Tag: Bailout

Federal Bailout of GM Still Horribly Wrong

Our friends at The Economist magazine usually talk good sense about free trade and free markets, which makes their retrospective endorsement of the government bailout of General Motors all the more disappointing.

In a leader in the current issue, the editors write that critics of the bailout (count Cato scholars among them) owe President Obama an apology. “His takeover of GM could have gone horribly wrong, but it has not,” they opine.

The Economist argues that, in contrast to state coddling of industries in, say, France, President Obama has driven a hard bargain by requiring GM to fire top management, cut jobs, close plants, and reduce its brand names. The magazine grants that the president’s labor-union allies won special concessions that came at the expense of bondholders, but “by and large Mr. Obama has not used his stakes in GM and Chrysler for political ends.”

First, it’s a pretty low bar to say an intervention was right because it did not go horribly wrong. The editors then too quickly brush over the horrible injustice of stiffing the taxpayers of Indiana and others who bought GM bonds and should have been in line ahead of the more politically connected United Auto Workers union.

To curry favor with organized labor, President Obama put $50 billion of taxpayer resources at risk. A post-bankruptcy GM turned a profit last quarter, along with most other automakers, but it is doubtful its anticipated IPO in the next few months will raise anything like the $80 billion or more needed to return the “investment” to taxpayers.

On top of that, the bailout of GM went far beyond any valid power granted to the federal government by the U.S. Constitution, and it blatantly favored two companies over a multitude of others in the very competitive automobile market.

Remind me again who owes whom an apology?

They Should Earn Our Trust

Ronald Brownstein points to the many measures showing Americans have lost confidence in their government and in some private institutions.  He concludes that these signs of distrust “point toward a widely shared conviction that the country’s public and private leadership is protecting its own interest at the expense of average (and even comfortable) Americans.”

Maybe. But there is another interpretation. Consider the recent performance of the government and of more than a few businesses. Most Americans do not pay attention to the details of governing. They have other things to occupy their time. They do, however, notice important matters like war and the economy. Since about 2004, Americans have steadily soured on the wars in Iraq and Afghanistan. The economy remains weak despite promises to the contrary from the current administration. Banks and auto companies flouted the presumed rules of the capitalist game by seeking and taking bailouts when bankruptcy loomed.

The last nine years have given the public little reason to have confidence in the performance of the federal government and of some business leaders. The lack of public confidence Brownstein notes might better be seen as a rational response to what is becoming a decade of incompetence in DC combined with bad faith elsewhere.

Another Government Employee Bailout

President Obama is proposing giving the states another $50 billion. However, this would amount to another bailout for state and local government employees and their unions. The president claims that more deficit spending is necessary to sustain the nascent economic recovery. But the only thing the money would sustain is the excessive wages and benefits government employees enjoy at the expense of the private sector.

According to the Bureau of Labor Statistics, the average state and local government employee receives 45 percent more in total compensation per hour worked than the average private-sector employee. Perhaps we should cut generous government wages and benefits rather than putting the federal government further into debt?

Total compensation for state and local workers is more than $1.1 trillion a years. So loosely speaking we could simply cut compensation by less than five percent for state and local governments to save the $50 billion they are in need of.

Of more fundamental concern is the continued relegation of the states to being administrative outposts of the federal government. The employment of firefighters, teachers, and police officers is an issue for the states to be concerned with. However, so long as the federal government continues to overstep its constitutional bounds, the states will have little incentive to tackle issues like excessive employee compensation. State and local policymakers can avoid the hassle of taking on the government employee unions by cashing Uncle Sam’s checks instead.

As the following chart shows, federal aid to state and local governments has almost doubled in real terms over the past decade:

It’s not a coincidence that the states find themselves in a fiscal bind. The increasing dependency on the federal government has contributed to the states’ dereliction of duty when it comes to keeping their fiscal houses in order. As this essay argues, reviving fiscal federalism is critical to getting governments at all levels in the United States to clean up their fiscal messes.

Gov. Bob McDonnell Needs to Lead on the Budget and Education

Gov. McDonnell just signed a bill that will give a tax credit to the film industry. They will shell out up to $2.5 million to movie-makers in the first year and up to $5 million thereafter. Proponents say it might save money. Unfortunately, the evidence from other states suggests it will lose money.

At a time of economic turmoil and budget problems, the Governor wants to lose money by giving a tax credit to the film industry. It’s even refundable, which in normal-talk means the state will send a check to a film executive even if he doesn’t owe any taxes; that’s a straight BAILOUT, not a tax credit. The last thing Virginia needs is another corporate bailout.

What is wrong with our Commonwealth? And what in the world is Governor McDonnell thinking?

There is one tax credit that has consistently proven to save money and increase achievement in public schools: education tax credits.

Florida recently expanded its successful education tax credit program to $140 million with the support of 42 percent of Democrats and almost every Republican. The program was found by the government to save $1.49 for every dollar invested in the credits. And the official academic researcher for the program just found that it significantly increases public school performance.

Strangely, education tax credits are not on the Governor’s agenda. Why?

Why is a Governor who had the good sense to appoint a true education reformer, Gerard Robinson, as the Secretary of Education not out front leading the movement for effective, efficient investment in education?

Look to Pennsylvania, to Georgia, Iowa, Rhode Island, Illinois, Arizona, any of the nine states supporting twelve education tax credit programs to see the new, bipartisan wave of education reform. A toothless Virginia charter school law will do nothing to improve education or save money. And the constitution won’t allow a strong charter law.

We need to save money, not waste it on another corporate bailout. We need to increase achievement.

We need leadership, Governor. We need education tax credits in Virginia. Now.

Congress Begins Conference on Financial Regulation

Today begins the televised political theatre that Barney Frank has been waiting months for:  the first public meeting of the House and Senate conferees on the two financial regulation bills.  While there are a handful of important differences between the House and Senate bills, these differences are overshadowed by what the bills have in common.  The most important, and tragic, commonality is that both bills ignore the real causes of the financial crisis and focus on convenient political targets.

As our financial system was brought to its knees by an exploding housing bubble, fueled by government mandates and distortions, one would think, just maybe, that Congress would roll back these distortions.  Despite their role in contributing to the crisis and the size of their bailout, however, neither bill barely mentions Fannie Mae and Freddie Mac.   Except, of course, to continue their favored and privileged status, such as their exemption from a proposed new “consumer protection” agency.  What we really need is a new “taxpayer protection” agency.

Nor will either bill change the government’s meddling in what is probably the most important price in the economy:  the interest rate.  Given the overwhelming evidence that loose monetary policy was a direct cause of the housing bubble, one might expect Congress to spend time and effort preventing the Fed from creating another bubble.  Not only does Congress ignore the issue, the Senate won’t even allow GAO to look at the Fed’s conduct of monetary policy.

Instead of spending the next few weeks gazing into the camera, Congress should stop and gaze into the mirror.  This was a crisis conceived and born in Washington DC.  The Rayburn building serving as the proverbial back-seat of the housing bubble.

Weak Defenses of Teacher Bailout

As the Obama administration continues to send mixed signals about the proposed $23 billion public-school bailout, rescue advocates are offering some very wimpy defenses of their cause. That is, except for the National Education Association, which has launched a PR blitz for the bailout in its grandest – and most shameless – tradition of using cute kids to get lots of dues-paying members:

OK, enough of the NEA. The more numerous defenses of the bailout try to offer more reasoned and less emotional arguments for the bailout than does the NEA. But not much more reasoned.

Case in point, the The Atlantic’s Derek Thompson, who takes issue with an op-ed I had in the New York Post yesterday making clear that even cutting 300,000 public-school employees – the worst-case scenario – would hardly be the “catastrophe” people like U.S. Secretary of Arne Duncan say it would be. As I wrote, even that cut would only constitute a 4.8 percent reduction in the public K-12 workforce. More important, we have seen decades of huge per-pupil spending and staffing increases in education with essentially no accompanying improvement in academic achievement. In other words, even far bigger cuts than the worst-case scenario would likely have little adverse effect on achievement.

So the worst cuts wouldn’t actually be that big, and they’d likely have little negative effect on achievement. But to Thompson, they’d be akin to the suffering of cold-turkey drug rehab:

At the risk of invoking a cliche, our education system is a bit like a painkiller junkie who just had his wisdom teeth pulled. In the long term, we probably want to wean the patient off drugs. In the short term, the patient happens to be in dire need of some drugs.

Perhaps more troubling than this overwrought analogy is that Thompson dismisses my complaint that the $23 billion bailout would, in addition to being educationally worthless, add to our staggering national debt.  $23 billion, Thompson essentially says, is just too small a piece of federal change to complain about its debt implications.

“Well,” he writes, “if we’re playing the put-it-in-context game, $23 billion is ‘only’ 0.6% of the 2010 budget. An unfortunate bailout, perhaps, but hardly catastrophic…”

OK. If the game we’re supposed to be playing is the “this-expenditure-isn’t-all-that-big” game, then we can forget about ever cutting the $13 trillion debt. Heck, the Defense Department’s budget in FY 2010 was “only” about $693 billion, a mere 5.3 percent of the national debt.

Joining the bailout defense today is White House Council of Economic Advisors chair Christina Romer, who pushes for it in the Washington Post.

In addition to repeating the usual, now thoroughly debunked proclamations of impending educational disaster, Romer rolls out boilerplate about the government needing to maintain high employment in order to keep people spending and paying taxes:

Because unemployed teachers have to cut back on spending, local businesses and overall economic activity suffer. And the costs of decreased learning time and support for students will be felt not just in the next year or two but will reduce our productivity for decades to come…

Furthermore, by preventing layoffs, we would save on unemployment insurance payments, food stamps and COBRA subsidies for health insurance, and we would maintain tax revenue.

Given the at-best highly dubious short-term positive effects of the “stimulus,” it is hard to believe that too many people at this point will find these arguments persuasive. Worse yet, Romer glosses right over the fact that the mammoth debt will eventually have to be repaid, and that that will have huge negative effects for local businesses and everyone else as their money goes from useful pursuits to government debt repayment.

In light of how flaccid the arguments are for the bailout, it’s really no surprise that the Obama administration is sending mixed signals about how much it really wants the rescue. By offering some support – including having the Education Secretary appear at the launch of the NEA’s PR blitz – the administration keeps on the good side of the teachers unions. But by not going all out, the administration doesn’t end up too closely connected to a debt-be-damned expenditure that neither addresses a real emergency, nor has any meaningful connection to education quality.

Public Wants Fed Audit

A new Rasmussen poll has 80% of the American public supporting an audit of the Federal Reserve.  Only 9% of the public oppose, with the rest unsure.

Unfortunately the poll did not ask specific questions over whether such an audit should cover monetary policy or just the Fed’s 2008 bailout activities.  So while the poll is likely to keep pressure on Congress, during its conference negotiations over financial regulation, to retain some audit of the Fed, the likely result is that Congress will leave out any real, on-going audit of monetary policy. 

After Sen. Bernie Sanders essentially gutted his own amendment, Senator Dodd and the Obama administration agreed to a minor audit of the Fed’s emergency lending programs.  Ron Paul, sponsor of the House version of the audit, quickly labeled this as a “sell-out”.  Fortunately Congressman Paul looks to be a House conferee on the bill, so some hope remains of a full audit being included.

Opponents of a Fed audit claim this would undermine the Fed’s political independence.  Sadly what opponents, including many economists, are missing is that the Fed is currently far from independent of politics.  This is again an area where the public gets what the experts miss, as just 20% of poll respondents thought the Fed has acted independently.  A full 60% felt the Fed was too much influenced by the President, getting at a crucial point concerning Fed independence:  it is independence from the Executive branch that is critical.