Topic: Finance, Banking & Monetary Policy

Public Tires of Wasteful “Stimulus” Spending

The president may believe that he’s created thousands (or is that millions?) of jobs, but the public doesn’t believe him.  In fact, according to Rasmussen Reports, a plurality of the public wants to drop the rest of the “stimulus” spending while keeping the tax cuts:

Forty-five percent (45%) of Americans say the rest of the new government spending authorized in the $787-billion economic stimulus plan should now be canceled. A new Rasmussen Reports national telephone survey found that just 36% disagree and 20% are not sure.

Just 20% of adults say the tax cuts included in the stimulus plan should be canceled while 55% disagree. The stimulus plan includes $288 billion in tax cuts.

While there is a wide partisan gap on the question of stimulus spending, there is little partisan disagreement on maintaining the tax cuts.

President Obama on Monday vowed to speed up the pace of stimulus spending and said the money will help “create or save” 600,000 more jobs this summer.

However, only 31% of Americans believe the new government spending in the stimulus package creates new jobs. Forty-eight percent (48%) say the stimulus spending does not create jobs, and 21% are not sure.

This is certainly a better approach for growing the economy.  The people are proving to be a lot smarter than their governors in Washington.

Indiana: Defender of “the Rule of Law”

While the majority of Chrysler’s senior creditors sacrificed their fiduciary duties and caved into political pressure in accepting the Obama Administration’s pre-packaged bankruptcy of Chrysler, a small group of state pension funds in Indiana has challenged the Obama plan and is asking the Supreme Court to review said plan. As in the 1930s, the protection of contractual rights, one of the most basic pillars of a free society, along with the rule of law, is now in the hands of the Supreme Court.

As discussed in today’s Washington Post, these pension funds believe their rights were infringed by the Administration’s placing of junior creditors in a preferred situation to senior creditors. It doesn’t take Ms. Manners to remind us that cutting in line, whether in traffic, at the grocery store, or in a bankruptcy, is plain rude. To have the government re-order the line for you is even worse.

To re-build confidence in our markets, trust in our institutions must be re-stored. Not simply in our private institutions, but also in our government. If players believe the game is going to be rigged, fewer will be willing to play. And while the Administration has portrayed Chrysler’s senior creditors as nothing more than greedy speculators, the Indiana request exposes that myth. President Obama should clearly articulate why retired state employees, such as teachers and firefighters, should have their pension funds raided solely for the benefit of the auto unions. Here’s to hoping Indiana goes all the way in this Court.

Should You Vote on Keeping Your Local Car Dealership?

There are lots of reasons Washington should not bail out the automakers.  Whatever the justification for saving financial institutions – the “lifeblood” of the economy, etc., etc. – saving selected industrial enterprises is lemon socialism at its worst.  The idea that the federal government will be able to engineer an economic turnaround is, well, the sort of economic fantasy that unfortunately dominates Capitol Hill these days.

One obvious problem is that legislators now have a great excuse to micromanage the automakers.  And they have already started.  After all, if the taxpayers are providing subsidies, don’t they deserve to have dealerships, lots of dealerships, just down the street?  That’s what our Congresscritters seem to think.

Observes Stephen Chapman of the Chicago Tribune:

The Edsel was one of the biggest flops in the history of car making. Introduced with great fanfare by Ford in 1958, it had terrible sales and was junked after only three years. But if Congress had been running Ford, the Edsel would still be on the market.

That became clear last week, when Democrats as well as Republicans expressed horror at the notion that bankrupt companies with plummeting sales would need fewer retail sales outlets. At a Senate Commerce Committee hearing, Chairman Jay Rockefeller, D-W.Va., led the way, asserting, “I honestly don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave it to local dealers and their customers to fend for themselves.”

Supporters of free markets can be grateful to Rockefeller for showing one more reason government shouldn’t rescue unsuccessful companies. As it happens, taxpayers are less likely to get their money back if the automakers are barred from paring dealerships. Protecting those dealers merely means putting someone else at risk, and that someone has been sleeping in your bed.

The Constitution guarantees West Virginia two senators, and Rockefeller seems to think it also guarantees the state a fixed supply of car sellers. “Chrysler is eliminating 40 percent of its dealerships in my state,” he fumed, “and I have heard that GM will eliminate more than 30 percent.” This development raises the ghastly prospect that “some consumers in West Virginia will have to travel much farther distances to get their cars serviced under warranty.”

Dealers were on hand to join the chorus. “To be arbitrarily closed with no compensation is wasteful and devastating,” said Russell Whatley, owner of a Chrysler outlet in Mineral Wells, Texas.

Lemon socialism mixed with pork barrel politics!  Could it get any worse?  Don’t ask: after all, this is Washington, D.C.

The Corporate Culture at Government Motors

David Brooks comes in for his share of criticism in these parts, but he has a very astute column today about the ways that government ownership will worsen an already problematic corporate culture at a once-great company:

Fifth, G.M.’s executives and unions now have an incentive to see Washington as a prime revenue center. Already, the union has successfully lobbied to move production centers back from overseas. Already, the company has successfully sought to restrict the import of cars that might compete with G.M. brands. In the years ahead, G.M.’s management will have a strong incentive to spend time in Washington, urging the company’s owner, the federal government, to issue laws to help it against Ford and Honda.

Sixth, the new plan will create an ever-thickening set of relationships between G.M.’s new owners — in government, management and unions. These thickening bonds between public and private bureaucrats will fundamentally alter the corporate culture, and not for the better. Members of Congress are also getting more involved in the company they own, and will have their own quaint impact.

The end result is that G.M. will not become more like successful car companies. It will become less like them.

Marginal Tax on Corporate Profits was 74.2% in the 1st Quarter

From the Bureau of Economic Analysis news release of May 29:

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $42.6 billion in the first quarter… Taxes on corporate income increased $31.6 billion… [therefore] profits after tax … increased $11.1 billion.

In other words, taxes extracted 74.2% of any added (marginal) corporate earnings, leaving only scraps for stockholder.

Companies that lost money, on the other hand, were often bailed out and/or nationalized.

Why bother even trying to maximize profits or minimize losses?

Tough Words

In the Wall Street Journal, Mary Anastasia O’Grady got Dallas Fed president Richard Fisher to go on the record about current Fed policy. He talks tough about inflation. “Throughout history, what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen.”

What is lacking is a plan to match the tough words with tough actions. Only when a tough and resolute U.S. president, Ronald Reagan, was matched with a tough and resolute Fed Chairman, Paul Volcker, did the Fed turn into an effective inflation fighter. There is no such match up now in the face of trillion dollar deficits forecast with no end in sight.

Ms. O’Grady describes Fisher as “the lead inflation worrywart” on the Federal Open Market Committee of the Fed. But Fed officials do not act in a political vacuum, and regional Fed presidents cannot on their own stop the Fed’s printing money in the face of the deficits. That requires leadership at the top from both the Fed chairman and the U.S president.

The Administration’s plan appears to be “to print their way out of an unfunded liability.” Thus far, despite tough words from some quarters, the Fed seems ready to accommodate “the political class.”

“They Don’t Have the Money to Pay Us Back”

When they let their guard down, politians can say the most revealing things.  In today’s Wall Street Journal, representatives of local governments in California attacked Governor Schwarnenegger’s plan to borrow $2 billion from local property tax revenues to cover some of the state’s budget shortfalls.  In response, Don Knabe, chairman of the Los Angeles County Board of Supervisiors said, “They’re hijacking our dollars.  They don’t have the money to pay us back.  It’s a joke.” 

Given that California doesn’t have the money to pay back borrowing from its local government, it’s likely they might not be able to pay back borrowing from private investors either.  To solve this problem, we have the Municipal Bond Insurance Enhancement Act, on which the House Financial Services Committee held a hearing this week.  To encourage investors to buy California’s risky debt, the federal government would cover any losses to the investor.  We’re told that the federal government would charge bond-issuing governments insurance premiums to cover any losses, but the federal government’s history of setting rates based on politics rather than risk (have you looked at the health of the National Flood Insurance Program lately?) guarantees that the taxpayer would likely have to cover billions in losses on any guarantee of California’s debt.