Paul Tullis's Grim Tidings

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Cantor’s Song: House minority whips spins a tall tale in the WSJ

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One of my favorite ways to indulge in masochism first thing in the morning is by reading The Wall Street Journal.

Today’s edition had a few gems from the Republican Party, but on a per-word basis of untruthful omissions, misleading statements, red herrings and pure bunk, the best piece by far is Rep. Eric Cantor’s (R-VA) op-ed.

He’s explaining why the GOP “won’t back down” on opposing the tax “increases” which “President Obama and Speaker Nancy Pelosi want…for those who happen to fit their description of ‘middle class.'”

That’s an interesting way of putting it. The president and speaker actually only oppose extending tax cuts that were to expire at the end of this year. These tax cuts—and their expiration—were enacted by a Republican Congress, and signed into law by a Republican president. But in Republican rhetoric, allowing a Republican law to expire as the Republicans themselves planned it to is a tax “increase.”

The “fit their description” part is also curious. If anything, Obama’s and Pelosi’s definition of middle class is expansive toward the wealthier end of the scale: They’re for extending the tax cuts for anyone making less than $200K a year. Only 4.3% of Americans earn more than that. So someone at $199,999 isn’t exactly in the “middle;” they’re in the top 20% of earners. I don’t know what universe it is that the top 20% is the “middle,” but apparently that’s not enough for Cantor; he implies that even people making more than $200k are “middle class.”

Cantor’s untruthful omission is the fact that the people who make the most money in the US aren’t getting it through earned income; they get it mostly through capital gains and dividends, which are taxed at 15%—far below even middle class marginal tax rates. In fact, the richest 400 Americans paid only 16.6% of their income in federal income taxes in 2007—even as their incomes rose.

But Cantor doesn’t stop there. He holds up the old Republican canard that “job creators…lack certainty” regarding “the tax and regulatory system.” This is how Wall Street and their pals in the GOP are holding the economy hostage: They don’t invest in the private sector and they don’t lend to small businesses (in whose name Cantor claims to be acting) because they “lack certainty.”

What would bring them certainty? Why, tax cuts for the rich, of course! To mix metaphors, what they’re saying is, Give us our free lunch or we won’t play ball. By the way, there’s no guarantee they will open the spigots of capital if they get the tax cuts they’re demanding for people earning a greater share of national income than at any time since the Gilded Age.

Then Cantor derides the “failed stimulus.” Here are the facts on the stimulus:

• President Bush enacted an economic stimulus in early 2008. If stimulus is so bad, why was it good enough for Bush?

• The CBO says Obama’s stimulus reduced unemployment by between 0.8% and 1.7%.

• Economists at Moody’s and Princeton say unemployment would be above 11% and GDP would be nearly $500bn lower. (Thanks to James Surowiecki for those last two.)

Some failure!

Later in that same sentence (way to pack the bullshit, Cantor!), the Minority Whip says private industry is better at creating jobs than government action. So how did Pres. Bush do in his 8 years?

1.5 million jobs LOST. The Republicans are like Superman: They created so many jobs that job creation went backwards!

Then Cantor disses “the new health care entitlement.” The biggest entitlement in the last 40 years, though, was Medicare Part D—passed by a Republican Congress and a Republican president, with no way of paying for it.

However, ObamaCare, as the Journal likes to call it, actually pays for itself—and saves money in the long run, according to CBO.

The next insult is a GOP favorite: accusing the Democrats of “class warfare.” Apparently, in the GOP universe, cutting taxes for the richest 5% of the country while income for the middle three quintiles stagnates; letting hedge fund managers (who made an average of $1bn each in 2009) declare the earnings they make on other people’s money their own capital gains so they can avoid paying a fair share; and calling the expiration of a law they themselves enacted a tax increase—none of this is class warfare.

But trying to change it, or even criticizing it, is.

The final rhetorical flourish is a red herring. Cantor writes (and he’s factually correct), “roughly half of all small business income in America will face a higher rate…”

If you’re a small business owner (like me), you probably read that (like I did) and think there’s a 50-50 chance your taxes will go up under Pres. Obama’s plan. But look carefully: “…half of all small business income…”

Because Bush was so expert with his policies at packing income at the upper end of the scale, half of all small business income in the US is earned by only about 750,000 people. How many small businesses are there in the US? 29.3 million.

For those of you keeping score at home, that’s 2.5% of the total of small business owners whose taxes will go up.

And some Americans want to put these disgraceful, hypocritical, selfish liars in charge again? Hard to believe.


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Written by ptullis

September 20, 2010 at 3:30 pm

No free lunch: Why Republican policies always end up biting you in the ass

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The Wall Street Journal today editorializes that the Cape Wind clean energy project that recently won the approval of the Interior Dept. is a “lousy deal” because it may, if the pricing scheme proposed by the company operating the wind farm is approved by regulators, produce energy at double the price consumers in the area now pay.

Here’s what’s also going to be expensive, if we don’t move aggressively toward a clean energy future:
•Rebuilding after hurricanes, which will be stronger and more frequent with a warmer Atlantic Ocean. Hurricane Andrew, in 1992, cost $41.5b in 2010 dollars.
•Cleaning up after oil spills, such as is now being played out along the Gulf Coast. Current costs are estimated at $350m and rising.
•The price of food, as fertile soil is lost to heat and drought.

I could go on, but you get the point: Conservatives don’t want to pay now, but we’ll all end up paying later. The difference is that the costs now are knowable, and so easier to plan for.

The Journal says that Cape Wind will result in “$443 million in new energy costs.” It doesn’t say among how many people these costs will be spread out, or over how long a period of time; if it’s 5 million people who might get power from Cape Wind, over 40 years (which seems like a reasonable amount of time for it to function), then we’re talking about a whopping $2.21 per person per year.

Disinvestment—the inevitable result of their tax-cuts-to-solve-everything approach to governing (if you can call it that)—also ends up costing more in the long term. Case in point: In 1978 Californians voted to cap their property taxes. This was hailed as a great moment, the people taking power away from big scary mean government, and launched an anti-tax movement that can be said to be the roots of the “Tea Party” (which boasts among its membership people who are on Medicaid yet rail against “people looking for handouts” and “the whole welfare mentality”). But since public schools get the bulk of their funding from this pool, the state’s schools went from tops in the nation to down around Mississippi’s somewhere. Obviously this would not have been the sole factor (conservatives will probably blame unions and immigrants), but it cannot be said that the way to improve outcomes in education is to reduce its funding.

Now you’ve got companies saying the students we’re graduating are too dumb for them to hire (I can point you to the surveys if you’re interested). So we get a lot of unemployed people. But Republicans don’t want to pay unemployment benefits. Some of these people turn to crime—and Republicans are always happy to lock people away. Here’s the problem: It costs about $25000 a year to incarcerate someone.

California spends about 1/3 that figure per pupil on public education. So would you rather educate people now, or get car-jacked by them later?

This would be funny except the pattern gets played out again and again. Look at the news today: It’s conventional wisdom on the conservative blogs (and leaking into the mainstream press) that the reason Greece and Spain are so screwed (if they are indeed screwed; the $18b per year bailout compares favorably with the $144b a year we’re spending in Iraq) is because of their overly generous welfare states. The implication is that there but for the grace of God go I, i.e., the US will be headed down this road if we don’t cut back on entitlements (somehow the Pentagon’s budget, which has nearly tripled in the last 20 years, is always left out of these discussions).

Now consider Republican policies: They want every company to be free to move their operations to wherever labor is cheapest. They don’t want to pay to retrain the workers left behind for the service jobs that are all our economy creates anymore. They don’t want to give them unemployment insurance over the long term. They don’t want to pay to educate their kids, so that the kids don’t grow up into the same predicament as their unemployed parents.

So what are they supposed to do? Live off the fat of the land? Become bond traders? Whoops, that won’t work—their education is shit. Work retail? Great—but who’s going to buy the stuff they’re selling?

Is there something I’m missing here?

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Big Drop Thursday: Market plunge shows why we need a transaction tax

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Today’s stunning market plunge and rebound, in which the Dow Jones Industrial Average swung 874 points in 13 minutes, is Exhibit A in why a transaction tax on stock trades is a good idea.

I’ve been a buy-and-hold investor since the late 1980’s, so while I don’t look at the daily fluctuations I think I would have noticed a day with such a dramatic swing, and I sure don’t remember one. (If I’m wrong, please correct me in the comments; I’d look through the charts myself but it would cause me to miss a deadline.)

The remarkable turn of events appears to be the result of computer-driven trading, in which trading firms employ software algorithms that automatically generate transactions. (For one thing, humans can’t trade at the speed required to move the market so far, so quickly.) These programs were blamed for much of the markets’ losses in late 2008 and early 2009, which saw a lot of days on which indices would plunge around 3pm after falling slightly, or even trying to rally, earlier on; the programs see a certain set of factors in place at a certain time of day and it sets off alarm bells, generating frenzied automatic selling no matter the stock and no matter the news.

There’s nothing wrong with these programs per se—in fact I’m sure they’ve helped market efficiency in some ways—but when a perfect storm happens they can wipe out trillions in shareholder value overnight, with no basis in fundamentals like EPS or EBITDA. When that happens, they’re acting on trends, not on the inherent value of companies which we’re supposed to be investing in. These algorithms are both a function and a cause of the transition of stock trading in recent decades from an emotion-driven casino where people and computers are betting on share price, instead of a rational market in which investors are buying a share of a company’s future earnings.

When I started watching the markets, a day in which a billion shares were traded was considered heavy volume. Today that’s typical for a Friday before a long weekend. A transaction tax would keep things from boiling over so frequently by putting a lid on much of the meaningless but stress-inducing volatility that gives traders and investors heart attacks.

A transaction tax—there are various proposals, but the one proposed in Congress would place a 0.25% levy on trades of $100,000 or more, and 2% on derivatives—would cause these algorithms to be recalculated on the side of caution. This wouldn’t affect Main Street investors, who generally don’t fool around with 100 grand at a pop and to whom the derivative markets aren’t open, but it’s estimated this plan would raise $150bn a year. It’s true that big institutional investors are trading with pension funds that affect regular folks’ pocketbooks and retirements, but the costs would be so spread out as to be barely noticeable, and in exchange we’d get a lot of market stability and send a lot of foolhardy players messing around with other people’s money to the sidelines.

Ask anyone who planned to tap their 401(k) or whose pension vested in late ’08 or ’09 if they’d give up a few dollars for every $100k of their nest egg in exchange for that.

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Three key financial reforms

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If you want to follow whether the financial-reform bill introduced by Sen. Dodd and recently sucking up a greater percentage of oxygen inside the Beltway now that health care is done, actually means anything in the end: Pay attention to these three key changes. Each will be a crucial factor in preventing a repeat of the breakdown of the financial system that occurred in fall 2008 (or not, in which case my advice is to invest in canned soup and bottled water, arm yourself, and move to a cabin deep in the woods somewhere.)

1) The bond-rating agencies, especially Moody’s, must become truly independent entities that are not paid by the companies whose products they are rating. As things currently stand, Moody’s is under strong structural pressure to rate crummy bonds and other debt instruments highly because they know who’s paying their bills. And with the most explosive products being issued by only a few institutions, there’s a paucity of data to rely on to rate them– it’s not like corporate or sovereign bonds, of which there are very, very many issued by very, very diverse institutions. Moreover, the data the ratings agencies rely on to rate the products comes from the very same banks whose products they are rating, and the models they use to forecast default are similar to what the banks use to create them. So what’s the point of a ratings agency at all, if that’s the situation? What happened in the lead-up to 2008 was, a bunch of shitty loans with low ratings and high likelihoods of default were packaged into securities which magically had higher ratings than the loans of which they were composed. This Alice-in-Wonderland logic misled investors to believe that the products they were purchasing were safe from default, when in fact the opposite was true. If Moody’s isn’t getting paid by the people whose products they are rating, this routine is likely to become less of a farce.

2) No more opaque transactions between banks. As things now stand, collateralized debt obligations and credit-default swaps are not only traded away from open exchanges, they are traded off the books of the parties to the transactions. How is this possible? Markets require information pertaining to them to be available to all participants in order to act efficiently. And yet—thanks to the intervention of Bob Rubin, Larry Summers, Allen Greenspan, and others, all of whom told Congress that regulating these derivatives was not only unnecessary but dangerous, when the opposite proved to be true—trillions of dollars are traded in ways completely invisible to investors or regulators. This is heretical to one of the core tenets of capitalism about which every economist who endorses the system from, Krugman to Friedman, agrees, and it must end if we are to be safe from another calamity.

3) No more side trading with taxpayer-backed funds, i.e. the “Volker Rule.” Since the repeal of the Glass-Steagall Act, which was implemented to fix many of the problems that led to the Gerat Depression, in 1999, banks whose deposits are backed by the full faith and credit of the US government, the most credit-worthy institution in human history, can go around making whatever bets they like to the benefit of their own company (rather than their customers). So if they bet wrongly often enough or severely enough, the public foots the bill—even though it would’ve been a private institution profiting had the bet gone well. This is just patently unfair; if banks want to rely on the Treasury to back them when they fuck up, they should be cutting the Treasury a check when they succeed. (Try getting Jamie Dimon or Lloyd Blankfein to agree to that one.) Moreover, this state of affairs motivates banks to take chances they wouldn’t otherwise take—because they know that ultimately it’s not their asses on the line. If an institution wants to engage in this kind of activity, about which there is nothing wrong per se, they can get off the public till and become hedge funds or private-equity groups, which are not backed by the FDIC and which eat their own losses when they lose.

Unless, of course, they’re Long-Term Capital Management.

Obesity industry: 1 Democracy: 0

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Score another victory for free speech.

The L.A. Times reported Sunday that the beverage industry, led by Coke and Pepsi, has successfully quashed efforts in Congress to help pay for their contribution to the nation’s obesity epidemic with a tax on the nutrition-free products they sell.

Only months ago, public health advocates thought the tax would be a natural for congressional Democrats looking for revenue to fund expanded health insurance coverage. The soaring costs of treating ailments related to excess weight — including diabetes and heart disease — added urgency to the issue.

But the White House staff reviewing funding options never embraced the idea even after President Obama expressed interest last summer. A key congressional committee, after initially seeming receptive, ended up refusing to consider it. Several minority advocacy groups, including some committed to fighting obesity, lined up against the tax after years of receiving financial support from the industry.

So with the same astroturf strategy employed by the oil industry to sow doubt about climate change–fund a group fronting as a grassroots effort offering bogus science to sow doubt about the life-threatening effects of the product you sell–another big business group kills the public interest so it can go on reaping profits.

If corporations are people too, Coke and Pepsi are laughing all the way to the bank over this one.

In the past couple of decades, groups receiving funding from ExxonMobil and the like have convinced journalists of the need for “balance” in discussion about issues over which there is little or no debate, such as the human contribution to global warming, and consequently appeared in the media to debunk decades of independent research by many of the world’s best scientists. “Climate change” is a term invented by Republican pollster Frank Lutz which the Consumer Energy Alliance–which has nothing to do with consumers–and the Institute for Energy Research–whose research results are pre-oradained by their polluting funders–adopted as a harmless-sounding alternative.

It was a brilliant investment on the oil industry’s part, as the percentage of the American public recognizing the danger of climate…um, whoops, global warming…has diminished as its astroturf groups have grown more prominent, and meaningful legislation to reduce emissions is now stalled in the Senate (to put it optimistically).

This time, in a lobbying and PR effort well detailed by reporters Tom Hamburger and Kim Geiger, Coke and Pepsi went one step further. They not only erected the populist-sounding “Americans Against Food Taxes” to speak their case (never mind the only Americans they were representing were corporations, not people; and the tax was to be on drinks, not food) but funded existing groups supposedly acting in the interest of Latinos and placed industry representatives on their boards.

Using the argument that higher food and drink taxes would unfairly burden the poor, the coalition recruited a bevy of Latino groups, among them the Hispanic Alliance for Prosperity Institute, the National Hispana Leadership Institute and the League of United Latin American Citizens…

“Why in the world would a Hispanic health advocacy group do this?” asked Kelly Brownell, the director of Yale University’s Rudd Center on Food Policy and Obesity.

A stunning chart in the Times’ print edition shows a rise from about $4,000,000 in spending by Coke, Pepsi, and their trade group the American Beverage Asssn. on lobbyists in 2008, to $37,500,000–nearly a tenfold rise–in 2009.

It sure paid off. Although Yale estimates

that a penny-an-ounce tax would induce a 23% drop in consumption, and the Congressional Budget Office has estimated that a smaller tax could raise $50 billion over 10 years

the Times reported, industry’s success at misrepresenting available science and attacking some of the most respected nutritionists in the country as biased overcame such facts as what UCLA researchers found:

adults who drink one or more sodas per day are 27% more likely than non-soda drinkers to be overweight or obese.

This is a clear example of why the Supreme Court decision in January, unleashing corporate cash into the political process, is so dangerous: The ones with the most money get what they want, even though it’s bad for the citizens.

Soda is bad for people’s health (see the UCLA study). Taxing stuff that is bad for people discourages people from consuming the bad stuff (see: cigarettes). Fewer bad things happen to people as a result (diabetes, heart disease). What could be a more obvious case of the public interest?

Not in America, though, land of unfettered free speech for pieces of paper.

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