Coyote Blog

…except when we do.  I think everyone pretty much assumed that Obama’s promise of treating GM like a real business and not as a political plaything was BS from the start, particularly when Congress started intervening in dealer-closure decisions about 5 seconds after the promise left Obama’s lips.

Henry Payne has a roundup of Congressional micro-management at GM.  One example:

Chrysler and GM have moved aggressively to cut their transportation costs, effecting Teamster jobs and riling the union’s political friends. Chrysler, for example, will save 25 percent of its $111 million annual hauling budget by transferring to lower-cost carriers. But Michigan reps from both sides of the aisle are unimpressed, reports the Detroit News. “Relatively minor short-term cost savings generated by shifting this work to non-unionized companies is greatly outweighed by the elimination of good-paying, union middle-class jobs,” complains Michigan Republican Thaddeus McCotter.

What do “good-paying” trucking jobs have anything to do with GM’s health?

Added a link on the right for phone numbers and emails of all Congress members.

I often say that most government officials are not dumb or evil, they just have bad incentives that make them act that way, and they look dumb because they attempt to tackle problems that even a 250IQ can’t solve (e.g. planning the economy).

But I may have been wrong.  Evidence is mounting that people in Congress, at least, really are just plain dumb.  From an interview on NPR:

[Congressman Henry] Waxman: Well, there have been scientists brought together to see if they could figure out the science and make it clear whether this is a danger or not, whether it’s a danger that’s a great one or one that we can postpone for a while, and the overwhelming consensus of all the leading scientists that have looked at this issue is there is a warming of the planet, it’s manmade, caused by our burning of carbon fuels, and it’s happening faster than anybody ever thought it would happen.

We’re seeing the reality of a lot of the North Pole starting to evaporate, and we could get to a tipping point. Because if it evaporates to a certain point – they have lanes now where ships can go that couldn’t ever sail through before. And if it gets to a point where it evaporates too much, there’s a lot of tundra that’s being held down by that ice cap.

If that gets released we’ll have more carbon emissions and methane gas in our atmosphere than we have now. We see a lot of destruction happening because of global warming, climate change problems, so we’ve got enough warning signals and enough of a scientific consensus to take this seriously.

Oh my heavens, we are certainly in good hands.  Via Tom Nelson.

Postscript: For those who slept through high school science:

• North Pole ice melts, it does not evaporate (liquids evaporate).  Occasionally a solid will go straight from a solid to a gaseous state (e.g. with dry ice) – that is called sublimation.  Ice on Kilimanjaro, for example, sublimes rather than melts.
• There have been a number of years this century, including several times in the 1930’s, when the Northwest Passage opened up in the summer, so a recent opening was far from the “first time.”
• The ice cap does not hold down the tundra.  The concern, as I understand it, is that large stretches of Siberia are essentially permanently frozen peat bogs.   If the permafrost (which is under the tundra) melts, this allows the previously frozen organic matter to start to decompose, releasing methane which is a strong greenhouse gas.
• When Waxman refers to a tipping point, he means that a positive feedback cycle, much like nuclear fission, is created causing temperatures to accelerate rapidly.  As an aside, such runaway positive feedback processes are rare among long-term stable natural systems, as at some point, given 5 billion years of history, they should have already run away by now.  Why temperatures would reach a tipping point now when they did not in millennia past when both global temperature and CO2 levels were much higher remains unexplained by Mr. Waxman and other tipping point advocates.
• As of today, global sea ice extent is higher than the last 30 year average.  (this graph is updated regularly)

Just a few days ago I wrote about proposals for government subsidies / bailouts / partial control of print media. Already, it seems that bills are popping up in Congress. I guess this is not surprising — as Congress loves to throw pork at particular industries in exchange for help getting elected, the temptation to make the newspaper industry, with its unique political muscle, beholden to the political class must be overwhelming.

But I must say this makes zero sense to me:

With many U.S. newspapers struggling to survive, a Democratic senator on Tuesday introduced a bill to help them by allowing newspaper companies to restructure as nonprofits with a variety of tax breaks.

“This may not be the optimal choice for some major newspapers or corporate media chains but it should be an option for many newspapers that are struggling to stay afloat,” said Senator Benjamin Cardin.

I don’t see how allowing organizations (whose problem is that they are making no profits) to avoid income taxes on their non-existent profits is really going to solve much. Is the thought that donations will save the day? Are we to endure endless pledge drives in print media?  Or maybe Democrats are hoping ACORN will use its stimulus funds to start buying up local papers?

This is classic government in the corporate state.  Economics and new technologies are driving huge changes in an influential business.  These changes will force survivors to adopt new business models, and will force formerly dominant competitors who refuse to change out of business.  Rather than face these changes and deal with risks to their leading positions, powerful incumbents run to government to try to get the state to lock in historic business models and prevent new entrants for poaching on what they consider their protected market preserves.

The Liberty Papers thinks we have become a lawless Banana Republic.  George Will is thinking along the same lines, snarkily observing that Sweden, China, and Mexico have all observed in one way or another that the Feds seem to be acting outside the rule of law.

I have opined in the past that what really extended the Great Depression was not any real underlying economic issue, or even vast increases in government spending per se.  It was that arbitrariness with which the Roosevelt administration dealt with economic matters.  With nutty programs like the Mussolini-inspired National Industrial Recovery Act coming and going, investors and businesses never knew from day to day what the rules of the game would be next year, or even next week.

I fear that this is exactly the climate Obama and Congress are creating today.

• When Congress reacts to CNN headlines by retroactively confiscating legal compensation that it had protected just weeks before, what will happen to my compensation?
• When government deficits soar by trillions of dollars, what will taxes look like next year?
• When the Administration says that Co2 will have to be reduced by 80%, what numbers do I plug into my forecasts for fuel and electricity?
• When the government decides on a whim to print a trillion dollars more money to pay off government debt, what will inflation look like in the coming months and years?

As of two months ago, my company was still investing.  We were still getting bank credit, particularly for equipment financing, though it took more work than in the past to secure it.  We still saw opportunity in our business, and in fact saw increased opportunity in the recession for low-cost recreation options and outsourcing of public recreation facilities.

But today, I am reluctant to make any new investments.  Investing $5000 now for $8,000 a year from now normally sounds good, but what happens now that the Feds have more than doubled the money supply?  How much will $8,000 really be worth a year from now?  What will my taxes be on the increase?**  What new costs or liabilities  might be retroactively placed on me for making the investment?  What happens if beltway pundits start thinking I am making too much money?

All this commotion of government intervention started when Paulson and other Bush appointees started screaming that the banking system was going to shut down and therefore crash the whole economy.  As my readers know, I believe to this day that this was all sky-is-falling over-reaction and panic-mongering, and most of the credit crunch resulted from uncertainty about the Treasury and its statements, not due to realities on the ground.   However, whatever tightening of credit we might or might not have avoided by government action, it pales in its effect on investment in comparison to the arbitrariness and trillion-dollar-plan-of-the-day that has been the first 60 days of the Obama administration.

** footnote: For those of you who have not lived through high inflation times, taxes and inflation are a deadly combination.  That is because the Federal Government, after creating inflation, then taxes each of us on its effects.  Here is an example:  Invest $5000 now at a fixed 10% a year.  Suddenly, inflation goes up to 8% a year.  In five years, I now have a bit over $8000.  In economic terms I have made a small profit of, since $8000 in five years at 8% inflation is worth $5,445 today.

But the IRS thinks I have made $3000, not just $445, and will tax me on the full $3000.  If they take a third, I only have $7000 at the end, or $4,764 in current dollars, meaning that after taxes, I actually lost money.

The normal process for bureaucratic allocation of, say, highway funds, does not always work that well.  Seriously, you don’t have to convince this libertarian of that.  But it is at least intended to try to balance priorities and allocate the funds marginally rationally.   Which points out the problem with earmarks — they are overrides by Congress of the normal allocation and prioritization process for political ends.  By definition, the projects in earmarks would not have normally been funded by the usual operation of the prioritization process.

Which brings me, oddly enough, to AIG  (and to GM).  When companies can no longer meet all of their obligations, they generally file for chapter 11 bankruptcy. This is an extremely well-worn process, both in the courts and the business community, that attempts to save as much value as possible and to allocate that value, based on law and a set of rules everyone understands in advance, to the various stakeholders.   The folks who are involved in this process are pretty hard-headed folks, less out for revenge and retribution as for maintaining value and capturing as much as possible for whatever group one might represent.

Now Congress and the Administration are getting themselves involved in the bankruptcy process, by trying to avert actual chapter 11 filings by AIG and GM.  By doing so, they are effectively overriding the bankruptcy process.  Just as with earmarking, they claim this override is for some good of the country.  But, just as with earmarking, you can assume it is to benefit some politically-favored group.  At GM, the feds are saying that we don’t want employees or the equity holders to take a haircut, as they would in Chapter 11, so we will transfer the loss to taxpayers, and perhaps bondholders (could there be any politically less favored group than taxpayers?).  Same at AIG.   Is it any surprise that the number one beneficiary of the Pauslon bailout of AIG was Goldman Sachs?  The Left thought they smelled a rat when the administrations contracted with ex-Cheney-run Haliburton in Iraq, but no one is going to bat an eye when the Treasury department, populated with ex-Wall Street types, is bailing out all its employees’ old firms?

On the subject de jour, the AIG executive bonuses, many of these were just as guaranteed, contractually, as were payments on AIG policies and bond guarantees.  I don’t know how such obligations are treated in chapter 11 (are they treated as more or less senior than other obligations?) but I do know the decision to keep them or ditch them would be made against a goal of maintaining long-term value, and not public witch-hunting.

This is the real problem, even beyond the taxpayer cost, of this new form of Congressional or Administration-led pseudo-bankruptcy:  Winners and losers are determined by political power and perceptions of short-term political gain, rather than against a goal of maintaining value and following well understood and predictable rule.  This process throws all the old predictable rules and traditions out the window.  Investors and folks with contracts used to know just how senior their obligations were in a corporate failure.  Now, they have no idea, as their position in the bankruptcy may in the future depend more on how much they donated in the last presidential election, or how good their PR agent is.

We will be posting on the stimulus bill for months and years, because it will take that long to figure out what was in it.  Congressman who voted for it may never know what they actually voted for.  Veronique de Rugy takes a first swing at it:

Total spending amounts to $792 billion, with $570 billion in direct spending and $212 billion in tax provisions. These numbers don’t include the massive amount of interest that will accrue on the increased debt. If we include that, the total amount comes to $1.14 trillion.

Supporters of the package describe the legislation as transportation and infrastructure investment, the idea being to use new spending to put America back to work while at the same time fixing decrepit infrastructure. However, only 17 percent of the discretionary spending in this package is for infrastructure items. More worrisome still, the final version lacks any mechanism to ensure that spending will be targeted toward infrastructure projects with high economic returns

De Rugy actually overestimates the infrastructure spending, because she looks at the spending over 10 years.  Since the stimulative effect of infrastructure spending in this recession is, at most, limited to 2009-2010 spending, and since the infrastructure spending is more back-end loaded, the percentage is much lower in the first 2 years — something like 6-7% as I calculated here (I will go back through the CBO reports with an update when I get a chance, but Kevin Drum links them here, hilariously saying they “scored well.”

Unfortunately, even this seems to wildly underestimate the true cost of the bill.  In creating the bill, Congress increased the general operating funds for zillions of departments and programs  (remember, 80+% of the spending is departmental budget increases, not infrastructure construction).  However, they show these increasing disappearing after a couple of years.  We all know that Democrats consider removing an increase to be “a massive cut” so we can assume that at some point, these budget increases will be extended for eternity.  If one makes this more realistic assumption, then the cost of the stimulus bill is over $3 trillion!  [update:  Carpe Diem demonstrates this with a nice set of graphs]

My other project I am working on is to look at some of the “shovel ready” projects on the mayor’s list here  (warning!  600 page pdf!!) in the Phoenix area.  My incoming hypothesis is that any project on here either:

1. Is not shovel ready, as it takes years to get a project through planning, procurement, and environmental permitting, but once anyone in DC finds that out, they won’t take back the money, -OR-
2. Is something that the local residents, who will enjoy the benefit, refused to fund, raising the question as to why the rest of us should fund it.

I won’t spill the beans yet, but here are a few tastes from the Phoenix area:

• A major upgrade to the water system of the town of Paradise Valley, a small community embedded in Phoenix which is, by a fairly good margin, the single wealthiest zip code in the state.
• A lot of solar.  Solar is a particularly good choice for this list because 1)  Obama has a hard-on for it, so he is unlikely to question it  2)  Solar’s problem is high capital cost vs. the amount of electricity produced, but if someone else is paying the capital cost….

Kevin Drum, quoting Joe Klein, hopes the press (which we know to be so terribly biased against leftish ideas and new government spending) doesn’t smear Obama’s economic plan like they did Clinton’s.

I won’t get into all that, but I want to ask a related question:  To what extent does current legislation actually represent an Obama plan at all?  Maybe the press coverage has been poor, but hasn’t Obama really been forced to put a happy face on and accept the half-baked mess that comes out of Congress?  Hasn’t Obama really taken the role as Majority Whip, trying to wrangle votes for an existing piece of legislation, rather than actually crafting its framework?

I would define one of the key aspects of Presidential leadership as bringing some adult supervision to Congress, and particularly his own party in Congress.  Bush CERTAINLY never was able or willing to do so, and I don’t see evidence of Obama doing so either.  Congress is running amuck, and every week seems to add another $100 billion in random pork to the bill.  In content, my perception is that the stimulus bill is Nancy Pelosi’s bill but Obama’s blame.  Or am I missing something?  Has the Administration had more involvement in the crafting of this bill than it appears?

Update: Jane Hamsher at Huffpo (HT to a commenter) argues that my understanding above is a result of furious Administration spin:

The story of the morning seems to be that the Obama team is unhappy with Nancy Pelosi and the House committee chairs for delivering up such a liberal, pork-laden bill that they themselves really had nothing to do with.

“Anonymous staffers” are fanning out to fuel the fiction that “during the transition Summers, his deputy Jason Furman, and the White House’s top Congressional liason, Phil Schiliro, laid out the broad principles they wanted the bill to adhere to, but when it came to actual content, they deferred to the chairmen.”

Except that it’s not true.  The Obama transition team has been working on the substance of the bill from day one.  Their first step was to go to the Association of Mayors, the National Governors’ Associations and other non-congressional groups and say “give us all your shovel-ready projects.”  That and other provisions written by the Obama team became the spine of the bill.  It went through only three committee markups, and moved through the House at lightening speed in a way that made many House chairs unhappy, with the notable exception of Dave Obey (now also under attack) who helped push it through quickly.

The House bill is notable not only for its size but also because it had no earmarks, which are the lifeblood of House members, the way they show their constituents what they’re doing for them.  As one person knowledgable about the writing of the bill says, “if you’re in the House why would you write a bill without earmarks unless you didn’t write the bill?”

But with public opinion quickly turning against the bill, and the House Republicans claiming the moral high ground as they held formation to oppose him, how could Obama be distanced from responsibility for elements of the bill under GOP attack and remain above the fray?  That seemed to be the locus of White House concern, and according to those familiar with what happened, the “polarizing” Nancy Pelosi was designated to take the fall.

Interesting.  Well, I don’t often comment on politics per se  (vs. actual proposals) because I am so naive about this stuff.  Hamsher could in turn be shilling for Pelosi.  I just don’t know enough.

By the way Hamsher tends to imply that it is a good bill with bad PR.  Phhhth.  It is an awful bill, and I am willing to bet that I have read more of it and the CBO report than she.

CEO’s of companies struggling on the brink of failure often make happy, confident public statements that all is well.  Is that a crime?

Well, it depends on how you look at it.  It comes down to a CEO’s fiduciary responsibility to the company’s investors, and how that is regulated for public companies.  We think of fibbing to inflate the company stock poorly serves investors, but what about when the company is facing a liquidity crisis?  Isn’t public optimism in a liquidity crisis exactly what is needed to serve shareholder’s interests?  Consider Treasury Secretary Paulson, and his near criminal declaration of a financial crisis, and the effect these ill-considered statements have had on the economy.

It is hard for me nowadays not to think about Jeff Skilling, who sits in jail for making what the jury thought to be overly optimistic public statements about the company’s financial health  (I know you are thinking that he was put in jail for all that off balance sheet accounting and gimmickry, but in fact the prosecution never chose to bring these charges in the trial).  Even Skilling’s jury, which was pretty clearly predisposed to convict, seemed to acknowledge that he did not make these statements for personal gain.

So why is Skilling in jail and not, say GM CEO Rick Wagoner?  Wagoner was making a lot of happy-face statements just a few months before his company acknowledged they were facing chapter 11 if Congress did not bail him out.  For extra credit, Wagoner told Congress $15 billion would be enough of a bailout, when he had to have been pretty confident it was not going to come close to cover the hole he faced.

Tom Kirkendall asks some of  the same questions, and looking at the cases he cites, it seems fairly clear that the difference between prosecuted and un-prosecuted CEO’s has more to do with their like-ability, celebrity status, and general PR position than their specific actions.

Postscript: I have actually been thinking about the Enron bankruptcy a bit lately for another reason.  Remember that massive natural gas shortage we had when Enron went bankrupt?  Neither do I.  That’s because chapter 11 is a pretty well-oiled process in this country.  Enron shareholders, bondholders, and management lost most their investment (and their jobs) but Enron’s productive assets and skilled employees didn’t disappear.  Enron’s assets were bought by other companies who hopefully will employ them more profitably and productively than Enron had.

The same goes for GM.  We have a well-understood and proven process for taking a company like GM through bankruptcy.  However, we are instead replacing this well-understood and practiced process with a new process, called something like “Congressionally-managed restructuring funded with taxpayer dollars.”  Does anyone really think this new process is better than the one we have?  Its only advantage, at least to some, is that it may preserve some management jobs, and shareholder and bondholder value, at the expense of taxpayers and any real effort for long-term reform of how GM’s assets are managed.