Free Markets, Free People

Monthly Archives: April 2010


The ObamaCare fallout continues

You remember when AT&T and other companies immediately took write downs against profit soon after the ObamaCare legislation was signed into law?

Henry Waxman and Bart Stupak reacted immediately calling for a Congressional hearing so the CEOs of some of these companies could be called on the carpet for trying to show up this fabulous law.  Waxman whined that wasn’t its intent.  And then, mysteriously, a week or so later, they quietly canceled the hearings.

In a memorandum summarizing its investigation, the Democratic staff of the committee said, “The companies acted properly and in accordance with accounting standards in submitting filings to the S.E.C. in March and April.”

Moreover, it said, “these one-time charges were required by applicable accounting rules.” The committee staff said this view was confirmed by independent experts at the Financial Accounting Standards Board and the American Academy of Actuaries.

Oops.  Waxman and Stupak tried to recover a little by  saying:

“Companies like AT&T, Verizon and a range of stakeholder associations are hopeful that the benefits of the new law will outweigh the costs,” Mr. Waxman and Mr. Stupak said in a memorandum to committee members. “But they cannot quantify the benefits until the law is implemented.”

Well, apparently they’ve found some more of those “benefits” in the law:

AT&T, which took a $995 million charge to reflect the impact of the health care overhaul, said it would be “evaluating prospective changes to the active and retiree health care benefits offered by the company.”

Under another provision, employers may be subject to financial penalties if they do not offer health insurance to employees. Documents provided to Congress by AT&T indicate that its medical costs in 2009 were $4.7 billion, divided about equally between active employees and retirees — far more than it would pay in penalties if it did not provide coverage.

Verizon said it was taking a $970 million charge against earnings because of the change in tax treatment of a subsidy it receives for retiree drug coverage. In addition, Verizon said it could be affected by a new tax on high-cost health plans that takes effect in 2018.

“Many of the plans that Verizon offers to employees and retirees are projected to have costs above the thresholds in the legislation and will be subject to the 40 percent excise tax,” the company told employees.

So obviously, in the case of AT&T (and many other companies) they’re going to be called into Congressional hearings for breaking Obama’s “if you like your doctor and you like your plan, you can keep it” promise, right?  I mean, those are the “benefits” the employees of AT&T and Verizon seem likely to “enjoy” when the law is implemented.

In a general analysis of the new law, Verizon said, “To avoid additional costs and regulations, employers may consider exiting the employer health market and send employees” to state-run insurance exchanges, where people can buy insurance.

A Caterpillar executive made a similar point in an e-mail message to colleagues, saying the tax changes could “drive many employers to just drop coverage for retirees altogether, and let the government foot the whole bill.”

I’d like to write this off to the law of unintended consequences, but that would be pure nonsense.  Not only was this known as a probable outcome, but Democrats lied through their teeth when they denied it. It was and is completely intended. It is the companies, however, that will be demonized for doing precisely what Democrats hoped they’d do (or, one assumes, the penalty for not supplying health care would have been much higher and any tax on Cadillac plans much lower).  Single payer, here we come.

And you wonder why they kept it hidden so no one could read it until after it passed?

~McQ


No Happy Meal for you!

The Nanny State never rests.  In Santa Clara county, California (surprise, surprise) county supervisors are proposing a ban on toys in fast food meals:

Convinced that Happy Meals and other food promotions aimed at children could make kids fat as well as happy, county officials in Silicon Valley are poised to outlaw the little toys that often come with high-calorie offerings.

The proposed ban is the latest in a growing string of efforts to change the types of foods aimed at youngsters and the way they are cooked and sold. Across the nation, cities, states and school boards have taken aim at excessive sugar, salt and certain types of fats.

Believed to be the first of its kind in the nation, the proposal would forbid the inclusion of a toy in any restaurant meal that has more than 485 calories, more than 600 mg of salt or high amounts of sugar or fat. In the case of McDonald’s, the limits would include all of the chain’s Happy Meals — even those that include apple sticks instead of French fries.

Because Nanny knows best, one size fits all,  and besides you parents out there are just incompetent.

Supporters say the ban would encourage restaurants to offer more-nutritious foods to kids and would make unhealthful items less appealing. But opponents believe it amounts to government meddling in parental decisions. The Santa Clara County Board of Supervisors will consider the proposal Tuesday.

Anyone – do you really believe that taking a toy out of a meal will make the meal “less appealing”, or do you suppose the taste of the meal has more to do with the appeal and the toy is just a bonus.  Or ask another way, if you take the kids to McD’s and toys are no longer available, will they order or want something other than what is normally found in a Happy Meal.

My four grandson survey says “no”.  But the nanny’s will not be denied:

Ken Yeager, the Santa Clara County supervisor who is behind the effort, says the toys in kids’ meals are contributing to America’s obesity epidemic by encouraging children to eat unhealthful, fattening foods.

“People ask why I want to take toys out of the hands of children,” said Yeager, who is president of the Santa Clara County Board of Supervisors. “But we now know that 70% of the kids that are overweight or obese will be overweight or obese as adults. Why would we want to burden anybody with a lifetime of chronic illness?”

Who is “we” Mr. Yeager and by what right do you reach down into a retail establishment and decide what it can or can’t offer to its customers? Just as importantly, since when is it the role of government to decide what is or isn’t appropriate for someone to eat?

This is just the beginning of what you can expect to see from the food nazis (the FDA and salt?) now that government health care reform is law.

~McQ


Does the Jones joke suggest an attitude?

I’m sure you’ve head about the joke National Security Adviser James Jones told at a recent speech to the Washington Institute For Near East Policy. If not, here it is:

I’d like to begin with a story that I think is true, a Taliban militant gets lost and is wandering around the desert looking for water. He finally arrives at a store run by a Jew and asks for water. The Jewish vendor tells him he doesn’t have any water but can gladly sell him a tie. The Taliban, the jokes goes on, begins to curse and yell at the Jewish storeowner. The Jew, unmoved, offers the rude militant an idea: Beyond the hill, there is a restaurant; they can sell you water. The Taliban keeps cursing and finally leaves toward the hill. An hour later he’s back at the tie store. He walks in and tells the merchant: “Your brother tells me I need a tie to get into the restaurant.”

Jones went on to deliver his speech. But the damage was done. He’s been called everything but a child of God since. Many believe the joke to be anti-semetic.

It certainly plays to a stereotype, doesn’t it? And at a minimum, it was inappropriate.

But Jones obviously thought nothing of telling the joke. And I was rather surprised by his suggestion that he believes the “story” to be “true”. Wiggle out of that one if you can.

So why did Jones feel comfortable in delivering a joke that was obviously of questionable taste and certainly inappropriate for the occasion? Did he actually believe it to be appropriate? Did he not think anyone would take offense? And if so, why?

Those questions get to the heart of my point. There are few rational people who have followed this administration’s dealings with Israel over the last year who would quibble with the word “disrespectful” as a description of how it has dealt with that country. Never, to my knowledge, have the Israelis been treated so badly by the US during their entire existence as a state (and Israel and I share a birth year). The recent diplomatic dust up in which a fairly routine announcement about housing in Jewish east Jerusalem was turned into a crisis by the US, not Israel. Subsequent treatment of the country and its leaders has been just a shabby. So shabby, in fact, that the only bipartisan thing to come out of Congress in a while is a condemnation of the administration’s treatment of Israel.

To me, that suggests an attitude. Jones joke suggest a pervasive attitude. The fact that the White House didn’t demand an apology from Jones only adds to the strength of that suggestion. Frankly it’s an attitude we can ill afford and certainly one that isn’t going to advance any peace process in the region.

On April 20th, apparently recognizing that the administrations treatment of Israel was causing problems within the US Jewish community, President Obama sent a letter to Alan P. Solow, Chairman of the Conference of Presidents of Major American Jewish Organizations in an effort to calm the storm that was brewing. In the letter he spoke of the “special relationship” the US has with Israel and promised it would not change. But he also said:

Since we have known each other for a long time, I am sure you can distinguish between the noise and distortion about my views that have appeared recently, and the actual approach of my Administration toward the Middle East.

Typical Obama doublespeak. The actions of his administration are what brought on the concern. It wasn’t “noise and distortion”, it was the words of administration spokespersons and Obama himself that caused consternation among supporters of Israel.

And now, after the letter, we have the Jones issue with no White House disclaimer (remember, this is a WH that felt it necessary to speak about the arrest of a person in DC and condemnation of the police – leading to the infamous “beer summit”).

To me, that points to an attitude – an unproductive attitude – that permeates the administration and clouds its ability to pursue meaningful peace in the Middle East.

~McQ


Stimulus had no impact

That’s according to a survey of the members of the National Association for Business Economics (NABE):

NABE conducted the study by polling 68 of its members who work in economic roles at private-sector firms. About 73% of those surveyed said employment at their company is neither higher nor lower as a result of the $787 billion Recovery Act, which the White House’s Council of Economic Advisers says is on track to create or save 3.5 million jobs by the end of the year.

That sentiment is shared for the recently passed $17.7 billion jobs bill that calls for tax breaks for businesses that hire and additional infrastructure spending. More than two-thirds of those polled believe the measure won’t affect payrolls, while 30% expect it to boost hiring “moderately.”

The point, of course, is these are the people who would have seen any such positive impact within the market created by both the stimulus and the “jobs” bill.  Almost 3/4s saw no effect whatsoever.  That’s because the stimulus, among other things, was ill conceived, ill timed (if you’re going to do it, you don’t pay “stimulus” out over several years) and despite what President Obama said, almost 100% pure pork.

So apparently, as the recovery begins, it will be under its own steam and without the impact of any government “stimulus” spending.

~McQ


Editor and Publisher: “Sky isn’t falling as fast as you might think; ignore chunks coming through ceiling around you”

The newspaper industry loves dramatic headlines. At least, until they’re looking at their own problems. Then it’s time to look for a silver lining, even if it’s a pretty tarnished one. So here’s the headline for the Editor and Publisher article that tells us that circulation for newspapers, which fell 10.6% last year, fell again this year by 8.6%:

Like Newspaper Revenue, Decline in Circ Shows Signs of Slowing

I guess the good news is that instead of plunging to oblivion immediately, they’re merely on a rapid glide path towards it, with no noticable prospect of reversing course. For any other industry or trend (e.g. global warming), I’m guessing we would see somewhat more dramatic headlines.

Newspapers are high-volume businesses. As a whole lot of newspapers in medium-to-large cities discovered in the last twenty years, it isn’t necessary to lose all, or even most, of your subscribers to become non-viable as a business. A certain reasonably sized subscriber base is required to sustain a large staff, a huge printing press facility, and a distribution network.

So how much more loss on top of the 20% in the last two years will it take for the major to start imploding? I don’t know, but it’s hard to see how they can tolerate more than four or five more years of that type of decline with anything like their current business model.

But they’re determined to find good news:

And newspapers — including some that reported big declines in print paid circ — showed significant growth when print and online audiences are combined.

OK, but for any major newspaper that doesn’t have “Wall Street” in its name, there’s no direct revenue from online “circulation”, and any advertising money from an on-line presence is a small fraction of the advertising revenue in print publication. Nobody except Google has figured out a way to turn online content into significant revenue, and it seems pretty unlikely that stodgy newspapers will be the ones to do it.

For those just tuning in, the basics for these guys are absolutely horrible. Traditionally, the biggest chunks of their print advertising revenue include:

- Classifieds

- Movie listings

- Automotive dealership ads

- Retail chain ads

Now lets take these one at a time. Classifieds have almost been destroyed by Craigslist. Teenagers would no more think of buying a newspaper to check movie listings than they would consider buying a leisure suit. Car sales are down, we don’t know when they’re coming back, and that entire industry is going through a re-structuring. Retail is in turmoil, as shown by the vaporization of Circuit City, Linens and Things, Media Play, S&K Menswear, and others.

It looks unlikely that any one of these four will get significantly better as revenue sources for newspapers. The top two are gone for good. I suppose the last two might stabilize if the economy improves, though I certainly would bet on merely slower declines instead of increases.

Newspapers also have the same problem as broadcast news programs: an aging customer base. Young people are shifting their reading habits away from print publications in general and newspapers in particular. This has been going on a while, and in the absence of all other factors presages a decline to irrelevance for print pubs.

That doesn’t even touch on the ongoing drop in quality and increase in bias many of us see in newspapers. I used to occasionally actually put money in a rack for USA Today. No more. I see it in hotels a few times a year, and it’s just awful. I’m considering stopping reading it even when it’s free because it’s just a waste of time.

It’s interesting, in fact, to note that the only major newspaper with a small increase in circulation was the Wall Street Journal. I don’t consider the WSJ to have gold-plated quality, but they at least try to do some in-depth work and not be totally blinded by their biases.

As a counterpoint, the very liberal San Francisco Chronicle has the largest percentage drop among the majors, down 22.68% in one year! Another year or two like this, and San Francisco will be left with no significant daily newspaper. That is, unless the Chronicle just does the same thing as the other majors in the Bay area and combines with the San Jose Mercury News:

There was a new kid in the top 10 as the San Jose Mercury News posted a weekday circulation of 516,701 by incorporating the Oakland Tribune and Contra Costa Times as editions of the Mercury News.

Our liberal friends often tell us we’ll miss these institutions when they’re gone, but as with climate alarmists and their huge houses, they don’t back up what they say with their own actions.

For those of us who love to beat up the majors for incompetence and biased reporting, take note: indulge while you can. With numbers like these, who knows how long it will last.


Volcanic Dust Cloud All An Illusion?

This will go down in history as an epic FAIL:

Britain’s airspace was closed under false pretences, with satellite images revealing there was no doomsday volcanic ash cloud over the entire country.

Skies fell quiet for six days, leaving as many as 500,000 Britons stranded overseas and costing airlines hundreds of millions of pounds.

[...]

However, new evidence shows there was no all-encompassing cloud and, where dust was present, it was often so thin that it posed no risk.

The satellite images demonstrate that the skies were largely clear, which will not surprise the millions who enjoyed the fine, hot weather during the flight ban.

Jim McKenna, the Civil Aviation Authority’s head of airworthiness, strategy and policy, admitted: ‘It’s obvious that at the start of this crisis there was a lack of definitive data.

‘It’s also true that for some of the time, the density of ash above the UK was close to undetectable.’

Is there any surprise as to exactly who was responsible for this little mistake?

The National Air Traffic Control Service decision to ban flights was based on Met Office computer models which painted a picture of a cloud of ash being blown south from the Eyjafjallajokull volcano.

These models should have been tested by the Met Office’s main research plane, a BAE 146 jet, but it was in a hangar to be repainted and could not be sent up until last Tuesday – the last day of the ban.

Just think, but for a coat of paint, thousands of Britons could have been home with their families, commerce could have gone on largely as usual, and airlines (which operate on paper-thin margins as it is) would not be out tens of millions of dollars. Given the notorious precision of the models employed by the Met Office to predict weather, perhaps it would have been wise to send that plane up sans its shiny new paint job? Just a thought.

I guess we should just all be thankful that we’re not relying on the expertise of the Met Office to push broad new government powers. Based on this incident, one could imagine how the world economies might come to a grinding halt, and all based on nothing but an illusion coughed up by a computer model. Well, thank goodness, that could never happen.

[HT: HotAir HL]


Quote of the day – Crony Capitalism edition

I think this captures my feelings about the situation:

“[C]rony capitalism” has as much to do with real capitalism as praying mantises have to do with real prayer.” – Donald J. Boudreaux, Cafe Hayek

Boudreaux is responding to an article by Gerald O’Driscoll a few days ago in which O’Driscoll took on the notion that “crony capitalism” is simply an natural evolution of capitalism.  Boudreaux had a slight nit to pick with the author but his characterization of crony capitalism was dead on.

O’Driscoll covers many of the myths that those who want to characterize crony capitalism as a problem only to be found under a capitalist system.  In fact it has little to do with capitalism at all.  It’s simply cronyism and, once you understand what is being described, it can exist under any system that has a government.

You see, that’s the one ingredient that is necessary for it to exist.

Under a free enterprise system – capitalism – the government’s job is to play referee, that is, enforce legal contracts and prevent/punish fraud.   And, there’s a certain amount of regulation necessary to exercise those functions.

But when it gets beyond those parameters, it has a number of effects which have little to do with capitalism or a free market.  When government gives up its role as referee in favor of a reciprocal relationship with those it regulates that also benefits those who run government, you have cronyism.  Obviously, a capitalist system, then, isn’t the only place it can happen.

And how does this cronyism develop?

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve’s Jackson Hole Conference in 2008, economist Willem Buiter described “cognitive capture,” by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.”

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Government also tends to favor those who favor it.  And this is one of the many things which came to light in this recent financial bailout:

Crony capitalism ensures the special access of protected firms and industries to capital.

Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

Consider the revolving door at Goldman Sacs.  Consider the preponderance of union workers at GM and Chrysler.  Go ahead and try to argue there’s no money connection between those who control the government’s purse strings and regulations and those who have benefited.

Donald Beoudreaux gives a great summary that dispels the myth that “crony capitalism” is a version of capitalism or, in fact, has anything whatsoever to do with it:

To the modern American ear, “anarchy” no longer means simply “no ruler”; instead it now means “no law” – true, free-for-all chaos.  In vivid contrast, capitalism – real capitalism – is infused with law, most of which is self-enforcing.  The manufacturer who pays his suppliers late gets poorer credit terms in the future; the retailer who cheats her customers loses business; the customer who doesn’t pay his bills can no longer buy on credit.

The chief problem with crony capitalism is precisely that it injects significant amounts of lawlessness into the economy, transforming capitalism into something entirely different and dysfunctional.  Under crony capitalism, government excuses the politically influential from capitalism’s laws.  Thus unleashed from the impartial discipline of the invisible hand, the politically influential become criminals who lie, rape, pillage, and plunder.  And that’s true lawlessness and chaos.

So don’t let the enemies of capitalism get away with calling it crony capitalism.  It’s cronyism, pure and simple, and it can and does exist with any form of government.  And increased regulation isn’t going to change that dynamic or curtail the developed system of cronyism that we now suffer under.

~McQ


Poll trends, the Democrats dilemma and the GOP’s chance

Trying to analyze polling results is indeed a tricky business.  To be worth anything a poll must be carefully crafted to remove obvious and hidden biases from questions.   And, for the most part, a single poll really demonstrates only a “snap shot” of opinion for that moment.

Where polls have some value is in the trends they track.   And, with the number of polls out there, similar findings from other polls lend credibility to the trend being tracked.  History also make is clear whether or polling trends have any credibility. Poll watchers take all of that in when they consider a poll’s worth. A small number of polls have emerged as doing a good job of credibly tracking how various issues are trending. They’re certainly not fool-proof indicators, but taken with other polls one can begin to build an emerging picture.

Take this recent Gallup poll on party identification. Political junkies know that self-identification with a party indicates the strength of that party electorally. Self-identification ebbs and flows with the fortunes of the party and history proves that for us. In mid 2004, identification with a party was tied between Democrats and the GOP. But in 2006, for the mid-term elections, a 5 point gap opened favoring Democrats. And, Democrats benefited by picking up seats in Congress (and a majority in the House). In 2008, that gap had gone to double digits, and the Democrats swept the Republicans out of power.

Well, the double digit advantage for the Democrats has disappeared according to Gallup. Democrats hold a slight 1 point lead in those who identify with or lean toward one of the two parties.

Two points to be made – one, Democrats are hemorrhaging independents much more than the GOP is doing things right to bring these numbers together. There’s a lot of “buyer’s remorse” in the ranks of independents than any flocking to the Republicans because of what they stand for. As Gallup points out, only 28% of the country identifies themselves as “Republican”. That hasn’t changed a single percentage point since the beginning of 2009. What has shrunk is the number of self-identified Democrats. The percentage has dropped 3 points from 35% to 32%. So on party identification alone, Democrats still hold a 4 point lead on those who identify themselves as Republicans. What closes that gap to 1 point in favor of Democrats are the independents now leaning toward the GOP. From 13 point lead in 2008 to a 1 point lead in 2010 points to some pretty disillusioned indies.

Two – Republicans still have a lot of selling (and proving themselves) to do. What isn’t apparent with this trend is how solid the independent leaners are for the GOP. The fact that self-identified Republicans haven’t increased a single percentage point in over a year says a lot about how the voting public still perceives Republicans. The fact that a large number of independents have declared they “lean” toward Republicans now doesn’t really mean a hill of beans. Unfortunately in the system with which we’re stuck, you have to pick a side or stay home. I think the only reason that indies tend to lean more Republican than Democrat is they don’t like what they see going on with Democrats in power and figure they may have to hold their nose and vote GOP just to change the mix and stop, or at least slow down the runaway train of government.

Two other polls help firm up that conclusion – one in which the President’s approval rating keeps trending down (an indicator the public isn’t seeing its priorities acted upon) and the second which shows generic Congressional Republicans holding a 4 point lead over the generic Congressional Democrat, which history tells us spells trouble for Democrats.

Can all of this change? Sure – but it is unlikely. Why? Because Democrats are caught in a very difficult spot. All the political stars aligned for them last November except one – the economy. It went tango uniform. And, as it turns out, it didn’t just hit a bump in the road, it went over the proverbial cliff. They were able to get away with blaming the previous administration for a while, but that excuse has pretty much been used up. So here they sit, with the legislative and executive power they’ve sought for decades in order to pass an agenda they’ve wanted to pass for centuries, and the top priorities for the voters are the economy, jobs and the ballooning deficit. What’s an activist to do?

Well they’ve chosen – spending a year dithering, scheming and manipulating the process with health care reform while the economy tanked further, proposed trillion dollar budget deficits were forecast for years to come and unemployment briefly hit double digits. Now they’re trying to force a financial regulation regime through while arguing over introducing cap-and-trade or immigration as their next priorities in Congress.

It seems the Democrats have chosen – the window is closing on their agenda and, throwing the priorities of the voters under the bus, they’re going with the agenda.

It is that, I think, as much as anything, which has driven the independents to lean Republican. That sort of “party before people” attitude isn’t very popular nor is it usually rewarded. Right now the polls indicate that voters are ready to give the GOP another chance, but the support for doing so isn’t particularly solid nor will it grant them much slack should they too decide not address the public’s priorities.

There’s a lesson to be learned here -whether or not either party will heed it- and that is that those in Congress are there to do the people’s business, not their party’s business. Of course having said that, it is obvious that undoing what this bunch has done is no easy matter, and, in the end, may be less popular than the GOP thinks it might be right now. However, if Republicans run on a particular plan and that plan ends up being endorsed by voters putting them in power (House and Senate), if I were them I’d interpret that as the people’s priority and, as Larry the Cable Guy would say “get ‘er done” (sponsor and pass legislation and make the President veto it). Anything short of that will find the GOP back at a double digit disadvantage again when we hit the 2012.

~McQ



Forbes gets to the bottom of the GM loan “repayment” claim

And, it’s actually worse than first imagined. First the background:

Uncle Sam gave GM $49.5 billion last summer in aid to finance its bankruptcy. (If it hadn’t, the company, which couldn’t raise this kind of money from private lenders, would have been forced into liquidation, its assets sold for scrap.) So when Mr. Whitacre publishes a column with the headline, “The GM Bailout: Paid Back in Full,” most ordinary mortals unfamiliar with bailout minutia would assume that he is alluding to the entire $49.5 billion. That, however, is far from the case.

Because a loan of such a huge amount would have been politically controversial, the Obama administration handed GM only $6.7 billion as a pure loan. (It asked for only a 7% interest rate–a very sweet deal considering that GM bonds at that time were trading below junk level.) The vast bulk of the bailout money was transferred to GM through the purchase of 60.8% equity stake in the company–arguably an even worse deal for taxpayers than the loan, given that the equity position requires them to bear the risk of the investment without any guaranteed return. (The Canadian government likewise gave GM $1.4 billion as a pure loan, and another $8.1 billion for an 11.7% equity stake. The U.S. and Canadian government together own 72.5% of the company.)

So GM “paid back” only the $6.7 billion it got in the “pure loan”, not the full $49.5 billion it is on the hook for to taxpayers, or the $1.4 billion it got in a “pure loan” from Canada’s government.

When this story was first reported, it was claimed that TARP money was used to pay the loan. That’s true, but not exactly how you might have imagined it. Remember, GM reported a $3.4 billion fourth quarter, and a loss for the year. Where did it get $6.7 billion to pay off the loan? Here’s where:

As it turns out, the Obama administration put $13.4 billion of the aid money as “working capital” in an escrow account when the company was in bankruptcy. The company is using this escrow money–government money–to pay back the government loan.

Yes, that’s right, they used a taxpayer funded escrow account to pay off the loan. And, as Forbes points out, the GM claim that being able to do so shows progress, it’s hardly worth the hype it received – except that’s not the whole story. In fact, it’s not a show of progress at all. GM did it for a very specific reason:

Sean McAlinden, chief economist at the Ann Arbor-based Center for Automotive Research, points out that the company has applied to the Department of Energy for $10 billion in low (5%) interest loan to retool its plants to meet the government’s tougher new CAFÉ (Corporate Average Fuel Economy) standards. However, giving GM more taxpayer money on top of the existing bailout would have been a political disaster for the Obama administration and a PR debacle for the company. Paying back the small bailout loan makes the new–and bigger–DOE loan much more feasible.

Or, as Forbes sums it up:

In short, GM is using government money to pay back government money to get more government money. And at a 2% lower interest rate at that. This is a nifty scheme to refinance GM’s government debt–not pay it back!

~McQ


Observations: The QandO Podcast for 25 Apr 10

In this podcast, Bruce, Michael, Bryan, and Dale discuss the controversial Arizona immigration law, and the squeeze public employee unions are putting on state budgets. The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2009, they can be accessed through the RSS Archive Feed.

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