James Pethokoukis

Politics and policy from inside Washington

Obamacare court ruling gives a shoutout to Tea Party movement

Jan 31, 2011 20:43 UTC

From page 42 of the ruling by Judge  Roger Vinson:

It would be a radical departure from existing case law to hold that Congress can regulate inactivity under the Commerce Clause. If it has the power to compelan otherwise passive individual into a commercial transaction with a third party merely by asserting — as was done in the Act — that compelling the actual transaction is itself “commercial and economic in nature, and substantially affects interstate commerce” [see Act § 1501(a)(1)], it is not hyperbolizing to suggest that Congress could do almost anything it wanted. It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place. If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain for it would be “difficult to perceive any limitation on federal power”[Lopez, supra, 514 U.S. at 564], and we would have a Constitution in name only.

COMMENT

“Obamacare court ruling gives a shoutout to Tea Party movement”-

Which is exactly why Judge Vinson’s hyper-political and confusing misjudgments produced a ruling that’s not only flawed, but hard to respect as a work of legal scholarship.

The outcome of this case was a foregone conclusion. This particular case was brought by conservative state officials from 26 states, who carefully chose the venue. Vinson had already telegraphed the outcome, so the ruling just makes official what everyone expected anyway. Republicans are thrilled, of course, because activist court rulings are to be celebrated, just so long as it’s activism the right can agree with.

So two Republican-appointed federal district court judges have found that the individual mandate, an idea Republicans came up with, is unconstitutional. And two other federal district court judges, appointed by Democratic presidents, came to the opposite conclusion. About a dozen other federal courts have dismissed challenges to the health care law.

In other words, when you hear Pethokoukis say that “courts” have a problem with the Affordable Care Act, remember that it’s actually a minority of the judges who’ve heard cases related to the law.

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America’s fiscal future

Jan 28, 2011 20:19 UTC

Here are two charts that give a good perspective on what the Congressional Budget Office thinks may be the likely U.S. budget path, not the baseline that the media focuses on:

cbo2

cbo1

Uh, yeah, Social Security does have a problem

Jan 28, 2011 19:41 UTC

And it is expertly outlined by IBD’s Jed Graham at the Capital Hill blog:

But the Congressional Budget Office forecast released a day later shows that the coming crisis has drawn one year closer — to 2017.

That year is when Social Security’s disability insurance trust fund is projected to run dry, triggering sharp cuts in disability benefits — reaching about 18% in 2018 — without action from Congress.

A little-discussed reality about Social Security is that it actually has two separate trust funds. The Old Age and Survivors Insurance trust fund is (theoretically) flush, with about $2.4 trillion in interest-bearing IOUs from the Treasury. But the Disability Insurance trust fund is down to about $180 billion and sinking. In fiscal 2010, the Disability Insurance trust fund cashed in about $30 billion in its special-issue Treasury notes, which the Treasury redeemed by floating roughly $30 billion in additional public debt.

The two trust funds are prohibited from transferring resources between them without legal action by Congress, so disability benefits would be slashed starting in 2017 unless something is done.

In theory, a crisis could be averted by transferring some OASI trust fund assets to the DI trust fund. But the longer Washington puts off addressing its long-term budget problem, the more ridiculous such a shift of funny money will appear.

The tough job of cutting corporate taxes

Jan 28, 2011 18:07 UTC

President Barack Obama’s State of the Union speech delivered on an idea he’s been telegraphing for weeks: corporate tax reform. And there are hints the changes he will seek could be major. But some companies will lobby hard against losing tax breaks to pay for a rate cut. Turning even sensible proposals into law is no sure thing.

For the most part, Obama has kept his distance from the long list of recommendations put forward by the debt commission he created last year. Tackling business taxes is turning out to be the exception. The panel suggested lowering the top U.S. corporate rate to 26 percent from 35 percent today and taxing only domestic income as a way of promoting economic growth. Yet it also called for eliminating all business tax breaks to fund the reductions and reduce the budget deficit.

Obama echoed the basic thrust of the panel’s proposal in his national address, though not the specific numbers. But his call for “fundamental reform” that was “revenue neutral,” implies that he wants to do more than just tinker with the existing tax code. Those goals can only be met by sharply lowering the overall rate and dramatically reducing loopholes.  Importantly: Obama did not hint that some of the money from simplifying the tax code be used for lowering the deficit, as the panel suggested. Republicans would likely view that as a tax hike and firmly oppose.

Not all companies will be pleased with the prospect. Some multinational companies, such as Pfizer, Hewlett Packard and Qualcomm, have successfully worked around the current system to have consistently managed effective tax rates closer to 20 percent or lower.

And lobbyists from a host of industries, including venture capital, private equity, and the oil patch, where tax-advantaged master limited partnerships are all the rage, will flood Capitol Hill and claim ending this or that tax subsidy will hurt competitiveness. Just look at this chart (from the NYTimes):

corptax

It’s been 25 years since the tax code was meaningfully reformed. That argues for Obama to slice indiscriminately through the Gordian Knot of corporate welfare by doing away with all business tax favors. Put everyone in the same boat and let markets choose winners. Yet as common-sensible as that sounds, it may be every bit as challenging as passing health and financial reform. This good idea will take some heavy lifting.

But it needs to be done correctly. Americans for Tax reform has some solid suggestions:

1. The rate needs to come down — way down. Our 40 percent rate is much higher than the average European rate of 25 percent. Ideally, we’d want to be under that in order to attract jobs and capital from the rest of the world

2. Don’t raise taxes. The President has argued this should be a tax revenue-neutral exercise. While we would prefer a net tax cut (at least on paper in a static score), revenue-neutrality should be the worst revenue case. This should not be an excuse to raise net taxes (like the President’s Debt Commission did).

3. Move from “worldwide” to “territorial” taxation. As part of reform, the corporate tax system should migrate away from “worldwide” taxation (where all income of U.S. companies from all around the world is liable to be taxed by the IRS) to “territorial” taxation (where only U.S.-source income is taxed). This is what the rest of the world by and large does, and would make all the international deferrals and credits unnecessary.

4. Resist the temptation to lengthen depreciation lives. The proper tax treatment of business purchases is immediate expensing (as was contained in the December tax deal). Going in the other direction by lengthening depreciation lives will only bias toward consumption and away from productive investment. It’s the government picking winners and losers, and hurting economic growth in the process.

5. Remember that the corporate income tax is only the first act of a two-act play. After-tax corporate profits distributed to shareholders are double-taxed as dividends. After-tax corporate profits retained by firms eventually come out in the wash as taxable capital gains to shareholders. An integration of both bites at the apple would truly be a pro-growth and comprehensive tax reform effort on the corporate side.

6. Don’t forget about corporate capital gains and dividends received. Unlike individuals, corporations don’t have a preferential rate on capital gains, and cannot exclude all the dividends received from other corporations. Dealing with the capital stock and portfolio income of corporations is a necessary component to reform.

7. Don’t pick winners and losers. President Obama seems to have a particular vitriol reserved for energy companies, as exemplified (again) in his SOTU speech. This hatred should not cause this sector to suffer more base-broadening than other sectors. Conversely, favored companies should not get light treatment. Rather, the goal of a revenue-neutral corporate tax reform (as opposed to a simple rate cut, which remains ATR’s preference) should be to broaden the base as much as possible in order to lower the rates as much as possible. How individual companies or sectors do is not particularly relevant.

COMMENT

Since human beings are really virtual corporations, to turn the tables a bit, then citizens of all sorts, flesh and blood as well as virtual, should only be taxed on US source income. After all, Europe does that too. No global octopus headquartered in D.C.

A good idea.

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One more from the crony capitalism beat

Jan 27, 2011 22:16 UTC

From the great Jerry Bowyer in Forbes:

The fact that Immelt is a Republican is as beside the point as the fact that Daley is a Democrat. Increasingly our nation is divided, not between Rs and Ds, but between TIs and TBs: tribute imposers and tribute bearers. The imposers are gigantic banks, agri-businesses, higher education Colossae, government employees, NGO and QUANGO employees and the myriad others whose living is made chiefly by extracting wealth from other people. The bearers are the rest of us: the people who extract wealth from the earth, not from others.

Does anyone seriously believe that Bill Daley, son of the founder of Chicago’s great political machine, is something other than a crony capitalist? That he became president of a Baby Bell phone company, created by government fiat, protected by state public utility regulators because of his knowledge of telecommunications technology and not because of his association with power? Does anyone believe that when JPMorgan purchased a regional Chicago bank, which required both federal and especially state regulatory approval, that Daley’s political credentials were irrelevant?

The Daleys of the world, the Rubins of the world, the Rahm Emmanuels of the world who rotate out of commerce secretary, treasury secretary, White House chief of staff positions and into positions at the top of investment banks, government-regulated utility monopolies and various GSEs are our nomenklatura. They are the members of our permanent ruling class. They are tribute imposers. The fact that they wrap themselves in the rhetoric of street-level populism just means that they are poseurs in addition to being imposers.

Are the Republicans, like Immelt, just as bad? No, but they are almost just as bad. And almost just as bad is not nearly good enough.

The latest on states declaring bankruptcy

Jan 27, 2011 20:34 UTC

Some Republicans are against the idea, but a couple of heavy hitters — Jeb Bush and Newt Gingrich — continue to be for it. Here is a bit from their LA Times op-ed:

First, as with municipal bankruptcy, it would have to be completely voluntary.

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc.

Third, the new law should allow for the restructuring of a state’s debt and other contractual obligations.

When California refused to bail out Orange County, the county entered bankruptcy and emerged within 18 months. Within three years, the county returned to an investment grade rating, and it repaid 100% of the principal of the vast majority of its investors by 2000 without raising taxes.

Fourth, the federal judge reviewing the state’s reorganization plan would have the power only to accept the plan as permissible under the federal bankruptcy law, or reject it as inconsistent with that law.

Fifth, the new law should provide for triggering mechanisms to initiate the bankruptcy process that respect the sovereignty of the people of a state.

An additional benefit of a new voluntary bankruptcy law for states is that its mere existence may deter any state from ever availing itself of its provisions. If government employee union bosses know that they could have all their contracts annulled under federal bankruptcy law, either through a plan of reorganization voluntarily entered into by state leaders or by the voters through proposition, they may be far more accommodating with state governments to restructure government employee union workforces, pensions and work rules.

Also, Moody’s has begun to take a closer look at state pension obligations, creating new metrics that combine debt and pension liabilities:

statesmoodys

COMMENT

‘An additional benefit of a new voluntary bankruptcy law for states is that its mere existence may deter any state from ever availing itself of its provisions.’

Precisely. After reading much of Mr. P’s writings on the subject and Felix Salmon’s shocked rejoinders, it occurred to me that this proposed state bankruptcy legislation would likely NEVER be used, much like nuclear weapons during the cold war. Their mere existence was enough to keep the other side in check or, in this case, keeping rapacious public sector union bosses and their followers from looting the state treasury.

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Crony capitalism update

Jan 27, 2011 20:08 UTC

The alliance between Big Money, Big Business and Big Government is something I will be giving a hard look over the coming a year. Two great pieces. First, Tim Carney on Obama and Immelt:

Subsidies are GE’s lifeblood, and Immelt’s own words make that clear. In his op-ed announcing his appointment, Immelt called for a “coordinated commitment among business, labor and government,” and wrote that, “government should incentivize … investment in innovation.” He also advocated “partnership between business and government on education and innovation in areas where America can lead, such as clean energy, are essential to sustainable growth.”

This is Immelt’s style. Days after Obama’s inauguration, the chief executive officer wrote to shareholders of a post-bailout “reset” in the global economy. “In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.”

Sure enough, wherever Obama has led, GE has followed. Obama has championed cap and trade in greenhouse gasses, and GE has started a business dedicated to creating and trading greenhouse gas credits. As Obama expanded subsidies on embryonic stem cells, GE opened an embryonic stem-cell business. Obama pushed rail subsidies, and GE hired Linda Daschle — wife of Obama confidant Tom Daschle — as a rail lobbyist. GE, with its windmills, its high-tech batteries, its health care equipment, and its smart meters, was the biggest beneficiary of Obama’s stimulus.

To get these gears in sync isn’t cheap: The company has spent $65.7 million on lobbying during the Obama administration — more than any other company by far. So much for Obama’s war on lobbyists.

For much of the media, the nuances will be lost: You’re either pro-business or anti-business. But the distinction is crucial between making a profit through subsidy, regulation, and bailouts on one hand, and competition and innovation on the other hand. The latter creates wealth. The former consumes it.

And Mickey Kaus:

Shouldn’t Republicans hold hearings on the general threat of Putin-like corporatism—i.e., an insidious alliance between big government and favored corporate and labor interests? a) They could call GE CEO Jeffrey Immelt to testify and embarrass him about the myriad ways in which his slightly creepy role as CEO and presidential adviser might allow him to benefit his company and squash competitors; b) They could grill the various regulators who might be tempted to favor the auto manufacturers that the government bailed out (and which, in GM’s case, it still owns about a third of). Maybe some GM competitors would even be brave enough to testify. (Exhibit No. 23: Will GM and Chrysler claim all the remaining billions of “green” retooling loan money from Obama’s Department of Energy? Entrepreneurial startups need not apply?) c) They could question whether these bureaucrats and others are also doing favors for other Obama constituencies, like labor unions, or Google; d) They’d appear transpartisan–this is an issue where left and right populists unite. Do they love corporate-government alliances at Daily Kos? It’s also one of the legitimate worries at the heart of TeaPartyism. e) Hearings might help: There is no obvious answer to some parts of the corporatism dilemma, such as the too-big-to-fail part. If lots of firms are now too big to fail—or else their markets are unstable—and if during a downturn the government winds up investing political and economic capital in specific companies, what are you going to do? Bail the companies out and then let them collapse again?

The right response to America’s Sputnik Moment?

Jan 27, 2011 19:56 UTC

I am a little late on this, but AmSpec’s John Guardiano is dead on:

Kennedy didn’t think America was “as strong as [it] should be.” And the reason, he surmised, was that the heavy hand of big government was too onerous. The feds, he realized, were stifling initiative and entrepreneurship. He knew the solution was to cut marginal tax rates. And so he did just that.

Kennedy cut the top marginal rate from 91 percent to 70 percent. He also cut tax withholding rates, instituted a new and more generous standard deduction, and increased deductions for child care and other familial expenses. The result: the economic boom of the 1960s.

FCIC report: 10 causes of the financial crisis

Jan 27, 2011 18:40 UTC

The other dissent (written by Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas) to the main Financial Crisis Inquiry Commission report identifies 10 causes for the meltdown. They run through them in a WSJ op-ed:

Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. The losses spread in two ways. Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.

A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10).

Me: I really like that they looked globally to try to find the common elements between the crises here and there. It is pretty hard to ignore this graphic:

housing

COMMENT

The list of “causes” should have included comparisons to previous great financial manias. This would have observed that since the 1825 example the final phase ran some 12 to 16 months against an inverted yield curve.

The problem during such a boom is not rising interest rates. This confirms that the boom is on. The problem arrives when the curves reverses to steepening, with T-bill rates declining.

This fateful reversal started in May 2007, which was the 15th month of inversion.

The rest, as the saying goes, became history. There are two “rules” that worked. Short rates plunge during the initial bear market and economic contraction. The notion that “cuts” in the Fed rate will reignite a boom is not supported by history.

The other “rule” is that the post-bubble recession starts virtually with the bear market. Using NBER determinations, the 1873 bubble ended in September and the recession started that October. The 1929 bubble ended in that September and the recession started that August. The 2007 bubble ended in October and the recession began in that December.

There are other “rules” but that would take a lot of space.

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