Archives: August, 2011

An Amazing Indictment of Obamanomics: Banks That Don’t Want Deposits

I’ve commented on the failure of Obamanomics, with special focus on how both banks and corporations are sitting on money because the investment climate is so grim. Not exactly flattering to the White House.

Using Minneapolis Federal Reserve data, I’ve compared the current recovery with the expansion of the early 1980s. Once again, not good news for the Obama administration.

And I’ve shared a couple of cartoons — here and here — that use humor to show the impact of bad public policy.

But here’s a Bloomberg story that provides what may be the most damning evidence that the President’s big government agenda is a failure:

U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.

Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.

…At least one firm, Bank of New York Mellon Corp., tried to recoup some of the costs by charging depositors 13 basis points, or 0.13 percent, for holding unusually high balances.

Let’s think about what this article is really saying. Banks normally make money by attracting deposits and then lending that money to people and businesses that have productive uses for the funds.

Yet the economy is so weak that banks are leery of taking more money. The story is complicated by other factors, including capital flight  from Europe, taxes (or premiums) imposed by the Federal Deposit Insurance Corporation, and various regulatory issues. But even with these caveats, it’s still remarkable that banks want to turn down money — or charge people for making deposits. That’s sort of like McDonald’s turning away customers because the firm loses money by selling Big Macs and french fries. Or, better yet, like McDonald’s turning away free goods from suppliers because not enough people want to buy the final product.

Private Wage Growth Outpaces Federal in 2010

Average private sector wages in the United States rose 3.1 percent in 2010, slightly more than the 2.5 percent increase in average wages of federal civilian government workers. The growth in federal wages was the slowest in at least two decades, and it coincided with a rebound in private wages after the recession, according to new Bureau of Economic Analysis data (see Table 6.6D).

Figure 1 shows average wage growth in recent years for private sector workers (blue line), federal civilian government workers (red line), and employees of the U.S. military (black line). The figure reveals the remarkable “Bush Boom” in government wages that occurred between 2001 and 2005.

Over the last decade, annual average military wages rose 6.6 percent, federal civilian wages rose 5.0 percent, and private sector wages rose 3.0 percent. (Federal “civilian” workers include essentially all federal workers except military and postal workers.)

In 2010, average military wages were $71,295, average federal civilian wages were $83,679, and average private sector wages were $51,986. Thus, federal civilian wages were, on average, 17 percent higher than military wages and 61 percent higher than average private sector wages. 

The BEA provides average wage data for dozens of separate industry groups. The data reveal that the federal government has had some of the largest wage increases of any industry. Figure 2 shows the 10 U.S. industries that had the fastest-growing wages between 2000 and 2010.

Military employees had the largest average annual wage growth in the nation, at 6.6 percent, followed by workers in the oil and gas extraction industry at 5.2 percent. Federal civilian workers had the third fastest wage growth, at 5.0 percent. Those growth rates compared to the average annual increase of 3.1 percent in all U.S.wages since 2000.

Note that farm wages rose rapidly over the past decade. That fact should be considered the next time Congress tackles farm subsidy legislation.

The data presented here do not include employee benefits, such as health and retirement benefits, which comprise an area of compensation where federal workers do particularly well. For a further discussion on the generosity of federal wages and benefits see this article.

How Much Should Washington Subsidize European Defense?

Illustration by John Camejo for the Washington Times

In today’s Washington Times, I argue that commentators should not take a victory lap—especially for NATO—in the wake of the Libya campaign, and instead should ask what, if anything, the costly commitment does for American security. NATO, I argue,

now constitutes a transfer payment from U.S. taxpayers (and their Chinese creditors) to bloated European welfare states. If the current Washington climate of austerity can serve any fruitful end, surely it should be to reconsider such foolish alliances.

NATO was created to counter the Soviet Union, but its broader purpose in Europe was summed up in an apocryphal quote attributed to Lord Ismay: to keep “the Russians out, the Americans in, and the Germans down.” It helped accomplish those objectives, but not without significant costs. Today the benefits to American national security have disappeared, but the costs to taxpayers remain.

The Libya campaign exposed the alliance’s imbalance. Germany and other NATO members sat out the fight. The U.S. military provided most of the surveillance capabilities, largely via drones, that enabled NATO pilots to bomb Col. Moammar Gadhafi’s loyalists. European air forces ran out of precision-guided munitions and had to come begging for Uncle Sam to provide some. Thus, Washington essentially borrowed money from China to buy ordnance to give to Europe to drop on Libya. The post-Cold War NATO rationale is that we agree to spend and fight and the Europeans agree to support us - sometimes.

[…]

Instead of taking a victory lap when Col. Gadhafi falls, American policymakers should consider the fruits of NATO’s decades-long policy of infantilizing its allies. Now that America is broke, Europe is safe and the Soviet Union is gone, American policymakers ought to acknowledge that NATO in the 21st century constitutes a costly commitment with little benefit for Americans.

Whole thing here. And thanks to the Times and its illustrator John Camejo for providing the terrific illustration seen above.

Rick Perry, Serious Constitutionalist?

In a Washington Examiner column Tuesday, reviewing Texas governor and 2012 GOP presidential candidate Rick Perry’s book, I wrote:

It’s clear from Fed Up! that the guy with a degree in animal science from Texas A&M understands the Constitution better than Barack Obama, former president of the Harvard Law Review.

I said that because Fed Up! is pretty radical for a campaign tract. At times it reads like a call to restore what legal analyst Jeffrey Rosen—borrowing from Judge Douglas Ginsburg’s 1995 Cato article—has dubbed “the Constitution in Exile”—which is to say, the original Constitution, whose doctrine of enumerated powers, Fed Up! notes, effectively vanished after the New Deal.

Alas, there isn’t a lot of room for nuance in a 600-word column; it might have been more accurate to say that Chip Roy, former senior adviser to Sen John Cornyn (R-TX), understands the Constitution a lot better than Barack Obama does.

Roy’s apparently the guy who did most of the heavy lifting on the book. Perry singles him out in the acknowledgments for “special recognition”Fed Up! “wouldn’t have been possible without Chip’s dedication over the course of several months.” Chip, Perry writes, “you have a brilliant legal mind, and after working with you on this project I will never again attempt one like this without you by my side.”

As these things go, Perry was relatively gracious and hardly tried to hide the fact that he’d had major help. Which is fine. I don’t know whether or not it’s fair to call Mr. Roy the “ghostwriter,” but being a governor is a busy job, and nobody really expects elected officials to write their own books these days.

Even so, when he’s called upon to explain the ideas in a book that he put his name on, Gov. Perry doesn’t exactly impress.

Here’s the transcript from a Newsweek interview the governor did last fall, when Fed Up! came out, and its arguments should have been fresh in his memory.

Newsweek: Let’s talk about some Constitutional issues, which take up a large part of your book. In the book, you argue against the 17th Amendment, which allowed the people to elect their senators directly instead of letting their state legislatures do it for them. This has become a big Tea Party talking point, but I’m not sure I understand the logic behind it. … wouldn’t we be less free, and the country less democratic, if we didn’t have a say in who was representing us in Washington?

Perry: Stand by just a second. [30 seconds of silence.] OK, I’m back with you. I apologize. I’m sorry, I got distracted when you were talking. I think the issue is about consolidating the power in Washington, D.C. The 17th Amendment is one of those where they were making… the states were historically more in control when they decided who those senators were going to be. They took the states out of the process at that particular point in time. So that’s the… uh… the historic concept of checks and balances, when you had the concept of the federal government and the states. The 17th Amendment is when the states started getting out of balance with the federal government, is my belief.

Newsweek: Progressives would say that “general welfare” includes things like Social Security or Medicare—that it gives the government the flexibility to tackle more than just the basic responsibilities laid out explicitly in our founding document. What does “general welfare” mean to you?

Perry: I don’t think our founding fathers when they were putting the term “general welfare” in there were thinking about a federally operated program of pensions nor a federally operated program of health care. What they clearly said was that those were issues that the states need to address. Not the federal government. I stand very clear on that. From my perspective, the states could substantially better operate those programs if that’s what those states decided to do.

Newsweek: So in your view those things fall outside of general welfare. But what falls inside of it? What did the Founders mean by “general welfare”?

Perry: I don’t know if I’m going to sit here and parse down to what the Founding Fathers thought general welfare meant.

Newsweek: But you just said what you thought they didn’t mean by general welfare. So isn’t it fair to ask what they did mean? It’s in the Constitution.

Perry: [Silence.]

Newsweek: OK. Moving on…

 

What to make of that “[30 seconds of silence]”? Was the governor looking for a “lifeline”? If so, maybe he should bring Chip Roy back to Austin and keep him close at hand.

I know what you’re going to say, and I get it: wonky people tend to overestimate the value of wonkishness–and wonks make some of the worst presidents.

And you’re right, there’s no reason to expect a president to be able to explain the Constitution as well as his solicitor general.

Even so, Perry’s the guy who signed his name to a book full of admirably radical–and, to my mind, correct–constitutional ideas. Is it asking too much to expect him to study up enough to be capable of convincingly bluffing his way through a discussion of those ideas?

As I suggested a couple of days ago, it’s hard to tell whether Fed Up! reflects Perry’s deeply held beliefs or primary-season cultural signaling that means about as much as Barack Obama’s 2007 boilerplate about civil liberties.

But if you’re a small-government type inclined to cheer Perry’s rise to the front of the GOP field, I’d give serious thought to the latter possibility.

$154 Million Medicaid Fraud Settlement a Sign of Govt Failure, Not Success

The federal government, four states, and a whistleblower have extracted a $154 million settlement from Par Pharmaceuticals for fraudulently inflating the prices it charges Medicaid, according to the Associated Press.

With Medicare and Medicaid losing roughly $100 billion each year to fraud and other improper payments, however, the fact that a paltry $154 million settlement is news can only mean that federal and state governments are not even trying to combat fraud in any serious way.   As I explain in this video, that’s because politicians have almost zero incentive to do so – which makes massive amounts of fraud an inherent part of these programs:

Under ObamaCare, Medicare and Medicaid fraud will only get worse.

What’s Next in the Obamacare Litigation?

My colleagues and I have covered the substance of the Eleventh Circuit ruling that two weeks ago struck down the individual mandate, but where do we go from here?  Why hasn’t the Supreme Court yet resolved the conflict between that ruling and the Sixth Circuit’s from earlier in the summer?  When will it do so?  A few points:

  1. The government is now likely to seek en banc review, meaning that they want the entire 10-judge court to review the 3-judge panel’s ruling.  It’s extremely unlikely that the Eleventh Circuit would grant such a motion because the panel is already 2-1 against and the members of the court not on the panel are a 4-3 Republican-appointed majority.  You need a majority (6 of 10) to get en banc review, which means the dissenting Judge Stanley Marcus from the panel, plus the three other Democratic appointees, plus two others.  Not gonna happen.  Thus, a government motion for en banc rehearing would be a purely political ploy to push the eventual Supreme Court decision past the election – no legal reason to do it. The release of the decision not to grant en banc review (which doesn’t require a written opinion) could be delayed, however, by the writing of a dissent from that denial.
  2. The earliest the Supreme Court could grant cert – on the existing petition out of the Sixth Circuit – is the moment after this blogpost goes live.  (Note that Cato adjunct scholar Tim Sandefur filed an amicus brief supporting that petition for the Pacific Legal Foundation, which brief he describes here.)  More realistically, it would be the week before the term opens for argument in October, right after the so-called long conference, when the justices review and rule on all the petitions that have come in over the summer. But they’ll likely wait to get the Eleventh Circuit case because they’d probably rather hear from the 26 states (and their counsel, former solicitor general Paul Clement) than any other plaintiffs. Here’s where it gets interesting: Assuming the government asks for en banc review, the plaintiffs could still file their own cert petition because they lost on severability and the Medicaid-coercion issue. Stay tuned.
  3. I still think this will get to the Court this term one way or another, with argument in the spring and a decision the last week of June.
  4. No stay of the Eleventh Circuit’s ruling is needed because the individual mandate doesn’t go into effect until 2014 and that’s the only provision that’s been struck down. So we don’t need to go into the type of analysis we did after Judge Vinson’s decision about what the federal government is authorized to do to keep implementing the legislation, in the 26 states or generally.

For more analysis, largely based on the above, see Jennifer Rubin’s Washington Post blog.

Forced Mortgage Refinance Does Not Create Wealth

The New York Times has gotten Washington all worked up with the suggestion that we can turn around both the economy and the housing market if only Fannie Mae and Freddie Mac gave all underwater borrowers an automatic reduction in their interest rate. 

The thinking, as illustrated by that world class economist Matt Yglesais, is  “with a lower monthly interest payment, an indebted household can pay down other debts more rapidly. A less-constrained household will increase its consumption of goods and services.”    What this misses is that a mortgage is one person’s liability, but another person’s asset.  By replacing a mortgage that yields 6% with a mortgage that yields, say, 4%, you decrease the value of that mortgage (or mortgage-backed security).  So whatever increase in consumption you get from making the borrower better off is reduced by making the investor worse off.  There’s no magic in wealth redistribution. 

I’ve argued all this before, but the reality is that the push to give underwater borrowers a free re-finance is not about economics, it is about politics.  Heading into the 2012 elections, this plan offers Obama the chance to give millions of borrowers (and voters) a freebie.  Of course, it isn’t free.  Even if the investor is the taxpayer, as in the case of Fannie and Freddie, it is simply a transfer from one set of taxpayers to another.

I was a little surprised, however, at Yglesais’s admission that he just discovered ” that Fannie & Freddie are overseen by an independent regulator.”  That’s mortgage finance policy 101.  But then why let any study of the facts or details get in the way of a good political giveaway.

What again is the great tragedy of borrowers being stuck with mortgage rates of 5.5 or 6.0 percent?  Those are quite low by historical standards.  And if the borrower wanted their rate to decline when overall rates decline, they should have taken out an adjustable rate mortgage.