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Archive for the ‘corporate welfare’ Category

Academics are given to bemoaning partisan polarization. But the mushy centrism being pushed by the No Labels crowd frequently just amounts to special-interest whoring. Bipartisanship usually means the people get screwed, and the lobbyists win. Latest case in point: the morally corrupt Farm Bill. Congress is claiming it has reformed the program and cut it slightly, but those claims turn out to be false. Perniciously, the farm subsidies are now more indirect and less transparent. The only Congressmen who voted against this were the radical Tea Partiers. Conservatives claim to defend the taxpayer and the free market, yet most of them voted for a bill that extends $10 billion or more a year in corporate welfare. Progressives claim to defend the poor, yet voted overwhelmingly for a bill that gives away taxpayer money to big business and wealthy families while killing starving Africans.

Shame on them.

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In my last two posts, I showed that the U.S. has a large social welfare state by cross-national standards, maybe even the second-largest in the OECD. However, the U.S. welfare state is much less redistributive from rich to poor than most other welfare states.

In this post, I tackle spending on infrastructure (“gross fixed capital formation”) and subsidies. According to the punditocracy, the U.S. always needs to spend more on infrastructure. Conversely, the populist mood in this country stands firmly against subsidies to business, and perhaps rightly so — very few subsidies seem rationally designed to compensate for positive externalities.

But it turns out the U.S. spends more than almost every other OECD country on public investment in fixed capital, and less than every other OECD country on subsidies. Take a look:

u.s. spends a lot on infrastructure

u.s. spends little on subsidies

The first plot shows public investment by country, divided by GDP, in 2012. It includes spending by all levels of government. The U.S. places near the top of the international standings in that year, but this is no fluke: throughout the last three decades, the U.S. has been near the top of international tables in this measure. Maybe everybody needs to spend more on infrastructure, but this certainly doesn’t seem like a uniquely American problem. And maybe you think that a less densely populated country has a higher optimal level of public infrastructure spending, but I’m not so sure: higher infrastructure spending in such a country could subsidize an inefficient distribution of population.

The second plot shows public subsidies by country, divided by GDP, in 2012, again summing up the figures for all levels of government. The U.S. stands right at the bottom, with less than half a percentage point of GDP going to subsidies. Further, state and local governments spend only about 0.1% of GDP on subsidies, so the federal government is the main sinner here. Now, these figures don’t seem to be picking up tax advantages like “tax increment financing” districts popular at the local level. Still, businesses can typically be exempted only from taxes that they otherwise would have paid; expenditure-side subsidies are potentially unlimited.

I should note that federalism doesn’t seem to be the key to U.S. spending patterns here: federal Austria and Switzerland are among the highest subsidy spenders, and are not very high on infrastructure spending.

Bottom line: it’s not clear that, at the margin, the U.S. needs a lot more infrastructure spending, and the subsidy picture certainly complicates any plausible “libertarian populist” movement aimed at big business privileges.

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Ah, yes, a bit of nostalgia from the “summer of recovery”: the Car Allowance Rebate System (CARS), also known as Cash for Clunkers.

It seemed quite promising to many in the halcyon days of 2009.  Citizens could trade in their old gas guzzlers (which were subsequently destroyed) for a rebate that could be applied to purchase a more fuel-efficient car. It would simultaneously stimulate the economy (and the auto industry) and improve the environment. Undoubtedly, as part of the stimulus efforts, it would pay for itself.

Ted Gayer and Emily Parker have a new paper and policy brief at Brookings on the program. (For a brief overview, see Kevin Robillard’s piece in Politico). The discussion below draws from the policy brief.

How did Cash for Clunkers perform?

  • By the end of the program, 677,842 vehicles were traded for vouchers, at an overall cost of $2.85 billion (some $4,200 per rebate).
  • But according to Gayer and Parker, the program only added 380,000 additional sales to what would have occurred absent the program, and these were largely sales that were pulled forward from sales that would have normally occurred in the future. “Ten months after the end of the program, the cumulative purchases from July 2009 to June 2010 were nearly the same, showing little lasting effect.”
  • And while there was a short-term addition of $2 billion to GDP, it was simply pulled forward from the next two quarters.
  • Cars for Clunkers did create jobs, but at a cost of $1.4 million per job.

There are some additional information in the brief on the distributional impacts (surprise: the recipients tended to be more affluent than those who purchased a new or used car during the same period without a rebate) and the environmental impacts (surprise: Cash for Clunkers was not a cost-effective means of reducing carbon emissions).

Bootlegger-Baptist coalitions (a term coined by economist Bruce Yandle) are common in politics (particularly in regulation). In essence, a Bootlegger promotes a policy that will further its economic interests. It  legitimizes its efforts by forming a coalition (often implicit) with the Baptists, who appeal to higher values or the public good. A simple example: renewable fuel standards. Agribusiness secures a market for corn ethanol, and draws on environmental advocates for cover.  In Cash for Clunkers, the bootlegger is easy to identify: auto dealers. Robillard’s article notes that the program retains the support of the National Automobile Dealers Association, which strongly advocated the program at its inception and lobbied quite effectively for its expansion from $1 billion to almost $3 billion. Its spokesperson noted: “There’s no question Cash for Clunkers was the best Obama administration program to date.”  From the perspective of the industry, what’s not to like? It provided a de facto subsidy for the industry, and industry self-interest was veiled by tying it to the larger goals of promoting the needs of the unemployed and saving the earth. Even if the Baptists were hung out to dry (another parallel with ethanol), what’s the harm? The $2.85 billion price tag (not including interest) will fall to future generations (i.e., the children who had the brief privilege, in 2009, to ride in their parents’ new cars).

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In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” Dodd-Frank was a massive piece of legislation (the Economist quipped that it was too big not to fail). One of the key criticisms was that so much of what Dodd-Frank aspired to do was delegated to rulemaking in the regulatory agencies. Ultimately, whether Dodd-Frank would prevent another financial crisis would depend on the quality and compatibility of some 398 rules.

One of the many targets of Dodd-Frank was the securitization process. In the days of traditional banking, banks financed their loans with deposits and then retained those loans until they matured (the “originate-to-hold” model). Because they had skin in the game, they had incentives to lend only to credit-worthy borrowers. But increasingly, this model was replaced by the “originate-to-distribute” model wherein banks would sell their loans to other parties that would, in turn, pool them and sell shares to investors (the securitization process). The securitization process changed the incentive structure. Lenders no longer had skin in the game and were thus far less interested in the question of whether borrowers could document their ability to meet their obligations. (more…)

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President Obama visited Phoenix yesterday to give a speech on homeownership. The promotion of homeownership has been on the agendas of the past several presidents (e.g., George W. Bush and the “ownership society) and much of President Obama’s speech could have been written by HUD secretaries Jack Kemp or Henry Cisneros. While there is little new in the President’s speech, two things were particularly noteworthy.

First, the administration appears committed to addressing Fannie and Freddie, the two government-sponsored enterprises (or GSEs) that played a central role in fueling the bubble. President Obama talked about “laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again.” He continued:

That begins with winding down the companies known as Fannie Mae and Freddie Mac. For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong.

Oddly enough, Dodd-Frank did little more than note that “the hybrid public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved” and stated that financial reforms “would be incomplete without enactment of meaningful structural reforms.” That task was put off for another day. Perhaps the day is nearing. (more…)

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The new farm bill is making its way through the Senate and to the House. As it currently stands, it will cost some $950 billion over the next ten years. To be fair, much of that is for food stamps (or the Supplemental Nutrition Assistance Program). As you may know, rural legislators used the original Food Stamp Act (1964) as a means of getting legislators representing urban districts to back agricultural price supports. It might have been a small price to pay: it provided some $75 million to 350,000 people when first enacted. However, in 2012, it claimed $75 billion to support some 48 million people, and this has been at the center of the debate.

Our agricultural policy has long been an exercise in corporate welfare, perverse incentives, and unintended consequences (of course, at some point what are unintended consequences may be correctly viewed as intended consequences if we continue to enact the same policies with the same results). Advocates of the new farm bill make the claim that this time there will be genuine reform. The new farm bill, purportedly, will end direct most subsidies to farmers (we will file that under “believe it when you see it”). But as a piece in the new Economist notes, this is really a case of bait-and-switch insofar as two-thirds of the “savings” are simply redirected into other, less visible forms of support. For example, much will be diverted to federal crop insurance. Taxpayers cover two-thirds of the premiums and the claims. Last year’s bill: $7 billion in insurance subsidies with an additional $17 billion in payouts due to the drought. (more…)

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Let’s start with the good: the Obama administration is considering removing all US troops from Afghanistan at the end of 2014 (rather than leaving a force of 6,000-15,000 behind).  As coverage in WaPo notes, this option “defies the Pentagon’s view that thousands of troops may be needed to contain al-Qaida and to strengthen Afghan forces.” If the Senate confirms Chuck Hagel as Defense Secretary, I would assume there would be an additional voice for complete withdrawal.

And now the bad: As of Tuesday, there have been six drone strikes so far this year. Total death toll: 35 and counting. As Spencer Ackerman (Wired) notes:

Obama has provided the CIA with authority to kill not only suspected militants, but unknown individuals it believes follow a pattern of militant activity, in what it terms “signature strikes.” The drone program has killed an undisclosed number of civilians. A recent study conducted by Center for Civilians in Conflict and Columbia Law School’s human-rights branch explored how they’ve torn the broader social fabric in tribal Pakistan, creating paranoia that neighbors are informing on each other and traumatizing those who live under the buzz of Predator and Reaper engines. Those traumas are raising alarm bells from some of the U.S.’ most experienced counterterrorists.

And the ugly: a crony capitalist may rise up against its political patron. AIG is contemplating joining a lawsuit against the US government. Now that it has repaid the $182 billion it owed, it may want to make a claim on some $22 billion in profits that were generated in the interim. As the NYT reports:

At issue is the possibility that [the] insurer may join a lawsuit filed by its former chief executive, Maurice R. Greenberg, claiming that the 2008 bailout shortchanged investors and violated their Fifth Amendment rights.

The alternative to the bailout would have been liquidation. A.I.G. embraced the bailout on the terms offered in 2008. It seems a bit odd to cry foul at this point in the game, particularly given that the collapse that A.I.G. helped create reduced the median net worth of American families by nearly 40 percent (from $126,400 in 2007 to $77,300 in 2010), according to the Fed.

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There is a wonderfully sad piece in the WSJ on the support for crony capitalism that were central to the fiscal cliff deal. A brief excerpt:

In praising Congress’s huge new tax increase, President Obama said Tuesday that “millionaires and billionaires” will finally “pay their fair share.” That is, unless you are a Nascar track owner, a wind-energy company or the owners of StarKist Tuna, among many others who managed to get their taxes reduced in Congress’s New Year celebration.

There’s plenty to lament about the capital and income tax hikes, but the bill’s seedier underside is the $40 billion or so in tax payoffs to every crony capitalist and special pleader with a lobbyist worth his million-dollar salary. Congress and the White House want everyone to ignore this corporate-welfare blowout, so allow us to shine a light on the merriment.

After providing some rather striking examples of cronyism, we get the core lesson:

The great joke here is that Washington pretends to want to pass “comprehensive tax reform,” even as each year it adds more tax giveaways that distort the tax code and keep tax rates higher than they have to be. Even as he praised the bill full of this stuff, Mr. Obama called Tuesday night for “further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

The article reinforces one of the key features of American politics: wherever you find Baptists, you will also find bootleggers.

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There is an interesting piece by John Bresnahan (Politico) on Countrywide Financial’s VIP Program, which provided loans to members of Congress, staffers, and executive branch officials who were responsible for shaping regulatory legislation.

More than a half a dozen current and former lawmakers, including Senate Budget Committee Chairman Kent Conrad (D-N.D.) and House Armed Services Committee Chairman Buck McKeon (R-Calif.), obtained mortgages through the Countrywide VIP program, in some cases saving thousands of dollars, according to the Issa report, set for release Thursday….

Other lawmakers who received Countrwide VIP loans include former Sen. Christopher Dodd (D-Conn.), Rep. Edolphus Towns (D-N.Y.), Rep. Pete Sessions (R-Texas), Rep. Elton Gallegly (R-Calif.) and former Rep. Tom Campbell (R-Calif.). Dodd, who chaired the Senate Banking Committee, was identified as a Countrywide VIP going back to 1999, and he even referred an aide to a former GOP senator to the same program, Issa’s probe found.

No real surprises here for anyone acquainted with public choice, but the piece is nonetheless worth a read, particularly for those interested in how Countrywide worked with the GSEs to shape (and derail) reform legislation that might have limited the magnitude of the collapse and the subsequent contagion.

Thankfully, many of the recipients of Countrywide’s munificence were involved in framing Dodd-Frank.

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It seems that all we have heard of late is about the sharp partisan battles in Congress that have placed it in a gridlock and prevented it from working in a bipartisan fashion to “do the nation’s business.” Yes, the “do nothing Congress.”

But there are exceptions to this description.  Given the depth and severity of the financial collapse, it is good to see bipartisanship in addressing the issue of financial regulation, or more correctly, providing exemptions when there are mutually beneficial exchanges to be made.

As John Bresnahan reports, the prospects look good for a “one sentence bill worth $300 million to a bank owned by a politically connected family that has doled out hundreds of thousands of dollars in campaign donations.”

The bill would allow Emigrant Bank to avoid meeting the requirements for Tier 1 capital by allowing it to base capital requirements on what its assets were on March 31, 2010, before it broke the Dodd-Frank threshold of $15 billion. Of course, the argument is that the bank only broke the $15 billion mark for a brief period of time. By tweaking Dodd-Frank, Congress could allow the bank to free up funds, thereby allowing it to make additional loans, largely in New York.

Although the bill was sponsored by a Republican (Rep. Michael Grimm, R-NY), it has strong bipartisan support from members of the Financial Services Committee (success in the Senate remains uncertain). Why the support? Howard Milstein, owner of Emigrant Bank, was “a bundler for President Barack Obama’s 2008 campaign.”  Bresnahan provides some additional details on Milstein:

He is a force in New York state politics. Aside from his fundraising for Obama four years ago, Milstein has been a prominent financial backer of Gov. Andrew Cuomo. The Democrat tapped Milstein last year to head the New York State Thruway Authority despite complaints by watchdog groups that having a real estate mogul run the agency would be a conflict of interest.

Even Diana Cantor, wife of House Majority Leader Eric Cantor (R-Va.), worked for a Milstein-owned trust that catered to the needs of high-income customers.

The Milsteins, along with business associates and other family members, have donated hundreds of thousands of dollars to both GOP and Democratic lawmakers over the past decade. Along with Grimm, New York Democratic Reps. Carolyn Maloney, Carolyn McCarthy and Gregory Meeks — all co-sponsors of the bill — have received $11,500 in donations from the Milsteins this cycle.

According to a statement by Emigrant Bank, “H.R. 3128 is all about credit availability in underserved communities throughout New York City.” Perhaps. But one might also note that so many of the poor decisions leading up to the recent collapse (e.g., regarding relaxed underwriting standards, securitization, and the GSEs pumping liquidity into the low and moderate income segments of the market) were given the same justification, often by members of the House Financial Services Committee.

There is a powerful public choice argument regarding some of the factors that contributed to the financial collapse. In the election cycles leading up to the financial collapse, the securities and investment industry and real estate industry contributed tens of millions of dollars to the campaign chests of the Financial Services Committee and its Senate counterpart. Regardless of the party in control, the committee members prevented and/or gamed any attempts to impose regulatory reforms that might have had lessened the severity of the impending financial collapse. Certainly Congress responded in the aftermath of the collapse, albeit it ways that were far from sufficient.

But now that attention has turned elsewhere, normal practices appear to have resumed. The days of reform have run their course and Congress appears ready to return to its standard mud farming, imposing new regulations only to relax when a mutually advantageous deal can be struck.

At least we know that in 2012, gridlock has its limits and bipartisanship is still a possibility.

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Tax Simplification

The Obama administration is now proposing to simply the corporate tax code. As the NYT notes:

President Obama will ask Congress to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, down from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent, a senior administration official said on Tuesday.

Mr. Obama also would establish a minimum tax on multinational corporations’ foreign earnings, the official said, to discourage “accounting games to shift profits abroad” or actual relocation of production overseas.

There is a strong theoretical case for tax simplification across the board. So much of what constitutes our corporate tax code is a dense network of tax expenditures, de facto transfers delivered through the tax system. The same could be said of the tax code more generally.

But the proposal, even in its initial rollout, should raise concerns. The decision to set differential rates for manufacturers reveals that there is no principled objection to using the tax code as an instrument of industrial policy. One might predict that even if this proposal made it through Congress as proposed in an election year (what are the odds?), members of Congress regardless of party would simply take away expenditures at time 1 so they could sell them back at time 2.

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Two stories in the news, one local and one national, help us answer that question. First, a pair of stories from the New Hampshire Union-Leader:

Representatives of the state’s major hospitals fought a proposal that could pave the way for a for-profit cancer facility to come to the state at a hearing Tuesday that was notable for the absence of the company that was the impetus for the legislation: Cancer Treatment Centers of America (CTCA).

The bill, HB 1642, would create a special “destination cancer hospital” classification, which would be exempt from the state’s Certification of Need review process for new hospitals, as well as the Medicaid Enhancement Tax on the grounds that it wouldn’t accept Medicaid patients.

The New Hampshire Business and Industry Association’s stand on this pro-competitive, deregulatory bill? The rent-seeking position:

“We don’t think this is the right way for the state to promote economic development,” BIA Vice President David Juvet said. “We are very supportive of New Hampshire having a pro-business climate, and the Legislature has done a number of good things over the past year, but we would never support an effort to create what is an unfair business advantage.”

Next, a story from the Washington Examiner, on a new effort to repeal all energy subsidies:

Freshmen Rep. Mike Pompeo of Kansas has proposed the loftily titled “Energy Freedom and Economic Prosperity Act,” while the Senate’s Tea Party heroes, Jim DeMint (S.C.) and Mike Lee (Utah), have introduced the companion bill in the upper chamber.

The bill, which Pompeo hopes to insert into legislation extending the payroll-tax credit, would take a huge bite out of energy subsidies by eliminating tax credits for everything from solar panels and wind turbines to oil drilling and nuclear power generation. At the same time, the measure would cut tax rates.

The Chamber of Commerce on this pro-competitive, anti-corporate-welfare bill? The rent-seeking position:

But for some business lobbies, Pompeo’s bill is no good. “This bill is not fundamental tax reform,” Chamber of Commerce lobbyist Bruce Josten told me in an email, “as a result, is punitive to every kind of energy company out there.”

In other words, the chamber won’t go for tax-rate reductions and credit-elimination unless it covers all industries.

Whom do supposed general-interest business associations represent? Not, apparently, business interests in general, let alone the “free enterprise system.” Mancur Olson would have had an answer: the interests of the largest companies, who will be by far their biggest donors.

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Investing Wisely?

A report released by the Public Campaign examines 30 top corporations. Some key findings:

  • Despite making combined profits totally $164 billion in that three-year period, the 30 companies combined received tax rebates totaling nearly $11 billion.
  • Altogether, these companies spent nearly half a billion dollars ($476 million) over three years to lobby Congress—that’s about $400,000 each day, including weekends.
  • In the three-year period beginning in 2009 through most of 2011, these large firms spent over $22 million altogether on federal campaigns.

The full report (available here) seems pitched to the OWS/99 percenters. But it should be of interest to anyone concerned with corporate welfare, crony capitalism, and the sloppy corporatism that has flourished in the US regardless of partisan control of our national institutions.

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The New York Constitution prohibits pork-barrel spending and corporate welfare: government money for private projects. Here’s what the clause says:

[T]he money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking.

Couldn’t be clearer, right?

Wrong. The state supreme court today ruled – in a split decision – that this constitutional provision is unenforceable. The state can give money to whomever it wants so long as it is not “patently illegal” to do so.

In dissent, Judge Robert Smith wrote:

I have defended before, and will no doubt defend again, the right of elected legislators to commit folly if they choose. But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed.

Indeed.

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