Monthly Archives: May 2009

The End Of The Rule Of Law

Back in mid November it was still unclear if we had elected a constitutional scholar or a community organizer as our President. With the fast track bankruptcy proceedings for Chrysler and a similar deal being micromanaged by the White House for General Motors, it is now clear that the community organizer won. It seems the constitutional law expert that many of us were counting on to defend the rule of law upon which our freedom, liberty and economic system are based has been driven from the scene.

So what’s wrong with having the community organizer in charge? It now appears that core decisions regarding economics, contract law and private enterprise will be made not by law, not by contract, not by precedent, not by rational economic theory and not by tradition, but rather by politic correctness, expedience, populism, campaign contributions and essentially what amounts to nothing more than the egotistical whims of a small elite group with concentrated political power who seem to think they are the smartest people in history.

We’ve been down this road before and history suggests clearly where it goes. Similar policies of various political stripes were a very common theme in the late 1930’s and early 1940’s. What they all had in common, whether in Russia, Germany, Italy, Japan and to significant degree even in  the United States, was a disregard for the rule of law, just as we are seeing today.

In “Chrysler and the Rule of Law”, law professor Todd Zywicki points out that “the Founders put the Contracts Clause in the Constitution for a reason”. He clarifies:

“The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”

“The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.”

“Violating absolute priority undermines this commitment”.

Bankruptcy law, while not perfect, has evolved over time with clear purpose. Along with sorting out a fair and rational distribution of the diminished assets of an organization to existing stakeholders according to established law and contracts, the asset disposal processes of normal bankruptcy procedures generally play a healthy role in our economy  by redeploying resources productively.

In “Bankruptcy is Economic Stimulus” Congressman Ron Paul explains that: “When a company makes a profit, it is a signal that it is taking resources and increasing their value while controlling costs.  When a company operates at a loss, it is a signal that it is decreasing the value of its resources or letting out-of-control costs outstrip any value it has created.  A company operating at a loss is therefore an engine of wealth destruction.   Bankruptcies are a net positive for the economy because more productive competitors are rewarded by opportunities to buy up remaining assets at bargain prices to strengthen their operations.  In an economy that allows this kind of growth and change, any jobs lost by bankruptcy are soon replaced by new ones as the most efficiently managed businesses gain access to more assets and expand.”

“Bankruptcy was the stimulus that we needed in the case of AIG. More bankruptcies would clean out malinvested resources and enable economic growth again.”

In both the Chrysler and GM deals, instead of letting the bankruptcy system do what it is intended to do, the White House is demanding that debt contracts, which under normal rule of law have precedence in bankruptcy proceedings, will be crammed down in favor of benefiting politically connected unions. In “Driving the Bond Markets To Ruin”, James Glassman describes exactly where these new economic policies will lead us as the fate of two of the world’s largest industrial companies are decided by strong arm tactic directly from the White House.

Glassman suggests that ” in strong hands, G.M. could be a going concern. Unfortunately, the new owners, with about nine-tenths of the shares, will be the government and the U.A.W. These are the same hands that shaped much of G.M.’s trouble in the first place. With substantial union co-ownership, labor costs won’t be contained; and with the government as the boss, politics may trump markets in decisions on such matters as where to put plants and whether to build big cars or small ones.”

“The deal would also put G.M.’s competitors at a serious disadvantage in the short run. Ford, which has been building better cars lately, prudently raised cash against a decline in demand, playing the ant to G.M.’s grasshopper. Now, Ford will face a G.M. buoyed by taxpayer dollars both for manufacturing and for cheap consumer and dealer financing.”

“The same holds true for the manufacturers that hold the key to future auto-making jobs: well-managed, foreign-based companies like Toyota and Honda, which, according to the automotive analysts at CSM Worldwide, will build more cars in the United States next year than G.M., Chrysler and Ford combined.”

“What lesson does federal favoritism toward Chrysler and G.M. teach other businesses that play by the rules? How will our trade negotiators keep a straight face when complaining about subsidies to Airbus or Chinese steel makers?”

While the administration’s actions may be popular policy among those who don’t want to explore the  implications too carefully, certain long term implications are unavoidable.  Having the government and unions in complete control of major industrial companies is not good for the companies themselves, their competitors, their customers or the competitive enterprise system that our economic system is based on. You can call them progressive or whatever else you choose based on the pretty rhetoric. But the administration’s economic policies are the very essence of corporate socialism, the worst of political-economic solutions.

What President Obama and his minions have not come to grips with is that postponing and hoping to avoid what Joseph Schumpeter described as the creative destruction of free markets can only lead more chaotic and severe destruction later. And disregarding the rule of law will lead to the destruction of everything that the constitutional scholar who ran for president holds dear.

Are there practical implications for personal decisions in the news about the General Motors and Chrysler? The actions of the administration are a clear signal to get out of any private or corporate bond investments you may hold. Why would anyone invest in the “security” of bonds when the contracts they are based on are now going to be completely disregarded in favor of political connections. Longer term, as Glassman points out, these are not good signals for for global trade or for the future of real business of any kind.

As Professor Zywicki points out: “By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?”

What is happening with GM and Chrysler pretty much sums up the fears many of us had about the new administration. It sometimes appears that the only enterprise left will be chasing government favors.

While generally too extreme in his views for my taste, in “Statism Is The Only Thing Being Stimulated” Mark Steyn pretty accurately captures the problems with the new economy we are supposed to all believe in. He relays his surprise at seeing a quarter page help wanted advertisement in a small local Vermont newspaper, essentially the only ad in the paper. The ad was from SEVCA, a “nonprofit agency, just like The New York Times, General Motors and the state of California.” The article goes on describing four of the eight jobs being advertised which are funded by the American Recovery & Reinvestment Act (ARRA): ARRA Projects Coordinator, Grantwriter – “responsible for writing grant applications to augment ARRA funds”, Marketing Specialist – “to increase public awareness of ARRA-funded services” and Job Readiness Program Coordinator – “a job coordinating the program that gets people ready to get a job.” He sums things up well suggesting: “I only hope there are enough qualified Job Readiness Program Coordinators out there, and that they don’t have to initiate a Job Readiness Program Coordinator Readiness Program.” It would be fun to just laugh at the material for comedy these new “solutions” offer if they weren’t bankrupting our nation and our kid’s futures on this senseless waste.

President Obama ran for office on a theme of Hope and Change. Things are definitely changing fast. Those who believe that the folks that brought us the wisdom of the American Recovery & Reinvestment Act are somehow qualified to instantaneously reshape all the traditions, rules and laws governing economics and commerce, as well as the ownership structures of the worlds major economic and industrial institutions, are surely demonstrating the very optimistic hope that they have placed with the Community Organizer In Chief and his team.

Sadly, it is a hope I can’t share. After eight years of Dick Cheney’s reign, the change I was really hoping for was that the constitutional scholar would be our president.



Filed under Economic Policy, Fundamental Perspectives

Too Little Spending or Too Much Debt?

Chris Martenson once again clearly highlights the risks of the Washington “solution” to our current economic mess in “The Wrong Diagnosis”. He is not convinced by the apparent general consensus in Washington that the solution to our economic challenges is taking on massive new levels of additional debt.

He quotes from the Minyanville article “Stabalization” which suggests that:

“If you add up all the government bailouts, explicit and implicit, along with actual government purchases of assets (debt from banks) it comes out to a surreal $30 trillion. Markets are cheering that things have “stabilized” and “things are getting less bad”. I ask you seriously when the government throws $30 trillion at the “crisis” (one which bankers are now claiming is over), can you call that stable? That is like declaring a patient being kept alive on a heart-lung machine healthy.”

“Of course we have stabilized. The government has bankrupted our future to do it. The government(s) control the LIBOR market, the swaps market, the bond markets with all the “money” they are printing. They are feeding “money” to banks under the table at an alarming rate.”

The folks in Washington seem to think that just by making everyone feel good enough so we start spending again, things will once again return to how they were in the boom times. Personally I don’t run into anyone who feels confident those times are ever coming back. Everyone I know is trying to get out of debt as fast as they can, not find more stuff to buy. Perhaps things are just different in the Washington echo chamber.

Many folks I run into seem to realize we have been living through a bubble and that bubble has burst and likely won’t be coming back any time soon. Though not quite as extremely irrational perhaps, our situation is not entirely unlike the aftermath of the famous tulip mania in Holland. Wikipedia reports that  “at the peak of tulip mania in February 1637, tulip contracts sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble.”  And since that bubble burst almost 400 years ago, the price of tulip bulbs has never come anywhere remotely close to recovering.

Folks holding those ridiculously expensive flower bulbs must have woken up after the crash saying to themselves “what was I thinking?”  As an owner of commercial real estate in 2009, I know that feeling.

Martenson concludes a his analysis with:

“Where the US government and its Wall Street partners have decided that we suffer from a condition of too little spending, the alternative diagnosis says that we suffer from too much debt.  Given our debt based monetary system these are exactly diametrically opposed conclusions and each implies solutions that are exactly in opposition to the other.”

“So if it turns out that we suffer from too much debt, and the wrong solution of MORE DEBT is applied, then we are making the situation worse, not better.  It would be the same as a drunk trying to drink themselves sober.”

“……………….. The hangover is going to be severe.”

1 Comment

Filed under Economic Policy

Kicking The Can To Bankruptcy

Robert J Samuelson wisely welcomes the impending bankruptcy of Social Security and Medicare in “A “Crisis’ America Needs”. Pointing to the $45.8 trillion in unfunded liabilites facing these two programs, he points out that due to reduced revenues, “Social Security, Medicare Risk Bankruptcy in 2010” and suggests that it is only facing a crisis situation that our political leaders will actually act responsibly.

President Obama’s has suggested that it is time to stop “kicking this can down the road”. His predecessors have also given lip service to the problem and some have even tried to enact meaningul reform.

As the “trust funds” in which the revenues from Social Security and Mediacre have been replaced with IOUs for subsidies of all sorts of other government spending instead become a liability that require current repayment, perhaps politicians will act more responsibly.

Idealistically, one can only hope for actually responsible government.

Leave a comment

Filed under Economic Policy, Fundamental Perspectives

Waxman Markey – Greenwashing Corporate Welfare

As the Waxman Markey Carbon Cap and Trade bill winds its way through Congress, our government is finally about to take action on our unsustainable addiction to fossil fuels …….. Or so it would seem.

But we should be paying attention not to the rhetoric, but rather the realities of the legislation. What matters is not the pretty sound bites or the presumed good intentions of the supporters behind legislation, but rather the actual legislation itself. As always in the legislative sausage making process, “the devil is in the details”.

The current Waxman Markey legislation is another truly audacious handout to the Wall Street traders and speculators, and to the nation’s largest carbon emitters, the two groups who stand to benefit most from this legislation. And unfortunately, the political compromises that evolved to give carbon free offsets to refineries, utilities and other major polluters along with all the other give aways will render the overall cap and trade effort effectively useless in actually reducing carbon emissions, as the European system has already proven to be.

What is being proposed in this legislation is one of the world’s largest derivatives markets, with complex rules being made up in a mad rush and Wall Street lobbyists very heavily engaged in the rule making. US Commodities Future Trading Commissioner Bart Chilton is quoted by the Financial Times as predicting carbon markets would become ” the biggest of any derivatives product in the next four to five years.”

One would have hoped Congress learned something from the fiasco created by the derivatives market for subprime mortgages. Unfortunately it seems they haven’t. There is a very good reason that environmentalist organization Friends of the Earth titled their report on Cap & Trade “Subprime Carbon”. In a CNBC video on “The Carbon Challenge”, former Governor and DNC Chairman Howard Dean declares “I am terrified of a Bernie Madoff in the Cap and Trade business who is selling stuff that doesn’t exist”.

This legislation is evolving to be even worse than the Washington solutions for the economic crisis, a record of terrible public policy that I thought would be impossible to challenge. After looting our children’s future handing trillions of tax-payer dollars to the Wall Street firms most responsible for the worlds worst economic problems since the Great Depression, our leaders in Washington are now about to hand additional hundreds of billions of dollars in direct subsidies to the companies most responsible for carbon emissions.

President Obama’s proposal for Cap and Trade was for all allowances to be auctioned to the highest bidder and proceeds largely used to offset the impacts of higher energy costs to citizens, an inevitable near term reality of effective emissions policy. Though not as effective as a straight carbon tax, that would be decent policy. However instead of following the President’s guidance, Congress is now deciding to hand carbon allowances out for free to the industries that currently emit the most carbon.

The Wall Street Journal quotes the President saying just in March “If you’re giving away carbon permits for free, then basically you’re not really pricing the thing and it doesn’t work — or people can game the system in so many ways that it’s not creating the incentive structures that we’re looking for.” White House Budget Director Peter Orszag was even more clear in his March testimony to Congress: “If you didn’t auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States”.

Under Waxman Markey, eighty five percent of initial carbon allowances would be simply given away. Estimates are that those initial allowances could be worth hundreds of billions of dollars annually. This is a massive handout. Effectively, instead of rewarding utility companies and independent power producers who have led the utility industry in developing wind and other clean energy projects over the last decade, Congress is proposing to hand a large portion of these huge subsidies to their competitors who stuck with the dirtiest possible technology. In a report on Cap and Trade, the Congressional Budget Office has estimated that some of these companies could see their market capitalization double and triple almost instantly on the receipt of these free handouts. That’s not a bad reward for companies that maintained the worst emissions policies absolutely as long as possible.

As a real solution, rather than Cap and Trade, a straightforward carbon tax is favored by the vast majority of economists, as well as Greenpeace, Friends of the Earth, NDN, Tom Friedman, James Hansen, Paul Volker, Joseph Stiglitz, William Ruckelshaus, Al Gore, Ralph Nader and a huge majority of knowledgeable people on all sides of the political spectrum who have actually explored the issue. Energy Secretary Stephen Chu also favored a carbon tax up until his political appointment. A straightforward carbon tax is also favored by almost all business groups other than utilities and other polluters angling for massive free carbon credit handouts.

So the fundamental question is the one the New York Times asked: “How did cap and trade……. become the policy of choice in the debate over how to slow the heating of the planet? And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?”

“The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics.”…………….

“[Cap and trade] is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee, which has used such concessions to patch together a Democratic majority to pass a far-reaching bill to regulate carbon emissions through a cap-and-trade plan.”

Bottom line, as Greg Mankiw, Harvard economist and author of the economics text book used in the majority of university economics courses points out: “Cap-and-trade = Carbon tax + Corporate welfare.”

We should also recognize that as part of the Waxman Markey deal, Congress will require state and regional emissions programs like the Regional Greenhouse Gas Initiative (RGGI), that were carefully designed and negotiated over years, will be put on hold for at least five years. It is truly unfortunate that just as the RGGI program is getting off the ground, it will be derailed in order to enable corrupt political shenanigans like this.

It is hard to imagine how congress can pretend to justify enriching the worst polluters in the country and entrenching the market positions with the massive handout now working its way through Congress.

As I argued here, it seems to me a far better response is to endorse the alternative bipartisan bill: H.R. 2380 The Raise Wages, Cut Carbon Act of 2009 which was recently introduced by Representatives Inglis, Flake and Lipinski.

The Miami Herald reports that that H.R. 2380  “would initially impose a tax of $15 a ton of carbon dioxide on the producers and distributors of gasoline, natural gas and coal, with the tax rising to $100 a ton over three decades. The tax increases would be offset by equivalent cuts in payroll taxes, with employers and employees sharing the reductions equally.”

Inglis, Flake and Lipinski calculate that under their bill, customers of coal fired utilities would see cost increases of 83.5 percent in the first year.  They address that direct impact to consumers with an offset to the regressive payroll taxes that impact people and jobs most directly.

Unlike Waxman Markey, The Raise Wages, Cut Carbon Act is both rational and real market oriented legislation. The fundamental premise of the Inglis, Flake and Lipinski bill is to dependably and significantly reduce carbon emissions and realistically stimulate the economy and job growth – all with no net increase in taxes. Perhaps the details around the specific numbers should be debated more. But unlike Waxman Markey, the fundamental principle is sound environmental policy and sound economic policy. And at the very outset it is far more serious than Waxman Market in actually putting a real and very predictable price on carbon emission.

A meaningful carbon tax at the federal level coupled with encouraging ongoing experiments in Cap and Trade at the state and regional effort, like RGGI, would be a far more rational approach to these issues than the original Waxman Markey bill and certainly far more rational than the cynical counterproductive corruption that it has evolved into.

I find it disheartening when very knowledgeable leaders that I usually respect seem eager to accept an ineffective policy based on political expediency. My own idealism suggests that we should hold out for real solutions, less subject to manipulation and corruption. That idealism is born from very real experience of a project developer trying to build good projects in the face of the morass of unintended consequences coming out of the traditional cynical process of political horse trading.

Over the years, the environmental and clean energy communities have been comprised of very practical idealists. If we are to settle for lousy solutions merely because they are politically expedient when they in fact have no practical value, then we well on our way down the slippery slope and are just another part of the problem rather than part of any solution.

In “Is Cap and Trade a Dead Policy Walking?”, Robert Shapiro of the progressive think tank NDN suggests that “after Wall Street’s meltdown, the proposition for another round of the financial merry-go-round that produced the worst economic crisis in our lifetimes seems either very naive or very cynical”. He also suggests that “for years, many politicians and environmental leaders have believed that any kind of tax to deal with climate change would be dead on arrival. That may be changing, especially if the tax is paired up with rebates to take away much of its political sting. More importantly, the costs and lessons of the financial crisis may effectively swamp the prospects for cap-and-trade. If cap-and-trade has become a dead policy walking, those who care deeply about climate change will find that a carbon tax system has become the last, reasonable policy standing”.

In an article entitled “Coal, Electric Industries Big Winners in Climate Bill Deal” , the Washington Independent points out that organizations who signed on to support Waxman Markey just weeks ago are already pulling away as they see the problems with the emerging legislation: “Janet Keating, executive director of the West Virginia-based Ohio Valley Environmental Coalition, said in a statement Friday. “There are some costs that are too high to pay when it comes to the environment, clean air and clean water. We urge Congress to either fix the Waxman-Markey bill or dump it and start over.””

In “Subprime Carbon: Environmentalists Warn About the Next Big Bubble” the Wall Street Journal suggests that “one possible side effect of the financial-market fallout and concerns about more toxic assets” is  “growing support for a straight carbon tax, rather than a complicated cap-and-trade plan.”

Once we get the “economic externalities” of fossil fuels somewhat accounted for in the marketplace that everyone participates in, we will start making real progress. Rather than supporting Waxman Markey’s politically created markets in which only specialized elites can play, truly effective policy would be simple, understandable and implemented in a manner that is very direct and clear in the normal economy that everyone makes transactions within. A straight forward carbon tax is the most effective and efficient way to do that.

Waxman Markey will massively increase costs of electricity and other major carbon emitting processes, but instead of providing a mechanism for average people to cover those costs, the benefits are all being handed to the carbon polluters for free. What single policy could more effectively turn citizens and voters away from trusting anything labeled with an environmental agenda in the future? It is insanity.

Despite the rhetoric, Cap and trade is not market driven policy, won’t reduce carbon emission and will never create what any real alternative solutions to carbon emission actually need to be successful – predictability in the market place.

Unfortunately, it seems that Simon Johnson, the former Chief Economist of the International Monetary Fund may be right in his Atlantic article, “The Quite Coup”, regarding who is really running both political parties of our government these days. But clearly Sen. Dick Durbin (D-Ill is exaggerating when he is widely quoted saying “The banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place”.  Clearly the banks don’t own Congress outright. The utilities and oil companies still have significant ownership and control of our government.

In a recent blog post entitled Then and Now, Harvard’s Greg Mankiw points out very conflicting realities:

“From a Obama-Biden campaign position paper:

Barack Obama and Joe Biden’s cap-and-trade system will require all pollution credits to be auctioned. A 100 percent auction ensures that all large corporate polluters pay for every ton of emissions they release, rather than giving these emission rights away for free to coal and oil companies.

From the Wall Street Journal: “Pollution Politics and the Climate-Bill Giveaway:

Under the House bill, only 15% of the emission permits will be auctioned initially. The rest of the permits will be given away — 2% to oil refiners, 5% to free-standing “merchant” coal plants, 9% to regulated natural-gas distributors, and so on.”

Mankiw then goes on to ask: “So, Mr President, the bill now being considered in Congress is in direct contradiction to your campaign pledge. Will you now please stand up for principle and issue a veto threat?”

Instead of defending their very clear and sensible positions of only a couple months ago, President Obama and Vice President Biden both praised the passage of Waxman Markey by the House Energy and Environment Committee.

If Congress and the President are not willing to stand up for principle and real solutions, then the rest of us have to demand they do.

Perhaps the main reason we should all support solutions that actually make sense is because citizens nationwide are becoming increasingly skeptical and cynical about government as a solution to anything at all. Anyone with doubts about that should just look at the results of the recent ballot initiatives in California. If we allow completely ineffective carbon legislation like the Waxman Markey bill to pass, that is really just another massive handout to Wall Street and other corporate political campaign contributors, it could be decades before voters allow Congress to attempt to do anything useful about all the problems associated with our fossil fuel addiction.

These issues are too important to settle for a feel good, green wash, ineffective pretense of a solution. Now is the time for the environmental and clean energy communities to unite with the general business community around a real solution far less subject to corruption.

Let’s find the courage to regain both our practicality and our idealism. Lets support something that not only makes environmental sense but also makes economic sense. Let’s demand Congress provide a real solution rather than selling out to the oligarchs that Simon Johnson describes. Their lobbyists are being very well served. Its time we all call our congressional representatives and senators and demand our voices be heard.

Lets demand very predictable and dependable higher levels of carbon taxes on those that should be taxed more rather than giving them massive corporate welfare. And lets demand real reductions in employment taxes to help put regular people back to work and help them pay for the increased costs of living that any meaningful carbon solution must inevitably entail.

Anyone actually paying attention knows it is past time to dump Waxman Markey and demand a real solution. Let’s join a very broad politically and economically sensible consensus and unite behind demanding passage of H.R. 2380  “The Raise Wages, Cut Carbon Act of 2009”.

1 Comment

Filed under Climate Policy, Economic Policy, Energy Policy