January 2012

Obama Budget Explodes Debt, Taxes, CBO Admits

by Hans Bader on March 20, 2009 · 14 comments

in Bailout Watch, Economy, Politics as Usual, Sanctimony, Stimulus to Nowhere

Obama’s budget would explode the national debt while increasing taxes. That’s the conclusion of the Congressional Budget Office, controlled by lawmakers who support Obama. “The President’s proposals would add $4.8 trillion to the national debt,” increasing “the cumulative deficit from 2010 to 2019 to $9.3 trillion.” The budget also adds $1.9 trillion in tax increases.

And the stimulus bill Obama claimed was needed to avert “disaster” and “irreversible decline“? It will shrink the economy over the long run, since its “increase in government debt is expected to displace or ‘crowd out’ . . . private capital.”

Obama yesterday praised the House for passing a bonus tax that would make some employees of healthy banks pay over 100 percent in taxes and legal obligations. (The administration is lying about when it became aware of the AIG bonuses, which it knew about for months, and shielded through language it slipped into the stimulus package to benefit AIG, which is a major donor to liberal politicians like Obama)

The CBO’s conclusion confirms its earlier findings that the stimulus package will cut wages and the size of the economy in the long run, despite costing $800 billion. The stimulus package also gutted welfare reform.

Despite Obama’s praise for the economically-destructive bonus-tax bill, his language was so vague and weaselly that both proponents and opponents of the bill, in wishful thinking, expressed the belief that he agreed with them. Supporters of the bill took his praise at face value; opponents thought his remarks were simply catering to public outrage, which has led to “threats of violence” against AIG employees. Public outrage over AIG may have peaked, judging by blog comment threads.

Herbert W. Obama

by Hans Bader on March 20, 2009 · 5 comments

in Bailout Watch, Economy, Politics as Usual, Sanctimony, Stimulus to Nowhere

In the Great Depression, President Herbert Hoover raised marginal tax rates to 63%, and went on a deficit spending binge. He also signed the Smoot-Hawley tariff, which helped turn a recession into the Great Depression by triggering a trade war with other countries.

Obama is on the same path. His deficit-exploding $800 billion stimulus package blocked 97 Mexican truckers from U.S. roads. That NAFTA violation “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade.” The CBO admits that the stimulus package will actually shrink the economy in the long run.

Yesterday, Obama praised the House’s passage of a bill to impose a 90% tax on bonuses at banks that received federal funds. He did so even though some of those banks are healthy and accepted federal TARP money under federal pressure so that unhealthy banks that also took TARP money would not be stigmatized. The bill passed in the furor over bonuses that AIG, being bailed out by taxpayers, paid to its employees. (Republicans only wanted to block the bonuses at AIG, which is a major donor to liberal politicians like Obama and the corrupt Sen. Chris Dodd (D-CT); Democrats successfully extended the tax to major companies receiving TARP money).

The AIG bonuses were publicly disclosed in November, as Michael Kinsley and others note in the Washington Post today. The Administration became aware of them and signed off on them long before a public furor arose over the bonuses, at which point Obama switched positions and began cynically condemning the bonuses to curry favor with the public. (Treasury Secretary Geithner has steadily backtracked about what he knew and when, first falsely claiming that he didn’t know of the bonuses until less than a week before they were paid; then falsely claiming he knew of the bonuses but didn’t know quite how big they would be — even though AIG’s public SEC filing last November predicted the full amount of bonuses ultimately paid; and even though the Administration was reminded yet again by a Congressman in a committee hearing on March 3 about $163 million in bonuses to be paid “in the coming weeks“)).

The Administration now admits that it itself suggested to Senate banking committee chairman Chris Dodd (D-CT) the very language Dodd added to the stimulus package that shielded AIG’s bonuses. “After explicitly denying responsibility, Senate Banking Committee Chairman Christopher Dodd eventually admitted to including the exception under pressure from the administration,” notes a columnist in the Washington Post.

Meanwhile, AIG’s current employees, who don’t deserve big bonuses, but are needed in their current positions to clean up the complicated mess left behind by AIG’s managers (and unload the arcane financial instruments in its portfolio), are receiving death threats aimed at them and their families as a result of all the demagoguery by disingenuous politicians claiming to be shocked by the bonuses. The politicians are feigning surprise even though many of them (like Elijah Cummings (D-Baltimore)) have known of the bonuses since as far back as November 27. AIG employees’ homes are being staked out by left-wing demonstrators.

If the Administration didn’t want AIG employees to receive their (mostly undeserved) bonuses, it should have quietly blocked them by putting limits in prior legislation it helped pass — not publicly demonized them, which will drive them away, leaving AIG (which is now 80-percent government-owned) losing even more money at taxpayer expense. Bonuses cost the taxpayers money; but so do death threats, which discourage talented employees from working at banks and companies taken over by the government.

Obama’s more than $8 trillion in new spending commitments will require far larger increases in marginal tax rates than he proposed in his 2008 campaign.

Some of the employees subject to the 90 percent federal income tax on bonuses passed by the House will actually end up with negative pay, not only receiving nothing after taxes, but having to pay countless thousands of dollars they don’t even have. This is because they will have to pay other income-based charges on top of the 90 percent rate, including but not limited to Medicare tax (1.45%), state income taxes (up to 10.3%), and other legal obligations, such as family-court orders based on pre-tax income (in Massachusetts, divorced fathers pay 25% of pre-tax income, for just one child, in child support! Child-support payments are not tax-deductible. Some courts have formulas for alimony that are based on pre-tax income, ranging up to 30% of gross income.).

The combination of death threats and negative pay will discourage talented employees from working at AIG and other companies being propped up by the government, resulting in even greater taxpayer losses.

Will talent flee to the City?

by Fran Smith on March 20, 2009

in Bailout Watch, Economy, International, Personal Liberty, Politics as Usual, Sanctimony

A different take on possible effects of lawmakers’ rabble-rousing on TARP bonuses. Jeffrey Goldfarb at breakingviews.com says that driving out talented financial executives in the U.S. may be a boon for foreign-owned banks in the U.S. in getting new talent, but most especially for London and its global financial powerhouse, the City. Sarbanes-Oxley already caused financial institutions to flee New York for London. The 90 percent tax rate on TARP bonuses might provide a new impetus for savvy executives to relocate.

Still, with London house prices down, and no “Keep Out” signs for foreigners – think TARP-related Visa restrictions in the U.S. – many of those who can choose their continents may soon be thinking the City is something of a safe haven with better job opportunities, as long as the UK doesn’t wind up succumbing to mob rule too.

Maybe London could adapt the Statue of Liberty’s quotation to: “Give me your tired, your rich, your huddled masses yearning to breathe free.”

“Going Galt”– 90 percent tax may provide impetus

by Fran Smith on March 20, 2009 · 3 comments

in Bailout Watch, Economy, Personal Liberty, Politics as Usual, Sanctimony

Already there’s confusion over what the 90 percent bonus tax bill passed by the House really means. Targeted at the AIG bonuses, which sparked bi-partisan demagogism, the bill would really apply to all firms that received more than $5 billion from the Troubled Asset Relief Program (TARP). Here’s what the text of the bill states:

· (1) IN GENERAL- The term `TARP bonus’ means, with respect to any individual for any taxable year, the lesser of–

(A) the aggregate disqualified bonus payments received from covered TARP recipients during such taxable year, or

(B) the excess of–

(i) the adjusted gross income of the taxpayer for such taxable year, over

(ii) $250,000 ($125,000 in the case of a married individual filing a separate return).

Here’s what Henry Blodgett thinks it means (by way of MarginalRevolution:

If the “TARP bonus” bill the House passed today becomes law, any of the hundreds of thousands of people who work for Citigroup, Bank of America, AIG, and nine other major US corporations will have to fork over 90 cents of every dollar they make that puts their household income over $250,000.

That’s household income, not individual income.*  If you’re married and filing singly, you’ll have to surrender anything over $125,000.  Indefinitely.

It does seem to mean that if somebody is making $125,000 or a couple filing jointly making $250,000 gets a bonus, the amount above that income level gets taxed at the confiscatory rate.

It’s not likely that those thousands of employees around the country will be happy with this confiscatory taxation. There’s been lots of talk in recent months about “going Galt,”but so far it hasn’t really caught on at the big firms. Caroline Baum at Bloomberg thinks the time may be ripe for that to happen, and this was written before the 90 percent tax vote.

Somewhere John Galt is smiling.

The hero of Ayn Rand’s “Atlas Shrugged” is smiling because he’s seen it all before: the government’s intervention in the private sector; the constraints placed on business in the name of the people; the desperation on the part of government bureaucrats when they realize their leverage is limited; and — this part is still fiction — the decision on the part of business leaders to walk away from the enterprises they built.

Wonder how AIG head Edward Liddy feels after his contemptible treatment by lawmakers this week. And this is the guy who took over the firm in September 2008 and pays himself $1 in salary. He should have been praised for taking on this almost-impossible job. But no, legislators were too busy posturing for the cameras and venting their outrage. But he would be a hero if he “goes Galt.”

No “hysteria” about trade — just some facts

by Fran Smith on March 19, 2009

in Odds & Ends

I admire Dan Ikenson’s work on trade issues at Cato. Usually I agree with his views. A notable exception is his post yesterday on Cato’s blog – “Too much hysteria about trade.”

No, Dan wasn’t hitting the current climate of China-bashing or the Teamsters’ on-going campaign against Mexican trucking and NAFTA or the “Buy American” provisions in the stimulus bill. Dan instead was taking to task newspapers like the Washington Post that have been warning readers about the rising tide of protectionism in this world economic downturn.

He writes:

The fact of the matter is that there isn’t any discernible trend toward protectionism in the United States or in the world right now. World leaders issue warnings about the consequences of protectionism, but there are not trends. There are incidences, but no trends.

He uses now-US Trade Representative Ron Kirk’s Senate testimony as evidence of the Obama Administration’s support for open trade and for enforcement of trade rules.

I beg to differ. Kirk’s testimony, of course, reiterates President Obama’s Trade Agenda, which, while including some good rhetoric about the importance of open trade, strongly endorses the need to focus on non-trade issues in trade agreements, such as those involving labor and the environment. Here’s what Kirk said:

I respectfully submit that two strong steps toward restoring domestic confidence in open markets are a real and renewed commitment to enforcement of our trade rules, including those addressing labor and the environment,

And –

. . . to ensure that the way we promote trade reflects our country’s values about economic progress and justice, including through the advancement of internationally recognized labor and environmental standards.

Such issues, as Jagdish Bhagwati has often written, really act as non-tariff trade barriers and force poorer countries to adopt our regulatory schemes in these areas (to “level the playing field”) even when they don’t have the resources.

Dan may not realize that U.S. policymakers such as the Energy Department Secretary and others are seriously considering imposing carbon tariffs on countries (read China and India) that aren’t taking appropriate steps to restrict carbon emissions. Again, that would be a good way to level the playing field and improve U.S. competitiveness. Not protectionism?

Food safety is another area where protectionism may rear its ugly head under the guise of protecting consumers but actually setting detailed standards that may rely more on procedures than the safety of the end product. A bill recently introduced in the House could easily be used to block foreign competition.

And let’s not forget the stimulus package and the infamous “Buy American” provisions, which mandate that any company receiving government funding has to use “made in America” goods, such as iron and steel. The stimulus legislation also restricts companies receiving bailout funds from hiring foreign workers and restricts those firms receiving Trouble Assets Relief Program (TARP) funds from hiring foreign nationals holding H-1B visas unless they can prove they could not hire U.S. citizens instead.

The Obama Team’s emphasis on enforcement issues seems benign to Dan. But take a look at what Rep. Sander Levin, head of the trade subcommittee of the House Ways and Means Committee is cooking up on trade enforcement. Besides promising lots more WTO complaints, the legislative plan is to put back in place provisions on U.S. antidumping and countervailing duties that were changed under President Bush because they weren’t WTO-compliant. But don’t interpret that as protectionism, Levin was quoted as saying, since its purpose is to “enforce the rule of law and the openness of markets.”

“Hysteria” about trade protectionism?  Think it’s not coming from the media, Dan, but from trade protectionists.

A Cynical Poison-Pill Bill

by Hans Bader on March 19, 2009 · 2 comments

in Bailout Watch, Economy, Politics as Usual, Sanctimony, Stimulus to Nowhere

Yesterday, liberal lawmakers, after publicly blasting the multi-million dollar AIG bonuses as undeserved and excessive, privately voted down GOP proposals to limit them. (AIG is a major donor to liberal politicians, such as Obama, who received more than $100,000, and Chris Dodd (D-CT), who received $280,000. AIG’s contributions over the last 6 years have gone mostly to Democrats).

Today, however, they are pushing legislation to impose a 90 percent tax on bonuses, not just at AIG, but also at other, healthy banks that received federal funds (which did so under pressure at the Treasury Department’s urging so that less healthy banks that really needed the money would not be stigmatized by receiving it). The legislation just passed the House by a 328-to-93 vote.

They are doing this for transparently political reasons. If conservatives vote against the proposal, liberals can turn it into a campaign issue, and neutralize their own political damage from having previously protected the AIG bonuses. (The Senate Banking Committee Chairman, Chris Dodd (D-CT) inserted language into the stimulus bill protecting the AIG bonuses, then lied about it. He says he stuck in the language at the request of the Obama Administration. Dodd has attracted ethical controversy for receiving a sweetheart deal from the sub-prime mortgage lender Countrywide, which helped spawn the mortgage crisis).

And if it passes, liberal lawmakers can use it to threaten further restrictions on employee compensation in the business world, such as in conservative-leaning industrial sectors that have given them few campaign contributions in the past.

House Banking Chairman Barney Frank (D-Mass.) wants to extend compensation limits to “all financial institutions,” regardless of whether they receive public funds, and perhaps “all U.S. companies.” Given the strong liberal majorities that current hold sway in Congress, the mere threat of that happening will probably trigger big campaign contributions by companies and businessmen seeking to buy him off and avert his wrath. (Frank helped spawn the mortgage crisis by blocking reform at Fannie Mae & Freddie Mac, which are now being bailed out at a cost of more than $200 billion, and by pushing risky loans in the name of “affordable housing“).

Congressman Jerry McNerney (D-Cal.) has argued for a 90 percent tax rate on all high-income households in the U.S. Even this rate would be insufficient to pay for all the new spending proposed by the Obama Administration, given the $8 trillion in spending commitments incurred as a result of all the bailouts, which will shrink the economy, and benefit even illegal aliens, people who lied on their loan applications, and high-income homeowners with modest, conventional mortgages.

The AIG Tax Trojan Horse

by John Berlau on March 19, 2009 · 3 comments

in Bailout Watch, Politics as Usual

The massive tax hike being voted on in the House today is a Trojan horse that uses the legitimate outrage over the American International Group bonuses to hit a wide variety of employees, and would be a serious blow to the economic growth we are trying to revive.

The bill would levy a 90 percent tax on bonuses of any employee, with some exceptions, whose family income is more than $250,000 and who works for a company receiving funds from the Troubled Asset Relief Program. The tax would hit regardless of the employees’ role in creating problems in the financial system. And many well-managed banks were practically forced by regulators and former Treasury Secretary Henry Paulson to take TARP money so the seriously troubled banks wouldn’t face a stigma.

CEI opposed the creation and further extensions of the TARP, and we want the money paid back to taxpayers as soon as it can be, and also the government to give up its stock ownership as soon as possible, to end the partial nationalization of the financial system.

But using the tax code to punish these firms’ employees is seriously wrongheaded. Many firms, unfortunately, have received government subsidies even before the TARP was created. Sports teams frequently receive subsidies for new stadiums, but we don’t tax athletes at 90 percent! We should end government subsidies to all these firms, but not punish individual employees who compete for the salaries the market will bear.

The tax system is not the way to remedy an ill-conceived bailout. There is no way to separate firms receiving government money from the economy as a whole. This is a big foot in the door for confiscatory taxes that will produce anemic economic growth.

Furthermore, by targeting employees of individual firms with punitive taxes, this may be an unconstitutional “bill of attainder.” The Constitution is very clear that only the courts, not the legislative branch, can single out individuals for punishment.

Rep. Sheila Jackson Lee*, Democrat of Texas, said on the House floor today that she was aware that the bill might be subject to “constitutional challenge” but was going to vote for it anyway. She and possibly other supporters of the bill overlook that members of Congress, as well as the courts, take an oath to uphold the Constitution. If members have any doubts about the constitutionality of a bill, they are violating their oath by voting for that bill before resolving these doubts. This is one of many reasons why this ill-conceived legislation should go down.

*UPDATE: A previous version of this post misidentified the Member of Congress is question.

CO2 regulation under the Clean Air Act: Economic Train Wreck, Constitutional Crisis, Legislative Thuggery

by Marlo Lewis on March 19, 2009

in Energy, Global Warming, Legal

Last week, EPA leaked a Power Point presentation revealing that the agency plans on April 30 to propose a finding that “air pollution” from emissions of greenhouse gases (GHGs), principally carbon dioxide (CO2), ”endanger public health and welfare.”

The endangerment proposal, part of EPA’s response to the Supreme Court’s Massachusetts v. EPA (April 2, 2007) decision, is the essential first step towards establishing GHG emission standards for new motor vehicles under Sec. 202 of the Clean Air Act (CAA).

As I explain in this column, EPA cannot establish GHG standards for new motor vehicles without triggering a regulatory cascade through multiple CAA provisions. The impacts on energy markets and the economy will be subject to the vagaries of litigation, and potentially would be far more costly and intrusive than any climate bill Congress has either rejected or declined to pass.

There are three main risks (indicated in the title of this post). Litigation-driven regulation of CO2 under the CAA could block development and new construction, create a Kyoto-on-Steroids regulatory regime never approved or even voted on by Congress, and empower the greenhouse lobby to extort industry support for cap-and-trade legislation in return for dubious promises of “regulatory certainty.”

In the column, I advise friends of energy abundance, economic growth, and limited government to hang tough. Team Obama has got to know that EPA cannot control the regulatory cascade once it starts, that the results could be economically devastating, and that they won’t be able to blame G.W. Bush. If they open Pandora’s Box, there will be political hell to pay, and they know it.

When the greenhouse gang invoke the specter of CAA regulation if we don’t support their cap-and-trade program, we should say: “First you take that gun away from our head, and then we’ll discuss the merits of your bill.”

NYT soft-balls trade protectionism

by Fran Smith on March 19, 2009

in International, Trade

A  New York Times editorial today urges the Obama Administration to take a stronger role in supporting open trade, more specifically, to reinstate the pilot program for Mexican trucks transporting goods in the U.S., which sparked a Mexican tariff retaliation.

But the editorial, while criticizing President Obama for “ambivalence” on trade and his position on the North America Free Trade Agreement, gives a limp excuse for Obama’s refusal to take a stand on the trucking provision in the stimulus package:

President Obama has so far shown a worrying ambivalence about trade. He has called for renegotiating Nafta, creating anxiety in both Ottawa and Mexico City — claiming that this can somehow be done without harming trade. While he managed to persuade Congressional Democrats to water down a “Buy American” provision in the fiscal stimulus package, he did not get them to pull it altogether.

We understand the White House did not want to threaten the passage of the spending bill by raising a ruckus over Mexican trucking, a comparatively minor issue. But it is time for Mr. Obama to put some political muscle behind his declared support for open trade.

Don’t think the Mexican government sees the trucking issue as a “minor” one.  After all, it represents a violation of NAFTA provisions.  And it’s likely to be hard to fix.  Trade unions, with the Teamsters in the lead, have long used the trucking issue as their NAFTA bête noire. They also provided strong support in the 2008 elections for Democrats, including Obama, for their anti-trade, anti-globalization stances. The Democratic majority isn’t likely to take the unions on — unless President Obama makes it a priority.

A Global Green New Deal – What Could Possibly Go Wrong?

by Iain Murray on March 19, 2009 · 4 comments

in Economy, Employment, Energy, Environment, Global Warming, International, Sanctimony, Stimulus to Nowhere

Showing that he believes Al Gore’s typical misunderstanding that the Chinese word for crisis is made up of the characters for threat and opportunity (it isn’t), Achim Steiner, head of the UN Environment Program, has said that the global financial crisis provides an opportunity for a global green new deal:

The UNEP report said investments of one percent of global gross domestic product, or about $750 billion, could bankroll a “Global Green New Deal” inspired by the “New Deal” of U.S. President Franklin D. Roosevelt that helped end the depression of the 1930s. [sic]

Investments should be split between more energy efficient buildings, renewable energies, better transport, improved agriculture and measures to safeguard nature — such as fresh water, forests or coral reefs, it said.

The $750bn bill would be paid for by – you guessed it – a tax on oil in rich countries:

“If, for argument’s sake, you were to put a five-year levy in OECD countries of $5 a barrel, you would generate $100 billion per annum. It translates into roughly 3 cents per liter,” he said.

“It would be almost, if not totally, unnoticed by the consumer,” he said, especially since oil prices have fallen from more than $140 a barrel at mid-2008 peaks to about $40.

A barrel of oil contains 158 liters and OECD consumption is about 20 billion barrels a year, he said. “This is just one example, there may be many others,” of funding, he said.

Ah, the “unnoticable” tax – the revenue stream with no consequences, the Holy Grail of socialists and their fellow travelers. While perhaps not noticable at the gas pump, such a tax would be noticable at the aggregate level of the economy. But why worry about a few jobs lost there, a few families forced into poverty here? It all leads to a much better world in terms of renewable energy, no?

Well, no. As is beginning to dawn on some people, the scale of the problem when it comes to CO2 is far beyond the ability of current renewable technology to solve:

The world used 14 trillion watts (14 terawatts) of power in 2006. Assuming minimal population growth (to 9 billion people), slow economic growth (1.6 percent a year, practically recession level) and—this is key—unprecedented energy efficiency (improvements of 500 percent relative to current U.S. levels, worldwide), it will use 28 terawatts in 2050. (In a business-as-usual scenario, we would need 45 terawatts.) Simple physics shows that in order to keep CO2 to 450 ppm, 26.5 of those terawatts must be zero-carbon. That’s a lot of solar, wind, hydro, biofuels and nuclear, especially since renewables kicked in a measly 0.2 terawatts in 2006 and nuclear provided 0.9 terawatts. Are you a fan of nuclear? To get 10 terawatts, less than half of what we’ll need in 2050, [Cal Tech scientist Nate] Lewis calculates, we’d have to build 10,000 reactors, or one every other day starting now. Do you like wind? If you use every single breeze that blows on land, you’ll get 10 or 15 terawatts. Since it’s impossible to capture all the wind, a more realistic number is 3 terawatts, or 1 million state-of-the art turbines, and even that requires storing the energy—something we don’t know how to do—for when the wind doesn’t blow. Solar? To get 10 terawatts by 2050, Lewis calculates, we’d need to cover 1 million roofs with panels every day from now until then. “It would take an army,” he says. Obama promised green jobs, but still.

In other words, this global green new deal will solve no problems, while exacerbating the current problem of too little money to go around by extracting more money from the viable economy. Just like the original New Deal, then.

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