Chrysler’s survival with the taxpayer’s dime, but not its own.

The real question is, if it is violative of Cerberus management’s fiduciary duty to bail out its own company, why is it fiscally responsible for the federal government to do so?

And what does it say when the leader of liberal opinion has more qualms about a bailout than the federal government? Nothing good I would think.

What’s Just Like Death?

Taxes, as the saying goes, in that both are certain to come to us all. The corollary is that once government spending outpaces tax receipts by a significant enough amount, then taxes will inevitably rise. Or, at least, that should be the corollary.

We’ve already heard about calls for raising the top income rate to 90%. Now Marc Pascal, writing at The Moderate Voice, lays out a more comprehensive plan:

The first of several stimulus packages has just passed but it is just the beginning of our efforts to address our immediate and long-term economic problems.

After 2010, the federal operating budget will face trillion-dollar deficits as far as the eye can see. They have to be addressed for the long-term prosperity of our country and our future credit-worthiness in the world.

Eventually every American has to dig in and pay more taxes to help our country and our fellow citizens. We must put in place the laws and mechanisms to steadily increase taxes after 2010. We have to owe up to our massive public and private financial messes. Cutting federal earmarks and waste will not eliminate even half the annual deficits. The federal budget gap will require increasing taxes by over $500 billion by 2011. Fiscally irresponsible and spoiled children hate to hear this news but it’s our only choice for our collective long-term prosperity.

It is true that people don’t want to hear this, and I don’t think that is limited to “fiscally irresponsible and spoiled children.” Indeed, the inevitable raising of taxes was one of the arguments against the stimulus package, so I’m not sure to whom Pascal is referring.

A number of prominent publicly-minded millionaires and billionaires including Warren Buffet have recommended higher income taxes on themselves and their friends for several years. Certainly Mr. Buffet has been right more than most politicians and it’s time to effectuate his recommendations. Their altruistic economic view may simply be a rational response for their long-term preservation and that of the nation as a whole.

Actually, their view is not altruistic at all. The very rich, with the financial means to hire the very best in tax advice, are quite skilled at arranging their affairs so as to minimize their tax burden. When Warren Buffet clamors for raising taxes on the rich, you can be sure that he does not intend to pay as much as he possibly can to the federal government. However, those in the middle income brackets surely will. Buffet and brethren simply hope that those taxpayers will somehow be mollified by the fantasy that “the rich are paying their share too.”

On to the plan:

The Bush tax cuts should expire by their own terms by 2010 and marginal income taxes will return to the rate of 39% for incomes over $250,000. Additionally, and instead of capping executive pay, we should create a new marginal tax rate of 49% for earning over $1 million.

That is actually a somewhat more reasonable plan than some that have be floated, but still a pipe dream in terms of raising tax revenues to cover the trillions in spending contemplated (and as yet revealed) over the next four years. Even if the rich were to pay every possible penny of their income above $1 Million in taxes at that rate, how long to do you suppose they would do it for? If you had a choice of living quite comfortably and making around a million dollars, knowing that you’d keep something close to 70% – 75% of the money, would you really continue working hard enough to earn more than that if you knew you would only receive 50 cents on the dollar?

If there are any short-term tax cuts, they should be combined with long-term tax increases. The 2009 FICA payroll tax for social security is a 6.2% tax rate on every dollar earned up to a gross annual income of $106,800. For more than a decade, everyone has agreed that to save social security (without increasing the retirement age, the tax rate, or lowering the average monthly benefits of just under $1,000 per person) the best solution is to raise the taxable income limit so the wealthy contribute more to the entire system. We could provide both a short-term economic stimulus to the majority of Americans and save social security for the long term.

Let’s lower the FICA social security tax rate for rest of 2009 and all of 2010 to 5.5% but raise the income limit to $250,000. In 2011, let’s raise it to 5.75% and set the income limit to $500,000. By 2012, the rate would be 6% and the taxable income unlimited. This would simply parallel the 1.45% FICA tax for Medicare and Medicaid imposed on all earned income. Its rate will probably have to be raised to 2% after 2010 to pay for existing programs and any expansions of benefits.

Again, not an entirely unreasonable plan considering the alternatives. But what’s never mentioned when someone suggests raising the income level for FICA is that, while more tax revenue would be raised, federal liabilities would also be increased. That’s because the government is simply taking more money now and promising to pay more benefits upon retirement. That does nothing to reduce the burden of current spending, which was supposed to be the point of the tax increases.

As near as I can tell, this part of the plan would have the effect of hastening the looming entitlements crisis in exchange for perhaps pushing the current one off down the road a bit. The end result looks more like a perfect budgetary storm as the bills we’re racking up today and the entitlements we’ve promised in the future, begin to overlap.

Across the political spectrum, most people agree that our various transportation, water/sewer, and electrical grid infrastructures have been long neglected. Infrastructure spending is the best use of government stimulus money because more jobs are created both quickly and over the long term. Just to modernize our existing infrastructures systems will cost at least 2 trillion dollars over the next 10 years. Furthermore, we must also invest in new energy technologies, mass transit and high speed rail lines – all of which will cost billions more. We can’t put off such spending and we have to be honest about paying for them over the foreseeable future without resorting to further borrowing.

This is a part of the supposedly Keynesian argument that government spending provides a greater multiplier than private spending. Of course, as Bruce has pointed out before, if that were the case then why have private spending at all?

Furthermore, I really don’t understand how government spending on infrastructure and energy technologies creates jobs.

In the infrastructure realm, once a government project is done, then the job disappears. If the job is done quickly, efficiently and completed on time then it’s not government work the job just disappears that much more quickly. And after that? How does a brand new bridge create a job after it’s built? Even worse, what happens if the project turns out like the Big Dig in Boston (which seems to be much more likely)? Sure people will have jobs for longer, but the supposed benefit of the structure will shoved further into the future and the taxpayers will be on the hook for a lot more than they signed on for. How does that sort of project stimulate the economy?

With respect to new energy technologies, I’m all for it. But with the government choosing which technologies to fund, how do we know we’re getting the best there is to offer? That’s not typically the case where government picks winners and losers. And just because something is “green” does not mean that it is efficient, beneficial to the economy, and/or capable of saving anyone money in the short (or long) term. In fact, it probably means the opposite of one or all of those things. Instead, why doesn’t government get out of the way and allow nuclear power plants to be built, thus saving taxpayers billions of research dollars. That’s technology that we already have, and it’s green. Otherwise, these sorts of proposals are little more than a massive wealth transfer from one group of people to the politically favored few. There is nothing stimulative about that.

Across Europe, the average tax per gallon of gasoline ranges from $4 to $6. The U.S. federal gasoline tax is a paltry 18.3 cents per gallon with each penny raising $850 million to $1 billion per year depending upon how much Americans drive. Only when gasoline hit $4 a gallon during last summer did we start taking mass transit, buying hybrids, shunning gas guzzlers, demanding more energy-efficient cars and buildings, and seriously considering alternative solar, wind and nuclear power, and our own oil and gas reserves. The best and only way to ensure long-term energy independence is to have a serious financial incentive that hits everyone.

OK, if we accept the premise that less fuel consumption is better for Americans, then Pascal has a good point here. Of course, I’m not sure why gas station owners or truck salesman are any less deserving of being stimulated than other Americans, but that seems to be a staple of these plans. Moreover, Pascal’s plan doesn’t look all that much different than how transportation projects are already funded at the federal level.

While we should not enact excessive gasoline taxes, we can at least impose an additional and modest oil import fee on foreign barrels of oil.

More importantly, we should increase the federal gasoline tax from 18.3 to 75 cents per gallon, by monthly increments of about 5 cents per gallon over 12 months. The overall U.S. gasoline price per gallon by the end of 2010 should still be around $3.00 but the U.S. would have $70 billion a year to pay for our many needed transportation and energy infrastructure projects. This would be the responsible, mature, and intelligent solution for raising the necessary funds for these projects.

Presumably, Pascal means that we would charge this import fee to the American refiners who distribute gasoline in the country. And Pascal does suggest that he thinks this would be a tax on everyone, which in addition to the increased gas tax it would be. Strangely, this is the sort of protectionist measure one sees where domestic industries are beset by low-cost foreign competitors, yet domestic production is practically forbidden. Instead, Pascal wants to drive demand for gasoline down, so he advocates raising the costs of gasoline indirectly. Would that have the effect of increasing demand for more domestic oil? Perhaps. But it would certainly raise costs for all Americans, whether we all buy hybrids (which are much more expensive) or not, and again I don’t see how raising prices is stimulative.

Overall Mr. Pascal’s tax proposal is not altogether outlandish, and certain elements of it are almost certain to come to pass. What’s so horrible is that these sorts of plans are only necessary (and inevitable) because the government has been spending far more than it takes in for quite some time now. Even if you think that the Bush tax cuts “cost” the federal government money, you have to admit that the one thing that every administration has had in common, whether Republican or Democrat, is that federal spending never decreases. Regardless of whether tax-and-spend is better/worse than cut-taxes-and-spend, the situation we find ourselves in today is precisely because spending never seems to drop, not because tax rates go up and down.

To be sure, there is nothing evil per se about deficit spending. Whether it’s bad or not depends on where the money is going, and how the costs are intended to be recouped. But at some point the piper must be paid, and when that time comes one would hope that all the spending had created some wealth with which to pay him.

Stumulative bridge for sale

Stimulative bridge for sale

Obviously taking money from Peter and giving it to Paul (minus a transfer fee, of course) won’t accomplish that goal. And neither does building a new bridge from Paul’s house to Peter’s. Indeed, unlike people, the government can’t work harder in an effort to “do something” and create wealth, because that’s not what governments do. The only things that government is any good at is making rules and enforcing (some of) them. Although those two actions can protect wealth and the opportunities to create wealth, neither action actually creates wealth.

Thus, we’re left with the unshakable propositions that (1) government spending necessitates taxes, (2) deficit spending necessitates tax increases, (3) tax increases necessitate higher prices, (4) higher prices produce less consumer spending, (5) less consumer spending results in less business revenues, (6) less business revenues means fewer jobs and less wages, (7) fewer jobs, less wages and less business revenues means less tax dollars, and (8) fewer jobs, less wages, less business revenues and less tax dollars means … more government spending is necessary?

If you believe that last one, then I have a bridge I’d like to build you. It will be ready for use immediately upon the check clearing.

Symbolism Over Substance

Unimpressed is a word that handily describes my reaction to the Obama cabinet to this point. For instance:

Two years ago, an effort to fix No Child Left Behind, the main federal law on public schools, provoked a grueling slugfest in Congress, leading Representative George Miller, Democrat of California, to say the law had become “the most negative brand in America.”

Education Secretary Arne Duncan agrees. “Let’s rebrand it,” he said in an interview. “Give it a new name.”

Why is the law the “most negative brand in America?” Because Democrats and teacher’s unions have spent 8 years blasting a program written by Ted Kennedy (that part seems to be conveniently forgotten now) but signed by George Bush.

And their solution?

Give it a new name.

There, all fixed.

Sheesh.

~McQ

[HT: Below The Beltway]

Signing On To The “Name And Shame” Policy

Gotta love this chutzpah:

Invoking his own name-and-shame policy, President Barack Obama warned the nation’s mayors on Friday that he will “call them out” if they waste the money from his massive economic stimulus plan.

“The American people are watching,” Obama told a gathering of mayors at the White House. “They need this plan to work. They expect to see the money that they’ve earned — they’ve worked so hard to earn — spent in its intended purposes without waste, without inefficiency, without fraud.”

This from a guy who just signed into law the biggest waste, fraud and abuse bill ever concocted by our so-called representatives in Washington DC.

~McQ

Ah, Chu

Yup, nothing like the best qualified for the job:

Energy Secretary Steven Chu may be a Nobel laureate Ph.D. in physics, but his first forays into energy policy suggest he’s a neophyte when it comes to the ways of Washington.
 
At a forum with reporters on Thursday, the head of the department that has traditionally taken the lead on global oil-market policy, was asked what message the Obama administration had for the Organization of Petroleum Exporting Countries at its meeting next month.
 
“I’m not the administration,” the Cabinet secretary replied. “I will be speaking and learning more about this in order to figure out what the U.S. position should be and what the president’s position is.”
 
Chu, who is still without a deputy, said he feels “like I’ve been dumped into the deep end of the pool” on oil policy.

He may be a Nobel laureate, but it is obvious that he isn’t at all prepared for the job of Energy Secretary. How, given his obvious lack of knowledge about oil, can he put a comprehensive energy plan together for the US? Well, he wasn’t brought in to consider oil – he’s going to be the “green guy”. Oil, coal and other Neanderthal energy sources aren’t really something he’s concerned himself with. But now, he is the man.

Makes you feel all warm and fuzzy, huh? Knowing all of that certainly reassures you that his priorities are going to be what is best for the US and not best for the agenda, doesn’t it?

~McQ

Bagram/Gitmo – What’s The Difference Again?

Promises, promises:

Detainees being held at Bagram Air Base in Afghanistan cannot use US courts to challenge their detention, the US says.

The Justice Department ruled that some 600 so-called enemy combatants at Bagram have no constitutional rights.

Most have been arrested in Afghanistan on suspicion of waging a terrorist war against the US.

The move has disappointed human rights lawyers who had hoped the Obama administration would take a different line to that of George W Bush.

Prof Barbara Olshansky, the lead counsel in a legal challenge on behalf of four Bagram detainees, told the BBC the justice department’s decision not to reform the rules was both surprising and “enormously disappointing”.

Uh, just for clarification, that’s Eric Holder’s Justice Department making the ruling. The Eric Holder who works for Barack Obama.

So the big one-two this week is the declared Obama human rights policy (the US won’t let human rights get in the way of economics, the enviroment or security concerns) and detainees held by the US in Bagram (but not Gitmo).

Heh … old boss/new boss.  At least Glenn Greenwald will have something to write about for a while, won’t he?

Wow, this governing is much harder than just flapping your gums about stuff, isn’t it?

“Just words …”

~McQ

The Beginnings Of The Problem We’ve Been Warning About

What if we wanted to borrow a bunch of money and no one would lend it to us? How would that affect the “stimulus” or bailout? The government would have to either raise taxes or print money, wouldn’t it? One leads to an extended recession and the other leads to the same thing plus inflation.

Guess what?

Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg. Overseas resistance may hamper U.S. efforts to hold down home-loan rates and shore up the nation’s largest mortgage-finance companies.

This shows a real lack of confidence in foreign investors.  If you want to view it this way, this is a de facto downgrading of the credit rating of the two FMs. And, as pointed out in the final sentence, this may trip up efforts to hold down interest rates for home owners. It certainly means trouble for the plan to refinance Freddie and Fanny and for the mortgage bailout plan.

And as the problem deepens, the effort to borrow money for the FMs will only get harder. My guess is that’s just a prelude to the same problems being encountered more broadly as the government tries to borrow the promised stimulus money. This is a very dangerous, and in my estimation, unnecessary road we’re traveling. The law of unintended consequences is setting up an ambush the likes of which we’ve never seen before.

~McQ

Jindal Turns Down Federal Funds Because Of Unconstitutional Mandate

That is how the headline should have been written.  

However, Think Progress chose to characterize it this way: “Jindal Rejects $90 Million In Recovery Funding That Would Have Benefited 25,000 Louisiana Residents“. Says Think Progress:

Today, however, Louisiana Governor Bobby Jindal announced his intention to oppose changing state law to allow his Lousiana citizens to qualify for the second two unemployment provisions.

So why did Louisiana Governor Bobby Jindal do what he did?  Well here’s what his office says in a press release:

The Governor said the state will not use a portion of the stimulus package that requires the state to change its law to expand unemployment insurance (UI) coverage to qualify for up to $32.8 million of the federal stimulus funding because it ultimately would result in a tax increase on Louisiana businesses.

Sounds like a governor who feels he and his legislature should be deciding their law and not the federal government.

Isn’t that what he’s elected to do? Doesn’t that sound like a perfect 10th amendment defense? Someone point out to me where the Constitution specifies that the federal government can reach down and, without debate or legislative or executive input, force a change of state law as a requirement to receive the aid.

Think Progress says:

But it is not clear why participating in the expanded unemployment insurance program would result in tax increases for business. By Jindal’s own estimate, the recovery package would have funded his state’s unemployment expansion for three years, at which point the state could — if it chose to do so — phase out the program.

Here’s a better idea – pull the requirement at a federal level. Why isn’t that the Think Progress position instead?

TP quotes a real expert in this area to close out the post:

As New Orleans Mayor Ray Nagin suggested earlier today, perhaps Jindal’s presidential ambitions are “clouding” his judgement. “I think he’s been tapped as the up-and-coming Republican to petition a run for president the next time it goes around. So he has a certain vernacular, and a certain way he needs to talk right now,” Nagin said.

Leave it to Mr. “Chocolate City” to see it that way instead of understanding Jindal’s position is the right position for his state. You have to wonder how Nagin would feel if Jindal told him the state would only pay for levee repair if he changed the law in New Orleans and did something the state required, even if it wasn’t in the city’s best interest?

We’d hear him hollering “no way” clear to Atlanta.

~McQ

Now That’s “Change” We Do Believe

You could hear jaws dropping all over the world’s human right’s establishment as Secretary of State Hillary Clinton stated the Obama administration’s new policy about human rights vs economic, environmental and security concerns:

Amnesty International and a pro-Tibet group voiced shock Friday after US Secretary of State Hillary Clinton vowed not to let human rights concerns hinder cooperation with China.

Paying her first visit to Asia as the top US diplomat, Clinton said the United States would continue to press China on long-standing US concerns over human rights such as its rule over Tibet.

But our pressing on those issues can’t interfere on the global economic crisis, the global climate change crisis and the security crisis,” Clinton told reporters in Seoul just before leaving for Beijing.

Hmmm … 4th place.

But Gitmo?

Bad.

~McQ

It’s Hard To Tell The Players Without A Program … Or Even With One

Who said:

“We should look at the vehicular miles program where people are actually clocked on the number of miles that they traveled.”

Why that would be Ray LaHood, the supposed Republican Secretary of Transportation.

Who said:

“The policy of taxing motorists based on how many miles they have traveled is not and will not be Obama administration policy.”

Well if you guessed Barack Obama, you’re wrong. And if your second guess was Robert Gibbs, President Obama’s Press Secretary, you’re 0-2.

No, it was Lori Irving.

And who is Lori Irving?

Well she’s the department spokeswoman for Secretary Ray LaHood’s Transporation Department.

Which begs the question – who is running Transportation? Or, perhaps, for whom is Lori Irving really the spokeswoman?

And more importantly why is a Republican putting this idea forward in the first place, I mean if its true they’ve finally “found” themselves?

~McQ