Topic: Government and Politics

Helicopter Paulson

Government equity investment or rescue of the broader (non-financial) economy is a mistake.  It will damage economic efficiency in the long-term by diluting the value of private shareholders and reduce incentives for cost cutting and product quality innovations.

Of course, the current focus is not on long-term incentives but on how to shorten and moderate the current economic recession.  The constantly changing mix of initiatives from the Treasury suggest:

1. A lack of knowledge/vision about what to do–so they’re throwing money at everything that moves in the hope that something will work.  These ex-Goldman Sachs personnel that make up the Paulson team are probably not economists–and certainly not good ones.  The majority are probably MBAs with little understanding of how things really work in the economy. They probably have a microeconomic firm-specific orientation and management skills that are unsuited for their current responsibilities. If I’m wrong, I’d be very surprised. If I’m right, it’s showing.

2. An attempt to assuage competing political constituencies and provide benefits to potential future supporters.

3. An attempt to distribute wealth to those people/firms that the next Congress and president won’t support–by tying their hands through government ownership of firms.

4. A deliberate and cynical attempt to damage the economy even more to make life difficult for the Obama administration.

I think # 4 is cynical on my part. But although unlikely, it is not impossible given how polarized the political atmosphere was during the GW Bush presidency.

Broad government involvement in private firms to solve the economic crisis is a dangerous turn.  The shareholders in these firms took risks and should bear the consequences of their decisions. If they sink, the economy may recover faster as other businesses are created over time in non-housing and less energy intensive sectors.  Supporting existing, inefficient firms run by poor decision makers is likely to prolong the recession because keeping those firms and their managers afloat won’t help to restore market confidence.  And, this policy will encourage future investors/managers to take even riskier decisions under expectations of yet another government bailout if they fail. Finally, government debt-financed wealth injections are worsening the nation’s finances–we’re already swimming in huge and unpayable entitlement obligations to a growing number of retirees, disabled, poor, and the sick.

The government purchase of securitized auto loans is probably intended to insure auto company creditors, who would otherwise become bankrupt and prolong the credit-flow freeze.  It’s another source of bad assets on bank and non-bank financial firm portfolios that’s contributing to the market failure in that sector.  I’m more sympathetic to the original TARP idea than government officials seem to be. That way the government’s involvement in the private sector will be limited and it will remove bad assets from their balance sheets–which are responsible for the pervasive uncertainty among financial market players and is causing the credit freeze.  But under TARP, government officials don’t get to choose whom to support–they must buy up assets from whoever is currently holding them–be it domestic or foreign firms, “friends and relatives” or “strangers and enemies.”

Cato Today

Op-Ed: “The Voters’ Message to Republicans,” by Michael D. Tanner on Cato.org

Given a choice between two “big-government parties,” voters will choose the Democrats every time.

Video: Daniel J. Ikenson discusses an auto industry bailout on CNN

Where is it written in scripture and in stone that we need to have a big three?…If one of them goes down, the industry will be doing much better.

Article: “Worse Than Bush?,” by Ted Galen Carpenter in National Interest Online

Although it is hard to imagine, Obama’s foreign policy could prove even worse than that of the Bush administration.

Article: “Save Parents the Lecture,” by Neal McCluskey in Educationnews.org

Are there things that parents could do to improve education? Sure, but they don’t need… Barack Obama lecturing them on getting involved in their kids’ learning. What they need is real power over their kids’ education. What they need is school choice—but that’s something for which Obama refuses to use his bully pulpit.

Podcast: “The New Face of the GOP,” featuring Michael D. Tanner

Obama’s Tax Promises

President-elect Obama has made a slew of tax promises. Some of them are tax increases, some of them are tax cuts, and many of them are actually spending increases. Let’s try to sort them out.

Here I classify tax changes in comparison with the taxes that Americans are paying this year. I am mainly working from this excellent Urban/Brookings study.

Note that many of Obama’s proposed tax breaks are “refundable,” meaning that much of the effect is to increase federal spending, not to cut taxes. Refundable tax breaks involve cash hand-outs to many people who do not pay any federal income taxes. 

With that in mind, here are Obama’s main proposals to change the tax system from its 2008 structure:

Tax Increases

  • Raise the top two personal income tax rates from 33 and 35% to 36 and 39.6%, respectively.
  • Restore the income phase-outs for personal exemptions and itemized deductions, further increasing effective tax rates at the top end.
  • Raise the top capital gains tax rate from 15 to 20%. 
  • Raise the top dividends tax rate from 15 to 20%.
  • Increase taxes on oil and gas companies.
  • Increase taxes on U.S. multinational companies.

Combined Spending Increases / Tax Cuts

  • Making Work Pay. A refundable tax credit of up to $500 for low-income workers.
  • Mortgage Credit. A refundable tax credit of up to $800 for nonitemizers who own homes.
  • Saver’s Credit. A refundable tax credit of up to $500 per family for retirement saving.
  • American Opportunity Credit. A refundable tax credit of up to $4,000 for education expenses.
  • EITC Expansion. Expand the refundable earned income tax credit.
  • Child Care Credit. Turn the current child care credit into a refundable credit.

The Urban/Brookings analysis (pages 22 and 25) found that more than half of the dollar impact of these six tax code changes will be to increase federal spending, not to cut taxes. That’s $648 billion more in federal spending over the next ten years. In addition, Obama is proposing a new refundable tax credit for buying health insurance. 

Tax Cuts

  • Exempt people age 65 and over from federal income tax if they earn less than $50,000.
  • Minor business incentives. These promises were so small and undefined that the Urban/Brookings study didn’t even score them.

Conclusions

As you can see, it was genius of Obama to successfully run for the White House as tax cutter, given that most of his proposed tax code changes are tax or spending increases. Part of the problem is that the media keeps calling Obama’s proposals “middle-class tax cuts,” as on the front of the Washington Post today.

For the economy, for tax code complexity, and for the America ideal of equal treatment under law, Obama’s tax proposals would be a disaster. With Obama’s tax and spending proposals, government as Santa Claus has reached new heights.

For other posts on Obama’s tax plans, see:

http://www.cato-at-liberty.org/2008/06/13/obama-tax-proposals/

http://www.cato-at-liberty.org/2008/09/17/obama-tax-cutter-or-tax-hiker/

Obama’s Touch Cured Me of Scrofula

Arjun Appadurai (of “Magic Ballot” fame) has replied to my recent post. I think it’s at least worth clearing up a few misconceptions:

I assume Mr. Kuznicki is sympathetic to the mission of the Cato Institute, whose name can be traced back to Cato the Younger, implacable foe of Julius Caesar. Alas, he sounds a lot more like Cato the Elder, also known as Cato the Censor, famed for his rigid moralizing, his ascetical approach to public spending, and his brutal approach to war against the enemies of Rome.

I don’t care for moralizing, and still less for war, but I’m guilty as charged when it comes to asceticism in public spending.

I believe that the government should live within its means, and that whenever possible, workers and investors should keep what they earn. Call me a penny-pincher, but I think that terming a $700 billion bank bailout “magic,” as Mr. Appadurai did, is the single weakest justification I’ve ever heard for any government project, ever. And I’ve heard some doozies before.

Calling acts of government “magic” gives our political leaders way more credit than they deserve. Our leaders may be intelligent, or charismatic, or honest, or judicious. But even the best of them are not magic. To tell the truth, I hadn’t thought this a controversial idea.

Mr. Appadurai continues:

Mr. Kuznicki is keen to remind me that the United States is a Lockean republic, that Barack Obama is not a priest or magician, that the Presidency is just a job (presumably like employment at Kinko’s) and that Obama was elected and not crowned. Well, where do I begin? I do know these facts. My essay was an interpretation of what seemed to us (not to Mr. Obama) so special about this election.

But his essay was the first to use the word “crowned,” not mine.

This election certainly was special: We shattered a racial barrier, and I’m thrilled to see it gone. We repudiated neoconservatism, our ill-conceived foreign wars, and the big-spending Bush administration. So much the better. But none of this is magic, and we don’t need the vocabulary of mysticism to express it. (In fact, I believe I just did express it.)

Mr. Appadurai also gets the following wrong:

Mr. Kuznicki is the kind of “secular” libertarian to whom the entire world of non-secular feelings, sensations, experiences and actions makes no sense, indeed it makes him sick. Well, in that case, 90% of humanity makes him sick, and perhaps 80% of the American electorate, including those who believe in faith-based philanthropy, religious calls to dialogue between faiths, and I assume the entire family of words from grace and charisma to hope and redemption also makes him sick. I am afraid there is no easy cure for this ailment.

It’s a bit silly to think that because I won’t call Barack Obama “magic,” I must have some deep-seated problem with 80% of the American electorate. I’d think, rather, that Christians would be on my side: Obama is a man and a sinner like any other, and all magic – excuse me, all glory – belongs to God.

In fact, the only thing I object to here is magical or mystical thinking about the government. The government has to serve people of all religious faiths, and of none. It can’t play favorites, and it can’t be some strange mysticism unto itself. If it were, it would alienate much of the public, and make tyrants of the rest. That’s what I object to.

A government of, by, and for the people is a huge advance over the divine rule of kings, kings who in former ages claimed that they really were magical, and whose touch was said to cure scrofula. Our leaders are human like the rest of us, and they should be open to our criticism, just like the guy at Kinko’s if he ruins our copies. That’s the genius of America: having a government we’re not afraid to criticize.

America is also about celebrating individual virtues. These virtues, however, take a pounding from Mr. Appadurai:

…Mr. Kuznicki knows the answers already and is sure that what makes the world go around are: “reason, hard work, rectitude, compassion, courage, and thrift.” I assume that when things go wrong, it is due to a deficit of these things. Well, there’s his answer to global warming, the biggest financial meltdown in the world’s wealthiest economy, military failure in Iraq and Afghanistan for the world’s most sophisticated army, not to speak of Avian flu, sudden infant death and Katrina.

“[R]eason, hard work, rectitude, compassion, courage, and thrift” are virtues. Virtues aren’t “the” answer, but they’re the beginning of one, and it’s a weak theodicity that gives up on virtue when the going gets tough.

(Ask yourself: Can there be a solution to global warming or Avian flu – without reason? A solution to Iraq – without courage? A solution to the financial crisis without hard work and thrift? Well, yes, there can be such solutions, but we wouldn’t want to implement them.)

And you know, it’s funny. I’d imagined that liberals would really go for the “reason” line, having plausibly accused the Bush administration of waging “war on science.” But I suppose that for at least a few liberals, when their guy wins, “reason” is out the window, and “magic” is what it’s all about.

The $700 Billion Honeypot

The Washington Post reports:

[There is] an army of accountants, financial advisers, asset managers, lobbyists and others descending on Washington as part of the government’s attempts to rescue the economy and bail out industries.

Big consulting firms like PriceWaterhouseCoopers and Ernst & Young have booked extended-stay apartments and blocks of hotel rooms. Out-of-town financial experts are scouting for office space, expecting to lease it for several months as they help do work for Treasury and others.

Commercial real estate brokerage companies have pulled lawyers and salesmen who usually put together deals on downtown offices to work out loans and foreclose on properties. Some have dubbed themselves the “TARP team” after the Treasury’s Troubled Asset Relief Program created to sort through assets.

“Everything from the policies, the regulations, to the money and the contracts to do the work will be emanating out of Washington, so people want to be here,” [lawyer Larry] Wolk said. “Wall Street has moved to K Street.”

National crises often provide a stimulus to the Washington economy….

“Firms see this as a potential gold mine,” said Anirban Basu, an economist and chief executive of Sage Policy Group in Baltimore. For Washington, “that has to translate into business sales, high-powered restaurant meals, business suit purchases, and travel and luxury hotel stays. We often talk about D.C. being different economically than the rest of the country and this is perfectly true. I don’t see much evidence of a slowdown here.”

As I wrote two years ago, “When you spread food out on a picnic table, you can expect ants. When you put $3 trillion on the table, you can expect special interests, lobbyists and pork-barrel politicians.”

‘After’ the Imperial Presidency?

Jonathan Mahler has a smart, informative feature on executive power in this week’s New York Times Magazine. I object only to the title, “After the Imperial Presidency.” As Mahler’s piece makes clear, the title could have used a question mark, at the very least.

Mahler writes:

Come January, the current administration will pass on to its successor a vast infrastructure for electronic surveillance, secret sites for detention and interrogation and a sheaf of legal opinions empowering the executive to do whatever he feels necessary to protect the country. The new administration will also be the beneficiary of Congress’s recent history of complacency, which amounts to a tacit acceptance of the Bush administration’s expansive views of executive authority. For that matter, thanks to the recent economic bailout, Bush’s successor will inherit control over much of the banking industry. “The next president will enter office as the most powerful president who has ever sat in the White House,” Jack Balkin, a constitutional law professor at Yale and an influential legal blogger, told me a few weeks ago.

Some prominent commentators — Jack Goldsmith and Jeffrey Rosen among them — have noted the “irony” that an administration monomaniacally committed to the growth of presidential power has allegedly weakened the presidency with its unilateralism and contempt of Congress. Given the powers the office retains and continues to accrue, that’s an irony that’s hard to savor. As Mahler notes, “it’s worth keeping in mind that in the final year of Bush’s presidency — while facing a Democratic Congress and historically low approval ratings — he was able to push through a federal bailout bill that vested almost complete control over the economy in the Treasury secretary (who reports to the president), not to mention a major rewriting of the 1978 Foreign Intelligence Surveillance Act that will make it easier for the White House to spy on American citizens.”

Indeed, Mahler documents how political realities— and in Obama’s case, perhaps, the prospect of actually taking power — led both candidates to move away from their early criticisms of Bush-style “deciderism,” and flip flop on torture (McCain) and wiretapping (McCain and Obama).

In explaining the post-9/11 growth of executive power, Mahler properly focuses on the twin problems of congressional cowardice and poisonous partisanship. In the Bush years, all too many congressional Republicans put party unity over institutional responsibility. That’s a common vice under unified government, which may be why Mahler hardly sounds optimistic when he quotes Senator Levin: “When I asked Levin what needs to happen for Congress to take back the rest of the ground that it ceded to the executive branch during the Bush years, he replied predictably, ‘We need a Democrat in the White House.’”

For further reasons to doubt that the Imperial Presidency is behind us, check here and here.

How Many Psychiatrists Does It Take to Change the GOP?

Just one, but the GOP has to want to change.

There’s an interesting difference between the post-election opeds written by House Minority Leader John Boehner (R-OH) and Rep. Jeff Flake (R-AZ) in the Washington Post

Flake admits the GOP has made mistakes:

I suggest that we return to first principles. At the top of that list has to be a recommitment to limited government. After eight years of profligate spending and soaring deficits, voters can be forgiven for not knowing that limited government has long been the first article of faith for Republicans.

Boehner writes of the same principles and that the GOP has a lot of work to do, but betrays no awareness that the GOP may have done anything wrong over the past eight years.

I guess this may take a while.

P.S. - A suggestion for Mr. Boehner: drop the talking point that the GOP will “offer health-care reforms that empower patients and doctors.”  Physicians have many legitimate gripes, but government has already done too much to empower doctors at the expense of patients.  Just focus on empowering patients.