Category Archives: Economics

Further commentary on shakedown artist Barack Obama

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As I noted last week, the Obama administration believes it’s the civic duty of some Chrysler investors to lose more money than they should by law and contract so that the unions, who are major investors in the Obama administration, can lose less; when said investors balked at the idea, the president threatened to turn the awesome power of his tame PR flacks (aka the White House press corps, an arm of our “independent media”) loose on them to destroy them.

Megan McArdle summarized the situation this way:

I see a lot of liberal blogs crowing that Obama’s really taking it to the hedge funds who are holding out on the Chrysler bankruptcy. Hedge fund managers, you see, have a civic duty to lose large amounts of other people’s money in order to ensure that the UAW makes as few sacrifices as possible in a bankruptcy.

Predictably, I got a couple liberal commenters popping up saying, in essence, “What’s bad about this?”  Well, let’s start off with McArdle again:

Which brings us to the real question, which is, when did it become the government’s job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line? Leave aside the moral point that these people lent money under a given set of rules, and now the government wants to intervene in our extremely well-functioning (and generous) bankruptcy regime solely in order to save a favored Democratic interest group.

No, leave that aside for the nonce, and let’s pretend that the most important thing in the world, far more interesting than stupid concepts like the rule of law, is saving unions. What do you think this is going to do to the supply of credit for industries with powerful unions? My liberal readers who ardently desire a return to the days of potent private unions should ask themselves what might happen to the labor movement in this country if any shop that unionizes suddenly has to pay through the nose for credit. Ask yourself, indeed, what this might do to Chrysler, since this is unlikely to be the last time in the life of the firm that they need credit. Though it may well be the last time they get it, on anything other than usurious terms.

Bill Roberts points out an interesting follow-up from one of her commenters:

Government interference, or arbitrary enforcement of the rule of law is a hallmark of bankruptcies in banana republics, and France. When lenders have confidence that the government will enforce bankruptcy laws (ie the rules of the game) will be consistently upheld, they will lend more freely. When lenders fear their contractual rights will be summarily ignored, they will demand equity-like rates of interest, thus stifling economic activity. Credit is a sacred trust.

The point here is not which party is more “deserving” of more or less of a shrunken pie, lazy unions or heartless hedge funds. Lots of folks fundamentally believe the government should do whatever the hell it wants (eg upend absolute priority in bankruptcy) to effect the “greater good”, as defined by a self-designated minority of people. But all government policies have a cost, and those same folks like to pretend that those costs don’t exist. When the Government flouts the rule of law to fit its preferred special interest groups, that has a real cost.

But then, this isn’t the only area in which we’ve seen banana-republic behavior from this administration starting off . . . I’m hoping this isn’t going to become a theme.  (And if anyone thinks the government’s intervention into the Chrysler bankruptcy is anything other than a payoff to the unions, McArdle also does a nice job of debunking that idea.)  For now, though, it has people in the financial market worried, and the backlash is already showing up.

John Derbyshire of National Review Online passes this one along from “a friend in the hedge fund biz” (HT:  Bill Roberts again):

Hey John—Would you like a sound bite from one of those evil hedge fund guys for Colmes’ show tonight? How’s this: “As a professional investor I’d have to be out of my skull to partner with this government on anything.”

This administration has made it quite clear that they can’t be relied upon to honor contracts or legal precedents and if I can’t know what the rules are before the game starts then I’m not going to play. Hedge funds aren’t like the banks . . . we haven’t failed. We aren’t beholden to the taxpayer to make our way. We have contractual and fiduciary obligation which we will honor. People pay us to make them money not to meet a political goal. So Obama had better think long and hard before he tries to bully us like he did the banks, or try to tell us that “he’s the only thing between us and the pitchforks.”

Also, Geithner and Obama have been saying that they plan on balancing the budget once the crisis is past. The press may believe that twaddle about how he’ll do it by “making things more efficient,” but we in the hedge fund industry aren’t so stupid. We’ve looked at the numbers and know what he’s planning to do. I know dozens of people who are already putting the legal structures in place to move their companies and themselves offshore and away from the grip of the tax man. These are some of the smartest most dynamic people in the world and they’ll have no trouble staying ahead of the [dumb] kids . . . over at the IRS.

So unless Obama wants to run out of “other people’s money” a lot sooner than he expected, he had better keep some people around to pay the bills. And if he keeps demonizing the productive and saying that it’s their responsibility to let him spend their money on the unproductive, then we’ll all be gone. I’ll be working my 14 hour days in Bahrain or Singapore, and Obama can go suck eggs. He needs the productive classes a lot more than the productive classes need him.

The problem here for the kind of approach President Obama is using in this situation is that he really does need the people with the money to cooperate for his plan (or any plan) to work, and strong-arming them into cooperation will only work for a very limited time in a very limited way.  The concern this raises among potential investors is succinctly expressed by Thomas Lauria:

The President is trying to abrogate contractual rights; if he will attack that contractual right, what right will he not attack?

I’ve often thought that the great problem with leftist economic theories is that they implicitly assume that people’s behavior doesn’t change as the incentives change—that reactions remain static, and thus that, for instance, increasing taxes on the rich will mean that the rich will pay more taxes.  This is a problem because the assumption is wildly false; thus, above a certain level, increasing taxes on the rich actually decreases the amount of taxes they pay, because their behavior shifts in ways designed to produce precisely that result.  Wealth protection (through tax avoidance) trumps wealth creation, economic productivity drops accordingly, and the economy suffers, hitting those who aren’t rich enough to make that choice—such as, for instance, the members of the UAW.  The same sort of thing will happen if the investment class decides that the government can’t be trusted to honor contracts if it doesn’t like their outcome:  they simply won’t sign contracts they don’t trust, leaving those who need investors to go whistle for them.

As such, the approach the president is employing here is a lot like the approach he employed in dealing with the Somali pirates last month:  good short-term tactics that will breed distrust and prove counterproductive, perhaps severely so, once his opponents wise up to what he’s likely to do.Further exacerbating the situation is the fact that Chrysler won’t be paying back the $8 billion the feds have given them, and the government won’t be getting stock in return for its “investment,” either.

Instead, the wreckage of Chrysler will be divided up among Fiat, Chrysler’s unions, and Chrysler’s debtholders. Which means that the taxpayers’ $8 billion was just a gift to these three consitituencies.

We don’t know about you, but we can think of a few dozen charities that we’d rather have given that $8 billion to than Chrysler’s debtholders, Chrysler’s unions, and Fiat.

Is the White House going to explain this one, or are we just supposed to ignore it?

On the bright side, at least Barack Obama is making his payments to the labor movement for the nice big white house they helped to buy him . . .

Barack Obama, union enforcer

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Mariner fans once dubbed Seattle Times beat writer Bob Finnegan “Pocket Lint” because he was so deep in ownership’s pocket—his pieces were, dependably, dutiful recitations of whatever the company line happened to be—and now I’m starting to think the nickname may need to be revived for Barack Obama.  We knew the labor movement had him in its pocket, but the whole business with Chrysler is beyond anything I would have expected.  President Obama and his administration essentially took a crowbar and attempted to kneecap a group of Chrysler investors in an effort to win better terms for the United Auto Workers than the UAW will be able to get in bankruptcy proceedings now that the automaker has filed for Chapter 11.  As the ever-invaluable Beldar lays it out,

What the Obama Administration has been trying to do, however, has been to cajole or—it’s now becoming more clear—threaten people who carefully bargained for less risk, and who thereby had to settle for lower rewards all along, into voluntarily forfeiting the protections they bought and paid for in the event of the underlying business’ insolvency. Primarily through Chrysler’s pension and retiree health-care obligations, the UAW is a creditor of Chrysler, but one whose position is less favored by the bankruptcy laws than the investors (debt holders) represented by companies like Oppenheimer Funds or Perella Weinburg. Unlike the UAW, their clients negotiated, bought, and paid for the rights not to have to have to make the same “sacrifices” that equity holders or general unsecured creditors would be compelled to make under the bankruptcy laws. But Obama insists—on pain of presidential demonization and worse—that these so-called “corporate renegades” (who’ve been guilty of nothing other than greater prudence) make those sacrifices anyway, and that they do so specifically in order to benefit the UAW!

This goes beyond populism or pro-unionism. Barack Obama is engaged in an assault on not just the entire system of business in the free world, but on the American rule of law upon which it is founded.

And the crowbar in question?  The White House press corps, as the lawyer for one of those investors told a talk-radio host in Detroit:

One of my clients was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under the threat that the full force of the White House Press Corps would destroy its reputation if it continued to fight.

Not that we really needed any further evidence that the MSM is a wholly-owned subsidiary of the Democratic Party machine, but that’s still telling.  The White House, of course, is denying the story; as for the response from the aforementioned reporters?  Aside from Jake Tapper, crickets.

The bottom line here, in Beldar’s words, is that

the Obama administration is engaged in a colossal abuse of power whose magnitude far exceeds a mere subversion of the White House press corps. Barack Obama has become Guido, the thug who everyone knows has not only a nasty habit but a nasty taste for breaking kneecaps. And the beneficiary of his shakedowns are the United Auto Workers.

Regardless of your position on Chrysler, unions, or any of the other parties involved in this mess, that sort of thing isn’t good for anybody for very long.  The rules need to be the same for everyone, and the same at every point in the process.  When the government starts bending them to try to manipulate results—when the process is compromised for the sake of someone’s agenda—the system will adjust in a way that will only hurt our economy, and especially those who are most vulnerable.

The thing is, these folks invested a lot of money in an effort to help Chrysler rebound—yes, in the hopes that they would profit off that rebound; our economy doesn’t run on altruism—and they did so knowing what the rules were if their efforts succeeded and what they were if Chrysler went down anyway.  Let them and others like them get the idea that the government is willing and able to do whatever is necessary to change those rules after the fact in order to skew the results to its liking, and the next time a big company is looking for help (General Motors, anyone?  The New York Times?), the money won’t be there.

Investors are willing to take the normal risks of business, because those risks are predictable, and they’re taken into account in the terms of the contract.  If they perceive a significant risk of ex post facto government intervention on behalf of other parties—risks which are neither predictable nor quantifiable—they’ll sit on their hands, rather than take the chance that the next kneecap the Obama administration aims at will be theirs; and GM, or whichever company totters next, will go down.

Is the Obama administration leading us to . . . fascism?

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It sounds startling, especially with all the voices calling him a socialist—but in one way, at least, that’s actually correct, as Thomas Sowell points out:

Socialists believe in government ownership of the means of production. Fascists believed in government control of privately owned businesses, which is much more the style of this government. That way, politicians can intervene whenever they feel like it and then, when their interventions turn out badly, summon executives from the private sector before Congress and denounce them on nationwide television.

It’s a great piece; Dr. Sowell covers a number of topics in his inimitable way, putting his own spin on the standard “notes” column, and it’s well worth your time to read the whole thing.  Here’s another excerpt to encourage you to do so:

Barack Obama seems determined to repeat every disastrous mistake of the 1930s, at home and abroad. He has already repeated Herbert Hoover’s policy of raising taxes on high income earners, FDR’s policy of trying to micro-manage the economy and Neville Chamberlain’s policy of seeking dialogues with hostile nations while downplaying the dangers they represent. . . .

Barack Obama’s favorable reception during his tour in Europe may be the most enthusiastic international acclaim for a democratic government leader since Neville Chamberlain returned from Munich in 1938, proclaiming “peace in our time.”

Frightening thought, that.

This is what a political cannonization looks like

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and no, that’s not a misspelling; British MEP Daniel Hannan definitely broke out the rhetorical cannons for this one, and his aim was unerring.  The Aged P called this a “very polite and beautifully enunciated assassination,” and he’s right; to his description I would only add “devastating,” because it’s that, too.  Here in the U.S., Republicans like Aaron Schock ought to be taking notes, because most of what MEP Hannan said to PM Gordon Brown could be said with equal point to Speaker Nancy Pelosi, Majority Leader Harry Reid, and others in the Obama/Pelosi administration.

Notes on the AIG story

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Make This One Go Viral: Obama’s Stimulus Bill Explicitly Grants AIG the Legal Right to Hand Out Unlimited Bonuses (Update)

This amendment provides an exception for contractually obligated bonuses agreed on before Feb. 11, 2009, which exempts the very AIG bonuses Obama is condemning every single chance he gets. The amendment is in the final version and is law.

And who’s responsible for that language being there? Sen. Christopher Dodd (D-CT):
Embedded video from CNN Video
Embedded video from CNN Video

Dodd lied. He spent a full day lying to the American people, and now he’s trying to shift blame to others. He and his pal Barney Frank want to publicly name the people who received the bonuses authorized by Congress and this administration in an attempt to deflect blame for their own actions.

And whose idea was it to add the language on the bonuses? The Obama administration’s.

Both Dodd and a Treasury Department official who asked not to be named told CNN the administration pushed for the language because they were afraid that the government would face numerous lawsuits without it.Dodd told CNN’s Dana Bash and Wolf Blitzer that Obama administration officials pushed for the language to an amendment designed to limit bonuses and “golden parachutes” at those companies.”The administration had expressed reservations,” Dodd said. “They asked for modifications. The alternative was losing the amendment entirely.”

(Incidentally, speaking of bonuses from AIG, you know who else got over $100,000 from them? Barack Obama.) Dodd clearly bears considerable responsibility for this mess; but the president who proclaimed “a new era of responsibility” wants him to take all of it, in order to protect Tim Geithner and Lawrence Summers (and possibly himself). I can’t think that’s going to go over well with the Congressional Democrats.As unpopular as it may be to say, though, hammering AIG and the folks who took the bonuses is unwise.  There was actually some reason for these bonuses, for one thing—it may not have been sufficient, but this wasn’t just an attempt to fleece the taxpayer—and for another, the downside here is much greater than the upside, as Ruth Marcus points out:

In the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would. The worst malefactors at AIG are gone. The new top management isn’t taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical but that are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn’t particularly cost-effective.In the longer term, having the government void existing contracts, directly or indirectly, as with the suggestions of a punitive tax on such bonuses, will make enterprises less likely to enter into arrangements with the government—even when that is in the national interest. This is similarly counterproductive.Remember, the contracts were negotiated long before the government put a cent into AIG. “The plan was implemented because there was a significant risk of departures among employees at [the company],” AIG wrote in a paper explaining the plan, “and given the $2.7 trillion of derivative positions at [the company] at that time, retention incentives appeared to be in the best interest of all of AIG’s stakeholders.” . . .”That was then and this is now” is not a valid legal principle. “We are a country of law,” Obama economic adviser Lawrence Summers said Sunday. “There are contracts. The government cannot just abrogate contracts.” He was right. . . .The administration argues that anger over the bonuses, among the public and members of Congress, was at such a level that the president needed to say something to show that he understood the fury. Perhaps, but there is a countervailing risk in stoking this populist rage—especially if the administration needs to come back to Congress for more money for the banks.Once the pitchforks are out, it’s awfully hard to convince the mob to put them down.

Truth to tell, though, I think Marcus has misunderstood the reason for President Obama’s faux-populist outrage; I think this is a deliberate attempt at misdirection.  After all, firing up “the mob” may be risky, but it’s the easiest way to manipulate a lot of people at once.  This whole scenario reminds me of the many mysteries I’ve read/watched in which the person who “discovered the body” actually turns out to be the killer.  What better way to keep people from thinking that you’re the one who did the deed than to be the guy who rushes out into the street shouting “Murder!”—it’s classic sleight-of-hand.  Blow outrage at the man who only took over after the disaster happened (and who at least has a plan to restructure AIG and repay the Treasury, which is more than we can say of anyone else) and at the big shots getting the big bonuses, you get folks made at all those “rich Republicans” (even if most of them actually voted Obama) and (you hope) keep them from looking for evidence of Democratic complicity.That complicity, by the way, goes beyond the White House or the Senate.  Most people remember, vaguely, that New Mexico Governor Bill Richardson withdrew his nomination to Commerce because he was under investigation in a pay-for-play scandal, but most folks don’t know anything about the nuts and bolts of that investigation, or about CDR Financial Products, the company on which it’s focused; unless you live in a county that’s staring at bankruptcy because of CDR’s “black box” deals, you probably don’t know that this scandal goes a long way beyond New Mexico.  In particular, you probably aren’t aware that this scandal is connected to the whole mess with AIG, or that Democratic politicians are tied into it at all levels of government.  The blog The 46 has been tracking this story for a while now; start with the post linked above and follow it out—the whole mess is complicated and will take some real focused attention if you aren’t a financial whiz, but it’s well worth your time.  When you understand the ways in which CDR has been colluding with local companies and politicians to use municipal bond issues to line their own pockets at taxpayer expense, it will blow your mind.Finally, Larry Kudlow offers a note of hope in the midst of everything.  He’s ticked over the way the government has mismanaged the takeover of AIG, calling it a “fiasco” and a “complete farce,” and concluding, “The government shouldn’t run anything, because it cannot run anything”; at the same time, though, he believes there’s reason for optimism:

This week’s decision by the Federal Accounting Standards Board (FASB) to allow cash-flow accounting rather than distressed last-trade mark-to-market accounting will go a long way toward solving the banking and toxic-asset problem.Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe.Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash—i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture. This is huge in terms of solving the credit crisis.

This follows on a piece he wrote last Friday in which he wrote,

Out of the blue, bank stocks mounted an impressive rally this week, jumping nearly 40 percent on the S&P financial list. One after another, big-bank CEOs like Vikram Pandit of Citi, Ken Lewis of BofA, and Jamie Dimon of JPMorgan are telling investors they will turn a handsome profit in the first quarter, their best money gain since 2007. This is big news. And it triggered the first weekly stock gain for the Obama administration.But this anticipated-profits turnaround doesn’t seem to have anything to do with the TARP. It’s about something called the Treasury yield curve—a medical diagnostic chart for banks and the economy.When the Fed loosens money, and short-term rates are pulled well below long rates, banks profit enormously from the upward-sloping yield curve. This is principally because banks borrow short in order to lend long. If bankers can buy money for near zero cost, and loan it for 2, 3, or 4 percent, they’re in fat city. Their broker-dealer operations make money, as do all their lending divisions.So the upward-sloped yield curve is the real bailout for the banking system.Now, turn the clock back to 2006 and 2007. In those days the Treasury curve was upside down. Due to the Federal Reserve’s extremely tight credit policies, short-term rates moved well above long-term rates for an extended period, and that played a major role in producing the credit crunch. Since interest margins turned negative, the banks had to turn off the credit spigot, and all those exotic securities—like mortgage-backed bonds and various credit derivatives—could no longer be financed.The Fed’s long-lived credit-tightening also wreaked havoc on home prices and was directly responsible for the recession that began in late 2007. At the time, Fed head Ben Bernanke said the inverted yield curve wouldn’t matter. Gosh was he wrong.

In other words, Kudlow’s arguing (and the evidence seems to be with him) that the credit crash was caused by federal over-management of the economy, and that now that that particular form of over-management has ceased, things are starting to recover.  He went on to argue in that column that “if somebody tells the banks they don’t have to sell these loans at distressed prices,” which is what the FASB’s rule change noted above has done,

the banks will enjoy plenty of breathing room to reap the benefits of the upward-sloping yield curve.Let the banks hold these investments over a long period, rather than force them to sell now. The economy will get better, as will housing and other impaired assets.

If his analysis is correct—and the evidence seems to be with him on this—then the recovery has already begun; we simply need to let it take the time it’s going to take.  The one thing that seems to be clear is that further government attempts to manage the recovery will only make matters worse, since the government can’t manage its way out of a paper bag.  That’s not a shot at Democrats, either, as it was no different when Republicans are running the show—the economy is simply too big to be managed.  All you can really do is try to keep the rules as fair as possible and try to manage the inputs so as not to distort the market (since distortions create greater opportunity for bubbles and subsequent crashes).  Here’s hoping our current government can at least resist the temptation to make matters worse.

An economic Trojan horse

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Michael Ledeen summarizes it this way:  “Obama told us he was going to use Congress to redistribute the wealth—explicitly. And he thinks it’s in the Constitution.”As a lolcat might put it:

“It” is the message Barack Obama delivered in a radio interview several years back, which is now embodied in his administration’s economic policy.  The audio of that interview is below; as Wizbang blogger Steve Schippert summarized it last fall,

Obama laments in the interview that the Warren Supreme Court failed to reinterpret the Constitution to read into it what was not there: Redistribution of wealth for “political and economic justice in this society.” . . .For Obama, the redistribution of wealth is a civil right that the civil rights movement failed to attain. To Barack Obama, the redistribution of wealth is basic “political and economic justice,” and one segment of society has the basic right to the money of other segments of society. He’s very straight forward about this.And while in the interview he did not think wealth redistribution could be affected through the courts, he was confident that it could be attained “legislatively.”

President Obama’s intellectual foundation on this issue is the work of two liberal French economists (if that isn’t a redundancy) named Thomas Piketty and Emmanuel Saez.  Daniel Henninger describes their work and its influence on the Obama administration’s economic strategy here:

Barack Obama has written two famous, widely read books of autobiography—”Dreams from My Father” and “The Audacity of Hope.” Let me introduce his third, a book that will touch everyone’s life: “A New Era of Responsibility: Renewing America’s Promise. The President’s Budget and Fiscal Preview” (Government Printing Office, 141 pages, $26; free on the Web). This is the U.S. budget for laymen, and it’s a must read.Turn immediately to page 11. There sits a chart called Figure 9. This is the Rosetta Stone to the presidential mind of Barack Obama. Memorize Figure 9, and you will never be confused. Not happy, perhaps, but not confused.


Bride of Rove summarizes Piketty-Saez thusly:

From what I gather they have been pulling together tax returns, tracking the rich and have determined that the rich have been getting richer faster than the poor have been getting unpoorer not so fast. Ok. I agree. It does take awhile to build that financial base and it tends to grow exponentially once you put that money to work. So if you have a lot, you make a lot proportionally. If you’ve got squat, you don’t tend to make much on nothing. You have to get a HS diploma, work hard, save and make good decisions. Sometimes you have to take a few risks. Eventually, if you keep at it, you will move up the scale faster and faster—except for now. But, yeah. There are poor people who never get ahead for a myriad of reasons and there are rich people who do better every year.Piketty and Saez believe that this is not fair.

They are making, as Henninger puts it, “a moral argument for raising taxes on the rich.”  As a consequence of President Obama’s belief in that argument,

Mr. Obama made clear in the campaign his intention to raise taxes on this income class by letting the Bush tax cuts expire. What is becoming clearer as his presidency unfolds is that something deeper is underway here than merely using higher taxes to fund his policy goals in health, education and energy.The “top 1%” isn’t just going to pay for these policies. Many of them would assent to that. The rancorous language used to describe these taxpayers makes it clear that as a matter of public policy they will be made to “pay for” the fact of their wealth—no matter how many of them worked honestly and honorably to produce it. No Democratic president in 60 years has been this explicit.The economy as most people understand it was a second-order concern of the stimulus strategy. The primary goal is a massive re-flowing of “wealth” from the top toward the bottom, to stop the moral failure they see in the budget’s “Top One Percent of Earners” chart.The White House says its goal is simple “fairness.” That may be, as they understand fairness. But Figure 9 makes it clear that for the top earners, there will be blood. This presidency is going to be an act of retribution. In the words of the third book from Mr. Obama, “it is our duty to change it.”

In other words, the first thing you need to understand about this administration’s economic policy is that it’s not really about the economy.  It’s not about prosperity or economic growth or even helping the poor in absolute terms.  It’s about reducing the gap between the poor and the rich.  And what’s the fastest way to do that?  Make the rich poorer.In my book, this sort of thing boils down to letting the sin of envy drive economic policy—and envy is a deadly sin for a reason.  It will probably accomplish its purpose; but it will probably also make everyone worse off in the process.  That’s a high price to pay for seeing the proud humbled.  It may well be God’s judgment on the proud of this nation, but even if so, I don’t think that justifies those who bring it about.

Do these taxes feel high to you?

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Though the theory underlying the Obama administration’s response to the current economic crisis is usually described as “Keynesian,” it’s interesting to note that John Maynard Keynes himself would demur.  Michael Barone puts it well when he writes,

“Animal spirits,” said John Maynard Keynes, are the essential spring of capitalism. We depend on the animal spirits of investors, high earners and entrepreneurs for a growing economy.Keynes, a subtler analyst of market economies than the single-minded booster of high government spending that so-called Keynesian economists depict, knew whereof he spoke. People don’t just respond in linear quantum jumps to the incentives and disincentives they perceive around them. They perk up when their animal spirits are aroused, and they slump down into inertia when they are not.

A good illustration of this comes from, of all people, Whoopi Goldberg.  Read the link, then check out this video (they’re from different parts of the conversation):

My wife watched the clip and read the transcript, then looked at me and said, “I didn’t think Whoopi was a Republican.”  She isn’t, but she sure sounds like one here; and if someone like Whoopi feels this way, you can be sure a lot of other rich folk do too.  I think Barone’s argument goes a long way to explaining why.

The Clintonites managed to hit a sweet spot with the 39.6 percent rate. It was a number that started with a three. To high earners, not bothering to calculate exact returns to the last decimal point but just concentrating on the big picture, it seemed that the government was taking just about one third—hey, maybe a bit more—of their incomes. They would get to keep the other two thirds, pretty much. So they proceeded to try to make intelligent investments and to earn large amounts of money without being preoccupied with how much the government would snatch from their hands.Quite a contrast with the 1970s, when the high income tax rate was 50 percent, and 70 percent on “unearned” (i.e., investment) income. In that environment, the animal spirits of the productive class were directed away from making productive investments and toward sheltering their income from seizure by the government. . . .I think there is a serious risk that the Obama tax proposals are going to bring back those days. Yes, they call for returning the high income tax rate only to the sweet spot of 39.6 percent. But they also want to reduce the amount of the mortgage interest and charitable deductions for high earners, which would channel less money to charities and more to the government (and thus to public employee unions and, through them, to the Democratic Party) and would raise the effective rate on high earners to above 40 percent—a number with a four in front of it.Add on to that the state income tax rates of 10 percent or so in place or in contemplation in New York, New Jersey, Connecticut and California—states with more than a quarter of the nation’s high earners—and you are looking at income tax rates above 50 percent.When you get a number with a five in front of it, you are in grave danger, I submit, of directing the animal spirits of our most productive citizens away from productive investments and toward tax shelters: “Those bastards want to take half my money, and I’m not going to let them get it.” You are at risk of directing our economy back into the unproductive slog of the 1970s and away from the robust growth of the 1980s, 1990s and most of this decade.

His argument is, in essence, that most economic actions aren’t purely rational responses to a detailed command of the facts, but rather are in response to more general perceptions, and that these perceptions don’t shift gradually, little by little, but rather tend to do so all at once when a particular threshold is crossed.  As he notes,

When gas prices earlier last year were at $2, $2.50, $3 and $3.50, most Americans opposed oil drilling offshore and in Alaska’s Arctic National Wildlife Refuge. When they hit $4, opinion shifted. The Santa Barbara County Board of Supervisors and the governor of Florida suddenly favored offshore oil drilling. As for Alaska, nuke the caribou!

This suggests that taxes can in fact be higher than most conservatives would prefer without causing much of an adverse effect, as long as they don’t feel higher to the folks whose investments drive the economy; it also suggests, though, that if you overshoot your target even a little, the adverse effect of your miscalculation is likely to be a lot worse than you would consider to be rational.  If Whoopi’s reaction is any guide, I suspect the Obama administration isn’t going to know what hit it.

The Peter Principle in the White House

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As was the case more than once during the campaign, SNL’s doing a better job of dealing with the news (in its own inimitable way) than the people whose job it is to cover it; this sketch captures the deer-in-the-headlights cluelessness of the Treasury Secretary so well, it’s almost painful to watch.  For all his résumé, it’s clear that Timothy Geithner is out of his depth in doing the job he’s been given; he has risen to the level of his incompetence.Unfortunately, it isn’t just Secretary Geithner.  We were repeatedly told during the campaign that Barack Obama was going to improve America’s reputation around the world—but that doesn’t appear to include our allies, since we’re not even two months in to his administration and he’s already managed to infuriate the Brits.  Though delivered in the “stiff upper lip” tone that Americans associate with our closest ally, the outrage in the British media at the way President Obama responded to their prime minister’s visit is clear.  I’m sure they particularly appreciated this curt dismissal of their concerns from an official in the State Department: “There’s nothing special about Britain. You’re just the same as the other 190 countries in the world. You shouldn’t expect special treatment.”True enough, I suppose, except of course for the fact that unlike those other 190 countries, the UK has been a staunch and consistent ally of our government . . . Now, as the whole David Brooks episode clearly demonstrated, this White House is remarkably thin-skinned when it comes to criticism and complaint, and so when the firestorm erupted, they defended the President—if you want to call this a defense (emphasis mine):

Sources close to the White House say Mr Obama and his staff have been “overwhelmed” by the economic meltdown and have voiced concerns that the new president is not getting enough rest.British officials, meanwhile, admit that the White House and US State Department staff were utterly bemused by complaints that the Prime Minister should have been granted full-blown press conference and a formal dinner, as has been customary. They concede that Obama aides seemed unfamiliar with the expectations that surround a major visit by a British prime minister.But Washington figures with access to Mr Obama’s inner circle explained the slight by saying that those high up in the administration have had little time to deal with international matters, let alone the diplomatic niceties of the special relationship.Allies of Mr Obama say his weary appearance in the Oval Office with Mr Brown illustrates the strain he is now under, and the president’s surprise at the sheer volume of business that crosses his desk. . . .The American source said: “Obama is overwhelmed. There is a zero-sum tension between his ability to attend to the economic issues and his ability to be a proactive sculptor of the national security agenda.”

In other words, as Power Line’s John Hinderaker summed it up, “Don’t blame us, we’re incompetent!”  Except that there’s one other factor referenced in the Telegraph article:

A well-connected Washington figure, who is close to members of Mr Obama’s inner circle, expressed concern that Mr Obama had failed so far to “even fake an interest in foreign policy”.

It seems clear that indifference—to foreign policy in general and Great Britain in particular—also played a part in this:  Barack Obama and his administration simply didn’t care enough about Gordon Brown’s visit or our alliance with his country to try to be competent about it, or even to try to hide their lackadaisical attitude about it.That said, the portrait painted here of an overwhelmed president who’s unable to keep up with the demands of his job in any sort of effective fashion is deeply worrying, and particularly when combined with his own expressed opinion that he’s “very good” at the job.  This is a member of the Self-Esteem Generation, all right.  It’s no wonder he inflated his résumé (follow the links from that post), took credit as a Senator for work he didn’t do, and gilded the lily in his autobiography to make his first job look much better, and his decision to leave it much more meaningful and meritorious, than it really was; he’s the product of an educational system that’s been more concerned in recent decades with making sure students feel good about themselves than about giving them the education they need to live lives that merit a healthy self-respect.  It’s all of a piece with him taking a job at a law firm, slacking on billable hours, and spending much of his time working on his autobiography (which he didn’t even manage to finish, at least while he was there).Up until last November, none of this has been much of a problem for Barack Obama; he’s had the brains, the grace, and the charm to keep wangling his way along and retelling his story to suit himself without anybody minding enough to cause him any problems.  After all, nothing was really riding on him.  The law firm wasn’t depending on him; the Illinois State Senate got its bills passed whether he did any work or just voted “present” (though the man who ran the shop was happy enough to boost him by putting his name on bills anyway); the US Senate kept running along whether the junior Senator from the state of Illinois was in his seat or not.  Being President of the United States, however, is different; and now, this is a problem.  This is the first actual job he’s had since his days as a community organizer (which were, by his own admission, unsuccessful) in which his job performance actually matters—and it’s one of the biggest jobs in the world, and his performance is all-important.  Now, it matters immensely whether he gets things done, and whether they’re the right things; and unfortunately (for us), he has never cultivated the habit of digging deep and digging in to get things done, he has never cultivated the endurance necessary to true accomplishment—in Nietzche’s words, he’s never practiced “a long obedience in the same direction”—and so he doesn’t have the habits and skills and life patterns necessary to do that job effectively.This shouldn’t be a surprise to anyone, since it was all there in his résumé, for anyone who cared to look; but too many people didn’t.  The McCain campaign tried to make the point, but they couldn’t get beyond talking about “experience,” as if it was simply a matter of time served, when it was really a matter of character.  This allowed the Obama campaign to counter it emotionally, by making “experience” mean “old, tired, and four more years of Bush”; it allowed them to counter it mathematically by adding Sen. Biden to the ticket, when in fact Sen. Biden’s career in the Senate basically consisted of nothing much more than Sen. Obama’s time in the Senate, spread out over many more years; and perhaps most fatally, it allowed them to portray Sarah Palin, when she was named as John McCain’s running mate, as equally “inexperienced.”  Thus what should have been a powerful comparison for the McCain campaign—that Gov. Palin had accomplished far more of substance at a similar age than Sen. Obama—ended up being used against them.  People looked at the numbers and missed the real point:

Two things would leap out from Sarah Palin’s résumé—a pattern of overachievement and a pattern of actually getting things done. Two things would also leap out from Barack Obama’s résumé—an undeniable wealth of talent and an equally undeniable dearth of accomplishments. . . .In truth, Sarah Palin is the kind of employee virtually every enterprise seeks—the kind who gets things done. And Barack Obama is the kind of employee a company hires only when it’s in the mood for taking a risk and willing to wager that the candidate’s past performance isn’t predictive of his future efforts.

So far, that risk isn’t looking too good.

The world’s largest canary?

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I don’t know if you can imagine the Phoenix Suns’ Amare Stoudamire, all 6’9″ and 250 pounds of him, covered in yellow feathers and chirping, but if there’s a canary in this economic mine telling us that things are going to get a whole heck of a lot worse before they get better, he just might be it.  Symbolically, at least.  Read Bill Simmons’ column from last week, “Welcome to the No Benjamins Association,” and you’ll understand.  Even if you aren’t a basketball fan, read it; it’s partly about other problems besetting the NBA these days, but what’s most telling is the angle it provides on where our economy is now, where it’s going, and what the consequences are likely to be for people locked into long-term commitments made before the economy tanked.

Addition to the blogroll

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Apparently the economics department at George Mason is big into blogging:  professors in that department maintain four separate blogs on economics and other matters.  I had had some familiarity with one of them, Café Hayek, but the others were new to me.  Since in the current situation, it’s good to have a guide or four to help us sort out the good ideas and statements from the bad, and since these bloggers do have interesting things to say beyond the scope of the dismal science, I’ve linked them and given them their own category down the sidebar a ways.