A 40-Year Wish List
You won't believe what's in that stimulus bill.
"Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."
So said White House Chief of Staff Rahm Emanuel in November, and Democrats in Congress are certainly taking his advice to heart. The 647-page, $825 billion House legislation is being sold as an economic "stimulus," but now that Democrats have finally released the details we understand Rahm's point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.
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APWe've looked it over, and even we can't quite believe it. There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.
In selling the plan, President Obama has said this bill will make "dramatic investments to revive our flagging economy." Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There's another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.
Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren't likely to help the economy immediately. As Peter Orszag, the President's new budget director, told Congress a year ago, "even those [public works] that are 'on the shelf' generally cannot be undertaken quickly enough to provide timely stimulus to the economy."
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Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?
Here's another lu-lu: Congress wants to spend $600 million more for the federal government to buy new cars. Uncle Sam already spends $3 billion a year on its fleet of 600,000 vehicles. Congress also wants to spend $7 billion for modernizing federal buildings and facilities. The Smithsonian is targeted to receive $150 million; we love the Smithsonian, too, but this is a job creator?
Another "stimulus" secret is that some $252 billion is for income-transfer payments -- that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There's $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don't pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren't job creators.
As for the promise of accountability, some $54 billion will go to federal programs that the Office of Management and Budget or the Government Accountability Office have already criticized as "ineffective" or unable to pass basic financial audits. These include the Economic Development Administration, the Small Business Administration, the 10 federal job training programs, and many more.
Oh, and don't forget education, which would get $66 billion more. That's more than the entire Education Department spent a mere 10 years ago and is on top of the doubling under President Bush. Some $6 billion of this will subsidize university building projects. If you think the intention here is to help kids learn, the House declares on page 257 that "No recipient . . . shall use such funds to provide financial assistance to students to attend private elementary or secondary schools." Horrors: Some money might go to nonunion teachers.
The larger fiscal issue here is whether this spending bonanza will become part of the annual "budget baseline" that Congress uses as the new floor when calculating how much to increase spending the following year, and into the future. Democrats insist that it will not. But it's hard -- no, impossible -- to believe that Congress will cut spending next year on any of these programs from their new, higher levels. The likelihood is that this allegedly emergency spending will become a permanent addition to federal outlays -- increasing pressure for tax increases in the bargain. Any Blue Dog Democrat who votes for this ought to turn in his "deficit hawk" credentials.
This is supposed to be a new era of bipartisanship, but this bill was written based on the wish list of every living -- or dead -- Democratic interest group. As Speaker Nancy Pelosi put it, "We won the election. We wrote the bill." So they did. Republicans should let them take all of the credit.
I did a thought experiment with some of my students after class yesterday that, I think, illustrates the importance of the economic way of thinking. Imagine the following three pairs of people:
1. LBJ and FDR
2. Bill Gates and Sam Walton
3. Mother Teresa and Gandhi
Now identify which pair people would classify as heroes, which pair people would classify as saints, and which pair people would classify as villains. As one might expect, LBJ and FDR are perceived as heroes, Gates and Walton are perceived as villains, and Mother Teresa and Gandhi are perceived as saints.
I then asked them to rank the group in order of the degree to which they have alleviated genuine human suffering. The students anticipated where I was going with this: I think Gates and Walton are the runaway winners, followed by Mother Teresa and Gandhi. If Robert Higgs is correct, LBJ and FDR have actually created human suffering instead of alleviating it. On ranking the presidents, here's John Denson's edited volume Reassessing the Presidency, which includes a chapter by Richard Vedder and Lowell Galloway on ranking the presidents.
Commentary by Caroline Baum
-- If it seems incongruous for elected officials to talk about budget discipline in the same breath as trillion-dollar deficits, it is.
President-elect Barack Obama is being encouraged by economists of all stripes to err on the side of doing too much to get the economy moving again. The bidding starts at $775 billion; only the naive believe it will stop there.
While Obama was in Washington pushing his agenda last week, the Congressional Budget Office was pouring cold water on the rollout. CBO projects a federal deficit of $1.2 trillion in fiscal 2009, 8.3 percent of gross domestic product, the biggest share of GDP ever with the exception of the periods during the two world wars.
The CBO estimates do not take into account the fiscal stimulus package, a.k.a. the American Recovery and Reinvestment Plan. That package will find a new urgency after Friday’s employment report for December closed the book on 2008 and its 2.6 million job losses, the biggest decline since the end of World War II.
Even scarier for those who measure the size of government by how much it spends is the projected jump in outlays to 25 percent of GDP, according to CBO, the highest since 1945.
If economics is, as it’s sometimes defined, the study of scarcity, then resources available to the private sector just got a whole lot scarcer.
Obama held up government as the only solution to the current problems.
“Only government can provide the short-term boost necessary to lift us from a recession this deep and severe,” he said in a Jan. 8 speech at George Mason University in Fairfax, Virginia. “Only government can break the vicious cycles that are crippling our economy.”
Kindness of Strangers
He neglected to say that only government can borrow trillions of dollars at miniscule interest rates. With yields on Treasury bills close to zero, I’m surprised the government hasn’t come up with a plan to borrow forward. Why not capitalize on the demand for super-safe T-bills and sell three-month bills one year from today?
How long the U.S. can count on the kindness of foreigners is an open question, not to mention a potential Armageddon scenario for the Federal Reserve if the dollar collapses.
Confronted with a fiscal situation that is bad and getting worse, what’s the government to do?
Even some groups dedicated to fiscal discipline concede the government has a responsibility to offset the decline in private demand. That the discretionary spending binge comes at a time when the retiring baby boomers are adding to existing strains on the government’s retirement and health-care systems (Social Security and Medicare) is an unlucky twist of fate -- or perhaps a needed wake-up call.
Like It Is
The challenge is “doing what’s necessary in the short-term without aggravating what’s already a monumental long-term problem,” says Susan Tanaka, director of citizens’ education at the Peter G. Peterson Foundation, a group dedicated to increasing public awareness about America’s fiscal future. The spending and tax cuts “should be temporary, targeted and efficient,” she says. “There is never an excuse for wasting money.”
Some of Obama’s supposed $300 billion in tax cuts -- credits for workers who pay no income tax, for instance -- is government spending by another name. (The first step in greater transparency is telling it like it is.)
Even in the face of $56.4 trillion of unfunded promises for future Social Security and Medicare beneficiaries -- $483,000 per household -- some economists are arguing that bigger (fiscal stimulus) is better. They cite statistics showing that every $1 of public spending translates into $1.50 of GDP.
Performance Czarina
If that’s the case, “why not do it every year?” says Andy Laperriere, managing director at the ISI Group in Washington.
The way he sees it, if consumers use the $150 billion of “tax cuts” to pay down credit-card debt, “we have $150 billion in government debt,” the burden of which ultimately falls on the taxpayer. The transaction boosts “short-term GDP at the expense of long-term GDP,” he says.
“The only way the stimulus package makes sense is to halt a downward spiral, to stop a freefall,” he says.
Obama promises the stimulus package will be kosher (pork- free, in other words). Management consultant McKinsey & Co. will be looking over his shoulder to ferret out any government waste and inefficiencies. (Former McKinsey consultant Nancy Killefer was named to the new post of chief performance officer.) And all those bridges that will be part of infrastructure spending? I have one or two to sell you.
Dire Straits
The dire state of federal finances presents an opportunity to educate the public, make the costs of government programs more transparent and “change the political environment so lawmakers can make the decisions they need to make,” Tanaka says.
“We talk about finding ‘efficiencies’ in health care, but these are euphemisms for not being able to get the volume of services we’re used to,” she says. “Everybody wants coverage. What are they willing to pay for it?”
Medical care may appear to be “free” to employees whose insurance premiums are paid by the company, but “it’s not free,” Tanaka says. “It’s coming out of wages.”
Until voters accept that there’s no free lunch, it’s hopeless to expect politicians to get the message.
Commentary by Kevin Hassett
Jan. 20 (Bloomberg) -- There is one way to be sure that you are complying precisely with U.S. tax law: read the entire code. Problem is, it currently contains about 3.4 million words. That’s like reading “War and Peace” six times.
If you did spend the month that it would take the typical American to read the tax code, and somehow miraculously survived the ordeal, odds are that you might miss the following fun tidbit: If you are employed by the International Monetary Fund, then you have to act as if you are self-employed, and pay your own payroll tax.
While the IMF informs its employees of this special requirement, it and other similar institutions have not done a good job assuring compliance. Indeed, it is so common for employees of international organizations to incorrectly calculate, or evade, their self-employment taxes that, in 2007, the IRS offered a “one-time settlement initiative” for former and current employees. They were offered generous amnesty incentives in order to get “into compliance.”
That might have been the end of the story, except for President-elect Barack Obama’s decision to nominate Timothy Geithner as Treasury secretary. Geithner’s nomination found itself in neutral last week because he made the same error.
Geithner neglected to pay self-employment tax on his IMF income from 2001 to 2004. He was audited in 2006 for tax years 2003 and 2004 and paid back taxes of $12,719 in 2003 and $2,128 in 2004, plus $1,885 in interest payments. The IRS waived tax penalties for these years.
A Vetting Embarrassment
Geithner made similar mistakes in 2001 and 2002, and it was only during his recent vetting for the Obama appointment that he paid $25,970 in taxes and interest for those years.
Since Treasury oversees the Internal Revenue Service, it is certainly an embarrassment for Geithner that he neglected to pay taxes. Such an error should disqualify him for political appointment only if it was intentional, and two bits of evidence do suggest it wasn’t a mistake.
First, IMF employees are given ample notification of their responsibility. Geithner even signed a “Tax Allowance Application,” which confirmed that he wished “to apply for tax allowance of U.S. Federal and State income taxes and the difference between the ‘self-employed’ and ‘employed’ obligation of the U.S. Social Security tax which I will pay on my Fund income.” So his claim of innocence means he was willing to sign a document without reading it.
Second, Geithner knew after his audit in 2006 that he had made the same mistake in previous years, but he only paid up when he was nominated to be Treasury secretary. Some have pointed to this as a sign that he intended to avoid the tax.
Made Correct Call
But it turns out that Geithner probably made the correct judgment in this case. While there is no statute of limitations for tax fraud, the IRS only audits tax returns going back three years. If you made a mistake four years ago, the case is considered closed. It is likely that the IRS auditor told Geithner he wasn’t responsible for the previous mistakes at the time of his audit. He really didn’t need to pay up for 2001 and 2002, except to manage appearances.
So in the end, Geithner’s only real problem is that he signed a paper that informed him that he had to pay self- employment tax, and then didn’t do so. Such a mistake is so plausibly innocent that the IRS itself didn’t impose a penalty on him. (As a result of recent scrutiny by the Senate Finance Committee, Geithner paid additional tax of $4,334 and interest of $1,232 for other errors.)
For me, this tax episode is more reason to support Geithner, not less. I would rather have a person running the IRS who has an appreciation of how Kafkaesque our tax system and its enforcement bureaucracy can be. There probably has never been a Treasury secretary more motivated to simplify the tax code.
Legitimate Policy Concerns
There are legitimate concerns about Geithner. He has been president of the New York Federal Reserve for the past five years. The New York Fed’s primary role is to be the U.S. government’s eyes and ears in financial markets. And yet the carnage that we have seen this year has taken us totally by surprise. The eyes and ears failed us.
It wouldn’t have made sense to promote the man in charge of Hawaiian reconnaissance to be supreme allied commander after Pearl Harbor. Appointing Geithner to Treasury is a similar jump.
Obama’s nominee should have to answer tough questions about his previous failures -- the policy ones, not the personal ones - - before he is confirmed. How is it that Wall Street as we knew it ended on his watch? What did he do wrong? And how can we be sure that he will not do for America what he did for Wall Street?
Americans deserve answers to these questions. They will only get them if everyone agrees before his confirmation that his tax problems are a sideshow.
Jan. 28 (Bloomberg) -- The global economy will slow close to a halt this year as more than $2 trillion of bad assets from the U.S. help sink economies from Russia to the U.K., the International Monetary Fund said.
Bank losses worldwide from toxic U.S.-originated assets may reach $2.2 trillion, the IMF said in a report released today, more than the $1.4 trillion that the fund predicted in October. World growth will be 0.5 percent this year, the weakest postwar pace, the fund said in a separate report.
The reports signal that writedowns and losses at banks totaling $1.1 trillion so far are only half of what’s to come and that contractions may deepen. Losses on that scale would leave banks needing at least $500 billion in fresh capital to restore confidence in their balance sheets, the IMF said.
“Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth,” the IMF said.
The IMF’s latest forecast revises its estimate of world growth down from 2.2 percent in November.
U.S. gross domestic product will contract 1.6 percent, Japan’s will shrink 2.6 percent and the euro area will decline 2 percent in 2009, the IMF said. The fund in November foresaw a 0.7 percent U.S. contraction, with declines of 0.2 percent in Japan and 0.5 percent in the euro zone.
Leading the Group of Seven nations in contraction this year will be the U.K. economy, which the IMF predicted would slide 2.8 percent, compared with the fund’s forecast in November for a 1.3 percent drop.
‘Standstill’
Global growth this year will come to a “virtual standstill,” said Olivier Blanchard, the IMF’s chief economist, in a press conference in Washington. “We need stronger policy on the financial front.”
In the U.S., President Barack Obama is negotiating with Congress on a plan worth $825 billion that includes tax cuts and spending projects to pull the world’s largest economy out of a 13-month recession.
The Federal Reserve meets today in Washington to decide how to use emergency credit programs, rather than interest rates, to arrest the financial crisis.
The European Central Bank has cut its benchmark interest rate by more than half since early October to 2 percent, matching a record low. Governments are also beginning to ease fiscal policy as the 16-nation euro-region suffers its worst recession since the single currency began trading a decade ago.
Timely Stimulus
Advanced and developing countries need to be “even more supportive” of demand than they already have been, with lower interest rates and fiscal stimulus, the lender said. The fund urged “timely” passage of fiscal aid, saying “any delays will likely worsen growth prospects.”
The Obama administration and federal regulators are considering setting up a “bad bank” that would absorb illiquid assets from otherwise healthy financial firms.
The IMF said “the restructuring process might involve the use of a publicly owned ‘bad bank’ to remove distressed assets from the balance sheets of institutions.” Governments should “move expeditiously toward recapitalization” and disposal of bad debt, the IMF said.
The fund said that banks needed at least $500 billion of new cash “just to prevent their capital position from deteriorating further.”
Hedge Funds
Hedge funds may have halved in size in the last three months of 2008, the fund said, dragged down by a combination of asset-price declines and investors withdrawing their money. Such a decline was “a particular concern for those markets in which hedge funds provided a significant proportion of market trading liquidity,” the IMF said.
“Downside risks continue to dominate, as the scale and scope of the current financial crisis have taken the global economy into uncharted waters,” the report said. “A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged.”
China’s economy will likely expand 6.7 percent this year, the IMF said, reducing its estimate for the world’s fastest- growing major economy from 8.5 percent in November. Russia will contract 0.7 percent this year, compared with a 3.5 percent expansion the IMF predicted in November, today’s report showed.
Inflation Outlook
The IMF report said inflation in advanced economies may fall to a record low of 0.3 percent this year, from a prediction in November of 3.6 percent. The average price of oil may be $50 a barrel this year, the IMF said, less than the $68 a barrel forecast it made three months ago.
Companies around the world are cutting workers by the thousands, raising the risk of even weaker consumer spending.
Walldorf, Germany-based SAP AG, the world’s biggest maker of business-management software, said today it will slash more than 3,000 jobs this year. Earlier this week Caterpillar Inc., Sprint Nextel Corp., Home Depot Inc. and ING Groep NV led companies announcing at least 74,000 job cuts as sales withered amid the global economic recession.
Ethics Order Affects Aide to Geithner
T.W. FARNAM
WASHINGTON -- The new chief of staff to Treasury Secretary Timothy Geithner was a top lobbyist for Goldman Sachs Group Inc. until last year, and will have to recuse himself from some government duties under new White House ethics rules.
The appointment of Mark Patterson runs into an executive order President Barack Obama signed to limit the ability of officials to move between industry and government. The order, part of a campaign promise to curb the influence business, allows lobbyists to join the administration as long as they don't work on the subjects they tried to influence for a period of two years.
Before Mr. Patterson left Goldman in April, he was vice president for government relations, and was registered to lobby Congress on legislation including energy tax credits and Indian gaming, according to disclosure forms filed with Congress. Mr. Patterson monitored other issues moving through Congress that Goldman never took a position on, including foreclosure-prevention measures and shareholder votes on executive compensation.
"Mr. Patterson has a long history of public service in the United States Senate. He brings significant expertise to the job of chief of staff, and has agreed to a far-reaching ethics pledge to remove any hint of a conflict of interest," said Treasury spokeswoman Stephanie Cutter. The pledge, outlined in the executive order, requires him to recuse himself from topics he lobbied on.
Last week, the Obama administration issued a waiver of the rules for another high-level staffer, William Lynn, who was appointed to be the deputy secretary at the Department of Defense. Mr. Lynn, formerly a registered lobbyist for Raytheon Co., where he was the senior vice president of government operations, was exempted from the requirement to remove himself from dealings with his former company or the issues that he addressed.
Several recent appointees have lobbied for groups that are close allies of the new president, including Patrick Gaspard, the new White House political director, who was registered by the Service Employees International Union to work on passing an expansion of funding for children's health insurance. A White House spokesman said Mr. Gaspard will recuse himself from matters dealing with that legislation and that a waiver will be granted to another administration employee, Cecilia Munoz, the new director of intergovernmental affairs, who was a lobbyist for The National Council of La Raza, a Hispanic advocacy organization.
Mr. Obama's pick for U.S. trade representative, former Dallas mayor Ron Kirk, was registered to lobby at the state level but not with the federal government. In the past two years, he took in more than $1 million in lobbying revenue from financial and energy firms, according to documents filed with the Texas Ethics Commission. The executive order applies only to lobbyists at the federal level.
Other appointees have worked to sway government but never officially registered to lobby Congress themselves, including Tom Daschle, Mr. Obama's choice to lead Health and Human Services. The former senator served as an adviser to lobbying firm Alston and Bird LLP.
U.S. Stocks Gain, Extending Global Rally
Jan. 28 (Bloomberg) -- U.S. stocks rose, extending a global rally, as President Barack Obama prepared to set up a so-called bad bank to absorb toxic investments and Yahoo! Inc. and Germany’s SAP AG reported better-than-estimated earnings.
Citigroup Inc. and Bank of America Corp. surged more than 13 percent after a White House official said Obama’s team may announce the outlines of its plan next week. Deutsche Bank AG and Barclays Plc added at least 18 percent in Europe. Yahoo and SAP, the largest maker of business-management software, climbed more 5.2 percent. The Standard & Poor’s 500 Index gained for a fourth straight day, its longest streak since November.
“The impact of the bad bank idea is positive for equities in that it moves us in the direction of finding a solution to the cloud of bad assets that continue to weigh on proper valuations,” said Alan Gayle, senior investment strategist at Ridgeworth Capital Management, which oversees $70 billion in Richmond, Virginia. It’s “giving nervous markets a lift.”
The S&P 500 added 3.4 percent to 874.09, with financial companies posting 19 of the top 20 gains. The Dow Jones Industrial Average climbed 200.72 points, or 2.5 percent, to 8,375.45. Europe’s benchmark, the Dow Jones Stoxx 600 Index, rose 3.2 percent and the MSCI Asia Pacific Index gained 0.5 percent.
Benchmark indexes climbed to their highs after the Federal Reserve left its benchmark interest rate as low as zero and said it may keep it at “exceptionally low levels” for some time. The S&P 500, which has dropped for three straight weeks, is still 16 percent above an 11-year low reached on Nov. 20 amid optimism that Obama’s stimulus package will revive the economy.
Stimulus, ‘Bad Bank’
Treasuries fell, led by the biggest decline in 30-year bonds in three weeks, after the central bank failed to expand on its plan to buy government debt as a means to reducing borrowing costs. The dollar gained against the yen and euro as the Fed resolved to do whatever is needed to revive the economy.
The U.S. House is set to approve Obama’s proposed $816 billion economic stimulus package. The plan is aimed at pulling the economy out of recession through a combination of tax cuts and $604 billion in spending.
Citigroup added 66 cents, or 19 percent, to $4.21, while Bank of America, the largest U.S. lender by assets, jumped 89 cents to $7.39. JPMorgan Chase & Co. climbed 10 percent to $27.66. Fifth Third Bancorp and State Street Corp. jumped more than 31 percent.
Financial companies in the S&P 500 rallied 13 percent collectively, with 79 of 81 companies advancing.
‘Relief Rally’
The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks’ toxic debt, in the hope of stemming a crisis that has stripped more than 1.3 million Americans of their homes. The S&P 500 fell 38 percent last year, the most since the Great Depression, after the collapse of Lehman Brothers Holdings Inc. froze credit markets and more than $1 trillion in losses at financial firms eroded profits.
“You’re getting a big relief rally in the financials and that’s lifting the whole market,” said Michael Binger, Minneapolis-based fund manager at Thrivent Asset Management, which oversees about $70 billion. “If the bad assets can be taken out, banks will feel more comfortable in where their capital ratios will be. And if that’s the case, they’ll be more ready to lend and the credit market freeze will thaw.”
Wells Fargo & Co., the second-biggest U.S. home lender, rallied 31 percent to $21.19. The bank maintained its dividend and said it doesn’t need more federal aid as it reported its first quarterly loss since 2001 following its takeover of Wachovia Corp.
Earnings Watch
Yahoo, owner of the second-most-popular U.S. search engine, added 7.9 percent to $12.24. Excluding items such as stock-based compensation, earnings were about 18 cents a share, buoyed by job cuts and rising domestic sales. That beat the 17 cents estimated by analysts in a Bloomberg survey.
Carol Bartz, in her first earnings conference call as chief executive officer, said she would consider offers to buy the company’s assets, while adding that she didn’t come to Yahoo with the intention of selling it.
Profits decreased 41 percent for the 144 companies in the S&P 500 that have released fourth-quarter results since Jan. 12. Analysts now forecast a 32 percent drop in earnings for the fourth quarter after saying in March 2008 that net income would rise as much as 55 percent, according to Bloomberg data.
Sun Rallies
Sun Microsystems Inc. added 22 percent to $4.86. The world’s fourth-largest maker of server computers reported sales and earnings that topped analysts’ estimates after cutting jobs to cope with the recession.
Life insurers advanced after state insurance commissioners endorsed industry proposals to loosen capital requirements, paving the way for a potential vote on Jan. 29 to change reserving rules. MetLife Inc., the biggest U.S. life insurer, jumped 20 percent to $33.27.
Deutsche Bank, Germany’s largest, surged 22 percent to 22.15 euros in Frankfurt. Barclays, the U.K. lender that turned down government funding last year, rallied 19 percent to 107 pence in London.
There are some signs that the Fed’s action has begun to thaw credit markets. Sales of commercial paper totaled $1.69 trillion last week, up from October’s low of $1.45 trillion, though down from $1.76 trillion in the first week of the year.
The cost of borrowing dollars in London for three months rose to a two-week high this week as confidence in the banking system weakened. The London interbank offered rate, or Libor, for three-month loans slipped 1 basis point to 1.17 percent today, according to British Bankers’ Association data. Libor had surged to 4.82 percent on Oct. 10. The TED spread, the difference between what the U.S. government and companies pay for loans for three months, fell 5 basis points to 100 basis points. The spread was 464 basis points on Oct. 10.
“The Fed has already dipped their toe into quantitative easing, now they want to see how far the credit markets thaw before they do anything big,” said Stephen Wood, who helps manage $150 billion as a senior portfolio strategist at Russell Investments in New York.
Geithner Says ‘Range of Options’ Considered
Jan. 28 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner said the department is considering a “range of options” for its financial rescue plan, with the goal of preserving the private banking system.
“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” he told reporters today in Washington.
Geithner was asked about the prospects of bank nationalization before a meeting with several officials charged with providing oversight for the $700 billion financial rescue effort. He said the administration would move “relatively soon” to announce its strategy.
“We are putting together what we hope will be a comprehensive plan for helping repair the financial system and bring recovery as a critical component to the president’s commitment to get growth going again and bring the economy back on track,” Geithner said.
Under pressure from lawmakers and taxpayers, upset that the rescue plan shows few signs of lifting the economy, the Obama administration plans to overhaul the effort. Geithner fielded questions from reporters for the first time as Treasury chief.
Without commenting on whether the administration would create a so-called bad bank to absorb troubled assets, Geithner said: “We’re looking at a range of options in that context and we hope to be in a position relatively soon to lay out what we believe is a viable program.”
TARP Oversight
The officials at the meeting included Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, and members of the Congressional Oversight Panel headed by Harvard law professor Elizabeth Warren.
Under Geithner’s predecessor, Henry Paulson, the Treasury allocated about half of the $700 billion program to inject capital into banks, help automakers, and guarantee assets for Citigroup Inc. and Bank of America Corp.
In its rescue efforts so far, the Treasury has taken ownership stakes in more than 300 banks as a condition of receiving aid. The government usually receives preferred shares and warrants, which can be converted into common stock and cashed out at the government’s request.
The Treasury, under the TARP, has not sought voting rights or control over day-to-day business.
Geithner, who took office two days ago, has pledged to make the bailout more transparent and yesterday offered plans to shield the program from political influence. Today Geithner said the Treasury will post contracts with TARP participants on the department’s Web site within days after deals are done.
“That’ll give the American public a chance to see those, to look at the detailed terms and conditions, in a relatively short time period after they’re concluded,” Geithner said.
When Darwin Meets Dickens
Nick Guillespie
Editor's note: This is the third installment of Nick Gillespie's coverage of the Modern Language Association's annual meeting. Read part 1, Who's Afraid of the MLA?, here and part 2, The Kids Are Alright, Dammit, here.
One of the subtexts of this year's Modern Language Association conference -- and, truth be told, of most contemporary discussions of literary and cultural studies -- is the sense that lit-crit is in a prolonged lull. There's no question that a huge amount of interesting work is being done -- scholars of 17th-century British and Colonial American literature, for instance, are bringing to light all sorts of manuscripts and movements that are quietly revising our understanding of liberal political theory and gender roles -- and that certain fields -- postcolonial studies, say, and composition and rhetoric -- are hotter than others. But it's been years -- decades even -- since a major new way of thinking about literature has really taken the academic world by storm.
If lit-crit is always something of a roller-coaster ride, the car has been stuck at the top of the first big hill for a while now, waiting for some type of rollicking approach to kick in and get the blood pumping again. What's the next big thing going to be? The next first-order critical paradigm that -- like New Criticism in the 1940s and '50s; cultural studies in the '60s; French post-structural theory in the '70s, and New Historicism in the '80s -- really rocks faculty lounges? (Go here for summaries of these and other movements).
It was with this question in mind that I attended yesterday's panel on "Cognition, Emotion, and Sexuality," which was arranged by the discussion group on Cognitive Approaches to Literature and moderated by Nancy Easterlin of the University of New Orleans. Scholars working in this area use developments in cognitive psychology, neurophysiology, evolutionary psychology, and related fields to figure out not only how we process literature but, to borrow the title of a forthcoming book in the field, Why We Read Fiction.
Although there are important differences, cognitive approaches often overlap with evolutionary approaches, or what The New York Times earlier this year dubbed "The Literary Darwinists"; those latter critics, to quote the Times:
"...read books in search of innate patterns of human behavior: child bearing and rearing, efforts to acquire resources (money, property, influence) and competition and cooperation within families and communities. They say that it's impossible to fully appreciate and understand a literary text unless you keep in mind that humans behave in certain universal ways and do so because those behaviors are hard-wired into us. For them, the most effective and truest works of literature are those that reference or exemplify these basic facts."
Both cognitive and evolutionary approaches to lit-crit have been gaining recognition and adherents over the past decade or so. Cognitive critics are less interested in recurring plots or specific themes in literature, but they share with the Darwinists an interest in using scientific advances to help explore the universally observed human tendency toward creative expression, or what the fascinating anthropologist Ellen Dissanayake called in Homo Aestheticus: Where Art Comes From and Why, "making special."
This unironic -- though hardly uncritical -- interest in science represents a clear break with much of what might be called the postmodern orthodoxy, which views science less as a pure source of knowledge and more as a means of controlling and regulating discourse and power. The postmodern view has contributed to a keener appreciation of how appeals to science are often self-interested and obfuscating. In this, it was anticipated in many ways by libertarian analyses such as F.A. Hayek's The Counter-Revolution of Science: Studies on the Abuse of Reason (1952) and Thomas Szasz's The Myth of Mental Illness, which exposed a hidden agenda of social control behind the helper rhetoric of the medical establishment and, not uncoincidentally, appeared the same year as Michel Foucault's The Birth of the Clinic. (For more on connections between libertarian thought and postmodernism, go here and here.)
At the same time, the postmodern view of science as simply one discourse among many could be taken to pathetic and self-defeating extremes, as the Sokal Hoax, in which physicist Alan Sokal published a secret parody in a leading pomo journal, illustrated. Indeed, the status of science -- and perhaps especially evolution and theories of human cognition that proceed from it -- in literary studies is curious. On the one hand, a belief in evolution as opposed to creationism or Intelligent Design is considered by most scholars a sign of cosmopolitan sophistication and a clear point of difference with religious fundamentalists. On the other hand, there are elements of biological determinism implicit in evolution that cut against various left-wing agendas -- and against the postmodern assertions that all stories are equally (in)valid.
Yet if evolution is real in any sense of the word, it must have a profound effect on what we do as human beings when it comes to art and culture.
Which brings us back to the "Cognition, Emotions, and Sexuality" panel, which sought, pace most literary theory of the past few decades, to explore universal processes by which human beings produce and consume literature. That alone makes the cognitive approach a significant break with the status quo.
The first presenter was Alan Palmer, an independent scholar based in London and the author of the award-winning Fictional Minds. For Palmer, how we process fiction is effectively hardwired, though not without cultural emphases that depend on social and historical context; it also functions as a place where we can understand more clearly how we process the "real" world. After summarizing recent cognitive work that suggests "our ways of knowing the world are bound up in how we feel the world...that cognition and emotion are inseparable," he noted that the basic way we read stories is by attributing intentions, motives, and emotions to characters. "Narrative," he argued, "is in essence the description of fictional mental networks," in which characters impute and test meanings about the world.
He led the session through a close reading of a passage from Thomas Pynchon's The Crying of Lot 49. The section in question was filled with discrepant emotions popping up even in the same short phrases. For instance, the female protagonist Oedipa Maas at one point hears in the voice of her husband "something between annoyance and agony." Palmer -- whose argument was incredibly complex and is hard to reproduce -- mapped out the ways in which both the character and the reader made sense of those distinct emotional states of mind. The result was a reading that, beyond digging deep into Pynchon, also helped make explicit the "folk psychology" Palmer says readers bring to texts -- and how we settle on meanings in the wake of unfamiliar emotional juxtapositions. As the panel's respondent, University of Connecticut's Elizabeth Hart, helpfully summarized, Palmers' reading greatly "complexified the passage" and was "richly descriptive" of the dynamics at play.
The second paper, by Auburn's Donald R. Wehrs, argued that infantile sexual experiences based around either the satisfaction of basic wants by mothers or proximity to maternal figures grounded the metaphors used by various philosophers of religious experience. Drawing on work that argues that consciousness emerges from the body's monitoring itself in relation to objects outside of it, Wehrs sketched a metaphoric continuum of images of religious fulfillment with St. Augustine at one end and Emmanuel Levinas on the other; he also briefly located the preacher Jonathan Edwards and Ralph Waldo Emerson on the continuum too. As Hart the respondent noted, Wehrs showed that there's "an emotional underwebbing to the history of ideas." That is, a set of diverse philosophers expressed a "common cognitive ground rooted in infantile erotic experience rather than practical reasoning."
Augustine, says Wehrs, conflates the divine and human and locates the origin of love and religious ecstasy with the stilling of appetite or desire. In essence, peace is understood as the absence of bad appetites, which accords with one basic infantile erotic or physical response to wants. Levinas, on the other hand, also draws on infantile experience but focuses not on ingestion but on proximity to the mother. Both of these reactions are basic cognitive realities that all humans experience as infants; together, they create a range of possible metaphors that recur in religious discussions. On the one hand, Augustine talks of being one with God (and the mother), of an inviolate bond that shows up in somewhat attenuated form in Jonathan Edward's imagery of being penetrated by God. On the other, Levinas stresses proximity to the Other, which mirrors infantile cognitive experience of closeness with the mother. This understanding, he said, is also reflected in Emerson's metaphors of resting and laying in Nature.
Will cognitive approaches become the next big thing in lit-crit? Or bio-criticism of the Darwinian brand? That probably won't happen, even as these approaches will, I think, continue to gain in reputation and standing. More to the point, as I argued in a 1998 article, these scholars who are linking Darwin and Dickens have helped challenge an intellectual orthodoxy that, however exciting it once was, seems pretty well played out. In his tour de force Mimesis and the Human Animal: On the Biogenetic Foundations of Literary Representation (1996), Temple's Robert Storey -- one of Nancy Easterlin's doctoral advisors -- warns:
"If [literary theory] continues on its present course, its reputation as a laughingstock among the scientific disciplines will come to be all but irreversible. Given the current state of scientific knowledge, it is still possible for literary theory to recover both seriousness and integrity and to be restored to legitimacy in the world at large."
Ten years out, Storey's warning seems less pressing. The lure of the most arch forms of anti-scientific postmodernism has subsided, partly because of their own excesses and partly because of challenges such as Storey's. As important, the work being done by the cognitive scholars and others suggest that literature and science can both gain from ongoing collaboration.
Nick Gillespie is Editor-in-Chief of Reason.
19th Century Taxes in the 21st Century Economy
By Kevin Hassett
Over the past few decades, economists have spent a great deal of effort understanding the optimal design of the tax code. One undisputed result is that the government should try not to play favorites, taxing one activity much heavier than other. Even that simple maxim is absent from current law, however, because policies enacted many decades ago have acquired a life of their own.
The importance of neutral taxation was not always universally recognized. Back in the Great Depression, for example, Herbert Hoover signed the Revenue Act of 1932 to boost federal revenue. Included in the Act was a series of excise taxes, designed to raise revenue in the short term, many of which were set to expire in 1934. The IRS collected excise duties on a host of goods including chewing gum, soda fountain syrup, and refrigerators. Taxable goods that were regarded as luxuries, opera glasses for example, were subject to higher taxes than goods more commonly regarded as necessities, with the notion that the poor wouldn't have to bear the brunt of government's new fundraising exercise. Cheap paper matches in books, for example were taxed at a rate of 0.5 cents per 1,000, while those who insisted on lighting their candles with "fancy wooden matches" would have to consider the 5 cents per 1000 matches rate at which these luxury matches were taxed.
For the federal government to enact taxes to raise emergency funds for wars or the Depression is not without precedent, but these taxes typically come off the books when the immediacy of the revenue crunch subsides. Consumers can now buy opera glasses and matches without facing depression era excise taxes. Unfortunately, the federal government is not always so ready to scrap such tax code anachronisms.
Perhaps, the most ludicrous example of this phenomenon is the federal telephone excise tax, which currently imposes a 3 percent tax on local and long distance telephone service. The tax was first enacted in 1898 to help fund the Spanish American war effort, in an era when telephones were regarded as luxuries. Unlike taxes on opera glasses and fancy matches however, this tax is still in effect, long after the battle of San Juan Hill, and long after telephone service was considered a luxury.
Not only is the tax the product of a 19th century war, it is also the product of a 19th century economy.
While telephone use may have been regarded as a luxury in 1898, and the original imposition of the tax could have been viewed as progressive, times have changed in the last 100 years. The tax today is regressive, unduly burdening the poor. According to the Tax Foundation, in 2001, the poorest quintile of the population bore the highest burden as a percentage of income of the telephone excise tax. This finding is consistent with a recent paper I co-wrote with Anne Moore which shows that the poor are increasingly responsible for the nation's sales and excise taxes.
But it gets worse. As written, the federal telephone excise tax imposes a surcharge on local and long distance service charges based on time and distance. The applicability of the telephone tax as such, is now in question as many service providers charge on the basis of price or distance, or by charging a single, flat rate. Many taxpayers are challenging the tax in the U.S. court system. They do so for a good reason. The clear meaning of the law excludes many current telecom bundles from taxation.
With a string of legal victories against the IRS (there are currently no rulings in favor of the IRS), most recently in the 11th Circuit Court of Appeals, taxpayers may succeed in shelving this antiquated tax. Unfortunately, the IRS continues to litigate these cases, despite its losing record, and despite the fact that a targeted tax on a specific activity is against everything we know about efficient tax design.
The fight may have to be taken to the Supreme Court before a final judgment is rendered, a long and expensive process. As an IRS spokesman recently told the Tampa Tribune, "It can happen that, in spite of what different courts rule, we're not bound by those rulings, unless it's a [U.S.] Supreme Court ruling.
"Unless the statute is changed," he continued, "we have to continue to collect the tax." He has it exactly wrong. Given that the statute has not changed, they must stop collecting the tax
The ongoing legal battle notwithstanding, some encouragement can be found on Capitol Hill. Two bills currently making their way through Congress, one in the House Ways and Means committee and one in the Senate Finance committee, call for a repeal of the tax. Before the legal morass draws on any further, and businesses and taxpayers continue to pay taxes that the courts have repeatedly rejected, Congress should work to repeal the federal telephone excise tax, which belongs in history books, like the Spanish American War.
Dr. Kevin Hassett is the director of the economic policy studies group and a resident scholar at the American Enterprise Institute. Before arriving at AEI, Dr. Hassett was a senior economist at the Board of Governors of the Federal Reserve System and associate professor of economics and finance at the Graduate School of Business of Columbia University.
THE PROMISE OF GAS
| The Promise of Gas | |
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| By Jens F. Laurson & George A. Pieler | |
In his inaugural address, President Obama observed that, "Each day brings further evidence that the way we use energy strengthens our adversaries". Tell it to Europe, Mr. President.
Russia has resumed delivering Gas to Europe—for now. The latest crisis, with dramatic visuals from freezing Bulgarians, is out of the headlines, but the issue is only becoming more important. Europe's future will be shaped, if not determined, by how soon Western politicians realize the need for a sound, non-ideological energy policy. All talk of—and lofty ideas about—a common foreign policy is but smoke and mirrors if Europe cannot generate with a common energy policy. Energy policy is foreign policy, and it has been for some years. Those who think they can separate foreign- and energy- policy fool themselves.
Russia, with barely rational (or plausible) pretenses regarding its dealing with the Ukraine, cuts off EU countries from essential gas supplies for political reasons. Russia's leadership is adept at arguing 'market forces' drive its actions, but even if they were less disingenuous, those arguments relate only to the Ukraine. That countries like Bulgaria, with low reserves, experience real suffering as a result is blamed on Kiev, as if Moscow were not the source of the gas-flow stoppage and as if Europe's coldest January in years had not been deliberately chosen for this showdown.
The causes for interrupting gas service are manifold, and the Ukraine paying market prices for the Russian share of its gas—on paper a perfectly sound proposition, even if it is politically motivated—is the least of them. Russia wants control of the pipelines, just as they managed to do in Belarus. Russia wants to discredit the Ukraine as unreliable in energy matters, thus forcing the Germans' hand to finally get the "Nordstream" pipeline built through the Baltic Sea, a pet project of Vladimir Putin and Nordstream Chair Gerhard Schroeder, also backed by Chancellor Merkel.
Russia certainly doesn't want the Nabucco pipeline built—it transects the Caucus but bypasses Russia itself, piping gas from the Caspian Sea. Lest we forget, Russia target-bombing just missed the Baku-Tblisi-Ceyhan pipeline in Georgia last August, sending a decisive message. Indeed scaring Europe off using Georgia as a pipeline route became a key Russian objective in the Georgian conflict. Bullying works, and as Russia grapples with plummeting oil and gas prices that threaten its economic viability, it's their cheapest foreign policy tool.
Russia may see this as their last hope for ensuring German dependence (and much of Europe's) on Russian gas. Threats to energy supply are Russia's greatest source of leverage over European (and NATO, EU) policy decisions, even if the price for gas drops further. In the latter case, a guaranteed buyer adds much needed stability and reduces the risk of further price pressure from competition. Ironically, lower gas prices also help Russia maintain its energy monopoly over Germany as cheap gas makes other, domestic and alternative energy sources too expensive to be attractive. Thus, Germany will fall further from the goal of a diverse, risk-sensible energy mix.
Germany's goal of a 20% 'alternative' energy mix is illusory, environmentally unsound (the destructive power of wind parks is still underestimated, and the huge, Greenpeace-backed, Weser hydropower plant in Bremen threatens to filter the European eel permanently out of the ecosystem), and economically irresponsible in a recession. (One cannot seriously debate putting a few dozen Euros back into the pockets of the consumers via tax-cuts or rebate schemes, while taking hundreds right back out through politically motivated hikes in energy prices). The much touted "green dividend" from ecological technologies is more of a "broken window" fallacy—wreck the existing energy infrastructure to manufacture Green Jobs. Alas, ça ce ne voit pas.
As a first measure, Europe should commit to the building of the Nabucco pipeline to introduce competition from Central Asia. The US should support Europe in this, but Secretary of State Hillary Clinton sends mixed signals, asking for "perfect understanding" among all parties before proceeding. Whether this is a wink to the Schroeder-Putin forces is unclear, but Schroeder was close to her husband and unequivocally endorsed Hillary's presidential bid.
Whatever the US does, Europe must diversify much further, consider following France in making nuclear energy an important part of the energy mix and a means to achieve Europe's ambitious carbon emission goals, and cut supply deals with as many non-Russian sources as possible. With low gas prices that could and should have Russia on the defensive, now would be a good time to act.
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