Consumer Financial Product Commission Distracts from Real Reform

Today the Obama Administration released a 152-page draft bill to create a new Consumer Financial Product Commission. While intended to protect against consumer confusion and reduce the likelihood of future financial crises, the proposed agency will at best have little impact and at worst contribute to the next financial crisis, with the added effect of decreased homeownership and increased litigation.

The president promises that “those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past,” The president ignores that those “ridiculous contracts” and “fine print” are the result of previous rounds of so-called consumer protections. The disclosures one receives with a mortgage or a credit card are those mandated by some level of government. They don’t call those credit card disclosures a “Schumer Box” because they were invented by a baron of industry. In addition to the government-mandated disclosures that have failed, are the endless amount of fine print added to protect companies from frivolous litigation. The Obama approach to that problem is to increase the amount of litigation.

If the president were serious about avoiding the next housing bubble and financial crisis, he would propose eliminating some of the various federal policies that contributed to the housing bubble. For instance, how about requiring real down payments when the taxpayer is on the hook – as with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Talk about bad incentives; under FHA, a borrower can put almost nothing down and if the loan goes bad, the government covers the lender for 100 percent of their losses.  No wonder we had a housing bubble. In addition, the proposed agency does nothing to address the underlying causes of any type of credit default: unemployment, unexpected health care costs or divorce.

Once again, when given the opportunity to address the real flaws in our financial system, the administration chooses to appease the special interests and provide a distraction from the underlying causes of our current financial crisis.

The Roberts Revolution to Come

As I mentioned yesterday, the U.S. Supreme Court surprised many people by ordering a reargument in the case of Citizens United v. Federal Election Commission. Specifically, the Court called for the parties to the case to address the question of overruling Austin v. Michigan Chamber of Commerce.

The Court decided Austin v. Michigan Chamber of Commerce in 1989.  The state of Michigan had prohibited corporations from spending money on electoral speech. In the case in question, the Chamber of Commerce wished to pay for an advertisement backing a candidate for the House of Representatives. The Chamber took this action on its own and not in tandem with the candidate or his party.  Paying for the ad was a felony under Michigan law.

A majority of the Court in 1989 said the Michigan law did not violate the First Amendment. However, the majority had a problem. Previous cases permitted limits on funding electoral speech only in pursuit of a compelling state interest: the prevention of quid pro quo corruption or its appearance. The Court had also ruled that independent spending by groups could not corrupt candidates.

So the majority needed a novel rationale for approving Michigan’s suppression of speech. The majority concluded that speech funded by corporations would distort the democratic process and that the state could prohibits such outlays to prevent harms done by “immense wealth.” In other words, the Austin majority tried to redefine “corruption” as “inequality of influence.” That revision had its own set of problems. Buckely v. Valeo, the Ur-decision in campaign finance, had excluded equality as a compelling state interest justifying regulation of campaign finance.

It is easy to see why the Buckley Court had rejected equality of influence as a reason for restricting political speech. Imagine Congress could prohibit speech that had “too much influence.” But how could that be determined? A majority in Congress would be tempted to suppress speech that threatened the power of that majority.  Paradoxically, the equality rationale would strengthen those who already held power while vitiating representative government. The First Amendment tries to prevent that outcome.

In last year’s decision in Davis v. FEC, the Court again rejected the equality rationale for campaign finance laws.  More and more the Austin decision is looking like bad law.

Justices Kennedy and Scalia, both current members of the Court, wrote dissents in Austin. Justice Thomas has called for Austin to be overruled in other contexts.  Neither Justices Roberts nor Alito is likely to vote to uphold Austin (or the relevant parts of McConnell v. FEC for that matter). But it would seem that either or both of them were unwilling to strike down a precedent without a formal hearing. That hearing will come on September 9 with a decision expected by Thanksgiving.

Almost six years after the Court utterly refused to defend free speech in McConnell v. FEC, the Roberts Court may be ready to vindicate the First Amendment against its accusers in Congress and elsewhere.

Private School Productivity Off the Charts

A new study of Florida’s tax credit scholarship program was announced yesterday, reporting test scores both for private school students in the program and for low-income public school students. The report notes that scholarship kids were much more disadvantaged than even the low-income public school students, and it wasn’t able to control for those differences, so it produced no really meaningful findings. In other words, it didn’t have the data to find out what impact the scholarships are having academically.

By reporting the unadjusted test scores (and the lack of a significant difference between them for public and private school kids) it has raised some eyebrows. Jay Greene has a good explanation of why we should just wait until the study’s author, David Figlio, has some meaningful data before getting too excited.

For me, a key point is that the scholarship kids are receiving a maximum of $3,950 while Florida public schools spent upwards of $11,150 per pupil in 2007-2008. Public schools are spending nearly three times as much per pupil and have nothing to show for it. Is Florida doing so well economically that they can afford to blow tens of billions of dollars for no reason at all? Every year? I had no idea….

Incidentally, I calculated the per pupil spending figure myself from the published spending and enrollment data on the Florida DOE’s website. The St Petersburg Times story by Ron Matus quotes a public school figure of $7,000 per student, which is one of those make believe numbers that politicians and officials come up with that only represents a fraction of what is spent. I’d be surprised if the Times keeps reporting that number in the future, given how detached it is from reality.

Appointing Another Supreme Commander of NATO

The Obama administration has just carried out one of its standard rituals – choosing a new commander of NATO.  But why are we still in NATO?

Reports the New York Times:

When Adm. James G. Stavridis took over the military’s Southern Command in late 2006, his French was excellent but he spoke no Spanish. Not content to rely on interpreters, he put himself on a crash course to learn the language.

Over the next three years, his fluency was measured not only in the high-level meetings he conducted in the native tongue of his military hosts. He also read the novels of Gabriel García Márquez, the Nobel laureate from Colombia, in the original rich and lyrical Spanish.

Now Admiral Stavridis’s boss, Defense Secretary Robert M. Gates, has given him a new assignment, which starts Tuesday.

“Jim must also learn to speak NATO,” Mr. Gates said.

As the new American and NATO commander in Europe, Admiral Stavridis, 54, becomes the first naval officer appointed to a position previously held by famed ground-warfare generals.

It is two jobs in one, as he oversees all American forces under the United States European Command and — far more important today — serves as the supreme allied commander, Europe, NATO’s top military position. He takes the NATO command as the future viability of the alliance is tested by whether he can rally members to make good on their promises to the mission in Afghanistan.

Adm. Stavridis obviously is a talented officer.  Alas, his chance of winning more meaningful support from the Europeans for the mission in Afghanistan is nil.  The Europeans don’t want to fight, especially in a conflict which they don’t view as their own.

But the most important question these days should be:  why does NATO still exist – at least, a NATO dominated by America?  No one, not even Russia, threatens “Old Europe.” 

Moreover, Europe is well able to defend itself.  The continent has a collective GDP more than ten times that of Russia, and even larger than that of America.  Europe’s population, too, is bigger than those of both Russia and the U.S.  The Europeans needed America’s military aid during the Cold War.  But no longer.

What of the Eastern Europeans, who worry more about Moscow?  We should wish them well, but we have no cause to threaten war on their behalf.  Security guarantees should not be distributed like party favors, inexpensive gifts for friends and acquaintances alike.  Rather, security guarantees should be issued to defend America.  It is hard to make the argument that, say, Albania, is relevant to America’s security, let alone vital to it.  Two decades after the end of the Cold War, we should start reshaping our alliance commitments to reflect our vital interest.

Attention GM Shareholders (That Means You!)

As my colleague Doug Bandow pointed out this morning, today’s Washington Post has an analysis about the uncertain prospects of GM ever making taxpayers whole again. It is a very similar analysis to the one I gave in this L.A. Times Dust-Up installment four weeks ago, although I find prospects unlikely, rather than just uncertain.

If GM emerges from bankruptcy next month in accordance with the pre-packaged Obama plan (as expected), taxpayers will be on the hook for $50 billion. That $50 billion will buy taxpayers a 60 percent stake in the company, which according to the laws of mathematics means that GM has to be worth $83.33 billion for the taxpayers to get their equity back without making a dime in capital gains or interest.  In the L.A. Times, I asked:

How and when will that ever happen? At its peak in 2000, GM’s value (based on its market capitalization) stood at $60 billion. Thus, the minimum benchmark for “success” will require a 38% increase in GM’s value from where it was in the heady days of 2000, when Americans were purchasing 16 million vehicles per year. U.S. demand projections for the next few years come in at around 10 million vehicles. Taxpayer ownership of GM is something we should all get used to, and the “investment” is only going to grow larger. Think Amtrak.

Obama’s Back-Door Tax Hike on American Workers

A column in the Washington Post makes an excellent general observation about how taxes on business are actually paid by people. The piece also cites a couple of examples, including an explanation of why the Administration’s big tax hike on American multinational firms will backfire - which is the same argument I made in this video. The moral of the story, of course, is that a bigger burden of government is good for politicians, but bad for regular people.

Geoff Colvin explains:

The average citizen had to conclude that most big U.S. companies are tax cheats. Only a dedicated student of accounting would figure out that the term “tax haven” as defined by the Treasury Department means any country with a lower corporate tax rate than America’s, which is all countries except Japan.

The reality is that the administration is lashing out against perfectly legal behavior. A U.S. company that makes money in Country X pays Country X’s taxes on that money. If the company ever brings the money back to the United States, it must also pay the tax that would be due under America’s higher rate. The administration argues that because the United States has almost the world’s highest corporate tax rate (and even Japan’s is only a fraction of a point higher), current rules create incentives for U.S. companies to operate anywhere but here, at the cost of U.S. jobs. The White House therefore proposes charging all American companies full freight – the whole difference between their overseas taxes and the U.S. corporate rate – on all their profits as soon as they’re earned, no matter where. This measure, in their minds, would bring jobs home.

If the logic eludes you, you’re not alone. The bottom-line effect of the change would be a steep tax hike – more money vacuumed out of corporate coffers. Would that make U.S. companies competing in a global economy more inclined to hire additional workers in the highly expensive United States? The answer is clear. It’s why Microsoft chief executive Steve Ballmer said recently that if the change is enacted, “we’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.”

…Tax-wise, a company is just a bunch of incorporation papers; all taxes are paid by people – customers, shareholders and employees. And guess who would bear most of the burden of these tax increases? It’s the U.S. employees of the companies being taxed.

Research has shown that when business taxes are raised by a dollar, 70 to 92 cents comes out of employees’ pay. When workers wake up to that fact, they may decide this is one time they don’t want the White House beating up on business.

Don’t Count on Getting Your “Investment” Back from Government Motors

The president and his appointees have expressed their hope that Government Motors will eventually pay back taxpayers for their “forced investment” in the company.  But there aren’t many cases of this sort of lemon socialism actually paying off.

Now most everyone connected with GM is admitting the same thing.  Reports the Washington Post:

If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.

It’s sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.

“I’m not going to predict it – that’s not my job today,” GM chief executive Fritz Henderson said in a recent interview.

“I don’t know how much we’re going to recover,” a senior Obama administration official said as the company headed into bankruptcy last month.

This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.

The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.

“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.

She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.

“It’s very unlikely” that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. “GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM’s efforts more difficult.”

Oh, well.  As they say, it’s only money!