Paintball Guns and Bank Bailouts

I just finished watching Maxed Out, an interesting documentary on the influence of banks on American’s use of credit. The general theme was that banks use an array of coercive tactics to sign people up for high interest, high fee credit cards and then find ways to inhibit people’s ability to pay off the balance.

I received my first credit card the month of my eighteenth birthday. I promptly bought a paintball gun and never paid the bill. My second card was an American Express charge card, with which I went to Las Vegas, promptly purchased a hotel room and again, never paid the bill. Probably because of this, the interest on my first car loan was 13.5%. And my next credit card was a Providian Mastercard with a $200 limit and a $75 annual fee charged to the card before I even activated it. The interest rate was 26.99%+prime and they also charged me an $18 fee for making payments online. There were more credit issues, but the point is that it took me four years to rebuild my credit.

Now, I don’t think I was tricked into any of this. It took little more than telling me that I could buy something even though I did not have money to convince me to sign up. But the banks were certainly not upfront with the fee structure. Generally in mutually beneficial transactions, there is no need to hide the fees on page 29 of a booklet written in tiny convoluted language.

Imperfect information distorts markets because people without information to perform cost-benefit analysis act irrationally. In the case of credit, it causes people to act irrationally exuberant. What’s worse is that people tend to buy depreciating assets(like paintball guns) with credit so that the only capital people have to back their purchases are their houses or potential income. For some people, this ends in a debilitating spiral of debt.

In a crude way, this is what happened in the financial crisis, debilitating spiral and all. Except it was the banks themselves who bought depreciating assets leveraged up 10-20 times (meaning they bought million dollar paintball guns with fifty thousand dollars in their pocket). They assumed that housing prices would never go down. Except when I went into debt, the government did not buy my paintball gun at its retail value, as it did the financial derivatives full of sub-prime mortgages of the banks. That would have given me the incentive to just buy another paintball gun and never pay it off. Yet after all was said and done, that’s exactly what the government said to the banks, “Here’s your bailout. Please be more careful next time, but if you’re not, it’s ok because there is this giant tax-payer financed insurance policy here to help.”

For me, this exposes the dual-morality of the banking system. Banks punish consumers for bankruptcy in this country. Yet, when banks are the consumers, they expect to and did in fact walk away free of consequence. But at least the banks changed their tune since the bailout and gave the same treatment to under water home owners… or not. Bailing out banks was necessary to save the financial system, bailing out homeowners is wasting money on deadbeats. Banks still make more money on defaulting homeowners and bankruptcy than they do readjusting loans. Even though it was the same underwater homeowners who paid for the bank bailout, banks continue to extend consumers the generosity of high rates on over-priced assets. In essence, the bailout was just one extremely large fee that was printed on page 167 of our account terms agreements, under the heading, “Banks Get out of Jail Free.” 

In my opinion, the only solution is a good public caning. With that in mind, I would like to use this opportunity to extend my middle finger to HSBC, Providian, the former Washington Mutual, Bank of Stockton, Kowloon auto sales, JP Morgan Chase, and Wells Fargo.

Some Good Reads: 1/30/2009

1.  No Jobs, No Recovery

It may seem counterintuitive, but with the government reporting stronger-than-expected economic growth at the end of last year, now is the time to think about renewed recession — and to act to avoid it.

So, what does it take to translate an incipient recovery into a sustained expansion? In a word: jobs. Employment leads to income and to spending. As sales deplete inventories, businesses restock, which creates more jobs and so on in an upward spiral.

Unfortunately, with the economy already some 10 million jobs short, there is no job growth on the horizon robust enough to set that upward spiral in motion. And because the economy is already in such a deep hole, a second leg down would mean ever worsening hardship.

In his State of the Union address, President Obama said that he, too, was worried about the deficit. And as a sign of good faith, he committed to cuts in federal discretionary spending starting in the upcoming budget. The Senate can show its good faith now by passing a jobs bill, ideally this week.

A good final bill would combine the Obama administration’s call for tax credits for hiring and incentives for small-business lending with sound features from the House and Senate versions. It would contain the House’s vital provisions for extending unemployment benefits and providing more aid to states. Without such aid, states will have to make even deeper budget cuts — laying off large numbers of their own work forces and forcing their private sector contractors to do the same.

A final bill should also include provisions from the House and the Senate to create infrastructure jobs and public service jobs. And it should adopt the Senate’s plan to create jobs that foster energy efficiency. 

2.  Haiti and the Leadership Vacuum

Bill Clinton's appeal to business leaders at the World Economic Forum in Davos yesterday reminded us that Haiti's crisis is far from over. He urged the business community to step up to the challenge of supporting and rebuilding Haiti, where 200,000 are dead and 1.5 million are homeless.

"We need to get a distribution network up to get the food and the water out," Mr Clinton said. "If there's anybody who knows where I can get pick-up trucks or something slightly bigger, I need 100 yesterday."

Clinton's appeal for such basic support was disconcerting. Haiti's humanitarian relief effort had a very shaky start in spite of the rapid and generous response by world governments, charities, and the public. The first problem was the leadership vacuum created when Haiti's government and the U.N. — two bodies that should have co-ordinated the effort — themselves fell victim to the earthquake.

It's a pity that the business community, with its global networks and deep experience in logistics and planning, was unable to contribute more fully to Haiti's relief effort. While many advertise their socially responsible credentials, few have demonstrated real leadership in the field. Ironically, the WEF itself has pioneered a six-year Humanitarian Relief Initiative in partnership with some of the world's leading companies, yet there was little mention of this at Davos yesterday.

Smart strategies, fine words, and analysis are no substitute for action in a crisis. Crises demand leadership and swift, co-ordinated action. Whether it's contributing money, equipment, expertise, or volunteers, what matters is that it is done quickly and in consultation with others. Far better for a company to appoint a crisis response leader or logistics expert who could make a real and immediate contribution in a crisis than a smart postgraduate who can write sparkling reports on CSR strategies.

3. Howard Zinn: A Public Intellectual Who Mattered

I'm not going to paste some of this in. But, it's well worth the read.

4. Funniest Thing

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Speech Therapy - Post-Racial
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

Daily Good Reads: 1/30/2010

1. President's Question Time - One More Time

The point of debate is to clarify things, to find where the real points of disagreement are, and to assess them in that context of actual alternatives. All last year we had a rather wonkish debate going on about the details of health insurance reform - how to insure 40 million people without breaking the bank, how to expand insurance with the cooperation of insurance and drug companies, how to curtail costs, how to pay for it, etc. I don't blame people for finding their eyes glazing over. Mine tend to as well. And I don't blame people for watching the sausage-making in Washington and feeling nauseated.

But the Dish forced me to grapple with these arguments and to subject my knee-jerk resistance to this topic to yield to a deeper understanding of how crucial it is for our fiscal future - and our moral present. Your emails brought home to me the desperation out there - not of the idle or irresponsible, but of those who had done all they could to take care of themselves and were rendered indigent or sick or terrified for no fault of their own. Finding a way to get insurance against the exigencies of human life, of which illness is a prime example, is not socialism. It's insurance. it also helps labor mobility, reduces crippling anxiety, and is fundamentally humane.

          This argument seems to have been lost on many of my more rigid libertarian friends out there.

But outside this reasoned debate, we had people and politicians and charlatans like Beck and Levin and Limbaugh turning understandable anxieties about this process into hysteria and hyperbole and panic. The reaction was so severe on the tea-party right that it seemed simply impossible to counter. You can't reason people out of total hysteria or utter contradiction: "Get the government out of Medicare!"

 But here are the obvious facts. The president wants to find a way to get private insurance to 40 million people who don't have it, but can turn up in emergency rooms in desperation, cost far more than if they'd had preventive care, and keep pushing up costs for everyone else. The Republicans have no such plans...

2.  Despite court ruling, Congress can still limit campaign finance

Now that the Supreme Court has struck down century-old restrictions on corporate money in politics, is Congress prepared to strike back?

Many suppose that the court has made it impossible for Congress to restrict corporate speech. But this is wrong. While Congress can't issue a broad ban on all companies, it can target the very large class that does business with the federal government and ban those companies from "endorsing or opposing a candidate for public office."

A 2008 Government Accountability Office study found that almost three-quarters of the largest 100 publicly traded firms are federal contractors. If Congress endorsed our proposal, these companies -- and tens of thousands of others -- would face a stark choice: They could endorse candidates or do business with the government, but they couldn't do both. When push came to shove, it's likely that very few would be willing to pay such a high price for their "free speech."...

 3.  Fannie & Freddie vs. Mama & Daddy

Capitalizing on the public distraction afforded by the holidays, the US Treasury quietly announced on Christmas Eve that it would abolish a former agreement that limited Fannie Mae and Freddie Mac to receiving no more than $200 billion in federal bailout funds. The $200 billion caps were set in 2008 when the federal government seized control of the mortgage giants in what is becoming an all-too-familiar trope of conservatorship—the legal process by which government acquires control of private corporations. The removal of these caps amounts to what is effectively a carte blanche for Fannie and Freddie, removing any capital limits to promise unlimited federal aid to the two. The announcement comes on the heals of a year in which Fannie and Freddie CEOs bothreceived an annual salary of $6million in cold, hard cash—bonuses included.

As a first generation high school graduate and college student, I have felt first hand the impact of a public funds put to good use. I went to public school my entire life, and though I now attend the most expensive college in this country (Sarah Lawrence College), I do not pay a dime of the approximately $55,000 annual cost of attendance (save a miniscule federally-subsidized student loan). This is because Sarah Lawrence is a private institution that awards financial aid based entirely on familial income. In addition to the roughly $50,000 I receive in private Sarah Lawrence aid, I also receive a Pell Grant, FSEOG grant, and a federally subsidized student loan. Situating myself within the interstices of public and private aid, I have been able to afford myself a college education.

Combing through the $787 billion dollar stimulus package signed into law by President Obama nearly one year ago, I found just under $60 billion to address Disability, Unemployment, and WIC (Women-Infants-Children) — all social programs that my family has utilized at one time or another.

Our nation is at a crossroads where it must demand a reevaluation of the neoliberal order, which has lead to our current economic environment — an environment that extolls the virtues of the free market and shames the recipients of government assistance with labels of “welfare queen,” among others. We must recognize that Algerism and American exceptionalism do not exclude the public sector — indeed, they are the crux of it. I only wonder when we will realize this; when the public sector will become a source of pride and not shame. Until then, I can only daydream about what Mama and Daddy could have done with that carte blanche placed firmly in the hands of Fannie and Freddie.

 4. Funniest Thing: French Fight AIDS With 120-Foot Flying Condom

The French have unveiled their latest weapon in the battle against sexually transmitted diseases: a 120-foot condom filled with helium that went on display Tuesday at the Palais de la Decouverte in Paris.

The giant inflatable – dubbed "Condomfiere" – will set off on a five-continent tour to promote World AIDS Day on Dec. 1, part of a campaign started by the safe-sex group CondomFly. The dirigible condom carries three passengers plus a pilot.

Before starting its international sojourn, the floating behemoth will stop in Vienna for the 18th International AIDS Conference in June, where it will disperse heath information, as it will throughout its travels.

A Note on the Passing of Howard Zinn

The first book I read in college was Howard Zinn’s A People’s History of the United States. It torched my preconceived notions of American history, but more than that, it set a high standard for everything I’ve read since. Most histories that I've read are either patently Marxist, detailing the exploitation of the masses by the always ominous “elite” (most of what I read at Berkeley), or traditional narratives that detail historical events as if they were induced by a singular unified people (most of what we read in high school).  Few however, detail the exploits of ordinary people in history for their own sake. Zinn argued that yes, there has always been exploitation, but more importantly, people have never taken it lying down. With varied success, ordinary people have attempted to change the course of history in their favor. These narratives make history much more personal, and because of that, much more useful.

 I owe much of my perspective on politics and economics to that first book I read in college. Hence, the word "ordinary" in the title of this blog. Going forward, Zinn’s narratives provide a basis for hope. They are testimony to the possibility of change. Certainly not Obama’s change, but the kind that comes from movements that are truly by and for the people. 

--Joe

Interesting Reads: 1/29/2010

1.  Most Low-Wage Workers Are Cheated of Pay, Report Finds

More than half of the low-wage workers in New York City are routinely being cheated of some of the meager pay that is due them, according to a report to be released on Thursday by the National Employment Law Project.

The average worker in a low-wage job in the city lost out on $58 a week, more than $3,000 a year, because he or she was not paid minimum wage or overtime, or because of some other violation of labor laws, according to thereport [pdf]. These workers, including laundry employees, home health care aides, deliverymen and grocery baggers, would still earn less than $400 a week, on average, if they were being paid fairly, according to the report.

In all, the report estimated, more than 315,000 workers were denied some of their deserved pay, amounting to a loss of more than $18.4 million a week — nearly a billion dollars a year — to the workers, and therefore to the neighborhoods where they spend their paychecks or to the families to whom they send money....

 2. Obama Needs to Teach Americans How to Get Out of The Mess We're In, But He's Not

The President wants businesses that hire new employees this year to get $5,000 per hire, in the form of a tax credit. That will come to about $33 billion. It’s good step. He’s also supporting a cut in the capital gains tax for small businesses. That makes sense; after all, small businesses generate most jobs.

But here’s the problem. Both of these measures, and many of the other tax cuts he’s proposing, give ammunition to supply-siders who think the way out of this awful economy is simply to cut taxes on businesses. If a new jobs tax credit is a good idea, why not a cut corporate in income taxes? If it’s useful to reduce capital gains taxes for small businesses, why isn’t it useful to reduce them for all businesses?

The answer, of course, is that across-the-board supply-side tax cuts for businesses don’t increase the demand for the things businesses produce. They’re useful only to the extent businesses are confident consumers are out there, able and willing to buy. Carefully targeted — as are the cuts the President is proposing — they can give businesses an extra nudge to hire. But without adequate demand, they’re useless.

So what’s the President’s new proposal for boosting overall demand? Hmmm. Turns out, he’s not really proposing anything new on that score. (Some who watched his State of the Union the other night thought they heard him call for a second stimulus. Actually, he didn’t, and as far as I can tell he doesn’t plan to.) His political advisors are telling him to emphasize deficit reduction instead. And that’s what he did Wednesday night when he talked about a “freeze” on discretionary spending, and a “commission” to look for ways to cut the deficit...

 3. Stupidest Thing: Obamanomics: "A Fiscal Catastrophe in the Making"

If President Obama thinks the political disaster that hit his party last month in Massachusetts was bad, he had better brace himself for the Congressional Budget Office's latest economic forecasts for the next two years. In testimony before the House Budget Committee last week, which got scant news media attention, CBO Director Douglas Elmendorf painted a bleak forecast for the nation's economy under the White House's no-jobs, no-growth tax-and-spend policies. It spells even deeper political losses for the Democrats in Congress than are presently forecast.

"We are presently in a dangerously risky economic environment, more risky than any in memory and that includes the 1970s," Stanford economist John Cogan told me.

"The primary sources of that risk come from uncertainty about U.S. government economic policy. In the area of taxation, personal income taxes -- especially those on savings and capital formation -- are set to rise substantially in a year (when the Bush income tax cuts are due to expire)," Cogan said.

"How high tax rates will rise and what activities will be hit hardest creates a sizable risk this year for investors and businesses," he said.

But perhaps the most ominous forecast of what we can expect from Obamanomics comes from famed economist Arthur Laffer, whose supply-side, tax-cut proposals under President Reagan put the economy on a nearly 25-year economic-growth trajectory that pounded unemployment to its lowest level in decades...

 4. Funniest Thing: 

A Free Market Failure In The Media

I had a political science instructor at my community college once tell me that in the realm of political ideologies, Americans are comparatively unified. He then proceeded to show the class a chart with three sections: Radical, Liberal, and Conservative. He then cut a small sliver of the liberal section, and divided it into two more segments: Democrat and Republican.  “Americans are all mostly in the middle,” he said. His argument was that there are few monarchists, fascists, or communists in this country. He continued that Americans generally do not discuss dissolving the union and starting over, rather they discuss individual policy changes within an accepted framework: a relatively limited government, free market, and civil liberties. But after watching videos like these, I am starting to believe that this might not be the case for much longer.  

During the nineties, the media industry went through a free market explosion with the advent of cable news networks and the internet.  Like most free market theory, it sounds like a great idea. Conservatives can watch conservative news, liberals can watch liberal news.  After all, it is impossible for people to remain completely unbiased. These outlets have had a profound impact on the way people perceived news and more importantly, their government. The internet and cable T.V reduced the cost of news dramatically, and the click of a mouse or a remote created easier access. As you would expect, demand for news shot through the roof.

I think however that this market is distorted, as it always is when the good is a necessity. In this case, it is a necessity for a republic. After years of market research and trial and error, these companies have discovered that consumers do not actually want news. We want someone to tell us how to think; more than that, we want someone to tell us that the way we think is OK; we want short pithy phrases that we can endlessly repeat, phrases that at some point in history did have significance. Oh… and we also need books every few months that reiterate our aforementioned wants.  And the suppliers have dutifully proven apt at answering this demand. But what they are providing is no longer news. We now need media watch groups to check the facts of the media who checks the facts of the government.  

Everyone knows the dangers of a government controlled press, but I think it’s time to start paying attention to the consequences of a free market media.  I don’t know if people are moving towards communism(left) or fascism(right), but their media certainly is. And products only go where there is demand. I don’t know how much longer or lower the media can go calling their political opposites “tea baggers” and the “anti-christ.” The difficulty is that this is a market that the government cannot and should not go anywhere near.  The only regulator left is the people…

In the meantime, after seeing this video, I think I am going to start watch Fox News.

5 Pieces worth a Moment of Your Time 1/28/2010

1. What Is an Economic Recovery? Levels, Changes, and Changes-in-Changes       

There’s some debate about whether the economy has begun to recover. The consensus among professional forecasters is that the trough occurred sometime in the second half of 2009. But it doesn’t feel that way — which is why the latest Gallup survey is so interesting. Gallup researchers asked regular people how long until they expect the recovery to begin, and nearly half think we are three years or longer away.

It’s clear people are pessimistic about the economy. Very pessimistic. (I should quibble that the question is sort of leading; while any response was allowed, negative numbers don’t seem like a natural response.

But I think there’s something else at play here. There’s a disjunction between how economists use words like “recession” and “recovery,” versus how the general public understand these terms. According to the NBER approach, “A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.” So the recession has ended and the recovery has begun, but only because things got as bad as they are going to get. The “recovery” that we are in will take us from this low point, through some hard times, and hopefully, eventually, to a brighter place.

2. Ghana leads the world in per capita aide to Haiti

3. A Budget Freeze?

Let me start with a statement of what I see as the core challenge facing monetary and fiscal policy at the moment. How can we successfully stimulate the economy in the short run and still maintain confidence in the longer-run reliability of the dollar and solvency of the U.S. government? In terms of monetary policy, the task is to persuade the public that the Fed will achieve 3% inflation over the next two years and yet subsequently contract its balance sheet sufficiently to prevent inflation from getting out of control afterwards. In terms of fiscal policy, the task is to support demand at the moment but then be able to phase out the fiscal stimulus over time as investment and net exports rise to take the place of government spending. Obviously this is not so easy to accomplish...

4. Stupidest Thing: United We Rant

My fellow Americans, the state of the union is angry. Also strong. Presidents usually say the state of the union is strong. But this year you would have to go with strongly angry.

In his speech on Wednesday night, President Obama actually dropped that traditional state-of-the-union-is rhetoric completely in honor of the new irascibility. “We all hated the bank bailout,” he said in one of his first big applause lines.

Yes, the one good thing you can say about our highest elected officials is that they are ticked off at so many people that sooner or later they’ve got to climb up on some common ground. The House hates the Senate. The liberal Democrats hate the moderate Democrats. The normal conservative Republicans hate the hyper Tea Party-types. The Tea Party-ists are having so many internal fights that there’s a definite danger of broken crockery.

And, of course, everybody hates the bankers, except the Republicans who sat on their hands when the president called for taxing them...

 5. Funniest Thing: Game Over: Inmate Can't Play Dungeons and Dragons

          MADISON, Wis. - A man serving life in prison for first-degree intentional homicide lost his legal battle          Monday to play Dungeons & Dragons behind bars.

Kevin T. Singer filed a federal lawsuit against officials at Wisconsin's Waupun prison, arguing that a policy banning all Dungeons & Dragons material violated his free speech and due process rights.

Prison officials instigated the Dungeons & Dragons ban among concerns that playing the game promoted gang-related activity and was a threat to security. Singer challenged the ban but the 7th U.S. Circuit Court of Appeals on Monday upheld it as a reasonable policy.

Meaningless Rhetoric Counter from Both Speeches

Just a sample of some of the meaningless, baseless rhetoric so prevalent in the political system: 

 

State of the Union:
1. As we stabilized the financial system, we also took steps to get our economy growing again, save as many jobs as possible and help Americans who had become unemployed.

2. Now, the true engine of job creation in this country will always be America's businesses.

3. Next, we can put Americans to work today building the infrastructure of tomorrow.

4. I am not interested in punishing banks, I'm interested in protecting our economy.

5. we need to invest in the skills and education of our people.

6. We will continue to go through the budget line by line to eliminate programs that we can't afford and don't work.

7. Let's meet our responsibility to the citizens who sent us here.

8. That is the leadership that we are providing -- engagement that advances the common security and prosperity of all people.

9. Abroad, America's greatest source of strength has always been our ideal

Republican Response:
1. Good government policy should spur economic growth and strengthen the private sector's ability to create new jobs.

2. What government should not do is pile on more taxation, regulation and litigation that kill jobs and hurt the middle class.

3. Without reform, the excessive growth of government threatens our very liberty and our prosperity.

4. We want results, not rhetoric. We want cooperation, not partisanship.

5. government closest to the people governs best.

6. Government should have this clear goal: Where opportunity is absent, we must create it. Where opportunity is limited, we must expand it. Where opportunity is unequal, we must make it open to everyone.

Quick! Start a charity to help desperate investment Bankers!

"I know it sounds ridiculous to Main Street, but it's a hardship," says Gary Goldstein, who runs Whitney Group, a financial-services job-search firm in New York. "So firms are trying to help out any way they can."

Loans are the most popular form of financial aid for traders and investment bankers. Gustavo Dolfino, a senior managing director at recruiting firm Accretive Solutions, says loans "are happening all over" Wall Street. They include a type of bridge loan made to tide over employees whose fixed expenses outstrip available cash resources...

Full WSJ Article

Apparently, there is plenty of money to loan investment bankers, just not the rest of America.

5 Pieces worth a Moment of Your Time

1. Whose Affraid of the Big Bad Deficit?
       By definition, the government runs a deficit when its spending exceeds its taxes.

It typically finances the difference by borrowing. Of course, government debt has to be someday repaid (otherwise no one would agree to lend to the government in the first place), which is why many observers conclude that these deficits leave us worse off in the future. Because our nation will be saddled with government debt in the future, its citizens in the future will either have to spend less, or work harder to pay it off.

Although we acknowledge that the government has recently been spending a lot more than it taxes, some of us think that the “legacy” effect has been exaggerated for a couple of reasons.

The first reason is that public dis-saving (that is, public borrowing) is substantially offset by private sector saving. (The second reason I will discuss in next week’s post.)

National saving is the sum of public and private savings, and is the purported channel through which public borrowing would reduce living standards in the future. However, to the degree that private saving offsets public borrowing, public borrowing leaves no such legacy...

2.  Using Reconciliation Process to Enact Health Reform Would Be Fully Consistent With Past Practice
The Reconciliation process, which would only require 50 senators to pass, rather than 60 has been used repeatedly used, and would require that the bill does not add to the deficit. 

In the aftermath of the Massachusetts Senate election, Democratic congressional leaders must soon decide whether to use the reconciliation process to help pass health reform legislation. Reconciliation is a process set forth in the Congressional Budget Act that allows for expedited consideration of legislation affecting mandatory spending programs or taxes.

Some critics have charged that using reconciliation to enact a major change in policy, such as health reform, would be unprecedented and would represent a gross misuse of the process. A review of the past use of reconciliation demonstrates, however, that this charge is incorrect:Congress has employed reconciliation many times to make major policy shifts. These include sweeping welfare reform enacted in 1996, massive tax cuts in 2001 and 2003, and creation or expansion of several health coverage program. The sharp break with past practice took place in 2001, when Congress used reconciliation to enact a large tax cut that greatly increased federal deficits and debt. Prior to 2001, every major reconciliation bill enacted into law reduced the deficit. In 2003 Congress used reconciliation to pass another round of deficit-increasing tax cuts. In 2007, the House and Senate adopted rules preventing Congress from using reconciliation to increase deficits and debt as was done in 2001 and 2003. Since rising health costs are the single largest reason for projected long-run deficits, it is appropriate that health reform be considered through the reconciliation process...

3. Obama's Tiny Jobs Ideas for Main Street, A Big Spending Freeze for Wall Street

President Obama today offered a set of proposals for helping America’s troubled middle class. All are sensible and worthwhile. But none will bring jobs back. And Americans could be forgiven for wondering how the President plans to enact any of these ideas anyway, when he can no longer muster 60 votes in the Senate.

The bigger news is Obama is planning a three-year budget freeze on a big chunk of discretionary spending. Wall Street is delighted. But it means Main Street is in worse trouble than ever.

A pending freeze will make it even harder to get jobs back because government is the last spender around. Consumers have pulled back, investors won’t do much until they know consumers are out there, and exports are minuscule.

Today, though, there’s no sign on the horizon of a vigorous recovery. Jobs may be coming back a bit in the next months but the country has lost so many (not to mention all those who have entered the workforce over the last two years and still can’t land a job) that it will be many years before the middle class can relax. Furthermore, this recession isn’t like other recessions in recent memory. It has more to do with problems deep in the structure of the American economy than with the ups and downs of the business cycle.

Obama can no longer afford to come up with lists of nice things to do. At the least, he’s got to do two very big and important things: (1) Enact a second stimulus. It should mainly focus on bailing out state and local governments that are now cutting services and raising taxes, and squeezing the middle class. This would be the best way to reinvigorate the economy quickly. (2) Help distressed homeowners by allowing them to include their mortgage debt in personal bankruptcy — which will give them far more bargaining leverage with morgage lenders. (Wall Street hates this.)

Yet instead of moving in this direction, Obama is moving in the opposite one. His three-year freeze on a large portion of discretionary spending will make it impossible for him to do much of anything for the middle class that’s important. Chalk up another win for Wall Street, another loss for Main.

4. The Stupidest Thing I have Read Today:  An Economic Time Bomb

Government spending has already hugely increased, and so has the size and scope of government, but next year there will also be substantial tax increases for a great many Americans. The first reason will be the expiration of the Bush tax cuts . The top personal income tax rate will rise next Jan. 1 to 39.6% from 35%, a hike of nearly one-eighth. The dividend tax rate will rise to 39.6%, more than 2½ times the current 15%. And the capital gains tax rate will rise by a third, to 20% from 15%. If the House health care bill had passed, all three of these rates would have risen to 45%. 

The estate tax, which fell to zero this year under the Bush tax cuts, will return in 2011--or sooner, if Congress acts to restore it. Another likely tax increase will be on the income of private equity and hedge-fund managers, from the capital gains rate of 15% to the new higher income tax rates. It has already been passed by the House and is supported by the Obama administration, as is an additional 10-year, $90 billion tax on banks aimed at "rolling back bonuses for top earners." It would affect some 50 banks, insurance companies, and large broker-dealers.

But when the huge tax-increase agenda arrives a year from now, the economy will begin to decline, and will be some 3% to 4% smaller than it otherwise would have been. The artificially high growth in 2010 followed by artificially low growth in 2011 would "represent a larger collapse than occurred in 2008 and early 2009," Mr. Laffer writes.

This, I guess would be where Republican rhetoric comes from. These arguments are based on supply-side economic models, which in this case attempt to show that workers change their hours and productivity levels based on the tax rates. Du Pont is arguing that if tax rates are raised, people will work so much less as to shrink GDP by 3-4%. Historically, this has not ever happened. Also, logically its dumb as well (Sorry Mr. Laffer). Most people have no clue what their average tax rate is, let alone their marginal rate. Also, even for those that do, most would not stop working because of a five percent decrease in pay. It would be different, if the person could switch to another profession or investment that was taxed at a lower rate, but in most cases that opportunity is not available. I do not believe that a multi-million dollar earning hedge fund manager is going to switch professions to something less productive to avoid a tax.
While it is true that when taxes are raised more people attempt to shelter money from the government, there is absolutely no evidence that lowering taxes will increase government revenue. The responsible thing to do is to let these tax-cuts expire so that the government can afford to pay for the stimulus and other deficit-inducing measures it is going to have to take to bring us out of this recession.


5. Funniest Thing: Fish Gotta Swim, Teachers Gotta Cheat? 

Remember the story about the cheating schoolteachers in Chicago? The theory was that high-stakes testing, by putting more pressure on students to pass, creates a stronger incentive for teachers to not leave those students behind — and that a fraction of those teachers, generally the worse ones, went so far as to cheat on behalf of their students.

Looks like it may have been happening in Springfield, Mass., too. From theBoston Globe:

One staff member at a Springfield charter school told state education investigators he                   felt so pressured by his principal last spring to improve MCAS scores that, in order to keep his job, he helped one student write an essay for the test.

Another staff member said he was fired after he accused the principal of encouraging cheating, while another staff member observed a colleague pull some students away from watching a movie so they could fix answers on their tests.

America's Chance at a New Begining in Haiti

           In the wake of this month's earthquake, and given the international goodwill directed towards Haiti right now, the US has a chance to undo the damage it has caused for the last two hundred years. The media coverage is going to die down soon, but hopefully before it does, the Obama administration will use this opportunity to promote a stable Haitian republic. 
          Throughout the nineteenth century, the US government failed to recognize Haiti as a country, and attempted to enforce a 150 million franc debt owed to France for the cost of the Haitian revolution. In essence, creating a long-term debtor nation. US government officials believed recognizing the republic would give inspiration to the millions of slaves in the States. Throughout the twentieth century, the US government supported a slew of dictators who opposed human rights, but were in favor of American capitalism. It even occupied the country from 1915 to 1934, declaring that the Haitians were unfit to rule themselves. In 1957, the infamous "Papa Doc" began his reign of terror assisted by US government funds and marines. The US also placed trade embargoes on Haiti in 1991 and 2000, along with preventing international development agencies from lending money to the nation. 

          Haiti is not a unique story to say the least, especially in the realm of American foreign policy in the Western Hemisphere (see Chile, Nicaragua, Cuba, Venezuela). Haiti also suffers from its own internal corruption, but the American government's policies have consistently inhibited Haiti's economic growth and political stability. 

         In the coming months and years, I expect plenty of coverage of Haitians' skepticism of American companies in the rebuilding effort. This I understand. I also expect, as I have already seen this week, to see plenty of politicians trumpeting the "We are not going to write Haiti a blank check" rhetoric. What I would like to see is a redevelopment effort that focuses on rebuilding Haiti's infrastructure, promotes capital development, enhances education opportunities, and comes without adding to Haiti's national debt, which is already 40% of its GDP. 

--Joe

5 interesting things I've ready today

1. The Supreme Court's Ruling: What Would Milton Friedman Say?

The "one and only social responsibility of business," economist Milton Friedman wrote back in 1970 in a New York Times Magazine essay that launched a thousand arguments, is "to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game ..." Friedman contrasted this with the multiple responsibilities that an individual — such as a corporate executive — might have "to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country."

His point was that CEOs shouldn't go around imposing their own notions of social responsibility on corporations that were owned by others. Since the only interest that could possibly unite the disparate shareholders of a large corporation was making money, that was what executives should focus on during their working hours.

Now think about this argument in the context of the Supreme Court's decision (pdf) last week to strike down all restrictions on political spending by corporations. During the oral arguments, Solicitor General Elena Kagan hinted at the Friedmanite line that corporate executives who spent shareholders' money on political causes might not really be looking out for shareholders' interests. To which Chief Justice John Roberts retorted:

Isn't it extraordinarily paternalistic for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can't sell their shares or object in the corporate context if they don't like it?... 

Read More: Justin Fox--Harvard Business Review

2. This Is Such a Disaster in the Making II

The Economist: "I understand the arguments from supporters... this is a political gambit... it won't actually amount to much... a tool with which to co-opt the president's moderate antagonists.... If this is the best the president can do, Democrats, and the country, are in for a very long few years":...

Read More: Brad Delong- Grasping Reality with Opposable Thumbs

3. Moral Hazard and the Crisis 

One of the more remarkable moments in yesterday’s Financial Crisis Inquiry Commission came when Jamie Dimon, the C.E.O. of J.P. Morgan, said that his bank had never tested its portfolio against the possibility that housing prices would fall.This was especially telling when you consider that J.P. Morgan was, of all the big banks, the one that was least enmeshed in the subprime market, which suggests that if it didn’t contemplate the chance that the housing market would crash, it’s unlikely any of the other banks did, either. Over at Free Exchange, Ryan Avent mused on what this means for the oft-heard argument that one of the engines of the financial crisis was moral hazard: big banks’ assumption that if things went horribly wrong, they would end up bailed out. He writes, “If the financial sector couldn’t conceive of a world in which house prices fell, they might also have struggled to conceive of a world in which the financial sector was troubled enough that even relatively small banks would be shielded from collapse, as was the case after Lehman’s failure.”...
Read more:New Yorker-James Surowiecki

4. Stupidest Thing I have Read Today: "Obama Seeks Partial Three-Year Spending Freeze"
I think this was mistakenly filed under news: 
President Obama, after approving billions of dollars in spending increases in his first year in office, now is seeking a three-year federal spending freeze that would reduce budgets by less than 1 percent. President Obama, after spending hundreds of billions his first year, now is seeking a partial three-year federal spending freeze that would reduce budgets by less than 1 percent.
 
The drop-in-the-bucket nature of the president's proposal was underscored Tuesday by a Congressional Budget Office estimate projecting the 2010 federal deficit to hit $1.35 trillion -- Obama's spending freeze would be expected to save up to $15 billion the first year.

The president will propose the congressional freeze on "non-security" spending in his State of the Union address Wednesday night, senior administration officials said. The freeze, which would apply to annual spending on day-to-day government, appears to be an attempt to answer widespread voter concern about rising deficits and debt.

But the scope of Obama's proposal is being met with skepticism on Capitol Hill, as Republicans say that any freeze will be small in the context of federal spending under Obama's watch.

"Given Washington Democrats' unprecedented spending binge, this is like announcing you're going on a diet after winning a pie-eating contest," said Michael Steel, spokesman for House Minority Leader John Boehner....

Read More: Fox News

5. Funniest thing I have read today: 

"A December National Public Radio report noted that fake houseflies have begun appearing in urinals around the world based apparently on research showing that men are more likely to aim at the flies, thus leaving the area surrounding the urinal cleaner. Another commentator wondered how such "research" was conducted (other than by the obvious method of paper-wiping floors around urinals and then comparing the wipes). [KPCC Radio (Pasadena, Calif.), 12-25-09]"

More Stupid News: News of the Weird

Obama’s Catch-all Rhetoric Seems to Miss Most People

First, the details. Most of the major news outlets are reporting some of the details from President Obama’s upcoming State Of The Union address. The main points are that those earning between $30,000 and $85,000 will receive up to a $900 tax rebate for child care, student loan repayments would be capped at ten percent of discretionary income, and Obama is implementing a $318 billion dollar spending freeze on discretionary, non-defense related expenditures.

       While these measures will make for great for a great speech: “Cut Taxes, reduce the deficit, cut spending, help for the middle class,” they unfortunately do little to tackle the bigger problems facing people today like double digit unemployment,  home foreclosures, and a fundamental overhaul of the banking system. 

        There are issues with all three measures, but let’s tackle the tax rebate and student loan cap first.  These are regressive tax measures in that they will assist those with higher incomes disproportionately.  For example, a person who graduates from college and takes a job as a teacher earning $30,000 per year will have their payment capped at $183 per month.  A person who graduates and takes a job with a finance company and earns $100,000 would have their payment capped at about $520. The difficulty is that a person who makes $100,000 is going to have a much easier time making their payment than the teacher is making theirs. The higher earner is still going to have over $4800 per month.  The same issue will arise with the child care rebate if it is proportional to income. The problem with these types of measure is that they tend to help the people who need it least. In the case of the child care credit, people earning less than $30,000 would receive no benefit, and they are the people who need the most help.

          The spending freeze is designed to prevent government discretionary spending from increasing with inflation.  The Obama administration claims this will save $250 billion over ten years.  In essence, the government must cut at least a percentage of the budget equal to inflation for the next three years.  Since Mr. Obama claims that this will not include defense spending, what else is left? Education, Transportation, Health and Human Services, Energy, and Housing and Urban Development. Essentially, social welfare and infrastructure. Though I am sure there are reasonable places to cut back in all of these areas, during a recession is not the time. These cuts will go to programs that are needed most during a recession. This will cost jobs, either directly through government layoffs or through eliminating government contracts with private firms.  Either way, this will increase unemployment during a recession, which will exacerbate the problem and worse yet, provides no long term solution to the deficit.

--Joe

Sources:

Wall St. Journal --Budget Freeze in the Works

NYT--Obama's measure for middle class

Fiscal year 2010 Budget

Hayek v. Keynes Rap

Over-caffeinated, tired of the same, and only two days of classes

         Those, along with a growing dog who seems to be occupying himself more often these days, are the reasons I thought of for starting this blog. I've also been reading a fair amount of news the past few years, doing my best to be an "informed citizen", and I've become disgusted with the way both politics and economics are covered by most news sources. Although these arenas have a broad and meaningful impact on people's everyday lives, the media presents them as abstract concepts being debated by much smarter people than me with the nation's best interests in mind. Here's my problem with this. It would require me to believe that our politicians have even a cursory understanding of economics, which they either do not, or if they do, they choose not to explain it to the people they represent.

          Case in point: Obamacare. Most people who follow the news know that the Democrats lost Ted Kennedy's senate seat in a special election last week. This means the Democrats only have 59 senate seats and cannot pass healthcare without facing a Republican filibuster. However, most of us have no clue what the actual healthcare bill says. In essence, the media has portrayed this bill in such an irrelevant partisan fashion that it has forgotten to examine the bill itself. The public discourse then is one of even more irrelevant party rhetoric since no one has a clue about the specifics of the bill. “Lower taxes, smaller government” and “healthcare is a right” become substitutes for substantive debate.  

          The general way I am hoping this will work is that I will present my opinion on a (most likely) current political or economic issue or criticizes the way the media presents an issue. I will also post interesting articles and such that I have read that day. Hopefully, someone else will then comment. I also realize that I have a leftist bent (possible understatement), so I will make anyone else an author on this blog. I will even share the ad revenue, which I expect to be none. But the general theme must remain how political and economic events affect people.   

--Joe