I generally hold John Tamny’s analysis of economic matters in high regard, so I was surprised to find his take on the American Airlines bankruptcy to be oddly lacking.
In his latest Forbes column, Tamny argues that it wasn’t its pension obligations, but monetary policy, specifically the weak dollar, that pushed American Airlines into bankruptcy.
The immediate reason he cites is high fuel prices, which are caused by the fact that oil is priced in dollars in the global market. High fuel prices have hit nearly all airlines hard, not just American. As Tamny himself notes, “Southwest Airlines was one of the few carriers that properly hedged its exposure to fuel prices that were set to go through the roof.”
What does set American Airlines apart is its pension and labor costs.
American’s pension liabilities are so enormous, at $10 billion, that to deny they were a major factor in the airline’s bankruptcy is contrarian to the point of absurdity. Tamny argues that those liabilities didn’t drive American to bankruptcy based on the notion that they would have been reflected in the airline’s stock price. However, that argument fails in the face of the dodgy accounting which many unionized companies with defined benefit pensions apply to those pensions. Information cannot get out into the market when it is suppressed or obscured.
Then there are labor costs, on which American spends $800 million more a year than its main competitors.
Finally, there’s the problem of management decisions that simply go awry. In that regard, last weekend’s interview of Alaska Airlines CEO Bill Ayer in The Wall Street Journal is worth reading. All too often, airlines place too much focus on gaining greater market share—usually through debt-fueled growth—and not enough on common sense strategies such as working to reduce per-mile costs.
The Chronicle of Higher Education reports that a team of eight law firms have just “sued a dozen more law schools across the country, accusing them of luring students with inflated job-placement and salary statistics and leaving graduates ‘burdened with debt and with limited job prospects.’ The lawyers . . . said they planned to file 20 to 25 new lawsuits every few months . . . the lawsuits had been filed on behalf of a total of 51 graduates, and each suit was seeking class-action status. The targets of the latest round of lawsuits” include “Brooklyn Law School,” “Chicago-Kent College of Law,” “DePaul University College of Law,” “Golden Gate University School of Law,” “Hofstra Law School,” “University of San Francisco School of Law,” “Widener University School of Law,” and several others. As the Chronicle notes, “Disgruntled law-school graduates who can’t find jobs are increasingly taking their complaints to court, asserting that the schools duped them into enrolling with misleading statistics about their chances of landing well-paying jobs when they get out. Last year similar lawsuits were filed against New York Law School, Thomas M. Cooley Law School, and Thomas Jefferson School of Law.”
As I noted earlier, much of what law schools teach their students is useless drivel, and law schools routinely exaggerate their students’ job prospects. Accordingly, there is no reason to require people to attend law school before sitting for the bar exam. As law professor Paul Campos notes, legal education is often a rip-off, since the typical law professor has little real-world experience practicing law, and “knows nothing about being a lawyer.” But since most states require people to attend law school before sitting for the bar exam, law schools have been able to increase tuition by nearly 1,000 percent since 1960 in real terms. For its part, the Obama Education Department has implemented policies that encourage colleges to jack up tuition and charge students even more, even as college students are learning less and less.
In his State of the Union address, President Obama, a consistent supporter of bailouts and crony capitalism, hypocritically railed against them, proclaiming, “no bailouts, no handouts, and no cop-outs.” Just a couple days later, though, his administration is rolling out a massive multibillion dollar bailout that will enrich speculators. Bloomberg News reports that the Obama Administration is vastly expanding aid for certain “delinquent homeowners,” paying banks up to 63 cents for every dollar in principal they write off for such homeowners, a tripling of what banks can currently get under the HAMP bailout program. Speculators will benefit, too: they don’t even have to live in a house to get its mortgage principal reduced: “Investors who rent out their properties would be eligible to refinance under the new rules.” In the coming weeks, the Obama administration is expected to roll out an ill-conceived mass mortgage refinancing program that could shrink your 401(k) and increase the cost of mortgage financing for future borrowers.
We previously wrote about the voodoo economics behind the Obama administration’s mortgage bailout ideas, which will cost taxpayers countless billions.
Obama’s State of the Union address also contained false claims about outsourcing and corporate taxes. The Obama administration has used green-jobs money from the stimulus package to enrich foreign green-energy firms and outsource American jobs to countries like China: “79 percent” of all green-jobs funding “went to companies based overseas,” and “the largest grant” it made “went to Babcock & Brown,” a “bankrupt Australian company,” noted the Investigative Reporting Workshop at American University. This just one of the ways the Obama administration used taxpayer money to outsource American jobs to foreign countries.
There has been much waxing in the last few days about how unfair it supposedly is that Mitt Romney was taxed at around 15 percent. And that Warren Buffett supposedly pays a lower tax rate than his beleaguered secretary does.
But as my colleague Trey Kovacs and I pointed out in a Wall Street Journal op-ed this week, these “low” tax rates are a charade. This is because “our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges [he, in fact, did so in the State of the Union] is one of the highest in the world … The law taxes corporations as if they were separate beings from the shareholders who own them and then levies a separate tax on shareholder payouts and gains. This double taxation brings the effective tax rate on investment income to as much as 44.75%.” In fact if you factor in the estate tax or “death tax,” the rate goes to 64 percent on this income. And that doesn’t even include state and local taxation.
As we note in the op-ed, “The most popular tax reforms—from the “9-9-9 plan” of former candidate Herman Cain to flat tax proposals—all have in common the reduction or elimination of double taxation on investment.”
My friend and mentor the late Richard Nadler found a few years back that polling showed that middle-class investors had “internalized their new role as capitalists” and “display favorable attitudes toward programs that reduce taxes on savings and investment.” New research seems to confirm this middle-class savers still retain these views even after the financial crisis.
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“After spending $55 million of a $118.5 million grant from” the U.S. “Department of Energy, Ener1, an Indianapolis-based maker of batteries,” has just “declared bankruptcy.”
The White House had enthusiastically touted the company, which gave rise to an embarrassing gaffe by Vice President Biden:
Vice President Biden visited Ener1 one year ago, January 26, 2011. . .On several occasions, Biden called the company “Enron one” during his visit, invoking a seemingly unintentional but ultimately prescient reference to the collapse of the energy giant Enron. The company was also ranked number 67 in the White House Report: 100 Recovery Projects that are Changing America.
To some, the bankrupt firm is a “candidate in the increasingly competitive race to become the Next Solyndra.” But in reality, several other recipients of green-jobs subsidies under the stimulus package have already gone broke. CBS News had earlier reported that there were 11 Solyndras — that is, financially-troubled recipients of green-jobs subsidies, five of which had already filed for bankruptcy. After the CBS News report, Evergreen Energy, another green-jobs recipient, filed for bankruptcy.
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President Obama has spent billions of dollars in taxpayer money on subsidizing foreign firms through his failed “green energy” programs, so it was ironic and hypocritical when he attacked outsourcing in his State of the Union address. As former congressional economist Chris Edwards notes, Obama made many blatantly false claims about outsourcing and corporate taxation in his speech. Here are just a few:
Claim: “Right now, companies get tax breaks for moving jobs and profits overseas.”
False: There are no such breaks. Instead, we punish U.S. and foreign businesses for investing and creating jobs here.
Claim: “If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it.”
False: There is no such tax deduction. . .
Claim: “From now on, every multinational company should have to pay a basic minimum tax.”
False: We’ve already got a corporate “alternative minimum tax,” and it’s an idiotic waste of accounting resources that ought to be repealed.
Claim: “It is time to stop rewarding businesses that ship jobs overseas.”
False: We penalize them for locating jobs here. Besides, the overseas operations of U.S. companies generally complement domestic jobs by boosting U.S. exports.
Claim: “Companies that choose to stay in America get hit with one of the highest tax rates in the world.”
True: Our rate is 40 percent, which compares to the global average rate of just 23 percent.
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Harvard University economist Jeffrey Miron argued that the $800 billion stimulus package wasn’t even designed to stimulate the economy, but rather to benefit special-interest groups, since it flunked even old-fashioned Keynesian policy prescriptions about how to revive the economy. Recently-disclosed memos obtained by the New Yorker provide more evidence for this argument: “over the objection of his economic advisors, President Obama replaced $60 billion of ‘highly stimulative spending’ with a slow-spending but ‘inspiring’ $20 billion for high-speed trains and $40 billion in pork for his Senate Democratic allies. And this is starting from a point at which he knew that his advisors thought that not more than $225 billion of the $826 billion total was high-quality, fast-spending, efficient stimulus.”
This is not the only way that Obama ignored economics in favor of politics when drawing up the stimulus. Originally, economists wanted the stimulus to include the kinds of transportation spending that could boost the economy. But the stimulus package was purged of most investments in roads and bridges, and filled instead with welfare and social spending, out of political correctness, after feminist leaders complained that fixing roads and bridges would put unemployed blue-collar men to work, rather than women. Christina Hoff Sommers points out that “of the 5.7 million jobs Americans lost between December 2007 and May 2009, nearly 80 percent had been held by men,” because men “predominate in manufacturing and construction, the hardest-hit sectors.” But when some administration officials floated the concept of “an ambitious . . . stimulus program to modernize roads, bridges,” and infrastructure as a way of “reinvigorating the hardest-hit sectors of the economy,” “Women’s groups were appalled,” denouncing “The Macho Stimulus Plan.” The Obama administration quickly knuckled under to this pressure, resulting in a “stimulus” package that spent money instead on social services like welfare that are administered mostly by female employees. As an AP story noted “Stimulus Aid Favors Welfare, Not Work, Programs.” (The stimulus package largely repealed welfare reform).
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Propped up by government subsidies and regulations requiring students to attend law school before taking the bar exam, law schools waste their students’ time teaching irrelevant legal theories and ideologies, even as they paint a deceptively rosy picture of the job prospects that await their students upon graduation. As I noted in The Wall Street Journal this weekend,
At Harvard Law School I learned about trendy ideological fads and feminist and Marxist legal theory. But I did not learn the basics of real-estate and family law until I took a commercial bar-exam preparation course after graduating from law school. I learned more practical law in one summer of studying for the bar exam than I did in three years of law school. Students should not have to attend law school before taking the bar exam.
As Charlotte Allen notes at Minding the Campus, law schools are “fudging the facts” regarding their students’ job prospects in order to attract students and justify skyrocketing tuitions:
law schools, along with the universities to which they are attached, crave their students’ tuition dollars (law schools, where expensive labs are nonexistent and large lecture courses are the rule, tend to be cash cows for their host campuses) . . . One way to do this is to boast a high percentage [to U.S. News & World Report of] “graduates known to be employed within nine months after graduation.”
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The Dodd-Frank law passed in 2010 in the name of “financial reform” has wiped out another 4,300 jobs: MetLife is closing down its growing mortgage unit, due to new regulations and restrictions contained in the Dodd-Frank law, and related Obama administration policies. “With MetLife’s exit, the market loses another mortgage competitor, diminishing competition and consumer choice,” notes the Wall Street Journal.
MetLife entered the mortgage market in 2008, and managed to achieve a “rising market share” despite a difficult economy and the collapse of the housing market. “Then came Dodd-Frank,” and other new legal and regulatory risks and burdens for mortgage lenders. MetLife as a whole was hit with restrictions harmful to shareholders because of its mortgage business, even though “mortgages were less than 1% of MetLife’s overall business.” So it wanted to sell the mortgage unit to Bank of America or Wells Fargo to escape from those regulations. But it couldn’t sell the mortgage unit, because those big banks don’t want a new mortgage unit, since their existing mortgage business is already unattractive due to “the Obama Administration’s various efforts to halt foreclosures” through government pressure, and “the robo-signing pseudo-scandal” involving the nation’s biggest banks — which will soon have to pay billions to state attorney generals and certain mortgage borrowers even though no one current on their mortgage payments has ever been foreclosed upon due to robo-signing. “So MetLife concluded it was better to shut down its [mortgage] operations, take a $90 million to $110 million after-tax charge, and move on.” Its “investors cheered” its escape from Dodd-Frank’s tentacles, and its stock price rose in response.
The Dodd-Frank Act also will wipe out and outsource thousands of jobs in the financial sector (such as in proprietary trading), and impose billions in new costs on American manufacturers, placing American industry at a disadvantage relative to foreign competitors. It also is disproportionately harming poor people.
The Dodd-Frank law also contains racially-discriminatory provisions that drew criticism from four members of the U.S. Commission on Civil Rights, as well as violations of constitutional separation-of-powers limits. And it gives unaccountable bureaucrats the power to seize certain businesses, effectively barring judicial oversight of any abuses.
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