Tag Archives: Derek Thompson

Wikileaks 2.0

http://bankofamericasuck.com/

Adrian Chen at Gawker:

A member of the activist collective Anonymous is claiming to be have emails and documents which prove “fraud” was committed by Bank of America employees, and the group says it’ll release them on Monday. The member, who goes by the Twitter handle OperationLeakS, has already posted an internal email from the formerly Bank of America-owned Balboa Insurance Company

The email is between Balboa Insurance vice president Peggy Johnson and other Balboa employees. (Click right to enlarge.) As far as we can tell, it doesn’t show anything suspicious, but was posted by OperationLeaks as a teaser. He also posted emails he claims are from the disgruntled employee who sent him the material. In one, the employee says he can “send you a copy of the certified letter sent to me by an AVP of BofA’s [HR department] telling me I am banned from stepping foot on BofA property or contacting their employee ever again.”

OperationLeaks, which runs the anti-Bank of America site BankofAmericasuck.com, says the employee contacted the group to blow the whistle on Bank of America’s shady business practices. “I seen some of the emails… I can tell you Grade A Fraud in its purest form…” read one tweet. “He Just told me he have GMAC emails showing BoA order to mix loan numbers to not match it’s Documents.. to foreclose on Americans.. Shame.”

An Anonymous insider told us he believes the leak is real. “From what I know and have been told, it’s legit,” he said. “Should be a round of emails, then some files, possible some more emails to follow that.” The documents should be released Monday on Anonleaks.ch, the same site where Anonymous posted thousands of internal emails from hacked security company HBGary last month. That leak exposed a legally-questionable plot to attack Wikileaks and ultimately led to the resignation of HBGary CEO Aaron Barr.

Katya Wachtel at Clusterstock:

Anonymous said late Sunday evening, however, “this is part 1 of the Emails.” So perhaps more incriminating correspondence is to come. And to be honest, these messages could be incredibly damaging, but we’re not mortgage specialists and don’t know if this is or isn’t common in the field. The beauty is, you can see and decide for yourself at bankofamericasuck.com.

But for those who want a simple explanation, here’s a summary of the content.

The Source

The ex-Balboa employee tells Anonymous that what he/she sends will be enough to,

crack [BofA’s] armor, and put a bad light on a $700 mil cash deal they need to pay back the government while ruining their already strained relationship with GMAC, one of their largest clients. Trust me… it’ll piss them off plenty.

The source then sends over a paystub, an unemployment form, a letter from HR upon dismissal and his/her last paystub and an ID badge.

He/she also describes his/herself:

My name is (Anonymous). For the last 7 years, I worked in the Insurance/Mortgage industry for a company called Balboa Insurance. Many of you do not know who Balboa Insurance Group is, but if you’ve ever had a loan for an automobile, farm equipment, mobile home, or residential or commercial property, we knew you. In fact, we probably charged you money…a lot of money…for insurance you didn’t even need.

Balboa Insurance Group, and it’s largest competitor, the market leader Assurant, is in the business of insurance tracking and Force Placed Insurance…  What this means is that when you sign your name on the dotted line for your loan, the lienholder has certain insurance requirements that must be met for the life of the lien. Your lender (including, amongst others, GMAC… IndyMac… HSBC… Wells Fargo/Wachovia… Bank of America) then outsources the tracking of your loan with them to a company like Balboa Insurance.

The Emails

Next comes the emails that are supposed to be so damaging. The set of emails just released shows conversational exchanges between Balboa employees.

The following codes pertain to the emails, so use as reference:

  1. SOR = System of Record
  2. Rembrandt/Tracksource = Insurance tracking systems
  3. DTN = Document Tracking Number. A number assigned to all incoming/outgoing documents (letters, insurance documents, etc)

The first email asks for a group of GMAC DTN’s to have their “images removed from Tracksource/Rembrandt.” The relevant DTNs are included in the email — there’s between 50-100 of them.

In reply, a Balboa employee says that the DTN’s cannot be removed from the Rembrandt, but that the loan numbers can be removed so “the documents will not show as matched to those loans.” But she adds that she needs upper management approval before she moves forward, since it’s an unusual request.

Then it gets approved. And then, one of the Balboa employees voices their concern. He says,

“I’m just a little concerned about the impact this has on the department and the company. Why are we removing all record of this error? We have told Denise Cahen, and there is always going to be the paper trail when one of these sent documents come back. this to me seems to be a huge red flag for the auditors… when the auditor sees the erroneous letter but no SOR trail or scanned doc on the corrected letter… What am I missing? This just doesn’t seem right to me.

We suspect this is the type of email that Anonymous believes shows BofA fraud:

leak one

Image: Anonymous

Click here to see why these emails prove nothing interesting, and to see what what Bank of America says about the emails >

Chris V. Nicholson at Dealbook at NYT:

A Bank of America spokesman told Reuters on Sunday that the documents had been stolen by a former Balboa employee, and were not tied to foreclosures. “We are confident that his extravagant assertions are untrue,” the spokesman said.

The e-mails dating from November 2010 concern correspondence among Balboa employees in which they discuss taking steps to alter the record about certain documents “that went out in error.” The documents were related to loans by GMAC, a Bank of America client, according to the e-mails.

“The following GMAC DTN’s need to have the images removed from Tracksource/Rembrandt,” an operations team manager at Balboa wrote. DTN refers to document tracking number, and Tracksource/Rembrandt is an insurance tracking system.

The response he receives: “I have spoken to my developer and she stated that we cannot remove the DTNs from Rembrandt, but she can remove the loan numbers, so the documents will not show as matched to those loans.”

According to the e-mails, approval was given to remove the loan numbers from the documents.

A member of Anonymous told DealBook on Monday that the purpose of his Web site was to bring attention to the wrongdoing of banks. “The way the system is, it’s made to cheat the average person,” he said.

He had set up a Web site to post bank data that WikiLeaks has said it would release, and was subsequently contacted this month by the former Balboa employee. It has been speculated that the documents, which have yet to be released, would focus on Bank of America. The spokesman for Anonymous said he had no direct ties to WikiLeaks, which is run by Julian Assange.

Nitasha Tiku at New York Magazine:

WikiLeaks’ founder, Julian Assange, has threatened to leak damning documents on Bank of America since 2009. And Anonymous has backed WikiLeaks’ mission as far as the free flow of information. But these e-mails date from November 2010. Plus, they don’t exactly amount to a smoking gun. Whether or not the e-mails prove real, it’s clear Bank of America should have expanded its negative-domain-name shopping spree beyond BrianMoynihanSucks.com.

Naked Capitalism:

The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible. (Note Balboa is due to be sold to QBE of Australia; I see that the definitive agreement was entered into on February 3 but do not see a press release saying that the sale has closed)

While the focus of ire may be Bank of America, let me stress that this sort of insurance really amounts to a scheme to fatten servicer margins. If this leak is accurate, the servicers at a minimum cooperated. If they got kickbacks, um, commissions, they are culpable and thus liable.

As we have stated repeatedly, servicers lose tons of money on portfolios with a high level of delinquencies and defaults. The example of Fairbanks, a standalone servicer who subprime portfolio got in trouble in 2002, is that servicers who are losing money start abusing customers and investors to restore profits. Fairbanks charged customers for force placed insurance and as part of its consent decree, paid large fines and fired its CEO (who was also fined).

Regardless, this release lends credence a notion too obvious to borrowers yet the banks and its co-conspirators, meaning the regulators, have long denied, that mortgage servicing and foreclosures are rife with abuses and criminality. Here’s some background courtesy Barry Ritholtz:

When a homeowner fails to keep up their insurance premiums on a mortgaged residence, their loan servicer has the option/obligation to step in to buy a comparable insurance policy on the loan holder’s behalf, to ensure the mortgaged property remains fully insured….

Consider one case found by [American Banker’s Jeff] Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy – one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

That $33,000 policy — including the $7,100 kickback – is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year.

Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.

And the worst of this is….the insurance is often reinsured by the bank/servicer, which basically means the insurance is completely phony. The servicer will never put in a claim to trigger payment. As Felix Salmon noted,

This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.

Note there are variants of this scheme where insurance is charged to the borrower (I’ve been told of insurance being foisted on borrowers that amounts to unconsented-to default insurance, again with the bank as insurer; this has been anecdotal with insufficient documentation, but I’ve heard enough independent accounts to make me pretty certain it was real)

David Dayen at Firedoglake:

Just because something has a lot of anecdotal evidence behind it doesn’t necessarily mean the specific case is true. But the forced-place insurance scam has been part of other servicer lawsuits, so it definitely exists. Whether this set of emails shows that taking place is another matter. Apparently this is just the first Anonymous email dump, so there should be more on the way

Derek Thompson at The Atlantic

Parmy Olson at Forbes:

Yet however inconclusive the e-mails may be, the leak may have wider implications as Anonymous gradually proves itself a source of comeuppance for disgruntled employees with damning information about a company or institution. Once the domain of WikiLeaks, the arrest of key whistleblower Bradley Manning suggested the site founded by fellow incarcerate Julian Assange could not always protect its sources. “A lot depends on the impact of this week,” says Gabriella Coleman, a professor at NYU who is researching Anonymous, who added that “Anonymous could go in that [WikiLeaks] direction.”

Anonymous is not an institution like WikiLeaks. It is global, has no leader, no clear hierarchy and no identifiable spokespeople save for pseudo-representatives like Gregg Housh (administrator of whyweprotest.net) and Barrett Brown.

It has some ideals: Anonymous tends to defend free speach and fight internet censorship, as with the DDoS-ing of the web sites of MasterCard, Visa and PayPal after they nixed funding services to WikiLeaks, and the DDoS-ing of Tunisian government Web sites. It is also great at spectacle. The group’s hacking of software security firm HBGary Federal not only gained oodles of press attention, it inadvertently revealed the firm had been proposing a dirty tricks campaign with others against WikiLeaks to Bank of America’s lawyers.

That hack led, rather organically, to the establishment of AnonLeaks.ru, a Web site where the Anonymous hackers posted tens of thousands of HBGary e-mails in a handy web viewer. While it took just five supporters to hack HBGary, hundreds more poured through the e-mails to identify incriminating evidence, leading to more press reports on the incident.

Such is the nature of Anonymous–global, fluid, intelligent, impossible to pin down–that it is could become an increasingly popular go-to for people wishing to vent damaging information about an institution with questionable practices.

The collective already receives dozens of requests each month from the public to attack all manner of unsavoury subjects, from personal targets to the government of Libya, from Westboro Baptist Church to Facebook. It rarely responds to them–as one Anonymous member recently told me, “we’re not hit men.”

Yet for all its facets as both hot-tempered cyber vigilantes and enlighteners of truth, Anonymous is becoming increasingly approachable, as the latest emails between OperationLeakS and the former BoA employee show. Assuming this particular employee doesn’t end up languishing in jail like Manning, more people may now be inclined to follow suit.

Advertisements

Leave a comment

Filed under Economics, New Media, Technology, The Crisis

Hey Kids, Tyler Cowen Wrote A Book!

Tyler Cowen’s new book, “The Great Stagnation”

Tyler Cowen:

That’s the title and it’s by me, the Amazon link is here, Barnes&Noble here.  That’s an eBook only, about 15,000 words, and it costs $4.00.  If you wish, think of it as a “Kindle single.”

Your copy will arrive on January 25 and loyal MR readers are receiving the very first chance to buy it.  Very little of the content has already appeared on MR.

Many of you have read my article “The Inequality that Matters,” but there I hardly touched on median income growth.  That is because I was writing this eBook.

Has median household income really stagnated in the United States?  If so, why?  Are the causes political or something deeper?  What are the important biases in how we are measuring national income and productivity and why do they matter for economic policy?  Are we getting enough value for all the extra money we are spending on the health care and education sectors?  What do some major right-wing and left-wing thinkers miss about this phenomenon?

How does all this relate to our recent financial crisis?

I dedicated this book to Michael Mandel and Peter Thiel, two major influences on some of the arguments.

Why did big government arise in the late 19th and early 20th centuries, what is its future, and why is science so important for macroeconomics?  How can we fix the current mess we are in?

Read (and buy) the whole thing.

Scott Sumner:

How great was Tyler Cowen’s marketing coup?  Well he forced a technophobe like me to actually learn how to use Kindle.  I wasn’t too happy about that, which makes me inclined to write a very negative review.  But that’s kind of hard to do credibly when I agree with the central proposition of the book; that technological progress (at least as traditionally measured) has slowed dramatically, and will continue to be disappointing for the foreseeable future.

In an earlier post I argued that my grandma’s generation (1890-1969) saw the biggest increase in living standards; most notably a longer lifespan (due to diet/sanitation/health care), indoor plumbing and electric lights.  Less important inventions included home appliances, cars and airplanes, and TVs.  From the horse and buggy era to the moon landing in one life.  And all I’ve seen is the home computer revolution.  Not much consolation for a technophobe like me.  I’m probably even more pessimistic than Tyler.

The parts of the book I liked best were those that discussed governance.  I had noticed that there was a correlation between cultures that are good at governance, and cultures that are good at running big corporations.    But Tyler added an interesting perspective, arguing that the technologies that facilitated the growth of big corporations also facilitated the growth of big government.  I don’t recall if he made this point, but I couldn’t help thinking that the neoliberal revolution, which led to some shrinkage in government size, was also associated with a move away from the big corporate conglomerates of the 1960s, towards smaller and more nimble businesses.

Tyler has a long list of complaints about the wasteful nature of our government/education/health care sectors, which he hinted is really just one big sector.  While reading this section I kept wondering when he was going to mention Singapore, which has constructed a fiscal regime ideally suited for the Great Stagnation.  When he finally did, on “Page” 830-37, he did so in an unexpected context, as an example of a society that reveres scientists and engineers.  He had just suggested that the most important thing we could do to overcome the stagnation was:

Raise the social status of scientists.

My initial reaction was skepticism.  First, how realistic is it to expect something like this to happen?  I suppose the counterargument is that every new idea seems unrealistic, until it actually occurs.  But even if it did, would it really speed up the rate of scientific progress?  My hunch is that if we doubled the number of people going into science, there would be very little acceleration in scientific progress.  First, because the best scientists (think Einstein) are already in science, driven by a love of the subject.  Second, with a reasonably comprehensive research regime, progress in finding a cure for cancer may require a certain set of interconnected discoveries in biochemistry that simply can’t be rushed by throwing more money and people at the problem.  Similarly, progress in info tech may play out at a pace dictated by Moore’s law.  Given Moore’s law, no amount of research could have produced a Kindle in 1983.  Could more scientists speed up Moore’s law?  Perhaps, I’m not qualified to say.  But that’s certainly not the impression I get from reading others talk about information technology.

Here’s another exhortation that caught my eye:

Be tolerant, and realize there are some pretty deep-seated reasons for all the political strife and all the hard feelings and all the polarization.

I couldn’t help thinking of Paul Krugman and Tyler Cowen, the two brightest stars of the economic blogosphere.  If only one of those two are able to have this sort of dispassionate take on policy strife, how likely are the rest of us mere mortals to be able keep a clear head and remain above the fray?  Still, it’s great advice.

Ryan Avent at Free Exchange at The Economist:

Mr Cowen’s book can be very briefly (too briefly) summarised as follows. The rich world faces two problems. The first is that a decline in innovation has reduced the growth rate of output and median incomes, making it hard for rich countries to meat obligations accepted when expectations were higher. The second is that a lot of recent innovation is occuring in places like the internet, where new products are cheap or free and create very few jobs.

Mr Sumner’s response is a good one. What Mr Cowen is essentially saying, he suggests, is that the actual price level is tumbling. Technology has created a lot of great things that are available for free, and so the price of a typical basket of household consumption is dropping like a rock. People used to spend a lot of money going to movies, buying books and records, making expensive long-distance phone calls, paying for word processing software, and so on. Now, a lot of that can be done at almost no cost. Prices are falling.

That has a couple of implications. It suggests that real incomes are actually rising, at least for those consuming the bulk of the free online content. And perhaps real incomes are too high, in some cases, for labour markets to clear. Given broader disinflation (understated because non-purchased goods aren’t included in price indexes) both prices and wages may need to adjust, but if they’re sticky, then they won’t. What’s needed is reinflation.

To a certain extent, Mr Cowen is concerned about society’s ability to pay off old obligations, and one reason society might struggle to do this is that new innovations deliver value through non-monetary transactions. But the value is still there, and that’s what should really matter for the paying-off of obligations. When you borrow, you’re offering to compensate the lender with more utility tomorrow for less utility today. Thanks to the internet, utility today is cheap, and that’s only a problem because the obligations we acquired yesterday were denominated in dollars. But we can print enough money to meet yesterday’s obligations. Indeed, we should, in order to offset the deflationary pressures from the cheap innovations.

Imagine a world in which technology has advanced to the point that robots can build robots that operate at basically no cost at basically no cost, such that people can have anything that want anytime for free; the only constraint on consumption is the time available. That would be a cashless economy, and as a result, debtors would be totally unable to pay creditors. But does that matter?

Paul Krugman:

Tyler Cowen argues that technological change since the early 1960s hasn’t been as transformative for ordinary peoples’ lives as the change that went before.

I agree. I wrote about that a long time ago, using the example of kitchens:

Better yet, think about how a typical middle-class family lives today compared with 40 years ago — and compare those changes with the progress that took place over the previous 40 years.

I happen to be an expert on some of those changes, because I live in a house with a late-50s-vintage kitchen, never remodelled. The nonself-defrosting refrigerator, and the gas range with its open pilot lights, are pretty depressing (anyone know a good contractor?) — but when all is said and done it is still a pretty functional kitchen. The 1957 owners didn’t have a microwave, and we have gone from black and white broadcasts of Sid Caesar to off-color humor on The Comedy Channel, but basically they lived pretty much the way we do. Now turn the clock back another 39 years, to 1918 — and you are in a world in which a horse-drawn wagon delivered blocks of ice to your icebox, a world not only without TV but without mass media of any kind (regularly scheduled radio entertainment began only in 1920). And of course back in 1918 nearly half of Americans still lived on farms, most without electricity and many without running water. By any reasonable standard, the change in how America lived between 1918 and 1957 was immensely greater than the change between 1957 and the present.

Now, you can overstate this case; medical innovations, in particular, have made a huge difference to some peoples’ lives, mine included (I have a form of arthritis that would have crippled me in the 1950s, and in fact almost did 20 years ago until it was properly diagnosed, but barely affects my life now thanks to modern anti-inflammatories.) But the general sense that the future isn’t what it used to be seems right.

David Leonhardt interviews Cowen at NYT

Derek Thompson at The Atlantic:

Tyler Cowen’s celebrated Kindle publication “The Great Stagnation” has received a lot of attention from the Web community. The New York Times David Leonhardt gets the author to sit for an e-interview on his e-book and asks a good first question: If our innovation motor is broken, what should we do know?

Cowen responds that we should double down on science…

The N.I.H. has done a very good job in promoting medical innovation and this is in large part because it allocates funds on a relatively meritocratic basis; Congress doesn’t control particular grants and on many important fronts the N.I.H. has autonomy. It is one reason why the United States is the world leader in medical research and development and I would expand its funding, provided it retains this autonomy. Basic research is often what economists call a “public good” and it offers economic and health returns for many years to come.

… and get realistic about clean energy.

“Clean energy” is a very important issue, for reasons of climate change, but it won’t be a job creator in a useful sense. In terms of energy production, fossil fuels are quite powerful. With green energy, at this point, we are simply looking to break even, namely to receive some of our current power but without the negative environmental consequences which accrue from carbon. That’s a worthy goal, but we shouldn’t start thinking about green energy as speeding up economic growth or creating jobs. It’s more like a necessary burden we will have to bear and the fact that these costs lie in front of us – from both the climate change and from the technological adjustments — is a sobering thought.

These are smart thoughts from a very smart guy. But let’s think about NIH funding from a jobs perspective. If the government increases science funding and this results in more pharmaceutical drugs coming online, that’s a great thing for the pharmaceutical industry. But new drugs, like any new technology, can be disruptive. For example, a drug to ease the side-effects of end-of-life diseases might replace the need for home health aides, which are projected to be one of the fastest growing jobs in the country for low-skilled workers. That’s not a reason not to develop a totally useful rug! But it throws a wrench into a claim (one that I’ve often made, too) that innovations in biosciences are pure job-creators.

Ezra Klein:

Cowen’s characterization of plumbing, fossil fuels, public education systems, penicillin and so forth as “low-hanging fruit” bugs me a bit. It took human beings quite a while to figure all that out. But Cowen is right to say that once discovered, those innovations produced extremely high returns. From the economy’s perspective, the difference between having cars and not having cars is a lot larger than the difference between having cars and having slightly better cars. A 1992 Honda Accord and a 2010 Honda Accord aren’t the same, but they’re pretty close.

The obvious rejoinder to this is, “What about the internet?” The problem, as Cowen points out, is that the Internet is not yet employing many people or creating much growth. We needed a lot of people to build cars. We don’t need many people to program Facebook. It’s possible, Cowen thinks, that the Internet is just a different type of innovation, at least so far as its ripples in the labor market are concerned. “We have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy,” he writes. “When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sector of our economy have been slowing down and the beg technological gains are coming in revenue-deficient sectors.”

Maybe the Internet just needs some time to come into its growth-accelerating own. Or maybe the Internet is going to be an odd innovation in that its gains to human knowledge and enjoyment and well-being will serve to demonstrate that GDP and even median wage growth are insufficient proxies for living standards. Either way, we’re still left with a problem: Stagnant wages are a bad thing even if Wikipedia is a big deal.

And it’s not just the Internet. Even when we’re growing, things look bad. The sectors that are expanding fastest are dysfunctional. We spend a lot of money on education and health care, but seem to be getting less and less back. The public sector is getting bigger, but it’s not at all clear it’s getting better. For much of the last few decades, the financial sector was was generating amazing returns — but that turned out to be a particularly damaging scam. And economic malaise is polarizing our politics, leaving us less able to respond to these problems in an effective or intelligent way.

Kevin Drum:

Tyler makes a bunch of other arguments in “The Great Stagnation” too, some more persuasive than others. Like some other critics, I’m not sure why he uses median wage growth as a proxy for economic growth. It’s important, but it’s just not the same thing. Besides, median wage growth in the United States slowed very suddenly in 1973, and it’s really not plausible that our supply of low hanging fruit just suddenly dropped by half over the space of a few years. I also had a lot of problems with his arguments about whether GDP generated by government, education, and healthcare is as “real” as other GDP. For example, he suggests that as government grows, its consumption is less efficient, but that’s as true of the private sector as it is of the public sector. A dollar of GDP spent on an apple is surely more “real” than a dollar spent on a pet rock, but there’s simply no way to judge that. So we just call a dollar a dollar, and figure that people are able to decide for themselves whether they’re getting the same utility from one dollar as they do from the next.

The healthcare front is harder to judge. I agree with Tyler that we waste a lot of money on healthcare, but at the same time, I think a lot of people seriously underrate the value of modern improvements in healthcare. It’s not just vaccines, antibiotics, sterilization and anesthesia. Hip replacements really, truly improve your life quality, far more than a better car does. Ditto for antidepressants, blood pressure meds, cancer treatments, arthritis medication, and much more. The fact that we waste lots of money on useless end-of-life treatments doesn’t make this other stuff any less real.

To summarize, then: I agree that the pace of fundamental technological improvements has slowed, and I agree with Tyler’s basic point that this is likely to usher in an era of slower economic growth in advanced countries. At the same time, improvements in managerial and organizational efficiency thanks to computerization shouldn’t be underestimated. Neither should the fact that other countries still have quantum leaps in education to make, and that’s going to help us, not just the countries trying to catch up to us. After all, an invention is an invention, no matter where it comes from. And finally, try to keep an even keel about healthcare. It’s easy to point out its inefficiencies, but it’s also easy to miss its advances if they happen to be in areas that don’t affect you personally.

David Brooks at NYT

Cowen and Matthew Yglesias on Bloggingheads

Leave a comment

Filed under Books, Economics

“The Moment Of Truth,” In Theaters Near You… Or Not

Derek Thompson at The Atlantic:

The president’s deficit commission released its final recommendation for reducing the debt and reforming the budget this morning. Dramatically named “The Moment of Truth,” the plan offers a mosaic of reforms that promise to cut $4 trillion from the debt before 2020.

The plan would also cap tax revenue at 21 percent, limit spending to 22 percent, and reduce debt as a percentage of GDP to the key figure of 60 percent by 2023.

The 18-member commission will vote Friday on the plan, which requires a 14-person majority to go to Congress. But you don’t have to wait until then to learn the basics. Here is your executive summary, with “bottom line” conclusions to give you a sense of how I see things.

Discretionary/Mandatory Spending 

The goal is clear: cut $100 billion from defense and $100 billion from non-defense spending by 2015. The road there is less clear, because the discretionary budget is a vertiginous array of programs.

So the report keeps things broad. Spending in 2012 will equal spending in 2011. Spending in 2013 will come down to pre-crisis levels, adjusted for inflation. The president will propose annual limits for war spending. Disaster funds will be set up to manage unforeseen tragedies. A new 15-cent per gallon gas tax will pay into a transportation fund so that roads and bridges rely less on general revenue. Agencies will be responsible for their own diets, but in the event that they don’t lose the weight themselves, a new, bipartisan “Cut-and-Invest Committee” will offer guidance.

On the mandatory spending side, the report recommends reforming civilian and military retirement plans, cutting agricultural subsidies, but protecting income support programs.

Bottom line: The commission doesn’t particularly care where the spending cuts come from so long as they draw equally from both security and non-security spending and don’t hurt education, infrastructure or support for low-income families.

Taxes

The name of the game here is: Broaden the base, lower the rates. That means eliminating most tax expenditures (explanation here) that don’t protect the low-income, while slashing tax rates for both individuals and companies.

For individuals, tax brackets move to a new scale of 12%/22%/28% (for comparison: under Clinton, those brackets were 15/ 28/ 31/ 36/ 39.6). Welfare provisions like the Earned Income Tax Credit and the Child Tax credit stay put. Itemized deductions are eliminated and capital gains and dividends are taxed as ordinary income, dramatically raising effective tax rates on rich folks who both itemize heavily and get more income from investments. The mortgage interest deduction [Flashcard here] becomes a tax credit to make it more progressive and the employer health care subsidy [Flashcard here] is capped and phased out slowly.

OK, so the upshot: After-tax income would decline proportionately — between one and two percent — on almost all quintiles except for the richest one percent, who would pay significantly more to Uncle Sam.

Alison Acosta Fraser at Heritage:

As a stalemate appears increasingly likely, what appears to be an updated “chairman’s mark” to guide the commission’s discussions over the next several days was released. Like its predecessor, the report, puzzlingly titled “The Moment of Truth” (as if this will somehow garner enough votes), has some strong elements, both positive and negative.

Overall, this proposal does much the same as the previous report, though it would cut spending deeper and faster, bringing discretionary spending to 2008 levels (adjusted for inflation) and balancing the budget two years earlier by 2035. Rather than wait to phase in cuts, it would reduce spending by $50 billion immediately, by starting “at home” with congressional and federal workforce pay and other common-sense ways to reduce federal spending.

Yet, as if taxes and spending are somehow equal bookkeeping maneuvers, the tax hike is bigger and faster than the earlier version. The commissioners appear to have wasted their opportunity to be truly transformational, such as in health care, by resorting to “pilot” trials of the Rivlin–Ryan Medicare premium support proposal. And notably, again, they leave Obamacare in place, save for one major improvement: the repeal or reform of the massively irresponsible long-term care benefits in the CLASS Act section of the law.

Ed Morrissey:

I’m hoping to get through the entire proposal later tonight, perhaps as an insomnia cure, but none of this sounds either outrageous or surprising.  Raising the retirement age for Medicare and Social Security eligibility should have been done years ago.  The original retirement age for both programs were set at or past the average life expectancy for a good reason — because to do otherwise invites financial ruin.  People live longer and healthier lives and do not need taxpayer support at age 65 any longer, and the systems should recognize that.

The elimination of the two major tax breaks will almost certainly doom this proposal, even though each makes sense in certain contexts.  The ObamaCare debate should have demonstrated by now the market-distorting effect of tax-free employer-provided health insurance, which has kept American workers dependent on employers and less mobile in the marketplace for decades.  However, the elimination of the tax break without real reform in the entire third-party payer system in the US will put those workers at even more risk for financial ruin.  That tax break should only be eliminated if Congress at the same time removes the barriers to interstate sales of health insurance, ends coverage mandates, and strengthens the HSA system — and ObamaCare took the opposite approach, which will make the system even worse as a result.

Similarly, the mortgage tax exemption is another government intervention in the housing and lending markets.  Unfortunately, millions of Americans built that deduction into their current purchases, which means that revoking it should only be done in a revenue-neutral manner.  That would happen if the US adopted a rational flat-tax system, or even a Fair Tax system where people could limit their tax liability by controlling consumption.   The mortgage tax exemption should literally be the last to go in tax reform.  If Congress thought the Tea Party was a serious issue in this last midterm election, just wait until millions of homeowners have thousands more dollars in tax liabilities thanks to this idea of reform.  It simply won’t happen unless Congress eliminates every other deduction and loophole in the tax system.

Under the circumstances, it’s small wonder that no elected official wants to affix his signature to the proposal, no matter how reasonable it might be.   It’s also telling that Bowles and Simpson didn’t write this in legislative language, which means that it will take months before all or even a portion of this makes it to the floor of the House.  There may be some good starting points for debate and action in this plan, but as a coherent proposal, it requires more reform than it demands.

Paul Krugman:

I think it is worth pointing out that like so many proposals from that side of the political spectrum — for this is, very much, bipartisanship as a compromise between the center-right and the hard right — this one involves a fundamental piece of strange logic. Namely, it argues that in order to head off the dire prospect of future cuts in Social Security benefits, we must … cut future Social Security benefits.

Also: in response to the point many of us have made about raising the retirement age — that only the affluent have seen life expectancy rise faster than the retirement-age rises already in the law — the plan promises special exemptions for those with physical hardships.

Let’s think about that. Right now we have a retirement system that has the great virtue of not being intrusive: Social Security doesn’t demand that you prove you need it, doesn’t ask about your personal life, doesn’t make you feel like a beggar. And now we’re going to replace that with a system in which large numbers of Americans have to plead for special dispensation, on the grounds that they’re too feeble to work for a living. Freedom!

Joan McCarter at Daily Kos:

The catfood commission has released the final report [pdf], and will vote on it Friday. It hasn’t substantially changed from the chairs’ mark preemptively released by Simpson and Bowles a couple of weeks ago. It still has the disastrous ratio 2:1 ratio of spending cuts to revenue increases, includes a payroll tax holiday (reducing further Social Security’s take), a regressive tax structure and arbitrary spending caps.

[…]

The question now is what happens next. Yesterday, Reid promised a vote, but with conditions, as David Dayen notes: “the commission must provide legislative language in hand, and they must get at least a majority vote on the commission, which would be 10 votes.” The legislative language condition is not going to be met, unless they find volunteers do translate for free. They didn’t create legislative language and officially cease to exist after today.

The other question is whether they’ll reach 10 votes–a bare majority. Kent Conrad and Judd Gregg have agreed to it, as far as the rest go, I agree with dday that it’s very much in question.

I think the House Republicans, led by Paul Ryan, are no votes. Jan Schakowsky, who came up with her own plan, is also a no. So we’re at 7-4.

What else do we know? Dick Durbin said he’s “studying” the proposal and didn’t have a commitment either way. Durbin did say that raising the retirement age was “acceptable.”

Joining Durbin on the fence is Andy Stern; Senators Max Baucus, Mike Crapo and Tom Coburn; and Democratic Reps. Xavier Becerra and John Spratt. To get 14 votes, they’d have to run the table. I’m not sure they get any of them, and could easily see 7 votes total for passage.

However, bits of this will survive as policy proposals and possibly in next year’s budget. The White House’s renewed commitment to bipartisanship seems destined to end up with Americans having to work longer for less secure retirements, and the wealthy continuing to do just fine.

Daniel Foster at The Corner:

That sounds, more or less, like the same great(ish) taste, now with more fiber. But getting the approval of 14 of the 18 panel members is still an uphill battle, and the co-chairmen have delayed a final vote on the proposal until at least Friday in the hopes of doing some last-minute arm twisting.

Josh Barro at Real Clear Markets:

…the Commission is exceeding my expectations, but perhaps that is because my expectations were always that it would serve a different mission than it purported to. In my view, the probability that 14 commission members would sign onto a consensus report was zero all along; so was the probability that we would get a comprehensive deficit reduction deal out of the 112th Congress, absent a sovereign debt crisis or other economic crisis that forces the hands of elected officials.

Instead, I view the Commission’s purpose as furthering a long-range process: driving an elite discussion about deficit reduction options so that, when the right economic time comes to actually close the budget gap, we have a clear vision of the steps we will need to take-and what compromises politicians will be willing to make. Viewed from this frame, the Commission has been a success, in part because it could not reach consensus and released several reports instead of one. These reports, and political players’ reactions to them, have helped to clarify those questions and identify a path toward budget sustainability.

Ross Douthat:

None of this makes a compromise inevitable, or even necessarily likely. (The fact that Paul Ryan didn’t join the “yes” votes represents a missed opportunity, I think, for the reasons that Allahpundit sketches here.) But if America does manage to pull back from the fiscal precipice, there’s a good chance that we’ll remember the Simpson-Bowles proposals as a significant and clarifying step toward figuring how to make that pullback work.

Felix Salmon:

I’m fascinated by the various headlines reporting the deficit commission’s 11-7 vote.

Some treat the plan as some kind of independent entity which was lobbying for votes: the WSJ runs with “Deficit Plan Fails to Win Panel Support,” while Reuters plumps for “Deficit-cut plan falls short, offers framework” and Fox News has “Deficit Commission Report Fails to Advance to Congress.” The Washington Post goes long: “Deficit plan wins 11 of 18 votes; more than expected, but not enough to force action.”

Other headlines concentrate on the panel as the key actors, and the range of views here is very wide. Bloomberg says bluntly that “Debt Panel Rejects $3.8 Trillion Budget-Cutting Plan,” in line with the FT’s “Panel reject US budget deficit plan”. Politico is a bit softer — “Debt panel falls short on votes” — while NPR is positively upbeat: “Majority Of Deficit Commission Endorses Plan; Not Enough To Make It Automatic.” Ezra, too, looks on the bright side, plumping for “The fiscal commission succeeded — sort of.”

My feeling here is that the second group is probably better than the first: the news here should properly focus on the deficit commission and what it has failed or succeeded in doing. It was the commission which was charged with putting a bipartisan plan together, it was the commission which faced the very high hurdle of getting 14 votes (a 78% supermajority), and it was the commission which ultimately didn’t manage to get there.

Michael Crowley at Swampland at Time:

So there are two ways you can look at this outcome. One is that failing to win a supermajority is clearly a disappointment, and means that Congress won’t feel strong pressure to take action on the plan. Another is that winning a majority wasn’t an obvious outcome, and is certainly better than the embarrassment–and sense of futility–that would come with not winning a majority. Ezra Klein, for one, thinks the vote–and some encouraging words even from the plan’s opponents–good enough to give the plan credibility if Obama wants to run with it. (One option would be to build some of its elements into his 2011 budget proposal.) Look for Obama’s take when he returns from Afghanistan.

One thing the commission clearly did accomplish was to focus attention on the medium-to-long term debt threat and ways of mitigating it. That was the basis for Bowles’s claim, at a press conference earlier this week, that the panel had achieved “victory” regardless of the final tally. Of course, not everyone agrees on the importance of having that conversation right now, especially with the economy still bleeding on the emergency-room floor. Now that the panel is folding up its tent, we’ll see whether Obama and leaders in Congress agree.

Leave a comment

Filed under Economics

John Boehner Has Something To Say

Paul Kane at WaPo:

House Minority Leader John Boehner (R-Ohio) called Tuesday for the mass firing of the Obama administration’s economic team, including Treasury Secretary Timothy F. Geithner and White House adviser Larry Summers, arguing that November’s midterm elections are shaping up as a referendum on sustained unemployment across the nation and saying the “writing is on the wall.”

Boehner said President Obama‘s team lacks “real-world, hands-on experience” in creating jobs that are needed for a full economic recovery. The Republican lawmaker cited reports that some senior aides complained of “exhaustion,” including the recently departed budget chief Peter Orszag.

“President Obama should ask for – and accept – the resignations of the remaining members of his economic team, starting with Secretary Geithner and Larry Summers, the head of the National Economic Council,” Boehner said in the morning speech to business leaders at the City Club of Cleveland. The mass dismissal, he added, would be “no substitute for a referendum on the president’s job-killing agenda. That question will be put before the American people in due time. But we do not have the luxury of waiting months for the president to pick scapegoats for his failing ‘stimulus’ policies.”

Vice President Biden lashed back at Boehner, called his “so-called” economic plan nothing but a list of what Republicans are against and devoid of innovative new ideas that can help move the country forward.

In a sarcastic tone, Biden thanked Boehner for the suggestion that the president fire his top economic advisers.

“Very constructive advice and we thank the leader for that,” Biden said.

Andrew Malcolm at Los Angeles Times:

But then Boehner’s communications staff springs the trap. Having drawn their DNC opponents into helping to publicize the Republican speech, just before he speaks and in time for the morning news shows they leak the fairly dramatic news that the GOP leader’s remarks will call for the mass firing of Obama’s entire economic time for, in effect, engineering the prolonged period of unemployment. Which gets the debate back onto the economy where the GOP wants it.)

Everyone involved and watching knows it’s a pedestrian game. Which is a large part of the reason that only 19% of Americans say they approve of the job the Democratic Congress is doing. Among Republicans that approval rate is only 5%. Even among Democrats, however, congressional approval stands at only 38%, down from 55% one year ago.

Such predictable sparring is what the parties do, though. Why? Because despite what voters tell pollsters, it works. Americans in recent elections have re-elected about 80% of incumbent senators and 90% of House representatives.

We’ll see come the night of Nov. 2 if 2010’s voters remain as hypocritical as they’re so quick to say pols are. Or if this era of fear and frustration spurs a real change in ballot box retribution — and, thus, perhaps even an end to predictable pathetic prebuttals.

Doug Mataconis:

Boehner’s call for mass firings makes for good sound bite material, but it surely doesn’t accomplish anything substantive. After all, Boehner knows that even if Obama fired his entire economic staff today, they’d be replaced by people who largely agree with the Geithner/Summers ideas. Certainly, Obama isn’t going to be appointing free-market conservatives to run his economic policy.

Moreover, Boehner’s demand inevitably brings up the question of who you bring in to replace them and, as Slate’s David Weigel noted this morning on Twitter the traditional GOP practice of looking to the business and financial community for such people hasn’t exactly worked out well in the past:

I like the suggestion of putting a “business leader” in charge. Like, err, Paul O’Neill, John Snow, or Hank Paulsen!

All of whom, of course, didn’t see the 2008 economic crisis coming, or at least didn’t do anything to try to stop it if they did.

Ed Morrissey:

In fact, Boehner may have given Obama the best political advice he could get.  Firing the team that failed to deliver the growth Obama promised would at least show that Obama understands that his policies aren’t working.  If he waits until the day after the midterms, it’s not going to do him or his party much good.

Michelle Malkin

Pete Davis:

This morning, in Cleveland, OH, House Republican Leader John Boehner (R-OH) slammed President Obama’s economic policies and called for the resignation of Tim Geithner and Larry Summers.  Here’s the video, and here are his prepared remarks.   He railed against “job-killing tax hikes,” stimulus spending that “has gotten us nowhere,” and “government run amok.”   Boehner is right on about ending economic uncertainty, particularly about future tax rates and unsupportable levels of future public debt.   However, he sounded as if all of our problems began when President Obama was sworn in as president on January 20, 2009.  Our current suffering mostly arose from the Iraq War, Medicare Part D, and the very lax regulatory environment that allowed the financial crisis and the Gulf oil spill to occur, all courtesy of President George W. Bush and the Republicans.  In my opinion, Tim Geithner, Larry Summers, and Ben Bernanke are all to be commended for their Herculean efforts to keep us from falling into a Depression.  Today, the Congressional Budget Office estimated how much worse off we would have been without the stimulus bill.   Mr. Boehner also forgot the mention that his tax and spending policies would make the rich a lot richer and the rest of us worse off.   The main advantage of being in the minority is that you get to blame the majority for everything that is wrong in the world.

Derek Thompson at The Atlantic:

Rep. John Boehner in a speech today: “When Congress returns, we should force Washington to cut non-defense discretionary spending to 2008 levels – before the ‘stimulus’ was put into place. This would show Washington is ready to get serious about bringing down the deficits that threaten our economy.”

Rep. John Boehner’s spokesperson in January when President Obama proposed freezing non-defense discretionary spending in 2010 for three years, which would have brought it in line with 2008 levels:

“Given Washington Democrats’ unprecedented spending binge, this is like announcing you’re going on a diet after winning a pie-eating contest.”

Robert Costa at The Corner:

There is a lot of buzz around Rep. John Boehner’s policy speech and Democrats — from Vice President Biden to little-known operatives — have scurried to slam it. Bush-bashing veterans, on the lookout for a new GOP demon, are hoping to make Boehner a campaign issue. Yet as Jake Sherman of Politico notes, that strategy seems to be a bit flat, “despite Democratic efforts.”

As Boehner basked in the spotlight today, even he acknowledged that November has little to do with him. “Eighty or 90 percent of this election is going to be about them,” the House minority leader told reporters. “But that 10 or 20 percent of the election that’s about us, my goal has been, for 20 months, is to maximize that portion of the election that’s about us.”

Leave a comment

Filed under Political Figures, Politics

Erlernen Sie Von Uns, Amerika, Part II

Nicholas Kulish at NYT:

Germany has sparred with its European partners over how to respond to the financial crisis, argued with the United States over the benefits of stimulus versus austerity, and defiantly pursued its own vision of how to keep its economy strong.

Statistics released Friday buttress Germany’s view that it had the formula right all along. The government on Friday announced quarter-on-quarter economic growth of 2.2 percent, Germany’s best performance since reunification 20 years ago — and equivalent to a nearly 9 percent annual rate if growth were that robust all year.

The strong growth figures will also bolster the conviction here that German workers and companies in recent years made the short-term sacrifices necessary for long-term success that Germany’s European partners did not. And it will reinforce the widespread conviction among policy makers that they handled the financial crisis and the painful recession that followed it far better than the United States, which, they never hesitate to remind, brought the world into this crisis.

Derek Thompson at The Atlantic:

Germany is absolutely on a tear. The economy grew at an annualized rate of nearly 9 percent last quarter, stoked by huge export growth. In a weird way, the debt crisis has helped, at least temporarily. A weak Euro is making German products more affordable outside the Eurozone, just as the developing world emerges from the recession with income to buy the cheaper cars, machines and equipment that Germany is selling.

The question is whether or not this kind of growth is sustainable for a country whose largest export partner, the EU, is undergoing spending cuts and tax increases that will freeze some consumer demand. As the continent’s economy slows down in the second half of this year, there’s simply no way for Germany to keep up 9 percent growth all year.

Free Exchange at The Economist:

Unemployment in Germany has been steadily falling, in contrast to the trend in the rest of the euro zone—and America. Firms used a short-time working scheme and flexible hours to keep hold of workers when demand was weak. Many of the workers whose hours were cut have been drawn back into full-time work far more quickly than firms had dared hope. Unemployment in Germany is now lower than it was when the crisis began.

It seems almost strange that the euro-area economy was so strong at a time when a sovereign-debt crisis and regional imbalances seemed to threaten the single currency’s very existence. The GDP figures show that the latter problem has not gone away. Countries with strong ties to Germany’s export machine, such as Austria and the Netherlands, posted strong growth. The figures from France were solid, too (if based more on consumer spending than exports). But in Spain and Portugal GDP rose by a feeble 0.2% in the second quarter. Greece’s economy shrank by 1.5% (see chart).

That will not worry the German firms whose focus is increasingly Asia and Latin America. Nor will American complaints that Germany is living off the spending of others and adding little to global demand have much impact. There are some signs that Germany’s recovery is leading to more spending at home. The German statistical office said that consumer spending made a positive contribution to GDP. Some firms are already reporting skill shortages, which ought to be good for jobs, wages and (eventually) consumption. Even so, a more balanced recovery in Germany may yet be thwarted by fragile banks and by the inherent thrift of consumers. It is telling that Germany is one of the few places where sales of Mercedes cars have fallen this year.

The renewed hope in Europe contrasts with anxiety in America, where the economy is faltering and jobs growth is scarce. But just as these concerns are a warning to Europeans that the global recovery is not secure, the joy in Germany should comfort Americans. The fortunes of both economies are as tightly bound as ever. If German exporters are thriving, it means that someone out there in the world economy is still spending freely.

Donald Douglas:

Exports are driving the German economic boom, but an expansionary fiscal policy laid the basis for market oriented growth. See, from last year, “Germany agrees biggest economic stimulus package since World War II“:

The plan, which Christian Democrats and Social Democrats hammered out late Monday, includes €17-18bn in infrastructure investments for education and highways, and tax cuts for firms and individuals.

It also grants families a one-off extra child benefit payment, cuts health insurance costs, simplifies rules for creating temporary jobs, and provides subsidies to encourage purchases of environmentally friendly cars.

And Germany has actually been cutting taxes for a decade, “German businesses enjoyed record tax cuts in last decade.”

Dean Baker at The Center For Economic and Policy Research:

It would have been worth noting that it is not possible for every country to follow Germany’s path of relying on a large trade surplus (someone must have a corresponding deficit). Germany and some number of other nations can create domestic demand through trade surpluses, but this strategy cannot be followed everywhere.

It also would have been helpful if this article reported economic data that would have been meaningful to its readers. For example, GDP is always reported as an annual growth rate, not a quarterly rate. Also, it would have been more useful to present the OECD harmonized unemployment rate for Germany (7.0 percent), which is measured in the same way as the U.S. rate, rather than the German official rate, which counts part-time workers as part of the unemployed.

Tyler Cowen:

There is much more of interest here.  I would describe this as a major, still uninternalized lesson of the recent crisis, with its roller coaster-rapid dips.  In a highly specialized modern economy, it is much easier to prevent jobs from being destroyed than to create them again, at least assuming those are “good” jobs in the first place.  (Yes, people thought they knew this but it’s an even stronger difference than had been believed.)  The U.S. auto bailout, for instance, worked better than did most of the stimulus program.  Most of the Austrians would disown this point, but you can pull it right out of Lachmann’s Capital and its Structure.

We should have cut the payroll tax as soon as possible, an idea which I might add Alex was promoting quite early on.

Arnold Kling responds to Cowen:

Tyler strikes me as engaging in Krugmanesque intellectual combat here. First of all, he pulls a quote out of context, giving only the first sentence of a paragraph from the New York Times article that reads

A vast expansion of a program paying to keep workers employed, rather than dealing with them once they lost their jobs, was the most direct step taken in the heat of the crisis. But the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder.

Second, he says that the auto bailout “worked better than did most of the stimulus program,” which leaves him plenty of wiggle room to say, “I did not say that the auto bailout was a success.” Finally, when he says “assuming those were ‘good’ jobs in the first place,” he leaves himself room to wiggle out of being accused of advocating keeping unsustainable jobs around.On the larger point, keep in mind that in an ordinary non-recession month 4 million jobs are destroyed and about 4.2 million jobs are created. Suppose that in a bad month of a recession, 4.0 million jobs are created and 4.5 million jobs are destroyed. Which of those 4.5 million jobs ought to be saved, because they might come back in a stronger economy? No one in Washington knows.

Trying to save existing jobs is a fool’s errand, comparable to trying to keep defaulting mortgage borrowers in their homes. When a firm lets an employee go, it is making a cost-benefit calculation that takes into account the cost of rehiring for that position when the economy turns up. The firm is unlikely to be making such a large mistake that government should try to change the decision.

FrumForum

UPDATE: Paul Krugman

UPDATE #2: David Brooks at NYT

Steve Benen

2 Comments

Filed under Economics, Foreign Affairs, The Crisis

Look, We’ve Got A Heartbeat!

Heather Horn at The Atlantic with the round-up. Horn:

GM has had a fantastic second quarter, reporting a $1.3 billion profit. That “set[s] the stage,” reports Bill Vlasic for The New York Times, “for the automaker to file for an initial public offering, possibly as soon as Friday.” How well GM stock does, he explains, “will determine how much money American taxpayers will recoup from the $50 billion government bailout of G.M.”

Steve Schaefer at Forbes:

A year ago, General Motors was fresh off a spin in bankruptcy court and an IPO was the light at the end of a very long tunnel. By January the automaker’s executives were laying out the key checkpoints on a journey back to the public markets and now, just over 14 months since filing for Chapter 11 GM is on its way to a public offering that is widely anticipated for the fourth quarter.

Everybody’s got a view on the GM story and on Thursday the IPO specialists at Renaissance Capital offered their own take on how the automaker should go about returning to the public market, offering up a four-point plan for how GM can get out from under the government’s thumb and ensure it is offering a valuable opportunity for IPO investors.

Here are a few highlights from the four-point plan outlined in the Renaissance Capital commentary, which I encourage you to read in its entirety:

Transparency means full and fair disclosure. The Treasury has the duty to ensure that all material fundamental and governance issues are fully disclosed to potential public investors. Thus far, GM has largely avoided specifics on its strategy, but the company now must clearly lay out a chronology for regaining market share, realigning costs and transitioning from government control.   Assuming that GM does a $20 billion raise in this upcoming IPO, what’s the plan for the other $30 billion held by the government?

Assure IPO allocation transparency.  Prior IPO bad practices included spinning shares to favored executives or giving hot IPOs as “free money” to institutional investors as a quid pro quo for other business.

Decision-making roles must be clarified. GM and the government have been silent on how the competing interests of shareholders, the administration and the United Autoworkers will be resolved.

Value the stock for success. In thinking about valuation, the government and management need to understand that the GM IPO is in a similar position as a debt-laden private equity company with backers eager to monetize an investment. Recent sales of shares by such highly motivated selling shareholders have been accomplished only with deep discounts.  Over the last two years, between 50% and 70% of private equity IPOs have been forced to price below the originally proposed ranges.  GM needs to adjust its expectations accordingly.

Among the other issues that need addressing according to Renaissance Capital’s roadmap: the post-IPO succession plan for CEO Ed Whitacre; how GM’s product mix will be driven by the administration’s environmental policy and will the Treasury take a backseat to management as it offloads its stake in the automaker over time.

John Ogg at 24/7 Wall Street:

We are expecting somewhere around $15 billion per discussions we have had with others.  Here is the big question… Will the GM IPO become a busted IPO right out of the chute like so many others have?

The company recently secured a new $5 billion credit line and when the IPO will actually come, that may be as long as 45 to 60 days after the filing and will be somewhat dependent upon market conditions.

Richard Read at The Car Connection:

The line of credit has been pieced together from ten banks, including big-hitters like Bank of America and Morgan Stanley — two corporations that have shared GM’s pain of bankruptcy and bailout. More may join the ranks, since the line of credit is a potential cash cow for lenders.

But today’s news isn’t just important for GM, it’s also a major development for politicians. GM and the Obama administration both took a lot of heat for last year’s controversial bailout, and the nickname “Government Motors” still hangs around GM’s neck. Filing for an IPO now means that GM’s return to the stock exchange could happen before November’s mid-term elections. That would be a boon for Democrats, who could point to the IPO as evidence that the bailout was successful and that taxpayers will eventually recoup their loan from GM.

But even if the IPO runs on schedule, Republicans will probably still be able to point to government ownership of GM, which currently hovers at 61%. GM wants the Treasury Department to sell off about $10 billion of its $43 billion stake in the company as soon as the IPO launches, which would bring the government’s position below the 50% mark. However, the Treasury isn’t completely onboard with that plan; they’re afraid — as they should be — that selling off that much equity at once would dilute the value of the company and the government’s remaining shares. And right now, “diluting” is the last thing that probably needs to happen for GM.

That said, demand could be high for GM stock when it does relaunch — not least because of the company’s earnings, which are rumored to ring in above the $1 billion mark for the second quarter. We’ll have more about that later, but in the meantime, check John Voelcker’s post about Ed Whitacre’s sudden retirement.

John Neff at Autoblog:

The announcement today that General Motors will soon be welcoming its fourth CEO in just 14 months was startling news, but the real unanswered question is just who is Dan Akerson? We’ve already told you what his business chops are and it’s clear the man can run a lemonade stand, but there’s virtually no other information available out there besides his resume. And as for pics, the entirety of the internet has but one to offer, which is Akerson’s glamor shot as a member of GM’s board of directors. Flattering? No. Looks like a high school principal’s year book picture.

Well, we dug a little and found some interesting info on one Mr. Daniel F. Akerson. For one, he lives in McLean, Virginia and is reportedly an avid golfer. Ok, not too surprising, as most corporate executives can swing a club. How about this: He’s said to be worth an estimated $190 million. Yeah, CEOing is a good gig if you can get it. Also, he currently drives a Cadillac CTS.

Finally, we’re told that Mr. Akerson’s first car was an MGB roadster, which he quickly traded in for a 1970 Oldsmobile Cutlass. Now, we don’t have confirmation on which Cutlass he had, and it makes a difference. The 1970 Cutlass was nothing special, unless you’re talking about the 442, which was a legitimate muscle car. The fact that Akerson first had an MGB makes us hopeful that he is a car guy after all and that the Olds in question was the 442… or at least was powered by a Rocket V8 of some sort.

Derek Thompson at The Atlantic:

The good news is coming from good places. Although the company cut 20,000 jobs and a dozen U.S. plants, the profits aren’t coming all from cost cuts. Revenue grew from $32 billion to $33 billion in the second three months of the year. What’s more, the company is seeing a strong North American market for its goods. While it’s certainly not bad to have a strong overseas market, any indication that the American consumer is actually breathing out there is nice to hear.

There’s lots of silver lining, but the dark cloud for tax payers is that an IPO won’t end the government’s significant stake in the company. As the Michigan Messenger reports, the federal government will reduce its stake in the company from about 60 percent to below 50 percent in the initial IPO, and sell off the rest of the taxpayers’ stake in the company bit by bit.

1 Comment

Filed under Economics, The Crisis

Sally Go ‘Round The Want Ads

Michael Fleischer at The Wall Street Journal:

With unemployment just under 10% and companies sitting on their cash, you would think that sooner or later job growth would take off. I think it’s going to be later—much later. Here’s why.

Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She’s been with us for over 15 years. She’s a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.

Before that money hits her bank, it is reduced by the $2,376 she pays as her share of the medical and dental insurance that my company provides. And then the government takes its due. She pays $126 for state unemployment insurance, $149 for disability insurance and $856 for Medicare. That’s the small stuff. New Jersey takes $1,893 in income taxes. The federal government gets $3,661 for Social Security and another $6,250 for income tax withholding. The roughly $13,000 taken from her by various government entities means that some 22% of her gross pay goes to Washington or Trenton. She’s lucky she doesn’t live in New York City, where the toll would be even higher.

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest—$9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.

Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers’ comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally’s Medicare and $3,661 for her Social Security.

When you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

Because my company has been conscripted by the government and forced to serve as a tax collector, we have lost control of a big chunk of our cost structure. Tax increases, whether cloaked as changes in unemployment or disability insurance, Medicare increases or in any other form can dramatically alter our financial situation. With government spending and deficits growing as fast as they have been, you know that more tax increases are coming—for my company, and even for Sally too.

Paul Chesser at The American Spectator:

Fleischer doesn’t understand that he needs to wise up, figure out a way to call each new hire a “green job,” and make nice with someone tight with the Obama administration (or in it). Then everything he’s complaining about will be subsidized — maybe for a whole year! Otherwise the unemployed “Sallys” of the world are out of luck.

Derek Thompson at The Atlantic:

Here’s where Fleischer is absolutely right: it is ludicrously expensive to add workers. Here’s where he’s not right: the acting government isn’t really adding to that cost. Two-thirds of that $30,000 surcharge isn’t the Obama administration: $12,000 comes from health insurance (for which we pay no taxes), $3,700 comes from Social Security taxes he would not have to pay under the new HIRE Act, and $6,250 comes from income tax withholding at a rate that is lower than at any time in the last 20 years and would not change under the president’s proposed tax plan.

The key item here is the health care premium. It’s been well documented that rising health care costs have eaten away raises and depressed median incomes. That’s one reason why the Obama health care plan tries to push workers off employer-provided plans and pull them onto exchanges. Will the push-pull work? Depends on whom you ask. But I still don’t see how the current administration’s actions are making it prohibitively difficult to add workers.

Logen Penza at The Moderate Voice:

It’s those Evil, Greedy Corporations.

That’s the simple explanation most of the talking heads have for the continuing high unemployment numbers.  Those Evil, Greedy Corporations horde their money and refuse to hire anyone.  When they do hire someone, they don’t pay them enough, don’t offer them enough benefits, don’t pay enough taxes, pollute the planet, steal candy from babies, kick puppies, and make obscene gestures at your auntie.  Evil, Greedy Corporations are offered up as cartoon villains, detestable and vile and without any redeeming value.

The trouble with cartoon villains is that they are fictional.

[…]

The flat truth is no one is going to hire new employees unless there is some reasonable promise that the additional cost of the employee will be recovered through increased profits resulting from the new employee’s work.  That’s not “greed”, it is bare survival in tough economic times.  And all the recent additions to per-employee costs aren’t alone.  There is a seemingly endless well of new possible costs coming, including new environmental regulations, the possibility of a massive new “carbon tax”, and “card check” that promises to raise labor costs even further with exactly zero (at best) increase in productivity. Vague gestures towards a few thousand dollars of tax credits to stimulate job growth don’t even begin to cover the risks.

On top of it all, if you happen to be an oil worker on the Gulf Coast, your job is politicallly verboten.  Sorry about that.  Or not.

Only a crazy person would be eager to start large-scale hiring in this political environment.  Yet many anti-corporation zealots profess themselves outraged that the Evil, Greedy Corporations won’t get with the business of economic recovery.

They just don’t realize that part of the explanation lies in the mirror.  The excesses of anti-corporation policy and rhetoric (which is the harbinger of future policy) is sand in the economic engine.  You can’t be anti-business and then expect business to bail out the economy by expanding and investing.

It doesn’t work that way.

Michael W.:

Well, yeah, but it’s so much easier to blame fictional bogeymen then to address what the real businesses say.

Another argument I’ve seen advanced is that the marketplace is inherently uncertain, and that businesses who can’t cope with changes in the law are simply unfit to survive. There is a certain laissez-faire appeal to this argument, but ultimately it doesn’t make sense.

The fact of the matter is that the types of market risk that businesses can and do adjust to, aside from increased competition, are changes in demand and supply, natural disasters and war. The more savvy, efficient and customer-sensitive businesses do survive these sorts of uncertainties and ultimately enhance the economy when they do.

In contrast, when the government continually raises the costs of doing business in the first place (or threatens to do so), the only ones who really survive are either the politically connected or the very wealthy (yes, they are often the same thing). That doesn’t have anything to do with building a better mousetrap, as it were, or growing the economy. And it certainly doesn’t do anything to raise everyone’s standard of living. Instead, all it does is reward those closest to the rule-makers, thus creating more competition to be closest to the King rather than satisfying the marketplace. It is exactly the sort of crony-capitalism we claim to detest.

James Joyner:

Now, I’m sympathetic to this argument, although not so much to lumping together the cost of government and the cost of providing health insurance, which are only tangentially related.  If each new employee adds extensive marginal overhead costs — much less push the firm over a threshold where they become subject to additional government mandates — then it’s very difficult to get the marginal gain in productivity necessary to justify to hire.

But, presumably, his competitors face exactly the same pressures.  And, surely, there has to come a point when additional hiring pays off despite the marginal costs?

Leave a comment

Filed under Economics, The Crisis