Capitalism Should Return to Its Roots
We wouldn't need pay caps if shareholders were given their rights.
CARL C. ICAHN
President Barack Obama's plan to limit executive pay to $500,000 a year -- plus restricted stock -- for institutions that get government funding is understandable. Still, salary caps are only a stopgap measure that fails to address the root of the problem.
The real problem is that many corporate managements operate with impunity -- with little oversight by, or accountability to, shareholders. Instead of operating as aggressive watchdogs over management and corporate assets, many boards act more like lapdogs.
Despite the fact that managements, albeit with some exceptions, have done an extremely poor job, they are often lavishly rewarded regardless of their performance.
We must change this dismal state of affairs if we are to rebuild our economy in a sustainable way that restores confidence. If we don't, these problems will keep recurring as investors pile into the next Wall Street innovation or asset bubble, enabled by the kinds of managements that nearly sank Wall Street.
The problem, as I have long maintained, is that boards and managements have been entrenched by years of state laws and court decisions that insulate them from shareholder accountability and allow them to maintain their salary-and-perk-laden sinecures.
What we need are fewer government rules at the state level that protect managements. We need to return capitalism -- our great national wealth machine -- to its roots, where owners call the shots to managements, not the other way around.
Currently, corporate law is largely the province of state governments, not federal. As a result, most corporations migrate to, and incorporate in, states that offer the most protection for managements.
Management-friendly states have a vested interest in attracting these companies because hosting them generates a substantial portion of state revenues. It's a symbiotic relationship: The state offers management protections and, in return, receives much-needed tax revenue.
However certain states, like North Dakota, offer many more rights and protections to shareholders. Because shareholders own companies, they should have the right to move a company to a state that gives shareholders more protections.
What is needed, therefore, is a federal law that allows shareholders to vote by simple majority to move their company's incorporation to another state. That power is currently vested with boards and management.
This move would not be a panacea for all our economic problems. But it would be a step forward, eliminating the stranglehold managements have on shareholder assets. Shouldn't the owners of companies have these rights?
Now some might ask: If this policy proposal is right, why haven't the big institutional shareholders that control the bulk of corporate stock and voting rights in this country risen up and demanded the changes already?
This is because many institutions have a vested interest in supporting their managements. It is the management that decides where to allocate their company's pension plans and 401(k) funds. And while there are institutions that do care about shareholder rights, unfortunately there are others that are loath to vote against the very managements that give them valuable mandates to manage billions of dollars.
This is an obvious and insidious conflict of interest that skews voting towards management. It is a problem that has existed for years and should be addressed with new legislation that benefits both stockholders and employees, the beneficiaries of retirement plans.
I am not arguing for a wholesale repudiation of corporate law in this country. But it is in our national interest to restore rights to equity holders who have seen their portfolios crushed at the hands of managements run amok. The suggestions above would do a great deal to change the dynamics of corporate governance in this country. Such a change will make us more productive as an economy, generating more wealth for everyone.
The Wall Street bailout and economic stimulus packages may be unfortunate and necessary steps to revive this flagging economy. But it is important to attack the real problem by demanding more management accountability.
I have initiated United Shareholders of America to empower shareholders to institute changes, and I encourage you to join our cause. A majority of the U.S. population owns shares. Their voices need to be heard -- now -- on Capitol Hill and in the boardrooms of corporate America.
Mr. Icahn is chairman of Icahn Enterprises, a publicly traded diversified holding company.
The Stimulus Tragedy
The Stimulus Tragedy
Obama bets that we can spend our way to prosperity.
President Obama has started to play the "catastrophe" card to sell his economic stimulus plan, using yesterday's terrible January jobs report to predict doom unless Congress acts. No doubt he'll get his way, but the tragedy of this first great effort of the Obama Presidency is what a lost opportunity it is.
![[Review & Outlook]](http://s.wsj.net/public/resources/images/OB-DC082_oj_1st_E_20090206210950.jpg)
APEveryone agrees that some kind of fiscal stimulus might help the economy, and that running budget deficits is appropriate in a recession. The stage was thus set for the popular President to forge a bipartisan consensus that combined ideas from both parties. A major cut in the corporate tax favored by Republicans could have been added to Democratic public works spending for a quick political triumph that might have done at least some economic good.
Instead, Mr. Obama chose to let House Democrats write the bill, and they did what comes naturally: They cleaned out their intellectual cupboards and wrote a bill that is 90% social policy, and 10% economic policy. (See here for a case study.) It is designed to support incomes with transfer payments, rather than grow incomes through job creation.
This is the reason the bill has run into political trouble, despite a new President with 65% job approval. The 11 Democrats who opposed it in the House didn't do so because they want to hand Mr. Obama a defeat. The same is true of the Senate moderates of both parties working to trim their $900 billion version. They've acted because they can't justify a vote for so much spending for so little economic effect. You know a piece of legislation is in trouble when even its authors begin to deny paternity, as economist Martin Feldstein has recently done.
Speaking to a House Democratic retreat on Thursday night, Mr. Obama took on those critics. "So then you get the argument, well, this is not a stimulus bill, this is a spending bill. What do you think a stimulus is? (Laughter and applause.) That's the whole point. No, seriously. (Laughter.) That's the point. (Applause.)"
So there it is: Mr. Obama is now endorsing a sort of reductionist Keynesianism that argues that any government spending is an economic stimulus. This is so manifestly false that we doubt Mr. Obama really believes it. He has to know that it matters what the government spends the money on, as well as how it is financed. A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP.
But that same dollar can't be conjured out of thin air. The government has to take that dollar away from someone else -- either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.
Some Democrats claim these transfer payments are stimulating because they go mainly to poor people, who immediately spend the money. Tax cuts for business or for incomes across the board won't work, they add, because those tax cuts go disproportionately to "the rich," who will save the money. But a saved $1 doesn't vanish from the economy, unless it is stuffed into a mattress. It enters the financial system, where it is lent to others; or it is invested in the stock market as capital for businesses; or it is invested in entirely new businesses, which are the real drivers of job creation and prosperity.
At the current moment, amid a capital strike, the latter is the kind of fiscal stimulus we really need. Yet there is virtually none of it in the bills now moving through Congress. Senate moderates may succeed in cutting $100 billion or so in spending from the bill, which is political window dressing. Even they aren't talking about adding the kind of tax cuts that would really help the economy now.
We should add how different this is from the 1980s or even the 1960s. Democrats added business tax cuts to the Reagan package of 1981, while Jack Kennedy's chief economist (Walter Heller) promoted marginal rate tax cuts on stimulus grounds in the 1960s. Yet Mr. Obama, on Thursday, dismissed any such tax cuts as "the same tired arguments and worn ideas that helped to create this crisis." That's rhetoric for a campaign, not for a President hoping to rally bipartisan support.
The biggest gamble with this stimulus is what it means if the economy doesn't recover. Monetary policy is already as stimulative as it can safely get, and the Obama Administration is set to announce its big financial fix on Monday. Stocks rallied Friday on expectations of the latter, despite the job loss report, with big bank stocks leading the way. If done right, this will help reduce risk aversion and gradually restore financial confidence.
We hope it does, because the size and waste of the stimulus means we won't have much ammunition left. The spending will take the U.S. budget deficit up to some 12% of GDP, about double the peak of the 1980s and into uncharted territory. The tragedy of the Obama stimulus is that we are getting so little for all that money.
Agreement Reached on Economic Stimulus
Feb. 6 (Bloomberg) -- Senators agreed on an economic stimulus plan of at least $780 billion to rescue the U.S. economy from sinking into what President Barack Obama warns would be an even deeper recession if Congress doesn’t act.
Three Republicans agreed to join Democrats who control the chamber in supporting the measure. A Senate vote, possibly this weekend, would move Congress closer to Obama’s deadline of sending a bill to him by mid-February. The plan would have to be reconciled with the House-passed $819 billion package.
“We are passing a bold and responsible plan that will help our economy get back on its feet, put people to work and put more money in their pockets,” said Senate Majority Leader Harry Reid, a Nevada Democrat.
Nebraska Democrat Ben Nelson said he and other senators from both political parties worked “line by line, dollar by dollar” during daylong negotiations to cut more than $100 billion from the Senate’s prior $900 billion-plus proposal. The plan is “about jobs, jobs, jobs,” he said.
Democrats said the $780 billion compromise didn’t include the cost of programs, including tax cuts aimed at boosting the housing and auto industries, that were added to the earlier Senate plan during debate this week.
Today’s Labor Department report, showing that the jobless rate rose to 7.6 percent last month from 7.2 percent in December, added urgency to the congressional talks. Payrolls fell by 598,000, the biggest monthly decline since December 1974.
‘Moving Forward’
“We are pleased the process is moving forward and we are closer to getting Americans a plan to create millions of jobs and get people back to work,” White House spokesman Robert Gibbs said in a statement.
Earlier today, Obama urged Congress to wrap up its work, saying it would be “inexcusable” to get “bogged down in distraction, delay or politics as usual while millions of Americans are being put out of work.”
Republican Senators Susan Collins and Olympia Snowe of Maine and Arlen Specter of Pennsylvania said they will support the package.
“This compromise greatly improves the bill,” Collins said.
Senate Minority Leader Mitch McConnell, a Kentucky Republican, said he opposed the plan and doubted it would do enough to boost the economy.
“The president said originally he had hoped to get 80 votes” in the Senate, said McConnell. “It appears that the way this has developed, there will be some bipartisan support but not a lot.” He added: “Most of us are deeply skeptical that this will work.”
Broadband Access
Lawmakers agreed to cut $2 billion that had been set aside to promote broadband access in rural areas, $3.5 billion to make federal buildings more energy efficient, $200 million for NASA and $400 million for state and local law enforcement grants.
Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said education initiatives would take among the biggest cuts under the accord. He estimated the plan now includes about $325 billion in tax cuts after a reduction of $18 billion.
The compromise reduces a proposed subsidy for laid-off workers who under federal law can continue to buy health insurance from their former employers, according to a description by the Senate Finance Committee.
The plan reduced the income cap for workers who would benefit from Obama’s $1,000 payroll tax credit to $140,000 for married couples and $70,000 for singles, from $150,000 and $75,000 respectively.
‘Build America Bonds’
Other provisions would reduce the value of a refundable child tax credit and certain types of new “build America bonds.” The compromise measure retains a $15,000 tax credit for people who buy homes over the next year and tax deductions for buyers of new cars, both of which were added to the larger measure this week, according to committee spokeswoman Carol Guthrie.
House Speaker Nancy Pelosi, a California Democrat, said earlier today she is “very much opposed to the cuts that are being proposed in the Senate” such as the reductions in education spending.
Lawmakers today approved an amendment imposing tougher restrictions on money for pet projects than those in the House bill. The House measure bars stimulus funding from going to casinos, aquariums, zoos, golf courses and swimming pools. The amendment adopted today includes those restrictions while also barring money from going to museums, arts centers, theaters, highway beautification projects, stadiums and parks.
“It’s about saying to the American people that we’re going to prioritize the spending,” said Senator Tom Coburn, an Oklahoma Republican who sponsored the amendment.
Venezuela Behind on Billions in Payments to Oil Contractors
Venezuela Behind on Billions in Payments to Oil Contractors
CARACAS, Venezuela — Venezuela's state oil company is behind on billions in payments to private oil contractors from Oklahoma to Belarus, some of which have now stopped work, even as President Hugo Chavez funnels more oil revenue to social programs.
Petroleos de Venezuela SA, or PDVSA, says unpaid invoices jumped 39 percent in the first nine months of last year — reaching $7.86 billion in September. And that was when world oil was selling for $100 a barrel.
With prices plummeting by more than half, PDVSA is trying to renegotiate some contracts. But analysts say hardball tactics to reduce charges from crucial service providers could backfire by lowering Venezuela's oil output. And foreign debt markets are reflecting jitters about Venezuela's finances.
Oil accounts for 94 percent of Venezuela's exports and funds nearly half the socialist government's budget, and Chavez uses it to bankroll an international aid bonanza, showering allies with cheap fuel, refining projects and cash donations.
But U.S. contractor Helmerich & Payne Inc. said last week that it has stopped drilling with two of its 11 oil rigs in Venezuela because of delayed payments. The Tulsa, Oklahoma, company says it will stop three more rigs by the end of February and the rest by the end of July if PDVSA doesn't begin to pay off a debt it puts at nearly $100 million.
Dallas-based Ensco International Inc. said it suspended operations on an oil rig off Venezuela's Caribbean coast because it was owed $35 million, prompting PDVSA to take over operations.
And Belgazstroy of Belarus has stopped work on gas networks in western Venezuela because of nonpayment, Venezuela's ambassador to Belarus, Americo Diaz Nunez, told Russia's RIA-Novosti news agency, adding that two other Belarusian contracts are also in question.
Greg Priddy, a global oil analyst with the Eurasia Group in Washington, estimated that within a year, production could decline an extra 100,000 to 150,000 barrels a day if drilling slows — equal to $5 million of daily income even at today's slumping oil prices.
PDVSA said in a statement that service providers increased prices by as much as 40 percent when oil prices were high, and company officials said only Oil Minister Rafael Ramirez could discuss the debts issue. PDVSA headquarters did not respond to requests for an interview with Ramirez, but he previously said PDVSA will make good on its accumulated debts with contractors.
Venezuela's net oil income soared 225 percent in the first nine months of 2008, allowing PDVSA to stash $10.8 billion in a government-run investment fund to be used for infrastructure, agriculture and other projects.
But the debts are mounting as Chavez campaigns for a Feb. 15 referendum that would eliminate term limits for all elected officials and enable him to seek re-election indefinitely.
In Venezuela's oil-producing Zulia state, PDVSA has held off on paying 230 service providers for an average of six months, said Nestor Borjas, state director of the nation's Fedecamaras business chamber. The debts total about $465 million, he said.
The outstanding payments appear to be contributing to declining confidence in Venezuelan bonds, which have fallen 7 percent since Jan. 9, to an average yield of 17.4 percentage points more than U.S. Treasuries, said Enrique Alvarez, head of research for Latin American financial markets at IDEAglobal in New York.
He attributed the plunge to PDVSA's shortfalls in payment, falling oil prices and the referendum.
Still, some analysts agree with government assurances that it has enough cash accumulated from the days of $147-a-barrel oil to sustain itself through 2010 with oil prices at $45 a barrel.
"While Venezuela is still far from being in a comfortable economic and financial position, the expectations of a default price in the markets appear excessive," Alejandro Grisanti of Barclays Capital in New York said in a recent report.
And some suppliers say they're not worried by the delays.
"It's happened in the past. We've always been paid," said Jens Schmidt, general manager for Copenhagen, Denmark-based Maersk Drilling in Venezuela, whose 10 offshore rigs are all operating normally.
Franco says many oil companies around the world are delaying payments as they renegotiate contracts, but PDVSA is taking a stronger stance than most — one likely to discourage already reluctant investors. "It's part of a larger strategy of hardball," said Franco said.
US senators 'agree' economy bill
US senators 'agree' economy bill
 There have been a series of meetings to try to find a compromise position |
Senators in Washington say they have reached agreement on a huge economic stimulus package designed to revitalise the US economy.
Senior Democrats say they will back a plan worth $780bn (£534bn), instead of the $900bn sought by the president, in order to gain vital Republican support.
President Barack Obama has become angry with delays to the bill, which mixes big spending plans and tax cuts.
The Senate is now due to hold a vote in the coming days.
President Obama has spoken of "an urgent and growing crisis" and said further Senate delays would be "inexcusable and irresponsible" and lead to "a catastrophe".
His comments came as the latest unemployment figures showed that the US had had its single worst month for job losses for 35 years.
Almost 600,000 people lost their jobs in January alone - figures Mr Obama described as devastating.
Rough water
President Obama is desperate to pass the package, the BBC's Adam Brookes in Washington says.
 |   The American people want us to work together - they don't want to see us dividing along partisan lines on the most serious crisis confronting our country  Senator Susan Collins Republican  |
This is the president's first big legislative initiative since he took office, and it has hit some very rough water, our correspondent says.
The new $780bn plan is composed of 42% tax cuts and 58% new government spending, Democratic Senator John Kerry said, according to Reuters news agency.
Other details of the slimmed-down package are sketchy, but one Democrat told Reuters that the homebuyer tax credit and car tax credit were still in the bill.
The Democrats need to persuade two Republicans to vote in favour of the bill for it to gain the necessary 60 Senate votes.
Although Democrats hold a 58-41 majority, 60 votes are required for the measures to pass because the bill would raise the federal deficit.
Senate Finance Committee Chairman Max Baucus said that at least three or four Republicans would vote for the bill.
"The American people want us to work together," said Senator Susan Collins, a Republican who will vote in favour.
"They don't want to see us dividing along partisan lines on the most serious crisis confronting our country."
However, the Senate minority leader, Republican Senator Mitch McConnell, said that "most of us are deeply sceptical that this will work".
And his Republican colleague, John McCain, defeated by Mr Obama in last year's presidential election said: "You can call it a lot of things but bipartisan isn't one of them."
'Echo chamber'
Mr Obama described as "devastating" the news that nearly 600,000 Americans lost their jobs in January.
"The situation could not be more serious. These numbers demand action," he said.
 Mr Obama said the situation "could not be more serious" |
"I created this board to enlist voices that come from beyond the echo chamber of Washington DC," said Mr Obama, "and to ensure that no stone is unturned as we work to put people back to work and to get our economy moving."
About one-third of the bill is currently composed of tax relief, with the rest devoted to spending on infrastructure projects, like roads and bridges, new schools and alternative energy programmes.
Republicans and some centrist Democrats are keen to reduce the number of spending commitments in the bill, and without their support the bill may not have enough votes to pass in the Senate.
The House of Representatives approved its version of the package last week, worth $825bn, without any Republican support.
If the Senate gives its approval to the bill, the two different versions will then have to be reconciled in a joint House-Senate committee before facing a final vote.
President Obama has said he wants the passage of the bill to be completed by 16 February.
Why the ‘Employee Free Choice Act’ Is Anything But
It's just an invitation to union intimidation and thuggery.
My uncle required a police escort to walk the 20 feet from the garage to his car door. He was 17-years-old, a good student living in a well-manicured suburb of St Louis West County. But he was a volunteer campaign worker for “Right to Work” in the summer of ‘76, and there were union goons waiting for him at the end of the driveway. One sunny morning on his way out the door, one of the thugs asked him menacingly, “How’s your little nephew Stevie enjoying day camp?” I was seven at the time and didn’t even know what a union was.
“Nothing personal, just business,” I suppose.
Welcome to the charming world of union intimidation. It could be coming to your workplace, as early as this summer. It might even come to your front door in the dead of night.
Workforce.com reports the latest developments on the so-called “employee free-choice”:
Simmering labor legislation reached a boiling point on Capitol Hill on Wednesday, February 4.
Hundreds of union workers and other supporters of a bill that would make it easier for employees to establish bargaining units gathered in a rally across the street from the Senate.
The event marked the launch of an aggressive effort by organized labor to gain congressional approval — and a presidential signature — for the Employee Free Choice Act, a bill that will be introduced soon.
“Free choice” is the worst kind of Orwellian language. If EFCA becomes law, then the secret ballot traditionally used to determine unionization votes in this country would be replaced by “card checks.” When the union comes to your business, asking you to join, you’ll be asked to check “Yes” or “No” on a card. In public. And if union history is any guide, the man holding the card under your nose might be large, threatening, and unlikely to take kindly to a “No.”
Veteran journalist — and self-confessed “neo liberal” — Mickey Kaus reported last week that Senate Majority Leader Harry Reid (D, AFL-CIO) has promised to get EFCA passed as early as this summer. Kaus has long fought against “card check” legislation, recognizing that unionized workers — especially in the auto industry — can’t compete against non-union workers. And often for wages little better than their non-union competition. Witness the productivity of Toyota (or Honda, or BMW, etc.) factories in this country versus General Motors. And it’s not just the pay — Wagner Act-inspired adversarialism between management and labor guarantees stringent work rules that have all but put Detroit out of business.
The issue here isn’t just economic, it’s also civil rights. It took decades of hard work to bring secret ballots to all our elections — and for the first time in modern history, a hard-won right could be stripped away from American workers.
How likely is EFCA to become law? The Los Angeles Times reports that President Barack Obama’s own pick for secretary of labor, California Congresswoman Hilda L. Solis (D, UAW) has “ties to American Rights at Work, a tax-exempt group dedicated to helping workers unionize.” Solis, the story says, is “treasurer of the organization,” and “federal records show that the group lobbied Congress last year to pass the measure [EFCA].” The Senate was originally scheduled to vote on Solis’s appointment Thursday, but was forced to delay after revelations of her husband’s tax liens.
On Fox News Sunday last month, House Speaker Nancy Pelosi confirmed that, “I myself am a strong supporter of that legislation.” The good news is, she seems to be in no rush to push the legislation through. The bad news is, she is an idiot. The very next words out of her mouth were, “But in terms of what we have to do in the first 100 days, we must address the needs of this country. Five hundred million people will lose their jobs each month until we have an economic package.” [Emphasis added.]
And President Obama? It’s hard to say just where he stands as president, but candidate Obama had this to say:
We need to stand up to the business lobby and pass the Employee Free Choice Act. That’s why I’ve been fighting for it in the Senate and that’s why I’ll make it the law of the land when I’m president of the United States.
EFCA proponents claim that their bill would make it easier for workers to form unions. That’s incorrect. Workers already have the ability to unionize wherever they see fit, using the same secret ballot they enjoy using in any other election. What EFCA would accomplish is to make is easier for unions to intimidate unwilling workers into accepting union domination. That’s not collective bargaining; that’s collective coercion.
Once upon a time, a young high school kid volunteering for his first political campaign needed the attention of a police officer to get safely across his parents’ driveway. What do you suppose your workplace — or even your front door — would be like if EFCA becomes law?
‘Economic Stimulus’ Is Essentially a Fraud
In twenty-first-century America, to be sure, we are far too sophisticated to be taken in by such hokum. However, as Kipling so incisively observed many years ago:
As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire.
So it is that not only did many Americans up until recently believe that housing prices would ever increase, they — or at least a large number of sophisticated investors — also believed that Bernie Madoff had solved the challenge of how to produce consistently above-average investment results with minimum risk. Such was their trust, they invested their hard-earned wealth in such nostrums.
We now find ourselves informed by “leading” economists and politicians that the solution to our current economic malaise is for government to embark on a gigantic spending spree. This spending, we are assured by one of the leading securities rating organizations, Moody’s Economy — whose recent history of ratings brings into question its judgment for quality analysis — that these expenditures will generate “multiples” of growth in GDP in magnitudes exceeding 1.5 times the amount spent. These estimates are supported by complex macroeconomic models which are incomprehensible to all but the most elite cognoscenti. In other words, the “experts” say the answer to economic stability and wealth creation is for our government to spend borrowed funds, to be repaid from our future wealth. Thus, miraculously, we are led to believe, our wealth will multiply and economic growth will be miraculously restored.
On the one hand, then, we are informed that we are in our financial straits as a result of a “bubble” caused by excessive spending which caused housing prices to grow beyond any sustainable level. On the other hand, we are advised that the way to solve this economic problem is to indulge in a massive spending program.
Is this not but a contemporary form of alchemy or fraud as understood in Dante’s time? I suggest that the alchemists have returned in the guise of economists and big-government propagandists and that it is time to reassert a few easily understood — and vital — economic principles.
The first of these is that since government has no wealth of its own, the only things it can do are:
- to redistribute private wealth (tax and spend), and/or
- to create new money (not wealth) with the resultant diminution of value in all of its citizens’ wealth.
Lest we forget, capital formation is the seed corn of wealth and job creation, and since wealth creation is the driver of economic progress, one must ask if government spending increases or enhances capital formation. If it does, does it do so more efficiently and produce more wealth and jobs than investment or spending decisions made by individuals, in the anticipation that their decisions will enhance their own economic well-being, i.e., create more personal wealth?
The answer is “no,” which is not to say that government spending or “investment” can have no beneficial effect. Yet the question remains whether the benefits of such spending are superior to those that would have accrued if individual citizens had been able to make their own decisions regarding economic matters. Viewed from the perspective at this time of, for example, General Motors, one could argue that although government loans may be beneficial to the recipient, they obscure the benefits that would have accrued had that same amount been saved or invested by individuals.
Moreover, government involvement in the economic affairs of a free market will also have a significant negative effect since market prices, which are the normal market indicators for allocation of resources, are distorted by this artificial and temporary spending and will thus encourage less efficient or even bad investments.
The history of economic progress throughout the world provides irrefutable evidence that the economic well-being of ordinary citizens is closely correlated to the relative degree of freedom in markets and the relative lack of government planning and spending. To argue that government direction and allocation of resources will produce better results is to ignore history and the general understanding of how markets function.
Let us put aside why politicians and various intellectuals prefer to have government allocate these resources and otherwise try to direct our lives in intrusive ways. It should be obvious to all that, from an economic standpoint, the cost of government intervention in the marketplace always comes at too high a price.
Is it too much to hope, at this time, to prove Kipling wrong and stop this ill-advised and headlong rush into massive government spending programs before our “Fool’s bandaged finger goes wabbling back to the Fire”?
by Bill BonnerWhat We Face Now Is a Depression
Oh...we got a good laugh this morning. Our favorite philosopher, Thomas L. Friedman, suddenly seemed to have understood something important:
"There is no magic bullet for this economic crisis," said he.
Then, (will wonders never cease!) he actually seemed to draw forth an insight:
"We are going to have to live with a lot more uncertainty for a lot longer than our generation has ever experienced."
Whoa. That's like, deep.
What happened to him? Did he drop the hair dryer in the bathtub...and give himself a jolt? Suddenly, he's saying something that is modest and sensible.
But Friedman's brush with intelligence lasted only three paragraphs. Then, it's back to the old simpleton Friedman...with a solution to every crisis...and a fix for every problem his last solution caused:
"The fact that there's no single pill doesn't mean there's nothing to be done. We need a stimulus big enough to create more jobs. We need to remove toxic assets from bank balance sheets. We need the US Treasury to close the insolvent banks, merge the weak ones and strengthen the healthy few. And we need to do each one right."
Good luck on that, Tom. These people doing all these wonderful things are the very same people who didn't notice that anything was in the financial sector in the first place. Mr. Geithner was right there at the New York Fed, hobnobbing with the masters of the universe, dining with the captains of the financial industry, nodding in approval as the biggest bamboozle in history was put over on investors and the public.
And even if Geithner were a genius who had warned us about excesses on Wall Street, he still wouldn't be the fixer Friedman imagines.
You can fix a recession with this kind of tinkering. But you can't fix a depression. And what we face now is a depression.
Yes, dear reader, the picture is becoming clearer and clearer. It is not very different from what we expected...but it is drawing closer. We see more detail. Like an asteroid that is on course to destroy the earth, it is getting close enough so we can make out the hills...the craters...and the dusty plains...
Many thanks to David Rosenberg, an economist at Merrill Lynch, for training his telescope on this rock from Hell.
He notices two disturbing features.
First, it is not a recession; it is a Depression. While there's no precise difference between the two, a depression is regarded as more severe...and NOT susceptible to normal government fixes. Typically, a downturn is met with lower interest rates and higher government spending. These twin missiles of increased consumer credit and higher deficits blast the asteroid smithereens before it reaches earth.
But as we have opined many times, this time it's different. We have a real, structural Depression on our hands...caused by too much debt. When people get in this situation, they can't spend more – even if someone offers them more credit on easier terms.
"People make a very conscious decision not to buy, and that kind of decision is not reversed quickly," said an analyst to the New York Times.
How much debt is too much? Well, private debt is usually about 80% of GDP. Now, it's about 140% of GDP. That's about $6 trillion of debt that needs to be paid off...or written off. And that's after $1 trillion of write-offs in 2007 & 2008.
There are only three ways to attack this debt: inflation, liquidation, or boondogglization. Friedman...and practically all mainstream economists and politicians...favor the third choice. A little of this...a little of that...and something for everyone...
"In order to pass a piece of legislation," explained a Democrat from New York, "items are added that are necessary to secure the votes."
The International Herald Tribune tells a bit of what has been put into the Obama plan:
"...there is $54 billion in the bill in the House of Representatives for new forms of 'American energy,' a phrase with an air of nationalism, along with a series of 'Buy America" requirements of dubious legality under trade treaties; $141 billion for education; $24 billion for lowering health care costs; and $6 billion for broadband service..." etc. etc.
Colleague Porter Stansberry adds this assessment:
"Congress wants you to believe we can dig ourselves out of the financial crisis by spending $400 million to research global warming, $650 million to convert analog TVs to digital, $7 billion to 'modernize' federal buildings, and $20 billion on food stamps, etc. According to the Wall Street Journal, '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.'"
We don't doubt that all this corruption is well-meant. Heck, who doesn't want to blow up this Depression Asteroid before it hits us? But boondogglization won't work. Because it doesn't solve the real problem – the debt. It merely moves debt from the private sector to the public sector; overall, debt actually increases.
There is about $6 trillion worth of debt that needs to be eliminated before the economy can begin to grow again. Liquidation would do it – quickly and painfully. People would get what they had coming. The U.S. dollar-based system would collapse. Everyone would learn a lesson and be better off for it.
But that could happen only over the dead bodies of Ben Bernanke and other key policy makers. Which is our preferred approach. But we are in a tiny minority. Everyone else believes that somehow some hocus-pocus will get us out of this mess without pain or suffering.
Let's "get all the right people into the room and close the door and put a solution up on the wall," said Jamie Dimon of JPMorgan Chase.
Eventually, the solution these simpletons are going to look at is the only one that will really work: inflation. Overt. Shameless. Explicit inflation.
Eventually, when their boondoggling is clearly not working...and when unemployment is over 12%...they will turn to Gideon Gono and ask for his help.
Our daughter, Maria, began her US television career during the Super Bowl. You see her for about a second.
Tough business, acting. You spend three years in acting school...you try out for hundreds of parts...and you get a little gig in a commercial, without a single line.
Florida's Unnatural Disaster
Florida's Unnatural Disaster
Charlie Crist, taxpayers and the next hurricane.
Who needs Mother Nature to cause a catastrophe? Florida's politicians are busy creating an unnatural disaster in their state insurance market that will blow away taxpayers when the next big hurricane hits. And we mean taxpayers across America.
Last month State Farm pulled the plug on its 1.2 million homeowner policies in Florida, citing the state's punishing price controls. The state's largest insurer joins a raft of competitors that have already reduced or dumped their property and casualty business in the Sunshine State, including Prudential, Allstate, Nationwide and USAA. This is the inevitable result of Governor Charlie Crist's drive to control property-insurance premiums. The Republican also lobbied his GOP legislature to make the state government a giant competitor in the market, undercutting private insurers.
State Farm's local subsidiary recently requested an increase of 47%, but state regulators refused. State Farm says that since 2000 it has paid $1.21 in claims and expenses for every $1 of premium income received. Since January 2008 alone, the company's surplus has fallen to $621 million from $820 million. Every month in Florida, State Farm loses $20 million. So it finally said, No mas.
Meanwhile, Floridians have been signing up with Citizens Property Insurance Corp., the state-run insurer that Mr. Crist unleashed in 2007. Because it has an implicit taxpayer guarantee, and because its actuarial assumptions are, well, loose, Citizens can offer lower premiums than private competitors can. Citizens has become the largest insurer in the state, with 1.1 million policies.
Mr. Crist has thus guaranteed that Floridians, rather than the global insurance industry, will be on the hook for property damage when the next Katrina hits. Citizens is facing more than $400 billion in potential exposure, yet Citizens Chief Financial Officer Sharon Binnun was recently cited in the South Florida Sun Sentinel as saying it had only $3.4 billion in net assets. Anxious to keep voters happy, legislators have frozen Citizens premiums the past three years.
Some 25% of the coastal property in U.S. hurricane zones is located in Florida, and another storm is inevitable. To pay for those claims when they come, Mr. Crist will either have to raise taxes on Floridians, or beg Congress for a rescue. Mr. Crist tried the latter in 2007 when he pushed federal legislation to distribute below-market loans to state insurance programs and create a federal reinsurance body to backstop undercapitalized states.
Even the Governor may be catching onto his folly. While dismissing State Farm's exit -- "Floridians will be much better off without them" -- he is pushing for a law barring the company from dropping more than 2% of its customers in a single year. So, having publicly brutalized State Farm, undercut its business and set its prices, Mr. Crist now wants to require it to keep losing money.
Mr. Crist's behavior stands in contrast to that of Louisiana, of all places. Baton Rouge also established a Citizens insurer after Katrina but only as a "last resort." Louisiana has a thriving private insurance market, in part because regulators have let companies adjust their rates. By law, Louisiana Citizens cannot offer competitive prices, save in a few high-risk coastal areas. From a peak of about 170,000 policies in 2007, it now holds about 130,000 (about what it had before Katrina) and is aiming to get below 100,000.
It's scary to imagine the bill taxpayers will get when the next big hurricane hits Florida. It's even scarier to think Mr. Crist is being touted as a potential GOP candidate for the White House.
Cap-And-Trade Will Hammer Consumers
At a time when proposals for higher taxes are politically unpopular, Congress is coming up with other strategies to raise revenues at the expense of the American public.
Key congressional committees are expected to begin debating legislation that would impose mandatory limits on greenhouse-gas emissions. If Congress is successful, the average American will not be victimized as a taxpayer, but as a consumer.
The proposed legislation would create a European-style, market-based system that caps the maximum allowable amounts of carbon dioxide from power plants, manufacturers and vehicles.
Hidden Taxes
If companies emit more than their cap allows, they must buy "carbon permits" on the market from companies that have extra ones. This cap-and-trade system is designed to give companies an incentive to reduce emissions, but unknowing consumers would be taxed through higher home energy bills and the rising cost of fuel, food and consumer products.
House Speaker Nancy Pelosi has vowed to hold a floor vote on cap-and-trade legislation before negotiators meet later this year in Copenhagen, Denmark, under U.N. auspices to work toward a new international climate change agreement.
"Cap and trade is there for a reason," the San Francisco Democrat said recently. "You cap and trade so you can pay for some of these investments in energy independence and renewables."
What this really means is that by collecting such fees from utilities and other companies, Congress would be placing an unfair burden on consumers' shoulders to reduce carbon emissions.
Some members of Congress are actually recommending an open-ended collection of fees from companies. The assumption is that firms such as utilities, whose only source of revenue in many cases is the ratepayers, are a bottomless pit of funding.
Consumers should pay their fair share of the cleanup, but the proposed fees far exceed that. The frightening part is that we still do not have a credible cost estimate for the cleanup effort.
Worse yet, Congress is preparing to spend tens of billions of dollars on renewable energy sources and improvements in energy efficiency in the hope they will replace fossil fuels. But solar, wind and geothermal energy cannot provide the large amounts of base-load electricity that our economy requires.
On the other hand, nuclear power, natural gas and clean coal can do the job, but these solutions have been closed down by environmentalists.
When Europe launched its system in 2005 as a way to meet its targets under the Kyoto Protocol, it cast itself as a leader in the fight against global warming. But Europe's first three years of cap and trade have not worked as intended. Emissions have risen.
With cap and trade, a significant cost has fallen on their economies from lost competitiveness, lost jobs and lost investment.
If we're not careful, carbon cap and trade in the U.S. could be disastrous, especially if it is linked to Europe's system.
Remember that no concrete plans are in the works to require China — the world's leading emitter — and other developing countries to reduce their greenhouse-gas emissions.
Real Costs
Although the U.S. and the other leading industrialized countries have set a goal to cut emissions by 50% by 2050, developing countries like China and India have not accepted mandatory caps on carbon emissions.
If we penalize our companies for carbon emissions, why should we exempt firms in developing countries from that requirement?
In effect, by collecting fees from American companies — with the cost ultimately borne by consumers — we are subsidizing our foreign competitors at our own expense.
It's time we developed a fair system by first recognizing that greenhouse gas controls must be implemented globally. No one nation can do much on its own to reduce climate change. We need to gauge the real costs involved in reducing carbon missions, then set a defined limit on what American consumers should pay.
Perry is a professor of finance and economics at the Flint campus of the University of Michigan.
Paul Krugman wages a dishonest war against Reagan’s record.
Paul Krugman wages a dishonest war against Reagan’s record.
By Alan Reynolds
In June 1980, under Pres. Jimmy Carter, the combined unemployment and inflation rates—the “misery index”—reached 22 percent. The Federal Reserve belatedly raised the federal-funds rate from 9 percent in July of 1980 to 19.1 percent shortly before Ronald Reagan took office. The 30-year mortgage rate hit 18.45 percent that fall.
Despite that unprecedented headwind, the misery index dropped to 7.7 percent by the end of 1986. And the U.S. economy grew by 3.4 percent a year from 1981 to 1988—an average that includes the worst postwar recession by far (this one is not even close). After the recession, from 1983 to 1989, the economy grew by 4.3 percent a year.
Two new books make a feeble, partisan effort to minimize that astonishing economic turnaround. Amazingly, they even try to blame our present discontent on Ronald Reagan.
One is Tear Down This Myth: How the Reagan Legacy Has Distorted Our Politics and Haunts Our Future by Will Bunch of the Philadelphia Daily News. One myth, according to Mr. Bunch, is “that the economic boom that Americans were enjoying in 1997 was the result of the Reagan tax cut (and not the march toward balanced budgets, lower interest rates and targeted investment).” Personally, I’d give the Internet some credit for 1997. But the capital-gains tax was also cut from 28 percent to 20 percent in 1997, and the top income-tax rate that year was lower than in all but the last two years of the Reagan presidency. If a “march toward balanced budgets” stimulated the economy after 1997, then Bunch should warn President Obama that he is marching in the wrong direction.
Then there is The Man Who Sold the World: Ronald Reagan and the Betrayal of Main Street America by William Kleinknecht, crime correspondent for the Newark Star Ledger. He complains of “the bitter legacy of Reaganism—the subprime mortgage scandal . . . the end of locally owned media, market crashes, blackouts, drug company scandals, rampant greed and materialism,” etc. To prove “Reaganomics . . . brought a reversal in the slow gains that the working class and the poor had made” (during the 1970s?) Kleinknecht offers no data about incomes or poverty, just errors about wealth. He says wealth gains among the top 1 percent “far surpassed” those in the middle. Federal Reserve figures show the opposite—median wealth rose by 18.3 percent from 1983 to 1989 and the top 1 percent’s share fell by 1.4 percentage points.
Bunch and Kleinknecht are not economists, obviously. But Paul Krugman won a Nobel Prize in the subject, and he, too, has long been trying to rewrite the economic history of the 1980s.
A column published a year ago, “Debunking the Reagan Myth,” attacked Barack Obama’s statement that the Reagan years offered a “sense of dynamism and entrepreneurship that had been missing.” Krugman thought “progressives ought to be driving home the idea . . . that Reaganism is fundamentally wrong.” “Where in [Obama’s] remarks was the clear declaration that Reaganomics failed?”
Krugman has been trying to prove Reagan’s policies failed since 1992, when he persuaded a reporter from the New York Times to write that most growth in incomes from 1977 to 1989 went to the top 1 percent. Defining the “Reagan era” as starting in 1977 or 1979 soon became his favorite trick. Krugman and his followers then began to stretch Reagan’s term of office to 1991. Kleinknecht goes further, blaming a “post-Reagan era” for mortgage-related errors of the Clinton administration and of Robert Rubin.
“A Vision of Change for America,” from the Clinton White House in February 1993, said, “Throughout the 1980s, slow growth in living standards was accompanied by growing inequality. . . . People at the bottom of the scale actually lost ground: measured in inflation-adjusted dollars, their income fell between 1977 and 1991.” The Clinton team understood Krugman’s main lesson about how progressives should “talk about the Reagan era”—namely, that they must always define Reagan’s term of office as starting in the 1970s and ending with the recession of 1991.
Krugman’s column insisted that Reaganomics “did fail. The Reagan economy was a one-hit wonder. Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession. But while the rich got much richer, there was little sustained economic improvement for most Americans. By the late 1980s, middle-class incomes were barely higher than they had been a decade before—and the poverty rate had actually risen.”
This suggests the entire period from early 1983 to mid-1990 was nothing more than a routine recovery from recession. That is wrong. Real GDP peaked in the first quarter of 1980 at $5,221.3 billion, measured in 2000 dollars. By the first quarter of 1983, real GDP reached $5253.8 billion; the economy had already passed from recovery to expansion. Industrial production hit 59.5 by 1984—well above the peak of 56.6 in 1979.
“By the late 1980s,” wrote Krugman, “middle-class incomes were barely higher than they had been a decade before.” That is because he compares 1989 with 1979, not 1980. Real median family income fell 3.6 percent in 1980 alone, but rose 9.7 percent from 1980 to 1989.
Krugman’s claim that “the poverty rate had actually risen” relied on a graph from 1976 to 1990. The poverty rate fell from 13 percent in 1980 to 12.8 percent in 1989. Poverty averaged 14.1 percent from 1993 to 1997 and did not get back to the1989 level until 1998.
Referring to Obama’s remark, Krugman says, “I’m not sure what ‘dynamism’ means, but if it means productivity growth, there wasn’t any resurgence in the Reagan years.” Dynamism surely refers to sustained economic progress, which can be achieved with more output per worker (productivity), but also with more people seeking and finding work.
Krugman first alluded to sluggish labor productivity growth from 1973 to 1994—the “Reagan years.” In a blog post, he also showed that multifactor productivity (of labor and capita) rose by just 0.6 percent a year from 1973 to 1990. But OECD in Figures shows that U.S. multifactor productivity increased by 1 percent per year from 1985 to 1992, slipping to 0.9 percent from 1993 to 2000, and then doubling to 1.8 percent from 2001 to 2005.
Referring again to Obama’s remark, Krugman said, “If a sense of entrepreneurship means having confidence in the talents of American business leaders, that didn’t happen in the 1980s, when all the business books seemed to have samurai warriors on their covers.” It is hard to imagine a weirder definition of entrepreneurship than “confidence” among the authors of such idiotic books as Trading Places by Clyde Prestowitz or Rising Sun by Michael Crichton. From 1991 to 2007, industrial production rose by 43.7 percent in the U.S., but by only 8.4 percent in Japan.
Krugman calls his book and his blog “The Conscience of a Liberal.” What conscience?
If we can recall bad peanut butter, why can’t we also recall a Nobel Prize?
— Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth
'Buy American' provision is ghost of Smoot-Hawley
'Buy American' provision is ghost of Smoot-Hawley
Protectionist measure could lead to a trade war that would make the recession worse
In 1930, as the Great Depression tightened its grip on the country, Congress passed the Smoot-Hawley Act, erecting a high and onerous tariff wall around the U.S. economy. The lawmakers thought they were helping American workers; instead, they greatly lengthened and deepened the Great Depression, here and worldwide.
What the Congress is considering doesn't rise to the level of Smoot-Hawley but "Buy American" is protectionism and protectionist measures tend to feed on themselves. We enact them, our trading partners retaliate and on it goes in a downward spiral.
Just the prospect of it caused the European Union to complain to the White House and the Treasury and State departments that Congress was about to set "a very dangerous precedent."
The House added a measure to the stimulus bill requiring that only U.S.-made iron and steel be used in federally funded public works projects. The Senate is contemplating an even more drastic step; that "manufactured goods" used in public works projects come from U.S. supplier.
This sounds simple but it could be a nightmare to administer in an era when U.S. and foreign companies own big chunks of each other and there's a huge foreign manufacturing presence in the United States.
President Obama is against it. He has said that the U.S. should avoid doing anything that "signals protectionism," which this clearly does, and he told ABC News this week, "I think that would be a mistake right now. That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe."
It is more than just potential. EU officials have said if these provisions go into effect they very likely will complain to the World Trade Organization and one outcome might be that the WTO would allow the EU to retaliate against U.S. exports.
And, European officials pointed out, at the G20 meeting in Washington the U.S. backed a resolution that the members would not let themselves be stampeded into protectionist measures by the recession.
The Senate had a chance to scrap the measure, removing it completely from the stimulus plan, but that was rejected. The Senate did agree to dilute the clause by adding language that it must adhere to existing laws and trade treaties. The new language proposed by Democrat Sen. Byron Dorgan ensured that "Buy American" provisions would be "applied in a manner consistent with United States obligations under international agreements."
Core supporters of the measure, chiefly Democrats from hard-hit states, say it will ensure that stimulus dollars don't head overseas.
Sen. John McCain voiced concerns that the clause would violate U.S. obligations under international trade pacts and could set off trade wars. That concern resulted in the softened language approved later Wednesday.
There will be another opportunity to scrap the measure when the Senate and House bills are reconciled in conference.
If it survives, it will be a tough call for Obama. "Buy American" is a great political sound bite but bad economics. The president's natural allies, the Democratic congressional leadership and the unions, are strongly for the Buy American provisions, and his opponents on much of the stimulus measures, the Republican congressional leadership, are against it. But it is a call the president has to make.
A Republican Fannie Mae
A Republican Fannie Mae
The worst mortgage idea since Barney Frank's last one.
How's this for a bright idea to boost home prices and goose the economy: Have two government-chartered entities exploit Uncle Sam's low borrowing costs to subsidize mortgage rates. Lower borrowing costs will make housing more affordable and increase demand for unsold homes. If this sounds hauntingly familiar, that's because it is.
![[Review & Outlook]](http://s.wsj.net/public/resources/images/OB-DB925_oj_1mo_E_20090205224422.jpg)
APMitch McConnell.
Think Fannie Mae and Freddie Mac, whose mortgage-rate subsidy helped get us into this mess.
Well, here we go again, though this time the Republicans are offering the free lunch. Under a proposal endorsed this week by Senate GOP leader Mitch McConnell, Fannie and Freddie would serve as the conduit for 30-year mortgages with fixed 4% interest rates. This is based on an idea that economists Glenn Hubbard and Christopher Mayer first floated on these pages, targeting a 4.5% fixed rate. Let's just say this proves we don't agree with everything we publish.
Because 10-year Treasury yields are currently around 2.9%, the government could in theory borrow the money, lend it out at 4% and make these mortgages available at minimal cost. These mortgages would encourage buyers to buy and so stem the decline in home prices. If they were made available to those refinancing, they could also help people struggling to pay their mortgage bills or facing resets on adjustable-rate loans.
That's the theory.
The problems are price-fixing, taxpayer cost, and a misunderstanding of housing trends. True, the government would not set the prices of the houses themselves. But by fixing the price of home financing, the government would be nationalizing one more branch of the housing market. The feds tried this recently with student loans, and the result is that the private market largely collapsed. After this all-too-predictable result, Congress did what comes naturally: It blamed lenders who withdrew from the market for being "greedy." And it had the government -- the taxpayer -- become the main lender to students.
If the government wanted to avoid this fate, it could instead let banks make the loans and subsidize them for the difference between the 4.5% rate and the market rate. But wait -- if the government has fixed the price, there is no market rate, so there's no way to know what a "fair" rate of subsidy is. This was one of the problems with Congress's 2007 student-loan reform. Lenders and lawmakers had different ideas about how to define fair compensation, so the lenders walked.
Proponents nonetheless claim this would help consumers by lowering their mortgage payments and stopping the house-price decline. In fact, the impact on home prices or housing demand is likely to be small. Some supporters claim a 4.5% mortgage rate could add 12% or more to house prices. But other estimates put the home-price boost at closer to 1%-3%, a tiny improvement in a dismal market. Home prices in many markets are still too high compared to long-term trends, and they are likely to keep falling until they get back to that norm.
Mr. Hubbard says 4.5% mortgages could boost homeownership back to levels last seen in 2004, at the height of the boom. That seems unlikely. Those who have had their credit destroyed by foreclosure are probably not the best candidates for jumping back into the housing pool. Most of the people who would take advantage of these loans either would have bought a home anyway, because they need one, or already own a home and want to (but don't need to) lower their rates.
But even if this did happen, it's not clear why it should. These days even Barney Frank agrees that homeownership rates were artificially high at the end of the boom. Getting back to those levels would only presage another bust. That bust would be scheduled for shortly after this supposedly temporary program ended, assuming it ever does. Right now, 30-year mortgage rates are hovering around 5.5%. These are already nearly as low as they've been in a generation. Even if they only went back up to current levels after the program ended, rates would seem high to homeshoppers merely because they are higher than they were. So any new demand generated now would have to be set against the depressed demand in the future.
Any such program would also have to be huge -- and hugely expensive. Harvard's Ed Glaeser estimated on these pages Thursday that a $10 trillion program might cost the Treasury $135 billion or so. But that assumes that all those mortgages are paid back in full. And keep in mind the money would have to be borrowed -- in addition to the $3 trillion or so the Treasury will already have to borrow in the next two years. If interest rates and thus federal borrowing costs rise to the 1990s average for the 10-year note of 6.5%, look out.
We realize Republicans feel obliged to have their own "stimulus" plan, and that doing something for housing scores well in polls. We also remember when the subsidy to Fannie and Freddie was considered costless too. Tens of billions later, the tab is still growing. This one could be larger.
Senators Close to Reaching Accord
Senators Close to Reaching Accord on Stimulus Bill
Senators Charles Schumer, left, and Ben Nelson outside Senator Harry Reid's office on Friday as the negotiating continued over President Obama's stimulus package.
Democrats appeared to have succeeded, after a long day of private negotiations and intense public debate, to have won the support of enough Republicans to move the package toward a final vote. Assuming there is a final vote, passage would be assured.
Exact outlines of the accord were not immediately available, but the senators reportedly agreed to cut some spending and strip out some business tax cuts to gain enough Republican support.
Once the Senate votes on the package, differences between the Senate legislation and a considerably different version passed recently by the House would have to be reconciled. President Obama has said he hopes all that can be accomplished in time for him to sign the measure within 10 days.
Three centrist Republicans, Arlen Specter of Pennsylvania and Olympia J. Snowe and Susan Collins, both of Maine, were said to be among the senators being wooed by Democrats, whose efforts were bolstered by Rahm Emanuel, the president’s chief of staff, who is a former Congressman from Illinois.
Senator Harry Reid of Nevada, the Democratic majority leader, and Mr. Emanuel reportedly met with Ms. Collins and Mr. Specter Friday evening to smooth out any remaining wrinkles. Soon afterward, Mr. Reid conferred with his fellow Democrats to gain their approval.
The Senate negotiations and day-long public debate were given new urgency by the announcement on Friday morning that 598,000 jobs were lost in January. Democratic lawmakers said it was time to stop quibbling about the exact parameters of the legislation, which mixes safety net spending, tax cuts and a huge infusion of dollars into federal programs.
“While we dither, Rome burns,” Senator Dianne Feinstein, Democrat of California, said, noting that the number of unemployed in her state was greater than the total population of other states.
At the White House, Mr. Obama urged Congress to act expeditiously.
“It is inexcusable and irresponsible for any of us to get bogged down in distraction, delay or politics as usual while millions of Americans are being put out of work,” said the president, who has grown increasingly impatient with Republican resistance to the legislation.
But Republicans argued that the urgency of the moment should not make them forget their party’s principles. “We want to stimulate the economy, not mortgage the future of our children and grandchildren by the kind of fiscally profligate spending embodied in this legislation,” said Senator John McCain of Arizona, the defeated presidential candidate who was emerging as a chief Republican opponent of the proposal.
The accord emerged after hours of talks between Democratic leaders and a bipartisan group of lawmakers seeking some reductions in the price tag of the plan. The bipartisan group led by Senators Collins and Ben Nelson, a conservative Democrat from Nebraska, was trying to reduce the spending to about $800 billion, in line with Mr. Obama’s initial request.
A memorandum circulating Friday afternoon listed proposed cuts that would bring a net reduction of about $80 billion from a measure that had grown to more than $900 billion. The document showed that money would be eliminated from education programs such as Head Start, criminal justice initiatives that included money for additional police, and some future spending on food stamp programs. The proposal would add spending on Pentagon programs, environmental cleanup and some transportation programs.
“This is a critical day for this new Congress and our country,” Senator Reid said. “Faced with this grave and growing economic crisis, Republicans must decide today whether they will join the president and Congressional Democrats on that road to recovery.”
“Lets not get dug in,” said Senator Joseph I. Lieberman, independent of Connecticut. “This is not a perfect bill, but it clearly is a very good bill. Most important, of all, it is a proposal that will pump money into American economy, into the pockets of working Americans and to businesses throughout this country.”
By mid-day, after the president called further delays “inexcusable,” the tone of the Senate debate was growing decidedly sharper, with no immediate end in sight, although the Democratic majority leader, Senator Harry Reid of Nevada, remained optimistic about a vote by Friday evening.
President Obama seized on Friday’s economic news — the Labor Department’s report that the unemployment rate shot up in January — to step up the pressure on the lawmakers. “Last month, another 600,000 Americans lost their jobs,” Mr. Obama said. “That is the single worst month of job loss in 35 years. The Department of Labor also adjusted their job loss numbers for 2008 upwards, and now report that we have lost 3.6 million jobs since this recession began.
“I am sure that at the other end of Pennsylvania Avenue, members of the Senate are reading these same numbers this morning. I hope they share my sense of urgency and draw the same, unmistakable conclusion: The situation could not be more serious. These numbers demand action. It is inexcusable and irresponsible to get bogged down in distraction and delay while millions of Americans are being put out of work. It is time for Congress to act.”Senator Joseph I. Lieberman, independent of Connecticut, said he was worried that the Senate was becoming like a gathering of firefighters arguing about “how to get to the fire while the house keeps burning.”
“This is a critical day for this new Congress and our country,” Mr. Reid said earlier on the Senate floor. “Faced with this grave and growing economic crisis, Republicans must decide today whether they will join the president and Congressional Democrats on that road to recovery.
“If we succeed, there will be plenty of credit to go around. But if we fail, our entire country will suffer the consequences.”
Still, Mr. Reid’s Republican counterpart, Senator Mitch McConnell of Kentucky, said his party colleagues would not sign on to “an aimless spending spree that masks as a stimulus.”
President Obama, after signaling for the last several weeks that he wanted to work with Republicans on the bill and accommodate their requests, suggested in sometimes-sharp language on Thursday night that his patience with the other party is wearing thin, and that the Democratic Party’s ideological approach should take precedence.
“Don’t come to the table with the same tired arguments and worn ideas that helped to create this crisis,” Mr. Obama told a gathering of House Democrats in Williamsburg, Va., referring to Republican demands for more tax cuts.
“We are not going to get relief by turning back to the very same policies that for the last eight years doubled the national debt and threw our economy into a tailspin,” Mr. Obama said. “We can’t embrace the losing formula that says only tax cuts will work for every problem we face, that ignores critical challenges like our addiction to foreign oil, or the soaring cost of health care, or falling schools and crumbling bridges and roads and levees.”
Stepping up his pressure on both parties on Capitol Hill to act swiftly to finish work on the bill in the next 10 days, the president said that the American people had not voted for “the false theories of the past” when they elected him in November, and that it was time to set aside “phony arguments and petty politics.”
The Democrats will need the support of at least two Republicans and probably more to win passage of the Senate’s stimulus bill, which for procedural reasons will require 60 votes. The Democrats now hold 58 seats, but only 57 have been voting this week. Senator Edward M. Kennedy of Massachusetts has been absent because of illness.
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