the gm deal and paying for universal healthcare

The bailout to save a second troubled automaker, this time its GM, is all but finished. Although it is still likely that GM will file for bankruptcy protection on Monday, the details of the deal that were advanced by Geithner and the Treasury Department, are pretty much set, pending final approval by the UAW workers. The UAW and their retirees are the big winners in the deal. The union and the trust tasked with safeguarding the UAW retiree's pension benefits holds approximately $20 billion in claims against GM. In exchange for settling the claims, the UAW will receive $10 billion in cash money, a 17.5% stake in the restructured GM, an option to purchase another 2.5% down the line (but to be fair, it is not likely they will exercise that option because of unfavorable terms in the warrant, so let's just assume it will stay at 17.5%), $6.5 billion in dividend preferred stock paying an astronomical 9% dividend, AND about $2.5 billion in promissory notes. Wow, that is a mouthful. Contrast that deal with the one received by GM's secured creditors, which are owed approximately $27 billion. They will receive a 10% stake in the restructured company and warrants to purchase another 15% in about a decade. So the secured creditors are receiving less equity and no cash for more total claims than a group that is on-par with other unsecured creditors.

Now I understand that this is not a bankruptcy proceeding, but a voluntary agreement, but let's get this straight: it is voluntary in the same sense as the situation where one of the parties threatens to physically harm the other party in negotiations, inducing the party that is threatened to agree to terms. In this sense almost any action can be considered voluntary because the party is voluntarily acquiescing, albeit due to threats of violence. In the case of GM, the large majority of the secured creditors are the major banks, including Citi, Bank of America and the old Wells Fargo (not sure what they are now, Wacovia maybe?). The arbiter is the Treasury Department; the same treasury department that controls many of the decisions that the banks are allowed to make as a condition of their receiving TARP money last year. In other words, since the banks have not yet repayed the TARP money, the Treasury can make their lives very difficult if they do not like what the bank is doing. Therefore, the banks, fearful of retribution by Geithner by way of terms associated with TARP funds, are almost forced to accept less than they could achieve through bankruptcy. If this isn't strong arming I don't know what is. And the Obama administration is playing politics by playing softball with the UAW, giving them a larger ownership share AND CASH FOR HALF THEIR CLAIMS. This supposed to make up for further concessions by the union in their collective bargaining agreement, but a UAW press released claimed, "[f]or our active members these tentative changes mean no loss in your base hourly pay, no reduction in your healthcare and no reduction in pensions." (Link here to read the actual memo released just a few days ago.) So much for concessions that make GM profitable.

So if the UAW is getting 17.5% of the equity, bondholders another 10%, who is going to get the rest of the company? The answer is... you guessed it! The federal government! Does anyone really believe that GM is going to be profitable anytime in the immediate future? Just because they have received a ton of taxpayer money (all told the total amount is projected to be $100 billion) doesn't mean that they are magically going to start making cars people are going to want to buy. A partnership between the federal government and the UAW doesn't seem like the type of ownership that will focus on the cost cutting and efficiencies necessary to get GM out of the red and into the black, once again making it a profitable company. The UAW is going to continue business as usual, sacrificing profitability for more benefits for workers. But don't worry, the unlimited cash cow, the federal government, is their partner so I'm sure there will be plenty of money to go around, regardless of how much the company is losing. Nobody will complain when the tax payer foots the bill, will they? Mark my words, unfortunately the U.S. government is now a majority owner of the largest automanufacturer in the world and they are not going to relinquish that hold anytime soon. For the next few years, GM will bleed money and the federal government will finance the losses. The only bright side is that this may be an issue Republicans will be able to use against Obama and the democrats in 2010 and beyond.

Lastly, although there is more I want to say regarding Obama's recent proposals to finance universal healthcare, I just want to comment one of the ideas. For a breakdown of a few of Obama's proposals check out this Wall Street Journal article. Even Obama admits that the costs of such a program will be huge, and that the feds will have to increase revenue to pay for it. One of the proposals is to make it so that contributions to health savings accounts would no longer be tax deductible. Currently there is very little incentive for insured individuals to curtail their healthcare expenditures. Typically low deductibles and the co-pay amounts do not reflect the actual cost of the services rendered. Therefore the price payed by the consumer does not serve its critical function of relaying the information regarding the costs of the services to downstream users. Since the price is distorted, there is no incentive to only use the service when it is marginally beneficial. Therefore, the services are overused, imposing larger costs on the system as whole. Health savings accounts go a long way in fixing this problem. Typically, they will be employed in combination with traditional catastrophic insurance coverage with a high deductible. Instead of comprehensive coverage, the patient will contribute part of his paycheck into the health savings account for use for future medical services that are below the price of the high deductible. Typically the contributions are partially matched by the employer and are tax deductible, just like other contributions to health insurance.

Under such a system, the patient would have to pay the full amount of any treatments received up to the deductible amount. They will make these payments from their health savings account. Since the patient is allowed to keep contributions to the savings account that are not used, he has a strong incentive to save as much of it as possible. Therefore, in cases where he may or may not have to go to the doctor (like when he has a head cold), he will probably choose not to go if the price of the visit is more valuable to him than the benefits of the visit. There is no such incentive in a system where a doctor visit only costs a $15 co-pay. By allowing the price system to function effectively, costs on the system as a whole are reduced because only transactions that both sides consider necessary and beneficial will occur. However, by eliminating the tax deduction associated with health savings accounts, the Obama administration is attempting to provide fewer incentives for more people to adopt such a system. He would like to replace this capitalist solution with his socialist system where everyone buys insurance from the federal government.

nba officiating

I thoroughly enjoy watching the NBA, especially the playoffs. Tonight's game four between the Cavs and Magic should be a great game; if the Cavs don't get a win tonight, it may be all over in the Eastern Finals. However, over the past few years, the NBA playoffs have often been overshadowed by what I consider the biggest problem facing the game today: extremely inconsistent and poor officiating.

Over the past decade or so, the officiating crews have slowly become very lax with calling traveling, and very stringent calling touch fouls. This combination has caused the players to evolve and often fundamentally change the way they play the game. In today's game, a slashing guard who can take a defender off the dribble, get to the basket, cause some contact near the rim, and hope for either a made basket, a quick put back for a big man because his defender was forced to help, or most often, to get a foul call is the most prized player a team could have. This style of play has made players Chris Paul, Dwyane Wade, and LeBron James superstars. And these players are doing exactly what they should be doing. They have strong incentive to play with abandon and hope for a foul call because officials consistently call the game that way. This type of officiating, however, is doing a disservice to the game in my opinion.

Throughout the past few playoff seasons officiating has been incredibly inconsistent and at times even corrupt (read Tim Donaghy). I think the problems really started coming to light during the '06 Finals between the Mavericks and Heat. Anyone who watched that series remembers it as the finals that Dwane Wade shot 4,324 free throws. Now I don't blame Wade for continually driving to the basket to get fouls, he was just trying to win and that was the easiest way to do it. But I also firmly believe that the Mavericks were the best team in the league that year, and the officials going foul crazy cost them the championship.

And calling touch fouls near the basket isn't the only problem with the officiating. How officials distinguish personal fouls, flagrant ones and flagrant twos is unbelievably inconsistent. For example, Ron Artest was given a flagrant two for a hard foul on Pau Gasol at the end game 5 of this year's western conference semifinals. The foul was nothing more than a strong attempt to defend the basket. It was obviously a foul, but in the NBA you should be allowed to aggressively defend your basket when you can put your body between it and the offensive player. Instead Artest was ejected. Contrast that with Dwight Howard throwing a deliberate elbow at Samuel Dalembert in game five the Orlando-Philly series in round one. Called a flagrant one on the court, Howard was not ejected and helped lead the magic to a come from behind victory that gave them a commanding 3-2 series lead. Although is was later upgraded to a flagrant two, the damage was done and the sixers lost their chance to steal a game in Orlando and force the Magic to have to be the team that needed to win two in a row. These types of inconsistencies need to be corrected. Not to mention the arbitrary seven flagrants in the course of the playoffs equal a suspension rule. When officials are giving out flagrants like candy, the league is just asking for one of their big stars (perhaps this year it could be Howard or Kobe Bryant) to be forced to miss a game during the finals. Does the league really want one of its biggest stars to be absent during the league's biggest stage?

Now officials are always going to miss some calls. Basketball is definitely the most difficult game to officiate, and at the end of the day, most things are going to just be judgment calls by the officials as the play happens. However, the NBA could do a lot to improve overall quality by taking three measures: use only the best officials during the playoffs, rewrite and clarify both the rules and penalties associated with flagrant fouls, and instruct officials to start giving the benefit of the doubt to defenders when there is body contact near the basket when the offensive player is the one initiating the contact.

The first proposal would have obvious and immediate benefits. Currently the NBA uses almost half of its officials in the playoffs, sometimes regardless of merit. By using only 15 or so officials in the playoffs (even fewer would be needed in later rounds), they would be able to increase the quality of officiating while at the same time eliminate some of the discrepancies in calls due to differences between crews.

Secondly, the league does not call flagrant fouls consistently and uniformly. Anytime the league is forced to review calls after the fact and constantly upgrade personals to flagrant ones, while at the same time downgrade some flagrant twos back to flagrant ones, that should signal that there is something wrong with the standard. Flagrant ones are defined as unnecessary contact, while a flagrant two is unnecessary and excessive. Now almost anyone would recognize how subjective the concepts of "unnecessary" and "excessive" can be. I think it would be in the best interest of the league to redefine these fouls, or at least issue a memo clarifying them, in which it specifically describes the types of conduct that are required to receive the foul, including any intent necessary. For instance, they may decide that an elbow to the head with intent to elbow is a flagrant two, while and elbow without intent is only a flagrant one. While not every scenario could be specifically described, probably 95% of the common scenarios could be. The holes could be filled in through judgment by the league after the fact, for use as precedent for later games. I have no doubt that such a system would provide much more consistency, and at the end of the day predictability should be the goal.

Lastly, officials need to start letting more things go near the basket. Now I am a HUGE LeBron James fan, but even I have to admit that he at times can get preferential treatment from officials. And it is no fault of his. He is so big, strong, and fast that he can just slash to the basket and draw a foul. However, officials need to allow more types of contact near the rim in these situations. Obviously, if the defender moves his body into a position that impedes the offensive players progress to the basket, a foul should be called. But when a defender starts near the basket, or keeps himself between the offensive player and the basket the entire play, there is an acceptable amount of body contact that is not a foul. Until the league retrains officials to be more lenient for defenders, I think the quality of the basketball will suffer.

THE KING

JUST WATCHED LEBRON WIN GAME 2. UNBELIEVABLE. I CANNOT BELIEVE HOW AWESOME THIS SERIES HAS BEEN. MVP! MVP! MVP!

what are the u.s.'s employment goals?

Everyday there are new reports about further economic contraction and rising unemployment. A conservative estimate puts the current national unemployment rate is 8.6%. President Obama has made fighting employment one of his most important goals. The recent $787 billion stimulus bill, along with the $3.5 trillion budget, have attempted to create jobs by spending tremendous amounts of money - money that we get from taxation, borrowing and increasing the money supply (i.e. creating it at the federal reserve and buying U.S. treasury bonds). Now these may be very necessary initiatives; an unemployment rate that is near 10% is unproductive and causes many inefficiencies, decreasing the GDP and average standard of living. But what is the ultimate employment goal of the federal government? Is it an unemployment rate of 5%? 2%? Full employment?

I am sure that most of you would recognize full employment as an admirable, but unachievable goal. But does the fact that full unemployment is probably unachievable make a policy goal of full employment any less desirable? According to the Obama administration, the answer is no. His policies are designed to save millions of unproductive, over-paid UAW jobs at Chrysler and GM, while attempting to create millions of "green" jobs, betting the future of the U.S. energy sector on the belief that biofuels, solar and wind energy are going to be economically feasible and efficient with the next few years. Regardless of the merit of saving/creating these jobs, if the Obama administration's goal is to create jobs and lower the unemployment level to something more akin to bullish economic times, then there are several other policies that it has proposed which have the exact opposite effect.

First, Obama has consistently supported and voted to raise the federal minimum wage. However, economists have all recognized that raising the minimum wage will raise unemployment. Generally, raising the minimum wage will cause a decrease in the number of entry-level and low-skill jobs available. By decreasing the number of entry-level jobs, the government prevents the poorest and most uneducated people from joining the workforce. Although the wages for these jobs are low, employers are forced to train these workers who have very few skills that make them attractive to employers. Instead of giving these working poor the chance to enter the work force and learn skills that could help make them more marketable to future employers with higher paying jobs, the minimum wage eliminates their chance to learn through experience. Instead, these people often rely on the crutch of welfare since now jobs for which they are qualified are unavailable. For a detailed U.S. House of Representatives report on the minimum wage and its effect on unemployment, see this link.

Similarly, Obama's strong support for labor unions also has the effect of decreasing employment opportunities. Inherently, labor unions operate to limit the number of possible applicants for a given job. The gains that a strong union achieves for its workers come primarily at the expense of other workers. This is inherent in the law of demand. By increasing the price associated with a given product (in this case labor), the demand for that product will decrease. A successful union will decrease the number of jobs available in which it controls. It can thereby increase the price of its labor force without fear of losing jobs. However, the results of this process are decreasing opportunities for employment in the unionized industry and flooding non-unionized industries with the excess labor, thereby lowering the price that could be charged by these laborers. The effect is that fewer laborers are hired than would have been employed in unionized industry absent the union, and the non-unionized labors have fewer opportunities to find employment and are only able to demand lower wages than they would absent the union.

In addition to supporting many measures that actually decrease employment levels, the Obama administration (as well as the Bush administration before that) continued policies that have the effect of lowering effective wages of all workers. By supporting a full employment policy through government spending financed through deficits, Obama is fueling inflation and chipping away at the spending power of the average worker. Government spending can be represented to the public as adding to employment, while taxes are represented as decreasing employment. Therefore there is a strong incentive for officials to spend in the guise of creating jobs, but not to increase taxes to finance the spending. However, the spending that is not financed through taxation must be paid for either through borrowing (either domestically or internationally) or through increasing the money supply. Excessive borrowing is also not politically expedient, however, there is little public outrage aimed at increasing the monetary supply. As a result, politicians have found it relatively easy to spend, spend, spend, and finance it all by printing more federal reserve notes. As I have repeatedly emphasized in previous posts, increasing the money supply faster than economic output will cause inflation. Although many wages will be forced up by this inflation, over the past half century the wages will not grow as fast as inflation. Below is a plot of real wages and nominal wages over that time period.


As you can see, although wages have increased with inflation, despite productivity growth real wages have remained relatively stagnant. One thing that should be considered is that the federal income tax rates do not change with inflation. So the government actually benefits as consumers are making more money (although the money is not worth as much) so they will move into higher tax brackets in our progressive tax system, even though they have no more spending power than before. It has the effects of a tax increase without having to pass a tax increase. Talk about taxation without representation! But no one ever questions how the federal government is the complete and only cause of inflation, and only they can cure it from occurring.

In conclusion, the Obama administration needs to be upfront about their employment goals. If its main goal is full employment, then it should be upfront with the American people about how its minimum wage and union policies counteract other efforts to achieve those goals. Additionally, it should take efforts to eliminate the deficit spending that is financed by the federal reserve. If not it should acknowledge is role in the inflationary boom and bust cycle, and let workers know the effects that this inflationary policies have on their wages and tax burden.

cloverfield creature attacking shittsburgh

Props to Eric.

one more year of school

I have finally finished my finals, so I am no officially done with my second year of law school.  Unlike many law students, I am in no hurry to get out of law school because attending school in Austin, Texas is pretty much the best thing ever.  But anyway, I should have plenty of time to blog over the Summer, so hopefully I keep this updated with a bunch of new posts.

First, my roommate Randy pointed out this Peter King article from his weekly Monday Morning Quarterback column.  The article does a good job of breaking down why the Eagles had one of the best drafts in the league in 2009 and is an interesting glimpse at how the Eagles front office approaches the draft.  Obviously I loved the Eagles draft this year: we got better at every offensive skill position, were able to get players with great value for the position they were taken, and added a couple of picks next year.  I am really pumped for the Eagles this season.  I think they have to be the favorites to not only win the NFC East, but the NFC as well.  

On a similar Philly sports note, the Raul Ibanez signing has worked out better than I could have ever imagined.  Nobody is happier about this than my Dad, since now he can constantly remind me how much better Ibanez is playing than former Phillies left-fielder Pat Burrell.  But I must say that Ibanez has been outstanding.  He hit his 14th homer of the year tonight and is hitting over 0.350.  I complained initially after the signing, mostly because of what we had to pay him, how old he was, and we lost our only slugging right-handed bat just to add another lefty.  But the results speak for themselves.  If Ibanez keeps up this pace, he would be the NL MVP.  If the Phils' starting pitchers ever get it together, they are gonna be a tough team to beat.

Game 1 of the Eastern Conference finals just ended in a 107-106 upset win for Orlando.  Very good game.  In the final minutes both teams hit big shots, but the other kept answering.  When LeBron got a huge and one with 25 seconds left to put Cleveland up by two, I thought it was over for sure.  But Rashard Lewis hit a huge three with a hand in his face to give Orlando the eventual win.  I think this is gonna be a tough series for the Cavs, who haven't been challenged at all yet in the playoffs, but I think they still are going to win in six.  Obviously I love LeBron, but I think Moe Williams is the key for the Cavs.  If he can create for himself, that will really open things up for LeBron, and when he isn't forced to do everything himself, he is pretty much unstoppable.  

Lastly, I want to post a letter my dad sent into a bunch of newspapers after the Chrysler bankruptcy agreement was released.  I think he is absolutely right, and the moral of the story is that whenever the government becomes so deeply entrenched in private business, it will be able to unfairly flex its muscles in negotiations and get exactly what it wants.  In this case, they used the TARP bailouts as leverage against several of Chrysler's secured creditors, forcing them to accept the government offer.  Unfortunately, the banks receiving the bailouts may have been Chrysler's largest creditors, but not their only secured creditors.  The smaller bondholders were forced to accept whatever the large banks acquiesced to because the large banks held a large enough amount of the debt to force the smaller creditors to take a raw deal.  The smaller bondholders were ready to force the issue in bankruptcy court, but the big banks decided it was in their best interest to to take a loss in this transaction so that they could continue to receive billions more in bailouts over the coming months.  It is a perfect example of government intervention favoring certain companies over others.  And people wonder why so much is spent on lobbying and special interests seem to run Washington.  When the federal government routinely gets involved in private enterprise, of course the companies are going to lobby both elected officials and government bureaucrats.  They have a huge incentive.  Anyway, below is the text of my Dad's letter.

While the average taxpayer goes about their business the federal government is in the process of nationalizing the automobile industry. As part of their proposed reorganization plan, both Chrysler (which entered bankruptcy court on May 1, 2009) and General Motors have proposed a federal government/auto workers union partnership to “save” these two companies. As part of this plan, the taxpayer is expected to be the piggy bank that finances this partnership.

This is the second major industry (the banking industry was the first) the feds are in the process of nationalizing. The health care and energy industries are next in the sights of our Washington politicians.

If the Obama admistration has its way, the big winners in this arrangement will be the united auto workers. The UAW and their pension fund will own 55% of Chrysler while the bondholders (who are secured creditors in bankruptcy court) were offered less then 10% position. It is obvious that the Obama administration is partnering with the UAW to run the auto industry. The bond holders (lenders who have lent Chrysler billions of dollars) are being asked to take a bath for the benefit of the UAW.

For two centuries the free market economic system in the United States has been the economic engine that was the envy of the world. The free market economic system has allowed a relatively obscure collection of 13 colonies to develop into the most powerful and wealthy economy ever seen in this world. There have been ups and downs in the economy over the centuries but when left alone, capitalism has an amazing self correcting mechanism to deal with its excesses. Limited government, sound money, free markets allowed free people to prosper in a way that had not been seen in this world.

Markets were free and hard work was rewarded throughout American history. Since the new deal was enacted in the 1930’s the federal government has injected itself more and more in the free market economy. More and more taxes and regulations were enacted to draw valuable assets from the private sector into the hands of the government. Along the way, government spending increased to the point taxes were not enough to cover expenses. Massive borrowing, deficit spending and an unsustainable national debt resulted.

Up to now, capitalism has been able to survive excessive taxation and regulation and still return a portion of its wealth to the tax man to finance our welfare society. The banking and auto industry bailouts are the beginning of a movement to nationalize our major wealth producing industries. The government has proven that everything it touches it cannot manage properly and will typically require unlimited subsidies to survive. With the banking, auto, health care and energy industries under government control in the future, these wealth creating industries face a bleak future. And as we move further toward European style socialism, our freedom and our individual and national wealth will gradually erode. The standard of living for the average person will continue to decline as our national wealth erodes.

Once we as a society nationalize and regulate the major wealth producing industries, the wealth will be eliminated from the national equation and we will have effectively “destroyed the goose that laid the golden eggs”. This will have negative long lasting effects on our economic and political freedom (they go hand-in-hand). This will also affect our individual and national wealth and equally important our national security. Our national wealth allows us to have a military that has been the envy of the world and one that is rarely challenged.

What does all this have to do with the Chrysler bailout you say? We as a society have reached an inflection point. We have begun a journey toward socialism. Do we allow our economy to move from a capitalist system to a socialist system? Do we allow the unions along with the government to force out private investors with little or no compensation? Do we remove risk taking and reward from the business equation? Do we eliminate individual responsibility from society and replace it with collectivism? Do we say that society is responsible for the individual and not the individual responsible for themselves? All these broad questions are being answered in the context of the Chrysler bailout.

The Chrysler bailout if executed as proposed by the Obama administration will continue the pattern of opportunistic takeovers by the Obama administration. In a few years we will have our banking, automobile, health care and energy industries owned and/or operated by the US government. Is this the change you wanted? Is this what you were hoping for? Do we want our children some day to ask how did we allow this to happen?

the preakness day

Picture from the Baltimore Sun at the entrance to the preakness this morning. Caption reads:
"Shown is the lack of crowd waiting to enter the infield at the 8 a.m. opening time."

*UPDATE*

Around 3 PM ET, Maryland Jockey Club President Tom Chuckas acknowledged that this year's Preakness infield attendance was "down, significantly down." What did he expect? Below is a picture from the 2009 infield.



Saying it's down is an understatement. Here is a picture from last year's infield, and keep in mind that this picture is just a small subsection of the infield, not an overhead shot like the one from the grandstand above. The whole infield was packed like this in 2008.

why do republicans let sean hannity represent the party?

I don't know why I am still a registered Republican.  The party is increasingly at odds with my beliefs and values, and its not for the reasons professed by the media that I feel disinterested with the party.  The media likes to say that Republicans are too far to the right, and that this is turning off voters and causing them to become a minority party.  I have to disagree.  The problem is not that the GOP is moving too far to the right, but that it doesn't have an identity right now,  and no one is attempting to rally the party behind ideals and general policy that apply on a fundamental level to all the issues facing the country.  Instead the GOP is left to people like Sean Hannity, a small-minded, religious-right ideologue, who repeats the same rhetoric on every issue, toting the party-line of Bush/Cheney.  For instance, check out his ridiculous comments about President Obama's choice of condiment.  

Now I personally prefer regular yellow mustard, put I have to admit that I dabble in the spicy mustards from time to time, so I hope that doesn't make me some kind of elitist.  Instead of attacking a popular president's credibility on food, the GOP should be challenging some of his policies that are fundamentally changing the landscape in America.  The current handling of the Chrysler bankruptcy and restructuring is a perfect opportunity.  

In the current plan put forward by the government, the UAW is receiving a majority equity stake (~55% in exchange for relinquishing rights to about $10 billion in liabilities it held for pension payments) in the restructured Chrysler.  The government will receive around a 10% equity stake in return for around $4 billion in loans so that the restructuring can move forward.  The remaining 35% or so of equity will go to Italian manufacturer Fiat, in exchange for access to its fuel efficient engine technology and ability to open Chrysler up to the European market.  Notice how Fiat is not investing a single dime of capital in the restructuring.  Left holding the short end of the stick are Chrysler's senior secured creditors and bondholders.  Now in a traditional bankruptcy bondholders are almost always left out to dry, as there are no guarantees on their investments, and that is the risk they have taken.  However, the secured creditors are a totally different story.  Traditionally, they are near the top of the list in receiving payments, as the loans were issued with the companies real property and tangible assets as a backing for the loan.  When a company declares bankruptcy these secured creditors are guaranteed to receive at least as much as the value that the assets upon which the loans were secured.  These values are calculated through an estimate of what the property would be sold for if the company was liquidated under Chapter Seven.  

In this case the secured creditors are owed about $7 billion by Chrysler.  In exchange the administration only offered them about $1 billion and no equity stake in a restructured Chrysler.  The creditors knew they could get more through liquidation, so they forced a Chapter 11 filing.  However, the majority of these lenders are the big banks receiving federal TARP bailouts, like Citi, J.P. Morgan Chase, and Bank of America, although many smaller companies own smaller shares of debt.  Administration officials put pressure on the banks receiving federal bailouts to accept the offer at the expense of the smaller debt holders who received no federal money.  The squeeze proved successful, and last Friday the debtors acquiesced to the deal, accepting less than $2 billion and no equity.  This is probably half of what they could have gotten if Chrysler had liquidated.  And yet there has been no talk about how this major conflict of interest has allowed the banks and feds to put the squeeze on Chrysler's remanining secured creditors.

Although Chrysler's restructuring is not going to destroy the economy or put taxpayers on the hook for too much money, it does illustrate a much larger, and scarier, problem.  When we allow the government to get involved in private business affairs, it gives one side an unfair advantage in the bargaining process and prevents the even-handed negotiating that is both fair and and necessary for the free markets to function effectively.  For instance, Obama is big on fuel efficiency, so Fiat is getting a major stake in Chrysler because they can offer fuel efficient technologies for Chrysler's next generation of automobiles.  However, they were included in the deal because Obama decided it was a good idea, not because they bargained for their equity stake.  In contrast, secured creditors that made arms length bargains under the rule of law are being short-changed so that Fiat can move in.  They played by the rules, secured their debt, but now are being muscled out by the government.  Republicans need to point out this hypocrisy, and let the public know that similar injustice will occur when the government gets involved in the private business sector.  If the government is allowed to come in after the fact and use its tremendous influence and power to change the rules of the game at any time, there will be a chilling effect on how companies do business, especially if their is a risk of insolvency.  This could have a devastating effect, causing credit to seize up any time a company could potentially go bankrupt, as lenders will not want to risk the government changing the rules so that they cannot recoup their investments.

the consumer nation

Often a lot is made over the large, sometimes described as excessive, consumption of the American public.  Officials from both parties decry that the U.S. cannot continue to consume at the rate it does, importing products from all over the world, and only exporting a few select products to the international community.  According to these officials this consumption is unsustainable and will eventually cost America its status as the economic leader of the free world.  But what causes these officials to make these accusations?  And are they right in their hypotheses?

The answer to the first question is almost always the same, regardless of the product or industry.   When American consumers buy cheap international products, the artificially low wages of foreign workers and subsidies of foreign governments make competition between the international producers and domestic producers fundamentally unfair.  American producers, with higher labor costs and large costs associated with complying with both state and federal industrial standards, cannot produce the products as cheaply as 3rd world labor.  In order to insulate American industries, the federal government should impose high tariffs on imports from these countries, thereby protecting the domestic industry.  Therefore the American industry will be able to compete with the international competitors, and the American workers will not lose their jobs because of cheap labor overseas.  

Now this all this sounds great, and its easy to make soundbites that can convince people that this is the right policy.  However, in reality this practice does more to harm the American people than it does to protect them.  First, we must understand that if another country can produce a good cheaper than we can domestically, it is the best interest of the large percentage of the American people to buy at this lower price.  As I stated above, the U.S. is a nation of consumers, and by allowing the consumer to purchase a product at the lowest possible cost, the maximum amount of people will see a benefit.  

Additionally, if Americans choose to buy strictly foreign products at the expense of purchasing domestic products, there is a market mechanism to counteract this balance.  The reason international labor is cheaper is because foreign workers are willing to accept less for the same work that American workers in the same industry will accept for the job.  Now these international workers are not paid in U.S. dollars, but in their home country's currency.  However, American consumers purchase their products using U.S. dollars.  In order to pay their workers, international producers must change the U.S. dollars paid into their own country's currency.  When Americans are buying large amounts of international products and few international consumers are buying American products, instead buying from their own domestic industry or another nation other than the U.S., the result is that more people will attempt to change dollars into the international currency than the international currency into dollars.  As a result the exchange rate between the international currency and the dollar will change, with the dollar becoming relative less valuable than it was in relation to the international currency.  In turn, this means that the international labors will become more expensive in terms of the amount of U.S. dollars it takes to pay for their labor.  Additionally, U.S. exports will drop in price in the international market, making U.S. exports more competitive abroad.  In the long term, if the market is allowed to function properly, an equilibrium will be struck, and the U.S. consumer will be able to buy the cheapest products, and products that the U.S. can produce most cheaply will be purchased both domestically and abroad.  

Now many are quick to point out that this equilibrium point may occur at a price where many industries that are currently being subsidized would no longer be able to operate profitably (easy example is the domestic auto industry) and thousands of people would lose their jobs.  Well this is probably true, but in the grand scheme of things it will maximize the country's benefit to let these industries fail.  The benefits to the consumer of lower prices for goods far outweigh the benefits to workers of a government subsidized industry.  In most any industry, the amount of workers is small relative to the amount of consumers of the product.  Even if some workers lose their jobs, a much larger number of people will see the benefit of lower prices.  And the people that do lose their jobs can either get a new job in a similar industry that has a business model that can compete with the international  producers, or they can get jobs in a different industry where American producers can create the cheapest products.  

Opponents of free trade like to portray economic problems as a winner/loser dichotomy.  According to their arguments, when U.S. consumers buy international products at the expense of domestic producers, the foreign country wins and the U.S. loses.  But in reality economic transactions are win/win situations.  The transaction would not take place if both producer and consumer saw a benefit.  In this case, the international producer benefits from sales of its product, and the American consumer benefits by receiving a product that he desires at the lowest price he can find.  If the U.S. is importing more value than it is exporting, than exchange rates will change until the equilibrium is reached.  If the U.S. is truly a nation of consumers, which it surely is, than it is the free market, and not the tyranny of government controls that will provide the maximum benefit to the American people. 

play him off, keyboard cat

$3.5 trillion and manny being manny

To most people $3.5 trillion is an un-immanginable amount of money.  Hell, to 99% of Americans, $3.5 million is more money than they will ever see.  That is what makes Obama's proposed FY2010 budget so ridiculous.  At at total bill of about $3.5 trillion, it will most likely be well over 25% of the U.S.'s GDP.  In other words, for every dollar created through private enterprise and entreprenuership the federal government will be shelling out a quarter (maybe even a quarter and an extra nickle and few pennies depending on how quickly the economy recovers).  This may not seem like a huge event, as over the past few decade Americans have become all too used to government spending trillions of dollars they don't have.  But unlike past extravagances for the first time in our history a full 50% of the federal budget or roughly $1.75 trillion will be financed through defecit spending and borrowing.  Even Mr. Obama admits that under the current plan the federal debt will be doubled within 10 years.  

What I just can't seem to understand is the lack of outrage over such a proposal.  Now I can understand why old farts like the members of the AARP are so enamoured by Obama; they will be long dead before we ever have to pay off any of our debt.  However, young people, most of whom are Obama's biggest supporters, don't seem to care at all that the debt that the government is currently building up will eventually have to be paid for.  Whether it is in the form of higher taxes or inflated money, the next generations will be poorer because of excesses of toady.  And I'm not even complaining about what the money is being spent on, just the fact that the federal government is so irresponsible that it will jeopordize the futures of millions of Americans so that it can pay for its political expenses and pet projects of the present. 

On an unrelated note Manny Ramirez was suppsended 50 games for violating the MLB's performance enhancing drug policy.  HAHA.  Let's see the Dodgers win all their home games without a cheating Manny.  I can't say I saw this coming, but it is a present suprise.  I bet if they did a hair follicle tesy on Manny it would come back positive for every drug known to man, considering his hairs have to date back to win he was 10 years old.  I'm all for a Manny suspension.  Anything that makes it easier for the WORLD CHAMPION PHILADELPHIA PHILLIES easier to repeat as world champions is fine with me.

jack kemp, becker and posner, and the federal reserve

First, I would like to start off with the sad news the former NFL quarterback, Congressman, and 1996 Vice-Presidential candidate Jack Kemp died over the weekend. Kemp was one of the few voices for truly free markets and limited government over the past half century. One of the biggest mistakes the Republican party has ever made was nominating George H. W. Bush for President in 1988 instead of Kemp.  The first Bush's anti-free trade and pro-tax growth policies undercut the Republican message and its legitimacy, leading directly to Bill Clinton's election in 1992.  Kemp also co-sponsored Reagan's 30% across the board tax cuts in the early 1980's, which were a major factor contributing the sustained economic growth of the United States during the 1980's and 1990's.  Today's WSJ had an excellent collection of partial op-eds written by Kemp over the past 30 years.  The link is here, and I highly recommend checking it out, as Kemp's consistent policies and dedication to free markets, show that he understood the problems facing the nation and how to address it.  If more of Kemp's ideas had been put into place, we may not be facing as serious economic problems as we are today.

Secondly, I recently stumbled upon a blog written by Gary Becker (a Nobel Prize winning economist at the University of Chicago) and Richard Posner (Judge on the 7th Circuit Court of Appeals, leading scholar on economics and the law, and probably the most cited Circuit Judge in United States history).  Located at http://www.becker-posner-blog.com/, the blog breaks down important issues in economic terms.  For instance, in their latest posts, the two independently analyze the economic consequences of a pandemic such as swine flu, the costs associated with preventing such an outbreak, and posit several viable options as the most economically efficient way to tackle such a problem.  I highly recommend it to anyone interested in economics and its application to real world political issues as well as policy in general.   Both Becker and Posner have great economic and analytical minds and are able to succinctly breakdown very complex issues, thereby making them understandable even to someone with only a modest economic background.  

In one of his more recent posts, Judge Posner addressed the Independence and fundamental role of the Federal Reserve system, which got me thinking.  It is unfortunate and extremely disheartening that so many Americans do not even understand what it is that the Fed actually does or what its role is in the American financial system.  Fundamentally, many Americans understand that the Fed adjusts interests rates, but they do not understand how they accomplish this goal, what the Fed's objectives actually are, and how it is responsible for the entire monetary policy of the United States.  Therefore I am going to briefly describe the Fed and its role in our financial system and address what I consider potentially devestating powers available to the Fed with regards to monetary policy.

The federal reserve was originally created in 1913 as a lender of last resort in order to prevent runs on banks that were common at that time.  After the Bretten Woods agreement collapsed in the 1970's when Nixon took the U.S. off the gold standard, the Fed gained increased influence by affecting monetary policy in order to attempt to maintain low inflation as well as maximum employment.  But how does the fed actually affect monetary policy?  In times of economic downturn, the money supply will become more scarce, as more people will save in an expectation that they will need it later during more tough times.  In order to keep the credit markets flowing and provide the capital necessary to spur investment, the fed will buy government securities/bonds (mostly short-term bonds), which pumps cash into the economy when the cash is deposited in bank accounts and then withdrawn and spent.  This increase in monetary supply held by banks will allow for more money to be lent, decreasing the demanded interest for such loans (i.e. lowering short term interest rates).  Long term interest rates will inevitably follow (at least to some degree) the short term rates, which will increasing lending, hopefully spurring economic growth and growing the economy.  Conversely, if the Fed wants to raise interest rates (probably to combat inflation) it will sell some of the government bonds it holds, thereby removing money from the financial system.  Presumably, it could then prevent that money from re-entering the system, which decreases the total amount available, thereby increasing the demand for the currency.  This increased demand will lead lenders to value their money higher, an charge an increased rate of interest on the money that they loan.

All of this sounds good, but missteps by the Fed over the past few decades have had extremely detrimental effects on the U.S. economy.  Additionally, the Fed's tremendous power as the sole decision maker with regards to the U.S. money supply (and effectively the entire world's money supply as many major currencies are fixed to the U.S. dollar) has the potential to have a devastating effect on the country's growth and the standard of living of all Americans.  Today, there is almost uniform agreement that the Fed's easy money policy of the late 1990's and early 2000's was a major contributing factor to the housing bubble that lead to the economic collapse we are currently facing.  In order to spur current economic growth, the Fed has increased the money supply by over $1 trillion this year alone.  If the Fed gets its job right, then it should increase the money supply as total U.S. output increase, thereby stabilizing prices relative to growth.  However, this rarely happens.  In order to prevent devastating deflation from occurring, the Fed must over estimate the amount of money to produce, thus increasing money supply relative to total economic output and causing inflation.  In fact, for the past three decades the fed has doubled the money supply every ten years.  This inflation is a hidden tax, which is in fact extremely regressive.  How is it that we allow a completely private, unelected board decide how much to tax the American consumer in the form of inflation?  It just doesn't make sense.  Unfortunately I do not have time to outline my solution here, but I will in a future post.