Archives: 01/2010

Obama Bank Tax Is Misguided

Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit?   But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

If the effort is really about deficit reduction, then it completely misses the mark.  Any serious deficit reduction plan has to start with Medicare and Social Security.  Assessing bank fees is nothing more than a rounding error in terms of the deficit.  Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order.  The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.

The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs.  Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do.   So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.

But now the same administration is proposing to assess a fee on banks to cover losses from the TARP.  Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer.  He appears, however, to be missing the critical reason why:  the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?

Another Reason Imports Get a Bad Rap

Why blame only media and politicians for the public’s confusion about imports and trade deficits? Surely economists deserve some scorn. Some of the misunderstanding can be traced to the famous National Income Identity, which expresses gross domestic product, as: Y = C + G + I + (X-M). That is, national output (Y) equals personal consumption (C) plus government spending (G) plus investment (I) plus exports (X) minus imports (M).

The expression clearly lends itself to the wrong interpretation. The minus sign preceding imports suggests a negative relationship with output. It is the reason for the oft-repeated fallacy that imports are a drag on growth. Here’s why that conclusion is wrong.

The expression is an accounting identity, which “accounts” for all of the possible channels for disposing of our national output. That output is either consumed in the private sector, consumed by government, invested by business, or exported. The identity requires subtraction of aggregate imports because consumption, government spending, business investment, and exports all contain, in various amounts, import value. Americans consume domestic and imported products and services, the aggregate of which shows up in Consumption. Likewise, Government purchases include domestic and imported products and services; businesses Invest in domestic and imported machines and inventory; and, eXports often contain some imported intermediate components. Thus, the identity would overstate national output if it didn’t make that adjustment for iMports. After all, imports are not made on U.S. soil with U.S. factors of production, so they shouldn’t be included in an expression of our national output.

To reiterate, it is a simple matter of accounting: as an expression of national output, the National Income Identity subtracts imports only because imports are that portion of consumption, government spending, investment, and exports that are not produced on U.S. soil with U.S. factors of production. If we did not subtract an aggregate import value, then national output would be overstated.

But what unnecessary confusion that identity has created. Economists are often indecipherable, but here was an opportunity to actually connect with the public and describe a relatively easy concept in relatively easy terms. Why has it not been commonplace to use notation that conveys in no uncertain terms that C and G and I and X include some amount of imports? Maybe something like this:

Y=C(d)+C(m)+G(d)+G(m)+I(d)+I(m)+X(d)+X(m)-M,

where (d) connotes domestic; (m) connotes imported; and M=C(m)+G(m)+I(m)+X(m).

Again, imports are subtracted, not because they are a drag on output, but because imports are included in the other constituent elements of the identity. I’ve always found it misleading that the parentheses go around X-M – which isolates the expression “net exports,” but in the process can obscure the fact that imports are subtracted from the whole expression.

Finally, if the description above makes sense, then you’ll agree that imports have NO impact on national output. Regardless of how large or small, the import value embedded in the four constituent elements of national output is fully deducted by subtracting M. Thus, imports are neither a drag on GDP, nor can they cause GDP to rise. That conclusion may sound like it contradicts one of my assertions in yesterday’s post—that imports are pro-cyclical—(at least that was the claim of a NBER economist responding my post yesterday), but I think the conclusions are harmonious. To say imports are pro-cyclical means that they rise when the economy is growing and fall when the economy is contracting. It says nothing about causation.  That pattern has been amply and consistently demonstrated through expansion, recession, and recovery.

Federal Job Creation

The board game Monopoly first took off during the Great Depression. A different game has become popular during today’s Great Recession. In this game, politicians race against high unemployment to create jobs in order to save their own. The players (politicians) have unlimited tax and borrowing authority, and can call upon friendly economists to help them maneuver. The players even get to keep score, although the media can penalize shoddy scorekeeping. Ultimately, voters will decide which players win and lose in the fall elections.

Okay, I’m being facetious. But as politicians continue to throw trillions of dollars at the economy in a vain effort to create jobs, and the media continues to go along with it by obsessing over meaningless job counts, the entire spectacle has become surreal. If government job creation is a game, the losers have been the taxpayers underwriting it, as well as the employers (and their employees) who are closing shop, laying off workers, or not hiring because of uncertainty over what big government schemes will be next.

Two news articles point to this “regime uncertainty” being generated by Washington.

First, the government’s chief technology officer, Aneesh Chopra, received a somewhat hostile reception at the recent Consumer Electronics Show in Las Vegas according to the BBC:

“The government doesn’t spur innovation or entrepreneurship. The government often gets in the way,” said Mr. [Gary] Shapiro, president of the Consumer Electronics Association (CEA) which stages CES.

It [CEA] also had little support for President Obama’s $787 billion stimulus act calling it “panic spending” and warned of the growing federal deficit.

“The government is often a barrier,” said Mr. Shapiro. “High taxes and regulatory bureaucracy are barriers.”

Mr. Chopra’s response was typical of the political-bureaucratic mindset:

He said the US government was planning a summit with a number of chief executives from the “most innovative companies in the country to directly advise us to make government more efficient and more effective”.

Ah, another summit.

In the other article, the CNBC headline says it all: “Many Reluctant to Hire Because of New Taxes, Rules.” The article makes it clear that what businesses don’t need is another orchestrated summit:

The prospect of increased federal and state regulation and taxes has been particularly disruptive to the hiring plans of small- and medium-sized businesses, which have historically generated about two-thirds of the nation’s jobs. “I don’t really see the private sector hiring much in the next few months,” says Brian Bethune, an economist at Global Insight. “For the small-business sector there is just too much uncertainty about what happens beyond 2010.”

In reporting that its small business optimism index fell for the second straight month in December, the National Federation of Independent Business Tuesday said members’ No. 2 reason for not expanding payrolls was the prospect of government policy initiatives…”We’re hearing it more and more from our membership,” says Bill Rys, the NFIB’s tax counsel. “At the federal level, there’s uncertainty about tax rates, health care costs, energy costs. You also have what’s going on at the state and local levels, with new fees and taxes. They’re reluctant to jump back in.”

Unfortunately, instead of heeding the business community’s message, the Obama administration is focusing its energies on tinkering with the game’s scorekeeping. From ABC News:

The Obama administration has taken some heat and mockery for using the nebulous and non-economic term of jobs being “saved or created” by the $787 billion stimulus program.

So it’s gotten rid of it.

In a little-noticed December 18, 2009 memo from Office of Management and Budget director Peter Orszag the Obama administration is changing the way stimulus jobs are counted.

The memo, first noted by ProPublica, says that those receiving stimulus funds no longer have to say whether a job has been saved or created.

“Instead, recipients will more easily and objectively report on jobs funded with Recovery Act dollars,” Orszag wrote.

In other words, if the project is being funded with stimulus dollars – even if the person worked at that company or organization before and will work the same place afterward – that’s a stimulus job.

The American people are rightly growing tired of this nonsense. But it’s important that they understand that the idea of government job creation was flawed from the get-go. The government cannot simply wave a magic wand and create jobs without making private sector jobs disappear at the same time because of higher taxing and borrowing. There is no free lunch with government.

So Much for That Argument for War!

Remember when President George W. Bush was pushing war for democracy? Excited neoconservatives promised that a new wave of democratization was about to roll through the Middle East, sweeping out authoritarian and anti-American regimes.

Oops.

Reports the Washington Times:

The most significant finding of the latest report is the decline in freedom in the Middle East, [Arch Puddington] said.

Three countries — Jordan, Yemen and Bahrain — were reclassified from “partly free” to “not free,” and freedoms declined in Morocco and Iran.

“Freedom House saw the region as a whole as headed slightly in the right direction after 9/11,” he said. “But that has changed.”

Not only are countries moving backwards, but America’s friends and allies are leading the parade:  Jordan, Morocco, Bahrain.

So much for that justification for invading and bombing other lands.

Actually, Justice Breyer, the Constitution Enumerates Specific Powers, not Limitations on Otherwise Plenary Federal Power

Today I went to the Court to watch the argument in United States v. Comstock, which I blogged about previously and in which Cato filed an amicus brief.  As I also blogged previously, Cato’s arguments so concerned the government that the solicitor general spent four pages of her reply brief going after them.

At issue is a 2006 federal law that provides for the civil commitment of any federal prisoner after the conclusion of his sentence upon the appropriate official’s certification that the soon-to-be-released prisoner is “sexually dangerous.”  The problem is that, while states have what’s called a “police power” to handle this sort of thing – to appropriately deal with with threats to society from the dangerously insane and so forth – the federal government’s powers are limited to those enumerated in the Constitution.  And I’m sorry, there’s no power to civilly commit people who have committed no further crime beyond those for which they’ve already been duly punished.

The government, having abandoned its Commerce Clause argument – a big loser in the lower courts – relied at the Supreme Court on the Necessary and Proper Clause.  This clause says that Congress shall have the power to “make all laws which shall be necessary and proper for carrying into execution [the specific powers listed in Article I, section 8], and all other powers vested by this Constitution in the government of the United States.”

In other words, we have a government of delegated and enumerated, and therefore limited powers.  As Ryan Lirette put it in National Review Online last week,  ”Congress may not search every corner of our country looking for problems to vanquish.  Instead, Congress must be able to justify each law it passes with a specific congressional authorization.”

The solicitor general contends that civilly committing the sexually dangerous is “necessary and proper” to regulating the federal prison system – which itself is not an enumerated power but ancillary to enforcing federal criminal laws that Congress is appropriately empowered to make.  At the argument, solicitor general Kagan further justified the relevant provision as related to “responsibly” releasing federal prisoners.

I don’t think her “cascading powers” theory of the Necessary and Proper Clause is a winner – for reasons I describe in my recent podcast – and Justice Scalia also wasn’t convinced.  Justice Breyer, however, at one point asked where the Constitution prohibited the federal government from “help[ing] with” a problem it identified (see page 31 of the transcript) and in general was hesitant to find limits to congressional action to solve big policy areas.

Breyer has it all backward: We don’t operate on the premise that the government has full plenary power to do whatever it thinks is best, for the “general welfare,” for “the children,” for “society,” or for any particular group, checked only by specific prohibitions.  Instead, our system of government – our constitutional rule of law – provides for islands of government involvement in a sea of liberty.  It is individual people who can do whatever they want that isn’t prohibited by law, not the government.

And so we’ll see soon enough which vision of the relationship between citizen and state the Supreme Court embraces.  Along with Justice Breyer, Justices Stevens and Ginsburg also were not very sympathetic to the federalism and libertarian arguments ably presented by federal public defender G. Alan Dubois.  Along with Justice Scalia, Justice Alito was (refreshingly) skeptical of undue government power – and one would expect (the silent) Justice Thomas to be in that category as well.  Justice Sotomayor also asked some interesting questions inquiring into the federal government’s ability to hold someone indefinitely – including on the relationship of that power to the Commerce Clause authority underlying most federal exercise of power – so she could go either way.  Finally, the Chief Justice and Justice Kennedy were, uncharacteristically, not all too active – seeming to question both sides equally – so it’s hard to predict how the Court will ultimately rule.

“Risk of Accidents Ameliorated!” Doesn’t Sell Papers

What a headline on the Washington Examiner today! It’s a good illustration of the propensity of media to overplay terrorism.

“Terror threat to city water,” the headline blares in large type. “Chlorine changed to protect D.C., Va. supply.”

The actual story is about the Army Corps of Engineers’ switch from chlorine gas to a liquid form of chlorine called sodium hypochlorite. Gaseous chlorine is relatively more dangerous and difficult to contain if it’s released, so the change is a prudent safety step.

It has as much to do with protecting against accidental release as any terror threat. And an accidental release is not a threat to the water supply; it’s a threat to people near the facilities or transportation corridors where cholrine gas could be released.

The idea of terrorism may have gotten the Corps moving forward, but nothing in the story says there was any specific threat by anyone to attack the D.C. water treatment infrastructure.

This is a story about risks being ameliorated, and it’s pretty boring—except for the headline!!

Supreme Court Lets Eminent Domain Abuse Continue

Yesterday, the Supreme Court decided not take up an important takings case, the infelicitously titled 480.00 Acres of Land v. United States. As I blogged previously, Cato filed an amicus brief in the case in the hopes that the owner of the “480.00 Acres of Land,” Gil Fornatora, would ultimately receive the “just compensation” to which he is constitutionally entitled.  The Court also missed the chance to correct the pattern of due process abuse that is apparently rampant in Florida.  The case involved the federal government maneuvering to unjustly drive down property values before taking land for (legitimate) public use – in this case expanding the Everglades – thus greatly diminishing the compensation it was obligated to pay the owners.  Fox News recently had a report about the case, in which I briefly appeared.

Interestingly – and sadly – since the Fox News report, my voicemail and email inbox has been receiving story after story of individuals who have experienced injustices similar to that of Mr. Fornatora. While it is unfortunate that this case has come to an end, the number of calls and emails leads me to believe that more cases like this will be making their way through the federal judiciary and that, eventually, this abuse will be halted.

To that end, while Cato does not involve itself directly in litigation, on the subject of takings and eminent domain abuse I can certainly recommend our friends at the Institute for Justice and Pacific Legal Foundation.  Specifically on the type of “condemnation blight” at the heart of the Fornatora case, feel free to contact PLF’s Atlantic (Florida) office at (772)781-7787 or write to Pacific Legal Foundation, 1002 SE Monterey Commons Blvd., Suite 102, Stuart, FL  34996.  Steven Gieseler was the attorney who presented the Fornatora case to the Supreme Court, and who got me involved.

In other eminent domain news, George Will had an excellent column on January 3 condemning the pernicious Atlantic Yards land grab that you can read about here.