Archive for July, 2011
Federal Government Subsidizes and Penalizes Boeing Co.
When an entity is as mammoth and undisciplined as the $3.8 trillion U.S. federal government, it’s inevitable that its programs will be working at cross purposes. Just ask the civil aircraft manufacturer Boeing Company.
Politicians love Boeing because it not only makes valuable products but it also exports billions of dollars worth around the globe. To give a boost to those exports and supposedly create more jobs in the United States, the federal government’s Export-Import Bank offers preferential loans to foreign governments and airlines to help them buy more Boeing aircraft.
As my Cato colleague Sallie James documents in a new study, “Time to X Out the Ex-Im Bank,”
the number-one user of the Ex-Im Bank is the Boeing Company. Of the 35 aircraft sales supported by Ex-Im in FY2010, 28 were Boeing products, and the Congressional Research Service estimates that more than 60 percent of the value of Ex-Im Bank loan guarantees supported Boeing aircraft sales in that year.
No wonder critics refer to the Ex-Im as “Boeing’s Bank.”
Yet the same federal government is making it more difficult for Boeing to manufacture its airliners cost-effectively in the United States. Under the sway of organized labor, the National Labor Relations Board is seeking to prevent Boeing from expanding its production in South Carolina, a right-to-work state where the company’s employees are non-unionized.
In a column at Bloomberg.com today, Harvard economist Edward L. Glaeser rightly worries that the NLRB action is undermining one of the most important advantages enjoyed by American-based companies—the freedom of labor, capital, and goods to move freely within the United States. As Glaeser notes:
The profound role that mobility has played in our country, enabling repeated reinvention, causes me to be deeply worried about the possibility that a National Labor Relations Board complaint will prevent Boeing Co. from moving plane production from [unionized] Washington state to South Carolina.
In the spirit of compromise, Congress should eliminate the Ex-Im Bank, while telling the NLRB to back off and let U.S. companies deploy their productive resources in whatever locations within the United States that make the most competitive sense.
The Gang of Six Is Back from the Dead: Contemplating the Good, the Bad, and the Ugly in Their Budget Plan
The on-again, off-again “Gang of Six” has come back on the scene and is offering a “Bipartisan Plan to Reduce Our Nation’s Deficits.”
The proposal is quite similar to the one put forth by the President’s Simpson-Bowles Commission, which isn’t too surprising since some of the same people are involved.
At this stage, all I’ve seen is this summary (A BIPARTISAN PLAN TO REDUCE OUR NATIONS DEFICITS v7), so I reserve the right to modify my analysis as more details emerge (and since I fully expect the plan to look worse when additional information is available, the following is an optimistic assessment.
The Good
- Unlike President Obama, the Gang of Six is not consumed by class-warfare resentment. The plan envisions that the top personal income tax rate will fall to no higher than 29 percent.
- The corporate income tax rate will fall to no higher than 29 percent as well, something that is long overdue since the average corporate tax rate in Europe is now down to 23 percent.
- The alternative minimum tax (which should be called the mandatory maximum tax) will be repealed.
- The plan would repeal the CLASS Act, a provision of Obamacare for long-term-care insurance that will significantly expand the burden of federal spending once implemented.
- The plan targets some inefficient and distorting tax preference such as the health care exclusion.
The Bad
- The much-heralded spending caps do not apply to entitlement programs. This is like going to the doctor because you have cancer and getting treated for a sprained wrist.
- A net tax increase of more than $1 trillion (I expect that number to be much higher when further details are divulged).
- The plan targets some provisions of the tax code – such as IRAs and 401(k)s) – that are not preferences, but instead exist to mitigate against the double taxation of saving and investment.
- There is no Medicare reform, just tinkering and adjustments to the current system.
- There in no Medicaid reform, just tinkering and adjustments to the current system.
The Ugly
- The entire package is based on dishonest Washington budget math. Spending increases under the plan, but the politicians claim to be cutting spending because the budget didn’t grow even faster.
- Speaking of spending, why is there no information, anywhere in the summary document, showing how big government will be five years from now? Ten years from now? The perhaps-all-too-convenient absence of this critical information should set off alarm bells.
- There’s a back-door scheme to change the consumer price index in such a way as to reduce expenditures (i.e., smaller cost-of-living-adjustments) and increase tax revenue (i.e., smaller adjustments in tax brackets and personal exemptions). The current CPI may be flawed, but it would be far better to give the Bureau of Labor Statistics further authority, if necessary, to make changes. A politically imposed change seems like nothing more than a ruse to impose a hidden tax hike.
- A requirement that the internal revenue code maintain the existing bias against investors, entrepreneurs, small business owners, and other upper-income taxpayers. This “progressivity” mandate implies very bad things for the double taxation of dividends and capital gains.
This quick analysis leaves many questions unanswered. I particularly look forward to getting information on the following:
- How fast will discretionary spending rise or fall under the caps? Will this be like the caps following the 1990 tax-hike deal, which were akin to 60-mph speed limits in a school zone? Or will the caps actually reduce spending, erasing the massive increase in discretionary spending of the Bush-Obama years?
- What does it mean to promise Social Security reform “if and only if the comprehensive deficit reduction bill has already received 60 votes.” Who defines reform? And why does the reform have to focus on “75-year” solvency, apparently to the exclusion of giving younger workers access to a better and more stable system?
- Will federal spending under the plan shrink back down to the historical average of 20 percent of GDP? And why aren’t those numbers in the summary? The document contains information of deficits and debt, but those figures are just the symptoms of excessive spending. Why aren’t we being shown the data that really matters?
Over the next few days, we’ll find out what’s really in this package, but my advice is to keep a tight hold on your wallet.
What to Read on the Financial Crisis, Part I
I really couldn’t find anything in John Tamny’s fairly critical review of Reckless Endangerment by Gretchen Morgenson and Joshua Rosner to disagree with, but still I liked the book. That may be because I spent most of the last decade as a staffer on the Senate Banking Committee, and I know that Josh was one of the few raising the early alarm bells about Fannie, Freddie (and FHA).
But I’ve also come to conclude that I liked the book because pretty much everything I’ve read on the financial crisis, regardless of who wrote it, has some pretty big flaws. So now I have a pretty low bar for what’s acceptable. While Reckless Endangerment has lots of flaws too, it has fewer than the typical book on the crisis.
Anyway, in thinking about the many books out there, only one really strikes me as being anywhere near a full and perfect story. Unfortunately said book has a low readership, and gotten almost no coverage. So here it is: If you are only going read one book on the financial crisis, read Alchemists of Loss by Kevin Dowd* and Martin Hutchinson. It isn’t an easy read, but you won’t find a better one — at least not yet.
Now I hope you don’t stop at reading just one, and so to assist in that endeavor, my Part II will be a longer list of fun summer reading on the financial crisis.
——
*Full disclosure, Kevin Dowd has had a long affiliation with Cato.
Shocker Reported from Delaware Judiciary
“[The] Delaware [court system] is now almost actively hostile toward cases they think are without merit,” Widener lawprof Larry Hamermesh tells the Wall Street Journal, regarding flimsily based suits in which lawyers seek to block corporate mergers and then collect fees when the target agrees to settle in order to get the deal done. Imagine that — almost actively hostile. If this keeps up, are lawyers supposed to hold back on unmeritorious cases, and only file the meritorious sort? Wouldn’t that be, like, monotonous?
Giving Medicaid to Very Poor & Sick Folks, Who Go out of Their Way to Request It, Makes Them Report Feeling Healthier
Robin Hanson has a post on the Oregon Health Insurance Experiment over at Overcoming Bias. He concludes:
So far, the new Oregon Health Insurance Experiment shows that for very poor and sick folks who go out of their way to request medical insurance, giving them such insurance makes them report feeling healthier. Two-thirds of this effect appears immediately on granting their request, and before they actually got more medical treatment. It remains to be seen if these healthy feelings will be reflected in more direct health measures, though that seems plausible, and we’ll probably never see mortality effects. The main results of the RAND [health insurance] experiment, which looked at all sorts of people, suggests doubts about presuming that if medicine helps the very poor and sick, it on average helps everyone.
Strip-Search Machines: A Loss Seeds the Win
Last week, the D.C. Circuit Court of Appeals rejected a Fourth Amendment challenge to the Transportation Security Administration’s strip-search machine policies, but it found that the TSA violated the Administrative Procedure Act in rolling them out. Too bad that the court arrived at the Fourth Amendment issues before they were ripe.
The bulk of the decision was devoted to the TSA’s law violation in creating strip-search machine policies without doing a notice-and-comment rulemaking. That’s the procedure federal agencies are required to carry out when Congress has delegated them legislative authority. Congress did delegate such authority when it told the Department of Homeland Security to develop technologies that detect nonmetallic, chemical, biological, and radiological weapons in 2004′s Intelligence Reform and Terrorism Prevention Act.
“[T]he TSA has advanced no justification for having failed to conduct a notice-and-comment rulemaking,” the court wrote, adding that it expects the agency “to act promptly on remand to cure the defect in its promulgation.”
The TSA will likely spout “constantly changing threat environment” boilerplate to try and argue that it can avoid notice and comment under the APA’s “good cause” exception. An agency can skip notice and comment “when the agency for good cause finds . . . that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.”
But the threat environment is not “constantly changing” at the level of abstraction relevant for the strip-search machine policy—some people are out there who might try to get dangerous articles onto planes—and these machines will be in place for decades, if not permanently, under the TSA policy. They will affect the privacy and security of billions of air passenger journeys. Even if there were need for haste in rolling out the machines, nothing makes it uniquely difficult, or anything other than appropriate, for the TSA to engage in a public process to substantiate its actions.
The Debt Ceiling and the Balanced Budget Amendment
The Washington Post editorializes:
A balanced-budget amendment would deprive policymakers of the flexibility they need to address national security and economic emergencies.
A fair point. Statesmen should have the ability to “address national security and economic emergencies.” But the same day’s paper included this graphic on the growth of the national debt:
Does this look like the record of policymakers making sensible decisions, running surpluses in good year and deficits when they have to “address national security and economic emergencies”? Of course not. Once Keynesianism gave policymakers permission to run deficits, they spent with abandon year after year. And that’s why it makes sense to impose rules on them, even rules that leave less flexibility than would be ideal if you had ideal statesmen. Indeed, the debt ceiling itself should be that kind of rule, one that limits the amount of debt policymakers can run up. But it has obviously failed.
We’ve become so used to these stunning, incomprehensible, unfathomable levels of deficits and debt — and to the once-rare concept of trillions of dollars — that we forget how new all this debt is. In 1980, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 30 years later, it’s sailing past $14 trillion.
Historian John Steele Gordon points out how unnecessary our situation is:
There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.
It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer (D., N.Y.) — no deficit hawk when his party is in the majority — called it “porky.”
Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It has risen another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office. Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. They could find some of them here in this report by Chris Edwards.
In the Kentucky Resolutions, Thomas Jefferson wrote, “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.” Just so. When it becomes clear that Congress as a body cannot be trusted with the management of the public fisc, then bind them down with the chains of the Constitution, even — or especially — chains that deny them the flexibility they have heretofore abused.
Did ‘Too-Big-To-Fail’ Cause the Financial Crisis?
Last week I askedif Dodd-Frank had ended “too-big-to-fail” (TBTF) that is the perception that some banks (or other companies) are simply too big to be allowed to fail, and thus, must be rescued by the government. As this was an explicit purpose of the reform efforts, it seemed like a reasonable question to ask. Apparently even raising questions about the wisdom of Chris Dodd and Barney Frank is enough to throw some people into a fit.
In offering what I assume is meant as a rebuttal to my suggestion that the debt markets seem to indicate that the largest banks are currently enjoying a significant funding advantage over the smallest banks, which could result from ”too-big-to-fail”, Matt Yglesias makes the quite accurate observation: “The thesis that looking at the debt market was a good idea sounded compelling to me, but if you look at the chart it shows clearly that during the peak bubble years large banks didn’t have a funding advantage. The large bank funding advantage was a consequence of the crisis, not a cause of it”
Matt stumbles onto a critical point here. If we believe debt spreads can tell us something about “too-big-to-fail” then the debt markets during the housing crisis did not believe, or behave, as if the largest banks, as a whole, were “too-big-to-fail”. In fact the largest banks didn’t start enjoying a funding advantage until after the assisted sale of Bear Stearns. This TGTF funding advantage reached its peak in the Spring of 2009, after the bailouts of Fall 2008. I think the fact that both Bear and Lehman counter-parties started a slow “run” weeks before either failed is also evidence that the markets didn’t see these institutions as TBTF. I think its fair to say that what regulators were actually trying to do was stop market discipline, not replace a lack of it. Also why would market participants try to insure against the failure of a company (often via a credit-default-swap) if they believe such a company was going to be bailed-out. It would appear to me that market participants were, unlike regulators, taking actions to minimize the harm from the failure of a large bank.
What does all this amount to? It suggests to me that “too-big-to-fail” is ultimately a political/regulatory creation and not the result of the market. Which also suggests it can only be stopped with a political solution (stopping the regulators from being able to do bailouts). Again it seems as if one of the basic assumptions of Dodd-Frank, that TBTF drove the crisis, is false. No wonder the Act itself has done so little to fix our financial markets.
Chicago Still Disrespects Second Amendment
That’s the upshot of a recent decision by the Seventh Circuit Court of Appeals in the case of Ezell v. City of Chicago. This was a challenge to the new regulations the city enacted in the wake of McDonald v. City of Chicago case, which applied the Second Amendment to the states.
In an attempt to circumvent the Supreme Court’s clear holding, Chicago’s ordinance first mandates that would-be gun owners receive training at a firing range but then prohibits firing ranges from operating in the city. The court, in a striking opinion by Judge Diane Sykes (put her on your Supreme Court shortlist for the next Republican administration), tells the city to go back to the drawing board.
I won’t go into the details, but the court applied something greater than intermediate (but “not quite strict”) scrutiny and found that Chicago has not presented anything approaching a compelling reason for its restriction. Here’s an analysis of the opinion by Josh Blackman and some follow-up commentary from Cato associate policy analyst Dave Kopel.
Gratifyingly, Judge Sykes cites the Pandora’s Box article that Josh and I published early last year in the run-up to the McDonald argument (see footnote 11 on page 31). It’s quite an honor to appear in the same footnote as Randy Barnett, Steven Calabresi, Brannon Denning, Glenn Harlan Reynolds (the Instapundit), and many other noted scholars — including Akhil Amar, who in the wake of our Obamacare debate and bet may not appreciate it as much.
Congratulations to the intrepid Alan Gura (who also litigated McDonald and Heller v. District of Columbia) and to all the citizens of Chicago!
Protecting Consumers from Consumer Protection
It’s an article of faith that government regulation always delivers better outcomes. The new consumer protection agency now ramping up its involvement in financial markets may prove to be an agency that harms consumer interests in the long term. Mark Calabria discussed the new agency in today’s podcast.
Subscribe to the podcast here (RSS) and here (iTunes).
Even Imaginary Guns Save Lives
Because we care about individual liberty here, we think you should be able to engage in self-defense to protect that liberty (and your life, if it comes to that). That includes the right to armed self-defense, of course, a right that becomes all the more important when encountering potential assailants who are stronger and/or more numerous than you.
Indeed you might recall from the legal fight to guarantee an individual right to keep and bear arms, that my colleague Tom Palmer once fended off some anti-gay marauders by just showing them that he had a gun.
And now we see that same story play itself out, except the would-be victim scared off a homophobic gang by merely maintaining the impression that he had a gun:
The situation could have gone either way: I could end up beaten or dead, or we could all go our separate ways.
All I could think to do was to get to my backpack and find my phone. As I fumbled for the phone, I heard one of them say, “Does he have a gun?”
So I kept my hand in my backpack, allowing them to wonder whether I was reaching for a gun. Then a couple of them started to run away, and the others soon followed. I got back on my bike and pedaled as fast as I could out of there.
When I got home, I began to reflect on what had happened, and more disturbingly what could have happened. I am in contact with the LGBT unit of the police department to file a report. But I’ve thought a lot about the turning point of the situation — the fact that one of them thought that I might have a gun. None of them said, “There’s a law against antigay hate crimes!” That wasn’t the deterrent. It was the possibility that I might have had a gun that saved my life Friday night.
It’s unfortunate that the people Mr. LaSalvia encountered are around — whatever their motivations — but would we be in a better world if people like him couldn’t imply the potential for armed self-defense?
Of course, in DC, Chicago, and many other places — which, after the recent Supreme Court rulings, must allow guns to be kept at home — it’s still illegal to carry a gun (open or concealed). If the thugs Mr. LaSalvia ran into knew the local gun regulations (as many professional criminals do) and accurately gauged their target as a law-abiding citizen, they would have known that he was bluffing.
Is that what gun-control proponents — many of whom I surmise strongly support gay and women’s rights — want?
(H/t: Lindsay Charles)
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