Free Markets, Free People

Economy


Cap-And-Trade – The Impact And The Politics

It is time to get real about what the promised cap-and-trade tax means to the average American.

Politicians love cap and trade because they can claim to be taxing “polluters,” not workers. Hardly. Once the government creates a scarce new commodity — in this case the right to emit carbon — and then mandates that businesses buy it, the costs would inevitably be passed on to all consumers in the form of higher prices. Stating the obvious, Peter Orszag — now Mr. Obama’s budget director — told Congress last year that “Those price increases are essential to the success of a cap-and-trade program.”

Essentially Congress will be creating a new commodity literally out of thin air. It will only create a certain amount of that commodity and so create instant scarcity. As we all know, scarcity drives up prices. The next year, the plan is to remove a portion of the created commodity from the market creating even more scarcity and driving prices for the commodity even higher.

Imagine steel as the commodity. Imagine steel prices going through the roof. Do you suppose they might effect the price of, say, automobiles? Metal buildings? The price of building a bridge or sky scraper?

So who, in the final analysis, is going to end up paying for this increase in steel prices? Why the final consumer, of course. Naturally, with steel, in some cases you can choose to consume (buy a new car, rent an office or approve the bridge) or not consume. However, with the CO2 tax on all industry, to include manufacturing, service, transportation and energy, you have little choice in the matter of consumption. You will be picking up the tab for this.

That brings us full circle to the promised tax cut for 95% of America and my promise that what government gives with one hand it takes with another, making the tax cut illusory at best:

Hit hardest would be the “95% of working families” Mr. Obama keeps mentioning, usually omitting that his no-new-taxes pledge comes with the caveat “unless you use energy.” Putting a price on carbon is regressive by definition because poor and middle-income households spend more of their paychecks on things like gas to drive to work, groceries or home heating.

After all the caterwalling the left does about “progressive taxation” they are about to implement the most regressive tax I can imagine. And as I’ve pointed out, the tax is pervasive, touching just about all aspects of life. Food prices will rise. Energy prices will go through the roof.

The Congressional Budget Office — Mr. Orszag’s former roost — estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).

Of course there is talk of subsidizing those at the lower end of the economic ladder so the impact of rising prices is lessened. Naturally that also negates the impact of the cap-and-trade system. In the end, your tax dollars subsidze the system while increased prices are passed along by so-called polluters. As the price of permits rise over the years, permit holders pay the increasing cost, pass it along and you again subsidize it. The rich can afford it, the poor will be subsidized, so who will get squeezed? Why that middle class that Obama and Biden are so concerned with.

Economically, estimates are that we’re going to have a miserable year in ’09 and possibly ’10. But we may begin to see a recovery really start to take hold in ’11, just in time for the 2012 presidential election. The smart politicians in Washington plan to delay cap-and-trade implementation until 2012. The reason should be obvious. If cap-and-trade has the expected impact on the economy, we could very well see the recovery stall and head back into recession. But politically the timing would be perfect. The mirage of recovery would be just enough to keep the current administration in power for another 4 years, before the economy wrecker of cap-and-trade begins to do its work.

~McQ


There are jobs and then there are ‘jobs’

Some specifics about the record job losses:

Hiring last month in goods-producing industries fell by 276,000. Within this group, manufacturing firms cut 168,000 jobs bringing the total since the recession began to 1.3 million.

Construction employment was down 104,000 last month. The unemployment rate in that sector is now 21.4%, almost double where it was this time last year.

Service-sector employment tumbled 375,000. Business and professional services companies shed 180,000 jobs, the fourth-straight six-figure loss, and financial-sector payrolls were down 44,000.

Retail trade cut almost 40,000 jobs, while leisure and hospitality businesses shed 33,000 as households curtail nonessential spending.

Temporary employment, a leading indicator of future job prospects, fell by almost 80,000.

So there, in a nutshell, is the status of the productive sector of the economy – the sector that produces wealth, jobs and growth. The sector that should be the focus of any recovery plans and stimulus money.

Instead, what is the President talking about in Ohio, as he panders in the buckle of the rust belt (via email transcript)?

Today I’m pleased to announce that Attorney General Eric Holder and the Department of Justice are making available $2 billion in justice assistance grants from the recovery act. (Applause.) That’s funding that will help communities throughout America keep their neighborhoods safer, with more cops, more prosecutors, more probation officers, more radios and equipment, more help for crime victims, and more crime prevention programs for youth.

 Cities and states can apply for these funds right away, and as soon as those applications are received, the Justice Department will start getting the money out the door within 15 days. In Savannah, Georgia, the police department would use this funding to hire more crime and intelligence analysts and put more cops on the beat protecting our schools. In Long Beach, California, it will be able to help fund 17,000 hours of overtime for law enforcement officials who are needed in high-crime areas.

West Haven, Connecticut, will be able to restore crime prevention programs that were cut even though they improved the quality of life in the city’s most troubled neighborhoods. And the state of Iowa will be able to rehire drug enforcement officers and restart drug prevention programs that have been critical in fighting the crime and violence that plagues too many cities and too many towns.

So the list goes on and on. From Maine to San Francisco, from Colorado to New Jersey, these grants will put Americans to work doing the work necessary to keep America safe. They’ll be directed only towards worthy programs that have been carefully planned and proven to work. And Vice President Biden and I will be holding every state and community accountable for the tax dollars they spend.

More cops, more prosecutors, more parole officers.

Private sector jobs? Nada.

Now I understand we need all of those people he talks about. But they won’t help one bit in creating new wealth, new jobs or new opportunities for both, will they? They’re a number Obama can point too when he tries to sell is jobs “saved or created” nonsense in a few years. But as far as a stimulus to the economy – huh uh. What they are, however, are precisely what is expected from a big government liberal – government jobs.

As the WSJ further informs us after giving us the bad news about the productive sector of the economy above, “the government added 9,000 jobs.”

‘Nuff said.

~McQ


The Dishonesty Inherent In The Administration’s Economic Claims

David Brooks, 3 days after a semi-courageous, “what-the-heck-is-going-on” column, received calls from the senior staff at the White House and quietly got back in line:

In the first place, they do not see themselves as a group of liberal crusaders. They see themselves as pragmatists who inherited a government and an economy that have been thrown out of whack. They’re not engaged in an ideological project to overturn the Reagan Revolution, a fight that was over long ago. They’re trying to restore balance: nurture an economy so that productivity gains are shared by the middle class and correct the irresponsible habits that developed during the Bush era.

The budget, they continue, isn’t some grand transformation of America. It raises taxes on energy and offsets them with tax cuts for the middle class. It raises taxes on the rich to a level slightly above where they were in the Clinton years and then uses the money as a down payment on health care reform. That’s what the budget does. It’s not the Russian Revolution.

How moderately wonderful, right? They’ve now dazzled Brooks again. They’re not “liberal crusaders”, they’re moderate pragmatists who want to lend stability to the economy.

Brooks then goes through a litany of things “Republicans should like”. He finishes up by claiming he still thinks they’re trying to do too much too fast, and that may lead to problems “down the road”, but all in all, he’s impressed by their sincerity, commitment to what is best for America and the fact that all of this is not going to cost anywhere near what all the critics claim.

On their face, the arguments are nonsense. This is the biggest planned expansion of government in a century. Estimates are the federal government will be hiring between 100,000 and 250,000 new employees to oversee its new programs and spend the trillions of dollars being borrowed through debt instruments right now.

Unlike the rather facile and easy to impress Brooks, Charles Krauthammer takes a look at the spin and deconstructs it rather handily.

At the very center of our economic near-depression is a credit bubble, a housing collapse and a systemic failure of the entire banking system. One can come up with a host of causes: Fannie Mae and Freddie Mac pushed by Washington (and greed) into improvident loans, corrupted bond-ratings agencies, insufficient regulation of new and exotic debt instruments, the easy money policy of Alan Greenspan’s Fed, irresponsible bankers pushing (and then unloading in packaged loan instruments) highly dubious mortgages, greedy house-flippers, deceitful homebuyers.

The list is long. But the list of causes of the collapse of the financial system does not include the absence of universal health care, let alone of computerized medical records. Nor the absence of an industry-killing cap-and-trade carbon levy. Nor the lack of college graduates. Indeed, one could perversely make the case that, if anything, the proliferation of overeducated, Gucci-wearing, smart-ass MBAs inventing ever more sophisticated and opaque mathematical models and debt instruments helped get us into this credit catastrophe in the first place.

And yet with our financial house on fire, Obama makes clear both in his speech and his budget that the essence of his presidency will be the transformation of health care, education and energy. Four months after winning the election, six weeks after his swearing in, Obama has yet to unveil a plan to deal with the banking crisis.

As Krauthammer points out, none of the costly things that Obama pledged to focus on have anything to do with the down economy. They all do, however, include the  the probability of causing even more damage if enacted.

And since they’ve been in office, Obama or his surrogates (mostly in the guise of Timothy “tax cheat” Geithner”) have talked down the stock market, the auto industry, the oil and gas industry, the health care industry, energy, banks, financial and the defense industry. They still don’t seem to realize what impact their words have on markets, or if they do, then one has to assume they’re doing this on purpose. I tend toward the side of ignorance, but at some point, after it has been pointed out to them over and over again, you have to abandon that belief and head toward the other conclusion. Their words, quite literally, are wrecking the economy.

Markets can’t stand instability and insecurity. When leaders talk about what’s wrong with this industry or that industry and what they intend on doing to punish or change how that industry does business, investors get very nervous. As you might imagine, they’re extremely nervous right now, as reflected by the Dow. They know that there is a government assault coming, in some form or fashion, on the industries I’ve mentioned. So they’re going to get out of the position they now hold in them and they’re going to refrain from investing in them until they’re clear what that assault will entail. And I don’t use the word “assault” lightly.

Health care, defense, oil and gas, pharma, auto, energy, housing, banking, finance etc. are all under a form of assault by the new administration. Health care will change and expand dramatically under government auspices, oil and gas will lose tax breaks, cap-and-trade will bury the auto industry and shoot energy prices through the roof – affecting transportion and manufacturing. Cram-downs affect the housing, banking and financial sectors. Who wants to invest in any of that when a judge can reward irresponsible home owners with a write down of their principle? Meanwhile responsible home seekers will see the interest rate go up by about 2 points to cover the losses. That’ll spur homebuying, won’t it?

Like Dale pointed out about the Red Kangaroo, you can see this coming from a mile off. And “useful idiots” like David Brooks climb back on the bandwagon and resume cheering the parade to economic ruin.

~McQ


Watching the Kangaroo

This morning on the Opie and Anthony show, Aussie comedian Jim Jeffries was a guest, and he told an amusing story.  It seems that he and some fellow comedians were travelling from Perth to Kalgoorlie for some sort comic event.  Things went well for a bit, until, about three hours outside of Perth, they ran into an emu. The poor emu didn’t die immediately, and, tragically, had to be dispatched with a large rock.  Their car, however, did die, due to radiator damage.

They were stuck in the Australian desert with no transportation.  Fortunately, in Australia, they do keep cell towers along the major roads, so Jeff and the boys were able to call a fellow they knew back in Perth, to ask if he could come help them out, and if he did, they’d try to see if they could get him some mike time at the comedy show.

He agreed, and told them he’d be on his way in about an  hour.

So, four hours later, Jeff saw his car, coming down the road a couple of miles away.  He also saw, anbling slowly towards the road, a large Red Kangaroo.  As he watched, the car get closer, he also watched the kangaroo come closer and closer to the road.  And in what must have been sort of a horrified fascination, he watched the convergence until BOOM!  The car and kangaroo collided.

Fortunately for them, their friend’s car was still driveable after the accident, although the ‘roo was a total write off.

But, the story really encapsulated the way I’ve been feeling watching the economy over the last several months.  You can see the elements coming together for some sort of horrible wreck, but there’s not really anything you can do to stop it.

And it looks like the kangaroo is coming closer.

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department…

Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding…

The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted. The bill would allow it to borrow $100 billion absent that approval. Currently, its line of credit with the Treasury is $30 billion.

Let’s examine the implications of this.  TheFDIC fund is now depleted, and needs to be recharged.  Not with $30 billion, but with $500 billion. Banks howled at premiums being increased, saying it could damage their business even further.  So now Sec. Geithner, Chmn. Bernanke, and Chmn. Bair are asking for the federal government to open their credit line, which is currently restricted to $30 billion.

Does this mean that the SecTreas, FDIC, and Federal Reserve all believe the FDIC may need to come up with half a trillion dollars to pay back depositors for bank failures?  If so, that’s…disturbing.

What do they know about the health of banks that we do not in order to come up with that number?  What will the general public do if they figure out the implications of this?  How will the markets respond?

Hop.  Hop.  Hop.


Let Them Buy Stock

While stocks are tanking, partially due to uncertainty and skepticism over President Barack Obama’s economic agenda, the president encouraged people to invest:

As Wall Street tumbles, President Barack Obama offered up some investing advice on Tuesday, telling a wary nation that stocks are becoming a “a potentially good deal” for those willing to think long term. The White House later cautioned people not to read too much into the statement.

Obama also said he will not base policy on what he called the “day-to-day gyrations of the stock market.” The Dow Jones industrial average fell again Tuesday after plunging on Monday to it lowest level in more than 11 years.

The index has lost more than half its value since a record peak in October 2007. The toll on retirement plans, college savings and nest eggs has been huge.

“You know, the stock market is sort of like a tracking poll in politics,” Obama said during an appearance with British Prime Minister Gordon Brown. “It bobs up and down day to day, and if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.”

Yet lately, Wall Street’s direction has been down, period. Investors are in despair over the state of financial companies, the deepening scope of the recession and doubts about the government’s various attempts to bolster the banking sector and create jobs.

Talk show host Neal Boortz responded with this:

Is he kidding? He’s waging an all-out war against capitalism, and he wants us to buy stocks? This man who wants a government-controlled economy wants us to invest in the stock market? This is like the Surgeon General telling us to go out and have unprotected sex with drug addicted street walkers. Yeah … let’s all do that!

No doubt that stocks may improve in the future, but economic forecasts aren’t that great in the long term, considering the amount of debt being piled up and unfunded liabilities from entitlements.

And who wants to be an investor when they constantly have a target painted on their backs by politicians who make class warfare the focal point of their economic agenda?


The “Deregulation” Bogeyman

As Dale has mentioned before, ginning up support for massive federal expenditures and deepening deficits was much easier for FDR because he had Nazis. Obama does not have any such luxury, so he has to invent an equivalent enemy. Luckily for him, decades of propaganda have cemented the idea into many heads that capitalism=rightwing=nazi, leading to the inexorable conclusion that anyone or thing whose primary purpose is to make profit is dangerous and must be controlled.

Dovetailing nicely with that need is the meme that deregulation is to blame for the current financial mess. Although it’s a fairly ridiculous claim (as I’ve pointed out before), that won’t stop “studies” like this from being published and reported on:

$5 BILLION IN POLITICAL CONTRIBUTIONS BOUGHT WALL STREET FREEDOM FROM REGULATION, RESTRAINT, REPORT FINDS

Steps to Financial Cataclysm Paved with Industry Dollars

March 4 – The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse, according to a 231-page report issued today by Essential Information and the Consumer Education Foundation.

The report, “Sold Out: How Wall Street and Washington Betrayed America,” shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation. Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act to stop predatory subprime lending.

The quote above comes directly from the report’s financial backers, Essential Information and the Consumer Education Foundation. The former is a non-profit that was created by Harvey Rosenfield, a lawyer who also controls the advocacy group Consumer Watchdog, formerly known as the Foundation for Taxpayer and Consumer Rights. The latter is an entity created by Ralph Nader. None of that information is found either in the press release, or in the news stories reporting on (i.e. quoting) the release.

The Hill reports:

The organizations are a nonpartisan, nonprofit advocacy groups which push for stronger consumer protection laws and to curb “excessive corporate power.”

The report alleges that excessive deregulation of the financial sector combined with undue influence from the billions spent in lobbying and political contributions resulted in the current financial crisis.

And CBS’ Political Hotsheet finds:

The two men behind the report are California lawyer Harvey Rosenfield of the nonprofit Consumer Education Foundation and Robert Weissman of Essential Information, a Washington nonprofit “that seeks to curb excessive corporate power.”

The report argues that the lobbying and contributions kept financial derivatives from being regulated, led to the repeal of regulatory barriers between commercial banks and investment banks and kept the government from stepping into halt predatory subprime lending.

The remainder of the reporting is merely quoting and paraphrasing the press release. Absolutely zero analysis of the actual report is offered. Why would they report anything else? Well, just looking at the press release provides one clue:

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. “Sold Out” details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

1. 1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
2. Regulatory rules permitted off-balance sheet accounting — tricks that enabled banks to hide their liabilities.
3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives — which became the basis for massive speculation.
4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal “risk-assessment models.”
7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

The damning list offers only one instance of actual deregulation (the Glass-Steagall Act), at least seven instances of regulation that the authors simply disagree with (nos. 2-5, and 8-10), one claim each of “global regulators” and ratings agencies failing to do their respective duties (nos. 6 and 12), and two allegations that federal regulators didn’t pursue their jobs aggressively enough (7 and 11). So, despite the bold claim that “Financial deregulation led directly to the current economic meltdown,” the authors produce almost no evidence to support their conclusion.

It seems like that may have been a little more newsworthy than simply regurgitating the press release.

Then there is the fact that a Ralph Nader organization is partly responsible for the funding. Not only has the man run for president four times, one of those times perhaps leading to the election of George W. Bush, he’s notorious for his left-wing politics, including having a serious distaste for corporate America and capitalism.

Could be relevant, no?

But the real failure of journalism here was to take anything that Harvey Rosenfield has to say at face value.

The Foundation for Taxpayer and Consumer Rights (FTCR) [owned by Essential Information creator, Harvey Rosenfield] has decided to re-brand itself as “Consumer Watchdog.” Will a simple name change help shore-up the eroding reputation of this “consumer group?”

Few days pass without someone from FTCR pontificating in a newspaper story or TV report. Agents of this organization often are quoted — without explanation of their credentials — about auto, fire or health insurance, gasoline pricing, stem-cell research, or just about any public policy debate on the FTCR’s mind.

[...]

Behind the pithy quotes from FTCR’s leaders lies an organization with too much to hide and too many faults to be taken seriously anymore. It has survived by quietly pocketing millions of dollars in fees stemming from an initiative it wrote and sponsored nearly two decades ago. Along the way, it has engaged in hypocritical and speculative stock trading, enjoyed the secret patronage of wealthy trial donors, and either cozied up to or bullied politicians. All of this came despite operating under IRS rules as a “public-benefit” charity.

[...]

Of course, the public has no idea what is really motivating FTCR because its agents refuse to disclose their financial backers. Their reasons for hiding the facts are insulting to the average Californian’s intelligence.

FTCR declined to release a list of donors on its website by ludicrously equating their work to the civil rights movement in the South. It’s refusal to list details about its financial backers is particularly galling since FTCR spends a lot of time lambasting politicians for alleged corruption surrounding their own political donations.

One source of income is clear, thanks to some available public disclosure forms. Following the disastrous 1994 Northridge earthquake, founder Rosenfield extracted $5 million in a consumer-protection settlement with Allstate Insurance. The money was placed in a new group he controls, the Consumer Education Foundation, which was supposed to prevent the kinds of insurance disasters that followed the Northridge quake.

But nearly a decade after the group was formed, its biggest accomplishment appears to be paying Rosenfield a $100,000 salary and writing a few grant checks … including to Rosenfield’s own FTCR, to fund its operations. One wonders what the judge in the Allstate settlement would think about this cozy relationship, let alone why Northridge consumers have yet to see much benefit from the $5 million that was paid out supposedly for the public good.

It gets even more absurd.

Rosenfield’s Consumer Education Foundation invested some of its Northridge windfall in Enron stock — the Texas company that bilked California consumers out of billions of dollars. This laughable investment, which the CEF was forced to reveal in disclosure statements, is almost too incredible to believe. The “consumer” foundation put its money in one of the biggest consumer ripoff companies in U.S. history.

Enron wasn’t the only hypocritical stock purchase made by the Rosenfield’s Consumer Education Foundation. The group purchased stock in Abbott Labs, Amgen, Merck, Pfizer, Idec Pharmaceuticals, Johnson and Johnson, and Proctor and Gamble. Meanwhile, FTCR would soon get busy lambasting politicians for accepting campaign donations from these same companies. And while FTCR has lashed out at automobile and chemical companies, the “consumer” foundation has invested in Clorox, DuPont, General Motors, Ford Motors, and Toyota Motor Credit.

There’s more on Rosenfield’s endeavors here (scroll through the comments to the ftcrfollies.org stuff), but the original site is now defunct, so caution is warranted.

In any case, it seems that Rosenfield’s alleged background as an agent provocateur should raise enough red flags to warrant at least a mention that perhaps the report he’s funded (written?) should be taken with a grain of salt. Instead, we get news stories that basically repeat exactly little more than the juiciest allegations from the press release, absolutely zero analysis of the actual report (or the press release for that matter), and nothing more than the bare bones information regarding the provenance of the report.

With apologies to Mike Judge, “What would you say ya do here, MSM?”


Tax the Rich and What Do You Get?

Another day older and deeper in debt. Of course, that’s because you plan to spend $3.6 Trillion on budget over the next year.

WASHINGTON – President Obama laid out his first budget plan, a bold $3.6 trillion proposal that would transfer wealth from rich taxpayers to the middle class and the poor, and predicts a stunning federal deficit of $1.75 trillion this year – nearly four times last year’s record.

Obama blamed the expected federal deficit explosion on a “deep and destructive” recession and recent efforts to battle it, including the Wall Street bailout and the $787 billion stimulus plan.

[...]

Among the budget proposals, the plan would:

extend a $400 tax credit for most workers while letting expire former President George W. Bush’s tax cuts for couples making more than $250,000 a year. The budget contains almost $1 trillion in tax hikes over 10 years on individuals making more than $200,000 and couples earning more than $250,000;

close tax loopholes for the wealthy to raise $318 billion toward a down payment on Obama’s universal health care plan;

clamp down on the Pentagon budget, which would get a 4 percent boost next year, but would then get increases of 2 percent or less over the next several years;

make permanent the expanded $2,500 tax credit for college expenses;

spend more than $6 billion on cancer research at the National Institutes of Health next year, a 15 percent hike;

spend $3.9 billion to improve the nation’s sewage treatment plants and drinking water systems; and

raise $15 billion a year, beginning in 2012, from auctioning off carbon pollution permits to help develop clean-energy and renewable-energy technologies. The administration “will work expeditiously” to get Congress to approve an 83 percent reduction in global warming emissions by mid-century. There’s also more money at NASA for space-based monitoring of greenhouse gases.

sisyphus
After reviewing some of the comments from those intended to be taxed, as well as some of the criticisms of those taxpayers’ intelligence [as an aside, I think the liberals denouncing both the story and the interviewees are playing a little fast and loose with the assumptions, since the taxpayers displayed no misunderstanding of marginal rates, and voiced concerns solely based on principles], I got to thinking about how much money will this proposed tax hike really raise. This seems important, not only because of the size of proposed budget, but also since a common refrain from those in favor of letting the top rate snap back to 39.6% (from the current 35%) is that it will only cost those taxpayers 5 cents on the marginal dollar, which is very little to worry about much less enough to change behavior, or so the argument goes.

Before looking at the actual numbers, let’s get something straight first. While it is accurate to say that raising the top rate only costs these taxpayers a nickel per extra dollar earned, that is not all that is being proposed. These taxpayers will also be losing deductions and credits that they would otherwise have, as well as paying extra taxes on anything subject to cap-and-trade taxes, should that lovely piece of legislation be passed. Moreover, if you truly believe Obama when he says that those with incomes less than $250,000 per year will receive a tax cut, then it seems ludicrous to pretend that at least some, if not virtually all, of those taxpayers near the margin will change their working behavior so as to be in the benefit group rather than the extra-taxed one.

Nevertheless, for purposes of calculating the expected tax revenues generated under this plan, I’m going to assume that nobody changes their behavior in the slightest (i.e. everyone earns as much taxable income as possible), and that the number of taxpayers and the amount of taxes paid largely mirrors the 2006 numbers (which is the most recent data available).

According to IRS figures [xls], about 50% of all taxable income came from the $200,000 and above earners in 2006. By my calculations that came to $2.056 Trillion dollars in taxable income from 3,847,241 taxpayers (about 9% of all returns). This cohort paid approximately $522 Billion in taxes, or about 62.4% of the total $837 Billion in tax receipts. These are the people upon whom the new burden will be placed according to President Obama.

In order to figure out how much taxable income is above $200K (there is no breakout for $250K and above), I took all of the taxpayers in the $200K to infinity range (3,847,241) and multiplied it by 200,000 (= 769,448,200,000).

I then subtracted that number from the (rounded) total of taxable income for the same range (@ $2.056 Trillion), and got $1,286,551,800,000. If I thought about it correctly, then that should be the amount of taxable income above $200K.

I then took my above-$200K number and multiplied it by 5 cents, figuring that the increase in marginal rate of 4.6% would lead to about a nickel per taxable dollar earned in new revenues, if everything were to remain static.

From all of that I figured that approximately $64.3 Billion in new taxes would be raised by the new tax hike … to cover a $3.6 Trillion budget.

I sent my calculations to Dale, who became so engrossed in the matter that he put together an entire spreadsheet figuring the numbers in not one, not two, not three, but in six different ways. I realized later that asking Dale to check out my math was rather like standing on one foot and excitedly calling attention to my “skill” while in the midst of an acrobat convention.

Anyhoo …

After Dale played with the numbers [xls] for awhile, he arrived generally at the conclusion that the absolute most that could be raised was in the neighborhood of $85 Billion, and at worst around $55 Billion. On average, Dale calculated that approximately $65 Billion was the likely amount of new tax revenue that could be expected if all payers in the 2006 cohort behave exactly as they did then. Sticking with the metaphor, “Yes, Michael, that’s a decent one-legged stand you have there.”

In short, a complete klutz has a better chance of joining the Flying Wallendas than the bottom 95% of taxpayers do of getting a tax cut. Instead, they will all see a significant tax hike, whether in their marginal rates, in excise taxes, corporate taxes, fuel taxes, or other forms of indirect taxation. And as those taxes begin to mount up, and the national debt does it’s best imitation of the Challenger, people will work and produce less and less, and tax revenues will dry up.

That is the plan for our recovery. Read it and weep.


The Shape of Things to Come

It seems so hard to remember those halcyon days, long ago, when there was some optimism about the country’s economic future. Why, it seems like just last week, when Fed Chairman Ben Bernanke was telling us to be cautiously optimistic about the near future.

In his twice-yearly testimony to Congress, Bernanke conceded the economy was undergoing a “severe contraction”, but held out hope of recovery if the White House’s latest bail-out helped to unblock lending to households and businesses.

“Only if that is the case, in my view there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” he told the Senate banking committee, adding that healthier global markets would also be essential if the US economy was to return to health.

Some were willing to go even farther, in those happier days of February, 2009.  Some chap named Bernard Baumohl of the Economic Outlook Group who seems really to believe that happier days are just around the corner.

“We are not doomed to a lost decade of the sort experienced by Japan in the 1990s,” Mr. Baumohl says. “Nor are we in a depression. We view the drop in GDP in the last quarter, which we may see repeated in magnitude this quarter, [as] symptomatic of a recession in its final convulsive stages, to be followed by a recovery in the second half of the year.”

Oh, wait.  That was last week.

This week started off with the S&P 500 dropping another 4.66% today, closing at 700.82, and the Dow off by 4.24% to close at 6,763.29.  Well, you can’t slip something like that past the boys at the Dallas Morning News.

“The number 7,000 is not what is important,” said Hugh Johnson, chairman of Illington Advisors in Albany, N.Y. “What is important to everyone is the message that the market is sending us with these losses.”

And that message is that the current recession probably will be longer and more severe than most people expected. For months, the consensus on Wall Street was that the low of 7,500 that the Dow hit in November 2008 would mark the bear market bottom.

Many market analysts predicted that while the Dow would “retest” that low, it would not break through it. They were wrong. The scary thing now is where the Dow and the broader Standard & Poor’s 500 index will make their next stand.

As I’ve mentioned several times, both on the blog, and on the podcast, the historical long-term trend is for the average P/E ratio to drop back to 15.  Well, that implies that our equilibrium point is somewhere in the vicinity now of 6,000 on the Dow, and about 620 or so for the S&P.  So we’ve still got a ways to go if that historical trend holds true.

Of course, we also have a tendency to drop below an average P/E of 15 as we pull back off the highs, so a 5,000 Dow doesn ‘t seem like an overly pessimistic prediction.

I know I’ve been consistently downbeat on the economy for the last several months, and nothing I’ve seen since I started writing about this in 2007 has changed my mind.  I’m not counting on a recovery in 2009, or even in 2010.

 


Things That Need To Be Said…Unofficially

Sometimes, a message has to get out there, so that the people who need to hear it can hear it.  Often, however, the message can’t be gotten out by presidents, finance ministers, or Fed officials.  But, someone has to make the arguments.  Samizdata’s Brian Micklethwait takes up the task today.

It needs to be said that under certain circumstances easily now imaginable, many Western citizens would argue, strongly and vocally, that those idiot foreigners who are now lending money to Western governments should in due course be told: sorry sunshine, you ain’t ever going to get it back. Our governments are bankrupt. Why the hell should we and our descendants in perpetuity be paying tribute to you? You knew that the money to pay you back would have to be stolen from us. You assumed we’d just cough up indefinitely. Well, we damn well won’t. You are now a definite part of our problem, and telling you to take a hike is going to be part of our solution. Our thieving class is now “borrowing” money from your thieving class like there is no tomorrow, and we are not responsible for the actions of either gang. A plague on both your houses.

We want you foreign thieves to stop lending to our thieves, now. And the best way for us to convince you that you should indeed stop lending, is to tell you that you are extremely liable never to see most of your money back.

Which has the added virtue of probably, approximately, being true, already.

We probably won't be able to borrow money from these guys for much longer...

We probably won't be able to borrow money from these guys for much longer...

The last sentence is the real kicker, because it’s beginning to look more like a question of when, rather than if.  And, who of course.  Of the Western nations, my favored picks, in no particular order, for winning 1st place in the 21st Century Debt repudiation race are, in no particular order:  Hungary, Italy, Ireland, Spain, and Portugal.

Second place will be too close to call.

And you don’t have to couch it in Mr. Micklethwait’s incendiary libertarian rhetoric about their thieves and our thieves.  I mean, I agree with it, but the plain fact is that even if you grant that everyone has the best intentions in the world, it still seems that we are very close to a tipping point where it could begin to happen.  Bruce wrote about it earlier today.

If one of the Euro Zone nations decide to revert to Lira or Escudos, or whatever, the news that such a deal is in the offing will not only hammer the nation that tries, but anyone else who looks iffy, and, untimately, the Euro itself.

Investors are not going to sit around and wait to have their Euro-denominated paper revalued in Drachma.  They’ll immediately start dumping that paper, and moving all the assets they can out of not only the offending nation, but any other country that looks like a weak sister.  As the article Bruce quoted notes, “Such a wholesale shift would lead to a collapse in the money supply…”  Gee, you think?

Germany, of course, would probably get the lion’s share of that new money, and to avoid a general economic collapse, they’d probably have to dump the Euro, too, and redenominate all that nice cash in Deutschemarks to avoid getting hammered as the rest of the Euro Zone economies collapse.  Or, Germany might be the Euro Zone.  Maybe France, too. France is more of a hindrance than a help, really, but palling around with the French is the price Germans paid for re-admittance to the human race, after the recent…unpleasantness.

No finance minister can yet say such unpleasant things publicly.  But someone needs to to say them, especially since they are starting to sound less and less extreme.


Notes on the “Big Plan”

Two major points about the budget plan the Obama administration has out there (from the Heritage Foundation):

Spending: Obama’s budget proposes $1.13 trillion in regular discretionary spending for 2010. This is a full 12% increase over the 2009 spending baseline. On top of this the Obama budget increases entitlement spending by another $700 billion. The proposed post-recession spending level of 22% of GDP has been exceeded only 8 times in the post-war era. And these numbers do not include the spending priorities of the unchecked far left in Congress.

The Chicago Tribune reports today “President Barack Obama will break a campaign pledge against congressional earmarks and sign a budget bill laden with millions in lawmakers’ pet projects … Taxpayers for Common Sense, a watchdog group, identified almost 8,600 earmarks totaling $7.7 billion.”

Deficits: The Obama budget claims to cut the deficit in half by 2012, but relies on audaciously optimistic economic forecasts that no one believes in. Adding the “stimulus” bill to a realistic budget baseline yields a projected 2010-2017 cumulative budget deficit of $8.4 trillion – 2.5 times the size of President Bush’s deficits over the same 8-year time period. Before the recession, revenues were 18 percent of GDP and spending was 20 percent. After the recession, President Obama would maintain revenues at 19 percent of GDP, and spending at 22 percent. In other words, all new tax revenues would finance new spending, rather than deficit reduction. President Obama’s structural budget deficit would exceed President Bush’s.

So you have, in the time of economic contraction and massive deficit, a 12% increase over the 2009 spending baseline in discretionary spending. 12%. And entitlement increase of $700 billion. In an 8 year time period (should he be re-elected in 2012) Obama plans to add 8.4 trillion to the debt – a full 2.5 times larger than the huge debt George Bush added. This is a phenomenal and eventually crippling level of borrowing and spending. There is no end in sight. Where the Bush administration spent 2% above the revenue, even with an increase in revenue from increased taxation, the Obama administration plans on maintaining a 3% spending gap of revenue/spending.

Untenable, unsustainable and ultimately, utterly destructive to a market economy.

~McQ

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