January 2012

Stimulus Package Shrinks Economy, Destroys Private Sector Jobs

by Hans Bader on May 31, 2009 · 2 comments

in Bailout Watch, Economy, Employment, International, Labor, Odds & Ends, Politics as Usual, Precaution & Risk, Stimulus to Nowhere, Trade

Most of the $800 billion stimulus package has yet to be spent, but it’s already harming the economy, both by triggering trade wars that have cost at least 40,000 jobs, and by driving up interest rates for businesses that need to borrow money to expand or create jobs. (The government is keeping down interest rates on its own debt by printing vast sums of money to buy its own bonds, in order to finance the exploding national debt, which will result in massively higher taxes).

As economist Arnold Kling explains, “most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy. According to this standard analysis, the stimulus is going to hurt GDP now, when we could use the most help. Much of the spending will kick in a year or more from now,” when the economy will already be in recovery, and “when the economy will need little, if any, stimulus. This is the flaw with using spending rather than tax cuts as a stimulus. The lags are longer when you use spending. Of course, if the real goal is to promote government at the expense of civil society” through “political favoritism, then the stimulus is working exactly as intended.”

1.2 million Americans have lost their jobs since Obama signed the stimulus package into law. The Congressional Budget Office predicted it would shrink the economy “in the long run” (contrary to Obama’s claim that it would prevent “irreversible decline“), but create jobs in the short run.

But the stimulus package turned out to be harmful even in the short run, because it was so badly designed. It poured money into sectors of the economy where no help is needed because unemployment is low, while siphoning money out of sectors where unemployment is high. Moreover, “states hit hardest by the recession are getting the least amount of stimulus spending.”

The stimulus package is just one example of the Obama Administration running up the national debt to bail out the more fortunate while sticking less fortunate people with the bill. The auto bailouts are another. They run up the national debt to keep unskilled auto workers enjoying wages and benefits that are much better than those enjoyed by the average American (while ripping off pension funds and bondholders). As Mickey Kaus notes, “Why should the government tax unskilled workers making $18 an hour, who haven’t bankrupted their employers, in order to protect unskilled workers making $28 an hour, and who have bankrupted their employers, from having to take a pay cut?” (Actually, the Chrysler autoworkers are making far more than $28 an hour, when you factor in benefits).

The stimulus package has directly destroyed tens of thousands of jobs. A provision in the stimulus package that blocked a mere 97 Mexican truckers from U.S. roads “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade,” destroying 40,000 American jobs. And its vague “buy American” provisions, despite doing little to promote purchases of U.S. products, managed to ignite a trade war with Canada.

Obama’s policies echo those of Herbert Hoover, who helped spawn the Great Depression through his protectionism and tax increases. One of Obama’s own advisers admits that “the barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.” Even the Washington Post, which endorsed Obama and once supported his auto bailouts, now has soured on them and their waste of taxpayer money.

Wasteful Obama Auto Bailouts Disturb Even Liberal Washington Post

by Hans Bader on May 30, 2009 · 2 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Employment, Energy, Environment, Global Warming, Labor, Politics as Usual, Regulation, Stimulus to Nowhere

Even the liberal Washington Post, which endorsed Obama and has not backed a Republican for president since 1952, is getting fed up with the Obama Administration’s wasteful and politicized bailouts of General Motors and Chrysler. Today, it laments the
“imminent transformation of General Motors into a government-owned company, infused with upward of $50 billion in federal money.” “It doesn’t take much imagination to forecast the political pressures that will buffet the government-as-auto-executive. We’ve seen one effect already in the preferential treatment of the autoworkers’ union at the expense of private creditors. . . . the union can boast that it has been promised no loss in ‘base hourly pay, no reduction in . . . health care, and no reduction in pensions,’” even though excessive union wages and benefits helped sink the company. And politics will now divert the company’s attention away from making cars consumers actually want. “Influential members of Congress will insist on jobs in their districts; environmentalists will want electric cars; overseas sourcing will be frowned upon. How such decisions affect profits could become secondary.”

That’s what happened in Britain in the 1970s. The government took over and attempted to bail out the country’s auto industry, and ruined it in the process, destroying whatever chance it had left to survive. The British auto industry ended up being run mainly to benefit the unions, and produced politically-correct cars drivers didn’t want.

Earlier the Post argued that Obama “should stop bullying the company’s bondholders”: “While the Obama administration has been playing hardball with bondholders, it has been more than happy to play nice with the United Auto Workers. How else to explain why a retiree health-care fund controlled by the UAW is slated to get a 39 percent equity stake in GM for its remaining $10 billion in claims while bondholders are being pressured to take a 10 percent stake for their $27 billion?” “If this were a typical bankruptcy, the company would be allowed by law to tear up its UAW collective bargaining agreement and negotiate for drastically reduced wages and benefits. That’s not going happen. Phrased another way: The government won’t let that happen.” Instead, the government is moving towards “financial engineering that ignores basic principles of fairness and economic realities to further political goals.”

The automakers would have been better off simply filing for bankruptcy last fall rather than seeking a taxpayer-funded bailout. The bailouts have cost taxpayers tens of billions, but made it harder to fix the root causes of the crisis facing the Detroit automakers, such as excessive labor costs.

The federal government poured billions of dollars into Chrysler, which then went bankrupt and now is in the process of merging with Fiat. But Chrysler may never revive, thanks to absurdly generous compensation for the company’s union employees. The Obama Administration has refused to cut union wages substantially, though it had no compunction about ripping off the pension funds and other lenders who loaned money to Chrysler to try to keep it afloat. Even union members seem surprised by how little they were asked to sacrifice. (The Administration is also seeking to rip off GM bondholders to benefit the union).

Moderate Democrat Mickey Kaus, who reluctantly voted for Obama, notes that the federal bailout may yet fail because of Obama’s failure to reduce excessive labor costs:

“Before the deal, Chrysler’s UAW workers made $28 an hour. After the deal, they’ll make $28 an hour. They gave up a scheduled increase in wages, plus a couple of scheduled bonuses. That explains why Chrysler’s Belvidere, Illinois workers told TV station WIFR that ‘the plan is not nearly as drastic as they expected.’ …As for Chrysler’s ‘chance for long-term success,’ it appears vanishingly small. Italian manufacturer FIAT is supposed to save Chrysler with new products, but according to a recent Automotive News article, ‘four of the six new vehicles from Fiat will enter the small-car segment,’ which is highly competitive but ‘covers only 14 percent of the entire U.S. light-vehicle market.’ . . . Pathetically, Chrysler hopes that even if they don’t save the company the new small cars will ‘[b]urnish the environmental image of Chrysler brands,’ says Automotive News. Unfortunately, the pipeline for those brands’ other, larger, products–burnished or not–is pretty much empty. If Chrysler workers were paid, say, not $28 an hour instead of $24–still not bad–the firm might actually have a ‘chance for long term success’ through charging lower prices. But that wasn’t a sacrifice Obama was ready to ask (even if Belvidere workers were apparently willing).”

In addition to leaving General Motors and Chrysler saddled with excessive costs and union ownership, Obama harmed them by radically ratcheting up federal CAFE fuel-economy standards, which affect them more than their foreign competitors. 50,000 jobs could be lost. And his global-warming regulations will destroy countless jobs and cut “household purchasing power,” reducing auto sales and Chrysler’s chances of survival.

Against Freedom, Against Art, Against Reality

by Marc Scribner on May 29, 2009 · 1 comment

in Culture, Nanny State, Personal Liberty, Zeitgeist

The crusade against film depictions of tobacco smoking is once again gaining momentum. The American Medical Association Alliance, in coalition with several other well-funded special interests, has launched a campaign called “Which Movie Studios Will Cause the Most Youth to Start Smoking This Summer?” The campaign, among other things, calls for an automatic “R” rating for any movie that depicts tobacco smoking.

The New York Times reports:

Studios, under pressure from health groups, have been urging filmmakers to trim tobacco scenes but have balked at an outright ban, citing the need for artistic license. An association spokeswoman, Angela Belden Martinez, noted that the movie industry now includes antismoking announcements on DVDs.

“The industry understands the concerns of parents about smoking and takes them seriously,” Ms. Martinez said. “One of the great things about the ratings system is that it has evolved to reflect society.”

I can’t speak for everybody, but I know few film-goers enthusiastic over the looming prospect of public health busy-bodies deciding the artistic merit of the films they pay to see. Furthermore, according to the CDC, 20.8% of Americans 18-and-over smoke tobacco regularly. How are filmmakers supposed to present their stylized views of reality when they are asked to ignore an activity characteristic to more than a fifth of society? And don’t most children already see plenty of smoking outside the movies? Will there be an R-rating exemption for films with chain-smoking villains and anti-smoking heroes?

Also, check out CEI’s video on The Big Tobacco Deal’s 10th Anniversary.

The AFL-CIO’s “Creative Accounting”

by Ivan Osorio on May 29, 2009 · 2 comments

in Economy, Labor

The AFL-CIO has obscured its poor financial condition through “creative accounting,” says Machinists union President Tom Buffenbarger, reports Associated Press.

Tom Buffenbarger, president of the International Association of Machinists and Aerospace Workers, said in a report that the labor federation obscured its financial difficulties heading into last year’s presidential election campaign, in which it backed Democrat Barack Obama. Net assets of the 11 million-member AFL-CIO declined to a negative $2.3 million as of June 30, 2008, from a $66 million surplus on July 1, 2000.

“A new leadership — leaders chosen by our members, leaders help accountable by our members — is needed,” wrote Buffenbarger, who is a member of the AFL-CIO’s finance committee and the president of one of the nation’s largest unions. Alison Omens, a spokeswoman for the AFL-CIO, declined to comment on the report.

Where all that money has gone would take considerable financial detective work to determine, but there are a few obvious places to start looking. First, as the report notes, the AFL-CIO lost more than $13.9 million in annual revenue as a result of the Service Employees International Union, the Teamsters, and some other unions leaving the AFL-CIO in 2005 to form the new labor federation Change to Win.

But that steep drop in revenues seems not to have cooled the AFL-CIO’s aggressive use of pension funds to advance political goals. This is part of a deliberate strategy, as I wrote in 2005, on a Federalist Society-sponsored panel discussion on institutional investors, where the issue of fiduciary duty proved contentious.

AFL-CIO Associate General Counsel Damon Silvers sought to define union pension fund managers’ fiduciary responsibility broadly. First he pointed out that, “There’s a big difference between union and pension funds,” because pension funds have one function, while unions have several functions, and that the AFL-CIO, its affiliates, and “ex-affiliates” — the unions who bolted the old federation and formed Change to Win — seek to maintain that distinction. By this definition, unions’ fiduciary responsibility for their investments does not just address the return on those investments, but how they can advance the unions’ greater goals. As Silvers said, union fund managers must ask the question, “Are these assets being managed in our interest?”

The problem with this view is that such interest can be defined very, very broadly.

Earlier this year [2005], the AFL-CIO successfully pressured some banks and brokerage firms to distance themselves from organizations supportive of the Bush Social Security plan to create private accounts. In a letter to AFL-CIO General Counsel Jonathan Hiatt dated May 3, 2005, Department of Labor Deputy Assistant Secretary for Program Operations Alan Lebowitz stated that, “The Department reiterates its view that plan fiduciaries may not increase expenses, sacrifice investment returns or reduce the security of plan benefits in order to promote collateral goals.” According to The New York Times, the unions’ anti-Social Security reform campaign also involved protest rallies in New York, Washington, San Francisco, and 70 other cities.

The Labor Department was right to call the AFL-CIO on this dubious use of pension funds they are entrusted to manage in the individual pensioners’ interest; any definition of fiduciary that seeks to go beyond increasing shareholder value is mere sophistry. Yet that is precisely what the AFL-CIO has pursued as a deliberate strategy. As Diana Furchtgott-Roth of the Hudson Institute notes in a study of union pension funds:

Over the years, unions have successfully changed the operative meaning of fiduciary duty. This process of change started in the early 1990s when the AFL-CIO published Proxy Voting Guidelines. These guidelines encouraged union pension funds to consider not only how investment decisions would affect a pension fund’s financial performance, but also the effect of these decisions on communities, the environment, and the economy. This overly broad interpretation of “fiduciary duty” has allowed unions to join forces with others in the left-leaning progressive community by making investment decisions whose goals are not always consistent with traditional investment strictures.

In her study, Furchtgott-Roth found that union pension funds are severely underfunded compared to private company pension plans. (The current AFL-CIO proxy voting guidelines can be perused here; see page 21 for the “Corporate Responsibility” section.) While Furchtgott-Roth’s study does not single out the AFL-CIO, and Buffenbarger does not specify pensions as a source of trouble, the AFL-CIO is doing a lot of pensioners no favors by promoting a definition of “fiduciary duty” that concerns itself with political activism.

With union pension funds facing severe shortfalls, the obvious first step for unions seeking to address that problem would be to stop digging — that is, focus on shareholder value without other considerations to cloud investment decisions. But rather than opt for a more conservative investment strategy that they have followed to date, union leaders seem more intent on getting access to more dues by corralling in new members, though changes in the law such as the so-called Employee Free Choice Act’s (EFCA).

EFCA’s card-check provision, which would have allowed unions to circumvent secret ballot elections in organizing campaigns, turned out to be a public relations disaster for organized labor — for good reason. Now, however, union activists and their allies on Capitol Hill are looking for ways to get enough support for a “compromise” that would include EFCA’s binding arbitration provision. Under this provision, if a newly unionized company would have 120 days to reach an agreement with the union that had just begun representing its employees. After that period, a federall appointed arbitrator can come in and impose a contract — including retirement benefits.

Thus, literally overnight, a business could find itself on the hook for millions in pension obligations which it did not itself assume. For the union, this allows it to keep its pension fund going for some time longer. For the company, it could spell disaster.

As far as the government is concerned, it should maintain union financial reporting requirement at least at their current level. Rolling them back would allow greater obfuscation of the kind Buffenbarger is denouncing. Moreover, when workers decide on whether to join a union or not, they need to know what they would be getting into.

Obama Justice Department Winks at Racist Voter Intimidation

by Hans Bader on May 29, 2009

in Legal, Personal Liberty, Politics as Usual, Sanctimony

Black Panthers in Philadelphia used nightsticks and racial epithets to drive white voters away from a polling place. “Career lawyers pursued the case for months, including obtaining an affidavit from a prominent 1960s civil rights activist who witnessed the confrontation and described it as ‘the most blatant form of voter intimidation’ that he had seen, even during the voting rights crisis in Mississippi a half-century ago.” But Obama’s political appointees at the Justice Department overruled them, dropping the case after victory was already assured because “the court had already entered a default judgment against the” Black Panthers. Because of that bizarre decision, the only result of the case was a toothless injunction telling one of the three defendants not to commit such crimes again.

In the 2008 campaign, Obama complained about the “politicization” of the Justice Department. But he is guilty of it far more than Bush ever was. Obama’s Justice Department has rubberstamped unconstitutional legislation sought by Democratic lawmakers that even liberal Justice Department attorneys admit is unconstitutional. It has downplayed even egregious voter fraud and denials of the right to vote committed by black officials, chronicled in a ruling by a federal appeals court. And it has deliberately done little or nothing to remedy clear-cut violations of the voting rights of American soldiers overseas.

Anti-GMO Zealots vs. Starving Zimbabweans

by Marc Scribner on May 29, 2009 · 3 comments

in Agriculture, Environment, International, Nanny State, Nano & Biotech, Personal Liberty, Regulation, Trade

In Zimbabwe, the most food aid-dependent country in the world, officials and self-styled “consumer activists” have begun raiding shops suspected of selling genetically-modified food, The Zimbabwean reported earlier this week.

[The Consumer Council of Zimbabwe] which fights for the rights of consumers last week started to inspect and recommend that shops selling GMO foods should be closed. CCZ said the GMO foods which have flooded Zimbabwe were mostly powered milk, meal-mealie, rice and chicken.

“We have received a lot of reports of people, mainly children, getting sick after consuming the foods which in most cases will be expired,” said Comfort Muchekeza, the CCZ spokesperson. “We have raided and closed several shops and supermarkets in Bulawayo for selling expired GMO foods. We are working with the health ministry to bar GMO foods from entering the country. The health ministry has mounted check-up points at the country’s borders to inspect foodstuffs coming to into the country.”

So, the issue is expired GMO foods. Former CEI Warren T. Brookes Journalism Fellow and current Reason science correspondent Ron Bailey makes the following observation:

Reading further into the article, one finds the claim that people are getting sick because they are eating foods past their expiration dates. Could THAT be the problem rather than being made from genetically modified crops?

When you witness your fellow citizens going hungry day after day, it shouldn’t take a genius to realize that drastically reducing the already-dwindling food supply is a really, really bad idea. In fact, I believe most Zimbabweans would agree that expired GMO food is still better than no food at all.

(H/T Reason‘s Hit & Run)

The Cost of Cybersecurity in Context

by Ryan Young on May 29, 2009

in Tech & Telecom

President Obama has just  announced the creation of a new “cyber czar.” During his remarks, he noted that “cyber crime has cost Americans more than $8 billion.”

He continued, “My presidency has so far cost Americans more than $4 trillion.”

Just kidding about that last part. Kind of.

Does the ethanol mandate increase CO2 emissions?

by Marlo Lewis on May 27, 2009

in Ethanol, Global Warming, Odds & Ends

That may seem counter-intuitive, because burning ethanol merely puts back into the air the carbon dioxide (CO2) that corn crops recently pulled out of it, whereas burning gasoline liberates carbon that had been stored in geologic deposits for millions of years.

But other factors come into play, such as the fossil energy inputs required to produce the corn, turn it into ethanol, and deliver the ethanol to market. 

In addition, as EPA argues in its proposed rule to implement the renewable fuel standard program established by the 2007 Energy Independence and Security Act (EISA), expanding corn production into forest and grass lands can release substantial amounts of carbon stored in soils and trees.

Similarly, when U.S. farmers grow corn in areas previously used to produce soy beans, for example, farmers in Brazil have an incentive to convert forest land into soy plantations.

As you might expect, EPA’s use of life-cycle analysis, although required by EISA, drives the ethanol lobby and its congressional allies up the wall. They claim it is ridiculous to link increased corn production here to increased CO2 emissions in developing countries.

But, as my colleague, agricultural commodity analyst Dave Juday, demonstrates, the numbers paint a very clear picture. With Dave’s permission, I reproduce below an email he sent around earlier today.

*  *  *

With regard to GHG and the EPA’s RFS [renewable fuel standard] 2 rule, … the concept of “indirect land use changes” (ILUC) get criticized for being faulty, but it actually is pretty sound.  

Consider, if ethanol drives up US corn  plantings (which it did) and drives down US soybean plantings and production (which it did, because the US – the largest producer and exporter – has only so much farm land and not much tillable acreage to expand) and thereby raises the world price of soybeans, it raises the incentives to grow soybeans elsewhere in the world.  It just so happens Brazil – which is the world’s second largest producer and exporter – is the most likely place where additional soybeans will be grown on virgin land because that is where the virgin land is. 

The real weak link in this GHG lifecycle emissions concept is the ability to measure and value the carbon emissions and sequestration and the process by which “value” gets assigned to practices and manufacturing processes.  Yet, as might be expected from ethanol advocates, it is the simple, fundamental, and rational economic concept that is argued against.    Consider the perspectives shared by a lobbyist and a US Senator on the issue of “indirect land use changes” driven by US biofuel policy:

  •  Basically, the EPA has determined that the production of ethanol in America is forcing land use changes in Brazil and other foreign countries to destroy their valuable rain forests to produce farm commodities to make up for reduced exports of these commodities from the United States. Mr. Chairman, I have been in Washington for a long time, but I have never heard of a more bizarre concept. – Tom Buis, CEO, Growth Energy
  •  Every chance I get, I’m going to bring this issue up. It’s so obvious that the EPA’s rationale doesn’t meet the common sense test.  It’s ridiculous to think that Brazilian farmers are looking to see what Iowa farmers are doing to determine how they run their own business, and quite frankly it’s plain unfair to farmers. –  Honorable Charles Grassley, US Senator (R-IA)

Addressing these comments above is one of those cases where a picture is indeed worth 1,000 words:

corn-and-soy-us-and-brazil

SOURCE: USDA, Foreign Agricultural Service: Production, Supply, and Distribution Online

Added: May 29, 2009

Lisa Lerer delves into the ”life cycle analysis” controversy in the May 26 issue of Politico.  Farm state Democrats are threatening to oppose the Waxman-Markey bill if, as required by EISA, EPA considers the indirect impacts on land-use changes abroad when determining the life-cycle CO2 emissions of domestic ethanol production. 

The same lawmakers enthusiastically supported the EISA renewable fuel program as a global warming policy when they thought it would rig the market in favor of corn farmers. Now they’re threatening to derail Obama’s cap-and-trade initiative if EPA follows the law they helped enact. 

Obama campaigned on a platform of CHANGE, but he may find that in Washington still, Pork Rules and Corn Is King.

More Bailouts at Taxpayer Expense

by Hans Bader on May 27, 2009

in Bailout Watch, Economy, Legal, Politics as Usual

Mortgage lenders are getting even bigger taxpayer subsidies to write off mortgage loans for potentially delinquent borrowers, reports today’s Washington Examiner. “President Barack Obama last week created another subsidy for home lenders, boosting benefits to lenders under the ‘Hope for Homeowners’ program created last summer. Under the 2008 law, Washington guarantees loans if lenders gave favorable terms, including principal reduction. The amendment Obama signed last week heightens cash payments to lenders and loosens standards.”

It’s not just lenders who are getting federal payments for writing off loans, but also companies that service loans without owning them. The servicers now have a financial incentive to write off other institutions’ loans to potential deadbeats, at the expense of whoever actually owns the loan — which probably includes some of the companies your 401(k) mutual funds invested in. Essentially, it’s a bounty on your 401(k).

The Obama Administration has now devoted at least $250 billion to mortgage bailouts, including high-income borrowers whose mortgage payments are not excessive, but who face financial difficulties because of other debts they incurred through excessive consumption. This will increase a deficit that now exceeds $1.8 trillion. Obama’s budget would increase the national debt over the budgets left behind by the Bush Administration by a phenomenal 26.3% of the economy.

Powerful Wall Street firms like Goldman Sachs, a major liberal donor that received billions it didn’t need through the AIG bailout, now are being given protection against competition from hedge funds, which did not get bailouts or cause problems for taxpayers. “Wall Street’s largest banks are getting what they want in the U.S. treasury’s plan to regulate over-the-counter derivatives by making all market participants adhere to the same capital requirements,” even funds that are small and ill-equipped to handle the hassle of such regulation. “‘The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible and to protect their profitable market conditions,’ said Brad Hint, an analyst at Stanford C. Bernstein & Co. in New York.”

Laffer Curve No Laughing Matter

by Marc Scribner on May 26, 2009 · 3 comments

in Economy, Politics as Usual, Zeitgeist

The Laffer curve is the economic model that purports to demonstrate that by decreasing marginal tax rates, tax receipts may actually increase. It is a central concept of supply-side economics, famously denounced by George H.W. Bush as “voodoo economics” during his Republican presidential primary run against Ronald Reagan. Setting aside the debate over what constitutes an “optimal level of taxation” and the Laffer curve’s other political implications, Maryland provides a good example of how “soak-the-rich” tax policies can lead to disastrous fiscal results.

From the Wall Street Journal:

Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”

One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.

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