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  • GM Stock Sale Doesn't End Damage Of Government Motors

    December 21, 2012 4:25 PM

    Below is my statement released today on the government's planned 15-month sale of its remaining General Motors stock:


    On Wednesday, the government announced a plan to sell its remaining stake in General Motors at an estimated loss to taxpayers of $12 billion. If the losses on General Motors Acceptance Corporation (GMAC) are included, the total probably rises to nearly $20 billion.


    It is good news the government is winding down its misguided involvement in Government Motors. It has announced an 15-month plan to divest its stock. It also is good news the auto industry is expanding – though most of the growth has been enjoyed by foreign automakers who have built plants in right-to-work Southern states and had nothing to do with the bailout.


    But there is nothing new or remarkable about businesses showing signs of improvement thanks to massive infusions of public dollars. We will never know how many small businesses may have survived, expanded or moved into more profitable lines of business had the government pursued a more pro-growth alternative to this massive government bailout. We hear a lot about jobs allegedly “saved or created” by this bailout. But in reality, we will never know how much farther along the road to recovery we might be if we had foregone this “investment” and lowered tax rates so entrepreneurs could invest, grow and hire.

  • Obama's Low-Quality College Bailout Will Fuel Skyrocketing Tuition

    December 12, 2012 9:19 AM

    We wrote earlier about perverse federal financial aid policies that encourage colleges to jack up tuition. Recently, the Obama administration came up with something even worse. It announced a new financial aid policy that will effectively bail out low-quality, high-tuition colleges and especially law schools at taxpayer expense, and encourage colleges and professional schools to increase tuition even more. These changes are the product of a revised income-based federal student loan repayment program that will go into effect starting Dec. 21.


    The revised "Pay as You Earn" program will allow eligible student-loan borrowers to cap monthly payments at 10 percent of discretionary income, and have their federal student loans forgiven after 20 years -- or just 10 years, if they go to work for the government. An earlier version of the program capped payments at 15 percent and offered forgiveness after 25 years. For students who foolishly attended third-rate but expensive colleges and law schools, this could wipe out part of their debt, at taxpayer expense, since their salaries in the low-paying jobs they end up with will be insufficient to pay off all of their massive debt in 20 years if they pay only 10 percent of their leftover income on repaying their student loans.


    In the short run, this will primarily benefit those students. But in the long run, the primary beneficiaries will be low-quality but expensive colleges and law schools, which will be able to raise college tuition through the roof, since no matter how much debt their students run up in college, it will be written off after 20 years. That will eliminate market-based price discipline for those colleges, resulting in even more rapid increases in tuition.


  • The Hostess Bankruptcy And The Threat Of A PBGC Bailout

    November 20, 2012 4:40 PM

    On Friday, November 16, Hostess Brands announced it was shutting down operations after the Bakers, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM), which rejected the company's last contract offer in September, announced it would go on strike. (Today, the two parties entered into a last-ditch negotiation effort today to avoid liquidation.)


    The same day, the Pension Benefit Guaranty Corporation (PBGC), the federally created agency that insures private sector pensions, announced that its deficit had increased from $26 billion to $34 billion over the past year.


    Then yesterday, Hostess announced that  it would pass off its pension liabilities to the PBGC.


    If this looks like an oncoming slow-motion train wreck, that's because it is -- and taxpayers are standing on the tracks.


    Hostess has about $2 billion in unfunded pension liabilities, which would add even more red ink to the PBGC's already strained books. If a growing number of companies shed their pension liabilities on to the PBGC -- a possibility given the American economy's continuing weakness -- the threat of a taxpayer bailout will only grow. AP's Marcy Gordon notes, "If the trend continues, the agency could struggle to pay benefits without an infusion of taxpayer funds."


  • The Basel Cliff -- Basel III's Poisonous Recipe For The Economy

    November 16, 2012 2:14 PM

    As if the "fiscal cliff," with its prospects of looming tax hikes, were not enough, big and small banks—and in turn consumers and businesses who rely on their credit—also face the "Basel cliff."


    The Basel cliff is not a mountain in Switzerland. It refers to meetings in Basel and elsewhere by international banking bureaucrats to develop the Basel III agreement for harmonizing international capital requirements. And if implemented as planned, it will dramatically increase the costs of mortgage and small business loans while, according to many experts, actually making the banking system less stable.


    The Basel Cliff is part of what Sen. Rob Portman (R-Ohio) and others have called the "regulatory cliff." In the year leading up to the election, the Obama administration put hundreds of regulations on hold.


    As I wrote in Forbes a couple weeks before the election, these regulatory delays may have spurred some slightly improved growth measures in 2012. Now, as CEI's Ryan Young reminds us, "in short run, it means a midnight rush of new rules is coming."


    But the Basel rules are unusual for a number of reasons: their extreme stringency, complexity, lack of accountability, and—in a sign of hope -- their unpopularity with both parties. The entire Maryland congressional delegation, mostly consisting of liberal Democrats such as House Majority Whip Steny Hoyer and House Budget Committee Ranking Member Chris Van Hollen, recently wrote to regulators from the Federal Reserve Board, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.


  • FEMA's Wasteful "Disaster Socialism"

    November 9, 2012 1:19 PM

    In the Washington Examiner, Shikha Dalmia of the Reason Foundation notes that FEMA has been as slow after Superstorm Sandy as it was after Hurricane Katrina -- and that when it finally provides aid to residents of affected regions, it will be providing not life-sustaining aid, but loans, handouts and welfare benefits, some of which will flow to people who don't even legally qualify for them. People have this weird idea that FEMA helps people in the 48-hours after a natural disaster. It doesn’t. Instead, it lets state and local governments take care of their people in the immediate aftermath of a disaster, and then writes checks to residents of affected areas later on. Dalmia calls it "disaster socialism." As she notes,


    how did the new and improved FEMA perform post-Sandy, a storm for which it had lots of advance warning? Not so well.


    It didn't set up its first relief center until four days after Sandy hit -- only to run out of drinking water on the same day. It couldn't put sufficient boots on the ground to protect Queens residents from roving looters. The Red Cross -- on whom FEMA depends for delivering basic goods -- left Staten Island stranded for nearly a week, prompting borough President Jim Molinaro to fume that America was not a Third World country. But FEMA's most egregious gaffe was that it arranged for 24 million gallons of free gas for Sandy's victims, but most of them couldn't lay their hands on it.


    But if you think FEMA's inability to provide rapid relief subverts the core reason for its existence, think again. A few days after [a New York Times editorial that falsely claimed that FEMA provides rapid relief], FEMA head W. Craig Fugate told the newspaper that the agency's rapid response role is really a fallacy. 'The general public assumes we are part of the response team that will be there the first couple of days,' he said. But it is really designed to deal with disasters several days after the fact."


    How does FEMA do that? By indiscriminately writing checks -- a task at which it evidently excels.


    FEMA administrator Elizabeth Zimmerman testified before Congress last year that between 2005 and 2009, 14.5 percent of the agency's $10 billion-plus disaster aid budget was handed to people who didn't qualify. The agency tried to get 154,000 of these people to return the money (on average, each had received about $5,000), but they filed a class action lawsuit forcing FEMA to pay them a multimillion settlement. And it forgave the debt of every one with an income below $90,000. . .


    Less than a sixth of Alabama's $566 million allotment after Katrina financed legitimate government functions such as debris removal, repairing damaged infrastructure and restoring public utilities. The rest was all handouts: food stamps, subsidies for trailer homes and low-interest loans for small businesses.


  • Auto Industry Expert: “Romney’s Plan Also Would Have ‘Saved’ Detroit"

    November 5, 2012 5:00 AM

    Earlier, we noted that the auto bailouts temporarily look more successful right now than they likely will be in the long-run since Toyota's bogus safety issues, and a series of massive natural disasters that temporarily devastated Japanese automakers, gave General Motors only a temporary advantage over its Japanese competitors in 2010-2012 that won't last (the Obama administration left serious problems at GM unresolved, and failed to implement needed reforms that would have antagonized the powerful UAW Union but were essential to make GM cost-competitive in the long-run).


    Writing in The Wall Street Journal, auto industry expert Edward Niedermeyer argues the Obama administration's costly bailouts resulted in much higher costs to taxpayers, and poorer prospects for GM's long-run survival, than if Romney’s cheaper plan for aiding the auto industry had been followed.


    GM and Chrysler could have averted tens of thousands of lost jobs, and the government could have preserved billions of dollars in tax revenue, by undergoing a true bankruptcy reorganization, even if the government had provided full debtor-in-possession financing.


    In a true bankruptcy guided by the law rather than by a sympathetic, rule-bending political task force, GM and Chrysler would have more fully faced their competitive challenges, enjoyed more leverage to secure union concessions, and had the chance to divest money-losing operations like GM’s moribund Opel unit. True bankruptcy would have lessened the chance that GM and Chrysler will stumble again, a very real possibility in the brutally competitive auto industry.


    Certainly President Obama threw enough money at GM and Chrysler to create a short-term turnaround, but if the auto makers find themselves on hard times and return to Washington with hats in hand, his policy will have been no rescue at all.


  • Chrysler And The Cratering Credit Rating Of Fiat

    November 2, 2012 4:44 PM

    My piece yesterday in The Daily Caller, "The Real Fiat Scandal," spotlights the real threat to Chrysler's prospects in the immediate and long term: Fiat's cratering credit rating caused by its bloated workforce in Italy and sinking auto demand in Europe due to the European fiscal crisis. As Barron's put it in a headline, "This time, Chrysler could bail out Fiat."


    Actually, as I write with former CEI Research Associate Mark Beatty in the piece, Fiat didn't contribute much of anything to Chrysler's bailout "last time." "In the 2009 deal overseen by the Obama administration’s auto task force, Fiat paid no money to acquire its initial 20 percent stake in Chrysler — only contributing some of its intellectual property, instead." But even here, Fiat "made Chrysler profitable again not by producing more of Fiat’s mini-cars, as the Obama administration urged it to do, but rather by doubling down on Chrysler’s most 'environmentally incorrect' light trucks and sport-utility vehicles, such as the Jeep Grand Cherokee and Dodge Durango."


    But the woes of Chrysler's Italian parent cast a big shadow over its prospects stateside, regardless of where its plants are built and/or relocated (which as we know has been an issue in political news recently). As we write, "Moody’s had downgraded Fiat’s credit rating to “junk” even before the Obama administration arranged for it to acquire a Chrysler stake, and last month Moody’s gave Fiat another downgrade that the Financial Times described as even 'further into ‘junk’ territory.'” Due to antiquated Italian labor laws, Fiat keeps 63,000 workers on its payroll in its home country. These costs are almost certainly putting a crimp on the company expanding or even maintaining Chrysler's operations in America.


  • Did Bush Save General Motors? Obama Messed Up Chrysler

    November 2, 2012 3:17 PM

    If you accept the dubious logic the federal government "saved" the auto industry (which requires ignoring other things that rescued General Motors, such as the Japanese earthquake and tsunami, and Thai floods, that battered its Japanese competitors, and ignores how government red tape weighs down the auto industry), then you have to give the credit primarily to President George W. Bush, not President Obama.


    PolitiFact leaves out Bush, and refers to the bailouts as Obama's "rescue of the auto industry," in a flawed recent "fact-check" of a claim that is literally true but arguably misleading (the claim that "Obama took GM and Chrysler into bankruptcy and sold Chrysler to Italians who are going to build Jeeps in China"). It's just the latest faulty pronouncement from a "fact-checker" that falsely claimed a costly energy-rationing scheme wouldn't raise energy prices, and got the basic facts of a Supreme Court decision wrong.


    PolitiFact says the claim about Chrysler building Jeeps in China creates the "impression that Jeeps built in China come at the expense of American workers," and thus is false, although the claim does not literally say that. PolitiFact does not address related news that Fiat, which bought Chrysler, is now planning to produce some Jeeps in Italy, rather than in the United States. As the Detroit Free Press reported, Fiat plans to "export new . . . Jeep models from Italy to prevent plants from closing, protect Italian jobs and reduce Fiat's dependence on Chrysler's profits in the U.S. . . . by exporting premium brands from Italy to the U.S."


    As John Berlau and Mark Beatty note in The Daily Caller, "The real outrage arising from the 2009 Chrysler bailout is not that its parent company, Fiat, is planning to build plants in China. It’s that the politicized bankruptcy process limited Chrysler’s growth potential by tying it to an Italian dinosaur in the midst of the European fiscal crisis. The Obama administration literally gave away ownership of one of the Big Three American auto manufacturers to an Italian car maker struggling with labor and productivity issues worse than those that drove Chrysler to near-liquidation. As a result, much of Chrysler’s profits from its overhauled line are going to prop up Fiat’s failing, money-losing Italian business, rather than to expanding production and jobs in the U.S. Moody’s had downgraded Fiat’s credit rating to “junk” even before the Obama administration arranged for it to acquire a Chrysler stake, and last month Moody’s gave Fiat another downgrade that the Financial Times described as even “further into ‘junk’ territory." Since Fiat has to keep paying idle Italian auto workers under Italy's perverse labor laws, it has an incentive to shift production from America to Italy even if American auto workers are more productive than Italians.


  • Sandy Beaches, Meet Hurricane Sandy

    November 1, 2012 12:48 PM

    In the wake of Hurricane Sandy, many reminisce of 2005's Hurricane Katrina. With at least a dozen East Coast states in a declared state of emergency, many look toward the Obama administration and FEMA for assistance. With whispers of the incalculable amount of damage done to the East Coast, few bring up the debt that FEMA has incurred, much from the FEMA-administered National Flood Insurance Program.


    The National Flood Insurance Program (NFIP), with the Flood Disaster Protection Act, has made the purchase of flood insurance mandatory in certain areas. NFIP under-cuts private flood insurance companies by offering a lower, government-subsidized price for flood insurance.


    NFIP is around $18 billion in debt, even before the financial effects of Sandy are counted.


    Many homeowners don’t realize that flood insurance is not part of the typical homeowners insurance policy and needs to be purchased separately. Those who know may opt not to purchase it because flood insurance can be just as much as homeowners insurance.


  • On Halloween, Euro Politics Fit Right In

    October 31, 2012 12:28 PM

    All the usual characters are present this Halloween night across the Atlantic. But European leaders doing the trick-or-treating aren’t getting the sweet sugar fix they crave, as I write in RealClear Markets:


    [M]any Europeans aren't getting treats this Halloween. That's because the German and ECB houses on the block are handing out austerity apples. And only one type of trick-or-treater eagerly takes those: the nice polite ones who showed up early and go home to do their homework.


    Get the full lowdown on Europe’s list of neighborhood Halloween visitors here.


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